UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-04149
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FRANKLIN TAX-FREE TRUST
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
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Date of fiscal year end: 02/28
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Date of reporting period: 02/28/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
FEBRUARY 28, 2005
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Franklin Florida Insured
Tax-Free Income Fund
Franklin Insured
Tax-Free Income Fund
[GRAPHIC OMITTED] Franklin Massachusetts Insured
Tax-Free Income Fund
Franklin Michigan Insured
Tax-Free Income Fund
Franklin Minnesota Insured
Tax-Free Income Fund
Franklin Ohio Insured
Tax-Free Income Fund
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ANNUAL REPORT AND SHAREHOLDER LETTER TAX - FREE INCOME
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WANT TO RECEIVE
FRANKLIN TAX-FREE TRUST THIS DOCUMENT
FASTER VIA EMAIL?
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
[GRAPHIC OMITTED] See inside for details.
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[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INVESTEMENTS
FRANKLIN o Templeton o Mutual Series
FRANKLIN TEMPLETON INVESTMENTS
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global fund.
Today, with research offices in over 25 countries,
they offer investors the broadest global reach in
the industry.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among
undervalued stocks, arbitrage situations and
distressed companies.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to distinctly different investment
approaches, Franklin, Templeton and Mutual Series
funds typically have a low overlap of securities.
That's why our funds can be used to build truly
diversified portfolios 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 account services that have helped
us become one of the most trusted names in
financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
[GRAPHIC OMITTED]
Not part of the annual report
CONTENTS
SHAREHOLDER LETTER ........................... 1
SPECIAL FEATURE:
Understanding Interest Rates ................. 4
ANNUAL REPORT
Municipal Bond
Market Overview .............................. 7
Investment Strategy and
Manager's Discussion ......................... 9
Franklin Florida Insured
Tax-Free Income Fund ......................... 10
Franklin Insured
Tax-Free Income Fund ......................... 16
Franklin Massachusetts
Insured Tax-Free Income Fund ................. 24
Franklin Michigan Insured
Tax-Free Income Fund ......................... 32
Franklin Minnesota Insured
Tax-Free Income Fund ......................... 41
Franklin Ohio Insured
Tax-Free Income Fund ......................... 49
Financial Highlights and
Statements of Investments .................... 58
Financial Statements ......................... 119
Notes to Financial Statements ................ 128
Report of Independent
Registered Public
Accounting Firm .............................. 142
Tax Designation .............................. 143
Board Members and Officers ................... 144
Shareholder Information ...................... 149
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ANNUAL REPORT
MUNICIPAL BOND MARKET OVERVIEW
For the one-year period ended February 28, 2005, the fixed income markets had
positive performance despite record high oil prices, the presidential election,
concerns about the dollar, and mixed economic releases. Although experiencing
some volatility throughout the year, long-term interest rates ended the year
close to where they started. Municipal bonds outperformed U.S. Treasury bonds
with similar maturities. The Lehman Brothers Municipal Bond Index returned 2.96%
for the period, while the Lehman Brothers U. S. Treasury Index returned
1.31%.(1)
In contrast, short-term interest rates experienced greater changes over the
year. The Federal Reserve Board raised the federal funds target rate from 1.00%
to 2.50% in six successive moves from late June through February. The Treasury
yield curve, which shows rates for Treasuries with short to long maturities,
flattened somewhat as short-term rates went up and longer-maturity Treasuries
traded in a narrower range. Over the one-year period, the 10-year Treasury bond
yield increased 37 basis points, while the 30-year Treasury bond yield decreased
12 basis points. (One hundred basis points equal one percent.) According to
Municipal Market Data, 10- and 30-year municipal bond yields increased 34 and 7
basis points.(2) Consequently, long-maturity municipal bonds outperformed
intermediates.
Although short-term interest rates rose during the year, overall interest rates
remained relatively low. This environment led to another high-volume year for
new-issue municipal bonds. Just as homebuyers seek the lowest mortgage rates,
municipalities borrow money when interest rates are low. Thus, over the past two
years, municipalities have issued more bonds to lock in lower rates.
Municipalities issued more than $358 billion in new debt during 2004.(3)
Although this was
(1) Source: Lehman Brothers Inc. The Lehman Brothers Municipal Bond Index is a
market value-weighted index engineered for the long-term tax-exempt bond market.
All bonds included have a minimum credit rating of at least Baa. They must have
an outstanding par value of at least $5 million and be issued as part of a
transaction of at least $50 million. The bonds must be dated after 12/31/90, and
must be at least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded from the
index. The index has four main bond sectors: general obligation, revenue,
insured and prerefunded. The Lehman Brothers U.S. Treasury Index includes public
obligations of the U.S. Treasury with a remaining maturity of one year or more.
All issues must have at least one year to final maturity regardless of call
features, have at least $250 million par amount outstanding and be rated
investment grade (Baa3 or better). They must also be dollar denominated,
nonconvertible and publicly issued. The index excludes Treasury bills (because
of the maturity constraint), flower bonds, targeted investor notes (TINs), and
state and local government series (SLGS) bonds, STRIPS and Treasury
Inflation-Protected Securities (TIPS).
(2) Source: Thomson Financial.
(3) Source: THE BOND BUYER.
Annual Report | 7
a decrease of more than 6% from 2003 (a record year), 2004 was the third
successive year of more than $300 billion in new issuance.(3) Demand for
municipal bonds remained strong as investors sought to reinvest proceeds
from a combination of coupon payments, maturities and bond calls. Healthy
demand came from a wide range of traditional buyers including mutual
funds, individuals and property and casualty companies, as well as
crossover buyers. Crossover buyers, such as hedge funds, typically invest
in taxable securities, but they enter the tax-exempt market when municipal
valuations are attractive.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF
FEBRUARY 28, 2005. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY
ASPECT OF ANY MARKET, STATE, INDUSTRY, SECURITY OR FUND. STATEMENTS OF
FACT ARE FROM SOURCES CONSIDERED RELIABLE.
8 | Annual Report
INVESTMENT STRATEGY AND
MANAGER'S DISCUSSION
We use a consistent, disciplined strategy to maximize income for our
shareholders by seeking to maintain our 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, each
Fund's 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.
The mixture of our value-oriented philosophy of investing primarily for
income and a relatively steep yield curve favored the use of longer-term
bonds. Consequently, we sought to remain fully invested in bonds that
ranged from 15 to 30 years in maturity with good call features. We intend
to maintain our conservative, buy-and-hold investment strategy as we
attempt to provide shareholders with high, current, tax-free income.
We invite you to read your Fund report for more detailed performance and
portfolio information. Thank you for your participation in Franklin
Tax-Free Trust. We look forward to serving your future investment needs.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO
HOLDINGS AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY
WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO
HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR
AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE
ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE, INDUSTRY, SECURITY OR FUND.
STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER
MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY.
ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE
INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 9
FRANKLIN FLORIDA INSURED
TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Florida Insured Tax-Free Income
Fund seeks to provide high, current income exempt from federal income tax
consistent with prudent investment management and preservation of capital by
investing at least 80% of its total assets in insured securities that pay
interest free from such tax.(1),(2) In addition, the Fund's shares are free from
Florida's annual intangibles tax.
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PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
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DIVIDEND DISTRIBUTIONS(3)
Franklin Florida Insured
Tax-Free Income Fund - Class A
3/1/04-2/28/05
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MONTH DIVIDEND PER SHARE
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March 3.80 cents
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April 3.80 cents
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May 3.80 cents
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June 3.80 cents
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July 3.80 cents
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August 3.80 cents
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September 3.84 cents
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October 3.84 cents
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November 3.84 cents
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December 3.84 cents
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January 3.84 cents
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February 3.84 cents
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TOTAL 45.84 CENTS
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This annual report for Florida Insured Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $10.97 on February
29, 2004, to $10.80 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 45.84 cents per share for the same period.(3) 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 4.09%. An investor in the 2005
maximum federal income tax bracket of 35.00% would need to earn a distribution
rate of 6.29% from a taxable investment to match the Fund's Class A tax-free
distribution rate.
STATE UPDATE
Florida's service-based economy proved resilient in the face of adversity as it
quickly recovered from the 2004 storm season and continued to outpace the
national recovery. Business services employment was notably strong as was hiring
in the scientific and technical services-producing industries. Despite the
negative impact from four hurricanes that made landfall in or near the state,
tourism increased in 2004. Unemployment remained below the national average,
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(2) The insurance relates only to the payment of principal and interest on the
portfolio's insured securities. No representation is made as to any insurer's
ability to meet its commitments.
(3) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
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 59.
10 | Annual Report
and personal incomes, while still trailing the nation's, also made steady gains
during the period under review.
Population growth, especially among senior citizens, continued to be a primary
factor affecting Florida's financial condition, state employment trends and
government services. However, any increased effect the state's demographics
placed on education, corrections, transportation, health and human services in
2004 was temporarily absorbed by Florida's abundant coffers. The state was one
of few to maintain significant reserves throughout the recent recession.
Florida's financial condition strengthened significantly in 2004 as revenue
collections well exceeded estimates, even after a series of upward revisions.
The state's annual Debt Affordability Report, a critical component of the
state's financial operations, showed improvement in the ratio of debt service
against revenue. Because of its rapid growth rates, Florida must continually
evaluate alternative funding sources to pay for voter-authorized constitutional
amendments. As it is, Florida's tax-supported debt burden is considered above
average and continues to grow. However, unlike many states, Florida historically
has issued debt to fund local school construction thereby alleviating some of
the tax burden from local governments or school districts.
Due to Florida's strong and growing financial reserves, stable revenue
performance and solid economic long-term growth prospects, Moody's Investors
Service, an independent credit rating agency, recently upgraded Florida's
general obligation debt rating to Aa1 from Aa2 with a stable outlook.(4)
MANAGER'S DISCUSSION
We used various strategies during the 12 months under review as we sought to
maximize tax-free income for shareholders. Please read the discussion on page 9
for details.
Thank you for your continued participation in Franklin Florida Insured Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
(4) This does not indicate Moody's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
PORTFOLIO BREAKDOWN
Franklin Florida Insured
Tax-Free Income Fund
2/28/05
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% OF TOTAL
LONG-TERM INVESTMENTS*
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Utilities** 27.2%
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Other Revenue 19.0%
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Subject to Government Appropriations 14.5%
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Tax-Supported 13.2%
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Transportation 9.4%
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Prerefunded 6.0%
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Housing 5.0%
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Hospital & Health Care 2.9%
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General Obligation 1.4%
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Higher Education 1.4%
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* Does not include short-term investments and other net assets.
** The Fund may invest more than 25% in municipal securities that finance
similar types of projects such as utilities. A change that affects one project
may affect all similar projects, thereby increasing market risk.
Annual Report | 11
PERFORMANCE SUMMARY AS OF 2/28/05
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes due on Fund
dividends, capital gain distributions, if any, or any realized gains on the sale
of Fund shares. Total return reflects reinvestment of the Fund's dividends and
capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A CHANGE 2/28/05 2/29/04
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Net Asset Value (NAV) -$0.17 $10.80 $10.97
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DISTRIBUTIONS (3/1/04-2/28/05)
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Dividend Income $0.4584
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PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE. CUMULATIVE TOTAL RETURN EXCLUDES
SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE THE MAXIMUM SALES CHARGE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return(1) +2.79% +40.52% +83.05%
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Average Annual Total Return(2) -1.61% +6.11% +5.78%
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Avg. Ann. Total Return (3/31/05)(3) -1.76% +5.42% +5.63%
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Distribution Rate(4) 4.09%
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Taxable Equivalent Distribution Rate(5) 6.29%
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30-Day Standardized Yield(6) 3.12%
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Taxable Equivalent Yield(5) 4.80%
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PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
12 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current maximum sales charge, Fund expenses, account fees
and reinvested distributions. The unmanaged index includes reinvestment of any
income or distributions. It differs from the Fund in composition and does not
pay management fees or expenses. One cannot invest directly in an index. The
Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics,
is a commonly used measure of the inflation rate.
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Florida Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ---------------- --------------- ---------
3/1/1995 $9,578 $10,000 $10,000
3/31/1995 $9,667 $10,115 $10,033
4/30/1995 $9,678 $10,127 $10,066
5/31/1995 $10,039 $10,450 $10,086
6/30/1995 $9,891 $10,359 $10,106
7/31/1995 $9,957 $10,457 $10,106
8/31/1995 $10,084 $10,589 $10,133
9/30/1995 $10,159 $10,656 $10,152
10/31/1995 $10,354 $10,811 $10,186
11/30/1995 $10,575 $10,991 $10,179
12/31/1995 $10,723 $11,096 $10,172
1/31/1996 $10,750 $11,180 $10,232
2/29/1996 $10,627 $11,105 $10,265
3/31/1996 $10,896 $10,963 $10,318
4/30/1996 $10,849 $10,932 $10,358
5/31/1996 $10,858 $10,928 $10,378
6/30/1996 $11,011 $11,047 $10,384
7/31/1996 $11,127 $11,147 $10,404
8/31/1996 $11,111 $11,144 $10,424
9/30/1996 $11,337 $11,300 $10,457
10/31/1996 $11,430 $11,428 $10,490
11/30/1996 $11,643 $11,637 $10,510
12/31/1996 $11,575 $11,588 $10,510
1/31/1997 $11,057 $11,610 $10,543
2/28/1997 $11,171 $11,716 $10,577
3/31/1997 $10,987 $11,560 $10,603
4/30/1997 $11,101 $11,657 $10,616
5/31/1997 $11,267 $11,832 $10,610
6/30/1997 $11,396 $11,958 $10,623
7/31/1997 $11,775 $12,289 $10,636
8/31/1997 $11,640 $12,174 $10,656
9/30/1997 $11,772 $12,319 $10,683
10/31/1997 $11,884 $12,398 $10,709
11/30/1997 $11,966 $12,471 $10,702
12/31/1997 $12,158 $12,653 $10,689
1/31/1998 $12,292 $12,783 $10,709
2/28/1998 $12,285 $12,787 $10,729
3/31/1998 $12,303 $12,799 $10,749
4/30/1998 $12,267 $12,741 $10,769
5/31/1998 $12,436 $12,942 $10,789
6/30/1998 $12,485 $12,994 $10,802
7/31/1998 $12,541 $13,026 $10,815
8/31/1998 $12,726 $13,227 $10,828
9/30/1998 $12,847 $13,392 $10,842
10/31/1998 $12,866 $13,392 $10,868
11/30/1998 $12,956 $13,439 $10,868
12/31/1998 $12,970 $13,473 $10,861
1/31/1999 $13,084 $13,633 $10,888
2/28/1999 $13,024 $13,573 $10,901
3/31/1999 $13,058 $13,592 $10,934
4/30/1999 $13,071 $13,626 $11,014
5/31/1999 $12,991 $13,547 $11,014
6/30/1999 $12,794 $13,352 $11,014
7/31/1999 $12,816 $13,401 $11,047
8/31/1999 $12,643 $13,293 $11,074
9/30/1999 $12,577 $13,299 $11,127
10/31/1999 $12,357 $13,155 $11,146
11/30/1999 $12,489 $13,295 $11,153
12/31/1999 $12,374 $13,196 $11,153
1/31/2000 $12,309 $13,138 $11,186
2/29/2000 $12,475 $13,291 $11,252
3/31/2000 $12,824 $13,581 $11,345
4/30/2000 $12,706 $13,501 $11,352
5/31/2000 $12,582 $13,431 $11,365
6/30/2000 $12,975 $13,787 $11,425
7/31/2000 $13,200 $13,979 $11,451
8/31/2000 $13,399 $14,194 $11,451
9/30/2000 $13,276 $14,120 $11,511
10/31/2000 $13,454 $14,274 $11,531
11/30/2000 $13,587 $14,382 $11,537
12/31/2000 $14,001 $14,738 $11,531
1/31/2001 $14,032 $14,884 $11,604
2/28/2001 $14,109 $14,931 $11,650
3/31/2001 $14,235 $15,065 $11,677
4/30/2001 $14,047 $14,901 $11,723
5/31/2001 $14,158 $15,062 $11,776
6/30/2001 $14,264 $15,163 $11,796
7/31/2001 $14,532 $15,387 $11,763
8/31/2001 $14,784 $15,641 $11,763
9/30/2001 $14,722 $15,588 $11,816
10/31/2001 $14,909 $15,774 $11,776
11/30/2001 $14,780 $15,641 $11,756
12/31/2001 $14,627 $15,493 $11,710
1/31/2002 $14,826 $15,762 $11,736
2/28/2002 $14,977 $15,952 $11,783
3/31/2002 $14,704 $15,639 $11,849
4/30/2002 $14,926 $15,945 $11,915
5/31/2002 $15,028 $16,041 $11,915
6/30/2002 $15,136 $16,211 $11,922
7/31/2002 $15,315 $16,420 $11,935
8/31/2002 $15,500 $16,617 $11,975
9/30/2002 $15,923 $16,981 $11,995
10/31/2002 $15,616 $16,699 $12,015
11/30/2002 $15,566 $16,630 $12,015
12/31/2002 $15,894 $16,981 $11,988
1/31/2003 $15,864 $16,938 $12,041
2/28/2003 $16,050 $17,175 $12,134
3/31/2003 $16,096 $17,185 $12,207
4/30/2003 $16,243 $17,299 $12,180
5/31/2003 $16,626 $17,704 $12,160
6/30/2003 $16,578 $17,628 $12,174
7/31/2003 $15,893 $17,011 $12,187
8/31/2003 $15,990 $17,138 $12,233
9/30/2003 $16,401 $17,642 $12,273
10/31/2003 $16,322 $17,553 $12,260
11/30/2003 $16,512 $17,736 $12,227
12/31/2003 $16,655 $17,883 $12,213
1/31/2004 $16,775 $17,986 $12,273
2/29/2004 $17,059 $18,256 $12,339
3/31/2004 $17,014 $18,193 $12,419
4/30/2004 $16,541 $17,762 $12,459
5/31/2004 $16,440 $17,697 $12,531
6/30/2004 $16,458 $17,762 $12,571
7/31/2004 $16,691 $17,996 $12,551
8/31/2004 $17,008 $18,356 $12,558
9/30/2004 $17,132 $18,454 $12,584
10/31/2004 $17,284 $18,612 $12,651
11/30/2004 $17,125 $18,459 $12,657
12/31/2004 $17,365 $18,684 $12,611
1/31/2005 $17,601 $18,859 $12,638
2/28/2005 $17,533 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.61%
- -------------------------------------
5-Year +6.11%
- -------------------------------------
10-Year +5.78%
- -------------------------------------
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current maximum sales
charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the 3.84 cent per share
current monthly dividend and the maximum offering price of $11.28 per share on
2/28/05.
(5) Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
(6) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 13
YOUR FUND'S EXPENSES
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
14 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.90 $3.83
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.03 $3.81
- ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 0.76%, multiplied by the
average account value over the period, multiplied by 181/365 to reflect the
one-half year period.
Annual Report | 15
FRANKLIN INSURED TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Insured Tax-Free Income Fund
seeks to provide high, current income exempt from federal income tax consistent
with prudent investment management and preservation of capital by investing at
least 80% of its total assets in insured securities that pay interest free from
such tax.(1),(2)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Insured Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.62 on February
29, 2004, to $12.41 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 54.96 cents per share for the same period.(3) The Performance
Summary beginning on page 18 shows that at the end of this reporting period the
Fund's Class A shares' distribution rate was 4.19%, based on an annualization of
the current 4.53 cent per share dividend and the maximum offering price of
$12.96 on February 28, 2005. An investor in the 2005 maximum federal income tax
bracket of 35.00% would need to earn a distribution rate of 6.45% from a taxable
investment to match the Fund's Class A tax-free distribution rate. For the
Fund's Class B and C shares' performance, please see the Performance Summary.
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(2) The insurance relates only to the payment of principal and interest on the
portfolio's insured securities. No representation is made as to any insurer's
ability to meet its commitments.
(3) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
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 65.
16 | Annual Report
DIVIDEND DISTRIBUTIONS(3)
Franklin Insured Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 4.58 cents 4.01 cents 4.02 cents
- --------------------------------------------------------------------------------
April 4.58 cents 4.01 cents 4.02 cents
- --------------------------------------------------------------------------------
May 4.58 cents 4.01 cents 4.02 cents
- --------------------------------------------------------------------------------
June 4.58 cents 4.00 cents 4.00 cents
- --------------------------------------------------------------------------------
July 4.58 cents 4.00 cents 4.00 cents
- --------------------------------------------------------------------------------
August 4.58 cents 4.00 cents 4.00 cents
- --------------------------------------------------------------------------------
September 4.58 cents 4.01 cents 4.01 cents
- --------------------------------------------------------------------------------
October 4.58 cents 4.01 cents 4.01 cents
- --------------------------------------------------------------------------------
November 4.58 cents 4.01 cents 4.01 cents
- --------------------------------------------------------------------------------
December 4.58 cents 4.01 cents 4.00 cents
- --------------------------------------------------------------------------------
January 4.58 cents 4.01 cents 4.00 cents
- --------------------------------------------------------------------------------
February 4.58 cents 4.01 cents 4.00 cents
- --------------------------------------------------------------------------------
TOTAL 54.96 CENTS 48.09 CENTS 48.09 CENTS
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
We used various strategies during the 12 months under review as we sought to
maximize tax-free income for shareholders. Please read the discussion on page 9
for details.
Thank you for your continued participation in Franklin Insured Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
PORTFOLIO BREAKDOWN
Franklin Insured Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 17.6%
- --------------------------------------------------------------------------------
Utilities 17.1%
- --------------------------------------------------------------------------------
Hospital & Health Care 16.4%
- --------------------------------------------------------------------------------
General Obligation 16.2%
- --------------------------------------------------------------------------------
Transportation 12.2%
- --------------------------------------------------------------------------------
Tax-Supported 6.0%
- --------------------------------------------------------------------------------
Higher Education 5.7%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 5.4%
- --------------------------------------------------------------------------------
Other Revenue 2.4%
- --------------------------------------------------------------------------------
Housing 0.7%
- --------------------------------------------------------------------------------
Corporate-Backed 0.3%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 17
PERFORMANCE SUMMARY AS OF 2/28/05
FRANKLIN INSURED TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.21 $12.41 $12.62
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.5496
- ----------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0095
- ----------------------------------------------------------------------------------------
TOTAL $0.5591
- ----------------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.20 $12.47 $12.67
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4809
- ----------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0095
- ----------------------------------------------------------------------------------------
TOTAL $0.4904
- ----------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.21 $12.51 $12.72
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4809
- ----------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0095
- ----------------------------------------------------------------------------------------
TOTAL $0.4904
- ----------------------------------------------------------------------------------------
Franklin Insured Tax-Free Income Fund paid distributions derived from long-term
capital gains of 0.95 cents ($0.0095) per share in June 2004. The Fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
18 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.93% +40.14% +76.65%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.44% +6.06% +5.40%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.67% +5.45% +5.25%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 4.19%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.45%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.21%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.94%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.35% +36.75% +38.54%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.59% +6.15% +6.48%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.70% +5.54% +6.27%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.80%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 5.85%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.80%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.31%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.34% +36.33% +66.24%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.35% +6.39% +5.31%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.24% +5.80% +5.21%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.74%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 5.75%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.81%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.32%
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 19
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.44%
- -------------------------------------
5-Year +6.06%
- -------------------------------------
10-Year +5.40%
- -------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Insured Lehman Brothers
Tax-Free Income Municipal Bond
Date Fund Index(7) CPI(7)
- ---------- ---------------- --------------- ----------
3/1/1995 $9,576 $10,000 $10,000
3/31/1995 $9,659 $10,115 $10,033
4/30/1995 $9,679 $10,127 $10,066
5/31/1995 $9,898 $10,450 $10,086
6/30/1995 $9,851 $10,359 $10,106
7/31/1995 $9,900 $10,457 $10,106
8/31/1995 $9,988 $10,589 $10,133
9/30/1995 $10,035 $10,656 $10,152
10/31/1995 $10,162 $10,811 $10,186
11/30/1995 $10,301 $10,991 $10,179
12/31/1995 $10,389 $11,096 $10,172
1/31/1996 $10,450 $11,180 $10,232
2/29/1996 $10,407 $11,105 $10,265
3/31/1996 $10,303 $10,963 $10,318
4/30/1996 $10,276 $10,932 $10,358
5/31/1996 $10,295 $10,928 $10,378
6/30/1996 $10,394 $11,047 $10,384
7/31/1996 $10,464 $11,147 $10,404
8/31/1996 $10,480 $11,144 $10,424
9/30/1996 $10,610 $11,300 $10,457
10/31/1996 $10,703 $11,428 $10,490
11/30/1996 $10,850 $11,637 $10,510
12/31/1996 $10,824 $11,588 $10,510
1/31/1997 $10,838 $11,610 $10,543
2/28/1997 $10,915 $11,716 $10,577
3/31/1997 $10,814 $11,560 $10,603
4/30/1997 $10,890 $11,657 $10,616
5/31/1997 $11,017 $11,832 $10,610
6/30/1997 $11,115 $11,958 $10,623
7/31/1997 $11,377 $12,289 $10,636
8/31/1997 $11,279 $12,174 $10,656
9/30/1997 $11,395 $12,319 $10,683
10/31/1997 $11,468 $12,398 $10,709
11/30/1997 $11,543 $12,471 $10,702
12/31/1997 $11,703 $12,653 $10,689
1/31/1998 $11,803 $12,783 $10,709
2/28/1998 $11,799 $12,787 $10,729
3/31/1998 $11,826 $12,799 $10,749
4/30/1998 $11,789 $12,741 $10,769
5/31/1998 $11,957 $12,942 $10,789
6/30/1998 $12,014 $12,994 $10,802
7/31/1998 $12,051 $13,026 $10,815
8/31/1998 $12,213 $13,227 $10,828
9/30/1998 $12,351 $13,392 $10,842
10/31/1998 $12,357 $13,392 $10,868
11/30/1998 $12,400 $13,439 $10,868
12/31/1998 $12,413 $13,473 $10,861
1/31/1999 $12,525 $13,633 $10,888
2/28/1999 $12,475 $13,573 $10,901
3/31/1999 $12,515 $13,592 $10,934
4/30/1999 $12,537 $13,626 $11,014
5/31/1999 $12,470 $13,547 $11,014
6/30/1999 $12,309 $13,352 $11,014
7/31/1999 $12,328 $13,401 $11,047
8/31/1999 $12,177 $13,293 $11,074
9/30/1999 $12,155 $13,299 $11,127
10/31/1999 $11,984 $13,155 $11,146
11/30/1999 $12,105 $13,295 $11,153
12/31/1999 $11,990 $13,196 $11,153
1/31/2000 $11,916 $13,138 $11,186
2/29/2000 $12,074 $13,291 $11,252
3/31/2000 $12,364 $13,581 $11,345
4/30/2000 $12,287 $13,501 $11,352
5/31/2000 $12,207 $13,431 $11,365
6/30/2000 $12,524 $13,787 $11,425
7/31/2000 $12,721 $13,979 $11,451
8/31/2000 $12,910 $14,194 $11,451
9/30/2000 $12,818 $14,120 $11,511
10/31/2000 $12,967 $14,274 $11,531
11/30/2000 $13,077 $14,382 $11,537
12/31/2000 $13,430 $14,738 $11,531
1/31/2001 $13,512 $14,884 $11,604
2/28/2001 $13,553 $14,931 $11,650
3/31/2001 $13,657 $15,065 $11,677
4/30/2001 $13,500 $14,901 $11,723
5/31/2001 $13,638 $15,062 $11,776
6/30/2001 $13,748 $15,163 $11,796
7/31/2001 $13,950 $15,387 $11,763
8/31/2001 $14,159 $15,641 $11,763
9/30/2001 $14,094 $15,588 $11,816
10/31/2001 $14,263 $15,774 $11,776
11/30/2001 $14,178 $15,641 $11,756
12/31/2001 $14,049 $15,493 $11,710
1/31/2002 $14,260 $15,762 $11,736
2/28/2002 $14,419 $15,952 $11,783
3/31/2002 $14,165 $15,639 $11,849
4/30/2002 $14,396 $15,945 $11,915
5/31/2002 $14,467 $16,041 $11,915
6/30/2002 $14,590 $16,211 $11,922
7/31/2002 $14,762 $16,420 $11,935
8/31/2002 $14,902 $16,617 $11,975
9/30/2002 $15,230 $16,981 $11,995
10/31/2002 $14,997 $16,699 $12,015
11/30/2002 $14,966 $16,630 $12,015
12/31/2002 $15,263 $16,981 $11,988
1/31/2003 $15,236 $16,938 $12,041
2/28/2003 $15,413 $17,175 $12,134
3/31/2003 $15,465 $17,185 $12,207
4/30/2003 $15,600 $17,299 $12,180
5/31/2003 $15,969 $17,704 $12,160
6/30/2003 $15,928 $17,628 $12,174
7/31/2003 $15,329 $17,011 $12,187
8/31/2003 $15,445 $17,138 $12,233
9/30/2003 $15,852 $17,642 $12,273
10/31/2003 $15,798 $17,553 $12,260
11/30/2003 $15,965 $17,736 $12,227
12/31/2003 $16,096 $17,883 $12,213
1/31/2004 $16,206 $17,986 $12,273
2/29/2004 $16,439 $18,256 $12,339
3/31/2004 $16,388 $18,193 $12,419
4/30/2004 $15,988 $17,762 $12,459
5/31/2004 $15,913 $17,697 $12,531
6/30/2004 $15,951 $17,762 $12,571
7/31/2004 $16,143 $17,996 $12,551
8/31/2004 $16,433 $18,356 $12,558
9/30/2004 $16,520 $18,454 $12,584
10/31/2004 $16,671 $18,612 $12,651
11/30/2004 $16,536 $18,459 $12,657
12/31/2004 $16,760 $18,684 $12,611
1/31/2005 $16,955 $18,859 $12,638
2/28/2005 $16,916 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 2/28/05
- -------------------------------------
1-Year -1.59%
- -------------------------------------
5-Year +6.15%
- -------------------------------------
Since Inception (2/1/00) +6.48%
- -------------------------------------
CLASS B (2/1/00-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Insured Lehman Brothers
Tax-Free Income Municipal Bond
Date Fund Index(7) CPI(7)
- ---------- ---------------- --------------- ----------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,131 $10,116 $10,059
3/31/2000 $10,369 $10,337 $10,142
4/30/2000 $10,309 $10,276 $10,148
5/31/2000 $10,237 $10,223 $10,160
6/30/2000 $10,497 $10,494 $10,213
7/31/2000 $10,657 $10,640 $10,237
8/31/2000 $10,810 $10,804 $10,237
9/30/2000 $10,737 $10,747 $10,290
10/31/2000 $10,847 $10,865 $10,308
11/30/2000 $10,943 $10,947 $10,314
12/31/2000 $11,235 $11,217 $10,308
1/31/2001 $11,297 $11,328 $10,373
2/28/2001 $11,327 $11,364 $10,415
3/31/2001 $11,417 $11,466 $10,438
4/30/2001 $11,282 $11,342 $10,480
5/31/2001 $11,391 $11,464 $10,527
6/30/2001 $11,478 $11,541 $10,545
7/31/2001 $11,650 $11,712 $10,515
8/31/2001 $11,819 $11,905 $10,515
9/30/2001 $11,761 $11,865 $10,563
10/31/2001 $11,895 $12,006 $10,527
11/30/2001 $11,819 $11,905 $10,509
12/31/2001 $11,706 $11,792 $10,468
1/31/2002 $11,876 $11,997 $10,492
2/28/2002 $12,003 $12,141 $10,533
3/31/2002 $11,787 $11,903 $10,592
4/30/2002 $11,972 $12,136 $10,652
5/31/2002 $12,034 $12,210 $10,652
6/30/2002 $12,132 $12,339 $10,658
7/31/2002 $12,258 $12,498 $10,669
8/31/2002 $12,379 $12,648 $10,705
9/30/2002 $12,644 $12,925 $10,723
10/31/2002 $12,446 $12,711 $10,741
11/30/2002 $12,415 $12,658 $10,741
12/31/2002 $12,654 $12,925 $10,717
1/31/2003 $12,627 $12,892 $10,764
2/28/2003 $12,768 $13,072 $10,847
3/31/2003 $12,805 $13,080 $10,912
4/30/2003 $12,910 $13,167 $10,889
5/31/2003 $13,209 $13,475 $10,871
6/30/2003 $13,179 $13,418 $10,883
7/31/2003 $12,669 $12,948 $10,895
8/31/2003 $12,759 $13,045 $10,936
9/30/2003 $13,087 $13,428 $10,972
10/31/2003 $13,036 $13,361 $10,960
11/30/2003 $13,168 $13,500 $10,930
12/31/2003 $13,269 $13,612 $10,918
1/31/2004 $13,354 $13,690 $10,972
2/29/2004 $13,541 $13,896 $11,031
3/31/2004 $13,492 $13,847 $11,102
4/30/2004 $13,159 $13,519 $11,137
5/31/2004 $13,092 $13,470 $11,203
6/30/2004 $13,117 $13,519 $11,238
7/31/2004 $13,267 $13,697 $11,220
8/31/2004 $13,498 $13,972 $11,226
9/30/2004 $13,563 $14,046 $11,250
10/31/2004 $13,680 $14,167 $11,309
11/30/2004 $13,562 $14,050 $11,315
12/31/2004 $13,738 $14,221 $11,274
1/31/2005 $13,902 $14,354 $11,297
2/28/2005 $13,754 $14,307 $11,363
20 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.35%
- -------------------------------------
5-Year +6.39%
- -------------------------------------
Since Inception (5/1/95) +5.31%
- -------------------------------------
CLASS C (5/1/95-2/28/05)
Franklin Insured Lehman Brothers
Tax-Free Income Municipal Bond
Fund Index(7) CPI(7)
- ---------- ---------------- --------------- ----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,238 $10,319 $10,020
6/30/1995 $10,192 $10,229 $10,039
7/31/1995 $10,238 $10,326 $10,039
8/31/1995 $10,324 $10,457 $10,066
9/30/1995 $10,376 $10,523 $10,086
10/31/1995 $10,501 $10,676 $10,118
11/30/1995 $10,630 $10,853 $10,112
12/31/1995 $10,725 $10,957 $10,105
1/31/1996 $10,780 $11,040 $10,165
2/29/1996 $10,733 $10,966 $10,197
3/31/1996 $10,620 $10,825 $10,250
4/30/1996 $10,597 $10,795 $10,290
5/31/1996 $10,612 $10,791 $10,309
6/30/1996 $10,708 $10,908 $10,316
7/31/1996 $10,784 $11,007 $10,336
8/31/1996 $10,788 $11,004 $10,355
9/30/1996 $10,916 $11,158 $10,388
10/31/1996 $11,007 $11,285 $10,421
11/30/1996 $11,151 $11,491 $10,441
12/31/1996 $11,118 $11,443 $10,441
1/31/1997 $11,127 $11,464 $10,474
2/28/1997 $11,210 $11,569 $10,507
3/31/1997 $11,092 $11,415 $10,533
4/30/1997 $11,173 $11,511 $10,546
5/31/1997 $11,297 $11,684 $10,540
6/30/1997 $11,392 $11,808 $10,553
7/31/1997 $11,653 $12,136 $10,566
8/31/1997 $11,548 $12,022 $10,586
9/30/1997 $11,660 $12,164 $10,612
10/31/1997 $11,729 $12,243 $10,639
11/30/1997 $11,800 $12,315 $10,632
12/31/1997 $11,967 $12,494 $10,619
1/31/1998 $12,054 $12,623 $10,639
2/28/1998 $12,053 $12,627 $10,658
3/31/1998 $12,065 $12,638 $10,678
4/30/1998 $12,021 $12,581 $10,698
5/31/1998 $12,195 $12,780 $10,718
6/30/1998 $12,247 $12,831 $10,731
7/31/1998 $12,279 $12,863 $10,744
8/31/1998 $12,437 $13,062 $10,757
9/30/1998 $12,572 $13,224 $10,770
10/31/1998 $12,572 $13,224 $10,797
11/30/1998 $12,609 $13,270 $10,797
12/31/1998 $12,616 $13,304 $10,790
1/31/1999 $12,724 $13,462 $10,816
2/28/1999 $12,668 $13,403 $10,829
3/31/1999 $12,701 $13,422 $10,862
4/30/1999 $12,716 $13,455 $10,941
5/31/1999 $12,644 $13,377 $10,941
6/30/1999 $12,476 $13,185 $10,941
7/31/1999 $12,489 $13,233 $10,974
8/31/1999 $12,342 $13,127 $11,001
9/30/1999 $12,304 $13,132 $11,053
10/31/1999 $12,115 $12,990 $11,073
11/30/1999 $12,243 $13,128 $11,080
12/31/1999 $12,121 $13,030 $11,080
1/31/2000 $12,041 $12,974 $11,113
2/29/2000 $12,196 $13,124 $11,178
3/31/2000 $12,481 $13,411 $11,271
4/30/2000 $12,399 $13,332 $11,277
5/31/2000 $12,313 $13,263 $11,290
6/30/2000 $12,625 $13,614 $11,350
7/31/2000 $12,816 $13,803 $11,376
8/31/2000 $12,998 $14,016 $11,376
9/30/2000 $12,913 $13,943 $11,435
10/31/2000 $13,044 $14,095 $11,455
11/30/2000 $13,149 $14,202 $11,461
12/31/2000 $13,508 $14,553 $11,455
1/31/2001 $13,571 $14,697 $11,527
2/28/2001 $13,605 $14,744 $11,573
3/31/2001 $13,714 $14,876 $11,600
4/30/2001 $13,551 $14,715 $11,646
5/31/2001 $13,670 $14,873 $11,698
6/30/2001 $13,774 $14,973 $11,718
7/31/2001 $13,979 $15,194 $11,685
8/31/2001 $14,180 $15,445 $11,685
9/30/2001 $14,109 $15,393 $11,738
10/31/2001 $14,270 $15,576 $11,698
11/30/2001 $14,179 $15,445 $11,679
12/31/2001 $14,044 $15,299 $11,633
1/31/2002 $14,259 $15,564 $11,659
2/28/2002 $14,399 $15,752 $11,705
3/31/2002 $14,141 $15,443 $11,771
4/30/2002 $14,363 $15,745 $11,837
5/31/2002 $14,438 $15,841 $11,837
6/30/2002 $14,555 $16,008 $11,843
7/31/2002 $14,706 $16,214 $11,856
8/31/2002 $14,850 $16,409 $11,896
9/30/2002 $15,168 $16,768 $11,916
10/31/2002 $14,932 $16,490 $11,935
11/30/2002 $14,894 $16,422 $11,935
12/31/2002 $15,182 $16,768 $11,909
1/31/2003 $15,148 $16,726 $11,962
2/28/2003 $15,330 $16,960 $12,054
3/31/2003 $15,362 $16,970 $12,126
4/30/2003 $15,488 $17,082 $12,100
5/31/2003 $15,846 $17,482 $12,080
6/30/2003 $15,810 $17,407 $12,093
7/31/2003 $15,199 $16,798 $12,107
8/31/2003 $15,307 $16,924 $12,153
9/30/2003 $15,711 $17,421 $12,192
10/31/2003 $15,650 $17,333 $12,179
11/30/2003 $15,808 $17,514 $12,146
12/31/2003 $15,928 $17,659 $12,133
1/31/2004 $16,029 $17,760 $12,192
2/29/2004 $16,251 $18,028 $12,258
3/31/2004 $16,193 $17,965 $12,337
4/30/2004 $15,782 $17,539 $12,377
5/31/2004 $15,714 $17,476 $12,449
6/30/2004 $15,731 $17,539 $12,488
7/31/2004 $15,923 $17,770 $12,469
8/31/2004 $16,198 $18,126 $12,475
9/30/2004 $16,276 $18,222 $12,502
10/31/2004 $16,416 $18,379 $12,567
11/30/2004 $16,275 $18,228 $12,574
12/31/2004 $16,486 $18,450 $12,528
1/31/2005 $16,669 $18,623 $12,554
2/28/2005 $16,624 $18,561 $12,627
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B and
C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
(6) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 21
YOUR FUND'S EXPENSES
FRANKLIN INSURED TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
22 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.60 $3.17
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.67 $3.16
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.70 $5.93
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.60 $5.93
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.63%;
B: 1.18%; and C: 1.18%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 23
FRANKLIN MASSACHUSETTS INSURED
TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Massachusetts Insured Tax-Free
Income Fund seeks to provide high, current income exempt from federal and
Massachusetts state personal income taxes consistent with prudent investment
management and preservation of capital by investing at least 80% of its total
assets in insured securities that pay interest free from such taxes.(1),(2)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Massachusetts Insured Tax-Free Income Fund
covers the fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.11 on February
29, 2004, to $11.98 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 51.60 cents per share for the same period.(3) The Performance
Summary beginning on page 27 shows that at the end of this reporting period the
Fund's Class A shares' distribution rate was 4.03%, based on an annualization of
the current 4.20 cent per share dividend and the maximum offering price of
$12.51 on February 28, 2005. An investor in the 2005 maximum combined federal
and Massachusetts state personal income tax bracket of 38.45% would need to earn
a distribution rate of 6.55% from a taxable investment to match the Fund's Class
A tax-free distribution rate. For the Fund's Class C shares' performance, please
see the Performance Summary.
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(2) The insurance relates only to the payment of principal and interest on the
portfolio's insured securities. No representation is made as to any insurer's
ability to meet its commitments.
(3) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
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 81.
24 | Annual Report
COMMONWEALTH UPDATE
Massachusetts has a diverse and broad economy driven by the high-technology,
health care, education and financial services sectors. The state's decade-long
track record of financial discipline and professional management has helped in a
period of economic slowdown. Although reduced compared with the booming late
1990s through 2001, the commonwealth's reserve levels began to accumulate with
the fiscal year 2004 close, reversing a trend of declines caused by economic
slowdown in recent years.
Tax revenue exceeded fiscal year 2004 estimates, with performance driven
primarily by growth in personal income tax withholdings, estimated payments and
sales taxes. The upturn in personal tax revenues suggested improving job growth,
and in fact, the commonwealth's unemployment rate has declined from 5.5% in
February 2004 to 4.9% in February 2005, below the overall U.S. unemployment
rate.(4)
Offsetting the past year's various improvements was the state's high debt
burden, which ranked second highest among the 50 states on a per capita basis
and as a percentage of personal income. In addition, Massachusetts faces ongoing
spending pressures, notably in the health care and pension areas. However,
Moody's Investors Service affirmed the state's Aa2 general obligation bond
rating and revised the commonwealth's outlook to stable from negative citing an
improved financial position, increased reserve levels and signs of employment
gains.(5)
(4) Source: Bureau of Labor Statistics.
(5) This does not indicate Moody's rating of the Fund.
PORTFOLIO BREAKDOWN
Franklin Massachusetts Insured
Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Higher Education 23.2%
- --------------------------------------------------------------------------------
Hospital & Health Care 16.1%
- --------------------------------------------------------------------------------
Transportation 13.5%
- --------------------------------------------------------------------------------
Other Revenue 12.0%
- --------------------------------------------------------------------------------
General Obligation 11.6%
- --------------------------------------------------------------------------------
Utilities 11.4%
- --------------------------------------------------------------------------------
Prerefunded 9.4%
- --------------------------------------------------------------------------------
Tax-Supported 1.2%
- --------------------------------------------------------------------------------
Housing 1.1%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 0.5%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 25
DIVIDEND DISTRIBUTIONS*
Franklin Massachusetts Insured Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.30 cents 3.74 cents
- --------------------------------------------------------------------------------
April 4.30 cents 3.74 cents
- --------------------------------------------------------------------------------
May 4.30 cents 3.74 cents
- --------------------------------------------------------------------------------
June 4.30 cents 3.75 cents
- --------------------------------------------------------------------------------
July 4.30 cents 3.75 cents
- --------------------------------------------------------------------------------
August 4.30 cents 3.75 cents
- --------------------------------------------------------------------------------
September 4.30 cents 3.76 cents
- --------------------------------------------------------------------------------
October 4.30 cents 3.76 cents
- --------------------------------------------------------------------------------
November 4.30 cents 3.76 cents
- --------------------------------------------------------------------------------
December 4.30 cents 3.73 cents
- --------------------------------------------------------------------------------
January 4.30 cents 3.73 cents
- --------------------------------------------------------------------------------
February 4.30 cents 3.73 cents
- --------------------------------------------------------------------------------
TOTAL 51.60 CENTS 44.94 CENTS
- --------------------------------------------------------------------------------
* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
MANAGER'S DISCUSSION
We used various strategies during the 12 months under review as we sought to
maximize tax-free income for shareholders. Please read the discussion on page 9
for details.
Thank you for your continued participation in Franklin Massachusetts Insured
Tax-Free Income Fund. We intend to maintain our conservative, buy-and-hold
investment strategy as we attempt to provide shareholders with high, current,
tax-free income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
26 | Annual Report
PERFORMANCE SUMMARY AS OF 2/28/05
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $11.98 $12.11
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.5160
- ----------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $12.06 $12.19
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4494
- ----------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.35% +40.62% +77.08%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.07% +6.12% +5.42%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.37% +5.56% +5.31%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 4.03%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.55%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.10%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.04%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.75% +36.75% +66.34%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.76% +6.46% +5.31%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.55% +5.91% +5.23%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.62%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 5.88%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.69%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.37%
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 27
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.07%
- -------------------------------------
5-Year +6.12%
- -------------------------------------
10-Year +5.42%
- -------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Massachusetts Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ---------------------- --------------- ----------
3/1/1995 $9,578 $10,000 $10,000
3/31/1995 $9,655 $10,115 $10,033
4/30/1995 $9,689 $10,127 $10,066
5/31/1995 $9,883 $10,450 $10,086
6/30/1995 $9,847 $10,359 $10,106
7/31/1995 $9,913 $10,457 $10,106
8/31/1995 $9,994 $10,589 $10,133
9/30/1995 $10,058 $10,656 $10,152
10/31/1995 $10,179 $10,811 $10,186
11/30/1995 $10,304 $10,991 $10,179
12/31/1995 $10,403 $11,096 $10,172
1/31/1996 $10,454 $11,180 $10,232
2/29/1996 $10,422 $11,105 $10,265
3/31/1996 $10,776 $10,963 $10,318
4/30/1996 $10,737 $10,932 $10,358
5/31/1996 $10,755 $10,928 $10,378
6/30/1996 $10,849 $11,047 $10,384
7/31/1996 $10,929 $11,147 $10,404
8/31/1996 $10,943 $11,144 $10,424
9/30/1996 $11,068 $11,300 $10,457
10/31/1996 $11,163 $11,428 $10,490
11/30/1996 $11,324 $11,637 $10,510
12/31/1996 $11,283 $11,588 $10,510
1/31/1997 $10,825 $11,610 $10,543
2/28/1997 $10,910 $11,716 $10,577
3/31/1997 $10,772 $11,560 $10,603
4/30/1997 $10,856 $11,657 $10,616
5/31/1997 $11,013 $11,832 $10,610
6/30/1997 $11,133 $11,958 $10,623
7/31/1997 $11,433 $12,289 $10,636
8/31/1997 $11,325 $12,174 $10,656
9/30/1997 $11,452 $12,319 $10,683
10/31/1997 $11,515 $12,398 $10,709
11/30/1997 $11,590 $12,471 $10,702
12/31/1997 $11,758 $12,653 $10,689
1/31/1998 $11,839 $12,783 $10,709
2/28/1998 $11,839 $12,787 $10,729
3/31/1998 $11,851 $12,799 $10,749
4/30/1998 $11,826 $12,741 $10,769
5/31/1998 $11,986 $12,942 $10,789
6/30/1998 $12,054 $12,994 $10,802
7/31/1998 $12,078 $13,026 $10,815
8/31/1998 $12,233 $13,227 $10,828
9/30/1998 $12,364 $13,392 $10,842
10/31/1998 $12,324 $13,392 $10,868
11/30/1998 $12,376 $13,439 $10,868
12/31/1998 $12,392 $13,473 $10,861
1/31/1999 $12,497 $13,633 $10,888
2/28/1999 $12,474 $13,573 $10,901
3/31/1999 $12,511 $13,592 $10,934
4/30/1999 $12,540 $13,626 $11,014
5/31/1999 $12,478 $13,547 $11,014
6/30/1999 $12,306 $13,352 $11,014
7/31/1999 $12,322 $13,401 $11,047
8/31/1999 $12,150 $13,293 $11,074
9/30/1999 $12,091 $13,299 $11,127
10/31/1999 $11,909 $13,155 $11,146
11/30/1999 $12,043 $13,295 $11,153
12/31/1999 $11,930 $13,196 $11,153
1/31/2000 $11,860 $13,138 $11,186
2/29/2000 $12,055 $13,291 $11,252
3/31/2000 $12,344 $13,581 $11,345
4/30/2000 $12,250 $13,501 $11,352
5/31/2000 $12,141 $13,431 $11,365
6/30/2000 $12,501 $13,787 $11,425
7/31/2000 $12,728 $13,979 $11,451
8/31/2000 $12,897 $14,194 $11,451
9/30/2000 $12,798 $14,120 $11,511
10/31/2000 $12,972 $14,274 $11,531
11/30/2000 $13,095 $14,382 $11,537
12/31/2000 $13,507 $14,738 $11,531
1/31/2001 $13,565 $14,884 $11,604
2/28/2001 $13,616 $14,931 $11,650
3/31/2001 $13,709 $15,065 $11,677
4/30/2001 $13,519 $14,901 $11,723
5/31/2001 $13,647 $15,062 $11,776
6/30/2001 $13,782 $15,163 $11,796
7/31/2001 $13,989 $15,387 $11,763
8/31/2001 $14,227 $15,641 $11,763
9/30/2001 $14,156 $15,588 $11,816
10/31/2001 $14,327 $15,774 $11,776
11/30/2001 $14,223 $15,641 $11,756
12/31/2001 $14,073 $15,493 $11,710
1/31/2002 $14,266 $15,762 $11,736
2/28/2002 $14,417 $15,952 $11,783
3/31/2002 $14,164 $15,639 $11,849
4/30/2002 $14,365 $15,945 $11,915
5/31/2002 $14,498 $16,041 $11,915
6/30/2002 $14,600 $16,211 $11,922
7/31/2002 $14,776 $16,420 $11,935
8/31/2002 $14,958 $16,617 $11,975
9/30/2002 $15,296 $16,981 $11,995
10/31/2002 $15,024 $16,699 $12,015
11/30/2002 $14,961 $16,630 $12,015
12/31/2002 $15,279 $16,981 $11,988
1/31/2003 $15,260 $16,938 $12,041
2/28/2003 $15,453 $17,175 $12,134
3/31/2003 $15,503 $17,185 $12,207
4/30/2003 $15,638 $17,299 $12,180
5/31/2003 $16,005 $17,704 $12,160
6/30/2003 $15,946 $17,628 $12,174
7/31/2003 $15,332 $17,011 $12,187
8/31/2003 $15,450 $17,138 $12,233
9/30/2003 $15,843 $17,642 $12,273
10/31/2003 $15,782 $17,553 $12,260
11/30/2003 $15,953 $17,736 $12,227
12/31/2003 $16,085 $17,883 $12,213
1/31/2004 $16,196 $17,986 $12,273
2/29/2004 $16,408 $18,256 $12,339
3/31/2004 $16,405 $18,193 $12,419
4/30/2004 $16,013 $17,762 $12,459
5/31/2004 $15,931 $17,697 $12,531
6/30/2004 $15,968 $17,762 $12,571
7/31/2004 $16,177 $17,996 $12,551
8/31/2004 $16,460 $18,356 $12,558
9/30/2004 $16,576 $18,454 $12,584
10/31/2004 $16,713 $18,612 $12,651
11/30/2004 $16,581 $18,459 $12,657
12/31/2004 $16,797 $18,684 $12,611
1/31/2005 $16,981 $18,859 $12,638
2/28/2005 $16,960 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.76%
- -------------------------------------
5-Year +6.46%
- -------------------------------------
Since Inception (5/1/95) +5.31%
- -------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Massachusetts Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ---------------------- --------------- ----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,212 $10,319 $10,020
6/30/1995 $10,177 $10,229 $10,039
7/31/1995 $10,239 $10,326 $10,039
8/31/1995 $10,326 $10,457 $10,066
9/30/1995 $10,378 $10,523 $10,086
10/31/1995 $10,495 $10,676 $10,118
11/30/1995 $10,630 $10,853 $10,112
12/31/1995 $10,726 $10,957 $10,105
1/31/1996 $10,772 $11,040 $10,165
2/29/1996 $10,736 $10,966 $10,197
3/31/1996 $10,725 $10,825 $10,250
4/30/1996 $10,689 $10,795 $10,290
5/31/1996 $10,710 $10,791 $10,309
6/30/1996 $10,790 $10,908 $10,316
7/31/1996 $10,876 $11,007 $10,336
8/31/1996 $10,876 $11,004 $10,355
9/30/1996 $11,006 $11,158 $10,388
10/31/1996 $11,088 $11,285 $10,421
11/30/1996 $11,236 $11,491 $10,441
12/31/1996 $11,197 $11,443 $10,441
1/31/1997 $11,097 $11,464 $10,474
2/28/1997 $11,189 $11,569 $10,507
3/31/1997 $11,043 $11,415 $10,533
4/30/1997 $11,114 $11,511 $10,546
5/31/1997 $11,270 $11,684 $10,540
6/30/1997 $11,397 $11,808 $10,553
7/31/1997 $11,688 $12,136 $10,566
8/31/1997 $11,574 $12,022 $10,586
9/30/1997 $11,707 $12,164 $10,612
10/31/1997 $11,764 $12,243 $10,639
11/30/1997 $11,835 $12,315 $10,632
12/31/1997 $11,990 $12,494 $10,619
1/31/1998 $12,076 $12,623 $10,639
2/28/1998 $12,070 $12,627 $10,658
3/31/1998 $12,076 $12,638 $10,678
4/30/1998 $12,046 $12,581 $10,698
5/31/1998 $12,202 $12,780 $10,718
6/30/1998 $12,266 $12,831 $10,731
7/31/1998 $12,294 $12,863 $10,744
8/31/1998 $12,434 $13,062 $10,757
9/30/1998 $12,561 $13,224 $10,770
10/31/1998 $12,526 $13,224 $10,797
11/30/1998 $12,562 $13,270 $10,797
12/31/1998 $12,583 $13,304 $10,790
1/31/1999 $12,683 $13,462 $10,816
2/28/1999 $12,642 $13,403 $10,829
3/31/1999 $12,684 $13,422 $10,862
4/30/1999 $12,707 $13,455 $10,941
5/31/1999 $12,639 $13,377 $10,941
6/30/1999 $12,460 $13,185 $10,941
7/31/1999 $12,471 $13,233 $10,974
8/31/1999 $12,292 $13,127 $11,001
9/30/1999 $12,215 $13,132 $11,053
10/31/1999 $12,027 $12,990 $11,073
11/30/1999 $12,167 $13,128 $11,080
12/31/1999 $12,048 $13,030 $11,080
1/31/2000 $11,961 $12,974 $11,113
2/29/2000 $12,163 $13,124 $11,178
3/31/2000 $12,446 $13,411 $11,271
4/30/2000 $12,346 $13,332 $11,277
5/31/2000 $12,230 $13,263 $11,290
6/30/2000 $12,585 $13,614 $11,350
7/31/2000 $12,806 $13,803 $11,376
8/31/2000 $12,970 $14,016 $11,376
9/30/2000 $12,866 $13,943 $11,435
10/31/2000 $13,034 $14,095 $11,455
11/30/2000 $13,152 $14,202 $11,461
12/31/2000 $13,570 $14,553 $11,455
1/31/2001 $13,611 $14,697 $11,527
2/28/2001 $13,668 $14,744 $11,573
3/31/2001 $13,754 $14,876 $11,600
4/30/2001 $13,557 $14,715 $11,646
5/31/2001 $13,678 $14,873 $11,698
6/30/2001 $13,794 $14,973 $11,718
7/31/2001 $14,004 $15,194 $11,685
8/31/2001 $14,222 $15,445 $11,685
9/30/2001 $14,158 $15,393 $11,738
10/31/2001 $14,310 $15,576 $11,698
11/30/2001 $14,212 $15,445 $11,679
12/31/2001 $14,045 $15,299 $11,633
1/31/2002 $14,241 $15,564 $11,659
2/28/2002 $14,372 $15,752 $11,705
3/31/2002 $14,115 $15,443 $11,771
4/30/2002 $14,320 $15,745 $11,837
5/31/2002 $14,446 $15,841 $11,837
6/30/2002 $14,541 $16,008 $11,843
7/31/2002 $14,721 $16,214 $11,856
8/31/2002 $14,882 $16,409 $11,896
9/30/2002 $15,221 $16,768 $11,916
10/31/2002 $14,934 $16,490 $11,935
11/30/2002 $14,866 $16,422 $11,935
12/31/2002 $15,173 $16,768 $11,909
1/31/2003 $15,145 $16,726 $11,962
2/28/2003 $15,330 $16,960 $12,054
3/31/2003 $15,370 $16,970 $12,126
4/30/2003 $15,496 $17,082 $12,100
5/31/2003 $15,851 $17,482 $12,080
6/30/2003 $15,797 $17,407 $12,093
7/31/2003 $15,186 $16,798 $12,107
8/31/2003 $15,295 $16,924 $12,153
9/30/2003 $15,673 $17,421 $12,192
10/31/2003 $15,605 $17,333 $12,179
11/30/2003 $15,754 $17,514 $12,146
12/31/2003 $15,889 $17,659 $12,133
1/31/2004 $15,978 $17,760 $12,192
2/29/2004 $16,194 $18,028 $12,258
3/31/2004 $16,182 $17,965 $12,337
4/30/2004 $15,791 $17,539 $12,377
5/31/2004 $15,704 $17,476 $12,449
6/30/2004 $15,732 $17,539 $12,488
7/31/2004 $15,929 $17,770 $12,469
8/31/2004 $16,198 $18,126 $12,475
9/30/2004 $16,316 $18,222 $12,502
10/31/2004 $16,430 $18,379 $12,567
11/30/2004 $16,307 $18,228 $12,574
12/31/2004 $16,495 $18,450 $12,528
1/31/2005 $16,681 $18,623 $12,554
2/28/2005 $16,634 $18,561 $12,627
28 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C) per
share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates as
of 12/23/04 for the maximum combined federal and Massachusetts state personal
income tax bracket of 38.45%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 29
YOUR FUND'S EXPENSES
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
30 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.10 $3.42
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.41
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.10 $6.18
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.16
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.68%
and C: 1.23%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
Annual Report | 31
FRANKLIN MICHIGAN INSURED
TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Michigan Insured Tax-Free Income
Fund seeks to provide high, current income exempt from federal and Michigan
state personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in insured
securities that pay interest free from such taxes.(1),(2)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Michigan Insured Tax-Free Income Fund covers the
fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.58 on February
29, 2004, to $12.35 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 54.42 cents per share for the same period.(3) The Performance
Summary beginning on page 35 shows that at the end of this reporting period the
Fund's Class A shares' distribution rate was 4.25%, based on an annualization of
the current 4.57 cent per share dividend and the maximum offering price of
$12.90 on February 28, 2005. An investor in the 2005 maximum combined federal
and Michigan state personal income tax bracket of 37.54% would need to earn a
distribution rate of 6.80% from a taxable investment to match the Fund's Class A
tax-free distribution rate. For the Fund's Class B and C shares' performance,
please see the Performance Summary.
STATE UPDATE
Michigan has a deep economic base that continues to slowly diversify away from
durables manufacturing; however, persistent economic weakness suggested that
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(2) The insurance relates only to the payment of principal and interest on the
portfolio's insured securities. No representation is made as to any insurer's
ability to meet its commitments.
(3) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
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 88.
32 | Annual Report
the biggest benefits of this trend may be yet to come. Prolonged job losses
undermined the state's financial performance despite strong management actions
to preserve balanced operations. The state passed its fiscal year 2005 budget
and succeeded in eliminating a $1.57 billion general fund budget gap with little
reliance on one-time revenues.(4) However, recently announced additional revenue
shortfalls could mean that existing balances may be quickly depleted, as has
been the case with prior shortfall plans.
The state's low debt burden of $405 per capita and 1.26% of income remained a
strength.(4) Also, the largely funded and manageable nature of the state's
pension liabilities helped Michigan's operations. However, the state's heavy
reliance on the manufacturing sector and high exposure to the cyclical auto
industry in particular strained its ability to maintain an above-average
financial performance.
Largely as a result of the challenges Michigan faces, Moody's Investors Service
downgraded the state's general obligation bond rating to Aa2 from Aa1.(5) The
state faced ongoing job losses, which have been among the nation's highest on a
percentage basis over the past several years, and continued financial strain as
the state heads into its fifth year of revenue weakness. However, Moody's cited
such credit strengths as the state's solid reserve levels built during earlier
economic strength, which provided a cushion for Michigan to absorb some of the
financial impact of substantial job losses. In addition, recent economic
forecasts were revised upward slightly to reflect an improved job climate in
nonmanufacturing sectors. The outlook for Michigan is stable, reflecting Moody's
expectations that the state will manage its budget challenges as it has in the
past and bring itself into structural balance.
(4) Source: Standard & Poor's, "Research: Summary: Michigan; Tax Secured,
General Obligation," RATINGSDIRECT, 1/25/05.
(5) This does not indicate Moody's rating of the Fund.
PORTFOLIO BREAKDOWN
Franklin Michigan Insured
Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 31.5%
- --------------------------------------------------------------------------------
Prerefunded 22.3%
- --------------------------------------------------------------------------------
Utilities 13.1%
- --------------------------------------------------------------------------------
Hospital & Health Care 12.4%
- --------------------------------------------------------------------------------
Transportation 8.5%
- --------------------------------------------------------------------------------
Higher Education 5.6%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 3.4%
- --------------------------------------------------------------------------------
Tax-Supported 1.7%
- --------------------------------------------------------------------------------
Other Revenue 1.5%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 33
DIVIDEND DISTRIBUTIONS*
Franklin Michigan Insured Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 4.50 cents 3.92 cents 3.92 cents
- --------------------------------------------------------------------------------
April 4.50 cents 3.92 cents 3.92 cents
- --------------------------------------------------------------------------------
May 4.50 cents 3.92 cents 3.92 cents
- --------------------------------------------------------------------------------
June 4.50 cents 3.95 cents 3.94 cents
- --------------------------------------------------------------------------------
July 4.50 cents 3.95 cents 3.94 cents
- --------------------------------------------------------------------------------
August 4.50 cents 3.95 cents 3.94 cents
- --------------------------------------------------------------------------------
September 4.57 cents 4.02 cents 4.02 cents
- --------------------------------------------------------------------------------
October 4.57 cents 4.02 cents 4.02 cents
- --------------------------------------------------------------------------------
November 4.57 cents 4.02 cents 4.02 cents
- --------------------------------------------------------------------------------
December 4.57 cents 4.00 cents 3.99 cents
- --------------------------------------------------------------------------------
January 4.57 cents 4.00 cents 3.99 cents
- --------------------------------------------------------------------------------
February 4.57 cents 4.00 cents 3.99 cents
- --------------------------------------------------------------------------------
TOTAL 54.42 CENTS 47.67 CENTS 47.61 CENTS
- --------------------------------------------------------------------------------
* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
MANAGER'S DISCUSSION
We used various strategies during the 12 months under review as we sought to
maximize tax-free income for shareholders. Please read the discussion on page 9
for details.
Thank you for your continued participation in Franklin Michigan Insured Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
34 | Annual Report
PERFORMANCE SUMMARY AS OF 2/28/05
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.23 $12.35 $12.58
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.5442
- ----------------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.23 $12.40 $12.63
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4767
- ----------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.23 $12.46 $12.69
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4761
- ----------------------------------------------------------------------------------------
Annual Report | 35
PERFORMANCE SUMMARY (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.65% +38.78% +77.78%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.72% +5.86% +5.46%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.79% +5.31% +5.32%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 4.25%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.80%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.10%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.96%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.08% +35.17% +36.67%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.85% +5.90% +6.19%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -2.04% +5.36% +5.97%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.86%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.18%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.69%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.31%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.06% +35.00% +67.32%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.08% +6.19% +5.37%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +0.97% +5.64% +5.27%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.84%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.15%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.69%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.31%
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
36 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Michigan Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ----------------- --------------- ----------
3/1/1995 $9,577 $10,000 $10,000
3/31/1995 $9,660 $10,115 $10,033
4/30/1995 $9,679 $10,127 $10,066
5/31/1995 $9,908 $10,450 $10,086
6/30/1995 $9,850 $10,359 $10,106
7/31/1995 $9,906 $10,457 $10,106
8/31/1995 $9,994 $10,589 $10,133
9/30/1995 $10,049 $10,656 $10,152
10/31/1995 $10,175 $10,811 $10,186
11/30/1995 $10,324 $10,991 $10,179
12/31/1995 $10,404 $11,096 $10,172
1/31/1996 $10,471 $11,180 $10,232
2/29/1996 $10,425 $11,105 $10,265
3/31/1996 $10,766 $10,963 $10,318
4/30/1996 $10,755 $10,932 $10,358
5/31/1996 $10,747 $10,928 $10,378
6/30/1996 $10,863 $11,047 $10,384
7/31/1996 $10,950 $11,147 $10,404
8/31/1996 $10,938 $11,144 $10,424
9/30/1996 $11,087 $11,300 $10,457
10/31/1996 $11,182 $11,428 $10,490
11/30/1996 $11,366 $11,637 $10,510
12/31/1996 $11,321 $11,588 $10,510
1/31/1997 $10,846 $11,610 $10,543
2/28/1997 $10,931 $11,716 $10,577
3/31/1997 $10,800 $11,560 $10,603
4/30/1997 $10,874 $11,657 $10,616
5/31/1997 $11,020 $11,832 $10,610
6/30/1997 $11,116 $11,958 $10,623
7/31/1997 $11,388 $12,289 $10,636
8/31/1997 $11,278 $12,174 $10,656
9/30/1997 $11,394 $12,319 $10,683
10/31/1997 $11,468 $12,398 $10,709
11/30/1997 $11,534 $12,471 $10,702
12/31/1997 $11,728 $12,653 $10,689
1/31/1998 $11,828 $12,783 $10,709
2/28/1998 $11,849 $12,787 $10,729
3/31/1998 $11,853 $12,799 $10,749
4/30/1998 $11,831 $12,741 $10,769
5/31/1998 $11,997 $12,942 $10,789
6/30/1998 $12,077 $12,994 $10,802
7/31/1998 $12,113 $13,026 $10,815
8/31/1998 $12,264 $13,227 $10,828
9/30/1998 $12,411 $13,392 $10,842
10/31/1998 $12,415 $13,392 $10,868
11/30/1998 $12,467 $13,439 $10,868
12/31/1998 $12,487 $13,473 $10,861
1/31/1999 $12,599 $13,633 $10,888
2/28/1999 $12,588 $13,573 $10,901
3/31/1999 $12,627 $13,592 $10,934
4/30/1999 $12,646 $13,626 $11,014
5/31/1999 $12,578 $13,547 $11,014
6/30/1999 $12,424 $13,352 $11,014
7/31/1999 $12,453 $13,401 $11,047
8/31/1999 $12,321 $13,293 $11,074
9/30/1999 $12,297 $13,299 $11,127
10/31/1999 $12,177 $13,155 $11,146
11/30/1999 $12,288 $13,295 $11,153
12/31/1999 $12,203 $13,196 $11,153
1/31/2000 $12,148 $13,138 $11,186
2/29/2000 $12,263 $13,291 $11,252
3/31/2000 $12,521 $13,581 $11,345
4/30/2000 $12,454 $13,501 $11,352
5/31/2000 $12,396 $13,431 $11,365
6/30/2000 $12,712 $13,787 $11,425
7/31/2000 $12,887 $13,979 $11,451
8/31/2000 $13,076 $14,194 $11,451
9/30/2000 $13,005 $14,120 $11,511
10/31/2000 $13,131 $14,274 $11,531
11/30/2000 $13,219 $14,382 $11,537
12/31/2000 $13,551 $14,738 $11,531
1/31/2001 $13,643 $14,884 $11,604
2/28/2001 $13,706 $14,931 $11,650
3/31/2001 $13,833 $15,065 $11,677
4/30/2001 $13,710 $14,901 $11,723
5/31/2001 $13,836 $15,062 $11,776
6/30/2001 $13,922 $15,163 $11,796
7/31/2001 $14,123 $15,387 $11,763
8/31/2001 $14,319 $15,641 $11,763
9/30/2001 $14,276 $15,588 $11,816
10/31/2001 $14,443 $15,774 $11,776
11/30/2001 $14,333 $15,641 $11,756
12/31/2001 $14,204 $15,493 $11,710
1/31/2002 $14,451 $15,762 $11,736
2/28/2002 $14,587 $15,952 $11,783
3/31/2002 $14,310 $15,639 $11,849
4/30/2002 $14,566 $15,945 $11,915
5/31/2002 $14,638 $16,041 $11,915
6/30/2002 $14,761 $16,211 $11,922
7/31/2002 $14,947 $16,420 $11,935
8/31/2002 $15,099 $16,617 $11,975
9/30/2002 $15,415 $16,981 $11,995
10/31/2002 $15,217 $16,699 $12,015
11/30/2002 $15,173 $16,630 $12,015
12/31/2002 $15,483 $16,981 $11,988
1/31/2003 $15,455 $16,938 $12,041
2/28/2003 $15,633 $17,175 $12,134
3/31/2003 $15,672 $17,185 $12,207
4/30/2003 $15,794 $17,299 $12,180
5/31/2003 $16,167 $17,704 $12,160
6/30/2003 $16,112 $17,628 $12,174
7/31/2003 $15,546 $17,011 $12,187
8/31/2003 $15,638 $17,138 $12,233
9/30/2003 $16,008 $17,642 $12,273
10/31/2003 $15,965 $17,553 $12,260
11/30/2003 $16,133 $17,736 $12,227
12/31/2003 $16,251 $17,883 $12,213
1/31/2004 $16,361 $17,986 $12,273
2/29/2004 $16,584 $18,256 $12,339
3/31/2004 $16,517 $18,193 $12,419
4/30/2004 $16,139 $17,762 $12,459
5/31/2004 $16,089 $17,697 $12,531
6/30/2004 $16,100 $17,762 $12,571
7/31/2004 $16,279 $17,996 $12,551
8/31/2004 $16,544 $18,356 $12,558
9/30/2004 $16,632 $18,454 $12,584
10/31/2004 $16,783 $18,612 $12,651
11/30/2004 $16,646 $18,459 $12,657
12/31/2004 $16,872 $18,684 $12,611
1/31/2005 $17,041 $18,859 $12,638
2/28/2005 $17,025 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.72%
- -------------------------------------
5-Year +5.86%
- -------------------------------------
10-Year +5.46%
- -------------------------------------
CLASS B (2/1/00-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Michigan Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ----------------- --------------- ----------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,111 $10,116 $10,059
3/31/2000 $10,309 $10,337 $10,142
4/30/2000 $10,249 $10,276 $10,148
5/31/2000 $10,204 $10,223 $10,160
6/30/2000 $10,459 $10,494 $10,213
7/31/2000 $10,599 $10,640 $10,237
8/31/2000 $10,748 $10,804 $10,237
9/30/2000 $10,694 $10,747 $10,290
10/31/2000 $10,793 $10,865 $10,308
11/30/2000 $10,860 $10,947 $10,314
12/31/2000 $11,127 $11,217 $10,308
1/31/2001 $11,207 $11,328 $10,373
2/28/2001 $11,253 $11,364 $10,415
3/31/2001 $11,342 $11,466 $10,438
4/30/2001 $11,244 $11,342 $10,480
5/31/2001 $11,342 $11,464 $10,527
6/30/2001 $11,408 $11,541 $10,545
7/31/2001 $11,566 $11,712 $10,515
8/31/2001 $11,721 $11,905 $10,515
9/30/2001 $11,691 $11,865 $10,563
10/31/2001 $11,812 $12,006 $10,527
11/30/2001 $11,718 $11,905 $10,509
12/31/2001 $11,607 $11,792 $10,468
1/31/2002 $11,802 $11,997 $10,492
2/28/2002 $11,908 $12,141 $10,533
3/31/2002 $11,677 $11,903 $10,592
4/30/2002 $11,879 $12,136 $10,652
5/31/2002 $11,931 $12,210 $10,652
6/30/2002 $12,026 $12,339 $10,658
7/31/2002 $12,180 $12,498 $10,669
8/31/2002 $12,299 $12,648 $10,705
9/30/2002 $12,549 $12,925 $10,723
10/31/2002 $12,374 $12,711 $10,741
11/30/2002 $12,343 $12,658 $10,741
12/31/2002 $12,587 $12,925 $10,717
1/31/2003 $12,558 $12,892 $10,764
2/28/2003 $12,696 $13,072 $10,847
3/31/2003 $12,722 $13,080 $10,912
4/30/2003 $12,815 $13,167 $10,889
5/31/2003 $13,120 $13,475 $10,871
6/30/2003 $13,068 $13,418 $10,883
7/31/2003 $12,595 $12,948 $10,895
8/31/2003 $12,663 $13,045 $10,936
9/30/2003 $12,956 $13,428 $10,972
10/31/2003 $12,914 $13,361 $10,960
11/30/2003 $13,045 $13,500 $10,930
12/31/2003 $13,134 $13,612 $10,918
1/31/2004 $13,227 $13,690 $10,972
2/29/2004 $13,390 $13,896 $11,031
3/31/2004 $13,340 $13,847 $11,102
4/30/2004 $13,029 $13,519 $11,137
5/31/2004 $12,973 $13,470 $11,203
6/30/2004 $12,987 $13,519 $11,238
7/31/2004 $13,125 $13,697 $11,220
8/31/2004 $13,332 $13,972 $11,226
9/30/2004 $13,398 $14,046 $11,250
10/31/2004 $13,502 $14,167 $11,309
11/30/2004 $13,397 $14,050 $11,315
12/31/2004 $13,562 $14,221 $11,274
1/31/2005 $13,703 $14,354 $11,297
2/28/2005 $13,567 $14,307 $11,363
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 2/28/05
- -------------------------------------
1-Year -1.85%
- -------------------------------------
5-Year +5.90%
- -------------------------------------
Since Inception (2/1/00) +6.19%
- -------------------------------------
Annual Report | 37
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.08%
- -------------------------------------
5-Year +6.19%
- -------------------------------------
Since Inception (5/1/95) +5.37%
- -------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Michigan Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ----------------- --------------- ----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,258 $10,319 $10,020
6/30/1995 $10,201 $10,229 $10,039
7/31/1995 $10,254 $10,326 $10,039
8/31/1995 $10,340 $10,457 $10,066
9/30/1995 $10,400 $10,523 $10,086
10/31/1995 $10,524 $10,676 $10,118
11/30/1995 $10,672 $10,853 $10,112
12/31/1995 $10,749 $10,957 $10,105
1/31/1996 $10,813 $11,040 $10,165
2/29/1996 $10,758 $10,966 $10,197
3/31/1996 $10,738 $10,825 $10,250
4/30/1996 $10,719 $10,795 $10,290
5/31/1996 $10,614 $10,791 $10,309
6/30/1996 $10,710 $10,908 $10,316
7/31/1996 $10,792 $11,007 $10,336
8/31/1996 $10,792 $11,004 $10,355
9/30/1996 $10,930 $11,158 $10,388
10/31/1996 $11,020 $11,285 $10,421
11/30/1996 $11,192 $11,491 $10,441
12/31/1996 $11,147 $11,443 $10,441
1/31/1997 $11,145 $11,464 $10,474
2/28/1997 $11,234 $11,569 $10,507
3/31/1997 $11,086 $11,415 $10,533
4/30/1997 $11,158 $11,511 $10,546
5/31/1997 $11,301 $11,684 $10,540
6/30/1997 $11,402 $11,808 $10,553
7/31/1997 $11,675 $12,136 $10,566
8/31/1997 $11,548 $12,022 $10,586
9/30/1997 $11,670 $12,164 $10,612
10/31/1997 $11,730 $12,243 $10,639
11/30/1997 $11,801 $12,315 $10,632
12/31/1997 $11,992 $12,494 $10,619
1/31/1998 $12,087 $12,623 $10,639
2/28/1998 $12,103 $12,627 $10,658
3/31/1998 $12,100 $12,638 $10,678
4/30/1998 $12,073 $12,581 $10,698
5/31/1998 $12,236 $12,780 $10,718
6/30/1998 $12,321 $12,831 $10,731
7/31/1998 $12,351 $12,863 $10,744
8/31/1998 $12,498 $13,062 $10,757
9/30/1998 $12,641 $13,224 $10,770
10/31/1998 $12,640 $13,224 $10,797
11/30/1998 $12,687 $13,270 $10,797
12/31/1998 $12,703 $13,304 $10,790
1/31/1999 $12,811 $13,462 $10,816
2/28/1999 $12,795 $13,403 $10,829
3/31/1999 $12,825 $13,422 $10,862
4/30/1999 $12,838 $13,455 $10,941
5/31/1999 $12,764 $13,377 $10,941
6/30/1999 $12,603 $13,185 $10,941
7/31/1999 $12,626 $13,233 $10,974
8/31/1999 $12,487 $13,127 $11,001
9/30/1999 $12,458 $13,132 $11,053
10/31/1999 $12,321 $12,990 $11,073
11/30/1999 $12,437 $13,128 $11,080
12/31/1999 $12,335 $13,030 $11,080
1/31/2000 $12,274 $12,974 $11,113
2/29/2000 $12,396 $13,124 $11,178
3/31/2000 $12,649 $13,411 $11,271
4/30/2000 $12,565 $13,332 $11,277
5/31/2000 $12,511 $13,263 $11,290
6/30/2000 $12,823 $13,614 $11,350
7/31/2000 $12,992 $13,803 $11,376
8/31/2000 $13,174 $14,016 $11,376
9/30/2000 $13,098 $13,943 $11,435
10/31/2000 $13,217 $14,095 $11,455
11/30/2000 $13,309 $14,202 $11,461
12/31/2000 $13,623 $14,553 $11,455
1/31/2001 $13,720 $14,697 $11,527
2/28/2001 $13,776 $14,744 $11,573
3/31/2001 $13,885 $14,876 $11,600
4/30/2001 $13,767 $14,715 $11,646
5/31/2001 $13,875 $14,873 $11,698
6/30/2001 $13,966 $14,973 $11,718
7/31/2001 $14,159 $15,194 $11,685
8/31/2001 $14,347 $15,445 $11,685
9/30/2001 $14,310 $15,393 $11,738
10/31/2001 $14,457 $15,576 $11,698
11/30/2001 $14,342 $15,445 $11,679
12/31/2001 $14,207 $15,299 $11,633
1/31/2002 $14,445 $15,564 $11,659
2/28/2002 $14,574 $15,752 $11,705
3/31/2002 $14,293 $15,443 $11,771
4/30/2002 $14,540 $15,745 $11,837
5/31/2002 $14,604 $15,841 $11,837
6/30/2002 $14,721 $16,008 $11,843
7/31/2002 $14,909 $16,214 $11,856
8/31/2002 $15,054 $16,409 $11,896
9/30/2002 $15,359 $16,768 $11,916
10/31/2002 $15,158 $16,490 $11,935
11/30/2002 $15,108 $16,422 $11,935
12/31/2002 $15,406 $16,768 $11,909
1/31/2003 $15,372 $16,726 $11,962
2/28/2003 $15,541 $16,960 $12,054
3/31/2003 $15,572 $16,970 $12,126
4/30/2003 $15,686 $17,082 $12,100
5/31/2003 $16,058 $17,482 $12,080
6/30/2003 $15,995 $17,407 $12,093
7/31/2003 $15,418 $16,798 $12,107
8/31/2003 $15,499 $16,924 $12,153
9/30/2003 $15,868 $17,421 $12,192
10/31/2003 $15,805 $17,333 $12,179
11/30/2003 $15,975 $17,514 $12,146
12/31/2003 $16,082 $17,659 $12,133
1/31/2004 $16,184 $17,760 $12,192
2/29/2004 $16,396 $18,028 $12,258
3/31/2004 $16,322 $17,965 $12,337
4/30/2004 $15,943 $17,539 $12,377
5/31/2004 $15,875 $17,476 $12,449
6/30/2004 $15,892 $17,539 $12,488
7/31/2004 $16,061 $17,770 $12,469
8/31/2004 $16,313 $18,126 $12,475
9/30/2004 $16,391 $18,222 $12,502
10/31/2004 $16,532 $18,379 $12,567
11/30/2004 $16,390 $18,228 $12,574
12/31/2004 $16,603 $18,450 $12,528
1/31/2005 $16,761 $18,623 $12,554
2/28/2005 $16,732 $18,561 $12,627
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. 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.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B and
C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates as
of 12/23/04 for the maximum combined federal and Michigan state personal income
tax bracket of 37.54%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
38 | Annual Report
YOUR FUND'S EXPENSES
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 39
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.90 $3.27
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.20 $5.98
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.90 $6.03
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.84 $6.01
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.65%;
B: 1.19%; and C: 1.20%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
40 | Annual Report
FRANKLIN MINNESOTA INSURED
TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Minnesota Insured Tax-Free
Income Fund seeks to provide high, current income exempt from federal and
Minnesota state personal income taxes consistent with prudent investment
management and preservation of capital by investing at least 80% of its total
assets in insured securities that pay interest free from such taxes.(1),(2)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Minnesota Insured Tax-Free Income Fund covers
the fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.39 on February
29, 2004, to $12.23 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 52.20 cents per share for the same period.(3) The Performance
Summary beginning on page 44 shows that at the end of this reporting period the
Fund's Class A shares' distribution rate was 4.09%, based on an annualization of
the current 4.35 cent per share dividend and the maximum offering price of
$12.77 on February 28, 2005. An investor in the 2005 maximum combined federal
and Minnesota state personal income tax bracket of 40.10% would need to earn a
distribution rate of 6.83% from a taxable investment to match the Fund's Class A
tax-free distribution rate. For the Fund's Class C shares' performance, please
see the Performance Summary.
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(2) The insurance relates only to the payment of principal and interest on the
portfolio's insured securities. No representation is made as to any insurer's
ability to meet its commitments.
(3) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
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 97.
Annual Report | 41
PORTFOLIO BREAKDOWN
Franklin Minnesota Insured
Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 49.4%
- --------------------------------------------------------------------------------
Hospital & Health Care 12.8%
- --------------------------------------------------------------------------------
Utilities 9.8%
- --------------------------------------------------------------------------------
Housing 8.2%
- --------------------------------------------------------------------------------
Prerefunded 7.1%
- --------------------------------------------------------------------------------
Transportation 6.4%
- --------------------------------------------------------------------------------
Higher Education 2.7%
- --------------------------------------------------------------------------------
Other Revenue 1.7%
- --------------------------------------------------------------------------------
Tax-Supported 1.2%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 0.7%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
STATE UPDATE
Minnesota has a deep and diverse economy and moderate debt levels. The state's
strong management is addressing short- and long-term structural issues. A
rebounding economy and accurate revenue forecasting helped the state move toward
fiscal stability. Minnesota's 2004-2005 biennial budget provides for building
balances up to $631 million, with a positive result for fiscal year 2004 adding
to this total.(4)
Although employment has not completely recovered from the 2001 recession,
payroll employment growth has improved as active unemployment claims have
steadily fallen from recession levels. Minnesota's unemployment rate was 4.2% as
of February 2005, below the 5.4% national rate.(5) The state's wealth levels are
strong, with personal income per capita at about 108% of the national figure.(6)
Minnesota's debt issuance is highly centralized and controlled. The state's debt
per capita of $691, compared with the national median of $701, ranked 26th among
states.(6) Minnesota's debt as a percent of personal income fell slightly in
recent years, largely as a result of increasingly strong personal income levels,
and ranked 30th, down from its historical ranking in the mid-20s.(6) As a result
of Minnesota's diverse economy, strong management and moderate debt levels,
Standard & Poor's has assigned the state's general obligation bonds the highest
AAA rating and a stable outlook.(7)
(4) Source: Standard & Poor's, "Research: Summary: Minnesota; Tax Secured,
General Obligation," RATINGSDIRECT, 10/19/04.
(5) Source: Bureau of Labor Statistics.
(6) Source: Moody's Investors Service, "New Issue: Minnesota (State of),"
10/15/04.
(7) This does not indicate Standard & Poor's rating of the Fund.
42 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Minnesota Insured Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.35 cents 3.83 cents
- --------------------------------------------------------------------------------
April 4.35 cents 3.83 cents
- --------------------------------------------------------------------------------
May 4.35 cents 3.83 cents
- --------------------------------------------------------------------------------
June 4.35 cents 3.76 cents
- --------------------------------------------------------------------------------
July 4.35 cents 3.76 cents
- --------------------------------------------------------------------------------
August 4.35 cents 3.76 cents
- --------------------------------------------------------------------------------
September 4.35 cents 3.78 cents
- --------------------------------------------------------------------------------
October 4.35 cents 3.78 cents
- --------------------------------------------------------------------------------
November 4.35 cents 3.78 cents
- --------------------------------------------------------------------------------
December 4.35 cents 3.77 cents
- --------------------------------------------------------------------------------
January 4.35 cents 3.77 cents
- --------------------------------------------------------------------------------
February 4.35 cents 3.77 cents
- --------------------------------------------------------------------------------
TOTAL 52.20 CENTS 45.42 CENTS
- --------------------------------------------------------------------------------
* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
MANAGER'S DISCUSSION
We used various strategies during the 12 months under review as we sought to
maximize tax-free income for shareholders. Please read the discussion on page 9
for details.
Thank you for your continued participation in Franklin Minnesota Insured
Tax-Free Income Fund. We intend to maintain our conservative, buy-and-hold
investment strategy as we attempt to provide shareholders with high, current,
tax-free income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
Annual Report | 43
PERFORMANCE SUMMARY AS OF 2/28/05
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.16 $12.23 $12.39
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.5220
- ----------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.16 $12.31 $12.47
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4542
- ----------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.99% +38.46% +71.15%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.39% +5.81% +5.06%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.77% +5.19% +4.92%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 4.09%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.83%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.30%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.51%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.40% +34.79% +60.93%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.41% +6.15% +4.96%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.13% +5.52% +4.85%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.69%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.16%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.90%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.84%
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
44 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Minnesota Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ------------------ --------------- ----------
3/1/1995 $9,573 $10,000 $10,000
3/31/1995 $9,654 $10,115 $10,033
4/30/1995 $9,672 $10,127 $10,066
5/31/1995 $9,874 $10,450 $10,086
6/30/1995 $9,824 $10,359 $10,106
7/31/1995 $9,879 $10,457 $10,106
8/31/1995 $9,965 $10,589 $10,133
9/30/1995 $10,027 $10,656 $10,152
10/31/1995 $10,144 $10,811 $10,186
11/30/1995 $10,264 $10,991 $10,179
12/31/1995 $10,351 $11,096 $10,172
1/31/1996 $10,400 $11,180 $10,232
2/29/1996 $10,346 $11,105 $10,265
3/31/1996 $10,230 $10,963 $10,318
4/30/1996 $10,210 $10,932 $10,358
5/31/1996 $10,218 $10,928 $10,378
6/30/1996 $10,315 $11,047 $10,384
7/31/1996 $10,400 $11,147 $10,404
8/31/1996 $10,387 $11,144 $10,424
9/30/1996 $10,515 $11,300 $10,457
10/31/1996 $10,606 $11,428 $10,490
11/30/1996 $10,742 $11,637 $10,510
12/31/1996 $10,713 $11,588 $10,510
1/31/1997 $10,733 $11,610 $10,543
2/28/1997 $10,816 $11,716 $10,577
3/31/1997 $10,713 $11,560 $10,603
4/30/1997 $10,786 $11,657 $10,616
5/31/1997 $10,911 $11,832 $10,610
6/30/1997 $11,006 $11,958 $10,623
7/31/1997 $11,256 $12,289 $10,636
8/31/1997 $11,184 $12,174 $10,656
9/30/1997 $11,289 $12,319 $10,683
10/31/1997 $11,351 $12,398 $10,709
11/30/1997 $11,416 $12,471 $10,702
12/31/1997 $11,539 $12,653 $10,689
1/31/1998 $11,628 $12,783 $10,709
2/28/1998 $11,640 $12,787 $10,729
3/31/1998 $11,664 $12,799 $10,749
4/30/1998 $11,644 $12,741 $10,769
5/31/1998 $11,790 $12,942 $10,789
6/30/1998 $11,842 $12,994 $10,802
7/31/1998 $11,868 $13,026 $10,815
8/31/1998 $11,997 $13,227 $10,828
9/30/1998 $12,104 $13,392 $10,842
10/31/1998 $12,139 $13,392 $10,868
11/30/1998 $12,180 $13,439 $10,868
12/31/1998 $12,196 $13,473 $10,861
1/31/1999 $12,286 $13,633 $10,888
2/28/1999 $12,245 $13,573 $10,901
3/31/1999 $12,303 $13,592 $10,934
4/30/1999 $12,313 $13,626 $11,014
5/31/1999 $12,267 $13,547 $11,014
6/30/1999 $12,098 $13,352 $11,014
7/31/1999 $12,115 $13,401 $11,047
8/31/1999 $11,954 $13,293 $11,074
9/30/1999 $11,921 $13,299 $11,127
10/31/1999 $11,728 $13,155 $11,146
11/30/1999 $11,857 $13,295 $11,153
12/31/1999 $11,740 $13,196 $11,153
1/31/2000 $11,675 $13,138 $11,186
2/29/2000 $11,841 $13,291 $11,252
3/31/2000 $12,125 $13,581 $11,345
4/30/2000 $12,036 $13,501 $11,352
5/31/2000 $11,934 $13,431 $11,365
6/30/2000 $12,255 $13,787 $11,425
7/31/2000 $12,437 $13,979 $11,451
8/31/2000 $12,643 $14,194 $11,451
9/30/2000 $12,561 $14,120 $11,511
10/31/2000 $12,705 $14,274 $11,531
11/30/2000 $12,812 $14,382 $11,537
12/31/2000 $13,137 $14,738 $11,531
1/31/2001 $13,238 $14,884 $11,604
2/28/2001 $13,299 $14,931 $11,650
3/31/2001 $13,423 $15,065 $11,677
4/30/2001 $13,289 $14,901 $11,723
5/31/2001 $13,412 $15,062 $11,776
6/30/2001 $13,507 $15,163 $11,796
7/31/2001 $13,682 $15,387 $11,763
8/31/2001 $13,864 $15,641 $11,763
9/30/2001 $13,810 $15,588 $11,816
10/31/2001 $13,961 $15,774 $11,776
11/30/2001 $13,887 $15,641 $11,756
12/31/2001 $13,760 $15,493 $11,710
1/31/2002 $13,955 $15,762 $11,736
2/28/2002 $14,077 $15,952 $11,783
3/31/2002 $13,872 $15,639 $11,849
4/30/2002 $14,076 $15,945 $11,915
5/31/2002 $14,158 $16,041 $11,915
6/30/2002 $14,256 $16,211 $11,922
7/31/2002 $14,414 $16,420 $11,935
8/31/2002 $14,539 $16,617 $11,975
9/30/2002 $14,826 $16,981 $11,995
10/31/2002 $14,618 $16,699 $12,015
11/30/2002 $14,586 $16,630 $12,015
12/31/2002 $14,853 $16,981 $11,988
1/31/2003 $14,860 $16,938 $12,041
2/28/2003 $15,046 $17,175 $12,134
3/31/2003 $15,070 $17,185 $12,207
4/30/2003 $15,188 $17,299 $12,180
5/31/2003 $15,539 $17,704 $12,160
6/30/2003 $15,483 $17,628 $12,174
7/31/2003 $14,990 $17,011 $12,187
8/31/2003 $15,067 $17,138 $12,233
9/30/2003 $15,428 $17,642 $12,273
10/31/2003 $15,336 $17,553 $12,260
11/30/2003 $15,486 $17,736 $12,227
12/31/2003 $15,625 $17,883 $12,213
1/31/2004 $15,719 $17,986 $12,273
2/29/2004 $15,922 $18,256 $12,339
3/31/2004 $15,893 $18,193 $12,419
4/30/2004 $15,536 $17,762 $12,459
5/31/2004 $15,472 $17,697 $12,531
6/30/2004 $15,520 $17,762 $12,571
7/31/2004 $15,692 $17,996 $12,551
8/31/2004 $15,950 $18,356 $12,558
9/30/2004 $16,045 $18,454 $12,584
10/31/2004 $16,190 $18,612 $12,651
11/30/2004 $16,067 $18,459 $12,657
12/31/2004 $16,284 $18,684 $12,611
1/31/2005 $16,446 $18,859 $12,638
2/28/2005 $16,384 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.39%
- -------------------------------------
5-Year +5.81%
- -------------------------------------
10-Year +5.06%
- -------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Minnesota Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ------------------ --------------- ----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,220 $10,319 $10,020
6/30/1995 $10,163 $10,229 $10,039
7/31/1995 $10,215 $10,326 $10,039
8/31/1995 $10,308 $10,457 $10,066
9/30/1995 $10,358 $10,523 $10,086
10/31/1995 $10,472 $10,676 $10,118
11/30/1995 $10,600 $10,853 $10,112
12/31/1995 $10,683 $10,957 $10,105
1/31/1996 $10,728 $11,040 $10,165
2/29/1996 $10,666 $10,966 $10,197
3/31/1996 $10,542 $10,825 $10,250
4/30/1996 $10,516 $10,795 $10,290
5/31/1996 $10,528 $10,791 $10,309
6/30/1996 $10,614 $10,908 $10,316
7/31/1996 $10,696 $11,007 $10,336
8/31/1996 $10,687 $11,004 $10,355
9/30/1996 $10,805 $11,158 $10,388
10/31/1996 $10,893 $11,285 $10,421
11/30/1996 $11,027 $11,491 $10,441
12/31/1996 $10,992 $11,443 $10,441
1/31/1997 $11,006 $11,464 $10,474
2/28/1997 $11,092 $11,569 $10,507
3/31/1997 $10,980 $11,415 $10,533
4/30/1997 $11,050 $11,511 $10,546
5/31/1997 $11,173 $11,684 $10,540
6/30/1997 $11,275 $11,808 $10,553
7/31/1997 $11,514 $12,136 $10,566
8/31/1997 $11,434 $12,022 $10,586
9/30/1997 $11,536 $12,164 $10,612
10/31/1997 $11,594 $12,243 $10,639
11/30/1997 $11,654 $12,315 $10,632
12/31/1997 $11,783 $12,494 $10,619
1/31/1998 $11,868 $12,623 $10,639
2/28/1998 $11,874 $12,627 $10,658
3/31/1998 $11,893 $12,638 $10,678
4/30/1998 $11,868 $12,581 $10,698
5/31/1998 $12,011 $12,780 $10,718
6/30/1998 $12,057 $12,831 $10,731
7/31/1998 $12,078 $12,863 $10,744
8/31/1998 $12,204 $13,062 $10,757
9/30/1998 $12,306 $13,224 $10,770
10/31/1998 $12,334 $13,224 $10,797
11/30/1998 $12,370 $13,270 $10,797
12/31/1998 $12,390 $13,304 $10,790
1/31/1999 $12,475 $13,462 $10,816
2/28/1999 $12,418 $13,403 $10,829
3/31/1999 $12,470 $13,422 $10,862
4/30/1999 $12,484 $13,455 $10,941
5/31/1999 $12,421 $13,377 $10,941
6/30/1999 $12,246 $13,185 $10,941
7/31/1999 $12,268 $13,233 $10,974
8/31/1999 $12,089 $13,127 $11,001
9/30/1999 $12,049 $13,132 $11,053
10/31/1999 $11,851 $12,990 $11,073
11/30/1999 $11,974 $13,128 $11,080
12/31/1999 $11,852 $13,030 $11,080
1/31/2000 $11,781 $12,974 $11,113
2/29/2000 $11,942 $13,124 $11,178
3/31/2000 $12,233 $13,411 $11,271
4/30/2000 $12,139 $13,332 $11,277
5/31/2000 $12,030 $13,263 $11,290
6/30/2000 $12,335 $13,614 $11,350
7/31/2000 $12,523 $13,803 $11,376
8/31/2000 $12,723 $14,016 $11,376
9/30/2000 $12,635 $13,943 $11,435
10/31/2000 $12,773 $14,095 $11,455
11/30/2000 $12,864 $14,202 $11,461
12/31/2000 $13,196 $14,553 $11,455
1/31/2001 $13,291 $14,697 $11,527
2/28/2001 $13,345 $14,744 $11,573
3/31/2001 $13,463 $14,876 $11,600
4/30/2001 $13,323 $14,715 $11,646
5/31/2001 $13,439 $14,873 $11,698
6/30/2001 $13,529 $14,973 $11,718
7/31/2001 $13,707 $15,194 $11,685
8/31/2001 $13,870 $15,445 $11,685
9/30/2001 $13,811 $15,393 $11,738
10/31/2001 $13,956 $15,576 $11,698
11/30/2001 $13,876 $15,445 $11,679
12/31/2001 $13,742 $15,299 $11,633
1/31/2002 $13,941 $15,564 $11,659
2/28/2002 $14,044 $15,752 $11,705
3/31/2002 $13,847 $15,443 $11,771
4/30/2002 $14,043 $15,745 $11,837
5/31/2002 $14,104 $15,841 $11,837
6/30/2002 $14,207 $16,008 $11,843
7/31/2002 $14,357 $16,214 $11,856
8/31/2002 $14,476 $16,409 $11,896
9/30/2002 $14,754 $16,768 $11,916
10/31/2002 $14,543 $16,490 $11,935
11/30/2002 $14,505 $16,422 $11,935
12/31/2002 $14,775 $16,768 $11,909
1/31/2003 $14,764 $16,726 $11,962
2/28/2003 $14,941 $16,960 $12,054
3/31/2003 $14,958 $16,970 $12,126
4/30/2003 $15,067 $17,082 $12,100
5/31/2003 $15,406 $17,482 $12,080
6/30/2003 $15,343 $17,407 $12,093
7/31/2003 $14,849 $16,798 $12,107
8/31/2003 $14,916 $16,924 $12,153
9/30/2003 $15,263 $17,421 $12,192
10/31/2003 $15,175 $17,333 $12,179
11/30/2003 $15,316 $17,514 $12,146
12/31/2003 $15,434 $17,659 $12,133
1/31/2004 $15,520 $17,760 $12,192
2/29/2004 $15,727 $18,028 $12,258
3/31/2004 $15,679 $17,965 $12,337
4/30/2004 $15,335 $17,539 $12,377
5/31/2004 $15,266 $17,476 $12,449
6/30/2004 $15,291 $17,539 $12,488
7/31/2004 $15,466 $17,770 $12,469
8/31/2004 $15,709 $18,126 $12,475
9/30/2004 $15,795 $18,222 $12,502
10/31/2004 $15,917 $18,379 $12,567
11/30/2004 $15,800 $18,228 $12,574
12/31/2004 $15,993 $18,450 $12,528
1/31/2005 $16,158 $18,623 $12,554
2/28/2005 $16,093 $18,561 $12,627
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.41%
- -------------------------------------
5-Year +6.15%
- -------------------------------------
Since Inception (5/1/95) +4.96%
- -------------------------------------
Annual Report | 45
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C) per
share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates as
of 12/23/04 for the maximum combined federal and Minnesota state personal income
tax bracket of 40.10%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
46 | Annual Report
YOUR FUND'S EXPENSES
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 47
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.10 $3.32
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.10 $6.08
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.67%
and C: 1.22%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
48 | Annual Report
FRANKLIN OHIO INSURED
TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Ohio Insured Tax-Free Income
Fund seeks to provide high, current income exempt from federal and Ohio state
personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in insured
securities that pay interest free from such taxes.(1),(2)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Ohio Insured Tax-Free Income Fund covers the
fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.81 on February
29, 2004, to $12.64 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 53.88 cents per share for the same period.(3) The Performance
Summary beginning on page 52 shows that at the end of this reporting period, the
Fund's Class A shares' distribution rate was 4.14%, based on an annualization of
the current 4.55 cent per share dividend and the maximum offering price of
$13.20 on February 28, 2005. An investor in the 2005 maximum combined federal
and Ohio state personal income tax bracket of 39.88% would need to earn a
distribution rate of 6.89% from a taxable investment to match the Fund's Class A
tax-free distribution rate. For the Fund's Class B and C shares' performance,
please see the Performance Summary.
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(2) The insurance relates only to the payment of principal and interest on the
portfolio's insured securities. No representation is made as to any insurer's
ability to meet its commitments.
(3) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchase your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
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 107.
Annual Report | 49
PORTFOLIO BREAKDOWN
Franklin Ohio Insured
Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 47.8%
- --------------------------------------------------------------------------------
Prerefunded 13.0%
- --------------------------------------------------------------------------------
Higher Education 10.3%
- --------------------------------------------------------------------------------
Utilities 10.2%
- --------------------------------------------------------------------------------
Tax-Supported 5.3%
- --------------------------------------------------------------------------------
Hospital & Health Care 4.5%
- --------------------------------------------------------------------------------
Transportation 3.3%
- --------------------------------------------------------------------------------
Housing 1.7%
- --------------------------------------------------------------------------------
Other Revenue 1.7%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 1.5%
- --------------------------------------------------------------------------------
Corporate-Backed 0.7%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
STATE UPDATE
Ohio has a broad and diverse economic base led by manufacturing and expanding
health care and technology sectors. The economic slowdown of the past few years
was broad based, with the auto, machinery, steel and air industries particularly
hard hit. Job losses continued in 2004 for many sectors, although the rate of
decline slowed. However, employment in education and health care showed gains
throughout the economic downturn, slowing only recently. The state's
unemployment rate was 6.1% in February 2004 and rose to 6.4% in February 2005,
above the 5.4% national average.(4)
The state has a history of sound financial management, including through the
recent period of severe revenue strain. Some of Ohio's credit strengths are its
prompt spending reduction to address revenue weakness and its healthy reserve
levels built up during better economic times that provided a cushion to absorb
some of the recession's financial impact. Financial results for fiscal year 2004
exceeded March 2004 expectations, when revenue estimates were revised downward.
Revenue projections for fiscal year 2005 remained at the same level projected in
March 2004, and year-to-date revenue figures through January 2005 showed tax
receipts ahead of the revised estimate.
Moody's Investors Service revised upward the state's outlook to stable from
negative in November 2004. Despite weak economic conditions that resulted in
downward revisions to revenue projections in recent years, economic trends
showed some improvement, and state finances have strengthened relative to the
prior biennium, helped by a temporary sales tax increase and other onetime
sources.
(4) Source: Bureau of Labor Statistics.
50 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Ohio Insured Tax-Free Income Fund
3/1/04-2/28/05
------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 4.49 cents 3.90 cents 3.92 cents
- --------------------------------------------------------------------------------
April 4.49 cents 3.90 cents 3.92 cents
- --------------------------------------------------------------------------------
May 4.49 cents 3.90 cents 3.92 cents
- --------------------------------------------------------------------------------
June 4.49 cents 3.92 cents 3.91 cents
- --------------------------------------------------------------------------------
July 4.49 cents 3.92 cents 3.91 cents
- --------------------------------------------------------------------------------
August 4.49 cents 3.92 cents 3.91 cents
- --------------------------------------------------------------------------------
September 4.49 cents 3.93 cents 3.93 cents
- --------------------------------------------------------------------------------
October 4.49 cents 3.93 cents 3.93 cents
- --------------------------------------------------------------------------------
November 4.49 cents 3.93 cents 3.93 cents
- --------------------------------------------------------------------------------
December 4.49 cents 3.89 cents 3.90 cents
- --------------------------------------------------------------------------------
January 4.49 cents 3.89 cents 3.90 cents
- --------------------------------------------------------------------------------
February 4.49 cents 3.89 cents 3.90 cents
- --------------------------------------------------------------------------------
TOTAL 53.88 CENTS 46.92 CENTS 46.98 CENTS
- --------------------------------------------------------------------------------
* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
MANAGER'S DISCUSSION
We used various strategies during the 12 months under review as we sought to
maximize tax-free income for shareholders. Please read the discussion on page 9
for details.
Thank you for your continued participation in Franklin Ohio Insured Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
Annual Report | 51
PERFORMANCE SUMMARY AS OF 2/28/05
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.17 $12.64 $12.81
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.5388
- ----------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0123
- ----------------------------------------------------------------------------------------
TOTAL $0.5511
- ----------------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.17 $12.68 $12.85
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4692
- ----------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0123
- ----------------------------------------------------------------------------------------
TOTAL $0.4815
- ----------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ----------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.16 $12.74 $12.90
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ----------------------------------------------------------------------------------------
Dividend Income $0.4698
- ----------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0123
- ----------------------------------------------------------------------------------------
TOTAL $0.4821
- ----------------------------------------------------------------------------------------
Franklin Ohio Insured Tax-Free Income Fund paid distributions derived from
long-term capital gains of 1.23 cents ($0.0123) per share in June 2004. The Fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
52 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.15% +38.70% +76.43%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.25% +5.84% +5.38%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.39% +5.26% +5.23%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 4.14%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.89%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.12%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.19%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.56% +35.25% +36.85%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.38% +5.91% +6.22%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.56% +5.32% +5.98%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.77%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.27%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.71%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.51%
- ----------------------------------------------------------------------------------------
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.64% +35.10% +66.24%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.65% +6.20% +5.30%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.38% +5.61% +5.18%
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.73%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.20%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.71%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.51%
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 53
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.25%
- -------------------------------------
5-Year +5.84%
- -------------------------------------
10-Year +5.38%
- -------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Ohio Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ---------------- --------------- ----------
3/1/1995 $9,574 $10,000 $10,000
3/31/1995 $9,656 $10,115 $10,033
4/30/1995 $9,667 $10,127 $10,066
5/31/1995 $9,911 $10,450 $10,086
6/30/1995 $9,844 $10,359 $10,106
7/31/1995 $9,891 $10,457 $10,106
8/31/1995 $9,995 $10,589 $10,133
9/30/1995 $10,041 $10,656 $10,152
10/31/1995 $10,167 $10,811 $10,186
11/30/1995 $10,313 $10,991 $10,179
12/31/1995 $10,409 $11,096 $10,172
1/31/1996 $10,467 $11,180 $10,232
2/29/1996 $10,405 $11,105 $10,265
3/31/1996 $10,280 $10,963 $10,318
4/30/1996 $10,267 $10,932 $10,358
5/31/1996 $10,292 $10,928 $10,378
6/30/1996 $10,405 $11,047 $10,384
7/31/1996 $10,490 $11,147 $10,404
8/31/1996 $10,485 $11,144 $10,424
9/30/1996 $10,641 $11,300 $10,457
10/31/1996 $10,742 $11,428 $10,490
11/30/1996 $10,913 $11,637 $10,510
12/31/1996 $10,876 $11,588 $10,510
1/31/1997 $10,880 $11,610 $10,543
2/28/1997 $10,963 $11,716 $10,577
3/31/1997 $10,834 $11,560 $10,603
4/30/1997 $10,916 $11,657 $10,616
5/31/1997 $11,060 $11,832 $10,610
6/30/1997 $11,166 $11,958 $10,623
7/31/1997 $11,442 $12,289 $10,636
8/31/1997 $11,334 $12,174 $10,656
9/30/1997 $11,457 $12,319 $10,683
10/31/1997 $11,510 $12,398 $10,709
11/30/1997 $11,584 $12,471 $10,702
12/31/1997 $11,763 $12,653 $10,689
1/31/1998 $11,871 $12,783 $10,709
2/28/1998 $11,864 $12,787 $10,729
3/31/1998 $11,870 $12,799 $10,749
4/30/1998 $11,842 $12,741 $10,769
5/31/1998 $12,006 $12,942 $10,789
6/30/1998 $12,053 $12,994 $10,802
7/31/1998 $12,088 $13,026 $10,815
8/31/1998 $12,226 $13,227 $10,828
9/30/1998 $12,380 $13,392 $10,842
10/31/1998 $12,403 $13,392 $10,868
11/30/1998 $12,444 $13,439 $10,868
12/31/1998 $12,464 $13,473 $10,861
1/31/1999 $12,565 $13,633 $10,888
2/28/1999 $12,535 $13,573 $10,901
3/31/1999 $12,584 $13,592 $10,934
4/30/1999 $12,604 $13,626 $11,014
5/31/1999 $12,529 $13,547 $11,014
6/30/1999 $12,376 $13,352 $11,014
7/31/1999 $12,393 $13,401 $11,047
8/31/1999 $12,244 $13,293 $11,074
9/30/1999 $12,243 $13,299 $11,127
10/31/1999 $12,084 $13,155 $11,146
11/30/1999 $12,193 $13,295 $11,153
12/31/1999 $12,089 $13,196 $11,153
1/31/2000 $12,036 $13,138 $11,186
2/29/2000 $12,181 $13,291 $11,252
3/31/2000 $12,446 $13,581 $11,345
4/30/2000 $12,371 $13,501 $11,352
5/31/2000 $12,325 $13,431 $11,365
6/30/2000 $12,615 $13,787 $11,425
7/31/2000 $12,798 $13,979 $11,451
8/31/2000 $12,982 $14,194 $11,451
9/30/2000 $12,913 $14,120 $11,511
10/31/2000 $13,027 $14,274 $11,531
11/30/2000 $13,135 $14,382 $11,537
12/31/2000 $13,461 $14,738 $11,531
1/31/2001 $13,542 $14,884 $11,604
2/28/2001 $13,581 $14,931 $11,650
3/31/2001 $13,695 $15,065 $11,677
4/30/2001 $13,564 $14,901 $11,723
5/31/2001 $13,677 $15,062 $11,776
6/30/2001 $13,764 $15,163 $11,796
7/31/2001 $13,951 $15,387 $11,763
8/31/2001 $14,157 $15,641 $11,763
9/30/2001 $14,140 $15,588 $11,816
10/31/2001 $14,285 $15,774 $11,776
11/30/2001 $14,213 $15,641 $11,756
12/31/2001 $14,099 $15,493 $11,710
1/31/2002 $14,319 $15,762 $11,736
2/28/2002 $14,454 $15,952 $11,783
3/31/2002 $14,230 $15,639 $11,849
4/30/2002 $14,448 $15,945 $11,915
5/31/2002 $14,518 $16,041 $11,915
6/30/2002 $14,640 $16,211 $11,922
7/31/2002 $14,787 $16,420 $11,935
8/31/2002 $14,926 $16,617 $11,975
9/30/2002 $15,212 $16,981 $11,995
10/31/2002 $15,009 $16,699 $12,015
11/30/2002 $14,979 $16,630 $12,015
12/31/2002 $15,272 $16,981 $11,988
1/31/2003 $15,246 $16,938 $12,041
2/28/2003 $15,434 $17,175 $12,134
3/31/2003 $15,460 $17,185 $12,207
4/30/2003 $15,591 $17,299 $12,180
5/31/2003 $15,942 $17,704 $12,160
6/30/2003 $15,888 $17,628 $12,174
7/31/2003 $15,324 $17,011 $12,187
8/31/2003 $15,413 $17,138 $12,233
9/30/2003 $15,749 $17,642 $12,273
10/31/2003 $15,706 $17,553 $12,260
11/30/2003 $15,895 $17,736 $12,227
12/31/2003 $16,025 $17,883 $12,213
1/31/2004 $16,145 $17,986 $12,273
2/29/2004 $16,386 $18,256 $12,339
3/31/2004 $16,322 $18,193 $12,419
4/30/2004 $15,915 $17,762 $12,459
5/31/2004 $15,841 $17,697 $12,531
6/30/2004 $15,868 $17,762 $12,571
7/31/2004 $16,068 $17,996 $12,551
8/31/2004 $16,378 $18,356 $12,558
9/30/2004 $16,476 $18,454 $12,584
10/31/2004 $16,649 $18,612 $12,651
11/30/2004 $16,487 $18,459 $12,657
12/31/2004 $16,733 $18,684 $12,611
1/31/2005 $16,949 $18,859 $12,638
2/28/2005 $16,891 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 2/28/05
- -------------------------------------
1-Year -1.38%
- -------------------------------------
5-Year +5.91%
- -------------------------------------
Since Inception (2/1/00) +6.22%
- -------------------------------------
CLASS B (2/1/00-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Ohio Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ---------------- --------------- ----------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,119 $10,116 $10,059
3/31/2000 $10,334 $10,337 $10,142
4/30/2000 $10,276 $10,276 $10,148
5/31/2000 $10,231 $10,223 $10,160
6/30/2000 $10,475 $10,494 $10,213
7/31/2000 $10,613 $10,640 $10,237
8/31/2000 $10,770 $10,804 $10,237
9/30/2000 $10,709 $10,747 $10,290
10/31/2000 $10,798 $10,865 $10,308
11/30/2000 $10,892 $10,947 $10,314
12/31/2000 $11,148 $11,217 $10,308
1/31/2001 $11,209 $11,328 $10,373
2/28/2001 $11,237 $11,364 $10,415
3/31/2001 $11,326 $11,466 $10,438
4/30/2001 $11,211 $11,342 $10,480
5/31/2001 $11,309 $11,464 $10,527
6/30/2001 $11,375 $11,541 $10,545
7/31/2001 $11,524 $11,712 $10,515
8/31/2001 $11,688 $11,905 $10,515
9/30/2001 $11,670 $11,865 $10,563
10/31/2001 $11,782 $12,006 $10,527
11/30/2001 $11,718 $11,905 $10,509
12/31/2001 $11,618 $11,792 $10,468
1/31/2002 $11,803 $11,997 $10,492
2/28/2002 $11,899 $12,141 $10,533
3/31/2002 $11,719 $11,903 $10,592
4/30/2002 $11,882 $12,136 $10,652
5/31/2002 $11,934 $12,210 $10,652
6/30/2002 $12,030 $12,339 $10,658
7/31/2002 $12,154 $12,498 $10,669
8/31/2002 $12,252 $12,648 $10,705
9/30/2002 $12,491 $12,925 $10,723
10/31/2002 $12,317 $12,711 $10,741
11/30/2002 $12,287 $12,658 $10,741
12/31/2002 $12,520 $12,925 $10,717
1/31/2003 $12,493 $12,892 $10,764
2/28/2003 $12,640 $13,072 $10,847
3/31/2003 $12,655 $13,080 $10,912
4/30/2003 $12,758 $13,167 $10,889
5/31/2003 $13,048 $13,475 $10,871
6/30/2003 $12,988 $13,418 $10,883
7/31/2003 $12,523 $12,948 $10,895
8/31/2003 $12,590 $13,045 $10,936
9/30/2003 $12,857 $13,428 $10,972
10/31/2003 $12,816 $13,361 $10,960
11/30/2003 $12,963 $13,500 $10,930
12/31/2003 $13,062 $13,612 $10,918
1/31/2004 $13,153 $13,690 $10,972
2/29/2004 $13,344 $13,896 $11,031
3/31/2004 $13,285 $13,847 $11,102
4/30/2004 $12,949 $13,519 $11,137
5/31/2004 $12,883 $13,470 $11,203
6/30/2004 $12,898 $13,519 $11,238
7/31/2004 $13,065 $13,697 $11,220
8/31/2004 $13,299 $13,972 $11,226
9/30/2004 $13,372 $14,046 $11,250
10/31/2004 $13,505 $14,167 $11,309
11/30/2004 $13,380 $14,050 $11,315
12/31/2004 $13,571 $14,221 $11,274
1/31/2005 $13,729 $14,354 $11,297
2/28/2005 $13,585 $14,307 $11,363
54 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Ohio Lehman Brothers
Insured Tax-Free Municipal Bond
Date Income Fund Index(7) CPI(7)
- ---------- ---------------- --------------- ----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,255 $10,319 $10,020
6/30/1995 $10,181 $10,229 $10,039
7/31/1995 $10,234 $10,326 $10,039
8/31/1995 $10,336 $10,457 $10,066
9/30/1995 $10,379 $10,523 $10,086
10/31/1995 $10,512 $10,676 $10,118
11/30/1995 $10,658 $10,853 $10,112
12/31/1995 $10,752 $10,957 $10,105
1/31/1996 $10,815 $11,040 $10,165
2/29/1996 $10,745 $10,966 $10,197
3/31/1996 $10,611 $10,825 $10,250
4/30/1996 $10,593 $10,795 $10,290
5/31/1996 $10,614 $10,791 $10,309
6/30/1996 $10,717 $10,908 $10,316
7/31/1996 $10,815 $11,007 $10,336
8/31/1996 $10,805 $11,004 $10,355
9/30/1996 $10,950 $11,158 $10,388
10/31/1996 $11,056 $11,285 $10,421
11/30/1996 $11,227 $11,491 $10,441
12/31/1996 $11,183 $11,443 $10,441
1/31/1997 $11,182 $11,464 $10,474
2/28/1997 $11,262 $11,569 $10,507
3/31/1997 $11,125 $11,415 $10,533
4/30/1997 $11,205 $11,511 $10,546
5/31/1997 $11,346 $11,684 $10,540
6/30/1997 $11,448 $11,808 $10,553
7/31/1997 $11,736 $12,136 $10,566
8/31/1997 $11,619 $12,022 $10,586
9/30/1997 $11,730 $12,164 $10,612
10/31/1997 $11,787 $12,243 $10,639
11/30/1997 $11,858 $12,315 $10,632
12/31/1997 $12,036 $12,494 $10,619
1/31/1998 $12,139 $12,623 $10,639
2/28/1998 $12,127 $12,627 $10,658
3/31/1998 $12,137 $12,638 $10,678
4/30/1998 $12,092 $12,581 $10,698
5/31/1998 $12,253 $12,780 $10,718
6/30/1998 $12,304 $12,831 $10,731
7/31/1998 $12,324 $12,863 $10,744
8/31/1998 $12,468 $13,062 $10,757
9/30/1998 $12,619 $13,224 $10,770
10/31/1998 $12,637 $13,224 $10,797
11/30/1998 $12,672 $13,270 $10,797
12/31/1998 $12,676 $13,304 $10,790
1/31/1999 $12,782 $13,462 $10,816
2/28/1999 $12,745 $13,403 $10,829
3/31/1999 $12,789 $13,422 $10,862
4/30/1999 $12,804 $13,455 $10,941
5/31/1999 $12,722 $13,377 $10,941
6/30/1999 $12,562 $13,185 $10,941
7/31/1999 $12,574 $13,233 $10,974
8/31/1999 $12,417 $13,127 $11,001
9/30/1999 $12,400 $13,132 $11,053
10/31/1999 $12,245 $12,990 $11,073
11/30/1999 $12,348 $13,128 $11,080
12/31/1999 $12,238 $13,030 $11,080
1/31/2000 $12,169 $12,974 $11,113
2/29/2000 $12,310 $13,124 $11,178
3/31/2000 $12,570 $13,411 $11,271
4/30/2000 $12,490 $13,332 $11,277
5/31/2000 $12,437 $13,263 $11,290
6/30/2000 $12,733 $13,614 $11,350
7/31/2000 $12,911 $13,803 $11,376
8/31/2000 $13,091 $14,016 $11,376
9/30/2000 $13,016 $13,943 $11,435
10/31/2000 $13,123 $14,095 $11,455
11/30/2000 $13,225 $14,202 $11,461
12/31/2000 $13,545 $14,553 $11,455
1/31/2001 $13,620 $14,697 $11,527
2/28/2001 $13,654 $14,744 $11,573
3/31/2001 $13,762 $14,876 $11,600
4/30/2001 $13,624 $14,715 $11,646
5/31/2001 $13,743 $14,873 $11,698
6/30/2001 $13,823 $14,973 $11,718
7/31/2001 $14,002 $15,194 $11,685
8/31/2001 $14,201 $15,445 $11,685
9/30/2001 $14,178 $15,393 $11,738
10/31/2001 $14,314 $15,576 $11,698
11/30/2001 $14,237 $15,445 $11,679
12/31/2001 $14,116 $15,299 $11,633
1/31/2002 $14,328 $15,564 $11,659
2/28/2002 $14,455 $15,752 $11,705
3/31/2002 $14,227 $15,443 $11,771
4/30/2002 $14,435 $15,745 $11,837
5/31/2002 $14,498 $15,841 $11,837
6/30/2002 $14,614 $16,008 $11,843
7/31/2002 $14,765 $16,214 $11,856
8/31/2002 $14,884 $16,409 $11,896
9/30/2002 $15,173 $16,768 $11,916
10/31/2002 $14,964 $16,490 $11,935
11/30/2002 $14,928 $16,422 $11,935
12/31/2002 $15,211 $16,768 $11,909
1/31/2003 $15,179 $16,726 $11,962
2/28/2003 $15,359 $16,960 $12,054
3/31/2003 $15,366 $16,970 $12,126
4/30/2003 $15,501 $17,082 $12,100
5/31/2003 $15,841 $17,482 $12,080
6/30/2003 $15,779 $17,407 $12,093
7/31/2003 $15,203 $16,798 $12,107
8/31/2003 $15,296 $16,924 $12,153
9/30/2003 $15,619 $17,421 $12,192
10/31/2003 $15,569 $17,333 $12,179
11/30/2003 $15,748 $17,514 $12,146
12/31/2003 $15,867 $17,659 $12,133
1/31/2004 $15,979 $17,760 $12,192
2/29/2004 $16,209 $18,028 $12,258
3/31/2004 $16,137 $17,965 $12,337
4/30/2004 $15,732 $17,539 $12,377
5/31/2004 $15,652 $17,476 $12,449
6/30/2004 $15,671 $17,539 $12,488
7/31/2004 $15,859 $17,770 $12,469
8/31/2004 $16,155 $18,126 $12,475
9/30/2004 $16,257 $18,222 $12,502
10/31/2004 $16,420 $18,379 $12,567
11/30/2004 $16,254 $18,228 $12,574
12/31/2004 $16,486 $18,450 $12,528
1/31/2005 $16,691 $18,623 $12,554
2/28/2005 $16,624 $18,561 $12,627
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.65%
- -------------------------------------
5-Year +6.20%
- -------------------------------------
Since Inception (5/1/95) +5.30%
- -------------------------------------
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. 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.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B and
C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates as
of 12/23/04 for the maximum combined federal and Ohio state personal income tax
bracket of 39.88%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 55
YOUR FUND'S EXPENSES
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
56 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.00 $3.27
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
- ----------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.10 $6.04
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.84 $6.01
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.80 $6.04
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.84 $6.01
- ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.65%;
B: 1.20%; and C: 1.20%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 57
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $10.97 $10.76 $10.50 $10.36 $9.61
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.46 0.46 0.46 0.48 0.49
Net realized and unrealized gains (losses) ........ (0.17) 0.20 0.27 0.14 0.74
--------------------------------------------------------------
Total from investment operations ................... 0.29 0.66 0.73 0.62 1.23
Less distributions from net investment
income ............................................. (0.46) (0.45) (0.47) (0.48) (0.48)
Redemption fees .................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year ....................... $10.80 $10.97 $10.76 $10.50 $10.36
==============================================================
Total return(b) .................................... 2.79% 6.29% 7.14% 6.14% 13.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $149,897 $156,033 $156,973 $127,595 $116,581
Ratios to average net assets:
Expenses .......................................... 0.76% 0.75% 0.76% 0.78% 0.78%
Net investment income ............................. 4.29% 4.27% 4.39% 4.58% 4.87%
Portfolio turnover rate ............................ 21.09% 11.38% 10.83% 23.17% 29.18%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
58 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.6%
BONDS 99.6%
FLORIDA 99.6%
Alachua County Public Improvement Revenue, AMBAC Insured, 5.25%, 8/01/29 ....................... $ 2,500,000 $ 2,645,775
Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/20 ................................. 1,000,000 1,067,770
Broward County HFAR, FSA Insured,
5.65%, 11/01/22 ............................................................................. 405,000 414,765
5.70%, 11/01/29 ............................................................................. 225,000 230,267
Broward County School Board COP,
MBIA Insured, 5.00%, 7/01/28 ................................................................ 2,000,000 2,079,960
Series A, FSA Insured, 5.00%, 7/01/22 ....................................................... 2,000,000 2,111,540
Series A, FSA Insured, 5.00%, 7/01/26 ....................................................... 2,850,000 2,970,441
Canaveral Port Authority Revenue, Refunding, Series B, FGIC Insured, 5.625%, 6/01/21 ........... 1,000,000 1,056,260
Coral Gables Health Facilities Authority Hospital Revenue, Baptist Health South Florida,
FSA Insured, 5.00%, 8/15/29 .................................................................. 1,500,000 1,558,350
Dade County HFA, MFMR, Siesta Pointe Apartments, Series A, FSA Insured, 5.75%, 9/01/29 ......... 1,890,000 1,939,801
Dade County Water and Sewer System Revenue, FGIC Insured, 5.25%, 10/01/21 ...................... 1,000,000 1,068,260
Daytona Beach Utility System Revenue, Refunding, Series B, FGIC Insured, 5.00%, 11/15/32 ....... 1,000,000 1,039,250
Destin Capital Improvement Revenue, MBIA Insured, 5.00%, 8/01/27 ............................... 1,315,000 1,377,449
Escambia County HFA, SFMR, Multi County Program, Series A, MBIA Insured, 6.40%,
10/01/30 ..................................................................................... 355,000 359,906
Escambia County Utilities Authority Utility System Revenue,
FGIC Insured, 5.00%, 1/01/31 ................................................................ 1,775,000 1,825,445
Refunding, Series B, FGIC Insured, 5.00%, 1/01/22 ........................................... 2,000,000 2,117,140
Florida HFAR, Spinnaker Cove Apartments, Series G, AMBAC Insured, 6.50%, 7/01/36 ............... 1,600,000 1,662,608
Florida HFC Revenue,
Housing Logans Pointe Apartments, Series F-1, FSA Insured, 5.90%, 12/01/19 .................. 1,205,000 1,276,035
Marina Bay Apartments, Series S, FSA Insured, 5.85%, 2/01/41 ................................ 1,070,000 1,117,669
Florida Intergovernmental Finance Commission Capital Revenue, Series A, AMBAC Insured,
5.00%, 8/01/32 ............................................................................... 3,570,000 3,692,665
Florida State Board of Education GO, Series F, MBIA Insured, 5.00%, 6/01/28 .................... 2,000,000 2,086,300
Florida State Board Regent Housing Revenue, University of Florida, FGIC Insured,
5.25%, 7/01/30 ............................................................................... 2,000,000 2,112,100
Florida State Correctional Privatization Commission COP, Series B, AMBAC Insured,
5.00%, 8/01/25 ............................................................................... 2,000,000 2,121,660
Florida State Department Environmental Protection Preservation Revenue, Florida Forever,
Series A, MBIA Insured, 5.00%, 7/01/21 ........................................................ 3,000,000 3,217,140
Florida State Department of General Services Division Facilities Management Revenue,
Florida Facilities Pool, Series B, FSA Insured, 5.50%, 9/01/28 ............................... 550,000 594,600
Gulf Breeze Revenue,
FGIC Insured, 5.80%, 12/01/20 ............................................................... 1,250,000 1,411,388
Local Government Loan Program, FGIC Insured, 6.05%, 12/01/15 ................................ 1,915,000 2,044,492
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, MBIA Insured,
6.25%, 12/01/34 .............................................................................. 1,500,000 1,567,575
Hillsborough County School Board COP, MBIA Insured,
(a)5.00%, 7/01/26 ............................................................................ 1,670,000 1,754,652
5.375%, 7/01/26 ........................................................................... 2,000,000 2,150,940
Indian River County Water and Sewer Revenue, FGIC Insured, 5.50%, 9/01/26 ...................... 1,250,000 1,326,663
Indian Trace Development District Special Assessment Revenue, Water Management
Special Benefit, Refunding, MBIA Insured, 5.00%, 5/01/27 ..................................... 1,000,000 1,035,930
Annual Report | 59
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Indian Trail Water Control District Improvement Revenue, MBIA Insured,
5.75%, 8/01/16 .............................................................................. $ 1,090,000 $ 1,159,684
5.50%, 8/01/22 .............................................................................. 500,000 531,700
Jacksonville Capital Improvement Revenue, Refunding, Series C, AMBAC Insured,
5.00%, 10/01/25 .............................................................................. 4,000,000 4,203,080
Jacksonville Guaranteed Entitlement Revenue, Refunding and Improvement, FGIC Insured,
5.00%, 10/01/32 .............................................................................. 1,000,000 1,035,020
Jacksonville Sales Tax Revenue, Better Jacksonville, MBIA Insured, 5.00%, 10/01/30 ............. 1,500,000 1,560,405
Jacksonville Transportation Revenue, MBIA Insured, 5.00%, 10/01/26 ............................. 2,000,000 2,082,900
Jacksonville Water and Sewer Revenue, United Water Project, AMBAC Insured,
6.35%, 8/01/25 ............................................................................... 1,000,000 1,035,320
Lake Clarke Shores Utility Systems Revenue, Refunding and Improvement, FGIC Insured,
5.80%, 10/01/18 .............................................................................. 1,415,000 1,447,970
Lee County Airport Revenue, Series B, FSA Insured, 5.75%, 10/01/33 ............................. 4,000,000 4,418,920
Lee County IDA Utilities Revenue, Bonita Springs Utilities Project, Refunding, MBIA Insured,
6.05%,
11/01/15 .................................................................................... 2,000,000 2,116,720
11/01/20 .................................................................................... 1,500,000 1,572,540
Lynn Haven Capital Improvement Revenue,
MBIA Insured, 5.50%, 12/01/32 ................................................................ 2,000,000 2,174,860
Series A, MBIA Insured, Pre-Refunded, 5.75%, 12/01/16 ........................................ 1,000,000 1,046,250
Marion County Utility System Revenue, FGIC Insured, 5.00%, 12/01/31 ............................ 1,500,000 1,554,435
Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ............................. 3,000,000 3,106,170
Miami-Dade County Aviation Revenue, Miami International Airport,
HUB, Series B, FGIC Insured, 5.00%, 10/01/30 ................................................ 3,500,000 3,634,820
Series B, FGIC Insured, 5.75%, 10/01/29 ..................................................... 2,500,000 2,775,125
Nassau County Public Improvement Revenue, MBIA Insured, 5.00%, 5/01/31 ......................... 5,000,000 5,149,200
Ocala Utility System Revenue, Refunding, Series A, FGIC Insured, 5.00%, 10/01/31 ............... 2,000,000 2,093,660
Ocoee Water and Sewer System Revenue, AMBAC Insured, 5.625%, 10/01/26 .......................... 4,220,000 4,495,650
Orange County Health Facilities Authority Revenue, MBIA Insured, 6.00%, 11/01/24 ............... 700,000 703,150
Orange County Public Services Tax Revenue, FGIC Insured, Pre-Refunded, 6.00%, 10/01/24 ......... 1,000,000 1,042,440
Orange County School Board COP, AMBAC Insured, 5.50%, 8/01/25 .................................. 1,000,000 1,082,920
Orange County Tourist Development Tax Revenue, AMBAC Insured, 5.50%,
10/01/22 .................................................................................... 1,000,000 1,086,540
10/01/31 .................................................................................... 2,500,000 2,705,325
10/01/32 .................................................................................... 2,000,000 2,170,440
Osceola County HFA, MFHR, Tierra Vista Apartment Project, Series A, FSA Insured,
5.70%, 12/01/17 .............................................................................. 480,000 490,483
Osceola County Tourist Development Tax Revenue, FGIC Insured, 5.00%, 10/01/32 .................. 3,000,000 3,105,060
Palm Beach County IDR, South Florida Fair Project, AMBAC Insured, 5.50%, 6/01/31 ............... 2,000,000 2,153,260
Palm Beach County Public Improvement Revenue, Convention Center Project, FGIC Insured,
Pre-Refunded, 5.125%, 11/01/30 ............................................................... 2,000,000 2,216,580
Palm Beach County School Board COP, Series A,
AMBAC Insured, 5.125%, 8/01/24 .............................................................. 5,000,000 5,330,550
FGIC Insured, Pre-Refunded, 6.00%, 8/01/22 .................................................. 3,000,000 3,452,400
Panama City Beach Utility Revenue, Refunding, AMBAC Insured, 5.00%, 6/01/32 .................... 2,000,000 2,075,080
60 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Pembroke Pines Public Improvement Revenue,
Series A, AMBAC Insured, 5.00%, 10/01/29 ..................................................... $ 2,000,000 $ 2,094,480
Series B, AMBAC Insured, 5.00%, 10/01/34 ..................................................... 2,000,000 2,083,360
Pinellas County Sewer Revenue, FSA Insured, 5.00%, 10/01/32 .................................... 3,000,000 3,116,490
Polk County Capital Improvement Revenue, Special Tax, FSA Insured, Pre-Refunded,
5.75%, 12/01/21 .............................................................................. 1,000,000 1,143,950
Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/26 ............................ 1,000,000 1,039,780
Polk County Utility System Revenue, Series A, FGIC Insured, 5.00%, 10/01/30 .................... 1,000,000 1,044,060
Saint Augustine Capital Improvement Revenue, Refunding, AMBAC Insured,
5.00%, 10/01/29 .............................................................................. 1,250,000 1,309,050
Sarasota County Utilities System Revenue, FGIC Insured, 5.75%, 10/01/27 ........................ 520,000 561,907
St. Lucie West Services District Special Assessment Revenue, Port St. Lucie, Water
Management Benefit, Refunding, senior lien, Series A, MBIA Insured, 5.25%, 5/01/25 ........... 5,000,000 5,389,500
St. Lucie West Services District Utility Revenue, senior lien, MBIA Insured,
6.125%, 10/01/32 ............................................................................. 2,240,000 2,592,262
Tavares Water and Sewer Revenue, AMBAC Insured, 5.50%, 10/01/30 ................................ 1,000,000 1,077,920
-------------
TOTAL LONG TERM INVESTMENTS (COST $138,591,255) ................................................ 149,296,212
-------------
SHORT TERM INVESTMENT (COST $400,000) 0.3%
BOND 0.3%
FLORIDA 0.3%
(b)Orange County School Board COP, Series B, MBIA Insured, Daily VRDN and Put,
1.80%, 8/01/27 ............................................................................... 400,000 400,000
-------------
TOTAL INVESTMENTS (COST $138,991,255) 99.9% .................................................... 149,696,212
OTHER ASSETS, LESS LIABILITIES 0.1% ............................................................ 200,827
-------------
NET ASSETS 100.0% .............................................................................. $ 149,897,039
=============
See Glossary of Terms on page 118.
(a) See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
(b) 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.
Annual Report | See notes to financial statements. | 61
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN INSURED TAX-FREE INCOME FUND
------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $12.62 $12.37 $12.13 $11.98 $11.24
------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.55 0.55 0.58 0.59 0.60
Net realized and unrealized gains (losses) ...... (0.20) 0.25 0.24 0.16 0.74
------------------------------------------------------------------------
Total from investment operations ................. 0.35 0.80 0.82 0.75 1.34
------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... (0.55) (0.55) (0.58) (0.60) (0.60)
Net realized gains .............................. (0.01) -- -- -- --
------------------------------------------------------------------------
Total distributions .............................. (0.56) (0.55) (0.58) (0.60) (0.60)
------------------------------------------------------------------------
Redemption fees .................................. --(c) -- -- -- --
------------------------------------------------------------------------
Net asset value, end of year ..................... $12.41 $12.62 $12.37 $12.13 $11.98
========================================================================
Total return(b) .................................. 2.93% 6.65% 6.90% 6.39% 12.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $1,602,174 $1,696,913 $1,646,355 $1,554,245 $1,472,089
Ratios to average net assets:
Expenses ........................................ 0.63% 0.63% 0.62% 0.63% 0.62%
Net investment income ........................... 4.47% 4.45% 4.73% 4.90% 5.23%
Portfolio turnover rate .......................... 9.07% 9.41% 11.74% 8.48% 10.40%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
62 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INSURED TAX-FREE INCOME FUND (CONTINUED)
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $12.67 $12.42 $12.17 $12.00 $11.24
-------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.48 0.49 0.51 0.53 0.55
Net realized and unrealized gains (losses) ...... (0.19) 0.24 0.25 0.17 0.75
-------------------------------------------------------------
Total from investment operations ................. 0.29 0.73 0.76 0.70 1.30
-------------------------------------------------------------
Less distributions from:
Net investment income ........................... (0.48) (0.48) (0.51) (0.53) (0.54)
Net realized gains .............................. (0.01) -- -- -- --
-------------------------------------------------------------
Total distributions .............................. (0.49) (0.48) (0.51) (0.53) (0.54)
-------------------------------------------------------------
Redemption fees .................................. --(c) -- -- -- --
-------------------------------------------------------------
Net asset value, end of year ..................... $12.47 $12.67 $12.42 $12.17 $12.00
=============================================================
Total return(b) .................................. 2.35% 6.04% 6.37% 5.96% 11.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $103,378 $108,518 $82,062 $38,158 $6,291
Ratios to average net assets:
Expenses ........................................ 1.18% 1.18% 1.18% 1.18% 1.18%
Net investment income ........................... 3.92% 3.90% 4.17% 4.35% 4.68%
Portfolio turnover rate .......................... 9.07% 9.41% 11.74% 8.48% 10.40%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 63
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INSURED TAX-FREE INCOME FUND (CONTINUED)
-----------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.72 $12.47 $12.21 $12.05 $11.31
-----------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.49 0.48 0.52 0.53 0.55
Net realized and unrealized gains (losses) ........ (0.21) 0.25 0.25 0.16 0.73
-----------------------------------------------------------
Total from investment operations ................... 0.28 0.73 0.77 0.69 1.28
-----------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.48) (0.48) (0.51) (0.53) (0.54)
Net realized gains ................................ (0.01) -- -- -- --
-----------------------------------------------------------
Total distributions ................................ (0.49) (0.48) (0.51) (0.53) (0.54)
-----------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
-----------------------------------------------------------
Net asset value, end of year ....................... $12.51 $12.72 $12.47 $12.21 $12.05
===========================================================
Total return(b) .................................... 2.34% 5.99% 6.45% 5.84% 11.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $138,027 $152,833 $129,608 $90,403 $62,212
Ratios to average net assets:
Expenses .......................................... 1.18% 1.20% 1.15% 1.18% 1.18%
Net investment income ............................. 3.92% 3.88% 4.20% 4.35% 4.67%
Portfolio turnover rate ............................ 9.07% 9.41% 11.74% 8.48% 10.40%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
64 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.2%
BONDS 97.7%
ALABAMA 5.3%
Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan,
Series A, AMBAC Insured, 5.25%, 8/15/21 ...................................................... $ 2,490,000 $ 2,686,585
Anniston Regional Medical Center Board Revenue, Series A, AMBAC Insured,
5.25%, 6/01/18 ............................................................................... 5,000,000 5,393,750
Bessemer Governmental Utility Services Corp. Water Supply Revenue, MBIA Insured,
5.25%, 6/01/32 ............................................................................... 5,000,000 5,238,000
Bessemer, wts., XLCA Insured, 5.00%, 2/01/35 ................................................... 2,000,000 2,085,400
Birmingham GO, Refunding and Capital Improvement, Series B, AMBAC Insured,
5.00%, 12/01/32 .............................................................................. 3,000,000 3,094,980
Daphne Utilities Board Water Gas and Sewer Revenue, Series B, AMBAC Insured,
5.50%, 6/01/30 ............................................................................... 1,670,000 1,801,730
East Alabama Health Care Authority Health Care Facilities Revenue, Tax Anticipation Bond,
Series A, MBIA Insured, 5.25%, 9/01/28 ....................................................... 7,000,000 7,318,430
Helena Utilities Board Water and Sewer Revenue, MBIA Insured, 5.25%,
4/01/27 ..................................................................................... 3,260,000 3,483,114
4/01/33 ..................................................................................... 4,890,000 5,180,075
Jefferson County Sewer Revenue,
Capital Improvement, wts., Series A, FGIC Insured, Pre-Refunded, 5.125%, 2/01/29 ............ 22,050,000 23,945,638
Series D, FGIC Insured, Pre-Refunded, 5.00%, 2/01/32 ........................................ 14,690,000 16,238,179
wts., Series D, FGIC Insured, Pre-Refunded, 5.75%, 2/01/22 .................................. 5,000,000 5,340,860
Montgomery Medical Clinic Board Health Care Facilities Revenue, Jackson Hospital and
Clinic, Refunding, AMBAC Insured, 6.00%, 3/01/26 ............................................. 4,000,000 4,202,880
Muscle Shoals GO, wts., MBIA Insured, 5.50%, 8/01/30 ........................................... 2,000,000 2,173,820
University of Alabama General Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 .................. 3,000,000 3,113,040
University of Alabama University Revenues, FGIC Insured, 5.25%, 10/01/27 ....................... 5,975,000 6,318,025
-------------
97,614,506
-------------
ALASKA 0.8%
Alaska Energy Authority Power Revenue, Bradley Lake Project, BIG Insured, 6.25%, 7/01/21 ....... 5,000 5,019
Alaska Energy Authority Utilities Revenue, Refunding, FSA Insured, 5.20%, 7/01/17 .............. 3,000,000 3,189,780
Alaska Industrial Development and Export Authority Revenue, Revolving Fund, Refunding,
Series A, MBIA Insured, 6.125%, 4/01/27 ...................................................... 5,000,000 5,325,550
Alaska State HFC Revenue, Refunding, Series A, MBIA Insured,
6.00%, 6/01/27 .............................................................................. 5,000,000 5,174,550
5.875%, 12/01/30 ............................................................................ 215,000 219,087
-------------
13,913,986
-------------
ARIZONA 2.5%
Arizona State Municipal Financing Program COP, Series 1986-20, BIG Insured, ETM,
7.70%, 8/01/10 ............................................................................... 6,000,000 7,024,440
Cochise County USD No. 68 GO, Sierra Vista, Refunding, FGIC Insured, 7.50%, 7/01/10 ............ 500,000 606,155
Maricopa County IDA Hospital Facility Revenue, Samaritan Health Services, Refunding,
Series A, MBIA Insured, ETM, 7.00%, 12/01/16 ................................................. 300,000 373,533
Mesa IDAR, Discovery Health System, Series A, MBIA Insured,
5.75%, 1/01/25 .............................................................................. 18,000,000 19,734,120
5.625%, 1/01/29 ............................................................................. 12,655,000 13,705,618
Tucson Water Revenue, Series 1994-A, MBIA Insured, Pre-Refunded, 6.00%, 7/01/21 ................ 5,000,000 5,284,800
-------------
46,728,666
-------------
Annual Report | 65
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARKANSAS 1.2%
Arkansas State Development Finance Authority Water Revenue, Refunding,
Series A, MBIA Insured, 6.50%, 7/01/10 ....................................................... $ 2,000,000 $ 2,227,060
Little Rock School District GO,
Refunding, Series B, FSA Insured, 5.50%, 2/01/33 ............................................ 3,970,000 4,262,271
Series C, FSA Insured, 5.25%, 2/01/33 ....................................................... 7,790,000 8,168,205
Paragould Water and Electric Revenue, AMBAC Insured, 5.65%, 12/01/25 ........................... 1,000,000 1,095,140
Pulaski Technical College Revenue, Student Tuition and Fee, FGIC Insured,
5.00%, 9/01/34 ............................................................................... 2,190,000 2,250,575
University of Arkansas University Revenues, Various Facility, Fayetteville Campus,
FGIC Insured, 5.00%, 12/01/32 ................................................................ 4,000,000 4,129,280
-------------
22,132,531
-------------
CALIFORNIA 3.2%
California State GO,
AMBAC Insured, 5.00%, 2/01/33 ............................................................... 7,000,000 7,263,900
Refunding, AMBAC Insured, 5.00%, 2/01/32 .................................................... 4,750,000 4,920,952
Refunding, MBIA Insured, 5.00%, 2/01/31 ..................................................... 20,000,000 20,753,000
Refunding, MBIA Insured, 5.00%, 10/01/32 .................................................... 1,910,000 1,984,356
Corona COP, Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 ................... 15,000,000 19,476,300
Oakland RDA Tax Allocation, Central District Redevelopment, Refunding, AMBAC Insured,
5.50%, 2/01/14 ............................................................................... 250,000 284,498
San Francisco BART District Sales Tax Revenue, FGIC Insured, 5.50%, 7/01/20 .................... 1,035,000 1,056,911
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Refunding,
Series A, MBIA Insured, 5.25%, 1/15/30 ....................................................... 4,000,000 4,241,440
-------------
59,981,357
-------------
COLORADO 2.8%
Broomfield COP, AMBAC Insured, 6.00%, 12/01/29 ................................................. 3,000,000 3,368,280
Centennial Water and Sanitation District Water and Sewer Revenue, Refunding,
Series A, FSA Insured, 5.125%, 12/01/17 ...................................................... 5,000,000 5,281,650
Colorado Health Facilities Authority Revenue, Community Provider Pooled Loan Program,
Series A, FSA Insured, 7.25%, 7/15/17 ........................................................ 121,000 121,467
Colorado Mountain College Residence Hall Authority Revenue, MBIA Insured, Pre-Refunded,
5.625%, 6/01/12 ............................................................................. 1,900,000 1,995,209
5.75%, 6/01/23 .............................................................................. 3,000,000 3,154,920
Colorado Springs Hospital Revenue, MBIA Insured, Pre-Refunded, 6.00%, 12/15/24 ................. 2,455,000 2,575,614
Denver City and County Airport Revenue,
Series C, MBIA Insured, ETM, 6.125%, 11/15/25 ............................................... 8,000,000 8,721,128
Series E, MBIA Insured, 5.50%, 11/15/25 ..................................................... 5,000,000 5,331,450
E-470 Public Highway Authority Revenue, Refunding, Senior Series A, MBIA Insured,
5.00%, 9/01/21 ............................................................................... 5,000,000 5,270,950
Morgan County PCR, first mortgage, Public Service Co., Refunding, Series A, MBIA Insured,
5.50%, 6/01/12 ............................................................................... 1,000,000 1,004,220
University of Colorado Hospital Authority Revenue, Refunding, Series A, AMBAC Insured,
5.20%, 11/15/17 ............................................................................. 5,425,000 5,801,387
5.25%, 11/15/22 ............................................................................. 7,800,000 8,344,830
-------------
50,971,105
-------------
66 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CONNECTICUT 0.2%
Connecticut State Health and Educational Facilities Authority Revenue,
Danbury Hospital, Series E, MBIA Insured, 6.50%, 7/01/14 .................................... $ 335,000 $ 347,338
Mansfield Nursing Home, AMBAC Insured, 6.00%, 11/01/22 ...................................... 2,450,000 2,485,256
-------------
2,832,594
-------------
FLORIDA 8.7%
Celebration CDD Special Assessment, Series B, MBIA Insured, 5.50%, 5/01/19 ..................... 230,000 244,690
Clearwater Water and Sewer Revenue, FGIC Insured, 5.00%,
12/01/28 .................................................................................... 11,050,000 11,502,498
12/01/32 .................................................................................... 13,665,000 14,151,884
Dade County Seaport Revenue, Refunding, Series E, MBIA Insured, 8.00%, 10/01/08 ................ 200,000 234,942
Florida State Board of Education Capital Outlay GO, Public Education,
Refunding, Series E, FGIC Insured, 5.00%, 6/01/24 ........................................... 5,000,000 5,263,250
Series B, FGIC Insured, 5.00%, 6/01/23 ...................................................... 5,395,000 5,731,432
Florida State Board of Education GO, Series C, MBIA Insured, 5.00%, 6/01/27 .................... 4,245,000 4,443,157
Greater Orlando Aviation Authority Orlando Airport Facilities Revenue, Series B, FGIC Insured,
5.25%, 10/01/28 .............................................................................. 2,500,000 2,629,950
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, MBIA Insured,
6.25%, 12/01/34 .............................................................................. 1,000,000 1,045,050
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/30 ................................. 5,000,000 5,160,900
Jacksonville Transportation Revenue, MBIA Insured, 5.25%, 10/01/29 ............................. 11,000,000 11,643,610
Lee County IDA Utilities Revenue, Bonita Springs Utilities Project, Refunding,
MBIA Insured, 6.05%,
11/01/15 .................................................................................... 1,000,000 1,058,360
11/01/20 .................................................................................... 1,000,000 1,048,360
Lee County Solid Waste System Revenue, MBIA Insured, 5.375%, 10/01/15 .......................... 2,000,000 2,066,860
Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/21 ................... 5,000,000 5,341,400
Opa-Locka Capital Improvement Revenue, FGIC Insured, 6.125%, 1/01/24 ........................... 1,000,000 1,013,580
Orange County Health Facilities Authority Revenue, MBIA Insured, 6.00%, 11/01/24 ............... 260,000 261,170
Orange County School Board COP, Series A, MBIA Insured, 5.00%, 8/01/27 ......................... 10,000,000 10,394,800
Orange County Tourist Development Tax Revenue, AMBAC Insured,
5.25%, 10/01/27 ............................................................................. 10,000,000 10,687,300
5.50%, 10/01/31 ............................................................................. 1,000,000 1,082,130
Orlando and Orange County Expressway Authority Expressway Revenue,
junior lien, FGIC Insured, 6.50%, 7/01/10 ................................................... 100,000 115,988
junior lien, FGIC Insured, 6.50%, 7/01/12 ................................................... 225,000 268,443
Series B, AMBAC Insured, 5.00%, 7/01/35 ..................................................... 20,000,000 20,715,000
Osceola County School Board COP, Series A, AMBAC Insured, 5.25%, 6/01/27 ....................... 13,000,000 14,007,890
Pasco County Guaranteed Entitlement Revenue, Refunding, FSA Insured, 5.00%, 12/01/33 ........... 2,185,000 2,269,516
Pinellas County Health Facilities Authority Revenue, Baycare Health System, FSA Insured,
5.00%, 11/15/30 .............................................................................. 4,000,000 4,119,000
Polk County IDAR, Winter Haven Hospital, Series 2, MBIA Insured, 6.25%, 9/01/15 ................ 875,000 882,131
Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/24 ............................ 5,000,000 5,179,350
Port Saint Lucie Utility Revenue, MBIA Insured, 5.00%, 9/01/34 ................................. 8,420,000 8,768,756
Sumter County School District Revenue, Multi-District Loan Program, FSA Insured,
7.15%, 11/01/15 .............................................................................. 245,000 317,630
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 .................... 2,000,000 2,245,020
Tampa Bay Water Utility System Revenue, FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 ............ 2,000,000 2,292,640
Annual Report | 67
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Volusia County Educational Facility Authority Revenue, Embry Riddle Aeronautical
University, Refunding, Series B, AMBAC Insured, 5.25%, 10/15/19 .............................. $ 3,500,000 $ 3,794,945
-------------
159,981,632
-------------
GEORGIA 7.3%
Athens Housing Authority Student Housing Lease Revenue, University of Georgia,
East Campus, Refunding, AMBAC Insured, 5.00%, 12/01/33 ....................................... 6,000,000 6,205,860
Atlanta Airport Facilities Revenue, Series A, FGIC Insured, Pre-Refunded, 5.50%, 1/01/26 ....... 13,750,000 15,382,950
Atlanta GO, Refunding, FGIC Insured, 5.00%, 12/01/20 ........................................... 3,775,000 4,010,069
Atlanta Water and Wastewater Revenue,
FSA Insured, 5.00%, 11/01/34 ................................................................ 2,000,000 2,082,300
Series A, FGIC Insured, 5.00%, 11/01/29 ..................................................... 4,750,000 4,894,828
Series A, FGIC Insured, Pre-Refunded, 5.00%, 11/01/29 ....................................... 5,250,000 5,732,108
Brunswick Water and Sewer Revenue, Refunding and Improvement, MBIA Insured,
6.10%, 10/01/14 .............................................................................. 1,535,000 1,840,741
Burke County Development Authority PCR, Georgia Power Co. Plant Vogtle, Refunding,
2nd Series, AMBAC Insured, 5.25%, 5/01/34 .................................................... 5,000,000 5,079,950
Cherokee County Water and Sewage Authority Revenue,
FGIC Insured, 5.00%, 8/01/27 ................................................................ 1,500,000 1,557,630
MBIA Insured, 6.90%, 8/01/18 ................................................................ 15,000 15,054
Columbus Building Authority Lease Revenue, Series A, FGIC Insured, 5.00%, 1/01/31 .............. 3,500,000 3,657,360
Fulton County Development Authority Revenue, Georgia Technical Athletic Association,
Refunding, AMBAC Insured, 5.125%, 10/01/32 ................................................... 9,000,000 9,370,620
Georgia Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus
Regional Healthcare Systems, MBIA Insured, 5.50%, 8/01/19 .................................... 15,000,000 16,337,850
Henry County Water and Sewer Authority Revenue, FGIC Insured, 5.625%, 2/01/30 .................. 3,500,000 3,875,690
Macon-Bibb County Urban Development Authority Revenue, MFH, Refunding, Series A,
MBIA Insured, 5.55%, 1/01/24 ................................................................. 1,590,000 1,642,104
Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Second Indenture Series,
MBIA Insured, 5.00%,
7/01/27 ..................................................................................... 13,470,000 14,081,134
7/01/28 ..................................................................................... 14,175,000 14,770,350
7/01/32 ..................................................................................... 8,575,000 8,889,102
Rockdale County Water and Sewer Authority Revenue, Refunding, Series A, MBIA Insured,
5.375%, 7/01/29 .............................................................................. 6,350,000 6,870,319
South Fulton Municipal Regional Water and Sewer Authority Water Revenue, MBIA Insured,
5.00%, 1/01/33 ............................................................................... 8,000,000 8,287,680
-------------
134,583,699
-------------
HAWAII 0.9%
Hawaii County GO, Refunding and Improvement, Series A, FGIC Insured, 5.60%,
5/01/12 ..................................................................................... 1,000,000 1,133,310
5/01/13 ..................................................................................... 1,000,000 1,138,020
Hawaii State Department of Budget and Finance Special Purpose Revenue,
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ..................... 2,000,000 2,080,440
St. Francis Medical Centers, Refunding, FSA Insured, 6.50%, 7/01/22 ......................... 4,000,000 4,015,360
Honolulu City and County GO, Series C, FGIC Insured, 5.00%, 7/01/20 ............................ 6,250,000 6,600,062
Kauai County GO, Series A, FGIC Insured, Pre-Refunded, 6.125%, 8/01/23 ......................... 1,755,000 2,015,653
-------------
16,982,845
-------------
68 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ILLINOIS 0.8%
Chicago Board of Education GO, Chicago School Reform, Series A, AMBAC Insured,
5.25%, 12/01/30 .............................................................................. $ 2,000,000 $ 2,092,620
Chicago Board of Education Lease COP, Refunding, Series A, MBIA Insured,
6.25%, 1/01/09 ............................................................................... 320,000 357,449
Illinois Health Facilities Authority Revenue,
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%, 11/15/28 ......... 5,000,000 5,176,050
Series 1990, FSA Insured, ETM, 7.75%, 8/15/10 ............................................... 50,000 61,519
Macon County and Decatur COP, Decatur Public Building Commission, FGIC Insured,
6.50%, 1/01/06 ............................................................................... 300,000 310,059
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue, McCormick Place
Expansion Project, Refunding, Series A, AMBAC Insured, 5.25%, 6/15/27 ........................ 4,225,000 4,422,181
Onterie Center HFC Mortgage Revenue, Refunding, MBIA Insured, 7.05%, 7/01/27 ................... 2,000,000 2,019,800
Regional Transportation Authority Revenue, Series A, AMBAC Insured, 7.20%, 11/01/20 ............ 300,000 387,192
-------------
14,826,870
-------------
KANSAS 0.1%
Cowley and Shawnee Counties SFMR, GNMA Secured, 7.35%, 12/01/11 ................................ 115,000 115,622
Kansas State Development Finance Authority Health Facility Revenue, MBIA Insured,
5.80%, 11/15/21 .............................................................................. 1,330,000 1,394,598
-------------
1,510,220
-------------
KENTUCKY 0.5%
Jefferson County Capital Projects Corp. Revenue, Lease, MBIA Insured,
5.375%, 6/01/22 ............................................................................. 2,000,000 2,145,120
5.50%, 6/01/28 .............................................................................. 750,000 806,445
Kenton County Water District No. 1 Waterworks Revenue, Series B, FGIC Insured,
Pre-Refunded, 5.70%, 2/01/20 ................................................................. 1,250,000 1,293,450
Louisville and Jefferson County Metropolitan Sewer District Sewer and Drain System Revenue,
Series A, MBIA Insured, 5.50%, 5/15/34 ....................................................... 5,000,000 5,441,200
-------------
9,686,215
-------------
LOUISIANA 0.9%
Louisiana Local Government Environmental Facilities CDA Revenue, Parking Facilities Corp.
Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/31 .................................... 5,485,000 5,832,420
Louisiana State Gas and Fuels Tax Revenue, Series A, AMBAC Insured, 5.00%, 6/01/27 ............. 10,000,000 10,374,400
-------------
16,206,820
-------------
MAINE 0.1%
Maine State Health and Higher Educational Facilities Authority Revenue, Series C, FSA Insured,
6.20%, 7/01/25 .............................................................................. 100,000 103,171
Pre-Refunded, 6.20%, 7/01/25 ................................................................ 1,915,000 1,978,923
-------------
2,082,094
-------------
MARYLAND 1.0%
Baltimore Project Revenue, Wastewater Project, Refunding, FGIC Insured, 5.125%, 7/01/42 ........ 11,000,000 11,487,190
Baltimore Revenue, Wastewater Project, Series A, FSA Insured, Pre-Refunded, 5.75%, 7/01/30 ..... 5,880,000 6,633,404
Maryland State Health and Higher Educational Facilities Authority Revenue,
University of Maryland Medical System, Series B, FGIC Insured, 7.00%, 7/01/22 ................ 200,000 263,618
-------------
18,384,212
-------------
Annual Report | 69
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MASSACHUSETTS 4.2%
Central Berkshire Religious School District GO, Series B, FSA Insured, 5.125%, 3/01/18 ......... $ 1,125,000 $ 1,200,926
Massachusetts State GO, Consolidated Loan, Series D, MBIA Insured,
5.00%, 8/01/27 .............................................................................. 3,535,000 3,685,944
Pre-Refunded, 5.00%, 8/01/27 ................................................................ 855,000 945,108
Massachusetts State Health and Educational Facilities Authority Revenue,
Bay State Medical Center, Series E, FSA Insured, 6.00%, 7/01/26 ............................. 10,000,000 10,602,500
Caregroup Issue, Series A, MBIA Insured, 5.00%, 7/01/25 ..................................... 4,250,000 4,394,160
Caregroup Issue, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/25 ....................... 750,000 831,623
Central New England Health, Series B, AMBAC Insured, 5.20%, 8/01/28 ......................... 5,000,000 5,189,750
Harvard Pilgrim Health, Series A, FSA Insured, 5.00%, 7/01/18 ............................... 3,000,000 3,156,150
Lahey Clinic Medical Center, Series B, MBIA Insured, 5.375%, 7/01/23 ........................ 1,000,000 1,012,660
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ......................... 9,700,000 10,259,302
Simmons College, Series C, MBIA Insured, 5.125%, 10/01/28 ................................... 8,000,000 8,277,040
Massachusetts State Industrial Finance Agency Revenue, Suffolk University,
AMBAC Insured, 5.25%, 7/01/17 ................................................................ 3,000,000 3,218,520
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project,
MBIA Insured, 5.625%,
7/01/20 ..................................................................................... 1,590,000 1,672,871
7/01/21 ..................................................................................... 1,560,000 1,639,529
7/01/23 ..................................................................................... 2,155,000 2,258,462
7/01/24 ..................................................................................... 2,910,000 3,046,392
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, sub. lien,
Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 ........................................... 2,100,000 2,152,227
Massachusetts State Water Resource Authority Revenue, Refunding, Series J, FSA Insured,
5.00%, 8/01/32 ............................................................................... 13,500,000 13,972,500
-------------
77,515,664
-------------
MICHIGAN 10.8%
Allen Park Public School District GO, School Building and Site, MBIA Insured,
5.00%, 5/01/33 ............................................................................... 8,430,000 8,749,750
Birmingham City School District GO, School Building and Site, FSA Insured, 5.00%, 11/01/33 ..... 8,135,000 8,489,279
Central Michigan University Revenue, Series A, AMBAC Insured, 5.05%, 10/01/32 .................. 8,650,000 9,016,414
Chippewa Valley Schools GO, Refunding, AMBAC Insured, 5.00%, 5/01/27 ........................... 1,000,000 1,022,800
Detroit City School District GO, Series A, FSA Insured, 5.125%, 5/01/31 ........................ 6,500,000 6,798,610
Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/21 ....................... 12,390,000 13,048,776
Detroit Sewage Disposal Revenue,
2004, Series A, MBIA Insured, 5.00%, 7/01/25 ................................................ 710,000 713,380
2004, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/25 .................................. 3,685,000 3,720,413
senior lien, Refunding, Series A, FGIC Insured, 5.125%, 7/01/31 ............................. 6,000,000 6,247,740
senior lien, Refunding, Series A, FSA Insured, 5.00%, 7/01/32 ............................... 10,000,000 10,357,500
Detroit Water Supply System Revenue, senior lien, Series A,
FGIC Insured, 5.25%, 7/01/33 ................................................................ 9,815,000 10,359,536
FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 .................................................. 10,185,000 11,334,988
MBIA Insured, 5.00%, 7/01/34 ................................................................ 10,150,000 10,527,174
Ecorse Public School District GO, FGIC Insured, 5.50%, 5/01/27 ................................. 7,250,000 7,702,327
Grand Rapids Sanitation Sewer System Revenue, FGIC Insured, 5.00%, 1/01/34 ..................... 10,000,000 10,423,300
Jackson County Hospital Finance Authority Revenue, W.A. Foote Memorial Hospital,
Series A, AMBAC Insured, 5.25%, 6/01/17 ...................................................... 500,000 521,965
70 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
Kalamazoo Hospital Finance Authority Hospital Facility Revenue, Bronson Methodist Hospital,
Refunding and Improvement,
MBIA Insured, 5.875%, 5/15/26 ............................................................... $ 5,500,000 $ 5,837,535
Series A, MBIA Insured, 6.375%, 5/15/17 ..................................................... 495,000 499,396
Marquette City Hospital Finance Authority Revenue, Marquette General Hospital,
Series D, FSA Insured, Pre-Refunded, 6.10%, 4/01/19 .......................................... 5,000,000 5,298,000
Michigan Municipal Bond Authority Revenue, Clean Water Revolving, MBIA Insured,
5.00%, 10/01/23 .............................................................................. 5,095,000 5,341,904
Michigan State Hospital Finance Authority Revenue,
Hospital Botsford Obligation, Refunding, Series A, MBIA Insured, 5.25%, 2/15/22 ............. 2,000,000 2,107,900
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 .................. 10,000,000 10,191,900
St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ................ 2,500,000 2,683,050
Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co. Pollution
Project, Refunding, Series BB, AMBAC Insured, 7.00%, 5/01/21 ................................. 250,000 331,860
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 10,554,400
Michigan State Trunk Line Revenue, Series A, FSA Insured, 5.25%, 11/01/30 ...................... 20,000,000 21,172,400
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%, 11/15/31 ................................................................ 4,000,000 4,209,400
Saginaw Valley State University Revenue, Refunding, AMBAC Insured, 5.30%, 7/01/28 .............. 3,400,000 3,656,768
Yale Public Schools District GO, FSA Insured, 5.375%, 5/01/27 .................................. 3,845,000 4,044,440
Zeeland Public Schools GO, Refunding, MBIA Insured, 5.25%, 5/01/24 ............................. 3,180,000 3,336,679
-------------
198,299,584
-------------
MINNESOTA 4.1%
Eden Prairie MFHR, Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%, 1/20/31 ............ 2,000,000 2,060,480
Medford ISD No. 763 GO, Series A, FSA Insured, 5.125%, 2/01/26 ................................. 2,475,000 2,605,556
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue, Series C,
FGIC Insured, 5.25%, 1/01/26 ................................................................. 8,000,000 8,472,160
Minneapolis and St. Paul Metropolitan Apartments Community Apartment Revenue,
Series C, FGIC Insured, 5.25%, 1/01/32 ....................................................... 4,500,000 4,736,970
Minneapolis Special School District No. 001 COP, Refunding, Series B, FGIC Insured,
4.625%, 2/01/17 .............................................................................. 1,635,000 1,700,498
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Fairview Hospital, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ........................ 12,280,000 13,355,482
Minnesota State HFAR, Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 ........ 260,000 265,244
Robbinsdale ISD No. 281 GO, MBIA Insured, 5.00%, 2/01/22 ....................................... 7,340,000 7,869,361
Sauk Rapids ISD No. 47 GO, Series A, MBIA Insured, 5.75%, 2/01/26 .............................. 11,850,000 13,289,064
South Washington County ISD No. 833 GO, Series B, FSA Insured, 5.00%,
2/01/22 ..................................................................................... 10,970,000 11,626,335
2/01/23 ..................................................................................... 6,000,000 6,340,380
Woodbury COP, Series A, AMBAC Insured, 5.35%, 2/01/21 .......................................... 2,915,000 3,148,113
-------------
75,469,643
-------------
MISSISSIPPI 0.0%(A)
Harrison County Wastewater Management District Revenue, Wastewater Treatment Facilities,
Refunding, Series A, FGIC Insured, 8.50%, 2/01/13 ............................................ 200,000 265,474
-------------
Annual Report | 71
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MISSOURI 0.2%
St. Louis Municipal Finance Corp. Leasehold Revenue, City Justice Center, Series A,
AMBAC Insured, Pre-Refunded, 5.95%, 2/15/16 .................................................. $ 2,000,000 $ 2,107,120
St. Louis School District GO, FGIC Insured, Pre-Refunded, 6.00%, 4/01/12 ....................... 1,330,000 1,333,897
-------------
3,441,017
-------------
MONTANA 0.5%
Montana State Board of Workers Compensation Investment Program Revenue,
MBIA Insured, ETM, 6.875%, 6/01/20 ........................................................... 8,500,000 9,398,110
-------------
NEBRASKA 0.2%
Lancaster County Hospital Authority Revenue, Bryan Memorial Hospital Project No. 1,
MBIA Insured, ETM, 6.70%, 6/01/22 ............................................................ 2,500,000 3,125,025
Nebraska Educational Finance Authority Revenue, Creighton University Project,
AMBAC Insured, 5.95%, 1/01/11 ................................................................ 1,000,000 1,037,510
-------------
4,162,535
-------------
NEVADA 0.9%
Carson City Hospital Revenue, Series B, AMBAC Insured, Pre-Refunded, 5.40%, 3/01/17 ............ 1,000,000 1,065,190
Clark County GO, Series A, AMBAC Insured, 6.50%, 6/01/17 ....................................... 250,000 309,472
Clark County School District GO, Series A, MBIA Insured, 7.00%, 6/01/10 ........................ 4,000,000 4,713,440
Director of the State Department of Business and Industry Revenue,
Las Vegas Monorail Project, First Tier, AMBAC Insured, 5.625%, 1/01/34 ....................... 5,000,000 5,447,350
Truckee Meadows Water Authority Revenue, Series A, FSA Insured, 5.125%, 7/01/30 ................ 5,000,000 5,231,750
-------------
16,767,202
-------------
NEW JERSEY 2.1%
Essex County Improvement Authority Revenue, Garden State Cancer Center Project,
AMBAC Insured, 6.00%, 12/01/20 ............................................................... 2,525,000 2,636,731
Middlesex County COP, MBIA Insured, 5.30%, 6/15/29 ............................................. 3,575,000 3,774,700
New Brunswick Parking Authority Revenue, Guaranteed Parking, Series A, MBIA Insured,
5.00%, 9/01/34 ............................................................................... 1,500,000 1,556,925
New Jersey EDA Revenue,
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 ..................... 3,450,000 3,604,077
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 ..................... 21,250,000 22,132,938
Municipal Rehabilitation, Series A, AMBAC Insured, 5.00%, 4/01/28 ........................... 4,000,000 4,178,120
New Jersey State Turnpike Authority Turnpike Revenue,
Refunding, Series C, AMBAC Insured, 6.50%, 1/01/16 .......................................... 70,000 84,715
Series C, AMBAC Insured, Pre-Refunded, 6.50%, 1/01/16 ....................................... 230,000 276,945
-------------
38,245,151
-------------
NEW MEXICO 0.1%
Gallup PCR, Plains Electric Generation, Refunding, MBIA Insured, 6.65%, 8/15/17 ................ 2,000,000 2,006,740
-------------
NEW YORK 7.0%
Central Square GO, Central School District, FGIC Insured, ETM, 6.50%, 6/15/10 .................. 900,000 1,049,445
Dutchess County IDA Civic Facilities Revenue, Bard College Project, AMBAC Insured,
5.375%, 6/01/27 .............................................................................. 3,945,000 4,235,746
MTA Revenue, Series B, MBIA Insured, 5.00%, 11/15/28 ........................................... 20,000,000 20,932,000
MTA Service Contract Revenue, Series B, MBIA Insured, 5.00%, 1/01/31 ........................... 7,000,000 7,251,370
Nassau Health Care Corp. Health System Revenue, Nassau County Guaranteed, FSA Insured,
Pre-Refunded, 5.75%, 8/01/29 ................................................................. 5,000,000 5,665,050
72 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Refunding, Series B, FGIC Insured, 5.25%, 6/15/29 ........................................... $ 10,405,000 $ 11,031,277
Series B, AMBAC Insured, 5.25%, 6/15/29 ..................................................... 5,000,000 5,300,950
New York City Transitional Finance Authority Revenue, Future Tax Secured,
Refunding, Series B, MBIA Insured, 5.00%, 8/01/32 ........................................... 2,230,000 2,318,353
Series A, FGIC Insured, 5.125%, 8/01/33 ..................................................... 14,590,000 15,336,862
New York City Trust Cultural Resources Revenue, New York Botanical Garden, MBIA Insured,
5.80%, 7/01/26 ................................................................................ 2,000,000 2,103,580
New York State Dormitory Authority Revenues,
Mental Health Services Facilities Improvement, Series B, MBIA Insured, 5.25%,
8/15/31 .................................................................................... 9,065,000 9,534,930
Mental Health Services Facilities Improvement, Series B, MBIA Insured, Pre-Refunded,
5.25%, 8/15/31 ............................................................................. 5,935,000 6,616,931
Pace University, MBIA Insured, 5.70%, 7/01/22 ............................................... 7,500,000 8,130,675
Pace University, Refunding, MBIA Insured, 5.75%, 7/01/26 .................................... 2,500,000 2,713,025
St. John's University, MBIA Insured, 5.70%, 7/01/26 ......................................... 15,000,000 15,902,550
Vassar Brothers Hospital, FSA Insured, 5.375%, 7/01/25 ...................................... 4,000,000 4,214,760
Triborough Bridge and Tunnel Authority Revenues, Refunding, MBIA Insured, 5.00%, 11/15/32 ...... 5,000,000 5,183,900
Upper Mohawk Valley Regional Water Finance Authority Water Systems Revenue, Refunding,
Series A, FSA Insured, 5.125%, 10/01/26 ....................................................... 1,495,000 1,570,109
-------------
129,091,513
-------------
NORTH CAROLINA 0.8%
Asheville Water System Revenue, FGIC Insured, 5.70%, 8/01/25 ................................... 1,000,000 1,061,790
North Carolina Medical Care Commission Hospital Revenue, Rex Healthcare Project,
AMBAC Insured, 5.00%, 6/01/17 ................................................................ 5,000,000 5,241,100
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, MBIA Insured, ETM,
6.50%, 1/01/10 ............................................................................... 20,000 22,133
Raleigh Durham Airport Authority Airport Revenue, Series A, FGIC Insured, 5.00%,
11/01/25 .................................................................................... 5,000,000 5,207,200
11/01/31 .................................................................................... 4,000,000 4,130,920
-------------
15,663,143
-------------
NORTH DAKOTA 0.3%
Grand Forks Health Care System Revenue, Altru Health System Obligation Group,
MBIA Insured, 5.625%, 8/15/27 ................................................................ 5,390,000 5,714,909
-------------
OHIO 7.2%
Akron Income Tax Revenue, Community Learning Centers, Series A, FGIC Insured,
5.00%, 12/01/33 .............................................................................. 5,000,000 5,193,400
Cleveland Airport System Revenue, Series A, FSA Insured,
5.125%, 1/01/27 ............................................................................. 4,000,000 4,067,200
5.00%, 1/01/31 .............................................................................. 15,405,000 15,874,698
Cleveland Waterworks Revenue, Refunding and Improvement, Series I, FSA Insured,
5.00%, 1/01/23 .............................................................................. 1,580,000 1,656,219
Pre-Refunded, 5.00%, 1/01/23 ................................................................ 1,170,000 1,253,257
Columbus City School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.00%, 12/01/28 ............................................................... 8,000,000 8,350,880
FGIC Insured, 5.00%, 12/01/31 ............................................................... 10,295,000 10,688,681
FSA Insured, 5.00%, 12/01/32 ................................................................ 7,765,000 8,130,499
Annual Report | 73
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Elyria GO, FGIC Insured, 5.40%, 12/01/17 ....................................................... $ 2,400,000 $ 2,555,112
Hamilton County Sales Tax Revenue, Hamilton County Football, Project B, MBIA Insured,
5.00%, 12/01/27 .............................................................................. 3,250,000 3,380,455
Hamilton Wastewater System Revenue, Series A, FSA Insured, 5.15%, 10/15/17 ..................... 3,015,000 3,205,940
Licking Heights Local School District GO, School Facilities Construction and Improvements,
Series A, FGIC Insured, 5.625%, 12/01/28 ..................................................... 3,465,000 3,825,984
Lucas County Hospital Revenue, Promedica Healthcare Obligation Group, Refunding,
AMBAC Insured, 5.375%, 11/15/29 .............................................................. 5,000,000 5,271,200
Maumee City School District GO, School Facilities Construction and Improvements,
FSA Insured, 5.00%, 12/01/27 ................................................................. 3,250,000 3,409,315
Medina City School District GO, FGIC Insured, 5.25%, 12/01/28 .................................. 7,500,000 8,018,775
Ohio State GO, Common Schools, FSA Insured, 5.00%, 9/15/21 ..................................... 3,230,000 3,431,229
Ohio State Turnpike Commission Turnpike Revenue, Series A, MBIA Insured, Pre-Refunded,
5.50%, 2/15/26 ............................................................................... 12,000,000 12,592,320
Olentangy Local School District GO, School Facilities Construction and Improvement,
Series A, FGIC Insured, 5.25%, 12/01/32 ...................................................... 11,450,000 12,316,994
Springfield City School District GO, FGIC Insured, 5.20%, 12/01/23 ............................. 3,860,000 4,178,373
Streetsboro City School District GO, School Improvement, MBIA Insured, 5.125%, 12/01/21 ........ 3,700,000 3,945,939
Toledo City School District GO, School Facilities Improvement, Series B, FGIC Insured,
5.00%, 12/01/32 .............................................................................. 4,000,000 4,157,640
University of Cincinnati COP, University Center Project, MBIA Insured, 5.125%, 6/01/24 ......... 2,950,000 3,085,611
West Holmes Local School District GO, MBIA Insured, 5.375%, 12/01/17 ........................... 3,100,000 3,295,858
-------------
131,885,579
-------------
OKLAHOMA 0.1%
McGee Creek Authority Water Revenue, MBIA Insured, 6.00%, 1/01/23 .............................. 300,000 360,672
Okmulgee County Governmental Building Authority Sales Tax Revenue, first mortgage,
MBIA Insured, 6.20%, 3/01/20 ................................................................. 1,625,000 1,797,640
-------------
2,158,312
-------------
OREGON 1.7%
Chemeketa Community College District GO, FGIC Insured, Pre-Refunded, 5.95%, 6/01/16 ............ 3,000,000 3,133,080
Clackamas Community College District Revenue, MBIA Insured, Pre-Refunded,
5.80%, 6/01/26 ............................................................................... 2,500,000 2,606,325
Josephine County School District No. 7 GO, FGIC Insured, 5.70%, 6/01/13 ........................ 5,000,000 5,344,650
Northern Wasco County Peoples Utilities District Electric Revenue,
FGIC Insured, Pre-Refunded, 5.625%, 12/01/22 ................................................. 1,000,000 1,035,480
Ontario Catholic Health Revenue, Holy Rosary Medical Center, MBIA Insured,
5.50%, 11/15/12 .............................................................................. 700,000 727,664
Oregon Health Sciences University Revenue,
Series A, MBIA Insured, 5.00%, 7/01/32 ...................................................... 8,000,000 8,325,200
Series B, MBIA Insured, 5.25%, 7/01/15 ...................................................... 1,500,000 1,580,475
Oregon State Department of Administrative Services COP, Series A,
AMBAC Insured, Pre-Refunded, 5.80%, 5/01/24 ................................................. 5,000,000 5,390,000
MBIA Insured, Pre-Refunded, 5.70%, 5/01/17 .................................................. 1,000,000 1,048,320
Port of Portland International Airport Revenue, Portland International Airport,
Series 11, FGIC Insured, 5.625%, 7/01/26 ..................................................... 1,000,000 1,042,250
74 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON (CONT.)
Washington County Unified Sewer Agency Revenue, senior lien, FGIC Insured, Pre-Refunded,
5.50%, 10/01/16 .............................................................................. $ 1,845,000 $ 1,951,955
-------------
32,185,399
-------------
PENNSYLVANIA 2.0%
Allegheny County Hospital Development Authority Revenue, Health System, Series A,
MBIA Insured, 6.50%, 11/15/30 ................................................................ 10,000,000 11,775,600
Beaver County GO, Series A, MBIA Insured, Pre-Refunded, 5.90%, 10/01/26 ........................ 2,000,000 2,108,980
Pennsylvania Convention Center Authority Revenue, Series A, FGIC Insured, ETM,
6.00%, 9/01/19 ............................................................................... 500,000 600,230
Philadelphia Airport Revenue, Philadelphia Airport System, Series A, AMBAC Insured,
6.10%, 6/15/25 ............................................................................... 4,000,000 4,119,120
Philadelphia Gas Works Revenue, 1998 General Ordinance, Fourth Series, FSA Insured,
5.00%, 8/01/32 ............................................................................... 4,000,000 4,138,600
Philadelphia Water and Wastewater Revenue, Series A, FGIC Insured, 5.25%, 11/01/24 ............. 2,000,000 2,162,080
Pittsburgh and Allegheny County Public Auditorium Revenue, Regional Asset District Sales
Tax, AMBAC Insured, 5.25%, 2/01/31 ........................................................... 6,000,000 6,379,200
Pittsburgh Water and Sewer System Authority Revenue, Refunding, FGIC Insured, ETM,
7.25%, 9/01/14 ............................................................................... 90,000 107,026
State Public School Building Authority School Revenue, Philadelphia School District Project,
FSA Insured, 5.00%, 6/01/33 .................................................................. 5,000,000 5,173,750
-------------
36,564,586
-------------
RHODE ISLAND 0.7%
Providence GO, Series A, FSA Insured, Pre-Refunded, 5.70%, 7/15/19 ............................. 3,000,000 3,240,960
Rhode Island Clean Water Financing Agency Revenue, Cranston Wastewater Treatment System,
MBIA Insured, 5.80%, 9/01/22 ................................................................. 7,785,000 8,196,515
Rhode Island State Health and Educational Building Corp. Revenue, Hospital Financing,
Lifespan Obligation Group, MBIA Insured, 5.75%, 5/15/23 ...................................... 1,750,000 1,880,515
-------------
13,317,990
-------------
SOUTH CAROLINA 0.5%
Piedmont Municipal Power Agency Electric Revenue, Refunding, FGIC Insured,
6.25%, 1/01/21 ............................................................................... 200,000 251,840
Richland County Hospital Facilities Revenue, Community Provider, Pooled Loan Program,
Series A, FSA Insured, ETM, 7.125%, 7/01/17 .................................................. 3,000,000 3,658,560
South Carolina Jobs EDA Industrial Revenue, South Carolina Electric and Gas Co. Project,
Series A, AMBAC Insured, 5.20%, 11/01/27 ..................................................... 5,000,000 5,300,850
Spartanburg Sanitation Sewer District Sewer System Revenue, MBIA Insured, Pre-Refunded,
5.50%, 6/01/27 ............................................................................... 500,000 537,020
-------------
9,748,270
-------------
SOUTH DAKOTA 0.8%
Brookings COP, AMBAC Insured, 5.10%, 12/01/18 .................................................. 5,000,000 5,280,800
Grant County PCR, Refunding, MBIA Insured, 5.90%, 6/01/23 ...................................... 4,800,000 4,851,408
Sioux Falls Medical Clinic Revenue, AMBAC Insured, 8.00%, 9/01/08 .............................. 1,035,000 1,062,490
South Dakota Lease Revenue, Series A, FSA Insured, 6.75%, 12/15/16 ............................. 2,720,000 3,247,544
-------------
14,442,242
-------------
Annual Report | 75
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TENNESSEE 0.6%
Johnson City Health and Educational Facilities Board Hospital Revenue, Series 2000 A,
MBIA Insured, Pre-Refunded, 5.125%, 7/01/25 .................................................. $ 2,780,000 $ 2,907,658
Johnson City Health and Educational Revenue, Medical Center Hospital,
Refunding and Improvement, MBIA Insured, ETM, 5.25%, 7/01/28 ................................. 8,500,000 8,884,540
-------------
11,792,198
-------------
TEXAS 10.7%
Austin Hotel Occupancy Tax Revenue, sub. lien, Refunding, AMBAC Insured,
5.625%, 11/15/21 ............................................................................ 2,355,000 2,560,427
5.80%, 11/15/29 ............................................................................. 13,750,000 15,121,287
Austin Water and Wastewater System Revenue, Refunding, Series B, FSA Insured,
5.125%, 5/15/27 ............................................................................. 11,125,000 11,625,291
5.25%, 5/15/31 .............................................................................. 5,000,000 5,258,550
Bell County Health Facilities Development Corporate Revenue, Hospital, Cook Children's
Medical Center, Refunding, FSA Insured, 5.30%, 12/01/23 ...................................... 5,000,000 5,370,750
Coastal Bend Health Facilities Development Corp. Revenue, Series B, AMBAC Insured, ETM,
6.30%, 1/01/17 ............................................................................... 12,230,000 14,151,455
Dallas-Fort Worth International Airport Revenue,
Joint Series A, FGIC Insured, 6.00%, 11/01/21 ............................................... 2,210,000 2,420,701
Refunding and Improvement, Joint Series A, FGIC Insured, 5.625%, 11/01/21 ................... 12,000,000 13,034,760
Fort Bend County Levee ID No. 011 GO, AMBAC Insured, Pre-Refunded, 6.00%,
9/01/21 ..................................................................................... 1,395,000 1,422,105
9/01/22 ..................................................................................... 1,495,000 1,524,048
9/01/23 ..................................................................................... 1,610,000 1,641,282
Harris County Health Facilities Development Corp. Revenue, Christus Health, Refunding,
Series A, MBIA Insured, 5.375%, 7/01/29 ...................................................... 22,000,000 23,384,240
Harris County Hospital District Mortgage Revenue, AMBAC Insured,
7.40%, 2/15/10 .............................................................................. 1,055,000 1,181,748
ETM, 7.40%, 2/15/10 ......................................................................... 595,000 652,733
Harris County Houston Sports Authority Revenue, senior lien, Series G, MBIA Insured,
5.25%, 11/15/30 .............................................................................. 21,325,000 22,517,494
Houston Airport System Revenue, sub. lien, Series B, FSA Insured, 5.50%, 7/01/30 ............... 4,700,000 5,051,325
Houston Water and Sewer System Revenue, junior lien,
Series B, FGIC Insured, Pre-Refunded, 5.75%, 12/01/30 ....................................... 10,000,000 11,355,900
Series C, FGIC Insured, Pre-Refunded, 5.375%, 12/01/27 ...................................... 6,800,000 7,355,968
Laredo ISD Public Facility Corp. Lease Revenue, Series C, AMBAC Insured, 5.00%, 8/01/29 ........ 1,000,000 1,025,300
Matagorda County Navigation District No. 1 Revenue, Houston Industries Inc.
Project, Refunding,
Series A, MBIA Insured, 5.25%, 11/01/29 ..................................................... 3,185,000 3,312,687
Series B, MBIA Insured, 5.15%, 11/01/29 ..................................................... 2,750,000 2,860,577
Palo Duro River Authority GO, Refunding, FSA Insured, 6.375%, 8/01/08 .......................... 4,945,000 5,259,057
Pflugerville GO, FGIC Insured,
5.25%, 8/01/27 .............................................................................. 3,320,000 3,524,711
5.20%, 8/01/32 .............................................................................. 3,000,000 3,161,910
Portland Community Center Complex Development Corp. Sales Tax Revenue, Refunding,
AMBAC Insured, 5.45%, 2/15/25 ................................................................ 1,450,000 1,547,860
San Antonio Water Revenue, Refunding and Improvement, MBIA Insured, 5.60%, 5/15/21 ............. 3,250,000 3,428,133
76 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
San Marcos Waterworks and Sewer Systems Revenue, Series 1998, FSA Insured,
5.125%, 8/15/20 .............................................................................. $ 2,870,000 $ 3,010,200
Smithville HDC Mortgage Revenue, Smithville Retirement, Refunding, Series A,
MBIA Insured, 6.40%, 1/01/22 ................................................................. 915,000 937,646
Southeast HDC Mortgage Revenue, Stonegate Retirement, MBIA Insured, 6.40%, 1/01/24 ............. 980,000 1,008,665
Tarrant County Health Facilities Development Corp. Health Systems Revenue, Harris Methodist
Health System, MBIA Insured, ETM, 6.00%, 9/01/24 ............................................. 3,250,000 3,894,150
Tarrant County Health Facilities Development Corp. Hospital Revenue,
Fort Worth Osteopathic Hospital, MBIA Insured, 5.125%, 5/15/21 ............................... 2,905,000 2,912,931
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical Center Project,
Series B, FSA Insured, 5.50%, 11/01/17 ...................................................... 1,000,000 1,063,310
Series C, FSA Insured, 5.60%, 11/01/27 ...................................................... 1,430,000 1,543,485
Series D, FSA Insured, 5.375%, 11/01/27 ..................................................... 8,800,000 9,280,656
United ISD, GO, 5.125%, 8/15/26 ................................................................ 3,000,000 3,162,150
-------------
196,563,492
-------------
U.S. TERRITORIES 0.0%A
District of Columbia HFA, RMR, Series 1986-1, FGIC Insured, 7.75%, 9/01/16 ..................... 235,000 236,147
-------------
UTAH 0.7%
Intermountain Power Agency Power Supply Revenue, Refunding, Series B, MBIA Insured,
5.75%, 7/01/19 ............................................................................... 3,250,000 3,523,065
Provo Electric System Revenue, Refunding, Series A, AMBAC Insured, ETM,
10.375%, 9/15/15 ............................................................................. 35,000 48,408
Utah County Hospital Revenue, IHC Health Services Inc., MBIA Insured, ETM, 5.25%,
8/15/21 ..................................................................................... 5,000,000 5,239,950
8/15/26 ..................................................................................... 5,000,000 5,073,800
-------------
13,885,223
-------------
VIRGINIA 1.2%
Chesapeake IDA Public Facilities Lease Revenue, Chesapeake Jail Project, MBIA Insured,
6.00%, 6/01/12 ............................................................................... 5,000,000 5,099,550
Front Royal and Warren County IDA Lease Revenue, School and Capital Improvement,
Series B, FSA Insured, 5.00%, 4/01/35 ........................................................ 6,000,000 6,225,840
Middle River Regional Jail Authority Jail Facility Revenue, MBIA Insured, 5.00%, 5/15/28 ....... 3,510,000 3,693,152
Spotsylvania County Water and Sewer System Revenue, MBIA Insured, 5.40%, 6/01/27 ............... 3,850,000 4,131,435
Winchester IDA Educational Facilities Revenue, first mortgage, Shenandoah University Project,
MBIA Insured,
5.00%, 10/01/18 ............................................................................. 1,000,000 1,053,450
5.25%, 10/01/28 ............................................................................. 1,420,000 1,503,354
-------------
21,706,781
-------------
WASHINGTON 2.3%
Klickitat County PUD No. 1 Electric Revenue, FGIC Insured, Pre-Refunded,
5.65%, 10/01/15 ............................................................................. 1,000,000 1,030,550
5.75%, 10/01/27 ............................................................................. 1,000,000 1,031,130
Pierce County GO, School District No. 003 Puyallup, FGIC Insured, Pre-Refunded,
5.70%, 12/01/15 .............................................................................. 1,000,000 1,081,000
Port of Longview GO, MBIA Insured, 6.00%, 11/01/15 ............................................. 2,000,000 2,099,740
Seattle Water System Revenue, FGIC Insured, 5.625%, 8/01/26 .................................... 2,000,000 2,161,340
Annual Report | 77
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
WASHINGTON (CONT.)
Snohomish County PUD No. 1 Electric Revenue, Generation System, FGIC Insured, ETM,
6.65%, 1/01/16 ............................................................................... $ 4,250,000 $ 5,142,117
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ............................................ 3,400,000 3,590,026
Washington State GO, Various Purpose, Series C, FSA Insured, 5.25%, 1/01/26 .................... 6,000,000 6,389,340
Washington State Health Care Facilities Authority Revenue,
Providence Services, MBIA Insured, 5.50%, 12/01/26 .......................................... 5,000,000 5,335,450
Swedish Health Services, Refunding, AMBAC Insured, 5.50%, 11/15/28 .......................... 13,000,000 13,858,130
--------------
41,718,823
--------------
WEST VIRGINIA 0.9%
Harrison County Community Solid Waste Disposal Revenue, Potomac Edison Co., Series C,
AMBAC Insured, 6.75%, 8/01/24 ................................................................ 11,560,000 11,831,660
West Virginia State GO, Series A, FGIC Insured, 5.00%, 11/01/21 ................................ 5,000,000 5,237,100
--------------
17,068,760
--------------
WISCONSIN 0.2%
Superior Limited Obligation Revenue, Midwest Energy Resources, Refunding, Series E,
FGIC Insured, 6.90%, 8/01/21 ................................................................. 3,000,000 3,966,180
--------------
WYOMING 0.6%
Natrona County Hospital Revenue, Wyoming Medical Center Projects, Refunding,
AMBAC Insured, Pre-Refunded, 6.00%, 9/15/24 .................................................. 9,885,000 10,351,770
--------------
TOTAL BONDS (COST $1,682,604,452) .............................................................. 1,802,051,789
--------------
STEP-UP BONDS 1.5%
KENTUCKY 1.5%
Kentucky Economic Development Finance Authority Health System Revenue,
Norton Healthcare Inc., Refunding, Series C, MBIA Insured, zero cpn. to 10/01/05,
6.15% thereafter, 10/01/26 ................................................................. 12,195,000 12,991,212
Series C, MBIA Insured, zero cpn. to 10/01/05, 6.05% thereafter, 10/01/20 ................... 12,760,000 13,844,856
--------------
TOTAL STEP-UP BONDS (COST $24,090,516) ......................................................... 26,836,068
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,706,694,968) .............................................. 1,828,887,857
--------------
SHORT TERM INVESTMENT (COST $600,000) 0.0%A
BOND 0.0%a
LOUISIANA 0.0%a
(b)Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project,
First Stage, ACES, Refunding, Daily VRDN and Put, 1.80%, 9/01/17 ............................. 600,000 600,000
--------------
TOTAL INVESTMENTS (COST $1,707,294,968) 99.2% .................................................. 1,829,487,857
OTHER ASSETS, LESS LIABILITIES 0.8% ............................................................ 14,091,222
--------------
NET ASSETS 100.0% .............................................................................. $1,843,579,079
==============
See Glossary of Terms on page 118.
(a) Rounds to less than 0.05% of net assets
(b) 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.
78 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.11 $11.91 $11.64 $11.54 $10.75
-------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.52 0.52 0.54 0.55 0.57
Net realized and unrealized gains (losses) ........ (0.13) 0.20 0.27 0.11 0.79
-------------------------------------------------------------
Total from investment operations ................... 0.39 0.72 0.81 0.66 1.36
Less distributions from net investment income ...... (0.52) (0.52) (0.54) (0.56) (0.57)
Redemption fees .................................... --(c) -- -- -- --
-------------------------------------------------------------
Net asset value, end of year ....................... $11.98 $12.11 $11.91 $11.64 $11.54
=============================================================
Total return(b) .................................... 3.35% 6.16% 7.19% 5.87% 12.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $442,842 $432,467 $426,319 $382,300 $327,650
Ratios to average net assets:
Expenses .......................................... 0.67% 0.67% 0.67% 0.69% 0.70%
Net investment income ............................. 4.35% 4.36% 4.59% 4.79% 5.12%
Portfolio turnover rate ............................ 9.54% 10.99% 16.23% 6.31% 15.69%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 79
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
--------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.19 $11.98 $11.70 $11.61 $10.81
--------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.45 0.46 0.48 0.49 0.51
Net realized and unrealized gains (losses) ........ (0.13) 0.20 0.28 0.09 0.80
--------------------------------------------------------
Total from investment operations ................... 0.32 0.66 0.76 0.58 1.31
Less distributions from net investment
income ............................................. (0.45) (0.45) (0.48) (0.49) (0.51)
Redemption fees .................................... --(c) -- -- -- --
--------------------------------------------------------
Net asset value, end of year ....................... $12.06 $12.19 $11.98 $11.70 $11.61
========================================================
Total return(b) .................................... 2.75% 5.62% 6.66% 5.16% 12.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $50,272 $48,268 $43,002 $32,354 $28,397
Ratios to average net assets:
Expenses .......................................... 1.22% 1.23% 1.21% 1.24% 1.25%
Net investment income ............................. 3.80% 3.80% 4.05% 4.24% 4.57%
Portfolio turnover rate ............................ 9.54% 10.99% 16.23% 6.31% 15.69%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
80 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.2%
BONDS 98.2%
MASSACHUSETTS 98.2%
Auburn GO, AMBAC Insured, 5.125%, 6/01/24 ...................................................... $ 1,465,000 $ 1,585,906
Boston Convention Center Act of 1997, Special Obligation, Series A, AMBAC Insured,
5.00%, 5/01/27 ............................................................................... 3,970,000 4,093,785
Boston GO,
MBIA Insured, 5.00%, 2/01/21 ................................................................ 3,000,000 3,179,520
Series A, MBIA Insured, 5.00%, 2/01/22 ...................................................... 2,940,000 3,109,021
Chelsea GO, State Qualified, Refunding, AMBAC Insured, 5.125%, 6/15/16 ......................... 1,750,000 1,877,260
Dudley Charlton Regional School District GO, Series B, FGIC Insured, 5.25%, 5/01/19 ............ 3,140,000 3,583,023
Foxborough Stadium Infrastructure Improvement Revenue, 5.75%, 6/01/25 .......................... 4,000,000 4,416,360
Greater Lawrence Sanitary District GO, MBIA Insured, 5.625%, 6/15/20 ........................... 1,000,000 1,109,450
Holyoke Gas and Electric Department Revenue, Series A, MBIA Insured, 5.00%, 12/01/26 ........... 9,805,000 10,161,314
Kingston GO, FGIC Insured, 5.50%, 11/15/19 ..................................................... 2,055,000 2,260,294
Lawrence GO, AMBAC Insured, 5.00%, 2/01/21 ..................................................... 1,000,000 1,059,840
Lowell GO,
FGIC Insured, 5.85%, 2/15/20 ................................................................ 1,595,000 1,784,342
State Qualified, AMBAC Insured, 5.00%, 2/01/21 .............................................. 1,330,000 1,417,394
State Qualified, AMBAC Insured, 5.00%, 2/01/22 .............................................. 1,405,000 1,494,344
Ludlow GO, School Project, Limited Tax, MBIA Insured,
7.30%, 11/01/07 ............................................................................. 210,000 235,152
7.30%, 11/01/08 ............................................................................. 210,000 242,892
7.40%, 11/01/09 ............................................................................. 210,000 249,801
Lynn Water and Sewer Commission General Revenue, Series A, FSA Insured,
5.125%, 12/01/17 ............................................................................. 3,000,000 3,202,470
Mansfield GO, Municipal Purpose Loan, FGIC Insured, 5.125%, 8/15/17 ............................ 1,685,000 1,790,380
Martha's Vineyard Land Bank Revenue, AMBAC Insured,
4.875%, 5/01/22 ............................................................................. 2,000,000 2,103,640
5.00%, 5/01/32 .............................................................................. 2,000,000 2,071,700
5.00%, 5/01/34 .............................................................................. 7,000,000 7,270,620
Massachusetts Bay Transportation Authority COP, MBIA Insured, 7.75%, 1/15/06 ................... 500,000 522,740
Massachusetts Bay Transportation Authority Revenue, General Transportation System,
Series C, FGIC Insured, 5.25%, 3/01/15 ...................................................... 2,000,000 2,246,360
Series D, MBIA Insured, 5.00%, 3/01/27 ...................................................... 5,000,000 5,287,300
Massachusetts Bay Transportation Authority Sales Tax Revenue, Refunding,
Senior Series A, FGIC Insured, 5.00%, 7/01/27 ................................................ 5,000,000 5,521,650
Massachusetts State College Building Authority Project Revenue,
Capital Assurance, Refunding, Series A, XLCA Insured, 5.00%, 5/01/43 ........................ 5,000,000 5,124,250
Refunding, Series B, XLCA Insured, 5.50%, 5/01/39 ........................................... 5,000,000 5,704,700
Series 1, MBIA Insured, ETM, 5.375%, 5/01/23 ................................................ 5,000,000 5,303,250
Series A, MBIA Insured, 5.00%, 5/01/23 ...................................................... 2,000,000 2,131,500
Massachusetts State Development Finance Agency Revenue,
Brandeis University, Series K, FGIC Insured, 4.75%, 10/01/28 ................................ 2,000,000 2,030,920
College of Pharmacy and Allied Health Sciences, Series D, Assured Guaranty,
5.00%, 7/01/27 ............................................................................. 5,845,000 6,074,124
Massachusetts/Saltonstall Redevelopment Building Corp., Series A, MBIA Insured,
5.125%, 2/01/34 ............................................................................ 22,400,000 23,315,488
MBIA Insured, 5.20%, 7/01/32 ................................................................ 2,250,000 2,391,975
Series A, AMBAC Insured, 5.375%, 1/01/42 .................................................... 4,000,000 4,279,320
Annual Report | 81
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MASSACHUSETTS (CONT.)
Series A, GNMA Secured, 6.90%, 10/20/41 ..................................................... $ 2,090,000 $ 2,384,335
Western New England College, AMBAC Insured, 5.25%, 7/01/20 .................................. 1,500,000 1,642,740
Massachusetts State GO,
Consolidated Loan, Series C, FGIC Insured, Pre-Refunded, 5.25%, 11/01/30 .................... 9,645,000 10,715,402
Consolidated Loan, Series D, FSA Insured, 5.00%, 11/01/24 ................................... 2,500,000 2,654,325
Consolidated Loan, Series D, MBIA Insured, 5.00%, 8/01/27 ................................... 3,430,000 3,576,461
Consolidated Loan, Series D, MBIA Insured, Pre-Refunded, 5.00%, 8/01/27 ..................... 965,000 1,066,701
MBIA Insured, Pre-Refunded, 5.00%, 8/01/22 .................................................. 4,100,000 4,489,869
Massachusetts State Health and Educational Facilities Authority Revenue,
Bay State Medical Center, Series E, FSA Insured, 6.00%, 7/01/26 ............................. 1,500,000 1,590,375
Berkshire Health System, Series D, MBIA Insured, 6.00%, 10/01/19 ............................ 5,500,000 5,715,435
Boston College, Series N, MBIA Insured, 5.125%, 6/01/33 ..................................... 5,000,000 5,237,500
Brandeis University, Refunding, Series I, MBIA Insured, 4.75%, 10/01/20 ..................... 3,000,000 3,090,120
Cable Housing and Health Services, Series A, MBIA Insured, 5.25%, 7/01/23 ................... 1,000,000 1,003,900
Catholic Health East, Series A, AMBAC Insured, 5.00%, 11/15/28 .............................. 6,575,000 6,725,502
Cooley Dickinson Hospital, Series B, AMBAC Insured, 5.50%, 11/15/18 ......................... 3,500,000 3,603,950
Cooley Dickinson Hospital, Series B, AMBAC Insured, 5.50%, 11/15/25 ......................... 7,720,000 7,833,484
Harvard University, Series FF, 5.125%, 7/15/37 .............................................. 8,000,000 8,391,920
Lahey Clinic Medical Center, Series B, MBIA Insured, 5.375%, 7/01/23 ........................ 21,730,000 22,005,102
New England Medical Center Hospital, Series H, FGIC Insured, 5.00%, 5/15/22 ................. 10,000,000 10,441,500
Newton-Wellesley Hospital, Series E, MBIA Insured, 6.00%, 7/01/18 ........................... 1,300,000 1,340,378
Newton-Wellesley Hospital, Series E, MBIA Insured, 6.00%, 7/01/25 ........................... 6,750,000 6,959,655
Northeastern University, Series I, MBIA Insured, 5.00%, 10/01/29 ............................ 1,250,000 1,289,412
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ......................... 5,000,000 5,288,300
Springfield College, AMBAC Insured, 5.00%, 10/15/27 ......................................... 2,500,000 2,562,000
Stonehill College, Series F, AMBAC Insured, 5.75%, 7/01/26 .................................. 1,690,000 1,770,072
Tufts University, Series I, 5.25%, 2/15/30 .................................................. 4,000,000 4,223,320
University of Massachusetts Project, Series A, FGIC Insured, 5.875%, 10/01/29 ............... 4,000,000 4,523,440
University of Massachusetts Project, Series C, MBIA Insured, 5.25%, 10/01/31 ................ 1,500,000 1,600,260
University of Massachusetts, Series C, FGIC Insured, 5.125%, 10/01/34 ....................... 3,000,000 3,142,710
University of Massachusetts, Worcester Campus, Series B, FGIC Insured, 5.25%,
10/01/31 ................................................................................... 3,500,000 3,707,130
Wellesley College, Series F, 5.125%, 7/01/39 ................................................ 7,500,000 7,764,825
Wheelock College, Series B, MBIA Insured, 5.625%, 10/01/30 .................................. 1,770,000 1,920,751
Williams College, Series F, MBIA Insured, 5.50%, 7/01/26 .................................... 2,500,000 2,618,075
Massachusetts State HFA,
MFHR, Section 8 Assisted, Series A, GNMA Secured, ETM, 7.00%, 4/01/21 ....................... 430,000 566,804
SFHR, Series 53, MBIA Insured, 6.15%, 12/01/29 .............................................. 690,000 710,113
SFHR, Series 57, MBIA Insured, 5.55%, 6/01/25 ............................................... 2,255,000 2,295,680
Massachusetts State HFA Housing Revenue, Rental, Series A, AMBAC Insured,
5.95%, 7/01/30 ............................................................................... 2,000,000 2,103,120
Massachusetts State Industrial Finance Agency Electrical Utility Revenue,
Nantucket Electric Co., Series A, AMBAC Insured, 5.875%, 7/01/17 .............................. 4,000,000 4,222,080
Massachusetts State Industrial Finance Agency Revenue,
Simons Rock College, AMBAC Insured, 5.50%, 6/01/27 .......................................... 1,560,000 1,646,845
St. Marks School Issue, MBIA Insured, 5.375%, 1/01/21 ....................................... 2,665,000 2,778,609
Suffolk University, AMBAC Insured, 5.25%, 7/01/27 ........................................... 4,000,000 4,178,240
82 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MASSACHUSETTS (CONT.)
Massachusetts State Industrial Finance Agency Revenue, (cont.)
Trustees Deerfield Academy, 5.25%, 10/01/27 ................................................. $ 2,800,000 $ 2,930,452
Western New England College, AMBAC Insured, 5.00%, 7/01/28 .................................. 4,000,000 4,112,640
WGBH Educational Foundation, Refunding, AMBAC Insured, 5.00%, 3/01/28 ....................... 2,500,000 2,566,600
Worcester Polytechnical Institute, Refunding, MBIA Insured, 5.125%, 9/01/17 ................. 3,720,000 3,966,524
Worcester Polytechnical Institute, Refunding, Series II, MBIA Insured, 5.50%, 9/01/21 ....... 2,000,000 2,141,400
Worcester Polytechnical Institute, Refunding, Series II, MBIA Insured, 5.125%,
9/01/27 .................................................................................... 4,000,000 4,145,120
Massachusetts State Port Authority Revenue,
Series A, FSA Insured, 5.125%, 7/01/17 ...................................................... 2,000,000 2,148,260
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/19 .......................... 2,215,000 2,337,047
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/22 .......................... 2,000,000 2,099,680
Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/29 ........................... 7,450,000 7,819,595
Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/39 ........................... 845,000 885,957
US Airways Project, MBIA Insured, 6.00%, 9/01/21 ............................................ 4,700,000 4,987,029
US Airways Project, Series A, MBIA Insured, 5.875%, 9/01/23 ................................. 4,500,000 4,737,015
Massachusetts State Special Obligation Dedicated Tax Revenue, FGIC Insured,
5.25%, 1/01/29 ............................................................................... 5,000,000 5,353,150
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue,
Series A, MBIA Insured, 5.00%, 1/01/37 ...................................................... 9,000,000 9,143,370
sub. lien, Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 ............................... 10,000,000 10,248,700
sub. lien, Series B, MBIA Insured, 5.25%, 1/01/29 ........................................... 4,600,000 4,851,252
Massachusetts State Water Pollution Abatement Trust Revenue,
Pool Program Bonds, Series 6, 5.50%, 8/01/30 ................................................ 2,620,000 2,850,560
Pool Program Bonds, Series 6, Pre-Refunded, 5.50%, 8/01/30 .................................. 1,075,000 1,210,547
Pool Program Bonds, Series 7, 5.125%, 2/01/31 ............................................... 4,300,000 4,482,105
Pool Program Bonds, Series 7, Pre-Refunded, 5.125%, 2/01/31 ................................. 1,700,000 1,866,566
Water Revenue Authority Program, Sub Series A, 5.75%, 8/01/29 ............................... 3,995,000 4,428,178
Water Revenue Authority Program, Sub Series A, Pre-Refunded, 5.75%, 8/01/29 ................. 1,005,000 1,129,841
Massachusetts State Water Resource Authority Revenue, Refunding,
Series A, FGIC Insured, 5.75%, 8/01/39 ...................................................... 9,275,000 10,391,710
Series J, FSA Insured, 5.00%, 8/01/32 ....................................................... 10,000,000 10,350,000
Monson GO, AMBAC Insured, 5.25%, 11/01/23 ...................................................... 1,675,000 1,846,554
New Bedford GO, Municipal Purpose Loan, FGIC Insured, 5.00%, 5/01/21 ........................... 3,685,000 3,927,694
Plymouth County COP, Correctional Facility Project, Refunding, AMBAC Insured,
5.125%, 10/01/18 ............................................................................. 2,000,000 2,155,580
Route 3 North Transportation Improvement Association Lease Revenue, MBIA Insured,
Pre-Refunded, 5.375%, 6/15/33 ................................................................ 15,475,000 17,161,930
Salisbury GO, MBIA Insured, 5.30%, 3/15/27 ..................................................... 2,795,000 3,035,174
Shrewsbury GO, Municipal Purpose Loan, 5.00%, 8/15/20 .......................................... 2,075,000 2,216,515
Springfield GO, Municipal Purpose Loan,
FGIC Insured, 5.00%, 8/01/21 ................................................................ 5,000,000 5,339,400
FSA Insured, 5.00%, 11/15/18 ................................................................ 1,500,000 1,595,955
Springfield Water and Sewer Commission Revenue, Series A, AMBAC Insured,
5.00%, 11/01/21 .............................................................................. 2,775,000 2,962,063
University Building Authority Project Revenue, Refunding, Senior Series 1, AMBAC Insured, 5.25%,
11/01/23 .................................................................................... 2,155,000 2,340,567
11/01/28 .................................................................................... 5,035,000 5,385,084
Annual Report | 83
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MASSACHUSETTS (CONT.)
University of Massachusetts Building Authority Project Revenue, Refunding,
Senior Series 2004-1, AMBAC Insured, 5.25%, 11/01/29 ......................................... $ 3,000,000 $ 3,228,120
Whitman Hanson Regional School District GO, Refunding, FGIC Insured, 5.00%, 6/15/21 ............ 1,960,000 2,090,987
Winthrop GO, AMBAC Insured, 5.00%, 11/01/20 .................................................... 1,230,000 1,319,642
Worcester GO, Refunding, Series E, MBIA Insured, 6.00%, 10/01/15 ............................... 1,335,000 1,389,108
-------------
TOTAL LONG TERM INVESTMENTS (COST $432,771,727) ................................................ 464,790,196
-------------
SHORT TERM INVESTMENTS 0.5%
BONDS
MASSACHUSETTS 0.5%
(a)Massachusetts State Health and Educational Facilities Authority Revenue,
Capital Assets Program, Series D, MBIA Insured, Daily VRDN and Put, 1.80%, 1/01/35 ........... 1,300,000 1,300,000
(a)Massachusetts State Water Resource Authority Revenue, Multi-Modal, Refunding,
Sub Series D, Daily VRDN and Put, 1.80%, 8/01/17 ............................................. 800,000 800,000
-------------
2,100,000
-------------
U.S. TERRITORIES 0.0%B
(a)Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ................................. 100,000 100,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $2,200,000) ................................................. 2,200,000
-------------
TOTAL INVESTMENTS (COST $434,971,727) 98.7% .................................................... 466,990,196
OTHER ASSETS, LESS LIABILITIES 1.3% ............................................................ 6,123,711
-------------
NET ASSETS 100.0% .............................................................................. $ 473,113,907
=============
See Glossary of Terms on page 118.
(a) 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.
(b) Rounds to less than 0.05% of net assets.
84 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.58 $12.46 $12.25 $12.08 $11.37
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.55 0.55 0.57 0.58 0.60
Net realized and unrealized gains (losses) ........ (0.23) 0.18 0.28 0.18 0.70
-----------------------------------------------------------------------
Total from investment operations ................... 0.32 0.73 0.85 0.76 1.30
-----------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.55) (0.54) (0.57) (0.59) (0.59)
Net realized gains ................................ -- (0.07) (0.07) -- --
-----------------------------------------------------------------------
Total distributions ................................ (0.55) (0.61) (0.64) (0.59) (0.59)
-----------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ....................... $12.35 $12.58 $12.46 $12.25 $12.08
=======================================================================
Total return(b) .................................... 2.65% 6.06% 7.17% 6.44% 11.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $1,199,126 $1,248,975 $1,253,847 $1,185,152 $1,084,743
Ratios to average net assets:
Expenses .......................................... 0.64% 0.64% 0.64% 0.64% 0.64%
Net investment income ............................. 4.45% 4.42% 4.62% 4.81% 5.10%
Portfolio turnover rate ............................ 9.40% 11.29% 13.22% 8.86% 10.34%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 85
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND (CONTINUED)
-------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
-------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.63 $12.51 $12.29 $12.12 $11.38
-------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.48 0.48 0.50 0.52 0.54
Net realized and unrealized gains (losses) ........ (0.23) 0.19 0.30 0.17 0.73
-------------------------------------------------------
Total from investment operations ................... 0.25 0.67 0.80 0.69 1.27
-------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.48) (0.48) (0.51) (0.52) (0.53)
Net realized gains ................................ -- (0.07) (0.07) -- --
-------------------------------------------------------
Total distributions ................................ (0.48) (0.55) (0.58) (0.52) (0.53)
-------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
-------------------------------------------------------
Net asset value, end of year ....................... $12.40 $12.63 $12.51 $12.29 $12.12
=======================================================
Total return(b) .................................... 2.08% 5.46% 6.64% 5.81% 11.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $54,867 $58,687 $49,931 $30,225 $7,818
Ratios to average net assets:
Expenses .......................................... 1.19% 1.19% 1.19% 1.19% 1.20%
Net investment income ............................. 3.90% 3.87% 4.07% 4.25% 4.52%
Portfolio turnover rate ............................ 9.40% 11.29% 13.22% 8.86% 10.34%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
86 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND (CONTINUED)
-----------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.69 $12.56 $12.34 $12.17 $11.45
-----------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.48 0.48 0.51 0.52 0.54
Net realized and unrealized gains (losses) ........ (0.23) 0.19 0.29 0.17 0.71
-----------------------------------------------------------
Total from investment operations ................... 0.25 0.67 0.80 0.69 1.25
-----------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.48) (0.47) (0.51) (0.52) (0.53)
Net realized gains ................................ -- (0.07) (0.07) -- --
-----------------------------------------------------------
Total distributions ................................ (0.48) (0.54) (0.58) (0.52) (0.53)
-----------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
-----------------------------------------------------------
Net asset value, end of year ....................... $12.46 $12.69 $12.56 $12.34 $12.17
===========================================================
Total return(b) .................................... 2.06% 5.50% 6.63% 5.80% 11.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $108,308 $116,544 $110,159 $77,514 $53,620
Ratios to average net assets:
Expenses .......................................... 1.19% 1.22% 1.16% 1.19% 1.20%
Net investment income ............................. 3.90% 3.84% 4.10% 4.26% 4.54%
Portfolio turnover rate ............................ 9.40% 11.29% 13.22% 8.86% 10.34%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 87
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
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FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS 98.8%
BONDS 98.8%
MICHIGAN 94.4%
Adrian City School District GO, FSA Insured, 5.00%,
5/01/26 ..................................................................................... $ 1,960,000 $ 2,067,428
5/01/29 ..................................................................................... 2,125,000 2,218,521
5/01/34 ..................................................................................... 6,690,000 6,958,871
Allegan Public School GO, AMBAC Insured, Pre-Refunded, 5.75%, 5/01/22 .......................... 4,165,000 4,446,054
Allendale Public School District GO, School Building and Site, FGIC Insured, 5.125%,
5/01/27 ..................................................................................... 6,450,000 6,799,009
5/01/32 ..................................................................................... 5,490,000 5,749,073
Almont Community Schools GO, FGIC Insured, Pre-Refunded, 5.50%, 5/01/26 ........................ 1,925,000 1,994,897
Alpena Public Schools GO, MBIA Insured, Pre-Refunded, 5.625%, 5/01/22 .......................... 1,665,000 1,773,009
Anchor Bay School District GO, School Building and Site,
Series I, FGIC Insured, Pre-Refunded, 6.00%, 5/01/29 ........................................ 2,000,000 2,243,800
Series II, FGIC Insured, Pre-Refunded, 5.70%, 5/01/25 ....................................... 5,000,000 5,633,200
Series II, FGIC Insured, Pre-Refunded, 5.75%, 5/01/30 ....................................... 3,750,000 4,233,787
Avondale School District GO,
AMBAC Insured, Pre-Refunded, 5.75%, 5/01/22 ................................................. 4,000,000 4,269,920
School Building and Site, FSA Insured, 5.00%, 5/01/29 ....................................... 9,000,000 9,360,090
Birmingham City School District GO, School Building and Site, FSA Insured, 5.00%, 11/01/33 ..... 2,590,000 2,702,794
Brandon School District GO, FGIC Insured, Pre-Refunded, 5.875%, 5/01/26 ........................ 7,000,000 7,352,170
Brown City Community School District GO, Building and Site, FGIC Insured, 5.00%,
5/01/26 ..................................................................................... 4,445,000 4,631,157
5/01/31 ..................................................................................... 3,200,000 3,302,176
Byron Center Public Schools GO, Refunding, MBIA Insured, 5.875%, 5/01/24 ....................... 135,000 137,117
Caledonia Community Schools GO, MBIA Insured, Pre-Refunded, 5.85%, 5/01/22 ..................... 4,500,000 4,813,065
Carmen-Ainsworth Community School District GO, FGIC Insured, 5.00%, 5/01/27 .................... 2,950,000 3,072,248
Central Michigan University Revenue,
FGIC Insured, 5.00%, 10/01/27 ............................................................... 500,000 512,810
FGIC Insured, Pre-Refunded, 5.625%, 10/01/22 ................................................ 2,500,000 2,677,225
General, AMBAC Insured, 5.00%, 10/01/34 ..................................................... 3,205,000 3,355,090
Series A, AMBAC Insured, 5.05%, 10/01/32 .................................................... 10,000,000 10,423,600
Central Montcalm Public School GO, MBIA Insured, 6.00%, 5/01/29 ................................ 1,400,000 1,550,948
Charles Stewart Mott Community College GO, FGIC Insured, 5.50%, 5/01/21 ........................ 3,550,000 3,849,265
Charlotte Public School District GO, FGIC Insured, 5.375%, 5/01/29 ............................. 5,000,000 5,377,900
De Witt Public Schools GO, AMBAC Insured, Pre-Refunded, 5.70%, 5/01/21 ......................... 6,905,000 7,363,768
Dearborn EDC Hospital Revenue, Oakwood Obligation Group,
Refunding, Series A, MBIA Insured, 5.25%, 8/15/21 ........................................... 1,000,000 1,022,660
Series A, FGIC Insured, 5.75%, 11/15/15 ..................................................... 100,000 104,124
Detroit City School District GO,
School Building and Site Improvements, Series A, FGIC Insured, 5.00%, 5/01/23 ............... 2,650,000 2,795,061
School Building and Site Improvements, Series B, FGIC Insured, 5.00%, 5/01/25 ............... 2,000,000 2,095,400
Series A, FSA Insured, 5.125%, 5/01/31 ...................................................... 38,330,000 40,090,880
Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/20 ....................... 10,610,000 11,217,953
Detroit Sewage Disposal Revenue,
Refunding, Series B, MBIA Insured, 5.25%, 7/01/21 ........................................... 12,585,000 12,830,282
Series A, MBIA Insured, 5.00%, 7/01/27 ...................................................... 22,000,000 22,874,060
Series A, MBIA Insured, Pre-Refunded, 5.50%, 7/01/20 ........................................ 215,000 230,074
Detroit Water Supply System Revenue,
Refunding, FGIC Insured, ETM, 6.25%, 7/01/12 ................................................ 1,455,000 1,644,979
88 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
Detroit Water Supply System Revenue, (cont.)
second lien, Series B, FGIC Insured, 5.50%, 7/01/33 ......................................... $ 20,000,000 $ 21,840,400
senior lien, Series A, FGIC Insured, 5.00%, 7/01/30 ......................................... 11,400,000 11,735,502
senior lien, Series A, FGIC Insured, 5.25%, 7/01/33 ......................................... 4,745,000 5,008,253
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/01/29 .......................... 1,500,000 1,703,235
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ........................... 4,880,000 5,431,001
Series A, MBIA Insured, 5.00%, 7/01/27 ...................................................... 5,750,000 5,978,447
Series B, MBIA Insured, 5.00%, 7/01/34 ...................................................... 14,145,000 14,670,628
Detroit/Wayne County Stadium Authority Revenue, FGIC Insured, 5.25%, 2/01/27 ................... 5,500,000 5,843,640
East Detroit School District GO, FGIC Insured,
6.10%, 5/01/16 .............................................................................. 1,025,000 1,075,922
Pre-Refunded, 6.10%, 5/01/16 ................................................................ 4,975,000 5,238,028
East Grand Rapids Public School District GO, FSA Insured, Pre-Refunded, 6.00%, 5/01/29 ......... 4,775,000 5,357,072
Eastern Michigan University Revenues, Refunding, Series A, FGIC Insured, 5.00%,
6/01/28 ..................................................................................... 6,730,000 7,001,488
6/01/33 ..................................................................................... 14,700,000 15,262,128
Eaton Rapids Public Schools GO, School Building and Site, FSA Insured, 5.00%,
5/01/26 ..................................................................................... 2,700,000 2,847,987
5/01/29 ..................................................................................... 2,750,000 2,860,522
Ecorse Public School District GO, FGIC Insured, 5.50%, 5/01/17 ................................. 5,000,000 5,400,700
Farmington Hills EDC Revenue, Botsford Continuing Care, Series A, MBIA Insured,
5.75%, 2/15/25 ............................................................................... 100,000 102,422
Fennville Public Schools GO, School Building and Site, FGIC Insured, 5.00%,
5/01/30 ..................................................................................... 3,200,000 3,328,608
5/01/34 ..................................................................................... 3,250,000 3,373,175
Ferndale School District GO, FGIC Insured, 5.375%, 5/01/21 ..................................... 2,805,000 2,848,562
Ferris State University Revenue,
AMBAC Insured, Pre-Refunded, 5.75%, 10/01/17 ................................................ 2,500,000 2,686,150
AMBAC Insured, Pre-Refunded, 5.85%, 10/01/22 ................................................ 2,500,000 2,691,175
AMBAC Insured, Pre-Refunded, 5.90%, 10/01/26 ................................................ 6,840,000 7,369,895
FGIC Insured, 5.25%, 10/01/26 ............................................................... 1,500,000 1,598,565
FGIC Insured, 5.25%, 10/01/31 ............................................................... 3,255,000 3,429,403
Fowlerville Community School District GO, FGIC Insured, 5.00%,
5/01/30 ..................................................................................... 1,990,000 2,074,535
5/01/34 ..................................................................................... 8,145,000 8,484,809
Genesee County GO, Water Supply System, AMBAC Insured, 5.00%, 11/01/30 ......................... 4,000,000 4,183,800
Gladstone Area Public Schools GO, AMBAC Insured, Pre-Refunded, 5.50%, 5/01/26 .................. 1,500,000 1,593,390
Grand Blanc Community Schools GO, School Building and Site, FSA Insured, 5.00%, 5/01/28 ........ 4,250,000 4,453,362
Grand Rapids Building Authority GO, AMBAC Insured, 5.50%, 8/01/20 .............................. 2,000,000 2,179,100
Grand Rapids Building Authority Revenue, AMBAC Insured, 5.00%, 10/01/28 ........................ 6,000,000 6,245,340
Grand Rapids Downtown Development Authority Tax Increment Revenue, MBIA Insured,
6.875%, 6/01/24 .............................................................................. 7,500,000 7,672,800
Grosse-Ile Township School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 ............. 5,250,000 5,631,727
Hamilton Community School District GO, Refunding, FGIC Insured, 5.00%, 5/01/24 ................. 2,000,000 2,058,140
Hancock Hospital Finance Authority Revenue, Portage Health, MBIA Insured, 5.45%, 8/01/47 ....... 4,400,000 4,588,540
Hartland Consolidated School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/29 ........... 30,000,000 34,226,100
Haslett Public School District GO, MBIA Insured, Pre-Refunded, 5.70%, 5/01/26 .................. 3,900,000 4,159,116
Hazel Park Building Authority Revenue, Ice Arena, AMBAC Insured, 4.70%, 4/01/24 ................ 700,000 705,621
Annual Report | 89
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
Hazel Park School District GO, FSA Insured, 5.00%,
5/01/27 ..................................................................................... $ 9,000,000 $ 9,372,960
5/01/32 ..................................................................................... 12,475,000 12,906,510
Hopkins Public Schools GO, FGIC Insured, Pre-Refunded,
5.70%, 5/01/21 .............................................................................. 2,025,000 2,159,541
5.50%, 5/01/26 .............................................................................. 1,000,000 1,062,260
Howell Public Schools GO, MBIA Insured, Pre-Refunded,
5.875%, 5/01/22 ............................................................................. 2,000,000 2,234,060
6.00%, 5/01/25 .............................................................................. 1,600,000 1,716,336
Huron School District GO, FSA Insured,
5.25%, 5/01/21 .............................................................................. 1,500,000 1,614,975
5.375%, 5/01/26 ............................................................................. 2,500,000 2,685,925
Huron Valley School District GO, FGIC Insured, Pre-Refunded,
5.875%, 5/01/16 ............................................................................. 100,000 107,010
5.75%, 5/01/22 .............................................................................. 2,450,000 2,615,326
Jackson Brownfield RDAR, FGIC Insured,
5.125%, 6/01/22 ............................................................................. 2,290,000 2,444,552
5.125%, 6/01/24 ............................................................................. 1,215,000 1,293,866
5.25%, 6/01/26 .............................................................................. 2,820,000 3,035,956
5.375%, 6/01/30 ............................................................................. 5,830,000 6,287,655
Jackson Public Schools GO, School Building and Site, Refunding, FSA Insured,
5.00%, 5/01/34 ............................................................................... 6,620,000 6,830,715
Jenison Public Schools GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/16 .......................... 130,000 136,356
Kalamazoo City School District GO, Building and Site, FSA Insured, 5.00%, 5/01/21 .............. 4,000,000 4,200,720
Kalamazoo Hospital Finance Authority Hospital Facility Revenue,
Borgess Medical Center, Series A, AMBAC Insured, ETM, 5.625%, 6/01/14 ....................... 3,805,000 3,990,608
Bronson Methodist Hospital, Refunding, MBIA Insured, 5.25%, 5/15/18 ......................... 250,000 264,812
Bronson Methodist Hospital, Refunding, MBIA Insured, 5.50%, 5/15/28 ......................... 10,000,000 10,500,000
Bronson Methodist Hospital, Refunding and Improvement, MBIA Insured,
5.875%, 5/15/26 ............................................................................ 26,165,000 27,770,746
Bronson Methodist Hospital, Refunding and Improvement, Series A, MBIA Insured,
6.25%, 5/15/12 ............................................................................. 1,445,000 1,449,219
Bronson Methodist Hospital, Refunding and Improvement, Series A, MBIA Insured,
6.375%, 5/15/17 ............................................................................ 720,000 726,394
Kenowa Hills Public Schools GO, MBIA Insured, 5.875%,
5/01/21 ..................................................................................... 1,510,000 1,566,489
5/01/26 ..................................................................................... 7,000,000 7,261,870
Kent County Building Authority GO, 5.00%, 6/01/26 .............................................. 21,885,000 22,422,933
Lake Orion Community School District GO, Refunding, AMBAC Insured, 5.50%, 5/01/20 .............. 2,200,000 2,234,606
Lake Shore Public Schools GO, Macomb County, FSA Insured, Pre-Refunded, 5.50%, 5/01/20 ......... 2,000,000 2,124,520
Lake St. Clair Shores Drain District GO, Series A, MBIA Insured, 5.125%, 10/01/29 .............. 1,000,000 1,045,080
Lake Superior State University Revenue, Refunding, AMBAC Insured, 5.25%, 11/15/31 .............. 3,320,000 3,513,589
Lakeview Community Schools GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/16 ...................... 100,000 106,747
Lakewood Public Schools GO, MBIA Insured, Pre-Refunded, 5.75%, 5/01/22 ......................... 800,000 831,320
Lansing Building Authority Revenue, Refunding, MBIA Insured, 5.60%, 6/01/19 .................... 1,470,000 1,496,372
Lenawee County Hospital Finance Authority Hospital Revenue, Lenawee Health Alliance,
Refunding, Series A, AMBAC Insured, 5.20%, 7/01/19 ........................................... 2,115,000 2,252,623
90 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
Leslie Public Schools GO, Ingham and Jackson Counties, AMBAC Insured, Pre-Refunded,
6.00%, 5/01/25 ............................................................................... $ 2,500,000 $ 2,541,325
Lincoln Consolidated School District GO, FSA Insured, 5.00%, 5/01/28 ........................... 1,000,000 1,018,650
Lincoln Park School District GO,
FGIC Insured, Pre-Refunded, 5.90%, 5/01/26 .................................................. 6,050,000 6,356,130
Refunding, FGIC Insured, 5.00%, 5/01/26 ..................................................... 900,000 938,358
Livonia Municipal Building Authority GO, FGIC Insured, 5.25%, 5/01/30 .......................... 3,950,000 4,201,773
Lowell Area Schools GO, FGIC Insured, 5.625%,
5/01/25 ..................................................................................... 3,125,000 3,422,000
5/01/30 ..................................................................................... 3,250,000 3,546,107
Marquette City Hospital Finance Authority Revenue, Marquette General Hospital, Series D,
FSA Insured, Pre-Refunded,
5.875%, 4/01/11 ............................................................................. 4,525,000 4,783,920
6.10%, 4/01/19 .............................................................................. 5,225,000 5,536,410
Merrill Community School District GO, FGIC Insured, Pre-Refunded, 5.60%, 5/01/26 ............... 4,000,000 4,257,400
Michigan Higher Education Student Loan Authority Revenue, Series XVII-E, AMBAC Insured,
5.40%, 6/01/19 .............................................................................. 5,000,000 5,207,200
5.50%, 6/01/25 .............................................................................. 5,000,000 5,221,950
Michigan Municipal Bond Authority Revenue,
Clean Water State Revolving Fund, 5.00%, 10/01/24 ........................................... 14,785,000 15,596,143
Local Government Loan Program, Series C, MBIA Insured, 6.00%, 11/01/10 ...................... 3,790,000 3,851,057
Michigan State Building Authority Revenue, Facilities Program, Refunding,
Series I, FSA Insured, 4.75%, 10/15/18 ...................................................... 3,000,000 3,091,320
Series I, FSA Insured, 5.00%, 10/15/24 ...................................................... 5,000,000 5,225,800
Series III, FSA Insured, 5.00%, 10/15/26 .................................................... 14,000,000 14,657,860
Michigan State COP, AMBAC Insured, 5.50%, 6/01/27 .............................................. 12,000,000 12,966,960
Michigan State HDA Rental Housing Revenue, Refunding, Series A, AMBAC Insured,
6.00%, 4/01/16 ............................................................................... 200,000 210,346
Michigan State HDA Revenue, Refunding, Series A, AMBAC Insured, 5.95%, 6/01/17 ......... 355,000 365,671
Michigan State Hospital Finance Authority Revenue,
Ascension Health Credit, Series A, MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 ............. 15,175,000 17,377,803
Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured,
5.50%, 8/15/24 ............................................................................. 15,000,000 16,098,750
Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured,
5.25%, 8/15/27 ............................................................................. 10,000,000 10,413,700
Mercy Health Services, Refunding, Series T, MBIA Insured, 5.75%, 8/15/15 .................... 10,525,000 11,285,957
Mercy Health Services, Refunding, Series X, MBIA Insured, 6.00%, 8/15/34 .................... 11,000,000 12,271,160
Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.375%, 8/15/26 ........................ 6,000,000 6,217,260
Mercy Health Services, Series R, AMBAC Insured, ETM, 5.375%, 8/15/26 ........................ 1,750,000 1,813,368
Mercy Health Services, Series U, ETM, 5.75%, 8/15/26 ........................................ 300,000 314,349
Mercy Health Services, Series W, FSA Insured, ETM, 5.25%, 8/15/27 ........................... 8,605,000 8,993,172
Mercy Mount Clemens Corp., Refunding, Series A, MBIA Insured, 5.75%, 5/15/29 ................ 4,890,000 5,330,247
Mid-Michigan Health, AMBAC Insured, 5.00%, 4/15/24 .......................................... 7,065,000 7,382,713
Mid-Michigan Health, AMBAC Insured, 5.00%, 4/15/32 .......................................... 1,000,000 1,030,110
Mid-Michigan Obligation Group, Refunding, Series A, FSA Insured, 5.375%, 6/01/27 ............ 7,500,000 7,947,300
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ................. 7,500,000 7,792,800
Sparrow Obligation Group, MBIA Insured, 5.90%, 11/15/26 ..................................... 100,000 106,928
St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ................ 3,445,000 3,697,243
Annual Report | 91
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
Michigan State Hospital Finance Authority Revenue (cont.)
St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.25%, 5/15/14 ................ $ 9,545,000 $ 10,559,347
St. John's Hospital, Series A, AMBAC Insured, ETM, 5.125%, 5/15/17 .......................... 14,500,000 15,019,390
Michigan State Strategic Fund Ltd. Obligation Revenue,
Detroit Edison Co. Pollution Project, Refunding, Series AA, FGIC Insured,
6.95%, 5/01/11 ............................................................................. 5,000,000 5,978,850
Detroit Edison Co. Pollution Project, Refunding, Series BB, AMBAC Insured,
7.00%, 5/01/21 ............................................................................. 3,000,000 3,982,320
Detroit Edison Co. Project Collateral, Refunding, Series BB, MBIA Insured,
6.20%, 8/15/25 ............................................................................. 10,250,000 10,630,173
Michigan State Strategic Fund Resources Recovery Ltd. Obligation Revenue, Detroit
Education Exempt Facilities, Refunding, Series D, XLCA Insured, 5.25%, 12/15/32 .............. 12,350,000 13,034,684
Michigan State Trunk Line Revenue,
Refunding, Series A, MBIA Insured, 4.75%, 11/01/20 .......................................... 3,300,000 3,403,917
Refunding, Series A, MBIA Insured, 5.00%, 11/01/26 .......................................... 3,050,000 3,181,791
Series A, FSA Insured, 5.00%, 11/01/25 ...................................................... 16,265,000 16,965,371
Series A, FSA Insured, 5.25%, 11/01/30 ...................................................... 34,680,000 36,712,942
Michigan Technological University Revenue, General, Series A, MBIA Insured,
5.00%, 10/01/34 .............................................................................. 3,675,000 3,815,054
Milan Area Schools GO, Series A, FGIC Insured, Pre-Refunded, 5.75%, 5/01/24 .................... 3,500,000 3,951,535
Northview Public Schools District GO,
MBIA Insured, 5.80%, 5/01/21 ................................................................ 235,000 245,873
Refunding, FGIC Insured, 5.00%, 5/01/21 ..................................................... 3,450,000 3,575,166
Oakridge Public Schools GO, FSA Insured,
5.00%, 5/01/23 .............................................................................. 500,000 515,430
5.125%, 5/01/28 ............................................................................. 500,000 511,895
Otsego Public Schools District GO, School Building and Site, FSA Insured, 5.00%, 5/01/34 ....... 5,000,000 5,208,600
Ovid Elsie Area Schools GO, School Building and Site, MBIA Insured, 5.00%, 5/01/32 ............. 7,775,000 8,003,818
Oxford Area Community School District GO, FSA Insured, 5.00%,
5/01/26 ..................................................................................... 5,425,000 5,652,199
5/01/31 ..................................................................................... 4,865,000 5,020,339
Pennfield Schools District GO, School Building and Site, FGIC Insured, 5.00%,
5/01/29 ..................................................................................... 1,150,000 1,200,612
5/01/34 ..................................................................................... 2,500,000 2,600,475
Pinckney Community Schools GO, Refunding, FSA Insured, 5.00%, 5/01/26 .......................... 2,955,000 3,116,964
Pontiac General Building Authority GO, FGIC Insured, 5.375%,
6/01/23 ..................................................................................... 1,620,000 1,771,583
6/01/27 ..................................................................................... 2,635,000 2,852,150
Port Huron GO, Limited Tax, AMBAC Insured, 5.00%, 10/01/22 ..................................... 1,600,000 1,680,352
Portage Lake Water and Sewer Authority GO, Refunding, AMBAC Insured,
6.10%, 10/01/14 ............................................................................. 770,000 802,109
6.20%, 10/01/20 ............................................................................. 670,000 698,321
Redford USD, GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 .................................... 14,090,000 14,819,017
River Rouge School District GO, Refunding, FGIC Insured, 5.00%, 5/01/22 ........................ 6,575,000 6,951,485
Rockford Public Schools GO, Refunding, FGIC Insured, 5.25%,
5/01/22 ..................................................................................... 1,250,000 1,312,938
5/01/27 ..................................................................................... 3,000,000 3,144,600
92 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%,
11/15/31 .................................................................................... $ 12,750,000 $ 13,417,463
11/15/35 .................................................................................... 17,600,000 18,396,400
Saginaw City School District GO, School Building and Site, FSA Insured, 5.00%, 5/01/34 ......... 650,000 674,635
Saginaw Hospital Finance Authority Revenue, Covenant Medical Center, Refunding,
Series E, MBIA Insured,
5.375%, 7/01/19 ............................................................................. 4,850,000 5,245,615
5.50%, 7/01/24 .............................................................................. 1,750,000 1,870,890
Saginaw Valley State University Revenue,
Refunding, AMBAC Insured, 5.25%, 7/01/19 .................................................... 2,540,000 2,720,289
Series A, MBIA Insured, 5.125%, 7/01/30 ..................................................... 4,315,000 4,490,966
Schoolcraft Community School District GO, FGIC Insured, Pre-Refunded,
5.75%, 5/01/21 .............................................................................. 3,575,000 3,816,241
5.375%, 5/01/26 ............................................................................. 1,000,000 1,059,650
South Macomb Disposal Authority Revenue, AMBAC Insured, 5.25%, 9/01/20 ......................... 2,000,000 2,138,500
South Redford School District GO, FGIC Insured, Pre-Refunded, 5.50%, 5/01/22 ................... 3,155,000 3,351,430
Sparta Area Schools GO, School Building and Site, FGIC Insured, 5.00%, 5/01/30 ................. 2,730,000 2,845,970
St. Clair County Building Authority GO, MBIA Insured, Pre-Refunded, 5.25%,
4/01/18 ..................................................................................... 2,065,000 2,149,355
4/01/21 ..................................................................................... 2,400,000 2,498,040
St. Clair County EDC, PCR, Detroit Edison Co., Refunding, Series AA, AMBAC Insured,
6.40%, 8/01/24 ............................................................................... 10,000,000 11,222,800
Taylor Tax Increment Finance Authority Revenue, FSA Insured, 5.00%, 5/01/21 .................... 2,595,000 2,725,217
Tecumseh Public Schools GO, FGIC Insured, 5.50%,
5/01/25 ..................................................................................... 5,925,000 6,410,021
5/01/30 ..................................................................................... 4,500,000 4,839,930
Thornapple Kellogg School GO, School Building and Site, Refunding, FSA Insured, 5.00%,
5/01/23 ..................................................................................... 4,000,000 4,220,960
5/01/28 ..................................................................................... 6,250,000 6,507,813
Three Rivers Community Schools GO, Building and Site, MBIA Insured, Pre-Refunded,
6.00%, 5/01/23 ............................................................................... 2,400,000 2,524,176
Warren Consolidated School District GO, FSA Insured,
4.875%, 5/01/22 ............................................................................. 11,850,000 12,330,873
5.00%, 5/01/26 .............................................................................. 14,450,000 15,055,166
Warren Water and Sewer Revenue, FSA Insured, 5.125%, 11/01/23 .................................. 2,450,000 2,599,352
Wayland USD, GO, FGIC Insured, Pre-Refunded, 6.75%, 5/01/24 .................................... 2,000,000 2,035,440
Wayne Charter County Airport Hotel GO, Detroit Metropolitan Airport, Series A, MBIA Insured,
5.25%, 12/01/25 ............................................................................. 17,000,000 18,018,640
5.00%, 12/01/30 ............................................................................. 10,750,000 11,012,623
Wayne Charter County Airport Revenue, Detroit Metropolitan Wayne County, Series A,
MBIA Insured, 5.25%, 12/01/18 ................................................................ 5,500,000 5,785,890
Wayne State University Revenue, FGIC Insured, 5.125%, 11/15/29 ................................. 17,900,000 18,708,364
West Bloomfield School District GO, FGIC Insured, Pre-Refunded, 6.00%,
5/01/19 ..................................................................................... 2,100,000 2,395,827
5/01/20 ..................................................................................... 2,000,000 2,281,740
West Branch Rose City Area School District GO, FGIC Insured, 5.50%, 5/01/24 .................... 1,400,000 1,506,358
Annual Report | 93
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
West Ottawa Public School District GO,
FGIC Insured, 5.60%, 5/01/21 ................................................................ $ 695,000 $ 734,302
FGIC Insured, 5.60%, 5/01/26 ................................................................ 3,575,000 3,777,166
FGIC Insured, Pre-Refunded, 5.60%, 5/01/26 .................................................. 6,000,000 6,386,100
School Building Site, Refunding, MBIA Insured, 5.00%, 5/01/32 ............................... 6,025,000 6,245,696
Western School District GO, Refunding, MBIA Insured, Pre-Refunded, 5.50%, 5/01/20 .............. 1,660,000 1,686,112
Western Townships Utilities Authority GO, Sewer Disposal System, FGIC Insured,
4.75%, 1/01/23 ............................................................................... 8,500,000 8,762,905
Whitmore Lake Public School District GO, FGIC Insured, 5.00%, 5/01/32 .......................... 9,375,000 9,724,125
Willow Run Community Schools GO, FSA Insured, 5.00%, 5/01/31 ................................... 12,550,000 12,924,492
Wyoming Public Schools GO, FGIC Insured, 5.125%, 5/01/23 ....................................... 5,750,000 5,979,828
Ypsilanti Community Utilities GO, Sanitation Sewer System No. 3, FGIC Insured,
5.00%, 5/01/32 ............................................................................... 6,065,000 6,267,268
Ypsilanti School District GO,
FGIC Insured, Pre-Refunded, 5.75%, 5/01/20 .................................................. 4,700,000 5,017,156
Refunding, FGIC Insured, 5.375%, 5/01/26 .................................................... 6,750,000 7,100,123
Ypsilanti Water and Sewer Disposal System Revenue, Series C, AMBAC Insured,
5.00%, 9/01/27 ............................................................................... 2,115,000 2,206,241
--------------
1,286,633,092
--------------
U.S. TERRITORIES 4.4%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured,
Pre-Refunded, 9.00%, 7/01/09 ................................................................. 1,535,000 1,569,415
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series D, FSA Insured, 5.00%, 7/01/32 ............................................ 20,000,000 20,807,000
Series B, MBIA Insured, 5.875%, 7/01/35 ..................................................... 16,430,000 18,541,419
Series B, MBIA Insured, Pre-Refunded, 5.875%, 7/01/35 ....................................... 8,570,000 9,815,649
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ..................... 8,700,000 8,735,322
--------------
59,468,805
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,255,166,066) .............................................. 1,346,101,897
--------------
SHORT TERM INVESTMENTS 0.1%
BONDS 0.1%
MICHIGAN 0.1%
(a)Detroit Sewage Disposal Revenue, senior lien, Series B, FSA Insured, Daily VRDN and Put,
1.80%, 7/01/33 ............................................................................... 400,000 400,000
(a)Michigan State University Revenues, Series A, Daily VRDN and Put, 1.80%, 8/15/32 ............... 300,000 300,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $700,000) ................................................... 700,000
--------------
TOTAL INVESTMENTS (COST $1,255,866,066) 98.9% .................................................. 1,346,801,897
OTHER ASSETS, LESS LIABILITIES 1.1% ............................................................ 15,499,540
--------------
NET ASSETS 100.0% .............................................................................. $1,362,301,437
==============
See Glossary of Terms on page 118.
(a) 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.
94 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.39 $12.23 $11.99 $11.89 $11.13
-------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.53 0.54 0.56 0.58 0.58
Net realized and unrealized gains (losses) ........ (0.16) 0.15 0.25 0.10 0.76
-------------------------------------------------------------
Total from investment operations ................... 0.37 0.69 0.81 0.68 1.34
Less distributions from net investment
income ............................................. (0.53) (0.53) (0.57) (0.58) (0.58)
Redemption fees .................................... --(c) -- -- -- --
-------------------------------------------------------------
Net asset value, end of year ....................... $12.23 $12.39 $12.23 $11.99 $11.89
=============================================================
Total return(b) .................................... 2.99% 5.81% 6.89% 5.84% 12.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $515,780 $528,609 $524,076 $485,818 $465,758
Ratios to average net assets:
Expenses .......................................... 0.67% 0.67% 0.67% 0.66% 0.67%
Net investment income ............................. 4.35% 4.39% 4.64% 4.81% 5.04%
Portfolio turnover rate ............................ 12.06% 10.77% 13.28% 4.86% 24.68%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 95
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
--------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.47 $12.30 $12.05 $11.95 $11.18
--------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.46 0.47 0.50 0.51 0.52
Net realized and unrealized gains (losses) ........ (0.16) 0.16 0.25 0.10 0.76
--------------------------------------------------------
Total from investment operations ................... 0.30 0.63 0.75 0.61 1.28
Less distributions from net investment income ...... (0.46) (0.46) (0.50) (0.51) (0.51)
Redemption fees .................................... --(c) -- -- -- --
--------------------------------------------------------
Net asset value, end of year ....................... $12.31 $12.47 $12.30 $12.05 $11.95
========================================================
Total return(b) .................................... 2.40% 5.25% 6.38% 5.22% 11.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $59,682 $59,389 $54,704 $39,170 $24,738
Ratios to average net assets:
Expenses .......................................... 1.22% 1.26% 1.17% 1.22% 1.23%
Net investment income ............................. 3.80% 3.80% 4.14% 4.26% 4.49%
Portfolio turnover rate ............................ 12.06% 10.77% 13.28% 4.86% 24.68%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
96 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 101.2%
BONDS 96.7%
MINNESOTA 94.3%
Anoka County Housing and RDA, GO, Housing Development, AMBAC Insured,
4.875%, 2/01/24 ............................................................................. $ 2,195,000 $ 2,301,567
5.00%, 2/01/34 .............................................................................. 2,000,000 2,081,600
Anoka-Hennepin ISD No. 11 GO, School District Credit Enhancement Program, Series A,
FSA Insured, 5.00%, 2/01/20 .................................................................. 6,130,000 6,492,651
Bemidji Health Care Facilities First Mortgage Revenue, North Country Health Services,
Radian Insured, 5.00%, 9/01/24 ............................................................... 2,000,000 2,084,980
Bemidji ISD No. 031 GO, Refunding, Series A, FSA Insured, 4.50%, 4/01/19 ....................... 3,550,000 3,673,859
Bemidji Lease Revenue, Minnesota State Bureau of Criminal Apprehension, MBIA Insured,
5.70%, 12/01/17 .............................................................................. 120,000 130,766
Big Lake ISD No. 727 GO, MBIA Insured, 5.70%, 2/01/21 .......................................... 3,085,000 3,257,359
Bloomington ISD No. 271 GO, Series A, FSA Insured, 5.125%, 2/01/24 ............................. 2,000,000 2,127,160
Bloomington Port Authority Lease Revenue, City Hall Lease Obligation, 5.00%, 2/01/18 ........... 1,045,000 1,108,526
Brooklyn Center ISD No. 286 GO, FGIC Insured, 5.00%, 2/01/22 ................................... 1,000,000 1,059,830
Buffalo GO, AMBAC Insured, 5.55%, 6/01/17 ...................................................... 1,000,000 1,037,850
Buffalo ISD No. 877 GO, Refunding, MBIA Insured, 5.00%, 2/01/22 ................................ 4,255,000 4,454,559
Burnsville MFR, Coventry Court, Refunding, Series A, GNMA Secured,
5.90%, 9/20/19 .............................................................................. 400,000 426,760
5.95%, 9/20/29 .............................................................................. 1,275,000 1,352,622
6.00%, 9/20/34 .............................................................................. 1,000,000 1,061,640
Byron ISD No. 531 GO, School Building, Series A, FGIC Insured, 5.00%, 2/01/24 .................. 2,215,000 2,358,598
Cambridge ISD No. 911 GO, Series A, MBIA Insured,
4.125%, 2/01/22 ............................................................................. 1,410,000 1,388,850
4.25%, 2/01/24 .............................................................................. 1,235,000 1,217,586
4.75%, 2/01/30 .............................................................................. 3,000,000 3,059,340
Cass Lake ISD No. 115 GO, Refunding, FGIC Insured, 5.00%, 2/01/22 .............................. 3,805,000 4,060,734
Centennial ISD No. 012 GO, Series A, FSA Insured, 5.00%, 2/01/21 ............................... 1,000,000 1,065,420
Champlin EDA, GO, Housing Development, MBIA Insured, 5.625%, 2/01/26 ........................... 250,000 257,125
Chanhassen Apartments Project GO, Series B, AMBAC Insured, Pre-Refunded, 6.20%, 1/01/25 ........ 2,975,000 3,067,969
Columbia Heights ISD No. 013 GO, FSA Insured, 5.50%, 2/01/23 ................................... 4,500,000 4,734,765
Dakota County Housing and RDA,
MFHR, Dakota Station Project, GNMA Secured, 5.65%, 1/20/24 .................................. 1,368,000 1,420,449
SFMR, GNMA Secured, 5.75%, 4/01/18 .......................................................... 460,000 473,749
SFMR, GNMA Secured, 5.85%, 10/01/30 ......................................................... 775,000 796,522
Dakota County Housing and RDA Governmental Housing Revenue, Eagan Senior Housing
Facility, MBIA Insured, 5.40%, 1/01/27 ....................................................... 1,015,000 1,016,269
Deer River ISD No. 317 GO,
FSA Insured, 6.00%, 2/01/25 ................................................................. 1,325,000 1,492,970
School Building, Refunding, FSA Insured, 4.10%, 2/01/20 ..................................... 445,000 444,987
School Building, Refunding, FSA Insured, 4.30%, 2/01/23 ..................................... 745,000 747,712
Eagan GO, Recreational Facilities, Series A, MBIA Insured, 5.00%, 2/01/21 ...................... 3,075,000 3,276,166
Eagan MFHR, Forest Ridge Apartments, Refunding, Series A, GNMA Secured,
5.95%, 9/20/29 .............................................................................. 1,700,000 1,802,816
6.00%, 9/20/34 .............................................................................. 1,480,000 1,568,726
Eden Prairie MFHR,
Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%, 1/20/31 ............................ 2,000,000 2,060,480
Parkway Apartments Project, Series A, GNMA Secured, 5.80%, 2/20/32 .......................... 7,380,000 7,680,514
Annual Report | 97
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Edina ISD No. 273 GO, MBIA Insured,
4.00%, 2/01/18 .............................................................................. $ 2,060,000 $ 2,062,719
4.25%, 2/01/21 .............................................................................. 2,700,000 2,716,146
Eveleth EDA, GO, Housing Development, MBIA Insured, 5.80%, 7/01/25 ............................. 1,000,000 1,044,670
Farmington ISD No. 192 GO, MBIA Insured, 5.25%, 2/01/24 ........................................ 5,915,000 6,345,612
Forest Lake ISD No. 831 GO, Refunding, Series A, FSA Insured, 5.00%,
2/01/18 ..................................................................................... 3,720,000 4,044,012
2/01/19 ..................................................................................... 1,965,000 2,126,091
Ham Lake GO, Anoka County Housing, Senior Housing Project, Series B, MBIA Insured,
6.10%, 1/01/26 ............................................................................... 2,180,000 2,202,912
(a)Hastings ISD No. 200 GO, Refunding, Series A, FSA Insured, 4.50%, 2/01/22 ...................... 2,700,000 2,754,054
Hibbing Health Care Facilities Revenue, The Duluth Clinic, Ltd., FSA Insured, Pre-Refunded,
5.00%, 11/01/25 .............................................................................. 8,000,000 8,870,640
Hopkins Elderly Housing Revenue, St. Therese Project, Refunding, Series A, GNMA Secured,
5.60%, 11/20/17 ............................................................................. 750,000 783,900
5.70%, 11/20/32 ............................................................................. 3,000,000 3,109,890
Hopkins ISD No. 270 GO, FGIC Insured, 5.125%, 2/01/22 .......................................... 3,880,000 4,153,268
Hubbard County Housing and RDA, GO, Heritage Center Project, MBIA Insured,
5.50%, 8/01/27 ............................................................................... 1,085,000 1,167,265
Lake Crystal Wellcome Memorial Area Schools ISD No. 2071 GO, School Building, Series B,
MBIA Insured, 5.00%, 2/01/34 ................................................................. 3,285,000 3,431,084
Lake Superior ISD No. 381 GO, Series A, FSA Insured, 5.00%, 4/01/23 ............................ 4,195,000 4,467,088
Lakeview ISD No. 2167 GO, MBIA Insured, 5.25%, 2/01/26 ......................................... 3,705,000 3,954,569
Lakeville GO, Capital Improvement Plan, Series A, MBIA Insured, 4.75%, 2/01/30 ................. 2,695,000 2,748,307
Lakeville ISD No. 194 GO, Series A, FGIC Insured, 5.00%, 2/01/23 ............................... 10,180,000 10,828,670
Mahtomedi ISD No. 832 GO, FSA Insured, 5.00%, 2/01/18 .......................................... 3,240,000 3,480,376
Maple Grove HDA Municipal Facility Lease Revenue, AMBAC Insured, 5.55%, 2/01/17 ................ 280,000 299,029
Medford ISD No. 763 GO, Series A, FSA Insured, 5.125%, 2/01/29 ................................. 2,700,000 2,819,367
Minneapolis and St. Paul Housing RDA Health Care System Revenue, Children's Health Care,
Series A, FSA Insured, Pre-Refunded,
5.70%, 8/15/16 .............................................................................. 1,005,000 1,041,341
5.50%, 8/15/25 .............................................................................. 9,000,000 9,317,430
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue,
Series A, AMBAC Insured, 5.20%, 1/01/24 ..................................................... 5,000,000 5,247,200
Series A, FGIC Insured, 5.125%, 1/01/31 ..................................................... 7,000,000 7,248,360
Series A, FGIC Insured, 5.25%, 1/01/32 ...................................................... 7,000,000 7,368,620
Series C, FGIC Insured, 5.25%, 1/01/26 ...................................................... 2,000,000 2,118,040
Minneapolis and St. Paul Metropolitan Apartments Community Apartment Revenue,
Series C, FGIC Insured, 5.25%, 1/01/32 ....................................................... 12,000,000 12,631,920
Minneapolis CDA and St. Paul Housing and RDAR, Health Care Facilities, Carondelet,
Series B, BIG Insured, Pre-Refunded, 8.875%, 11/01/15 ........................................ 740,000 924,608
Minneapolis GO,
Sports Arena Project, Refunding, 5.125%, 10/01/20 ........................................... 8,340,000 8,776,766
Sports Arena Project, Refunding, 5.20%, 10/01/24 ............................................ 3,750,000 3,918,750
Various Purpose, 5.125%, 12/01/28 ........................................................... 3,000,000 3,148,740
Minneapolis MFR, Riverside Plaza, Refunding, GNMA Secured, 5.20%, 12/20/30 ..................... 5,000,000 5,065,900
Minneapolis Revenue, University Gateway Project, Series A, 5.25%, 12/01/24 ..................... 3,000,000 3,139,290
98 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Minneapolis Special School District No. 001 COP,
(a)Refunding, Series A, MBIA Insured, 4.50%, 2/01/21 ......................................... $ 2,715,000 $ 2,752,738
Series A, FSA Insured, 5.00%, 2/01/21 ..................................................... 1,950,000 2,077,569
Series A, MBIA Insured, Pre-Refunded, 5.90%, 2/01/17 ...................................... 5,000,000 5,160,800
Minnesota Agriculture and Economic Development Board Revenue,
Benedictine Health, Refunding, Series A, MBIA Insured, 5.125%, 2/15/29 ...................... 14,625,000 15,182,212
Evangelical Lutheran Good Samaritan, Society Project, AMBAC Insured, 5.15%, 12/01/22 ........ 4,870,000 5,118,224
Evangelical Lutheran Good Samaritan, Society Project, AMBAC Insured, Pre-Refunded,
5.15%, 12/01/22 ............................................................................ 310,000 336,400
Health Care System, Fairview Hospital, Refunding, Series A, MBIA Insured,
5.75%, 11/15/26 ............................................................................ 18,000,000 19,576,440
Minnesota State HFAR,
Rental Housing, Refunding, Series D, MBIA Insured, 5.90%, 8/01/15 ........................... 1,090,000 1,110,972
Rental Housing, Refunding, Series D, MBIA Insured, 5.95%, 2/01/18 ........................... 340,000 346,793
Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 ........................... 440,000 448,875
SF, Series I, MBIA Insured, 6.25%, 1/01/15 .................................................. 1,175,000 1,178,055
SFM, Series B, 5.00%, 7/01/13 ............................................................... 65,000 67,112
SFM, Series D, 5.45%, 1/01/26 ............................................................... 2,900,000 2,953,389
SFM, Series E, AMBAC Insured, 5.40%, 1/01/25 ................................................ 4,715,000 4,792,750
SFM, Series G, AMBAC Insured, 6.25%, 7/01/26 ................................................ 525,000 537,337
Minnesota State Higher Education Facilities Authority Revenue,
Bethel, Mandatory Put 4/01/19, Refunding, 5.10%, 4/01/28 .................................... 7,700,000 7,848,841
St. Johns University, Series 5-I, MBIA Insured, 5.25%, 10/01/21 ............................. 1,750,000 1,903,842
St. Johns University, Series 5-I, MBIA Insured, 5.25%, 10/01/26 ............................. 1,500,000 1,606,560
University of St. Thomas, Series 4-A1, MBIA Insured, 5.625%, 10/01/16 ....................... 1,000,000 1,046,130
Minnetonka MFHR, Cedar Hills Project, Refunding, Series A, GNMA Secured,
5.90%, 10/20/19 ............................................................................. 1,750,000 1,865,342
5.95%, 10/20/29 ............................................................................. 5,955,000 6,326,413
Moorhead EDA, GO, Tax Increment, Series A, MBIA Insured, 5.25%, 2/01/28 ........................ 1,890,000 2,003,003
New Hope MFR, North Ridge, Series A, GNMA Secured, Pre-Refunded,
6.05%, 1/01/17 .............................................................................. 450,000 464,134
6.20%, 1/01/31 .............................................................................. 5,470,000 5,634,811
Nobles County Housing and RDA Public Project Revenue, Annual Appropriate Lease
Obligation, AMBAC Insured, 5.625%, 2/01/22 ................................................... 1,230,000 1,337,699
North St. Paul Maplewood ISD No. 622 GO, Refunding, Series A, 5.125%, 2/01/25 .................. 2,275,000 2,326,188
Northern Municipal Power Agency Electric System Revenue, Refunding, FSA Insured,
5.00%, 1/01/12 ............................................................................... 1,030,000 1,098,526
Osseo ISD No. 279 GO, Series A, FSA Insured, 5.00%, 2/01/20 .................................... 3,000,000 3,203,760
Park Rapids ISD No. 309 GO,
MBIA Insured, 4.75%, 2/01/21 .............................................................. 2,500,000 2,657,400
MBIA Insured, 5.00%, 2/01/25 .............................................................. 3,000,000 3,216,360
(a)Refunding, Series A, FSA Insured, 4.50%, 2/01/24 .......................................... 2,255,000 2,280,098
(a)Refunding, Series A, FSA Insured, 4.50%, 2/01/25 .......................................... 2,355,000 2,371,791
Pipestone-Jasper ISD No. 2689 GO, Refunding, Series 2004-A, FSA Insured,
5.00%, 3/01/20 ............................................................................... 1,595,000 1,718,246
Plymouth Health Facilities Revenue, Westhealth Project, Series A, FSA Insured,
6.25%, 6/01/16 .............................................................................. 1,600,000 1,630,608
6.125%, 6/01/24 ............................................................................. 1,815,000 1,849,176
Annual Report | 99
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Princeton ISD No. 477 GO, Mille Lacs County, FSA Insured, 5.125%, 2/01/24 ...................... $ 1,190,000 $ 1,221,856
Prior Lake ISD No. 719 GO,
FGIC Insured, 5.125%, 2/01/19 ............................................................... 1,140,000 1,233,172
FSA Insured, 5.50%, 2/01/20 ................................................................. 2,255,000 2,450,441
FSA Insured, 5.50%, 2/01/21 ................................................................. 2,590,000 2,810,823
Series C, MBIA Insured, 5.00%, 2/01/21 ...................................................... 2,000,000 2,139,020
Series C, MBIA Insured, 5.00%, 2/01/23 ...................................................... 6,025,000 6,388,067
Robbinsdale GO, Housing Development, Senior Housing Project, Series B, FGIC Insured,
5.875%, 1/01/31 .............................................................................. 2,160,000 2,256,941
Robbinsdale ISD No. 281 GO, Refunding, Series A, MBIA Insured, 4.50%,
2/01/21 ..................................................................................... 3,420,000 3,486,040
2/01/22 ..................................................................................... 3,570,000 3,629,298
Rochester Electric Utility Revenue, AMBAC Insured, 5.25%, 12/01/24 ............................. 3,000,000 3,225,630
Rochester Health Care Facilities Revenue, Mayo Foundation, Refunding, Series B,
5.50%, 11/15/27 .............................................................................. 4,000,000 4,250,760
Rochester ISD No. 535 GO, Series A, MBIA Insured, 5.00%,
2/01/28 ..................................................................................... 1,385,000 1,451,120
2/01/29 ..................................................................................... 1,455,000 1,519,704
Rosemount ISD No. 196 GO, Series A, MBIA Insured, 4.70%, 2/01/25 ............................... 1,000,000 1,027,240
Rush City ISD No. 139 GO, School Building, MBIA Insured,
5.00%, 2/01/21 .............................................................................. 1,680,000 1,796,777
5.125%, 2/01/26 ............................................................................. 4,245,000 4,489,937
Sartell ISD No. 748 GO, Refunding, Series A, FSA Insured,
4.125%, 8/01/20 ............................................................................. 1,785,000 1,783,929
4.25%, 2/01/22 .............................................................................. 2,810,000 2,809,916
Sauk Rapids ISD No. 47 GO, Series A, MBIA Insured, 5.75%,
2/01/23 ..................................................................................... 2,740,000 3,066,526
2/01/26 ..................................................................................... 5,000,000 5,607,200
Scott County GO, MBIA Insured, 5.00%, 2/01/33 .................................................. 5,555,000 5,760,424
Scott County Housing and Redevelopment Authority Facilities Lease Revenue, AMBAC Insured,
5.70%, 2/01/29 ............................................................................... 1,380,000 1,494,844
Scott County Housing and Redevelopment Authority GO,
River City Center Project, Series A, FSA Insured, 5.375%, 2/01/27 ........................... 1,520,000 1,618,131
Savage City, Hamilton Apartments Project, AMBAC Insured, 5.70%, 2/01/33 ..................... 2,285,000 2,361,182
Scott County Housing and Redevelopment Authority MFR, Highview Commons, Series A,
GNMA Secured,
6.20%, 1/20/41 .............................................................................. 2,800,000 2,927,260
6.50%, 7/20/41 .............................................................................. 1,300,000 1,358,955
Scott County Housing and Redevelopment Authority Special Benefits Tax Revenue,
River City Centre Project, Series B, AMBAC Insured, 5.50%, 2/01/27 ........................... 675,000 719,935
Scott County Housing and Redevelopment Authority Tax Increment Development Revenue,
River City Centre Project, Series E, FSA Insured, 5.375%, 2/01/25 ............................ 1,170,000 1,245,535
Shakopee Public Utilities Commission Public Utilities Revenue, MBIA Insured, Pre-Refunded,
6.00%, 2/01/28 ............................................................................... 2,530,000 2,815,966
South Washington County ISD No. 833 GO, Series B, FSA Insured, 5.00%, 2/01/23 .................. 4,000,000 4,226,920
100 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Southeastern Multi-County Housing and RDAR, Housing Development,
Goodhue County Apartments B, MBIA Insured, 5.75%, 1/01/31 .................................... $ 2,415,000 $ 2,517,927
Southern Minnesota Municipal Power Agency Power Supply System Revenue, Refunding,
Series A, MBIA Insured, ETM, 5.75%, 1/01/18 .................................................. 1,000,000 1,079,510
St. Clair ISD No. 75 GO, MBIA Insured, 5.70%, 4/01/22 .......................................... 2,250,000 2,478,758
St. Cloud Health Care Revenue, St. Cloud Hospital Obligation, Group A, FSA Insured,
5.875%, 5/01/30 .............................................................................. 17,785,000 19,893,590
St. Cloud Hospital Facilities Revenue, St. Cloud Hospital, Refunding, Series A,
AMBAC Insured, 5.00%, 7/01/15 ................................................................. 1,165,000 1,208,117
St. Cloud Housing and RDA Sales Tax Revenue, Paramount Theater Project, Refunding,
Series A, FGIC Insured, 5.00%, 3/01/22 ........................................................ 1,000,000 1,038,830
St. Francis ISD No.15 GO, Series A, FSA Insured,
6.35%, 2/01/13 .............................................................................. 1,500,000 1,552,485
6.375%, 2/01/16 ............................................................................. 5,465,000 5,657,477
St. Michael ISD No. 885 GO, FSA Insured, 5.00%, 2/01/23 ........................................ 3,300,000 3,487,209
St. Paul Housing and RDA Parking Revenue, Refunding, Series A, FSA Insured,
5.75%, 8/01/13 ............................................................................... 5,105,000 5,159,828
St. Paul ISD No. 625 GO,
School Building, Series B, FSA Insured, 4.25%, 2/01/21 ...................................... 1,000,000 1,003,180
School Building, Series B, FSA Insured, 4.375%, 2/01/22 ..................................... 1,065,000 1,075,639
Series C, FSA Insured, 6.00%, 2/01/20 ....................................................... 1,600,000 1,768,368
St. Paul Port Authority IDR, Brown and Bigelow Co., Series K-1996, FGIC Insured,
9.50%, 12/01/14 .............................................................................. 170,000 174,651
St. Peter GO, Hospital, Series A, MBIA Insured, 5.00%, 9/01/32 ................................. 6,805,000 7,009,014
Todd Morrison and Stearns Counties ISD No. 2753 GO, MBIA Insured, 5.00%, 4/01/17 ............... 1,500,000 1,503,420
Upsala ISD No. 487 GO, School Building, FGIC Insured, 5.00%, 2/01/22 ........................... 1,140,000 1,216,619
Virginia Governmental Housing Project GO, Refunding, MBIA Insured, 5.90%, 2/01/26 .............. 2,915,000 3,062,295
Walker-Hakensack-Akeley ISD No. 113 GO, Series A, FSA Insured, 6.00%,
2/01/23 ..................................................................................... 1,160,000 1,307,053
2/01/25 ..................................................................................... 1,300,000 1,464,801
Washington County GO, Capital Improvement Plan, Series A, 4.75%,
2/01/22 ..................................................................................... 3,200,000 3,328,256
2/01/23 ..................................................................................... 1,760,000 1,829,326
Washington County Housing and RDAR, Government Housing, Landfall Terrace
Project, Refunding,
5.35%, 2/01/22 .............................................................................. 1,000,000 1,062,140
5.40%, 8/01/27 .............................................................................. 2,015,000 2,140,111
Western Minnesota Municipal Power Agency Power Supply Revenue, Refunding, Series A,
AMBAC Insured, 5.50%,
1/01/12 ..................................................................................... 2,745,000 2,864,792
1/01/13 ..................................................................................... 4,500,000 4,696,380
Western Minnesota Municipal Power Agency Revenue,
MBIA Insured, 5.00%, 1/01/26 ................................................................ 8,565,000 9,000,102
Refunding, Series B, MBIA Insured, 5.00%, 1/01/15 ........................................... 2,000,000 2,210,760
Series A, MBIA Insured, 5.00%, 1/01/30 ...................................................... 8,200,000 8,538,906
White Bear Lake ISD No. 624 GO, Series 4-A, FSA Insured, 4.00%, 2/01/19 ........................ 1,405,000 1,399,029
Annual Report | 101
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Willmar GO, Rice Memorial Hospital Project, FSA Insured, 5.00%,
2/01/19 ..................................................................................... $ 2,000,000 $ 2,149,860
2/01/22 ..................................................................................... 2,550,000 2,717,816
2/01/25 ..................................................................................... 3,000,000 3,164,160
2/01/32 ..................................................................................... 5,415,000 5,629,867
Worthington ISD No. 518 GO,
(a)Refunding, Series A, FSA Insured, 4.25%, 2/01/22 ......................................... 5,010,000 5,028,287
(a)Refunding, Series A, FSA Insured, 4.25%, 2/01/24 ......................................... 2,840,000 2,818,018
Series A, FSA Insured, 5.00%, 2/01/24 .................................................... 5,000,000 5,195,700
-------------
542,634,534
-------------
U.S. TERRITORIES 2.4%
Puerto Rico Commonwealth GO, Public Improvement, FSA Insured,
5.00%, 7/01/23 .............................................................................. 955,000 1,005,147
5.125%, 7/01/30 ............................................................................. 420,000 444,717
Pre-Refunded, 5.00%, 7/01/23 ................................................................ 1,545,000 1,702,173
Pre-Refunded, 5.125%, 7/01/30 ............................................................... 580,000 643,121
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/27 ............ 2,000,000 2,098,320
Puerto Rico PBA Revenue, Government Facilities, Refunding, Series F, XLCA Insured,
5.25%, 7/01/25 ................................................................................ 2,500,000 2,886,250
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ..................... 1,300,000 1,305,278
Puerto Rico Public Finance Corp. Commonwealth Revenue, Series E, AMBAC Insured,
5.50%, 8/01/27 .............................................................................. 625,000 742,213
ETM, 5.50%, 8/01/27 ......................................................................... 375,000 442,905
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, FSA Insured, 5.25%,
10/01/20 .................................................................................... 1,160,000 1,289,027
10/01/21 .................................................................................... 1,000,000 1,106,160
-------------
13,665,311
-------------
TOTAL BONDS (COST $528,478,482) 556,299,845
-------------
ZERO COUPON BONDS 4.5%
MINNESOTA 4.5%
Cambridge ISD No. 911 GO, Capital Appreciation, Series B, MBIA Insured, 2/01/30 ................ 2,240,000 622,071
Southern Minnesota Municipal Power Agency Power Supply System Revenue,
Capital Appreciation, Refunding, Series A, MBIA Insured, 1/01/23 ............................ 4,000,000 1,759,520
Capital Appreciation, Refunding, Series A, MBIA Insured, 1/01/26 ............................ 5,000,000 1,854,200
Capital Appreciation, Refunding, Series A, MBIA Insured, 1/01/27 ............................ 6,600,000 2,308,944
Capital Appreciation, Series A, MBIA Insured, 1/01/19 ....................................... 5,875,000 3,214,036
Capital Appreciation, Series A, MBIA Insured, 1/01/20 ....................................... 14,035,000 7,276,165
Series A, AMBAC Insured, 1/01/18 ............................................................ 15,985,000 9,192,334
-------------
TOTAL ZERO COUPON BONDS (COST $24,409,711) ..................................................... 26,227,270
-------------
TOTAL LONG TERM INVESTMENTS (COST $552,888,193) ................................................ 582,527,115
-------------
102 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 1.1%
BONDS 1.1%
MINNESOTA 1.0%
(b)Maple Grove MFHR, Refunding, Series A, Weekly VRDN and Put, 1.82%, 11/01/31 .................... $ 500,000 $ 500,000
Minneapolis GO,
(b)Convention Center, Weekly VRDN and Put, 1.72%, 12/01/18 ................................... 1,650,000 1,650,000
(b)Guthrie Parking Ramp, Weekly VRDN and Put, 1.72%, 12/01/28 ................................ 450,000 450,000
(b)Library, Weekly VRDN and Daily Put, 1.72%, 12/01/32 ....................................... 300,000 300,000
(b)Minneapolis Housing Development Revenue, One Ten Grant Project, Refunding,
FNMA Insured, Weekly VRDN and Put, 1.72%, 9/01/08 ............................................ 200,000 200,000
(b)Minneapolis MFR, Seven Corners Apartments Project, Weekly VRDN and Put,
1.82%, 10/01/31 .............................................................................. 900,000 900,000
(b)Minneapolis State Revenue, Refunding, Weekly VRDN and Daily Put, 1.72%, 12/01/18 ............... 1,500,000 1,500,000
-------------
5,500,000
-------------
U.S. TERRITORIES 0.1%
(b)Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ................................. 500,000 500,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $6,000,000) ................................................. 6,000,000
-------------
TOTAL INVESTMENTS (COST $558,888,193) 102.3% ................................................... 588,527,115
OTHER ASSETS, LESS LIABILITIES (2.3)% .......................................................... (13,064,983)
-------------
NET ASSETS 100.0% .............................................................................. $ 575,462,132
=============
See Glossary of Terms on page 118.
(a) See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
(b) 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.
Annual Report | See notes to financial statements. | 103
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.81 $12.60 $12.37 $12.21 $11.52
-------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.54 0.55 0.57 0.60 0.61
Net realized and unrealized gains (losses) ........ (0.16) 0.20 0.24 0.16 0.68
-------------------------------------------------------------
Total from investment operations ................... 0.38 0.75 0.81 0.76 1.29
-------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.54) (0.54) (0.58) (0.60) (0.60)
Net realized gains ................................ (0.01) --(e) -- -- --
-------------------------------------------------------------
Total distributions ................................ (0.55) (0.54) (0.58) (0.60) (0.60)
-------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
-------------------------------------------------------------
Net asset value, end of year ....................... $12.64 $12.81 $12.60 $12.37 $12.21
=============================================================
Total return(b) .................................... 3.15% 6.17% 6.77% 6.41% 11.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $849,970 $852,182 $822,031 $752,423 $698,853
Ratios to average net assets:
Expenses .......................................... 0.65% 0.65% 0.65% 0.65% 0.66%
Net investment income ............................. 4.36% 4.38% 4.64% 4.86% 5.10%
Portfolio turnover rate ............................ 19.87% 14.89% 13.40% 9.62% 16.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
(e) The fund made a capital gain distribution of $0.0027.
104 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND (CONTINUED)
-------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
-------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.85 $12.64 $12.40 $12.23 $11.52
-------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.48 0.48 0.51 0.53 0.55
Net realized and unrealized gains (losses) ........ (0.17) 0.21 0.25 0.17 0.70
-------------------------------------------------------
Total from investment operations ................... 0.31 0.69 0.76 0.70 1.25
-------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.47) (0.48) (0.52) (0.53) (0.54)
Net realized gains ................................ (0.01) --(e) -- -- --
-------------------------------------------------------
Total distributions ................................ (0.48) (0.48) (0.52) (0.53) (0.54)
-------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
-------------------------------------------------------
Net asset value, end of year ....................... $12.68 $12.85 $12.64 $12.40 $12.23
=======================================================
Total return(b) .................................... 2.56% 5.57% 6.24% 5.89% 11.04%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $60,264 $60,869 $44,222 $16,629 $3,649
Ratios to average net assets:
Expenses .......................................... 1.20% 1.20% 1.20% 1.20% 1.22%
Net investment income ............................. 3.81% 3.83% 4.09% 4.31% 4.53%
Portfolio turnover rate ............................ 19.87% 14.89% 13.40% 9.62% 16.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
(e) The fund made a capital gain distribution of $0.0027.
Annual Report | See notes to financial statements. | 105
FRANKLIN TAX-FREE TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $12.90 $12.69 $12.45 $12.28 $11.58
----------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... 0.48 0.48 0.51 0.53 0.54
Net realized and unrealized gains (losses) ........ (0.16) 0.20 0.25 0.17 0.69
----------------------------------------------------------
Total from investment operations ................... 0.32 0.68 0.76 0.70 1.23
----------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.47) (0.47) (0.52) (0.53) (0.53)
Net realized gains ................................ (0.01) --(e) -- -- --
----------------------------------------------------------
Total distributions ................................ (0.48) (0.47) (0.52) (0.53) (0.53)
----------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
----------------------------------------------------------
Net asset value, end of year ....................... $12.74 $12.90 $12.69 $12.45 $12.28
==========================================================
Total return(b) .................................... 2.64% 5.53% 6.23% 5.87% 10.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $108,617 $108,062 $91,189 $59,305 $42,072
Ratios to average net assets:
Expenses .......................................... 1.20% 1.22% 1.17% 1.20% 1.22%
Net investment income ............................. 3.81% 3.81% 4.12% 4.31% 4.55%
Portfolio turnover rate ............................ 19.87% 14.89% 13.40% 9.62% 16.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
(e) The fund made a capital gain distribution of $0.0027.
106 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.2%
BONDS 97.8%
OHIO 94.4%
Akron Bath Copley Joint Township Hospital District Revenue, Hospital Improvement
Children's Hospital Center, FSA Insured, 5.00%, 11/15/22 ..................................... $ 5,000,000 $ 5,270,650
Akron GO,
7.50%, 9/01/05 .............................................................................. 500,000 512,660
Improvement, FGIC Insured, 5.00%, 12/01/20 .................................................. 2,150,000 2,307,208
Improvement, FGIC Insured, 5.00%, 12/01/21 .................................................. 2,255,000 2,407,866
Improvement, FGIC Insured, 5.00%, 12/01/22 .................................................. 1,185,000 1,260,840
Akron Income Tax Revenue, Community Learning Centers, Series A, FGIC Insured, 5.00%,
12/01/22 .................................................................................... 2,460,000 2,617,440
12/01/24 .................................................................................... 3,200,000 3,383,136
12/01/33 .................................................................................... 8,005,000 8,314,633
Akron Sewer System Revenue, Refunding, MBIA Insured, 5.55%, 12/01/16 ........................... 3,660,000 3,876,526
Anthony Wayne Local School District GO,
Refunding, FSA Insured, 5.00%, 12/01/24 ..................................................... 3,200,000 3,365,376
School Facilities Construction and Improvement, FSA Insured, 5.65%, 12/01/21 ................ 2,490,000 2,760,588
School Facilities Construction and Improvement, FSA Insured, 5.70%, 12/01/25 ................ 2,335,000 2,607,588
School Facilities Construction and Improvement, FSA Insured, 5.125%, 12/01/30 ............... 2,535,000 2,651,610
Archbold Area Local School District GO, AMBAC Insured, Pre-Refunded, 6.00%, 12/01/21 ........... 2,000,000 2,159,840
Athens City School District GO, School Facilities Construction and Improvement, FSA Insured,
6.00%, 12/01/24 .............................................................................. 2,345,000 2,681,226
Aurora City School District COP, MBIA Insured,
6.10%, 12/01/19 ............................................................................. 1,825,000 2,076,175
6.15%, 12/01/24 ............................................................................. 1,670,000 1,899,525
Aurora City School District GO, FGIC Insured, Pre-Refunded, 5.80%, 12/01/16 .................... 1,075,000 1,125,106
Austintown Local School District GO, School Improvement, FSA Insured, 5.125%, 12/01/30 ......... 7,715,000 8,197,882
Avon Lake City School District GO, FGIC Insured, 5.50%, 12/01/26 ............................... 4,000,000 4,364,840
Avon Lake Water System Revenue, Series A, AMBAC Insured, 5.75%, 10/01/26 ....................... 2,020,000 2,249,512
Avon Local School District GO,
AMBAC Insured, Pre-Refunded, 6.00%, 12/01/20 ................................................ 2,500,000 2,675,850
School Improvement, MBIA Insured, 5.25%, 12/01/23 ........................................... 1,000,000 1,095,270
School Improvement, MBIA Insured, 5.25%, 12/01/29 ........................................... 2,295,000 2,467,951
Beavercreek Local School District GO, FGIC Insured, 5.70%, 12/01/20 ............................ 8,125,000 8,626,312
Bluffton Exempted Village School District GO, Improvement, AMBAC Insured,
5.50%, 12/01/28 .............................................................................. 1,190,000 1,389,325
Bowling Green MFHR, Village Apartments, Refunding, Series A, GNMA Secured,
5.40%, 9/20/36 ............................................................................... 2,940,000 3,011,177
Brookville Local School District GO, FSA Insured,
5.25%, 12/01/22 ............................................................................. 1,075,000 1,178,254
5.00%, 12/01/31 ............................................................................. 3,000,000 3,120,450
Buckeye Local School District GO, Construction and Improvement Bonds, FGIC Insured,
5.50%, 12/01/25 .............................................................................. 750,000 818,430
Butler County GO,
AMBAC Insured, 5.75%, 12/01/16 .............................................................. 1,000,000 1,065,200
Judgment Bonds, FSA Insured, 4.75%, 12/01/26 ................................................ 4,000,000 4,094,640
Central Local School District GO, Classroom Facilities, FSA Insured, 5.75%, 12/01/22 ........... 1,555,000 1,748,286
Cincinnati City School District GO,
Classroom Facilities Construction and Improvement, FSA Insured, 5.00%, 12/01/27 ............. 2,500,000 2,622,550
FSA Insured, 5.00%, 12/01/22 ................................................................ 9,510,000 9,971,901
Annual Report | 107
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Cincinnati Technical College Revenue, AMBAC Insured,
5.25%, 10/01/23 ............................................................................. $ 2,510,000 $ 2,745,363
5.00%, 10/01/28 ............................................................................. 2,715,000 2,838,152
Circleville GO, Capital Facilities Improvement, AMBAC Insured, 5.625%, 12/01/20 ................ 2,035,000 2,261,048
Cleveland Municipal School District GO, FSA Insured, 5.00%, 12/01/27 ........................... 4,000,000 4,205,240
Cleveland State University General Receipt Revenue, FGIC Insured,
5.25%, 6/01/24 .............................................................................. 1,000,000 1,088,480
5.00%, 6/01/34 .............................................................................. 11,190,000 11,686,053
Cleveland Waterworks Revenue,
Refunding and Improvement, Series I, FSA Insured, 5.00%, 1/01/28 ............................ 6,715,000 6,946,936
Refunding and Improvement, Series I, FSA Insured, Pre-Refunded, 5.00%, 1/01/28 .............. 4,785,000 5,125,501
Series H, MBIA Insured, Pre-Refunded, 5.75%, 1/01/26 ........................................ 1,000,000 1,047,630
Series K, FGIC Insured, Pre-Refunded, 5.00%, 1/01/22 ........................................ 2,075,000 2,278,329
Series K, FGIC Insured, Pre-Refunded, 5.00%, 1/01/23 ........................................ 4,285,000 4,704,887
Series K, FGIC Insured, Pre-Refunded, 5.00%, 1/01/25 ........................................ 8,150,000 8,948,618
Clinton-Massie Local School District GO, School Improvement, MBIA Insured,
5.00%, 12/01/25 .............................................................................. 1,185,000 1,239,842
Clyde-Green Springs Exempt Village School District GO, School Facilities Construction,
Refunding and Improvement, MBIA Insured, 5.125%, 12/01/32 .................................... 1,000,000 1,055,800
Columbus City School District GO, Linden Elementary Construction, FSA Insured,
5.00%, 12/01/28 .............................................................................. 900,000 933,282
Columbus Municipal Airport Authority Revenue, Airport Improvement,
Port Columbus International, Series B, AMBAC Insured, 5.00%, 1/01/18 ......................... 3,565,000 3,758,437
Columbus Tax Increment Financing Revenue,
Easton Project, AMBAC Insured, Pre-Refunded, 5.30%, 12/01/19 ................................ 1,500,000 1,657,905
Polaris Project, Series A, AMBAC Insured, 4.75%, 12/01/22 ................................... 1,385,000 1,440,622
Crawford County GO, Refunding, AMBAC Insured, 5.25%, 12/01/31 .................................. 1,330,000 1,417,807
Cuyahoga Community College District General Receipts Revenue, Series A, AMBAC Insured, 5.00%,
12/01/22 .................................................................................... 1,000,000 1,064,000
12/01/32 .................................................................................... 3,000,000 3,118,230
Cuyahoga County Hospital Revenue, University Hospitals Health System Inc., AMBAC Insured,
5.40%, 1/15/19 .............................................................................. 1,500,000 1,622,865
5.50%, 1/15/30 .............................................................................. 1,760,000 1,880,982
Cuyahoga County MFHR, Rockefeller Park Project, Series A, GNMA Secured, 5.75%,
1/20/29 ...................................................................................... 1,000,000 1,048,900
Cuyahoga County Utility System Revenue,
AMBAC Insured, 5.125%, 2/15/28 .............................................................. 1,000,000 1,043,460
Medical Center Co. Project, Refunding, Series B, MBIA Insured, 6.10%, 8/15/15 ............... 2,945,000 3,050,048
Darke County GO, Real Estate Acquisition and Improvement, FGIC Insured,
5.125%, 12/01/27 ............................................................................. 1,020,000 1,078,997
Dayton City School District GO, School Facilities Construction and Improvement,
Series A, FGIC Insured, 5.00%, 12/01/29 ...................................................... 8,275,000 8,608,813
Deerefield Township Tax Increment Revenue, Refunding, Series B, MBIA Insured,
5.00%, 12/01/25 .............................................................................. 1,000,000 1,048,990
Defiance GO, MBIA Insured,
6.10%, 12/01/14 ............................................................................. 1,000,000 1,026,050
6.20%, 12/01/20 ............................................................................. 750,000 769,590
108 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Delaware City School District GO, FGIC Insured, Pre-Refunded, 5.75%, 12/01/15 .................. $ 1,640,000 $ 1,699,696
Dover Municipal Electric System Revenue, FGIC Insured, 6.00%, 12/01/19 ......................... 1,625,000 1,683,792
Eastlake GO, Capital Facilities, MBIA Insured, 5.00%, 12/01/27 ................................. 1,950,000 2,036,365
Eaton City School District GO, FGIC Insured, 5.00%, 12/01/25 ................................... 1,250,000 1,317,800
Fairfield City School District GO, FGIC Insured, Pre-Refunded, 6.00%, 12/01/20 ................. 1,000,000 1,028,390
Fairfield County GO, FGIC Insured, 5.00%, 12/01/20 ............................................. 1,600,000 1,711,328
Finneytown Local School District GO, FGIC Insured, 5.80%, 12/01/24 ............................. 1,980,000 2,173,565
Franklin County Hospital Revenue,
Children's Hospital Project, AMBAC Insured, 5.50%, 5/01/21 .................................. 3,365,000 3,662,466
Children's Hospital Project, AMBAC Insured, 5.50%, 5/01/28 .................................. 4,265,000 4,615,327
Holy Cross Health Systems, AMBAC Insured, 5.875%, 6/01/21 ................................... 2,500,000 2,640,925
OhioHealth Corp., Refunding, Series C, MBIA Insured, 5.00%, 5/15/33 ......................... 5,250,000 5,406,240
Franklin GO, MBIA Insured, 5.25%, 12/01/27 ..................................................... 1,500,000 1,608,225
Garfield Heights GO, Various Purpose, Refunding and Improvement, FGIC Insured,
5.00%, 12/01/27 .............................................................................. 2,655,000 2,797,175
Georgetown Exempted Village School District GO, Classroom Facilities, FSA Insured,
5.125%, 12/01/31 ............................................................................. 1,000,000 1,061,770
Grand Valley Local School District GO, Classroom Facilities Improvement, FGIC Insured,
5.00%, 12/01/24 .............................................................................. 1,300,000 1,367,184
Greater Cleveland Regional Transit Authority GO, Capital Improvement,
Series A, MBIA Insured, 5.125%, 12/01/21 ..................................................... 1,750,000 1,866,322
Green Community Learning Centers Income Tax Revenue, MBIA Insured, 5.00%,
12/01/27 .................................................................................... 1,205,000 1,266,829
12/01/28 .................................................................................... 1,265,000 1,325,973
12/01/32 .................................................................................... 2,675,000 2,789,463
Greene County GO, AMBAC Insured, 5.00%,
12/01/22 .................................................................................... 1,475,000 1,560,225
12/01/28 .................................................................................... 2,620,000 2,729,044
Greene County Sewer System Revenue, Governmental Enterprise,
AMBAC Insured, 5.625%, 12/01/25 ............................................................. 1,890,000 2,095,027
MBIA Insured, 5.25%, 12/01/25 ............................................................... 5,000,000 5,410,150
Greene County Water System Revenue,
Governmental Enterprise, MBIA Insured, 5.25%, 12/01/21 ...................................... 5,400,000 5,873,310
Series A, FGIC Insured, Pre-Refunded, 6.125%, 12/01/21 ...................................... 2,100,000 2,332,701
Guernsey County GO, Refunding, FGIC Insured, 5.00%, 12/01/23 ................................... 2,690,000 2,839,941
Hamilton County Convention Facilities Authority Revenue,
FGIC Insured, 5.00%, 12/01/24 ............................................................... 2,795,000 2,951,492
FGIC Insured, 5.00%, 12/01/28 ............................................................... 5,400,000 5,639,382
second lien, FGIC Insured, 5.00%, 12/01/33 .................................................. 7,235,000 7,527,873
Hamilton County Hospital Facilities Revenue, Cincinnati Children's Hospital,
Series J, FGIC Insured, 5.25%, 5/15/34 ....................................................... 5,000,000 5,333,950
Hamilton County Sales Tax Revenue, Series B, AMBAC Insured,
5.25%, 12/01/32 ............................................................................. 19,720,000 20,962,360
5.60%, 12/01/32 ............................................................................. 1,200,000 1,323,468
Hamilton County Sewer System Revenue,
Refunding, MBIA Insured, 5.25%, 12/01/21 .................................................... 1,000,000 1,079,940
Series A, FGIC Insured, Pre-Refunded, 6.05%, 12/01/15 ....................................... 3,010,000 3,155,834
Annual Report | 109
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Hamilton GO, One Renaissance Center, Series A, AMBAC Insured, 5.25%,
11/01/18 .................................................................................... $ 1,010,000 $ 1,100,163
11/01/19 .................................................................................... 1,015,000 1,110,623
11/01/20 .................................................................................... 1,120,000 1,222,054
11/01/21 .................................................................................... 1,180,000 1,282,436
Hamilton Wastewater System Revenue, Series A, FSA Insured,
5.90%, 10/15/21 ............................................................................. 3,040,000 3,225,866
5.20%, 10/15/23 ............................................................................. 7,275,000 7,654,100
Heath City School District GO, School Improvement, Series A, FGIC Insured,
5.60%, 12/01/21 ............................................................................. 1,000,000 1,103,440
5.50%, 12/01/27 ............................................................................. 1,170,000 1,272,972
Highland Local School District GO, School Improvement, FSA Insured, 5.00%,
12/01/23 .................................................................................... 3,680,000 3,862,160
12/01/26 .................................................................................... 3,675,000 3,830,526
Hilliard School District GO,
Refunding, FGIC Insured, 6.55%, 12/01/05 .................................................... 500,000 515,685
aSchool Construction, Refunding, MBIA Insured, 5.00%, 12/01/27 ............................... 2,895,000 3,044,556
School Improvement, FGIC Insured, 5.75%, 12/01/28 ........................................... 4,000,000 4,486,120
School Improvement, Series A, FGIC Insured, 5.25%, 12/01/28 ................................. 3,010,000 3,223,830
Hudson City School District COP, MBIA Insured, 5.00%, 6/01/34 .................................. 6,720,000 6,992,026
Independence Local School District GO, FGIC Insured, 5.25%, 12/01/21 ........................... 1,390,000 1,522,161
Jackson Center Local School District Shelby County GO, Facilities Construction and
Improvements, MBIA Insured, 5.00%, 12/01/28 .................................................. 1,175,000 1,223,903
Jackson City School District GO, School Improvement, MBIA Insured, 5.25%, 12/01/27 ........ 3,000,000 3,220,020
Jackson Local School District GO, Stark and Summit Counties Local School District,
FSA Insured, 5.50%, 12/01/20 ................................................................ 4,000,000 4,377,960
FSA Insured, 5.625%, 12/01/25 ............................................................... 3,500,000 3,866,555
MBIA Insured, Pre-Refunded, 5.50%, 12/01/21 ................................................. 3,060,000 3,278,606
Jefferson Local School District Madison County School Construction GO, FGIC Insured,
5.00%, 12/01/25 .............................................................................. 1,200,000 1,271,124
Jonathan Alder Local School District GO, School Facilities Construction and Improvement,
MBIA Insured,
4.75%, 12/01/22 ............................................................................. 1,105,000 1,143,277
5.00%, 12/01/27 ............................................................................. 6,195,000 6,469,377
5.00%, 12/01/30 ............................................................................. 3,320,000 3,442,707
Kenston Local School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/24 .................................................................................... 2,380,000 2,509,686
12/01/25 .................................................................................... 2,500,000 2,629,100
Kettering City School District GO, School Improvements, FSA Insured, 5.00%,
12/01/28 .................................................................................... 2,970,000 3,113,154
12/01/31 .................................................................................... 2,595,000 2,704,042
Keystone Local School District Lorain County GO, School Improvement, FSA Insured,
5.00%, 12/01/30 .............................................................................. 6,170,000 6,434,014
Lake County Hospital Facilities Revenue, Lake Hospital System Inc., AMBAC Insured,
5.00%, 8/15/23 ............................................................................... 1,500,000 1,551,135
Lake Ohio Local School District GO, MBIA Insured,
5.30%, 12/01/21 ............................................................................. 1,575,000 1,722,577
5.375%, 12/01/25 ............................................................................ 1,900,000 2,069,879
110 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Lakewood City School District GO, School Improvement, FSA Insured, 5.125%, 12/01/31 ............ $ 21,900,000 $ 23,252,763
Lakota Local District GO, AMBAC Insured, Pre-Refunded, 6.125%, 12/01/17 ........................ 3,200,000 3,293,792
Lebanon City School District GO, FSA Insured, 5.00%, 12/01/29 .................................. 6,250,000 6,462,687
Licking County Joint Vocational School District GO, School Facilities Construction and
Improvement, MBIA Insured,
5.00%, 12/01/21 ............................................................................. 2,200,000 2,334,618
4.75%, 12/01/23 ............................................................................. 2,230,000 2,298,327
Licking Heights Local School District GO, School Facilities Construction and Improvements,
Series A, FGIC Insured, 5.625%, 12/01/28 ..................................................... 4,000,000 4,416,720
Logan Hocking Local School District GO, Construction and Improvement,
MBIA Insured, 5.00%,
12/01/22 .................................................................................... 1,200,000 1,261,560
12/01/29 .................................................................................... 1,000,000 1,034,030
London City School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.00%,
12/01/22 .................................................................................... 700,000 735,910
12/01/29 .................................................................................... 1,500,000 1,551,045
Lorain County GO, Sewer System Improvement, MBIA Insured, 5.00%, 12/01/19 ...................... 1,640,000 1,753,586
Lorain County Health Facilities Revenue, Catholic Healthcare Partners, Series A,
AMBAC Insured, 5.50%, 9/01/29 ................................................................ 6,250,000 6,691,312
Lorain County Hospital Revenue, Catholic Healthcare Partners, Refunding,
Series B, MBIA Insured, 5.50%, 9/01/27 ....................................................... 5,000,000 5,368,500
Lorain GO, Urban Renewal, MBIA Insured, 5.70%, 12/01/28 ........................................ 1,050,000 1,166,896
Louisville City School District GO, FGIC Insured, 5.00%, 12/01/24 .............................. 3,500,000 3,660,650
Loveland City School District GO, Refunding, Series A, MBIA Insured, 5.00%, 12/01/24 ........... 4,000,000 4,174,000
Lucas County GO, 8.00%,
12/01/06 .................................................................................... 120,000 130,673
12/01/08 .................................................................................... 110,000 128,866
12/01/09 .................................................................................... 120,000 144,280
12/01/10 .................................................................................... 220,000 271,482
Lucas County Hospital Revenue, Promedica Healthcare Obligation Group,
MBIA Insured, 5.75%, 11/15/14 ............................................................... 300,000 320,040
Refunding, AMBAC Insured, 5.375%, 11/15/29 .................................................. 750,000 790,680
Refunding, MBIA Insured, ETM, 5.75%, 11/15/14 ............................................... 4,460,000 4,662,618
Mad River Local School District GO, Classroom Facilities, FGIC Insured, 5.125%, 12/01/24 ....... 4,180,000 4,452,996
Madison Local School District Butler County GO,
MBIA Insured, 5.75%, 12/01/26 ............................................................... 1,000,000 1,117,630
School Improvement, FGIC Insured, 5.60%, 12/01/26 ........................................... 1,120,000 1,246,213
Mahoning County Hospital Facilities Revenue, Western Reserve Care, MBIA Insured,
ETM, 5.50%, 10/15/25 .......................................................................... 4,750,000 5,188,282
Mahoning County Sewer System Revenue, AMBAC Insured, 5.375%, 12/01/18 .......................... 1,905,000 2,068,620
Marietta Water Revenue, AMBAC Insured, Pre-Refunded, 5.95%, 12/01/21 ........................... 3,875,000 4,144,274
Marion County City School District GO, School Facilities Construction and Improvement
Project, FSA Insured,
5.55%, 12/01/20 ............................................................................. 1,000,000 1,107,920
5.625%, 12/01/22 ............................................................................ 1,100,000 1,219,933
Marion County GO, AMBAC Insured, 5.05%, 12/01/31 ............................................... 1,500,000 1,559,310
Annual Report | 111
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Marysville Exempted Village School District GO,
FSA Insured, 5.30%, 12/01/21 ................................................................ $ 2,000,000 $ 2,165,200
FSA Insured, 5.35%, 12/01/25 ................................................................ 2,010,000 2,197,473
FSA Insured, 5.375%, 12/01/29 ............................................................... 2,465,000 2,672,528
Refunding, MBIA Insured, 5.00%, 12/01/29 .................................................... 1,000,000 1,038,290
School Improvement, AMBAC Insured, Pre-Refunded, 6.00%, 12/01/29 ............................ 2,890,000 3,343,701
Mason City School District GO,
Refunding, MBIA Insured, 5.00%, 12/01/20 .................................................... 5,495,000 5,836,734
School Improvement, FSA Insured, 5.00%, 12/01/31 ............................................ 5,000,000 5,210,100
Maumee City School District GO, School Facilities Construction and Improvements,
FSA Insured, 5.00%, 12/01/27 ................................................................. 3,610,000 3,786,962
Medina GO, 5.00%, 12/01/22 ..................................................................... 1,100,000 1,174,085
Miami University General Receipts Revenue, Refunding, AMBAC Insured, 5.00%,
12/01/22 ..................................................................................... 1,675,000 1,782,200
Middletown City School District GO, FGIC Insured, 5.00%, 12/01/31 .............................. 5,475,000 5,694,821
Milford Exempted Village School District GO, School Improvement, FSA Insured,
5.00%, 12/01/22 ............................................................................. 2,000,000 2,102,600
5.125%, 12/01/30 ............................................................................ 7,325,000 7,661,950
Minerva Local School District GO, Classroom Facilities, MBIA Insured, 5.30%, 12/01/29 .......... 1,300,000 1,390,077
Minster School District School Facilities and Construction GO, FSA Insured,
5.70%, 12/01/23 ............................................................................. 3,190,000 3,572,991
5.75%, 12/01/27 ............................................................................. 3,260,000 3,659,806
Monroe Local School District GO, AMBAC Insured, 5.00%, 12/01/23 ................................ 1,000,000 1,055,740
Morley Library District GO, Lake County District Library, Library Improvement, AMBAC Insured,
4.75%, 12/01/21 .............................................................................. 1,000,000 1,037,990
New Albany Community Authority Community Facilities Revenue, Refunding,
Series B, AMBAC Insured,
5.125%, 10/01/21 ............................................................................ 3,000,000 3,208,080
5.20%, 10/01/24 ............................................................................. 5,000,000 5,347,450
New Lexington HDC Mortgage Revenue, Lincoln Park, Refunding, Series A,
MBIA Insured, 5.85%, 1/01/21 ................................................................. 895,000 920,346
Nordonia Hills Local School District GO, School Improvement, AMBAC Insured,
5.45%, 12/01/25 .............................................................................. 3,035,000 3,341,930
Oak Hills Local School District GO, MBIA Insured, 5.45%, 12/01/21 .............................. 5,000,000 5,375,850
Ohio Capital Corp. HMR,
Refunding, Series G, MBIA Insured, 6.35%, 7/01/22 ........................................... 1,970,000 2,018,698
Westview Apartments, Refunding, Series A, MBIA Insured, 6.125%, 1/01/15 ..................... 1,505,000 1,532,812
Westview Apartments, Refunding, Series A, MBIA Insured, 6.25%, 1/01/23 ...................... 2,565,000 2,630,946
Ohio Center Local Government Capital Asset Financing Program Fractionalized
Institute GO, FSA Insured,
4.875%, 12/01/18 ............................................................................ 1,255,000 1,340,064
5.25%, 12/01/23 ............................................................................. 1,410,000 1,545,430
Ohio HFA,
MFHR, Wind River Apartment Project, Series A, GNMA Secured, 5.65%, 5/01/32 .................. 2,035,000 2,099,469
RMR, Series C, GNMA Secured, 5.75%, 9/01/30 ................................................. 3,665,000 3,747,609
Ohio Municipal Electric Generation Agency Revenue, Joint Venture 5, CBI, Refunding,
AMBAC Insured, 5.00%, 2/15/23 ................................................................ 3,000,000 3,177,450
112 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Ohio State Air Quality Development Authority Revenue,
Cincinnati Gas and Electric, Refunding, Series B, MBIA Insured, 5.45%, 1/01/24 .............. $ 3,500,000 $ 3,546,445
JMG Funding LP Project, AMBAC Insured, 5.625%, 10/01/22 ..................................... 6,875,000 7,143,538
Ohio Power Co., Refunding, Series C, AMBAC Insured, 5.15%, 5/01/26 .......................... 9,075,000 9,593,092
Pollution Control, Ohio Edison Co., Refunding, Series B, AMBAC Insured,
5.625%, 11/15/29 ........................................................................... 5,400,000 5,476,626
Ohio State Building Authority Revenue,
Adult Correctional Facilities, Series A, AMBAC Insured, Pre-Refunded, 5.60%, 4/01/16 ........ 2,000,000 2,142,880
State Facilities, Administration Building Fund Project, Refunding, Series A, FSA Insured,
5.00%, 4/01/22 ............................................................................. 3,100,000 3,265,912
Ohio State Department of Transportation COP, Panhandle Rail Line Project, FSA Insured,
6.50%, 4/15/12 ................................................................................ 945,000 949,631
Ohio State Education Loan Revenue, Series A-1, AMBAC Insured, 5.85%, 12/01/19 .................. 1,050,000 1,098,174
Ohio State GO, Common Schools, Series B, 4.625%, 9/15/22 ....................................... 5,000,000 5,128,200
Ohio State Higher Educational Facilities Revenue, Case Western Reserve University Project,
Series A, AMBAC Insured, 5.00%, 12/01/34 ...................................................... 4,935,000 5,125,886
Ohio State Higher Educational Facility Commission Revenue,
FGIC Insured, 5.00%, 5/01/23 ................................................................ 8,460,000 8,953,049
Higher Educational Facility Oberlin College, AMBAC Insured, 5.00%, 10/01/26 ................. 8,000,000 8,345,040
University of Dayton Project, XLCA Insured, 5.00%, 12/01/34 ................................. 6,000,000 6,253,380
Xavier University Higher Educational Facility, MBIA Insured, 5.375%, 5/15/22 ................ 3,500,000 3,750,425
Ohio State Turnpike Commission Turnpike Revenue, AMBAC Insured, 5.25%, 2/15/31 ................. 16,425,000 17,288,955
Ohio State University General Receipts Athens Revenue, FSA Insured, 5.00%, 12/01/24 ...... 3,025,000 3,156,588
Ohio State University General Receipts Revenue,
MBIA Insured, 5.00%, 12/01/24 ............................................................... 2,155,000 2,284,128
Series A, 5.125%, 12/01/31 .................................................................. 2,500,000 2,614,350
State University Ohio, Series B, MBIA Insured, 5.00%, 6/01/33 ............................... 5,255,000 5,455,951
Ohio State Water Development Authority Pollution Control Facilities Revenue,
Pennsylvania Power Co. Project, Refunding, AMBAC Insured, 6.15%, 8/01/23 .................... 3,420,000 3,499,344
Water Control Loan Fund, Water Quality Series, MBIA Insured, 5.125%, 6/01/19 ................ 5,000,000 5,325,100
Ohio State Water Development Authority Revenue,
Dayton Power, Refunding, Series A, AMBAC Insured, 6.40%, 8/15/27 ............................ 5,000,000 5,016,250
Drinking Water Fund, Leverage, Refunding, 5.00%, 6/01/23 .................................... 2,255,000 2,391,428
Fresh Water Service, AMBAC Insured, Pre-Refunded, 5.90%, 12/01/21 ........................... 8,750,000 9,009,175
Pure Water, Refunding and Improvement, AMBAC Insured, 5.50%, 12/01/11 ....................... 270,000 271,139
Pure Water, Refunding and Improvement, AMBAC Insured, 5.50%, 12/01/18 ....................... 385,000 386,598
Pure Water, Series I, AMBAC Insured, ETM, 7.00%, 12/01/09 ................................... 2,000,000 2,195,060
Olentangy Local School District GO,
BIG Insured, 7.75%, 12/01/08 ................................................................ 375,000 439,796
BIG Insured, 7.75%, 12/01/09 ................................................................ 375,000 450,259
BIG Insured, 7.75%, 12/01/10 ................................................................ 375,000 460,763
FSA Insured, 5.00%, 12/01/25 ................................................................ 1,835,000 1,919,924
FSA Insured, 5.00%, 12/01/30 ................................................................ 4,000,000 4,139,720
School Facilities Construction and Improvement, FSA Insured, 5.625%, 12/01/27 ............... 4,500,000 4,986,045
School Facilities Construction and Improvement, Series A, FGIC Insured, 5.25%,
12/01/32 ................................................................................... 11,200,000 12,048,064
Ottawa and Glandorf Local School District GO, School Facilities Construction and Improvement,
MBIA Insured, 5.25%, 12/01/23 ................................................................. 2,175,000 2,369,510
Annual Report | 113
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
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FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
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LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Perrysburg Exempted Village School District GO, Series B, FSA Insured, 5.00%, 12/01/25 ......... $ 5,000,000 $ 5,217,300
Pickerington Local School District GO,
AMBAC Insured, 5.00%, 12/01/25 .............................................................. 7,000,000 7,304,220
School Facilities Construction and Improvement, FGIC Insured, 5.00%, 12/01/28 ............... 3,000,000 3,110,940
Plain Local School District GO, FGIC Insured,
6.00%, 12/01/25 ............................................................................. 800,000 913,192
Pre-Refunded, 6.00%, 12/01/25 ............................................................... 3,700,000 4,281,973
Plainesville City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/28 ........ 2,515,000 2,641,505
Princeton City School District GO, MBIA Insured, 5.00%,
12/01/25 .................................................................................... 1,700,000 1,792,208
12/01/26 .................................................................................... 2,725,000 2,868,717
12/01/30 .................................................................................... 1,330,000 1,384,384
Ridgewood Local School District GO, School Facilities Improvement, FSA Insured,
6.00%, 12/01/24 .............................................................................. 1,730,000 1,985,867
Rittman Exempted Village School District GO, School Improvement, FSA Insured,
5.125%, 12/01/31 ............................................................................. 1,000,000 1,048,280
Riverside Local School District GO, School Facilities Construction and Improvement,
MBIA Insured, 5.75%, 12/01/22 ................................................................ 1,000,000 1,124,300
Rural Lorain County Water Authority Water Resource Revenue, AMBAC Insured,
5.875%, 10/01/24 ............................................................................. 3,100,000 3,480,060
Salem GO, AMBAC Insured, 6.50%, 12/01/06 ....................................................... 800,000 834,504
Shaker Heights GO, Urban Renewal, Refunding, AMBAC Insured,
5.00%, 12/01/21 ............................................................................. 1,225,000 1,308,043
5.25%, 12/01/26 ............................................................................. 725,000 784,595
Sidney City School District GO, School Improvement,
FGIC Insured, 5.125%, 12/01/28 .............................................................. 1,425,000 1,500,682
Refunding, Series B, FGIC Insured, 5.25%, 12/01/23 .......................................... 1,780,000 1,929,395
Refunding, Series B, FGIC Insured, 5.25%, 12/01/28 .......................................... 1,000,000 1,071,040
South Range Local School District GO, MBIA Insured, 6.15%, 12/01/18 ............................ 375,000 380,374
South-Western City School District of Ohio Franklin and Pickway Counties GO,
FGIC Insured, ETM, 7.875%,
12/01/06 .................................................................................... 600,000 655,542
12/01/07 .................................................................................... 600,000 682,080
Southwest Regional Water District Revenue, MBIA Insured, Pre-Refunded, 6.00%,
12/01/15 .................................................................................... 1,000,000 1,038,240
12/01/20 .................................................................................... 700,000 726,768
Springboro Sewer System Revenue, Mortgage, MBIA Insured, 5.00%,
6/01/25 ..................................................................................... 1,000,000 1,056,780
6/01/27 ..................................................................................... 1,095,000 1,151,184
St. Henry Local Consolidated School District GO, MBIA Insured, 5.75%, 12/01/22 ................. 1,515,000 1,703,315
St. Mary's Waterworks Revenue, AMBAC Insured, 6.65%, 12/01/11 .................................. 750,000 753,540
Steubenville City School District GO, School Facilities and Implementation,
MBIA Insured, 5.60%, 12/01/22 ................................................................ 1,500,000 1,657,515
Streetsboro City School District GO, School Improvement, MBIA Insured, 5.00%, 12/01/25 ......... 2,500,000 2,608,800
Struthers City School District GO, Refunding, AMBAC Insured, 5.50%, 12/01/22 ................... 1,950,000 2,134,158
Summit County GO, Sanitary Sewer System Improvement, FGIC Insured, Pre-Refunded,
5.25%, 12/01/21 .............................................................................. 4,505,000 5,053,664
Swanton Local School District GO, School Improvement, FGIC Insured, 5.25%, 12/01/25 ............ 1,895,000 2,042,374
114 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Sycamore Community City School District COP, Blue Ash Elementary School Project,
AMBAC Insured, 5.125%, 12/01/25 .............................................................. $ 1,000,000 $ 1,058,590
Sylvania City School District GO,
FGIC Insured, Pre-Refunded, 5.75%, 12/01/22 ................................................. 1,500,000 1,554,600
Refunding, FGIC Insured, 5.00%, 12/01/22 .................................................... 1,550,000 1,639,559
Various Purpose, FGIC Insured, 5.30%, 12/01/20 .............................................. 2,225,000 2,436,264
Toledo City School District GO, School Facilities Improvement,
FSA Insured, 5.00%, 12/01/23 ................................................................ 1,500,000 1,592,610
Series B, FGIC Insured, 5.00%, 12/01/27 ..................................................... 1,925,000 2,019,364
Toledo GO, Limited Tax,
7.375%, 12/01/05 ............................................................................ 650,000 673,342
7.375%, 12/01/06 ............................................................................ 625,000 671,869
AMBAC Insured, Pre-Refunded, 5.95%, 12/01/15 ................................................ 3,715,000 3,892,243
AMBAC Insured, Pre-Refunded, 6.00%, 12/01/16 ................................................ 1,000,000 1,079,920
Toledo Sewer System Revenue, AMBAC Insured, 5.00%,
11/15/22 .................................................................................... 1,000,000 1,063,740
11/15/23 .................................................................................... 1,000,000 1,061,480
Trenton Water System Revenue, Improvement, FSA Insured, 5.125%, 12/01/34 ....................... 2,750,000 2,915,385
Tri-Valley Local School District GO, FGIC Insured, 5.25%, 12/01/29 ............................. 8,530,000 9,078,394
Trotwood-Madison City School District GO, School Improvement, FGIC Insured,
5.375%, 12/01/22 .............................................................................. 1,685,000 1,856,752
Trumbull County GO, Refunding, MBIA Insured, 5.20%, 12/01/20 ................................... 1,475,000 1,605,803
Twinsburg GO,
Golf Course, Refunding, FGIC Insured, 5.00%, 12/01/21 ....................................... 1,000,000 1,054,310
Park Land and Conservation, FGIC Insured, 5.00%, 12/01/21 ................................... 1,000,000 1,054,310
Union County GO, MBIA Insured, 5.00%, 12/01/33 ................................................. 2,895,000 2,985,816
University of Akron General Receipts Revenue, FGIC Insured,
4.75%, 1/01/25 .............................................................................. 1,080,000 1,112,929
5.00%, 1/01/28 .............................................................................. 1,475,000 1,543,470
5.00%, 1/01/35 .............................................................................. 5,250,000 5,462,468
Pre-Refunded, 5.70%, 1/01/24 ................................................................ 7,050,000 7,950,144
Pre-Refunded, 5.75%, 1/01/29 ................................................................ 1,500,000 1,694,865
University of Cincinnati COP, Jefferson Avenue Residence Hall, MBIA Insured,
5.125%, 6/01/28 .............................................................................. 7,400,000 7,703,474
University of Cincinnati General Receipts Revenue,
AMBAC Insured, 5.00%, 6/01/31 ............................................................... 1,350,000 1,398,992
Series A, AMBAC Insured, 5.00%, 6/01/22 ..................................................... 1,610,000 1,717,902
Series A, AMBAC Insured, 5.00%, 6/01/23 ..................................................... 1,845,000 1,964,279
Series A, AMBAC Insured, 5.00%, 6/01/24 ..................................................... 1,940,000 2,056,245
Series AD, MBIA Insured, 5.125%, 6/01/20 .................................................... 1,500,000 1,570,620
Series W, MBIA Insured, 5.85%, 6/01/16 ...................................................... 1,630,000 1,710,375
Upper Arlington County School District GO, MBIA Insured, 5.25%, 12/01/22 ....................... 5,000,000 5,288,050
Upper Scioto Valley Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.25%, 12/01/25 ................................................................ 1,160,000 1,242,801
Van Wert City School District GO, School Improvement, FGIC Insured, 5.00%,
12/01/27 .................................................................................... 4,805,000 5,017,813
12/01/30 .................................................................................... 2,500,000 2,592,400
Annual Report | 115
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Wadsworth City School District GO, FGIC Insured, 5.75%, 12/01/22 ............................... $ 1,200,000 $ 1,341,336
Warren City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/28 .............. 3,000,000 3,144,600
Warrensville Heights City School District GO, School Improvement, FGIC Insured,
5.625%, 12/01/20 ............................................................................ 3,500,000 3,891,230
5.75%, 12/01/24 ............................................................................. 2,750,000 3,084,208
Waterville GO, Refunding, MBIA Insured, 5.05%, 12/01/26 ........................................ 1,085,000 1,140,237
Wausen Exempted Village School District GO, School Improvements, MBIA Insured,
Pre-Refunded, 5.50%, 12/01/17 ................................................................ 1,800,000 1,931,238
Wayne Local School District GO, Warren County, AMBAC Insured, Pre-Refunded,
6.10%, 12/01/24 .............................................................................. 1,800,000 1,929,654
West Chester Township GO, AMBAC Insured, 5.00%, 12/01/25 ....................................... 1,500,000 1,565,280
West Muskingum Local School District School Facilities GO, FGIC Insured, 5.00%,
12/01/24 ..................................................................................... 2,750,000 2,907,383
Westfall Local School District GO, School Facilities Construction Improvement,
FGIC Insured, 6.00%, 12/01/22 ................................................................ 2,850,000 3,222,011
Wilmington Water Revenue, First Mortgage System, AMBAC Insured,
6.00%, 6/15/21 .............................................................................. 2,510,000 2,644,812
5.25%, 6/15/29 .............................................................................. 3,320,000 3,537,560
Woodmore Local School District GO, Refunding, AMBAC Insured, 5.65%, 12/01/08 ................... 500,000 509,155
Youngstown City School District GO, Classroom Facilities and School Improvement,
FSA Insured, 5.00%,
(a)12/01/21 ................................................................................. 1,775,000 1,899,215
(a)12/01/22 ................................................................................. 1,865,000 1,987,792
(a)12/01/23 ................................................................................. 1,955,000 2,078,888
Zanesville City School District GO, School Improvement, MBIA Insured,
4.75%, 12/01/22 ............................................................................. 5,500,000 5,730,340
4.75%, 12/01/26 ............................................................................. 3,250,000 3,346,948
5.05%, 12/01/29 ............................................................................. 3,500,000 3,670,345
-------------
961,335,015
-------------
U.S. TERRITORIES 3.4%
Puerto Rico Commonwealth GO,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/24 .................................................. 2,000,000 2,054,240
Public Improvement, Series A, FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 .................... 10,000,000 11,077,500
Puerto Rico PBA Revenue, Government Facilities, Series A, AMBAC Insured, Pre-Refunded,
5.50%, 7/01/21 ............................................................................... 4,000,000 4,105,240
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 ..................... 11,000,000 11,039,820
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 ..................... 6,000,000 6,133,140
-------------
34,409,940
-------------
TOTAL BONDS (COST $935,810,507) ................................................................ 995,744,955
-------------
116 | Annual Report
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON BONDS 0.4%
OHIO 0.4%
Hilliard School District GO, Capital Appreciation School Construction, Refunding,
MBIA Insured,
(a)12/01/19 .................................................................................. $ 2,190,000 $ 1,138,887
(a)12/01/20 .................................................................................. 4,525,000 2,230,282
Marysville Exempted Village School District GO, Capital Appreciation, Refunding, MBIA Insured,
12/01/20 ..................................................................................... 1,000,000 493,980
12/01/21 ..................................................................................... 1,000,000 467,720
--------------
TOTAL ZERO COUPON BONDS (COST $4,224,953) ...................................................... 4,330,869
--------------
TOTAL LONG TERM INVESTMENTS (COST $940,035,460) ................................................ 1,000,075,824
--------------
SHORT TERM INVESTMENTS 0.7%
BONDS 0.7%
OHIO 0.5%
(b)Cuyahoga County Hospital Revenue, University Hospitals of Cleveland, Daily VRDN and Put,
1.79%, 1/01/16 ............................................................................... 4,500,000 4,500,000
(b)Ohio State Air Quality Development Authority Revenue, Pollution Control, Ohio Edison Co.,
Series C, Daily VRDN and Put, 1.83%, 6/01/23 ................................................. 600,000 600,000
--------------
5,100,000
--------------
U.S. TERRITORIES 0.2%
(b)Puerto Rico Commonwealth Government Development Bank Revenue, Refunding,
MBIA Insured, Weekly VRDN and Put, 1.78%, 12/01/15 ........................................... 2,250,000 2,250,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $7,350,000) ................................................. 7,350,000
--------------
TOTAL INVESTMENTS (COST $947,385,460) 98.9% .................................................... 1,007,425,824
OTHER ASSETS, LESS LIABILITIES 1.1% ............................................................ 11,425,555
--------------
NET ASSETS 100.0% .............................................................................. $1,018,851,379
==============
See Glossary of Terms on page 118.
(a) See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
(b) 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.
Annual Report | See notes to financial statements. | 117
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
GLOSSARY OF TERMS
ACES - Adjustable Convertible Exempt Securities
AMBAC - American Municipal Bond Assurance Corp.
BART - Bay Area Rapid Transit
BIG - Bond Investors Insurance Co. (acquired by MBIA in
1989 and no longer does business under this name)
CBI - Certificate of Beneficial Interest
CDA - Community Development Authority/Agency
CDD - Community Development District
COP - Certificate of Participation
EDA - Economic Development Authority
EDC - Economic Development Corp.
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HDC - Housing Development Corp.
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority/Agency Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
ID - Improvement District
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
IDR - Industrial Development Revenue
ISD - Independent School District
LP - Limited Partnership
MBIA - Municipal Bond Investors Assurance Corp.
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
RDAR - Redevelopment Agency Revenue
RMR - Residential Mortgage Revenue
SF - Single Family
SFHR - Single Family Housing Revenue
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
USD - Unified/Union School District
XLCA - XL Capital Assurance
118 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2005
-----------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN
INSURED INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------
Assets:
Investments in securities:
Cost .................................................... $138,991,255 $1,707,294,968 $434,971,727 $1,255,866,066
=================================================================
Value ................................................... 149,696,212 1,829,487,857 466,990,196 1,346,801,897
Cash ..................................................... 81,781 63,508 1,113,513 14,499
Receivables:
Capital shares sold ..................................... 259,137 2,324,000 1,329,214 1,269,081
Interest ................................................ 2,099,649 20,810,022 5,364,843 19,394,195
-----------------------------------------------------------------
Total assets ...................................... 152,136,779 1,852,685,387 474,797,766 1,367,479,672
-----------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ......................... 1,756,740 2,094,011 -- --
Capital shares redeemed ................................. 182,591 3,349,575 781,290 2,525,721
Affiliates .............................................. 86,368 1,138,515 287,622 740,315
Distributions to shareholders ............................ 189,075 2,355,471 578,204 1,772,069
Other liabilities ........................................ 24,966 168,736 36,743 140,130
-----------------------------------------------------------------
Total liabilities ................................. 2,239,740 9,106,308 1,683,859 5,178,235
-----------------------------------------------------------------
Net assets, at value ........................... $149,897,039 $1,843,579,079 $473,113,907 $1,362,301,437
=================================================================
Net assets consist of:
Undistributed net investment income (distributions in
excess of net investment income) ........................ $ 36,038 $ (2,123,530) $ (390,982) $ (954,175)
Net unrealized appreciation (depreciation) ............... 10,704,957 122,192,889 32,018,469 90,935,831
Accumulated net realized gain (loss) ..................... (1,572,230) (1,605,666) (1,475,198) (775,358)
Capital shares ........................................... 140,728,274 1,725,115,386 442,961,618 1,273,095,139
-----------------------------------------------------------------
Net assets, at value ........................... $149,897,039 $1,843,579,079 $473,113,907 $1,362,301,437
=================================================================
Annual Report | See notes to financial statements. | 119
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
-----------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN
INSURED INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------
CLASS A:
Net assets, at value ................................. $149,897,039 $1,602,174,288 $422,842,065 $1,199,126,249
=================================================================
Shares outstanding ................................... 13,882,564 129,108,778 35,294,999 97,122,410
=================================================================
Net asset value per share(a) ......................... $10.80 $12.41 $11.98 $12.35
=================================================================
Maximum offering price per share (net asset value
per share / 95.75%) ................................. $11.28 $12.96 $12.51 $12.90
=================================================================
CLASS B:
Net assets, at value ................................. -- $ 103,377,726 -- $ 54,867,048
=================================================================
Shares outstanding ................................... -- 8,293,418 -- 4,423,643
=================================================================
Net asset value and maximum offering price
per share(a) ........................................ -- $12.47 -- $12.40
=================================================================
CLASS C:
Net assets, at value ................................. -- $ 138,027,065 $ 50,271,842 $ 108,308,140
=================================================================
Shares outstanding ................................... -- 11,030,906 4,167,092 8,692,887
=================================================================
Net asset value and maximum offering price
per share(a) ........................................ -- $12.51 $12.06 $12.46
=================================================================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
120 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
----------------------------------
FRANKLIN FRANKLIN
MINNESOTA OHIO
INSURED INSURED
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------------
Assets:
Investments in securities:
Cost $ 558,888,193 $ 947,385,460
==================================
Value ............................................... 588,527,115 1,007,425,824
Cash ................................................. 1,848,629 13,316,898
Receivables:
Capital shares sold ................................. 339,041 1,573,715
Interest ............................................ 4,826,815 12,423,485
----------------------------------
Total assets .................................. 595,541,600 1,034,739,922
----------------------------------
Liabilities:
Payables:
Investment securities purchased ..................... 18,215,891 12,437,428
Capital shares redeemed ............................. 757,868 1,496,668
Affiliates .......................................... 322,502 587,092
Distributions to shareholders ........................ 720,560 1,269,172
Other liabilities .................................... 62,647 98,183
----------------------------------
Total liabilities ............................. 20,079,468 15,888,543
----------------------------------
Net assets, at value ....................... $ 575,462,132 $ 1,018,851,379
==================================
Net assets consist of:
Distributions in excess of net investment income $ (347,994) $ (187,825)
Net unrealized appreciation (depreciation) ........... 29,638,922 60,040,364
Accumulated net realized gain (loss) ................. (2,038,790) (64,406)
Capital shares ....................................... 548,209,994 959,063,246
----------------------------------
Net assets, at value ....................... $ 575,462,132 $ 1,018,851,379
==================================
Annual Report | See notes to financial statements. | 121
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
--------------------------------
FRANKLIN FRANKLIN
MINNESOTA OHIO
INSURED INSURED
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
--------------------------------
CLASS A:
Net assets, at value ......................................................... $515,780,338 $849,970,170
================================
Shares outstanding ........................................................... 42,190,420 67,261,866
================================
Net asset value per share(a) ................................................. $12.23 $12.64
================================
Maximum offering price per share (net asset value per share / 95.75%) ........ $12.77 $13.20
================================
CLASS B:
Net assets, at value ......................................................... -- $ 60,263,720
================================
Shares outstanding ........................................................... -- 4,750,949
================================
Net asset value and maximum offering price per share(a) ...................... -- $12.68
================================
CLASS C:
Net assets, at value ......................................................... $ 59,681,794 $108,617,489
================================
Shares outstanding ........................................................... 4,850,058 8,528,851
================================
Net asset value and maximum offering price per share(a) ...................... $12.31 $12.74
================================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
122 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2005
------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN
INSURED INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------
Investment income:
Interest ................................................. $ 7,391,626 $ 94,485,478 $ 23,205,646 $ 69,263,733
------------------------------------------------------------
Expenses:
Management fees (Note 3) ................................. 856,404 8,567,620 2,328,525 6,356,563
Distribution fees: (Note 3)
Class A ................................................. 146,195 1,579,953 412,720 1,191,239
Class B ................................................. -- 668,747 -- 360,569
Class C ................................................. -- 901,191 312,228 706,133
Transfer agent fees (Note 3) ............................. 49,314 814,122 195,719 699,399
Custodian fees ........................................... 2,507 27,402 7,797 23,220
Reports to shareholders .................................. 10,092 120,478 29,020 91,476
Registration and filing fees ............................. 5,641 98,664 19,020 30,649
Professional fees ........................................ 16,628 48,910 22,338 46,868
Trustees' fees and expenses .............................. 1,426 18,021 4,473 13,186
Other .................................................... 18,609 139,719 41,106 102,479
------------------------------------------------------------
Total expenses .................................... 1,106,816 12,984,827 3,372,946 9,621,781
------------------------------------------------------------
Net investment income .......................... 6,284,810 81,500,651 19,832,700 59,641,952
------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ................ (339,878) (1,744,139) (517,347) (353,421)
Net change in unrealized appreciation (depreciation)
on investments .......................................... (2,384,200) (30,959,571) (5,080,148) (26,355,380)
------------------------------------------------------------
Net realized and unrealized gain (loss) ................... (2,724,078) (32,703,710) (5,597,495) (26,708,801)
------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .......................................... $ 3,560,732 $ 48,796,941 $ 14,235,205 $ 32,933,151
============================================================
Annual Report | See notes to financial statements. | 123
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2005
------------------------------
FRANKLIN FRANKLIN
MINNESOTA OHIO
INSURED INSURED
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------
Investment income:
Interest ................................................................ $ 28,623,570 $ 49,806,039
------------------------------
Expenses:
Management fees (Note 3) ................................................ 2,815,438 4,723,988
Distribution fees: (Note 3)
Class A ................................................................ 511,309 827,963
Class B ................................................................ -- 387,450
Class C ................................................................ 375,995 676,697
Transfer agent fees (Note 3) ............................................ 283,934 499,105
Custodian fees .......................................................... 8,445 17,026
Reports to shareholders ................................................. 37,861 65,792
Registration and filing fees ............................................ 16,365 28,424
Professional fees ....................................................... 21,930 27,344
Trustees' fees and expenses ............................................. 5,521 9,587
Other ................................................................... 58,797 129,103
------------------------------
Total expenses ................................................... 4,135,595 7,392,479
------------------------------
Net investment income ......................................... 24,487,975 42,413,560
------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ............................... 52,083 (113,437)
Net change in unrealized appreciation (depreciation) on investments ..... (8,360,413) (13,458,617)
------------------------------
Net realized and unrealized gain (loss) .................................. (8,308,330) (13,572,054)
------------------------------
Net increase (decrease) in net assets resulting from operations .......... $ 16,179,645 $ 28,841,506
==============================
124 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended February 28, 2005 and February 29, 2004
-----------------------------------------------------------------
FRANKLIN FLORIDA FRANKLIN
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 6,284,810 $ 6,547,512 $ 81,500,651 $ 83,821,050
Net realized gain (loss) from investments ............... (339,878) 235,864 (1,744,139) 2,048,055
Net change in unrealized appreciation (depreciation)
on investments ......................................... (2,384,200) 2,531,290 (30,959,571) 34,955,520
-----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......................... 3,560,732 9,314,666 48,796,941 120,824,625
-----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................................ (6,332,933) (6,401,032) (72,396,826) (74,296,016)
Class B ................................................ -- -- (4,047,814) (3,831,684)
Class C ................................................ -- -- (5,426,709) (5,555,656)
Net realized gains:
Class A ................................................ -- -- (1,245,975) --
Class B ................................................ -- -- (79,483) --
Class C ................................................ -- -- (105,636) --
-----------------------------------------------------------------
Total distributions to shareholders ...................... (6,332,933) (6,401,032) (83,302,443) (83,683,356)
Capital share transactions: (Note 2) -----------------------------------------------------------------
Class A ................................................ (3,364,124) (3,854,378) (64,940,511) 18,066,931
Class B ................................................ -- -- (3,238,406) 24,494,078
Class C ................................................ -- -- (12,004,260) 20,537,476
-----------------------------------------------------------------
Total capital share transactions ......................... (3,364,124) (3,854,378) (80,183,177) 63,098,485
----------------------------------------------------------------
Redemption fees .......................................... 781 -- 2,579 --
-----------------------------------------------------------------
Net increase (decrease) in net assets .............. (6,135,544) (940,744) (114,686,100) 100,239,754
Net assets:
Beginning of year ........................................ 156,032,583 156,973,327 1,958,265,179 1,858,025,425
-----------------------------------------------------------------
End of year .............................................. $149,897,039 $156,032,583 $1,843,579,079 $1,958,265,179
=================================================================
Undistributed net investment income
(distributions in excess of net investment income)
included in net assets:
End of year ............................................. $ 36,038 $ 84,156 $ (2,123,530) $ (1,611,240)
=================================================================
Annual Report | See notes to financial statements. | 125
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005 and February 29, 2004
-----------------------------------------------------------------
FRANKLIN MASSACHUSETTS FRANKLIN MICHIGAN
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 19,832,700 $ 20,454,580 $ 59,641,952 $ 61,636,992
Net realized gain (loss) from investments ............... (517,347) (7,930) (353,421) 3,996,146
Net change in unrealized appreciation (depreciation)
on investments ......................................... (5,080,148) 7,601,007 (26,355,380) 15,657,907
-----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......................... 14,235,205 28,047,657 32,933,151 81,291,045
Distributions to shareholders from: -----------------------------------------------------------------
Net investment income:
Class A ................................................ (18,103,815) (18,589,297) (53,389,112) (54,613,690)
Class B ................................................ -- -- (2,176,488) (2,116,930)
Class C ................................................ (1,821,278) (1,713,691) (4,224,515) (4,333,371)
Net realized gains:
Class A ................................................ -- -- -- (7,079,499)
Class B ................................................ -- -- -- (320,983)
Class C ................................................ -- -- -- (658,685)
-----------------------------------------------------------------
Total distributions to shareholders ...................... (19,925,093) (20,302,988) (59,790,115) (69,123,158)
-----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ................................................ (4,479,618) (869,166) (26,380,519) (15,548,539)
Class B ................................................ -- -- (2,692,186) 8,232,491
Class C ................................................ 2,547,769 4,538,779 (5,975,278) 5,417,148
-----------------------------------------------------------------
Total capital share transactions ......................... (1,931,849) 3,669,613 (35,047,983) (1,898,900)
-----------------------------------------------------------------
Redemption fees .......................................... 203 -- 2 --
-----------------------------------------------------------------
Net increase (decrease) in net assets .............. (7,621,534) 11,414,282 (61,904,945) 10,268,987
Net assets:
Beginning of year ........................................ 480,735,441 469,321,159 1,424,206,382 1,413,937,395
-----------------------------------------------------------------
End of year .............................................. $473,113,907 $480,735,441 $1,362,301,437 $1,424,206,382
=================================================================
Distributions in excess of net investment income
included in net assets:
End of year ............................................. $ (390,982) $ (292,322) $ (954,175) $ (789,199)
=================================================================
126 | See notes to financial statements. | Annual Report
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005 and February 29, 2004
-----------------------------------------------------------------
FRANKLIN MINNESOTA FRANKLIN OHIO
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 24,487,975 $ 25,230,783 $ 42,413,560 $ 42,372,188
Net realized gain (loss) from investments ............... 52,083 1,040,597 (113,437) 1,111,175
-----------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
on investments ......................................... (8,360,413) 6,244,375 (13,458,617) 14,805,264
-----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......................... 16,179,645 32,515,755 28,841,506 58,288,627
-----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................................ (22,202,470) (22,886,588) (36,025,856) (36,083,275)
Class B ................................................ -- -- (2,254,795) (2,012,492)
Class C ................................................ (2,171,556) (2,166,431) (3,920,235) (3,753,007)
Net realized gains:
Class A ................................................ -- -- (809,574) (178,907)
Class B ................................................ -- -- (58,638) (12,199)
Class C ................................................ -- -- (101,588) (22,112)
-----------------------------------------------------------------
Total distributions to shareholders ..................... (24,374,026) (25,053,019) (43,170,686) (42,061,992)
Capital share transactions: (Note 2) -----------------------------------------------------------------
Class A ................................................ (5,481,151) (2,172,190) 9,725,629 16,612,998
Class B ................................................ -- -- 209,784 15,671,766
Class C ................................................ 1,139,233 3,927,617 2,131,419 15,159,555
-----------------------------------------------------------------
Total capital share transactions ......................... (4,341,918) 1,755,427 12,066,832 47,444,319
-----------------------------------------------------------------
Redemption fees .......................................... 29 -- 786 --
-----------------------------------------------------------------
Net increase (decrease) in net assets .............. (12,536,270) 9,218,163 (2,261,562) 63,670,954
Net assets:
Beginning of year ........................................ 587,998,402 578,780,239 1,021,112,941 957,441,987
-----------------------------------------------------------------
End of year .............................................. $575,462,132 $587,998,402 $1,018,851,379 $1,021,112,941
=================================================================
Distributions in excess of net investment income
included in net assets:
End of year ............................................. $ (347,994) $ (452,601) $ (187,825) $ (347,619)
=================================================================
Annual Report | See notes to financial statements. | 127
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Free Trust (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of twenty-five
separate series. All funds included in this report (the Funds) are diversified
except the Franklin Florida Insured Tax-Free Income Fund. The financial
statements of the remaining funds in the series are presented separately. The
investment objective of the Funds is to provide tax-free income.
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange. The Trust'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 Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. 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 Trust's Board of Trustees.
B. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds 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
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
C. INCOME TAXES
No provision has been made for U.S. income taxes because each fund's policy is
to qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute substantially all of its income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
128 | Annual Report
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividends from net investment income are normally declared daily and
distributed monthly to shareholders. Other distributions are recorded on the
ex-dividend date.
Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets. Other expenses are
charged to each fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
E. INSURANCE
The scheduled payments of interest and principal for each insured municipal
security in the Trust are insured by either a new issue insurance policy, a
portfolio insurance policy, or a secondary insurance policy. Some municipal
securities in the Funds are secured by collateral guaranteed by an agency of the
U.S. government.
Depending on the type of coverage, premiums for insurance are either added to
the cost basis of the security, included as an expense of the fund, or paid by a
third party.
F. 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.
G. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of the Funds' shares held five
trading days or less may be subject to the Funds' redemption fee, which is 2 %
of the amount redeemed. Such fees are retained by the Funds and accounted for as
additional paid-in capital as noted in the Statements of Changes in Net Assets.
Annual Report | 129
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liability arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. However, based on experience, the
Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective March 1, 2005, Class B shares will no longer be offered except to
existing Class B shareholders through reinvested distributions or exchanges into
other Franklin Templeton funds' Class B shares, as permitted by the applicable
fund prospectus. 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.
- -----------------------------------------------------------------------------------------------------------------
CLASS A CLASS A & CLASS C CLASS A, CLASS B & CLASS C
- -----------------------------------------------------------------------------------------------------------------
Franklin Florida Insured Tax-Free Franklin Massachusetts Insured Tax-Free Franklin Insured Tax-Free
Income Fund Income Fund Income Fund
Franklin Minnesota Insured Tax-Free Franklin Michigan Insured
Income Fund Tax-Free Income Fund
Franklin Ohio Insured Tax-Free
Income Fund
At February 28, 2005, there were an unlimited number of shares authorized (no
par value). Transactions in the Funds' shares were as follows:
----------------------------------------------------------------
FRANKLIN FLORIDA FRANKLIN
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold .......................... 2,380,834 $ 25,579,437 11,148,598 $ 137,509,729
Shares issued in reinvestment of
distributions ....................... 294,932 3,152,785 3,209,861 39,471,052
Shares redeemed ...................... (3,018,767) (32,096,346) (19,724,306) (241,921,292)
----------------------------------------------------------------
Net increase (decrease) ................ (343,001) $ (3,364,124) (5,365,847) $ (64,940,511)
================================================================
Year ended February 29, 2004
Shares sold .......................... 2,966,219 $ 32,001,922 16,368,935 $ 203,090,532
Shares issued in reinvestment of
distributions ....................... 280,966 3,030,130 3,103,906 38,561,258
Shares redeemed ...................... (3,611,141) (38,886,430) (18,062,233) (223,584,859)
----------------------------------------------------------------
Net increase (decrease) .............. (363,956) $ (3,854,378) 1,410,608 $ 18,066,931
================================================================
130 | Annual Report
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN
INSURED TAX-FREE
INCOME FUND
---------------------------
SHARES AMOUNT
---------------------------
CLASS B SHARES:
Year ended February 28, 2005
Shares sold ...................................... 747,122 $ 9,253,319
Shares issued in reinvestment of distributions ... 210,067 2,594,689
Shares redeemed .................................. (1,227,949) (15,086,414)
---------------------------
Net increase (decrease) ........................... (270,760) $ (3,238,406)
===========================
Year ended February 29, 2004
Shares sold ...................................... 2,783,981 $ 34,717,366
Shares issued in reinvestment of distributions ... 180,756 2,255,619
Shares redeemed .................................. (1,006,485) (12,478,907)
---------------------------
Net increase (decrease) .......................... 1,958,252 $ 24,494,078
===========================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ...................................... 1,885,614 $ 23,457,384
Shares issued in reinvestment of distributions ... 276,246 3,424,479
Shares redeemed .................................. (3,147,827) (38,886,123)
---------------------------
Net increase (decrease) ........................... (985,967) $(12,004,260)
===========================
Year ended February 29, 2004
Shares sold ...................................... 3,892,315 $ 48,794,934
Shares issued in reinvestment of distributions ... 278,005 3,480,399
Shares redeemed .................................. (2,549,948) (31,737,857)
---------------------------
Net increase (decrease) .......................... 1,620,372 $ 20,537,476
===========================
FRANKLIN MASSACHUSETTS FRANKLIN MICHIGAN
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold .......................... 3,927,574 $ 46,781,013 7,053,997 $ 86,726,673
Shares issued in reinvestment of
distributions ....................... 835,408 9,909,870 2,530,107 31,030,243
Shares redeemed ...................... (5,178,256) (61,170,501) (11,772,740) (144,137,435)
--------------------------------------------------------------
Net increase (decrease) ............... (415,274) $ (4,479,618) (2,188,636) $ (26,380,519)
==============================================================
Year ended February 29, 2004
Shares sold .......................... 4,128,170 $ 49,322,423 9,500,511 $ 118,289,564
Shares issued in reinvestment of
distributions ....................... 835,054 9,970,016 2,921,569 36,368,267
Shares redeemed ...................... (5,057,026) (60,161,605) (13,736,589) (170,206,370)
--------------------------------------------------------------
Net increase (decrease) .............. (93,802) $ (869,166) (1,314,509) $ (15,548,539)
==============================================================
Annual Report | 131
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------
FRANKLIN MASSACHUSETTS FRANKLIN MICHIGAN
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS B SHARES:
Year ended February 28, 2005
Shares sold ........................... 367,779 $ 4,542,198
Shares issued in reinvestment of
distributions ........................ 119,946 1,477,790
Shares redeemed ....................... (710,224) (8,712,174)
----------------------------
Net increase (decrease) ............... (222,499) $ (2,692,186)
============================
Year ended February 29, 2004
Shares sold ........................... 1,050,924 $ 13,140,992
Shares issued in reinvestment of
distributions ........................ 135,395 1,692,739
Shares redeemed ....................... (530,914) (6,601,240)
----------------------------
Net increase (decrease) ................ 655,405 $ 8,232,491
============================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ........................... 785,330 $ 9,417,191 981,143 $ 12,188,612
Shares issued in reinvestment of
distributions ........................ 105,457 1,259,725 231,136 2,860,326
Shares redeemed ....................... (683,411) (8,129,147) (1,706,201) (21,024,216)
-----------------------------------------------------------
Net increase (decrease) ................ 207,376 $ 2,547,769 (493,922) $ (5,975,278)
===========================================================
Year ended February 29, 2004
Shares sold ........................... 1,041,675 $ 12,537,307 2,123,775 $ 26,729,976
Shares issued in reinvestment of
distributions ........................ 96,536 1,160,098 275,268 3,456,052
Shares redeemed ....................... (767,480) (9,158,626) (1,979,889) (24,768,880)
-----------------------------------------------------------
Net increase (decrease) ................ 370,731 $ 4,538,779 419,154 $ 5,417,148
===========================================================
-----------------------------------------------------------
FRANKLIN MINNESOTA FRANKLIN OHIO
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ........................... 4,097,554 $ 49,873,484 6,856,234 $ 85,984,051
Shares issued in reinvestment of
distributions ........................ 1,098,992 13,334,214 1,662,857 20,779,704
Shares redeemed ....................... (5,664,499) (68,688,849) (7,794,493) (97,038,126)
-----------------------------------------------------------
Net increase (decrease) ................ (467,953) $ (5,481,151) 724,598 $ 9,725,629
===========================================================
Year ended February 29, 2004
Shares sold ........................... 4,190,260 $ 51,183,196 8,513,022 $ 107,348,240
Shares issued in reinvestment of
distributions ........................ 1,094,576 13,397,894 1,586,103 19,995,754
Shares redeemed ....................... (5,474,646) (66,753,280) (8,813,292) (110,730,996)
-----------------------------------------------------------
Net increase (decrease) ................ (189,810) $ (2,172,190) 1,285,833 $ 16,612,998
===========================================================
132 | Annual Report
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------------------------------------
FRANKLIN MINNESOTA FRANKLIN OHIO
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
CLASS B SHARES:
Year ended February 28, 2005
Shares sold ........................... 458,234 $ 5,764,506
Shares issued in reinvestment of
distributions ........................ 127,714 1,601,135
Shares redeemed ....................... (571,229) (7,155,857)
---------------------------
Net increase (decrease) ................ 14,719 $ 209,784
===========================
Year ended February 29, 2004
Shares sold ........................... 1,546,614 $ 19,557,073
Shares issued in reinvestment of
distributions ........................ 111,911 1,415,364
Shares redeemed ....................... (421,263) (5,300,671)
---------------------------
Net increase (decrease) ................ 1,237,262 $ 15,671,766
===========================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ........................... 941,110 $ 11,513,641 1,580,359 $ 20,016,992
Shares issued in reinvestment of
distributions ........................ 111,381 1,360,109 199,122 2,506,802
Shares redeemed ....................... (965,764) (11,734,517) (1,625,627) (20,392,375)
---------------------------------------------------------
Net increase (decrease) ................ 86,727 $ 1,139,233 153,854 $ 2,131,419
=========================================================
Year ended February 29, 2004
Shares sold ........................... 1,040,412 $ 12,796,366 2,277,644 $ 28,934,342
Shares issued in reinvestment of
distributions ........................ 107,297 1,321,263 182,034 2,311,111
Shares redeemed ....................... (830,344) (10,190,012) (1,272,289) (16,085,898)
---------------------------------------------------------
Net increase (decrease) ................ 317,365 $ 3,927,617 1,187,389 $ 15,159,555
=========================================================
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
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- ------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
Annual Report | 133
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Funds pay an investment management fee to Advisers based on the month-end
net assets of the Funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% In excess of $250 million
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
C. DISTRIBUTION FEES
The Funds reimburse Distributors up to 0.10%, 0.65%, and 0.65% per year of their
average daily net asset of Class A, Class B, and Class C, respectively, for
costs incurred in marketing the Funds' shares under a Rule 12b-1 plan. Under the
Class A distribution plan, costs exceeding the maximum for the current plan year
cannot be reimbursed in subsequent periods.
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the year:
------------------------------------------------------
FRANKLIN
FRANKLIN MASSACHUSETTS
FLORIDA FRANKLIN INSURED
INSURED TAX-FREE INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------
Net sales charges received ..................... $55,229 $387,378 $135,667
Contingent deferred sales charges retained ..... $14,999 $279,702 $ 6,083
------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN OHIO
MICHIGAN MINNESOTA INSURED
INSURED TAX-FREE INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------
Net sales charges received ..................... $283,810 $110,751 $254,101
Contingent deferred sales charges retained ..... $151,436 $ 6,504 $128,023
134 | Annual Report
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were paid to Investor Services:
----------------------------------------------------
FRANKLIN
FRANKLIN MASSACHUSETTS
FLORIDA FRANKLIN INSURED
INSURED TAX-FREE INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------
Transfer agent fees ...... $ 32,603 $577,228 $133,335
----------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN OHIO
MICHIGAN MINNESOTA INSURED
INSURED TAX-FREE INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------
Transfer agent fees ...... $495,999 $204,622 $347,759
4. INCOME TAXES
At February 28, 2005, the Funds had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:
--------------------------------------------
FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS
INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------
Capital loss carryovers expiring in:
2008 ..................................... $ 429,186 $ -- $ 337,078
2009 ..................................... 546,752 -- 608,972
2010 ..................................... 256,409 -- --
2012 ..................................... -- -- 18,068
2013 ..................................... 339,883 1,605,666 450,213
--------------------------------------------
$1,572,230 $1,605,666 $1,414,331
============================================
--------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MICHIGAN MINNESOTA OHIO
INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------
Capital loss carryovers expiring in:
2009 ..................................... $ -- $1,250,029 $ --
2010 ..................................... -- 788,761 --
2013 ..................................... 775,358 -- 64,406
--------------------------------------------
$ 775,358 $2,038,790 $ 64,406
============================================
At February 28, 2005, the Franklin Massachusetts Insured Tax-Free Income Fund
had deferred capital losses of $60,867 occurring subsequent to October 31, 2004.
For tax purposes, such losses will be reflected in the year ending February 28,
2006.
Annual Report | 135
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended February 28, 2005
and February 29, 2004, was as follows:
------------------------------------------------------------
FRANKLIN FLORIDA FRANKLIN
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Distributions paid from:
Tax exempt income ........... $ 6,332,933 $ 6,401,032 $81,871,349 $83,683,356
Long term capital gain ...... -- -- 1,431,094 --
------------------------------------------------------------
$ 6,332,933 $ 6,401,032 $83,302,443 $83,683,356
============================================================
------------------------------------------------------------
FRANKLIN MASSACHUSETTS FRANKLIN MICHIGAN
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Distributions paid from:
Tax exempt income ........... $19,925,093 $20,302,988 $59,790,115 $61,063,991
Long term capital gain ...... -- -- -- 8,059,167
------------------------------------------------------------
$19,925,093 $20,302,988 $59,790,115 $69,123,158
============================================================
------------------------------------------------------------
FRANKLIN MINNESOTA FRANKLIN OHIO
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Distributions paid from:
Tax exempt income ........... $24,374,026 $25,053,019 $42,200,886 $41,848,774
Long term capital gain ...... -- -- 969,800 213,218
------------------------------------------------------------
$24,374,026 $25,053,019 $43,170,686 $42,061,992
============================================================
Net investment income (loss) and realized gains (losses) differs for financial
statement and tax purposes primarily due to differing treatment of bond
discounts.
At February 28, 2005, the cost of investments, net unrealized appreciation
(depreciation), undistributed tax exempt and ordinary income for income tax
purposes were as follows:
--------------------------------------------------
FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS
INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------
Cost of investments ............................ $138,988,572 $1,707,172,873 $434,841,917
==================================================
Unrealized appreciation ........................ $ 10,727,800 $ 122,323,407 $ 32,149,447
Unrealized depreciation ........................ (20,160) (8,423) (1,168)
--------------------------------------------------
Net unrealized appreciation (depreciation) ..... $ 10,707,640 $ 122,314,984 $ 32,148,279
==================================================
Distributable earnings - undistributed tax
exempt income ................................. $ 222,432 $ 109,846 $ 57,412
-------------------------------------------------
136 | Annual Report
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
--------------------------------------------------
FRANKLIN FRANKLIN
FRANKLIN MINNESOTA OHIO
MICHIGAN INSURED INSURED
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------
Cost of investments ................ $1,255,746,492 $558,784,898 $947,317,891
==================================================
Unrealized appreciation ............ $ 91,061,725 $ 30,019,271 $ 60,162,123
Unrealized depreciation ............ (6,320) (277,054) (54,190)
--------------------------------------------------
Net unrealized appreciation
(depreciation) ..................... $ 91,055,405 $ 29,742,217 $ 60,107,933
==================================================
Undistributed tax exempt income .... $ 698,320 $ 269,273 $ 970,161
Undistributed ordinary income ...... -- -- 43,617
--------------------------------------------------
Distributable earnings ............. $ 698,320 $ 269,273 $ 1,013,778
==================================================
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended February 28, 2005, were as follows:
---------------------------------------------------------
FRANKLIN
FRANKLIN MASSACHUSETTS
FLORIDA FRANKLIN INSURED
INSURED TAX-FREE INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------
Purchases .......... $ 30,600,770 $166,774,937 $ 43,657,873
Sales .............. $ 31,726,569 $241,918,322 $ 47,007,398
---------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN OHIO
MICHIGAN MINNESOTA INSURED
INSURED TAX-FREE INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------
Purchases .......... $127,045,084 $ 74,429,449 $198,041,584
Sales .............. $161,004,847 $ 68,294,299 $196,188,305
6. CREDIT RISK
Each of the Funds invest a large percentage of their total assets in obligations
of issuers within their respective states, except for the Franklin Insured
Tax-Free Income Fund. Such concentration may subject the Funds to risks
associated with industrial or regional matters, and economic, political or legal
developments occurring within those states.
Annual Report | 137
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.
138 | Annual Report
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing, in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing", failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
On November 17, 2004, Franklin Resources, Inc. announced that Franklin Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
Annual Report | 139
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
The SEC's Second Order and the CAGO settlement agreement concerning marketing
support payments provide that the distribution of settlement monies are to be
made to the relevant funds, not to individual shareholders. The independent
distribution consultant has substantially completed preparation of these
distribution plans. The CAGO has approved the distribution plan pertaining to
the distribution of the monies owed under the CAGO settlement agreement and, in
accordance with the terms and conditions of that settlement, the monies were
disbursed to the participating funds. The Trust did not participate in the CAGO
settlement. The SEC has not yet approved the distribution plan pertaining to the
Second Order. When approved, disbursements of settlement monies under the SEC's
Second Order will be made promptly in accordance with the terms and conditions
of that order.
OTHER LEGAL PROCEEDINGS
The Company, and other funds, and certain current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York and Florida, alleging
violations of various federal securities laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
140 | Annual Report
FRANKLIN TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the lawsuits identified above are without merit and intend to vigorously defend
against them. The Company cannot predict with certainty, however, the eventual
outcome of the remaining governmental investigations or private lawsuits, nor
whether they will have a material negative impact on the Company. Public trust
and confidence are critical to the Company's business and any material loss of
investor and/or client confidence could result in a significant decline in
assets under management by the Company, which would have an adverse effect on
the Company's future financial results. If the Company finds that it bears
responsibility for any unlawful or inappropriate conduct that caused losses to
the Trust, it is committed to making the Trust or its shareholders whole, as
appropriate. The Company is committed to taking all appropriate actions to
protect the interests of its funds' shareholders.
Annual Report | 141
FRANKLIN TAX-FREE TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN TAX-FREE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Florida Insured Tax-Free
Income Fund, Franklin Insured Tax-Free Income Fund, Franklin Massachusetts
Insured Tax-Free Income Fund, Franklin Michigan Insured Tax-Free Income Fund,
Franklin Minnesota Insured Tax-Free Income Fund and Franklin Ohio Insured
Tax-Free Income Fund (separate portfolios of The Franklin Tax-Free Trust,
hereafter referred to as the "Funds") at February 28, 2005, the results of each
of their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management, our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2005 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 11, 2005
142 | Annual Report
FRANKLIN TAX-FREE TRUST
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby
designate 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended February 28, 2005. A portion
of the Funds' exempt-interest dividends may be subject to the federal
alternative minimum tax. In January 2006, shareholders will be notified of
amounts for use in preparing their 2005 income tax returns.
Annual Report | 143
BOARD MEMBERS AND OFFICERS
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Trust, principal occupations during the
past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Each board member will serve until
that person's successor is elected and qualified.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK H. ABBOTT, III (83) Trustee Since 1984 115 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Abbott Corporation (an investment company).
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (72) Trustee Since 1984 143 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) Trustee Since 1989 144 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (53) Trustee Since 1998 98 Director, Amerada Hess Corporation
One Franklin Parkway (exploration and refining of oil
San Mateo, CA 94403-1906 and gas), H.J. Heinz Company
(processed foods and allied
products), RTI International Metals,
Inc. (manufacture and distribution
of titanium), Canadian National
Railway (railroad), and White
Mountains Insurance Group, Ltd.
(holding company).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary
of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (75) Trustee Since 1984 117 Director, The California Center for
One Franklin Parkway Land Recycling (redevelopment).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 144
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Trustee Since 1992 143 Director, Martek Biosciences
One Franklin Parkway Corporation, MedImmune, Inc.
San Mateo, CA 94403-1906 (biotechnology), and Overstock.com
(Internet services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding com-
pany) (1987-2004) and Spacehab, Inc.
(aerospace services) (1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004);
Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and
President, National Association of Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (72) Trustee Since 1984 143 None
One Franklin Parkway and Chairman
San Mateo, CA 94403-1906 of the Board
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be,
of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (64) Trustee, Trustee since 127 None
One Franklin Parkway President and 1984, President
San Mateo, CA 94403-1906 Chief since 1993 and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice
President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
145 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (45) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) Vice President Since 1986 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services,
Inc.; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc.
and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (40) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (42) Treasurer Since July 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 34 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and
Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton
Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (44) Vice President Since 1995 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin
Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice
President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.;
Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial
Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 146
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources,
Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer
and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc.,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in
Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission
(1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue - AML
Rockefeller Center Compliance
New York, NY 10020-2302
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals, Inc.
and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources,
Inc. and of 48 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable None
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director,
Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
147 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (43) Vice President Since 2000 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments trust
complex. These portfolios have a common investment adviser or affiliated
investment advisers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested
persons of the Fund under the federal securities laws due to their positions as
officers and directors and major shareholders of Franklin Resources, Inc., which
is the parent company of the Fund's adviser and distributor.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAVE DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR
OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF
TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF
QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF
VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER
IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN
ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF
PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER
AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF
SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE
HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION
WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND
EVALUATING FINANCIAL STATEMENTS THAT PRESENT AND BREADTH AND LEVEL OF COMPLEXITY
OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE
AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION
RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
148 | Annual Report
FRANKLIN TAX-FREE TRUST
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust'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 Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Annual Report | 149
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LITERATURE REQUEST
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)
VALUE
Franklin Balance Sheet
Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund4,5
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
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) Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and strategy
remained the same.
(6) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7) Portfolio of insured municipal securities.
(8) These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
(9) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/05
Not part of the annual report
[LOGO](R)
FRANKLIN(R) TEMPLETON(R) One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com. See
inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN TAX-FREE TRUST
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.
TF1 A2005 04/05
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005
- --------------------------------------------------------------------------------
Franklin Alabama
Tax-Free Income Fund
Franklin Florida
Tax-Free Income Fund
Franklin Georgia
[GRAPHIC OMITTED] Tax-Free Income Fund
Franklin Kentucky
Tax-Free Income Fund
Franklin Louisiana
Tax-Free Income Fund
Franklin Maryland
Tax-Free Income Fund
Franklin Missouri
Tax-Free Income Fund
Franklin North Carolina
Tax-Free Income Fund
Franklin Virginia
Tax-Free Income Fund
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER TAX-FREE INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
[GRAPHIC OMITTED] THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN TAX-FREE TRUST Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with research offices in over 25 countries, they
offer investors the broadest global reach in the
industry.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among
undervalued stocks, arbitrage situations and
distressed companies.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to distinctly different investment
approaches, Franklin, Templeton and Mutual Series
funds typically have a low overlap of securities.
That's why our funds can be used to build truly
diversified portfolios 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 account services that have helped us
become one of the most trusted names in financial
services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ................. 1
SPECIAL FEATURE:
Understanding Interest Rates ....... 4
ANNUAL REPORT
Municipal Bond
Market Overview..................... 7
Investment Strategy and
Manager's Discussion................ 9
Franklin Alabama
Tax-Free Income Fund................ 10
Franklin Florida
Tax-Free Income Fund................ 18
Franklin Georgia
Tax-Free Income Fund................ 28
Franklin Kentucky
Tax-Free Income Fund................ 36
Franklin Louisiana
Tax-Free Income Fund................ 44
Franklin Maryland
Tax-Free Income Fund................ 53
Franklin Missouri
Tax-Free Income Fund................ 62
Franklin North Carolina
Tax-Free Income Fund................ 70
Franklin Virginia
Tax-Free Income Fund................ 79
Financial Highlights and
Statements of Investments .......... 88
Financial Statements................ 147
Notes to Financial Statements ..... 158
Report of Independent
Registered Public
Accounting Firm..................... 174
Tax Designation..................... 175
Board Members and
Officers............................ 176
Shareholder Information............. 181
- --------------------------------------------------------------------------------
ANNUAL REPORT
Municipal Bond Market Overview
For the one-year period ended February 28, 2005, the fixed income markets had
positive performance despite record high oil prices, the presidential election,
concerns about the dollar, and mixed economic releases. Although experiencing
some volatility throughout the year, long-term interest rates ended the year
close to where they started. Municipal bonds outperformed U.S. Treasury bonds
with similar maturities. The Lehman Brothers Municipal Bond Index returned 2.96%
for the period, while the Lehman Brothers U.S. Treasury Index returned 1.31%.(1)
In contrast, short-term interest rates experienced greater changes over the
year. The Federal Reserve Board raised the federal funds target rate from 1.00%
to 2.50% in six successive moves from late June through February. The Treasury
yield curve, which shows rates for Treasuries with short to long maturities,
flattened somewhat as short-term rates went up and longer-maturity Treasuries
traded in a narrower range. Over the one-year period, the 10-year Treasury bond
yield increased 37 basis points, while the 30-year Treasury bond yield decreased
12 basis points. (One hundred basis points equal one percent.) According to
Municipal Market Data, 10- and 30-year municipal bond yields increased 34 and 7
basis points.(2) Consequently, long-maturity municipal bonds outperformed
intermediates.
Although short-term interest rates rose during the year, overall interest rates
remained relatively low. This environment led to another high-volume year for
new-issue municipal bonds. Just as homebuyers seek the lowest mortgage rates,
municipalities borrow money when interest rates are low. Thus, over the past two
years, municipalities have issued more bonds to lock in lower
(1) Source: Lehman Brothers Inc. The Lehman Brothers Municipal Bond Index is a
market value-weighted index engineered for the long-term tax-exempt bond
market. All bonds included have a minimum credit rating of at least Baa.
They must have an outstanding par value of at least $5 million and be
issued as part of a transaction of at least $50 million. The bonds must be
dated after 12/31/90, and must be at least one year from their maturity
date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main
bond sectors: general obligation, revenue, insured and prerefunded. The
Lehman Brothers U.S. Treasury Index includes public obligations of the
U.S. Treasury with a remaining maturity of one year or more. All issues
must have at least one year to final maturity regardless of call features,
have at least $250 million par amount outstanding and be rated investment
grade (Baa3 or better). They must also be dollar denominated,
nonconvertible and publicly issued. The index excludes Treasury bills
(because of the maturity constraint), flower bonds, targeted investor
notes (TINs), and state and local government series (SLGS) bonds, STRIPS
and Treasury Inflation-Protected Securities (TIPS).
(2) Source: Thomson Financial.
Annual Report | 7
rates. Municipalities issued more than $358 billion in new debt during 2004.(3)
Although this was a decrease of more than 6% from 2003 (a record year), 2004 was
the third successive year of more than $300 billion in new issuance.(3) Demand
for municipal bonds remained strong as investors sought to reinvest proceeds
from a combination of coupon payments, maturities and bond calls. Healthy demand
came from a wide range of traditional buyers including mutual funds, individuals
and property and casualty companies, as well as crossover buyers. Crossover
buyers, such as hedge funds, typically invest in taxable securities, but they
enter the tax-exempt market when municipal valuations are attractive.
(3) Source: THE BOND BUYER.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2005. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
STATE, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE.
8 | Annual Report
Investment Strategy and Manager's Discussion
We use a consistent, disciplined strategy to maximize income for our
shareholders by seeking to maintain our 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, each Fund's 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.
The mixture of our value-oriented philosophy of investing primarily for income
and a relatively steep yield curve favored the use of longer-term bonds.
Consequently, we sought to remain fully invested in bonds that ranged from 15 to
30 years in maturity with good call features. We intend to maintain our
conservative, buy-and-hold investment strategy as we attempt to provide
shareholders with high, current, tax-free income.
We invite you to read your Fund report for more detailed performance and
portfolio information. Thank you for your participation in Franklin Tax-Free
Trust. We look forward to serving your future investment needs.
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
Annual Report | 9
Franklin Alabama Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Alabama Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Alabama state
personal income taxes consistent with prudent investing while seeking
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Alabama Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- --------------------------------------------------------------------------------
AAA 65.5%
- --------------------------------------------------------------------------------
A 4.8%
- --------------------------------------------------------------------------------
BBB 7.6%
- --------------------------------------------------------------------------------
Below Investment Grade 0.8%
- --------------------------------------------------------------------------------
Not Rated by S&P 21.3%
- --------------------------------------------------------------------------------
* 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 20.0% 0.1%
BBB or Baa 1.2% --
- -----------------------------------------------------
Total 21.2% 0.1%
- --------------------------------------------------------------------------------
This annual report for Franklin Alabama Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $11.76 on February
29, 2004, to $11.61 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 50.28 cents per share for the same period.(2) The
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
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 90.
10 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Alabama Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.17 cents 3.71 cents
- --------------------------------------------------------------------------------
April 4.17 cents 3.71 cents
- --------------------------------------------------------------------------------
May 4.17 cents 3.71 cents
- --------------------------------------------------------------------------------
June 4.17 cents 3.67 cents
- --------------------------------------------------------------------------------
July 4.17 cents 3.67 cents
- --------------------------------------------------------------------------------
August 4.17 cents 3.67 cents
- --------------------------------------------------------------------------------
September 4.21 cents 3.68 cents
- --------------------------------------------------------------------------------
October 4.21 cents 3.68 cents
- --------------------------------------------------------------------------------
November 4.21 cents 3.68 cents
- --------------------------------------------------------------------------------
December 4.21 cents 3.64 cents
- --------------------------------------------------------------------------------
January 4.21 cents 3.64 cents
- --------------------------------------------------------------------------------
February 4.21 cents 3.64 cents
- --------------------------------------------------------------------------------
TOTAL 50.28 CENTS 44.10 CENTS
- --------------------------------------------------------------------------------
Performance Summary beginning on page 13 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.16% based on an
annualization of the current 4.21 cent per share dividend and the maximum
offering price of $12.13 on February 28, 2005. An investor in the 2005 maximum
combined federal and Alabama state personal income tax bracket of 38.25% would
need to earn a distribution rate of 6.74% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class C shares'
performance, please see the Performance Summary.
STATE UPDATE
Alabama's economic recovery, although lagging the rest of the nation's, appeared
to be on track as the state enjoyed substantial employment gains and higher
personal incomes during the year under review. After sustaining severe losses in
the manufacturing sector and three straight years of shrinking payrolls, total
nonfarm payrolls increased 1.7% in 2004 with most of the new job growth
occurring in the services sector.(3) State personal incomes also grew 4.9% in
2004.(4) Although Alabama's economic base has shifted from manufacturing to
services and trade, the manufacturing sector remained vital to Alabama's overall
economic health. The automotive industry emerged as a bright spot within
manufacturing by creating jobs when most other manufacturing industries lost
them.
(3) Source: Bureau of Labor Statistics.
(4) Source: Bureau of Economic Analysis.
Annual Report | 11
PORTFOLIO BREAKDOWN
Franklin Alabama Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 25.3%
- --------------------------------------------------------------------------------
Prerefunded 19.2%
- --------------------------------------------------------------------------------
Hospital & Health Care 15.1%
- --------------------------------------------------------------------------------
Utilities 13.5%
- --------------------------------------------------------------------------------
Higher Education 7.3%
- --------------------------------------------------------------------------------
Tax-Supported 6.0%
- --------------------------------------------------------------------------------
Corporate-Backed 5.9%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 4.6%
- --------------------------------------------------------------------------------
Transportation 2.3%
- --------------------------------------------------------------------------------
Housing 0.8%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
The state's improved financial condition in 2004 benefited mostly from higher
state tax collections and federal medical budget assistance. However, Alabama
faced significant fiscal challenges as expenditures, most notably Medicaid,
outpaced revenue sources. With the prospect of declining federal subsidies,
rising Medicaid costs could substantially add to budget shortfalls.
Alabama's legacy of conservative fiscal policies have allowed the state to
maintain balanced financial operations and a moderate total debt ratio of
roughly $500 per capita.(5) However, the legislature's ability to readily
generate additional revenue streams is limited, which could strain state
financial operations. For instance, while Alabama's recent reduction of one-time
revenues is generally considered fiscally responsible, there is the potential
for near-term budget gaps to arise due to lack of liquidity.
Alabama's Aa3 credit rating and stable outlook, by independent credit rating
agency Moody's Investors Service, was largely the result of the state's history
of strong legal and constitutional provisions designed to keep municipal debt
levels low, and its growing and increasingly diversified economic base.(6)
Moody's has also placed Alabama's debt on its watchlist for a possible upgrade.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Alabama Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(5) Source: Moody's Investors Service, "New Issue: Alabama (State of),"
2/1/05.
(6) This does not indicate Moody's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
12 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN ALABAMA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.15 $11.61 $11.76
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.5028
- --------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.14 $11.70 $11.84
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4410
- --------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.12% +39.03% +74.19%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.25% +5.89% +5.25%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.61% +5.30% +5.10%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.16%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.74%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.99%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.84%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.63% +35.34% +63.31%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.64% +6.24% +5.11%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.29% +5.65% +5.01%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.74%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.06%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.57%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.16%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 13
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.25%
- -------------------------------------
5-Year +5.89%
- -------------------------------------
10-Year +5.25%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
Alabama Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,577 $10,000 $10,000
3/31/1995 $ 9,670 $10,115 $10,033
4/30/1995 $ 9,712 $10,127 $10,066
5/31/1995 $ 9,940 $10,450 $10,086
6/30/1995 $ 9,893 $10,359 $10,106
7/31/1995 $ 9,949 $10,457 $10,106
8/31/1995 $10,039 $10,589 $10,133
9/30/1995 $10,101 $10,656 $10,152
10/31/1995 $10,228 $10,811 $10,186
11/30/1995 $10,392 $10,991 $10,179
12/31/1995 $10,491 $11,096 $10,172
1/31/1996 $10,541 $11,180 $10,232
2/29/1996 $10,510 $11,105 $10,265
3/31/1996 $10,404 $10,963 $10,318
4/30/1996 $10,400 $10,932 $10,358
5/31/1996 $10,417 $10,928 $10,378
6/30/1996 $10,527 $11,047 $10,384
7/31/1996 $10,606 $11,147 $10,404
8/31/1996 $10,619 $11,144 $10,424
9/30/1996 $10,753 $11,300 $10,457
10/31/1996 $10,872 $11,428 $10,490
11/30/1996 $11,033 $11,637 $10,510
12/31/1996 $11,011 $11,588 $10,510
1/31/1997 $11,037 $11,610 $10,543
2/28/1997 $11,126 $11,716 $10,577
3/31/1997 $11,028 $11,560 $10,603
4/30/1997 $11,115 $11,657 $10,616
5/31/1997 $11,238 $11,832 $10,610
6/30/1997 $11,357 $11,958 $10,623
7/31/1997 $11,631 $12,289 $10,636
8/31/1997 $11,546 $12,174 $10,656
9/30/1997 $11,688 $12,319 $10,683
10/31/1997 $11,767 $12,398 $10,709
11/30/1997 $11,847 $12,471 $10,702
12/31/1997 $12,008 $12,653 $10,689
1/31/1998 $12,101 $12,783 $10,709
2/28/1998 $12,104 $12,787 $10,729
3/31/1998 $12,130 $12,799 $10,749
4/30/1998 $12,110 $12,741 $10,769
5/31/1998 $12,071 $12,942 $10,789
6/30/1998 $12,057 $12,994 $10,802
7/31/1998 $12,096 $13,026 $10,815
8/31/1998 $12,245 $13,227 $10,828
9/30/1998 $12,358 $13,392 $10,842
10/31/1998 $12,353 $13,392 $10,868
11/30/1998 $12,397 $13,439 $10,868
12/31/1998 $12,418 $13,473 $10,861
1/31/1999 $12,525 $13,633 $10,888
2/28/1999 $12,493 $13,573 $10,901
3/31/1999 $12,543 $13,592 $10,934
4/30/1999 $12,563 $13,626 $11,014
5/31/1999 $12,516 $13,547 $11,014
6/30/1999 $12,365 $13,352 $11,014
7/31/1999 $12,383 $13,401 $11,047
8/31/1999 $12,212 $13,293 $11,074
9/30/1999 $12,210 $13,299 $11,127
10/31/1999 $12,043 $13,155 $11,146
11/30/1999 $12,103 $13,295 $11,153
12/31/1999 $11,970 $13,196 $11,153
1/31/2000 $11,857 $13,138 $11,186
2/29/2000 $12,002 $13,291 $11,252
3/31/2000 $12,284 $13,581 $11,345
4/30/2000 $12,215 $13,501 $11,352
5/31/2000 $12,164 $13,431 $11,365
6/30/2000 $12,451 $13,787 $11,425
7/31/2000 $12,593 $13,979 $11,451
8/31/2000 $12,779 $14,194 $11,451
9/30/2000 $12,683 $14,120 $11,511
10/31/2000 $12,810 $14,274 $11,531
11/30/2000 $12,911 $14,382 $11,537
12/31/2000 $13,141 $14,738 $11,531
1/31/2001 $13,164 $14,884 $11,604
2/28/2001 $13,218 $14,931 $11,650
3/31/2001 $13,301 $15,065 $11,677
4/30/2001 $13,168 $14,901 $11,723
5/31/2001 $13,297 $15,062 $11,776
6/30/2001 $13,425 $15,163 $11,796
7/31/2001 $13,633 $15,387 $11,763
8/31/2001 $13,874 $15,641 $11,763
9/30/2001 $13,817 $15,588 $11,816
10/31/2001 $13,991 $15,774 $11,776
11/30/2001 $13,910 $15,641 $11,756
12/31/2001 $13,767 $15,493 $11,710
1/31/2002 $13,921 $15,762 $11,736
2/28/2002 $14,075 $15,952 $11,783
3/31/2002 $13,856 $15,639 $11,849
4/30/2002 $14,032 $15,945 $11,915
5/31/2002 $14,141 $16,041 $11,915
6/30/2002 $14,259 $16,211 $11,922
7/31/2002 $14,438 $16,420 $11,935
8/31/2002 $14,571 $16,617 $11,975
9/30/2002 $14,900 $16,981 $11,995
10/31/2002 $14,716 $16,699 $12,015
11/30/2002 $14,682 $16,630 $12,015
12/31/2002 $14,964 $16,981 $11,988
1/31/2003 $14,968 $16,938 $12,041
2/28/2003 $15,142 $17,175 $12,134
3/31/2003 $15,190 $17,185 $12,207
4/30/2003 $15,327 $17,299 $12,180
5/31/2003 $15,652 $17,704 $12,160
6/30/2003 $15,616 $17,628 $12,174
7/31/2003 $15,046 $17,011 $12,187
8/31/2003 $15,208 $17,138 $12,233
9/30/2003 $15,645 $17,642 $12,273
10/31/2003 $15,546 $17,553 $12,260
11/30/2003 $15,707 $17,736 $12,227
12/31/2003 $15,848 $17,883 $12,213
1/31/2004 $15,960 $17,986 $12,273
2/29/2004 $16,190 $18,256 $12,339
3/31/2004 $16,169 $18,193 $12,419
4/30/2004 $15,771 $17,762 $12,459
5/31/2004 $15,727 $17,697 $12,531
6/30/2004 $15,803 $17,762 $12,571
7/31/2004 $16,002 $17,996 $12,551
8/31/2004 $16,272 $18,356 $12,558
9/30/2004 $16,373 $18,454 $12,584
10/31/2004 $16,514 $18,612 $12,651
11/30/2004 $16,375 $18,459 $12,657
12/31/2004 $16,580 $18,684 $12,611
1/31/2005 $16,751 $18,859 $12,638
2/28/2005 $16,681 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.64%
- -------------------------------------
5-Year +6.24%
- -------------------------------------
Since Inception (5/1/95) +5.11%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
Alabama Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,237 $10,319 $10,020
6/30/1995 $10,192 $10,229 $10,039
7/31/1995 $10,253 $10,326 $10,039
8/31/1995 $10,330 $10,457 $10,066
9/30/1995 $10,398 $10,523 $10,086
10/31/1995 $10,524 $10,676 $10,118
11/30/1995 $10,687 $10,853 $10,112
12/31/1995 $10,793 $10,957 $10,105
1/31/1996 $10,839 $11,040 $10,165
2/29/1996 $10,801 $10,966 $10,197
3/31/1996 $10,689 $10,825 $10,250
4/30/1996 $10,679 $10,795 $10,290
5/31/1996 $10,691 $10,791 $10,309
6/30/1996 $10,799 $10,908 $10,316
7/31/1996 $10,875 $11,007 $10,336
8/31/1996 $10,882 $11,004 $10,355
9/30/1996 $11,013 $11,158 $10,388
10/31/1996 $11,129 $11,285 $10,421
11/30/1996 $11,287 $11,491 $10,441
12/31/1996 $11,258 $11,443 $10,441
1/31/1997 $11,279 $11,464 $10,474
2/28/1997 $11,373 $11,569 $10,507
3/31/1997 $11,268 $11,415 $10,533
4/30/1997 $11,351 $11,511 $10,546
5/31/1997 $11,470 $11,684 $10,540
6/30/1997 $11,586 $11,808 $10,553
7/31/1997 $11,859 $12,136 $10,566
8/31/1997 $11,768 $12,022 $10,586
9/30/1997 $11,907 $12,164 $10,612
10/31/1997 $11,980 $12,243 $10,639
11/30/1997 $12,055 $12,315 $10,632
12/31/1997 $12,223 $12,494 $10,619
1/31/1998 $12,302 $12,623 $10,639
2/28/1998 $12,310 $12,627 $10,658
3/31/1998 $12,321 $12,638 $10,678
4/30/1998 $12,305 $12,581 $10,698
5/31/1998 $12,249 $12,780 $10,718
6/30/1998 $12,239 $12,831 $10,731
7/31/1998 $12,272 $12,863 $10,744
8/31/1998 $12,416 $13,062 $10,757
9/30/1998 $12,524 $13,224 $10,770
10/31/1998 $12,513 $13,224 $10,797
11/30/1998 $12,552 $13,270 $10,797
12/31/1998 $12,567 $13,304 $10,790
1/31/1999 $12,668 $13,462 $10,816
2/28/1999 $12,630 $13,403 $10,829
3/31/1999 $12,673 $13,422 $10,862
4/30/1999 $12,699 $13,455 $10,941
5/31/1999 $12,635 $13,377 $10,941
6/30/1999 $12,487 $13,185 $10,941
7/31/1999 $12,490 $13,233 $10,974
8/31/1999 $12,311 $13,127 $11,001
9/30/1999 $12,315 $13,132 $11,053
10/31/1999 $12,119 $12,990 $11,073
11/30/1999 $12,185 $13,128 $11,080
12/31/1999 $12,046 $13,030 $11,080
1/31/2000 $11,928 $12,974 $11,113
2/29/2000 $12,067 $13,124 $11,178
3/31/2000 $12,344 $13,411 $11,271
4/30/2000 $12,270 $13,332 $11,277
5/31/2000 $12,213 $13,263 $11,290
6/30/2000 $12,494 $13,614 $11,350
7/31/2000 $12,640 $13,803 $11,376
8/31/2000 $12,810 $14,016 $11,376
9/30/2000 $12,708 $13,943 $11,435
10/31/2000 $12,829 $14,095 $11,455
11/30/2000 $12,924 $14,202 $11,461
12/31/2000 $13,159 $14,553 $11,455
1/31/2001 $13,163 $14,697 $11,527
2/28/2001 $13,211 $14,744 $11,573
3/31/2001 $13,287 $14,876 $11,600
4/30/2001 $13,148 $14,715 $11,646
5/31/2001 $13,282 $14,873 $11,698
6/30/2001 $13,391 $14,973 $11,718
7/31/2001 $13,602 $15,194 $11,685
8/31/2001 $13,835 $15,445 $11,685
9/30/2001 $13,773 $15,393 $11,738
10/31/2001 $13,939 $15,576 $11,698
11/30/2001 $13,853 $15,445 $11,679
12/31/2001 $13,692 $15,299 $11,633
1/31/2002 $13,851 $15,564 $11,659
2/28/2002 $13,998 $15,752 $11,705
3/31/2002 $13,774 $15,443 $11,771
4/30/2002 $13,940 $15,745 $11,837
5/31/2002 $14,041 $15,841 $11,837
6/30/2002 $14,150 $16,008 $11,843
7/31/2002 $14,333 $16,214 $11,856
8/31/2002 $14,445 $16,409 $11,896
9/30/2002 $14,774 $16,768 $11,916
10/31/2002 $14,572 $16,490 $11,935
11/30/2002 $14,531 $16,422 $11,935
12/31/2002 $14,814 $16,768 $11,909
1/31/2003 $14,799 $16,726 $11,962
2/28/2003 $14,977 $16,960 $12,054
3/31/2003 $15,005 $16,970 $12,126
4/30/2003 $15,133 $17,082 $12,100
5/31/2003 $15,457 $17,482 $12,080
6/30/2003 $15,414 $17,407 $12,093
7/31/2003 $14,846 $16,798 $12,107
8/31/2003 $14,998 $16,924 $12,153
9/30/2003 $15,431 $17,421 $12,192
10/31/2003 $15,312 $17,333 $12,179
11/30/2003 $15,462 $17,514 $12,146
12/31/2003 $15,592 $17,659 $12,133
1/31/2004 $15,694 $17,760 $12,192
2/29/2004 $15,912 $18,028 $12,258
3/31/2004 $15,885 $17,965 $12,337
4/30/2004 $15,491 $17,539 $12,377
5/31/2004 $15,443 $17,476 $12,449
6/30/2004 $15,509 $17,539 $12,488
7/31/2004 $15,695 $17,770 $12,469
8/31/2004 $15,965 $18,126 $12,475
9/30/2004 $16,056 $18,222 $12,502
10/31/2004 $16,172 $18,379 $12,567
11/30/2004 $16,044 $18,228 $12,574
12/31/2004 $16,235 $18,450 $12,528
1/31/2005 $16,393 $18,623 $12,554
2/28/2005 $16,331 $18,561 $12,627
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C)
per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Alabama state personal
income tax bracket of 38.25%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
Annual Report | 15
Your Fund's Expenses
FRANKLIN ALABAMA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
16 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.90 $3.62
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.22 $3.61
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,022.80 $6.37
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.36
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.72% and C: 1.27%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 17
Franklin Florida Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Florida Tax-Free Income Fund
seeks to provide high, current income exempt from federal income tax consistent
with prudent investing while seeking preservation of capital by investing at
least 80% of its total assets in securities that pay interest free from such
tax.(1) In addition, the Fund's shares are free from Florida's annual
intangibles tax.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Florida Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA .......................... 58.2%
AA ........................... 6.2%
A ............................ 15.4%
BBB .......................... 3.5%
Not Rated by S&P ............. 16.7%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
and Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa 6.8% 0.3% 0.9%
AA or Aa 0.8% -- --
A 1.5% 0.5% --
BBB or Baa 1.5% 2.6% 1.8%
- --------------------------------------------------
Total 10.6% 3.4% 2.7%
- --------------------------------------------------------------------------------
This annual report for Franklin Florida Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.17 on
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 96.
18 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Florida Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
----------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 4.60 cents 4.05 cents 4.14 cents
- --------------------------------------------------------------------------------
April 4.60 cents 4.05 cents 4.14 cents
- --------------------------------------------------------------------------------
May 4.60 cents 4.05 cents 4.14 cents
- --------------------------------------------------------------------------------
June 4.60 cents 3.97 cents 3.94 cents
- --------------------------------------------------------------------------------
July 4.60 cents 3.97 cents 3.94 cents
- --------------------------------------------------------------------------------
August 4.60 cents 3.97 cents 3.94 cents
- --------------------------------------------------------------------------------
September 4.60 cents 4.04 cents 4.00 cents
- --------------------------------------------------------------------------------
October 4.60 cents 4.04 cents 4.00 cents
- --------------------------------------------------------------------------------
November 4.60 cents 4.04 cents 4.00 cents
- --------------------------------------------------------------------------------
December 4.60 cents 4.04 cents 4.04 cents
- --------------------------------------------------------------------------------
January 4.60 cents 4.04 cents 4.04 cents
- --------------------------------------------------------------------------------
February 4.60 cents 4.04 cents 4.04 cents
- --------------------------------------------------------------------------------
TOTAL 55.20 CENTS 48.30 CENTS 48.36 CENTS
- --------------------------------------------------------------------------------
February 29, 2004, to $12.00 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 55.20 cents per share for the same period.(2) The
Performance Summary beginning on page 21 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.41% based on an
annualization of the current 4.60 cent per share dividend and the maximum
offering price of $12.53 on February 28, 2005. An investor in the 2005 maximum
combined federal income tax bracket of 35.00% would need to earn a distribution
rate of 6.78% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class B and C shares' performance, please see
the Performance Summary.
STATE UPDATE
Florida's service-based economy proved resilient in the face of adversity as it
quickly recovered from the 2004 storm season and continued to outpace the
national recovery. Business services employment was notably strong as was hiring
in the scientific and technical services-producing industries. Despite the
negative impact from four hurricanes that made landfall in or near the state,
tourism increased in 2004. Unemployment remained below the national average, and
personal incomes, while still trailing the nation's, also made steady gains
during the period under review.
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 19
PORTFOLIO BREAKDOWN
Franklin Florida Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Hospital & Health Care 19.9%
- --------------------------------------------------------------------------------
Utilities 15.3%
- --------------------------------------------------------------------------------
Prerefunded 13.0%
- --------------------------------------------------------------------------------
Transportation 12.6%
- --------------------------------------------------------------------------------
Tax-Supported 9.1%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 8.4%
- --------------------------------------------------------------------------------
Other Revenue 7.8%
- --------------------------------------------------------------------------------
General Obligation 7.2%
- --------------------------------------------------------------------------------
Housing 4.5%
- --------------------------------------------------------------------------------
Higher Education 2.2%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Population growth, especially among senior citizens, continued to be a primary
factor affecting Florida's financial condition, state employment trends and
government services. However, any increased effect the state's demographics
placed on education, corrections, transportation, health and human services in
2004 was temporarily absorbed by Florida's abundant coffers. The state was one
of few to maintain significant reserves throughout the recent recession.
Florida's financial condition strengthened significantly in 2004 as revenue
collections well exceeded estimates, even after a series of upward revisions.
The state's annual Debt Affordability Report, a critical component of the
state's financial operations, showed improvement in the ratio of debt service
against revenue. Because of its rapid growth rates, Florida must continually
evaluate alternative funding sources to pay for voter-authorized constitutional
amendments. As it is, Florida's tax-supported debt burden is considered above
average and continues to grow. However, unlike many states, Florida historically
has issued debt to fund local school construction thereby alleviating some of
the tax burden from local governments or school districts.
Due to Florida's strong and growing financial reserves, stable revenue
performance and solid economic long-term growth prospects, Standard & Poor's, an
independent credit rating agency, recently upgraded Florida's general obligation
debt rating to AAA from AA+ with a stable outlook.(3)
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Florida Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
3. This does not indicate Standard & Poor's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
20 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN FLORIDA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.17 $12.00 $12.17
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.5520
- ---------------------------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.17 $12.08 $12.25
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.4830
- ---------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.16 $12.14 $12.30
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.4836
- ---------------------------------------------------------------------------------------------------
Annual Report | 21
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- --------------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.28% +40.89% +79.03%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.11% +6.18% +5.54%
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.22% +5.64% +5.41%
- --------------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.41%
- --------------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.78%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.37%
- --------------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.18%
- --------------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.66% +37.65% +39.13%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.28% +6.29% +6.57%
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.37% +5.73% +6.38%
- --------------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.01%
- --------------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.17%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.97%
- --------------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.57%
- --------------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.74% +37.20% +68.68%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.75% +6.53% +5.46%
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.65% +5.98% +5.37%
- --------------------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.98%
- --------------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.12%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.98%
- --------------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.58%
- --------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
22 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.11%
- -------------------------------------
5-Year +6.18%
- -------------------------------------
10-Year +5.54%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
Florida Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,578 $10,000 $10,000
3/31/1995 $ 9,657 $10,115 $10,033
4/30/1995 $ 9,693 $10,127 $10,066
5/31/1995 $ 9,923 $10,450 $10,086
6/30/1995 $ 9,905 $10,359 $10,106
7/31/1995 $ 9,964 $10,457 $10,106
8/31/1995 $10,046 $10,589 $10,133
9/30/1995 $10,102 $10,656 $10,152
10/31/1995 $10,224 $10,811 $10,186
11/30/1995 $10,363 $10,991 $10,179
12/31/1995 $10,455 $11,096 $10,172
1/31/1996 $10,507 $11,180 $10,232
2/29/1996 $10,468 $11,105 $10,265
3/31/1996 $10,384 $10,963 $10,318
4/30/1996 $10,363 $10,932 $10,358
5/31/1996 $10,372 $10,928 $10,378
6/30/1996 $10,494 $11,047 $10,384
7/31/1996 $10,556 $11,147 $10,404
8/31/1996 $10,552 $11,144 $10,424
9/30/1996 $10,697 $11,300 $10,457
10/31/1996 $10,790 $11,428 $10,490
11/30/1996 $10,943 $11,637 $10,510
12/31/1996 $10,914 $11,588 $10,510
1/31/1997 $10,922 $11,610 $10,543
2/28/1997 $11,013 $11,716 $10,577
3/31/1997 $10,888 $11,560 $10,603
4/30/1997 $10,986 $11,657 $10,616
5/31/1997 $11,112 $11,832 $10,610
6/30/1997 $11,225 $11,958 $10,623
7/31/1997 $11,491 $12,289 $10,636
8/31/1997 $11,407 $12,174 $10,656
9/30/1997 $11,489 $12,319 $10,683
10/31/1997 $11,566 $12,398 $10,709
11/30/1997 $11,636 $12,471 $10,702
12/31/1997 $11,799 $12,653 $10,689
1/31/1998 $11,923 $12,783 $10,709
2/28/1998 $11,936 $12,787 $10,729
3/31/1998 $11,961 $12,799 $10,749
4/30/1998 $11,939 $12,741 $10,769
5/31/1998 $12,081 $12,942 $10,789
6/30/1998 $12,122 $12,994 $10,802
7/31/1998 $12,171 $13,026 $10,815
8/31/1998 $12,328 $13,227 $10,828
9/30/1998 $12,440 $13,392 $10,842
10/31/1998 $12,456 $13,392 $10,868
11/30/1998 $12,511 $13,439 $10,868
12/31/1998 $12,550 $13,473 $10,861
1/31/1999 $12,645 $13,633 $10,888
2/28/1999 $12,624 $13,573 $10,901
3/31/1999 $12,641 $13,592 $10,934
4/30/1999 $12,672 $13,626 $11,014
5/31/1999 $12,604 $13,547 $11,014
6/30/1999 $12,448 $13,352 $11,014
7/31/1999 $12,456 $13,401 $11,047
8/31/1999 $12,351 $13,293 $11,074
9/30/1999 $12,305 $13,299 $11,127
10/31/1999 $12,128 $13,155 $11,146
11/30/1999 $12,232 $13,295 $11,153
12/31/1999 $12,135 $13,196 $11,153
1/31/2000 $12,056 $13,138 $11,186
2/29/2000 $12,176 $13,291 $11,252
3/31/2000 $12,443 $13,581 $11,345
4/30/2000 $12,374 $13,501 $11,352
5/31/2000 $12,301 $13,431 $11,365
6/30/2000 $12,607 $13,787 $11,425
7/31/2000 $12,791 $13,979 $11,451
8/31/2000 $12,963 $14,194 $11,451
9/30/2000 $12,902 $14,120 $11,511
10/31/2000 $13,033 $14,274 $11,531
11/30/2000 $13,136 $14,382 $11,537
12/31/2000 $13,459 $14,738 $11,531
1/31/2001 $13,542 $14,884 $11,604
2/28/2001 $13,610 $14,931 $11,650
3/31/2001 $13,731 $15,065 $11,677
4/30/2001 $13,603 $14,901 $11,723
5/31/2001 $13,735 $15,062 $11,776
6/30/2001 $13,829 $15,163 $11,796
7/31/2001 $14,062 $15,387 $11,763
8/31/2001 $14,292 $15,641 $11,763
9/30/2001 $14,250 $15,588 $11,816
10/31/2001 $14,438 $15,774 $11,776
11/30/2001 $14,313 $15,641 $11,756
12/31/2001 $14,177 $15,493 $11,710
1/31/2002 $14,395 $15,762 $11,736
2/28/2002 $14,540 $15,952 $11,783
3/31/2002 $14,289 $15,639 $11,849
4/30/2002 $14,516 $15,945 $11,915
5/31/2002 $14,602 $16,041 $11,915
6/30/2002 $14,733 $16,211 $11,922
7/31/2002 $14,914 $16,420 $11,935
8/31/2002 $15,099 $16,617 $11,975
9/30/2002 $15,466 $16,981 $11,995
10/31/2002 $15,158 $16,699 $12,015
11/30/2002 $15,089 $16,630 $12,015
12/31/2002 $15,409 $16,981 $11,988
1/31/2003 $15,404 $16,938 $12,041
2/28/2003 $15,604 $17,175 $12,134
3/31/2003 $15,643 $17,185 $12,207
4/30/2003 $15,768 $17,299 $12,180
5/31/2003 $16,145 $17,704 $12,160
6/30/2003 $16,100 $17,628 $12,174
7/31/2003 $15,499 $17,011 $12,187
8/31/2003 $15,597 $17,138 $12,233
9/30/2003 $16,007 $17,642 $12,273
10/31/2003 $15,927 $17,553 $12,260
11/30/2003 $16,117 $17,736 $12,227
12/31/2003 $16,251 $17,883 $12,213
1/31/2004 $16,382 $17,986 $12,273
2/29/2004 $16,616 $18,256 $12,339
3/31/2004 $16,575 $18,193 $12,419
4/30/2004 $16,174 $17,762 $12,459
5/31/2004 $16,095 $17,697 $12,531
6/30/2004 $16,135 $17,762 $12,571
7/31/2004 $16,366 $17,996 $12,551
8/31/2004 $16,668 $18,356 $12,558
9/30/2004 $16,787 $18,454 $12,584
10/31/2004 $16,931 $18,612 $12,651
11/30/2004 $16,814 $18,459 $12,657
12/31/2004 $17,023 $18,684 $12,611
1/31/2005 $17,212 $18,859 $12,638
2/28/2005 $17,148 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 2/28/05
- -------------------------------------
1-Year -1.28%
- -------------------------------------
5-Year +6.29%
- -------------------------------------
Since Inception (2/1/00) +6.57%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS B (2/1/00-2/28/05)
Franklin Lehman
Florida Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,107 $10,116 $10,059
3/31/2000 $10,333 $10,337 $10,142
4/30/2000 $10,272 $10,276 $10,148
5/31/2000 $10,207 $10,223 $10,160
6/30/2000 $10,464 $10,494 $10,213
7/31/2000 $10,611 $10,640 $10,237
8/31/2000 $10,749 $10,804 $10,237
9/30/2000 $10,695 $10,747 $10,290
10/31/2000 $10,797 $10,865 $10,308
11/30/2000 $10,887 $10,947 $10,314
12/31/2000 $11,139 $11,217 $10,308
1/31/2001 $11,213 $11,328 $10,373
2/28/2001 $11,265 $11,364 $10,415
3/31/2001 $11,359 $11,466 $10,438
4/30/2001 $11,257 $11,342 $10,480
5/31/2001 $11,350 $11,464 $10,527
6/30/2001 $11,422 $11,541 $10,545
7/31/2001 $11,618 $11,712 $10,515
8/31/2001 $11,802 $11,905 $10,515
9/30/2001 $11,763 $11,865 $10,563
10/31/2001 $11,902 $12,006 $10,527
11/30/2001 $11,814 $11,905 $10,509
12/31/2001 $11,697 $11,792 $10,468
1/31/2002 $11,871 $11,997 $10,492
2/28/2002 $11,985 $12,141 $10,533
3/31/2002 $11,763 $11,903 $10,592
4/30/2002 $11,943 $12,136 $10,652
5/31/2002 $12,018 $12,210 $10,652
6/30/2002 $12,122 $12,339 $10,658
7/31/2002 $12,264 $12,498 $10,669
8/31/2002 $12,410 $12,648 $10,705
9/30/2002 $12,715 $12,925 $10,723
10/31/2002 $12,447 $12,711 $10,741
11/30/2002 $12,384 $12,658 $10,741
12/31/2002 $12,651 $12,925 $10,717
1/31/2003 $12,630 $12,892 $10,764
2/28/2003 $12,800 $13,072 $10,847
3/31/2003 $12,825 $13,080 $10,912
4/30/2003 $12,921 $13,167 $10,889
5/31/2003 $13,222 $13,475 $10,871
6/30/2003 $13,180 $13,418 $10,883
7/31/2003 $12,674 $12,948 $10,895
8/31/2003 $12,759 $13,045 $10,936
9/30/2003 $13,086 $13,428 $10,972
10/31/2003 $13,014 $13,361 $10,960
11/30/2003 $13,163 $13,500 $10,930
12/31/2003 $13,266 $13,612 $10,918
1/31/2004 $13,367 $13,690 $10,972
2/29/2004 $13,562 $13,896 $11,031
3/31/2004 $13,521 $13,847 $11,102
4/30/2004 $13,178 $13,519 $11,137
5/31/2004 $13,108 $13,470 $11,203
6/30/2004 $13,133 $13,519 $11,238
7/31/2004 $13,313 $13,697 $11,220
8/31/2004 $13,562 $13,972 $11,226
9/30/2004 $13,651 $14,046 $11,250
10/31/2004 $13,762 $14,167 $11,309
11/30/2004 $13,649 $14,050 $11,315
12/31/2004 $13,833 $14,221 $11,274
1/31/2005 $13,967 $14,354 $11,297
2/28/2005 $13,813 $14,307 $11,363
Annual Report | 23
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.75%
- -------------------------------------
5-Year +6.53%
- -------------------------------------
Since Inception (5/1/95) +5.46%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
Florida Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,275 $10,319 $10,020
6/30/1995 $10,260 $10,229 $10,039
7/31/1995 $10,306 $10,326 $10,039
8/31/1995 $10,394 $10,457 $10,066
9/30/1995 $10,456 $10,523 $10,086
10/31/1995 $10,565 $10,676 $10,118
11/30/1995 $10,712 $10,853 $10,112
12/31/1995 $10,801 $10,957 $10,105
1/31/1996 $10,850 $11,040 $10,165
2/29/1996 $10,805 $10,966 $10,197
3/31/1996 $10,704 $10,825 $10,250
4/30/1996 $10,677 $10,795 $10,290
5/31/1996 $10,681 $10,791 $10,309
6/30/1996 $10,810 $10,908 $10,316
7/31/1996 $10,858 $11,007 $10,336
8/31/1996 $10,848 $11,004 $10,355
9/30/1996 $11,000 $11,158 $10,388
10/31/1996 $11,099 $11,285 $10,421
11/30/1996 $11,250 $11,491 $10,441
12/31/1996 $11,214 $11,443 $10,441
1/31/1997 $11,219 $11,464 $10,474
2/28/1997 $11,308 $11,569 $10,507
3/31/1997 $11,176 $11,415 $10,533
4/30/1997 $11,272 $11,511 $10,546
5/31/1997 $11,395 $11,684 $10,540
6/30/1997 $11,506 $11,808 $10,553
7/31/1997 $11,781 $12,136 $10,566
8/31/1997 $11,680 $12,022 $10,586
9/30/1997 $11,768 $12,164 $10,612
10/31/1997 $11,840 $12,243 $10,639
11/30/1997 $11,905 $12,315 $10,632
12/31/1997 $12,065 $12,494 $10,619
1/31/1998 $12,184 $12,623 $10,639
2/28/1998 $12,191 $12,627 $10,658
3/31/1998 $12,211 $12,638 $10,678
4/30/1998 $12,184 $12,581 $10,698
5/31/1998 $12,323 $12,780 $10,718
6/30/1998 $12,368 $12,831 $10,731
7/31/1998 $12,401 $12,863 $10,744
8/31/1998 $12,564 $13,062 $10,757
9/30/1998 $12,661 $13,224 $10,770
10/31/1998 $12,671 $13,224 $10,797
11/30/1998 $12,731 $13,270 $10,797
12/31/1998 $12,754 $13,304 $10,790
1/31/1999 $12,854 $13,462 $10,816
2/28/1999 $12,826 $13,403 $10,829
3/31/1999 $12,838 $13,422 $10,862
4/30/1999 $12,863 $13,455 $10,941
5/31/1999 $12,790 $13,377 $10,941
6/30/1999 $12,626 $13,185 $10,941
7/31/1999 $12,629 $13,233 $10,974
8/31/1999 $12,506 $13,127 $11,001
9/30/1999 $12,455 $13,132 $11,053
10/31/1999 $12,272 $12,990 $11,073
11/30/1999 $12,381 $13,128 $11,080
12/31/1999 $12,277 $13,030 $11,080
1/31/2000 $12,181 $12,974 $11,113
2/29/2000 $12,297 $13,124 $11,178
3/31/2000 $12,570 $13,411 $11,271
4/30/2000 $12,485 $13,332 $11,277
5/31/2000 $12,405 $13,263 $11,290
6/30/2000 $12,716 $13,614 $11,350
7/31/2000 $12,894 $13,803 $11,376
8/31/2000 $13,060 $14,016 $11,376
9/30/2000 $12,994 $13,943 $11,435
10/31/2000 $13,117 $14,095 $11,455
11/30/2000 $13,226 $14,202 $11,461
12/31/2000 $13,532 $14,553 $11,455
1/31/2001 $13,621 $14,697 $11,527
2/28/2001 $13,682 $14,744 $11,573
3/31/2001 $13,796 $14,876 $11,600
4/30/2001 $13,662 $14,715 $11,646
5/31/2001 $13,774 $14,873 $11,698
6/30/2001 $13,872 $14,973 $11,718
7/31/2001 $14,097 $15,194 $11,685
8/31/2001 $14,318 $15,445 $11,685
9/30/2001 $14,271 $15,393 $11,738
10/31/2001 $14,450 $15,576 $11,698
11/30/2001 $14,332 $15,445 $11,679
12/31/2001 $14,179 $15,299 $11,633
1/31/2002 $14,401 $15,564 $11,659
2/28/2002 $14,539 $15,752 $11,705
3/31/2002 $14,272 $15,443 $11,771
4/30/2002 $14,490 $15,745 $11,837
5/31/2002 $14,569 $15,841 $11,837
6/30/2002 $14,692 $16,008 $11,843
7/31/2002 $14,876 $16,214 $11,856
8/31/2002 $15,052 $16,409 $11,896
9/30/2002 $15,419 $16,768 $11,916
10/31/2002 $15,095 $16,490 $11,935
11/30/2002 $15,020 $16,422 $11,935
12/31/2002 $15,341 $16,768 $11,909
1/31/2003 $15,316 $16,726 $11,962
2/28/2003 $15,508 $16,960 $12,054
3/31/2003 $15,539 $16,970 $12,126
4/30/2003 $15,668 $17,082 $12,100
5/31/2003 $16,019 $17,482 $12,080
6/30/2003 $15,979 $17,407 $12,093
7/31/2003 $15,367 $16,798 $12,107
8/31/2003 $15,454 $16,924 $12,153
9/30/2003 $15,861 $17,421 $12,192
10/31/2003 $15,774 $17,333 $12,179
11/30/2003 $15,953 $17,514 $12,146
12/31/2003 $16,078 $17,659 $12,133
1/31/2004 $16,200 $17,760 $12,192
2/29/2004 $16,424 $18,028 $12,258
3/31/2004 $16,376 $17,965 $12,337
4/30/2004 $15,976 $17,539 $12,377
5/31/2004 $15,893 $17,476 $12,449
6/30/2004 $15,924 $17,539 $12,488
7/31/2004 $16,140 $17,770 $12,469
8/31/2004 $16,427 $18,126 $12,475
9/30/2004 $16,536 $18,222 $12,502
10/31/2004 $16,683 $18,379 $12,567
11/30/2004 $16,546 $18,228 $12,574
12/31/2004 $16,755 $18,450 $12,528
1/31/2005 $16,931 $18,623 $12,554
2/28/2005 $16,868 $18,561 $12,627
24 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. 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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B
and C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
(6) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
Annual Report | 25
Your Fund's Expenses
FRANKLIN FLORIDA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
26 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.60 $3.12
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.72 $3.11
- ---------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.60 $5.88
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.20 $5.88
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
- ---------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.62%; B: 1.17%; and C: 1.17%), multiplied by the average account value
over the period, multiplied by 181/365 to reflect the one-half year
period.
Annual Report | 27
Franklin Georgia Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Georgia Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Georgia state
personal income taxes consistent with prudent investing while seeking
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Georgia Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA .......................... 57.3%
AA ........................... 17.1%
A ............................ 2.7%
BBB .......................... 3.9%
Below Investment Grade%....... 1.9%
Not Rated by S&P ............. 17.1%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. 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
AAA or Aaa 13.2%
AA or Aa 1.9%
BBB or Baa 1.0%
Below Investment Grade 1.0%
- -----------------------------------------
Total 17.1%
- --------------------------------------------------------------------------------
This annual report for Franklin Georgia Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting
period. The Fund's
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 106.
28 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Georgia Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
----------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.39 cents 3.85 cents
- --------------------------------------------------------------------------------
April 4.39 cents 3.85 cents
- --------------------------------------------------------------------------------
May 4.39 cents 3.85 cents
- --------------------------------------------------------------------------------
June 4.39 cents 3.84 cents
- --------------------------------------------------------------------------------
July 4.39 cents 3.84 cents
- --------------------------------------------------------------------------------
August 4.39 cents 3.84 cents
- --------------------------------------------------------------------------------
September 4.39 cents 3.84 cents
- --------------------------------------------------------------------------------
October 4.39 cents 3.84 cents
- --------------------------------------------------------------------------------
November 4.39 cents 3.84 cents
- --------------------------------------------------------------------------------
December 4.39 cents 3.82 cents
- --------------------------------------------------------------------------------
January 4.39 cents 3.82 cents
- --------------------------------------------------------------------------------
February 4.39 cents 3.82 cents
- --------------------------------------------------------------------------------
TOTAL 52.68 CENTS 46.05 CENTS
- --------------------------------------------------------------------------------
Class A share price, as measured by net asset value, declined from $12.27 on
February 29, 2004, to $12.17 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 52.68 cents per share for the same period.(2) The
Performance Summary beginning on page 31 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.10% based on an
annualization of the current 4.34 cent per share dividend and the maximum
offering price of $12.71 on February 28, 2005. An investor in the 2005 maximum
combined federal and Georgia state personal income tax bracket of 38.90% would
need to earn a distribution rate of 6.71% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's C shares' performance,
please see the Performance Summary.
STATE UPDATE
Georgia's broad-based economy continued to modestly expand during the period
under review, albeit at a slower rate than the national average. State
unemployment remained below national levels with most new job growth occurring
in the trade and services sectors. Georgia's population and in-migration
momentum slowed during the recession, but has since trended toward growth as
increased convention activity triggered a rebound in the hospitality industry.
The opening of the new multimillion-dollar Georgia Aquarium is also expected to
boost tourism later this year.
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 29
PORTFOLIO BREAKDOWN
Franklin Georgia Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Utilities 23.8%
- --------------------------------------------------------------------------------
Higher Education 16.8%
- --------------------------------------------------------------------------------
Hospital & Health Care 16.7%
- --------------------------------------------------------------------------------
Housing 11.2%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 8.0%
- --------------------------------------------------------------------------------
Prerefunded 6.9%
- --------------------------------------------------------------------------------
General Obligation 6.1%
- --------------------------------------------------------------------------------
Other Revenue 3.7%
- --------------------------------------------------------------------------------
Tax-Supported 2.6%
- --------------------------------------------------------------------------------
Transportation 2.5%
- --------------------------------------------------------------------------------
Corporate-Backed 1.7%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Concentration of jobs and economic activity in the Atlanta metropolitan area has
polarized the state's economy between rural manufacturing and metropolitan
service-based areas. In the late 1990s, the state's burgeoning high-tech
industry caused the state's economy to grow at an exaggerated pace, relative to
the nation. But during the last economic downturn, the state's high-tech
industry contracted and added to already steep manufacturing sector job losses.
Significantly, manufacturing stabilized in 2004, as the sector and its affected
regions remained vital to a healthy Georgian economy.
After a difficult year of escalating health and human services costs, and
revenues below estimates, Georgia's financial picture improved in 2004. The
state was aggressive in monitoring revenues and adjusting spending levels to
bring about fiscal balance. Timely spending adjustments, including staff cuts
and agency budget reductions, were put in place early on. Although depleting the
nearly $400 million dollar reserve, Georgia planned to rebuild reserves to the
maximum level (1% of net revenues) partly because of renewed revenue growth. In
addition, a low overall debt burden, attractive business climate and low average
cost of living continued to support the recovering economy.
Independent credit rating agencies Standard & Poor's and Moody's Investors
Service assigned Georgia's general obligation bonds their highest ratings of AAA
and Aaa with a stable outlook.(3) The ratings reflect the state's practice of
fiscal conservatism and strong administrative oversight. Improved financials
positioned the state to meet estimates and replenish reserves.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Georgia Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(3) These do not indicate ratings of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
30 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN GEORGIA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $12.17 $12.27
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------------
Dividend Income $0.5268
- ---------------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $12.27 $12.37
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------------
Dividend Income $0.4605
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ---------------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.65% +39.71% +75.18%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.72% +5.99% +5.31%
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.02% +5.39% +5.16%
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.10%
- ---------------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.71%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.26%
- ---------------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.34%
- ---------------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.05% +35.98% +64.60%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.06% +6.34% +5.20%
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.78% +5.74% +5.09%
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.71%
- ---------------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.07%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.86%
- ---------------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.68%
- ---------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 31
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -0.72%
- -------------------------------------
5-Year +5.99%
- -------------------------------------
10-Year +5.31%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/95)
Franklin Lehman
Georgia Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,577 $10,000 $10,000
3/31/1995 $ 9,669 $10,115 $10,033
4/30/1995 $ 9,695 $10,127 $10,066
5/31/1995 $ 9,919 $10,450 $10,086
6/30/1995 $ 9,882 $10,359 $10,106
7/31/1995 $ 9,930 $10,457 $10,106
8/31/1995 $10,026 $10,589 $10,133
9/30/1995 $10,063 $10,656 $10,152
10/31/1995 $10,191 $10,811 $10,186
11/30/1995 $10,322 $10,991 $10,179
12/31/1995 $10,419 $11,096 $10,172
1/31/1996 $10,460 $11,180 $10,232
2/29/1996 $10,430 $11,105 $10,265
3/31/1996 $10,336 $10,963 $10,318
4/30/1996 $10,340 $10,932 $10,358
5/31/1996 $10,366 $10,928 $10,378
6/30/1996 $10,465 $11,047 $10,384
7/31/1996 $10,525 $11,147 $10,404
8/31/1996 $10,538 $11,144 $10,424
9/30/1996 $10,668 $11,300 $10,457
10/31/1996 $10,761 $11,428 $10,490
11/30/1996 $10,900 $11,637 $10,510
12/31/1996 $10,905 $11,588 $10,510
1/31/1997 $10,926 $11,610 $10,543
2/28/1997 $11,002 $11,716 $10,577
3/31/1997 $10,904 $11,560 $10,603
4/30/1997 $10,988 $11,657 $10,616
5/31/1997 $11,106 $11,832 $10,610
6/30/1997 $11,204 $11,958 $10,623
7/31/1997 $11,441 $12,289 $10,636
8/31/1997 $11,366 $12,174 $10,656
9/30/1997 $11,483 $12,319 $10,683
10/31/1997 $11,547 $12,398 $10,709
11/30/1997 $11,624 $12,471 $10,702
12/31/1997 $11,763 $12,653 $10,689
1/31/1998 $11,855 $12,783 $10,709
2/28/1998 $11,857 $12,787 $10,729
3/31/1998 $11,882 $12,799 $10,749
4/30/1998 $11,871 $12,741 $10,769
5/31/1998 $12,020 $12,942 $10,789
6/30/1998 $12,055 $12,994 $10,802
7/31/1998 $12,081 $13,026 $10,815
8/31/1998 $12,224 $13,227 $10,828
9/30/1998 $12,362 $13,392 $10,842
10/31/1998 $12,336 $13,392 $10,868
11/30/1998 $12,388 $13,439 $10,868
12/31/1998 $12,427 $13,473 $10,861
1/31/1999 $12,519 $13,633 $10,888
2/28/1999 $12,477 $13,573 $10,901
3/31/1999 $12,505 $13,592 $10,934
4/30/1999 $12,545 $13,626 $11,014
5/31/1999 $12,476 $13,547 $11,014
6/30/1999 $12,313 $13,352 $11,014
7/31/1999 $12,320 $13,401 $11,047
8/31/1999 $12,177 $13,293 $11,074
9/30/1999 $12,143 $13,299 $11,127
10/31/1999 $11,968 $13,155 $11,146
11/30/1999 $12,058 $13,295 $11,153
12/31/1999 $11,951 $13,196 $11,153
1/31/2000 $11,842 $13,138 $11,186
2/29/2000 $12,013 $13,291 $11,252
3/31/2000 $12,294 $13,581 $11,345
4/30/2000 $12,237 $13,501 $11,352
5/31/2000 $12,166 $13,431 $11,365
6/30/2000 $12,485 $13,787 $11,425
7/31/2000 $12,629 $13,979 $11,451
8/31/2000 $12,828 $14,194 $11,451
9/30/2000 $12,733 $14,120 $11,511
10/31/2000 $12,892 $14,274 $11,531
11/30/2000 $13,002 $14,382 $11,537
12/31/2000 $13,313 $14,738 $11,531
1/31/2001 $13,394 $14,884 $11,604
2/28/2001 $13,445 $14,931 $11,650
3/31/2001 $13,571 $15,065 $11,677
4/30/2001 $13,434 $14,901 $11,723
5/31/2001 $13,548 $15,062 $11,776
6/30/2001 $13,658 $15,163 $11,796
7/31/2001 $13,860 $15,387 $11,763
8/31/2001 $14,081 $15,641 $11,763
9/30/2001 $13,978 $15,588 $11,816
10/31/2001 $14,182 $15,774 $11,776
11/30/2001 $14,070 $15,641 $11,756
12/31/2001 $13,938 $15,493 $11,710
1/31/2002 $14,113 $15,762 $11,736
2/28/2002 $14,273 $15,952 $11,783
3/31/2002 $14,027 $15,639 $11,849
4/30/2002 $14,211 $15,945 $11,915
5/31/2002 $14,281 $16,041 $11,915
6/30/2002 $14,392 $16,211 $11,922
7/31/2002 $14,565 $16,420 $11,935
8/31/2002 $14,693 $16,617 $11,975
9/30/2002 $15,012 $16,981 $11,995
10/31/2002 $14,701 $16,699 $12,015
11/30/2002 $14,667 $16,630 $12,015
12/31/2002 $14,968 $16,981 $11,988
1/31/2003 $14,939 $16,938 $12,041
2/28/2003 $15,131 $17,175 $12,134
3/31/2003 $15,144 $17,185 $12,207
4/30/2003 $15,305 $17,299 $12,180
5/31/2003 $15,666 $17,704 $12,160
6/30/2003 $15,699 $17,628 $12,174
7/31/2003 $15,052 $17,011 $12,187
8/31/2003 $15,183 $17,138 $12,233
9/30/2003 $15,632 $17,642 $12,273
10/31/2003 $15,512 $17,553 $12,260
11/30/2003 $15,680 $17,736 $12,227
12/31/2003 $15,836 $17,883 $12,213
1/31/2004 $15,958 $17,986 $12,273
2/29/2004 $16,193 $18,256 $12,339
3/31/2004 $16,151 $18,193 $12,419
4/30/2004 $15,744 $17,762 $12,459
5/31/2004 $15,679 $17,697 $12,531
6/30/2004 $15,744 $17,762 $12,571
7/31/2004 $15,948 $17,996 $12,551
8/31/2004 $16,253 $18,356 $12,558
9/30/2004 $16,365 $18,454 $12,584
10/31/2004 $16,529 $18,612 $12,651
11/30/2004 $16,362 $18,459 $12,657
12/31/2004 $16,614 $18,684 $12,611
1/31/2005 $16,850 $18,859 $12,638
2/28/2005 $16,777 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +2.06%
- -------------------------------------
5-Year +6.34%
- -------------------------------------
Since Inception (5/1/95) +5.20%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
Georgia Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,234 $10,319 $10,020
6/30/1995 $10,208 $10,229 $10,039
7/31/1995 $10,260 $10,326 $10,039
8/31/1995 $10,347 $10,457 $10,066
9/30/1995 $10,389 $10,523 $10,086
10/31/1995 $10,505 $10,676 $10,118
11/30/1995 $10,645 $10,853 $10,112
12/31/1995 $10,740 $10,957 $10,105
1/31/1996 $10,776 $11,040 $10,165
2/29/1996 $10,741 $10,966 $10,197
3/31/1996 $10,640 $10,825 $10,250
4/30/1996 $10,640 $10,795 $10,290
5/31/1996 $10,660 $10,791 $10,309
6/30/1996 $10,756 $10,908 $10,316
7/31/1996 $10,818 $11,007 $10,336
8/31/1996 $10,824 $11,004 $10,355
9/30/1996 $10,960 $11,158 $10,388
10/31/1996 $11,050 $11,285 $10,421
11/30/1996 $11,177 $11,491 $10,441
12/31/1996 $11,187 $11,443 $10,441
1/31/1997 $11,194 $11,464 $10,474
2/28/1997 $11,276 $11,569 $10,507
3/31/1997 $11,171 $11,415 $10,533
4/30/1997 $11,241 $11,511 $10,546
5/31/1997 $11,365 $11,684 $10,540
6/30/1997 $11,458 $11,808 $10,553
7/31/1997 $11,694 $12,136 $10,566
8/31/1997 $11,612 $12,022 $10,586
9/30/1997 $11,726 $12,164 $10,612
10/31/1997 $11,785 $12,243 $10,639
11/30/1997 $11,857 $12,315 $10,632
12/31/1997 $12,002 $12,494 $10,619
1/31/1998 $12,079 $12,623 $10,639
2/28/1998 $12,086 $12,627 $10,658
3/31/1998 $12,095 $12,638 $10,678
4/30/1998 $12,078 $12,581 $10,698
5/31/1998 $12,223 $12,780 $10,718
6/30/1998 $12,263 $12,831 $10,731
7/31/1998 $12,284 $12,863 $10,744
8/31/1998 $12,423 $13,062 $10,757
9/30/1998 $12,557 $13,224 $10,770
10/31/1998 $12,524 $13,224 $10,797
11/30/1998 $12,571 $13,270 $10,797
12/31/1998 $12,605 $13,304 $10,790
1/31/1999 $12,703 $13,462 $10,816
2/28/1999 $12,655 $13,403 $10,829
3/31/1999 $12,677 $13,422 $10,862
4/30/1999 $12,703 $13,455 $10,941
5/31/1999 $12,629 $13,377 $10,941
6/30/1999 $12,459 $13,185 $10,941
7/31/1999 $12,461 $13,233 $10,974
8/31/1999 $12,310 $13,127 $11,001
9/30/1999 $12,270 $13,132 $11,053
10/31/1999 $12,088 $12,990 $11,073
11/30/1999 $12,182 $13,128 $11,080
12/31/1999 $12,058 $13,030 $11,080
1/31/2000 $11,944 $12,974 $11,113
2/29/2000 $12,110 $13,124 $11,178
3/31/2000 $12,387 $13,411 $11,271
4/30/2000 $12,325 $13,332 $11,277
5/31/2000 $12,249 $13,263 $11,290
6/30/2000 $12,562 $13,614 $11,350
7/31/2000 $12,712 $13,803 $11,376
8/31/2000 $12,895 $14,016 $11,376
9/30/2000 $12,795 $13,943 $11,435
10/31/2000 $12,949 $14,095 $11,455
11/30/2000 $13,054 $14,202 $11,461
12/31/2000 $13,370 $14,553 $11,455
1/31/2001 $13,443 $14,697 $11,527
2/28/2001 $13,488 $14,744 $11,573
3/31/2001 $13,606 $14,876 $11,600
4/30/2001 $13,451 $14,715 $11,646
5/31/2001 $13,570 $14,873 $11,698
6/30/2001 $13,673 $14,973 $11,718
7/31/2001 $13,867 $15,194 $11,685
8/31/2001 $14,080 $15,445 $11,685
9/30/2001 $13,972 $15,393 $11,738
10/31/2001 $14,168 $15,576 $11,698
11/30/2001 $14,050 $15,445 $11,679
12/31/2001 $13,912 $15,299 $11,633
1/31/2002 $14,081 $15,564 $11,659
2/28/2002 $14,233 $15,752 $11,705
3/31/2002 $13,984 $15,443 $11,771
4/30/2002 $14,171 $15,745 $11,837
5/31/2002 $14,222 $15,841 $11,837
6/30/2002 $14,339 $16,008 $11,843
7/31/2002 $14,504 $16,214 $11,856
8/31/2002 $14,624 $16,409 $11,896
9/30/2002 $14,944 $16,768 $11,916
10/31/2002 $14,618 $16,490 $11,935
11/30/2002 $14,567 $16,422 $11,935
12/31/2002 $14,869 $16,768 $11,909
1/31/2003 $14,835 $16,726 $11,962
2/28/2003 $15,017 $16,960 $12,054
3/31/2003 $15,023 $16,970 $12,126
4/30/2003 $15,175 $17,082 $12,100
5/31/2003 $15,536 $17,482 $12,080
6/30/2003 $15,548 $17,407 $12,093
7/31/2003 $14,905 $16,798 $12,107
8/31/2003 $15,025 $16,924 $12,153
9/30/2003 $15,472 $17,421 $12,192
10/31/2003 $15,332 $17,333 $12,179
11/30/2003 $15,504 $17,514 $12,146
12/31/2003 $15,650 $17,659 $12,133
1/31/2004 $15,750 $17,760 $12,192
2/29/2004 $15,986 $18,028 $12,258
3/31/2004 $15,938 $17,965 $12,337
4/30/2004 $15,534 $17,539 $12,377
5/31/2004 $15,464 $17,476 $12,449
6/30/2004 $15,505 $17,539 $12,488
7/31/2004 $15,712 $17,770 $12,469
8/31/2004 $16,002 $18,126 $12,475
9/30/2004 $16,105 $18,222 $12,502
10/31/2004 $16,258 $18,379 $12,567
11/30/2004 $16,087 $18,228 $12,574
12/31/2004 $16,325 $18,450 $12,528
1/31/2005 $16,560 $18,623 $12,554
2/28/2005 $16,460 $18,561 $12,627
32 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C)
per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Georgia state personal
income tax bracket of 38.90%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
Annual Report | 33
Your Fund's Expenses
FRANKLIN GEORGIA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
34 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.70 $3.78
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.08 $3.76
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.60 $6.54
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.51
- ----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.75% and C: 1.30%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 35
Franklin Kentucky Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Kentucky Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Kentucky state
personal income taxes consistent with prudent investing while seeking
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Kentucky Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA .......................... 32.1%
AA ........................... 11.9%
A ............................ 17.9%
BBB .......................... 5.2%
Below Investment Grade%....... 2.7%
Not Rated by S&P ............. 30.2%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. 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
AAA or Aaa 23.6%
A 5.8%
BBB or Baa 0.8%
- -----------------------------------------
Total 30.2%
- --------------------------------------------------------------------------------
This annual report for Franklin Kentucky Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $11.51 on
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 110.
36 | Annual Report
February 29, 2004, to $11.41 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 48.45 cents per share for the same period.(2) The
Performance Summary beginning on page 39 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 3.98%. An investor in
the 2005 maximum combined federal and Kentucky state personal income tax bracket
of 38.90% would need to earn a distribution rate of 6.51% from a taxable
investment to match the Fund's Class A tax-free distribution rate.
COMMONWEALTH UPDATE
Kentucky's overall economic condition improved in 2004, as did the nation's. The
commonwealth's unemployment rate fell from 5.7% to 5.2% during the year under
review.(3) Contract construction accounted for the largest employment gains,
mostly due to a strong housing market, which continued to benefit from
historically low mortgage rates. In keeping with broader national trends,
personal incomes also grew 4.3% in 2004.(4)
Uncertainty loomed over Kentucky's overall fiscal picture for much of the period
as the commonwealth failed to adopt a budget prior to the start of the 2005-2006
biennial fiscal year for the second consecutive time. The commonwealth operated
instead under the governor's emergency public services continuation plan that
authorized expenditures and payment of debt service to avoid a shutdown. In late
February, Kentucky's general assembly put an end to the longstanding legislative
impasse, and approved a revised version of the governor's original budget and
tax plan, aimed at stimulating economic development and reducing the tax burden
on businesses and residents. While the budget primarily focused on expenditures
from the state's general fund, the "tax modernization plan" represented the
first overhaul of the state's tax code in more than a decade. Highlights of the
new plan included increased cigarette and alcohol taxes, a repeal of the
corporate license tax, and reductions in personal and corporate income tax top
rates. Debt levels remained manageable at roughly $783 per capita and less than
3.3% of budget.(5)
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
(3) Source: Bureau of Labor Statistics.
(4) Source: Bureau of Economic Analysis.
(5) Source: Moody's Investors Service, "New Issue: Kentucky (State of),"
2/1/05.
DIVIDEND DISTRIBUTIONS(2)
Franklin Kentucky Tax-Free
Income Fund - Class A
3/1/04-2/28/05
- --------------------------------------------------------------------------------
MONTH DIVIDEND PER SHARE
- --------------------------------------------------------------------------------
March 4.15 cents
- --------------------------------------------------------------------------------
April 4.15 cents
- --------------------------------------------------------------------------------
May 4.15 cents
- --------------------------------------------------------------------------------
June 4.00 cents
- --------------------------------------------------------------------------------
July 4.00 cents
- --------------------------------------------------------------------------------
August 4.00 cents
- --------------------------------------------------------------------------------
September 4.00 cents
- --------------------------------------------------------------------------------
October 4.00 cents
- --------------------------------------------------------------------------------
November 4.00 cents
- --------------------------------------------------------------------------------
December 4.00 cents
- --------------------------------------------------------------------------------
January 4.00 cents
- --------------------------------------------------------------------------------
February 4.00 cents
- --------------------------------------------------------------------------------
TOTAL 48.45 CENTS
- --------------------------------------------------------------------------------
Annual Report | 37
PORTFOLIO BREAKDOWN
Franklin Kentucky Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Subject to Government Appropriations 39.5%
- --------------------------------------------------------------------------------
Utilities 23.6%
- --------------------------------------------------------------------------------
General Obligation 8.8%
- --------------------------------------------------------------------------------
Prerefunded 8.6%
- --------------------------------------------------------------------------------
Hospital & Health Care 7.3%
- --------------------------------------------------------------------------------
Transportation 4.6%
- --------------------------------------------------------------------------------
Other Revenue 3.9%
- --------------------------------------------------------------------------------
Tax-Supported 1.9%
- --------------------------------------------------------------------------------
Corporate-Backed 1.4%
- --------------------------------------------------------------------------------
Housing 0.4%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Independent credit rating agency Moody's Investors Service assigned Kentucky's
debt an Aa3 credit rating with a stable outlook.(6) The rating reflected the
commonwealth's budgetary imbalance and deteriorating financial flexibility. The
stable outlook, which was in jeopardy due to Kentucky's inability to enact a
budget, is based on Moody's expectation that revenue will stabilize as the
economy improves, and that fiscal operations will return to balance once a
budget is approved.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
Thank you for your continued participation in Franklin Kentucky Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(6) This does not indicate Moody's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
38 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN KENTUCKY TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes due on Fund
dividends, capital gain distributions, if any, or any realized gains on the sale
of Fund shares. Total return reflects reinvestment of the Fund's dividends and
capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $11.41 $11.51
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------------
Dividend Income $0.4845
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE(1)
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE. CUMULATIVE TOTAL RETURN EXCLUDES
THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS INCLUDE THE MAXIMUM SALES CHARGE.
- ---------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return(2) +3.47% +38.76% +79.96%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return(3) -0.92% +5.85% +5.59%
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(4) -1.39% +5.23% +5.42%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate(5) 3.98%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(6) 6.51%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(7) 3.59%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(6) 5.88%
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 39
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes the current maximum sales charge, Fund expenses, account fees
and reinvested distributions. The unmanaged index includes reinvestment of any
income or distributions. It differs from the Fund in composition and does not
pay management fees or expenses. One cannot invest directly in an index. The
Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics,
is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -0.92%
- -------------------------------------
5-Year +5.85%
- -------------------------------------
10-Year +5.59%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
Kentucky Brothers
Tax-Free Municipal
Date Income Fund Bond Index(8) CPI(8)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,574 $10,000 $10,000
3/31/1995 $ 9,679 $10,115 $10,033
4/30/1995 $ 9,686 $10,127 $10,066
5/31/1995 $10,037 $10,450 $10,086
6/30/1995 $ 9,891 $10,359 $10,106
7/31/1995 $ 9,949 $10,457 $10,106
8/31/1995 $10,079 $10,589 $10,133
9/30/1995 $10,162 $10,656 $10,152
10/31/1995 $10,342 $10,811 $10,186
11/30/1995 $10,543 $10,991 $10,179
12/31/1995 $10,664 $11,096 $10,172
1/31/1996 $10,714 $11,180 $10,232
2/29/1996 $10,601 $11,105 $10,265
3/31/1996 $10,447 $10,963 $10,318
4/30/1996 $10,439 $10,932 $10,358
5/31/1996 $10,452 $10,928 $10,378
6/30/1996 $10,587 $11,047 $10,384
7/31/1996 $10,658 $11,147 $10,404
8/31/1996 $10,658 $11,144 $10,424
9/30/1996 $10,827 $11,300 $10,457
10/31/1996 $10,960 $11,428 $10,490
11/30/1996 $11,148 $11,637 $10,510
12/31/1996 $11,120 $11,588 $10,510
1/31/1997 $11,124 $11,610 $10,543
2/28/1997 $11,225 $11,716 $10,577
3/31/1997 $11,076 $11,560 $10,603
4/30/1997 $11,175 $11,657 $10,616
5/31/1997 $11,334 $11,832 $10,610
6/30/1997 $11,459 $11,958 $10,623
7/31/1997 $11,768 $12,289 $10,636
8/31/1997 $11,684 $12,174 $10,656
9/30/1997 $11,821 $12,319 $10,683
10/31/1997 $11,890 $12,398 $10,709
11/30/1997 $11,982 $12,471 $10,702
12/31/1997 $12,163 $12,653 $10,689
1/31/1998 $12,270 $12,783 $10,709
2/28/1998 $12,281 $12,787 $10,729
3/31/1998 $12,317 $12,799 $10,749
4/30/1998 $12,270 $12,741 $10,769
5/31/1998 $12,464 $12,942 $10,789
6/30/1998 $12,517 $12,994 $10,802
7/31/1998 $12,544 $13,026 $10,815
8/31/1998 $12,721 $13,227 $10,828
9/30/1998 $12,861 $13,392 $10,842
10/31/1998 $12,831 $13,392 $10,868
11/30/1998 $12,876 $13,439 $10,868
12/31/1998 $12,907 $13,473 $10,861
1/31/1999 $13,031 $13,633 $10,888
2/28/1999 $12,962 $13,573 $10,901
3/31/1999 $13,002 $13,592 $10,934
4/30/1999 $13,022 $13,626 $11,014
5/31/1999 $12,947 $13,547 $11,014
6/30/1999 $12,766 $13,352 $11,014
7/31/1999 $12,773 $13,401 $11,047
8/31/1999 $12,613 $13,293 $11,074
9/30/1999 $12,585 $13,299 $11,127
10/31/1999 $12,384 $13,155 $11,146
11/30/1999 $12,480 $13,295 $11,153
12/31/1999 $12,362 $13,196 $11,153
1/31/2000 $12,252 $13,138 $11,186
2/29/2000 $12,426 $13,291 $11,252
3/31/2000 $12,733 $13,581 $11,345
4/30/2000 $12,598 $13,501 $11,352
5/31/2000 $12,457 $13,431 $11,365
6/30/2000 $12,804 $13,787 $11,425
7/31/2000 $13,023 $13,979 $11,451
8/31/2000 $13,241 $14,194 $11,451
9/30/2000 $13,136 $14,120 $11,511
10/31/2000 $13,296 $14,274 $11,531
11/30/2000 $13,416 $14,382 $11,537
12/31/2000 $13,783 $14,738 $11,531
1/31/2001 $13,846 $14,884 $11,604
2/28/2001 $13,877 $14,931 $11,650
3/31/2001 $14,016 $15,065 $11,677
4/30/2001 $13,838 $14,901 $11,723
5/31/2001 $13,988 $15,062 $11,776
6/30/2001 $14,122 $15,163 $11,796
7/31/2001 $14,341 $15,387 $11,763
8/31/2001 $14,556 $15,641 $11,763
9/30/2001 $14,393 $15,588 $11,816
10/31/2001 $14,603 $15,774 $11,776
11/30/2001 $14,491 $15,641 $11,756
12/31/2001 $14,337 $15,493 $11,710
1/31/2002 $14,549 $15,762 $11,736
2/28/2002 $14,724 $15,952 $11,783
3/31/2002 $14,490 $15,639 $11,849
4/30/2002 $14,726 $15,945 $11,915
5/31/2002 $14,811 $16,041 $11,915
6/30/2002 $14,973 $16,211 $11,922
7/31/2002 $15,145 $16,420 $11,935
8/31/2002 $15,283 $16,617 $11,975
9/30/2002 $15,559 $16,981 $11,995
10/31/2002 $15,240 $16,699 $12,015
11/30/2002 $15,188 $16,630 $12,015
12/31/2002 $15,523 $16,981 $11,988
1/31/2003 $15,456 $16,938 $12,041
2/28/2003 $15,663 $17,175 $12,134
3/31/2003 $15,655 $17,185 $12,207
4/30/2003 $15,740 $17,299 $12,180
5/31/2003 $16,121 $17,704 $12,160
6/30/2003 $16,066 $17,628 $12,174
7/31/2003 $15,420 $17,011 $12,187
8/31/2003 $15,560 $17,138 $12,233
9/30/2003 $16,088 $17,642 $12,273
10/31/2003 $15,994 $17,553 $12,260
11/30/2003 $16,162 $17,736 $12,227
12/31/2003 $16,326 $17,883 $12,213
1/31/2004 $16,414 $17,986 $12,273
2/29/2004 $16,670 $18,256 $12,339
3/31/2004 $16,661 $18,193 $12,419
4/30/2004 $16,243 $17,762 $12,459
5/31/2004 $16,123 $17,697 $12,531
6/30/2004 $16,200 $17,762 $12,571
7/31/2004 $16,437 $17,996 $12,551
8/31/2004 $16,720 $18,356 $12,558
9/30/2004 $16,807 $18,454 $12,584
10/31/2004 $16,981 $18,612 $12,651
11/30/2004 $16,863 $18,459 $12,657
12/31/2004 $17,089 $18,684 $12,611
1/31/2005 $17,295 $18,859 $12,638
2/28/2005 $17,229 $18,796 $12,710
40 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
(1) The Fund's manager has agreed in advance to waive a portion of its
management fees, which reduces operating expenses and increases
distribution rate, yield and total return to shareholders. Without this
waiver, the Fund's distribution rate and total return would have been
lower, and yield for the period would have been 3.50%. The fee waiver may
be discontinued at any time upon notice to the Fund's Board of Trustees.
(2) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current
maximum sales charge.
(4) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5) Distribution rate is based on an annualization of the 3.95 cent per share
current monthly dividend and the maximum offering price of $11.92 per
share on 2/28/05.
(6) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Kentucky state
personal income tax bracket of 38.90%, based on the federal income tax
rate of 35.00%.
(7) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(8) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
Annual Report | 41
Your Fund's Expenses
FRANKLIN KENTUCKY TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
42 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.60 $3.78
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.08 $3.76
- -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, of 0.75%, multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 43
Franklin Louisiana Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Louisiana Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Louisiana state
personal income taxes consistent with prudent investing while seeking
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Louisiana Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- --------------------------------------------------------------------------------
AAA 70.9%
- --------------------------------------------------------------------------------
AA 0.9%
- --------------------------------------------------------------------------------
A 3.4%
- --------------------------------------------------------------------------------
BBB 10.0%
- --------------------------------------------------------------------------------
Below Investment Grade 5.7%
- --------------------------------------------------------------------------------
Not Rated by S&P 9.1%
- --------------------------------------------------------------------------------
* 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 6.9% 0.8%
A 1.4% --
- --------------------------------------------
Total 8.3% 0.8%
- --------------------------------------------------------------------------------
This annual report for Franklin Louisiana Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $11.81 on February
29, 2004, to $11.68 on February 28, 2005. The Fund's Class A
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 115.
44 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Louisiana Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.30 cents 3.74 cents
- --------------------------------------------------------------------------------
April 4.30 cents 3.74 cents
- --------------------------------------------------------------------------------
May 4.30 cents 3.74 cents
- --------------------------------------------------------------------------------
June 4.26 cents 3.73 cents
- --------------------------------------------------------------------------------
July 4.26 cents 3.73 cents
- --------------------------------------------------------------------------------
August 4.26 cents 3.73 cents
- --------------------------------------------------------------------------------
September 4.26 cents 3.74 cents
- --------------------------------------------------------------------------------
October 4.26 cents 3.74 cents
- --------------------------------------------------------------------------------
November 4.26 cents 3.74 cents
- --------------------------------------------------------------------------------
December 4.26 cents 3.70 cents
- --------------------------------------------------------------------------------
January 4.26 cents 3.70 cents
- --------------------------------------------------------------------------------
February 4.26 cents 3.70 cents
- --------------------------------------------------------------------------------
TOTAL 51.24 CENTS 44.73 CENTS
- --------------------------------------------------------------------------------
shares paid dividends totaling 51.24 cents per share for the same period.(2) The
Performance Summary beginning on page 48 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.19% based on an
annualization of the current 4.26 cent per share dividend and the maximum
offering price of $12.20 on February 28, 2005. An investor in the 2005 maximum
combined federal and Louisiana state personal income tax bracket of 38.90% would
need to earn a distribution rate of 6.86% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class C shares'
performance, please see the Performance Summary.
STATE UPDATE
Louisiana's economy recovered at a slower pace than the nation's during the year
under review, with above average unemployment and moderate personal income
growth. The state's economy diversified somewhat with the education and health
services sectors producing the largest gains in 2004. While professional
services and manufacturing remained flat, a year without manufacturing sector
losses was a welcome reprieve from
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 45
PORTFOLIO BREAKDOWN
Franklin Louisiana Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Utilities 15.7%
- --------------------------------------------------------------------------------
Tax-Supported 15.6%
- --------------------------------------------------------------------------------
Higher Education 15.1%
- --------------------------------------------------------------------------------
Other Revenue 9.4%
- --------------------------------------------------------------------------------
Prerefunded 9.4%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 9.3%
- --------------------------------------------------------------------------------
Hospital & Health Care 8.9%
- --------------------------------------------------------------------------------
General Obligation 6.6%
- --------------------------------------------------------------------------------
Housing 4.8%
- --------------------------------------------------------------------------------
Transportation 2.6%
- --------------------------------------------------------------------------------
Corporate-Backed 2.6%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
the sector's previous five years of steady declines. Louisiana's economy
remained heavily dependent on oil and gas, but state employment saw little
benefit from rising oil prices due to lack of production and exploration.
Hurricane Hugo also caused many offshore rigs to temporarily shut down, thereby
eliminating industry jobs. The most notable losses, however, occurred in the
high-paying petrochemical industry due to slack demand, high natural gas prices
and rising foreign competition.
Louisiana's financial picture improved in 2004 with better than expected
revenues, largely the result of increased severance and royalty tax collections
made possible by high oil and natural gas prices. Most of the state's key
revenue sources such as individual and corporate income taxes, severance and
royalty taxes, and even its broad-based sales tax are linked either directly or
indirectly to the oil and gas industry, which has led to unstable financial
operations in the past. In a renewed effort to address budget gaps while
continuing to face rising pressure from Medicaid, education and social services,
the state implemented staff cuts, reinstated a temporary sales tax, redirected a
portion of its mineral revenues to the general fund, and placed added emphasis
to matching recurring expenditures to recurring revenues. Louisiana's debt
ratios have dropped significantly due to reduced borrowing, economic gains and
the adoption of debt limitation measures.
Independent credit rating agency Standard & Poor's assigned Louisiana's general
obligation bonds an A+ rating with a stable outlook.(3) The rating reflected the
state's improved financial condition, based on disciplined budget management and
a sustained commitment to reducing its now moderate debt burden.
(3) This does not indicate Standard & Poor's rating of the Fund.
46 | Annual Report
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
Thank you for your continued participation in Franklin Louisiana Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
Annual Report | 47
Performance Summary as of 2/28/05
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $11.68 $11.81
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------------------
Dividend Income $0.5124
- ------------------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.12 $11.79 $11.91
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------------------
Dividend Income $0.4473
- ------------------------------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.36% +40.89% +77.96%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.00% +6.17% +5.47%
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.36% +5.56% +5.37%
- ------------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.19%
- ------------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.86%
- ------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.35%
- ------------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.48%
- ------------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.84% +37.16% +67.99%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.85% +6.52% +5.42%
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.50% +5.92% +5.31%
- ------------------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.77%
- ------------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.17%
- ------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.96%
- ------------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.84%
- ------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
48 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -1.00%
- -------------------------------------
5-Year +6.17%
- -------------------------------------
10-Year +5.47%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
Louisiana Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 9575 10000 10000
3/31/1995 9627 10115 10033
4/30/1995 9653 10127 10066
5/31/1995 9886 10450 10086
6/30/1995 9821 10359 10106
7/31/1995 9888 10457 10106
8/31/1995 9979 10589 10133
9/30/1995 10052 10656 10152
10/31/1995 10182 10811 10186
11/30/1995 10332 10991 10179
12/31/1995 10424 11096 10172
1/31/1996 10466 11180 10232
2/29/1996 10414 11105 10265
3/31/1996 10325 10963 10318
4/30/1996 10310 10932 10358
5/31/1996 10345 10928 10378
6/30/1996 10449 11047 10384
7/31/1996 10529 11147 10404
8/31/1996 10560 11144 10424
9/30/1996 10687 11300 10457
10/31/1996 10789 11428 10490
11/30/1996 10953 11637 10510
12/31/1996 10929 11588 10510
1/31/1997 10945 11610 10543
2/28/1997 11035 11716 10577
3/31/1997 10944 11560 10603
4/30/1997 11013 11657 10616
5/31/1997 11138 11832 10610
6/30/1997 11262 11958 10623
7/31/1997 11512 12289 10636
8/31/1997 11444 12174 10656
9/30/1997 11578 12319 10683
10/31/1997 11655 12398 10709
11/30/1997 11725 12471 10702
12/31/1997 11893 12653 10689
1/31/1998 11979 12783 10709
2/28/1998 11971 12787 10729
3/31/1998 11998 12799 10749
4/30/1998 11965 12741 10769
5/31/1998 12122 12942 10789
6/30/1998 12163 12994 10802
7/31/1998 12181 13026 10815
8/31/1998 12342 13227 10828
9/30/1998 12477 13392 10842
10/31/1998 12449 13392 10868
11/30/1998 12494 13439 10868
12/31/1998 12534 13473 10861
1/31/1999 12642 13633 10888
2/28/1999 12596 13573 10901
3/31/1999 12635 13592 10934
4/30/1999 12666 13626 11014
5/31/1999 12595 13547 11014
6/30/1999 12432 13352 11014
7/31/1999 12429 13401 11047
8/31/1999 12265 13293 11074
9/30/1999 12250 13299 11127
10/31/1999 12056 13155 11146
11/30/1999 12161 13295 11153
12/31/1999 12048 13196 11153
1/31/2000 11943 13138 11186
2/29/2000 12100 13291 11252
3/31/2000 12395 13581 11345
4/30/2000 12312 13501 11352
5/31/2000 12236 13431 11365
6/30/2000 12548 13787 11425
7/31/2000 12712 13979 11451
8/31/2000 12910 14194 11451
9/30/2000 12846 14120 11511
10/31/2000 13000 14274 11531
11/30/2000 13139 14382 11537
12/31/2000 13457 14738 11531
1/31/2001 13516 14884 11604
2/28/2001 13559 14931 11650
3/31/2001 13669 15065 11677
4/30/2001 13534 14901 11723
5/31/2001 13677 15062 11776
6/30/2001 13757 15163 11796
7/31/2001 13992 15387 11763
8/31/2001 14199 15641 11763
9/30/2001 14141 15588 11816
10/31/2001 14367 15774 11776
11/30/2001 14274 15641 11756
12/31/2001 14118 15493 11710
1/31/2002 14314 15762 11736
2/28/2002 14473 15952 11783
3/31/2002 14239 15639 11849
4/30/2002 14482 15945 11915
5/31/2002 14542 16041 11915
6/30/2002 14687 16211 11922
7/31/2002 14856 16420 11935
8/31/2002 14978 16617 11975
9/30/2002 15286 16981 11995
10/31/2002 15046 16699 12015
11/30/2002 15000 16630 12015
12/31/2002 15288 16981 11988
1/31/2003 15256 16938 12041
2/28/2003 15420 17175 12134
3/31/2003 15445 17185 12207
4/30/2003 15558 17299 12180
5/31/2003 15916 17704 12160
6/30/2003 15855 17628 12174
7/31/2003 15278 17011 12187
8/31/2003 15443 17138 12233
9/30/2003 15900 17642 12273
10/31/2003 15786 17553 12260
11/30/2003 15936 17736 12227
12/31/2003 16082 17883 12213
1/31/2004 16296 17986 12273
2/29/2004 16505 18256 12339
3/31/2004 16485 18193 12419
4/30/2004 16097 17762 12459
5/31/2004 16068 17697 12531
6/30/2004 16118 17762 12571
7/31/2004 16321 17996 12551
8/31/2004 16612 18356 12558
9/30/2004 16700 18454 12584
10/31/2004 16872 18612 12651
11/30/2004 16718 18459 12657
12/31/2004 16941 18684 12611
1/31/2005 17129 18859 12638
2/28/2005 17039 18796 12710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +1.85%
- -------------------------------------
5-Year +6.52%
- -------------------------------------
Since Inception (5/1/95) +5.42%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
Louisiana Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 10000 10000 10000
5/31/1995 10245 10319 10020
6/30/1995 10180 10229 10039
7/31/1995 10262 10326 10039
8/31/1995 10351 10457 10066
9/30/1995 10412 10523 10086
10/31/1995 10551 10676 10118
11/30/1995 10699 10853 10112
12/31/1995 10798 10957 10105
1/31/1996 10836 11040 10165
2/29/1996 10777 10966 10197
3/31/1996 10671 10825 10250
4/30/1996 10660 10795 10290
5/31/1996 10690 10791 10309
6/30/1996 10782 10908 10316
7/31/1996 10869 11007 10336
8/31/1996 10896 11004 10355
9/30/1996 11021 11158 10388
10/31/1996 11120 11285 10421
11/30/1996 11282 11491 10441
12/31/1996 11250 11443 10441
1/31/1997 11269 11464 10474
2/28/1997 11345 11569 10507
3/31/1997 11255 11415 10533
4/30/1997 11321 11511 10546
5/31/1997 11453 11684 10540
6/30/1997 11564 11808 10553
7/31/1997 11825 12136 10566
8/31/1997 11752 12022 10586
9/30/1997 11873 12164 10612
10/31/1997 11947 12243 10639
11/30/1997 12014 12315 10632
12/31/1997 12178 12494 10619
1/31/1998 12260 12623 10639
2/28/1998 12257 12627 10658
3/31/1998 12267 12638 10678
4/30/1998 12229 12581 10698
5/31/1998 12393 12780 10718
6/30/1998 12430 12831 10731
7/31/1998 12441 12863 10744
8/31/1998 12598 13062 10757
9/30/1998 12719 13224 10770
10/31/1998 12696 13224 10797
11/30/1998 12736 13270 10797
12/31/1998 12760 13304 10790
1/31/1999 12875 13462 10816
2/28/1999 12823 13403 10829
3/31/1999 12867 13422 10862
4/30/1999 12881 13455 10941
5/31/1999 12804 13377 10941
6/30/1999 12632 13185 10941
7/31/1999 12622 13233 10974
8/31/1999 12450 13127 11001
9/30/1999 12430 13132 11053
10/31/1999 12230 12990 11073
11/30/1999 12331 13128 11080
12/31/1999 12211 13030 11080
1/31/2000 12101 12974 11113
2/29/2000 12254 13124 11178
3/31/2000 12545 13411 11271
4/30/2000 12456 13332 11277
5/31/2000 12373 13263 11290
6/30/2000 12681 13614 11350
7/31/2000 12839 13803 11376
8/31/2000 13045 14016 11376
9/30/2000 12962 13943 11435
10/31/2000 13112 14095 11455
11/30/2000 13245 14202 11461
12/31/2000 13570 14553 11455
1/31/2001 13623 14697 11527
2/28/2001 13659 14744 11573
3/31/2001 13762 14876 11600
4/30/2001 13620 14715 11646
5/31/2001 13758 14873 11698
6/30/2001 13843 14973 11718
7/31/2001 14059 15194 11685
8/31/2001 14271 15445 11685
9/30/2001 14196 15393 11738
10/31/2001 14414 15576 11698
11/30/2001 14326 15445 11679
12/31/2001 14153 15299 11633
1/31/2002 14341 15564 11659
2/28/2002 14505 15752 11705
3/31/2002 14264 15443 11771
4/30/2002 14498 15745 11837
5/31/2002 14550 15841 11837
6/30/2002 14687 16008 11843
7/31/2002 14847 16214 11856
8/31/2002 14961 16409 11896
9/30/2002 15259 16768 11916
10/31/2002 15015 16490 11935
11/30/2002 14974 16422 11935
12/31/2002 15239 16768 11909
1/31/2003 15213 16726 11962
2/28/2003 15370 16960 12054
3/31/2003 15387 16970 12126
4/30/2003 15492 17082 12100
5/31/2003 15837 17482 12080
6/30/2003 15769 17407 12093
7/31/2003 15192 16798 12107
8/31/2003 15333 16924 12153
9/30/2003 15789 17421 12192
10/31/2003 15654 17333 12179
11/30/2003 15809 17514 12146
12/31/2003 15945 17659 12133
1/31/2004 16148 17760 12192
2/29/2004 16345 18028 12258
3/31/2004 16317 17965 12337
4/30/2004 15943 17539 12377
5/31/2004 15894 17476 12449
6/30/2004 15950 17539 12488
7/31/2004 16127 17770 12469
8/31/2004 16404 18126 12475
9/30/2004 16497 18222 12502
10/31/2004 16646 18379 12567
11/30/2004 16488 18228 12574
12/31/2004 16710 18450 12528
1/31/2005 16886 18623 12554
2/28/2005 16799 18561 12627
Annual Report | 49
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C)
per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Louisiana state
personal income tax bracket of 38.90%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
50 | Annual Report
Your Fund's Expenses
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 51
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.80 $3.72
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.12 $3.71
- --------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.70 $6.48
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.40 $6.46
- --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.74% and C: 1.29%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
52 | Annual Report
Franklin Maryland Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Maryland Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Maryland state and
local personal income taxes consistent with prudent investing while seeking
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Maryland Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................ 49.0%
AA ......................... 19.6%
A .......................... 10.6%
BBB ........................ 5.3%
Not Rated by S&P ........... 15.5%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
AAA or Aaa 4.0% --
AA or Aa 3.5% --
A 3.3% --
BBB or Baa 3.3% 1.4%
- ----------------------------------------------
Total 14.1% 1.4%
- --------------------------------------------------------------------------------
This annual report for Franklin Maryland Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 120.
Annual Report | 53
DIVIDEND DISTRIBUTIONS(2)
Franklin Maryland Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.30 cents 3.71 cents
- --------------------------------------------------------------------------------
April 4.30 cents 3.71 cents
- --------------------------------------------------------------------------------
May 4.30 cents 3.71 cents
- --------------------------------------------------------------------------------
June 4.27 cents 3.74 cents
- --------------------------------------------------------------------------------
July 4.27 cents 3.74 cents
- --------------------------------------------------------------------------------
August 4.27 cents 3.74 cents
- --------------------------------------------------------------------------------
September 4.27 cents 3.75 cents
- --------------------------------------------------------------------------------
October 4.27 cents 3.75 cents
- --------------------------------------------------------------------------------
November 4.27 cents 3.75 cents
- --------------------------------------------------------------------------------
December 4.27 cents 3.71 cents
- --------------------------------------------------------------------------------
January 4.27 cents 3.71 cents
- --------------------------------------------------------------------------------
February 4.27 cents 3.71 cents
- --------------------------------------------------------------------------------
TOTAL 51.33 CENTS 44.73 CENTS
- --------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $11.93 on Feb-
ruary 29, 2004, to $11.80 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 51.33 cents per share for the same period.(2) The Performance
Summary beginning on page 57 shows that at the end of this reporting period the
Fund's Class A shares' distribution rate was 4.10% based on an annualization of
the current 4.21 cent per share dividend and the maximum offering price of
$12.32 on February 28, 2005. An investor in the 2005 maximum combined federal
and Maryland state and local personal income tax bracket of 40.17% would need to
earn a distribution rate of 6.85% from a taxable investment to match the Fund's
Class A tax-free distribution rate. For the Fund's Class C shares' performance,
please see the Performance Summary.
STATE UPDATE
Maryland's economy rebounded strongly in 2004, and continued to outperform the
nation's. Its well-diversified economic base, anchored by the services, trade
and government sectors, consistently delivered positive employment growth
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
54 | Annual Report
between 2001 and 2003, while many other states were in negative territory during
the same period. Total nonfarm payrolls increased 1.7% during the period under
review.(3) The federal government continued to benefit Maryland proportionately
more than other states due to its geographic proximity to the nation's capital.
Health institution and biotech companies, also heavily supported by government
grants, continued to add strength and diversification to Maryland's economy.
Personal incomes remained well above the national average.
With continued improvement in the national economy, Maryland ended the year with
a budget surplus, mostly driven by increased income and sales tax receipts in
2004. Consequently, 2005 estimates were revised upward. Maryland reduced
expenditures and relied on revenue transfers from nongeneral fund sources to
maintain a balanced budget and continues to operate under austerity measures,
including a hiring freeze, work staff reductions and reducing aid to local
governments. To address increased expenses for education and Medicaid, the
state's administration was quick to identify new revenue sources, mostly through
fees and fund transfers.
Independent credit rating agencies Standard & Poor's and Moody's Investor's
Service assigned Maryland's general obligation bonds the highest ratings of AAA
and Aaa with a stable outlook.(4) The AAA rating, held for more than 30 years
through various economic cycles, substantiated Maryland's long history of
balanced budgets, sound liquidity and a manageable debt burden that is
constitutionally limited.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
(3) Source: Bureau of Labor Statistics.
(4) These do not indicate ratings of the Fund.
PORTFOLIO BREAKDOWN
Franklin Maryland Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Hospital & Health Care 21.2%
- --------------------------------------------------------------------------------
Transportation 16.1%
- --------------------------------------------------------------------------------
Prerefunded 15.8%
- --------------------------------------------------------------------------------
Higher Education 12.5%
- --------------------------------------------------------------------------------
Utilities 12.3%
- --------------------------------------------------------------------------------
General Obligation 9.0%
- --------------------------------------------------------------------------------
Housing 5.6%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 5.0%
- --------------------------------------------------------------------------------
Tax-Supported 1.4%
- --------------------------------------------------------------------------------
Other Revenue 0.6%
- --------------------------------------------------------------------------------
Corporate-Backed 0.5%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 55
Thank you for your continued participation in Franklin Maryland Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
56 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN MARYLAND TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $11.80 $11.93
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.5133
- --------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.12 $11.93 $12.05
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4473
- --------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.34% +40.35% +78.96%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.06% +6.09% +5.54%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.26% +5.53% +5.39%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.10%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.85%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.30%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.52%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.73% +36.58% +68.79%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.74% +6.43% +5.47%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.65% +5.87% +5.38%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.66%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.12%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.91%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.86%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 57
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS A 2/28/05
- --------------------------------------------
1-Year -1.06%
- --------------------------------------------
5-Year +6.09%
- --------------------------------------------
10-Year +5.54%
- --------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
Maryland Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 9579 10000 10000
3/31/1995 9673 10115 10033
4/30/1995 9680 10127 10066
5/31/1995 9940 10450 10086
6/30/1995 9863 10359 10106
7/31/1995 10001 10457 10106
8/31/1995 10119 10589 10133
9/30/1995 10200 10656 10152
10/31/1995 10321 10811 10186
11/30/1995 10479 10991 10179
12/31/1995 10578 11096 10172
1/31/1996 10619 11180 10232
2/29/1996 10556 11105 10265
3/31/1996 10436 10963 10318
4/30/1996 10428 10932 10358
5/31/1996 10434 10928 10378
6/30/1996 10536 11047 10384
7/31/1996 10624 11147 10404
8/31/1996 10616 11144 10424
9/30/1996 10770 11300 10457
10/31/1996 10871 11428 10490
11/30/1996 11044 11637 10510
12/31/1996 10998 11588 10510
1/31/1997 11013 11610 10543
2/28/1997 11111 11716 10577
3/31/1997 10977 11560 10603
4/30/1997 11064 11657 10616
5/31/1997 11207 11832 10610
6/30/1997 11317 11958 10623
7/31/1997 11594 12289 10636
8/31/1997 11512 12174 10656
9/30/1997 11643 12319 10683
10/31/1997 11707 12398 10709
11/30/1997 11784 12471 10702
12/31/1997 11937 12653 10689
1/31/1998 12029 12783 10709
2/28/1998 12028 12787 10729
3/31/1998 12051 12799 10749
4/30/1998 12037 12741 10769
5/31/1998 12201 12942 10789
6/30/1998 12255 12994 10802
7/31/1998 12291 13026 10815
8/31/1998 12449 13227 10828
9/30/1998 12572 13392 10842
10/31/1998 12585 13392 10868
11/30/1998 12616 13439 10868
12/31/1998 12642 13473 10861
1/31/1999 12747 13633 10888
2/28/1999 12710 13573 10901
3/31/1999 12734 13592 10934
4/30/1999 12783 13626 11014
5/31/1999 12721 13547 11014
6/30/1999 12543 13352 11014
7/31/1999 12569 13401 11047
8/31/1999 12378 13293 11074
9/30/1999 12350 13299 11127
10/31/1999 12152 13155 11146
11/30/1999 12277 13295 11153
12/31/1999 12161 13196 11153
1/31/2000 12075 13138 11186
2/29/2000 12218 13291 11252
3/31/2000 12500 13581 11345
4/30/2000 12460 13501 11352
5/31/2000 12358 13431 11365
6/30/2000 12668 13787 11425
7/31/2000 12866 13979 11451
8/31/2000 13086 14194 11451
9/30/2000 13043 14120 11511
10/31/2000 13172 14274 11531
11/30/2000 13285 14382 11537
12/31/2000 13577 14738 11531
1/31/2001 13660 14884 11604
2/28/2001 13738 14931 11650
3/31/2001 13834 15065 11677
4/30/2001 13722 14901 11723
5/31/2001 13840 15062 11776
6/30/2001 13955 15163 11796
7/31/2001 14152 15387 11763
8/31/2001 14370 15641 11763
9/30/2001 14324 15588 11816
10/31/2001 14498 15774 11776
11/30/2001 14403 15641 11756
12/31/2001 14272 15493 11710
1/31/2002 14466 15762 11736
2/28/2002 14623 15952 11783
3/31/2002 14375 15639 11849
4/30/2002 14603 15945 11915
5/31/2002 14751 16041 11915
6/30/2002 14869 16211 11922
7/31/2002 15050 16420 11935
8/31/2002 15198 16617 11975
9/30/2002 15491 16981 11995
10/31/2002 15239 16699 12015
11/30/2002 15204 16630 12015
12/31/2002 15489 16981 11988
1/31/2003 15496 16938 12041
2/28/2003 15672 17175 12134
3/31/2003 15696 17185 12207
4/30/2003 15821 17299 12180
5/31/2003 16150 17704 12160
6/30/2003 16102 17628 12174
7/31/2003 15540 17011 12187
8/31/2003 15677 17138 12233
9/30/2003 16037 17642 12273
10/31/2003 15965 17553 12260
11/30/2003 16128 17736 12227
12/31/2003 16275 17883 12213
1/31/2004 16363 17986 12273
2/29/2004 16597 18256 12339
3/31/2004 16563 18193 12419
4/30/2004 16206 17762 12459
5/31/2004 16149 17697 12531
6/30/2004 16199 17762 12571
7/31/2004 16387 17996 12551
8/31/2004 16662 18356 12558
9/30/2004 16764 18454 12584
10/31/2004 16893 18612 12651
11/30/2004 16768 18459 12657
12/31/2004 16974 18684 12611
1/31/2005 17176 18859 12638
2/28/2005 17142 18796 12710
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS C 2/28/05
- --------------------------------------------
1-Year +1.74%
- --------------------------------------------
5-Year +6.43%
- --------------------------------------------
Since Inception (5/1/95) +5.47%
- --------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
Maryland Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 10000 10000 10000
5/31/1995 10281 10319 10020
6/30/1995 10196 10229 10039
7/31/1995 10340 10326 10039
8/31/1995 10456 10457 10066
9/30/1995 10525 10523 10086
10/31/1995 10663 10676 10118
11/30/1995 10820 10853 10112
12/31/1995 10917 10957 10105
1/31/1996 10962 11040 10165
2/29/1996 10906 10966 10197
3/31/1996 10787 10825 10250
4/30/1996 10765 10795 10290
5/31/1996 10773 10791 10309
6/30/1996 10864 10908 10316
7/31/1996 10948 11007 10336
8/31/1996 10944 11004 10355
9/30/1996 11087 11158 10388
10/31/1996 11195 11285 10421
11/30/1996 11357 11491 10441
12/31/1996 11315 11443 10441
1/31/1997 11323 11464 10474
2/28/1997 11417 11569 10507
3/31/1997 11274 11415 10533
4/30/1997 11358 11511 10546
5/31/1997 11509 11684 10540
6/30/1997 11616 11808 10553
7/31/1997 11894 12136 10566
8/31/1997 11804 12022 10586
9/30/1997 11932 12164 10612
10/31/1997 11992 12243 10639
11/30/1997 12065 12315 10632
12/31/1997 12225 12494 10619
1/31/1998 12302 12623 10639
2/28/1998 12295 12627 10658
3/31/1998 12323 12638 10678
4/30/1998 12292 12581 10698
5/31/1998 12464 12780 10718
6/30/1998 12513 12831 10731
7/31/1998 12543 12863 10744
8/31/1998 12697 13062 10757
9/30/1998 12817 13224 10770
10/31/1998 12823 13224 10797
11/30/1998 12849 13270 10797
12/31/1998 12869 13304 10790
1/31/1999 12970 13462 10816
2/28/1999 12926 13403 10829
3/31/1999 12954 13422 10862
4/30/1999 12986 13455 10941
5/31/1999 12918 13377 10941
6/30/1999 12733 13185 10941
7/31/1999 12753 13233 10974
8/31/1999 12556 13127 11001
9/30/1999 12520 13132 11053
10/31/1999 12316 12990 11073
11/30/1999 12436 13128 11080
12/31/1999 12313 13030 11080
1/31/2000 12223 12974 11113
2/29/2000 12361 13124 11178
3/31/2000 12650 13411 11271
4/30/2000 12593 13332 11277
5/31/2000 12496 13263 11290
6/30/2000 12801 13614 11350
7/31/2000 12982 13803 11376
8/31/2000 13197 14016 11376
9/30/2000 13148 13943 11435
10/31/2000 13284 14095 11455
11/30/2000 13391 14202 11461
12/31/2000 13677 14553 11455
1/31/2001 13752 14697 11527
2/28/2001 13823 14744 11573
3/31/2001 13924 14876 11600
4/30/2001 13793 14715 11646
5/31/2001 13916 14873 11698
6/30/2001 14025 14973 11718
7/31/2001 14214 15194 11685
8/31/2001 14424 15445 11685
9/30/2001 14372 15393 11738
10/31/2001 14539 15576 11698
11/30/2001 14439 15445 11679
12/31/2001 14302 15299 11633
1/31/2002 14488 15564 11659
2/28/2002 14637 15752 11705
3/31/2002 14384 15443 11771
4/30/2002 14602 15745 11837
5/31/2002 14742 15841 11837
6/30/2002 14866 16008 11843
7/31/2002 15025 16214 11856
8/31/2002 15177 16409 11896
9/30/2002 15461 16768 11916
10/31/2002 15204 16490 11935
11/30/2002 15163 16422 11935
12/31/2002 15438 16768 11909
1/31/2003 15436 16726 11962
2/28/2003 15603 16960 12054
3/31/2003 15618 16970 12126
4/30/2003 15734 17082 12100
5/31/2003 16064 17482 12080
6/30/2003 15997 17407 12093
7/31/2003 15437 16798 12107
8/31/2003 15565 16924 12153
9/30/2003 15912 17421 12192
10/31/2003 15834 17333 12179
11/30/2003 15988 17514 12146
12/31/2003 16122 17659 12133
1/31/2004 16214 17760 12192
2/29/2004 16436 18028 12258
3/31/2004 16395 17965 12337
4/30/2004 16023 17539 12377
5/31/2004 15960 17476 12449
6/30/2004 16015 17539 12488
7/31/2004 16178 17770 12469
8/31/2004 16453 18126 12475
9/30/2004 16545 18222 12502
10/31/2004 16664 18379 12567
11/30/2004 16536 18228 12574
12/31/2004 16744 18450 12528
1/31/2005 16934 18623 12554
2/28/2005 16879 18561 12627
58 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C)
per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Maryland state and
local personal income tax bracket of 40.17%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
Annual Report | 59
Your Fund's Expenses
FRANKLIN MARYLAND TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
60 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.30 $3.52
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.32 $3.51
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.20 $6.28
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.26
- -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.70% and C: 1.25%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 61
Franklin Missouri Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Missouri Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Missouri state
personal income taxes consistent with prudent investing while seeking
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Missouri Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% of Total
Ratings LONG-TERM INVESTMENTS**
- --------------------------------------------------------------------------------
AAA 43.5%
- --------------------------------------------------------------------------------
AA 14.1%
- --------------------------------------------------------------------------------
A 17.9%
- --------------------------------------------------------------------------------
BBB 4.6%
- --------------------------------------------------------------------------------
Below Investment Grade 0.7%
- --------------------------------------------------------------------------------
Not Rated by S&P 19.2%
- --------------------------------------------------------------------------------
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
and Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa 12.2% -- --
A -- 1.7% --
BBB or Baa 2.5% 0.3% 2.5%
- ----------------------------------------------------
Total 14.7% 2.0% 2.5%
- --------------------------------------------------------------------------------
This annual report for Franklin Missouri Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.44 on
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 126.
62 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Missouri Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
April 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
May 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
June 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
July 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
August 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
September 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
October 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
November 4.47 cents 3.91 cents
- --------------------------------------------------------------------------------
December 4.47 cents 3.89 cents
- --------------------------------------------------------------------------------
January 4.47 cents 3.89 cents
- --------------------------------------------------------------------------------
February 4.47 cents 3.89 cents
- --------------------------------------------------------------------------------
TOTAL 53.64 CENTS 46.86 CENTS
- --------------------------------------------------------------------------------
February 29, 2004, to $12.32 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 53.64 cents per share for the same period.(2) The
Performance Summary beginning on page 65 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.17% based on an
annualization of the current 4.47 cent per share dividend and the maximum
offering price of $12.87 on February 28, 2005. An investor in the 2005 maximum
combined federal and Missouri state personal income tax bracket of 38.90% would
need to earn a distribution rate of 6.82% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class C shares'
performance, please see the Performance Summary.
STATE UPDATE
Although Missouri's economy is often considered a microcosm of what happens on
the national level, several of the state's growth indicators outperformed the
nation's, as the state returned to expansion at a faster rate than many of its
peers. Strong employment growth across nearly all industries erased most of the
state's job losses from the 2001 recession. The state's greatest employment
gains occurred in the education and health services, construction, and
professional and business services sectors. While manufacturing sector weakness
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 63
PORTFOLIO BREAKDOWN
Franklin Missouri Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Hospital & Health Care 23.0%
- --------------------------------------------------------------------------------
Higher Education 16.0%
- --------------------------------------------------------------------------------
Transportation 11.4%
- --------------------------------------------------------------------------------
General Obligation 10.8%
- --------------------------------------------------------------------------------
Utilities 9.9%
- --------------------------------------------------------------------------------
Prerefunded 7.2%
- --------------------------------------------------------------------------------
Other Revenue 6.0%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 4.7%
- --------------------------------------------------------------------------------
Tax-Supported 4.4%
- --------------------------------------------------------------------------------
Corporate-Backed 3.4%
- --------------------------------------------------------------------------------
Housing 3.2%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
persisted on the national level, local sector stability and growth were notable
bright spots for the state. Missouri set a new record for exports in 2004,
primarily due to an improved global economy and a weak U.S. dollar, which
increased the demand for U.S. goods abroad. Personal incomes increased slightly
in 2004, but continued to track national long-term trends.
Missouri's longstanding tradition of disciplined fiscal management includes a
midyear review to promptly address revenue shortfalls and preserve balanced
operations. Revenues, although lower than peak levels of the 1990s, remained
robust. New recurring revenues from increases in gaming, casino and cigarette
taxes and an income tax surcharge were proposed for the fiscal year 2005 budget,
to reduce reliance on transfers and other nonrecurring revenues. Missouri ended
the fiscal year with a fully funded reserve and balanced budget, with additional
help from federal fiscal relief. Although the state's debt burden relative to
personal income has risen over the past five years, it remained well below the
national median.
Independent credit rating agencies Standard & Poor's and Moody's Investors
Service assigned Missouri's general obligation bonds their highest ratings of
AAA and Aaa with a stable outlook.(3) The ratings, held for more than 30 years
through various economic cycles, indicated Missouri's excellent financial
management, strong reserves, low debt levels and financial flexibility.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Missouri Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(3) These do not indicate ratings of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
64 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN MISSOURI TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.12 $12.32 $12.44
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.5364
- --------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.11 $12.39 $12.50
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4686
- --------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.49% +41.85% +80.24%
- ----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.89% +6.31% +5.61%
- ----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.00%% +5.70% +5.47%
- ----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.17%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.82%
- ----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.44%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.63%
- ----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.98% +38.15% +69.16%
- ----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.99% +6.68% +5.49%
- ----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.82% +6.06% +5.39%
- ----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.76%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.15%
- ----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.04%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.98%
- ----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 65
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS A 2/28/05
- --------------------------------------------
1-Year -0.89%
- --------------------------------------------
5-Year +6.31%
- --------------------------------------------
10-Year +5.61%
- --------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
Missouri Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 9573 10000 10000
3/31/1995 9655 10115 10033
4/30/1995 9688 10127 10066
5/31/1995 9946 10450 10086
6/30/1995 9890 10359 10106
7/31/1995 9945 10457 10106
8/31/1995 10049 10589 10133
9/30/1995 10092 10656 10152
10/31/1995 10217 10811 10186
11/30/1995 10379 10991 10179
12/31/1995 10493 11096 10172
1/31/1996 10595 11180 10232
2/29/1996 10554 11105 10265
3/31/1996 10424 10963 10318
4/30/1996 10401 10932 10358
5/31/1996 10399 10928 10378
6/30/1996 10507 11047 10384
7/31/1996 10583 11147 10404
8/31/1996 10604 11144 10424
9/30/1996 10752 11300 10457
10/31/1996 10859 11428 10490
11/30/1996 11017 11637 10510
12/31/1996 10987 11588 10510
1/31/1997 11003 11610 10543
2/28/1997 11090 11716 10577
3/31/1997 10983 11560 10603
4/30/1997 11096 11657 10616
5/31/1997 11236 11832 10610
6/30/1997 11344 11958 10623
7/31/1997 11613 12289 10636
8/31/1997 11528 12174 10656
9/30/1997 11677 12319 10683
10/31/1997 11742 12398 10709
11/30/1997 11820 12471 10702
12/31/1997 11993 12653 10689
1/31/1998 12084 12783 10709
2/28/1998 12136 12787 10729
3/31/1998 12152 12799 10749
4/30/1998 12121 12741 10769
5/31/1998 12282 12942 10789
6/30/1998 12322 12994 10802
7/31/1998 12340 13026 10815
8/31/1998 12495 13227 10828
9/30/1998 12636 13392 10842
10/31/1998 12611 13392 10868
11/30/1998 12645 13439 10868
12/31/1998 12685 13473 10861
1/31/1999 12801 13633 10888
2/28/1999 12759 13573 10901
3/31/1999 12797 13592 10934
4/30/1999 12817 13626 11014
5/31/1999 12741 13547 11014
6/30/1999 12546 13352 11014
7/31/1999 12564 13401 11047
8/31/1999 12386 13293 11074
9/30/1999 12362 13299 11127
10/31/1999 12156 13155 11146
11/30/1999 12280 13295 11153
12/31/1999 12139 13196 11153
1/31/2000 12017 13138 11186
2/29/2000 12169 13291 11252
3/31/2000 12477 13581 11345
4/30/2000 12398 13501 11352
5/31/2000 12314 13431 11365
6/30/2000 12649 13787 11425
7/31/2000 12831 13979 11451
8/31/2000 13057 14194 11451
9/30/2000 12973 14120 11511
10/31/2000 13112 14274 11531
11/30/2000 13225 14382 11537
12/31/2000 13554 14738 11531
1/31/2001 13637 14884 11604
2/28/2001 13691 14931 11650
3/31/2001 13798 15065 11677
4/30/2001 13670 14901 11723
5/31/2001 13798 15062 11776
6/30/2001 13900 15163 11796
7/31/2001 14130 15387 11763
8/31/2001 14426 15641 11763
9/30/2001 14348 15588 11816
10/31/2001 14544 15774 11776
11/30/2001 14418 15641 11756
12/31/2001 14235 15493 11710
1/31/2002 14512 15762 11736
2/28/2002 14667 15952 11783
3/31/2002 14371 15639 11849
4/30/2002 14619 15945 11915
5/31/2002 14704 16041 11915
6/30/2002 14847 16211 11922
7/31/2002 15050 16420 11935
8/31/2002 15206 16617 11975
9/30/2002 15541 16981 11995
10/31/2002 15263 16699 12015
11/30/2002 15220 16630 12015
12/31/2002 15499 16981 11988
1/31/2003 15482 16938 12041
2/28/2003 15680 17175 12134
3/31/2003 15692 17185 12207
4/30/2003 15815 17299 12180
5/31/2003 16186 17704 12160
6/30/2003 16117 17628 12174
7/31/2003 15499 17011 12187
8/31/2003 15647 17138 12233
9/30/2003 16049 17642 12273
10/31/2003 15969 17553 12260
11/30/2003 16155 17736 12227
12/31/2003 16312 17883 12213
1/31/2004 16413 17986 12273
2/29/2004 16681 18256 12339
3/31/2004 16624 18193 12419
4/30/2004 16200 17762 12459
5/31/2004 16134 17697 12531
6/30/2004 16171 17762 12571
7/31/2004 16410 17996 12551
8/31/2004 16706 18356 12558
9/30/2004 16807 18454 12584
10/31/2004 16976 18612 12651
11/30/2004 16831 18459 12657
12/31/2004 17075 18684 12611
1/31/2005 17301 18859 12638
2/28/2005 17255 18796 12710
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS C 2/28/05
- --------------------------------------------
1-Year +1.99%
- --------------------------------------------
5-Year +6.68%
- --------------------------------------------
Since Inception (5/1/95) +5.49%
- --------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
Missouri Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 10000 10000 10000
5/31/1995 10277 10319 10020
6/30/1995 10214 10229 10039
7/31/1995 10265 10326 10039
8/31/1995 10368 10457 10066
9/30/1995 10417 10523 10086
10/31/1995 10540 10676 10118
11/30/1995 10700 10853 10112
12/31/1995 10812 10957 10105
1/31/1996 10911 11040 10165
2/29/1996 10866 10966 10197
3/31/1996 10718 10825 10250
4/30/1996 10698 10795 10290
5/31/1996 10690 10791 10309
6/30/1996 10796 10908 10316
7/31/1996 10871 11007 10336
8/31/1996 10887 11004 10355
9/30/1996 11025 11158 10388
10/31/1996 11138 11285 10421
11/30/1996 11292 11491 10441
12/31/1996 11237 11443 10441
1/31/1997 11247 11464 10474
2/28/1997 11336 11569 10507
3/31/1997 11231 11415 10533
4/30/1997 11341 11511 10546
5/31/1997 11477 11684 10540
6/30/1997 11581 11808 10553
7/31/1997 11860 12136 10566
8/31/1997 11769 12022 10586
9/30/1997 11915 12164 10612
10/31/1997 11976 12243 10639
11/30/1997 12050 12315 10632
12/31/1997 12220 12494 10619
1/31/1998 12307 12623 10639
2/28/1998 12353 12627 10658
3/31/1998 12363 12638 10678
4/30/1998 12326 12581 10698
5/31/1998 12484 12780 10718
6/30/1998 12530 12831 10731
7/31/1998 12541 12863 10744
8/31/1998 12693 13062 10757
9/30/1998 12820 13224 10770
10/31/1998 12788 13224 10797
11/30/1998 12826 13270 10797
12/31/1998 12851 13304 10790
1/31/1999 12961 13462 10816
2/28/1999 12922 13403 10829
3/31/1999 12955 13422 10862
4/30/1999 12959 13455 10941
5/31/1999 12886 13377 10941
6/30/1999 12673 13185 10941
7/31/1999 12686 13233 10974
8/31/1999 12511 13127 11001
9/30/1999 12471 13132 11053
10/31/1999 12269 12990 11073
11/30/1999 12377 13128 11080
12/31/1999 12230 13030 11080
1/31/2000 12102 12974 11113
2/29/2000 12250 13124 11178
3/31/2000 12554 13411 11271
4/30/2000 12470 13332 11277
5/31/2000 12391 13263 11290
6/30/2000 12710 13614 11350
7/31/2000 12898 13803 11376
8/31/2000 13107 14016 11376
9/30/2000 13029 13943 11435
10/31/2000 13162 14095 11455
11/30/2000 13269 14202 11461
12/31/2000 13593 14553 11455
1/31/2001 13669 14697 11527
2/28/2001 13718 14744 11573
3/31/2001 13829 14876 11600
4/30/2001 13684 14715 11646
5/31/2001 13806 14873 11698
6/30/2001 13902 14973 11718
7/31/2001 14123 15194 11685
8/31/2001 14412 15445 11685
9/30/2001 14339 15393 11738
10/31/2001 14527 15576 11698
11/30/2001 14397 15445 11679
12/31/2001 14208 15299 11633
1/31/2002 14464 15564 11659
2/28/2002 14623 15752 11705
3/31/2002 14322 15443 11771
4/30/2002 14561 15745 11837
5/31/2002 14638 15841 11837
6/30/2002 14773 16008 11843
7/31/2002 14966 16214 11856
8/31/2002 15116 16409 11896
9/30/2002 15441 16768 11916
10/31/2002 15158 16490 11935
11/30/2002 15108 16422 11935
12/31/2002 15376 16768 11909
1/31/2003 15353 16726 11962
2/28/2003 15541 16960 12054
3/31/2003 15546 16970 12126
4/30/2003 15661 17082 12100
5/31/2003 16020 17482 12080
6/30/2003 15957 17407 12093
7/31/2003 15330 16798 12107
8/31/2003 15468 16924 12153
9/30/2003 15855 17421 12192
10/31/2003 15780 17333 12179
11/30/2003 15955 17514 12146
12/31/2003 16088 17659 12133
1/31/2004 16192 17760 12192
2/29/2004 16435 18028 12258
3/31/2004 16386 17965 12337
4/30/2004 15963 17539 12377
5/31/2004 15891 17476 12449
6/30/2004 15920 17539 12488
7/31/2004 16133 17770 12469
8/31/2004 16429 18126 12475
9/30/2004 16521 18222 12502
10/31/2004 16678 18379 12567
11/30/2004 16529 18228 12574
12/31/2004 16759 18450 12528
1/31/2005 16972 18623 12554
2/28/2005 16916 18561 12627
66 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C)
per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Missouri state
personal income tax bracket of 38.90%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
Annual Report | 67
Your Fund's Expenses
FRANKLIN MISSOURI TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
68 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.30 $3.38
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.36
- --------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.30 $6.14
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.74 $6.11
- --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.67% and C: 1.22%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 69
Franklin North Carolina Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin North Carolina Tax-Free Income
Fund seeks to provide high, current income exempt from federal and North
Carolina state personal income taxes consistent with prudent investing while
seeking preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin North Carolina Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 55.4%
AA ............................ 13.4%
A ............................. 12.3%
BBB ........................... 10.7%
Not Rated by S&P .............. 8.2%
* 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 4.6% --
A 1.0% --
BBB or Baa 2.4% 0.2%
- ----------------------------------------------
Total 8.0% 0.2%
- --------------------------------------------------------------------------------
This annual report for Franklin North Carolina Tax-Free Income Fund covers the
period ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 134.
70 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin North Carolina Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.53 cents 3.95 cents
- --------------------------------------------------------------------------------
April 4.53 cents 3.95 cents
- --------------------------------------------------------------------------------
May 4.53 cents 3.95 cents
- --------------------------------------------------------------------------------
June 4.53 cents 3.98 cents
- --------------------------------------------------------------------------------
July 4.53 cents 3.98 cents
- --------------------------------------------------------------------------------
August 4.53 cents 3.98 cents
- --------------------------------------------------------------------------------
September 4.53 cents 3.98 cents
- --------------------------------------------------------------------------------
October 4.53 cents 3.98 cents
- --------------------------------------------------------------------------------
November 4.53 cents 3.98 cents
- --------------------------------------------------------------------------------
December 4.49 cents 3.89 cents
- --------------------------------------------------------------------------------
January 4.49 cents 3.89 cents
- --------------------------------------------------------------------------------
February 4.49 cents 3.89 cents
- --------------------------------------------------------------------------------
TOTAL 54.24 CENTS 47.40 CENTS
- --------------------------------------------------------------------------------
Class A share price, as measured by net asset value, declined from $12.42 on
February 29, 2004, to $12.37 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 54.24 cents per share for the same period.(2) The
Performance Summary beginning on page 74 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.13% based on an
annualization of the current 4.45 cent per share dividend and the maximum
offering price of $12.92 on February 28, 2005. An investor in the 2005 maximum
combined federal and North Carolina state personal income tax bracket of 40.36%
would need to earn a distribution rate of 6.93% from a taxable investment to
match the Fund's Class A tax-free distribution rate. For the Fund's Class C
shares' performance, please see the Performance Summary.
STATE UPDATE
North Carolina's diversified economy has overcome prolonged weakness relative to
other states, and now faces the strongest long-term growth prospects it has seen
in years. Unemployment levels, which peaked at 6.8% during the recession,
receded to 5.4% in February 2005, while 2004 employment growth rose for the
first time since 2000.(3) Strong gains in service sector jobs have so far offset
ongoing declines in manufacturing.
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
(3) Source: Bureau of Labor Statistics.
Annual Report | 71
PORTFOLIO BREAKDOWN
Franklin North Carolina Tax-Free
Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Utilities 18.0%
- --------------------------------------------------------------------------------
Hospital & Health Care 17.0%
- --------------------------------------------------------------------------------
Prerefunded 14.9%
- --------------------------------------------------------------------------------
Transportation 13.5%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 11.6%
- --------------------------------------------------------------------------------
Higher Education 7.5%
- --------------------------------------------------------------------------------
General Obligation 4.7%
- --------------------------------------------------------------------------------
Corporate-Backed 4.2%
- --------------------------------------------------------------------------------
Housing 3.5%
- --------------------------------------------------------------------------------
Other Revenue 3.3%
- --------------------------------------------------------------------------------
Tax-Supported 1.8%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
State legislators moved forward with ambitious spending initiatives devoted to
education, health, human services and other areas, despite the barriers of
substantial financial pressure and diminished reserve funds left over from the
recession. North Carolina's general obligation (GO) debt has more than doubled
since 2001, to $5 billion, in an effort to fund a range of current and future
projects.(4) Much of this is being financed by spending reductions and revenue
enhancements that involve sales and income tax hikes and a broadening of the
state's debt profile to include variable-rate and appropriation-backed debt
instruments. Debt service levels, low at less than 2% of general fund spending,
will rise as nearly $2.5 billion of GO and other, tax-supported debt is
gradually issued over the remainder of the fiscal 2004-2005 biennium.(4)
Consequently, state residents will likely pay into an increasing, yet
manageable, debt burden. The state has set conservative debt boundaries designed
to provide financial relief while protecting its stabilizing liquidity position.
By January 2005, North Carolina's tax-supported debt levels were still moderate
by all measures at $654 per capita and 2.3% of personal income.(4)
Independent credit rating agency Standard & Poor's assigned North Carolina its
highest possible credit rating of AAA, with a stable outlook, based on the
state's responsible financial management practices, liquidity and stable cash
flow.(5)
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
(4) Source: Standard & Poor's, "Research: Public Finance Report Card: U.S.
States Debt Profiles," RATINGSDIRECT, 1/31/05.
(5) This does not indicate Standard & Poor's rating of the Fund.
72 | Annual Report
Thank you for your continued participation in Franklin North Carolina Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
Annual Report | 73
Performance Summary as of 2/28/05
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.05 $12.37 $12.42
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.5424
- -----------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.06 $12.48 $12.54
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.4740
- -----------------------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.11% +42.08% +79.63%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.31% +6.35% +5.58%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.81% +5.73% +5.39%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.13%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.93%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.20%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.37%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.41% +38.15% +68.74%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.42% +6.68% +5.46%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +2.08% +6.08% +5.37%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.71%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.22%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.80%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.70%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
74 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -0.31%
- -------------------------------------
5-Year +6.35%
- -------------------------------------
10-Year +5.58%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
North Carolina Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,579 $10,000 $10,000
3/31/1995 $ 9,697 $10,115 $10,033
4/30/1995 $ 9,706 $10,127 $10,066
5/31/1995 $ 9,957 $10,450 $10,086
6/30/1995 $ 9,885 $10,359 $10,106
7/31/1995 $ 9,933 $10,457 $10,106
8/31/1995 $10,030 $10,589 $10,133
9/30/1995 $10,083 $10,656 $10,152
10/31/1995 $10,236 $10,811 $10,186
11/30/1995 $10,399 $10,991 $10,179
12/31/1995 $10,497 $11,096 $10,172
1/31/1996 $10,546 $11,180 $10,232
2/29/1996 $10,470 $11,105 $10,265
3/31/1996 $10,366 $10,963 $10,318
4/30/1996 $10,360 $10,932 $10,358
5/31/1996 $10,376 $10,928 $10,378
6/30/1996 $10,484 $11,047 $10,384
7/31/1996 $10,559 $11,147 $10,404
8/31/1996 $10,560 $11,144 $10,424
9/30/1996 $10,700 $11,300 $10,457
10/31/1996 $10,806 $11,428 $10,490
11/30/1996 $10,954 $11,637 $10,510
12/31/1996 $10,929 $11,588 $10,510
1/31/1997 $10,942 $11,610 $10,543
2/28/1997 $11,036 $11,716 $10,577
3/31/1997 $10,935 $11,560 $10,603
4/30/1997 $11,028 $11,657 $10,616
5/31/1997 $11,156 $11,832 $10,610
6/30/1997 $11,273 $11,958 $10,623
7/31/1997 $11,523 $12,289 $10,636
8/31/1997 $11,456 $12,174 $10,656
9/30/1997 $11,574 $12,319 $10,683
10/31/1997 $11,657 $12,398 $10,709
11/30/1997 $11,734 $12,471 $10,702
12/31/1997 $11,904 $12,653 $10,689
1/31/1998 $12,005 $12,783 $10,709
2/28/1998 $12,007 $12,787 $10,729
3/31/1998 $12,031 $12,799 $10,749
4/30/1998 $12,008 $12,741 $10,769
5/31/1998 $12,167 $12,942 $10,789
6/30/1998 $12,216 $12,994 $10,802
7/31/1998 $12,253 $13,026 $10,815
8/31/1998 $12,407 $13,227 $10,828
9/30/1998 $12,557 $13,392 $10,842
10/31/1998 $12,551 $13,392 $10,868
11/30/1998 $12,584 $13,439 $10,868
12/31/1998 $12,613 $13,473 $10,861
1/31/1999 $12,726 $13,633 $10,888
2/28/1999 $12,673 $13,573 $10,901
3/31/1999 $12,700 $13,592 $10,934
4/30/1999 $12,720 $13,626 $11,014
5/31/1999 $12,652 $13,547 $11,014
6/30/1999 $12,455 $13,352 $11,014
7/31/1999 $12,462 $13,401 $11,047
8/31/1999 $12,326 $13,293 $11,074
9/30/1999 $12,302 $13,299 $11,127
10/31/1999 $12,117 $13,155 $11,146
11/30/1999 $12,219 $13,295 $11,153
12/31/1999 $12,078 $13,196 $11,153
1/31/2000 $11,979 $13,138 $11,186
2/29/2000 $12,120 $13,291 $11,252
3/31/2000 $12,414 $13,581 $11,345
4/30/2000 $12,335 $13,501 $11,352
5/31/2000 $12,273 $13,431 $11,365
6/30/2000 $12,583 $13,787 $11,425
7/31/2000 $12,775 $13,979 $11,451
8/31/2000 $12,966 $14,194 $11,451
9/30/2000 $12,895 $14,120 $11,511
10/31/2000 $13,045 $14,274 $11,531
11/30/2000 $13,157 $14,382 $11,537
12/31/2000 $13,474 $14,738 $11,531
1/31/2001 $13,567 $14,884 $11,604
2/28/2001 $13,622 $14,931 $11,650
3/31/2001 $13,730 $15,065 $11,677
4/30/2001 $13,569 $14,901 $11,723
5/31/2001 $13,698 $15,062 $11,776
6/30/2001 $13,813 $15,163 $11,796
7/31/2001 $14,077 $15,387 $11,763
8/31/2001 $14,290 $15,641 $11,763
9/30/2001 $14,213 $15,588 $11,816
10/31/2001 $14,396 $15,774 $11,776
11/30/2001 $14,297 $15,641 $11,756
12/31/2001 $14,138 $15,493 $11,710
1/31/2002 $14,363 $15,762 $11,736
2/28/2002 $14,541 $15,952 $11,783
3/31/2002 $14,269 $15,639 $11,849
4/30/2002 $14,527 $15,945 $11,915
5/31/2002 $14,597 $16,041 $11,915
6/30/2002 $14,724 $16,211 $11,922
7/31/2002 $14,911 $16,420 $11,935
8/31/2002 $15,090 $16,617 $11,975
9/30/2002 $15,434 $16,981 $11,995
10/31/2002 $15,181 $16,699 $12,015
11/30/2002 $15,137 $16,630 $12,015
12/31/2002 $15,450 $16,981 $11,988
1/31/2003 $15,407 $16,938 $12,041
2/28/2003 $15,590 $17,175 $12,134
3/31/2003 $15,589 $17,185 $12,207
4/30/2003 $15,671 $17,299 $12,180
5/31/2003 $16,040 $17,704 $12,160
6/30/2003 $15,996 $17,628 $12,174
7/31/2003 $15,435 $17,011 $12,187
8/31/2003 $15,555 $17,138 $12,233
9/30/2003 $15,955 $17,642 $12,273
10/31/2003 $15,888 $17,553 $12,260
11/30/2003 $16,072 $17,736 $12,227
12/31/2003 $16,215 $17,883 $12,213
1/31/2004 $16,316 $17,986 $12,273
2/29/2004 $16,543 $18,256 $12,339
3/31/2004 $16,541 $18,193 $12,419
4/30/2004 $16,162 $17,762 $12,459
5/31/2004 $16,097 $17,697 $12,531
6/30/2004 $16,176 $17,762 $12,571
7/31/2004 $16,401 $17,996 $12,551
8/31/2004 $16,682 $18,356 $12,558
9/30/2004 $16,783 $18,454 $12,584
10/31/2004 $16,938 $18,612 $12,651
11/30/2004 $16,809 $18,459 $12,657
12/31/2004 $17,024 $18,684 $12,611
1/31/2005 $17,247 $18,859 $12,638
2/28/2005 $17,207 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +2.42%
- -------------------------------------
5-Year +6.68%
- -------------------------------------
Since Inception (5/1/95) +5.46%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
North Carolina Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 10000 10000 10000
5/31/1995 10262 10319 10020
6/30/1995 10200 10229 10039
7/31/1995 10252 10326 10039
8/31/1995 10348 10457 10066
9/30/1995 10407 10523 10086
10/31/1995 10559 10676 10118
11/30/1995 10720 10853 10112
12/31/1995 10824 10957 10105
1/31/1996 10860 11040 10165
2/29/1996 10779 10966 10197
3/31/1996 10666 10825 10250
4/30/1996 10656 10795 10290
5/31/1996 10665 10791 10309
6/30/1996 10779 10908 10316
7/31/1996 10843 11007 10336
8/31/1996 10839 11004 10355
9/30/1996 10985 11158 10388
10/31/1996 11078 11285 10421
11/30/1996 11234 11491 10441
12/31/1996 11202 11443 10441
1/31/1997 11210 11464 10474
2/28/1997 11300 11569 10507
3/31/1997 11192 11415 10533
4/30/1997 11282 11511 10546
5/31/1997 11417 11684 10540
6/30/1997 11521 11808 10553
7/31/1997 11779 12136 10566
8/31/1997 11696 12022 10586
9/30/1997 11819 12164 10612
10/31/1997 11888 12243 10639
11/30/1997 11970 12315 10632
12/31/1997 12127 12494 10619
1/31/1998 12234 12623 10639
2/28/1998 12230 12627 10658
3/31/1998 12248 12638 10678
4/30/1998 12220 12581 10698
5/31/1998 12386 12780 10718
6/30/1998 12430 12831 10731
7/31/1998 12461 12863 10744
8/31/1998 12610 13062 10757
9/30/1998 12746 13224 10770
10/31/1998 12735 13224 10797
11/30/1998 12772 13270 10797
12/31/1998 12795 13304 10790
1/31/1999 12904 13462 10816
2/28/1999 12844 13403 10829
3/31/1999 12865 13422 10862
4/30/1999 12878 13455 10941
5/31/1999 12804 13377 10941
6/30/1999 12588 13185 10941
7/31/1999 12600 13233 10974
8/31/1999 12448 13127 11001
9/30/1999 12429 13132 11053
10/31/1999 12228 12990 11073
11/30/1999 12323 13128 11080
12/31/1999 12177 13030 11080
1/31/2000 12072 12974 11113
2/29/2000 12217 13124 11178
3/31/2000 12506 13411 11271
4/30/2000 12423 13332 11277
5/31/2000 12344 13263 11290
6/30/2000 12660 13614 11350
7/31/2000 12845 13803 11376
8/31/2000 13030 14016 11376
9/30/2000 12953 13943 11435
10/31/2000 13097 14095 11455
11/30/2000 13203 14202 11461
12/31/2000 13513 14553 11455
1/31/2001 13612 14697 11527
2/28/2001 13661 14744 11573
3/31/2001 13761 14876 11600
4/30/2001 13582 14715 11646
5/31/2001 13715 14873 11698
6/30/2001 13823 14973 11718
7/31/2001 14079 15194 11685
8/31/2001 14283 15445 11685
9/30/2001 14202 15393 11738
10/31/2001 14377 15576 11698
11/30/2001 14272 15445 11679
12/31/2001 14107 15299 11633
1/31/2002 14336 15564 11659
2/28/2002 14494 15752 11705
3/31/2002 14218 15443 11771
4/30/2002 14467 15745 11837
5/31/2002 14542 15841 11837
6/30/2002 14662 16008 11843
7/31/2002 14839 16214 11856
8/31/2002 15010 16409 11896
9/30/2002 15355 16768 11916
10/31/2002 15086 16490 11935
11/30/2002 15036 16422 11935
12/31/2002 15339 16768 11909
1/31/2003 15290 16726 11962
2/28/2003 15476 16960 12054
3/31/2003 15456 16970 12126
4/30/2003 15544 17082 12100
5/31/2003 15898 17482 12080
6/30/2003 15849 17407 12093
7/31/2003 15279 16798 12107
8/31/2003 15401 16924 12153
9/30/2003 15770 17421 12192
10/31/2003 15696 17333 12179
11/30/2003 15883 17514 12146
12/31/2003 16015 17659 12133
1/31/2004 16105 17760 12192
2/29/2004 16333 18028 12258
3/31/2004 16310 17965 12337
4/30/2004 15932 17539 12377
5/31/2004 15862 17476 12449
6/30/2004 15930 17539 12488
7/31/2004 16142 17770 12469
8/31/2004 16421 18126 12475
9/30/2004 16500 18222 12502
10/31/2004 16644 18379 12567
11/30/2004 16524 18228 12574
12/31/2004 16725 18450 12528
1/31/2005 16923 18623 12554
2/28/2005 16874 18561 12627
Annual Report | 75
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C)
per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and North Carolina state
personal income tax bracket of 40.36%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
76 | Annual Report
Your Fund's Expenses
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 77
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.50 $3.43
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.41
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.60 $6.19
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.16
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.68% and C: 1.23%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
78 | Annual Report
Franklin Virginia Tax-Free Income Fund
Your Fund's Goal and Main Investments: Franklin Virginia Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Virginia state
personal income taxes consistent with prudent investing while seeking
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Virginia Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS
- --------------------------------------------------------------------------------
AAA 54.9%
- --------------------------------------------------------------------------------
AA 14.2%
- --------------------------------------------------------------------------------
A 16.8%
- --------------------------------------------------------------------------------
BBB 2.7%
- --------------------------------------------------------------------------------
Below Investment Grade 0.2%
- --------------------------------------------------------------------------------
Not Rated by S&P 11.2%
- --------------------------------------------------------------------------------
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Ratings for securities not rated by S&P
are in the table below.
RATINGS MOODY'S
AAA or Aaa 2.6%
AA or Aa 1.1%
A 2.9%
BBB or Baa 2.5%
Below Investment Grade 2.1%
- ---------------------------------------
Total 11.2%
- --------------------------------------------------------------------------------
This annual report for Franklin Virginia Tax-Free Income Fund covers the period
ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are
generally taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 141.
Annual Report | 79
DIVIDEND DISTRIBUTIONS(2)
Franklin Virginia Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.25 cents 3.68 cents
- --------------------------------------------------------------------------------
April 4.25 cents 3.68 cents
- --------------------------------------------------------------------------------
May 4.25 cents 3.68 cents
- --------------------------------------------------------------------------------
June 4.25 cents 3.72 cents
- --------------------------------------------------------------------------------
July 4.25 cents 3.72 cents
- --------------------------------------------------------------------------------
August 4.25 cents 3.72 cents
- --------------------------------------------------------------------------------
September 4.25 cents 3.73 cents
- --------------------------------------------------------------------------------
October 4.25 cents 3.73 cents
- --------------------------------------------------------------------------------
November 4.25 cents 3.73 cents
- --------------------------------------------------------------------------------
December 4.32 cents 3.75 cents
- --------------------------------------------------------------------------------
January 4.32 cents 3.75 cents
- --------------------------------------------------------------------------------
February 4.32 cents 3.75 cents
- --------------------------------------------------------------------------------
TOTAL 51.21 CENTS 44.64 CENTS
- --------------------------------------------------------------------------------
Class A share price, as measured by net asset value, declined from $11.94 on
February 29, 2004, to $11.91 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 51.21 cents per share for the same period.(2) The
Performance Summary beginning on page 83 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.17% based on an
annualization of the current 4.32 cent per share dividend and the maximum
offering price of $12.44 on February 28, 2005. An investor in the 2005 maximum
combined federal and Virginia state personal income tax bracket of 38.74% would
need to earn a distribution rate of 6.81% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class C shares'
performance, please see the Performance Summary.
COMMONWEALTH UPDATE
Virginia's resilient, broad-based economy experienced strong growth as it
continued to recover from the effects of the national recession. During economic
downturns, the commonwealth's workforce has always been partially stabilized by
a relatively high concentration of federal government and related jobs.
Meanwhile, its more economically vulnerable technology- and
manufacturing-related industries tended to ebb and flow with the national
economy. In fiscal
(2) Assumes shares were purchased and held for the entire accrual period.
Since dividends accrue daily, your actual distributions will vary
depending on the date you purchased your shares and any account activity.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
80 | Annual Report
year 2004, significant increases in construction, financial and other service
sector jobs helped offset losses in the manufacturing, information technology,
utilities and transportation sectors. Despite the mixed employment situation,
overall employment actually rose 1% in 2004 after flat or negative employment
growth in 2001-2003.(3) Virginia continued to attract new businesses with its
low business costs, generous tax incentives and highly skilled labor force.
The commonwealth's financial operations have stabilized with unexpectedly robust
corporate, sales and individual income tax revenues brought on by economic
recovery and a fiscal year 2004 tax reform act designed to close budget gaps
accrued over the recessionary years. Rather than use the windfall for new
spending initiatives, Virginia successfully eliminated previous budget gaps and
replenished the diminished financial reserve fund of 2001-2003. The broadened
tax base included increases in recurring sales, property and cigarette taxes
that were instrumental in achieving budgetary balance. Furthermore, the
commonwealth's general fund and stabilization fund have been restored to healthy
surpluses. Although its tax-supported debt burden has risen to about $5.5
billion, Virginia's debt ratios are still lower than the national median, with
overall debt per resident at $739, or 2.2% of personal income.(4)
Independent credit rating agencies Standard & Poor's and Moody's Investors
Service assigned Virginia's general obligation bonds their highest ratings of
AAA and Aaa with a stable outlook, reflecting the commonwealth's strengthening
economy, manageable debt burden, and long history of proactive and conservative
financial and budget management.(5)
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
(3) Source: Standard & Poor's, "Research; Tax Secured, General Obligation,"
RatingsDirect, 11/3/04.
(4) Source: Standard & Poor's, "Research: Public Finance Report Card: U.S.
States Debt Profiles," RATINGSDIRECT, 1/31/05.
(5) These do not indicate ratings of the Fund.
PORTFOLIO BREAKDOWN
Franklin Virginia Tax-Free Income Fund
2/28/05
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Transportation 18.0%
- --------------------------------------------------------------------------------
Utilities 17.1%
- --------------------------------------------------------------------------------
Prerefunded 13.7%
- --------------------------------------------------------------------------------
General Obligation 9.4%
- --------------------------------------------------------------------------------
Hospital & Health Care 8.0%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 8.0%
- --------------------------------------------------------------------------------
Housing 6.3%
- --------------------------------------------------------------------------------
Higher Education 5.6%
- --------------------------------------------------------------------------------
Other Revenue 5.2%
- --------------------------------------------------------------------------------
Tax-Supported 5.1%
- --------------------------------------------------------------------------------
Corporate-Backed 3.6%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 81
Thank you for your continued participation in Franklin Virginia Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
82 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $11.91 $11.94
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.5121
- -----------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.02 $12.02 $12.04
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.4464
- -----------------------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.18% +39.81% +76.05%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.24% +6.01% +5.36%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.42% 5.36% +5.23%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.17%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.81%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.25%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.31%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.66% +36.15% +65.73%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.66% +6.37% +5.27%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +2.50% +5.70% +5.19%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.72%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.07%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.85%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.65%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 83
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -0.24%
- -------------------------------------
5-Year +6.01%
- -------------------------------------
10-Year +5.36%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
CLASS A (3/1/95-2/28/05)
Franklin Lehman
Virginia Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,577 $10,000 $10,000
3/31/1995 $ 9,670 $10,115 $10,033
4/30/1995 $ 9,687 $10,127 $10,066
5/31/1995 $ 9,923 $10,450 $10,086
6/30/1995 $ 9,876 $10,359 $10,106
7/31/1995 $ 9,958 $10,457 $10,106
8/31/1995 $10,056 $10,589 $10,133
9/30/1995 $10,109 $10,656 $10,152
10/31/1995 $10,236 $10,811 $10,186
11/30/1995 $10,382 $10,991 $10,179
12/31/1995 $10,479 $11,096 $10,172
1/31/1996 $10,528 $11,180 $10,232
2/29/1996 $10,479 $11,105 $10,265
3/31/1996 $10,383 $10,963 $10,318
4/30/1996 $10,386 $10,932 $10,358
5/31/1996 $10,401 $10,928 $10,378
6/30/1996 $10,502 $11,047 $10,384
7/31/1996 $10,570 $11,147 $10,404
8/31/1996 $10,573 $11,144 $10,424
9/30/1996 $10,705 $11,300 $10,457
10/31/1996 $10,795 $11,428 $10,490
11/30/1996 $10,945 $11,637 $10,510
12/31/1996 $10,916 $11,588 $10,510
1/31/1997 $10,932 $11,610 $10,543
2/28/1997 $11,019 $11,716 $10,577
3/31/1997 $10,911 $11,560 $10,603
4/30/1997 $10,997 $11,657 $10,616
5/31/1997 $11,138 $11,832 $10,610
6/30/1997 $11,231 $11,958 $10,623
7/31/1997 $11,494 $12,289 $10,636
8/31/1997 $11,399 $12,174 $10,656
9/30/1997 $11,528 $12,319 $10,683
10/31/1997 $11,603 $12,398 $10,709
11/30/1997 $11,690 $12,471 $10,702
12/31/1997 $11,847 $12,653 $10,689
1/31/1998 $11,951 $12,783 $10,709
2/28/1998 $11,963 $12,787 $10,729
3/31/1998 $11,988 $12,799 $10,749
4/30/1998 $11,935 $12,741 $10,769
5/31/1998 $12,117 $12,942 $10,789
6/30/1998 $12,176 $12,994 $10,802
7/31/1998 $12,212 $13,026 $10,815
8/31/1998 $12,368 $13,227 $10,828
9/30/1998 $12,500 $13,392 $10,842
10/31/1998 $12,472 $13,392 $10,868
11/30/1998 $12,515 $13,439 $10,868
12/31/1998 $12,541 $13,473 $10,861
1/31/1999 $12,656 $13,633 $10,888
2/28/1999 $12,612 $13,573 $10,901
3/31/1999 $12,638 $13,592 $10,934
4/30/1999 $12,657 $13,626 $11,014
5/31/1999 $12,599 $13,547 $11,014
6/30/1999 $12,408 $13,352 $11,014
7/31/1999 $12,425 $13,401 $11,047
8/31/1999 $12,253 $13,293 $11,074
9/30/1999 $12,239 $13,299 $11,127
10/31/1999 $12,038 $13,155 $11,146
11/30/1999 $12,151 $13,295 $11,153
12/31/1999 $12,028 $13,196 $11,153
1/31/2000 $11,915 $13,138 $11,186
2/29/2000 $12,068 $13,291 $11,252
3/31/2000 $12,412 $13,581 $11,345
4/30/2000 $12,330 $13,501 $11,352
5/31/2000 $12,244 $13,431 $11,365
6/30/2000 $12,571 $13,787 $11,425
7/31/2000 $12,730 $13,979 $11,451
8/31/2000 $12,935 $14,194 $11,451
9/30/2000 $12,850 $14,120 $11,511
10/31/2000 $12,990 $14,274 $11,531
11/30/2000 $13,044 $14,382 $11,537
12/31/2000 $13,320 $14,738 $11,531
1/31/2001 $13,402 $14,884 $11,604
2/28/2001 $13,492 $14,931 $11,650
3/31/2001 $13,611 $15,065 $11,677
4/30/2001 $13,469 $14,901 $11,723
5/31/2001 $13,599 $15,062 $11,776
6/30/2001 $13,690 $15,163 $11,796
7/31/2001 $13,896 $15,387 $11,763
8/31/2001 $14,087 $15,641 $11,763
9/30/2001 $13,994 $15,588 $11,816
10/31/2001 $14,178 $15,774 $11,776
11/30/2001 $14,099 $15,641 $11,756
12/31/2001 $13,910 $15,493 $11,710
1/31/2002 $14,124 $15,762 $11,736
2/28/2002 $14,266 $15,952 $11,783
3/31/2002 $14,023 $15,639 $11,849
4/30/2002 $14,235 $15,945 $11,915
5/31/2002 $14,317 $16,041 $11,915
6/30/2002 $14,433 $16,211 $11,922
7/31/2002 $14,609 $16,420 $11,935
8/31/2002 $14,739 $16,617 $11,975
9/30/2002 $15,025 $16,981 $11,995
10/31/2002 $14,714 $16,699 $12,015
11/30/2002 $14,667 $16,630 $12,015
12/31/2002 $14,983 $16,981 $11,988
1/31/2003 $14,923 $16,938 $12,041
2/28/2003 $15,106 $17,175 $12,134
3/31/2003 $15,141 $17,185 $12,207
4/30/2003 $15,288 $17,299 $12,180
5/31/2003 $15,673 $17,704 $12,160
6/30/2003 $15,625 $17,628 $12,174
7/31/2003 $15,062 $17,011 $12,187
8/31/2003 $15,196 $17,138 $12,233
9/30/2003 $15,547 $17,642 $12,273
10/31/2003 $15,530 $17,553 $12,260
11/30/2003 $15,702 $17,736 $12,227
12/31/2003 $15,844 $17,883 $12,213
1/31/2004 $15,956 $17,986 $12,273
2/29/2004 $16,197 $18,256 $12,339
3/31/2004 $16,178 $18,193 $12,419
4/30/2004 $15,788 $17,762 $12,459
5/31/2004 $15,774 $17,697 $12,531
6/30/2004 $15,823 $17,762 $12,571
7/31/2004 $16,033 $17,996 $12,551
8/31/2004 $16,315 $18,356 $12,558
9/30/2004 $16,415 $18,454 $12,584
10/31/2004 $16,582 $18,612 $12,651
11/30/2004 $16,446 $18,459 $12,657
12/31/2004 $16,704 $18,684 $12,611
1/31/2005 $16,901 $18,859 $12,638
2/28/2005 $16,860 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +2.66%
- -------------------------------------
5-Year +6.37%
- -------------------------------------
Since Inception (5/1/95) +5.27%
- -------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
CLASS C (5/1/95-2/28/05)
Franklin Lehman
Virginia Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,273 $10,319 $10,020
6/30/1995 $10,228 $10,229 $10,039
7/31/1995 $10,298 $10,326 $10,039
8/31/1995 $10,402 $10,457 $10,066
9/30/1995 $10,452 $10,523 $10,086
10/31/1995 $10,578 $10,676 $10,118
11/30/1995 $10,722 $10,853 $10,112
12/31/1995 $10,817 $10,957 $10,105
1/31/1996 $10,862 $11,040 $10,165
2/29/1996 $10,806 $10,966 $10,197
3/31/1996 $10,711 $10,825 $10,250
4/30/1996 $10,700 $10,795 $10,290
5/31/1996 $10,711 $10,791 $10,309
6/30/1996 $10,809 $10,908 $10,316
7/31/1996 $10,884 $11,007 $10,336
8/31/1996 $10,872 $11,004 $10,355
9/30/1996 $11,011 $11,158 $10,388
10/31/1996 $11,097 $11,285 $10,421
11/30/1996 $11,246 $11,491 $10,441
12/31/1996 $11,211 $11,443 $10,441
1/31/1997 $11,221 $11,464 $10,474
2/28/1997 $11,305 $11,569 $10,507
3/31/1997 $11,199 $11,415 $10,533
4/30/1997 $11,282 $11,511 $10,546
5/31/1997 $11,421 $11,684 $10,540
6/30/1997 $11,500 $11,808 $10,553
7/31/1997 $11,772 $12,136 $10,566
8/31/1997 $11,669 $12,022 $10,586
9/30/1997 $11,785 $12,164 $10,612
10/31/1997 $11,865 $12,243 $10,639
11/30/1997 $11,948 $12,315 $10,632
12/31/1997 $12,102 $12,494 $10,619
1/31/1998 $12,202 $12,623 $10,639
2/28/1998 $12,208 $12,627 $10,658
3/31/1998 $12,227 $12,638 $10,678
4/30/1998 $12,168 $12,581 $10,698
5/31/1998 $12,358 $12,780 $10,718
6/30/1998 $12,411 $12,831 $10,731
7/31/1998 $12,433 $12,863 $10,744
8/31/1998 $12,584 $13,062 $10,757
9/30/1998 $12,721 $13,224 $10,770
10/31/1998 $12,687 $13,224 $10,797
11/30/1998 $12,724 $13,270 $10,797
12/31/1998 $12,744 $13,304 $10,790
1/31/1999 $12,854 $13,462 $10,816
2/28/1999 $12,792 $13,403 $10,829
3/31/1999 $12,823 $13,422 $10,862
4/30/1999 $12,846 $13,455 $10,941
5/31/1999 $12,770 $13,377 $10,941
6/30/1999 $12,571 $13,185 $10,941
7/31/1999 $12,582 $13,233 $10,974
8/31/1999 $12,404 $13,127 $11,001
9/30/1999 $12,373 $13,132 $11,053
10/31/1999 $12,177 $12,990 $11,073
11/30/1999 $12,284 $13,128 $11,080
12/31/1999 $12,145 $13,030 $11,080
1/31/2000 $12,037 $12,974 $11,113
2/29/2000 $12,173 $13,124 $11,178
3/31/2000 $12,524 $13,411 $11,271
4/30/2000 $12,437 $13,332 $11,277
5/31/2000 $12,345 $13,263 $11,290
6/30/2000 $12,666 $13,614 $11,350
7/31/2000 $12,821 $13,803 $11,376
8/31/2000 $13,021 $14,016 $11,376
9/30/2000 $12,930 $13,943 $11,435
10/31/2000 $13,064 $14,095 $11,455
11/30/2000 $13,114 $14,202 $11,461
12/31/2000 $13,383 $14,553 $11,455
1/31/2001 $13,459 $14,697 $11,527
2/28/2001 $13,544 $14,744 $11,573
3/31/2001 $13,667 $14,876 $11,600
4/30/2001 $13,520 $14,715 $11,646
5/31/2001 $13,630 $14,873 $11,698
6/30/2001 $13,727 $14,973 $11,718
7/31/2001 $13,926 $15,194 $11,685
8/31/2001 $14,097 $15,445 $11,685
9/30/2001 $14,011 $15,393 $11,738
10/31/2001 $14,188 $15,576 $11,698
11/30/2001 $14,103 $15,445 $11,679
12/31/2001 $13,908 $15,299 $11,633
1/31/2002 $14,114 $15,564 $11,659
2/28/2002 $14,259 $15,752 $11,705
3/31/2002 $14,001 $15,443 $11,771
4/30/2002 $14,216 $15,745 $11,837
5/31/2002 $14,278 $15,841 $11,837
6/30/2002 $14,387 $16,008 $11,843
7/31/2002 $14,554 $16,214 $11,856
8/31/2002 $14,676 $16,409 $11,896
9/30/2002 $14,965 $16,768 $11,916
10/31/2002 $14,652 $16,490 $11,935
11/30/2002 $14,599 $16,422 $11,935
12/31/2002 $14,891 $16,768 $11,909
1/31/2003 $14,839 $16,726 $11,962
2/28/2003 $15,014 $16,960 $12,054
3/31/2003 $15,041 $16,970 $12,126
4/30/2003 $15,180 $17,082 $12,100
5/31/2003 $15,552 $17,482 $12,080
6/30/2003 $15,497 $17,407 $12,093
7/31/2003 $14,938 $16,798 $12,107
8/31/2003 $15,062 $16,924 $12,153
9/30/2003 $15,399 $17,421 $12,192
10/31/2003 $15,375 $17,333 $12,179
11/30/2003 $15,538 $17,514 $12,146
12/31/2003 $15,668 $17,659 $12,133
1/31/2004 $15,770 $17,760 $12,192
2/29/2004 $16,000 $18,028 $12,258
3/31/2004 $15,973 $17,965 $12,337
4/30/2004 $15,583 $17,539 $12,377
5/31/2004 $15,575 $17,476 $12,449
6/30/2004 $15,602 $17,539 $12,488
7/31/2004 $15,800 $17,770 $12,469
8/31/2004 $16,081 $18,126 $12,475
9/30/2004 $16,171 $18,222 $12,502
10/31/2004 $16,328 $18,379 $12,567
11/30/2004 $16,189 $18,228 $12,574
12/31/2004 $16,434 $18,450 $12,528
1/31/2005 $16,620 $18,623 $12,554
2/28/2005 $16,573 $18,561 $12,627
84 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C)
per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Virginia state
personal income tax bracket of 38.74%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered
for the long-term tax-exempt bond market. All bonds included have a
minimum credit rating of at least Baa. They must have an outstanding par
value of at least $5 million and be issued as part of a transaction of at
least $50 million. The bonds must be dated after 12/31/90, and must be at
least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded
from the index. The index has four main bond sectors: general obligation,
revenue, insured and prerefunded.
Annual Report | 85
Your Fund's Expenses
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
86 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,034.40 $3.43
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.41
- --------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.30 $6.19
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.16
- --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.68% and C: 1.23%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 87
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN ALABAMA TAX-FREE INCOME FUND
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(c) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 11.76 $ 11.50 $ 11.22 $ 11.08 $ 10.62
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .51 .52 .54 .56 .58
Net realized and unrealized gains (losses) ................... (.16) .26 .28 .14 .47
--------------------------------------------------------------
Total from investment operations .............................. .35 .78 .82 .70 1.05
--------------------------------------------------------------
Less distributions from net investment income ................. (.50) (.52) (.54) (.56) (.59)
--------------------------------------------------------------
Net asset value, end of year .................................. $ 11.61 $ 11.76 $ 11.50 $ 11.22 $ 11.08
==============================================================
Total return(b) ............................................... 3.12% 6.92% 7.55% 6.49% 10.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 225,258 $ 236,225 $ 228,746 $ 215,649 $ 210,198
Ratios to average net assets:
Expenses ..................................................... .72% .72% .73% .73% .73%
Net investment income ........................................ 4.39% 4.47% 4.81% 5.05% 5.32%
Portfolio turnover rate ....................................... 8.53% 12.53% 17.10% 9.94% 11.12%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) For the year ended February 29.
88 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ALABAMA TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(c) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 11.84 $ 11.58 $ 11.29 $ 11.14 $ 10.68
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .45 .45 .49 .50 .52
Net realized and unrealized gains (losses) ................... (.15) .26 .28 .15 .47
--------------------------------------------------------------
Total from investment operations .............................. .30 .71 .77 .65 .99
--------------------------------------------------------------
Less distributions from net investment income ................. (.44) (.45) (.48) (.50) (.53)
--------------------------------------------------------------
Net asset value, end of year .................................. $ 11.70 $ 11.84 $ 11.58 $ 11.29 $ 11.14
==============================================================
Total return(b) ............................................... 2.63% 6.25% 7.01% 5.96% 9.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 31,702 $ 30,504 $ 25,258 $ 18,462 $ 14,475
Ratios to average net assets:
Expenses ..................................................... 1.27% 1.29% 1.26% 1.28% 1.28%
Net investment income ........................................ 3.84% 3.90% 4.28% 4.50% 4.77%
Portfolio turnover rate ....................................... 8.53% 12.53% 17.10% 9.94% 11.12%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) For the year ended February 29.
Annual Report | See notes to financial statements. | 89
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ALABAMA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.5%
BONDS 99.5%
ALABAMA 89.7%
Alabama Building Renovation Finance Authority Revenue, Refunding, AMBAC Insured, 5.625%,
9/01/24 ...................................................................................... $ 2,500,000 $ 2,759,750
Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan, Series A, AMBAC Insured,
5.25%, 8/15/24 ............................................................................... 1,755,000 1,873,761
Alabama HFA, SFMR, Series D-2, GNMA Secured, 5.75%, 10/01/23 .................................. 915,000 937,472
Alabama State Docks Department Docks Facilities Revenue,
MBIA Insured, 6.30%, 10/01/21 ............................................................... 4,500,000 4,814,370
Refunding, MBIA Insured, 5.50%, 10/01/22 .................................................... 1,000,000 1,093,570
Alabama State IDA, Solid Waste Disposal Revenue, Pine City Fiber Co., 6.45%, 12/01/23 ......... 2,000,000 2,123,200
Alabama Water Pollution Control Authority Revenue, Fund Loan, Series A, AMBAC Insured, 5.00%,
8/15/23 ...................................................................................... 4,435,000 4,666,463
Alabaster GO, wts., AMBAC Insured, Pre-Refunded, 5.00%,
9/01/24 ..................................................................................... 3,470,000 3,846,287
9/01/27 ..................................................................................... 1,500,000 1,662,660
Alabaster Sewer Revenue, AMBAC Insured, 5.00%, 4/01/29 ........................................ 2,055,000 2,138,577
Athens Electric Revenue, wts., MBIA Insured,
6.00%, 6/01/25 .............................................................................. 370,000 380,674
Pre-Refunded, 6.00%, 6/01/25 ................................................................ 630,000 648,812
Auburn GO, FSA Insured, 5.00%, 1/01/24 ........................................................ 1,500,000 1,548,105
Auburn University Athletic Revenue, Series A, FSA Insured, 5.00%, 4/01/32 ..................... 2,000,000 2,072,280
Baldwin County Eastern Shore Health Care Authority Hospital Revenue, 5.75%, 4/01/27 ........... 1,000,000 988,860
Bessemer, wts., XLCA Insured, 5.00%, 2/01/35 .................................................. 1,990,000 2,074,973
Birmingham Baptist Medical Center Special Care Facilities Financing Authority Revenue, Baptist
Health System Inc., Refunding, MBIA Insured, 5.875%,
11/15/19 .................................................................................... 3,500,000 3,741,010
11/15/26 .................................................................................... 2,000,000 2,103,380
Birmingham GO, Refunding and Capital Improvement, Series B, AMBAC Insured, 5.00%, 12/01/32 .... 4,000,000 4,126,640
Birmingham Southern College Private Educational Building Authority Tuition Revenue,
Refunding, 5.35%, 12/01/19 ................................................................... 1,000,000 1,014,120
Clarke and Mobile Counties Gas District Revenue, AMBAC Insured, 5.875%, 12/01/23 .............. 4,000,000 4,500,200
Coffee County PBA, Building Revenue,
MBIA Insured, 5.00%, 9/01/27 ................................................................ 2,145,000 2,229,234
wts., FSA Insured, Pre-Refunded, 6.10%, 9/01/16 ............................................. 1,000,000 1,073,910
Courtland IDBR,
Environmental Improvement Revenue, Champion International Corp. Project, Refunding, 6.40%,
11/01/26 .................................................................................... 2,000,000 2,106,080
Solid Waste Disposal Revenue, Champion International Corp. Project, Series A, 6.50%, 9/01/25 5,000,000 5,182,500
Culman and Jefferson County Gas District Gas Revenue, MBIA Insured, 5.85%, 7/01/24 ............ 2,000,000 2,244,160
Etowah County Board Education GO, Special Tax School wts., FSA Insured, 5.00%,
9/01/24 ..................................................................................... 4,235,000 4,453,314
9/01/28 ..................................................................................... 2,000,000 2,079,960
9/01/33 ..................................................................................... 2,500,000 2,583,875
Fairfield GO, wts., Refunding, AMBAC Insured, 5.00%, 2/01/29 .................................. 1,500,000 1,560,090
Fairfield IDB, Environmental Improvement Revenue, USX Corp. Project, Refunding,
5.45%, 9/01/14 .............................................................................. 2,000,000 2,113,680
Series A, 6.70%, 12/01/24 ................................................................... 3,500,000 3,573,745
Florence Electric Revenue, wts., FSA Insured, 5.25%, 6/01/19 .................................. 1,415,000 1,529,841
Florence GO, wts., Series B, FGIC Insured, 5.00%, 9/01/23 ..................................... 2,500,000 2,638,000
90 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ALABAMA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ALABAMA (CONT.)
Franklin County wts., Series B, AMBAC Insured, 5.125%, 10/01/33 ............................... $ 2,000,000 $ 2,099,680
Gulf Shores GO, wts., AMBAC Insured,
6.00%, 9/01/21 .............................................................................. 770,000 811,642
Pre-Refunded, 6.00%, 9/01/21 ................................................................ 1,165,000 1,229,797
Houston County Health Care Authority Revenue, AMBAC Insured,
6.125%, 10/01/25 ............................................................................ 1,000,000 1,124,060
6.25%, 10/01/30 ............................................................................. 3,150,000 3,580,353
Huntsville Capital Improvement GO, Series A, AMBAC Insured, 5.00%, 2/01/23 .................... 1,000,000 1,051,960
Huntsville Health Care Authority Revenue, Series A, MBIA Insured,
5.40%, 6/01/22 .............................................................................. 4,000,000 4,336,320
5.50%, 6/01/27 .............................................................................. 3,820,000 4,172,089
Huntsville PBA, Lease Revenue, Municipal Justice and Public Safety Center, MBIA Insured, 5.00%,
10/01/25 .................................................................................... 5,000,000 5,252,350
10/01/29 .................................................................................... 4,000,000 4,155,320
Jacksonville State University Tuition and Fee, Revenue, MBIA Insured, 5.00%, 12/01/22 ......... 3,000,000 3,154,110
Jefferson County Ltd. Obligation School wts. Revenue, Series A, 5.00%, 1/01/24 ................ 2,000,000 2,054,460
Jefferson County Sewer Revenue,
Capital Improvement, wts., Series A, FGIC Insured, Pre-Refunded, 5.00%, 2/01/33 ............. 2,385,000 2,592,948
Capital Improvement, wts., Series A, FGIC Insured, Pre-Refunded, 5.375%, 2/01/36 ............ 6,000,000 6,605,820
Series D, FGIC Insured, Pre-Refunded, 5.00%, 2/01/32 ........................................ 4,000,000 4,421,560
wts., ETM, 7.50%, 9/01/13 ................................................................... 200,000 223,786
wts., Series D, FGIC Insured, Pre-Refunded, 5.75%, 2/01/27 .................................. 6,000,000 6,416,400
Lauderdale County and Florence Health Care Authority Revenue, Coffee Health Group, Series A,
MBIA Insured,
5.625%, 7/01/21 ............................................................................. 3,000,000 3,324,570
5.375%, 7/01/29 ............................................................................. 3,095,000 3,269,496
Pre-Refunded, 5.375%, 7/01/29 ............................................................... 1,905,000 2,108,930
Madison GO, wts.,
AMBAC Insured, 5.35%, 2/01/26 ............................................................... 2,410,000 2,573,808
MBIA Insured, 6.00%, 4/01/23 ................................................................ 2,000,000 2,045,640
Madison County Board of Education Capital Outlay GO, Tax Anticipation wts., Series A,
AMBAC Insured, 5.00%, 9/01/34 ................................................................ 1,000,000 1,036,720
Marshall County Health Care Authority Hospital Revenue, Series A, 5.75%, 1/01/32 .............. 2,170,000 2,259,925
Mobile County Board School Commissioners GO, Capital Outlay wts., Series B, AMBAC Insured,
5.10%, 3/01/22 .............................................................................. 2,265,000 2,381,829
5.125%, 3/01/31 ............................................................................. 8,230,000 8,541,423
Mobile Housing Assistance Corp. MFHR, Refunding, Series A, FSA Insured, 7.625%, 2/01/21 ....... 1,220,000 1,224,575
Montgomery Medical Clinic Board Health Care Facilities Revenue, Jackson Hospital and Clinic,
Refunding, AMBAC Insured, 6.00%, 3/01/26 ..................................................... 6,000,000 6,304,320
Morgan County GO, wts., AMBAC Insured, 5.00%, 4/01/29 ......................................... 1,975,000 2,055,323
Moulton Water Works Board Water Revenue, MBIA Insured, 5.375%, 1/01/32 ........................ 1,935,000 2,048,430
Muscle Shoals GO, wts., MBIA Insured,
5.80%, 8/01/16 .............................................................................. 295,000 309,337
5.90%, 8/01/25 .............................................................................. 1,210,000 1,269,895
5.50%, 8/01/30 .............................................................................. 2,150,000 2,336,856
Pre-Refunded, 5.80%, 8/01/16 ................................................................ 1,430,000 1,502,716
Pre-Refunded, 5.90%, 8/01/25 ................................................................ 5,790,000 6,089,575
Oxford GO, School wts., AMBAC Insured, 6.00%, 5/01/30 ......................................... 4,275,000 4,814,377
Annual Report | 91
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ALABAMA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ALABAMA (CONT.)
Russellville GO, wts., Refunding, MBIA Insured, Pre-Refunded, 5.75%, 12/01/26 ................. $ 2,500,000 $ 2,686,950
Sheffield GO, wts., AMBAC Insured, 5.125%, 5/01/33 ............................................ 2,610,000 2,734,758
St. Clair County Board of Education, School Tax Anticipation wts., Series C, FSA Insured,
5.85%, 2/01/29 .............................................................................. 4,815,000 5,300,545
Sylacauga GO, wts., AMBAC Insured, 5.50%, 6/01/25 ............................................. 1,700,000 1,852,150
Tallahassee GO, Water, Gas and Sewer Waste, AMBAC Insured, 5.25%, 5/01/31 ..................... 1,135,000 1,207,822
Troy State University Student Fee Revenue, MBIA Insured, 5.00%, 11/01/21 ...................... 2,215,000 2,327,721
University of Montavello Revenue, FSA Insured, 5.30%, 5/01/22 ................................. 1,940,000 2,089,399
University of North Alabama General Fee Revenue, Series A, FSA Insured, 5.375%, 11/01/17 ...... 4,395,000 4,774,289
University of North Alabama Student Housing Revenue, FGIC Insured, 5.00%, 11/01/29 ............ 2,995,000 3,112,134
Valley Special Care Facilities Financing Authority Revenue, Lanier Memorial Hospital, Series A,
5.65%, 11/01/22 ............................................................................. 3,465,000 3,426,573
Warrior River Water Authority Water Revenue, FSA Insured,
5.40%, 8/01/29 .............................................................................. 4,250,000 4,569,430
5.50%, 8/01/34 .............................................................................. 4,735,000 5,086,811
------------
230,432,535
------------
U. S. TERRITORIES 9.8%
Puerto Rico Commonwealth GO, Public Improvement,
Series A, 5.125%, 7/01/31 ................................................................... 3,550,000 3,666,830
Series A, Pre-Refunded, 5.125%, 7/01/31 ..................................................... 1,450,000 1,607,803
FSA Insured, 5.125%, 7/01/30 ................................................................ 1,115,000 1,180,618
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 .................................................. 1,885,000 2,090,145
FSA Insured, Pre-Refunded, 5.25%, 7/01/27 ................................................... 1,495,000 1,668,330
Refunding, FSA Insured, 5.25%, 7/01/27 ...................................................... 1,005,000 1,069,360
Puerto Rico Electric Power Authority Power Revenue, Series II, FSA Insured, 5.125%, 7/01/26 ... 5,000,000 5,347,300
Puerto Rico PBA Revenue,
Guaranteed Government Facilities, Series G, 5.00%, 7/01/26 .................................. 1,000,000 1,034,640
Government Facilities, Series D, Pre-Refunded, 5.25%, 7/01/27 ............................... 2,305,000 2,558,896
Government Facilities, Series D, 5.25%, 7/01/27 ............................................. 760,000 803,457
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/13 .................................................................................... 1,700,000 1,801,830
10/01/22 .................................................................................... 2,300,000 2,379,327
------------
25,208,536
------------
TOTAL INVESTMENTS (COST $238,443,251) 99.5% ................................................... 255,641,071
OTHER ASSETS, LESS LIABILITIES .5% ............................................................ 1,319,252
------------
NET ASSETS 100.0% ............................................................................. $256,960,323
============
See Glossary of Terms on page 146.
92 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FLORIDA TAX-FREE INCOME FUND
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 12.17 $ 11.97 $ 11.71 $ 11.54 $ 10.89
----------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .55 .56 .57 .59 .61
Net realized and unrealized gains (losses) ................... (.17) .20 .26 .18 .64
----------------------------------------------------------------
Total from investment operations .............................. .38 .76 .83 .77 1.25
----------------------------------------------------------------
Less distributions from net investment income ................. (.55) (.56) (.57) (.60) (.60)
----------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
----------------------------------------------------------------
Net asset value, end of year .................................. $ 12.00 $ 12.17 $ 11.97 $ 11.71 $ 11.54
================================================================
Total return(b) ............................................... 3.28% 6.47% 7.32% 6.83% 11.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $1,488,979 $1,594,007 $1,624,544 $1,609,946 $1,538,593
Ratios to average net assets:
Expenses ..................................................... .62% .62% .61% .62% .62%
Net investment income ........................................ 4.67% 4.65% 4.87% 5.05% 5.41%
Portfolio turnover rate ....................................... 4.15% 6.89% 16.84% 13.91% 12.05%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 93
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLORIDA TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 12.25 $ 12.04 $ 11.77 $ 11.58 $ 10.90
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .49 .50 .51 .52 .55
Net realized and unrealized gains (losses) ................... (.18) .20 .27 .20 .67
--------------------------------------------------------------
Total from investment operations .............................. .31 .70 .78 .72 1.22
--------------------------------------------------------------
Less distributions from net investment income ................. (.48) (.49) (.51) (.53) (.54)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 12.08 $ 12.25 $ 12.04 $ 11.77 $ 11.58
==============================================================
Total return(b) ............................................... 2.66% 5.94% 6.78% 6.38% 11.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 74,311 $ 76,208 $ 55,167 $ 30,875 $ 7,412
Ratios to average net assets:
Expenses ..................................................... 1.17% 1.17% 1.16% 1.17% 1.17%
Net investment income ........................................ 4.12% 4.10% 4.32% 4.50% 4.81%
Portfolio turnover rate ....................................... 4.15% 6.89% 16.84% 13.91% 12.05%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
94 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLORIDA TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 12.30 $ 12.09 $ 11.83 $ 11.65 $ 10.98
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .49 .50 .51 .53 .55
Net realized and unrealized gains (losses) ................... (.17) .20 .26 .18 .66
--------------------------------------------------------------
Total from investment operations .............................. .32 .70 .77 .71 1.21
--------------------------------------------------------------
Less distributions from net investment income ................. (.48) (.49) (.51) (.53) (.54)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 12.14 $ 12.30 $ 12.09 $ 11.83 $ 11.65
==============================================================
Total return(b) ............................................... 2.74% 5.90% 6.66% 6.26% 11.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 124,949 $ 124,727 $ 113,644 $ 90,895 $ 74,194
Ratios to average net assets:
Expenses ..................................................... 1.17% 1.17% 1.16% 1.17% 1.17%
Net investment income ........................................ 4.12% 4.10% 4.32% 4.51% 4.86%
Portfolio turnover rate ....................................... 4.15% 6.89% 16.84% 13.91% 12.05%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 95
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.9%
BONDS 92.7%
FLORIDA 86.7%
Alachua County Health Facilities Authority Revenue, Shands Teaching Hospital, Series A, MBIA
Insured, 5.80%, 12/01/26 ..................................................................... $10,000,000 $ 10,688,400
Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/21 ................................ 2,000,000 2,125,840
Brevard County Health Facilities Authority Health Care Facilities Revenue, Health First Inc. ..
Project, 5.00%, 4/01/26 ...................................................................... 5,000,000 5,189,800
Brevard County Housing Finance Authority SFMR, Multi-County Program, GNMA Secured,
6.40%, 9/01/30 ............................................................................... 345,000 358,703
Brevard County School Board COP,
AMBAC Insured, 5.00%, 7/01/26 .............................................................. 10,000,000 10,422,600
Refunding, Series A, AMBAC Insured, 5.40%, 7/01/11 ......................................... 4,415,000 4,897,780
Series A, FGIC Insured, 5.00%, 7/01/30 ..................................................... 4,500,000 4,695,030
Broward County Educational Facilities Authority Revenue, Educational Facilities,
Nova Southeastern, Series B, 5.60%, 4/01/29 ................................................ 3,180,000 3,329,555
Broward County Health Facilities Authority Revenue, Catholic Health Services, Refunding,
5.50%, 8/15/20 ............................................................................. 9,360,000 9,876,485
Broward County HFAR, Series D,
6.90%, 6/01/09 ............................................................................. 50,000 50,001
7.375%, 6/01/21 ............................................................................ 245,000 245,167
Broward County HFA, MFHR,
Bridgewater Place Apartments Project, Series A, 5.45%, 10/01/34 ............................ 3,000,000 3,059,610
Cross Keys Apartments Project, Series A, 5.80%, 10/01/33 ................................... 1,985,000 2,030,377
Cross Keys Apartments Project, Series A, 5.85%, 4/01/39 .................................... 5,760,000 5,872,032
Stirling Apartments Phase II, Series A, 5.35%, 10/01/29 .................................... 1,000,000 1,012,930
Stirling Apartments Phase II, Series A, 5.40%, 4/01/39 ..................................... 2,000,000 2,014,260
Broward County Professional Sports Facilities Tax Revenue, Civic Arena Project,
Series A, MBIA Insured,
5.75%, 9/01/21 ............................................................................. 5,000,000 5,276,750
5.625%, 9/01/28 ............................................................................ 10,000,000 10,535,300
Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/26 ........................ 21,500,000 22,408,590
Cape Canaveral Hospital District Revenue COP, Refunding, 5.25%, 1/01/28 ....................... 3,500,000 3,575,985
Celebration CDD, Special Assessment,
MBIA Insured, 6.00%, 5/01/10 ............................................................... 2,460,000 2,477,761
MBIA Insured, 6.10%, 5/01/16 ............................................................... 1,800,000 1,813,284
Series A, MBIA Insured, 5.50%, 5/01/18 ..................................................... 1,470,000 1,563,889
Citrus County Hospital Board Revenue, Citrus Memorial Hospital, Refunding, 6.25%,
8/15/23 .................................................................................... 10,165,000 10,780,084
Clearwater MFR, Rental Housing, Drew Gardens Projects, Refunding, Series A, FHA Insured,
6.50%, 10/01/25 ............................................................................ 2,550,000 2,553,595
Clermont Water and Sewer Revenue, Refunding, FSA Insured, 5.375%, 12/01/30 .................... 5,000,000 5,360,150
Crossing At Fleming Island CDD, Florida Special Assessment Revenue, Refunding, Series B,
MBIA Insured, 5.80%, 5/01/16 .................................................................. 5,980,000 6,710,098
Dade County Aviation Revenue, Miami International Airport,
Series B, FSA Insured, 5.125%, 10/01/22 .................................................... 4,750,000 4,897,155
Series C, FSA Insured, 5.125%, 10/01/27 .................................................... 9,550,000 9,930,185
Dade County Special Obligation, Courthouse Center Project, Pre-Refunded, 6.10%, 4/01/20 ....... 5,000,000 5,115,850
96 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Dade County Water and Sewer System Revenue, FGIC Insured,
5.75%, 10/01/22 ............................................................................ $ 5,000,000 $ 5,195,550
5.50%, 10/01/25 ............................................................................ 11,500,000 11,933,320
5.25%, 10/01/26 ............................................................................ 13,000,000 13,870,610
Daytona Beach Utility System Revenue, Refunding, Series B, FGIC Insured, 5.00%, 11/15/32 ...... 3,250,000 3,377,562
Dovera CDD, Special Assessment Revenue, 7.875%, 5/01/12 ....................................... 525,000 526,942
Duval County HFA, MFHR, Mortgage, Eagles Point North, Series A, MBIA Insured,
5.60%, 7/01/17 ............................................................................. 1,000,000 1,040,170
5.70%, 7/01/27 ............................................................................. 2,000,000 2,060,000
Enterprise CDD, Water and Sewer Revenue, MBIA Insured, 5.50%, 5/01/26 ......................... 3,000,000 3,245,370
Escambia County Health Facilities Authority Health Facility Revenue,
Baptist Hospital and Baptist Manor, 5.125%, 10/01/19 ....................................... 8,750,000 8,857,450
Florida Health Care Facility Loan VHA Project, AMBAC Insured, 5.95%, 7/01/20 ............... 10,000,000 10,145,300
Escambia County Health Facilities Authority Revenue, Ascension Health Credit, Series A-2,
AMBAC Insured, Pre-Refunded, 5.75%, 11/15/29 ................................................ 25,000,000 28,162,000
Escambia County HFA, SFMR, Multi County Program, Series A, MBIA Insured,
6.40%, 10/01/30 ............................................................................. 1,915,000 1,941,465
First Florida Governmental Financing Commission Revenue, AMBAC Insured, Pre-Refunded,
5.75%, 7/01/16 .............................................................................. 3,700,000 3,898,727
Florida HFAR,
General Mortgage, Refunding, Series A, FHA Insured, 6.40%, 6/01/24 ......................... 240,000 240,401
Homeowner Mortgage, Series 1, MBIA Insured, 5.625%, 7/01/17 ................................ 3,020,000 3,151,944
MFH, Driftwood Terrace Project, Series I, 7.65%, 12/20/31 .................................. 3,295,000 3,298,789
Reserve at Kanapaha, Series G, AMBAC Insured, 5.70%, 7/01/37 ............................... 5,000,000 5,136,250
Reserve at Northshore, Series H, AMBAC Insured, 5.70%, 5/01/37 ............................. 2,000,000 2,058,260
Riverfront Apartments, Series A, AMBAC Insured, 6.25%, 4/01/37 ............................. 1,300,000 1,357,486
Florida HFC Revenue,
Brenwood Trace Apartments, Series E-1, FSA Insured, 5.80%, 12/01/38 ........................ 4,965,000 5,189,418
Deer Meadows Apartments, Series R, FNMA Insured, 6.00%, 5/01/32 ............................ 3,505,000 3,715,090
Homeowner Mortgage, Series 4, FSA Insured, 6.25%, 7/01/22 .................................. 2,405,000 2,471,618
Housing Brenwood Trace Apartments, Series E-1, FSA Insured, 5.65%, 6/01/19 ................. 1,245,000 1,309,653
Housing-Waverly Apartments, Series C-1, FSA Insured, 6.50%, 7/01/40 ........................ 3,000,000 3,213,570
Florida Intergovernmental Finance Commission Capital Revenue,
Series C-1, AMBAC Insured, 5.00%, 2/01/21 .................................................. 1,355,000 1,424,200
Florida Municipal Loan Council Revenue, Series B, MBIA Insured, 5.75%, 11/01/29 ............... 1,500,000 1,671,060
Florida Ports Financing Commission Revenue, State Transportation Trust Fund-Intermodal
Program, FGIC Insured, 5.50%, 10/01/23 ...................................................... 7,000,000 7,508,620
Florida State Board of Education Capital Outlay GO, Public Education,
Refunding, Series D, 5.75%, 6/01/22 ........................................................ 25,900,000 28,818,412
Refunding, Series D, 6.00%, 6/01/23 ........................................................ 15,000,000 18,437,700
Refunding, Series G, FGIC Insured, 5.00%, 6/01/31 .......................................... 5,000,000 5,191,200
Series B, Pre-Refunded, 5.875%, 6/01/24 .................................................... 5,000,000 5,098,050
Series C, FGIC Insured, 5.75%, 6/01/29 ..................................................... 5,000,000 5,560,900
Series F, FGIC Insured, Pre-Refunded, 5.50%, 6/01/26 ....................................... 10,000,000 10,485,900
Florida State Board of Education GO, Series F, MBIA Insured, 5.00%, 6/01/28 ................... 20,000,000 20,863,000
Annual Report | 97
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Florida State Board Regent Housing Revenue, University of Florida, FGIC Insured,
5.75%, 7/01/25 ............................................................................. $ 3,400,000 $ 3,781,208
5.25%, 7/01/30 ............................................................................. 2,060,000 2,175,463
Florida State Board of Education Lottery Revenue, Series A, FGIC Insured, 5.00%, 7/01/20 ...... 7,000,000 7,539,070
Florida State Board Regent Housing Revenue, University of Central Florida, AMBAC Insured,
5.75%, 10/01/29 ............................................................................ 8,650,000 9,602,192
Florida State Department of Corrections COP, Okeechobee Correctional Facility, AMBAC Insured,
6.25%, 3/01/15 ............................................................................. 2,960,000 3,019,200
Florida State Department Environmental Protection Preservation Revenue, Florida Forever,
Series A, MBIA Insured, 5.00%, 7/01/21 ..................................................... 4,000,000 4,289,520
Florida State Department of General Services Division Facilities Management Revenue, Florida
Facilities Pool, Series B, FSA Insured, 5.50%, 9/01/28 ..................................... 10,000,000 10,810,900
Florida State Department of Transportation GO, Right of Way, Series A, 4.75%, 7/01/24 ......... 6,000,000 6,205,320
Florida State Mid-Bay Bridge Authority Revenue,
Exchangeable, 6.05%, 10/01/22 .............................................................. 7,000,000 7,264,670
Exchangeable, Refunding, Series D, 6.10%, 10/01/22 ......................................... 13,695,000 14,291,143
Exchangeable, Series A, 5.95%, 10/01/13 .................................................... 12,030,000 12,989,753
Exchangeable, Series D, ETM, 6.10%, 10/01/22 ............................................... 3,545,000 4,283,282
Series A, ETM, 6.875%, 10/01/22 ............................................................ 6,000,000 7,917,240
Florida State Municipal Power Agency Revenue, Stanton II Project, Refunding, AMBAC Insured,
5.00%, 10/01/26 ............................................................................ 5,000,000 5,217,550
Florida State Turnpike Authority Turnpike Revenue, Department of Transportation,
Series A, FGIC Insured, Pre-Refunded, 5.50%, 7/01/21 ....................................... 5,000,000 5,105,850
Series B, 5.00%, 7/01/30 ................................................................... 3,455,000 3,550,911
Fort Pierce Utilities Authority Revenue, AMBAC Insured, 5.00%, 10/01/27 ....................... 7,000,000 7,287,350
Gainesville Utilities Systems Revenue, Series A, 5.20%, 10/01/26 .............................. 7,590,000 7,858,458
Gateway Services District Revenue, Transportation Roadway Service Charges, 8.75%, 5/01/14 ..... 2,425,000 2,473,136
Hialeah Housing Authority Revenue, Affordable Housing Program, Refunding, GNMA Secured,
5.30%, 12/20/18 ............................................................................ 1,240,000 1,306,216
Highlands County Health Facilities Authority Revenue, Adventist Health Systems,
5.25%, 11/15/20 ............................................................................ 10,000,000 10,333,700
Series A, 6.00%, 11/15/31 .................................................................. 16,000,000 17,347,520
Hillsborough County Aviation Authority Revenue, Tampa International Airport, Series B, FGIC
Insured, 5.875%, 10/01/23 .................................................................... 5,000,000 5,337,700
Hillsborough County IDAR, Refunding, Series B, 5.40%, 10/01/28 ................................ 7,000,000 7,242,410
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, 5.50%, 10/01/23 .......... 16,000,000 16,437,920
Hillsborough County School Board COP,
Master Lease Program, Series A, MBIA Insured, 5.375%, 7/01/21 .............................. 5,000,000 5,395,350
Master Lease Program, Series A, MBIA Insured, 5.25%, 7/01/22 ............................... 5,000,000 5,367,550
(a)MBIA Insured, 5.00%, 7/01/26 ............................................................... 8,330,000 8,752,248
MBIA Insured, 5.375%, 7/01/26 .............................................................. 8,000,000 8,603,760
MBIA Insured, 5.00%, 7/01/29 ............................................................... 10,000,000 10,385,700
Series B, MBIA Insured, 5.125%, 7/01/26 .................................................... 5,000,000 5,282,400
Hillsborough County Assessment Revenue, Capacity Assessment Special, FSA Insured, 5.125%,
3/01/20 .................................................................................... 1,000,000 1,075,550
Hillsborough County HFA Mortgage Revenue, SF, Series A, GNMA Secured, 5.875%, 4/01/30 ........ 2,100,000 2,161,509
Indian River County Hospital District Revenue, Refunding, FSA Insured, 5.70%, 10/01/15 ....... 1,000,000 1,062,770
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/23 ............................... 5,000,000 5,257,000
98 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Jacksonville Transportation Revenue, MBIA Insured,
5.25%, 10/01/29 ............................................................................ $17,955,000 $ 19,005,547
5.00%, 10/01/31 ............................................................................ 25,000,000 25,790,250
Jacksonville Capital Improvement Revenue,
Refunding, Series C, AMBAC Insured, 5.00%, 10/01/25 ........................................ 3,460,000 3,635,664
Series A, AMBAC Insured, 5.00%, 10/01/30 ................................................... 10,000,000 10,363,200
Jacksonville Capital Improvement Revenue Certificates, Gator Bowl Project, AMBAC Insured,
5.875%, 10/01/25 ........................................................................... 5,000,000 5,151,250
Jacksonville Electric Authority Revenue, Water and Sewer,
Series A, 6.125%, 10/01/39 ................................................................. 20,330,000 20,594,900
Series B, FGIC Insured, 5.40%, 10/01/20 .................................................... 3,000,000 3,154,410
Jacksonville Guaranteed Entitlement Revenue, Refunding and Improvement, FGIC Insured,
5.00%, 10/01/32 ............................................................................ 17,250,000 17,854,095
Kissimmee Water and Sewer Revenue, Refunding, AMBAC Insured, ETM, 6.00%, 10/01/15 ............. 5,000,000 5,017,400
Lakeland Hospital System Revenue, Lakeland Regional Health System,
Series A, MBIA Insured, 5.50%, 11/15/26 .................................................... 10,000,000 10,688,200
5.75%, 11/15/27 ............................................................................ 6,925,000 7,438,143
5.50%, 11/15/32 ............................................................................ 12,070,000 12,725,642
Lee County Hospital Board of Directors Hospital Revenue, Lee Memorial Health System, Series A,
MBIA Insured, 5.875%, 4/01/24 ................................................................ 18,000,000 19,334,880
Lee County Transportation Facilities Revenue, MBIA Insured, 5.75%, 10/01/27 ................... 5,000,000 5,205,050
Lee County Airport Revenue, Series A, FSA Insured, 6.00%, 10/01/32 ............................ 11,405,000 12,650,426
Lee County IDA, Health Care Facilities Revenue, Shell Point Village Project,
Refunding, Series A, 5.50%, 11/15/29 ....................................................... 4,000,000 3,994,280
Series A, 5.50%, 11/15/21 .................................................................. 7,500,000 7,574,625
Lessburg Hospital Revenue, Leesburg Regional Medical Center Project, 5.50%, 7/01/32 ........... 4,150,000 4,280,808
Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/21 .................. 5,575,000 5,955,661
Marion County Utility System Revenue,
FGIC Insured, 5.00%, 12/01/31 .............................................................. 5,000,000 5,181,450
MBIA Insured, 5.00%, 12/01/28 .............................................................. 5,000,000 5,226,550
Melbourne Water and Sewer Revenue, FGIC Insured, 5.25%, 10/01/30 .............................. 6,000,000 6,330,360
Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ............................ 7,000,000 7,247,730
Miami Beach Special Obligation, Subordinated, FGIC Insured, ETM, 7.375%, 12/01/08 ............. 1,140,000 1,153,771
Miami-Dade County Aviation Revenue, Miami International Airport,
FGIC Insured, 5.375%, 10/01/27 ............................................................. 5,000,000 5,281,400
FGIC Insured, 5.375%, 10/01/32 ............................................................. 5,000,000 5,232,350
HUB, Series B, FGIC Insured, 5.00%, 10/01/30 ............................................... 4,440,000 4,611,029
Miami-Dade County School Board COP, Series A, MBIA Insured, Pre-Refunded, 5.00%, 5/01/31 ...... 5,000,000 5,511,050
Miami-Dade County Special Obligation Revenue, Juvenile Courthouse Project, Series A, AMBAC
Insured, 5.00%, 4/01/35 .................................................................... 5,000,000 5,164,150
Miami-Dade County IDAR, Airis Miami ll LLC Project, AMBAC Insured, 6.00%, 10/15/25 ............ 4,500,000 4,995,585
Miami-Dade County Educational Facilities Authority Revenue, Series A, AMBAC Insured, 5.75%,
4/01/29 .................................................................................... 10,000,000 11,126,900
Miami-Dade County HFA,
MFHR, Cedar Grove Apartments, FSA Insured, 5.50%, 8/01/27 .................................. 2,015,000 2,075,148
MFMR, Villa Esperanza Apartments Project, 5.25%, 10/01/19 .................................. 430,000 438,299
MFMR, Villa Esperanza Apartments Project, 5.40%, 10/01/33 .................................. 1,500,000 1,525,185
Annual Report | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
North Broward Hospital District Revenue,
Improvement, 6.00%, 1/15/31 ................................................................ $25,530,000 $ 27,164,175
Refunding and Improvement, MBIA Insured, 5.375%, 1/15/24 ................................... 10,000,000 10,486,800
Refunding and Improvement, MBIA Insured, 5.75%, 1/15/27 .................................... 19,370,000 20,479,707
North Miami Health Facilities Authority Revenue, Catholic Health Services Obligation Group,
6.00%, 8/15/16 ............................................................................. 2,000,000 2,088,900
8/15/24 .................................................................................... 1,750,000 1,814,698
Orange County Health Facilities Authority Revenue,
Adventist Health System, 6.375%, 11/15/20 .................................................. 3,000,000 3,354,390
Adventist Health System, 6.25%, 11/15/24 ................................................... 5,500,000 6,173,310
Adventist Health System, 6.50%, 11/15/30 ................................................... 10,750,000 11,874,343
Hospital Adventist Health System, 5.625%, 11/15/32 ......................................... 15,000,000 15,941,550
Hospital Orlando Regional Healthcare, 6.00%, 12/01/29 ...................................... 6,000,000 6,599,040
MBIA Insured, 6.00%, 11/01/24 .............................................................. 285,000 286,283
Regional Healthcare System, Series E, 6.00%, 10/01/26 ...................................... 12,000,000 12,819,240
Orange County HFA, Homeowner Revenue, Series C-1, GNMA Secured, 5.70%, 9/01/26 ................ 1,270,000 1,296,035
Orange County Public Services Tax Revenue, FGIC Insured, Pre-Refunded, 6.00%, 10/01/24 ........ 5,050,000 5,264,322
Orange County School Board COP, Series A, MBIA Insured, 5.00%, 8/01/27 ........................ 12,000,000 12,473,760
Orange County Tourist Development Tax Revenue,
AMBAC Insured, 5.50%, 10/01/31 ............................................................. 10,500,000 11,362,365
AMBAC Insured, 5.50%, 10/01/32 ............................................................. 20,000,000 21,704,400
Refunding, MBIA Insured, 5.125%, 10/01/20 .................................................. 10,000,000 10,605,500
Subordinate, AMBAC Insured, 5.125%, 10/01/25 ............................................... 5,500,000 5,839,625
Subordinate, AMBAC Insured, 5.125%, 10/01/30 ............................................... 10,000,000 10,418,000
Orlando and Orange County Expressway Authority Expressway Revenue,
junior lien, FGIC Insured, 5.00%, 7/01/28 .................................................. 8,000,000 8,273,600
senior lien, AMBAC Insured, ETM, 7.625%, 7/01/18 ........................................... 265,000 273,830
Series B, AMBAC Insured, 5.00%, 7/01/35 .................................................... 9,185,000 9,513,364
Osceola County IDAR, Community Provider Pooled Loan Program,
Series A, FSA Insured, 7.75%, 7/01/10 ...................................................... 1,896,000 1,904,513
Series C, FSA Insured, 7.60%, 7/01/10 ...................................................... 585,000 587,586
Osceola County Sales Tax Revenue, FSA Insured, 5.00%, 4/01/24 ................................. 10,000,000 10,400,400
Osceola County Tourist Development Tax Revenue, FGIC Insured, 5.00%, 10/01/32 ................. 10,000,000 10,350,200
Palm Beach County Financing Authority MFR, Housing Windsor Park Apartment Project, Series A,
5.90%, 6/01/38 ............................................................................. 995,000 1,017,368
Palm Beach County IDR,
Lourdes-Noreen McKeen Residence, Geriatric Care Inc. Project, Pre-Refunded, 6.55%,
12/01/16 ................................................................................... 1,755,000 1,910,072
Lourdes-Noreen McKeen Residence, Geriatric Care Inc. Project, Pre-Refunded, 6.625%,
12/01/26 .................................................................................. 4,000,000 4,358,520
South Florida Fair Project, AMBAC Insured, 5.50%, 6/01/31 .................................. 5,000,000 5,383,150
Palm Beach County Public Improvement Revenue, Convention Center Project, FGIC Insured,
Pre-Refunded, 5.125%, 11/01/30 ............................................................... 10,000,000 11,082,900
Palm Beach County School Board COP,
Series A, FGIC Insured, Pre-Refunded, 6.00%, 8/01/22 ....................................... 5,000,000 5,754,000
Series A, AMBAC Insured, 5.125%, 8/01/24 ................................................... 15,000,000 15,991,650
Series C, FSA Insured, 5.00%, 8/01/27 ...................................................... 10,000,000 10,394,800
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Palm Beach County HFAR, Acts Retirement-Life Communities, 5.125%, 11/15/29 .................... $ 3,650,000 $ 3,650,621
Panama City Beach Utility Revenue, Refunding, AMBAC Insured, 5.00%,
6/01/27 .................................................................................... 4,450,000 4,657,726
6/01/32 .................................................................................... 2,795,000 2,899,924
Pensacola Airport Revenue, Series A, MBIA Insured, 5.75%, 10/01/27 ............................ 5,615,000 6,105,021
Pinellas County Health Facilities Authority Revenue, Baycare Health System, FSA Insured,
5.00%, 11/15/30 ............................................................................ 11,500,000 11,842,125
Polk County Capital Improvement Revenue Special Tax, FSA Insured, Pre-Refunded, 5.75%,
12/01/21 ................................................................................... 2,350,000 2,688,283
Polk County IDAR, Solid Waste Disposal Facility, Tampa Electric Co. Project, 5.85%, 12/01/30 .. 15,000,000 15,163,950
Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/26 ........................... 4,000,000 4,159,120
Polk County Utility System Revenue, Series A, FGIC Insured, 5.00%, 10/01/34 ................... 1,000,000 1,041,680
Port Everglades Authority Port Improvement Revenue, Series 1986, ETM, 7.50%, 11/01/06 ......... 265,000 279,284
Sarasota County Utilities System Revenue,
FGIC Insured, 5.75%, 10/01/27 .............................................................. 18,000,000 19,450,620
Refunding, Series A, FGIC Insured, 5.25%, 10/01/25 ......................................... 9,000,000 9,536,040
Sarasota County Solid Waste System Revenue, AMBAC Insured, 5.50%, 10/01/16 .................... 5,250,000 5,582,850
South Broward Hospital District Revenue,
5.60%, 5/01/27 ............................................................................. 5,000,000 5,326,200
5.625%, 5/01/32 ............................................................................ 16,250,000 17,291,950
St. Lucie West Services District Utility Revenue, senior lien, MBIA Insured, 6.125%, 10/01/32 . 10,000,000 11,572,600
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ................... 2,550,000 2,862,401
Sunrise Lakes Recreation District GO, Phase 4,
Refunding, AMBAC Insured, 5.25%, 8/01/24 ................................................... 4,320,000 4,590,778
Series A, Pre-Refunded, 6.75%, 8/01/15 ..................................................... 3,080,000 3,199,566
Series A, Pre-Refunded, 6.75%, 8/01/24 ..................................................... 6,120,000 6,357,578
Tamarac Sales Tax Revenue, FGIC Insured, 5.00%, 4/01/22 ....................................... 2,490,000 2,632,652
Tampa Bay Water Utility System Revenue,
FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 ................................................ 15,000,000 17,194,800
Series B, FGIC Insured, 5.00%, 10/01/31 .................................................... 10,000,000 10,316,100
Tampa Sports Authority Revenue,
Guaranteed Package, Tampa Bay Arena Project, MBIA Insured, 6.00%, 10/01/15 ................. 1,000,000 1,194,940
Guaranteed Package, Tampa Bay Arena Project, MBIA Insured, 6.05%, 10/01/20 ................. 1,715,000 2,117,356
Guaranteed Package, Tampa Bay Arena Project, MBIA Insured, 6.10%, 10/01/26 ................. 2,695,000 3,350,694
Interlock Agreement, Tampa Bay, MBIA Insured, Pre-Refunded, 6.125%, 10/01/26 ............... 6,800,000 6,957,964
Sales Tax Payments, Stadium Project, MBIA Insured, 5.25%, 1/01/27 .......................... 5,860,000 6,154,465
Tampa Water and Sewer Revenue, sub. lien, Series A, AMBAC Insured, 7.25%, 10/01/16 ............ 1,330,000 1,335,067
Tampa-Hillsborough County Expressway Authority Revenue, AMBAC Insured, 5.00%, 7/01/22 ......... 5,000,000 5,165,550
Viera East CDD,
Revenue, Special Assessment, Series B, ETM, 6.75%, 5/01/14 ................................. 6,550,000 7,453,376
Revenue, Special Assessment, Series B, 6.75%, 5/01/14 ...................................... 150,000 150,215
Special Assessment, Water Management, Refunding, Series A, 6.50%, 5/01/22 .................. 11,340,000 11,690,746
Special Assessment, Water Management, Series B, 6.50%, 5/01/05 ............................. 245,000 245,458
Special Assessment, Water Management, Series B, 6.50%, 5/01/22 ............................. 4,580,000 4,721,659
Special Assessment, Refunding, 7.00%, 5/01/26 .............................................. 7,090,000 7,732,992
Water and Sewer Revenue, 6.75%, 5/01/09 .................................................... 1,990,000 2,058,197
Village Center CDD, Recreational Revenue, Series A, MBIA Insured, 5.20%, 11/01/25 ............. 10,000,000 10,662,200
Annual Report | 101
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Volusia County Educational Facility Authority Revenue, Educational Facilities,
Embry Riddle University, Refunding, Series B, AMBAC Insured, 5.25%, 10/15/22 ............... $ 2,000,000 $ 2,168,540
Stetson University Inc. Project, AMBAC Insured, 5.25%, 6/01/29 ............................. 5,000,000 5,290,300
Volusia County School Board COP, Master Lease Program, FSA Insured, 5.50%, 8/01/24 ............ 5,000,000 5,422,550
West Lake CDD, Special Assessment Revenue, MBIA Insured, 5.75%, 5/01/17 ....................... 1,885,000 2,093,443
West Orange Healthcare District Revenue, Series A, 5.65%, 2/01/22 ............................. 10,850,000 11,425,593
West Palm Beach Utility System Revenue, FGIC Insured, 5.50%, 10/01/29 ......................... 5,000,000 5,249,550
-------------
1,464,135,260
-------------
U. S. TERRITORIES 6.0%
Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.00%,
7/01/25 .................................................................................... 5,000,000 5,227,200
7/01/29 .................................................................................... 10,000,000 10,384,600
7/01/33 .................................................................................... 13,000,000 13,373,750
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, MBIA Insured, 5.00%, 7/01/38 ..................................................... 12,800,000 13,165,312
Series B, Pre-Refunded, 6.00%, 7/01/39 ..................................................... 5,000,000 5,757,250
Series D, 5.375%, 7/01/36 .................................................................. 5,000,000 5,328,000
Series G, 5.00%, 7/01/33 ................................................................... 5,000,000 5,143,750
Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 ................. 15,000,000 15,869,250
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Revenue, Cogeneration Facility, AES Puerto Rico Project, 6.625%, 6/01/26 ..................... 5,900,000 6,427,991
Puerto Rico PBA Revenue, Guaranteed, Government Facilities,
Series D, 5.375%, 7/01/33 .................................................................. 1,210,000 1,289,376
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................... 3,790,000 4,237,826
Series I, 5.00%, 7/01/36 ................................................................... 5,000,000 5,157,650
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 .......... 10,000,000 10,338,000
-------------
101,699,955
-------------
TOTAL BONDS (COST $1,448,118,333) ............................................................. 1,565,835,215
-------------
ZERO COUPON BONDS 6.2%
FLORIDA 6.2%
Broward County HFAR, SFMR, Refunding, Series B, FHA Insured, 4/01/29 .......................... 1,390,000 265,240
Broward County Water and Sewer Utility Revenue, Refunding, Series A, AMBAC Insured,
10/01/08 ................................................................................... 2,815,000 2,342,193
Dade County Guaranteed Entitlement Revenue, Capital Appreciation, AMBAC Insured,
Pre-Refunded, 8/01/18 ....................................................................... 17,020,000 6,729,027
Florida HFC Revenue,
Capital Appreciation, Homeowner Mortgage, Series 4, FSA Insured, 7/01/30 ................... 4,185,000 746,437
Deferred Interest, Homeowner Mortgage, Series 1, MBIA Insured, 7/01/17 ..................... 2,115,000 1,113,230
Deferred Interest, Homeowner Mortgage, Series 2, MBIA Insured, 1/01/29 ..................... 37,600,000 10,009,496
Florida State Mid-Bay Bridge Authority Revenue, Series A, AMBAC Insured,
10/01/25 ................................................................................... 9,845,000 3,828,720
10/01/26 ................................................................................... 2,500,000 920,900
Fort Pierce Utilities Authority Revenue, Capital Appreciation, Series B, AMBAC Insured,
10/01/20 ................................................................................... 3,090,000 1,537,831
10/01/21 ................................................................................... 2,585,000 1,218,233
10/01/22 ................................................................................... 3,090,000 1,377,337
10/01/23 ................................................................................... 3,060,000 1,288,597
10/01/24 ................................................................................... 2,560,000 1,017,267
102 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLORIDA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON BONDS (CONT.)
FLORIDA (CONT.)
Hillsborough County HFA Mortgage Revenue, SF, Series A, GNMA Secured, 4/01/32 ................. $ 1,425,000 $ 271,861
Lakeland Electric and Water Revenue, Capital Appreciation, ETM, 10/01/14 ...................... 5,770,000 3,926,370
Melbourne Water and Sewer Revenue, Capital Appreciation,
FGIC Insured, ETM, 10/01/26 ................................................................. 1,500,000 541,275
Refunding, Series B, FGIC Insured, 10/01/22 ................................................. 1,785,000 795,646
Refunding, Series B, FGIC Insured, 10/01/26 ................................................. 4,500,000 1,593,315
Miami-Dade County Special Obligation,
sub. lien, Refunding, Series A, MBIA Insured, 10/01/25 ...................................... 22,365,000 7,535,887
Sub Series C, MBIA Insured, 10/01/28 ........................................................ 8,305,000 2,310,036
Sub Series B, MBIA Insured, 10/01/36 ........................................................ 5,635,000 994,577
Pinellas County HFA, SFHMR, Multi County B-1, GNMA Secured, 9/01/31 ........................... 885,000 153,574
Port Everglades Authority Port Improvement Revenue, Capital Appreciation,
ETM, 9/01/10 ................................................................................ 25,475,000 19,454,748
9/01/10 ..................................................................................... 24,525,000 20,061,450
Port Saint Lucie Utility Revenue, MBIA Insured, 9/01/29 ....................................... 20,000,000 5,491,000
Sarasota Special Obligated Revenue, Refunding, AMBAC Insured,
11/01/09 .................................................................................... 1,365,000 1,162,762
11/01/12 .................................................................................... 1,780,000 1,313,159
11/01/15 .................................................................................... 2,180,000 1,392,322
St Johns County Water and Sewer Revenue, Capital Appreciation, AMBAC Insured,
ETM, 6/01/22 ................................................................................ 4,000,000 1,696,080
6/01/23 ..................................................................................... 4,255,000 1,690,171
6/01/24 ..................................................................................... 1,500,000 559,695
6/01/25 ..................................................................................... 2,130,000 749,313
--------------
TOTAL ZERO COUPON BONDS (COST $92,908,359) .................................................... 104,087,749
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,541,026,692) ............................................. 1,669,922,964
--------------
SHORT TERM INVESTMENTS .3%
BONDS .3%
FLORIDA .3%
(b) Jacksonville Health Facilities Authority Hospital Revenue,
Baptist Medical Center Project, Daily VRDN and Put, 1.79%, 8/15/21 .......................... 1,200,000 1,200,000
Series C, Daily VRDN and Put, 1.79%, 8/15/33 ................................................ 1,420,000 1,420,000
(b) Pinellas County Health Facilities Authority Revenue, Pooled Hospital Loan Program, Refunding,
AMBAC Insured, Daily VRDN and Put, 1.80%, 12/01/15 ........................................... 2,600,000 2,600,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $5,220,000) ................................................ 5,220,000
--------------
TOTAL INVESTMENTS (COST $1,546,246,692) 99.2% ................................................. 1,675,142,964
OTHER ASSETS, LESS LIABILITIES .8% ............................................................ 13,096,663
--------------
NET ASSETS 100.0% ............................................................................. $1,688,239,627
==============
See Glossary of Terms on page 146.
(a) See Note 1b regarding securities purchased on a delayed delivery basis.
(b) 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.
Annual Report | See notes to financial statements. | 103
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN GEORGIA TAX-FREE INCOME FUND
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 12.27 $ 11.99 $ 11.86 $ 11.73 $ 11.03
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .53 .54 .56 .57 .59
Net realized and unrealized gains (losses) ................... (.10) .28 .13 .14 .70
--------------------------------------------------------------
Total from investment operations .............................. .43 .82 .69 .71 1.29
--------------------------------------------------------------
Less distributions from net investment income ................. (.53) (.54) (.56) (.58) (.59)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 12.17 $ 12.27 $ 11.99 $ 11.86 $ 11.73
==============================================================
Total return(b) ............................................... 3.65% 7.00% 6.02% 6.15% 11.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 170,407 $ 176,193 $ 171,381 $ 169,489 $ 163,352
Ratios to average net assets:
Expenses ..................................................... .75% .75% .74% .75% .76%
Net investment income ........................................ 4.40% 4.49% 4.76% 4.83% 5.15%
Portfolio turnover rate ....................................... 22.50% 11.83% 10.56% 19.66% 18.67%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
104 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GEORGIA TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 12.37 $ 12.08 $ 11.94 $ 11.81 $ 11.10
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .47 .47 .50 .51 .53
Net realized and unrealized gains (losses) ................... (.11) .29 .14 .13 .71
--------------------------------------------------------------
Total from investment operations .............................. .36 .76 .64 .64 1.24
--------------------------------------------------------------
Less distributions from net investment income ................. (.46) (.47) (.50) (.51) (.53)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 12.27 $ 12.37 $ 12.08 $ 11.94 $ 11.81
==============================================================
Total return(b) ............................................... 3.05% 6.44% 5.50% 5.52% 11.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 37,017 $ 35,645 $ 32,422 $ 24,672 $ 16,780
Ratios to average net assets:
Expenses ..................................................... 1.30% 1.32% 1.27% 1.30% 1.31%
Net investment income ........................................ 3.85% 3.92% 4.23% 4.29% 4.60%
Portfolio turnover rate ....................................... 22.50% 11.83% 10.56% 19.66% 18.67%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 105
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GEORGIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.8%
BONDS 97.9%
GEORGIA 96.1%
Atlanta Airport Facilities Revenue,
Refunding, Series A, FGIC Insured, Pre-Refunded, 5.60%, 1/01/30 ............................ $ 5,000,000 $ 5,616,100
Series A, FGIC Insured, Pre-Refunded, 5.50%, 1/01/26 ....................................... 5,000,000 5,593,800
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien,
Series C, FSA Insured, 5.00%, 1/01/33 ....................................................... 5,000,000 5,188,400
Atlanta and Fulton County Recreation Authority Revenue, AMBAC Insured, 5.50%, 12/01/20 ........ 1,500,000 1,649,820
Atlanta Development Authority Revenue, Yamacraw Design Center Project,
Series A, MBIA Insured, 5.125%, 1/01/23 ..................................................... 4,150,000 4,413,566
Atlanta Urban Residential Finance Authority MFHR,
Defoors Ferry Manor Project, 5.90%, 10/01/18 ............................................... 1,700,000 1,766,419
Fulton Cotton Mill, GNMA Secured, 6.00%, 5/20/17 ........................................... 1,040,000 1,088,360
Fulton Cotton Mill, GNMA Secured, 6.125%, 5/20/27 .......................................... 1,560,000 1,624,178
Atlanta Water and Wastewater Revenue, Refunding, Series A, MBIA Insured, 5.00%, 11/01/33 ...... 8,000,000 8,271,760
Augusta Water and Sewer Revenue, FSA Insured, 5.00%, 10/01/32 ................................. 5,000,000 5,178,350
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center,
5.25%, 12/01/22 ............................................................................ 2,500,000 2,187,800
5.375%, 12/01/28 ........................................................................... 2,000,000 1,738,100
Brunswick and Glynn County Development Authority Revenue, Georgia Pacific Project,
Refunding, 5.55%, 3/01/26 ................................................................... 2,000,000 1,982,860
Bulloch County Development Authority Lease Revenue, Georgia Southern University,
XLCA Insured, 5.00%, 8/01/27 ................................................................ 5,000,000 5,264,400
Cherokee County Water and Sewage Authority Revenue, MBIA Insured, 6.90%, 8/01/18 .............. 10,000 10,036
Clayton County Development Authority Revenue, Gateway Village Project, Series A, 6.00%,
8/01/23 ..................................................................................... 3,500,000 3,959,375
Clayton County Housing Authority MFHR,
Southlake Cove Project A, GNMA Secured, 5.60%, 12/20/24 .................................... 1,990,000 2,153,061
Vineyard Pointe, Series A, GNMA Secured, 5.50%, 10/20/32 ................................... 1,475,000 1,549,133
Clayton County MFHR, Pointe Clear Apartments Project, FSA Insured, 5.70%, 7/01/23 ............. 995,000 1,025,626
Cobb County Development Authority Parking Revenue, Kennesaw State University Foundation Inc.
Project, MBIA Insured, 5.00%, 7/15/29 ....................................................... 2,000,000 2,094,340
Cobb County Kennestone Hospital Authority Revenue, Series A, MBIA Insured,
ETM, 7.75%, 2/01/07 ......................................................................... 35,000 37,026
College Park Business and IDAR, Civic Center Project, AMBAC Insured, 5.75%, 9/01/26 ........... 2,000,000 2,221,120
Columbia County GO, Courthouse/Detention Center Projects, 5.00%, 2/01/24 ...................... 2,000,000 2,085,580
Columbia County Water and Sewer Revenue, FSA Insured, 5.00%, 6/01/24 .......................... 1,130,000 1,198,591
Columbus Water and Sewage Revenue, Refunding, MBIA Insured, 5.00%, 5/01/25 .................... 1,000,000 1,058,700
De Kalb County Housing Authority MFHR, Castaway Apartments, Series A, GNMA Insured,
5.40%, 2/20/29 .............................................................................. 1,980,000 2,070,842
De Kalb County Public Safety and Judicial Facilities Authority Revenue, Public Safety and
Judicial Facility Project, 5.00%, 12/01/29 .................................................. 2,000,000 2,102,220
De Kalb County Water and Sewer Revenue, 5.125%, 10/01/31 ...................................... 6,500,000 6,785,285
Fayette County PFAR, Criminal Justice Center Project, Refunding, 5.00%, 6/01/26 ............... 3,000,000 3,152,220
Forsyth County GO, Pre-Refunded, 5.75%, 2/01/19 ............................................... 1,500,000 1,707,015
Fulton County Development Authority Revenue,
Georgia Tech Foundation, Sac II Project, Series A, 5.25%, 11/01/30 ......................... 5,000,000 5,308,000
Georgia Tech Foundation Funding, Series A, 5.00%, 11/01/31 ................................. 3,000,000 3,109,380
Molecular Science Building Project, MBIA Insured, 5.00%, 5/01/25 ........................... 2,240,000 2,371,488
106 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GEORGIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
GEORGIA (CONT.)
Fulton County Water and Sewer Revenue, FGIC Insured, 5.00%, 1/01/30 ........................... $ 2,500,000 $ 2,606,750
Gainesville and Hall County Hospital Authority Revenue Anticipation Certificates,
Northeast Health System Inc. Project, Refunding, 5.50%, 5/15/31 ............................. 2,500,000 2,585,925
Georgia Municipal Association Inc. COP, City Court Atlanta Project, AMBAC Insured,
5.25%, 12/01/26 ............................................................................ 2,000,000 2,156,360
Georgia Municipal Electric Authority Power Revenue, Series W, ETM,
6.60%, 1/01/18 ............................................................................. 45,000 57,117
6.60%, 1/01/18 ............................................................................. 955,000 1,172,960
Georgia Municipal Gas Authority Gas Revenue, City of Toccoa Project, AMBAC Insured,
5.00%, 6/01/24 ............................................................................. 1,000,000 1,041,520
Georgia Private Colleges and Universities Authority Student Housing Revenue, Mercer Housing
Corp. Project, Series A, 6.00%, 6/01/24 .................................................... 2,550,000 2,655,085
Georgia State HFAR,
MF, Club Candlewood Project, FSA Insured, Pre-Refunded, 7.15%, 1/01/25 ..................... 1,000,000 1,079,350
MF, Lake Vista Apartments Project, Series A, FSA Insured, 5.95%, 1/01/27 ................... 1,000,000 1,038,690
SF, Sub Series C-2, 5.95%, 12/01/31 ........................................................ 4,435,000 4,591,733
SFM, Sub Series B-2, 5.85%, 12/01/28 ....................................................... 2,205,000 2,268,901
Gwinnett County Development Authority COP, Gwinnett County Public Schools Project,
MBIA Insured, 5.00%, 1/01/24 ................................................................ 8,500,000 8,996,740
Gwinnett County Hospital Authority Revenue, Anticipation Certificates, Gwinnett Hospital
Systems Inc. Project, Series B, MBIA Insured, 5.30%, 9/01/27 ................................ 3,750,000 3,997,313
Gwinnett County Water and Sewer Authority Revenue, 5.25%, 8/01/25 ............................. 2,795,000 3,020,780
Henry County Hospital Authority Revenue, Henry Medical Center Inc. Project, Refunding,
AMBAC Insured, 6.00%, 7/01/29 ............................................................... 5,000,000 5,628,250
Hogansville Combined Public Utility System Revenue, Refunding, FSA Insured, 6.00%,
10/01/23 .................................................................................... 3,300,000 3,930,465
Marietta Development Authority Revenue, First Mortgage, Life College Inc.,
Refunding, Series A, FSA Insured, 5.75%, 9/01/14 ........................................... 1,800,000 1,865,682
Refunding, Series A, FSA Insured, 5.80%, 9/01/19 ........................................... 1,100,000 1,140,403
Refunding, Series A, FSA Insured, 5.95%, 9/01/19 ........................................... 1,000,000 1,037,460
Series B, FSA Insured, 5.75%, 9/01/14 ...................................................... 800,000 829,192
Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus Regional
Healthcare System, MBIA Insured, 5.50%, 8/01/25 ............................................. 6,000,000 6,461,160
Meriwether County PFAR, Meriwether County Schools Project, MBIA Insured, 5.85%,
10/01/26 .................................................................................... 1,000,000 1,118,820
Monroe County Development Authority PCR, Oglethorpe Power Co., Scherer Project, Refunding,
Series A, 6.80%, 1/01/12 .................................................................... 1,500,000 1,795,200
Newton County Hospital Authority Revenue, Newton Health System Project 1999, AMBAC
Insured, 6.10%, 2/01/24 ..................................................................... 4,500,000 5,091,975
Private Colleges and Universities Authority Revenue,
Emory University Project, Refunding, Series A, 5.50%, 11/01/25 ............................. 10,000,000 10,901,800
Mercer University Project, Refunding, Series A, 5.375%, 10/01/29 ........................... 2,000,000 2,047,140
Richmond County Development Authority Educational Facilities Revenue, Augusta State University
Jaguar Student Center, Series A, XLCA Insured, 5.00%, 7/01/29 ............................... 1,000,000 1,038,360
Richmond County Development Authority, Solid Waste Disposal Revenue, International Paper Co.
Project, 5.80%, 12/01/20 .................................................................... 1,500,000 1,565,430
Rockdale County Water and Sewer Authority Revenue, Refunding, Series A, MBIA Insured,
5.375%, 7/01/29 ............................................................................. 5,000,000 5,409,700
Annual Report | 107
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GEORGIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
GEORGIA (CONT.)
South Fulton Municipal Regional Water and Sewer Authority Water Revenue, MBIA Insured,
5.00%, 1/01/33 .............................................................................. $ 3,500,000 $ 3,625,860
Suwanee GO, MBIA Insured, 5.25%, 1/01/32 ...................................................... 3,000,000 3,177,810
Upper Oconee Basin Water Authority Revenue,
FGIC Insured, 5.25%, 7/01/27 ............................................................... 1,550,000 1,660,298
(a)Refunding, MBIA Insured, 5.00%, 7/01/26 .................................................... 1,000,000 1,051,570
Valdosta and Lowndes County Hospital Authority Revenue, Certificates, South Georgia Medical
Center Project, AMBAC Insured, 5.25%, 10/01/27 .............................................. 3,000,000 3,200,340
Walton County Water and Sewer Authority Revenue, Refunding and Improvement, MBIA Insured,
6.00%, 2/01/21 .............................................................................. 750,000 788,498
Ware County Hospital Authority Revenue, Anticipation Certificates, MBIA Insured,
5.25%, 3/01/25 .............................................................................. 3,000,000 3,217,140
------------
199,414,728
------------
U. S. TERRITORIES 1.8%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.40%, 10/01/12 ............................................................................ 850,000 898,399
5.50%, 10/01/22 ............................................................................ 1,200,000 1,241,388
5.625%, 10/01/25 ........................................................................... 1,530,000 1,589,517
------------
3,729,304
------------
TOTAL BONDS (COST $188,917,949) ............................................................... 203,144,032
------------
ZERO COUPON/STEP-UP BONDS .9%
GEORGIA .9%
Fayette County School District GO, zero cpn. to 9/01/10,
4.75% thereafter, 3/01/21 .................................................................. 1,355,000 1,054,407
4.95% thereafter, 3/01/25 .................................................................. 1,000,000 766,730
------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $1,810,644) ............................................. 1,821,137
------------
TOTAL LONG TERM INVESTMENTS (COST $190,728,593) ............................................... 204,965,169
------------
SHORT TERM INVESTMENTS .5%
BONDS .5%
GEORGIA .5%
(b) Athens-Clarke County Unified Government Authority Revenue,
University of Georgia Athletic Association Project, Daily VRDN and Put, 1.80%, 8/01/33 1,000,000 1,000,000
(b) Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and
Put, 1.80%, 11/01/41 ........................................................................ 100,000 100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,100,000) ................................................ 1,100,000
------------
TOTAL INVESTMENTS (COST $191,828,593) 99.3% ................................................... 206,065,169
OTHER ASSETS, LESS LIABILITIES .7% ............................................................ 1,358,819
------------
NET ASSETS 100.0% ............................................................................. $207,423,988
============
See Glossary of Terms on page 146.
(a) See Note 1b regarding securities purchased on a delayed delivery basis.
(b) 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.
108 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN KENTUCKY TAX-FREE INCOME FUND
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 11.51 $ 11.30 $ 11.13 $ 11.03 $ 10.42
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .48 .50 .52 .55 .57
Net realized and unrealized gains (losses) ................... (.10) .21 .17 .10 .61
--------------------------------------------------------------
Total from investment operations .............................. .38 .71 .69 .65 1.18
--------------------------------------------------------------
Less distributions from net investment income ................. (.48) (.50) (.52) (.55) (.57)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 11.41 $ 11.51 $ 11.30 $ 11.13 $ 11.03
==============================================================
Total return(b) ............................................... 3.47% 6.43% 6.38% 6.08% 11.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 112,941 $ 118,797 $ 114,541 $ 96,299 $ 76,369
Ratios to average net assets:
Expenses ..................................................... .71% .60% .60% .52% .45%
Expenses excluding waiver and payments
by affiliates ............................................... .79% .78% .80% .82% .82%
Net investment income ........................................ 4.30% 4.44% 4.67% 4.96% 5.34%
Portfolio turnover rate ....................................... 12.48% 11.87% 7.34% 6.07% 12.80%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN KENTUCKY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.7%
BONDS 96.4%
KENTUCKY 84.4%
Bellevue GO, Public Project, Harbor Greene Project, 5.00%, 2/01/34 ................................ $ 1,065,000 $ 1,098,963
Boone County GO, Public Project, 5.00%,
4/01/20 ........................................................................................ 1,310,000 1,393,342
4/01/21 ........................................................................................ 1,000,000 1,058,550
Boone County PCR, Dayton Power and Light Co., Collateralized, Refunding, Series A, 6.50%,
11/15/22 ....................................................................................... 710,000 735,162
Boone Florence Water Commission Water Supply Systems Revenue, Refunding, FGIC Insured, 5.00%,
12/01/22 ....................................................................................... 1,200,000 1,271,400
12/01/27 ....................................................................................... 2,000,000 2,088,920
Bowling Green ISD, Finance Corp. School Building Revenue, 5.75%, 1/01/20 .......................... 1,140,000 1,259,392
Campbell and Kenton Counties Sanitation District No.1 Sanitation District Revenue, Series A,
FSA Insured, 5.00%,
8/01/19 ........................................................................................ 1,500,000 1,597,320
8/01/24 ........................................................................................ 2,000,000 2,097,020
Christian County Hospital Revenue, Jennie Stuart Medical Center, Series A, 6.00%, 7/01/17 ......... 1,000,000 1,049,190
Christian County Public Courthouse Corp. Lease Revenue, District Court Facilities Project, 5.125%,
8/01/20 ........................................................................................ 1,015,000 1,087,319
Elizabethtown Public Properties Holding Inc. Revenue, First Mortgage, Administrative Office of the
Courts, Judicial Facilities Project, MBIA Insured, 5.20%, 4/01/22 .............................. 2,000,000 2,146,400
Fayette County School District Finance Corp. School Building Revenue,
5.50%, 9/01/18 ................................................................................. 1,525,000 1,533,570
Refunding, Series B, FSA Insured, 4.00%, 1/01/17 ............................................... 2,500,000 2,731,450
Series A, AMBAC Insured, 5.25%, 4/01/20 ........................................................ 2,160,000 2,334,679
Florence GO, Public Project, Series A, FGIC Insured, 5.00%, 11/01/32 .............................. 1,000,000 1,030,880
Greater Kentucky Housing Assistance Corp. Mortgage Revenue, Section 8 Assisted Projects,
Refunding, Series A, MBIA Insured, 6.10%, 1/01/24 .............................................. 405,000 405,478
Hancock County Solid Waste Disposal Revenue, Willamette Industries Inc. Project, 6.60%,
5/01/26 ........................................................................................ 1,000,000 1,039,400
Hardin County School District Finance Corp. School Building Revenue, 5.75%, 2/01/20 ............... 1,500,000 1,655,805
Hardin County Water District No. 2, Water System Revenue, Series A, AMBAC Insured, 5.00%,
1/01/31 ........................................................................................ 2,620,000 2,701,927
Harlan County Justice Center Revenue, First Judicial Center Project, AMBAC Insured, 5.00%,
3/01/25 ........................................................................................ 1,330,000 1,388,985
Henry County Water District No. 2 Water Revenue, Refunding, MBIA Insured, 4.75%, 1/01/28 .......... 2,035,000 2,058,626
Jefferson County Health Facilities Revenue, Jewish Hospital Healthcare Services Inc., Refunding,
AMBAC Insured, 5.75%, 1/01/26 .................................................................. 1,000,000 1,065,780
Jefferson County PCR, DuPont, Series A, 6.30%, 7/01/12 ............................................ 450,000 462,973
Jefferson County School District Finance Corp. School Building Revenue, Series C, MBIA Insured,
4.00%, 9/01/17 ................................................................................. 1,535,000 1,543,443
Jefferson County School District Financial Corp. School Building Revenue, Series A, FSA Insured,
5.25%, 7/01/18 ................................................................................. 1,500,000 1,608,915
Jessamine County School District Finance Corp. School Building Revenue, 5.50%, 1/01/21 ............ 2,500,000 2,613,975
Kenton County Airport Board Revenue,
Cincinnati/Northern Kentucky International Airport, Series B, MBIA Insured, 5.75%, 3/01/13 ..... 1,230,000 1,291,020
Special Facilities, Delta Airlines Inc. Project, Series A, 7.50%, 2/01/20 ...................... 445,000 402,178
Special Facilities, Delta Airlines Inc. Project, Series A, 7.125%, 2/01/21 ..................... 325,000 282,308
Special Facilities, Delta Airlines Inc. Project, Series B, 7.25%, 2/01/22 ...................... 445,000 394,435
110 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN KENTUCKY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
KENTUCKY (CONT.)
Kentucky Area Development Districts Financing Trust Lease Program Revenue, City of Ewing,
6.00%, 6/01/30 ............................................................................. $ 2,000,000 $ 2,184,040
Series C, 6.00%, 6/01/30 ................................................................... 1,285,000 1,445,843
Series E, 5.70%, 6/01/22 ................................................................... 1,000,000 1,112,000
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 ............... 2,000,000 1,918,500
Kentucky Economic Development Finance Authority Revenue, Catholic Health Project, Refunding
and Improvement, Series A, 5.00%, 12/01/18 ................................................. 2,000,000 2,071,580
Kentucky Infrastructure Authority Revenue,
Infrastructure Revolving Fund Program, Series J, Pre-Refunded, 6.375%, 6/01/14 ............. 500,000 515,385
Series A, 5.00%, 6/01/19 ................................................................... 1,140,000 1,208,195
Series A, 5.00%, 6/01/20 ................................................................... 1,250,000 1,320,513
Series A, 5.00%, 6/01/21 ................................................................... 1,190,000 1,253,760
Kentucky Rural Water Finance Corp. Public Project Revenue,
Flexible Term Program, Series A, 5.00%, 2/01/26 ............................................ 1,055,000 1,103,319
Multimodal Flexible Term Program H, 5.00%, 2/01/34 ......................................... 1,500,000 1,553,310
Kentucky State Property and Buildings Commission Revenues,
Project No. 62, Refunding, 2nd Series, 5.25%, 10/01/18 ..................................... 3,540,000 3,836,086
Project No. 64, MBIA Insured, Pre-Refunded, 5.50%, 5/01/17 ................................. 1,535,000 1,701,409
Project No. 69, Refunding, Series A, FSA Insured, 5.00%, 8/01/21 ........................... 2,300,000 2,415,575
Project No. 77, Refunding, MBIA Insured, Pre-Refunded, 5.00%, 8/01/23 ...................... 280,000 309,719
Project No. 77, Refunding, MBIA Insured, 5.00%, 8/01/23 .................................... 820,000 867,839
Lawrenceburg Water and Sewer Revenue, MBIA Insured, 5.00%, 10/01/28 ........................... 1,730,000 1,803,439
Louisville and Jefferson County Metropolitan Sewer District Sewer and Drain System Revenue,
Series A, FGIC Insured, 5.00%, 5/15/30 ..................................................... 2,750,000 2,813,470
Louisville Parking Authority of River City Revenue, MBIA Insured, 5.00%, 6/01/29 .............. 3,290,000 3,404,920
Louisville Waterworks Board Water System Revenue, Louisville Water Co.,
FSA Insured, 5.50%, 11/15/25 ............................................................... 2,000,000 2,175,860
Refunding, FSA Insured, 5.25%, 11/15/24 .................................................... 2,500,000 2,698,700
(a) Madison County School District Finance Corp. School Building Revenue, MBIA Insured, 4.00%,
2/01/22 .................................................................................... 1,315,000 1,281,796
2/01/23 .................................................................................... 1,370,000 1,323,968
McCracken County Hospital Revenue, Mercy Health System, Refunding, Series A, MBIA Insured,
6.40%, 11/01/07 ............................................................................ 500,000 513,230
Northern Kentucky University COP, AMBAC Insured, 5.00%, 12/01/27 .............................. 1,500,000 1,562,430
Northern Kentucky Water Service District Revenue, MBIA Insured, 4.875%, 2/01/20 ............... 1,270,000 1,319,632
Oldham County School District Finance Corp. School Building Revenue, MBIA Insured, 5.00%,
5/01/24 .................................................................................... 5,680,000 6,008,986
Pendleton County Multi-County Lease Revenue, Kentucky Association of Counties Leasing Trust,
Series A, 6.50%, 3/01/19 ................................................................... 1,050,000 1,053,465
Russell Health System Revenue,
Our Lady of Bellefonte, Pre-Refunded, 5.50%, 7/01/15 ....................................... 800,000 873,336
Pre-Refunded, 8.10%, 7/01/15 ............................................................... 145,000 158,317
Pre-Refunded, 8.10%, 7/01/15 ............................................................... 140,000 149,995
------------
95,387,422
------------
Annual Report | 111
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN KENTUCKY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U. S. TERRITORIES 12.0%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.375%, 5/15/33 ............................................................................ $ 1,915,000 $ 1,934,763
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.125%, 7/01/31 ............................................................................ 3,125,000 3,227,844
Pre-Refunded, 5.125%, 7/01/31 .............................................................. 1,875,000 2,079,056
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, 5.375%, 7/01/36 .................................................................. 2,500,000 2,664,000
Puerto Rico PBA Revenue, Government Facilities, Series D,
Pre-Refunded, 5.25%, 7/01/36 ............................................................... 995,000 1,104,599
5.25%, 7/01/36 ............................................................................. 455,000 476,649
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.625%, 10/01/25 ...... 2,000,000 2,077,800
------------
13,564,711
------------
TOTAL BONDS (COST $102,932,526) ............................................................... 108,952,133
------------
ZERO COUPON/STEP-UP BONDS 1.3%
KENTUCKY 1.3%
Kentucky Economic Development Finance Authority Revenue, Norton Healthcare Inc., Series C,
MBIA Insured, zero cpn. to 10/01/05, 6.15% thereafter,
10/01/24 ................................................................................... 405,000 434,751
10/01/25 ................................................................................... 935,000 1,000,207
------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $1,293,206) ............................................. 1,434,958
------------
TOTAL LONG TERM INVESTMENTS (COST $104,225,732) ............................................... 110,387,091
------------
SHORT TERM INVESTMENTS 3.5%
BONDS 3.5%
KENTUCKY 3.2%
(b) Berea Educational Facilities Revenue, Series A, Daily VRDN and Put, 1.80%, 6/01/32 ............ 3,380,000 3,380,000
(b) Kentucky Area Development Districts Financing Trust Lease Program Revenue, Ewing Acquisition
Project, Weekly VRDN and Put, 1.96%, 6/01/33 ................................................ 210,000 210,000
------------
3,590,000
------------
U. S. TERRITORIES .3%
(b) Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ................................. 300,000 300,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $3,890,000) ................................................ 3,890,000
------------
TOTAL INVESTMENTS (COST $108,115,732) 101.2% .................................................. 114,277,091
OTHER ASSETS, LESS LIABILITIES (1.2)% ......................................................... (1,336,270)
------------
NET ASSETS 100.0% ............................................................................. $112,940,821
============
See Glossary of Terms on page 146.
(a) See Note 1b regarding securities purchased on a delayed delivery basis.
(b) 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.
112 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 11.81 $ 11.55 $ 11.38 $ 11.22 $ 10.55
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .52 .53 .55 .56 .58
Net realized and unrealized gains (losses) ................... (.14) .26 .17 .16 .67
--------------------------------------------------------------
Total from investment operations .............................. .38 .79 .72 .72 1.25
--------------------------------------------------------------
Less distributions from net investment income ................. (.51) (.53) (.55) (.56) (.58)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 11.68 $ 11.81 $ 11.55 $ 11.38 $ 11.22
==============================================================
Total return(b) ............................................... 3.36% 7.01% 6.52% 6.73% 12.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 188,659 $ 185,987 $ 177,211 $ 167,909 $ 154,750
Ratios to average net assets:
Expenses ..................................................... .73% .73% .74% .74% .74%
Net investment income ........................................ 4.49% 4.56% 4.84% 4.99% 5.32%
Portfolio turnover rate ....................................... 8.67% 16.35% 12.60% 10.05% 8.63%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 113
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LOUISIANA TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 11.91 $ 11.65 $ 11.47 $ 11.29 $ 10.62
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .46 .46 .49 .51 .52
Net realized and unrealized gains (losses) ................... (.13) .26 .18 .17 .67
--------------------------------------------------------------
Total from investment operations .............................. .33 .72 .67 .68 1.19
--------------------------------------------------------------
Less distributions from net investment income ................. (.45) (.46) (.49) (.50) (.52)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 11.79 $ 11.91 $ 11.65 $ 11.47 $ 11.29
==============================================================
Total return(b) ............................................... 2.84% 6.34% 5.98% 6.18% 11.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 19,196 $ 20,768 $ 20,503 $ 16,047 $ 12,424
Ratios to average net assets:
Expenses ..................................................... 1.28% 1.29% 1.28% 1.29% 1.29%
Net investment income ........................................ 3.94% 4.00% 4.30% 4.44% 4.77%
Portfolio turnover rate ....................................... 8.67% 16.35% 12.60% 10.05% 8.63%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
114 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN LOUISIANA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.0%
BONDS 97.0%
LOUISIANA 92.1%
Bossier City Public Improvement Sales and Use Tax Revenue,
FGIC Insured, 5.00%, 12/01/19 .................................................................. $ 1,145,000 $ 1,213,757
Refunding, FGIC Insured, 5.00%, 12/01/21 ....................................................... 1,875,000 1,970,756
Refunding, FGIC Insured, 5.00%, 12/01/22 ....................................................... 1,515,000 1,582,221
Bossier Parish Sales and Use Tax Revenue, AMBAC Insured, 5.00%, 7/01/20 ........................... 1,900,000 2,030,853
Calcasieu Parish Public Trust Authority Mortgage Revenue, Refunding, Series B, 6.875%,
11/01/12 ....................................................................................... 55,000 55,550
Calcasieu Parish Public Trust Authority SFMR, Series A, GNMA Secured, 6.40%, 4/01/32 .............. 20,000 20,634
Calcasieu Parish Public Trust Authority Student Lease Revenue, McNeese Student Housing Project,
MBIA Insured, 5.25%,
5/01/21 ........................................................................................ 1,505,000 1,623,669
5/01/33 ........................................................................................ 2,500,000 2,632,300
De Soto Parish Environmental Improvement Revenue, International Paper Co. Project, Series A,
5.65%, 12/01/21 ................................................................................ 1,000,000 1,025,790
De Soto Parish PCR, Cleco Utility Group Inc. Project, Refunding, AMBAC Insured, 5.875%,
9/01/29 ........................................................................................ 11,500,000 12,813,300
Denham Spring Livingston Housing and Mortgage Finance Authority SFHR, Series A, FHA Insured,
ETM, 7.20%, 8/01/10 ............................................................................ 1,380,000 1,650,701
East Baton Rouge Mortgage Finance Authority Revenue, SFM Purchase, Refunding, Series A,
6.10%, 10/01/29 ................................................................................ 390,000 400,920
East Baton Rouge Parish Sales and Use Tax Revenue, Public Improvement, Series ST, FGIC Insured,
5.00%, 2/01/20 ................................................................................. 1,000,000 1,055,730
Ernest N. Morial New Orleans Exhibit Hall Authority Special Tax, senior sub. note, Series A,
AMBAC Insured, 5.00%, 7/15/33 .................................................................. 5,000,000 5,161,850
Greater New Orleans Expressway Commission Revenue, Refunding, AMBAC Insured, 5.00%,
11/01/27 ....................................................................................... 5,000,000 5,217,500
Jefferson Parish Revenue, Public Improvement, 24 Judicial District Project, MBIA Insured, 5.00%,
4/01/29 ........................................................................................ 3,060,000 3,182,125
Jefferson Parish West Jefferson Park and Community Center Revenue, MBIA Insured, 5.00%,
10/01/29 ....................................................................................... 2,925,000 3,046,914
Jefferson Sales Tax District Special Sales Tax Revenue,
Refunding, FSA Insured, 5.00%, 12/01/22 ........................................................ 3,000,000 3,133,110
Special Tax Bond, AMBAC Insured, 5.00%, 12/01/20 ............................................... 4,195,000 4,420,313
Lafayette Public Trust Financing Authority Revenue, Ragin Cajun Facilities Inc. Project,
MBIA Insured, 5.00%, 10/01/22 .................................................................. 1,500,000 1,598,655
Lafayette Public Trust Financing Authority SFMR, Series A, ETM, 7.20%, 4/01/11 .................... 30,000 36,211
Lafayette Utilities Revenue, MBIA Insured, 5.00%, 11/01/28 ........................................ 5,000,000 5,221,750
Lafourche Parish Home Mortgage Authority SFMR, ETM, 7.40%, 7/01/10 ................................ 75,000 83,572
Livingston Parish Waterworks Revenue, Ward Two Water District, AMBAC Insured, 5.125%, 4/01/29 ..... 2,200,000 2,336,598
Louisiana HFA Mortgage Revenue,
MF, Westview Project, FHA Insured, 7.80%, 4/01/30 .............................................. 750,000 759,435
SF, Series A-1, GNMA Secured, 5.45%, 12/01/20 .................................................. 1,180,000 1,208,721
Louisiana Local Government Environmental Facilities CDA Revenue,
Delgado Community College Foundation Project, AMBAC Insured, 6.00%, 10/01/29 ................... 1,000,000 1,127,840
Jefferson Parking Garage Project, AMBAC Insured, 5.00%, 9/01/21 ................................ 2,215,000 2,322,494
MBIA Insured, 5.00%, 12/01/26 .................................................................. 3,000,000 3,128,850
Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/26 ............. 2,000,000 2,140,880
Annual Report | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN LOUISIANA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
LOUISIANA (CONT.)
Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/31 ............. $ 2,000,000 $ 2,126,680
Southeastern Louisiana Student Housing, Series A, MBIA Insured, 5.00%, 8/01/27 ................. 3,000,000 3,139,710
Louisiana Local Government Environmental Facility Revenue, Baton Rouge Apartments, Series A,
MBIA Insured, 6.375%, 1/01/30 .................................................................. 4,265,000 4,593,959
Louisiana Public Facilities Authority Hospital Revenue,
Franciscan Missionaries, Series C, MBIA Insured, 5.00%, 7/01/19 ................................ 3,750,000 3,911,550
Pendleton Memorial Methodist, Pre-Refunded, 5.25%, 6/01/28 ..................................... 4,500,000 4,864,545
Touro Infirmary Project, Series A, 5.625%, 8/15/29 ............................................. 6,000,000 6,139,440
Louisiana Public Facilities Authority Revenue,
Centenary College Project, Refunding, 5.75%, 2/01/29 ........................................... 7,300,000 7,123,632
Dillard University Project, Refunding, AMBAC Insured, 5.00%, 2/01/18 ........................... 1,500,000 1,590,915
Dillard University Project, Series A, AMBAC Insured, 5.30%, 8/01/26 ............................ 1,540,000 1,647,877
HFA, Mortgage Purchase, FNMA Insured, 6.05%, 1/01/26 ........................................... 645,000 654,372
Mortgage Purchase, HFA, Refunding, Series A, FNMA Insured, 6.40%, 7/20/20 ...................... 1,900,000 1,941,534
Ochsner Clinic Foundation Project, Series B, 5.75%, 5/15/23 .................................... 2,500,000 2,667,950
Tulane University, AMBAC Insured, Pre-Refunded, 6.05%, 10/01/25 ................................ 5,500,000 5,918,385
Tulane University, Refunding, Series A, AMBAC Insured, 5.125%, 7/01/27 ......................... 3,000,000 3,155,910
Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/17 ................ 1,000,000 1,075,780
Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/27 ................ 6,015,000 6,376,321
Louisiana State Gas and Fuels Tax Revenue, Series A, AMBAC Insured, 5.00%, 6/01/27 ................ 3,500,000 3,631,040
Louisiana State Office Facilities Corp. Lease Revenue, Capital Complex Program,
AMBAC Insured, 5.00%, 5/01/21 .................................................................. 2,500,000 2,631,925
Series A, MBIA Insured, 5.375%, 3/01/19 ........................................................ 3,000,000 3,214,380
Louisiana State University and Agricultural and Mechanical College Board Revenue,
AMBAC Insured, 5.00%, 7/01/22 .................................................................. 5,000,000 5,328,250
Auxiliary, Series B, AMBAC Insured, 5.00%, 7/01/27 ............................................. 1,500,000 1,569,330
Louisiana State University and Agricultural and Mechanical College University Revenues, Auxiliary,
MBIA Insured, 5.50%, 7/01/26 ................................................................... 1,500,000 1,585,335
Monroe Sales and Use Tax Revenue, FGIC Insured, 5.25%, 7/01/23 .................................... 1,535,000 1,667,455
New Orleans GO,
Drain Systems, AMBAC Insured, 5.00%, 12/01/18 .................................................. 1,000,000 1,050,010
Public Improvement, AMBAC Insured, 5.25%, 12/01/29 ............................................. 1,485,000 1,595,009
Public Improvement, FGIC Insured, 5.25%, 12/01/21 .............................................. 1,295,000 1,407,199
Public Improvement, FGIC Insured, 5.125%, 12/01/26 ............................................. 2,000,000 2,102,760
Refunding, MBIA Insured, 5.125%, 9/01/21 ....................................................... 2,000,000 2,145,800
Orleans Levee District Revenue, Levee Improvement, Refunding, FSA Insured, 5.95%,
11/01/14 ....................................................................................... 680,000 717,720
Orleans Parish Parishwide School District GO, Refunding, Series B, FGIC Insured, 5.50%,
9/01/20 ........................................................................................ 1,000,000 1,068,130
Orleans Parish School Board GO, Series 95, FGIC Insured, 5.375%, 9/01/18 .......................... 1,950,000 1,979,016
Ouachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical Center,
Refunding, FSA Insured, 5.75%, 5/15/21 ......................................................... 2,500,000 2,739,025
Ouachita Parish La West Ouachita Parish School District Sales and Use Tax Revenue, FGIC Insured,
5.75%, 9/01/24 ................................................................................. 1,410,000 1,564,395
Rapides Parish Housing and Mortgage Finance Authority Revenue, SFM Purchase, FHA Insured,
ETM, 7.25%, 8/01/10 ............................................................................ 870,000 971,529
Shreveport Certificates of Indebtedness Revenue, Refunding, Series A, AMBAC Insured, 5.00%,
10/01/16 ....................................................................................... 1,000,000 1,070,830
116 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN LOUISIANA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
LOUISIANA (CONT.)
St. Bernard Home Mortgage Authority Revenue, SF, Series A, FGIC Insured, ETM, 7.50%,
9/01/10 ..................................................................................... $ 435,000 $ 530,522
St. Bernard Parish Exempt Facilities Revenue, Mobil Oil Corp. Project, 5.90%, 11/01/26 ......... 1,500,000 1,563,960
St. Charles Parish PCR, Louisiana Power and Light Co. Project, 7.50%, 6/01/21 .................. 2,500,000 2,512,575
St. Charles Parish Solid Waste Disposal Revenue, Louisiana Power and Light Co. Project,
7.05%, 4/01/22 .............................................................................. 1,500,000 1,508,700
Series A, 7.00%, 12/01/22 ................................................................... 750,000 753,607
St. John's Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 ................... 2,500,000 2,640,375
St. Tammany's Public Trust Financing Authority SFMR, Series A, ETM, 7.20%,
7/01/10 ..................................................................................... 80,000 88,428
7/01/11 ..................................................................................... 50,000 61,179
State Colleges and Universities Lease Revenue, University of Southwestern Louisiana, Cajundome,
MBIA Insured, 5.65%, 9/01/26 ................................................................ 3,080,000 3,273,516
Terrebonne Parish Hospital Service District No. 1 Hospital Revenue, Terrebonne General Medical
Center Project, Refunding, AMBAC Insured, 5.50%, 4/01/33 .................................... 2,155,000 2,332,831
University of Louisiana Board of Supervisors Lease Revenue, LaFayette Cajundome Convention,
MBIA Insured, 6.25%, 9/01/29 ................................................................ 1,200,000 1,381,092
University System Board of Supervisors Revenue, Northwestern State University Wellness,
AMBAC Insured, 5.10%, 4/01/24 ............................................................... 1,000,000 1,044,830
West Feliciana Parish PCR, Gulf State Utility Co. Project, 7.70%, 12/01/14 ..................... 6,500,000 6,580,340
------------
191,442,652
------------
U. S. TERRITORIES 4.9%
Puerto Rico Commonwealth GO, Public Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 .................................................. 4,400,000 4,917,968
Series A, 5.00%, 7/01/33 .................................................................... 2,000,000 2,057,500
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ........ 3,000,000 3,139,800
------------
10,115,268
------------
TOTAL LONG TERM INVESTMENTS (COST $189,337,428) ................................................ 201,557,920
------------
SHORT TERM INVESTMENTS 1.6%
BONDS 1.6%
LOUISIANA 1.5%
(a) Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project, First
Stage, ACES, Refunding, Daily VRDN and Put, 1.80%, 9/01/17 ................................... 3,200,000 3,200,000
U. S. TERRITORIES .1%
(a) Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A,
AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ........................................... 100,000 100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $3,300,000) ................................................. 3,300,000
------------
TOTAL INVESTMENTS (COST $192,637,428) 98.6% .................................................... 204,857,920
OTHER ASSETS, LESS LIABILITIES 1.4% ............................................................ 2,996,732
------------
NET ASSETS 100.0% .............................................................................. $207,854,652
============
See Glossary of Terms on page 146.
(a) 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.
Annual Report | See notes to financial statements. | 117
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MARYLAND TAX-FREE INCOME FUND
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 11.93 $ 11.78 $ 11.52 $ 11.36 $ 10.63
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .51 .52 .54 .55 .57
Net realized and unrealized gains (losses) ................... (.13) .16 .26 .17 .72
--------------------------------------------------------------
Total from investment operations .............................. .38 .68 .80 .72 1.29
--------------------------------------------------------------
Less distributions from net investment income ................. (.51) (.53) (.54) (.56) (.56)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 11.80 $ 11.93 $ 11.78 $ 11.52 $ 11.36
==============================================================
Total return(b) ............................................... 3.34% 5.89% 7.16% 6.44% 12.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 332,943 $ 340,237 $ 322,873 $ 281,141 $ 248,964
Ratios to average net assets:
Expenses ..................................................... .70% .70% .70% .72% .73%
Net investment income ........................................ 4.40% 4.43% 4.65% 4.81% 5.16%
Portfolio turnover rate ....................................... 12.03% 10.56% 6.30% 6.39% 13.01%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
118 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MARYLAND TAX-FREE INCOME FUND (CONTINUED)
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 12.05 $ 11.90 $ 11.63 $ 11.46 $ 10.72
--------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................................... .46 .46 .48 .49 .51
Net realized and unrealized gains (losses) ................... (.13) .15 .27 .17 .73
--------------------------------------------------------------
Total from investment operations .............................. .33 .61 .75 .66 1.24
--------------------------------------------------------------
Less distributions from net investment income ................. (.45) (.46) (.48) (.49) (.50)
--------------------------------------------------------------
Redemption fees ............................................... --(c) -- -- -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 11.93 $ 12.05 $ 11.90 $ 11.63 $ 11.46
==============================================================
Total return(b) ............................................... 2.73% 5.33% 6.59% 5.88% 11.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $ 48,997 $ 49,739 $ 48,305 $ 33,257 $ 22,547
Ratios to average net assets:
Expenses ..................................................... 1.25% 1.28% 1.22% 1.27% 1.28%
Net investment income ........................................ 3.85% 3.85% 4.13% 4.26% 4.61%
Portfolio turnover rate ....................................... 12.03% 10.56% 6.30% 6.39% 13.01%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 119
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MARYLAND TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.2%
BONDS 98.2%
MARYLAND 85.8%
Anne Arundel County GO, 4.625%, 3/01/32 ........................................................... $ 2,000,000 $ 2,026,020
Anne Arundel County PCR, Baltimore Gas and Electric Co. Project, Refunding, 6.00%,
4/01/24 ......................................................................................... 9,500,000 9,829,175
Baltimore County Metropolitan 68th District GO, Refunding, 5.00%, 8/01/32 ......................... 1,000,000 1,043,340
Baltimore Economic Development Lease Revenue, Armistead Partnership, Refunding, Series A,
7.00%, 8/01/11 .................................................................................. 2,665,000 2,701,617
Baltimore GO, Consolidated Public Improvement,
Series A, FGIC Insured, Pre-Refunded, 5.30%, 10/15/17 .......................................... 1,500,000 1,630,200
Series A, FSA Insured, Pre-Refunded, 5.25%, 10/15/17 ........................................... 3,300,000 3,684,417
Series B, 7.15%, 10/15/08 ...................................................................... 1,000,000 1,142,660
Baltimore Port Facilities Revenue, Consolidated Coal Sales, Series A, 6.50%, 10/01/11 ............. 1,850,000 1,984,865
Baltimore Project Revenue, Wastewater Project,
Refunding, FGIC Insured, 5.125%, 7/01/42 ....................................................... 7,630,000 7,967,933
Series A, FGIC Insured, 5.00%, 7/01/33 ......................................................... 3,000,000 3,130,560
Series B, FGIC Insured, Pre-Refunded, 5.00%, 7/01/28 ........................................... 4,000,000 4,261,400
Baltimore Revenue, Wastewater Project, Series A,
FGIC Insured, Pre-Refunded, 5.80%, 7/01/15 ..................................................... 5,000,000 5,576,900
FSA Insured, Pre-Refunded, 5.75%, 7/01/30 ...................................................... 10,000,000 11,281,300
Carroll County Revenue, Fairhaven and Copper Ridge, Refunding, Series A, Radian Insured,
5.375%, 1/01/16 ................................................................................ 2,000,000 2,150,660
5.50%, 1/01/19 ................................................................................. 1,000,000 1,066,050
5.625%, 1/01/25 ................................................................................ 2,000,000 2,149,800
Gaithersburg Hospital Facilities Revenue, Shady Grove Adventist Hospital, Refunding
and Improvement, FSA Insured, 6.00%, 9/01/21 .................................................... 8,000,000 8,292,320
Harford County GO, Consolidated Public Improvement,
4.40%, 1/15/15 ................................................................................. 1,450,000 1,519,426
4.40%, 1/15/16 ................................................................................. 1,420,000 1,481,088
4.45%, 1/15/17 ................................................................................. 1,125,000 1,175,130
Harford County Mortgage Revenue, Greenbrier V Apartments Project, Refunding, FHA Insured,
6.50%, 11/01/26 ................................................................................. 3,000,000 3,067,290
Howard County Mortgage Revenue, Normandy Woods III Apartments Project, Refunding, Series A,
FHA Insured, 6.10%, 7/01/25 ..................................................................... 2,000,000 2,083,380
Maryland Environmental Services COP, Water and Waste Facilities, Series A, 6.70%, 6/01/11 ......... 1,900,000 1,909,025
Maryland State CDA, Department of Housing and Community Development Revenue,
Housing, Series A, 6.00%, 7/01/32 .............................................................. 4,000,000 4,148,560
Residential, Series D, 5.25%, 9/01/29 .......................................................... 3,770,000 3,804,684
Series B, 5.35%, 9/01/30 ....................................................................... 1,580,000 1,760,782
SF Program, First Series, 5.00%, 4/01/17 ....................................................... 220,000 221,236
SF Program, Second Series, 5.00%, 4/01/17 ...................................................... 3,000,000 3,051,750
Maryland State EDC, Utility Infrastructure Revenue, University College Park Project,
AMBAC Insured, 5.00%, 7/01/19 ................................................................... 1,710,000 1,817,439
Maryland State Energy Financing Administration Solid Waste Disposal Revenue, Limited Obligation,
Wheelabrator Water Projects, 6.45%, 12/01/16 .................................................... 3,000,000 3,177,900
120 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MARYLAND TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MARYLAND (CONT.)
Maryland State Health and Higher Educational Facilities Authority Revenue,
Anne Arundel Health System, Series A, 5.125%, 7/01/34 .......................................... $ 2,500,000 $ 2,564,125
Anne Arundel Medical Center, FSA Insured, 5.125%, 7/01/33 ...................................... 8,365,000 8,646,315
Carroll County General Hospital, 6.00%, 7/01/26 ................................................ 2,000,000 2,131,380
Carroll County General Hospital, 5.80%, 7/01/32 ................................................ 5,000,000 5,261,300
Catholic Health Initiatives, Series A, 6.00%, 12/01/20 ......................................... 2,920,000 3,309,309
Catholic Health Initiatives, Series A, ETM, 6.00%, 12/01/24 .................................... 2,025,000 2,278,246
Charity Obligation Group, Series A, 5.00%, 11/01/19 ............................................ 1,515,000 1,567,071
Charity Obligation Group, Series A, 5.00%, 11/01/29 ............................................ 2,250,000 2,314,732
Doctors Community Hospital, Refunding, 5.75%, 7/01/13 .......................................... 2,885,000 2,893,886
Helix Health Issue, AMBAC Insured, ETM, 5.00%, 7/01/27 ......................................... 11,000,000 11,856,130
Johns Hopkins University Issue, Pre-Refunded, 6.00%, 7/01/39 ................................... 5,000,000 5,661,350
Johns Hopkins, AMBAC Insured, 5.00%, 7/01/27 ................................................... 655,000 679,759
Maryland Institute College of Art, 5.625%, 6/01/36 ............................................. 3,600,000 3,772,152
Mercy Medical Center Project, Refunding, FSA Insured, 5.75%, 7/01/26 ........................... 1,500,000 1,553,655
Mercy Medical Center, Refunding, 5.625%, 7/01/31 ............................................... 5,500,000 5,666,045
North Arundel Hospital, 6.50%, 7/01/26 ......................................................... 1,000,000 1,140,350
North Arundel Hospital, 6.50%, 7/01/31 ......................................................... 1,320,000 1,502,516
Parking, Johns Hopkins Medical Institutions, AMBAC Insured, 5.00%, 7/01/34 ..................... 5,000,000 5,258,450
Roland Park Place Project, Refunding, 5.625%, 7/01/18 .......................................... 2,500,000 2,514,650
Roland Park Place Project, Refunding, 5.625%, 7/01/24 .......................................... 2,680,000 2,682,948
University of Maryland Medical System, 6.75%, 7/01/30 .......................................... 11,000,000 12,498,530
Upper Chesapeake Hospitals, Series A, FSA Insured, 5.375%, 1/01/28 ............................. 5,000,000 5,230,600
Upper Chesapeake Hospitals, Series A, FSA Insured, 5.125%, 1/01/33 ............................. 7,100,000 7,286,659
Maryland State Health and Higher Revenue, Johns Hopkins University, Series A, 5.00%,
7/01/32 ......................................................................................... 29,000,000 30,096,490
Maryland State Stadium Authority Lease Revenue, Convention Center Expansion, AMBAC Insured,
5.875%, 12/15/14 ................................................................................ 4,655,000 4,772,353
Maryland State Stadium Authority Sports Facilities Lease Revenue, AMBAC Insured,
5.75%, 3/01/22 ................................................................................. 5,000,000 5,204,350
5.80%, 3/01/26 ................................................................................. 2,045,000 2,129,581
Maryland State Transportation Authority Transportation Facility Projects Revenue, FSA Insured,
5.00%, 7/01/27 .................................................................................. 5,890,000 6,199,107
Maryland State Transportation Authority Lease Revenue, Metrorail Parking Project, AMBAC Insured,
5.00%, 7/01/28 .................................................................................. 3,975,000 4,174,267
Maryland State Transportation Authority Transportation Facility Projects Revenue, FSA Insured,
5.00%, 7/01/31 .................................................................................. 7,455,000 7,793,755
7/01/32 ......................................................................................... 7,165,000 7,490,578
7/01/34 ......................................................................................... 7,500,000 7,858,350
Maryland Transportation Authority Revenue, AMBAC Insured, 5.00%, 3/01/27 .......................... 8,000,000 8,320,800
Maryland Water Quality Financing Administration Revenue, Revolving Loan Fund, Series A, 6.55%,
9/01/14 ......................................................................................... 965,000 968,213
Annual Report | 121
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MARYLAND TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MARYLAND (CONT.)
Montgomery County GO, 4.75%,
2/01/17 ......................................................................................... $ 5,000,000 $ 5,302,900
4/01/22 ......................................................................................... 3,000,000 3,146,490
Montgomery County Housing Opportunities Commission MFHR, Series B, FHA Insured, 6.00%,
7/01/37 ......................................................................................... 2,500,000 2,583,575
Montgomery County Revenue Authority Golf Course System Revenue, Series A, Pre-Refunded,
6.125%, 10/01/22 ................................................................................ 1,000,000 1,075,600
Morgan State University Maryland and Aux Facilities Fees Revenue, Series A, FGIC Insured,
5.00%, 7/01/32 .................................................................................. 6,450,000 6,717,030
Prince George's County GO, Consolidated Public Improvement,
4.40%, 9/15/22 .................................................................................. 10,000,000 10,171,400
MBIA Insured, 5.00%, 4/15/18 .................................................................... 2,100,000 2,217,390
Prince George's County IDA, Lease Revenue, Upper Marlboro Justice-B, MBIA Insured, 4.75%,
6/30/30 ......................................................................................... 4,000,000 4,051,920
Prince George's County Parking Authority Revenue, Justice Center Facilities Project, Refunding,
6.45%, 5/01/05 .................................................................................. 500,000 502,385
Prince George's County PCR, Potomac Electric Project, Refunding,
6.00%, 9/01/22 .................................................................................. 1,200,000 1,203,612
6.375%, 1/15/23 ................................................................................. 2,975,000 2,985,383
St. Mary's College Revenue, Academic Fees and Auxiliary Fees Project, Series A, AMBAC Insured,
5.55%, 9/01/30 .................................................................................. 2,000,000 2,164,940
University of Maryland Auxiliary Facilities System and Tuition Revenue, Series A, Pre-Refunded,
5.60%, 4/01/16 .................................................................................. 1,000,000 1,022,830
Westminster Education Facility Revenue, McDaniel College, 5.50%,
4/01/27 ......................................................................................... 425,000 444,244
4/01/32 ......................................................................................... 1,500,000 1,565,010
------------
327,569,618
------------
U. S. TERRITORIES 12.4%
Puerto Rico Commonwealth GO, Public Improvement,
Refunding, FSA Insured, 5.25%, 7/01/27 ......................................................... 1,015,000 1,080,001
Refunding, FSA Insured, 5.125%, 7/01/30 ........................................................ 2,870,000 3,038,899
Pre-Refunded, FSA Insured, 5.25%, 7/01/27 ...................................................... 1,520,000 1,696,229
Pre-Refunded, FSA Insured, 5.125%, 7/01/30 ..................................................... 4,360,000 4,834,499
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, 5.25%, 7/01/38 ....................................................................... 5,000,000 5,228,400
Series G, 5.00%, 7/01/33 ....................................................................... 7,000,000 7,201,250
Puerto Rico Electric Power Authority Power Revenue,
Series HH, FSA Insured, 5.25%, 7/01/29 ......................................................... 10,780,000 11,625,907
Series II, 5.25%, 7/01/31 ...................................................................... 3,000,000 3,173,850
Puerto Rico PBA Revenue, Government Facilities, Series D,
Pre-Refunded, 5.25%, 7/01/36 ................................................................... 1,480,000 1,643,022
5.25%, 7/01/36 ................................................................................. 520,000 544,742
122 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MARYLAND TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES (CONT.)
Virgin Islands PFAR,
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ............................. $ 1,700,000 $ 1,779,220
Gross Receipts Taxes, Loan Note, FSA Insured, 5.00%, 10/01/22 .................................. 2,000,000 2,151,180
senior lien, Refunding, Series A, 5.50%, 10/01/14 .............................................. 3,300,000 3,490,872
------------
47,488,071
------------
TOTAL LONG TERM INVESTMENTS (COST $354,468,074) ................................................... 375,057,689
------------
SHORT TERM INVESTMENTS (COST $1,505,000) .4%
BOND .4%
MARYLAND .4%
(a) Maryland State EDC Revenue, U.S. Pharmacopeial Project, Series A, AMBAC Insured,
Daily VRDN and Put, 1.80%, 7/01/34 .............................................................. 1,505,000 1,505,000
------------
TOTAL INVESTMENTS (COST $355,973,074) 98.6% ....................................................... 376,562,689
OTHER ASSETS, LESS LIABILITIES 1.4% ............................................................... 5,377,545
------------
NET ASSETS 100.0% ................................................................................. $381,940,234
============
See Glossary of Terms on page 146.
(a) 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.
Annual Report | See notes to financial statements. | 123
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MISSOURI TAX-FREE INCOME FUND
---------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.44 $ 12.23 $ 12.00 $ 11.77 $ 11.02
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... .54 .55 .58 .58 .60
Net realized and unrealized gains (losses) ........ (.12) .21 .23 .24 .75
---------------------------------------------------------------------------
Total from investment operations ................... .42 .76 .81 .82 1.35
---------------------------------------------------------------------------
Less distributions from net investment income ...... (.54) (.55) (.58) (.59) (.60)
---------------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ....................... $ 12.32 $ 12.44 $ 12.23 $ 12.00 $ 11.77
===========================================================================
Total return(b) .................................... 3.49% 6.38% 6.90% 7.13% 12.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 516,312 $ 499,238 $ 468,008 $ 425,795 $ 373,190
Ratios to average net assets:
Expenses .......................................... .67% .67% .67% .68% .69%
Net investment income ............................. 4.44% 4.50% 4.72% 4.91% 5.22%
Portfolio turnover rate ............................ 17.93% 25.04% 18.73% 22.80% 38.38%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
124 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MISSOURI TAX-FREE INCOME FUND (CONTINUED)
---------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.50 $ 12.29 $ 12.06 $ 11.82 $ 11.06
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... .48 .48 .51 .52 .54
Net realized and unrealized gains (losses) ........ (.12) .21 .23 .24 .75
---------------------------------------------------------------------------
Total from investment operations ................... .36 .69 .74 .76 1.29
---------------------------------------------------------------------------
Less distributions from net investment income ...... (.47) (.48) (.51) (.52) (.53)
---------------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ....................... $ 12.39 $ 12.50 $ 12.29 $ 12.06 $ 11.82
===========================================================================
Total return(b) .................................... 2.98% 5.75% 6.29% 6.61% 11.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 60,418 $ 60,208 $ 55,608 $ 41,013 $ 28,695
Ratios to average net assets:
Expenses .......................................... 1.22% 1.25% 1.19% 1.23% 1.24%
Net investment income ............................. 3.89% 3.92% 4.20% 4.36% 4.67%
Portfolio turnover rate ............................ 17.93% 25.04% 18.73% 22.80% 38.38%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 125
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MISSOURI TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.5%
BONDS 98.5%
MISSOURI 83.6%
BI-State Development Agency Revenue, Missouri Illinois Metropolitan District, Metrolink Cross
County Project, Series B, FSA Insured, 5.00%, 10/01/32 ...................................... $ 4,500,000 $ 4,691,025
Boone County IDA Health Care Revenue, Retirement Center Project, GNMA Secured, 5.70%,
10/20/22 .................................................................................... 1,515,000 1,631,913
Cape Girardeau County IDA Health Care Facilities Revenue, St. Francis Medical Center, Series A,
5.50%,
6/01/27 ..................................................................................... 6,350,000 6,680,136
6/01/32 ..................................................................................... 5,000,000 5,252,950
Cape Girardeau County IDA Solid Waste Disposal Revenue, Procter and Gamble Paper Products,
5.30%, 5/15/28 ............................................................................... 6,875,000 7,090,119
Curators University System Facilities Revenue, Series A, 5.00%, 11/01/31 ....................... 17,845,000 18,608,231
Dunklin County COP, FGIC Insured, 5.00%, 12/01/24 .............................................. 1,000,000 1,050,300
Florissant COP, FGIC Insured, 5.00%, 8/01/22 ................................................... 1,285,000 1,364,978
Grandview COP, FGIC Insured, 5.00%, 1/01/23 .................................................... 2,410,000 2,553,853
Hazelwood IDA, MFHR, Lakes Apartments Project, Refunding, Series A, GNMA Secured, 6.10%,
9/20/26 ..................................................................................... 1,745,000 1,816,144
Hazelwood School District GO, Missouri Direct Deposit Page, Series A, FGIC Insured, 5.00%,
3/01/24 ..................................................................................... 3,000,000 3,204,360
Hickory County School District R-1 Skyline GO, Direct Deposit Program, 6.05%, 3/01/20 .......... 1,100,000 1,237,493
High Ridge Fire Protection District GO, FSA Insured, 5.375%, 11/01/20 .......................... 1,000,000 1,065,020
Howard Bend Levee District Special Tax,
5.65%, 3/01/13 .............................................................................. 1,000,000 1,063,560
5.85%, 3/01/19 .............................................................................. 4,000,000 4,256,040
Jackson County Consolidated School District No. 2 GO, Direct Deposit Program, 5.20%, 3/01/20 ... 2,000,000 2,143,300
Jackson County Reorganized School District No. 7 Lees Summit GO, Direct Deposit, Refunding and
Improvement, FSA Insured, 5.00%, 3/01/21 ...................................................... 5,700,000 6,055,509
Jackson County Special Obligation Revenue, MBIA Insured, 5.00%, 12/01/27 ....................... 3,105,000 3,242,520
Jasper County Reorganized School District No. R-7 GO, Direct Deposit Program, 6.00%, 3/01/20 ... 1,025,000 1,145,970
Jefferson County Conservation Public Water Supply District No. C-1 Waterworks Revenue, AMBAC
Insured, 5.00%, 12/01/26 .................................................................... 4,500,000 4,663,575
(a) Jefferson County Consolidated School District No. 6 Lease Particiation COP, FSA Insured, 5.00%,
3/01/25 ..................................................................................... 1,050,000 1,119,751
Joplin IDA Health Facilities Revenue, Freeman Health Systems Project,
5.50%, 2/15/29 .............................................................................. 2,000,000 2,067,240
5.75%, 2/15/35 .............................................................................. 2,500,000 2,653,200
Kansas City IDA, MFHR, Mews Apartments Project, Series A, FNMA Insured, 6.30%, 7/01/20 ......... 3,345,000 3,426,952
Kansas City Land Clearance Redevelopment Authority Lease Revenue, Municipal Auditorium and
Muehlebach Hotel, Series A, FSA Insured, 5.90%, 12/01/18 .................................... 5,000,000 5,226,400
Kansas City MAC Revenue, Leasehold Roe Bartle, Refunding, Series A, MBIA Insured, 5.00%,
4/15/20 ..................................................................................... 10,000,000 10,367,200
Kansas City Sanitary Sewer System Revenue, Series B, MBIA Insured, 5.00%, 1/01/25 .............. 1,120,000 1,191,478
Kansas City Tax Increment Financing Commerce Tax Increment Revenue, Blue Parkway Town Center
Project, MBIA Insured, 5.00%, 7/01/27 ....................................................... 1,730,000 1,819,424
126 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MISSOURI TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MISSOURI (CONT.)
Lake of the Ozarks Community Board Corp. Bridge System Revenue,
Pre-Refunded, 6.25%, 12/01/16 ............................................................... $ 2,000,000 $ 2,168,340
Pre-Refunded, 6.40%, 12/01/25 ............................................................... 5,000,000 5,433,550
Refunding, 5.25%, 12/01/14 .................................................................. 750,000 732,622
Refunding, 5.25%, 12/01/26 .................................................................. 800,000 704,632
Lee's Summit IDAR, John Knox Village Project,
6.55%, 8/15/10 .............................................................................. 1,000,000 1,028,260
6.625%, 8/15/13 ............................................................................. 2,000,000 2,057,540
5.70%, 8/15/22 .............................................................................. 1,500,000 1,583,235
Lee's Summit Water and Sewer Revenue, Series A, AMBAC Insured, 5.00%, 7/01/22 .................. 1,995,000 2,117,912
Metropolitan St. Louis Sewer District Wastewater Systems Revenue, Series A, MBIA Insured,
5.00%, 5/01/34 .............................................................................. 21,230,000 22,197,026
Missouri Development Finance Board Cultural Facilities Revenue, Nelson Gallery Foundation,
Series A, MBIA Insured, 5.00%, 12/01/30 ..................................................... 9,500,000 9,868,220
Missouri School Board Association COP, Pooled Finance Program,
Series A-3, 7.875%, 3/01/06 ................................................................. 5,000 5,122
Series A-5, 7.375%, 3/01/06 ................................................................. 20,000 20,493
Missouri School Board Association Lease COP, Republic R-3 School District Project, Refunding,
FSA Insured, 6.00%, 3/01/16 ................................................................. 2,220,000 2,296,723
Missouri Southern State College Revenue, Auxiliary Enterprise System, MBIA Insured, 5.50%,
4/01/23 ..................................................................................... 1,200,000 1,306,344
Missouri State Board of Public Buildings State Office Building, Special Obligation, Series A,
5.125%, 5/01/26 ............................................................................. 3,960,000 4,183,225
Missouri State Development Finance Board Infrastructure Facilities Revenue, Midtown
Redevelopment Project, Series A, MBIA Insured, 5.75%, 4/01/22 ............................... 10,000,000 11,067,500
Missouri State Development Finance Board Recreation Facilities Revenue, YMCA Greater St. Louis
Project, Series A, 5.40%, 9/01/18 ........................................................... 7,420,000 7,902,523
Missouri State Development Finance Board Solid Waste Disposal Revenue, Procter and Gamble
Paper Product, 5.20%, 3/15/29 ............................................................... 3,000,000 3,232,680
Missouri State Environmental Improvement and Energy Resources Authority PCR, National Rural
Association, Electric Project, Series G-6, AMBAC Insured, 5.85%, 2/01/13 .................... 2,100,000 2,150,967
Missouri State Environmental Improvement and Energy Resources Authority Water PCR, State
Revolving Fund,
Series A, 7.00%, 10/01/10 ................................................................... 685,000 687,911
Series A, 6.55%, 7/01/14 .................................................................... 890,000 893,444
Series A, 5.75%, 1/01/16 .................................................................... 150,000 155,382
Series B, 7.125%, 12/01/10 .................................................................. 275,000 276,356
Series B, 5.80%, 1/01/15 .................................................................... 125,000 128,111
Series B, 6.05%, 7/01/16 .................................................................... 485,000 496,461
Series B, 7.20%, 7/01/16 .................................................................... 825,000 848,554
Series B, 5.50%, 7/01/21 .................................................................... 710,000 776,846
Series B, 5.00%, 1/01/25 .................................................................... 3,195,000 3,398,010
Series B, Pre-Refunded, 5.50%, 7/01/21 ...................................................... 730,000 818,293
Annual Report | 127
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MISSOURI TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTEMENTS (CONT.)
BONDS (CONT.)
MISSOURI (CONT.)
Missouri State GO,
State Water Pollution Control, Series A, 5.00%, 6/01/26 ..................................... $ 3,785,000 $ 3,932,691
Stormwater Control, Series A, 5.00%, 6/01/26 ................................................ 1,895,000 1,968,943
Missouri State HDC,
MFHR, FHA Insured, 8.50%, 12/01/29 .......................................................... 65,000 66,205
SFMR, Homeowner Loan, Series D, GNMA Secured, 6.125%, 3/01/28 ............................... 290,000 297,459
SFMR, Series B, GNMA Secured, 6.10%, 9/01/14 ................................................ 575,000 589,524
SFMR, Series B, GNMA Secured, 6.45%, 9/01/27 ................................................ 390,000 401,758
Missouri State Health and Educational Facilities Authority Educational Facilities Revenue,
Maryville University of St. Louis Project, 6.50%, 6/15/22 ................................... 1,750,000 1,900,815
Maryville University of St. Louis Project, 6.75%, 6/15/30 ................................... 4,500,000 4,887,315
Washington University, 5.00%, 11/15/37 ...................................................... 9,150,000 9,386,436
Washington University, Refunding, Series B, 5.00%, 3/01/30 .................................. 14,000,000 14,453,320
Washington University, Series B, Pre-Refunded, 6.00%, 3/01/30 ............................... 13,550,000 15,484,940
Webster University, MBIA Insured, 5.30%, 4/01/27 ............................................ 8,000,000 8,533,760
Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
Children's Mercy Hospital, 5.30%, 5/15/28 ................................................... 12,420,000 12,722,800
Freeman Health Systems Project, 5.25%, 2/15/28 .............................................. 2,750,000 2,767,765
Improvement, Jefferson Memorial Hospital, Refunding, Radian Insured, 5.00%, 8/15/21 ......... 4,585,000 4,788,528
Improvement, Jefferson Memorial Hospital, Refunding, Radian Insured, 5.25%, 8/15/28 ......... 4,900,000 5,157,103
Jefferson Memorial Hospital Obligated Group, 6.75%, 5/15/15 ................................. 4,000,000 4,089,720
Jefferson Memorial Hospital Obligated Group, Pre-Refunded, 6.80%, 5/15/25 ................... 3,250,000 3,346,038
Lake of the Ozarks General Hospital, 6.25%, 2/15/11 ......................................... 410,000 424,137
Lake of the Ozarks General Hospital, Pre-Refunded, 6.25%, 2/15/11 ........................... 840,000 886,931
Lake of the Ozarks General Hospital, Pre-Refunded, 6.50%, 2/15/21 ........................... 670,000 709,001
Lake of the Ozarks General Hospital, Refunding, 6.50%, 2/15/21 .............................. 330,000 340,388
Lake Regional Health Systems Project, 5.60%, 2/15/25 ........................................ 1,250,000 1,304,463
Lake Regional Health Systems Project, 5.70%, 2/15/34 ........................................ 2,750,000 2,871,330
Lutheran Senior Services, Refunding, 5.875%, 2/01/23 ........................................ 1,000,000 1,052,860
Lutheran Senior Services, Series A, 6.375%, 2/01/27 ......................................... 4,000,000 4,167,040
St. Luke's Episcopal, Presbyterian Hospital, FSA Insured, 5.25%, 12/01/26 ................... 8,500,000 9,113,700
Missouri State Health and Educational Facilities Authority Revenue,
Series A, 5.00%, 2/15/33 .................................................................... 16,125,000 16,745,813
SSM Healthcare System, Series A, AMBAC Insured, 5.25%, 6/01/28 .............................. 16,385,000 17,385,960
Missouri State Highways and Transportation Commission State Road Revenue, Series A, 5.00%,
2/01/21 ..................................................................................... 10,000,000 10,641,700
2/01/22 ..................................................................................... 3,000,000 3,181,350
Missouri State Housing Development Commission Revenue, SF, Homeowner Loan, Series C-1,
GNMA Secured,
5.90%, 9/01/25 .............................................................................. 2,040,000 2,109,442
5.95%, 3/01/28 .............................................................................. 1,440,000 1,488,269
128 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MISSOURI TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MISSOURI (CONT.)
Monarch-Chesterfield Levee District Revenue, MBIA Insured, 5.75%, 3/01/19 ...................... $ 1,920,000 $ 2,141,875
North Kansas City Hospital Revenue, North Kansas City Hospital, Series A, FSA Insured,
5.00%, 11/15/20 ............................................................................. 1,000,000 1,063,740
5.00%, 11/15/21 ............................................................................. 1,000,000 1,059,980
5.00%, 11/15/22 ............................................................................. 1,000,000 1,056,240
5.00%, 11/15/28 ............................................................................. 1,965,000 2,040,692
5.125%, 11/15/33 ............................................................................ 2,755,000 2,906,057
Northeast State University Recreational Facility Revenue, Campus Recreational Center Project,
AMBAC Insured, 5.80%, 6/01/15 ............................................................... 1,000,000 1,009,070
(a) Northwest State University Revenue, Housing System, MBIA Insured, 4.50%, 6/01/28 ............... 5,000,000 4,956,950
Pulaski County IDA, MFHR, St. Robert Project, Series A, GNMA Secured, 6.00%, 8/20/39 ........... 1,600,000 1,676,624
Springfield Missouri IDAR, Bethesda Living Centers, Refunding, Series A,
5.625%, 8/15/18 ............................................................................. 3,000,000 2,873,040
5.70%, 8/15/28 .............................................................................. 5,250,000 4,806,638
Springfield Public Building Corp. Leasehold Revenue,
Capital Improvement Program, AMBAC Insured, 5.00%, 3/01/24 .................................. 2,600,000 2,762,474
Springfield Recreational, Series B, AMBAC Insured, 6.125%, 6/01/21 .......................... 3,230,000 3,672,607
Springfield Recreational, Series B, AMBAC Insured, 6.15%, 6/01/25 ........................... 3,645,000 4,141,303
Springfield School District No. R 12 GO, Missouri Direct Deposit Program, 5.85%, 3/01/20 ....... 1,500,000 1,674,060
St. Charles County Public Water Supply District No. 2, COP, Missouri Project, Series A,
MBIA Insured, 5.25%, 12/01/28 ............................................................... 1,000,000 1,066,490
St. Louis Airport Revenue,
Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/26 ........................... 5,000,000 5,163,850
Airport Development Program, Series A, MBIA Insured, 5.25%, 7/01/31 ........................... 18,835,000 19,656,771
Capital Improvement Program, Series A, MBIA Insured, 5.00%, 7/01/32 ........................... 2,540,000 2,602,433
St. Louis County Housing Authority MFHR, Kensington Square Apartments Project, Refunding,
6.55%, 3/01/14 .............................................................................. 1,000,000 1,001,280
6.65%, 3/01/20 .............................................................................. 2,750,000 2,805,633
St. Louis County IDA Health Facilities Revenue,
Jewish Center Healthcare, GNMA Secured, 5.40%, 2/20/31 ...................................... 1,000,000 1,030,570
Jewish Center Healthcare, GNMA Secured, 5.50%, 2/20/36 ...................................... 10,460,000 11,161,029
Mary Queen Healthcare, GNMA Secured, 5.375%, 9/20/31 ........................................ 3,310,000 3,505,720
Mother of Perpetual Help, GNMA Secured, 6.40%, 8/01/35 ...................................... 1,895,000 1,995,909
St. Louis County IDA, MFHR,
Lucas Hunt Village Project, GNMA Secured, 5.20%, 9/20/31 .................................... 1,095,000 1,121,192
South Summit Apartments, Refunding, Series A, GNMA Secured, 6.10%, 4/20/32 .................. 1,250,000 1,303,750
St. Louis County IDAR, Bethesda Living Centers, Series B, 5.85%, 8/15/28 ....................... 1,500,000 1,400,460
St. Louis IDA Sewer and Solid Waste Disposal Facilities Revenue, Anheuser-Busch Project,
5.875%, 11/01/26 ............................................................................ 1,100,000 1,128,985
St. Louis Municipal Finance Corp. Leasehold Revenue,
Carnahan Courthouse, Series A, FGIC Insured, 5.125%, 2/15/27 ................................ 4,750,000 5,015,288
City Justice Center, Series A, AMBAC Insured, 6.00%, 2/15/20 ................................ 1,000,000 1,130,860
Annual Report | 129
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MISSOURI TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MISSOURI (CONT.)
Taney County IDA Hospital Revenue, The Skaggs Community Hospital Association,
5.30%, 5/15/18 .............................................................................. $ 3,000,000 $ 3,063,930
5.40%, 5/15/28 .............................................................................. 1,500,000 1,506,615
Taney County Reorganized School District GO, No. R-V Hollister, Refunding, FSA Insured,
5.00%, 3/01/20 .............................................................................. 1,300,000 1,390,948
University of Missouri Revenues, System Facilities,
Pre-Refunded, 5.80%, 11/01/27 ............................................................... 1,000,000 1,089,170
Refunding, Series B, 5.00%, 11/01/27 ........................................................ 7,865,000 8,189,746
West Plains IDA Hospital Revenue, Ozarks Medical Center Project, Refunding,
5.50%, 11/15/12 ............................................................................. 1,000,000 1,009,380
5.60%, 11/15/17 ............................................................................. 1,700,000 1,675,571
5.65%, 11/15/22 ............................................................................. 1,500,000 1,451,010
West Plains Waterworks System Revenue, AMBAC Insured, 5.625%, 3/01/21 .......................... 1,250,000 1,368,350
-------------
482,098,717
-------------
U. S. TERRITORIES 14.9%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Pre-Refunded, 6.00%,
7/01/26 ..................................................................................... 2,785,000 3,168,439
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured,
Pre-Refunded, 9.00%, 7/01/09 ................................................................ 30,000 30,673
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.375%, 7/01/28 ............................................................................. 1,975,000 2,098,141
5.125%, 7/01/31 ............................................................................. 5,000,000 5,164,550
Pre-Refunded, 5.375%, 7/01/28 ............................................................... 1,025,000 1,151,116
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
5.50%, 7/01/36 .............................................................................. 11,750,000 12,859,552
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, 5.375%, 7/01/36 ................................................................... 2,500,000 2,664,000
Series G, 5.00%, 7/01/42 .................................................................... 2,500,000 2,563,150
Puerto Rico Electric Power Authority Power Revenue,
Series NN, 5.125%, 7/01/29 .................................................................. 3,250,000 3,398,752
Series II, 5.25%, 7/01/31 ................................................................... 10,000,000 10,579,500
Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ............................ 145,000 145,055
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Industrial Revenue, Guaynabo Municipal Government, 5.625%, 7/01/22 ...... 2,500,000 2,586,750
Puerto Rico PBA Revenue, Guaranteed, Government Facilities,
Series D, 5.375%, 7/01/33 ................................................................... 2,150,000 2,291,040
Series D, Pre-Refunded, 5.375%, 7/01/33 ..................................................... 5,885,000 6,580,372
Series I, 5.375%, 7/01/34 ................................................................... 10,000,000 10,675,600
Series I, 5.00%, 7/01/36 .................................................................... 14,450,000 14,905,609
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.40%, 10/01/12 ............................................................................. 2,500,000 2,642,350
5.50%, 10/01/22 ............................................................................. 2,500,000 2,586,225
-------------
86,090,874
-------------
TOTAL LONG TERM INVESTMENTS (COST $534,332,253) ................................................ 568,189,591
-------------
130 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MISSOURI TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS .8%
BONDS .8%
MISSOURI .8%
(b) Missouri State Health and Educational Facilities Authority Educational Facilities Revenue,
Rockhurst University, Daily VRDN and Put, 1.80%, 11/01/32 ................................... $ 600,000 $ 600,000
Washington University, Series B, Daily VRDN and Put, 1.81%, 2/15/33 ......................... 3,785,000 3,785,000
-------------
4,385,000
-------------
U. S. TERRITORIES .0%(C)
(b) Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ................................ 200,000 200,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $4,585,000) ................................................. 4,585,000
-------------
TOTAL INVESTMENTS (COST $538,917,253) 99.3% .................................................... 572,774,591
OTHER ASSETS, LESS LIABILITIES .7% ............................................................. 3,955,029
-------------
NET ASSETS 100.0% .............................................................................. $ 576,729,620
=============
See Glossary of Terms on page 146.
(a) See Note 1b regarding securities purchased on a delayed delivery basis.
(b) 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.
(c) Rounds to less than 0.05% of net assets.
Annual Report | See notes to financial statements. | 131
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
---------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.42 $ 12.24 $ 11.96 $ 11.78 $ 11.04
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... .54 .55 .56 .58 .60
Net realized and unrealized gains (losses) ........ (.05) .18 .28 .19 .73
---------------------------------------------------------------------------
Total from investment operations ................... .49 .73 .84 .77 1.33
---------------------------------------------------------------------------
Less distributions from net investment income ...... (.54) (.55) (.56) (.59) (.59)
---------------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ....................... $ 12.37 $ 12.42 $ 12.24 $ 11.96 $ 11.78
===========================================================================
Total return(b) .................................... 4.11% 6.10% 7.23% 6.74% 12.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 428,204 $ 413,438 $ 418,196 $ 388,400 $ 342,402
Ratios to average net assets:
Expenses .......................................... .67% .67% .66% .69% .69%
Net investment income ............................. 4.42% 4.49% 4.65% 4.89% 5.25%
Portfolio turnover rate ............................ 8.15% 7.67% 7.69% 10.85% 9.61%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
132 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND (CONTINUED)
---------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.54 $ 12.35 $ 12.05 $ 11.87 $ 11.12
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... .47 .48 .50 .52 .54
Net realized and unrealized gains (losses) ........ (.06) .19 .30 .19 .74
---------------------------------------------------------------------------
Total from investment operations ................... .41 .67 .80 .71 1.28
---------------------------------------------------------------------------
Less distributions from net investment income ...... (.47) (.48) (.50) (.53) (.53)
---------------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ....................... $ 12.48 $ 12.54 $ 12.35 $ 12.05 $ 11.87
===========================================================================
Total return(b) .................................... 3.41% 5.52% 6.76% 6.09% 11.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 83,343 $ 82,420 $ 76,400 $ 57,881 $ 43,476
Ratios to average net assets:
Expenses .......................................... 1.22% 1.25% 1.19% 1.24% 1.24%
Net investment income ............................. 3.87% 3.91% 4.12% 4.34% 4.70%
Portfolio turnover rate ............................ 8.15% 7.67% 7.69% 10.85% 9.61%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 133
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.5%
BONDS 98.5%
NORTH CAROLINA 80.0%
Appalachian State University Revenue, Teachers College Utility System, Refunding, MBIA Insured,
5.00%, 5/15/24 .............................................................................. $ 3,000,000 $ 3,123,690
Asheville Water System Revenue,
FGIC Insured, 5.70%, 8/01/25 ................................................................ 4,000,000 4,247,160
FSA Insured, 5.00%, 8/01/25 ................................................................. 1,000,000 1,050,250
Broad River Water Authority Water System Revenue, MBIA Insured, 5.375%, 6/01/26 ................ 1,000,000 1,095,390
Brunswick County Enterprise System Revenue, Series A, FSA Insured, 5.00%,
4/01/27 ..................................................................................... 1,500,000 1,579,335
4/01/28 ..................................................................................... 1,750,000 1,833,160
Buncombe County Metropolitan Sewer District Sewer System Revenue,
FSA Insured, 5.00%, 7/01/29 ................................................................. 5,000,000 5,453,150
MBIA Insured, 5.00%, 7/01/26 ................................................................ 1,000,000 1,096,920
Centennial Authority Hotel Tax Revenue, Arena Project, FSA Insured, 5.125%, 9/01/19 ............ 5,115,000 5,477,040
Charlotte Airport Revenue,
Series A, MBIA Insured, 5.00%, 7/01/29 ...................................................... 5,000,000 5,200,000
Series A, MBIA Insured, 5.00%, 7/01/34 ...................................................... 9,130,000 9,452,928
Series B, MBIA Insured, 6.00%, 7/01/24 ...................................................... 4,000,000 4,465,040
Series B, MBIA Insured, 6.00%, 7/01/28 ...................................................... 6,300,000 7,008,120
Charlotte COP,
Convention Facility Project, 5.625%, 12/01/25 ............................................... 7,230,000 7,994,500
Governmental Facilities Projects, Series G, 5.00%, 6/01/28 .................................. 3,000,000 3,110,520
Charlotte GO, Series C, 5.00%, 7/01/27 ......................................................... 2,010,000 2,107,827
Charlotte Storm Water Fee Revenue, Refunding, 5.00%, 6/01/25 ................................... 1,000,000 1,057,340
Charlotte Water and Sewer GO, 5.00%, 2/01/21 ................................................... 4,000,000 4,233,440
Charlotte Water and Sewer System Revenue,
5.125%, 6/01/26 ............................................................................. 6,000,000 6,392,220
Pre-Refunded, 5.25%, 6/01/24 ................................................................ 3,000,000 3,312,390
Pre-Refunded, 5.25%, 6/01/25 ................................................................ 3,950,000 4,391,570
Charlotte-Mecklenberg Hospital Authority Health Care System Revenue,
5.90%, 1/15/16 .............................................................................. 3,465,000 3,622,623
Carolinas Healthcare System, Refunding, Series A, 5.00%, 1/15/31 ............................ 5,000,000 5,084,850
Carolinas Healthcare System, Series A, 5.125%, 1/15/22 ...................................... 8,000,000 8,198,000
Columbus County Industrial Facilities and PCFA, Solid Water Disposal Revenue, International
Paper Co. Project, Refunding, Series A, 5.80%, 12/01/16 ..................................... 1,450,000 1,526,400
Concord COP, Series B, MBIA Insured,
5.75%, 6/01/16 .............................................................................. 1,475,000 1,565,875
6.125%, 6/01/21 ............................................................................. 2,180,000 2,324,272
Cumberland County COP, Civic Center Project, Refunding, AMBAC Insured, 5.00%, 12/01/18 ......... 3,000,000 3,159,030
Cumberland County Finance Corp. Installment Payment Revenue, Detention Center and Mental
Health, FSA Insured, Pre-Refunded, 5.625%, 6/01/24 .......................................... 5,000,000 5,687,150
Cumberland County Hospital Facilities Revenue, Cumberland County Hospital Systems Inc.,
Refunding, 5.25%, 10/01/29 .................................................................. 5,250,000 5,372,798
Dare County COP, AMBAC Insured,
5.125%, 6/01/21 ............................................................................. 650,000 706,199
5.00%, 6/01/23 .............................................................................. 3,000,000 3,187,650
5.00%, 6/01/29 .............................................................................. 5,295,000 5,529,727
Durham County Enterprise System Revenue, MBIA Insured, 5.00%, 6/01/23 .......................... 1,670,000 1,780,153
Durham County GO, Public Improvement, 5.00%, 6/01/22 ........................................... 2,000,000 2,134,960
134 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NORTH CAROLINA (CONT.)
Franklin County COP, AMBAC Insured, 5.00%, 6/01/25 ............................................. $ 1,250,000 $ 1,311,938
Gastonia Combined Utilities System Revenue,
FSA Insured, 5.00%, 5/01/25 ................................................................. 1,000,000 1,048,510
MBIA Insured, 5.625%, 5/01/19 ............................................................... 1,000,000 1,104,360
Greensboro Enterprise Systems Revenue, Series A, 5.125%,
6/01/21 ..................................................................................... 390,000 418,618
6/01/22 ..................................................................................... 350,000 374,479
Greensboro HDC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 6.70%, 1/01/24 ............ 1,320,000 1,331,312
Halifax County Industrial Facilities and PCFA Revenue, Champion International Corp. Project,
5.45%, 11/01/33 ............................................................................. 4,000,000 4,019,000
Refunding, 6.45%, 11/01/29 .................................................................. 3,900,000 4,159,857
Harnett County COP, FSA Insured, 5.125%, 12/01/23 .............................................. 1,000,000 1,083,670
Haywood County Industrial Facilities and PCFA, Environmental Improvement Revenue, Champion
International Project, 6.25%, 9/01/25 ....................................................... 2,000,000 2,053,760
Henderson County COP, Henderson County School Project, AMBAC Insured, 5.00%, 3/01/21 ........... 1,000,000 1,065,120
High Point Combined Enterprise System Revenue, FGIC Insured, 5.00%, 11/01/31 ................... 5,000,000 5,241,800
Martin County Industrial Facilities and PCFA Revenue, Solid Waste, Weyerhaeuser Co. Project,
5.65%, 12/01/23 ............................................................................. 2,000,000 2,004,420
6.00%, 11/01/25 ............................................................................. 5,400,000 5,572,854
Mecklenburg County GO, Public Improvement, Series B, 4.70%, 2/01/20 ............................ 3,000,000 3,120,090
New Hanover County COP, New Hanover County Projects, AMBAC Insured, 5.00%, 12/01/22 ............ 5,000,000 5,340,150
North Carolina Capital Facilities Finance Agency Educational Facilities Revenue,
Johnson & Wales University Project, Series A, XLCA Insured, 5.00%, 4/01/33 .................. 3,000,000 3,098,490
Meredith College, AMBAC Insured, 4.875%, 6/01/24 ............................................ 1,000,000 1,035,040
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 6.50%, 1/01/18 ......................................................... 3,000,000 3,557,070
Refunding, Series A, 5.75%, 1/01/26 ......................................................... 10,000,000 10,595,700
Refunding, Series D, 6.75%, 1/01/26 ......................................................... 5,000,000 5,587,800
Series B, MBIA Insured, 5.875%, 1/01/21 ..................................................... 5,000,000 5,365,050
North Carolina Educational Facilities Finance Agency Revenue,
Duke University Project, Series A, 5.25%, 7/01/42 ........................................... 10,000,000 10,502,900
North Carolina HFAR,
MF, Mortgage Loan Resolution, Refunding, Series H, 6.05%, 7/01/28 ........................... 2,230,000 2,293,042
MF, Refunding, Series A, AMBAC Insured, 5.90%, 7/01/20 ...................................... 2,780,000 2,846,386
MF, Refunding, Series J, 5.45%, 7/01/17 ..................................................... 2,175,000 2,254,757
Refunding, Series F, 6.70%, 1/01/27 ......................................................... 2,210,000 2,254,399
SF, Refunding, Series DD, 6.20%, 9/01/27 .................................................... 1,280,000 1,301,530
SF, Series JJ, 6.45%, 9/01/27 ............................................................... 1,970,000 2,030,991
SFR, Series AA, 6.25%, 3/01/17 .............................................................. 380,000 388,330
SFR, Series RR, 5.85%, 9/01/28 .............................................................. 2,625,000 2,685,821
SFR, Series X, 6.65%, 9/01/19 ............................................................... 190,000 191,649
North Carolina Medical Care Commission Health Care Facilities Revenue,
Novant Health Project, Refunding, Series A, MBIA Insured, 5.00%, 10/01/18 ................... 1,000,000 1,049,530
Novant Health Project, Refunding, Series A, MBIA Insured, 5.00%, 10/01/24 ................... 5,500,000 5,699,375
Scotland Memorial Hospital Project, Radian Insured, 5.50%, 10/01/19 ......................... 630,000 675,625
Scotland Memorial Hospital Project, Radian Insured, 5.50%, 10/01/29 ......................... 1,220,000 1,291,492
Wakemed Project, AMBAC Insured, 5.00%, 10/01/32 ............................................. 4,205,000 4,338,593
Annual Report | 135
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NORTH CAROLINA (CONT.)
North Carolina Medical Care Commission Health System Revenue, Catholic Health East Project,
Series C, AMBAC Insured, 5.00%, 11/15/18 .................................................... $ 2,500,000 $ 2,635,775
North Carolina Medical Care Commission Hospital Revenue,
Annie Penn Memorial Hospital Project, Pre-Refunded, 5.375%, 1/01/22 ......................... 1,920,000 2,103,245
Annie Penn Memorial Hospital Project, Refunding, ETM, 5.25%, 1/01/12 ........................ 1,940,000 2,086,140
Halifax Regional Medical Center Project, 5.00%, 8/15/24 ..................................... 1,800,000 1,744,668
Mission St. Joseph's Health System Project, MBIA Insured, 5.125%, 10/01/28 .................. 5,000,000 5,178,000
Northeast Medical Center, AMBAC Insured, 5.50%, 11/01/30 .................................... 1,580,000 1,706,526
Rex Healthcare Project, AMBAC Insured, 5.00%, 6/01/17 ....................................... 2,780,000 2,914,052
Southeastern Regional Medical Center, 6.25%, 6/01/29 ........................................ 4,000,000 4,259,920
Southeastern Regional Medical Center, 5.375%, 6/01/32 ....................................... 3,500,000 3,611,370
Transylvania Community Hospital Inc. Project, Refunding, 5.75%, 10/01/19 .................... 1,090,000 1,083,569
Wake County Hospital System Project, MBIA Insured, 5.375%, 10/01/26 ......................... 10,825,000 11,519,640
Wilson Memorial Hospital Project, Refunding, AMBAC Insured, 5.625%, 11/01/18 ................ 5,000,000 5,314,600
North Carolina Medical Care Commission Revenue, Rowan Regional Medical Center, FSA Insured,
5.00%, 9/01/33 .............................................................................. 5,900,000 6,084,493
North Carolina Medical Care Community Revenue, FHA Insured Betsy Johnson Project, FSA Insured,
5.125%, 10/01/32 ............................................................................ 4,500,000 4,747,320
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Series A, MBIA Insured,
5.25%, 1/01/19 .............................................................................. 5,000,000 5,486,650
5.00%, 1/01/20 .............................................................................. 2,000,000 2,091,920
North Carolina State COP, Western Carolina University Housing Project, AMBAC Insured,
5.00%, 6/01/33 .............................................................................. 1,500,000 1,560,510
North Carolina State Education Assistance Authority Revenue, Guaranteed, Student Loan, sub. lien,
Series A, 6.05%, 7/01/10 .................................................................... 3,310,000 3,394,637
Series A, 6.30%, 7/01/15 .................................................................... 1,500,000 1,537,905
Series C, 6.35%, 7/01/16 .................................................................... 4,500,000 4,693,590
North Carolina University Revenue, 5.00%, 12/01/28 ............................................. 1,000,000 1,049,760
Pasquotank County COP, MBIA Insured, 5.00%, 6/01/25 ............................................ 1,400,000 1,474,018
Piedmont Triad Airport Authority Airport Revenue, Refunding, Series A, FSA Insured,
6.00%, 7/01/24 .............................................................................. 5,745,000 6,437,617
Pitt County COP,
MBIA Insured, Pre-Refunded, 5.85%, 4/01/17 .................................................. 5,055,000 5,491,701
School Facilities Project, Series A, FSA Insured, 5.25%, 4/01/25 ............................ 1,670,000 1,815,591
School Facilities Project, Series B, AMBAC Insured, 5.00%, 4/01/29 .......................... 2,500,000 2,613,075
School Facilities Project, Series B, FSA Insured, 5.50%, 4/01/25 ............................ 1,000,000 1,086,550
Raleigh Durham Airport Authority Airport Revenue, Series A, FGIC Insured, 5.00%,
11/01/25 .................................................................................... 6,480,000 6,748,531
11/01/31 .................................................................................... 8,000,000 8,261,840
Raleigh Combined Enterprise System Revenue, 5.00%, 3/01/31 ..................................... 10,360,000 10,825,475
Raleigh COP, Downtown Improvement Projects, Series A, 5.00%, 2/01/29 ........................... 6,070,000 6,339,933
Randolph County COP, FSA Insured, Pre-Refunded, 5.75%, 6/01/22 ................................. 5,500,000 6,181,890
Robeson County Industrial Facilities and PCFA Revenue, Campbell Soup Co. Project, Refunding,
6.40%, 12/01/06 ............................................................................. 1,750,000 1,862,910
University of Greenboro Revenue, Housing and Dining System, Series G, MBIA Insured,
6.00%, 4/01/26 .............................................................................. 2,040,000 2,312,789
University of North Carolina Ashville Revenue, Refunding, Series A, AMBAC Insured,
5.00%, 6/01/27 .............................................................................. 1,200,000 1,254,012
136 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NORTH CAROLINA (CONT.)
University of North Carolina Greensboro Revenue, Series A, FSA Insured, 5.00%, 4/01/26 ......... $ 4,940,000 $ 5,204,389
University of North Carolina Revenue, Series A, 5.00%, 12/01/25 ................................ 4,000,000 4,191,840
University of North Carolina System Pool Revenue,
AMBAC Insured, 5.00%, 4/01/29 ............................................................... 2,500,000 2,603,575
Series A, AMBAC Insured, 5.00%, 4/01/27 ..................................................... 2,100,000 2,205,231
Wake County Industrial Facilities and PCFA Revenue, Carolina Power and Light Company Project,
Refunding, 5.375%, 2/01/17 .................................................................. 8,000,000 8,633,040
Wilkes County COP, Public Improvements Project, FSA Insured, 5.375%, 12/01/20 .................. 1,000,000 1,100,010
Wilmington COP, AMBAC Insured, 5.00%, 9/01/29 .................................................. 1,000,000 1,049,320
Winston-Salem Water and Sewer System Revenue,
Pre-Refunded, 5.125%, 6/01/20 ............................................................... 2,500,000 2,793,825
Series B, Pre-Refunded, 5.70%, 6/01/17 ...................................................... 2,250,000 2,315,678
-------------
409,462,315
-------------
U. S. TERRITORIES 18.5%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.50%, 5/15/39 .............................................................................. 7,000,000 6,946,030
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, 5.125%, 7/01/30 ................................................................ 3,445,000 3,647,738
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 .................................................. 4,805,000 5,327,928
Series A, 5.375%, 7/01/28 ................................................................... 4,925,000 5,232,074
Series A, 5.125%, 7/01/31 ................................................................... 3,265,000 3,372,451
Series A, Pre-Refunded, 5.00%, 7/01/27 ...................................................... 5,000,000 5,538,750
Series A, Pre-Refunded, 5.375%, 7/01/28 ..................................................... 2,405,000 2,700,911
Series A, Pre-Refunded, 5.125%, 7/01/31 ..................................................... 1,000,000 1,108,830
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Refunding, Series H,
5.00%, 7/01/35 .............................................................................. 4,280,000 4,403,050
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series D, FSA Insured, 5.00%, 7/01/32 ............................................ 5,000,000 5,201,750
Series A, MBIA Insured, 5.00%, 7/01/38 ...................................................... 2,000,000 2,057,080
Series D, 5.375%, 7/01/36 ................................................................... 5,000,000 5,328,000
Series D, 5.25%, 7/01/38 .................................................................... 3,000,000 3,137,040
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
7.50%, 7/01/09 .............................................................................. 5,000 5,022
AMBAC Insured, 5.00%, 7/01/28 ............................................................... 10,000,000 10,286,100
Puerto Rico Electric Power Authority Power Revenue,
Series II, 5.25%, 7/01/31 ................................................................... 6,000,000 6,347,700
Series X, Pre-Refunded, 6.125%, 7/01/21 ..................................................... 4,000,000 4,133,200
Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ............................ 160,000 170,065
Puerto Rico PBA Revenue, Guaranteed, Government Facilities,
Series D, 5.375%, 7/01/33 ................................................................... 1,790,000 1,907,424
Series D, Pre-Refunded, 5.375%, 7/01/33 ..................................................... 5,210,000 5,825,614
Series I, 5.00%, 7/01/36 .................................................................... 2,405,000 2,480,830
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E, Pre-Refunded,
5.70%, 8/01/25 .............................................................................. 5,000,000 5,616,900
Annual Report | 137
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U. S. TERRITORIES (CONT.)
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 ............................................................................. $ 2,000,000 $ 2,093,200
5.625%, 10/01/25 ............................................................................ 1,575,000 1,636,267
-------------
94,503,954
-------------
TOTAL LONG TERM INVESTMENTS (COST $471,813,932) ................................................ 503,966,269
-------------
SHORT TERM INVESTMENTS .3%
BONDS .3%
NORTH CAROLINA .3%
(a) North Carolina Medical Care Commission Hospital Revenue, Lexington Memorial Hospital Project,
Refunding, Daily VRDN and Put, 1.79%, 4/01/10 ............................................... 700,000 700,000
(a) North Carolina State GO, Series G, Weekly VRDN and Put, 1.80%, 5/01/21 ......................... 700,000 700,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $1,400,000) ................................................. 1,400,000
-------------
TOTAL INVESTMENTS (COST $473,213,932) 98.8% .................................................... 505,366,269
OTHER ASSETS, LESS LIABILITIES 1.2% ............................................................ 6,180,484
-------------
NET ASSETS 100.0% .............................................................................. $ 511,546,753
=============
See Glossary of Terms on page 146.
(a) 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.
138 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
---------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.94 $ 11.64 $ 11.52 $ 11.45 $ 10.79
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... .52 .52 .54 .56 .59
Net realized and unrealized gains (losses) ........ (.04) .30 .12 .08 .65
---------------------------------------------------------------------------
Total from investment operations ................... .48 .82 .66 .64 1.24
---------------------------------------------------------------------------
Less distributions from net investment income ...... (.51) (.52) (.54) (.57) (.58)
---------------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ....................... $ 11.91 $ 11.94 $ 11.64 $ 11.52 $ 11.45
===========================================================================
Total return(b) .................................... 4.18% 7.20% 5.90% 5.73% 11.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 438,871 $ 441,916 $ 426,371 $ 395,579 $ 356,599
Ratios to average net assets:
Expenses .......................................... .67% .68% .68% .69% .70%
Net investment income ............................. 4.42% 4.44% 4.67% 4.88% 5.27%
Portfolio turnover rate ............................ 5.85% 7.01% 12.94% 15.36% 8.89%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 139
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN VIRGINIA TAX-FREE INCOME FUND (CONTINUED)
---------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.04 $ 11.74 $ 11.62 $ 11.53 $ 10.86
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .......................... .46 .45 .48 .50 .53
Net realized and unrealized gains (losses) ........ (.03) .30 .12 .09 .66
---------------------------------------------------------------------------
Total from investment operations ................... .43 .75 .60 .59 1.19
---------------------------------------------------------------------------
Less distributions from net investment income ...... (.45) (.45) (.48) (.50) (.52)
---------------------------------------------------------------------------
Redemption fees .................................... --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ....................... $ 12.02 $ 12.04 $ 11.74 $ 11.62 $ 11.53
===========================================================================
Total return(b) .................................... 3.66% 6.54% 5.28% 5.28% 11.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 43,661 $ 43,009 $ 41,802 $ 33,992 $ 24,766
Ratios to average net assets:
Expenses .......................................... 1.22% 1.25% 1.21% 1.24% 1.24%
Net investment income ............................. 3.87% 3.87% 4.14% 4.34% 4.72%
Portfolio turnover rate ............................ 5.85% 7.01% 12.94% 15.36% 8.89%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
140 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN VIRGINIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.2%
BONDS 99.2%
VIRGINIA 77.8%
Abingdon IDA Hospital Facilities Revenue, Johnston Memorial Hospital, Refunding, 5.375%,
7/01/28 ..................................................................................... $ 5,000,000 $ 5,138,100
Alexandria IDA Educational Facilities Revenue, Episcopal High School, 5.875%, 1/01/29 ......... 2,500,000 2,711,200
Arlington County GO, Public Improvements, 5.00%, 2/01/22 ...................................... 2,060,000 2,188,359
Bedford County IDA, IDR, Nekoosa Packaging Corp. Project, Refunding,
5.60%, 12/01/25 ............................................................................. 2,650,000 2,650,980
6.30%, 12/01/25 ............................................................................. 2,000,000 2,073,640
Series A, 6.55%, 12/01/25 ................................................................... 5,000,000 5,235,550
Bristol Utility System Revenue, Refunding, ETM, 5.00%, 7/15/21 ................................ 1,245,000 1,339,769
Caroline County IDA Lease Revenue, AMBAC Insured, 5.125%, 6/15/34 ............................. 1,000,000 1,057,820
Chesapeake IDA Public Facilities Lease Revenue, Chesapeake Jail Project, MBIA Insured, 6.00%,
6/01/12 ..................................................................................... 3,940,000 4,018,445
Chesapeake Toll Road Revenue, Expressway, Series A, 5.625%,
7/15/19 ..................................................................................... 3,250,000 3,504,475
7/15/32 ..................................................................................... 8,000,000 8,389,440
Dinwiddie County IDA Lease Revenue, Refunding, Series B, MBIA Insured, 5.00%, 2/15/30 ......... 1,410,000 1,474,127
Fairfax County EDA Revenue, National Wildlife Federation, MBIA Insured, 5.375%, 9/01/29 ....... 8,000,000 8,718,640
Fairfax County IDAR, Health Care,
Inova Health, Refunding, Series A, 5.00%, 8/15/18 ........................................... 2,100,000 2,175,978
Inova Health System Project, Refunding, Series A, 5.00%, 8/15/25 ............................ 5,000,000 5,089,450
Inova Health System Project, 6.00%, 8/15/26 ................................................. 5,000,000 5,359,750
Fairfax County Redevelopment and Housing Authority MFHR,
Cedar Ridge Apartments, GNMA Secured, 6.30%, 12/20/27 ....................................... 4,700,000 4,812,941
Paul Spring Center, Refunding, Series A, FHA Insured, 5.90%, 6/15/17 ........................ 1,000,000 1,051,010
Paul Spring Center, Refunding, Series A, FHA Insured, 6.00%, 12/15/28 ....................... 1,000,000 1,048,460
Fairfax County Sewer Revenue, MBIA Insured, Pre-Refunded, 5.875%, 7/15/28 ..................... 5,000,000 5,331,650
Fairfax County Water Authority Water Revenue, Refunding, 5.00%, 4/01/27 ....................... 14,250,000 14,932,433
Fredericksburg IDA Hospital Facilities Revenue, Medicorp Health System Obligation, Refunding,
AMBAC Insured, 5.25%, 6/15/23 ............................................................... 10,000,000 10,622,000
Front Royal and Warren County IDA Lease Revenue,
Series B, FSA Insured, 5.00%, 4/01/29 ....................................................... 7,115,000 7,409,774
School and Capital Improvement, Series B, FSA Insured, 5.00%, 4/01/35 ....................... 6,000,000 6,225,840
Gloucester County IDA Lease Revenue, Courthouse Project, MBIA Insured, 5.50%, 11/01/30 ........ 1,715,000 1,862,319
Greater Richmond Convention Center Authority Hotel Tax Revenue, Convention Center Expansion
Project,
6.125%, 6/15/29 ............................................................................ 8,000,000 8,976,400
6.25%, 6/15/32 ............................................................................. 8,175,000 9,196,221
Hampton Convention Center Revenue, Refunding, AMBAC Insured,
5.25%, 1/15/23 ............................................................................. 3,000,000 3,271,950
5.125%, 1/15/28 ............................................................................ 2,605,000 2,754,136
5.00%, 1/15/35 ............................................................................. 2,000,000 2,074,920
Hampton Redevelopment and Housing Authority Senior Living Association Revenue, Refunding,
Series A, GNMA Secured, 6.00%, 1/20/26 ...................................................... 1,060,000 1,109,767
Annual Report | 141
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN VIRGINIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
VIRGINIA (CONT.)
Hampton Roads Regional Jail Authority Jail Facilities Revenue, Series A, MBIA Insured,
5.00%, 7/01/28 .............................................................................. $10,000,000 $ 10,211,200
Hanover County Water and Sewer System Revenue, MBIA Insured, 5.25%, 2/01/26 ................... 4,175,000 4,355,444
Harrisonburg GO, FSA Insured, 5.75%, 12/01/29 ................................................. 1,000,000 1,125,240
Henrico County IDAR, Solid Waste, Browning-Ferris Industries, South Atlantic Inc., Series A,
5.875%, 3/01/17 ............................................................................. 1,000,000 954,890
Henry County IDA Hospital Revenue, Memorial Hospital of Martinsville and Henry, Pre-Refunded,
6.00%, 1/01/27 .............................................................................. 1,250,000 1,337,950
Isle Wight County IDA Environmental Improvement Revenue, International Paper Company Project,
Series A, 6.60%, 5/01/24 .................................................................... 2,000,000 2,186,020
Isle Wight County IDAR, International Paper Co. Project, Series A, 5.85%, 1/01/18 ............. 4,155,000 4,451,625
King George County IDA Lease Revenue, FSA Insured, 5.00%, 3/01/32 ............................. 3,595,000 3,745,666
Leesburg Utilities System Revenue, Refunding, MBIA Insured, 5.125%, 7/01/22 ................... 3,000,000 3,202,380
Loudoun County IDA Hospital Revenue, Loudoun Hospital Center,
FSA Insured, 5.80%, 6/01/26 ................................................................ 3,000,000 3,083,340
Series A, 6.10%, 6/01/32 ................................................................... 1,500,000 1,609,605
Loudoun County Sanitation Authority Water and Sewer Revenue,
Refunding, FGIC Insured, 5.125%, 1/01/26 ................................................... 3,795,000 3,919,059
Refunding, FGIC Insured, 5.125%, 1/01/30 ................................................... 5,250,000 5,404,770
Series 96, FGIC Insured, 5.25%, 1/01/26 .................................................... 6,500,000 6,896,695
Series 96, FGIC Insured, 5.25%, 1/01/30 .................................................... 1,000,000 1,037,120
Lynchburg IDA Healthcare Facilities Revenue, Centra Health, Refunding, 5.20%, 1/01/28 ......... 8,000,000 8,601,200
Lynchburg Redevelopment and Housing Authority Revenue, Walden Pond III, Refunding, Series A,
GNMA Secured, 6.20%, 7/20/27 ................................................................ 1,000,000 1,037,510
Middle River Regional Jail Authority Jail Facility Revenue, MBIA Insured, 5.00%, 5/15/28 ...... 1,000,000 1,052,180
Middlesex County IDA Lease Revenue, School Facilities Project, MBIA Insured, Pre-Refunded,
5.875%, 8/01/21 ............................................................................ 1,420,000 1,616,173
6.10%, 8/01/26 ............................................................................. 1,725,000 1,979,248
Montgomery County IDA Lease Revenue, Series B, AMBAC Insured, 5.50%, 1/15/22 .................. 1,000,000 1,083,990
Newport News IDA Mortgage Revenue, Mennowood Communities Inc., Series A, GNMA Secured,
6.25%, 8/01/36 .............................................................................. 2,960,000 3,097,877
Newport News Redevelopment and Housing Authority Revenue, Refunding, Series A,
GNMA Secured, 5.85%, 12/20/30 ............................................................... 4,060,000 4,245,501
Norfolk Airport Authority Revenue, Series B, FGIC Insured, 5.125%, 7/01/31 .................... 1,440,000 1,473,062
Norfolk GO, Capital Improvements, Refunding, Series B, FSA Insured, 5.00%, 7/01/22 ............ 1,720,000 1,820,379
Norfolk IDAR, Health Care, Bon Secours Health, Series B, MBIA Insured, 5.25%, 8/15/26 ......... 3,000,000 3,132,450
Norfolk Parking System Revenue, MBIA Insured,
5.55%, 2/01/27 ............................................................................. 1,775,000 1,896,410
Pre-Refunded, 5.55%, 2/01/27 ............................................................... 225,000 241,927
Norfolk Water Revenue, MBIA Insured, 5.90%, 11/01/25 .......................................... 5,000,000 5,213,050
Orange County IDAR, Public Facility, Orange County Project, AMBAC Insured, 5.00%, 2/01/34 ..... 1,000,000 1,042,180
Peninsula Ports Authority Hospital Facilities Revenue, Whittaker Memorial Hospital Project,
Refunding, FHA Insured, 8.70%, 8/01/23 ...................................................... 50,000 59,863
Port Authority Commonwealth Port Fidelity Revenue, MBIA Insured, 4.75%, 7/01/28 ............... 1,500,000 1,510,875
Powhatan Co. EDA Lease Revenue, Virginia Capital Projects, AMBAC Insured, 5.25%, 7/15/33 ...... 1,000,000 1,072,590
Prince William County IDA, MFHR, Remington Place Apartments Project, Series A-1,
AMBAC Insured, 6.00%, 12/01/33 .............................................................. 2,340,000 2,456,579
142 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN VIRGINIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
VIRGINIA (CONT.)
Prince William County Service Authority Water and Sewer Systems Revenue, FGIC Insured, 5.50%,
7/01/29 ..................................................................................... $ 5,000,000 $ 5,405,500
Richmond GO, FGIC Insured, 5.00%, 7/15/19 ..................................................... 3,690,000 3,956,381
Richmond IDA Student Housing Revenue, University Real Estate Foundation, 5.55%, 1/01/31 ....... 4,400,000 4,742,144
Richmond Public Facilities COP, 800 Megahertz Project, Series A, AMBAC Insured, 5.00%,
8/01/22 ..................................................................................... 2,000,000 2,103,960
Richmond Public Utility Revenue,
FSA Insured, 5.00%, 1/15/35 ................................................................ 3,500,000 3,669,295
Refunding, FSA Insured, 5.00%, 1/15/33 ..................................................... 8,500,000 8,793,930
Spotsylvania County Water and Sewer System Revenue, MBIA Insured,
5.25%, 6/01/22 ............................................................................. 6,500,000 6,961,500
5.40%, 6/01/27 ............................................................................. 6,800,000 7,297,080
University of Virginia Revenue, Series A, 5.00%, 6/01/33 ...................................... 14,000,000 14,574,700
Virginia Beach Water and Sewer Revenue, 5.25%, 8/01/21 ........................................ 1,865,000 2,003,625
Virginia College Building Authority Educational Facilities Revenue,
21st Century College Program, 5.00%, 2/01/21 ............................................... 1,000,000 1,056,050
Hampton University Project, 6.00%, 4/01/20 ................................................. 1,500,000 1,695,315
Regent University Project, MBIA Insured, 5.125%, 10/01/21 .................................. 5,000,000 5,355,200
Regent University Project, MBIA Insured, 5.125%, 10/01/31 .................................. 4,050,000 4,241,889
Washington and Lee University, 5.75%, 1/01/19 .............................................. 50,000 50,671
Virginia Commonwealth Transportation Board Transportation Revenue,
Northern Virginia Transportation Program, Refunding, Series A, 5.00%, 5/15/27 .............. 8,920,000 9,353,244
U.S. Route 58 Corridor Development Program, Series B, 5.00%, 5/15/24 ....................... 2,000,000 2,097,540
U.S. Route 58 Corridor Development Project, Series B, 5.00%, 5/15/26 ....................... 10,000,000 10,454,300
Virgina Danville Solid Waste Rev, 6.50%, 3/01/19 .............................................. 500,000 510,000
Virginia State HDA Commonwealth Mortgage Revenue, Series J, Sub Series J-1, MBIA Insured,
5.20%, 7/01/19 .............................................................................. 2,415,000 2,485,470
Virginia State HDA Rental Housing Revenue,
Series J, 5.80%, 2/01/19 ................................................................... 2,000,000 2,092,720
Series L, 5.75%, 2/01/15 ................................................................... 1,000,000 1,060,810
Virginia State HDA, MFHR,
Series C, 5.30%, 11/01/16 .................................................................. 1,000,000 1,049,200
Series H, 5.55%, 5/01/15 ................................................................... 1,000,000 1,049,470
Virginia State Public School Authority GO, School Financing,
Series A, 5.00%, 8/01/20 ................................................................... 3,000,000 3,212,430
Series A, 5.00%, 8/01/21 ................................................................... 4,000,000 4,271,520
Series C, 5.00%, 8/01/22 ................................................................... 2,000,000 2,119,400
Series C, 5.00%, 8/01/26 ................................................................... 10,925,000 11,463,603
Virginia State Resources Authority Airports Revenue, Revolving Fund, Series A, 5.00%, 8/01/27.. 3,000,000 3,086,400
Virginia State Resources Authority Infrastructure Revenue, Virginia Pooled Financing Program,
Senior Series, 5.00%, 11/01/33 ............................................................. 5,000,000 5,213,850
Virginia State Resources Authority Water and Sewer System Revenue,
Pooled Loan Program, Mandatory Put 11/01/05, Series A, ETM, 7.35%, 11/01/16 ................ 45,000 45,470
Pooled Loan Program, Mandatory Put 11/01/07, Series A, ETM, 7.45%, 11/01/16 ................ 10,000 10,358
Rapidan Service Authority, Refunding, 5.30%, 10/01/18 ...................................... 1,610,000 1,711,478
Tuckahoe Service District Project, 5.00%, 11/01/35 ......................................... 2,000,000 2,084,900
Annual Report | 143
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN VIRGINIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
VIRGINIA (CONT.)
York County Sewer Revenue, 5.875%,
6/01/24 .................................................................................... $ 500,000 $ 558,300
6/01/29 .................................................................................... 1,500,000 1,665,405
------------
375,462,700
------------
U. S. TERRITORIES 21.4%
Metropolitan Washington D.C. Airports Authority General Airport Revenue,
Series A, 5.375%, 10/01/23 ................................................................. 3,000,000 3,118,830
Series B, 5.75%, 10/01/20 .................................................................. 6,000,000 6,367,860
Metropolitan Washington D.C. Airport Authority System Revenue,
Refunding, Series A, FGIC Insured, 5.00%, 10/01/25 ......................................... 1,000,000 1,028,770
Series B, FGIC Insured, 5.25%, 10/01/32 .................................................... 6,655,000 6,972,244
Metropolitan Washington D.C. Airports Authority General Airport Revenue, Refunding, Series A,
FGIC Insured, 5.00%, 10/01/27 .............................................................. 5,000,000 5,095,150
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.00%, 7/01/29 ............................................................................. 8,000,000 8,307,680
5.125%, 7/01/31 ............................................................................ 3,315,000 3,424,097
5.00%, 7/01/33 ............................................................................. 2,000,000 2,057,500
FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 ................................................. 16,000,000 17,724,000
Pre-Refunded, 5.125%, 7/01/31 .............................................................. 1,685,000 1,868,378
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
5.50%, 7/01/36 ............................................................................. 4,500,000 4,924,935
Pre-Refunded, 6.00%, 7/01/22 ............................................................... 2,000,000 2,124,980
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, 5.375%, 7/01/36 .................................................................. 5,000,000 5,328,000
Series D, 5.25%, 7/01/38 ................................................................... 3,000,000 3,137,040
Series G, 5.00%, 7/01/33 ................................................................... 5,000,000 5,143,750
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/28 ............................................................... 5,000,000 5,143,050
Puerto Rico Electric Power Authority Power Revenue,
Refunding, Series Z, 5.25%, 7/01/21 ........................................................ 1,500,000 1,512,060
Series HH, FSA Insured, 5.25%, 7/01/29 5,910,000 6,373,758
Puerto Rico HFC Revenue,
MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ................................................. 1,025,000 1,025,389
Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 ..................... 20,000 20,274
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/27 ........... 2,580,000 2,706,833
Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D,
5.375%, 7/01/33 ............................................................................ 1,315,000 1,401,264
Pre-Refunded, 5.375%, 7/01/33 .............................................................. 3,685,000 4,120,420
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E, Pre-Refunded,
5.70%, 8/01/25 .............................................................................. 1,000,000 1,123,380
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/15 ................................................................................... 1,500,000 1,581,630
10/01/18 ................................................................................... 1,500,000 1,569,900
------------
103,201,172
------------
TOTAL LONG TERM INVESTMENTS (COST $448,150,075)................................................ 478,663,872
------------
144 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN VIRGINIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (COST $400,000) .1%
BOND .1%
VIRGINIA .1%
(a) Alexandria Redevelopment and Housing Authority Residential Care Facility Revenue,
First Mortgage, Goodwin House Inc., Series B, Daily VRDN and Put, 1.79%, 10/01/06 ........... $ 400,000 $ 400,000
------------
TOTAL INVESTMENTS (COST $448,550,075) 99.3%.................................................... 479,063,872
OTHER ASSETS, LESS LIABILITIES .7%............................................................. 3,468,556
------------
NET ASSETS 100.0%.............................................................................. $482,532,428
============
See Glossary of Terms on page 146.
(a) 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.
Annual Report | See notes to financial statements. | 145
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
GLOSSARY OF TERMS
ACES - Adjustable Convertible Exempt Securities
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Authority/Agency
CDD - Community Development District
COP - Certificate of Participation
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HDC - Housing Development Corporation
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority Revenue
HFC - Housing Finance Corp.
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
IDB - Industrial Development Board
IDBR - Industrial Development Bond Insurance Revenue
IDR - Industrial Development Revenue
ISD - Independent School District
LLC - Limited Liability Corporation
MAC - Municipal Assistance Corp.
MBIA - Municipal Bond Investors Assurance Corp.
MF - Multi-Family
MFH - Multi-Family Housing
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFAR - Public Financing Authority Revenue
SF - Single Family
SFHR - Single Family Housing Revenue
SFHMR - Single Family Housing Mortgage Revenue
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
VHA - Volunteer Hospital of America
XLCA - XL Capital Assurance
146 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2005
--------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA TAX-FREE FLORIDA TAX-FREE GEORGIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
Assets:
Investments in securities:
Cost ......................................................... $ 238,443,251 $ 1,546,246,692 $ 191,828,593
========================================================
Value ........................................................ 255,641,071 1,675,142,964 206,065,169
Cash .......................................................... -- 72,441 3,851
Receivables:
Capital shares sold .......................................... 568,338 3,290,952 609,938
Interest ..................................................... 3,644,296 24,394,700 2,604,450
--------------------------------------------------------
Total assets ............................................. 259,853,705 1,702,901,057 209,283,408
--------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .............................. 2,083,541 8,762,661 1,055,320
Capital shares redeemed ...................................... 333,588 3,403,518 371,984
Affiliates ................................................... 166,676 953,401 142,915
Distributions to shareholders ................................. 201,799 1,413,883 257,120
Funds advanced by custodian ................................... 75,754 -- --
Other liabilities ............................................. 32,024 127,967 32,081
--------------------------------------------------------
Total liabilities ........................................ 2,893,382 14,661,430 1,859,420
--------------------------------------------------------
Net assets, at value .................................... $ 256,960,323 $ 1,688,239,627 $ 207,423,988
========================================================
Net assets consist of:
Undistributed net investment income (distributions in excess of
net investment income) ....................................... $ (77,691) $ 47,250 $ (175,169)
Net unrealized appreciation (depreciation) .................... 17,197,820 128,896,272 14,236,576
Accumulated net realized gain (loss) .......................... (10,046,606) (5,885,192) (3,623,416)
Capital shares ................................................ 249,886,800 1,565,181,297 196,985,997
--------------------------------------------------------
Net assets, at value .................................... $ 256,960,323 $ 1,688,239,627 $ 207,423,988
========================================================
CLASS A:
Net assets, at value .......................................... $ 225,258,307 $ 1,488,979,111 $ 170,407,202
========================================================
Shares outstanding ............................................ 19,403,848 124,047,615 14,006,368
========================================================
Net asset value per share(a) .................................. $ 11.61 $ 12.00 $ 12.17
========================================================
Maximum offering price per share (net asset value
per share / 95.75%) ........................................... $ 12.13 $ 12.53 $ 12.71
========================================================
CLASS B:
Net assets, at value .......................................... -- $ 74,311,101 --
========================================================
Shares outstanding ............................................ -- 6,149,478 --
========================================================
Net asset value and maximum offering price per share(a) ....... -- $ 12.08 --
========================================================
CLASS C:
Net assets, at value .......................................... $ 31,702,016 $ 124,949,415 $ 37,016,786
========================================================
Shares outstanding ............................................ 2,710,343 10,288,654 3,016,944
========================================================
Net asset value and maximum offering price per share(a) ....... $ 11.70 $ 12.14 $ 12.27
========================================================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 147
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
--------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY TAX-FREE LOUISIANA TAX-FREE MARYLAND TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
Assets:
Investments in securities:
Cost ......................................................... $ 108,115,732 $ 192,637,428 $ 355,973,074
========================================================
Value ........................................................ 114,277,091 204,857,920 376,562,689
Cash .......................................................... 669,279 69,295 38,570
Receivables:
Capital shares sold .......................................... 47,984 382,040 2,444,643
Interest ..................................................... 1,398,884 3,058,196 4,500,051
--------------------------------------------------------
Total assets ............................................. 116,393,238 208,367,451 383,545,953
--------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .............................. 2,683,809 -- --
Capital shares redeemed ...................................... 593,969 187,315 1,022,240
Affiliates ................................................... 64,209 131,195 243,501
Distributions to shareholders ................................. 87,031 165,897 295,898
Other liabilities ............................................. 23,399 28,392 44,080
--------------------------------------------------------
Total liabilities ........................................ 3,452,417 512,799 1,605,719
--------------------------------------------------------
Net assets, at value .................................... $ 112,940,821 $ 207,854,652 $ 381,940,234
========================================================
Net assets consist of:
Undistributed net investment income (distributions in excess of
net investment income) ....................................... $ (15,184) $ 22,406 $ (133,573)
Net unrealized appreciation (depreciation) .................... 6,161,359 12,220,492 20,589,615
Accumulated net realized gain (loss) .......................... (2,237,944) (2,238,549) (1,697,621)
Capital shares ................................................ 109,032,590 197,850,303 363,181,813
--------------------------------------------------------
Net assets, at value .................................... $ 112,940,821 $ 207,854,652 $ 381,940,234
========================================================
CLASS A:
Net assets, at value .......................................... $ 112,940,821 $ 188,658,994 $ 332,943,126
========================================================
Shares outstanding ............................................ 9,897,346 16,151,247 28,219,934
========================================================
Net asset value per share(a) .................................. $ 11.41 $ 11.68 $ 11.80
========================================================
Maximum offering price per share (net asset value
per share / 95.75%) ........................................... $ 11.92 $ 12.20 $ 12.32
========================================================
CLASS C:
Net assets, at value .......................................... -- $ 19,195,658 $ 48,997,108
========================================================
Shares outstanding ............................................ -- 1,628,365 4,106,376
========================================================
Net asset value and maximum offering price per share(a) ....... -- $ 11.79 $ 11.93
========================================================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
148 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
--------------------------------------------------------
FRANKLIN
FRANKLIN NORTH CAROLINA FRANKLIN
MISSOURI TAX-FREE TAX-FREE VIRGINIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
Assets:
Investments in securities:
Cost ......................................................... $ 538,917,253 $ 473,213,932 $ 448,550,075
========================================================
Value ........................................................ 572,774,591 505,366,269 479,063,872
Cash .......................................................... 364,838 280,013 113,855
Receivables:
Investment securities sold ................................... 2,520,003 -- --
Capital shares sold .......................................... 1,314,954 1,196,249 694,695
Interest ..................................................... 7,335,698 6,523,676 5,295,505
--------------------------------------------------------
Total assets ............................................. 584,310,084 513,366,207 485,167,927
--------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .............................. 6,094,032 -- --
Capital shares redeemed ...................................... 630,655 1,050,555 1,909,924
Affiliates ................................................... 342,851 318,231 290,270
Distributions to shareholders ................................. 456,918 399,048 384,323
Other liabilities ............................................. 56,008 51,620 50,982
--------------------------------------------------------
Total liabilities ........................................ 7,580,464 1,819,454 2,635,499
--------------------------------------------------------
Net assets, at value .................................... $ 576,729,620 $ 511,546,753 $ 482,532,428
========================================================
Net assets consist of:
Undistributed net investment income (distributions in excess of
net investment income) ....................................... $ (104,100) $ (182,859) $ 95,346
Net unrealized appreciation (depreciation) .................... 33,857,338 32,152,337 30,513,797
Accumulated net realized gain (loss) .......................... (5,161,576) (3,038,785) (6,059,196)
Capital shares ................................................ 548,137,958 482,616,060 457,982,481
--------------------------------------------------------
Net assets, at value .................................... $ 576,729,620 $ 511,546,753 $ 482,532,428
========================================================
CLASS A:
Net assets, at value .......................................... $ 516,311,789 $ 428,203,555 $ 438,871,331
========================================================
Shares outstanding ............................................ 41,892,164 34,628,977 36,841,132
========================================================
Net asset value per share(a) .................................. $ 12.32 $ 12.37 $ 11.91
========================================================
Maximum offering price per share (net asset value
per share / 95.75%) ........................................... $ 12.87 $ 12.92 $ 12.44
========================================================
CLASS C:
Net assets, at value .......................................... $ 60,417,831 $ 83,343,198 $ 43,661,097
========================================================
Shares outstanding ............................................ 4,874,502 6,676,592 3,631,524
========================================================
Net asset value and maximum offering price per share(a) ....... $ 12.39 $ 12.48 $ 12.02
========================================================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 149
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2005
--------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA TAX-FREE FLORIDA TAX-FREE GEORGIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
Investment income:
Interest ...................................................... $ 13,041,530 $ 89,353,282 $ 10,435,109
========================================================
Expenses:
Management fees (Note 3) ...................................... 1,394,080 7,837,345 1,138,732
Distribution fees (Note 3)
Class A ...................................................... 223,948 1,492,055 166,436
Class B ...................................................... -- 471,586 --
Class C ...................................................... 197,488 784,338 233,055
Transfer agent fees (Note 3) .................................. 107,243 576,074 103,642
Custodian fees ................................................ 4,310 28,675 3,449
Reports to shareholders ....................................... 19,823 106,382 17,330
Registration and filing fees .................................. 8,706 24,427 8,719
Professional fees ............................................. 19,442 58,284 15,266
Trustees' fees and expenses ................................... 2,209 16,279 1,841
Other ......................................................... 26,184 103,541 20,348
--------------------------------------------------------
Total expenses ........................................... 2,003,433 11,498,986 1,708,818
--------------------------------------------------------
Net investment income .................................. 11,038,097 77,854,296 8,726,291
--------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ..................... 210,051 872,286 (216,997)
Net change in unrealized appreciation (depreciation)
on investments ............................................... (3,891,794) (28,262,475) (1,927,441)
--------------------------------------------------------
Net realized and unrealized gain (loss) ........................ (3,681,743) (27,390,189) (2,144,438)
--------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 7,356,354 $ 50,464,107 $ 6,581,853
========================================================
150 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2005
--------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY TAX-FREE LOUISIANA TAX-FREE MARYLAND TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
Investment income:
Interest ...................................................... $ 5,576,955 $ 10,588,000 $ 19,217,346
========================================================
Expenses:
Management fees (Note 3) ...................................... 680,244 1,139,987 1,946,779
Distribution fees (Note 3)
Class A ...................................................... 110,917 183,068 327,570
Class C ...................................................... -- 124,975 315,876
Transfer agent fees (Note 3) .................................. 41,048 80,373 200,523
Custodian fees ................................................ 1,867 3,400 6,322
Reports to shareholders ....................................... 8,418 15,358 35,068
Registration and filing fees .................................. 3,231 5,953 12,540
Professional fees ............................................. 14,243 16,031 21,119
Trustees' fees and expenses ................................... 1,038 1,803 3,724
Other ......................................................... 16,643 22,736 32,507
--------------------------------------------------------
Total expenses ........................................... 877,649 1,593,684 2,902,028
Expenses waived/paid by affiliate (Note 3) ............... (88,395) -- --
--------------------------------------------------------
Net expenses ............................................ 789,254 1,593,684 2,902,028
--------------------------------------------------------
Net investment income .................................. 4,787,701 8,994,316 16,315,318
--------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ..................... (253,618) (240,989) (728,813)
Net change in unrealized appreciation (depreciation)
on investments ................................................. (1,094,477) (2,362,079) (3,864,292)
--------------------------------------------------------
Net realized and unrealized gain (loss) ........................ (1,348,095) (2,603,068) (4,593,105)
--------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 3,439,606 $ 6,391,248 $ 11,722,213
========================================================
Annual Report | See notes to financial statements. | 151
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2005
--------------------------------------------------------
FRANKLIN
FRANKLIN NORTH CAROLINA FRANKLIN
MISSOURI TAX-FREE TAX-FREE VIRGINIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
Investment income:
Interest ...................................................... $ 28,293,647 $ 24,903,420 $ 23,961,494
========================================================
Expenses:
Management fees (Note 3) ...................................... 2,744,254 2,452,095 2,368,678
Distribution fees (Note 3)
Class A ...................................................... 493,457 407,177 427,723
Class C ...................................................... 378,819 521,190 270,696
Transfer agent fees (Note 3) .................................. 265,397 214,449 212,321
Custodian fees ................................................ 9,343 8,181 7,726
Reports to shareholders ....................................... 46,108 39,412 37,337
Registration and filing fees .................................. 12,381 10,115 11,008
Professional fees ............................................. 26,681 22,430 21,873
Trustees' fees and expenses ................................... 4,897 4,194 4,238
Other ......................................................... 47,091 46,237 42,089
--------------------------------------------------------
Total expenses ........................................... 4,028,428 3,725,480 3,403,689
--------------------------------------------------------
Net investment income .................................. 24,265,219 21,177,940 20,557,805
--------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ..................... (1,392,338) 606,760 57,234
Net change in unrealized appreciation (depreciation)
on investments ................................................ (3,931,193) (3,049,638) (1,556,093)
--------------------------------------------------------
Net realized and unrealized gain (loss) ........................ (5,323,531) (2,442,878) (1,498,859)
--------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 18,941,688 $ 18,735,062 $ 19,058,946
========================================================
152 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended February 28, 2005
and February 29, 2004
--------------------------------------------------------------------
FRANKLIN ALABAMA FRANKLIN FLORIDA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 11,038,097 $ 11,438,945 $ 77,854,296 $ 81,592,311
Net realized gain (loss) from
investments ............................................. 210,051 (206,846) 872,286 834,841
Net change in unrealized appreciation
(depreciation) on investments ........................... (3,891,794) 5,829,605 (28,262,475) 27,232,681
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................ 7,356,354 17,061,704 50,464,107 109,659,833
Distributions to shareholders from:
Net investment income:
Class A ................................................. (9,790,562) (10,331,630) (69,421,795) (73,479,490)
Class B ................................................. -- -- (2,939,629) (2,734,894)
Class C ................................................. (1,154,405) (1,095,137) (4,857,241) (4,756,909)
--------------------------------------------------------------------
Total distributions to shareholders ....................... (10,944,967) (11,426,767) (77,218,665) (80,971,293)
Capital share transactions: (Note 2)
Class A ................................................. (7,745,788) 2,479,520 (81,267,736) (56,001,257)
Class B ................................................. -- -- (843,775) 19,801,947
Class C ................................................. 1,565,062 4,611,111 2,140,176 9,097,122
--------------------------------------------------------------------
Total capital share transactions .......................... (6,180,726) 7,090,631 (79,971,335) (27,102,188)
Redemption fees ........................................... -- -- 23,227 --
--------------------------------------------------------------------
Net increase (decrease) in
net assets ........................................... (9,769,339) 12,725,568 (106,702,666) 1,586,352
Net assets
Beginning of year ......................................... 266,729,662 254,004,094 1,794,942,293 1,793,355,941
--------------------------------------------------------------------
End of year ............................................... $ 256,960,323 $ 266,729,662 $ 1,688,239,627 $ 1,794,942,293
====================================================================
Undistributed net investment income (distributions in excess
of net investment income) included in net assets:
End of year ............................................... $ (77,691) $ (169,406) $ 47,250 $ (565,076)
====================================================================
Annual Report | See notes to financial statements. | 153
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005
and February 29, 2004
--------------------------------------------------------------------
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 8,726,291 $ 9,011,298 $ 4,787,701 $ 5,194,899
Net realized gain (loss) from
investments ............................................... (216,997) (446,778) (253,618) (194,210)
Net change in unrealized appreciation
(depreciation) on investments ............................. (1,927,441) 5,212,862 (1,094,477) 2,220,045
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................ 6,581,853 13,777,382 3,439,606 7,220,734
Distributions to shareholders from:
Net investment income:
Class A ................................................. (7,360,601) (7,680,375) (4,775,453) (5,158,609)
Class C ................................................. (1,373,298) (1,295,109) -- --
--------------------------------------------------------------------
Total distributions to shareholders ....................... (8,733,899) (8,975,484) (4,775,453) (5,158,609)
Capital share transactions: (Note 2)
Class A ................................................. (3,944,888) 828,606 (4,520,633) 2,194,026
Class C ................................................. 1,682,052 2,404,142 -- --
--------------------------------------------------------------------
Total capital share transactions .......................... (2,262,836) 3,232,748 (4,520,633) 2,194,026
Redemption fees ........................................... 1,129 -- 2 --
--------------------------------------------------------------------
Net increase (decrease) in
net assets ....................................... (4,413,753) 8,034,646 (5,856,478) 4,256,151
Net assets
Beginning of year ......................................... 211,837,741 203,803,095 118,797,299 114,541,148
--------------------------------------------------------------------
End of year ............................................... $ 207,423,988 $ 211,837,741 $ 112,940,821 $ 118,797,299
====================================================================
Distributions in excess of net investment income included in
net assets:
End of year ............................................... $ (175,169) $ (165,457) $ (15,184) $ (27,583)
====================================================================
154 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005
and February 29, 2004
--------------------------------------------------------------------
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 8,994,316 $ 9,115,540 $ 16,315,318 $ 16,534,831
Net realized gain (loss) from
investments ............................................ (240,989) (871,197) (728,813) 844,841
Net change in unrealized appreciation
(depreciation) on investments .......................... (2,362,079) 5,159,230 (3,864,292) 4,203,914
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................ 6,391,248 13,403,573 11,722,213 21,583,586
Distributions to shareholders from:
Net investment income:
Class A ................................................. (8,106,367) (8,287,908) (14,417,870) (14,770,030)
Class C ................................................. (737,891) (814,367) (1,842,918) (1,919,132)
--------------------------------------------------------------------
Total distributions to shareholders ....................... (8,844,258) (9,102,275) (16,260,788) (16,689,162)
Capital share transactions: (Note 2)
Class A ................................................. 4,833,877 4,910,431 (3,302,347) 13,088,801
Class C ................................................. (1,281,715) (170,476) (194,365) 814,408
--------------------------------------------------------------------
Total capital share transactions .......................... 3,552,162 4,739,955 (3,496,712) 13,903,209
Redemption fees ........................................... 89 -- 25 --
--------------------------------------------------------------------
Net increase (decrease) in
net assets ....................................... 1,099,241 9,041,253 (8,035,262) 18,797,633
Net assets
Beginning of year ......................................... 206,755,411 197,714,158 389,975,496 371,177,863
--------------------------------------------------------------------
End of year ............................................... $ 207,854,652 $ 206,755,411 $ 381,940,234 $ 389,975,496
====================================================================
Undistributed net investment income (distributions in excess
of net investment income) included in net assets:
End of year ............................................... $ 22,406 $ (126,883) $ (133,573) $ (186,674)
====================================================================
Annual Report | See notes to financial statements. | 155
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005
and February 29, 2004
--------------------------------------------------------------------
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 24,265,219 $ 23,806,193 $ 21,177,940 $ 21,525,482
Net realized gain (loss) from
investments ............................................ (1,392,338) (1,495,217) 606,760 (338,443)
Net change in unrealized appreciation
(depreciation) on investments .......................... (3,931,193) 10,569,681 (3,049,638) 7,113,032
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................... 18,941,688 32,880,657 18,735,062 28,300,071
Distributions to shareholders from:
Net investment income:
Class A ................................................. (21,796,349) (21,508,601) (18,105,246) (18,428,670)
Class C ................................................. (2,237,076) (2,266,500) (3,087,767) (3,062,666)
--------------------------------------------------------------------
Total distributions to shareholders ....................... (24,033,425) (23,775,101) (21,193,013) (21,491,336)
Capital share transactions: (Note 2)
Class A ................................................. 21,573,426 23,089,986 16,795,220 (10,377,974)
Class C ................................................. 801,871 3,635,035 1,351,189 4,831,266
--------------------------------------------------------------------
Total capital share transactions .......................... 22,375,297 26,725,021 18,146,409 (5,546,708)
Redemption fees ........................................... 14 -- 46 --
--------------------------------------------------------------------
Net increase (decrease) in
net assets .......................................... 17,283,574 35,830,577 15,688,504 1,262,027
Net assets
Beginning of year ......................................... 559,446,046 523,615,469 495,858,249 494,596,222
--------------------------------------------------------------------
End of year ............................................... $ 576,729,620 $ 559,446,046 $ 511,546,753 $ 495,858,249
====================================================================
Distributions in excess of net investment income included in
net assets:
End of year ............................................... $ (104,100) $ (328,091) $ (182,859) $ (163,357)
====================================================================
156 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005
and February 29, 2004
---------------------------------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
---------------------------------
2005 2004
---------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................................................... $ 20,557,805 $ 20,760,239
Net realized gain (loss) from investments .................................. 57,234 318,193
Net change in unrealized appreciation (depreciation) on investments ........ (1,556,093) 11,519,624
---------------------------------
Net increase (decrease) in net assets resulting from operations ........ 19,058,946 32,598,056
Distributions to shareholders from:
Net investment income:
Class A ................................................................... (18,706,855) (19,035,054)
Class C ................................................................... (1,572,850) (1,596,169)
---------------------------------
Total distributions to shareholders ......................................... (20,279,705) (20,631,223)
Capital share transactions: (Note 2)
Class A ................................................................... (1,935,364) 4,626,319
Class C ................................................................... 763,301 158,524
---------------------------------
Total capital share transactions ............................................ (1,172,063) 4,784,843
Redemption fees ............................................................. 99 --
---------------------------------
Net increase (decrease) in net assets .................................. (2,392,723) 16,751,676
Net assets
Beginning of year ........................................................... 484,925,151 468,173,475
---------------------------------
End of year ................................................................. $ 482,532,428 $ 484,925,151
=================================
Undistributed net investment income (distributions in excess of net investment
income) included in net assets:
End of year ................................................................. $ 95,346 $ (180,282)
=================================
Annual Report | See notes to financial statements. | 157
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Free Trust (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of twenty-five
separate series. All Funds included in this report (the Funds) are diversified
except the Franklin Maryland Tax-Free Income Fund. The financial statements of
the remaining funds in the series are presented separately. The investment
objective of the Funds is to provide tax-free income. The following summarizes
the Funds' significant accounting policies.
A. SECURITY VALUATION
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange. The Trust'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 Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. 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 Trust's Board of Trustees.
B. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds 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
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
C. INCOME TAXES
No provision has been made for U.S. income taxes because each Fund's policy is
to qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute substantially all of its income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
158 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividends from net investment income are normally declared daily and
distributed monthly to shareholders. Other distributions are recorded on the
ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
E. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
F. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of the Funds' shares held five
trading days or less may be subject to the Funds' redemption fee, which is 2% of
the amount redeemed. Such fees are retained by the Funds and accounted for as
additional paid-in capital as noted in the Statements of Changes in Net Assets.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liability arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. However, based on experience, the
Trust expects the risk of loss to be remote.
Annual Report | 159
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective March 1, 2005, Class B shares will no longer be offered except to
existing Class B shareholders through reinvested distributions or exchanges into
other Franklin Templeton funds' Class B shares, as permitted by the applicable
fund prospectus. 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.
- ----------------------------------------------------------------------------------------------------------------------
CLASS A CLASS A & CLASS C CLASS A, CLASS B, & CLASS C
- ----------------------------------------------------------------------------------------------------------------------
Franklin Kentucky Tax-Free Franklin Alabama Tax-Free Income Fund Franklin Florida Tax-Free Income Fund
Income Fund Franklin Georgia Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
At February 28, 2005, there were an unlimited number of shares authorized (no
par value). Transactions in the Funds' shares were as follows:
------------------------------------------------------------
FRANKLIN ALABAMA FRANKLIN FLORIDA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold .................... 1,800,416 $ 20,860,837 11,852,355 $ 141,343,362
Shares issued in reinvestment of
distributions ................. 421,045 4,856,377 2,423,564 28,842,034
Shares redeemed ................ (2,912,811) (33,463,002) (21,192,727) (251,453,132)
------------------------------------------------------------
Net increase (decrease) ........ (691,350) $ (7,745,788) (6,916,808) $ (81,267,736)
============================================================
Year ended February 29, 2004
Shares sold .................... 2,263,954 $ 26,105,547 14,888,557 $ 178,197,604
Shares issued in reinvestment of
distributions ................. 413,398 4,773,178 2,342,089 28,048,077
Shares redeemed ................ (2,464,934) (28,399,205) (21,979,610) (262,246,938)
------------------------------------------------------------
Net increase (decrease) ........ 212,418 $ 2,479,520 (4,748,964) $ (56,001,257)
============================================================
CLASS B SHARES:
Year ended February 28, 2005
Shares sold .................... 837,853 $ 10,043,282
Shares issued in reinvestment of
distributions ................. 128,374 1,537,870
Shares redeemed ................ (1,040,041) (12,424,927)
----------------------------
Net increase (decrease) ........ (73,814) $ (843,775)
============================
Year ended February 29, 2004
Shares sold .................... 2,246,771 $ 27,088,183
Shares issued in reinvestment of
distributions ................. 120,530 1,451,711
Shares redeemed ................ (727,812) (8,737,947)
----------------------------
Net increase (decrease) ........ 1,639,489 $ 19,801,947
============================
160 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------
FRANKLIN ALABAMA FRANKLIN FLORIDA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS C SHARES:
Year ended February 28, 2005
Shares sold .................... 464,804 $ 5,404,368 1,877,350 $ 22,746,514
Shares issued in reinvestment of
distributions ................. 43,353 503,934 209,946 2,526,932
Shares redeemed ................ (373,841) ( 4,343,240) (1,935,259) (23,133,270)
------------------------------------------------------------
Net increase (decrease) ........ 134,316 $ 1,565,062 152,037 $ 2,140,176
============================================================
Year ended February 29, 2004
Shares sold .................... 615,117 $ 7,148,888 2,396,470 $ 29,074,616
Shares issued in reinvestment of
distributions ................. 40,743 473,587 203,452 2,462,332
Shares redeemed ................ (260,368) ( 3,011,364) (1,860,119) (22,439,826)
------------------------------------------------------------
Net increase (decrease) ........ 395,492 $ 4,611,111 739,803 $ 9,097,122
============================================================
------------------------------------------------------------
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ..................... 1,765,327 $ 21,266,825 1,343,129 $ 15,154,589
Shares issued in reinvestment of
distributions .................. 356,603 4,286,607 215,593 2,432,648
Shares redeemed ................. (2,473,141) (29,498,320) (1,984,276) (22,107,870)
------------------------------------------------------------
Net increase (decrease) ......... (351,211) $ (3,944,888) (425,554) $ (4,520,633)
============================================================
Year ended February 29, 2004
Shares sold ..................... 1,660,253 $ 19,992,989 1,644,747 $ 18,576,555
Shares issued in reinvestment of
distributions .................. 365,767 4,406,855 210,011 2,369,767
Shares redeemed ................. (1,966,391) (23,571,238) (1,672,321) (18,752,296)
------------------------------------------------------------
Net increase (decrease).......... 59,629 $ 828,606 182,437 $ 2,194,026
============================================================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ..................... 647,384 $ 7,860,354
Shares issued in reinvestment of
distributions .................. 66,552 806,908
Shares redeemed ................. (578,351) (6,985,210)
----------------------------
Net increase (decrease) ......... 135,585 $ 1,682,052
============================
Year ended February 29, 2004
Shares sold ..................... 711,949 $ 8,634,883
Shares issued in reinvestment of
distributions .................. 62,293 756,473
Shares redeemed ................. (577,059) (6,987,214)
----------------------------
Net increase (decrease).......... 197,183 $ 2,404,142
============================
Annual Report | 161
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold .................... 2,032,890 $ 23,654,162 3,499,195 $ 40,987,640
Shares issued in reinvestment of
distributions ................. 379,998 4,406,804 742,424 8,681,412
Shares redeemed ................ (2,008,719) (23,227,089) (4,548,949) (52,971,399)
------------------------------------------------------------
Net increase (decrease) ........ 404,169 $ 4,833,877 (307,330) $ (3,302,347)
============================================================
Year ended February 29, 2004
Shares sold .................... 1,992,894 $ 23,090,261 4,647,064 $ 54,623,543
Shares issued in reinvestment of
distributions ................. 392,394 4,538,960 732,776 8,618,206
Shares redeemed ................ (1,978,776) (22,718,790) (4,272,744) (50,152,948)
------------------------------------------------------------
Net increase (decrease)......... 406,512 $ 4,910,431 1,107,096 $ 13,088,801
============================================================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold .................... 262,839 $ 3,098,583 685,868 $ 8,133,649
Shares issued in reinvestment of
distributions ................. 31,983 374,389 96,926 1,145,816
Shares redeemed ................ (409,562) (4,754,687) (802,462) (9,473,830)
------------------------------------------------------------
Net increase (decrease) ........ (114,740) $ (1,281,715) (19,668) $ (194,365)
============================================================
Year ended February 29, 2004
Shares sold .................... 313,052 $ 3,651,038 946,909 $ 11,262,018
Shares issued in reinvestment of
distributions ................. 36,055 420,614 101,326 1,204,169
Shares redeemed ................ (366,588) (4,242,128) (981,755) (11,651,779)
------------------------------------------------------------
Net increase (decrease)......... (17,481) $ (170,476) 66,480 $ 814,408
============================================================
------------------------------------------------------------
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold .................... 4,856,471 $ 59,249,246 4,678,657 $ 57,331,052
Shares issued in reinvestment of
distributions ................. 958,627 11,667,775 843,616 10,311,343
Shares redeemed ................ (4,067,456) (49,343,595) (4,171,563) (50,847,175)
------------------------------------------------------------
Net increase (decrease) ........ 1,747,642 $ 21,573,426 1,350,710 $ 16,795,220
============================================================
Year ended February 29, 2004
Shares sold .................... 6,216,991 $ 76,004,841 4,241,562 $ 51,874,884
Shares issued in reinvestment of
distributions ................. 904,776 11,052,586 856,817 10,468,046
Shares redeemed ................ (5,255,100) (63,967,441) (5,976,256) (72,720,904)
------------------------------------------------------------
Net increase (decrease)......... 1,866,667 $ 23,089,986 (877,877) $ (10,377,974)
============================================================
162 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS C SHARES:
Year ended February 28, 2005
Shares sold .................... 635,039 $ 7,801,828 1,125,178 $ 13,913,708
Shares issued in reinvestment of
distributions ................. 112,810 1,380,495 146,159 1,803,160
Shares redeemed ................ (688,983) (8,380,452) (1,169,607) (14,365,679)
------------------------------------------------------------
Net increase (decrease) ........ 58,866 $ 801,871 101,730 $ 1,351,189
============================================================
Year ended February 29, 2004
Shares sold .................... 947,105 $ 11,655,629 1,207,157 $ 14,897,913
Shares issued in reinvestment of
distributions ................. 115,205 1,414,442 149,255 1,839,541
Shares redeemed ................ (771,237) (9,435,036) (968,584) (11,906,188)
------------------------------------------------------------
Net increase (decrease)......... 291,073 $ 3,635,035 387,828 $ 4,831,266
============================================================
----------------------------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
----------------------------
SHARES AMOUNT
----------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ................................................... 3,622,211 $ 42,602,248
Shares issued in reinvestment of distributions ................ 891,647 10,478,349
Shares redeemed ............................................... (4,695,273) (55,015,961)
----------------------------
Net increase (decrease) ....................................... (181,415) $ (1,935,364)
============================
Year ended February 29, 2004
Shares sold ................................................... 4,425,238 $ 51,817,464
Shares issued in reinvestment of distributions ................ 901,659 10,552,449
Shares redeemed ............................................... (4,941,087) (57,743,594)
----------------------------
Net increase (decrease) ....................................... 385,810 $ 4,626,319
============================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ................................................... 575,859 $ 6,849,810
Shares issued in reinvestment of distributions ................ 83,179 986,100
Shares redeemed ............................................... (599,362) (7,072,609)
----------------------------
Net increase (decrease) ....................................... 59,676 $ 763,301
============================
Year ended February 29, 2004
Shares sold ................................................... 658,051 $ 7,776,322
Shares issued in reinvestment of distributions ................ 80,253 947,475
Shares redeemed ............................................... (728,074) (8,565,273)
----------------------------
Net increase (decrease) ....................................... 10,230 $ 158,524
============================
Annual Report | 163
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (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
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- ---------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ---------------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Funds pay an investment management fee to Advisers based on the month-end
net assets of the Funds as follows:
- ---------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ---------------------------------------------------------------------------
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% In excess of $250 million
Advisers agreed in advance to voluntarily waive a portion of management fees for
the Franklin Kentucky Tax-Free Income Fund, as noted in the Statement of
Operations. Total expenses waived by Advisers are not subject to reimbursement
by the Fund.
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
C. DISTRIBUTION FEES
The Funds reimburse Distributors up to 0.10%, 0.65%, and 0.65% per year of their
average daily net assets of Class A, Class B, and Class C, respectively, for
costs incurred in marketing the Funds' shares under a Rule 12b-1 plan.
Under the Class A distribution plan, costs exceeding the maximum for the current
plan year cannot be reimbursed in subsequent periods.
164 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS
DISTRIBUTORS HAS ADVISED THE FUNDS OF THE FOLLOWING COMMISSION TRANSACTIONS
RELATED TO THE SALES AND REDEMPTIONS OF THE FUNDS' SHARES FOR THE YEAR:
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Net sales charges received ........................ $ 63,298 $ 294,309 $ 51,912
Contingent deferred sales charges retained ........ $ 11,884 $ 187,235 $ 8,868
-------------------------------------------
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Net sales charges received ........................ $ 32,957 $ 69,920 $ 111,885
Contingent deferred sales charges retained ........ $ 131 $ 1,408 $ 12,996
----------------------------------------------
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Net sales charges received ........................ $ 190,261 $ 155,214 $ 110,376
Contingent deferred sales charges retained ........ $ 4,071 $ 8,515 $ 8,209
----------------------------------------------
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were paid to Investor Services:
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Transfer agent fees ............................... $ 64,572 $ 360,565 $ 69,450
----------------------------------------------
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Transfer agent fees ............................... $ 27,340 $ 52,073 $ 132,873
----------------------------------------------
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Transfer agent fees ............................... $ 178,184 $ 139,963 $ 141,457
----------------------------------------------
Annual Report | 165
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
At February 28, 2005, the Funds had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Capital loss carryovers expiring in:
2008 ............................................. $ 1,730,280 $ -- $ 1,387,542
2009 ............................................. 135,955 5,639,823 833,999
2010 ............................................. 7,179,861 245,369 --
2011 ............................................. 804,634 -- --
2012 ............................................. 195,876 -- 972,862
2013 ............................................. -- -- 416,353
----------------------------------------------
$ 10,046,606 $ 5,885,192 $ 3,610,756
==============================================
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Capital loss carryovers expiring in:
2008 ............................................. $ 305,529 $ 545,898 $ --
2009 ............................................. -- 171,149 850,416
2010 ............................................. 413,791 -- 119,821
2011 ............................................. -- -- --
2012 ............................................. 1,264,854 1,281,282 --
2013 ............................................. 253,770 240,220 727,384
----------------------------------------------
$ 2,237,944 $ 2,238,549 $ 1,697,621
==============================================
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Capital loss carryovers expiring in:
2008 ............................................. $ -- $ -- $ 2,226,407
2009 ............................................. 1,738,727 2,702,995 1,407,973
2010 ............................................. -- -- 1,188,255
2011 ............................................. 316,094 -- --
2012 ............................................. 1,619,914 335,790 1,236,561
2013 ............................................. 1,384,535 -- --
----------------------------------------------
$ 5,059,270 $ 3,038,785 $ 6,059,196
==============================================
On February 28, 2005, Franklin Kentucky Tax-Free Income Fund had expired capital
loss carryovers of $294,278, which were reclassified to paid-in capital.
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of bond discounts.
166 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of bond discounts and wash sales.
At February 28, 2005, the cost of investments, net unrealized appreciation
(depreciation) and undistributed tax exempt income for income tax purposes were
as follows:
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------
Cost of investments............................... $ 238,411,767 $1,546,010,593 $ 191,824,936
=================================================
Unrealized appreciation........................... $ 17,269,628 $ 129,132,371 $ 14,703,007
Unrealized depreciation........................... (40,324) -- (462,774)
-------------------------------------------------
Net unrealized appreciation (depreciation)........ $ 17,229,304 $ 129,132,371 $ 14,240,233
=================================================
Distributable earnings - undistributed tax
exempt income.................................... $ 92,624 $ 1,225,039 $ 65,638
=================================================
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------
Cost of investments............................... $ 108,094,767 $ 192,590,765 $ 355,942,356
=================================================
Unrealized appreciation........................... $ 6,454,486 $ 12,395,513 $ 20,660,219
Unrealized depreciation........................... (272,162) (128,358) (39,886)
-------------------------------------------------
Net unrealized appreciation (depreciation)........ $ 6,182,324 $ 12,267,155 $ 20,620,333
=================================================
Distributable earnings - undistributed tax
exempt income.................................... $ 50,882 $ 141,641 $ 131,607
=================================================
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------
Cost of investments............................... $ 538,915,845 $ 473,178,732 $ 448,513,843
=================================================
Unrealized appreciation........................... $ 34,569,017 $ 32,187,537 $ 30,595,096
Unrealized depreciation........................... (710,271) -- (45,067)
-------------------------------------------------
Net unrealized appreciation (depreciation)........ $ 33,858,746 $ 32,187,537 $ 30,550,029
=================================================
Distributable earnings - undistributed tax exempt
income........................................... $ 249,104 $ 180,989 $ 443,435
=================================================
Annual Report | 167
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended February 28, 2005
and February 29, 2004, was as follows:
------------------------------------------------------------
FRANKLIN ALABAMA FRANKLIN FLORIDA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Distributions paid from -
tax-exempt income................... $ 10,944,967 $ 11,426,767 $77,218,665 $ 80,971,293
------------------------------------------------------------
------------------------------------------------------------
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Distributions paid from -
tax-exempt income................... $ 8,733,899 $ 8,975,484 $ 4,775,453 $ 5,158,609
------------------------------------------------------------
------------------------------------------------------------
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Distributions paid from -
tax-exempt income................... $ 8,844,258 $ 9,102,275 $ 16,260,788 $ 16,689,162
------------------------------------------------------------
------------------------------------------------------------
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Distributions paid from -
tax-exempt income................... $ 24,033,425 $ 23,775,101 $ 21,193,013 $ 21,491,336
------------------------------------------------------------
---------------------------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
---------------------------
2005 2004
---------------------------
Distributions paid from -
tax-exempt income................... $ 20,279,705 $ 20,631,223
---------------------------
168 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended February 28, 2005 were as follows:
------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------
Purchases ............. $ 21,508,617 $ 69,459,131 $ 45,243,002
Sales ................. $ 25,350,561 $ 146,992,080 $ 46,689,648
------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------
Purchases ............. $ 13,549,863 $ 19,525,162 $ 44,937,517
Sales ................. $ 19,257,189 $ 17,227,102 $ 49,838,054
------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------
Purchases ............. $ 108,678,566 $ 60,743,757 $ 30,193,823
Sales ................. $ 97,916,511 $ 39,234,382 $ 27,224,216
6. CREDIT RISK
Each of the Funds invests a large percentage of their total assets in
obligations of issuers within their respective states. Such concentration may
subject the Funds to risks associated with industrial or regional matters, and
economic, political or legal developments occurring within those states.
7. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
Annual Report | 169
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
170 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing, in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing", failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
On November 17, 2004, Franklin Resources, Inc. announced that Franklin Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
Annual Report | 171
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
The SEC's Second Order and the CAGO settlement agreement concerning marketing
support payments provide that the distribution of settlement monies are to be
made to the relevant funds, not to individual shareholders. The independent
distribution consultant has substantially completed preparation of these
distribution plans. The CAGO has approved the distribution plan pertaining to
the distribution of the monies owed under the CAGO settlement agreement and, in
accordance with the terms and conditions of that settlement, the monies were
disbursed to the participating funds. The Trust did not participate in the CAGO
settlement. The SEC has not yet approved the distribution plan pertaining to the
Second Order. When approved, disbursements of settlement monies under the SEC's
Second Order will be made promptly in accordance with the terms and conditions
of that order.
OTHER LEGAL PROCEEDINGS
The Company, and other funds, and certain current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York and Florida, alleging
violations of various federal securities laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
172 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the lawsuits identified above are without merit and intend to vigorously defend
against them. The Company cannot predict with certainty, however, the eventual
outcome of the remaining governmental investigations or private lawsuits, nor
whether they will have a material negative impact on the Company. Public trust
and confidence are critical to the Company's business and any material loss of
investor and/or client confidence could result in a significant decline in
assets under management by the Company, which would have an adverse effect on
the Company's future financial results. If the Company finds that it bears
responsibility for any unlawful or inappropriate conduct that caused losses to
the Trust, it is committed to making the Trust or its shareholders whole, as
appropriate. The Company is committed to taking all appropriate actions to
protect the interests of its funds' shareholders.
Annual Report | 173
Franklin Tax-Free Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN TAX-FREE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Franklin Alabama Tax-Free
Income Fund, Franklin Florida Tax-Free Income Fund, Franklin Georgia Tax-Free
Income Fund, Franklin Kentucky Tax-Free Income Fund, Franklin Louisiana Tax-Free
Income Fund, Franklin Maryland Tax-Free Income Fund, Franklin Missouri Tax-Free
Income Fund, Franklin North Carolina Tax-Free Income Fund and Franklin Virginia
Tax-Free Income Fund (separate portfolios of Franklin Tax-Free Trust, hereafter
referred to as the "Funds") at February 28, 2005, the results of each of their
operations for the year then ended, the changes in each of their net assets for
each of the two years in the period then ended and the financial highlights for
each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 11, 2005
174 | Annual Report
Franklin Tax-Free Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby
designate 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended February 28, 2005. A portion
of the Funds' exempt-interest dividends may be subject to the federal
alternative minimum tax. In January 2006, shareholders will be notified of
amounts for use in preparing their 2005 income tax returns.
Annual Report | 175
BOARD MEMBERS AND OFFICERS
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Trust, principal occupations during the
past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Each board member will serve until
that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK H. ABBOTT, III (83) Trustee Since 1984 115 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Abbott Corporation (an investment company).
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (72) Trustee Since 1984 143 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) Trustee Since 1989 144 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (53) Trustee Since 1998 98 Director, Amerada Hess Corporation
One Franklin Parkway (exploration and refining of oil and
San Mateo, CA 94403-1906 gas), H.J. Heinz Company (processed
foods and allied products), RTI
International Metals, Inc. (manufacture
and distribution of titanium),
Canadian National Railway (railroad),
and White Mountains Insurance
Group, Ltd. (holding company).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (75) Trustee Since 1984 117 Director, The California Center for
One Franklin Parkway Land Recycling (redevelopment).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
- ------------------------------------------------------------------------------------------------------------------------------------
176 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Trustee Since 1992 143 Director, Martek Biosciences
One Franklin Parkway Corporation, MedImmune, Inc.
San Mateo, CA 94403-1906 (biotechnology), and Overstock.com
(Internet services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding com-
pany) (1987-2004) and Spacehab, Inc.
(aerospace services) (1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004);
Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992);
and President, National Association of Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (72) Trustee and Since 1984 143 None
One Franklin Parkway Chairman of
San Mateo, CA 94403-1906 the Board
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of
some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (64) Trustee, Trustee since 127 None
One Franklin Parkway President and 1984, President
San Mateo, CA 94403-1906 Chief since 1993 and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice
President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 177
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (45) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) Vice President Since 1986 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services,
Inc.; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. and
of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (40) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (42) Treasurer Since July 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 34 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and
Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton
Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (44) Vice President Since 1995 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin
Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice
President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.;
Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief
Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in
Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
178 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, Executive
FL 33394-3091 Officer -
Finance and
Administration
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources,
Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer
and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc.,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant
and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue - AML
Rockefeller Center Compliance
New York, NY 10020-2302
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals,
Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable None
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director,
Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 179
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, Chief
FL 33394-3091 Accounting
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (43) Vice President Since 2000 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments trust
complex. These portfolios have a common investment adviser or affiliated
investment advisers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested
persons of the Fund under the federal securities laws due to their positions as
officers and directors and major shareholders of Franklin Resources, Inc., which
is the parent company of the Fund's adviser and distributor.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR
OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF
TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF
QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF
VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER
IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN
ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF
PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER
AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF
SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE
HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION
WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND
EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY
OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE
AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION
RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
180 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust'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 Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Annual Report | 181
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)
VALUE
Franklin Balance Sheet Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(4),(5)
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
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
Arizona
California(8)
Colorado
Connecticut
Florida(8)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
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. Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and
strategy remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/05 Not part of the annual report
[LOGO](R)
FRANKLIN(R) TEMPLETON(R) One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN TAX-FREE TRUST
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.
TF2 A2005 04/05
FEBRUARY 28, 2005
- --------------------------------------------------------------------------------
Franklin Arizona
Tax-Free Income Fund
Franklin Colorado
Tax-Free Income Fund
Franklin Connecticut
[GRAPHIC OMITTED] Tax-Free Income Fund
Franklin Double
Tax-Free Income Fund
Franklin Federal
Intermediate-Term
Tax-Free Income Fund
Franklin Federal
Limited-Term
Tax-Free Income Fund
Franklin High Yield
Tax-Free Income Fund
Franklin New Jersey
Tax-Free Income Fund
Franklin Oregon
Tax-Free Income Fund
Franklin Pennsylvania
Tax-Free Income Fund
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER | TAX-FREE INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
[GRAPHIC OMITTED] THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN TAX-FREE TRUST Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager structure combines the specialized
expertise of three world-class investment management groups-- Franklin,
Templeton and Mutual Series.
SPECIALIZED EXPERTISE
Each of our portfolio management groups operates autonomously, relying on its
own research and staying true to the unique investment disciplines that
underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income
investing and also brings expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in
1954, launched what has become the industry's oldest global fund. Today, with
research offices in over 25 countries, they offer investors the broadest global
reach in the industry.
MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of
value investing, searching aggressively for opportunity among undervalued
stocks, arbitrage situations and distressed companies.
TRUE DIVERSIFICATION
Because our management groups work independently and adhere to distinctly
different investment approaches, Franklin, Templeton and Mutual Series funds
typically have a low overlap of securities. That's why our funds can be used to
build truly diversified portfolios 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 account services that have helped us become one of the most trusted
names in financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ................. 1
SPECIAL FEATURE:
Understanding Interest Rates ....... 4
ANNUAL REPORT
Municipal Bond
Market Overview .................... 7
Investment Strategy and
Manager's Discussion ............... 9
Franklin Arizona
Tax-Free Income Fund ............... 10
Franklin Colorado
Tax-Free Income Fund ............... 19
Franklin Connecticut
Tax-Free Income Fund ............... 27
Franklin Double
Tax-Free Income Fund ............... 35
Franklin Federal
Intermediate-Term
Tax-Free Income Fund ............... 44
Franklin Federal Limited-Term
Tax-Free Income Fund ............... 52
Franklin High Yield
Tax-Free Income Fund ............... 58
Franklin New Jersey
Tax-Free Income Fund ............... 67
Franklin Oregon
Tax-Free Income Fund ............... 76
Franklin Pennsylvania
Tax-Free Income Fund ............... 84
Financial Highlights and
Statements of Investments .......... 93
Financial Statements ............... 195
Notes to
Financial Statements ............... 209
Report of Independent
Registered Public
Accounting Firm .................... 227
Tax Designation .................... 228
Board Members and Officers ......... 229
Shareholder Information ............ 234
- --------------------------------------------------------------------------------
Annual Report
Municipal Bond Market Overview
For the one-year period ended February 28, 2005, the fixed income markets had
positive performance despite record high oil prices, the presidential election,
concerns about the dollar, and mixed economic releases. Although experiencing
some volatility throughout the year, long-term interest rates ended the year
close to where they started. Municipal bonds outperformed U.S. Treasury bonds
with similar maturities. The Lehman Brothers Municipal Bond Index returned 2.96%
for the period, while the Lehman Brothers U.S. Treasury Index returned 1.31%.(1)
In contrast, short-term interest rates experienced greater changes over the
year. The Federal Reserve Board raised the federal funds target rate from 1.00%
to 2.50% in six successive moves from late June through February. The Treasury
yield curve, which shows rates for Treasuries with short to long maturities,
flattened somewhat as short-term rates went up and longer-maturity Treasuries
traded in a narrower range. Over the one-year period, the 10-year Treasury bond
yield increased 37 basis points, while the 30-year Treasury bond yield decreased
12 basis points. (One hundred basis points equal one percent.) According to
Municipal Market Data, 10- and 30-year municipal bond yields increased 34 and 7
basis points.(2) Consequently, long-maturity municipal bonds outperformed
intermediates.
Although short-term interest rates rose during the year, overall interest rates
remained relatively low. This environment led to another high-volume year for
new-issue municipal bonds. Just as homebuyers seek the lowest mortgage rates,
municipalities borrow money when interest rates are low. Thus, over the past two
(1) Source: Lehman Brothers Inc. The Lehman Brothers Municipal Bond Index is a
market value-weighted index engineered for the long-term tax-exempt bond market.
All bonds included have a minimum credit rating of at least Baa. They must have
an outstanding par value of at least $5 million and be issued as part of a
transaction of at least $50 million. The bonds must be dated after 12/31/90, and
must be at least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded from the
index. The index has four main bond sectors: general obligation, revenue,
insured and prerefunded. The Lehman Brothers U.S. Treasury Index includes public
obligations of the U.S. Treasury with a remaining maturity of one year or more.
All issues must have at least one year to final maturity regardless of call
features, have at least $250 million par amount outstanding and be rated
investment grade (Baa3 or better). They must also be dollar denominated,
nonconvertible and publicly issued. The index excludes Treasury bills (because
of the maturity constraint), flower bonds, targeted investor notes (TINs), and
state and local government series (SLGS) bonds, STRIPS and Treasury
Inflation-Protected Securities (TIPS).
(2) Source: Thomson Financial.
Annual Report | 7
years, municipalities have issued more bonds to lock in lower rates.
Municipalities issued more than $358 billion in new debt during 2004.(3)
Although this was a decrease of more than 6% from 2003 (a record year), 2004 was
the third successive year of more than $300 billion in new issuance.(3) Demand
for municipal bonds remained strong as investors sought to reinvest proceeds
from a combination of coupon payments, maturities and bond calls. Healthy demand
came from a wide range of traditional buyers including mutual funds, individuals
and property and casualty companies, as well as crossover buyers. Crossover
buyers, such as hedge funds, typically invest in taxable securities, but they
enter the tax-exempt market when municipal valuations are attractive.
(3) Source: The Bond Buyer.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2005. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
STATE, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE.
8 | Annual Report
Investment Strategy and Manager's Discussion
We use a consistent, disciplined strategy to maximize income for our
shareholders by seeking to maintain our 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, each Fund's 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.
The mixture of our value-oriented philosophy of investing primarily for income
and a relatively steep yield curve favored the use of longer-term bonds.
Consequently, we sought to remain fully invested in bonds that ranged from 15 to
30 years in maturity with good call features for the long-term funds, 10 to 13
years for the intermediate-term fund, and 5 years or less for the limited-term
fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
We invite you to read your Fund report for more detailed performance and
portfolio information. Thank you for your participation in Franklin Tax-Free
Trust. We look forward to serving your future investment needs.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
Annual Report | 9
Franklin Arizona Tax-free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Arizona Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Arizona state
personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Arizona Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 55.3%
AA ............................ 7.4%
A ............................. 18.9%
BBB ........................... 12.5%
Below Investment Grade ........ 2.0%
Not Rated by S&P .............. 3.9%
* 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 2.4% --
AA or Aa 0.3% --
A 0.5% --
BBB or Baa 0.5% 0.2%
- --------------------------------------------------
Total 3.7% 0.2%
- --------------------------------------------------------------------------------
This annual report for Franklin Arizona Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, began and ended
the 12-month reporting period at $11.21. The Fund's Class A shares
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 96.
10 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Arizona Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 4.23 cents 3.69 cents 3.72 cents
- --------------------------------------------------------------------------------
April 4.23 cents 3.69 cents 3.72 cents
- --------------------------------------------------------------------------------
May 4.23 cents 3.69 cents 3.72 cents
- --------------------------------------------------------------------------------
June 4.13 cents 3.63 cents 3.64 cents
- --------------------------------------------------------------------------------
July 4.13 cents 3.63 cents 3.64 cents
- --------------------------------------------------------------------------------
August 4.13 cents 3.63 cents 3.64 cents
- --------------------------------------------------------------------------------
September 4.13 cents 3.62 cents 3.62 cents
- --------------------------------------------------------------------------------
October 4.13 cents 3.62 cents 3.62 cents
- --------------------------------------------------------------------------------
November 4.08 cents 3.57 cents 3.57 cents
- --------------------------------------------------------------------------------
December 4.01 cents 3.50 cents 3.51 cents
- --------------------------------------------------------------------------------
January 4.01 cents 3.50 cents 3.51 cents
- --------------------------------------------------------------------------------
February 4.01 cents 3.50 cents 3.51 cents
- --------------------------------------------------------------------------------
TOTAL 49.45 CENTS 43.27 CENTS 43.42 CENTS
- --------------------------------------------------------------------------------
paid dividends totaling 49.45 cents per share for the Fund's fiscal year.(2) The
Performance Summary beginning on page 13 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.11% based on an
annualization of the current 4.01 cent per share dividend and the maximum
offering price of $11.71 on February 28, 2005. An investor in the 2005 maximum
combined federal and Arizona state personal income tax bracket of 38.28% would
need to earn a distribution rate of 6.66% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class B and C shares'
performance, please see the Performance Summary.
STATE UPDATE
Arizona's population grew rapidly, supported by a diverse and expanding economy,
which improved income levels for many state residents. The state's economy is a
mix of services, trade, finance and manufacturing. Strength in the high
technology sector and relatively cheap land and housing costs -- particularly in
relation to Southern California -- drove growth. Arizona's unemployment rate was
just 4.4% in February 2005, well below the 5.4% national average.(3)
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
(3) Source: Bureau of Labor Statistics.
Annual Report | 11
PORTFOLIO BREAKDOWN
Franklin Arizona Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
Hospital & Health Care 22.2%
- --------------------------------------------------
Utilities 16.4%
- --------------------------------------------------
Prerefunded 13.9%
- --------------------------------------------------
Higher Education 10.1%
- --------------------------------------------------
General Obligation 9.1%
- --------------------------------------------------
Transportation 7.9%
- --------------------------------------------------
Subject to Government Appropriations 7.1%
- --------------------------------------------------
Tax-Supported 4.6%
- --------------------------------------------------
Other Revenue 3.4%
- --------------------------------------------------
Housing 3.0%
- --------------------------------------------------
Corporate-Backed 2.3%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
Arizona's finances, which deteriorated in recent years, recovered during the
year under review. Sharp revenue declines and additional spending requirements
caused state legislators to predict an approximately $967 million budget
shortfall for fiscal year 2004.(4) However, the state experienced
better-than-expected revenue collections fueled by individual and corporate
income tax increases. Further solutions to the budget gap included revenue
enhancements (mostly nonrecurring), federal fiscal relief funding and an
improving economy. Consequently, operations for fiscal year 2004 were projected
to result in a $360 million ending balance.(4) Recurring general fund revenues
and the budget stabilization fund were also expected to increase for fiscal year
2005.
Based on Arizona's improving economy and financial results, independent credit
rating agency Standard & Poor's (S&P) maintained an AA issuer credit rating for
the state.(5) Arizona's low total debt burden, at $323 per capita, also
supported the state's general creditworthiness.(4) Additionally, S&P holds a
stable outlook for Arizona as they expect the state will continue to rebuild its
financial position.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
Thank you for your continued participation in Franklin Arizona Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(4) Source: Standard & Poor's, "Summary: Arizona; Appropriation,
Appropriations," RATINGSDIRECT, 2/8/05.
(5) This does not indicate S&P's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
12 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN ARIZONA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $11.21 $11.21
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4945
- --------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $11.27 $11.26
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4327
- --------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $11.32 $11.31
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4342
- --------------------------------------------------------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.61% +39.21% +74.76%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +0.14% +5.91% +5.29%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.11% +5.32% +5.12%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.11%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.66%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.42%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.54%
- -----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.09% +35.86% +37.50%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +0.09% +6.01% +6.32%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.13% +5.42% +6.13%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.72%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.03%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.01%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.88%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.09% +35.59% +64.23%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +3.09% +6.28% +5.17%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +2.77% +5.69% +5.08%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.70%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 5.99%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.02%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.89%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
14 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS A 2/28/05
- ---------------------------------------------
1-Year +0.14%
- ---------------------------------------------
5-Year +5.91%
- ---------------------------------------------
10-Year +5.29%
- ---------------------------------------------
CLASS A (3/1/95 - 2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Arizona Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,578 $10,000 $10,000
3/31/1995 $ 9,680 $10,115 $10,033
4/30/1995 $ 9,707 $10,127 $10,066
5/31/1995 $ 9,947 $10,450 $10,086
6/30/1995 $ 9,883 $10,359 $10,106
7/31/1995 $ 9,949 $10,457 $10,106
8/31/1995 $10,048 $10,589 $10,133
9/30/1995 $10,095 $10,656 $10,152
10/31/1995 $10,235 $10,811 $10,186
11/30/1995 $10,389 $10,991 $10,179
12/31/1995 $10,482 $11,096 $10,172
1/31/1996 $10,533 $11,180 $10,232
2/29/1996 $10,464 $11,105 $10,265
3/31/1996 $10,346 $10,963 $10,318
4/30/1996 $10,331 $10,932 $10,358
5/31/1996 $10,348 $10,928 $10,378
6/30/1996 $10,470 $11,047 $10,384
7/31/1996 $10,541 $11,147 $10,404
8/31/1996 $10,549 $11,144 $10,424
9/30/1996 $10,696 $11,300 $10,457
10/31/1996 $10,793 $11,428 $10,490
11/30/1996 $10,948 $11,637 $10,510
12/31/1996 $10,924 $11,588 $10,510
1/31/1997 $10,944 $11,610 $10,543
2/28/1997 $11,033 $11,716 $10,577
3/31/1997 $10,909 $11,560 $10,603
4/30/1997 $10,997 $11,657 $10,616
5/31/1997 $11,131 $11,832 $10,610
6/30/1997 $11,234 $11,958 $10,623
7/31/1997 $11,494 $12,289 $10,636
8/31/1997 $11,413 $12,174 $10,656
9/30/1997 $11,537 $12,319 $10,683
10/31/1997 $11,604 $12,398 $10,709
11/30/1997 $11,673 $12,471 $10,702
12/31/1997 $11,825 $12,653 $10,689
1/31/1998 $11,921 $12,783 $10,709
2/28/1998 $11,933 $12,787 $10,729
3/31/1998 $11,936 $12,799 $10,749
4/30/1998 $11,912 $12,741 $10,769
5/31/1998 $12,058 $12,942 $10,789
6/30/1998 $12,093 $12,994 $10,802
7/31/1998 $12,130 $13,026 $10,815
8/31/1998 $12,279 $13,227 $10,828
9/30/1998 $12,424 $13,392 $10,842
10/31/1998 $12,414 $13,392 $10,868
11/30/1998 $12,456 $13,439 $10,868
12/31/1998 $12,469 $13,473 $10,861
1/31/1999 $12,599 $13,633 $10,888
2/28/1999 $12,551 $13,573 $10,901
3/31/1999 $12,601 $13,592 $10,934
4/30/1999 $12,620 $13,626 $11,014
5/31/1999 $12,567 $13,547 $11,014
6/30/1999 $12,382 $13,352 $11,014
7/31/1999 $12,411 $13,401 $11,047
8/31/1999 $12,254 $13,293 $11,074
9/30/1999 $12,238 $13,299 $11,127
10/31/1999 $12,014 $13,155 $11,146
11/30/1999 $12,108 $13,295 $11,153
12/31/1999 $11,991 $13,196 $11,153
1/31/2000 $11,895 $13,138 $11,186
2/29/2000 $12,029 $13,291 $11,252
3/31/2000 $12,317 $13,581 $11,345
4/30/2000 $12,243 $13,501 $11,352
5/31/2000 $12,177 $13,431 $11,365
6/30/2000 $12,469 $13,787 $11,425
7/31/2000 $12,645 $13,979 $11,451
8/31/2000 $12,846 $14,194 $11,451
9/30/2000 $12,779 $14,120 $11,511
10/31/2000 $12,913 $14,274 $11,531
11/30/2000 $12,993 $14,382 $11,537
12/31/2000 $13,228 $14,738 $11,531
1/31/2001 $13,289 $14,884 $11,604
2/28/2001 $13,330 $14,931 $11,650
3/31/2001 $13,428 $15,065 $11,677
4/30/2001 $13,303 $14,901 $11,723
5/31/2001 $13,412 $15,062 $11,776
6/30/2001 $13,541 $15,163 $11,796
7/31/2001 $13,782 $15,387 $11,763
8/31/2001 $13,954 $15,641 $11,763
9/30/2001 $13,879 $15,588 $11,816
10/31/2001 $13,942 $15,774 $11,776
11/30/2001 $13,743 $15,641 $11,756
12/31/2001 $13,625 $15,493 $11,710
1/31/2002 $13,775 $15,762 $11,736
2/28/2002 $13,946 $15,952 $11,783
3/31/2002 $13,692 $15,639 $11,849
4/30/2002 $13,901 $15,945 $11,915
5/31/2002 $13,948 $16,041 $11,915
6/30/2002 $14,067 $16,211 $11,922
7/31/2002 $14,251 $16,420 $11,935
8/31/2002 $14,414 $16,617 $11,975
9/30/2002 $14,754 $16,981 $11,995
10/31/2002 $14,468 $16,699 $12,015
11/30/2002 $14,388 $16,630 $12,015
12/31/2002 $14,667 $16,981 $11,988
1/31/2003 $14,619 $16,938 $12,041
2/28/2003 $14,822 $17,175 $12,134
3/31/2003 $14,846 $17,185 $12,207
4/30/2003 $14,947 $17,299 $12,180
5/31/2003 $15,305 $17,704 $12,160
6/30/2003 $15,298 $17,628 $12,174
7/31/2003 $14,764 $17,011 $12,187
8/31/2003 $14,875 $17,138 $12,233
9/30/2003 $15,316 $17,642 $12,273
10/31/2003 $15,267 $17,553 $12,260
11/30/2003 $15,448 $17,736 $12,227
12/31/2003 $15,600 $17,883 $12,213
1/31/2004 $15,774 $17,986 $12,273
2/29/2004 $16,010 $18,256 $12,339
3/31/2004 $15,991 $18,193 $12,419
4/30/2004 $15,562 $17,762 $12,459
5/31/2004 $15,461 $17,697 $12,531
6/30/2004 $15,540 $17,762 $12,571
7/31/2004 $15,831 $17,996 $12,551
8/31/2004 $16,157 $18,356 $12,558
9/30/2004 $16,275 $18,454 $12,584
10/31/2004 $16,433 $18,612 $12,651
11/30/2004 $16,305 $18,459 $12,657
12/31/2004 $16,541 $18,684 $12,611
1/31/2005 $16,761 $18,859 $12,638
2/28/2005 $16,738 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS B 2/28/05
- ---------------------------------------------
1-Year +0.09%
- ---------------------------------------------
5-Year +6.01%
- ---------------------------------------------
Since Inception (2/1/00) +6.32%
- ---------------------------------------------
CLASS B (2/1/00 - 2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Arizona Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,121 $10,116 $10,059
3/31/2000 $10,359 $10,337 $10,142
4/30/2000 $10,302 $10,276 $10,148
5/31/2000 $10,240 $10,223 $10,160
6/30/2000 $10,481 $10,494 $10,213
7/31/2000 $10,633 $10,640 $10,237
8/31/2000 $10,795 $10,804 $10,237
9/30/2000 $10,735 $10,747 $10,290
10/31/2000 $10,841 $10,865 $10,308
11/30/2000 $10,914 $10,947 $10,314
12/31/2000 $11,096 $11,217 $10,308
1/31/2001 $11,142 $11,328 $10,373
2/28/2001 $11,171 $11,364 $10,415
3/31/2001 $11,257 $11,466 $10,438
4/30/2001 $11,136 $11,342 $10,480
5/31/2001 $11,232 $11,464 $10,527
6/30/2001 $11,335 $11,541 $10,545
7/31/2001 $11,530 $11,712 $10,515
8/31/2001 $11,669 $11,905 $10,515
9/30/2001 $11,601 $11,865 $10,563
10/31/2001 $11,648 $12,006 $10,527
11/30/2001 $11,489 $11,905 $10,509
12/31/2001 $11,374 $11,792 $10,468
1/31/2002 $11,492 $11,997 $10,492
2/28/2002 $11,639 $12,141 $10,533
3/31/2002 $11,412 $11,903 $10,592
4/30/2002 $11,592 $12,136 $10,652
5/31/2002 $11,615 $12,210 $10,652
6/30/2002 $11,719 $12,339 $10,658
7/31/2002 $11,867 $12,498 $10,669
8/31/2002 $11,986 $12,648 $10,705
9/30/2002 $12,272 $12,925 $10,723
10/31/2002 $12,029 $12,711 $10,741
11/30/2002 $11,958 $12,658 $10,741
12/31/2002 $12,183 $12,925 $10,717
1/31/2003 $12,137 $12,892 $10,764
2/28/2003 $12,310 $13,072 $10,847
3/31/2003 $12,313 $13,080 $10,912
4/30/2003 $12,390 $13,167 $10,889
5/31/2003 $12,681 $13,475 $10,871
6/30/2003 $12,669 $13,418 $10,883
7/31/2003 $12,223 $12,948 $10,895
8/31/2003 $12,310 $13,045 $10,936
9/30/2003 $12,668 $13,428 $10,972
10/31/2003 $12,622 $13,361 $10,960
11/30/2003 $12,765 $13,500 $10,930
12/31/2003 $12,883 $13,612 $10,918
1/31/2004 $13,020 $13,690 $10,972
2/29/2004 $13,210 $13,896 $11,031
3/31/2004 $13,188 $13,847 $11,102
4/30/2004 $12,830 $13,519 $11,137
5/31/2004 $12,753 $13,470 $11,203
6/30/2004 $12,812 $13,519 $11,238
7/31/2004 $13,044 $13,697 $11,220
8/31/2004 $13,305 $13,972 $11,226
9/30/2004 $13,395 $14,046 $11,250
10/31/2004 $13,518 $14,167 $11,309
11/30/2004 $13,408 $14,050 $11,315
12/31/2004 $13,595 $14,221 $11,274
1/31/2005 $13,769 $14,354 $11,297
2/28/2005 $13,650 $14,307 $11,363
Annual Report | 15
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 2/28/05
- ---------------------------------------------
1-Year +3.09%
- ---------------------------------------------
5-Year +6.28%
- ---------------------------------------------
Since Inception (5/1/95) +5.17%
- ---------------------------------------------
CLASS C (5/1/95 - 2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Arizona Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,268 $10,319 $10,020
6/30/1995 $10,195 $10,229 $10,039
7/31/1995 $10,257 $10,326 $10,039
8/31/1995 $10,364 $10,457 $10,066
9/30/1995 $10,416 $10,523 $10,086
10/31/1995 $10,545 $10,676 $10,118
11/30/1995 $10,707 $10,853 $10,112
12/31/1995 $10,788 $10,957 $10,105
1/31/1996 $10,844 $11,040 $10,165
2/29/1996 $10,759 $10,966 $10,197
3/31/1996 $10,643 $10,825 $10,250
4/30/1996 $10,623 $10,795 $10,290
5/31/1996 $10,633 $10,791 $10,309
6/30/1996 $10,744 $10,908 $10,316
7/31/1996 $10,820 $11,007 $10,336
8/31/1996 $10,822 $11,004 $10,355
9/30/1996 $10,966 $11,158 $10,388
10/31/1996 $11,069 $11,285 $10,421
11/30/1996 $11,221 $11,491 $10,441
12/31/1996 $11,191 $11,443 $10,441
1/31/1997 $11,197 $11,464 $10,474
2/28/1997 $11,286 $11,569 $10,507
3/31/1997 $11,165 $11,415 $10,533
4/30/1997 $11,249 $11,511 $10,546
5/31/1997 $11,379 $11,684 $10,540
6/30/1997 $11,469 $11,808 $10,553
7/31/1997 $11,729 $12,136 $10,566
8/31/1997 $11,652 $12,022 $10,586
9/30/1997 $11,771 $12,164 $10,612
10/31/1997 $11,832 $12,243 $10,639
11/30/1997 $11,897 $12,315 $10,632
12/31/1997 $12,045 $12,494 $10,619
1/31/1998 $12,147 $12,623 $10,639
2/28/1998 $12,153 $12,627 $10,658
3/31/1998 $12,151 $12,638 $10,678
4/30/1998 $12,111 $12,581 $10,698
5/31/1998 $12,253 $12,780 $10,718
6/30/1998 $12,293 $12,831 $10,731
7/31/1998 $12,313 $12,863 $10,744
8/31/1998 $12,469 $13,062 $10,757
9/30/1998 $12,621 $13,224 $10,770
10/31/1998 $12,593 $13,224 $10,797
11/30/1998 $12,629 $13,270 $10,797
12/31/1998 $12,635 $13,304 $10,790
1/31/1999 $12,759 $13,462 $10,816
2/28/1999 $12,705 $13,403 $10,829
3/31/1999 $12,760 $13,422 $10,862
4/30/1999 $12,773 $13,455 $10,941
5/31/1999 $12,704 $13,377 $10,941
6/30/1999 $12,513 $13,185 $10,941
7/31/1999 $12,536 $13,233 $10,974
8/31/1999 $12,373 $13,127 $11,001
9/30/1999 $12,352 $13,132 $11,053
10/31/1999 $12,122 $12,990 $11,073
11/30/1999 $12,209 $13,128 $11,080
12/31/1999 $12,086 $13,030 $11,080
1/31/2000 $11,984 $12,974 $11,113
2/29/2000 $12,114 $13,124 $11,178
3/31/2000 $12,396 $13,411 $11,271
4/30/2000 $12,317 $13,332 $11,277
5/31/2000 $12,244 $13,263 $11,290
6/30/2000 $12,530 $13,614 $11,350
7/31/2000 $12,700 $13,803 $11,376
8/31/2000 $12,894 $14,016 $11,376
9/30/2000 $12,833 $13,943 $11,435
10/31/2000 $12,949 $14,095 $11,455
11/30/2000 $13,036 $14,202 $11,461
12/31/2000 $13,265 $14,553 $11,455
1/31/2001 $13,307 $14,697 $11,527
2/28/2001 $13,342 $14,744 $11,573
3/31/2001 $13,445 $14,876 $11,600
4/30/2001 $13,302 $14,715 $11,646
5/31/2001 $13,417 $14,873 $11,698
6/30/2001 $13,539 $14,973 $11,718
7/31/2001 $13,772 $15,194 $11,685
8/31/2001 $13,937 $15,445 $11,685
9/30/2001 $13,857 $15,393 $11,738
10/31/2001 $13,914 $15,576 $11,698
11/30/2001 $13,711 $15,445 $11,679
12/31/2001 $13,588 $15,299 $11,633
1/31/2002 $13,729 $15,564 $11,659
2/28/2002 $13,905 $15,752 $11,705
3/31/2002 $13,635 $15,443 $11,771
4/30/2002 $13,848 $15,745 $11,837
5/31/2002 $13,875 $15,841 $11,837
6/30/2002 $14,000 $16,008 $11,843
7/31/2002 $14,175 $16,214 $11,856
8/31/2002 $14,330 $16,409 $11,896
9/30/2002 $14,658 $16,768 $11,916
10/31/2002 $14,369 $16,490 $11,935
11/30/2002 $14,284 $16,422 $11,935
12/31/2002 $14,552 $16,768 $11,909
1/31/2003 $14,498 $16,726 $11,962
2/28/2003 $14,691 $16,960 $12,054
3/31/2003 $14,708 $16,970 $12,126
4/30/2003 $14,801 $17,082 $12,100
5/31/2003 $15,147 $17,482 $12,080
6/30/2003 $15,132 $17,407 $12,093
7/31/2003 $14,599 $16,798 $12,107
8/31/2003 $14,702 $16,924 $12,153
9/30/2003 $15,126 $17,421 $12,192
10/31/2003 $15,070 $17,333 $12,179
11/30/2003 $15,241 $17,514 $12,146
12/31/2003 $15,383 $17,659 $12,133
1/31/2004 $15,558 $17,760 $12,192
2/29/2004 $15,783 $18,028 $12,258
3/31/2004 $15,757 $17,965 $12,337
4/30/2004 $15,317 $17,539 $12,377
5/31/2004 $15,225 $17,476 $12,449
6/30/2004 $15,295 $17,539 $12,488
7/31/2004 $15,572 $17,770 $12,469
8/31/2004 $15,882 $18,126 $12,475
9/30/2004 $15,990 $18,222 $12,502
10/31/2004 $16,137 $18,379 $12,567
11/30/2004 $16,005 $18,228 $12,574
12/31/2004 $16,229 $18,450 $12,528
1/31/2005 $16,436 $18,623 $12,554
2/28/2005 $16,423 $18,561 $12,627
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. 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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B and
C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Arizona state personal
income tax bracket of 38.28%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
16 | Annual Report
Your Fund's Expenses
FRANKLIN ARIZONA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 17
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,036.60 $3.23
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
- ------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.60 $6.00
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
- ------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,034.40 $6.00
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
- ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.64%;
B: 1.19%; and C: 1.19%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
18 | Annual Report
Franklin Colorado Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Colorado Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Colorado state
personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Colorado Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 61.9%
AA ............................ 7.2%
A ............................. 11.1%
BBB ........................... 7.4%
Not Rated by S&P .............. 12.4%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's and
Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa 8.6% -- --
AA or Aa 0.5% -- 0.2%
A 0.5% -- --
BBB or Baa 1.4% 1.2% --
- ---------------------------------------------------
Total 11.0% 1.2% 0.2%
- --------------------------------------------------------------------------------
This annual report for Franklin Colorado Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.19 on
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 104.
ANNUAL REPORT | 19
DIVIDEND DISTRIBUTIONS(2)
Franklin Colorado Tax-Free Income Fund
3/1/04-2/28/05
- -------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------
MONTH CLASS A CLASS C
- -------------------------------------------------------------------------------
March 4.52 cents 3.97 cents
- -------------------------------------------------------------------------------
April 4.52 cents 3.97 cents
- -------------------------------------------------------------------------------
May 4.52 cents 3.97 cents
- -------------------------------------------------------------------------------
June 4.52 cents 3.97 cents
- -------------------------------------------------------------------------------
July 4.52 cents 3.97 cents
- -------------------------------------------------------------------------------
August 4.52 cents 3.97 cents
- -------------------------------------------------------------------------------
Septembe 4.52 cents 3.98 cents
- -------------------------------------------------------------------------------
October 4.52 cents 3.98 cents
- -------------------------------------------------------------------------------
November 4.52 cents 3.98 cents
- -------------------------------------------------------------------------------
December 4.52 cents 3.96 cents
- -------------------------------------------------------------------------------
January 4.52 cents 3.96 cents
- -------------------------------------------------------------------------------
February 4.52 cents 3.96 cents
- -------------------------------------------------------------------------------
TOTAL 54.24 CENTS 47.64 CENTS
- -------------------------------------------------------------------------------
February 29, 2004, to $12.04 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 54.24 cents per share for the Fund's fiscal year.(2) The
Performance Summary beginning on page 22 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.27% based on an
annualization of the current 4.47 cent per share dividend and the maximum
offering price of $12.57 on February 28, 2005. An investor in the 2005 maximum
combined federal and Colorado state personal income tax bracket of 38.01% would
need to earn a distribution rate of 6.89% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class C shares'
performance, please see the Performance Summary.
STATE UPDATE
Colorado's growing economy of 4.5 million residents, coupled with above-average
income levels, put median household effective buying income at 114% of the
national average.(3) The state's employment base is well diversified with major
sectors including government, retail trade, manufacturing, construction,
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
(3) Source: Standard & Poor's, "Research: Colorado; Appropriation,
Appropriations," RATINGSDIRECT, 2/7/05.
20 | Annual Report
finance, telecommunications, high technology, professional and business
services, accommodation and food services, and health care and social
assistance. Colorado's unemployment rate, which rose during the last recession
due to tourism declines and weakness in high technology and telecommunications,
declined to 4.9% in February 2005, well below the 5.4% national average.(4)
Earlier tax cuts and significant prior downturns in sales, income and corporate
income taxes weakened state revenues in fiscal years 2002 and 2003. However,
Colorado ended fiscal year 2004 with a general fund reserve of $346.3 million,
resulting from a general fund revenue increase, a more conservative economic
forecast, numerous midyear budget adjustments and significant cutbacks on
capital fund outlays.(3) The state also forecast adequate fund balances for
fiscal year 2005, based on a budget that drastically reduces reliance on onetime
measures.
Based on Colorado's improving economy and financial results, independent credit
rating agency Standard & Poor's (S&P) maintained an AA- rating for the state's
outstanding lease obligations.(5) Colorado's very low state tax-supported debt
burden, at $13 per capita, also supported the state's general creditworthiness.
(3) Additionally, S&P holds a stable outlook for Colorado as they expect the
state will continue to rebuild its financial position.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Colorado Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(4) Source: Bureau of Labor Statistics.
(5) This does not indicate S&P's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
PORTFOLIO BREAKDOWN
Franklin Colorado Tax-Free Income Fund
2/28/05
- -------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- -------------------------------------------------
Transportation 16.6%
- -------------------------------------------------
Utilities 14.6%
- -------------------------------------------------
Hospital & Health Care 14.6%
- -------------------------------------------------
General Obligation 14.5%
- -------------------------------------------------
Prerefunded 11.0%
- -------------------------------------------------
Higher Education 6.9%
- -------------------------------------------------
Tax-Supported 6.6%
- -------------------------------------------------
Housing 6.5%
- -------------------------------------------------
Subject to Government Appropriations 5.1%
- -------------------------------------------------
Corporate-Backed 2.4%
- -------------------------------------------------
Other Revenue 1.2%
- -------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 21
Performance Summary as of 2/28/05
FRANKLIN COLORADO TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.15 $12.04 $12.19
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.5424
- --------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.14 $12.13 $12.27
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4764
- --------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ---------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.39% +40.49% +78.33%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.00% +6.12% +5.49%
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.06% +5.51% +5.37%
- ---------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.27%
- ---------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.89%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.39%
- ---------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.47%
- ---------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.88% +36.77% +67.73%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.89% +6.46% +5.40%
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.78% +5.85% +5.31%
- ---------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.87%
- ---------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.24%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.99%
- ---------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.82%
- ---------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
22 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS A 2/28/05
- ---------------------------------------------
1-Year -1.00%
- ---------------------------------------------
5-Year +6.12%
- ---------------------------------------------
10-Year +5.49%
- ---------------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Colorado Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,571 $10,000 $10,000
3/31/1995 $ 9,655 $10,115 $10,033
4/30/1995 $ 9,681 $10,127 $10,066
5/31/1995 $ 9,934 $10,450 $10,086
6/30/1995 $ 9,871 $10,359 $10,106
7/31/1995 $ 9,928 $10,457 $10,106
8/31/1995 $10,069 $10,589 $10,133
9/30/1995 $10,115 $10,656 $10,152
10/31/1995 $10,253 $10,811 $10,186
11/30/1995 $10,412 $10,991 $10,179
12/31/1995 $10,510 $11,096 $10,172
1/31/1996 $10,561 $11,180 $10,232
2/29/1996 $10,539 $11,105 $10,265
3/31/1996 $10,444 $10,963 $10,318
4/30/1996 $10,440 $10,932 $10,358
5/31/1996 $10,447 $10,928 $10,378
6/30/1996 $10,539 $11,047 $10,384
7/31/1996 $10,618 $11,147 $10,404
8/31/1996 $10,622 $11,144 $10,424
9/30/1996 $10,766 $11,300 $10,457
10/31/1996 $10,871 $11,428 $10,490
11/30/1996 $11,032 $11,637 $10,510
12/31/1996 $11,012 $11,588 $10,510
1/31/1997 $11,025 $11,610 $10,543
2/28/1997 $11,113 $11,716 $10,577
3/31/1997 $10,988 $11,560 $10,603
4/30/1997 $11,075 $11,657 $10,616
5/31/1997 $11,206 $11,832 $10,610
6/30/1997 $11,326 $11,958 $10,623
7/31/1997 $11,607 $12,289 $10,636
8/31/1997 $11,503 $12,174 $10,656
9/30/1997 $11,660 $12,319 $10,683
10/31/1997 $11,734 $12,398 $10,709
11/30/1997 $11,810 $12,471 $10,702
12/31/1997 $11,985 $12,653 $10,689
1/31/1998 $12,107 $12,783 $10,709
2/28/1998 $12,099 $12,787 $10,729
3/31/1998 $12,124 $12,799 $10,749
4/30/1998 $12,083 $12,741 $10,769
5/31/1998 $12,264 $12,942 $10,789
6/30/1998 $12,312 $12,994 $10,802
7/31/1998 $12,338 $13,026 $10,815
8/31/1998 $12,492 $13,227 $10,828
9/30/1998 $12,633 $13,392 $10,842
10/31/1998 $12,605 $13,392 $10,868
11/30/1998 $12,658 $13,439 $10,868
12/31/1998 $12,674 $13,473 $10,861
1/31/1999 $12,789 $13,633 $10,888
2/28/1999 $12,735 $13,573 $10,901
3/31/1999 $12,785 $13,592 $10,934
4/30/1999 $12,794 $13,626 $11,014
5/31/1999 $12,713 $13,547 $11,014
6/30/1999 $12,535 $13,352 $11,014
7/31/1999 $12,543 $13,401 $11,047
8/31/1999 $12,375 $13,293 $11,074
9/30/1999 $12,351 $13,299 $11,127
10/31/1999 $12,129 $13,155 $11,146
11/30/1999 $12,254 $13,295 $11,153
12/31/1999 $12,110 $13,196 $11,153
1/31/2000 $11,988 $13,138 $11,186
2/29/2000 $12,151 $13,291 $11,252
3/31/2000 $12,473 $13,581 $11,345
4/30/2000 $12,393 $13,501 $11,352
5/31/2000 $12,309 $13,431 $11,365
6/30/2000 $12,635 $13,787 $11,425
7/31/2000 $12,793 $13,979 $11,451
8/31/2000 $12,998 $14,194 $11,451
9/30/2000 $12,902 $14,120 $11,511
10/31/2000 $13,055 $14,274 $11,531
11/30/2000 $13,157 $14,382 $11,537
12/31/2000 $13,511 $14,738 $11,531
1/31/2001 $13,618 $14,884 $11,604
2/28/2001 $13,671 $14,931 $11,650
3/31/2001 $13,779 $15,065 $11,677
4/30/2001 $13,686 $14,901 $11,723
5/31/2001 $13,805 $15,062 $11,776
6/30/2001 $13,967 $15,163 $11,796
7/31/2001 $14,199 $15,387 $11,763
8/31/2001 $14,439 $15,641 $11,763
9/30/2001 $14,322 $15,588 $11,816
10/31/2001 $14,484 $15,774 $11,776
11/30/2001 $14,371 $15,641 $11,756
12/31/2001 $14,200 $15,493 $11,710
1/31/2002 $14,431 $15,762 $11,736
2/28/2002 $14,560 $15,952 $11,783
3/31/2002 $14,359 $15,639 $11,849
4/30/2002 $14,550 $15,945 $11,915
5/31/2002 $14,635 $16,041 $11,915
6/30/2002 $14,764 $16,211 $11,922
7/31/2002 $14,944 $16,420 $11,935
8/31/2002 $15,077 $16,617 $11,975
9/30/2002 $15,430 $16,981 $11,995
10/31/2002 $15,098 $16,699 $12,015
11/30/2002 $15,026 $16,630 $12,015
12/31/2002 $15,348 $16,981 $11,988
1/31/2003 $15,305 $16,938 $12,041
2/28/2003 $15,525 $17,175 $12,134
3/31/2003 $15,497 $17,185 $12,207
4/30/2003 $15,607 $17,299 $12,180
5/31/2003 $15,963 $17,704 $12,160
6/30/2003 $15,904 $17,628 $12,174
7/31/2003 $15,344 $17,011 $12,187
8/31/2003 $15,478 $17,138 $12,233
9/30/2003 $15,912 $17,642 $12,273
10/31/2003 $15,814 $17,553 $12,260
11/30/2003 $15,986 $17,736 $12,227
12/31/2003 $16,148 $17,883 $12,213
1/31/2004 $16,275 $17,986 $12,273
2/29/2004 $16,518 $18,256 $12,339
3/31/2004 $16,476 $18,193 $12,419
4/30/2004 $16,060 $17,762 $12,459
5/31/2004 $15,995 $17,697 $12,531
6/30/2004 $16,035 $17,762 $12,571
7/31/2004 $16,274 $17,996 $12,551
8/31/2004 $16,562 $18,356 $12,558
9/30/2004 $16,667 $18,454 $12,584
10/31/2004 $16,822 $18,612 $12,651
11/30/2004 $16,679 $18,459 $12,657
12/31/2004 $16,925 $18,684 $12,611
1/31/2005 $17,142 $18,859 $12,638
2/28/2005 $17,068 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 2/28/05
- ---------------------------------------------
1-Year +1.89%
- ---------------------------------------------
5-Year +6.46%
- ---------------------------------------------
Since Inception (5/1/95) +5.40%
- ---------------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Colorado Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,264 $10,319 $10,020
6/30/1995 $10,202 $10,229 $10,039
7/31/1995 $10,255 $10,326 $10,039
8/31/1995 $10,396 $10,457 $10,066
9/30/1995 $10,439 $10,523 $10,086
10/31/1995 $10,584 $10,676 $10,118
11/30/1995 $10,744 $10,853 $10,112
12/31/1995 $10,839 $10,957 $10,105
1/31/1996 $10,886 $11,040 $10,165
2/29/1996 $10,857 $10,966 $10,197
3/31/1996 $10,754 $10,825 $10,250
4/30/1996 $10,745 $10,795 $10,290
5/31/1996 $10,747 $10,791 $10,309
6/30/1996 $10,846 $10,908 $10,316
7/31/1996 $10,912 $11,007 $10,336
8/31/1996 $10,922 $11,004 $10,355
9/30/1996 $11,064 $11,158 $10,388
10/31/1996 $11,166 $11,285 $10,421
11/30/1996 $11,326 $11,491 $10,441
12/31/1996 $11,300 $11,443 $10,441
1/31/1997 $11,308 $11,464 $10,474
2/28/1997 $11,393 $11,569 $10,507
3/31/1997 $11,258 $11,415 $10,533
4/30/1997 $11,342 $11,511 $10,546
5/31/1997 $11,470 $11,684 $10,540
6/30/1997 $11,596 $11,808 $10,553
7/31/1997 $11,867 $12,136 $10,566
8/31/1997 $11,767 $12,022 $10,586
9/30/1997 $11,911 $12,164 $10,612
10/31/1997 $11,980 $12,243 $10,639
11/30/1997 $12,063 $12,315 $10,632
12/31/1997 $12,235 $12,494 $10,619
1/31/1998 $12,353 $12,623 $10,639
2/28/1998 $12,349 $12,627 $10,658
3/31/1998 $12,358 $12,638 $10,678
4/30/1998 $12,311 $12,581 $10,698
5/31/1998 $12,489 $12,780 $10,718
6/30/1998 $12,532 $12,831 $10,731
7/31/1998 $12,561 $12,863 $10,744
8/31/1998 $12,711 $13,062 $10,757
9/30/1998 $12,849 $13,224 $10,770
10/31/1998 $12,814 $13,224 $10,797
11/30/1998 $12,861 $13,270 $10,797
12/31/1998 $12,872 $13,304 $10,790
1/31/1999 $12,982 $13,462 $10,816
2/28/1999 $12,921 $13,403 $10,829
3/31/1999 $12,965 $13,422 $10,862
4/30/1999 $12,969 $13,455 $10,941
5/31/1999 $12,893 $13,377 $10,941
6/30/1999 $12,697 $13,185 $10,941
7/31/1999 $12,699 $13,233 $10,974
8/31/1999 $12,523 $13,127 $11,001
9/30/1999 $12,483 $13,132 $11,053
10/31/1999 $12,253 $12,990 $11,073
11/30/1999 $12,372 $13,128 $11,080
12/31/1999 $12,233 $13,030 $11,080
1/31/2000 $12,105 $12,974 $11,113
2/29/2000 $12,263 $13,124 $11,178
3/31/2000 $12,570 $13,411 $11,271
4/30/2000 $12,485 $13,332 $11,277
5/31/2000 $12,406 $13,263 $11,290
6/30/2000 $12,727 $13,614 $11,350
7/31/2000 $12,880 $13,803 $11,376
8/31/2000 $13,080 $14,016 $11,376
9/30/2000 $12,978 $13,943 $11,435
10/31/2000 $13,124 $14,095 $11,455
11/30/2000 $13,232 $14,202 $11,461
12/31/2000 $13,580 $14,553 $11,455
1/31/2001 $13,680 $14,697 $11,527
2/28/2001 $13,716 $14,744 $11,573
3/31/2001 $13,828 $14,876 $11,600
4/30/2001 $13,718 $14,715 $11,646
5/31/2001 $13,829 $14,873 $11,698
6/30/2001 $13,995 $14,973 $11,718
7/31/2001 $14,220 $15,194 $11,685
8/31/2001 $14,452 $15,445 $11,685
9/30/2001 $14,317 $15,393 $11,738
10/31/2001 $14,484 $15,576 $11,698
11/30/2001 $14,352 $15,445 $11,679
12/31/2001 $14,187 $15,299 $11,633
1/31/2002 $14,409 $15,564 $11,659
2/28/2002 $14,530 $15,752 $11,705
3/31/2002 $14,313 $15,443 $11,771
4/30/2002 $14,507 $15,745 $11,837
5/31/2002 $14,586 $15,841 $11,837
6/30/2002 $14,708 $16,008 $11,843
7/31/2002 $14,879 $16,214 $11,856
8/31/2002 $15,005 $16,409 $11,896
9/30/2002 $15,347 $16,768 $11,916
10/31/2002 $15,013 $16,490 $11,935
11/30/2002 $14,935 $16,422 $11,935
12/31/2002 $15,257 $16,768 $11,909
1/31/2003 $15,195 $16,726 $11,962
2/28/2003 $15,418 $16,960 $12,054
3/31/2003 $15,370 $16,970 $12,126
4/30/2003 $15,472 $17,082 $12,100
5/31/2003 $15,815 $17,482 $12,080
6/30/2003 $15,763 $17,407 $12,093
7/31/2003 $15,205 $16,798 $12,107
8/31/2003 $15,330 $16,924 $12,153
9/30/2003 $15,748 $17,421 $12,192
10/31/2003 $15,644 $17,333 $12,179
11/30/2003 $15,807 $17,514 $12,146
12/31/2003 $15,944 $17,659 $12,133
1/31/2004 $16,062 $17,760 $12,192
2/29/2004 $16,306 $18,028 $12,258
3/31/2004 $16,259 $17,965 $12,337
4/30/2004 $15,845 $17,539 $12,377
5/31/2004 $15,775 $17,476 $12,449
6/30/2004 $15,806 $17,539 $12,488
7/31/2004 $16,020 $17,770 $12,469
8/31/2004 $16,307 $18,126 $12,475
9/30/2004 $16,401 $18,222 $12,502
10/31/2004 $16,545 $18,379 $12,567
11/30/2004 $16,398 $18,228 $12,574
12/31/2004 $16,644 $18,450 $12,528
1/31/2005 $16,834 $18,623 $12,554
2/28/2005 $16,773 $18,561 $12,627
Annual Report | 23
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C) per
share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Colorado state personal
income tax bracket of 38.01%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
24 | Annual Report
Your Fund's Expenses
FRANKLIN COLORADO TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 25
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.10 $3.47
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.37 $3.46
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.00 $6.24
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.69%
and C: 1.24%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
26 | Annual Report
Franklin Connecticut Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Connecticut Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Connecticut state
personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Connecticut Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 48.8%
AA ............................ 17.1%
A ............................. 11.6%
BBB ........................... 15.5%
Below Investment Grade ........ 3.6%
Not Rated by S&P .............. 3.4%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
and Fitch are the secondary and tertiary rating agencies. 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 FITCH
AAA or Aaa 0.8% --
AA or Aa 0.3% --
BBB or Baa 0.4% 0.4%
Below Investment Grade 1.5% --
- -------------------------------------------
Total 3.0% 0.4%
- --------------------------------------------------------------------------------
This annual report for Franklin Connecticut Tax-Free Income Fund covers the
fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $11.12 on February
29, 2004,
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 110.
Annual Report | 27
DIVIDEND DISTRIBUTIONS(2)
Franklin Connecticut Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.00 cents 3.49 cents
- --------------------------------------------------------------------------------
April 4.00 cents 3.49 cents
- --------------------------------------------------------------------------------
May 4.00 cents 3.49 cents
- --------------------------------------------------------------------------------
June 4.00 cents 3.46 cents
- --------------------------------------------------------------------------------
July 4.00 cents 3.46 cents
- --------------------------------------------------------------------------------
August 4.00 cents 3.46 cents
- --------------------------------------------------------------------------------
September 4.00 cents 3.50 cents
- --------------------------------------------------------------------------------
October 4.00 cents 3.50 cents
- --------------------------------------------------------------------------------
November 4.00 cents 3.50 cents
- --------------------------------------------------------------------------------
December 4.02 cents 3.50 cents
- --------------------------------------------------------------------------------
January 4.02 cents 3.50 cents
- --------------------------------------------------------------------------------
February 4.02 cents 3.50 cents
- --------------------------------------------------------------------------------
TOTAL 48.06 CENTS 41.85 CENTS
- --------------------------------------------------------------------------------
to $11.11 on February 28, 2005. The Fund's Class A shares paid dividends
totaling 48.06 cents per share for the same period.(2) The Performance Summary
beginning on page 30 shows that at the end of this reporting period the Fund's
Class A shares' distribution rate was 4.16% based on an annualization of the
current 4.02 cent per share dividend and the maximum offering price of $11.60 on
February 28, 2005. An investor in the 2005 maximum combined federal and
Connecticut state personal income tax bracket of 38.25% would need to earn a
distribution rate of 6.74% from a taxable investment to match the Fund's Class A
tax-free distribution rate. For the Fund's Class C shares' performance, please
see the Performance Summary.
STATE UPDATE
Connecticut's economy stabilized with an improving revenue picture during this
reporting period. As a wealthy, urban state, Connecticut has a concentration of
high-paying jobs in the high-skilled manufacturing, finance, insurance and real
estate sectors. Softness in key manufacturing and finance sectors and slow
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
28 | Annual Report
overall job generation continued to hamper the employment market, although some
offsetting growth was seen in the pharmaceutical, educational and health
services sectors. The construction industry also experienced solid gains,
boosted by new residential projects. As of February 2005, state unemployment was
4.8%, lower than the 5.4% national rate.(3)
Connecticut's biennial budget was balanced through a combination of tax
increases and spending cuts. With renewed revenue growth attributed to healthy
personal income tax gains, oil company receipts and corporate tax collections,
the state projected a fiscal year-end surplus of $186 million.(4) This
turnaround enabled the state to cancel a previously planned bond issuance and
use most of the projected surplus to begin to replenish its eroded reserves.
Connecticut made progress in restoring fiscal balance with lesser reliance on
onetime revenues, but rising pension, health insurance and workers' compensation
costs continued to pressure the state's balance sheet.
Despite its high wealth and income levels, Connecticut's debt per capita and
debt to personal income ratio ranked second and third in the nation,
respectively. Independent credit rating agency Standard & Poor's assigned
Connecticut's general obligation bonds an AA rating with a stable outlook.(5)
The rating reflected the state's improved financial position in balancing
revenues and expenditures with anticipation to rebuild reserves and manage a
heavy debt load.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Connecticut Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
(3) Source: Bureau of Labor Statistics.
(4) Source: Standard & Poor's, "Research: Summary: Connecticut; Tax Secured,
General Obligation," RATINGSDIRECT, 12/30/04.
(5) This does not indicate Standard & Poor's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
PORTFOLIO BREAKDOWN
Franklin Connecticut Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
Higher Education 21.2%
- --------------------------------------------------
Hospital & Health Care 20.0%
- --------------------------------------------------
Prerefunded 15.1%
- --------------------------------------------------
Utilities 13.8%
- --------------------------------------------------
General Obligation 11.8%
- --------------------------------------------------
Other Revenue 5.7%
- --------------------------------------------------
Housing 4.5%
- --------------------------------------------------
Subject to Government Appropriations 3.1%
- --------------------------------------------------
Transportation 2.3%
- --------------------------------------------------
Tax-Supported 1.8%
- --------------------------------------------------
Corporate-Backed 0.7%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 29
Performance Summary as of 2/28/05
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.01 $11.11 $11.12
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.4806
- -----------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.01 $11.16 $11.17
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.4185
- -----------------------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.38% +40.02% +73.94%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.02% +6.03% +5.24%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.39% +5.41% +5.13%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.16%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.74%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.34%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.41%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.78% +36.17% +63.45%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.78% +6.37% +5.12%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +2.51% +5.75% +5.04%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.75%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.07%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.94%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.76%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
30 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS A 2/28/05
- --------------------------------------
1-Year -0.02%
- --------------------------------------
5-Year +6.03%
- --------------------------------------
10-Year +5.24%
- --------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Connecticut Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,577 10,000 10,000
3/31/1995 $ 9,645 10,115 10,033
4/30/1995 $ 9,679 10,127 10,066
5/31/1995 $ 9,909 10,450 10,086
6/30/1995 $ 9,829 10,359 10,106
7/31/1995 $ 9,886 10,457 10,106
8/31/1995 $10,014 10,589 10,133
9/30/1995 $10,096 10,656 10,152
10/31/1995 $10,220 10,811 10,186
11/30/1995 $10,354 10,991 10,179
12/31/1995 $10,447 11,096 10,172
1/31/1996 $10,498 11,180 10,232
2/29/1996 $10,442 11,105 10,265
3/31/1996 $10,347 10,963 10,318
4/30/1996 $10,359 10,932 10,358
5/31/1996 $10,383 10,928 10,378
6/30/1996 $10,488 11,047 10,384
7/31/1996 $10,560 11,147 10,404
8/31/1996 $10,589 11,144 10,424
9/30/1996 $10,698 11,300 10,457
10/31/1996 $10,782 11,428 10,490
11/30/1996 $10,920 11,637 10,510
12/31/1996 $10,913 11,588 10,510
1/31/1997 $10,937 11,610 10,543
2/28/1997 $11,018 11,716 10,577
3/31/1997 $10,931 11,560 10,603
4/30/1997 $11,000 11,657 10,616
5/31/1997 $11,147 11,832 10,610
6/30/1997 $11,250 11,958 10,623
7/31/1997 $11,504 12,289 10,636
8/31/1997 $11,431 12,174 10,656
9/30/1997 $11,555 12,319 10,683
10/31/1997 $11,611 12,398 10,709
11/30/1997 $11,691 12,471 10,702
12/31/1997 $11,839 12,653 10,689
1/31/1998 $11,935 12,783 10,709
2/28/1998 $11,966 12,787 10,729
3/31/1998 $11,979 12,799 10,749
4/30/1998 $11,985 12,741 10,769
5/31/1998 $12,133 12,942 10,789
6/30/1998 $12,182 12,994 10,802
7/31/1998 $12,229 13,026 10,815
8/31/1998 $12,358 13,227 10,828
9/30/1998 $12,473 13,392 10,842
10/31/1998 $12,463 13,392 10,868
11/30/1998 $12,506 13,439 10,868
12/31/1998 $12,546 13,473 10,861
1/31/1999 $12,677 13,633 10,888
2/28/1999 $12,639 13,573 10,901
3/31/1999 $12,676 13,592 10,934
4/30/1999 $12,671 13,626 11,014
5/31/1999 $12,618 13,547 11,014
6/30/1999 $12,412 13,352 11,014
7/31/1999 $12,439 13,401 11,047
8/31/1999 $12,255 13,293 11,074
9/30/1999 $12,226 13,299 11,127
10/31/1999 $12,000 13,155 11,146
11/30/1999 $12,093 13,295 11,153
12/31/1999 $11,939 13,196 11,153
1/31/2000 $11,793 13,138 11,186
2/29/2000 $11,892 13,291 11,252
3/31/2000 $12,205 13,581 11,345
4/30/2000 $12,116 13,501 11,352
5/31/2000 $12,033 13,431 11,365
6/30/2000 $12,340 13,787 11,425
7/31/2000 $12,507 13,979 11,451
8/31/2000 $12,708 14,194 11,451
9/30/2000 $12,639 14,120 11,511
10/31/2000 $12,772 14,274 11,531
11/30/2000 $12,864 14,382 11,537
12/31/2000 $13,115 14,738 11,531
1/31/2001 $13,186 14,884 11,604
2/28/2001 $13,253 14,931 11,650
3/31/2001 $13,387 15,065 11,677
4/30/2001 $13,245 14,901 11,723
5/31/2001 $13,403 15,062 11,776
6/30/2001 $13,507 15,163 11,796
7/31/2001 $13,772 15,387 11,763
8/31/2001 $14,020 15,641 11,763
9/30/2001 $13,917 15,588 11,816
10/31/2001 $14,133 15,774 11,776
11/30/2001 $13,993 15,641 11,756
12/31/2001 $13,855 15,493 11,710
1/31/2002 $14,078 15,762 11,736
2/28/2002 $14,249 15,952 11,783
3/31/2002 $13,977 15,639 11,849
4/30/2002 $14,223 15,945 11,915
5/31/2002 $14,293 16,041 11,915
6/30/2002 $14,424 16,211 11,922
7/31/2002 $14,634 16,420 11,935
8/31/2002 $14,795 16,617 11,975
9/30/2002 $15,148 16,981 11,995
10/31/2002 $14,816 16,699 12,015
11/30/2002 $14,750 16,630 12,015
12/31/2002 $15,067 16,981 11,988
1/31/2003 $15,028 16,938 12,041
2/28/2003 $15,232 17,175 12,134
3/31/2003 $15,238 17,185 12,207
4/30/2003 $15,336 17,299 12,180
5/31/2003 $15,711 17,704 12,160
6/30/2003 $15,644 17,628 12,174
7/31/2003 $14,934 17,011 12,187
8/31/2003 $15,001 17,138 12,233
9/30/2003 $15,368 17,642 12,273
10/31/2003 $15,304 17,553 12,260
11/30/2003 $15,483 17,736 12,227
12/31/2003 $15,614 17,883 12,213
1/31/2004 $15,700 17,986 12,273
2/29/2004 $15,953 18,256 12,339
3/31/2004 $15,958 18,193 12,419
4/30/2004 $15,527 17,762 12,459
5/31/2004 $15,465 17,697 12,531
6/30/2004 $15,570 17,762 12,571
7/31/2004 $15,819 17,996 12,551
8/31/2004 $16,099 18,356 12,558
9/30/2004 $16,215 18,454 12,584
10/31/2004 $16,374 18,612 12,651
11/30/2004 $16,271 18,459 12,657
12/31/2004 $16,481 18,684 12,611
1/31/2005 $16,685 18,859 12,638
2/28/2005 $16,658 18,796 12,710
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 2/28/05
- --------------------------------------
1-Year +2.78%
- --------------------------------------
5-Year +6.37%
- --------------------------------------
Since Inception (5/1/95) +5.12%
- --------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Connecticut Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,241 $10,319 $10,020
6/30/1995 $10,162 $10,229 $10,039
7/31/1995 $10,215 $10,326 $10,039
8/31/1995 $10,352 $10,457 $10,066
9/30/1995 $10,441 $10,523 $10,086
10/31/1995 $10,562 $10,676 $10,118
11/30/1995 $10,694 $10,853 $10,112
12/31/1995 $10,765 $10,957 $10,105
1/31/1996 $10,811 $11,040 $10,165
2/29/1996 $10,745 $10,966 $10,197
3/31/1996 $10,642 $10,825 $10,250
4/30/1996 $10,658 $10,795 $10,290
5/31/1996 $10,677 $10,791 $10,309
6/30/1996 $10,751 $10,908 $10,316
7/31/1996 $10,829 $11,007 $10,336
8/31/1996 $10,876 $11,004 $10,355
9/30/1996 $10,983 $11,158 $10,388
10/31/1996 $11,064 $11,285 $10,421
11/30/1996 $11,200 $11,491 $10,441
12/31/1996 $11,177 $11,443 $10,441
1/31/1997 $11,196 $11,464 $10,474
2/28/1997 $11,286 $11,569 $10,507
3/31/1997 $11,191 $11,415 $10,533
4/30/1997 $11,257 $11,511 $10,546
5/31/1997 $11,402 $11,684 $10,540
6/30/1997 $11,513 $11,808 $10,553
7/31/1997 $11,757 $12,136 $10,566
8/31/1997 $11,676 $12,022 $10,586
9/30/1997 $11,808 $12,164 $10,612
10/31/1997 $11,848 $12,243 $10,639
11/30/1997 $11,936 $12,315 $10,632
12/31/1997 $12,081 $12,494 $10,619
1/31/1998 $12,173 $12,623 $10,639
2/28/1998 $12,200 $12,627 $10,658
3/31/1998 $12,207 $12,638 $10,678
4/30/1998 $12,208 $12,581 $10,698
5/31/1998 $12,352 $12,780 $10,718
6/30/1998 $12,397 $12,831 $10,731
7/31/1998 $12,438 $12,863 $10,744
8/31/1998 $12,563 $13,062 $10,757
9/30/1998 $12,674 $13,224 $10,770
10/31/1998 $12,657 $13,224 $10,797
11/30/1998 $12,694 $13,270 $10,797
12/31/1998 $12,728 $13,304 $10,790
1/31/1999 $12,856 $13,462 $10,816
2/28/1999 $12,812 $13,403 $10,829
3/31/1999 $12,843 $13,422 $10,862
4/30/1999 $12,843 $13,455 $10,941
5/31/1999 $12,772 $13,377 $10,941
6/30/1999 $12,559 $13,185 $10,941
7/31/1999 $12,593 $13,233 $10,974
8/31/1999 $12,390 $13,127 $11,001
9/30/1999 $12,355 $13,132 $11,053
10/31/1999 $12,123 $12,990 $11,073
11/30/1999 $12,211 $13,128 $11,080
12/31/1999 $12,050 $13,030 $11,080
1/31/2000 $11,898 $12,974 $11,113
2/29/2000 $12,006 $13,124 $11,178
3/31/2000 $12,315 $13,411 $11,271
4/30/2000 $12,220 $13,332 $11,277
5/31/2000 $12,119 $13,263 $11,290
6/30/2000 $12,421 $13,614 $11,350
7/31/2000 $12,582 $13,803 $11,376
8/31/2000 $12,779 $14,016 $11,376
9/30/2000 $12,704 $13,943 $11,435
10/31/2000 $12,831 $14,095 $11,455
11/30/2000 $12,917 $14,202 $11,461
12/31/2000 $13,163 $14,553 $11,455
1/31/2001 $13,229 $14,697 $11,527
2/28/2001 $13,290 $14,744 $11,573
3/31/2001 $13,417 $14,876 $11,600
4/30/2001 $13,268 $14,715 $11,646
5/31/2001 $13,431 $14,873 $11,698
6/30/2001 $13,529 $14,973 $11,718
7/31/2001 $13,786 $15,194 $11,685
8/31/2001 $14,028 $15,445 $11,685
9/30/2001 $13,921 $15,393 $11,738
10/31/2001 $14,130 $15,576 $11,698
11/30/2001 $13,984 $15,445 $11,679
12/31/2001 $13,840 $15,299 $11,633
1/31/2002 $14,056 $15,564 $11,659
2/28/2002 $14,221 $15,752 $11,705
3/31/2002 $13,943 $15,443 $11,771
4/30/2002 $14,180 $15,745 $11,837
5/31/2002 $14,244 $15,841 $11,837
6/30/2002 $14,370 $16,008 $11,843
7/31/2002 $14,571 $16,214 $11,856
8/31/2002 $14,725 $16,409 $11,896
9/30/2002 $15,068 $16,768 $11,916
10/31/2002 $14,746 $16,490 $11,935
11/30/2002 $14,674 $16,422 $11,935
12/31/2002 $14,967 $16,768 $11,909
1/31/2003 $14,922 $16,726 $11,962
2/28/2003 $15,131 $16,960 $12,054
3/31/2003 $15,116 $16,970 $12,126
4/30/2003 $15,205 $17,082 $12,100
5/31/2003 $15,570 $17,482 $12,080
6/30/2003 $15,509 $17,407 $12,093
7/31/2003 $14,788 $16,798 $12,107
8/31/2003 $14,847 $16,924 $12,153
9/30/2003 $15,202 $17,421 $12,192
10/31/2003 $15,131 $17,333 $12,179
11/30/2003 $15,314 $17,514 $12,146
12/31/2003 $15,436 $17,659 $12,133
1/31/2004 $15,514 $17,760 $12,192
2/29/2004 $15,756 $18,028 $12,258
3/31/2004 $15,738 $17,965 $12,337
4/30/2004 $15,321 $17,539 $12,377
5/31/2004 $15,254 $17,476 $12,449
6/30/2004 $15,348 $17,539 $12,488
7/31/2004 $15,569 $17,770 $12,469
8/31/2004 $15,850 $18,126 $12,475
9/30/2004 $15,941 $18,222 $12,502
10/31/2004 $16,104 $18,379 $12,567
11/30/2004 $15,996 $18,228 $12,574
12/31/2004 $16,193 $18,450 $12,528
1/31/2005 $16,386 $18,623 $12,554
2/28/2005 $16,345 $18,561 $12,627
Annual Report | 31
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C) per
share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Connecticut state personal
income tax bracket of 38.25%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
32 | Annual Report
Your Fund's Expenses
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 33
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,034.50 $3.58
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.27 $3.56
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.50 $6.35
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.31
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.71%
and C: 1.26%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
34 | Annual Report
Franklin Double Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Double Tax-Free Income Fund
seeks to provide high, current income exempt from federal and personal income
taxes of all 50 U.S. states consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such tax and that are issued by U.S.
territories such as Puerto Rico.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. CREDIT QUALITY
BREAKDOWN* FRANKLIN DOUBLE TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM
INVESTMENTS AS OF 2/28/05**
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Double Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 37.5%
AA ............................ 7.1%
A ............................. 29.1%
BBB ........................... 19.9%
Not Rated by S&P .............. 6.4%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's and
Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa -- -- 0.6%
BBB or Baa 1.9% 1.5% 2.4%
- ---------------------------------------------
Total 1.9% 1.5% 3.0%
- --------------------------------------------------------------------------------
This annual report for Franklin Double Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.06 on
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 116.
Annual Report | 35
DIVIDEND DISTRIBUTIONS(2)
Franklin Double Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.26 cents 3.72 cents
- --------------------------------------------------------------------------------
April 4.26 cents 3.72 cents
- --------------------------------------------------------------------------------
May 4.26 cents 3.72 cents
- --------------------------------------------------------------------------------
June 4.26 cents 3.71 cents
- --------------------------------------------------------------------------------
July 4.26 cents 3.71 cents
- --------------------------------------------------------------------------------
August 4.26 cents 3.71 cents
- --------------------------------------------------------------------------------
September 4.26 cents 3.72 cents
- --------------------------------------------------------------------------------
October 4.26 cents 3.72 cents
- --------------------------------------------------------------------------------
November 4.26 cents 3.72 cents
- --------------------------------------------------------------------------------
December 4.19 cents 3.65 cents
- --------------------------------------------------------------------------------
January 4.19 cents 3.65 cents
- --------------------------------------------------------------------------------
February 4.19 cents 3.65 cents
- --------------------------------------------------------------------------------
TOTAL 50.91 CENTS 44.40 CENTS
- --------------------------------------------------------------------------------
February 29, 2004, to $11.99 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 50.91 cents per share for the Fund's fiscal year.(2) The
Performance Summary beginning on page 38 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.02% based on an
annualization of the current 4.19 cent per share dividend and the maximum
offering price of $12.52 on February 28, 2005. An investor in the 2005 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
6.18% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class C shares' performance, please see the
Performance Summary.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
36 | Annual Report
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
Franklin Double Tax-Free Income Fund is the only mutual fund of its kind to
offer both state and federal income tax exemption in all 50 states. We do this
by investing in U.S. territories such as Puerto Rico, Virgin Islands and Guam,
which are free from state personal income taxes in all states and the District
of Columbia. This can be particularly appealing to residents of states such as
Illinois, Iowa and Wisconsin, which place a tax on their in-state municipal
bonds.
The Fund was well diversified with 79 different positions across 11 different
sectors as of February 28, 2005. Issuers represented in the portfolio included
Puerto Rico (75.3% of the Fund's total long-term investments), Virgin Islands
(17.6%) and Guam (7.1%). At the end of the period, the Fund was entirely
investment grade, with AAA-rated securities representing 38.1% of the Fund's
total long-term investments.(3)
Many mutual funds purchase U.S. territory paper, mainly Puerto Rico's, as an
alternative for their specialty state funds when the supply within a particular
state is running low. This strong demand for territory paper also helps to keep
bond values high relative to other states. Puerto Rico's municipal bond market
is widely traded and is very liquid because of its dual tax-exemption
advantages.
Thank you for your continued participation in Franklin Double Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(3) S&P is the primary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
PORTFOLIO BREAKDOWN
Franklin Double Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
Transportation 16.4%
- --------------------------------------------------
Utilities 16.1%
- --------------------------------------------------
Prerefunded 14.1%
- --------------------------------------------------
General Obligation 12.5%
- --------------------------------------------------
Subject to Government Appropriations 10.4%
- --------------------------------------------------
Housing 7.3%
- --------------------------------------------------
Higher Education 7.1%
- --------------------------------------------------
Tax-Supported 6.1%
- --------------------------------------------------
Other Revenue 5.6%
- --------------------------------------------------
Hospital & Health Care 4.1%
- --------------------------------------------------
Corporate-Backed 0.3%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 37
Performance Summary as of 2/28/05
FRANKLIN DOUBLE TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.07 $11.99 $12.06
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.5091
- ---------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0209
- ---------------------------------------------------------------------------------------------------
TOTAL $0.5300
- ---------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.07 $12.03 $12.10
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------
Dividend Income $0.4440
- ---------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0209
- ---------------------------------------------------------------------------------------------------
TOTAL $0.4649
- ---------------------------------------------------------------------------------------------------
Franklin Double Tax-Free Income Fund paid distributions derived from long-term
capital gains of 2.09 cents ($0.0209) per share in June 2004. The Fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
38 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.01% +39.06% +78.85%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.45% +5.89% +5.53%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.75% +5.38% +5.42%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.02%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.18%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.50%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.38%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.42% +35.43% +67.84%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.43% +6.25% +5.41%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +2.06% +5.73% +5.31%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.61%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 5.55%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.10%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.77%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 39
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS A 2/28/05
- -------------------------------------
1-Year -0.45%
- -------------------------------------
5-Year +5.89%
- -------------------------------------
10-Year +5.53%
- -------------------------------------
CLASS A (31/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Double Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,577 $10,000 $10,000
3/31/1995 $ 9,638 $10,115 $10,033
4/30/1995 $ 9,684 $10,127 $10,066
5/31/1995 $ 9,939 $10,450 $10,086
6/30/1995 $ 9,825 $10,359 $10,106
7/31/1995 $ 9,900 $10,457 $10,106
8/31/1995 $10,008 $10,589 $10,133
9/30/1995 $10,072 $10,656 $10,152
10/31/1995 $10,211 $10,811 $10,186
11/30/1995 $10,336 $10,991 $10,179
12/31/1995 $10,417 $11,096 $10,172
1/31/1996 $10,486 $11,180 $10,232
2/29/1996 $10,409 $11,105 $10,265
3/31/1996 $10,340 $10,963 $10,318
4/30/1996 $10,344 $10,932 $10,358
5/31/1996 $10,352 $10,928 $10,378
6/30/1996 $10,480 $11,047 $10,384
7/31/1996 $10,549 $11,147 $10,404
8/31/1996 $10,562 $11,144 $10,424
9/30/1996 $10,715 $11,300 $10,457
10/31/1996 $10,811 $11,428 $10,490
11/30/1996 $10,973 $11,637 $10,510
12/31/1996 $10,945 $11,588 $10,510
1/31/1997 $10,948 $11,610 $10,543
2/28/1997 $11,037 $11,716 $10,577
3/31/1997 $10,928 $11,560 $10,603
4/30/1997 $11,015 $11,657 $10,616
5/31/1997 $11,176 $11,832 $10,610
6/30/1997 $11,269 $11,958 $10,623
7/31/1997 $11,541 $12,289 $10,636
8/31/1997 $11,472 $12,174 $10,656
9/30/1997 $11,602 $12,319 $10,683
10/31/1997 $11,666 $12,398 $10,709
11/30/1997 $11,753 $12,471 $10,702
12/31/1997 $11,906 $12,653 $10,689
1/31/1998 $11,988 $12,783 $10,709
2/28/1998 $12,010 $12,787 $10,729
3/31/1998 $12,054 $12,799 $10,749
4/30/1998 $12,031 $12,741 $10,769
5/31/1998 $12,194 $12,942 $10,789
6/30/1998 $12,233 $12,994 $10,802
7/31/1998 $12,260 $13,026 $10,815
8/31/1998 $12,405 $13,227 $10,828
9/30/1998 $12,548 $13,392 $10,842
10/31/1998 $12,531 $13,392 $10,868
11/30/1998 $12,573 $13,439 $10,868
12/31/1998 $12,590 $13,473 $10,861
1/31/1999 $12,715 $13,633 $10,888
2/28/1999 $12,691 $13,573 $10,901
3/31/1999 $12,761 $13,592 $10,934
4/30/1999 $12,790 $13,626 $11,014
5/31/1999 $12,749 $13,547 $11,014
6/30/1999 $12,582 $13,352 $11,014
7/31/1999 $12,620 $13,401 $11,047
8/31/1999 $12,469 $13,293 $11,074
9/30/1999 $12,475 $13,299 $11,127
10/31/1999 $12,325 $13,155 $11,146
11/30/1999 $12,416 $13,295 $11,153
12/31/1999 $12,292 $13,196 $11,153
1/31/2000 $12,178 $13,138 $11,186
2/29/2000 $12,319 $13,291 $11,252
3/31/2000 $12,576 $13,581 $11,345
4/30/2000 $12,516 $13,501 $11,352
5/31/2000 $12,454 $13,431 $11,365
6/30/2000 $12,760 $13,787 $11,425
7/31/2000 $12,941 $13,979 $11,451
8/31/2000 $13,147 $14,194 $11,451
9/30/2000 $13,084 $14,120 $11,511
10/31/2000 $13,168 $14,274 $11,531
11/30/2000 $13,271 $14,382 $11,537
12/31/2000 $13,545 $14,738 $11,531
1/31/2001 $13,629 $14,884 $11,604
2/28/2001 $13,682 $14,931 $11,650
3/31/2001 $13,778 $15,065 $11,677
4/30/2001 $13,672 $14,901 $11,723
5/31/2001 $13,827 $15,062 $11,776
6/30/2001 $13,940 $15,163 $11,796
7/31/2001 $14,185 $15,387 $11,763
8/31/2001 $14,401 $15,641 $11,763
9/30/2001 $14,221 $15,588 $11,816
10/31/2001 $14,407 $15,774 $11,776
11/30/2001 $14,279 $15,641 $11,756
12/31/2001 $14,120 $15,493 $11,710
1/31/2002 $14,341 $15,762 $11,736
2/28/2002 $14,544 $15,952 $11,783
3/31/2002 $14,277 $15,639 $11,849
4/30/2002 $14,565 $15,945 $11,915
5/31/2002 $14,622 $16,041 $11,915
6/30/2002 $14,734 $16,211 $11,922
7/31/2002 $14,911 $16,420 $11,935
8/31/2002 $15,068 $16,617 $11,975
9/30/2002 $15,420 $16,981 $11,995
10/31/2002 $15,160 $16,699 $12,015
11/30/2002 $15,123 $16,630 $12,015
12/31/2002 $15,430 $16,981 $11,988
1/31/2003 $15,333 $16,938 $12,041
2/28/2003 $15,516 $17,175 $12,134
3/31/2003 $15,514 $17,185 $12,207
4/30/2003 $15,547 $17,299 $12,180
5/31/2003 $15,943 $17,704 $12,160
6/30/2003 $15,870 $17,628 $12,174
7/31/2003 $15,268 $17,011 $12,187
8/31/2003 $15,401 $17,138 $12,233
9/30/2003 $15,825 $17,642 $12,273
10/31/2003 $15,738 $17,553 $12,260
11/30/2003 $15,950 $17,736 $12,227
12/31/2003 $16,097 $17,883 $12,213
1/31/2004 $16,168 $17,986 $12,273
2/29/2004 $16,477 $18,256 $12,339
3/31/2004 $16,473 $18,193 $12,419
4/30/2004 $16,009 $17,762 $12,459
5/31/2004 $15,858 $17,697 $12,531
6/30/2004 $15,979 $17,762 $12,571
7/31/2004 $16,244 $17,996 $12,551
8/31/2004 $16,587 $18,356 $12,558
9/30/2004 $16,675 $18,454 $12,584
10/31/2004 $16,841 $18,612 $12,651
11/30/2004 $16,722 $18,459 $12,657
12/31/2004 $16,923 $18,684 $12,611
1/31/2005 $17,149 $18,859 $12,638
2/28/2005 $17,128 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 2/28/05
- -------------------------------------
1-Year +2.43%
- -------------------------------------
5-Year +6.25%
- -------------------------------------
Since Inception (5/1/95) +5.41%
- -------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Double Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,267 $10,319 $10,020
6/30/1995 $10,143 $10,229 $10,039
7/31/1995 $10,223 $10,326 $10,039
8/31/1995 $10,328 $10,457 $10,066
9/30/1995 $10,389 $10,523 $10,086
10/31/1995 $10,526 $10,676 $10,118
11/30/1995 $10,660 $10,853 $10,112
12/31/1995 $10,729 $10,957 $10,105
1/31/1996 $10,803 $11,040 $10,165
2/29/1996 $10,721 $10,966 $10,197
3/31/1996 $10,636 $10,825 $10,250
4/30/1996 $10,645 $10,795 $10,290
5/31/1996 $10,638 $10,791 $10,309
6/30/1996 $10,764 $10,908 $10,316
7/31/1996 $10,831 $11,007 $10,336
8/31/1996 $10,849 $11,004 $10,355
9/30/1996 $10,992 $11,158 $10,388
10/31/1996 $11,086 $11,285 $10,421
11/30/1996 $11,237 $11,491 $10,441
12/31/1996 $11,203 $11,443 $10,441
1/31/1997 $11,211 $11,464 $10,474
2/28/1997 $11,296 $11,569 $10,507
3/31/1997 $11,158 $11,415 $10,533
4/30/1997 $11,252 $11,511 $10,546
5/31/1997 $11,411 $11,684 $10,540
6/30/1997 $11,500 $11,808 $10,553
7/31/1997 $11,773 $12,136 $10,566
8/31/1997 $11,697 $12,022 $10,586
9/30/1997 $11,823 $12,164 $10,612
10/31/1997 $11,882 $12,243 $10,639
11/30/1997 $11,956 $12,315 $10,632
12/31/1997 $12,115 $12,494 $10,619
1/31/1998 $12,192 $12,623 $10,639
2/28/1998 $12,208 $12,627 $10,658
3/31/1998 $12,258 $12,638 $10,678
4/30/1998 $12,230 $12,581 $10,698
5/31/1998 $12,379 $12,780 $10,718
6/30/1998 $12,414 $12,831 $10,731
7/31/1998 $12,435 $12,863 $10,744
8/31/1998 $12,588 $13,062 $10,757
9/30/1998 $12,716 $13,224 $10,770
10/31/1998 $12,692 $13,224 $10,797
11/30/1998 $12,739 $13,270 $10,797
12/31/1998 $12,751 $13,304 $10,790
1/31/1999 $12,862 $13,462 $10,816
2/28/1999 $12,831 $13,403 $10,829
3/31/1999 $12,905 $13,422 $10,862
4/30/1999 $12,918 $13,455 $10,941
5/31/1999 $12,872 $13,377 $10,941
6/30/1999 $12,708 $13,185 $10,941
7/31/1999 $12,741 $13,233 $10,974
8/31/1999 $12,583 $13,127 $11,001
9/30/1999 $12,584 $13,132 $11,053
10/31/1999 $12,417 $12,990 $11,073
11/30/1999 $12,501 $13,128 $11,080
12/31/1999 $12,383 $13,030 $11,080
1/31/2000 $12,263 $12,974 $11,113
2/29/2000 $12,399 $13,124 $11,178
3/31/2000 $12,650 $13,411 $11,271
4/30/2000 $12,575 $13,332 $11,277
5/31/2000 $12,517 $13,263 $11,290
6/30/2000 $12,818 $13,614 $11,350
7/31/2000 $12,995 $13,803 $11,376
8/31/2000 $13,195 $14,016 $11,376
9/30/2000 $13,127 $13,943 $11,435
10/31/2000 $13,204 $14,095 $11,455
11/30/2000 $13,301 $14,202 $11,461
12/31/2000 $13,571 $14,553 $11,455
1/31/2001 $13,648 $14,697 $11,527
2/28/2001 $13,707 $14,744 $11,573
3/31/2001 $13,796 $14,876 $11,600
4/30/2001 $13,683 $14,715 $11,646
5/31/2001 $13,818 $14,873 $11,698
6/30/2001 $13,926 $14,973 $11,718
7/31/2001 $14,164 $15,194 $11,685
8/31/2001 $14,385 $15,445 $11,685
9/30/2001 $14,188 $15,393 $11,738
10/31/2001 $14,378 $15,576 $11,698
11/30/2001 $14,231 $15,445 $11,679
12/31/2001 $14,079 $15,299 $11,633
1/31/2002 $14,290 $15,564 $11,659
2/28/2002 $14,473 $15,752 $11,705
3/31/2002 $14,214 $15,443 $11,771
4/30/2002 $14,493 $15,745 $11,837
5/31/2002 $14,543 $15,841 $11,837
6/30/2002 $14,638 $16,008 $11,843
7/31/2002 $14,818 $16,214 $11,856
8/31/2002 $14,966 $16,409 $11,896
9/30/2002 $15,307 $16,768 $11,916
10/31/2002 $15,043 $16,490 $11,935
11/30/2002 $15,000 $16,422 $11,935
12/31/2002 $15,309 $16,768 $11,909
1/31/2003 $15,207 $16,726 $11,962
2/28/2003 $15,368 $16,960 $12,054
3/31/2003 $15,360 $16,970 $12,126
4/30/2003 $15,385 $17,082 $12,100
5/31/2003 $15,770 $17,482 $12,080
6/30/2003 $15,689 $17,407 $12,093
7/31/2003 $15,088 $16,798 $12,107
8/31/2003 $15,224 $16,924 $12,153
9/30/2003 $15,632 $17,421 $12,192
10/31/2003 $15,524 $17,333 $12,179
11/30/2003 $15,740 $17,514 $12,146
12/31/2003 $15,863 $17,659 $12,133
1/31/2004 $15,926 $17,760 $12,192
2/29/2004 $16,238 $18,028 $12,258
3/31/2004 $16,227 $17,965 $12,337
4/30/2004 $15,750 $17,539 $12,377
5/31/2004 $15,594 $17,476 $12,449
6/30/2004 $15,705 $17,539 $12,488
7/31/2004 $15,972 $17,770 $12,469
8/31/2004 $16,299 $18,126 $12,475
9/30/2004 $16,377 $18,222 $12,502
10/31/2004 $16,535 $18,379 $12,567
11/30/2004 $16,396 $18,228 $12,574
12/31/2004 $16,599 $18,450 $12,528
1/31/2005 $16,815 $18,623 $12,554
2/28/2005 $16,784 $18,561 $12,627
40 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS 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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C) per
share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
(6) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 41
Your Fund's Expenses
FRANKLIN DOUBLE TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
42 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.30 $3.63
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.22 $3.61
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.40 $6.39
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.36
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.72%
and C: 1.27%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
Annual Report | 43
Franklin Federal Intermediate-Term
Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Federal Intermediate-Term
Tax-Free Income Fund seeks to provide high, current income exempt from federal
income tax consistent with prudent investment management and preservation of
capital by investing at least 80% of its total assets in securities that pay
interest free from such tax and that have a dollar-weighted average maturity
(the time in which the debt must be repaid) between 3 and 10 years.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Federal Intermediate-Term Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 54.2%
AA ............................ 6.5%
A ............................. 10.0%
BBB ........................... 8.8%
Below Investment Grade ........ 1.6%
Not Rated by S&P .............. 18.9%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's and
Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa 15.4% -- --
AA or Aa 1.9% -- --
BBB or Baa -- 0.6% 0.9%
Below Investment Grade -- -- 0.1%
- -------------------------------------------------------
Total 17.3% 0.6% 1.0%
- --------------------------------------------------------------------------------
This annual report for Franklin Federal Intermediate-Term Tax-Free Income Fund
covers the fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 121.
44 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Federal Intermediate-Term Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 3.49 cents 2.95 cents
- --------------------------------------------------------------------------------
April 3.49 cents 2.95 cents
- --------------------------------------------------------------------------------
May 3.49 cents 2.95 cents
- --------------------------------------------------------------------------------
June 3.49 cents 2.96 cents
- --------------------------------------------------------------------------------
July 3.49 cents 2.96 cents
- --------------------------------------------------------------------------------
August 3.49 cents 2.96 cents
- --------------------------------------------------------------------------------
September 3.54 cents 3.01 cents
- --------------------------------------------------------------------------------
October 3.54 cents 3.01 cents
- --------------------------------------------------------------------------------
November 3.54 cents 3.01 cents
- --------------------------------------------------------------------------------
December 3.49 cents 2.94 cents
- --------------------------------------------------------------------------------
January 3.49 cents 2.94 cents
- --------------------------------------------------------------------------------
February 3.49 cents 2.94 cents
- --------------------------------------------------------------------------------
TOTAL 42.03 CENTS 35.58 CENTS
- --------------------------------------------------------------------------------
Class A share price, as measured by net asset value, declined from $11.76 on
February 29, 2004, to $11.51 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 42.03 cents per share for the Fund's fiscal year.(2) The
Performance Summary beginning on page 47 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 3.52% based on an
annualization of the current 3.45 cent per share dividend and the maximum
offering price of $11.77 on February 28, 2005. An investor in the 2005 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
5.42% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class C shares' performance, please see the
Performance Summary.
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
Annual Report | 45
PORTFOLIO BREAKDOWN
Franklin Federal Intermediate-Term
Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
General Obligation 41.3%
- --------------------------------------------------
Utilities 21.2%
- --------------------------------------------------
Subject to Government Appropriations 8.1%
- --------------------------------------------------
Prerefunded 6.3%
- --------------------------------------------------
Hospital & Health Care 5.6%
- --------------------------------------------------
Higher Education 5.2%
- --------------------------------------------------
Tax-Supported 5.1%
- --------------------------------------------------
Transportation 4.2%
- --------------------------------------------------
Corporate-Backed 1.4%
- --------------------------------------------------
Other Revenue 1.2%
- --------------------------------------------------
Housing 0.4%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Federal Intermediate-Term
Tax-Free Income Fund. We intend to maintain our conservative, buy-and-hold
investment strategy as we attempt to provide shareholders with high, current,
tax-free income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
46 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.25 $11.51 $11.76
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.4203
- -----------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.24 $11.53 $11.77
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------------
Dividend Income $0.3558
- -----------------------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +1.54% +34.98% +72.92%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.74% +5.70% +5.39%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.98% +5.20% +5.20%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.52%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 5.42%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.95%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.54%
- -----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR INCEPTION (7/1/03)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +1.05% +4.04%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +0.07% +2.41%
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.14% +1.73%
- -----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.03%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 4.66%
- -----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.47%
- -----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 3.80%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 47
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------
CLASS A 2/28/05
- ------------------------------------
1-Year -0.74%
- ------------------------------------
5-Year +5.70%
- ------------------------------------
10-Year +5.39%
- ------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin
Federal Lehman
Intermediate Brothers
-Term Municipal
Tax-Free 10-Year
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,776 $10,000 $10,000
3/31/1995 $ 9,869 $10,135 $10,033
4/30/1995 $ 9,889 $10,147 $10,066
5/31/1995 $10,140 $10,469 $10,086
6/30/1995 $10,089 $10,404 $10,106
7/31/1995 $10,180 $10,557 $10,106
8/31/1995 $10,318 $10,700 $10,133
9/30/1995 $10,409 $10,769 $10,152
10/31/1995 $10,533 $10,893 $10,186
11/30/1995 $10,663 $11,039 $10,179
12/31/1995 $10,734 $11,107 $10,172
1/31/1996 $10,801 $11,219 $10,232
2/29/1996 $10,748 $11,173 $10,265
3/31/1996 $10,910 $11,034 $10,318
4/30/1996 $10,907 $10,995 $10,358
5/31/1996 $10,897 $10,964 $10,378
6/30/1996 $11,000 $11,068 $10,384
7/31/1996 $11,069 $11,175 $10,404
8/31/1996 $11,075 $11,175 $10,424
9/30/1996 $11,185 $11,290 $10,457
10/31/1996 $11,302 $11,432 $10,490
11/30/1996 $11,450 $11,664 $10,510
12/31/1996 $11,449 $11,611 $10,510
1/31/1997 $11,198 $11,657 $10,543
2/28/1997 $11,296 $11,767 $10,577
3/31/1997 $11,190 $11,609 $10,603
4/30/1997 $11,276 $11,695 $10,616
5/31/1997 $11,348 $11,860 $10,610
6/30/1997 $11,480 $11,991 $10,623
7/31/1997 $11,736 $12,328 $10,636
8/31/1997 $11,677 $12,209 $10,656
9/30/1997 $11,768 $12,363 $10,683
10/31/1997 $11,832 $12,429 $10,709
11/30/1997 $11,898 $12,486 $10,702
12/31/1997 $12,054 $12,684 $10,689
1/31/1998 $12,200 $12,824 $10,709
2/28/1998 $12,203 $12,823 $10,729
3/31/1998 $12,211 $12,815 $10,749
4/30/1998 $12,190 $12,744 $10,769
5/31/1998 $12,346 $12,961 $10,789
6/30/1998 $12,382 $13,008 $10,802
7/31/1998 $12,424 $13,029 $10,815
8/31/1998 $12,562 $13,256 $10,828
9/30/1998 $12,685 $13,453 $10,842
10/31/1998 $12,681 $13,459 $10,868
11/30/1998 $12,719 $13,499 $10,868
12/31/1998 $12,753 $13,541 $10,861
1/31/1999 $12,903 $13,748 $10,888
2/28/1999 $12,835 $13,625 $10,901
3/31/1999 $12,844 $13,618 $10,934
4/30/1999 $12,891 $13,654 $11,014
5/31/1999 $12,818 $13,559 $11,014
6/30/1999 $12,674 $13,307 $11,014
7/31/1999 $12,708 $13,396 $11,047
8/31/1999 $12,633 $13,346 $11,074
9/30/1999 $12,658 $13,391 $11,127
10/31/1999 $12,518 $13,297 $11,146
11/30/1999 $12,595 $13,442 $11,153
12/31/1999 $12,517 $13,372 $11,153
1/31/2000 $12,437 $13,318 $11,186
2/29/2000 $12,522 $13,422 $11,252
3/31/2000 $12,714 $13,683 $11,345
4/30/2000 $12,657 $13,615 $11,352
5/31/2000 $12,583 $13,534 $11,365
6/30/2000 $12,815 $13,902 $11,425
7/31/2000 $12,952 $14,094 $11,451
8/31/2000 $13,151 $14,313 $11,451
9/30/2000 $13,127 $14,246 $11,511
10/31/2000 $13,233 $14,392 $11,531
11/30/2000 $13,273 $14,471 $11,537
12/31/2000 $13,446 $14,811 $11,531
1/31/2001 $13,601 $15,002 $11,604
2/28/2001 $13,663 $15,028 $11,650
3/31/2001 $13,769 $15,155 $11,677
4/30/2001 $13,713 $14,968 $11,723
5/31/2001 $13,855 $15,131 $11,776
6/30/2001 $13,943 $15,221 $11,796
7/31/2001 $14,130 $15,430 $11,763
8/31/2001 $14,351 $15,693 $11,763
9/30/2001 $14,336 $15,671 $11,816
10/31/2001 $14,473 $15,865 $11,776
11/30/2001 $14,346 $15,661 $11,756
12/31/2001 $14,194 $15,495 $11,710
1/31/2002 $14,391 $15,787 $11,736
2/28/2002 $14,571 $16,013 $11,783
3/31/2002 $14,322 $15,683 $11,849
4/30/2002 $14,617 $16,047 $11,915
5/31/2002 $14,697 $16,123 $11,915
6/30/2002 $14,890 $16,323 $11,922
7/31/2002 $15,054 $16,540 $11,935
8/31/2002 $15,197 $16,756 $11,975
9/30/2002 $15,505 $17,155 $11,995
10/31/2002 $15,238 $16,844 $12,015
11/30/2002 $15,139 $16,706 $12,015
12/31/2002 $15,465 $17,071 $11,988
1/31/2003 $15,395 $16,980 $12,041
2/28/2003 $15,660 $17,273 $12,134
3/31/2003 $15,676 $17,282 $12,207
4/30/2003 $15,795 $17,411 $12,180
5/31/2003 $16,228 $17,909 $12,160
6/30/2003 $16,127 $17,823 $12,174
7/31/2003 $15,445 $17,075 $12,187
8/31/2003 $15,587 $17,222 $12,233
9/30/2003 $16,100 $17,801 $12,273
10/31/2003 $15,969 $17,665 $12,260
11/30/2003 $16,124 $17,856 $12,227
12/31/2003 $16,292 $18,044 $12,213
1/31/2004 $16,368 $18,120 $12,273
2/29/2004 $16,652 $18,439 $12,339
3/31/2004 $16,537 $18,334 $12,419
4/30/2004 $16,087 $17,827 $12,459
5/31/2004 $16,077 $17,838 $12,531
6/30/2004 $16,132 $17,898 $12,571
7/31/2004 $16,353 $18,143 $12,551
8/31/2004 $16,695 $18,540 $12,558
9/30/2004 $16,775 $18,639 $12,584
10/31/2004 $16,909 $18,787 $12,651
11/30/2004 $16,703 $18,574 $12,657
12/31/2004 $16,900 $18,793 $12,611
1/31/2005 $17,022 $18,952 $12,638
2/28/2005 $16,905 $18,832 $12,710
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 2/28/05
- --------------------------------------
1-Year +0.07%
- --------------------------------------
Since Inception (7/1/03) +2.41%
- --------------------------------------
CLASS C (7/1/03-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin
Federal Lehman
Intermediate Brothers
-Term Municipal
Tax-Free 10-Year
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
7/1/2003 $10,000 $10,000 $10,000
7/31/2003 $ 9,581 $ 9,580 $10,011
8/31/2003 $ 9,674 $ 9,662 $10,049
9/30/2003 $ 9,978 $ 9,988 $10,082
10/31/2003 $ 9,901 $ 9,911 $10,071
11/30/2003 $ 9,984 $10,018 $10,044
12/31/2003 $10,083 $10,124 $10,033
1/31/2004 $10,125 $10,167 $10,082
2/29/2004 $10,196 $10,345 $10,136
3/31/2004 $10,196 $10,286 $10,201
4/30/2004 $10,196 $10,002 $10,234
5/31/2004 $10,196 $10,008 $10,294
6/30/2004 $10,196 $10,042 $10,327
7/31/2004 $10,196 $10,179 $10,310
8/31/2004 $10,196 $10,402 $10,316
9/30/2004 $10,196 $10,457 $10,338
10/31/2004 $10,196 $10,541 $10,392
11/30/2004 $10,196 $10,421 $10,397
12/31/2004 $10,196 $10,544 $10,359
1/31/2005 $10,196 $10,633 $10,381
2/28/2005 $10,404 $10,566 $10,441
48 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS 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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C) per
share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
(6) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal 10-Year Bond Index is the 10-year (8-12) component of the
Municipal Bond Index, which is a market value-weighted index engineered for the
long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 49
Your Fund's Expenses
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
50 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,012.90 $3.44
- ---------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.37 $3.46
- ---------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,010.10 $6.18
- ---------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21
- ---------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.69%
and C: 1.24%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
Annual Report | 51
Franklin Federal Limited-Term
Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENT: Franklin Federal Limited-term Tax-Free
Income Fund seeks to provide hgh, current income exempt from federal income
taxes consistent with prudent investment and preservation of capital by
investing at least 80% of its total assets in securities that pay interest free
from such tax and that have a dollar-weighted average maturity (the time in
which the debt must be repaid) of five years of less.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Federal Limited-Term Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 41.8%
AA ............................ 30.6%
Not Rated by S&P .............. 27.6%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's is
the secondary rating agency. 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
AAA or Aaa 18.1%
AA or Aa 9.5%
- ------------------------------------------------------
Total 27.6%
- --------------------------------------------------------------------------------
This annual report for Franklin Federal Limited-Term Tax-Free Income Fund covers
the fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 132.
52 | Annual Report
Class A share price, as measured by net asset value, declined from $10.12 on
February 29, 2004, to $9.99 on February 28, 2005. The Fund's Class A shares paid
dividends totaling 14.22 cents per share for the Fund's fiscal year.(2) The
Performance Summary beginning on page 54 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 1.75%. An investor in
the 2005 maximum federal income tax bracket of 35.00% would need to earn a
distribution rate of 2.69% from a taxable investment to match the Fund's Class A
tax-free distribution rate.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Shorter term municipal bond market yields generally increased during the
reporting period as economic data reflected improved labor conditions and
continued U.S. economic growth, and the Fed raised the federal funds target rate
six times. Consistent with our investment philosophy, we invested in bonds we
believed could provide the most relative value from an income perspective.
Seeking a dollar-weighted average portfolio maturity of five years or less, we
concentrated on the one- to two-year range in an effort to take advantage of
rising yields. As a result of our strategy, the Fund was positioned to capture
changes in short-term interest rates, preserve capital and produce tax-free
income.
Thank you for your continued participation in Franklin Federal Limited-Term
Tax-Free Income Fund. We intend to maintain our conservative, buy-and-hold
investment strategy as we attempt to provide shareholders with high, current,
tax-free income.
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
DIVIDEND DISTRIBUTIONS(2)
Franklin Federal Limited-Term
Tax-Free Income Fund - Class A
3/1/04-2/28/05
- --------------------------------------------------
MONTH DIVIDEND PER SHARE
- --------------------------------------------------
March 1.16 cents
- --------------------------------------------------
April 1.16 cents
- --------------------------------------------------
May 1.16 cents
- --------------------------------------------------
June 1.16 cents
- --------------------------------------------------
July 1.16 cents
- --------------------------------------------------
August 1.16 cents
- --------------------------------------------------
September 1.16 cents
- --------------------------------------------------
October 1.16 cents
- --------------------------------------------------
November 1.16 cents
- --------------------------------------------------
December 1.26 cents
- --------------------------------------------------
January 1.26 cents
- --------------------------------------------------
February 1.26 cents
- --------------------------------------------------
TOTAL 14.22 CENTS
- --------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Federal Limited-Term
Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
General Obligation 34.0%
- --------------------------------------------------
Utilities 18.4%
- --------------------------------------------------
Tax-Supported 16.9%
- --------------------------------------------------
Other Revenue 9.1%
- --------------------------------------------------
Subject to Government Appropriations 7.5%
- --------------------------------------------------
Higher Education 5.7%
- --------------------------------------------------
Hospital & Health Care 5.7%
- --------------------------------------------------
Housing 1.8%
- --------------------------------------------------
Transportation 0.9%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 53
Performance Summary as of 2/28/05
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes due on Fund
dividends, capital gain distributions, if any, or any realized gains on the sale
of Fund shares. Total return reflects reinvestment of the Fund's dividends and
capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ---------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $9.99 $10.12
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ---------------------------------------------------------------------------------------------------------
Dividend Income $0.1422
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE(1)
- ---------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR INCEPTION (9/2/03)
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return(2) +0.14% +1.88%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return(3) +0.14% +1.26%
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(4) +0.06% +1.03%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate(5) 1.75%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(6) 2.69%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(7) 1.87%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(6) 2.88%
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
54 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes Fund expenses, account fees and reinvested distributions. The
unmanaged index includes reinvestment of any income or distributions. It differs
from the Fund in composition and does not pay management fees or expenses. One
cannot invest directly in an index. The Consumer Price Index (CPI), calculated
by the U.S. Bureau of Labor Statistics, is a commonly used measure of the
inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/05
- ----------------------------------------------
1-Year +0.14%
- ----------------------------------------------
Since Inception (9/2/03) +1.26%
- ----------------------------------------------
CLASS A (9/2/03-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin
Federal Lehman
Limited Brothers
-Term Municipal
Tax-Free 5-Year
Date Income Fund Bond Index(8) CPI(8)
- ---------------- ------------ ------------- -----------
9/2/2003 $10,000 $10,000 $10,000
9/30/2003 $10,084 $10,253 $10,033
10/31/2003 $10,064 $10,186 $10,022
11/30/2003 $10,083 $10,227 $ 9,995
12/31/2003 $10,094 $10,267 $ 9,984
1/31/2004 $10,114 $10,316 $10,033
2/29/2004 $10,174 $10,442 $10,087
3/31/2004 $10,157 $10,398 $10,152
4/30/2004 $10,067 $10,190 $10,184
5/31/2004 $10,028 $10,137 $10,244
6/30/2004 $10,041 $10,175 $10,276
7/31/2004 $10,103 $10,269 $10,260
8/31/2004 $10,196 $10,449 $10,265
9/30/2004 $10,207 $10,463 $10,287
10/31/2004 $10,228 $10,521 $10,341
11/30/2004 $10,190 $10,452 $10,347
12/31/2004 $10,224 $10,547 $10,309
1/31/2005 $10,215 $10,544 $10,330
2/28/2005 $10,188 $10,492 $10,390
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
(1) The Fund's manager has agreed in advance to waive a portion of its
management fees. If the manager had not taken this action, the Fund's
distribution rate and total return would have been lower, and yield for the
period would have been 1.26%. The fee waiver may be discontinued at any time
upon notice to the Fund's Board of Trustees.
(2) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5) Distribution rate is based on an annualization of the 1.46 cent per share
current monthly dividend and the $9.99 NAV on 2/28/05.
(6) Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
(7) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(8) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal 5-Year Bond Index is the 5-year (4-6) component of the
Municipal Bond Index, which is a market value-weighted index engineered for the
long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 55
Your Fund's Expenses
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
56 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 999.30 $2.48
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.32 $2.51
- --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, of
0.50%, multiplied by the average account value over the period, multiplied by
181/365 to reflect the one-half year period.
Annual Report | 57
Franklin High Yield Tax-Free Income Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin High Yield Tax-Free Income Fund
seeks to provide high, current yield exempt from federal income tax by investing
at least 80% of its total net assets in higher-yielding, medium- to lower-rated
and non-rated securities that pay interest free from such tax.(1) Its secondary
goal is capital appreciation.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin High Yield Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 18.8%
AA ............................ 1.7%
A ............................. 9.4%
BBB ........................... 17.9%
Below Investment Grade ........ 19.8%
Not Rated by S&P .............. 32.4%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's and
Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa 2.9% -- 0.3%
AA or Aa 0.3% -- --
A 0.2% -- 0.3%
BBB or Baa 1.3% 0.6% 4.7%
Below Investment Grade 3.1% 2.1% 16.6%
- --------------------------------------------------------
Total 7.8% 2.7% 21.9%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin High Yield Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
High yield municipal bonds outperformed the general market during the year under
review. The Fund's Class A share price, as measured by net asset value,
(1) These dividends are generally subject to state and local income taxes, if
any. For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 142.
58 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin High Yield Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 4.95 cents 4.43 cents 4.42 cents
- --------------------------------------------------------------------------------
April 4.95 cents 4.43 cents 4.42 cents
- --------------------------------------------------------------------------------
May 4.95 cents 4.43 cents 4.42 cents
- --------------------------------------------------------------------------------
June 4.88 cents 4.40 cents 4.39 cents
- --------------------------------------------------------------------------------
July 4.88 cents 4.40 cents 4.39 cents
- --------------------------------------------------------------------------------
August 4.88 cents 4.40 cents 4.39 cents
- --------------------------------------------------------------------------------
September 4.88 cents 4.40 cents 4.40 cents
- --------------------------------------------------------------------------------
October 4.88 cents 4.40 cents 4.40 cents
- --------------------------------------------------------------------------------
November 4.88 cents 4.40 cents 4.40 cents
- --------------------------------------------------------------------------------
December 4.80 cents 4.29 cents 4.29 cents
- --------------------------------------------------------------------------------
January 4.80 cents 4.29 cents 4.29 cents
- --------------------------------------------------------------------------------
February 4.80 cents 4.29 cents 4.29 cents
- --------------------------------------------------------------------------------
TOTAL 58.53 CENTS 52.56 CENTS 52.50 CENTS
- --------------------------------------------------------------------------------
increased from $10.78 on February 29, 2004, to $10.81 on February 28, 2005. The
Fund's Class A shares paid dividends totaling 58.53 cents per share for the same
period.(2) The Performance Summary beginning on page 61 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 5.10%
based on an annualization of the current 4.80 cent per share dividend and the
maximum offering price of $11.29 on February 28, 2005. An investor in the 2005
maximum federal income tax bracket of 35.00% would need to earn a distribution
rate of 7.85% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class B and C shares' performance, please see
the Performance Summary.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
Annual Report | 59
PORTFOLIO BREAKDOWN
Franklin High Yield Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
Utilities 23.4%
- --------------------------------------------------
Hospital & Health Care 15.7%
- --------------------------------------------------
Transportation 14.5%
- --------------------------------------------------
Prerefunded 13.9%
- --------------------------------------------------
Tax-Supported 12.8%
- --------------------------------------------------
Corporate-Backed 6.4%
- --------------------------------------------------
General Obligation 4.6%
- --------------------------------------------------
Subject to Government Appropriations 3.4%
- --------------------------------------------------
Other Revenue 3.1%
- --------------------------------------------------
Housing 1.3%
- --------------------------------------------------
Higher Education 0.9%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
Thank you for your continued participation in Franklin High Yield Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
60 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $10.81 $10.78
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------
Dividend Income $0.5853
- ------------------------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $10.87 $10.84
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------
Dividend Income $0.5256
- ------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $10.91 $10.88
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------
Dividend Income $0.5250
- ------------------------------------------------------------------------------------------------
Annual Report | 61
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +5.94% +37.78% +82.09%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.42% +5.70% +5.71%
- -----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.38% +5.24% +5.56%
- -----------------------------------------------------------------------------------------------------------
Distribution Rate(4) 5.10%
- -----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 7.85%
- -----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 4.41%
- -----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 6.78%
- -----------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +5.32% +34.06% +29.55%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.32% +5.72% +4.29%
- -----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.40% +5.27% +4.21%
- -----------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.72%
- -----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 7.26%
- -----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 4.05%
- -----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 6.23%
- -----------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +5.29% +34.04% +70.07%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +4.29% +6.03% +5.55%
- -----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +4.38% +5.59% +5.49%
- -----------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.70%
- -----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 7.23%
- -----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 4.07%
- -----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 6.26%
- -----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
62 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------
CLASS A 2/28/05
- ------------------------------------
1-Year +1.42%
- ------------------------------------
5-Year +5.70%
- ------------------------------------
10-Year +5.71%
- ------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
High Yield Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,572 $10,000 $10,000
3/31/1995 $ 9,703 $10,115 $10,033
4/30/1995 $ 9,745 $10,127 $10,066
5/31/1995 $ 9,983 $10,450 $10,086
6/30/1995 $ 9,995 $10,359 $10,106
7/31/1995 $10,061 $10,457 $10,106
8/31/1995 $10,161 $10,589 $10,133
9/30/1995 $10,242 $10,656 $10,152
10/31/1995 $10,375 $10,811 $10,186
11/30/1995 $10,507 $10,991 $10,179
12/31/1995 $10,608 $11,096 $10,172
1/31/1996 $10,668 $11,180 $10,232
2/29/1996 $10,659 $11,105 $10,265
3/31/1996 $10,554 $10,963 $10,318
4/30/1996 $10,564 $10,932 $10,358
5/31/1996 $10,588 $10,928 $10,378
6/30/1996 $10,692 $11,047 $10,384
7/31/1996 $10,772 $11,147 $10,404
8/31/1996 $10,811 $11,144 $10,424
9/30/1996 $10,959 $11,300 $10,457
10/31/1996 $11,103 $11,428 $10,490
11/30/1996 $11,271 $11,637 $10,510
12/31/1996 $11,263 $11,588 $10,510
1/31/1997 $11,296 $11,610 $10,543
2/28/1997 $11,397 $11,716 $10,577
3/31/1997 $11,307 $11,560 $10,603
4/30/1997 $11,392 $11,657 $10,616
5/31/1997 $11,536 $11,832 $10,610
6/30/1997 $11,678 $11,958 $10,623
7/31/1997 $11,974 $12,289 $10,636
8/31/1997 $11,906 $12,174 $10,656
9/30/1997 $12,102 $12,319 $10,683
10/31/1997 $12,188 $12,398 $10,709
11/30/1997 $12,266 $12,471 $10,702
12/31/1997 $12,456 $12,653 $10,689
1/31/1998 $12,593 $12,783 $10,709
2/28/1998 $12,622 $12,787 $10,729
3/31/1998 $12,632 $12,799 $10,749
4/30/1998 $12,623 $12,741 $10,769
5/31/1998 $12,781 $12,942 $10,789
6/30/1998 $12,839 $12,994 $10,802
7/31/1998 $12,860 $13,026 $10,815
8/31/1998 $13,011 $13,227 $10,828
9/30/1998 $13,089 $13,392 $10,842
10/31/1998 $13,075 $13,392 $10,868
11/30/1998 $13,035 $13,439 $10,868
12/31/1998 $13,055 $13,473 $10,861
1/31/1999 $13,162 $13,633 $10,888
2/28/1999 $13,154 $13,573 $10,901
3/31/1999 $13,201 $13,592 $10,934
4/30/1999 $13,250 $13,626 $11,014
5/31/1999 $13,193 $13,547 $11,014
6/30/1999 $13,053 $13,352 $11,014
7/31/1999 $13,113 $13,401 $11,047
8/31/1999 $12,970 $13,293 $11,074
9/30/1999 $12,960 $13,299 $11,127
10/31/1999 $12,726 $13,155 $11,146
11/30/1999 $12,831 $13,295 $11,153
12/31/1999 $12,645 $13,196 $11,153
1/31/2000 $12,529 $13,138 $11,186
2/29/2000 $12,652 $13,291 $11,252
3/31/2000 $12,910 $13,581 $11,345
4/30/2000 $12,852 $13,501 $11,352
5/31/2000 $12,777 $13,431 $11,365
6/30/2000 $12,892 $13,787 $11,425
7/31/2000 $13,048 $13,979 $11,451
8/31/2000 $13,227 $14,194 $11,451
9/30/2000 $13,174 $14,120 $11,511
10/31/2000 $13,267 $14,274 $11,531
11/30/2000 $13,266 $14,382 $11,537
12/31/2000 $13,375 $14,738 $11,531
1/31/2001 $13,464 $14,884 $11,604
2/28/2001 $13,537 $14,931 $11,650
3/31/2001 $13,667 $15,065 $11,677
4/30/2001 $13,602 $14,901 $11,723
5/31/2001 $13,743 $15,062 $11,776
6/30/2001 $13,856 $15,163 $11,796
7/31/2001 $14,083 $15,387 $11,763
8/31/2001 $14,305 $15,641 $11,763
9/30/2001 $14,181 $15,588 $11,816
10/31/2001 $14,293 $15,774 $11,776
11/30/2001 $14,263 $15,641 $11,756
12/31/2001 $14,169 $15,493 $11,710
1/31/2002 $14,356 $15,762 $11,736
2/28/2002 $14,422 $15,952 $11,783
3/31/2002 $14,298 $15,639 $11,849
4/30/2002 $14,468 $15,945 $11,915
5/31/2002 $14,523 $16,041 $11,915
6/30/2002 $14,628 $16,211 $11,922
7/31/2002 $14,704 $16,420 $11,935
8/31/2002 $14,783 $16,617 $11,975
9/30/2002 $14,881 $16,981 $11,995
10/31/2002 $14,529 $16,699 $12,015
11/30/2002 $14,640 $16,630 $12,015
12/31/2002 $14,899 $16,981 $11,988
1/31/2003 $14,912 $16,938 $12,041
2/28/2003 $14,994 $17,175 $12,134
3/31/2003 $14,897 $17,185 $12,207
4/30/2003 $15,068 $17,299 $12,180
5/31/2003 $15,418 $17,704 $12,160
6/30/2003 $15,461 $17,628 $12,174
7/31/2003 $15,181 $17,011 $12,187
8/31/2003 $15,221 $17,138 $12,233
9/30/2003 $15,638 $17,642 $12,273
10/31/2003 $15,717 $17,553 $12,260
11/30/2003 $15,904 $17,736 $12,227
12/31/2003 $16,089 $17,883 $12,213
1/31/2004 $16,271 $17,986 $12,273
2/29/2004 $16,461 $18,256 $12,339
3/31/2004 $16,436 $18,193 $12,419
4/30/2004 $16,191 $17,762 $12,459
5/31/2004 $16,123 $17,697 $12,531
6/30/2004 $16,204 $17,762 $12,571
7/31/2004 $16,390 $17,996 $12,551
8/31/2004 $16,658 $18,356 $12,558
9/30/2004 $16,764 $18,454 $12,584
10/31/2004 $16,932 $18,612 $12,651
11/30/2004 $16,978 $18,459 $12,657
12/31/2004 $17,200 $18,684 $12,611
1/31/2005 $17,400 $18,859 $12,638
2/28/2005 $17,430 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS B 2/28/05
- -------------------------------------------------
1-Year +1.32%
- -------------------------------------------------
5-Year +5.72%
- -------------------------------------------------
Since Inception (1/1/99) +4.29%
- -------------------------------------------------
CLASS B (1/1/99-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
High Yield Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,107 $10,119 $10,024
2/28/1999 $10,096 $10,075 $10,037
3/31/1999 $10,126 $10,089 $10,067
4/30/1999 $10,160 $10,114 $10,140
5/31/1999 $10,111 $10,055 $10,140
6/30/1999 $ 9,999 $ 9,911 $10,140
7/31/1999 $10,049 $ 9,947 $10,171
8/31/1999 $ 9,934 $ 9,867 $10,195
9/30/1999 $ 9,922 $ 9,871 $10,244
10/31/1999 $ 9,739 $ 9,764 $10,262
11/30/1999 $ 9,815 $ 9,868 $10,268
12/31/1999 $ 9,668 $ 9,794 $10,268
1/31/2000 $ 9,574 $ 9,752 $10,299
2/29/2000 $ 9,664 $ 9,865 $10,360
3/31/2000 $ 9,857 $10,081 $10,445
4/30/2000 $ 9,818 $10,021 $10,451
5/31/2000 $ 9,748 $ 9,969 $10,464
6/30/2000 $ 9,831 $10,233 $10,519
7/31/2000 $ 9,953 $10,375 $10,543
8/31/2000 $10,076 $10,535 $10,543
9/30/2000 $10,032 $10,481 $10,598
10/31/2000 $10,098 $10,595 $10,616
11/30/2000 $10,102 $10,675 $10,622
12/31/2000 $10,180 $10,939 $10,616
1/31/2001 $10,242 $11,047 $10,683
2/28/2001 $10,282 $11,082 $10,726
3/31/2001 $10,384 $11,182 $10,750
4/30/2001 $10,329 $11,060 $10,793
5/31/2001 $10,432 $11,179 $10,842
6/30/2001 $10,512 $11,254 $10,860
7/31/2001 $10,678 $11,421 $10,830
8/31/2001 $10,841 $11,609 $10,830
9/30/2001 $10,743 $11,570 $10,879
10/31/2001 $10,822 $11,708 $10,842
11/30/2001 $10,795 $11,609 $10,824
12/31/2001 $10,719 $11,499 $10,781
1/31/2002 $10,855 $11,699 $10,805
2/28/2002 $10,909 $11,840 $10,848
3/31/2002 $10,800 $11,608 $10,909
4/30/2002 $10,922 $11,835 $10,970
5/31/2002 $10,969 $11,907 $10,970
6/30/2002 $11,032 $12,033 $10,976
7/31/2002 $11,084 $12,187 $10,988
8/31/2002 $11,150 $12,334 $11,025
9/30/2002 $11,218 $12,604 $11,043
10/31/2002 $10,938 $12,395 $11,062
11/30/2002 $11,016 $12,343 $11,062
12/31/2002 $11,215 $12,604 $11,037
1/31/2003 $11,209 $12,572 $11,086
2/28/2003 $11,276 $12,748 $11,171
3/31/2003 $11,187 $12,755 $11,239
4/30/2003 $11,310 $12,840 $11,214
5/31/2003 $11,577 $13,140 $11,196
6/30/2003 $11,604 $13,084 $11,208
7/31/2003 $11,389 $12,627 $11,220
8/31/2003 $11,413 $12,721 $11,263
9/30/2003 $11,717 $13,095 $11,300
10/31/2003 $11,770 $13,029 $11,287
11/30/2003 $11,904 $13,165 $11,257
12/31/2003 $12,037 $13,274 $11,245
1/31/2004 $12,167 $13,350 $11,300
2/29/2004 $12,303 $13,551 $11,361
3/31/2004 $12,278 $13,503 $11,434
4/30/2004 $12,090 $13,184 $11,470
5/31/2004 $12,034 $13,136 $11,538
6/30/2004 $12,098 $13,184 $11,574
7/31/2004 $12,230 $13,357 $11,556
8/31/2004 $12,410 $13,625 $11,562
9/30/2004 $12,496 $13,697 $11,586
10/31/2004 $12,603 $13,815 $11,647
11/30/2004 $12,632 $13,701 $11,653
12/31/2004 $12,803 $13,868 $11,611
1/31/2005 $12,933 $13,998 $11,635
2/28/2005 $12,955 $13,951 $11,702
Annual Report | 63
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
CLASS C 2/28/05
- --------------------------------------------------
1-Year +4.29%
- --------------------------------------------------
5-Year +6.03%
- --------------------------------------------------
Since Inception (5/1/95) +5.55%
- --------------------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
High Yield Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,256 $10,319 $10,020
6/30/1995 $10,271 $10,229 $10,039
7/31/1995 $10,343 $10,326 $10,039
8/31/1995 $10,441 $10,457 $10,066
9/30/1995 $10,518 $10,523 $10,086
10/31/1995 $10,647 $10,676 $10,118
11/30/1995 $10,787 $10,853 $10,112
12/31/1995 $10,885 $10,957 $10,105
1/31/1996 $10,940 $11,040 $10,165
2/29/1996 $10,927 $10,966 $10,197
3/31/1996 $10,815 $10,825 $10,250
4/30/1996 $10,820 $10,795 $10,290
5/31/1996 $10,838 $10,791 $10,309
6/30/1996 $10,939 $10,908 $10,316
7/31/1996 $11,016 $11,007 $10,336
8/31/1996 $11,050 $11,004 $10,355
9/30/1996 $11,196 $11,158 $10,388
10/31/1996 $11,336 $11,285 $10,421
11/30/1996 $11,501 $11,491 $10,441
12/31/1996 $11,487 $11,443 $10,441
1/31/1997 $11,526 $11,464 $10,474
2/28/1997 $11,622 $11,569 $10,507
3/31/1997 $11,526 $11,415 $10,533
4/30/1997 $11,606 $11,511 $10,546
5/31/1997 $11,747 $11,684 $10,540
6/30/1997 $11,885 $11,808 $10,553
7/31/1997 $12,179 $12,136 $10,566
8/31/1997 $12,105 $12,022 $10,586
9/30/1997 $12,308 $12,164 $10,612
10/31/1997 $12,378 $12,243 $10,639
11/30/1997 $12,451 $12,315 $10,632
12/31/1997 $12,648 $12,494 $10,619
1/31/1998 $12,781 $12,623 $10,639
2/28/1998 $12,804 $12,627 $10,658
3/31/1998 $12,808 $12,638 $10,678
4/30/1998 $12,794 $12,581 $10,698
5/31/1998 $12,946 $12,780 $10,718
6/30/1998 $12,998 $12,831 $10,731
7/31/1998 $13,025 $12,863 $10,744
8/31/1998 $13,159 $13,062 $10,757
9/30/1998 $13,231 $13,224 $10,770
10/31/1998 $13,222 $13,224 $10,797
11/30/1998 $13,176 $13,270 $10,797
12/31/1998 $13,178 $13,304 $10,790
1/31/1999 $13,291 $13,462 $10,816
2/28/1999 $13,276 $13,403 $10,829
3/31/1999 $13,316 $13,422 $10,862
4/30/1999 $13,358 $13,455 $10,941
5/31/1999 $13,284 $13,377 $10,941
6/30/1999 $13,137 $13,185 $10,941
7/31/1999 $13,203 $13,233 $10,974
8/31/1999 $13,042 $13,127 $11,001
9/30/1999 $13,038 $13,132 $11,053
10/31/1999 $12,798 $12,990 $11,073
11/30/1999 $12,885 $13,128 $11,080
12/31/1999 $12,695 $13,030 $11,080
1/31/2000 $12,573 $12,974 $11,113
2/29/2000 $12,690 $13,124 $11,178
3/31/2000 $12,941 $13,411 $11,271
4/30/2000 $12,890 $13,332 $11,277
5/31/2000 $12,798 $13,263 $11,290
6/30/2000 $12,918 $13,614 $11,350
7/31/2000 $13,066 $13,803 $11,376
8/31/2000 $13,239 $14,016 $11,376
9/30/2000 $13,181 $13,943 $11,435
10/31/2000 $13,268 $14,095 $11,455
11/30/2000 $13,260 $14,202 $11,461
12/31/2000 $13,362 $14,553 $11,455
1/31/2001 $13,443 $14,697 $11,527
2/28/2001 $13,509 $14,744 $11,573
3/31/2001 $13,631 $14,876 $11,600
4/30/2001 $13,560 $14,715 $11,646
5/31/2001 $13,693 $14,873 $11,698
6/30/2001 $13,810 $14,973 $11,718
7/31/2001 $14,027 $15,194 $11,685
8/31/2001 $14,242 $15,445 $11,685
9/30/2001 $14,100 $15,393 $11,738
10/31/2001 $14,217 $15,576 $11,698
11/30/2001 $14,167 $15,445 $11,679
12/31/2001 $14,066 $15,299 $11,633
1/31/2002 $14,258 $15,564 $11,659
2/28/2002 $14,316 $15,752 $11,705
3/31/2002 $14,187 $15,443 $11,771
4/30/2002 $14,347 $15,745 $11,837
5/31/2002 $14,395 $15,841 $11,837
6/30/2002 $14,493 $16,008 $11,843
7/31/2002 $14,561 $16,214 $11,856
8/31/2002 $14,634 $16,409 $11,896
9/30/2002 $14,723 $16,768 $11,916
10/31/2002 $14,356 $16,490 $11,935
11/30/2002 $14,471 $16,422 $11,935
12/31/2002 $14,717 $16,768 $11,909
1/31/2003 $14,723 $16,726 $11,962
2/28/2003 $14,797 $16,960 $12,054
3/31/2003 $14,695 $16,970 $12,126
4/30/2003 $14,855 $17,082 $12,100
5/31/2003 $15,204 $17,482 $12,080
6/30/2003 $15,225 $17,407 $12,093
7/31/2003 $14,945 $16,798 $12,107
8/31/2003 $14,976 $16,924 $12,153
9/30/2003 $15,390 $17,421 $12,192
10/31/2003 $15,459 $17,333 $12,179
11/30/2003 $15,634 $17,514 $12,146
12/31/2003 $15,791 $17,659 $12,133
1/31/2004 $15,962 $17,760 $12,192
2/29/2004 $16,155 $18,028 $12,258
3/31/2004 $16,123 $17,965 $12,337
4/30/2004 $15,876 $17,539 $12,377
5/31/2004 $15,802 $17,476 $12,449
6/30/2004 $15,871 $17,539 $12,488
7/31/2004 $16,044 $17,770 $12,469
8/31/2004 $16,294 $18,126 $12,475
9/30/2004 $16,391 $18,222 $12,502
10/31/2004 $16,546 $18,379 $12,567
11/30/2004 $16,583 $18,228 $12,574
12/31/2004 $16,805 $18,450 $12,528
1/31/2005 $16,975 $18,623 $12,554
2/28/2005 $17,007 $18,561 $12,627
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. IN GENERAL, AN INVESTOR IS PAID A HIGHER
YIELD TO ASSUME A GREATER DEGREE OF RISK. 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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B and
C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
(6) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
64 | Annual Report
Your Fund's Expenses
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 65
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,047.10 $3.15
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.72 $3.11
- -----------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,044.00 $5.98
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- -----------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,043.80 $5.98
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
* Expenses are equal to the annualized expense ratio for each class (A: 0.62%;
B: 1.18%; and C: 1.18%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
66 | Annual Report
Franklin New Jersey Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin New Jersey Tax-Free Income Fund
seeks to provide high, current income exempt from federal and New Jersey state
personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin New Jersey Tax-Free Income Fund
2/28/05
- -------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- -------------------------------------------------------------------------------
AAA 70.3%
- -------------------------------------------------------------------------------
AA 0.5%
- -------------------------------------------------------------------------------
A 10.6%
- -------------------------------------------------------------------------------
BBB 4.4%
- -------------------------------------------------------------------------------
Below Investment Grade 0.8%
- -------------------------------------------------------------------------------
Not Rated by S&P 13.4%
- -------------------------------------------------------------------------------
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's and
Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa 5.7% -- 0.4%
AA or Aa 0.6% -- --
A 1.8% -- --
BBB or Baa 4.3% 0.3% 0.3%
- -------------------------------------------------
Total 12.4% 0.3% 0.7%
- --------------------------------------------------------------------------------
This annual report for Franklin New Jersey Tax-Free Income Fund covers the
fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $12.23 on February
29, 2004, to $12.18 on February 28, 2005. The Fund's Class A
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 169.
Annual Report | 67
DIVIDEND DISTRIBUTIONS(2)
Franklin New Jersey Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 4.45 cents 3.90 cents 3.89 cents
- --------------------------------------------------------------------------------
April 4.45 cents 3.90 cents 3.89 cents
- --------------------------------------------------------------------------------
May 4.45 cents 3.90 cents 3.89 cents
- --------------------------------------------------------------------------------
June 4.45 cents 3.90 cents 3.90 cents
- --------------------------------------------------------------------------------
July 4.45 cents 3.90 cents 3.90 cents
- --------------------------------------------------------------------------------
August 4.45 cents 3.90 cents 3.90 cents
- --------------------------------------------------------------------------------
September 4.50 cents 3.96 cents 3.95 cents
- --------------------------------------------------------------------------------
October 4.50 cents 3.96 cents 3.95 cents
- --------------------------------------------------------------------------------
November 4.50 cents 3.96 cents 3.95 cents
- --------------------------------------------------------------------------------
December 4.50 cents 3.96 cents 3.93 cents
- --------------------------------------------------------------------------------
January 4.50 cents 3.96 cents 3.93 cents
- --------------------------------------------------------------------------------
February 4.50 cents 3.96 cents 3.93 cents
- --------------------------------------------------------------------------------
TOTAL 53.70 CENTS 47.16 CENTS 47.01 CENTS
- --------------------------------------------------------------------------------
shares paid dividends totaling 53.70 cents per share for the same period.(2) The
Performance Summary beginning on page 70 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.21% based on an
annualization of the current 4.46 cent per share dividend and the maximum
offering price of $12.72 on February 28, 2005. An investor in the 2005 maximum
combined federal and New Jersey state personal income tax bracket of 40.83%
would need to earn a distribution rate of 7.12% from a taxable investment to
match the Fund's Class A tax-free distribution rate. For the Fund's Class B and
C shares' performance, please see the Performance Summary.
STATE UPDATE
New Jersey's diverse, wealthy economy recovered at a moderate pace. The state
benefited from its central location served by an extensive transportation
infrastructure, with proximity to industry centers consisting of large
high-technology and research operations and population centers with a highly
skilled workforce. However, the state is burdened by a high cost structure and
dense development,
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
68 | Annual Report
limiting potential for rapid growth. The job market remained bright with strong
employment growth and unemployment forecasts. New Jersey's unemployment rate was
4.4% in February 2005, compared with the 5.4% national average.(3)
Although helped by renewed revenue growth, New Jersey's financial position
remained weak with a structurally unbalanced budget. In addressing the operating
deficits, it relied heavily on bond issuances and onetime revenues in the last
three fiscal years, hurting the state's financial profile. Spending pressures
mounted as increases in direct property tax relief and school aid went into
effect. The growing pension payments, Medicaid obligations and debt service
costs also exacerbated the problem. With a court ruling prohibiting further
deficit financing, the state must count on economic growth to close the
significant budget gap projected for fiscal year 2006 and rebuild its low
reserves. Contributing to this end, major revenue sources picked up in 2004, and
for the current fiscal year, personal income and sales taxes were projected to
grow above their previous levels.
Exceeding the pace of personal income growth, New Jersey's debt levels rose,
ranking high in the nation. Independent credit rating agency Standard & Poor's
assigned New Jersey's general obligation bonds an AA- rating with a stable
outlook.(4) The rating reflected the state's high wealth levels and diverse
economic base offset by reduced financial flexibility and prolonged fiscal
weakness in the past few years.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin New Jersey Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
(3) Source: Bureau of Labor Statistics.
(4) This does not indicate Standard & Poor's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
PORTFOLIO BREAKDOWN
Franklin New Jersey Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
Hospital & Health Care 24.7%
- --------------------------------------------------
Transportation 20.1%
- --------------------------------------------------
Prerefunded 17.4%
- --------------------------------------------------
General Obligation 11.0%
- --------------------------------------------------
Utilities 7.0%
- --------------------------------------------------
Higher Education 5.5%
- --------------------------------------------------
Other Revenue 4.8%
- --------------------------------------------------
Subject to Government Appropriations 4.2%
- --------------------------------------------------
Housing 3.7%
- --------------------------------------------------
Tax-Supported 1.3%
- --------------------------------------------------
Corporate-Backed 0.3%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 69
Performance Summary as of 2/28/05
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.05 $12.18 $12.23
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------
Dividend Income $0.5370
- ------------------------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.05 $12.24 $12.29
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------
Dividend Income $0.4716
- ------------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- ------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.05 $12.27 $12.32
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- ------------------------------------------------------------------------------------------------
Dividend Income $0.4701
- ------------------------------------------------------------------------------------------------
70 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.13% +40.48% +79.27%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.27% +6.10% +5.55%
- ------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.62% +5.54% +5.41%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.21%
- ------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 7.12%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.30%
- ------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.58%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.55% +37.07% +39.04%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.43% +6.20% +6.56%
- ------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.76% +5.64% +6.36%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.79%
- ------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.41%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.90%
- ------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.90%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.53% +36.74% +68.58%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.53% +6.46% +5.45%
- ------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +2.20% +5.88% +5.36%
- ------------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.79%
- ------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.41%
- ------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.90%
- ------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.90%
- ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 71
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS A 2/28/05
- ---------------------------------------------
1-Year -0.27%
- ---------------------------------------------
5-Year +6.10%
- ---------------------------------------------
10-Year +5.55%
- ---------------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
New Jersey Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,576 $10,000 $10,000
3/31/1995 $ 9,668 $10,115 $10,033
4/30/1995 $ 9,684 $10,127 $10,066
5/31/1995 $ 9,937 $10,450 $10,086
6/30/1995 $ 9,880 $10,359 $10,106
7/31/1995 $ 9,936 $10,457 $10,106
8/31/1995 $10,041 $10,589 $10,133
9/30/1995 $10,102 $10,656 $10,152
10/31/1995 $10,247 $10,811 $10,186
11/30/1995 $10,401 $10,991 $10,179
12/31/1995 $10,498 $11,096 $10,172
1/31/1996 $10,547 $11,180 $10,232
2/29/1996 $10,478 $11,105 $10,265
3/31/1996 $10,363 $10,963 $10,318
4/30/1996 $10,347 $10,932 $10,358
5/31/1996 $10,354 $10,928 $10,378
6/30/1996 $10,464 $11,047 $10,384
7/31/1996 $10,551 $11,147 $10,404
8/31/1996 $10,535 $11,144 $10,424
9/30/1996 $10,686 $11,300 $10,457
10/31/1996 $10,785 $11,428 $10,490
11/30/1996 $10,955 $11,637 $10,510
12/31/1996 $10,922 $11,588 $10,510
1/31/1997 $10,928 $11,610 $10,543
2/28/1997 $11,016 $11,716 $10,577
3/31/1997 $10,917 $11,560 $10,603
4/30/1997 $11,003 $11,657 $10,616
5/31/1997 $11,125 $11,832 $10,610
6/30/1997 $11,225 $11,958 $10,623
7/31/1997 $11,498 $12,289 $10,636
8/31/1997 $11,402 $12,174 $10,656
9/30/1997 $11,531 $12,319 $10,683
10/31/1997 $11,606 $12,398 $10,709
11/30/1997 $11,684 $12,471 $10,702
12/31/1997 $11,836 $12,653 $10,689
1/31/1998 $11,938 $12,783 $10,709
2/28/1998 $11,940 $12,787 $10,729
3/31/1998 $11,965 $12,799 $10,749
4/30/1998 $11,933 $12,741 $10,769
5/31/1998 $12,095 $12,942 $10,789
6/30/1998 $12,156 $12,994 $10,802
7/31/1998 $12,184 $13,026 $10,815
8/31/1998 $12,340 $13,227 $10,828
9/30/1998 $12,460 $13,392 $10,842
10/31/1998 $12,495 $13,392 $10,868
11/30/1998 $12,518 $13,439 $10,868
12/31/1998 $12,558 $13,473 $10,861
1/31/1999 $12,663 $13,633 $10,888
2/28/1999 $12,610 $13,573 $10,901
3/31/1999 $12,659 $13,592 $10,934
4/30/1999 $12,690 $13,626 $11,014
5/31/1999 $12,622 $13,547 $11,014
6/30/1999 $12,480 $13,352 $11,014
7/31/1999 $12,520 $13,401 $11,047
8/31/1999 $12,351 $13,293 $11,074
9/30/1999 $12,305 $13,299 $11,127
10/31/1999 $12,151 $13,155 $11,146
11/30/1999 $12,255 $13,295 $11,153
12/31/1999 $12,134 $13,196 $11,153
1/31/2000 $12,057 $13,138 $11,186
2/29/2000 $12,221 $13,291 $11,252
3/31/2000 $12,497 $13,581 $11,345
4/30/2000 $12,417 $13,501 $11,352
5/31/2000 $12,333 $13,431 $11,365
6/30/2000 $12,658 $13,787 $11,425
7/31/2000 $12,830 $13,979 $11,451
8/31/2000 $13,036 $14,194 $11,451
9/30/2000 $12,951 $14,120 $11,511
10/31/2000 $13,114 $14,274 $11,531
11/30/2000 $13,215 $14,382 $11,537
12/31/2000 $13,535 $14,738 $11,531
1/31/2001 $13,605 $14,884 $11,604
2/28/2001 $13,707 $14,931 $11,650
3/31/2001 $13,814 $15,065 $11,677
4/30/2001 $13,673 $14,901 $11,723
5/31/2001 $13,825 $15,062 $11,776
6/30/2001 $13,938 $15,163 $11,796
7/31/2001 $14,156 $15,387 $11,763
8/31/2001 $14,344 $15,641 $11,763
9/30/2001 $14,252 $15,588 $11,816
10/31/2001 $14,423 $15,774 $11,776
11/30/2001 $14,308 $15,641 $11,756
12/31/2001 $14,171 $15,493 $11,710
1/31/2002 $14,397 $15,762 $11,736
2/28/2002 $14,576 $15,952 $11,783
3/31/2002 $14,300 $15,639 $11,849
4/30/2002 $14,562 $15,945 $11,915
5/31/2002 $14,646 $16,041 $11,915
6/30/2002 $14,775 $16,211 $11,922
7/31/2002 $14,941 $16,420 $11,935
8/31/2002 $15,110 $16,617 $11,975
9/30/2002 $15,445 $16,981 $11,995
10/31/2002 $15,125 $16,699 $12,015
11/30/2002 $15,068 $16,630 $12,015
12/31/2002 $15,398 $16,981 $11,988
1/31/2003 $15,329 $16,938 $12,041
2/28/2003 $15,514 $17,175 $12,134
3/31/2003 $15,539 $17,185 $12,207
4/30/2003 $15,649 $17,299 $12,180
5/31/2003 $16,009 $17,704 $12,160
6/30/2003 $15,950 $17,628 $12,174
7/31/2003 $15,341 $17,011 $12,187
8/31/2003 $15,460 $17,138 $12,233
9/30/2003 $15,850 $17,642 $12,273
10/31/2003 $15,793 $17,553 $12,260
11/30/2003 $15,978 $17,736 $12,227
12/31/2003 $16,133 $17,883 $12,213
1/31/2004 $16,246 $17,986 $12,273
2/29/2004 $16,488 $18,256 $12,339
3/31/2004 $16,471 $18,193 $12,419
4/30/2004 $16,059 $17,762 $12,459
5/31/2004 $16,006 $17,697 $12,531
6/30/2004 $16,085 $17,762 $12,571
7/31/2004 $16,312 $17,996 $12,551
8/31/2004 $16,608 $18,356 $12,558
9/30/2004 $16,738 $18,454 $12,584
10/31/2004 $16,880 $18,612 $12,651
11/30/2004 $16,749 $18,459 $12,657
12/31/2004 $16,966 $18,684 $12,611
1/31/2005 $17,207 $18,859 $12,638
2/28/2005 $17,166 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS B 2/28/05
- ---------------------------------------------
1-Year -0.43%
- ---------------------------------------------
5-Year +6.20%
- ---------------------------------------------
Since Inception (2/1/00) +6.56%
CLASS B (2/1/00-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
New Jersey Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,144 $10,116 $10,059
3/31/2000 $10,368 $10,337 $10,142
4/30/2000 $10,298 $10,276 $10,148
5/31/2000 $10,223 $10,223 $10,160
6/30/2000 $10,496 $10,494 $10,213
7/31/2000 $10,642 $10,640 $10,237
8/31/2000 $10,807 $10,804 $10,237
9/30/2000 $10,733 $10,747 $10,290
10/31/2000 $10,863 $10,865 $10,308
11/30/2000 $10,942 $10,947 $10,314
12/31/2000 $11,201 $11,217 $10,308
1/31/2001 $11,254 $11,328 $10,373
2/28/2001 $11,343 $11,364 $10,415
3/31/2001 $11,426 $11,466 $10,438
4/30/2001 $11,303 $11,342 $10,480
5/31/2001 $11,423 $11,464 $10,527
6/30/2001 $11,511 $11,541 $10,545
7/31/2001 $11,684 $11,712 $10,515
8/31/2001 $11,833 $11,905 $10,515
9/30/2001 $11,762 $11,865 $10,563
10/31/2001 $11,898 $12,006 $10,527
11/30/2001 $11,788 $11,905 $10,509
12/31/2001 $11,680 $11,792 $10,468
1/31/2002 $11,861 $11,997 $10,492
2/28/2002 $12,002 $12,141 $10,533
3/31/2002 $11,770 $11,903 $10,592
4/30/2002 $11,979 $12,136 $10,652
5/31/2002 $12,052 $12,210 $10,652
6/30/2002 $12,142 $12,339 $10,658
7/31/2002 $12,282 $12,498 $10,669
8/31/2002 $12,404 $12,648 $10,705
9/30/2002 $12,674 $12,925 $10,723
10/31/2002 $12,416 $12,711 $10,741
11/30/2002 $12,364 $12,658 $10,741
12/31/2002 $12,628 $12,925 $10,717
1/31/2003 $12,564 $12,892 $10,764
2/28/2003 $12,710 $13,072 $10,847
3/31/2003 $12,724 $13,080 $10,912
4/30/2003 $12,808 $13,167 $10,889
5/31/2003 $13,095 $13,475 $10,871
6/30/2003 $13,041 $13,418 $10,883
7/31/2003 $12,539 $12,948 $10,895
8/31/2003 $12,631 $13,045 $10,936
9/30/2003 $12,942 $13,428 $10,972
10/31/2003 $12,888 $13,361 $10,960
11/30/2003 $13,044 $13,500 $10,930
12/31/2003 $13,154 $13,612 $10,918
1/31/2004 $13,239 $13,690 $10,972
2/29/2004 $13,430 $13,896 $11,031
3/31/2004 $13,422 $13,847 $11,102
4/30/2004 $13,070 $13,519 $11,137
5/31/2004 $13,022 $13,470 $11,203
6/30/2004 $13,090 $13,519 $11,238
7/31/2004 $13,255 $13,697 $11,220
8/31/2004 $13,489 $13,972 $11,226
9/30/2004 $13,588 $14,046 $11,250
10/31/2004 $13,696 $14,167 $11,309
11/30/2004 $13,584 $14,050 $11,315
12/31/2004 $13,765 $14,221 $11,274
1/31/2005 $13,942 $14,354 $11,297
2/28/2005 $13,804 $14,307 $11,363
72 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 2/28/05
- ---------------------------------------------
1-Year +2.53%
- ---------------------------------------------
5-Year +6.46%
- ---------------------------------------------
Since Inception (5/1/95) +5.45%
- ---------------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
New Jersey Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,273 $10,319 $10,020
6/30/1995 $10,209 $10,229 $10,039
7/31/1995 $10,271 $10,326 $10,039
8/31/1995 $10,374 $10,457 $10,066
9/30/1995 $10,442 $10,523 $10,086
10/31/1995 $10,584 $10,676 $10,118
11/30/1995 $10,738 $10,853 $10,112
12/31/1995 $10,834 $10,957 $10,105
1/31/1996 $10,888 $11,040 $10,165
2/29/1996 $10,804 $10,966 $10,197
3/31/1996 $10,680 $10,825 $10,250
4/30/1996 $10,660 $10,795 $10,290
5/31/1996 $10,670 $10,791 $10,309
6/30/1996 $10,778 $10,908 $10,316
7/31/1996 $10,863 $11,007 $10,336
8/31/1996 $10,833 $11,004 $10,355
9/30/1996 $10,982 $11,158 $10,388
10/31/1996 $11,077 $11,285 $10,421
11/30/1996 $11,243 $11,491 $10,441
12/31/1996 $11,202 $11,443 $10,441
1/31/1997 $11,202 $11,464 $10,474
2/28/1997 $11,298 $11,569 $10,507
3/31/1997 $11,191 $11,415 $10,533
4/30/1997 $11,274 $11,511 $10,546
5/31/1997 $11,393 $11,684 $10,540
6/30/1997 $11,491 $11,808 $10,553
7/31/1997 $11,764 $12,136 $10,566
8/31/1997 $11,672 $12,022 $10,586
9/30/1997 $11,788 $12,164 $10,612
10/31/1997 $11,857 $12,243 $10,639
11/30/1997 $11,931 $12,315 $10,632
12/31/1997 $12,090 $12,494 $10,619
1/31/1998 $12,178 $12,623 $10,639
2/28/1998 $12,184 $12,627 $10,658
3/31/1998 $12,203 $12,638 $10,678
4/30/1998 $12,156 $12,581 $10,698
5/31/1998 $12,325 $12,780 $10,718
6/30/1998 $12,370 $12,831 $10,731
7/31/1998 $12,391 $12,863 $10,744
8/31/1998 $12,554 $13,062 $10,757
9/30/1998 $12,671 $13,224 $10,770
10/31/1998 $12,700 $13,224 $10,797
11/30/1998 $12,716 $13,270 $10,797
12/31/1998 $12,751 $13,304 $10,790
1/31/1999 $12,851 $13,462 $10,816
2/28/1999 $12,802 $13,403 $10,829
3/31/1999 $12,834 $13,422 $10,862
4/30/1999 $12,859 $13,455 $10,941
5/31/1999 $12,796 $13,377 $10,941
6/30/1999 $12,635 $13,185 $10,941
7/31/1999 $12,669 $13,233 $10,974
8/31/1999 $12,493 $13,127 $11,001
9/30/1999 $12,441 $13,132 $11,053
10/31/1999 $12,281 $12,990 $11,073
11/30/1999 $12,378 $13,128 $11,080
12/31/1999 $12,252 $13,030 $11,080
1/31/2000 $12,156 $12,974 $11,113
2/29/2000 $12,326 $13,124 $11,178
3/31/2000 $12,610 $13,411 $11,271
4/30/2000 $12,514 $13,332 $11,277
5/31/2000 $12,423 $13,263 $11,290
6/30/2000 $12,743 $13,614 $11,350
7/31/2000 $12,920 $13,803 $11,376
8/31/2000 $13,109 $14,016 $11,376
9/30/2000 $13,030 $13,943 $11,435
10/31/2000 $13,176 $14,095 $11,455
11/30/2000 $13,271 $14,202 $11,461
12/31/2000 $13,586 $14,553 $11,455
1/31/2001 $13,649 $14,697 $11,527
2/28/2001 $13,756 $14,744 $11,573
3/31/2001 $13,844 $14,876 $11,600
4/30/2001 $13,708 $14,715 $11,646
5/31/2001 $13,854 $14,873 $11,698
6/30/2001 $13,962 $14,973 $11,718
7/31/2001 $14,171 $15,194 $11,685
8/31/2001 $14,352 $15,445 $11,685
9/30/2001 $14,266 $15,393 $11,738
10/31/2001 $14,417 $15,576 $11,698
11/30/2001 $14,296 $15,445 $11,679
12/31/2001 $14,153 $15,299 $11,633
1/31/2002 $14,384 $15,564 $11,659
2/28/2002 $14,555 $15,752 $11,705
3/31/2002 $14,276 $15,443 $11,771
4/30/2002 $14,516 $15,745 $11,837
5/31/2002 $14,604 $15,841 $11,837
6/30/2002 $14,725 $16,008 $11,843
7/31/2002 $14,882 $16,214 $11,856
8/31/2002 $15,042 $16,409 $11,896
9/30/2002 $15,367 $16,768 $11,916
10/31/2002 $15,044 $16,490 $11,935
11/30/2002 $14,981 $16,422 $11,935
12/31/2002 $15,300 $16,768 $11,909
1/31/2003 $15,225 $16,726 $11,962
2/28/2003 $15,402 $16,960 $12,054
3/31/2003 $15,419 $16,970 $12,126
4/30/2003 $15,521 $17,082 $12,100
5/31/2003 $15,881 $17,482 $12,080
6/30/2003 $15,803 $17,407 $12,093
7/31/2003 $15,195 $16,798 $12,107
8/31/2003 $15,305 $16,924 $12,153
9/30/2003 $15,680 $17,421 $12,192
10/31/2003 $15,630 $17,333 $12,179
11/30/2003 $15,805 $17,514 $12,146
12/31/2003 $15,938 $17,659 $12,133
1/31/2004 $16,056 $17,760 $12,192
2/29/2004 $16,287 $18,028 $12,258
3/31/2004 $16,263 $17,965 $12,337
4/30/2004 $15,851 $17,539 $12,377
5/31/2004 $15,780 $17,476 $12,449
6/30/2004 $15,862 $17,539 $12,488
7/31/2004 $16,076 $17,770 $12,469
8/31/2004 $16,359 $18,126 $12,475
9/30/2004 $16,466 $18,222 $12,502
10/31/2004 $16,610 $18,379 $12,567
11/30/2004 $16,474 $18,228 $12,574
12/31/2004 $16,678 $18,450 $12,528
1/31/2005 $16,905 $18,623 $12,554
2/28/2005 $16,858 $18,561 $12,627
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. 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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B and
C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and New Jersey state personal
income tax bracket of 40.83%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 73
Your Fund's Expenses
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
74 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.80 $3.28
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
- -----------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.00 $5.99
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
- -----------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.80 $6.04
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.84 $6.01
* Expenses are equal to the annualized expense ratio for each class (A: 0.65%;
B: 1.19%; and C: 1.20%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 75
Franklin Oregon Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Oregon Tax-Free Income Fund
seeks to provide high, current income exempt from federal and Oregon state
personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Oregon Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 34.5%
AA ............................ 24.0%
A ............................. 12.5%
BBB ........................... 4.9%
Below Investment Grade ........ 2.1%
Not Rated by S&P .............. 22.0%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's and
Fitch are the secondary and tertiary rating agencies. 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 FITCH INTERNAL
AAA or Aaa 12.4% -- 0.7%
AA or Aa 6.9% -- --
A 0.6% -- --
BBB or Baa 0.5% 0.6% --
Below Investment Grade -- -- 0.3%
- -------------------------------------------------
Total 20.4% 0.6% 1.0%
- --------------------------------------------------------------------------------
This annual report for Franklin Oregon Tax-Free Income Fund covers the fiscal
year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 178.
76 | Annual Report
DIVIDEND DISTRIBUTIONS(2)
Franklin Oregon Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 4.42 cents 3.88 cents
- --------------------------------------------------------------------------------
April 4.42 cents 3.88 cents
- --------------------------------------------------------------------------------
May 4.42 cents 3.88 cents
- --------------------------------------------------------------------------------
June 4.42 cents 3.88 cents
- --------------------------------------------------------------------------------
July 4.42 cents 3.88 cents
- --------------------------------------------------------------------------------
August 4.42 cents 3.88 cents
- --------------------------------------------------------------------------------
September 4.42 cents 3.89 cents
- --------------------------------------------------------------------------------
October 4.42 cents 3.89 cents
- --------------------------------------------------------------------------------
November 4.42 cents 3.89 cents
- --------------------------------------------------------------------------------
December 4.36 cents 3.81 cents
- --------------------------------------------------------------------------------
January 4.36 cents 3.81 cents
- --------------------------------------------------------------------------------
February 4.36 cents 3.81 cents
- --------------------------------------------------------------------------------
TOTAL 52.86 CENTS 46.38 CENTS
- --------------------------------------------------------------------------------
Class A share price, as measured by net asset value, declined from $11.95 on
February 29, 2004, to $11.90 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 52.86 cents per share for the same period.(2) The
Performance Summary beginning on page 79 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.16% based on an
annualization of the current 4.31 cent per share dividend and the maximum
offering price of $12.43 on February 28, 2005. An investor in the 2005 maximum
combined federal and Oregon state personal income tax bracket of 40.85% would
need to earn a distribution rate of 7.03% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class C shares'
performance, please see the Performance Summary.
STATE UPDATE
Oregon's economy made some progress with several industries posting strong
growth. As a major high-technology center, the state was exposed to greater
employment volatility, but dominant sectors including semiconductors and
computer and electronic manufacturing added jobs during the reporting period.
Construction also made significant gains, boosted by population growth and low
mortgage rates. In 2004, Oregon's diversified economic base delivered
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
Annual Report | 77
PORTFOLIO BREAKDOWN
Franklin Oregon Tax-Free Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
General Obligation 27.9%
- --------------------------------------------------
Transportation 16.3%
- --------------------------------------------------
Prerefunded 13.2%
- --------------------------------------------------
Utilities 8.5%
- --------------------------------------------------
Hospital & Health Care 7.3%
- --------------------------------------------------
Higher Education 6.9%
- --------------------------------------------------
Housing 6.6%
- --------------------------------------------------
Subject to Government Appropriations 5.3%
- --------------------------------------------------
Other Revenue 4.7%
- --------------------------------------------------
Corporate-Backed 2.1%
- --------------------------------------------------
Tax-Supported 1.2%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
the strongest job growth rate since 1989, which marked a turning point in its
recession-weakened job market. Employment growth was forecast to continue based
on expected strong population and economic growth. The state's business-friendly
attributes such as low cost of doing business and low overall energy costs
attract companies. However, as of February 2005, Oregon's 6.6% unemployment rate
remained higher than the 5.4% national rate.(3)
Facing a prolonged economic slowdown, Oregon implemented corrective budget
actions including cost reductions and revenue enhancements to stabilize its
financial position. Cuts in education, various human services programs and
public safety programs as well as elimination of positions and salary freezes
brought about a balanced 2003-2005 biennium budget. However, the requirement to
return excess revenues to taxpayers made it difficult to save for unanticipated
shortfalls.
Oregon managed a rising but still low debt burden. Independent rating agency
Standard & Poor's assigned an AA- rating to the state's general obligation
bonds, reflecting the state's strong fiscal controls that compensate for
constitutional restrictions and low budget reserves.(4)
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
Thank you for your continued participation in Franklin Oregon Tax-Free Income
Fund. We intend to maintain our conservative, buy-and-hold investment strategy
as we attempt to provide shareholders with high, current, tax-free income.
(3) Source: Bureau of Labor Statistics.
(4) This does not indicate Standard & Poor's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
78 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN OREGON TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.05 $11.90 $11.95
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.5286
- -----------------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.05 $12.01 $12.06
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4638
- -----------------------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED
SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES.
AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.15% +39.48% +75.27%
- ----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.27% +5.96% +5.31%
- ----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -0.80% +5.37% +5.16%
- ----------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.16%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 7.03%
- ----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.46%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.85%
- ----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ----------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.55% +35.84% +65.08%
- ----------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.55% +6.32% +5.23%
- ----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +2.02% +5.71% +5.12%
- ----------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.72%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.29%
- ----------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.07%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.19%
- ----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 79
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS A 2/28/05
- --------------------------------------------
1-Year -0.27%
- --------------------------------------------
5-Year +5.96%
- --------------------------------------------
10-Year +5.31%
- --------------------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Oregon Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
3/1/1995 $ 9,573 $10,000 $10,000
3/31/1995 $ 9,664 $10,115 $10,033
4/30/1995 $ 9,679 $10,127 $10,066
5/31/1995 $ 9,924 $10,450 $10,086
6/30/1995 $ 9,850 $10,359 $10,106
7/31/1995 $ 9,914 $10,457 $10,106
8/31/1995 $10,037 $10,589 $10,133
9/30/1995 $10,089 $10,656 $10,152
10/31/1995 $10,224 $10,811 $10,186
11/30/1995 $10,369 $10,991 $10,179
12/31/1995 $10,440 $11,096 $10,172
1/31/1996 $10,506 $11,180 $10,232
2/29/1996 $10,453 $11,105 $10,265
3/31/1996 $10,345 $10,963 $10,318
4/30/1996 $10,348 $10,932 $10,358
5/31/1996 $10,361 $10,928 $10,378
6/30/1996 $10,470 $11,047 $10,384
7/31/1996 $10,537 $11,147 $10,404
8/31/1996 $10,546 $11,144 $10,424
9/30/1996 $10,669 $11,300 $10,457
10/31/1996 $10,757 $11,428 $10,490
11/30/1996 $10,897 $11,637 $10,510
12/31/1996 $10,890 $11,588 $10,510
1/31/1997 $10,904 $11,610 $10,543
2/28/1997 $10,990 $11,716 $10,577
3/31/1997 $10,907 $11,560 $10,603
4/30/1997 $10,983 $11,657 $10,616
5/31/1997 $11,103 $11,832 $10,610
6/30/1997 $11,192 $11,958 $10,623
7/31/1997 $11,434 $12,289 $10,636
8/31/1997 $11,395 $12,174 $10,656
9/30/1997 $11,504 $12,319 $10,683
10/31/1997 $11,569 $12,398 $10,709
11/30/1997 $11,646 $12,471 $10,702
12/31/1997 $11,788 $12,653 $10,689
1/31/1998 $11,880 $12,783 $10,709
2/28/1998 $11,892 $12,787 $10,729
3/31/1998 $11,898 $12,799 $10,749
4/30/1998 $11,886 $12,741 $10,769
5/31/1998 $12,029 $12,942 $10,789
6/30/1998 $12,070 $12,994 $10,802
7/31/1998 $12,098 $13,026 $10,815
8/31/1998 $12,254 $13,227 $10,828
9/30/1998 $12,375 $13,392 $10,842
10/31/1998 $12,348 $13,392 $10,868
11/30/1998 $12,401 $13,439 $10,868
12/31/1998 $12,429 $13,473 $10,861
1/31/1999 $12,545 $13,633 $10,888
2/28/1999 $12,501 $13,573 $10,901
3/31/1999 $12,539 $13,592 $10,934
4/30/1999 $12,557 $13,626 $11,014
5/31/1999 $12,488 $13,547 $11,014
6/30/1999 $12,297 $13,352 $11,014
7/31/1999 $12,335 $13,401 $11,047
8/31/1999 $12,175 $13,293 $11,074
9/30/1999 $12,149 $13,299 $11,127
10/31/1999 $11,950 $13,155 $11,146
11/30/1999 $12,073 $13,295 $11,153
12/31/1999 $11,951 $13,196 $11,153
1/31/2000 $11,882 $13,138 $11,186
2/29/2000 $12,033 $13,291 $11,252
3/31/2000 $12,308 $13,581 $11,345
4/30/2000 $12,227 $13,501 $11,352
5/31/2000 $12,153 $13,431 $11,365
6/30/2000 $12,477 $13,787 $11,425
7/31/2000 $12,648 $13,979 $11,451
8/31/2000 $12,852 $14,194 $11,451
9/30/2000 $12,766 $14,120 $11,511
10/31/2000 $12,893 $14,274 $11,531
11/30/2000 $12,971 $14,382 $11,537
12/31/2000 $13,266 $14,738 $11,531
1/31/2001 $13,335 $14,884 $11,604
2/28/2001 $13,389 $14,931 $11,650
3/31/2001 $13,494 $15,065 $11,677
4/30/2001 $13,353 $14,901 $11,723
5/31/2001 $13,481 $15,062 $11,776
6/30/2001 $13,583 $15,163 $11,796
7/31/2001 $13,801 $15,387 $11,763
8/31/2001 $14,013 $15,641 $11,763
9/30/2001 $13,921 $15,588 $11,816
10/31/2001 $14,092 $15,774 $11,776
11/30/2001 $13,975 $15,641 $11,756
12/31/2001 $13,823 $15,493 $11,710
1/31/2002 $14,023 $15,762 $11,736
2/28/2002 $14,187 $15,952 $11,783
3/31/2002 $13,946 $15,639 $11,849
4/30/2002 $14,193 $15,945 $11,915
5/31/2002 $14,261 $16,041 $11,915
6/30/2002 $14,388 $16,211 $11,922
7/31/2002 $14,550 $16,420 $11,935
8/31/2002 $14,692 $16,617 $11,975
9/30/2002 $15,000 $16,981 $11,995
10/31/2002 $14,691 $16,699 $12,015
11/30/2002 $14,644 $16,630 $12,015
12/31/2002 $14,947 $16,981 $11,988
1/31/2003 $14,889 $16,938 $12,041
2/28/2003 $15,085 $17,175 $12,134
3/31/2003 $15,082 $17,185 $12,207
4/30/2003 $15,190 $17,299 $12,180
5/31/2003 $15,586 $17,704 $12,160
6/30/2003 $15,552 $17,628 $12,174
7/31/2003 $15,006 $17,011 $12,187
8/31/2003 $15,112 $17,138 $12,233
9/30/2003 $15,501 $17,642 $12,273
10/31/2003 $15,443 $17,553 $12,260
11/30/2003 $15,629 $17,736 $12,227
12/31/2003 $15,769 $17,883 $12,213
1/31/2004 $15,869 $17,986 $12,273
2/29/2004 $16,124 $18,256 $12,339
3/31/2004 $16,121 $18,193 $12,419
4/30/2004 $15,749 $17,762 $12,459
5/31/2004 $15,709 $17,697 $12,531
6/30/2004 $15,760 $17,762 $12,571
7/31/2004 $15,972 $17,996 $12,551
8/31/2004 $16,255 $18,356 $12,558
9/30/2004 $16,343 $18,454 $12,584
10/31/2004 $16,511 $18,612 $12,651
11/30/2004 $16,379 $18,459 $12,657
12/31/2004 $16,610 $18,684 $12,611
1/31/2005 $16,821 $18,859 $12,638
2/28/2005 $16,779 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 2/28/05
- ---------------------------------------------
1-Year +2.55%
- ---------------------------------------------
5-Year +6.32%
- ---------------------------------------------
Since Inception (5/1/95) +5.23%
- ---------------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Oregon Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
- ---------------- ------------ ------------- -----------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,273 $10,319 $10,020
6/30/1995 $10,190 $10,229 $10,039
7/31/1995 $10,250 $10,326 $10,039
8/31/1995 $10,380 $10,457 $10,066
9/30/1995 $10,429 $10,523 $10,086
10/31/1995 $10,562 $10,676 $10,118
11/30/1995 $10,706 $10,853 $10,112
12/31/1995 $10,782 $10,957 $10,105
1/31/1996 $10,845 $11,040 $10,165
2/29/1996 $10,789 $10,966 $10,197
3/31/1996 $10,674 $10,825 $10,250
4/30/1996 $10,661 $10,795 $10,290
5/31/1996 $10,679 $10,791 $10,309
6/30/1996 $10,786 $10,908 $10,316
7/31/1996 $10,850 $11,007 $10,336
8/31/1996 $10,855 $11,004 $10,355
9/30/1996 $10,975 $11,158 $10,388
10/31/1996 $11,061 $11,285 $10,421
11/30/1996 $11,209 $11,491 $10,441
12/31/1996 $11,188 $11,443 $10,441
1/31/1997 $11,206 $11,464 $10,474
2/28/1997 $11,287 $11,569 $10,507
3/31/1997 $11,197 $11,415 $10,533
4/30/1997 $11,269 $11,511 $10,546
5/31/1997 $11,386 $11,684 $10,540
6/30/1997 $11,472 $11,808 $10,553
7/31/1997 $11,714 $12,136 $10,566
8/31/1997 $11,679 $12,022 $10,586
9/30/1997 $11,785 $12,164 $10,612
10/31/1997 $11,845 $12,243 $10,639
11/30/1997 $11,909 $12,315 $10,632
12/31/1997 $12,058 $12,494 $10,619
1/31/1998 $12,146 $12,623 $10,639
2/28/1998 $12,152 $12,627 $10,658
3/31/1998 $12,152 $12,638 $10,678
4/30/1998 $12,125 $12,581 $10,698
5/31/1998 $12,274 $12,780 $10,718
6/30/1998 $12,310 $12,831 $10,731
7/31/1998 $12,331 $12,863 $10,744
8/31/1998 $12,484 $13,062 $10,757
9/30/1998 $12,601 $13,224 $10,770
10/31/1998 $12,567 $13,224 $10,797
11/30/1998 $12,615 $13,270 $10,797
12/31/1998 $12,639 $13,304 $10,790
1/31/1999 $12,750 $13,462 $10,816
2/28/1999 $12,710 $13,403 $10,829
3/31/1999 $12,731 $13,422 $10,862
4/30/1999 $12,754 $13,455 $10,941
5/31/1999 $12,667 $13,377 $10,941
6/30/1999 $12,478 $13,185 $10,941
7/31/1999 $12,501 $13,233 $10,974
8/31/1999 $12,343 $13,127 $11,001
9/30/1999 $12,300 $13,132 $11,053
10/31/1999 $12,104 $12,990 $11,073
11/30/1999 $12,211 $13,128 $11,080
12/31/1999 $12,094 $13,030 $11,080
1/31/2000 $12,008 $12,974 $11,113
2/29/2000 $12,154 $13,124 $11,178
3/31/2000 $12,436 $13,411 $11,271
4/30/2000 $12,349 $13,332 $11,277
5/31/2000 $12,268 $13,263 $11,290
6/30/2000 $12,576 $13,614 $11,350
7/31/2000 $12,752 $13,803 $11,376
8/31/2000 $12,949 $14,016 $11,376
9/30/2000 $12,857 $13,943 $11,435
10/31/2000 $12,978 $14,095 $11,455
11/30/2000 $13,050 $14,202 $11,461
12/31/2000 $13,339 $14,553 $11,455
1/31/2001 $13,402 $14,697 $11,527
2/28/2001 $13,438 $14,744 $11,573
3/31/2001 $13,561 $14,876 $11,600
4/30/2001 $13,411 $14,715 $11,646
5/31/2001 $13,532 $14,873 $11,698
6/30/2001 $13,616 $14,973 $11,718
7/31/2001 $13,838 $15,194 $11,685
8/31/2001 $14,043 $15,445 $11,685
9/30/2001 $13,933 $15,393 $11,738
10/31/2001 $14,096 $15,576 $11,698
11/30/2001 $13,975 $15,445 $11,679
12/31/2001 $13,817 $15,299 $11,633
1/31/2002 $14,009 $15,564 $11,659
2/28/2002 $14,179 $15,752 $11,705
3/31/2002 $13,933 $15,443 $11,771
4/30/2002 $14,170 $15,745 $11,837
5/31/2002 $14,231 $15,841 $11,837
6/30/2002 $14,351 $16,008 $11,843
7/31/2002 $14,517 $16,214 $11,856
8/31/2002 $14,639 $16,409 $11,896
9/30/2002 $14,938 $16,768 $11,916
10/31/2002 $14,626 $16,490 $11,935
11/30/2002 $14,573 $16,422 $11,935
12/31/2002 $14,877 $16,768 $11,909
1/31/2003 $14,814 $16,726 $11,962
2/28/2003 $15,002 $16,960 $12,054
3/31/2003 $14,979 $16,970 $12,126
4/30/2003 $15,091 $17,082 $12,100
5/31/2003 $15,475 $17,482 $12,080
6/30/2003 $15,433 $17,407 $12,093
7/31/2003 $14,888 $16,798 $12,107
8/31/2003 $14,973 $16,924 $12,153
9/30/2003 $15,347 $17,421 $12,192
10/31/2003 $15,295 $17,333 $12,179
11/30/2003 $15,470 $17,514 $12,146
12/31/2003 $15,615 $17,659 $12,133
1/31/2004 $15,692 $17,760 $12,192
2/29/2004 $15,949 $18,028 $12,258
3/31/2004 $15,938 $17,965 $12,337
4/30/2004 $15,552 $17,539 $12,377
5/31/2004 $15,507 $17,476 $12,449
6/30/2004 $15,563 $17,539 $12,488
7/31/2004 $15,749 $17,770 $12,469
8/31/2004 $16,019 $18,126 $12,475
9/30/2004 $16,110 $18,222 $12,502
10/31/2004 $16,268 $18,379 $12,567
11/30/2004 $16,117 $18,228 $12,574
12/31/2004 $16,347 $18,450 $12,528
1/31/2005 $16,547 $18,623 $12,554
2/28/2005 $16,508 $18,561 $12,627
80 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Class C) per
share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Oregon state personal income
tax bracket of 40.85%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 81
Your Fund's Expenses
FRANKLIN OREGON TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
82 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.20 $3.33
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.00 $6.09
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
- ---------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.66%
and C: 1.21%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
Annual Report | 83
Franklin Pennsylvania Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Pennsylvania Tax-Free Income
Fund seeks to provide high, current income exempt from federal and Pennsylvania
state personal income taxes consistent with prudent investment management and
preservation of capital by investing at least 80% of its total assets in
securities that pay interest free from such taxes.(1)
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Pennsylvania Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................... 64.4%
AA ............................ 4.8%
A ............................. 7.3%
BBB ........................... 9.8%
Not Rated by S&P .............. 13.7%
* 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 12.3% 0.5%
A 0.4% --
BBB or Baa 0.5% --
- -------------------------------------------------
Total 13.2% 0.5%
- --------------------------------------------------------------------------------
This annual report for Franklin Pennsylvania Tax-Free Income Fund covers the
fiscal year ended February 28, 2005.
PERFORMANCE OVERVIEW
Because bond yield and price move in opposite directions, as municipal bond
yields rose bond prices fell for the 12-month reporting period. The Fund's Class
A share price, as measured by net asset value, declined from $10.62 on
(1) For investors subject to the alternative minimum tax, a small portion of
Fund dividends may be taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 187.
84 | ANNUAL REPORT
DIVIDEND DISTRIBUTIONS(2)
Franklin Pennsylvania Tax-Free Income Fund
3/1/04-2/28/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 3.82 cents 3.33 cents 3.34 cents
- --------------------------------------------------------------------------------
April 3.82 cents 3.33 cents 3.34 cents
- --------------------------------------------------------------------------------
May 3.82 cents 3.33 cents 3.34 cents
- --------------------------------------------------------------------------------
June 3.82 cents 3.34 cents 3.34 cents
- --------------------------------------------------------------------------------
July 3.82 cents 3.34 cents 3.34 cents
- --------------------------------------------------------------------------------
August 3.82 cents 3.34 cents 3.34 cents
- --------------------------------------------------------------------------------
September 3.87 cents 3.40 cents 3.39 cents
- --------------------------------------------------------------------------------
October 3.87 cents 3.40 cents 3.39 cents
- --------------------------------------------------------------------------------
November 3.87 cents 3.40 cents 3.39 cents
- --------------------------------------------------------------------------------
December 3.87 cents 3.39 cents 3.38 cents
- --------------------------------------------------------------------------------
January 3.87 cents 3.39 cents 3.38 cents
- --------------------------------------------------------------------------------
February 3.87 cents 3.39 cents 3.38 cents
- --------------------------------------------------------------------------------
TOTAL 46.14 CENTS 40.38 CENTS 40.35 CENTS
- --------------------------------------------------------------------------------
February 29, 2004, to $10.48 on February 28, 2005. The Fund's Class A shares
paid dividends totaling 46.14 cents per share for the same period.(2) The
Performance Summary beginning on page 87 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.24% based on an
annualization of the current 3.87 cent per share dividend and the maximum
offering price of $10.95 on February 28, 2005. An investor in the 2005 maximum
combined federal and Pennsylvania state personal income tax bracket of 37.00%
would need to earn a distribution rate of 6.73% from a taxable investment to
match the Fund's Class A tax-free distribution rate. For the Fund's Class B and
C shares' performance, please see the Performance Summary.
COMMONWEALTH UPDATE
Pennsylvania's diverse, urbanized economy experienced uneven recovery during the
reporting period. The recovery benefited from the shift to a more balanced
economic base from an industrial-heavy core, with the Philadelphia-centric
eastern half gaining more substantial growth than the Pittsburgh-anchored
western half. Labor force declines helped keep the elevated unemployment rate in
check
(2) Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are
not indicative of future trends.
Annual Report | 85
PORTFOLIO BREAKDOWN
Franklin Pennsylvania Tax-Free
Income Fund
2/28/05
- --------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------
General Obligation 19.9%
- --------------------------------------------------
Hospital & Health Care 15.9%
- --------------------------------------------------
Prerefunded 15.3%
- --------------------------------------------------
Transportation 14.3%
- --------------------------------------------------
Higher Education 10.1%
- --------------------------------------------------
Subject to Government Appropriations 8.6%
- --------------------------------------------------
Utilities 6.7%
- --------------------------------------------------
Housing 3.7%
- --------------------------------------------------
Corporate-Backed 3.2%
- --------------------------------------------------
Other Revenue 2.2%
- --------------------------------------------------
Tax-Supported 0.1%
- --------------------------------------------------
* Does not include short-term investments and other net assets.
at 5.2% as of February 2005.(3) Slow job generation dimmed the employment
picture, and in response, the governor introduced an economic stimulus plan.
Combined with private investments, the plan funds redevelopment of
recession-distressed areas, aiming to attract businesses to create jobs.
Responsive financial management has been evident in Pennsylvania's balanced
operations year after year. Faced with dwindling tax receipts during the recent
recession, the commonwealth proactively cut costs and increased personal income
and cigarette taxes to avoid excessive use of onetime revenues. In fiscal year
2004, strong renewed revenue growth from corporate and personal income taxes
contributed to a surplus, part of which was used to replenish depleted reserves.
New legislation shifted a large portion of public school costs from local
property taxes to the commonwealth, which will be funded by recently enacted
legislation authorizing slot machines at racetracks. The change is not expected
to directly affect the budget balance.
Pennsylvania managed a favorable, moderate debt profile, which may weaken with
new debt issuance as part of the economic stimulus plan. Independent credit
agency Standard & Poor's assigned the commonwealth's general obligation bonds an
AA rating with a stable outlook.(4) The rating reflected the commonwealth's
proactive efforts in managing resources and making necessary budget adjustments
to maintain fiscal balance.
MANAGER'S DISCUSSION
We used various investment strategies during the year under review as we sought
to maximize tax-free income for shareholders. Please read the discussion on page
9 for details.
Thank you for your continued participation in Franklin Pennsylvania Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
(3) Source: Bureau of Labor Statistics.
(4) This does not indicate Standard & Poor's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
86 | Annual Report
Performance Summary as of 2/28/05
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------------
CLASS A CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.14 $10.48 $10.62
- --------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------------
Dividend Income $0.4614
- --------------------------------------------------------------------------------------
CLASS B CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.14 $10.51 $10.65
- --------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------------
Dividend Income $0.4038
- --------------------------------------------------------------------------------------
CLASS C CHANGE 2/28/05 2/29/04
- --------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.13 $10.56 $10.69
- --------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/04-2/28/05)
- --------------------------------------------------------------------------------------
Dividend Income $0.4035
- --------------------------------------------------------------------------------------
Annual Report | 87
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +3.19% +39.78% +76.48%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.18% +6.01% +5.39%
- -------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.24% +5.42% +5.25%
- -------------------------------------------------------------------------------------------------------
Distribution Rate(4) 4.24%
- -------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.73%
- -------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 3.35%
- -------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 5.32%
- -------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.61% +36.30% +38.03%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) -1.34% +6.08% +6.40%
- -------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) -1.46% +5.48% +6.20%
- -------------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.86%
- -------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.13%
- -------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.95%
- -------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.68%
- -------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +2.69% +36.12% +65.98%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.70% +6.36% +5.29%
- -------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/05)(3) +1.58% +5.75% +5.18%
- -------------------------------------------------------------------------------------------------------
Distribution Rate(4) 3.84%
- -------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate(5) 6.09%
- -------------------------------------------------------------------------------------------------------
30-Day Standardized Yield(6) 2.95%
- -------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield(5) 4.68%
- -------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
88 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS A 2/28/05
- -----------------------------------
1-Year -1.18%
- -----------------------------------
5-Year +6.01%
- -----------------------------------
10-Year +5.39%
- -----------------------------------
CLASS A (3/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Pennsylvania Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
------------- ------------- ------------- ---------
3/1/1995 $ 9,576 $10,000 $10,000
3/31/1995 $ 9,668 $10,115 $10,033
4/30/1995 $ 9,685 $10,127 $10,066
5/31/1995 $ 9,918 $10,450 $10,086
6/30/1995 $ 9,883 $10,359 $10,106
7/31/1995 $ 9,943 $10,457 $10,106
8/31/1995 $10,031 $10,589 $10,133
9/30/1995 $10,090 $10,656 $10,152
10/31/1995 $10,203 $10,811 $10,186
11/30/1995 $10,350 $10,991 $10,179
12/31/1995 $10,447 $11,096 $10,172
1/31/1996 $10,501 $11,180 $10,232
2/29/1996 $10,452 $11,105 $10,265
3/31/1996 $10,362 $10,963 $10,318
4/30/1996 $10,354 $10,932 $10,358
5/31/1996 $10,379 $10,928 $10,378
6/30/1996 $10,478 $11,047 $10,384
7/31/1996 $10,551 $11,147 $10,404
8/31/1996 $10,551 $11,144 $10,424
9/30/1996 $10,687 $11,300 $10,457
10/31/1996 $10,780 $11,428 $10,490
11/30/1996 $10,924 $11,637 $10,510
12/31/1996 $10,917 $11,588 $10,510
1/31/1997 $10,947 $11,610 $10,543
2/28/1997 $11,031 $11,716 $10,577
3/31/1997 $10,926 $11,560 $10,603
4/30/1997 $11,019 $11,657 $10,616
5/31/1997 $11,151 $11,832 $10,610
6/30/1997 $11,261 $11,958 $10,623
7/31/1997 $11,520 $12,289 $10,636
8/31/1997 $11,441 $12,174 $10,656
9/30/1997 $11,560 $12,319 $10,683
10/31/1997 $11,638 $12,398 $10,709
11/30/1997 $11,721 $12,471 $10,702
12/31/1997 $11,894 $12,653 $10,689
1/31/1998 $12,017 $12,783 $10,709
2/28/1998 $12,015 $12,787 $10,729
3/31/1998 $12,025 $12,799 $10,749
4/30/1998 $12,007 $12,741 $10,769
5/31/1998 $12,139 $12,942 $10,789
6/30/1998 $12,204 $12,994 $10,802
7/31/1998 $12,228 $13,026 $10,815
8/31/1998 $12,365 $13,227 $10,828
9/30/1998 $12,497 $13,392 $10,842
10/31/1998 $12,472 $13,392 $10,868
11/30/1998 $12,527 $13,439 $10,868
12/31/1998 $12,547 $13,473 $10,861
1/31/1999 $12,660 $13,633 $10,888
2/28/1999 $12,629 $13,573 $10,901
3/31/1999 $12,654 $13,592 $10,934
4/30/1999 $12,694 $13,626 $11,014
5/31/1999 $12,609 $13,547 $11,014
6/30/1999 $12,459 $13,352 $11,014
7/31/1999 $12,485 $13,401 $11,047
8/31/1999 $12,299 $13,293 $11,074
9/30/1999 $12,266 $13,299 $11,127
10/31/1999 $12,032 $13,155 $11,146
11/30/1999 $12,167 $13,295 $11,153
12/31/1999 $12,035 $13,196 $11,153
1/31/2000 $11,939 $13,138 $11,186
2/29/2000 $12,093 $13,291 $11,252
3/31/2000 $12,388 $13,581 $11,345
4/30/2000 $12,315 $13,501 $11,352
5/31/2000 $12,263 $13,431 $11,365
6/30/2000 $12,576 $13,787 $11,425
7/31/2000 $12,748 $13,979 $11,451
8/31/2000 $12,961 $14,194 $11,451
9/30/2000 $12,911 $14,120 $11,511
10/31/2000 $13,024 $14,274 $11,531
11/30/2000 $13,080 $14,382 $11,537
12/31/2000 $13,344 $14,738 $11,531
1/31/2001 $13,458 $14,884 $11,604
2/28/2001 $13,512 $14,931 $11,650
3/31/2001 $13,654 $15,065 $11,677
4/30/2001 $13,501 $14,901 $11,723
5/31/2001 $13,642 $15,062 $11,776
6/30/2001 $13,738 $15,163 $11,796
7/31/2001 $13,967 $15,387 $11,763
8/31/2001 $14,192 $15,641 $11,763
9/30/2001 $14,148 $15,588 $11,816
10/31/2001 $14,309 $15,774 $11,776
11/30/2001 $14,228 $15,641 $11,756
12/31/2001 $14,067 $15,493 $11,710
1/31/2002 $14,308 $15,762 $11,736
2/28/2002 $14,461 $15,952 $11,783
3/31/2002 $14,182 $15,639 $11,849
4/30/2002 $14,418 $15,945 $11,915
5/31/2002 $14,508 $16,041 $11,915
6/30/2002 $14,662 $16,211 $11,922
7/31/2002 $14,842 $16,420 $11,935
8/31/2002 $15,001 $16,617 $11,975
9/30/2002 $15,308 $16,981 $11,995
10/31/2002 $15,082 $16,699 $12,015
11/30/2002 $15,037 $16,630 $12,015
12/31/2002 $15,334 $16,981 $11,988
1/31/2003 $15,322 $16,938 $12,041
2/28/2003 $15,509 $17,175 $12,134
3/31/2003 $15,517 $17,185 $12,207
4/30/2003 $15,652 $17,299 $12,180
5/31/2003 $15,991 $17,704 $12,160
6/30/2003 $15,947 $17,628 $12,174
7/31/2003 $15,376 $17,011 $12,187
8/31/2003 $15,489 $17,138 $12,233
9/30/2003 $15,855 $17,642 $12,273
10/31/2003 $15,795 $17,553 $12,260
11/30/2003 $15,953 $17,736 $12,227
12/31/2003 $16,064 $17,883 $12,213
1/31/2004 $16,169 $17,986 $12,273
2/29/2004 $16,389 $18,256 $12,339
3/31/2004 $16,330 $18,193 $12,419
4/30/2004 $15,969 $17,762 $12,459
5/31/2004 $15,916 $17,697 $12,531
6/30/2004 $15,934 $17,762 $12,571
7/31/2004 $16,149 $17,996 $12,551
8/31/2004 $16,417 $18,356 $12,558
9/30/2004 $16,509 $18,454 $12,584
10/31/2004 $16,661 $18,612 $12,651
11/30/2004 $16,536 $18,459 $12,657
12/31/2004 $16,742 $18,684 $12,611
1/31/2005 $16,947 $18,859 $12,638
2/28/2005 $16,900 $18,796 $12,710
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS B 2/28/05
- ---------------------------------------------
1-Year -1.34%
- ---------------------------------------------
5-Year +6.08%
- ---------------------------------------------
Since Inception (2/1/00) +6.40%
- ---------------------------------------------
CLASS B (2/1/00-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Pennsylvania Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
------------- ------------- ------------- ---------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,127 $10,116 $10,059
3/31/2000 $10,370 $10,337 $10,142
4/30/2000 $10,315 $10,276 $10,148
5/31/2000 $10,255 $10,223 $10,160
6/30/2000 $10,512 $10,494 $10,213
7/31/2000 $10,662 $10,640 $10,237
8/31/2000 $10,835 $10,804 $10,237
9/30/2000 $10,787 $10,747 $10,290
10/31/2000 $10,877 $10,865 $10,308
11/30/2000 $10,919 $10,947 $10,314
12/31/2000 $11,135 $11,217 $10,308
1/31/2001 $11,225 $11,328 $10,373
2/28/2001 $11,265 $11,364 $10,415
3/31/2001 $11,377 $11,466 $10,438
4/30/2001 $11,244 $11,342 $10,480
5/31/2001 $11,357 $11,464 $10,527
6/30/2001 $11,442 $11,541 $10,545
7/31/2001 $11,627 $11,712 $10,515
8/31/2001 $11,809 $11,905 $10,515
9/30/2001 $11,767 $11,865 $10,563
10/31/2001 $11,895 $12,006 $10,527
11/30/2001 $11,823 $11,905 $10,509
12/31/2001 $11,683 $11,792 $10,468
1/31/2002 $11,877 $11,997 $10,492
2/28/2002 $11,998 $12,141 $10,533
3/31/2002 $11,762 $11,903 $10,592
4/30/2002 $11,951 $12,136 $10,652
5/31/2002 $12,020 $12,210 $10,652
6/30/2002 $12,141 $12,339 $10,658
7/31/2002 $12,284 $12,498 $10,669
8/31/2002 $12,410 $12,648 $10,705
9/30/2002 $12,658 $12,925 $10,723
10/31/2002 $12,477 $12,711 $10,741
11/30/2002 $12,434 $12,658 $10,741
12/31/2002 $12,674 $12,925 $10,717
1/31/2003 $12,646 $12,892 $10,764
2/28/2003 $12,807 $13,072 $10,847
3/31/2003 $12,807 $13,080 $10,912
4/30/2003 $12,899 $13,167 $10,889
5/31/2003 $13,186 $13,475 $10,871
6/30/2003 $13,142 $13,418 $10,883
7/31/2003 $12,668 $12,948 $10,895
8/31/2003 $12,755 $13,045 $10,936
9/30/2003 $13,048 $13,428 $10,972
10/31/2003 $12,992 $13,361 $10,960
11/30/2003 $13,117 $13,500 $10,930
12/31/2003 $13,202 $13,612 $10,918
1/31/2004 $13,282 $13,690 $10,972
2/29/2004 $13,457 $13,896 $11,031
3/31/2004 $13,415 $13,847 $11,102
4/30/2004 $13,101 $13,519 $11,137
5/31/2004 $13,053 $13,470 $11,203
6/30/2004 $13,061 $13,519 $11,238
7/31/2004 $13,243 $13,697 $11,220
8/31/2004 $13,443 $13,972 $11,226
9/30/2004 $13,513 $14,046 $11,250
10/31/2004 $13,631 $14,167 $11,309
11/30/2004 $13,522 $14,050 $11,315
12/31/2004 $13,684 $14,221 $11,274
1/31/2005 $13,844 $14,354 $11,297
2/28/2005 $13,703 $14,307 $11,363
Annual Report | 89
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 2/28/05
- ---------------------------------------------
1-Year +1.70%
- ---------------------------------------------
5-Year +6.36%
- ---------------------------------------------
Since Inception (5/1/95) +5.29%
- ---------------------------------------------
CLASS C (5/1/95-2/28/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Lehman
Pennsylvania Brothers
Tax-Free Municipal
Date Income Fund Bond Index(7) CPI(7)
------------- ------------- ------------- ---------
5/1/1995 $10,000 $10,000 $10,000
5/31/1995 $10,255 $10,319 $10,020
6/30/1995 $10,214 $10,229 $10,039
7/31/1995 $10,271 $10,326 $10,039
8/31/1995 $10,356 $10,457 $10,066
9/30/1995 $10,423 $10,523 $10,086
10/31/1995 $10,533 $10,676 $10,118
11/30/1995 $10,670 $10,853 $10,112
12/31/1995 $10,776 $10,957 $10,105
1/31/1996 $10,825 $11,040 $10,165
2/29/1996 $10,771 $10,966 $10,197
3/31/1996 $10,674 $10,825 $10,250
4/30/1996 $10,660 $10,795 $10,290
5/31/1996 $10,691 $10,791 $10,309
6/30/1996 $10,777 $10,908 $10,316
7/31/1996 $10,858 $11,007 $10,336
8/31/1996 $10,842 $11,004 $10,355
9/30/1996 $10,976 $11,158 $10,388
10/31/1996 $11,076 $11,285 $10,421
11/30/1996 $11,217 $11,491 $10,441
12/31/1996 $11,203 $11,443 $10,441
1/31/1997 $11,229 $11,464 $10,474
2/28/1997 $11,308 $11,569 $10,507
3/31/1997 $11,196 $11,415 $10,533
4/30/1997 $11,286 $11,511 $10,546
5/31/1997 $11,415 $11,684 $10,540
6/30/1997 $11,522 $11,808 $10,553
7/31/1997 $11,780 $12,136 $10,566
8/31/1997 $11,694 $12,022 $10,586
9/30/1997 $11,809 $12,164 $10,612
10/31/1997 $11,883 $12,243 $10,639
11/30/1997 $11,973 $12,315 $10,632
12/31/1997 $12,143 $12,494 $10,619
1/31/1998 $12,250 $12,623 $10,639
2/28/1998 $12,253 $12,627 $10,658
3/31/1998 $12,258 $12,638 $10,678
4/30/1998 $12,222 $12,581 $10,698
5/31/1998 $12,363 $12,780 $10,718
6/30/1998 $12,422 $12,831 $10,731
7/31/1998 $12,429 $12,863 $10,744
8/31/1998 $12,574 $13,062 $10,757
9/30/1998 $12,691 $13,224 $10,770
10/31/1998 $12,671 $13,224 $10,797
11/30/1998 $12,721 $13,270 $10,797
12/31/1998 $12,735 $13,304 $10,790
1/31/1999 $12,843 $13,462 $10,816
2/28/1999 $12,806 $13,403 $10,829
3/31/1999 $12,837 $13,422 $10,862
4/30/1999 $12,858 $13,455 $10,941
5/31/1999 $12,767 $13,377 $10,941
6/30/1999 $12,610 $13,185 $10,941
7/31/1999 $12,632 $13,233 $10,974
8/31/1999 $12,437 $13,127 $11,001
9/30/1999 $12,397 $13,132 $11,053
10/31/1999 $12,157 $12,990 $11,073
11/30/1999 $12,286 $13,128 $11,080
12/31/1999 $12,148 $13,030 $11,080
1/31/2000 $12,046 $12,974 $11,113
2/29/2000 $12,195 $13,124 $11,178
3/31/2000 $12,486 $13,411 $11,271
4/30/2000 $12,407 $13,332 $11,277
5/31/2000 $12,349 $13,263 $11,290
6/30/2000 $12,656 $13,614 $11,350
7/31/2000 $12,823 $13,803 $11,376
8/31/2000 $13,031 $14,016 $11,376
9/30/2000 $12,975 $13,943 $11,435
10/31/2000 $13,083 $14,095 $11,455
11/30/2000 $13,134 $14,202 $11,461
12/31/2000 $13,392 $14,553 $11,455
1/31/2001 $13,499 $14,697 $11,527
2/28/2001 $13,560 $14,744 $11,573
3/31/2001 $13,681 $14,876 $11,600
4/30/2001 $13,522 $14,715 $11,646
5/31/2001 $13,670 $14,873 $11,698
6/30/2001 $13,758 $14,973 $11,718
7/31/2001 $13,980 $15,194 $11,685
8/31/2001 $14,197 $15,445 $11,685
9/30/2001 $14,147 $15,393 $11,738
10/31/2001 $14,301 $15,576 $11,698
11/30/2001 $14,214 $15,445 $11,679
12/31/2001 $14,048 $15,299 $11,633
1/31/2002 $14,279 $15,564 $11,659
2/28/2002 $14,425 $15,752 $11,705
3/31/2002 $14,142 $15,443 $11,771
4/30/2002 $14,369 $15,745 $11,837
5/31/2002 $14,450 $15,841 $11,837
6/30/2002 $14,596 $16,008 $11,843
7/31/2002 $14,769 $16,214 $11,856
8/31/2002 $14,919 $16,409 $11,896
9/30/2002 $15,216 $16,768 $11,916
10/31/2002 $15,000 $16,490 $11,935
11/30/2002 $14,949 $16,422 $11,935
12/31/2002 $15,236 $16,768 $11,909
1/31/2003 $15,216 $16,726 $11,962
2/28/2003 $15,394 $16,960 $12,054
3/31/2003 $15,394 $16,970 $12,126
4/30/2003 $15,507 $17,082 $12,100
5/31/2003 $15,849 $17,482 $12,080
6/30/2003 $15,797 $17,407 $12,093
7/31/2003 $15,228 $16,798 $12,107
8/31/2003 $15,318 $16,924 $12,153
9/30/2003 $15,668 $17,421 $12,192
10/31/2003 $15,614 $17,333 $12,179
11/30/2003 $15,763 $17,514 $12,146
12/31/2003 $15,865 $17,659 $12,133
1/31/2004 $15,960 $17,760 $12,192
2/29/2004 $16,171 $18,028 $12,258
3/31/2004 $16,106 $17,965 $12,337
4/30/2004 $15,745 $17,539 $12,377
5/31/2004 $15,687 $17,476 $12,449
6/30/2004 $15,697 $17,539 $12,488
7/31/2004 $15,899 $17,770 $12,469
8/31/2004 $16,153 $18,126 $12,475
9/30/2004 $16,236 $18,222 $12,502
10/31/2004 $16,377 $18,379 $12,567
11/30/2004 $16,248 $18,228 $12,574
12/31/2004 $16,441 $18,450 $12,528
1/31/2005 $16,632 $18,623 $12,554
2/28/2005 $16,598 $18,561 $12,627
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. SINCE THE FUND CONCENTRATES ITS
INVESTMENTS IN A SINGLE STATE, IT IS SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC
AND REGULATORY CHANGES IN THAT STATE THAN A GEOGRAPHICALLY DIVERSIFIED FUND. 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.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
(3) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(4) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B and
C) per share on 2/28/05.
(5) Taxable equivalent distribution rate and yield assume the published rates
as of 12/23/04 for the maximum combined federal and Pennsylvania state personal
income tax bracket of 37.00%, based on the 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 month ended 2/28/05.
(7) Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman
Brothers Municipal Bond Index is a market value-weighted index engineered for
the long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
90 | Annual Report
Your Fund's Expenses
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 91
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.00 $3.32
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
- ---------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.20 $6.08
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.00 $6.08
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
- ---------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.66%;
B: 1.21%; and C: 1.21%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
92 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN ARIZONA TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.21 $ 10.88 $ 10.76 $ 10.83 $ 10.31
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.50 0.52 0.54 0.55 0.57
Net realized and unrealized gains (losses) ...... (0.01) 0.33 0.12 (0.06) 0.52
-----------------------------------------------------------------------
Total from investment operations ................. 0.49 0.85 0.66 0.49 1.09
Less distributions from net investment income .... (0.49) (0.52) (0.54) (0.56) (0.57)
Redemption fees .................................. --(c) -- -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.21 $ 11.21 $ 10.88 $ 10.76 $ 10.83
=======================================================================
Total return(b) .................................. 4.61% 8.00% 6.28% 4.63% 10.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 852,608 $ 900,646 $ 880,409 $ 877,126 $ 777,553
Ratios to average net assets:
Expenses ........................................ 0.63% 0.63% 0.63% 0.64% 0.64%
Net investment income ........................... 4.52% 4.75% 5.00% 5.12% 5.39%
Portfolio turnover rate .......................... 27.99% 16.22% 24.94% 27.59% 24.38%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 93
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND (CONTINUED)
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.26 $ 10.93 $ 10.81 $ 10.86 $ 10.32
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.44 0.46 0.48 0.50 0.52
Net realized and unrealized gains (losses) ...... -- 0.33 0.12 (0.05) 0.53
-----------------------------------------------------------------------
Total from investment operations ................. 0.44 0.79 0.60 0.45 1.05
Less distributions from net investment income .... (0.43) (0.46) (0.48) (0.50) (0.51)
Redemption fees .................................. --(c) -- -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.27 $ 11.26 $ 10.93 $ 10.81 $ 10.86
=======================================================================
Total return(b) .................................. 4.09% 7.28% 5.76% 4.22% 10.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 23,753 $ 25,617 $ 20,648 $ 11,798 $ 3,700
Ratios to average net assets:
Expenses ........................................ 1.18% 1.18% 1.18% 1.19% 1.19%
Net investment income ........................... 3.97% 4.20% 4.45% 4.57% 4.82%
Portfolio turnover rate .......................... 27.99% 16.22% 24.94% 27.59% 24.38%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
94 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND (CONTINUED)
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.31 $ 10.97 $ 10.85 $ 10.90 $ 10.38
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.44 0.46 0.48 0.50 0.52
Net realized and unrealized gains (losses) ...... -- 0.33 0.12 (0.05) 0.51
-----------------------------------------------------------------------
Total from investment operations ................. 0.44 0.79 0.60 0.45 1.03
Less distributions from net investment income .... (0.43) (0.45) (0.48) (0.50) (0.51)
Redemption fees .................................. --(c) -- -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.32 $ 11.31 $ 10.97 $ 10.85 $ 10.90
=======================================================================
Total return(b) .................................. 4.09% 7.42% 5.66% 4.21% 10.13%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 44,055 $ 43,027 $ 37,315 $ 31,526 $ 23,840
Ratios to average net assets:
Expenses ........................................ 1.18% 1.20% 1.16% 1.19% 1.19%
Net investment income ........................... 3.97% 4.18% 4.47% 4.57% 4.84%
Portfolio turnover rate .......................... 27.99% 16.22% 24.94% 27.59% 24.38%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 95
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.7%
BONDS 98.7%
ARIZONA 78.6%
Arizona Educational Loan Marketing Corp. Revenue,
Senior Series, 6.375%, 9/01/05 ............................................................ $ 10,000,000 $ 10,100,000
Sub Series, 6.625%, 9/01/05 ............................................................... 1,000,000 1,003,370
Arizona Health Facilities Authority Hospital System Revenue,
John C. Lincoln Health Network, 5.75%, 12/01/32 ........................................... 3,280,000 3,426,255
Phoenix Baptist Hospital, MBIA Insured, ETM, 6.25%, 9/01/11 ............................... 1,555,000 1,647,180
Arizona Health Facilities Authority Revenue, Catholic Healthcare West, Series A, 6.625%,
7/01/20 .................................................................................... 6,390,000 7,271,948
Arizona School Facilities Board Revenue, State School Improvement, 5.00%, 7/01/19 ............ 2,000,000 2,154,740
Arizona State Board of Regents COP, University of Arizona Main Campus, Series A-1,
AMBAC Insured, 5.125%, 6/01/25 ............................................................. 2,000,000 2,105,040
Arizona State Municipal Financing Program COP,
Dysart School, Series 22, BIG Insured, ETM, 7.875%, 8/01/05 ............................... 1,350,000 1,382,089
Refunding, Series 14, AMBAC Insured, 5.00%, 8/01/33 ....................................... 1,000,000 1,031,170
Series 20, BIG Insured, ETM, 7.625%, 8/01/06 .............................................. 2,240,000 2,340,554
Arizona State University COP,
Arizona State University Project-2002, MBIA Insured, 5.00%, 7/01/20 ....................... 5,475,000 5,805,197
Arizona State University Project-2002, MBIA Insured, 5.00%, 7/01/21 ....................... 5,965,000 6,297,668
Arizona State University Project-2002, MBIA Insured, 5.10%, 7/01/23 ....................... 3,545,000 3,760,323
Arizona State University Project-2002, MBIA Insured, 5.10%, 7/01/24 ....................... 1,875,000 1,982,812
Arizona State University Project-2002, MBIA Insured, 5.10%, 7/01/25 ....................... 2,640,000 2,786,678
Downtown Campus/Mercado Project, Series A, MBIA Insured, 5.80%, 7/01/24 ................... 1,350,000 1,439,653
Research Infrastructure Projects, AMBAC Insured, 5.00%, 9/01/30 ........................... 17,250,000 17,964,495
Research Infrastructure Projects, Series A, AMBAC Insured, 5.00%, 9/01/27 ................. 2,165,000 2,267,340
Arizona State University Revenue, FGIC Insured,
5.00%, 7/01/23 ............................................................................ 2,890,000 3,038,084
5.00%, 7/01/25 ............................................................................ 2,250,000 2,353,725
5.875%, 7/01/25 ........................................................................... 1,000,000 1,112,540
Arizona Student Loan Acquisition Authority Student Loan Revenue,
junior subordinate, Refunding, Series B-1, 6.15%, 5/01/29 ................................. 1,000,000 1,064,390
Refunding, Senior Series A-1, 5.90%, 5/01/24 .............................................. 1,500,000 1,597,305
Arizona Tourism and Sports Authority Tax Revenue, Multipurpose Stadium Facility, Series A,
MBIA Insured, 5.00%, 7/01/28 ............................................................... 7,000,000 7,289,800
Casa Grande Excise Tax Revenue, FGIC Insured, Pre-Refunded, 6.20%, 4/01/15 ................... 930,000 932,874
Casa Grande IDA,
IDR, Frito Lay/PepsiCo, 6.65%, 12/01/14 ................................................... 500,000 507,275
PCR, Frito Lay/PepsiCo, 6.60%, 12/01/10 ................................................... 1,800,000 1,826,442
Chandler IDA, MFHR, Hacienda Apartments Project, Refunding, Series A, GNMA Secured,
6.05%, 7/20/30 ............................................................................. 4,055,000 4,064,854
Douglas Community Housing Corp. MFR, Rancho La Perilla, Series A, GNMA Secured, 6.125%,
7/20/41 .................................................................................... 2,240,000 2,377,984
Eloy Municipal Property Corp. Facilities Revenue, 7.80%, 7/01/09 ............................. 240,000 242,054
Gila County IDAR, Asarco Inc., Refunding, 5.55%, 1/01/27 ..................................... 20,000,000 18,589,600
Glendale IDA Educational Facilities Revenue, American Graduate School International,
Connie Lee Insured, Pre-Refunded, 7.00%, 7/01/14 .......................................... 1,000,000 1,026,040
Connie Lee Insured, Pre-Refunded, 7.125%, 7/01/20 ......................................... 1,250,000 1,283,050
Refunding, Connie Lee Insured, 5.875%, 7/01/15 ............................................ 2,200,000 2,314,598
96 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARIZONA (CONT.)
Glendale IDAR, Midwestern University, Series A,
5.375%, 5/15/28 ........................................................................... $ 8,000,000 $ 8,431,840
Connie Lee Insured, 6.00%, 5/15/16 ........................................................ 455,000 482,072
Connie Lee Insured, 6.00%, 5/15/26 ........................................................ 340,000 357,813
MBIA Insured, 5.375%, 5/15/28 ............................................................. 1,050,000 1,130,776
Glendale Municipal Property Corp. Excise Tax Revenue, Series A, AMBAC Insured, 5.00%,
7/01/33 .................................................................................... 1,000,000 1,034,350
Glendale Water and Sewer Revenue, sub. lien, AMBAC Insured, 5.00%, 7/01/23 ................... 2,000,000 2,114,220
Goodyear Community Facilities General District No. 1 GO, MBIA Insured, 5.20%, 7/15/25 ........ 1,500,000 1,590,705
Goodyear Community Facilities Utilities District No. 1 GO, MBIA Insured, 5.20%, 7/15/25 ...... 1,000,000 1,060,470
Marana Municipal Property Corp. Municipal Facilities Revenue, Refunding, MBIA Insured,
5.25%, 7/01/22 ............................................................................. 1,100,000 1,172,578
Maricopa County GO, USD No. 41, Gilbert,
6.25%, 7/01/15 ............................................................................ 160,000 174,118
Pre-Refunded, 6.25%, 7/01/15 .............................................................. 1,840,000 2,035,960
Maricopa County Hospital Revenue, Sun Health Corp.,
5.30%, 4/01/29 ............................................................................ 7,095,000 7,141,685
Refunding, 5.80%, 4/01/08 ................................................................. 3,870,000 4,076,581
Refunding, 5.90%, 4/01/09 ................................................................. 2,120,000 2,236,346
Refunding, 6.125%, 4/01/18 ................................................................ 15,650,000 16,360,510
Maricopa County IDA Health Facilities Revenue,
Catholic Healthcare West, Refunding, ACA Insured, 5.00%, 7/01/16 .......................... 1,785,000 1,830,357
Catholic Healthcare West, Refunding, Series A, ACA Insured, 5.00%, 7/01/21 ................ 9,600,000 9,733,728
Catholic Healthcare West, Series A, 5.375%, 7/01/23 ....................................... 7,000,000 7,315,350
Catholic Healthcare West, Series A, 5.50%, 7/01/26 ........................................ 12,250,000 12,812,765
Catholic Healthcare West Project, Refunding, Series A, 5.00%, 7/01/16 ..................... 10,315,000 10,583,603
Maricopa County IDA Hospital Facility Revenue,
Mayo Clinic Hospital, 5.25%, 11/15/37 ..................................................... 16,000,000 16,705,600
Mayo Clinic Hospital, AMBAC Insured, 5.25%, 11/15/37 ...................................... 3,000,000 3,124,890
Samaritan Health Services, Refunding, Series A, MBIA Insured, ETM, 7.00%, 12/01/16 ........ 1,890,000 2,353,258
Maricopa County IDA, MFHR,
Madera Pointe Apartments Project, Refunding, FSA Insured, 5.90%, 6/01/26 .................. 2,105,000 2,173,707
Metro Gardens, Mesa Ridge Project, Series A, MBIA Insured, 5.15%, 7/01/29 ................. 2,350,000 2,357,755
Senior National Health Facilities II, Project A, FSA Insured, 5.50%, 1/01/18 .............. 2,000,000 2,189,080
Tierra Antigua Project, Series A-1, AMBAC Insured, 5.30%, 12/01/21 ........................ 1,585,000 1,628,239
Villas De Merced Apartment Project, Series A, GNMA Secured, 5.50%, 12/20/37 ............... 570,000 576,652
Western Groves Apartments, Series A-1, AMBAC Insured, 5.30%, 12/01/22 ..................... 1,785,000 1,831,624
Maricopa County IDAR, SFMR, GNMA Secured, 6.25%, 12/01/30 .................................... 140,000 143,819
Maricopa County Osborn School District No. 8 GO, Series A, FGIC Insured, Pre-Refunded,
5.875%, 7/01/14 ............................................................................ 1,410,000 1,488,029
Maricopa County Pollution Control Corp. PCR, Public Service Co. Palo Verde Project, Series A,
AMBAC Insured, 5.05%, 5/01/29 .............................................................. 16,500,000 17,157,525
Mesa IDAR, Discovery Health System, Series A, MBIA Insured,
5.75%, 1/01/25 ............................................................................ 41,500,000 45,498,110
5.625%, 1/01/29 ........................................................................... 18,000,000 19,494,360
Mesa Street and Highway Revenue, FSA Insured, 5.00%, 7/01/19 ................................. 2,500,000 2,707,750
Annual Report | 97
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARIZONA (CONT.)
Mesa Utility System Revenue,
FGIC Insured, 5.00%, 7/01/21 .............................................................. $ 5,000,000 $ 5,245,450
MBIA Insured, 5.00%, 7/01/26 .............................................................. 10,000,000 10,524,800
MBIA Insured, 5.00%, 7/01/27 .............................................................. 10,500,000 11,009,880
MBIA Insured, 5.00%, 7/01/28 .............................................................. 11,000,000 11,499,840
Mohave County IDA Health Care Revenue, Refunding, GNMA Secured, 6.375%, 11/01/31 ............. 590,000 625,890
Northern Arizona University COP, AMBAC Insured, 5.00%, 9/01/30 ............................... 6,360,000 6,623,431
Northern Arizona University Revenues, FGIC Insured, 5.00%, 6/01/30 ........................... 1,000,000 1,033,050
Oro Valley Municipal Property Corp. Revenue, Municipal Water System, MBIA Insured,
Pre-Refunded, 5.75%, 7/01/17 ............................................................... 500,000 526,855
Peoria Water and Sewer Revenue, FGIC Insured, 5.00%, 7/01/19 ................................. 1,300,000 1,381,913
Phoenix Airport Revenue,
Refunding, Series B, MBIA Insured, 6.20%, 7/01/10 ......................................... 700,000 716,653
Refunding, Series C, MBIA Insured, 6.30%, 7/01/10 ......................................... 1,680,000 1,720,034
Refunding, Series C, MBIA Insured, 6.40%, 7/01/11 ......................................... 1,785,000 1,827,626
Refunding, Series C, MBIA Insured, 6.40%, 7/01/12 ......................................... 570,000 583,612
Series D, MBIA Insured, 6.30%, 7/01/10 .................................................... 1,800,000 1,842,894
Series D, MBIA Insured, 6.40%, 7/01/11 .................................................... 3,825,000 3,916,341
Series D, MBIA Insured, 6.40%, 7/01/12 .................................................... 820,000 839,582
Phoenix Civic Improvement Corp. Airport Revenue, senior lien, Series B, FGIC Insured, 5.25%,
7/01/22 ................................................................................... 3,000,000 3,163,830
7/01/23 ................................................................................... 5,000,000 5,282,700
7/01/27 ................................................................................... 15,250,000 15,965,987
Phoenix Civic Improvement Corp. Excise Tax Revenue,
Adams Street Garage Project, senior lien, Series B, 5.35%, 7/01/24 ........................ 2,985,000 3,198,189
Municipal Courthouse Project, senior lien, Series A, 5.375%, 7/01/29 ...................... 18,310,000 19,537,319
Phoenix Civic Improvement Corp. Wastewater System Revenue, junior lien,
FGIC Insured, Pre-Refunded, 6.00%, 7/01/19 ................................................ 3,000,000 3,446,370
FGIC Insured, Pre-Refunded, 6.00%, 7/01/20 ................................................ 3,670,000 4,216,059
FGIC Insured, Pre-Refunded, 6.00%, 7/01/24 ................................................ 24,715,000 28,392,345
MBIA Insured, 5.00%, 7/01/28 .............................................................. 2,000,000 2,090,880
MBIA Insured, 5.00%, 7/01/29 .............................................................. 3,405,000 3,551,790
Refunding, FGIC Insured, 5.00%, 7/01/20 ................................................... 9,710,000 10,225,407
Refunding, FGIC Insured, 5.125%, 7/01/21 .................................................. 10,000,000 10,617,200
Refunding, FGIC Insured, 5.00%, 7/01/24 ................................................... 7,050,000 7,348,215
Phoenix Civic Improvement Corp. Water System Revenue, junior lien,
FGIC Insured, 5.00%, 7/01/26 .............................................................. 3,250,000 3,389,425
Pre-Refunded, 6.00%, 7/01/19 .............................................................. 3,000,000 3,141,810
Phoenix Civic Plaza Building Corp. Excise Tax Revenue, senior lien, 6.00%, 7/01/14 ........... 4,300,000 4,394,557
Phoenix GO,
5.25%, 7/01/22 ............................................................................ 5,420,000 5,825,308
Various Purposes, Series B, 5.00%, 7/01/27 ................................................ 8,360,000 8,708,027
Phoenix HFC Mortgage Revenue,
Project A, Refunding, MBIA Insured, 6.50%, 7/01/24 ........................................ 1,070,000 1,072,568
Section 8 Project, Refunding, Series A, MBIA Insured, 6.90%, 1/01/23 ...................... 1,750,000 1,779,295
98 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARIZONA (CONT.)
Phoenix IDA Government Office Lease Revenue,
Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/21 ................................ $ 4,300,000 $ 4,531,641
Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/28 ................................ 4,000,000 4,143,760
Capitol Mall Project, AMBAC Insured, 5.375%, 9/15/22 ...................................... 2,000,000 2,189,240
Capitol Mall Project, AMBAC Insured, 5.50%, 9/15/27 ....................................... 24,300,000 26,268,057
Phoenix IDA, SFMR, GNMA Secured, 6.30%, 12/01/12 ............................................. 85,000 87,360
Phoenix IDA Hospital Revenue, Refunding, Series B, Connie Lee Insured, 5.75%, 12/01/16 ....... 3,500,000 3,801,525
Phoenix IDAR, SFMR, Series 1B, GNMA Secured, 6.20%, 6/01/22 .................................. 115,000 116,538
Phoenix Municipal Housing Revenue, Fillmore Gardens Project, Refunding, 6.30%, 6/01/09 ....... 1,500,000 1,537,140
Phoenix Street and Highway Revenue, Refunding, 6.60%, 7/01/07 ................................ 610,000 612,428
Pima County IDA,
MFR, Series A, FNMA Insured, Pre-Refunded, 6.00%, 12/01/21 ................................ 2,720,000 2,937,382
SFMR, Refunding, Series A, 7.625%, 2/01/12 ................................................ 630,000 632,180
SFMR, Series B-1, GNMA Secured, 6.10%, 5/01/31 ............................................ 95,000 98,761
Prescott Municipal Property Corp. Revenue, Series 2004, MBIA Insured, 5.00%, 7/01/34 ......... 1,000,000 1,033,830
Salt River Project Agricultural Improvement and Power District Electric System Revenue,
Salt River Project,
Refunding, Series A, 5.00%, 1/01/23 ....................................................... 6,000,000 6,358,140
Series B, 5.00%, 1/01/25 .................................................................. 7,125,000 7,516,091
Series B, 5.00%, 1/01/31 .................................................................. 10,000,000 10,399,800
Scottsdale GO, Refunding, 5.00%, 7/01/22 ..................................................... 3,000,000 3,208,560
Scottsdale IDA Hospital Revenue, Scottsdale Healthcare,
5.70%, 12/01/21 ........................................................................... 2,000,000 2,161,420
5.80%, 12/01/31 ........................................................................... 14,865,000 15,961,740
Scottsdale Municipal Property Corp. Excise Tax Revenue,
5.00%, 7/01/24 ............................................................................ 5,000,000 5,341,600
Series A, 5.00%, 7/01/34 .................................................................. 2,000,000 2,089,320
Sierra Vista Municipal Property Corp. Facilities Revenue, AMBAC Insured, 6.15%, 1/01/15 ...... 360,000 365,566
Southern Arizona Capital Facilities Finance Corp. Student Housing Revenue, University of
Arizona Project, MBIA Insured, Pre-Refunded, 5.10%, 9/01/33 ................................ 3,000,000 3,339,090
Tempe Arizona IDA Lease Revenue, State University Foundation, AMBAC Insured, 5.00%,
7/01/28 ................................................................................... 4,275,000 4,451,985
7/01/34 ................................................................................... 11,510,000 11,905,368
Tolleson IDA, MFR, Copper Cove Project, Series A, GNMA Secured,
5.40%, 11/20/22 ........................................................................... 1,090,000 1,128,303
5.45%, 11/20/32 ........................................................................... 1,285,000 1,329,281
Tucson Airport Authority Inc. Revenue, sub. lien, AMBAC Insured, 5.35%, 6/01/31 .............. 10,000,000 10,402,300
Tucson GO, Series A, Pre-Refunded, 5.25%, 7/01/20 ............................................ 1,050,000 1,145,613
Tucson IDA Lease Revenue, University of Arizona/Marshall Foundation, Series A,
AMBAC Insured, 5.00%, 7/15/32 .............................................................. 1,000,000 1,031,640
Tucson Water Revenue,
Series A, FGIC Insured, 5.00%, 7/01/23 .................................................... 3,600,000 3,762,432
Series D, FGIC Insured, 5.25%, 7/01/23 .................................................... 3,000,000 3,156,030
Series D, FGIC Insured, 5.25%, 7/01/24 .................................................... 2,700,000 2,906,064
Annual Report | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARIZONA (CONT.)
University of Arizona COP,
Parking and Student Housing, AMBAC Insured, 5.75%, 6/01/24 ................................ $ 1,115,000 $ 1,216,309
University of Arizona Projects, Series B, AMBAC Insured, 5.125%, 6/01/22 .................. 2,250,000 2,404,778
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/26 ................... 7,070,000 7,405,047
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/28 ................... 7,000,000 7,287,350
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/31 ................... 5,565,000 5,762,279
University of Arizona University Revenues, Arizona Board of Regents System, Series A,
FGIC Insured, 5.80%, 6/01/24 ............................................................... 2,000,000 2,246,760
Yavapai County IDA Hospital Facility Revenue, Regional Medical Center, Series A, 6.00%,
8/01/33 .................................................................................... 2,000,000 2,116,160
Yavapai County IDA Residential Care Facility Revenue, Margaret T. Morris Center, Series A,
GNMA Secured, 5.40%, 2/20/38 ............................................................... 1,575,000 1,580,371
Yavapai County USD No. 28, Camp Verde GO, Refunding, FGIC Insured, 6.00%, 7/01/09 ............ 75,000 76,712
Yuma IDA Hospital Revenue,
Regency Apartments, Refunding, Series A, GNMA Secured, 5.50%, 12/20/32 .................... 920,000 921,877
Yuma Regional Medical Center, FSA Insured, Pre-Refunded, 5.50%, 8/01/21 ................... 2,015,000 2,290,551
Yuma Municipal Property Corp. Revenue, Municipal Facilities, AMBAC Insured, 5.00%,
7/01/25 .................................................................................... 3,100,000 3,212,437
-------------
723,229,300
-------------
U.S TERRITORIES 20.1%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.50%, 5/15/39 ............................................................................. 5,000,000 4,961,450
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured,
Pre-Refunded, 9.00%, 7/01/09 ............................................................... 35,000 35,785
Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.375%, 7/01/28 ................... 3,355,000 3,564,184
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
5.50%, 7/01/36 ............................................................................. 8,550,000 9,357,376
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series B, Pre-Refunded, 6.00%, 7/01/39 .................................................... 19,600,000 22,568,420
Series D, 5.375%, 7/01/36 ................................................................. 5,000,000 5,328,000
Series Y, 5.00%, 7/01/36 .................................................................. 10,000,000 10,367,300
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
7.50%, 7/01/09 ............................................................................. 50,000 50,219
Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 ................ 15,000,000 15,869,250
Puerto Rico HFC Revenue,
MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ................................................ 620,000 620,236
Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 .................... 40,000 40,548
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Hospital Revenue,
Dr. Pila Hospital Project, Refunding, FHA Insured, 5.875%, 8/01/12 ........................ 5,225,000 5,380,026
Hospital Auxilio Mutuo Obligation, Series A, MBIA Insured, 6.25%, 7/01/24 ................. 2,790,000 2,860,447
Puerto Rico PBA Revenue, Guaranteed, Government Facilities,
Series D, 5.375%, 7/01/33 ................................................................. 8,190,000 8,727,264
Series D, Pre-Refunded, 5.375%, 7/01/33 ................................................... 21,810,000 24,387,070
Series I, 5.375%, 7/01/34 ................................................................. 40,000,000 42,702,400
Series I, 5.00%, 7/01/36 .................................................................. 7,000,000 7,220,710
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES (CONT.)
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
5.50%, 8/01/29 ........................................................................... $ 3,660,000 $ 3,954,081
Pre-Refunded, 5.50%, 8/01/29 ............................................................. 11,340,000 12,773,149
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/13 ..... 2,500,000 2,649,750
Virgin Islands Water and Power Authority Water System Revenue, Refunding, 5.50%,
7/01/17 ................................................................................... 1,500,000 1,558,740
-------------
184,976,405
-------------
TOTAL LONG TERM INVESTMENTS (COST $848,530,375) ............................................. 908,205,705
-------------
SHORT TERM INVESTMENTS 0.2%
BONDS 0.2%
ARIZONA 0.0%(a)
(b)Arizona Health Facilities Authority Revenue, Arizona Voluntary Hospital Federation, Series A,
FGIC Insured, Weekly VRDN and Put, 1.86%, 10/01/15 ......................................... 100,000 100,000
-------------
U.S. TERRITORIES 0.2%
(b)Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 .............................. 1,600,000 1,600,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $1,700,000) .............................................. 1,700,000
-------------
TOTAL INVESTMENTS (COST $850,230,375) 98.9% ................................................. 909,905,705
OTHER ASSETS, LESS LIABILITIES 1.1% ......................................................... 10,510,766
-------------
NET ASSETS 100.0% ........................................................................... $ 920,416,471
=============
See Glossary of Terms on page 194.
(a) Rounds to less than 0.05% of net assets.
(b) 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.
Annual Report | See notes to financial statements. | 101
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN COLORADO TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.19 $ 11.98 $ 11.79 $ 11.64 $ 10.90
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.54 0.55 0.57 0.58 0.59
Net realized and unrealized gains (losses) ..... (0.15) 0.19 0.19 0.16 0.74
----------------------------------------------------------------------
Total from investment operations ................. 0.39 0.74 0.76 0.74 1.33
Less distributions from net investment income .... (0.54) (0.53) (0.57) (0.59) (0.59)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 12.04 $ 12.19 $ 11.98 $ 11.79 $ 11.64
======================================================================
Total return(b) .................................. 3.39% 6.39% 6.62% 6.48% 12.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 346,589 $ 339,134 $ 345,825 $ 309,109 $ 285,169
Ratios to average net assets:
Expenses ....................................... 0.69% 0.69% 0.69% 0.70% 0.71%
Net investment income .......................... 4.52% 4.56% 4.79% 4.95% 5.27%
Portfolio turnover rate .......................... 30.06% 17.79% 26.30% 20.72% 50.05%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
102 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN COLORADO TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.27 $ 12.06 $ 11.86 $ 11.70 $ 10.96
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.48 0.48 0.51 0.52 0.54
Net realized and unrealized gains (losses) ..... (0.14) 0.20 0.20 0.16 0.73
----------------------------------------------------------------------
Total from investment operations ................. 0.34 0.68 0.71 0.68 1.27
Less distributions from net investment income .... (0.48) (0.47) (0.51) (0.52) (0.53)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 12.13 $ 12.27 $ 12.06 $ 11.86 $ 11.70
======================================================================
Total return(b) .................................. 2.88% 5.75% 6.10% 5.95% 11.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 40,875 $ 43,075 $ 43,821 $ 34,473 $ 23,450
Ratios to average net assets:
Expenses ....................................... 1.24% 1.26% 1.22% 1.25% 1.26%
Net investment income .......................... 3.97% 3.99% 4.26% 4.40% 4.72%
Portfolio turnover rate .......................... 30.06% 17.79% 26.30% 20.72% 50.05%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 103
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.9%
BONDS 97.1%
COLORADO 91.7%
Arapahoe County MFR, Housing Development Reserve, South Creek Project, Series A,
FSA Insured, 6.45%, 6/01/32 ............................................................... $ 3,105,000 $ 3,316,047
Arapahoe County Water and Wastewater GO, Refunding, Series A, MBIA Insured, 5.125%,
12/01/32 .................................................................................. 15,000,000 15,706,200
Arvada IDR, Wanco Inc. Project,
5.25%, 12/01/07 .......................................................................... 65,000 67,105
5.80%, 12/01/17 .......................................................................... 480,000 505,661
Aurora COP, AMBAC Insured, 5.50%, 12/01/30 .................................................. 4,935,000 5,342,828
Bayfield School District No. 10 GO, MBIA Insured, Pre-Refunded, 6.65%, 6/01/15 .............. 1,000,000 1,011,530
Boulder County Development Revenue, University Corp. for Atmospheric Research,
MBIA Insured, 5.00%, 9/01/33 .............................................................. 1,500,000 1,550,160
Boulder County Hospital Revenue, Longmont United Hospital Project,
5.50%, 12/01/12 .......................................................................... 1,000,000 1,031,090
5.60%, 12/01/17 .......................................................................... 3,385,000 3,472,942
Bowles Metropolitan District GO, Refunding, FSA Insured, 5.00%, 12/01/33 .................... 2,500,000 2,585,725
Broadlands Metropolitan District No. 2 GO, Refunding, MBIA Insured, 5.25%, 12/01/34 ......... 8,655,000 9,182,955
Broomfield COP,
AMBAC Insured, 6.00%, 12/01/29 ........................................................... 2,000,000 2,245,520
Master Facilities Lease Purchase, AMBAC Insured, 5.625%, 12/01/22 ........................ 1,535,000 1,687,625
Broomfield Sales and Use Tax Revenue, Refunding and Improvement, Series A, AMBAC Insured,
5.00%, 12/01/27 ........................................................................... 10,000,000 10,409,500
Broomfield Sewer Activity Enterprise Sewer and Wastewater Revenue, AMBAC Insured, 5.00%,
12/01/31 .................................................................................. 7,500,000 7,747,350
Centennial Downs Metropolitan District GO, Refunding, AMBAC Insured, 5.00%, 12/01/28 ........ 1,560,000 1,625,879
Colorado Department of Transportation COP, MBIA Insured, 5.00%, 6/15/34 ..................... 6,915,000 7,163,940
Colorado Educational and Cultural Facilities Authority Revenue,
Improvement, University of Denver Project, Refunding, AMBAC Insured, 5.375%,
3/01/23 .................................................................................. 4,000,000 4,279,560
Student Housing, University of Colorado Foundation Project, AMBAC Insured, 5.00%,
7/01/27 .................................................................................. 6,545,000 6,800,779
Student Housing, University of Colorado Foundation Project, AMBAC Insured, 5.00%,
7/01/32 ................................................................................. 10,005,000 10,313,754
Colorado Health Facilities Authority Revenue,
Birchwood Manor Project, Series A, GNMA Secured, 7.625%, 4/01/26 .......................... 1,615,000 1,622,655
Catholic Health Initiatives, Series A, 5.00%, 12/01/28 .................................... 1,800,000 1,827,216
Community Provider Pooled Loan Program, Series A, FSA Insured, 7.25%, 7/15/17 ............. 540,000 542,084
Covenant Retirement Communities, 6.75%, 12/01/15 .......................................... 1,750,000 1,806,052
Covenant Retirement Communities, 6.75%, 12/01/25 .......................................... 4,950,000 5,097,510
Evangelical Lutheran, Series A, 5.25%, 6/01/34 ............................................ 3,500,000 3,597,790
Hospital Improvement, North Colorado Medical Center Inc. Project, FSA Insured, 5.75%,
5/15/24 .................................................................................. 5,000,000 5,466,500
Kaiser Permanente, Series A, ETM, 5.35%, 11/01/16 ......................................... 8,000,000 8,361,680
Oakbrook Manor, Series A, GNMA Secured, 7.25%, 4/01/11 .................................... 210,000 210,934
Oakbrook Manor, Series A, GNMA Secured, 7.625%, 4/01/26 ................................... 885,000 889,195
Parkview Medical Center Inc. Project, 5.25%, 9/01/18 ...................................... 1,660,000 1,695,541
Parkview Medical Center Inc. Project, 5.30%, 9/01/25 ...................................... 1,615,000 1,636,027
Portercare Adventist Health, 6.625%, 11/15/26 ............................................. 2,500,000 2,781,300
Portercare Adventist Health, 6.50%, 11/15/31 .............................................. 5,500,000 6,079,810
104 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
COLORADO (CONT.)
Colorado HFAR,
MF, Project II, Series A-2, 5.30%, 10/01/23 .............................................. $ 1,855,000 $ 1,930,684
MF, Project II, Series A-2, 5.375%, 10/01/32 ............................................. 4,075,000 4,184,862
MFH, Castle High, Series A, AMBAC Insured, 5.90%, 12/01/20 ............................... 2,630,000 2,773,519
MFH, Insured Mortgage, Series A-2, FHA Insured, 6.00%, 10/01/28 .......................... 1,000,000 1,039,580
MFH, Insured Mortgage, Series C-3, 6.05%, 10/01/32 ....................................... 1,535,000 1,604,321
Colorado Mountain College Residence Hall Authority Revenue, MBIA Insured, Pre-Refunded,
5.75%, 6/01/23 ............................................................................ 2,000,000 2,103,280
Colorado Springs Hospital Revenue,
6.375%, 12/15/30 ......................................................................... 3,785,000 4,184,015
Pre-Refunded, 6.375%, 12/15/30 ........................................................... 3,715,000 4,363,936
Colorado Springs Utilities Revenue,
Refunding and Improvement, Series A, 5.375%, 11/15/26 .................................... 10,000,000 10,600,400
sub. lien, Refunding and Improvement, Series A, 5.00%, 11/15/29 .......................... 2,000,000 2,070,020
sub. lien, System Improvement, Series B, 5.00%, 11/15/33 ................................. 4,000,000 4,154,080
Colorado State Board of Community Colleges and Occupational Education Revenue, Red Rocks
Community College Project, AMBAC Insured, Pre-Refunded, 6.00%, 11/01/19 ................... 90,000 92,332
Colorado Water Resources and Power Development Authority Clean Water Revenue, Series A,
6.15%, 9/01/11 ........................................................................... 125,000 125,387
6.30%, 9/01/14 ........................................................................... 25,000 25,080
Colorado Water Resources and Power Development Authority Small Water Resource Revenue,
Series A, FGIC Insured, 5.80%, 11/01/20 ................................................... 2,000,000 2,244,100
Colorado Water Resources and Power Development Authority Water Resources Revenue, Parker
Water and Sanitary District, MBIA Insured, 5.00%, 9/01/30 ................................. 5,000,000 5,218,950
Colorado Water Resources and Power Development Revenue, East Cherry Creek Valley Water
Sanitary District, MBIA Insured, 5.00%,
(a)11/15/29 ............................................................................... 2,465,000 2,581,397
(a)11/15/30 ............................................................................... 2,590,000 2,705,566
Denver City and County Airport Revenue,
Series A, AMBAC Insured, 5.625%, 11/15/23 ................................................ 4,500,000 4,810,005
Series B, 5.50%, 11/15/33 ................................................................ 5,000,000 5,002,950
Series D, 7.75%, 11/15/13 ................................................................ 1,000,000 1,201,070
Denver City and County COP, Series B, AMBAC Insured, Pre-Refunded, 5.50%, 12/01/25 .......... 13,500,000 15,267,285
Denver Health and Hospital Authority Healthcare Revenue,
6.25%, 12/01/33 .......................................................................... 3,250,000 3,467,002
Series A, 6.00%, 12/01/23 ................................................................ 1,000,000 1,032,300
Series A, 6.00%, 12/01/31 ................................................................ 5,400,000 5,540,724
Dolores County School District GO, FSA Insured, 5.375%, 12/01/25 ............................ 1,400,000 1,524,236
Douglas County School District No. 1 GO, Douglas and Elbert Counties, Improvement, Series B,
FSA Insured, 5.00%,
12/15/28 ................................................................................. 1,760,000 1,841,682
12/15/29 ................................................................................. 2,955,000 3,084,961
E-470 Public Highway Authority Revenue,
Refunding, Senior Series A, MBIA Insured, 5.00%, 9/01/26 ................................. 5,000,000 5,167,200
Senior Series A, MBIA Insured, 5.75%, 9/01/29 ............................................ 4,575,000 5,141,477
Senior Series A, MBIA Insured, 5.75%, 9/01/35 ............................................ 10,825,000 12,148,032
El Paso County Mortgage Revenue, Stetson Meadows, Series A, GNMA Secured, 5.25%,
12/20/32 .................................................................................. 1,890,000 1,945,868
Annual Report | 105
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
COLORADO (CONT.)
El Paso County School District No. 2 GO, FGIC Insured, 5.25%, 12/01/26 ...................... $ 4,000,000 $ 4,251,440
El Paso County School District No. 38 GO, Pre-Refunded, 6.00%, 12/01/24 ..................... 1,500,000 1,722,945
Fort Collins PCR, Anheuser-Busch Co. Project, Refunding, 6.00%, 9/01/31 ..................... 5,325,000 5,501,524
Garfield County Building Corp. COP, AMBAC Insured, 5.75%,
12/01/19 ................................................................................. 1,500,000 1,684,890
12/01/24 ................................................................................. 1,000,000 1,111,560
Greeley MFR, Housing Mortgage, Creek Stone Project, FHA Insured, 5.95%, 7/01/28 ............. 1,000,000 1,039,240
La Junta Hospital Revenue, Ark Valley Regional Medical Center Project,
5.75%, 4/01/14 ........................................................................... 2,090,000 2,186,997
6.00%, 4/01/19 ........................................................................... 1,000,000 1,049,130
6.10%, 4/01/24 ........................................................................... 1,000,000 1,043,740
Lakewood MFHR, Mortgage, FHA Insured,
6.65%, 10/01/25 .......................................................................... 1,235,000 1,270,543
6.70%, 10/01/36 .......................................................................... 3,025,000 3,111,152
Las Animas County School District No. 1 COP, Refunding,
6.15%, 12/01/08 .......................................................................... 1,000,000 1,034,710
6.20%, 12/01/10 .......................................................................... 935,000 967,725
Northwest Parkway Public Highway Authority Revenue, Series A,
AMBAC Insured, 5.125%, 6/15/26 ........................................................... 7,550,000 8,023,008
AMBAC Insured, 5.125%, 6/15/31 ........................................................... 4,465,000 4,690,527
FSA Insured, 5.25%, 6/15/41 .............................................................. 3,460,000 3,632,654
Pitkin County Open Space Acquisition GO, Refunding, AMBAC Insured, 5.375%, 12/01/30 ......... 2,940,000 3,147,270
Pueblo Board Waterworks Water Revenue, Series A, FSA Insured, 6.00%, 11/01/21 ............... 4,300,000 4,875,813
Pueblo County COP, Public Parking, 6.90%, 7/01/15 ........................................... 415,000 418,175
Pueblo County GO, MBIA Insured, 6.00%, 6/01/16 .............................................. 4,395,000 4,577,173
Pueblo County School District No. 070 Pueblo Rural GO, FGIC Insured, Pre-Refunded, 6.00%,
12/01/19 .................................................................................. 3,995,000 4,523,019
Pueblo Urban Renewal Authority Tax Increment Revenue, Refunding, AMBAC Insured, 6.10%,
12/01/15 .................................................................................. 1,000,000 1,004,410
Regional Transportation District Sales Tax Revenue, Series A, FGIC Insured, 5.125%,
11/01/20 .................................................................................. 1,735,000 1,868,005
Summit County Sports Facilities Revenue, Keystone Resorts Project, Ralston Purina Co.,
Refunding, 7.875%, 9/01/08 ................................................................ 2,750,000 3,203,530
Thornton Development Authority Tax Increment Revenue, North Washington Street Urban
Renewal, MBIA Insured, 5.00%, 12/01/29 .................................................... 6,100,000 6,367,424
Thornton Water Enterprise Revenue, MBIA Insured, 5.00%, 12/01/29 ............................ 7,010,000 7,317,318
University of Colorado COP, Series A, AMBAC Insured, 5.00%, 6/01/33 ......................... 6,070,000 6,268,246
University of Colorado Hospital Authority Revenue, Series A, 5.60%, 11/15/25 ................ 1,900,000 1,973,929
University of Northern Colorado Revenue, Refunding and Improvement, Auxiliary Facilities
Systems, AMBAC Insured, 5.00%, 6/01/31 .................................................... 3,000,000 3,082,320
Ute Water Conservancy District Water Revenue, MBIA Insured, 5.75%, 6/15/20 .................. 5,000,000 5,602,850
Westminster Building Authority COP, MBIA Insured, 5.25%, 12/01/22 ........................... 1,555,000 1,665,965
-------------
355,053,977
-------------
106 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES 5.4%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured,
Pre-Refunded, 9.00%, 7/01/09 .............................................................. $ 25,000 $ 25,560
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series G, 5.00%, 7/01/42 .................................................................. 2,500,000 2,563,150
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Industrial Revenue, Guaynabo Municipal Government, 5.625%,
7/01/22 .................................................................................. 1,335,000 1,381,325
Puerto Rico PBA Revenue, Guaranteed, Government Facilities,
Series D, 5.375%, 7/01/33 ................................................................ 2,120,000 2,259,072
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................. 3,780,000 4,226,645
Series I, 5.375%, 7/01/34 ................................................................ 5,000,000 5,337,800
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.40%, 10/01/12 .......................................................................... 2,500,000 2,642,350
5.50%, 10/01/22 .......................................................................... 2,500,000 2,586,225
-------------
21,022,127
-------------
TOTAL BONDS (COST $350,148,985) ............................................................. 376,076,104
-------------
ZERO COUPON BONDS 0.8%
COLORADO 0.8%
E-470 Public Highway Authority Revenue, Capital Appreciation,
Series A, MBIA Insured, 9/01/33 .......................................................... 3,000,000 622,680
Series B, MBIA Insured, 9/01/32 .......................................................... 7,800,000 1,712,880
Series B, MBIA Insured, 9/01/34 .......................................................... 5,075,000 994,091
-------------
TOTAL ZERO COUPON BONDS (COST $3,216,875) ................................................... 3,329,651
-------------
TOTAL LONG TERM INVESTMENTS (COST $353,365,860) ............................................. 379,405,755
-------------
SHORT TERM INVESTMENTS 0.3%
BONDS 0.3%
COLORADO 0.0%(b)
(c)Galleria Metropolitan District GO, Weekly VRDN and Put, 1.87%, 12/01/29 ..................... 100,000 100,000
-------------
U.S. TERRITORIES 0.3%
(c)Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ............................. 1,100,000 1,100,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $1,200,000) .............................................. 1,200,000
-------------
TOTAL INVESTMENTS (COST $354,565,860) 98.2% ................................................. 380,605,755
OTHER ASSETS, LESS LIABILITIES 1.8% ......................................................... 6,857,606
-------------
NET ASSETS 100.0% ........................................................................... $ 387,463,361
=============
See Glossary of Terms on page 194.
(a) See Note 1(b) regarding securities purchased on a delayed delivery basis.
(b) Rounds to less than 0.05% of net assets.
(c) 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.
Annual Report | See notes to financial statements. | 107
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.12 $ 11.10 $ 10.88 $ 10.63 $ 10.06
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.49 0.49 0.51 0.53 0.56
Net realized and unrealized gains (losses) ..... (0.02) 0.02 0.22 0.25 0.56
----------------------------------------------------------------------
Total from investment operations ................. 0.47 0.51 0.73 0.78 1.12
Less distributions from net investment income .... (0.48) (0.49) (0.51) (0.53) (0.55)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.11 $ 11.12 $ 11.10 $ 10.88 $ 10.63
======================================================================
Total return(b) .................................. 4.38% 4.72% 6.90% 7.53% 11.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 249,286 $ 265,854 $ 279,268 $ 266,100 $ 228,844
Ratios to average net assets:
Expenses ....................................... 0.71% 0.70% 0.70% 0.70% 0.73%
Net investment income .......................... 4.46% 4.43% 4.66% 4.91% 5.37%
Portfolio turnover rate .......................... 2.77% 6.79% 10.20% 15.45% 10.11%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
108 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.17 $ 11.15 $ 10.92 $ 10.66 $ 10.10
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.43 0.43 0.45 0.47 0.50
Net realized and unrealized gains (losses) ..... (0.02) 0.02 0.23 0.26 0.56
----------------------------------------------------------------------
Total from investment operations ................. 0.41 0.45 0.68 0.73 1.06
Less distributions from net investment income .... (0.42) (0.43) (0.45) (0.47) (0.50)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.16 $ 11.17 $ 11.15 $ 10.92 $ 10.66
======================================================================
Total return(b) .................................. 3.78% 4.12% 6.40% 7.01% 10.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 40,942 $ 42,817 $ 46,267 $ 38,368 $ 27,256
Ratios to average net assets:
Expenses ....................................... 1.26% 1.27% 1.24% 1.25% 1.28%
Net investment income .......................... 3.91% 3.86% 4.12% 4.36% 4.83%
Portfolio turnover rate .......................... 2.77% 6.79% 10.20% 15.45% 10.11%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.8%
BONDS 98.8%
CONNECTICUT 72.8%
Bridgeport GO, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/15/19 ........................ $ 1,000,000 $ 1,143,599
Connecticut State Airport Revenue, Bradley International Airport, Series A, FGIC Insured,
5.125%, 10/01/26 .......................................................................... 3,000,000 3,094,110
Connecticut State Development Authority First Mortgage Gross Revenue, Health Care Project,
5.75%, 12/01/23 .......................................................................... 750,000 781,297
Baptist Homes Inc. Project, Refunding, Radian Insured, 5.625%, 9/01/22 ................... 2,000,000 2,180,660
Church Homes Inc., Refunding, 5.80%, 4/01/21 ............................................. 4,000,000 3,979,120
Elim Park Baptist Home, Refunding, Series A, 5.375%, 12/01/18 ............................ 1,100,000 1,117,600
Connecticut State Development Authority PCR, Connecticut Light and Water, Refunding,
Series A, 5.85%, 9/01/28 .................................................................. 5,500,000 5,849,635
Connecticut State Development Authority Revenue, Life Care Facilities, Seabury Project,
Refunding, Radian Insured, 5.00%, 9/01/21 ................................................. 2,000,000 2,054,080
Connecticut State Development Authority Solid Waste Disposal Facilities Revenue, Pfizer Inc.
Project, 7.00%, 7/01/25 ................................................................... 2,000,000 2,071,540
Connecticut State Development Authority Water Facility Revenue, Bridgeport Hydraulic
Co. Project,
6.15%, 4/01/35 ........................................................................... 1,000,000 1,047,520
6.00%, 9/01/36 ........................................................................... 10,000,000 10,375,000
Connecticut State GO,
Series B, 5.00%, 6/15/20 ................................................................. 10,000,000 10,590,000
Series B, 5.00%, 6/15/22 ................................................................. 2,000,000 2,117,400
Series D, MBIA Insured, 5.00%, 12/01/24 .................................................. 1,000,000 1,067,500
Connecticut State Health and Educational Facilities Authority Revenue,
Abbot Terrace Health Center Project, Series A, Pre-Refunded, 6.00%, 11/01/14 ............. 2,000,000 2,154,240
Brunswick School, Series A, MBIA Insured, 5.00%, 7/01/29 ................................. 5,000,000 5,150,400
Catholic Health East, Series F, MBIA Insured, 5.75%, 11/15/29 ............................ 3,250,000 3,581,402
Child Care Facilities Program, Series C, AMBAC Insured, 5.625%, 7/01/29 .................. 1,250,000 1,362,462
Child Care Facilities Program, Series E, AMBAC Insured, 5.00%, 7/01/31 ................... 1,000,000 1,035,270
Connecticut College Project, Series D-1, MBIA Insured, 5.75%, 7/01/30 .................... 1,000,000 1,115,210
Danbury Hospital Issue, Refunding, Series G, AMBAC Insured, 5.75%, 7/01/29 ............... 3,500,000 3,848,075
Eastern Connecticut Health Network, Refunding, Series A, Radian Insured, 6.00%,
7/01/25 ................................................................................. 9,195,000 10,097,030
Fairfield University, Series I, MBIA Insured, 5.25%, 7/01/25 ............................. 2,500,000 2,651,150
Fairfield University, Series I, MBIA Insured, 5.50%, 7/01/29 ............................. 8,000,000 8,665,520
Fairfield University, Series J, MBIA Insured, 5.00%, 7/01/29 ............................. 3,000,000 3,105,000
Greenwich Academy, Series B, FSA Insured, 5.00%, 3/01/32 ................................. 4,210,000 4,360,676
Greenwich Hospital, Series A, MBIA Insured, 5.80%, 7/01/26 ............................... 2,000,000 2,117,480
Griffin Hospital, Series B, Radian Insured, 5.00%, 7/01/23 ............................... 750,000 776,895
Hebrew Home and Hospital, Series B, FHA Insured, 5.15%, 8/01/28 .......................... 3,800,000 3,946,870
Horace Bushnell Memorial Hall, Series A, MBIA Insured, 5.625%, 7/01/29 ................... 1,000,000 1,098,280
Hospital for Special Care, Refunding, Series B, 5.375%, 7/01/17 .......................... 3,000,000 2,808,210
Hospital for Special Care, Refunding, Series B, 5.50%, 7/01/27 ........................... 3,200,000 2,912,864
110 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CONNECTICUT (CONT.)
Connecticut State Health and Educational Facilities Authority Revenue, (cont.)
Lutheran General Health Care System, ETM, 7.375%, 7/01/19 ................................ $ 500,000 $ 630,450
New Horizons Village Project, 7.30%, 11/01/16 ............................................ 2,905,000 2,985,323
Norwich Free Academy, Series A, AMBAC Insured, 5.00%, 7/01/34 ............................ 1,675,000 1,749,806
Sacred Heart University, Refunding, Series E, Radian Insured, 5.00%, 7/01/28 ............. 4,000,000 4,067,040
Sacred Heart University, Series C, 6.50%, 7/01/16 ........................................ 235,000 245,996
Sacred Heart University, Series C, 6.625%, 7/01/26 ....................................... 785,000 817,271
Sacred Heart University, Series C, Pre-Refunded, 6.50%, 7/01/16 .......................... 765,000 819,384
Sacred Heart University, Series C, Pre-Refunded, 6.625%, 7/01/26 ......................... 6,215,000 6,666,893
Sacred Heart University, Series D, Pre-Refunded, 6.20%, 7/01/27 .......................... 1,000,000 1,096,240
Series B, MBIA Insured, 5.00%, 7/01/33 ................................................... 2,000,000 2,081,380
St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ................................. 4,615,000 4,267,814
Trinity College, Series E, MBIA Insured, Pre-Refunded, 5.875%, 7/01/26 ................... 1,000,000 1,065,030
Trinity College, Series G, AMBAC Insured, 5.00%, 7/01/31 ................................. 5,425,000 5,643,953
Trinity College, Series H, MBIA Insured, 5.00%, 7/01/26 .................................. 1,855,000 1,959,641
University of Connecticut Foundation, Series A, 5.375%, 7/01/29 .......................... 1,250,000 1,313,550
Village Families and Children, Series A, AMBAC Insured, 5.00%, 7/01/32 ................... 1,000,000 1,037,860
Westover School, Series A, Radian Insured, 5.70%, 7/01/30 ................................ 2,000,000 2,164,760
Windham Community Memorial Hospital, Series C, 6.00%, 7/01/20 ............................ 5,000,000 4,649,200
Yale New Haven Hospital, Refunding, Series H, MBIA Insured, 5.70%, 7/01/25 ............... 4,000,000 4,237,960
Connecticut State HFAR,
Housing Mortgage Finance Program, Refunding, Sub Series E-2, 5.20%, 11/15/21 ............. 1,840,000 1,885,282
Housing Mortgage Finance Program, Series B, 6.10%, 11/15/31 .............................. 2,715,000 2,829,464
Housing Mortgage Finance Program, Series C-2, 6.25%, 11/15/18 ............................ 1,500,000 1,557,570
Housing Mortgage Finance Program, Sub Series E-4, 5.05%, 5/15/28 ......................... 4,650,000 4,719,750
Special Obligation, Special Needs Housing, Series 1, AMBAC Insured, 5.00%, 6/15/22 ....... 1,000,000 1,068,850
Special Obligation, Special Needs Housing, Series 1, AMBAC Insured, 5.00%, 6/15/32 ....... 1,000,000 1,039,840
Connecticut State Higher Education Supplemental Loan Authority Revenue, Family Education
Loan Program, Series A,
AMBAC Insured, 6.00%, 11/15/18 ........................................................... 1,050,000 1,067,231
MBIA Insured, 5.50%, 11/15/17 ............................................................ 1,260,000 1,275,649
Connecticut State Special Tax Obligation Revenue, Transportation Infrastructure,
Series A, FSA Insured, Pre-Refunded, 5.375%, 10/01/18 .................................... 1,000,000 1,124,280
Series B, AMBAC Insured, 5.00%, 12/01/20 ................................................. 5,000,000 5,333,300
Series B, AMBAC Insured, 5.00%, 12/01/22 ................................................. 1,000,000 1,059,140
Griswold GO, AMBAC Insured, 7.50%, 4/01/06 .................................................. 200,000 210,738
New Haven GO, Refunding, Series C, MBIA Insured, 5.00%, 11/01/22 ............................ 3,000,000 3,195,000
South Regional Water Authority Water System Revenue, Series A, MBIA Insured, 5.00%,
8/01/33 ................................................................................... 6,000,000 6,246,300
University of Connecticut Revenue, Student Fee,
Refunding, Series A, FGIC Insured, 5.00%, 11/15/26 ....................................... 10,000,000 10,532,700
Series A, 5.00%, 5/15/23 ................................................................. 10,000,000 10,581,200
Series A, FGIC Insured, Pre-Refunded, 6.00%, 11/15/25 .................................... 1,500,000 1,733,925
-------------
211,215,865
-------------
Annual Report | 111
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES 26.0%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.50%, 5/15/39 ............................................................................ $ 4,000,000 $ 3,969,160
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, 5.125%, 7/01/30 ............................................................. 835,000 884,140
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ............................................... 1,165,000 1,291,787
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ............................................... 1,775,000 1,983,953
Series A, 5.00%, 7/01/29 ................................................................. 1,000,000 1,038,460
Series A, 5.125%, 7/01/31 ................................................................ 3,195,000 3,300,147
Series A, 5.00%, 7/01/33 ................................................................. 1,000,000 1,028,750
Series A, 5.00%, 7/01/34 ................................................................. 750,000 776,528
Series A, FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 ..................................... 4,000,000 4,431,000
Series A, Pre-Refunded, 5.125%, 7/01/31 .................................................. 1,000,000 1,108,830
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, 5.00%, 7/01/38 ................................................................. 2,500,000 2,548,975
Series G, 5.00%, 7/01/33 ................................................................. 1,000,000 1,028,750
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/28 ............................................................. 5,000,000 5,143,050
Puerto Rico Electric Power Authority Power Revenue,
Series HH, FSA Insured, 5.25%, 7/01/29 ................................................... 13,000,000 14,020,110
Series II, 5.25%, 7/01/31 ................................................................ 1,000,000 1,057,950
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Industrial Revenue, Guaynabo Warehouse, Series A, 5.15%, 7/01/19 ...... 3,595,000 3,674,557
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Revenue, University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 ................. 1,000,000 1,030,550
Puerto Rico PBA Revenue, Guaranteed, Government Facilities,
Series D, 5.375%, 7/01/33 ................................................................ 1,995,000 2,125,872
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................. 6,005,000 6,714,551
Series I, 5.00%, 7/01/36 ................................................................. 1,000,000 1,031,530
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.70%, 8/01/25 .............................................................. 10,000,000 11,233,800
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/13 ................................................................................. 2,500,000 2,649,750
10/01/22 ................................................................................. 2,500,000 2,586,225
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/21 ................................................................................... 1,000,000 1,011,010
-------------
75,669,435
-------------
TOTAL LONG TERM INVESTMENTS (COST $270,670,045) ............................................. 286,885,300
-------------
112 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $200,000) 0.1%
BOND 0.1%
CONNECTICUT 0.1%
(a)Connecticut State Health and Educational Facilities Authority Revenue, Weekly VRDN and Put,
1.84%, 7/01/27 ............................................................................ $ 200,000 $ 200,000
-------------
TOTAL INVESTMENTS (COST $270,870,045) 98.9%.................................................. 287,085,300
OTHER ASSETS, LESS LIABILITIES 1.1%.......................................................... 3,142,471
-------------
NET ASSETS 100.0%............................................................................ $ 290,227,771
=============
See Glossary of Terms on page 194.
(a) 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.
Annual Report | See notes to financial statements. | 113
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN DOUBLE TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.06 $ 11.90 $ 11.68 $ 11.55 $ 10.95
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.51 0.52 0.54 0.56 0.58
Net realized and unrealized gains (losses) ..... (0.05) 0.19 0.22 0.15 0.60
----------------------------------------------------------------------
Total from investment operations ................. 0.46 0.71 0.76 0.71 1.18
----------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.51) (0.52) (0.54) (0.58) (0.58)
Net realized gains ............................. (0.02) (0.03) -- --(e) --
----------------------------------------------------------------------
Total distributions .............................. (0.53) (0.55) (0.54) (0.58) (0.58)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.99 $ 12.06 $ 11.90 $ 11.68 $ 11.55
======================================================================
Total return(b) .................................. 4.01% 6.18% 6.67% 6.29% 11.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 309,495 $ 298,732 $ 273,119 $ 239,081 $ 205,678
Ratios to average net assets:
Expenses ....................................... 0.72% 0.72% 0.74% 0.75% 0.77%
Net investment income .......................... 4.31% 4.35% 4.61% 4.84% 5.18%
Portfolio turnover rate .......................... 10.46% 25.31% 31.54% 33.53% 42.32%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
(e) The fund made a capital gain distribution of $0.002.
114 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DOUBLE TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.10 $ 11.93 $ 11.70 $ 11.58 $ 10.97
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.45 0.45 0.48 0.50 0.52
Net realized and unrealized gains (losses) ..... (0.05) 0.20 0.23 0.13 0.61
----------------------------------------------------------------------
Total from investment operations ................. 0.40 0.65 0.71 0.63 1.13
----------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.45) (0.45) (0.48) (0.51) (0.52)
Net realized gains ............................. (0.02) (0.03) -- --(e) --
----------------------------------------------------------------------
Total distributions .............................. (0.47) (0.48) (0.48) (0.51) (0.52)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 12.03 $ 12.10 $ 11.93 $ 11.70 $ 11.58
======================================================================
Total return(b) .................................. 3.42% 5.67% 6.17% 5.59% 10.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 45,621 $ 45,572 $ 30,856 $ 17,971 $ 10,413
Ratios to average net assets:
Expenses ....................................... 1.27% 1.30% 1.24% 1.30% 1.32%
Net investment income .......................... 3.76% 3.77% 4.11% 4.29% 4.63%
Portfolio turnover rate .......................... 10.46% 25.31% 31.54% 33.53% 42.32%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
(e) The fund made a capital gain distribution of $0.002.
Annual Report | See notes to financial statements. | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DOUBLE TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.9%
BONDS 97.9%
U.S. TERRITORIES 97.9%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.50%, 5/15/39 ............................................................................ $ 5,000,000 $ 4,961,450
Guam International Airport Authority Revenue,
Series A, MBIA Insured, 5.25%, 10/01/20 .................................................. 1,725,000 1,905,245
Series A, MBIA Insured, 5.25%, 10/01/22 .................................................. 700,000 767,242
Series B, MBIA Insured, 5.25%, 10/01/22 .................................................. 1,000,000 1,096,060
Series B, MBIA Insured, 5.25%, 10/01/23 .................................................. 1,000,000 1,090,730
Series C, MBIA Insured, 5.25%, 10/01/21 .................................................. 5,000,000 5,250,850
Series C, MBIA Insured, 5.00%, 10/01/23 .................................................. 5,000,000 5,179,700
Guam Power Authority Revenue, Refunding, Series A, MBIA Insured,
5.125%, 10/01/29 ......................................................................... 1,975,000 2,052,005
5.25%, 10/01/34 .......................................................................... 7,000,000 7,354,760
Puerto Rico Commonwealth GO, Public Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ............................................... 3,000,000 3,353,160
Series A, 5.375%, 7/01/28 ................................................................ 1,300,000 1,381,055
(a)Series A, 5.00%, 7/01/29 ................................................................. 3,500,000 3,634,610
Series A, 5.00%, 7/01/34 ................................................................. 7,000,000 7,247,590
Series A, FGIC Insured, 5.125%, 7/01/31 .................................................. 5,000,000 5,171,200
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
5.50%, 7/01/36 ............................................................................ 11,850,000 12,968,995
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series B, Pre-Refunded, 6.00%, 7/01/39 ................................................... 10,000,000 11,514,500
Series D, 5.375%, 7/01/36 ................................................................ 11,990,000 12,776,544
Puerto Rico Commonwealth Infrastructure Financing Authority Special Obligation Bonds,
Series A, ETM, 5.50%, 10/01/32 ............................................................ 10,000,000 10,965,000
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
7.50%, 7/01/09 ........................................................................... 135,000 135,591
AMBAC Insured, 5.00%, 7/01/21 ............................................................ 10,000,000 10,560,000
AMBAC Insured, 5.00%, 7/01/28 ............................................................ 2,000,000 2,057,220
Puerto Rico Electric Power Authority Power Revenue,
Series HH, FSA Insured, 5.25%, 7/01/29 ................................................... 1,605,000 1,730,944
Series II, 5.25%, 7/01/31 ................................................................ 15,500,000 16,398,225
Series II, FSA Insured, 5.125%, 7/01/26 .................................................. 1,000,000 1,069,460
Series NN, 5.125%, 7/01/29 ............................................................... 5,125,000 5,359,571
Series NN, MBIA Insured, 5.00%, 7/01/32 .................................................. 2,000,000 2,091,320
Puerto Rico HFAR, Capital Fund Program, 4.60%, 12/01/24 ..................................... 10,000,000 10,063,800
Puerto Rico HFC Revenue,
MF Mortgage, Portfolio A-I, 7.50%, 10/01/15 .............................................. 255,000 255,089
MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ............................................... 745,000 745,284
Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 ................... 2,060,000 2,088,201
Puerto Rico HFC, HMR, MBS, Series A, GNMA Secured, 5.20%, 12/01/33 .......................... 11,410,000 11,631,924
Puerto Rico Housing Bank and Financing Authority SFMR, Affordable Housing Mortgage,
First Portfolio, 6.25%, 4/01/29 ........................................................... 1,915,000 1,955,177
Puerto Rico Industrial Medical and Environmental Pollution Control Facilities Financing
Authority Revenue, PepsiCo Inc. Project, 6.25%, 11/15/13 .................................. 900,000 922,122
116 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DOUBLE TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES (CONT.)
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Hospital Revenue,
Dr. Pila Hospital Project, Refunding, FHA Insured, 6.125%, 8/01/25 ....................... $ 2,500,000 $ 2,578,700
Dr. Pila Hospital Project, Refunding, FHA Insured, 6.25%, 8/01/32 ........................ 500,000 514,605
Hospital Auxilio Mutuo Obligation, Series A, MBIA Insured, 6.25%, 7/01/24 ................ 8,445,000 8,658,236
Mennonite General Hospital Project, 5.625%, 7/01/17 ...................................... 750,000 704,528
Mennonite General Hospital Project, 5.625%, 7/01/27 ...................................... 1,950,000 1,743,924
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Industrial Revenue,
Guaynabo Municipal Government, 5.625%, 7/01/15 ........................................... 6,550,000 6,817,175
Guaynabo Municipal Government, 5.625%, 7/01/22 ........................................... 3,160,000 3,269,652
Guaynabo Warehouse, Series A, 5.15%, 7/01/19 ............................................. 1,250,000 1,277,663
Guaynabo Warehouse, Series A, 5.20%, 7/01/24 ............................................. 4,120,000 4,187,980
Puerto Rico Industrial Tourist Educational Medical and Environmental Control
Facilities Revenue,
Ana G. Mendez University System Project, Refunding, 5.375%, 12/01/21 ..................... 2,000,000 2,105,920
Ana G. Mendez University System Project, Refunding, 5.375%, 2/01/29 ...................... 7,850,000 8,014,772
Cogeneration Facility, AES Puerto Rico Project, 6.625%, 6/01/26 .......................... 5,970,000 6,504,255
Intermediate American University of Puerto Rico Project, MBIA Insured, 5.00%,
10/01/15 ............................................................................... 1,320,000 1,462,903
Intermediate American University of Puerto Rico Project, MBIA Insured, 5.00%,
10/01/18 ............................................................................... 1,000,000 1,089,690
International American University of Puerto Rico Project, MBIA Insured, 4.25%,
10/01/24 ............................................................................... 1,000,000 1,001,530
International American University of Puerto Rico Project, MBIA Insured, 4.375%,
10/01/25 ............................................................................... 1,000,000 1,008,150
International American University of Puerto Rico Project, MBIA Insured, 4.50%,
10/01/29 ............................................................................... 3,750,000 3,787,688
University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 ......................... 6,000,000 6,183,300
Puerto Rico Municipal Finance Agency GO, Series A, FSA Insured, 5.50%, 8/01/23 .............. 7,400,000 8,091,900
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/27 ......... 3,500,000 3,672,060
Puerto Rico PBA Revenue, Guaranteed, Government Facilities,
Series D, 5.375%, 7/01/33 ................................................................ 3,430,000 3,655,008
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................. 9,070,000 10,141,711
Series I, 5.25%, 7/01/33 ................................................................. 4,500,000 4,750,965
Series I, 5.375%, 7/01/34 ................................................................ 5,000,000 5,337,800
Series I, 5.00%, 7/01/36 ................................................................. 4,000,000 4,126,120
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 .................. 1,250,000 1,254,525
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation,
Mandatory Put 2/01/12, Refunding, Series A, 5.75%, 8/01/27 ............................... 5,000,000 5,568,250
Series A, Pre-Refunded, 5.00%, 6/01/26 ................................................... 2,865,000 3,088,957
Series E, 5.50%, 8/01/29 ................................................................. 2,155,000 2,328,154
Series E, Pre-Refunded, 5.50%, 8/01/29 ................................................... 6,845,000 7,710,071
Virgin Islands HFA, SFR, Refunding, Series A, GNMA Secured,
6.45%, 3/01/16 ........................................................................... 275,000 281,746
6.50%, 3/01/25 ........................................................................... 655,000 669,069
Annual Report | 117
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DOUBLE TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES (CONT.)
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/26 .......................... $ 5,000,000 $ 5,228,250
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 .......................... 9,220,000 9,531,636
Matching Fund Loan Note, senior lien, Series A, 5.25%, 10/01/24 .......................... 2,000,000 2,117,200
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ....................... 3,000,000 3,139,800
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/22 ....................... 6,750,000 6,982,808
senior lien, Fund Loan Notes, Refunding, Series A, 5.625%, 10/01/25 ...................... 3,950,000 4,103,655
senior lien, Matching Fund Loan Note, Series A, 5.25%, 10/01/21 .......................... 1,000,000 1,066,620
Virgin Islands Port Authority Marine Revenue, Series A, FSA Insured,
5.25%, 9/01/18 ........................................................................... 3,930,000 4,189,773
5.00%, 9/01/23 ........................................................................... 10,000,000 10,375,800
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/18 .................................................................................. 4,175,000 4,230,695
7/01/21 .................................................................................. 1,000,000 1,011,010
Virgin Islands Water and Power Authority Water System Revenue, Refunding,
5.25%, 7/01/12 ........................................................................... 4,000,000 4,167,360
5.50%, 7/01/17 ........................................................................... 4,000,000 4,156,640
-------------
TOTAL LONG TERM INVESTMENTS (COST $328,351,467).............................................. 347,622,878
-------------
SHORT TERM INVESTMENT (COST $2,250,000) 0.6%
BOND 0.6%
U.S. TERRITORIES 0.6%
(b)Puerto Rico Commonwealth Government Development Bank Revenue, Refunding,
MBIA Insured, Weekly VRDN and Put, 1.78%, 12/01/15 ........................................ 2,250,000 2,250,000
-------------
TOTAL INVESTMENTS (COST $330,601,467) 98.5%.................................................. 349,872,878
OTHER ASSETS, LESS LIABILITIES 1.5%.......................................................... 5,243,101
-------------
NET ASSETS 100.0%............................................................................ $ 355,115,979
=============
See Glossary of Terms on page 194.
(a) See Note 1(b) regarding securities purchased on a delayed delivery basis.
(b) 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.
118 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.76 $ 11.48 $ 11.14 $ 10.94 $ 10.52
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.42 0.43 0.46 0.50 0.52
Net realized and unrealized gains (losses) ..... (0.25) 0.28 0.35 0.21 0.42
----------------------------------------------------------------------
Total from investment operations ................. 0.17 0.71 0.81 0.71 0.94
Less distributions from net investment income .... (0.42) (0.43) (0.47) (0.51) (0.52)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.51 $ 11.76 $ 11.48 $ 11.14 $ 10.94
======================================================================
Total return(b) .................................. 1.54% 6.33% 7.45% 6.64% 9.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 493,994 $ 454,942 $ 365,043 $ 240,157 $ 164,450
Ratios to average net assets:
Expenses ....................................... 0.69% 0.70% 0.72% 0.77% 0.76%
Net investment income .......................... 3.67% 3.69% 4.07% 4.49% 4.88%
Portfolio turnover rate .......................... 9.14% 8.62% 4.86% 7.47% 8.87%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 119
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND (CONTINUED)
-------------------------
YEAR ENDED
FEBRUARY 28,
CLASS C 2005 2004(d)
-------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.77 $ 11.67
-------------------------
Income from investment operations:
Net investment income(a) ....................... 0.36 0.24
Net realized and unrealized gains (losses) ..... (0.24) 0.10
-------------------------
Total from investment operations ................. 0.12 0.34
Less distributions from net investment income .... (0.36) (0.24)
Redemption fees .................................. --(c) --
-------------------------
Net asset value, end of year ..................... $ 11.53 $ 11.77
=========================
Total return(b) .................................. 1.05% 2.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 23,384 $ 11,182
Ratios to average net assets:
Expenses ....................................... 1.24% 1.25%(e)
Net investment income .......................... 3.12% 3.14%(e)
Portfolio turnover rate .......................... 9.14% 8.62%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) For the period July 1, 2003 (effective date) to February 29, 2004.
(e) Annualized.
120 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.7%
BONDS 98.2%
ALABAMA 6.2%
Alabama State GO, Series A, 4.00%,
9/01/12 .................................................................................. $ 2,130,000 $ 2,201,099
9/01/15 .................................................................................. 1,000,000 1,009,140
Alabama Water Pollution Control Authority Revenue, Revolving Fund Loan,
Refunding, Series B, AMBAC Insured, 4.625%, 8/15/13 ...................................... 5,900,000 6,242,790
Series B, AMBAC Insured, 4.125%, 2/15/14 ................................................. 3,000,000 3,084,990
East Alabama Health Care Authority Health Care Facilities Revenue, Tax Anticipation Bond,
Series A, MBIA Insured,
4.50%, 9/01/13 ........................................................................... 1,925,000 2,013,261
4.625%, 9/01/14 .......................................................................... 2,010,000 2,106,259
4.50%, 9/01/15 ........................................................................... 2,100,000 2,176,062
Huntsville GO, Capital Improvement wts., Series C, AMBAC Insured, 4.00%, 11/01/14 ........... 1,000,000 1,021,270
Huntsville Health Care Authority Revenue, Series A, MBIA Insured, 4.80%, 6/01/13 ............ 2,400,000 2,547,432
Jefferson County GO, Capital Improvement wts., Series A, MBIA Insured, 5.00%, 4/01/17 ....... 2,195,000 2,376,285
Jefferson County Ltd. Obligation School wts. Revenue, Series A, 5.25%, 1/01/16 .............. 2,000,000 2,162,640
Sylacauga GO, wts., AMBAC Insured, 5.50%, 6/01/12 ........................................... 600,000 671,286
University of Alabama General Revenue, Series A, MBIA Insured, 5.00%, 7/01/15 ............... 4,070,000 4,453,720
-------------
32,066,234
-------------
ARIZONA 4.8%
Arizona School Facilities Board Revenue, Series B, FGIC Insured, 4.00%, 9/01/13 ............. 5,000,000 5,130,500
Arizona State University COP, Research Infrastructure Projects, AMBAC Insured, 5.25%,
9/01/16 ................................................................................... 2,505,000 2,811,337
Maricopa County GO,
School District No. 11, Peoria Unified, Refunding, FSA Insured, 4.00%, 7/01/12 ........... 2,200,000 2,276,230
School District No. 40, Glendale School Improvement, 6.10%, 7/01/08 ...................... 570,000 582,335
School District No. 40, Glendale School Improvement, Pre-Refunded, 6.10%, 7/01/08 ........ 430,000 439,795
School District No. 97, Deer Valley School Improvement, Series A, FGIC Insured, 4.75%,
7/01/12 ................................................................................ 4,000,000 4,331,280
Maricopa County USD No. 48 Scottsdale GO, Refunding, Series A, FSA Insured, 4.00%,
7/01/15 ................................................................................... 3,000,000 3,066,180
Maricopa County USD No. 80 Chandler GO, Project of 2002, Series A, FSA Insured, 4.00%,
7/01/14 ................................................................................... 1,000,000 1,026,350
Mesa GO,
FGIC Insured, Pre-Refunded, 4.50%, 7/01/14 ............................................... 1,000,000 1,070,340
Refunding, Series A, FGIC Insured, 4.20%, 7/01/16 ........................................ 715,000 731,273
Tempe Arizona IDA Lease Revenue, State University Foundation, AMBAC Insured, 4.00%,
7/01/14 .................................................................................. 1,110,000 1,139,249
7/01/15 .................................................................................. 1,000,000 1,018,420
7/01/16 .................................................................................. 1,000,000 1,011,270
-------------
24,634,559
-------------
ARKANSAS 1.4%
Conway Hospital Revenue, Conway Regional Medical Improvement, Refunding, Series A,
6.20%, 8/01/17 ............................................................................ 1,105,000 1,175,532
Little Rock GO, Capital Improvements, FSA Insured, 4.00%, 4/01/15 ........................... 2,500,000 2,539,950
Annual Report | 121
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARKANSAS (CONT.)
University of Arkansas University Revenues,
Construction, University of Arkansas for Medical Sciences Campus, Refunding, Series A,
MBIA Insured, 5.00%, 11/01/16 ........................................................... $ 1,000,000 $ 1,092,000
Student Fee University of Arkansas at Fort Smith, FSA Insured, 4.75%, 12/01/15 ........... 2,295,000 2,424,920
-------------
7,232,402
-------------
CALIFORNIA 9.2%
California State Department of Water Resources Power Supply Revenue, Series A, 5.125%,
5/01/18 ................................................................................... 3,000,000 3,211,290
California State GO,
Refunding, 5.00%, 2/01/17 ................................................................ 3,000,000 3,188,160
Various Purpose, 5.25%, 11/01/17 ......................................................... 10,000,000 10,991,400
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue, 5.00%, 6/01/12 ........ 1,500,000 1,595,385
Los Angeles Department of Water and Power Waterworks Revenue, Series B, MBIA Insured,
4.25%, 7/01/17 ............................................................................ 6,530,000 6,690,899
Los Angeles USD, GO, Series A, MBIA Insured,
4.125%, 7/01/15 .......................................................................... 2,500,000 2,568,225
4.25%, 7/01/16 ........................................................................... 2,500,000 2,577,750
Los Angeles Wastewater System Revenue, Refunding, MBIA Insured, 4.00%, 6/01/14 .............. 10,000,000 10,261,200
North Orange County Community College District GO, Election of 2002, Series B, FGIC Insured,
4.00%, 8/01/15 ............................................................................ 3,215,000 3,280,715
Tulare Joint UHSD, GO, Election of 2004, Series A, MBIA Insured, 5.00%, 8/01/16 ............. 2,870,000 3,178,123
-------------
47,543,147
-------------
COLORADO 1.8%
Denver City and County COP, Series B, AMBAC Insured, Pre-Refunded, 5.75%, 12/01/16 .......... 3,000,000 3,431,850
Denver City and County Medical Facilities GO, 4.00%, 8/01/16 ................................ 6,000,000 6,029,640
-------------
9,461,490
-------------
CONNECTICUT 0.5%
Connecticut State Health and Educational Facilities Authority Revenue,
Sacred Heart University, Refunding, Series C, 6.00%, 7/01/05 ............................. 135,000 136,305
Series C, ETM, 6.00%, 7/01/05 ............................................................ 425,000 430,253
Connecticut State HFAR, Housing Mortgage Finance Program, Series C-2, 6.00%,
11/15/10 .................................................................................. 2,000,000 2,085,380
-------------
2,651,938
-------------
FLORIDA 8.7%
Collier County Capital Improvement Revenue, FGIC Insured, 4.60%, 10/01/13 ................... 1,000,000 1,065,100
Collier County School Board COP, Refunding, FSA Insured, 5.00%, 2/15/16 ..................... 10,710,000 11,661,798
Hillsborough County School Board Sales Tax Revenue, AMBAC Insured, 4.25%, 10/01/12 .......... 1,800,000 1,904,688
Jacksonville Electric Authority Revenue, Electric System, Sub Series A, 5.00%, 10/01/16 ..... 3,420,000 3,495,206
Jacksonville Water and Sewer System Revenue, Series B, FSA Insured, 4.10%, 10/01/13 ......... 3,000,000 3,035,790
Marion County Public Improvement Revenue, Refunding, MBIA Insured,
4.10%, 12/01/11 .......................................................................... 1,600,000 1,668,896
4.20%, 12/01/12 .......................................................................... 1,400,000 1,463,980
4.30%, 12/01/13 .......................................................................... 1,800,000 1,883,178
122 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA(CONT.)
Marion County School Board COP, FSA Insured, 4.00%, 6/01/15 ................................. $ 1,115,000 $ 1,129,818
Orlando Waste Water Services Revenue, Refunding, Series A, AMBAC Insured, 4.00%,
10/01/14 .................................................................................. 7,530,000 7,682,934
Palm Beach County IDR, Lourdes-Noreen McKeen Residence, Geriatric Care Inc. Project,
Pre-Refunded,
6.20%, 12/01/08 .......................................................................... 275,000 297,666
6.30%, 12/01/09 .......................................................................... 580,000 628,784
Tampa Bay Water Utility System Revenue,
FGIC Insured, Pre-Refunded, 5.75%, 10/01/15 .............................................. 1,000,000 1,146,320
Series B, FGIC Insured, 4.75%, 10/01/15 .................................................. 4,140,000 4,384,177
Series B, FGIC Insured, 4.75%, 10/01/16 .................................................. 3,400,000 3,580,268
-------------
45,028,603
-------------
GEORGIA 1.4%
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.30%,
12/01/13 .................................................................................. 1,020,000 975,202
South Georgia Governmental Services Authority Revenue, FGIC Insured, 5.00%, 1/01/16 ......... 2,650,000 2,928,700
Wayne County Development Authority PCR, ITT Rayonier Inc. Project, Refunding, 6.10%,
11/01/07 .................................................................................. 3,105,000 3,127,915
-------------
7,031,817
-------------
HAWAII 0.6%
Hawaii State Department of Budget and Finance Special Purpose Revenue,
Kaiser Permanente, Series A, ETM, 5.10%, 3/01/14 ......................................... 2,500,000 2,686,125
Kapi `Olani Health Obligation, 5.60%, 7/01/06 ............................................ 500,000 511,650
-------------
3,197,775
-------------
ILLINOIS 1.0%
Chicago Park District GO, Refunding, FGIC Insured, 4.125%, 1/01/14 .......................... 3,125,000 3,212,281
Illinois Health Facilities Authority Revenue,
St. Elizabeth's Hospital, 6.00%, 7/01/05 ................................................. 70,000 70,735
Victory Health Services, Series A, 5.25%, 8/15/09 ........................................ 1,170,000 1,166,759
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue, McCormick Place
Convention Center, ETM, 5.75%, 7/01/06 .................................................... 490,000 502,211
-------------
4,951,986
-------------
KENTUCKY 0.5%
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement,
5.70%, 10/01/10 .......................................................................... 1,000,000 984,040
5.75%, 10/01/11 .......................................................................... 1,500,000 1,478,985
-------------
2,463,025
-------------
LOUISIANA 0.8%
St. John's Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 ................ 4,000,000 4,224,600
-------------
Annual Report | 123
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MARYLAND 0.2%
Maryland State Health and Higher Educational Facilities Authority Revenue, AMBAC Insured,
5.00%, 7/01/15 ............................................................................ $ 1,000,000 $ 1,103,640
-------------
MASSACHUSETTS 2.2%
Massachusetts State Development Finance Agency Resource Recovery Revenue,
Waste Management Inc. Project, Mandatory Put 12/01/09, Series A, 6.90%, 12/01/29 .......... 3,000,000 3,388,920
Massachusetts State Development Finance Agency Revenue, Loomis Community Project,
first mortgage, Refunding, Series A, 5.50%, 7/01/08 ....................................... 1,990,000 2,008,467
Massachusetts State Industrial Finance Agency Resource Recovery Revenue, Ogden Haverhill
Project, Refunding, Series A,
5.15%, 12/01/07 .......................................................................... 2,000,000 2,053,380
5.20%, 12/01/08 .......................................................................... 2,000,000 2,055,940
Massachusetts State Industrial Finance Agency Revenue, D'Youville Senior Care, 5.50%,
10/01/12 .................................................................................. 1,745,000 1,846,140
-------------
11,352,847
-------------
MICHIGAN 5.4%
Battle Creek Downtown Development Authority Tax Allocation, MBIA Insured, Pre-Refunded,
5.00%, 5/01/17 ............................................................................ 3,295,000 3,516,852
Chippewa County Hospital Financing Authority Revenue, Chippewa County War Memorial
Hospital, Refunding, Series B, 5.30%, 11/01/07 ............................................ 815,000 842,490
Detroit GO, Refunding, Series B, 6.375%, 4/01/06 ............................................ 1,000,000 1,013,400
Ferris State University Revenue, Refunding, AMBAC Insured, 5.00%, 10/01/18 .................. 2,640,000 2,733,456
Gull Lake Community School District GO, School Building and Site, FSA Insured, 5.00%,
5/01/16 ................................................................................... 1,000,000 1,090,440
Jackson Public Schools GO, School Building and Site, Refunding, FSA Insured, 5.00%,
5/01/16 .................................................................................. 1,925,000 2,091,339
5/01/17 .................................................................................. 2,025,000 2,180,540
Michigan State Hospital Finance Authority Revenue, Ascension Health Credit, Series A,
MBIA Insured, Pre-Refunded, 6.00%, 11/15/13 ............................................... 1,200,000 1,367,652
Otsego Public Schools District GO, School Building and Site, FSA Insured, 5.00%, 5/01/16 .... 1,630,000 1,770,848
Saginaw-Midland GO, Municipal Water Supply Corp. Revenue, Water Supply System, Refunding,
MBIA Insured, 4.25%, 9/01/13 .............................................................. 1,245,000 1,306,080
Wayne-Westland Community Schools GO, Refunding,
4.50%, 5/01/12 ........................................................................... 1,035,000 1,100,691
4.625%, 5/01/13 .......................................................................... 1,095,000 1,171,311
FSA Insured, 5.00%, 5/01/16 .............................................................. 2,825,000 3,080,126
Western Townships Utilities Authority GO, Refunding, MBIA Insured, 4.75%, 1/01/17 ........... 4,290,000 4,462,244
-------------
27,727,469
-------------
MINNESOTA 6.7%
Chaska ISD No. 112 GO, Refunding, Series A,
5.00%, 2/01/16 ........................................................................... 4,000,000 4,218,560
FSA Insured, 4.00%, 2/01/14 .............................................................. 2,060,000 2,108,699
Minneapolis GO, Various Purpose, 5.00%, 12/01/17 ............................................ 3,000,000 3,214,080
Minneapolis Special School District No. 001 COP, Refunding, Series B, FGIC Insured, 4.625%,
2/01/17 ................................................................................... 1,000,000 1,040,060
124 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Minneapolis Special School District No. 001 GO, Refunding, FSA Insured, 4.00%,
2/01/13 .................................................................................. $ 3,000,000 $ 3,089,430
2/01/14 .................................................................................. 6,300,000 6,448,932
Mounds View ISD No. 621 GO, MBIA Insured, 5.00%,
2/01/14 .................................................................................. 2,340,000 2,544,773
2/01/15 .................................................................................. 2,425,000 2,629,476
2/01/16 .................................................................................. 2,460,000 2,662,729
Ramsey County GO, Capital Improvement Plan, Series A, 4.75%, 2/01/15 ........................ 2,215,000 2,348,675
Robbinsdale ISD No. 281 GO, Refunding, FSA Insured,
4.00%, 2/01/13 ........................................................................... 2,070,000 2,131,707
4.125%, 2/01/14 .......................................................................... 2,175,000 2,242,925
-------------
34,680,046
-------------
MISSOURI 1.7%
Jackson County Reorganized School District No. 7 Lees Summit GO, School Building,
MBIA Insured, 5.00%, 3/01/16 .............................................................. 2,000,000 2,186,180
Lake of the Ozarks Community Board Corp. Bridge System Revenue,
5.00%, 12/01/08 .......................................................................... 2,060,000 2,082,248
Pre-Refunded, 5.00%, 12/01/08 ............................................................ 940,000 979,508
Southeast Missouri State University System Facilities Revenue, Refunding and Improvement,
MBIA Insured,
4.375%, 4/01/12 .......................................................................... 335,000 353,733
4.50%, 4/01/14 ........................................................................... 545,000 572,157
4.60%, 4/01/15 ........................................................................... 1,360,000 1,426,790
4.70%, 4/01/16 ........................................................................... 1,165,000 1,223,332
-------------
8,823,948
-------------
NEW JERSEY 3.8%
Gloucester County Improvement Authority Solid Waste Resource Recovery Revenue,
Waste Management Inc. Project, Mandatory Put 12/01/09, Refunding, Series A,
6.85%, 12/01/29 .......................................................................... 2,625,000 2,959,687
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding, Series 1,
5.90%, 1/01/15 ............................................................................ 850,000 856,299
New Jersey State COP, Equipment Lease Purchase, Series A, AMBAC Insured, 5.00%,
6/15/17 ................................................................................... 5,000,000 5,384,250
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System,
Refunding, Series C, FSA Insured, 4.50%, 12/15/10 ......................................... 10,000,000 10,648,300
-------------
19,848,536
-------------
NEW YORK 10.4%
Liverpool Central School District GO, Refunding, FSA Insured, 5.00%, 7/15/14 ................ 1,560,000 1,701,211
Middletown City School District GO, Refunding, Series A, FSA Insured, 4.00%,
11/01/14 ................................................................................. 1,785,000 1,827,555
11/01/15 ................................................................................. 2,050,000 2,085,137
MTA Commuter Facilities Revenue, Services Contract, Refunding, Series R, ETM, 5.50%,
7/01/11 ................................................................................... 2,215,000 2,423,121
MTA Transit Facilities Revenue, Series A, Pre-Refunded, 6.00%, 7/01/15 ...................... 1,500,000 1,688,430
Annual Report | 125
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
New York City GO,
Refunding, Series H, 5.90%, 8/01/09 ...................................................... $ 500,000 $ 536,670
Refunding, Series H, 5.00%, 8/01/17 ...................................................... 4,330,000 4,607,250
Refunding, Series J, 6.00%, 8/01/08 ...................................................... 3,000,000 3,237,840
Series C, MBIA Insured, 5.875%, 8/01/16 .................................................. 1,250,000 1,413,438
Series F, 4.75%, 1/15/16 ................................................................. 3,000,000 3,127,800
Series H, 5.00%, 8/01/16 ................................................................. 3,000,000 3,206,550
Series I, 5.00%, 8/01/18 ................................................................. 10,000,000 10,600,300
New York City Transitional Finance Authority Revenue, Series C, 4.50%, 2/15/13 .............. 4,500,000 4,749,840
New York State Dormitory Authority Revenue, FHA Insured Mortgage, St. Barnabas, Series B,
AMBAC Insured, 4.25%, 8/01/14 ............................................................. 2,355,000 2,436,671
New York State Dormitory Authority Revenues, Mental Health Services Facilities Improvement,
Refunding, Series D, 5.60%, 2/15/07 ...................................................... 140,000 147,413
Series D, MBIA Insured, 5.00%, 8/15/17 ................................................... 2,000,000 2,135,280
New York State HFAR, Health Facilities, New York City, Refunding, Series A, 5.90%,
5/01/05 ................................................................................... 1,000,000 1,006,080
New York State Thruway Authority Service Contract Revenue, Local Highway and Bridge,
Pre-Refunded, 5.75%,
4/01/08 .................................................................................. 500,000 528,225
4/01/09 .................................................................................. 1,150,000 1,214,918
Port Authority of New York and New Jersey Construction Revenue, One Hundred Thirty Fourth
Series, Refunding, 4.00%, 7/15/14 ......................................................... 2,460,000 2,490,627
Port Authority of New York and New Jersey Special Obligation Revenue, 3rd Installment, 7.00%,
10/01/07 .................................................................................. 700,000 726,572
Yonkers GO, Series B, FSA Insured, 4.00%, 10/15/16 .......................................... 1,890,000 1,908,654
-------------
53,799,582
-------------
NORTH CAROLINA 6.0%
Asheville Water System Revenue, FSA Insured, 5.25%,
8/01/15 .................................................................................. 915,000 1,008,980
8/01/17 .................................................................................. 1,020,000 1,115,554
8/01/19 .................................................................................. 1,030,000 1,127,108
Charlotte Water and Sewer System Revenue, 5.00%, 6/01/16 .................................... 4,000,000 4,312,200
Mecklenburg County GO, Public Improvement, Series A, 4.00%, 2/01/16 ......................... 5,000,000 5,067,650
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series D, 6.00%, 1/01/09 ...................................................... 800,000 844,320
Series D, 6.45%, 1/01/14 ................................................................. 1,000,000 1,110,600
North Carolina Infrastructure Financial Corp. COP, Correctional Facilities Project, Series A,
4.00%, 2/01/17 ............................................................................ 2,715,000 2,714,918
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Refunding, Series B,
6.50%, 1/01/09 ............................................................................ 5,000,000 5,549,750
Rutherford County COP, Refunding, AMBAC Insured, 5.00%, 9/01/17 ............................. 1,275,000 1,371,479
Wake County GO, Public Improvement, 4.50%, 3/01/14 .......................................... 6,400,000 6,769,600
-------------
30,992,159
-------------
126 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO 9.2%
Akron GO, Refunding and Improvement, Various Purpose, MBIA Insured, 4.125%, 12/01/14 ........ $ 1,000,000 $ 1,032,430
Akron Income Tax Revenue, Community Learning Centers, FGIC Insured, 4.00%, 12/01/14 ......... 2,140,000 2,197,159
Allen County GO, AMBAC Insured, 4.75%, 12/01/17 ............................................. 2,180,000 2,305,699
Bowling Green State University of Ohio General Receipts GO, MBIA Insured, 5.00%,
6/01/14 .................................................................................. 2,285,000 2,526,959
6/01/15 .................................................................................. 1,400,000 1,536,724
Butler County GO, MBIA Insured, 4.00%, 12/01/14 ............................................. 1,210,000 1,242,319
Cleveland Municipal School District GO, FSA Insured, 5.00%,
12/01/14 ................................................................................. 1,915,000 2,117,779
12/01/15 ................................................................................. 1,510,000 1,657,467
12/01/16 ................................................................................. 1,400,000 1,528,716
Franklin County Health Care Facilities Revenue, Presbyterian Retirement Services, Refunding,
5.25%, 7/01/08 ........................................................................... 575,000 585,131
5.40%, 7/01/10 ........................................................................... 775,000 790,740
5.50%, 7/01/11 ........................................................................... 500,000 510,125
Kenston Local School District GO, School Improvement, MBIA Insured, 4.00%, 12/01/15 ......... 1,775,000 1,807,394
Lake Ohio Local School District GO, MBIA Insured, 5.20%, 12/01/17 ........................... 2,565,000 2,775,920
Mahoning County Sewer System Revenue, AMBAC Insured, 5.20%, 12/01/14 ........................ 1,360,000 1,480,061
Mason City School District GO, School Improvement, Refunding, FGIC Insured, 5.00%,
12/01/15 .................................................................................. 2,670,000 2,965,275
Ohio State Building Authority Revenue, State Facilities, Administration Building Fund
Project, Refunding, Series B, FSA Insured, 4.00%, 10/01/12 ................................ 1,000,000 1,035,700
Ohio State GO, Common Schools, Series B, 4.00%, 9/15/14 ..................................... 8,895,000 9,064,361
Penta Career Center COP, Wood Lucas Sandusky Fulton Ottawa Henry and Hancock Counties,
FGIC Insured, 4.00%,
4/01/15 .................................................................................. 1,620,000 1,627,322
4/01/16 .................................................................................. 1,685,000 1,683,467
Southwest Regional Water District Water Improvement Revenue, Refunding, MBIA Insured, 4.00%,
12/01/13 ................................................................................. 1,020,000 1,051,100
12/01/14 ................................................................................. 1,020,000 1,047,244
University of Akron General Receipts Revenue, FGIC Insured, Pre-Refunded, 5.75%, 1/01/14 .... 2,000,000 2,259,820
Westerville City School District GO, Refunding, MBIA Insured, 5.00%, 12/01/18 ............... 1,000,000 1,083,840
Youngstown GO, AMBAC Insured, 6.125%, 12/01/15 .............................................. 1,275,000 1,535,674
-------------
47,448,426
-------------
OKLAHOMA 0.4%
Okmulgee County Governmental Building Authority Sales Tax Revenue, first mortgage,
MBIA Insured,
5.60%, 3/01/10 ........................................................................... 1,075,000 1,175,115
6.00%, 3/01/15 ........................................................................... 700,000 771,456
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding,
5.75%, 8/15/06 ............................................................................ 295,000 305,909
-------------
2,252,480
-------------
Annual Report | 127
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON 4.2%
Clackamas County Hospital Facilities Authority Revenue, Willamette View Inc. Project,
Refunding, 6.00%, 11/01/06 ................................................................ $ 500,000 $ 514,180
Emerald Peoples Utility District Revenue, Refunding, Series A, FSA Insured, 4.00%,
11/01/14 ................................................................................. 2,380,000 2,443,070
11/01/15 ................................................................................. 2,475,000 2,522,124
Lane County School District No. 052 Bethel GO, Refunding, FSA Insured,
3.75%, 6/15/12 ........................................................................... 1,000,000 1,024,970
3.75%, 6/15/13 ........................................................................... 1,785,000 1,808,812
3.875%, 6/15/14 .......................................................................... 1,935,000 1,963,773
Oregon State Facilities Authority Revenue, Peacehealth, Series A, AMBAC Insured, 5.00%,
8/01/13 ................................................................................... 2,305,000 2,530,314
(a)Portland GO, Arena, Refunding, Series B, 5.00%, 6/01/16 ..................................... 3,075,000 3,382,777
Salem Water and Sewer Revenue,
MBIA Insured, 4.10%, 6/01/16 ............................................................. 1,035,000 1,058,960
Refunding, FSA Insured, 4.375%, 6/01/11 .................................................. 2,160,000 2,296,231
Refunding, FSA Insured, 4.50%, 6/01/12 ................................................... 2,250,000 2,413,620
-------------
21,958,831
-------------
PENNSYLVANIA 2.4%
Allegheny County IDAR, Pollution Control, Refunding, Series A, AMBAC Insured, 4.35%,
12/01/13 .................................................................................. 5,000,000 5,282,800
Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding, 5.40%,
7/01/07 ................................................................................... 1,135,000 1,137,122
Pittsburgh Water and Sewer Authority Revenue, Refunding, FSA Insured, 4.00%,
9/01/14 .................................................................................. 4,000,000 4,119,160
9/01/15 .................................................................................. 2,000,000 2,037,540
-------------
12,576,622
-------------
SOUTH CAROLINA 0.6%
Charleston County Resource Recovery Revenue, Foster Wheeler Charleston, Refunding,
AMBAC Insured, 5.25%, 1/01/10 ............................................................. 1,000,000 1,089,120
Rock Hill Utility System Revenue, Refunding and Improvement, Series A, FSA Insured,
4.00%, 1/01/14 ............................................................................ 2,000,000 2,049,960
-------------
3,139,080
-------------
TENNESSEE 0.7%
Tennessee State School Board Authority Revenue, Higher Educational Facilities,
Second Program, Series A, FSA Insured, 5.00%, 5/01/13 ..................................... 3,425,000 3,725,167
-------------
TEXAS 3.2%
Abilene Higher Educational Facilities Revenue, Abilene Christian University,
5.90%, 10/01/05 .......................................................................... 720,000 731,894
ETM, 5.90%, 10/01/05 ..................................................................... 65,000 66,398
Edgewood ISD Bexar County GO, Series A, 5.00%,
2/15/16 .................................................................................. 1,225,000 1,331,747
2/15/17 .................................................................................. 1,285,000 1,389,895
128 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
Houston Hotel Occupancy Tax and Special Revenue, Convention and Entertainment, Series B,
AMBAC Insured, 5.00%, 9/01/11 ............................................................. $ 6,000,000 $ 6,573,540
Laredo ISD Public Facility Corp. Lease Revenue,
Series A, AMBAC Insured, 5.00%, 8/01/15 .................................................. 1,000,000 1,065,340
Series C, AMBAC Insured, 5.00%, 8/01/19 .................................................. 1,000,000 1,058,920
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.35%,
11/01/10 .................................................................................. 2,500,000 2,577,900
Travis County Health Facilities Development Corp. Revenue, Ascension Health Credit, Series A,
MBIA Insured, Pre-Refunded, 6.25%, 11/15/17 ............................................... 1,500,000 1,722,330
-------------
16,517,964
-------------
U.S TERRITORIES 1.7%
District of Columbia GO,
Refunding, Series A, 5.875%, 6/01/05 ..................................................... 200,000 201,586
Series A, ETM, 5.875%, 6/01/05 ........................................................... 500,000 504,825
Virgin Islands PFAR, senior lien, Refunding, Series A, 5.30%, 10/01/11 ...................... 4,000,000 4,220,040
Virgin Islands Water and Power Authority Water System Revenue, Refunding,
4.875%, 7/01/06 .......................................................................... 1,300,000 1,322,932
5.00%, 7/01/09 ........................................................................... 2,400,000 2,508,936
-------------
8,758,319
-------------
UTAH 0.1%
Salt Lake County College Revenue, Westminster College Project, 5.50%, 10/01/12 .............. 340,000 356,113
-------------
VIRGINIA 0.8%
Fairfax County GO, Series B, 4.00%, 6/01/15 ................................................. 4,000,000 4,098,720
-------------
WASHINGTON 1.5%
King County GO, Refunding, Series A, MBIA Insured, 4.00%, 1/01/16 ........................... 3,490,000 3,498,306
King County School District No. 406 South Central GO, Refunding, FSA Insured, 5.00%,
12/01/16 ................................................................................. 3,000,000 3,247,500
Washington State Public Power Supply System Revenue, Nuclear Project No. 1, Refunding,
Series A, AMBAC Insured, 5.70%, 7/01/09 .................................................. 1,000,000 1,058,810
-------------
7,804,616
-------------
WEST VIRGINIA 0.1%
West Virginia Public Energy Authority Energy Revenue, Morgantown Association Project,
Series A, 5.05%, 7/01/08 ................................................................. 610,000 620,962
-------------
TOTAL BONDS (COST $489,820,052) ............................................................. 508,073,103
-------------
ZERO COUPON/STEP-UP BOND (COST $2,702,752) 0.5%
CALIFORNIA 0.5%
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Capital Appreciation,
Refunding, Series A, zero cpn. to 1/15/07, 5.65% thereafter, 1/15/17 ..................... 3,000,000 2,675,940
-------------
TOTAL LONG TERM INVESTMENTS (COST $492,522,804) ............................................. 510,749,043
-------------
Annual Report | 129
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 1.1%
BONDS 1.1%
FLORIDA 0.9%
(b)Orange County School Board COP, Series B, MBIA Insured, Daily VRDN and Put, 1.80%,
8/01/27 ................................................................................... $ 4,550,000 $ 4,550,000
NEW YORK 0.2%
(b)New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Fiscal 2003, Refunding, Sub Series C-3, Daily VRDN and Put, 1.77%, 6/15/18 ................ 1,200,000 1,200,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $5,750,000)............................................... 5,750,000
-------------
TOTAL INVESTMENTS (COST $498,272,804) 99.8%.................................................. 516,499,043
OTHER ASSETS, LESS LIABILITIES 0.2%.......................................................... 878,949
-------------
NET ASSETS 100.0%............................................................................ $ 517,377,992
=============
See Glossary of Terms on page 194.
(a) See Note 1(b) regarding securities purchased on a delayed delivery basis.
(b) 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.
130 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND
-------------------------
YEAR ENDED
FEBRUARY 28,
CLASS A 2005 2004(d)
-------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.12 $ 10.00
-------------------------
Income from investment operations:
Net investment income(a)......................... 0.15 0.06
Net realized and unrealized gains (losses) ...... (0.14) 0.11
-------------------------
Total from investment operations ................. 0.01 0.17
Less distributions from net investment income .... (0.14) (0.05)
Redemption fees .................................. --(c) --
-------------------------
Net asset value, end of year ..................... $ 9.99 $ 10.12
=========================
Total return(b) .................................. 0.14% 1.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 33,254 $ 24,282
Ratios to average net assets:
Expenses ....................................... 1.13% 1.27%(e)
Expenses net of waiver and payments by affiliate 0.50% 0.50%(e)
Net investment income .......................... 1.49% 1.22%(e)
Portfolio turnover rate .......................... 15.79% 8.08%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) For the period September 2, 2003 (commencement of operations) to February
29, 2004.
(e) Annualized.
Annual Report | See notes to financial statements. | 131
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 78.7%
BONDS 78.7%
ALABAMA 0.7%
Etowah County Board of Education Special Tax GO, School Warrants, FSA Insured, 2.60%,
9/01/08 ................................................................................... $ 250,000 $ 248,347
-------------
ALASKA 1.5%
Kenai Peninsula Boro Alaska GO, Center Kenai Peninsula Hospital Service Area, FGIC Insured,
3.25%, 8/01/09 ............................................................................ 500,000 503,265
-------------
ARIZONA 3.9%
Buckeye UHSD No. 201 GO, School Improvement Project, Series B, MBIA Insured, 3.00%,
7/01/08 ................................................................................... 500,000 503,620
Mohave County Beneficial Interest COP, Mohave Administration Building Project, AMBAC Insured,
3.00%, 1/01/06 ............................................................................ 350,000 351,904
Oro Valley Municipal Property Corp. Revenue, senior lien, Water Project, MBIA Insured, 3.00%,
7/01/08 ................................................................................... 425,000 428,077
-------------
1,283,601
-------------
ARKANSAS 3.0%
Fayetteville Sales and Use Tax Capital Improvement Special Assessment, 4.00%, 12/01/05 ...... 1,000,000 1,011,930
-------------
CALIFORNIA 6.2%
California State University at Channel Islands Financing Authority Revenue, Rental Housing
and Town Center, Mandatory Put 8/01/07, Series A, 2.50%, 8/01/44 .......................... 1,000,000 995,120
Los Angeles Water and Power Revenue, Power System, Series A, Sub Series A-1, 4.00%,
7/01/06 ................................................................................... 1,050,000 1,071,241
-------------
2,066,361
-------------
COLORADO 1.0%
Colorado Water Resources and Power Development Authority Revenue, Series B, 3.25%,
9/01/07 ................................................................................... 320,000 324,605
-------------
FLORIDA 3.1%
Coral Gables Health Facilities Authority Hospital Revenue, Baptist Health South Florida,
FSA Insured, 5.00%, 8/15/09 ............................................................... 750,000 806,858
Jupiter Water Revenue, AMBAC Insured, 3.75%, 10/01/07 ....................................... 105,000 107,752
Marion County Utility System Revenue, Series A, MBIA Insured, 2.00%, 12/01/06 ............... 100,000 98,621
-------------
1,013,231
-------------
GEORGIA 1.7%
Association County Commissioners Leasing Program COP, DeKalb County Public Purpose
Project, 2.50%, 12/01/07 .................................................................. 555,000 548,518
-------------
INDIANA 0.4%
Madison Grant Industry School Building Corp. Revenue, First Mortgage, AMBAC Insured, 2.25%,
1/15/06 ................................................................................... 120,000 119,796
-------------
132 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
KANSAS 1.2%
Johnson County Water District No. 001 Water Revenue, Refunding, 2.50%, 6/01/08 .............. $ 400,000 $ 393,476
-------------
KENTUCKY 1.9%
Anderson County School District Financial Corp. School Building Revenue, Refunding, Series B,
3.80%, 3/01/06 ............................................................................ 120,000 121,618
Breathitt County Justice Center Corp. Revenue, Justice Center Project, MBIA Insured, 3.00%,
10/01/06 .................................................................................. 55,000 55,362
Breathitt County School District Financial Corp. School Building Revenue, Refunding, Second
Series, 4.00%, 3/01/07 .................................................................... 110,000 112,694
Kentucky State Property and Building Commission Revenues, Project No. 80, Refunding,
Series A, MBIA Insured, 2.75%, 5/01/08 .................................................... 225,000 224,793
Woodford County School District Financial Corp. School Building Revenue, Refunding, 4.30%,
8/01/06 ................................................................................... 100,000 102,380
-------------
616,847
-------------
MASSACHUSETTS 0.6%
Massachusetts State Development Finance Agency Revenue, Brandeis University, Series K,
FGIC Insured, 2.50%, 10/01/07 ............................................................. 200,000 199,256
-------------
MICHIGAN 1.8%
Commerce Charter Township Michigan GO, Special Assessment, Series A, FSA Insured, 2.50%,
10/01/06 .................................................................................. 100,000 99,922
Detroit GO, Refunding, Series B, XLCA Insured, 3.00%, 4/01/06 ............................... 400,000 402,532
Michigan Municipal Building Authority Revenue, Local Government Loan Project, Series B,
AMBAC Insured, 2.75%, 11/01/08 ............................................................ 100,000 99,584
-------------
602,038
-------------
MINNESOTA 3.7%
St. Paul Port Authority Lease Revenue, Office Building at Cedar Street-03-12, 2.50%,
12/01/07 .................................................................................. 500,000 496,725
Washington County GO, Jail, Refunding, Series B, 2.50%, 2/01/07 ............................. 750,000 748,882
-------------
1,245,607
-------------
MISSISSIPPI 3.0%
Mississippi State GO, Capital Improvements Building Fund Arts Project, 3.125%,
11/01/10 .................................................................................. 1,000,000 993,560
-------------
MISSOURI 4.5%
Missouri State Development Finance Board Infrastructure Facilities Revenue, Hartman
Heritage Center Phase II, AMBAC Insured, 3.00%, 4/01/08 ................................... 200,000 201,052
Platte County COP, Public Improvements, 2.40%, 10/01/08 ..................................... 200,000 195,032
Springfield COP, Enterprise System Project, 3.85%, 2/01/08 .................................. 50,000 51,273
Springfield Public Building Corp. Leasehold Revenue, Capital Improvement Program,
AMBAC Insured, 4.00%, 3/01/09 ............................................................. 1,000,000 1,040,820
-------------
1,488,177
-------------
Annual Report | 133
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEVADA 5.4%
Henderson Local ID Special Assessment,
No. T-1, Lake Las Vegas, Refunding, Senior Series A-1, FSA Insured, 3.75%,
8/01/09 .................................................................................. $ 1,265,000 $ 1,301,786
No. T-6, Limited Obligation, Refunding, Senior Series A, FSA Insured, 2.85%, 11/01/09 ..... 285,000 280,645
Washoe County Improvement Bonds, Refunding, FSA Insured, 2.50%, 11/01/08 .................... 220,000 215,567
-------------
1,797,998
-------------
NEW JERSEY 3.0%
Washington Township Board of Education Gloucester County GO, Refunding, MBIA Insured,
2.75%, 2/01/08 ............................................................................ 1,000,000 999,710
-------------
NEW YORK 5.9%
Buffalo Fiscal Stability Authority Sales Tax and State Aid Revenue, Series A, 4.00%,
8/15/05 ................................................................................... 1,000,000 1,008,450
New York State Dormitory Authority Revenues, Hospital, Maimonides, MBIA Insured, 3.50%,
8/01/09 ................................................................................... 300,000 305,031
New York State Urban Development Corp. Revenue,
State Personal Income Tax, Series C-1 Empire State, 2.80%, 12/15/09 ...................... 245,000 238,929
Correctional and Youth Facilities Service, Mandatory Put 1/01/09, Series A, 4.00%,
1/01/28 ................................................................................ 400,000 410,992
-------------
1,963,402
-------------
OHIO 9.5%
Franklin County Hospital Revenue, Refunding, Hospital Corp., Series C, MBIA Insured, 2.50%,
5/15/08 ................................................................................... 500,000 493,620
Jackson Local School District Stark and Summit Counties GO, Construction and Improvement,
FGIC Insured, 2.00%, 12/01/05 ............................................................. 445,000 443,647
Ohio State GO, Conservation Projects, Series A, 2.00%, 3/01/05 .............................. 1,000,000 1,000,000
Stark County GO, Refunding Sewerage Systems, AMBAC Insured, 2.50%, 12/01/08 ................. 370,000 363,366
Sugarcreek Local School District GO, School Improvement, Refunding, MBIA Insured, 2.00%,
12/01/06 .................................................................................. 500,000 492,730
Warren GO, AMBAC Insured, 2.00%, 12/01/06 ................................................... 365,000 359,693
-------------
3,153,056
-------------
OKLAHOMA 0.5%
Oklahoma County ISD No. 12 Edmond GO, Building, 2.25%, 7/01/06 .............................. 100,000 99,672
Oklahoma Development Finance Authority Lease Revenue, Department of Human Services
County Office, AMBAC Insured, 3.25%, 2/01/06 .............................................. 75,000 75,590
-------------
175,262
-------------
OREGON 0.3%
Lake County School District No. 014 GO, Refunding, FSA Insured, 2.50%, 1/15/08 .............. 105,000 104,214
-------------
134 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA 2.5%
Lehigh County IDA, PCR, Electrical Utilities Corp. Project, Refunding, AMBAC Insured, 3.125%,
11/01/08 .................................................................................. $ 150,000 $ 151,578
Philadelphia Gas Works Revenue, 18th Series, 5.00%, 8/01/05 ................................. 420,000 424,339
Pittsburgh Water and Sewer Authority Revenue, Refunding, FSA Insured, 2.65%, 9/01/08 ........ 250,000 248,595
-------------
824,512
-------------
RHODE ISLAND 0.3%
Rhode Island Housing and Mortgage Financial Corp. Revenue, Home Ownership Opportunity,
Series 44 A, 2.40%, 10/01/07 .............................................................. 100,000 98,243
-------------
SOUTH CAROLINA 0.2%
Florence County GO, Public Improvements, AMBAC Insured, 3.75%, 3/01/08 ...................... 75,000 77,207
-------------
SOUTH DAKOTA 1.1%
South Dakota HDA Revenue, Series D, 2.90%, 5/01/09 .......................................... 375,000 364,620
-------------
TEXAS 5.0%
Hays County GO, Refunding and Improvement, AMBAC Insured, 3.875%, 8/15/07 ................... 255,000 262,176
San Antonio Electric and Gas Revenue, Systems, Mandatory Put 12/01/05, junior lien, 2.20%,
12/01/27 .................................................................................. 1,000,000 997,930
Sienna Plantation MUD No. 2 GO, FGIC Insured, 4.75%,
10/01/06 ................................................................................. 70,000 72,343
10/01/07 ................................................................................. 75,000 78,841
10/01/08 ................................................................................. 80,000 84,994
Westador MUD, GO, FSA Insured, 4.00%, 3/01/09 ............................................... 170,000 172,188
-------------
1,668,472
-------------
U.S. TERRITORIES 1.3%
Guam International Airport Authority Revenue, Series A, MBIA Insured, 2.375%, 10/01/08 ...... 240,000 233,261
Puerto Rico Commonwealth GO, Public Improvement, Mandatory Put 7/01/08, Refunding,
Series C, MBIA Insured, 5.00%, 7/01/28 .................................................... 200,000 213,290
-------------
446,551
-------------
UTAH 0.5%
Davis County Sales Tax Revenue, Series B, AMBAC Insured, 2.55%, 10/01/08 .................... 180,000 176,717
-------------
VIRGINIA 0.9%
Virginia Beach Development Authority Public Facility Revenue, Series A, 3.00%, 12/01/07 ..... 300,000 301,410
-------------
WASHINGTON 3.5%
Burlington Sewer Revenue, Refunding, MBIA Insured, 2.50%, 9/01/06 ........................... 200,000 199,796
King County School District No. 403 Renton GO, FSA Insured, 3.00%, 12/01/07 ................. 500,000 503,400
Sunmer Water and Sewer Revenue, Utility Local Improvement District No.73 and 74,
FSA Insured, 1.80%, 10/01/06 .............................................................. 150,000 147,079
Washington COP, Equipment, Series C, 2.00%, 1/01/06 ......................................... 100,000 99,545
Yakima Tieton Irrigation District Revenue, Refunding, FSA Insured, 2.50%, 6/01/06 ........... 200,000 199,898
-------------
1,149,718
-------------
Annual Report | 135
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
WEST VIRGINIA 0.6%
West Virginia State Hospital Finance Authority Hospital Revenue, West Virginia University
Hospital, Refunding, FSA Insured, 2.50%, 6/01/07 .......................................... $ 205,000 $ 203,711
-------------
TOTAL LONG TERM INVESTMENTS (COST $26,350,185) .............................................. 26,163,418
-------------
SHORT TERM INVESTMENTS 27.5%
BONDS 27.5%
CALIFORNIA 4.7%
California State RAN, Series A, 3.00%, 6/30/05 .............................................. 1,250,000 1,253,712
(a)Irvine Ranch Water District Revenue, Consolidated Bonds, Daily VRDN and Put, 1.77%,
10/01/10 ................................................................................... 200,000 200,000
(a)Metropolitan Water District Southern California Waterworks Revenue, Refunding, Series B-1,
Daily VRDN and Put, 1.77%, 7/01/35 ......................................................... 100,000 100,000
-------------
1,553,712
-------------
FLORIDA 1.8%
(a)Alachua County Health Facilities Continuing Care Revenue, Oak Hammock University of
Florida Project, Series A, Daily VRDN and Put, 1.80%, 10/01/32 ............................ 100,000 100,000
(a)Jacksonville Health Facilities Authority Hospital Revenue, Baptist Medical Center Project,
Daily VRDN and Put, 1.79%, 8/15/21 ........................................................ 200,000 200,000
(a)Orange County School Board COP, Series B,
MBIA Insured, Daily VRDN and Put, 1.80%, 8/01/27 ......................................... 100,000 100,000
AMBAC Insured, Daily VRDN and Put, 1.80%, 8/01/25 ........................................ 200,000 200,000
-------------
600,000
-------------
GEORGIA 3.3%
(a)Athens-Clarke County Unified Government Authority Revenue, University of Georgia Athletic
Association Project, Daily VRDN and Put, 1.80%, 8/01/33 ................................... 300,000 300,000
(a)Atlanta Downtown Development Authority Revenue, Underground Atlanta Project, Refunding,
Weekly VRDN and Daily Put, 1.83%, 10/01/16 ................................................ 500,000 500,000
(a)Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 1.80%,
11/01/41 .................................................................................. 200,000 200,000
(a)Hapeville IDAR, Hapeville Hotel Ltd., Daily VRDN and Put, 1.80%, 11/01/15 ................... 100,000 100,000
-------------
1,100,000
-------------
LOUISIANA 0.6%
(a)Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project,
First Stage, ACES, Refunding, Daily VRDN and Put, 1.80%, 9/01/17 .......................... 200,000 200,000
-------------
MICHIGAN 1.2%
(a)Detroit Sewage Disposal Revenue, senior lien, Series B, FSA Insured, Daily VRDN and Put,
1.80%, 7/01/33 ............................................................................ 200,000 200,000
(a)Michigan State University Revenues, Series A, Daily VRDN and Put, 1.80%, 8/15/32 ............ 200,000 200,000
-------------
400,000
-------------
136 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA 2.4%
(a)Minneapolis GO,
Block E Bonds, Series A, Weekly VRDN and Put, 1.72%, 3/01/27 .............................. $ 200,000 $ 200,000
Library, Weekly VRDN and Daily Put, 1.72%, 12/01/32 ....................................... 200,000 200,000
(a)Spring Lake Park Senior Housing Revenue, Oak Crest Apartment Project, Refunding,
FNMA Insured, Weekly VRDN and Put, 1.87%, 2/15/33 .......................................... 390,000 390,000
-------------
790,000
-------------
NEW JERSEY 0.0%(b)
(a)New Jersey Sports and Exposition Authority State Contract Revenue, Refunding, Series B-2,
MBIA Insured, Weekly VRDN and Put, 1.80%, 3/01/21 .......................................... 5,000 5,000
-------------
NEW YORK 1.8%
(a)Jay Street Development Corp. Certificates Facility Lease Revenue, Jay Street Project,
Series A-2, AMBAC Insured, Daily VRDN and Put, 1.78%, 5/01/20 .............................. 100,000 100,000
(a)Nassau County Interim Finance Authority Revenue, Sales Tax Secured, Refunding, Series B,
FSA Insured, Weekly VRDN and Put, 1.80%, 11/15/22 .......................................... 100,000 100,000
(a)New York City GO, Sub Series E-3, Daily VRDN and Put, 1.77%, 8/01/23 ........................ 300,000 300,000
(a)New York State Local Government Assistance Corp. Revenue, Weekly VRDN and Put, 1.80%,
4/01/23 .................................................................................... 100,000 100,000
-------------
600,000
-------------
NORTH CAROLINA 6.0%
(a)Charlotte-Mecklenberg Hospital Authority Health Care System Revenue, Series B, Weekly
VRDN and Put, 1.83%, 1/15/26 ............................................................... 900,000 900,000
(a)North Carolina State GO, Series G, Weekly VRDN and Put, 1.80%, 5/01/21 ...................... 1,100,000 1,100,000
-------------
2,000,000
-------------
PENNSYLVANIA 2.7%
(a)Lehigh County General Purpose Authority Revenues, St. Lukes Hospital Project, Daily VRDN
and Put, 1.79%, 7/01/31 .................................................................... 900,000 900,000
-------------
TENNESSEE 0.6%
(a)Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN and
Put, 1.80%, 1/01/33 ........................................................................ 200,000 200,000
-------------
U.S. TERRITORIES 1.5%
(a)Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ............................... 500,000 500,000
-------------
Annual Report | 137
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
BONDS (CONT.)
VIRGINIA 0.9%
(a)Alexandria Redevelopment and Housing Authority Residential Care Facility Revenue,
First Mortgage, Goodwin House Inc., Series B, Daily VRDN and Put, 1.79%, 10/01/06 ......... $ 300,000 $ 300,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $9,150,220) .............................................. 9,148,712
-------------
TOTAL INVESTMENTS (COST $35,500,405) 106.2% ................................................. 35,312,130
OTHER ASSETS, LESS LIABILITIES (6.2)% ....................................................... (2,057,907)
-------------
NET ASSETS 100.0% ........................................................................... $ 33,254,223
=============
See Glossary of Terms on page 194.
(a) 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.
(b) Rounds to less than 0.05% of net assets.
138 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.78 $ 10.39 $ 10.58 $ 10.50 $ 10.41
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.58 0.59 0.59 0.61 0.62
Net realized and unrealized gains (losses) ...... 0.03 0.39 (0.18) 0.06 0.09
----------------------------------------------------------------------
Total from investment operations ................. 0.61 0.98 0.41 0.67 0.71
Less distributions from net investment income .... (0.58) (0.59) (0.60) (0.59) (0.62)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 10.81 $ 10.78 $ 10.39 $ 10.58 $ 10.50
======================================================================
Total return(b) .................................. 5.94% 9.75% 3.97% 6.53% 6.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $4,714,804 $4,570,744 $4,410,233 $4,660,764 $4,709,402
Ratios to average net assets:
Expenses ........................................ 0.62% 0.62% 0.62% 0.62% 0.62%
Net investment income ........................... 5.44% 5.62% 5.69% 5.78% 5.90%
Portfolio turnover rate .......................... 8.60% 8.67% 11.81% 10.18% 11.08%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 139
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.84 $ 10.45 $ 10.64 $ 10.54 $ 10.45
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.52 0.53 0.54 0.56 0.56
Net realized and unrealized gains (losses) ...... 0.04 0.39 (0.19) 0.07 0.09
----------------------------------------------------------------------
Total from investment operations ................. 0.56 0.92 0.35 0.63 0.65
Less distributions from net investment income .... (0.53) (0.53) (0.54) (0.53) (0.56)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 10.87 $ 10.84 $ 10.45 $ 10.64 $ 10.54
======================================================================
Total return(b) .................................. 5.32% 9.09% 3.37% 6.10% 6.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 258,063 $ 250,878 $ 212,027 $ 175,655 $ 136,030
Ratios to average net assets:
Expenses ........................................ 1.18% 1.18% 1.18% 1.18% 1.18%
Net investment income ........................... 4.88% 5.06% 5.13% 5.23% 5.33%
Portfolio turnover rate .......................... 8.60% 8.67% 11.81% 10.18% 11.08%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
140 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.88 $ 10.48 $ 10.67 $ 10.58 $ 10.48
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.52 0.54 0.54 0.56 0.56
Net realized and unrealized gains (losses) ...... 0.03 0.39 (0.19) 0.06 0.10
----------------------------------------------------------------------
Total from investment operations ................. 0.55 0.93 0.35 0.62 0.66
Less distributions from net investment income .... (0.52) (0.53) (0.54) (0.53) (0.56)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 10.91 $ 10.88 $ 10.48 $ 10.67 $ 10.58
======================================================================
Total return(b) .................................. 5.29% 9.16% 3.37% 5.98% 6.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 588,921 $ 565,210 $ 508,653 $ 504,900 $ 501,372
Ratios to average net assets:
Expenses ........................................ 1.18% 1.18% 1.18% 1.18% 1.18%
Net investment income ........................... 4.88% 5.06% 5.13% 5.23% 5.34%
Portfolio turnover rate .......................... 8.60% 8.67% 11.81% 10.18% 11.08%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 141
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.9%
BONDS 89.0%
ALABAMA 0.3%
Camden IDB Exempt Facilities Revenue, Weyerhaeuser, Refunding,
Series A, 6.125%, 12/01/24 ............................................................... $ 3,000,000 $ 3,227,640
Series B, 6.375%, 12/01/24 ............................................................... 1,750,000 1,867,495
Oneonta Eastern Health Systems Special Care Facilities Financing Authority GO, 7.75%,
7/01/21 ................................................................................... 10,905,000 12,009,895
-------------
17,105,030
-------------
ALASKA 0.2%
Alaska Industrial Development and Export Authority Power Revenue, Upper Lynn Canal
Regional Power,
5.70%, 1/01/12 ........................................................................... 2,260,000 2,252,226
5.80%, 1/01/18 ........................................................................... 1,495,000 1,425,946
5.875%, 1/01/32 .......................................................................... 6,900,000 5,987,682
Alaska State HFC Revenue, Series A, MBIA Insured, 5.85%, 12/01/15 ........................... 2,340,000 2,403,788
-------------
12,069,642
-------------
ARIZONA 7.0%
Apache County IDA,
IDR, Tucson Electric Power Co. Project, Series C, 5.85%, 3/01/26 ......................... 16,500,000 16,526,895
PCR, Tucson Electric Power Co. Project, Series A, 5.85%, 3/01/28 ......................... 53,150,000 53,236,634
PCR, Tucson Electric Power Co. Project, Series B, 5.875%, 3/01/33 ........................ 33,800,000 33,819,942
Arizona Health Facilities Authority Hospital System Revenue, John C. Lincoln Health Network,
6.375%, 12/01/37 .......................................................................... 2,500,000 2,716,850
Arizona Health Facilities Authority Revenue,
Bethesda Foundation Project, Series A, 6.375%, 8/15/15 ................................... 400,000 406,700
Bethesda Foundation Project, Series A, 6.40%, 8/15/27 .................................... 4,000,000 3,999,800
Catholic Healthcare West, Series A, 6.625%, 7/01/20 ...................................... 3,940,000 4,483,799
Casa Grande IDA Hospital Revenue, Casa Grande Regional Medical Center, Series A, 7.25%,
12/01/32 .................................................................................. 14,500,000 15,085,800
Coconino County Pollution Control Corp. Revenue,
Pollution Control, Nevada Power Co., Series B, 5.80%, 11/01/32 ........................... 9,230,000 8,921,072
Tucson Electric Power Navajo, Refunding, Series A, 7.125%, 10/01/32 ...................... 21,125,000 22,123,579
Tucson Electric Power Navajo, Refunding, Series B, 7.00%, 10/01/32 ....................... 9,500,000 9,918,760
Gila County IDAR, Asarco Inc., Refunding, 5.55%, 1/01/27 .................................... 4,000,000 3,717,920
Maricopa County IDA Health Facilities Revenue, Catholic Healthcare West,
Refunding, ACA Insured, 5.00%, 7/01/16 ................................................... 6,500,000 6,665,165
Series A, 5.50%, 7/01/26 ................................................................. 7,500,000 7,844,550
Maricopa County Pollution Control Corp. PCR,
El Paso Electric, Series A, 6.375%, 7/01/14 .............................................. 32,000,000 32,490,880
Public Service Co. of Colorado, Refunding, Series A, 5.75%, 11/01/22 ..................... 9,800,000 10,014,914
Pima County IDAR, Tucson Electric Power Co. Project,
Series A, 6.10%, 9/01/25 ................................................................. 3,990,000 3,994,748
Series B, 6.00%, 9/01/29 ................................................................. 94,690,000 94,816,885
Series C, 6.00%, 9/01/29 ................................................................. 53,500,000 53,535,310
Red Hawk Canyon CFD No. 1 Arizona Assessment Revenue, 7.625%, 6/01/05 ....................... 5,790,000 5,826,882
-------------
390,147,085
-------------
142 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARKANSAS 0.5%
Arkansas State Development Finance Authority Industrial Facilities Revenue, Potlatch Corp.
Projects, Series A, 7.75%, 8/01/25 ........................................................ $ 3,800,000 $ 4,356,776
Baxter County IDR, Aeroquip/Trinova Corp. Project, Refunding, 5.80%, 10/01/13 ............... 2,400,000 2,733,408
Calhoun County Solid Waste Disposal Revenue, Georgia-Pacific Corp. Project, 6.375%,
11/01/26 .................................................................................. 10,000,000 10,463,800
Independence County PCR, Arkansas Power and Light Co. Project, Refunding, 6.25%,
1/01/21 ................................................................................... 5,000,000 5,068,650
Warren Solid Waste Disposal Revenue, Potlach Corp. Project, 7.00%, 4/01/12 .................. 3,150,000 3,495,776
-------------
26,118,410
-------------
CALIFORNIA 10.8%
ABAG 1915 Act Special Assessment,
Windemere Ranch AD, Series 1, 7.45%, 9/02/30 ............................................. 37,535,000 39,864,047
Windemere Ranch AD 99, Series 1, 6.375%, 9/02/32 ......................................... 9,740,000 10,224,760
Adelanto Water Authority Revenue, Water Systems Acquisition Project, sub. lien, Series A,
Pre-Refunded, 7.50%, 9/01/28 .............................................................. 21,330,000 25,134,632
Alameda County MFHR, Claremont House Project, Refunding, Series A, 8.00%, 12/01/23 .......... 11,650,000 12,288,187
Avenal PFAR, Refunding,
7.00%, 9/02/10 ........................................................................... 1,000,000 1,047,720
7.25%, 9/02/27 ........................................................................... 3,665,000 3,841,726
Beaumont PFAR, Sewer Enterprise Project, Series A, Pre-Refunded, 6.90%, 9/01/23 ............. 4,400,000 5,407,556
Calabasas Special Tax, CFD No. 01-1, Refunding, 6.25%, 9/01/31 .............................. 5,790,000 5,989,060
California County Tobacco Securitization Agency Revenue, Asset-Backed, Alameda County,
5.875%, 6/01/35 ........................................................................... 3,700,000 3,660,891
California Educational Facilities Authority Revenue, Pooled College and University Financing,
Series B, 6.125%, 6/01/09 ................................................................. 340,000 343,828
California Health Facilities Financing Authority Revenue, Marshall Medical Center, Series A,
California Mortgage Insured, 5.00%,
11/01/24 ................................................................................. 2,295,000 2,371,240
11/01/29 ................................................................................. 2,220,000 2,248,727
11/01/33 ................................................................................. 3,130,000 3,180,174
California Infrastructure and Economic Development Bank Revenue, Department of Social
Services Administration Building, AMBAC Insured, 5.00%,
12/01/30 ................................................................................. 10,300,000 11,074,457
12/01/35 ................................................................................. 14,110,000 15,118,583
California PCFA Solid Waste Disposal Revenue, Keller Canyon Landfill Co. Project, 6.875%,
11/01/27 .................................................................................. 5,480,000 5,517,264
California State GO,
5.25%, 4/01/30 ........................................................................... 2,500,000 2,621,750
5.00%, 2/01/33 ........................................................................... 40,140,000 41,183,239
Refunding, 5.25%, 4/01/32 ................................................................ 2,500,000 2,618,650
Various Purpose, 5.125%, 11/01/24 ........................................................ 18,935,000 20,011,455
California Statewide CDA Revenue,
Elder Care Alliance, Series A, 8.25%, 11/15/32 ........................................... 13,090,000 13,812,961
Eskaton Village Grass Valley, 8.25%, 11/15/31 ............................................ 3,335,000 3,688,743
John F. Kennedy University, 6.75%, 10/01/33 .............................................. 8,000,000 8,009,680
Monterey Institute International, 7.75%, 7/01/31 ......................................... 13,240,000 12,848,228
Prospect Sierra School, 6.75%, 9/01/32 ................................................... 6,545,000 6,845,808
Annual Report | 143
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CALIFORNIA (CONT.)
Chula Vista CFD Special Tax,
No. 07-I, Otay Ranch Village Eleven, 5.875%, 9/01/34 ..................................... $ 3,205,000 $ 3,295,349
No. 99-1, Otay Ranch Special Assessment 1, 6.10%, 9/01/31 ................................ 4,890,000 5,059,096
Corona COP, Corona Community Hospital Project,
ETM, 9.425%, 9/01/06 ..................................................................... 2,555,000 2,725,188
Pre-Refunded, 9.425%, 9/01/20 ............................................................ 8,820,000 11,452,064
El Dorado County CFD Special Tax, Promontory Specific, Series No. 2001-1, 6.30%,
9/01/31 ................................................................................... 3,500,000 3,644,620
Elk Grove Special Tax, East Franklin Community No. 1-A,
5.80%, 8/01/25 ........................................................................... 3,745,000 3,844,991
6.00%, 8/01/33 ........................................................................... 5,435,000 5,619,409
Emeryville RDA, MFHR, Emery Bay Apartments II,
Refunding, Series A, 5.85%, 10/01/28 ..................................................... 13,805,000 13,595,992
sub. lien, Refunding, Series B, 6.35%, 10/01/28 .......................................... 3,265,000 3,237,215
sub. lien, Refunding, Series C, 7.875%, 10/01/28 ......................................... 1,930,000 1,916,123
Foothill/Eastern Corridor Agency Toll Road Revenue, senior lien, Series A, Pre-Refunded,
6.50%, 1/01/32 ............................................................................ 37,675,000 40,440,722
Fullerton CFD No. 1 Special Tax, Amerige Heights, 6.20%, 9/01/32 ............................ 3,500,000 3,620,610
Gateway Improvement Authority Revenue, Marin City CFD, Series A, Pre-Refunded, 7.75%,
9/01/25 ................................................................................... 4,410,000 4,614,007
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue,
Asset-Backed, Series A-3, 5.50%, 6/01/33 ................................................. 20,000,000 21,549,000
Asset-Backed, Series A-3, 7.875%, 6/01/42 ................................................ 10,000,000 11,470,400
Asset-Backed, Series A-3, 5.50%, 6/01/43 ................................................. 20,000,000 21,264,200
Asset-Backed, Series B, 5.625%, 6/01/38 .................................................. 21,000,000 22,731,030
Series 2003 A-1, 6.75%, 6/01/39 .......................................................... 4,735,000 4,962,753
Lake Elsinore 1915 Act Special Assessment, AD No. 93-1, Limited Obligation, Refunding,
7.00%, 9/02/30 ............................................................................ 8,310,000 8,836,771
Lee Lake Water District CFD No. 3 Special Tax, Retreat, 5.95%, 9/01/34 ...................... 5,000,000 5,072,050
Los Angeles MFR, Refunding,
Series J-1B, 7.125%, 1/01/24 ............................................................. 505,000 503,066
Series J-1C, 7.125%, 1/01/24 ............................................................. 1,155,000 1,150,576
Series J-2B, 8.50%, 1/01/24 .............................................................. 2,485,000 2,354,488
Series J-2C, 8.50%, 1/01/24 .............................................................. 5,585,000 5,291,676
Los Angeles Regional Airports Improvement Corp. Lease Revenue,
Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 .................. 12,000,000 8,799,480
Facilities Sub-Lease, Los Angeles International, Series A-1, 7.125%, 12/01/24 ............ 2,000,000 1,994,440
Facilities Sub-Lease, Los Angeles International, Series A-2, 7.50%, 12/01/24 ............. 10,000,000 10,127,000
Refunding, Series C, 6.125%, 12/01/07 .................................................... 4,655,000 4,530,618
Refunding, Series C, 7.00%, 12/01/12 ..................................................... 8,000,000 7,881,840
Refunding, Series C, 7.50%, 12/01/24 ..................................................... 30,000,000 30,600,900
(a)United Airlines, International Airport, Refunding, 6.875%, 11/15/12 ...................... 9,500,000 7,675,240
Murrieta 1915 Act Special Tax, CFD No. 2000-1, 6.375%, 9/01/30 .............................. 4,000,000 4,204,520
Oakland Revenue, YMCA East Bay Project, Refunding, 7.10%, 6/01/10 ........................... 1,715,000 1,789,157
Poway USD Special Tax,
CFD No. 11, Area A, 5.375%, 9/01/28 ...................................................... 2,965,000 2,943,474
CFD No. 11, Area A, 5.375%, 9/01/34 ...................................................... 2,235,000 2,204,068
GO, CFD No. 10, Area A, 6.10%, 9/01/31 ................................................... 1,995,000 2,044,456
144 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CALIFORNIA (CONT.)
San Bernardino County Finance Authority Revenue, Public Improvement, AD, Refunding,
Series A, 7.00%, 9/02/17 .................................................................. $ 2,040,000 $ 2,060,176
San Francisco Uptown Parking Corp. Parking Revenue, Union Square, MBIA Insured, 6.00%,
7/01/31 ................................................................................... 8,920,000 10,036,249
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, senior lien, 5.00%,
1/01/33 ................................................................................... 11,930,000 10,863,339
San Jose MFHR, Timberwood Apartments, Series B, 9.25%, 2/01/10 .............................. 1,180,000 1,183,139
San Ramon 1915 Act Special Assessment, Fostoria Parkway Reassessment District No. 9,
6.80%, 9/02/15 ............................................................................ 615,000 639,705
Saugus USD Special Tax, 6.00%, 9/01/33 ...................................................... 3,150,000 3,234,231
Stockton CFD Special Tax, Spanos Park West, 6.375%, 9/01/32 ................................. 4,100,000 4,276,341
Stockton Improvement Bond Revenue, 1915 Act, Limited Obligation, Mosher AD 02, 6.30%,
9/02/33 ................................................................................... 6,000,000 6,190,800
Upland CFD Special Tax, 2003-2 San Antonio Improvement, Series 1-A, 6.00%, 9/01/34 .......... 6,520,000 6,729,944
West Sacramento Special Tax, CFD No. 16, 6.00%, 9/01/33 ..................................... 3,000,000 3,080,220
-------------
600,294,099
-------------
COLORADO 2.1%
Colorado Health Facilities Authority Revenue, Volunteers of America Care Facilities,
Refunding and Improvement, Series A,
5.45%, 7/01/08 ........................................................................... 890,000 881,936
5.75%, 7/01/20 ........................................................................... 3,000,000 2,881,680
5.875%, 7/01/28 .......................................................................... 2,990,000 2,828,480
Denver City and County Airport Revenue,
Series B, 5.50%, 11/15/33 ................................................................ 20,000,000 20,011,800
Series D, 7.75%, 11/15/13 ................................................................ 500,000 600,535
(a)Denver City and County Special Facilities Airport Revenue, United Airlines Inc. Project,
Series A, 6.875%, 10/01/32 ................................................................ 11,760,000 9,976,361
Denver Health and Hospital Authority Healthcare Revenue, 6.25%, 12/01/33 .................... 4,000,000 4,267,080
Eagle County Air Terminal Corp. Revenue, Series A,
7.00%, 5/01/21 ........................................................................... 955,000 1,010,399
7.125%, 5/01/31 .......................................................................... 1,705,000 1,810,625
Eagle County Airport Terminal Project Revenue, 7.50%, 5/01/21 ............................... 1,785,000 1,840,371
Eagle County Sports and Housing Facilities Revenue, Vail Associate Project, Refunding,
6.95%, 8/01/19 ............................................................................ 41,200,000 43,520,796
Littleton MFHR, Riverpoint, Refunding, Series C, 8.00%, 12/01/29 ............................ 2,835,000 2,981,796
McKay Landing Metropolitan District No. 002 GO,
Limited Tax, 7.50%, 12/01/19 ............................................................. 3,375,000 3,672,439
Refunding, Subordinated, Series A, 7.50%, 12/01/34 ....................................... 2,000,000 2,014,440
Saddle Rock South Metropolitan District No. 2 GO, Ltd. Mill Levy Obligation, 7.20%,
12/01/19 .................................................................................. 575,000 619,948
Saddle Rock South Metropolitan District No. 3 GO, Ltd. Mill Levy Obligation, 7.35%,
12/01/19 .................................................................................. 3,320,000 3,584,538
University of Colorado Hospital Authority Revenue, Series A, 5.60%, 11/15/31 ................ 9,000,000 9,313,830
Villages Castle Rock Metropolitan District No. 4 Revenue, cash flow variable rate bond,
Refunding, 8.50%, 6/01/31 ................................................................. 3,000,000 2,968,260
-------------
114,785,314
-------------
Annual Report | 145
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CONNECTICUT 1.9%
Connecticut State Development Authority PCR,
Connecticut Light and Water, Refunding, Series A, 5.85%, 9/01/28 ......................... $ 53,825,000 $ 57,246,655
Western Massachusetts Electric Co., Refunding, Series A, 5.85%, 9/01/28 .................. 12,500,000 13,294,625
Connecticut State Development Authority Water Facility Revenue, Bridgeport Hydraulic Co.
Project, 6.15%, 4/01/35 ................................................................... 3,000,000 3,142,560
Connecticut State Health and Educational Facilities Authority Revenue,
Sacred Heart University, Series C, 6.50%, 7/01/16 ........................................ 420,000 439,652
Sacred Heart University, Series C, Pre-Refunded, 6.50%, 7/01/16 .......................... 1,580,000 1,692,322
St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ................................. 5,650,000 5,224,951
Windham Community Memorial Hospital, Series C, 6.00%, 7/01/11 ............................ 1,400,000 1,408,848
Connecticut State HFAR, Housing Mortgage Finance Program, Series C-1, 6.30%,
11/15/17 .................................................................................. 19,995,000 20,774,005
-------------
103,223,618
-------------
FLORIDA 7.7%
Beacon Tradeport CDD Special Assessment, Commercial Project, Series A, Pre-Refunded,
6.00%, 5/01/16 ........................................................................... 27,760,000 31,004,866
6.20%, 5/01/22 ........................................................................... 23,590,000 27,517,735
Brighton Lakes CDD Special Assessment, Series B,
7.375%, 5/01/07 .......................................................................... 1,885,000 1,916,687
7.625%, 5/01/31 .......................................................................... 3,255,000 3,457,656
Brooks of Bonita Springs CDD Capital Improvement Revenue,
6.85%, 5/01/31 ........................................................................... 1,440,000 1,533,528
Series A, 6.20%, 5/01/19 ................................................................. 6,825,000 7,178,194
Brooks of Bonita Springs II CDD Capital Improvement Revenue, Series A, 7.00%, 5/01/31 ....... 12,365,000 13,088,723
Capital Region CDD Capital Improvement Revenue, Series A-2, 6.85%, 5/01/31 .................. 2,395,000 2,576,349
Championsgate CDD Capital Improvement Revenue,
Series A, 6.25%, 5/01/20 ................................................................. 2,720,000 2,746,275
Series B, 5.70%, 5/01/05 ................................................................. 805,000 805,620
Citrus County Hospital Board Revenue, Citrus Memorial Hospital, Refunding, 6.375%,
8/15/32 ................................................................................... 10,550,000 11,101,343
Falcon Trace CDD Special Assessment, 6.00%, 5/01/20 ......................................... 3,690,000 3,794,685
Fleming Plantation CDD Special Assessment, Series B, 7.375%, 5/01/31 ........................ 9,900,000 10,733,085
Florida State Board of Education Capital Outlay GO, Public Education, Refunding, Series D,
6.00%, 6/01/23 ............................................................................ 5,000,000 6,145,900
Gateway Services District Water Management Benefit Tax Revenue, Second Assessment
Area, Phase One, 8.00%, 5/01/20 ........................................................... 3,825,000 3,913,625
Groves CDD Special Assessment Revenue,
Series A, 7.75%, 5/01/32 ................................................................. 1,790,000 1,789,714
Series B, 7.625%, 5/01/08 ................................................................ 6,200,000 6,123,678
Halifax Hospital Medical Center Hospital Revenue, Series A, 7.25%,
10/01/24 ................................................................................. 4,700,000 5,121,731
10/01/29 ................................................................................. 1,400,000 1,524,222
Heritage Harbor CDD Special Assessment Revenue, Series A, 6.70%, 5/01/19 .................... 1,635,000 1,680,567
Hillsborough County IDAR, Refunding, Series B, 5.25%,
10/01/28 ................................................................................. 1,500,000 1,536,345
10/01/34 ................................................................................. 7,250,000 7,400,220
146 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Indian Trace CDD, GO, Water Management Special Benefit, Refunding, Sub Series B, 8.25%,
5/01/05 .................................................................................. $ 1,650,000 $ 1,657,524
5/01/11 .................................................................................. 12,760,000 14,225,996
Indian Trace CDD Special Assessment, Isles at Weston Project, 5.50%, 5/01/33 ................ 3,000,000 3,022,500
Indian Trail ID, GO, Water Control and Improvement, Unit Development 18,
6.875%, 8/01/10 .......................................................................... 830,000 867,508
7.00%, 8/01/20 ........................................................................... 2,445,000 2,589,279
7.25%, 8/01/31 ........................................................................... 5,725,000 6,075,427
Indigo CDD Capital Improvement Revenue,
Refunding, Series A, 7.00%, 5/01/31 ...................................................... 950,000 978,253
Series C, 7.00%, 5/01/30 ................................................................. 4,975,000 5,122,956
Islands at Doral CDD Special Assessment, 6.125%, 5/01/24 .................................... 2,000,000 2,099,320
Lake Ashton CDD Revenue, Series A, 7.40%, 5/01/32 ........................................... 1,740,000 1,864,984
Lakeland Retirement Community Revenue, first mortgage, Carpenters Home, Refunding,
Series A, 6.75%, 1/01/19 .................................................................. 14,955,000 15,189,943
Lakeside Plantation CDD Capital Improvement Revenue, 7.00%, 5/01/07 ......................... 1,539,393 1,540,009
Lakewood Ranch CDD No. 2 Benefit Special Assessment, Series A, 8.125%, 5/01/17 .............. 2,825,000 2,922,095
Lakewood Ranch CDD No. 3 Special Assessment Revenue, 7.625%, 5/01/18 ........................ 480,000 498,917
Largo First Mortgage Revenue, The Barrington Project, Series A, 7.50%, 9/01/33 .............. 10,845,000 11,235,095
Mediterra North CDD Capital Improvement Revenue, Series A, 6.80%, 5/01/31 ................... 8,560,000 9,153,722
Mediterra South CDD Capital Improvement Revenue,
6.85%, 5/01/31 ........................................................................... 2,675,000 2,863,106
Series B, 6.95%, 5/01/31 ................................................................. 7,530,000 7,948,743
(a)Miami-Dade County IDAR, Special Facilities, United Airlines Inc. Project, Mandatory
Put 3/01/10, 6.05%, 3/01/35 ............................................................... 5,000,000 290,000
Midtown Miami Community Development Special Assessment Revenue,
Series A, 6.25%, 5/01/37 ................................................................. 7,500,000 7,806,825
Series B, 6.50%, 5/01/37 ................................................................. 4,000,000 4,190,640
Mount Dora Country Club CDD Special Assessment Revenue, 7.75%, 5/01/13 ...................... 615,000 623,100
North Springs ID Special Assessment, Water Management, Series B, 8.30%, 5/01/24 ............. 1,555,000 1,575,635
North Springs ID Special Assessment Revenue, Parkland Isles Project, Series A, 7.00%,
5/01/19 ................................................................................... 950,000 984,865
Northern Palm Beach County ID Revenue, Water Control and Improvement, Unit Development
No. 43, 6.10%, 8/01/21 .................................................................... 2,775,000 2,909,449
Northwood CDD Special Assessment Revenue, Series B, 7.60%, 5/01/17 .......................... 1,290,000 1,292,877
Oakstead CDD Revenue, Capital Improvement, Series A, 7.20%, 5/01/32 ......................... 3,365,000 3,619,024
Orange County Health Facilities Authority Revenue,
Hospital Adventist Health System, 5.625%, 11/15/32 ....................................... 10,000,000 10,627,700
Hospital Orlando Regional Healthcare, 5.75%, 12/01/32 .................................... 15,000,000 16,091,850
Parklands West CDD Revenue, Special Assessment, Series A, 6.90%, 5/01/32 .................... 2,935,000 3,126,861
Parkway Center CDD Special Assessment, Series A, 8.25%, 5/01/31 ............................. 1,401,443 1,408,548
Pelican Marsh CDD Special Assessment Revenue,
Series A, 7.10%, 5/01/20 ................................................................. 3,680,000 3,960,894
Series A, 7.20%, 5/01/31 ................................................................. 6,470,000 6,971,296
Series B, 6.90%, 5/01/11 ................................................................. 4,740,000 4,861,439
Series C, 7.00%, 5/01/19 ................................................................. 11,345,000 11,871,408
Series D, 6.95%, 5/01/19 ................................................................. 4,085,000 4,266,170
Annual Report | 147
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Piney-Z CDD Capital Improvement Revenue, Series A, 7.25%, 5/01/19 ........................... $ 740,000 $ 774,343
Poinciana CDD Special Assessment, Series A, 7.125%, 5/01/31 ................................. 10,495,000 11,116,094
Reserve CDD Capital Improvement Revenue, Stormwater Management, 8.25%, 5/01/14 .............. 2,165,000 2,202,519
Reserve CDD No. 2 Capital Improvement Revenue, 7.125%, 5/01/30 .............................. 4,470,000 4,669,049
Reserve CDD Utility Revenue, Stormwater Management, Refunding, Series A, 6.625%,
12/01/22 .................................................................................. 3,985,000 4,172,893
River Place St. Lucie CDD Special Assessment Revenue,
Series A, 7.625%, 5/01/21 ................................................................ 1,210,000 1,287,525
Series A, 7.625%, 5/01/30 ................................................................ 1,590,000 1,694,972
Series B, 7.25%, 5/01/10 ................................................................. 980,000 1,023,865
Riverwood Community Development Revenue, Special AD, Series A, 7.75%, 5/01/14 ............... 785,000 845,335
Sampson Creek CDD Capital Improvement Revenue, Series A, 6.95%, 5/01/31 ..................... 2,900,000 3,026,962
South-Dade Venture CDD Special Assessment Revenue, 6.00%, 5/01/24 ........................... 2,895,000 2,979,013
St. Lucie West Services District Capital Improvement Revenue, Cascades Project, 6.10%,
5/01/18 ................................................................................... 2,200,000 2,266,374
St. Lucie West Services District Special Assessment Revenue, Port St. Lucie,
Water Management Benefit, Refunding, Series B,
6.00%, 5/01/09 ........................................................................... 820,000 833,227
6.25%, 5/01/25 ........................................................................... 5,080,000 5,297,932
Stonegate CDD Special Assessment Revenue, 6.00%, 5/01/24 .................................... 2,295,000 2,358,044
Stoneybrook West CDD Special Assessment Revenue, Series A, 7.00%, 5/01/32 ................... 3,075,000 3,274,260
Tara CDD No. 1 Capital Improvement Revenue, Series A, 7.15%, 5/01/31 ........................ 1,375,000 1,468,198
Venetian CDD Capital Improvement Revenue, Series A, 6.75%, 5/01/34 .......................... 8,635,000 9,255,166
Verandah West CDD Revenue, Series A, 6.625%, 5/01/33 ........................................ 8,900,000 9,312,248
Village Center CDD Recreational Revenue,
Sub Series B, 6.30%, 1/01/07 ............................................................. 1,020,000 1,041,440
Sub Series B, 6.25%, 1/01/13 ............................................................. 6,935,000 7,325,441
Sub Series B, 8.25%, 1/01/17 ............................................................. 2,055,000 2,203,864
Sub Series C, 7.375%, 1/01/19 ............................................................ 2,325,000 2,490,005
Village CDD No. 4 Special Assessment Revenue, 7.20%, 5/01/31 ................................ 7,975,000 8,610,687
Vista Lake CDD Capital Improvement Revenue, Series A, 7.20%, 5/01/32 ........................ 2,760,000 2,946,659
Waterchase CDD Capital Improvement Revenue, Series A, 6.70%, 5/01/32 ........................ 2,930,000 3,116,553
Waterlefe CDD Capital Improvement Revenue, Series A, 6.95%, 5/01/31 ......................... 1,205,000 1,294,628
Westchase East CDD Capital Improvement Revenue, 7.10%, 5/01/21 .............................. 1,490,000 1,591,067
-------------
427,503,069
-------------
GEORGIA 2.3%
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien,
Series C, FSA Insured, 5.00%, 1/01/33 .................................................... 36,000,000 37,356,480
Series J, FSA Insured, 5.00%, 1/01/29 .................................................... 16,445,000 17,117,765
Atlanta Water and Wastewater Revenue, FSA Insured, 5.00%, 11/01/34 .......................... 20,200,000 21,031,230
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.375%,
12/01/28 .................................................................................. 1,470,000 1,277,504
Floyd County Development Authority Environmental Improvement Revenue,
Dates-Temple-Inland, 5.70%, 12/01/15 ...................................................... 1,575,000 1,686,746
148 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
GEORGIA (CONT.)
Forsyth County Hospital Authority Revenue, Anticipation Certificate, Georgia Baptist Health
Care System Project, ETM,
6.25%, 10/01/18 .......................................................................... $ 6,000,000 $ 7,080,360
6.375%, 10/01/28 ......................................................................... 8,000,000 10,120,240
Henry County Hospital Authority Revenue, Henry Medical Center Inc. Project, MBIA Insured,
5.00%, 7/01/34 ............................................................................ 26,145,000 27,175,897
McDuffie County Development Authority Waste Disposal Revenue, Temple-Inland Forest
Products, 6.95%, 12/01/23 ................................................................. 5,120,000 5,742,643
-------------
128,588,865
-------------
HAWAII 0.1%
Hawaii State Department of Transportation Special Facilities Revenue, Continental
Airlines Inc. Project, Refunding, 7.00%, 6/01/20 .......................................... 4,240,000 3,672,137
-------------
IDAHO 0.4%
Nez Perce County PCR,
Potlatch 84, 7.00%, 12/01/14 ............................................................. 2,500,000 2,829,200
Potlatch Corp. Project, Refunding, 6.00%, 10/01/24 ....................................... 17,500,000 17,751,475
-------------
20,580,675
-------------
ILLINOIS 2.8%
Antioch Village Special Service Area No. 1 Special Tax, Deercrest Project, 6.625%,
3/01/33 ................................................................................... 3,350,000 3,391,439
Antioch Village Special Service Area No. 2 Special Tax, Clublands Project, 6.625%,
3/01/33 ................................................................................... 5,650,000 5,719,890
Bolingbrook Special Service Area No. 1 Special Tax, Augusta Village Project,
6.75%, 3/01/32 ........................................................................... 5,500,000 5,741,560
Series 2004, 6.25%, 3/01/32 .............................................................. 3,670,000 3,720,830
Bolingbrook Special Service Area No. 2 Special Tax, Bloomfield West Project, Series A,
6.625%, 3/01/31 .......................................................................... 4,520,000 4,708,936
7.00%, 3/01/31 ........................................................................... 4,988,000 5,314,115
Bolingbrook Special Service Area No. 3 Special Tax, Lakewood Ridge Project, 7.05%,
3/01/31 ................................................................................... 5,893,000 6,246,875
Bryant PCR, Central Illinois Light Co. Project, Refunding, MBIA Insured, 5.90%, 8/01/23 ..... 11,000,000 11,279,400
Cary Special Tax,
Special Service Area No. 1 Cambridge, Series A, 7.625%, 3/01/30 .......................... 3,768,000 4,082,440
Special Service Area No. 2 Foxford Hill, 7.50%, 3/01/30 .................................. 5,400,000 5,734,098
Chicago O'Hare International Airport Special Facilities Revenue, American Airlines Inc.
Project, 8.20%, 12/01/24 .................................................................. 7,830,000 6,565,533
Gilberts Special Service Area No. 9 Special Tax, Big Timber Project, 7.75%, 3/01/27 ......... 6,000,000 6,657,600
Illinois Health Facilities Authority Revenue,
Rush Presbyterian Hospital, Refunding, Series A, MBIA Insured, 6.25%, 11/15/20 ........... 9,000,000 9,667,530
Sarah Bush Lincoln Health Center, Refunding, Series B, 6.00%, 2/15/11 .................... 3,370,000 3,584,433
St. Elizabeth's Hospital, 6.25%, 7/01/16 ................................................. 1,215,000 1,275,410
St. Elizabeth's Hospital, 6.375%, 7/01/26 ................................................ 6,695,000 6,923,500
Thorek Hospital and Medical Center, Refunding, 5.375%, 8/15/28 ........................... 8,595,000 8,543,688
Annual Report | 149
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ILLINOIS (CONT.)
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue, McCormick Place
Convention Center,
ETM, 7.00%, 7/01/26 ...................................................................... $ 7,500,000 $ 10,042,875
Pre-Refunded, 6.25%, 7/01/17 ............................................................. 11,000,000 11,768,900
Minooka Special Assessment, Improvement Prairie Ridge Project, 6.875%, 3/01/33 .............. 3,000,000 3,068,460
Montgomery Special Assessment, Improvement, Lakewood Creek Project, 7.75%, 3/01/30 .......... 4,893,000 5,348,636
Plano Special Service Area No. 2 Special Tax, Lakewood Springs Project, Series B, 6.375%,
3/01/34 ................................................................................... 8,000,000 8,142,240
Southwestern Development Authority Revenue, Anderson Hospital, 5.625%, 8/15/29 .............. 2,425,000 2,495,398
Wauconda Special Service Area No. 1 Special Tax, Liberty Lakes Project, 6.625%,
3/01/33 ................................................................................... 5,280,000 5,380,373
Yorkville United City Special Service Area Special Tax,
No. 04-104, MPI Grande Reserve Project, 6.375%, 3/01/34 .................................. 4,400,000 4,452,492
No. 2003, Windett Ridge Project, Series 101, 6.875%, 3/01/33 ............................. 3,900,000 4,095,390
-------------
153,952,041
-------------
INDIANA 1.5%
Goshen Industrial Revenue, Greencroft Hospital Association Inc., Refunding, 5.75%,
8/15/19 .................................................................................. 3,000,000 3,002,670
8/15/28 .................................................................................. 5,000,000 4,955,350
Indiana Health Facility Financing Authority Hospital Revenue,
6.25%, 3/01/25 ........................................................................... 3,200,000 3,339,520
6.00%, 3/01/34 ........................................................................... 12,000,000 12,400,080
Community Foundation Northwest Indiana, Series A, 6.375%, 8/01/31 ........................ 48,500,000 50,931,305
Jackson County Scheck Memorial Hospital, Refunding, 5.125%, 2/15/17 ...................... 1,500,000 1,558,680
Indiana State Development Finance Authority Environmental Revenue, USX Corp. Project,
Refunding, 5.60%, 12/01/32 ................................................................ 8,200,000 8,474,700
-------------
84,662,305
-------------
KANSAS 0.2%
Wyandotte County City Unified Government Utility System Revenue, Improvement, Series B,
FSA Insured, 5.00%, 9/01/32 ............................................................... 10,000,000 10,390,700
-------------
KENTUCKY 2.0%
Kenton County Airport Board Airport Revenue, Special Facilities, Delta Airlines Inc. Project,
Series A, 7.50%, 2/01/12 ................................................................. 7,050,000 6,634,050
Series A, 7.50%, 2/01/20 ................................................................. 35,275,000 31,880,487
Series A, 7.125%, 2/01/21 ................................................................ 28,830,000 25,042,891
Series A, 6.125%, 2/01/22 ................................................................ 12,940,000 9,987,739
Series B, 7.25%, 2/01/22 ................................................................. 5,315,000 4,711,056
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 .............. 6,835,000 6,556,474
Maysville Solid Waste Disposal Facilities Revenue, Inland Container Corp. Project, Refunding,
6.90%, 9/01/22 ............................................................................ 16,000,000 17,891,200
Powderly Industrial Development First Mortgage Revenue, Kroger Co., Refunding, 7.375%,
9/01/06 ................................................................................... 255,000 256,377
Russell Health System Revenue, Pre-Refunded, 8.10%, 7/01/15 ................................. 6,550,000 7,104,926
-------------
110,065,200
-------------
150 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
LOUISIANA 1.3%
Beauregard Parish Revenue, Boise Cascade Corporate Project, Refunding, 6.80%, 2/01/27 ........ $ 13,990,000 $ 15,086,256
Louisiana Public Facilities Authority Revenue, FHA Insured Mortgage, Baton Rouge General,
MBIA Insured, 5.25%, 7/01/33 ............................................................... 20,000,000 21,084,400
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 ....... 4,850,000 4,913,972
West Feliciana Parish PCR,
Entergy Gulf States Project, Refunding, Series B, 6.60%, 9/01/28 .......................... 20,750,000 21,099,845
Series A, 7.50%, 5/01/15 .................................................................. 8,740,000 8,797,946
-------------
70,982,419
-------------
MAINE 0.6%
Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 ......................... 4,800,000 4,927,248
Skowhegan PCR, S.D. Warren Co.,
Series A, 6.65%, 10/15/15 ................................................................. 24,570,000 24,954,521
Series B, 6.65%, 10/15/15 ................................................................. 4,940,000 5,017,311
-------------
34,899,080
-------------
MARYLAND 0.7%
Gaithersberg Hospital Facilities Revenue, Shady Grove Adventist Hospital, Refunding and
Improvement, Series B, 8.50%, 9/01/07 ...................................................... 3,890,000 4,173,542
Maryland State CDA Department of Housing and Community Development Revenue, Series A,
5.875%, 7/01/16 ............................................................................ 2,500,000 2,598,775
Maryland State EDC Revenue, Chesapeake Bay,
senior lien, Series B, 7.50%, 12/01/14 .................................................... 1,915,000 2,027,621
senior lien, Series B, 7.625%, 12/01/22 ................................................... 6,740,000 7,133,616
Series B, 7.75%, 12/01/31 ................................................................. 16,160,000 17,083,544
Takoma Park Hospital Facilities Revenue, Washington Adventist Hospital Project, Series B,
8.50%, 9/01/07 ............................................................................. 5,475,000 5,917,818
-------------
38,934,916
-------------
MASSACHUSETTS 0.4%
Massachusetts Bay Transportation Authority Revenue, General Transportation System, Series A,
7.00%, 3/01/21 ............................................................................. 2,000,000 2,525,160
Massachusetts State Development Finance Agency Resource Recovery Revenue,
Waste Management Inc. Project, Mandatory Put 12/01/09, Series A, 6.90%, 12/01/29 ........... 3,000,000 3,388,920
Massachusetts State Development Finance Agency Revenue,
Berkshire Retirement Project, first mortgage, 5.60%, 7/01/19 .............................. 1,030,000 1,041,381
Berkshire Retirement Project, first mortgage, 5.625%, 7/01/29 ............................. 1,620,000 1,623,694
Loomis Community Project, first mortgage, Refunding, Series A, 5.75%, 7/01/23 ............. 3,500,000 3,365,600
Loomis Community Project, first mortgage, Series A, 5.625%, 7/01/15 ....................... 1,850,000 1,856,160
Massachusetts State Health and Educational Facilities Authority Revenue, Saint Memorial
Medical Center, Refunding, Series A,
5.75%, 10/01/06 ........................................................................... 1,730,000 1,740,847
6.00%, 10/01/23 ........................................................................... 6,235,000 6,267,734
(a)Massachusetts State Industrial Finance Agency Solid Waste Disposal Revenue, Massachusetts
Paper Co. Project, senior lien, 8.50%, 11/01/12 ............................................ 39,820,661 238,924
-------------
22,048,420
-------------
Annual Report | 151
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN 3.6%
Delta County EDC Environmental Improvement Revenue, Mead Escanaba Paper, Refunding,
Series A, 6.25%, 4/15/27 ................................................................... $ 10,500,000 $ 11,846,100
Detroit GO,
Refunding, Series B, 6.375%, 4/01/07 ...................................................... 7,535,000 7,635,969
Refunding, Series B, 6.25%, 4/01/08 ....................................................... 3,000,000 3,039,900
Series A, Pre-Refunded, 6.80%, 4/01/15 .................................................... 5,160,000 5,231,002
Garden City Hospital Financing Authority Hospital Revenue, Refunding,
5.625%, 9/01/10 ........................................................................... 1,895,000 1,875,197
5.75%, 9/01/17 ............................................................................ 1,000,000 949,600
Gaylord Hospital Finance Authority Ltd. Obligation Revenue, Otsego Memorial Hospital,
Refunding, 6.50%,
1/01/31 ................................................................................... 1,000,000 996,160
1/01/37 ................................................................................... 1,000,000 994,550
Kent Hospital Finance Authority Health Care Revenue, Butterworth Health System, Series A,
MBIA Insured, Pre-Refunded, 6.125%, 1/15/21 ................................................ 11,770,000 12,378,156
Michigan State Building Authority Revenue, Facilities Program, Refunding, Series II,
MBIA Insured, 5.00%, 10/15/29 .............................................................. 10,950,000 11,408,476
Michigan State Hospital Finance Authority Revenue,
Ascension Health Credit, Series A, MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 ........... 18,000,000 20,612,880
Detroit Medical Center Obligation Group, Refunding, Series A, 6.25%, 8/15/13 .............. 7,500,000 7,512,225
Detroit Medical Center Obligation Group, Refunding, Series A, 6.50%, 8/15/18 .............. 30,205,000 30,203,490
Detroit Medical Center Obligation Group, Refunding, Series B, 5.50%, 8/15/23 .............. 500,000 461,315
Detroit Medical Center Obligation Group, Series A, 5.25%, 8/15/23 ......................... 500,000 447,700
Memorial Healthcare Center, Refunding, 5.75%, 11/15/15 .................................... 1,000,000 1,063,520
Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.75%, 8/15/16 ....................... 7,310,000 7,623,672
Sinai Hospital, Refunding, 6.625%, 1/01/16 ................................................ 2,990,000 3,008,329
Sinai Hospital, Refunding, 6.70%, 1/01/26 ................................................. 7,250,000 7,289,730
Michigan State Strategic Fund Limited Obligation Revenue,
Detroit Edison Co. Pollution Control Project, Refunding, Series C, 5.45%, 9/01/29 ......... 11,000,000 11,513,480
Detroit Edison Co. Project Collateral, Refunding, Series BB, MBIA Insured, 6.20%,
8/15/25 .................................................................................. 7,825,000 8,115,229
Midland County EDR, Refunding,
Series A, 6.875%, 7/23/09 ................................................................. 35,000,000 36,313,550
Series B, 6.75%, 7/23/09 .................................................................. 4,000,000 4,152,720
Tawas City Hospital Finance Authority Revenue, Tawas St. Joseph's Hospital Project,
Refunding, Series A, ETM, 5.60%, 2/15/13 ................................................... 1,565,000 1,710,764
Wayne Charter County Special Airport Facilities Revenue, Airport Revenues, Refunding,
6.75%, 12/01/15 ............................................................................ 4,995,000 4,304,192
-------------
200,687,906
-------------
MINNESOTA 1.0%
Hubbard County Solid Waste Disposal Revenue, Potlatch Corp. Project, 7.25%, 8/01/14 .......... 9,000,000 10,203,480
Maplewood Health Care Facility Revenue, Health East Project, 5.95%, 11/15/06 ................. 1,510,000 1,524,632
Minneapolis and St. Paul Metropolitan Airports Commission Special Facilities Revenue,
Northwest Airlines Inc. Project,
Mandatory Put 4/01/05, Series B, 6.50%, 4/01/25 .......................................... 3,750,000 3,800,437
Refunding, 7.375%, 4/01/25 ............................................................... 5,000,000 4,815,100
Series A, 7.00%, 4/01/25 ................................................................. 6,000,000 5,556,420
152 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Minneapolis Health Care Facility Revenue, Fairview Health Services, Series A, 5.625%,
5/15/32 .................................................................................... $ 18,380,000 $ 19,469,199
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Series A, 6.375%, 11/15/29 ................................................................. 6,500,000 7,122,310
Minnesota State HFAR, Rental Housing, Refunding, Series D, MBIA Insured, 5.95%,
2/01/18 .................................................................................... 460,000 469,191
Roseville MFHR, Rosepointe I Project, Refunding, Series C, 8.00%, 12/01/29 ................... 3,240,000 3,415,057
St. Paul Housing and RDA Tax Increment Revenue, Energy Park Project, Series A, 8.625%,
9/01/07 .................................................................................... 560,000 565,746
-------------
56,941,572
-------------
MISSISSIPPI 0.6%
Claiborne County PCR, Systems Energy Resources Inc., Refunding, 6.20%, 2/01/26 ............... 33,295,000 33,365,918
-------------
MISSOURI 0.6%
Lake of the Ozarks Community Board Corp. Bridge System Revenue,
Pre-Refunded, 6.25%, 12/01/16 ............................................................. 1,000,000 1,084,170
Pre-Refunded, 6.40%, 12/01/25 ............................................................. 3,000,000 3,260,130
Refunding, 5.25%, 12/01/20 ................................................................ 8,350,000 7,716,903
St. Louis County IDA Industrial Revenue, Kiel Center, Refunding,
7.625%, 12/01/09 .......................................................................... 8,000,000 8,055,600
7.75%, 12/01/13 ........................................................................... 5,175,000 5,207,758
7.875%, 12/01/24 .......................................................................... 6,000,000 6,033,360
West Plains IDA Hospital Revenue,
Ozarks Medical Center, 6.30%, 11/15/11 .................................................... 865,000 914,166
Ozarks Medical Center, 6.75%, 11/15/24 .................................................... 1,870,000 1,924,847
Ozarks Medical Center Project, Refunding, 5.50%, 11/15/12 ................................. 500,000 504,690
-------------
34,701,624
-------------
NEBRASKA 0.0%(c)
Scotts Bluff County Hospital Authority No. 1, Hospital Revenue, Regional West Medical
Center, 6.375%, 12/15/08 ................................................................... 1,145,000 1,149,580
-------------
NEVADA 3.2%
Clark County ID Special Assessment,
Special ID No. 132, Local Improvement, 6.875%, 2/01/21 .................................... 3,925,000 4,054,996
Special ID No. 142, Local Improvement, 6.375%, 8/01/23 .................................... 4,200,000 4,312,770
Clark County IDR, Nevada Power Co. Project, Refunding, Series B, 5.90%, 10/01/30 ............. 5,125,000 5,025,319
Director of the State Department of Business and Industry Revenue, Las Vegas Monorail
Project, Second Tier,
7.25%, 1/01/23 ............................................................................ 8,000,000 8,276,640
7.375%, 1/01/30 ........................................................................... 9,000,000 9,277,740
7.375%, 1/01/40 ........................................................................... 49,750,000 51,042,505
Henderson Health Care Facility Revenue, Catholic Healthcare West, Series A, 5.625%,
7/01/24 .................................................................................... 7,000,000 7,445,900
Henderson Local ID Special Assessment,
No. T-2, 9.50%, 8/01/11 ................................................................... 1,215,000 1,218,888
No. T-4C, Green Valley, Refunding, Series A, 5.90%, 11/01/18 .............................. 3,095,000 3,190,790
No. T-12, Series A, 7.375%, 8/01/18 ....................................................... 42,050,000 45,219,309
Annual Report | 153
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEVADA (CONT.)
Las Vegas Local Improvement Bonds Special Assessment,
Special ID No. 404, Refunding, FSA Insured, 5.85%, 11/01/09 ............................... $ 2,890,000 $ 2,906,386
Special ID No. 607, 6.25%, 6/01/24 ........................................................ 5,000,000 5,152,450
Special ID No. 808, Summerlin Area, 6.75%, 6/01/21 ........................................ 8,360,000 8,625,179
Las Vegas Special Assessment, ID No. 505, Elkhorn Springs, 8.00%, 9/15/13 .................... 4,485,000 4,575,956
Nevada Housing Division Revenue, SF Program,
Sub Series B-1, 7.90%, 10/01/05 ........................................................... 75,000 75,197
Sub Series C-1, 7.55%, 10/01/05 ........................................................... 95,000 95,070
Washoe County Revenue, Reno-Sparks Convention Center Project, FSA Insured, Pre-Refunded,
6.40%, 7/01/29 ............................................................................. 15,415,000 17,731,104
-------------
178,226,199
-------------
NEW HAMPSHIRE 0.4%
New Hampshire Higher Education and Health Facilities Authority Revenue,
Hillcrest Terrace, 7.50%, 7/01/24 ......................................................... 16,850,000 17,152,121
Littleton Hospital Assn., Series B, 5.90%, 5/01/28 ........................................ 2,000,000 1,903,000
New Hampshire Catholic Charities, Refunding, Series A, 5.75%, 8/01/11 ..................... 1,300,000 1,331,915
-------------
20,387,036
-------------
NEW JERSEY 4.5%
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding,
Series 1, 6.00%, 1/01/19 .................................................................. 2,180,000 2,195,195
Series 1, 6.00%, 1/01/29 .................................................................. 5,000,000 5,026,500
Series 2, 6.125%, 1/01/19 ................................................................. 2,125,000 2,150,840
Series 2, 6.125%, 1/01/29 ................................................................. 5,105,000 5,158,552
New Jersey EDA Lease Revenue, International Center for Public Health Project, University of
Medicine and Dentistry, AMBAC Insured, 6.00%, 6/01/32 ...................................... 9,965,000 11,214,611
New Jersey EDA Revenue,
Cigarette Tax, 5.50%, 6/15/24 ............................................................. 23,000,000 23,906,430
Cigarette Tax, 5.50%, 6/15/31 ............................................................. 6,500,000 6,684,990
Cigarette Tax, 5.75%, 6/15/34 ............................................................. 10,000,000 10,445,000
FHA, Keswick Pines, Refunding, 5.75%, 1/01/24 ............................................. 1,500,000 1,504,875
first mortgage, Presbyterian, Series A, 6.25%, 11/01/20 ................................... 7,635,000 7,896,804
New Jersey EDA Special Facility Revenue, Continental Airlines Inc. Project,
6.625%, 9/15/12 ........................................................................... 18,500,000 17,011,860
6.25%, 9/15/19 ............................................................................ 54,420,000 45,460,835
6.40%, 9/15/23 ............................................................................ 73,030,000 60,191,326
New Jersey Health Care Facilities Financing Authority Revenue,
Lutheran Home, Series A, 8.40%, 7/01/19 ................................................... 2,100,000 2,114,238
South Jersey Hospital, 5.875%, 7/01/21 .................................................... 7,500,000 7,916,700
South Jersey Hospital, 6.00%, 7/01/32 ..................................................... 18,000,000 19,012,500
Trinitas Hospital Obligation Group, Refunding, 7.50%, 7/01/30 ............................. 5,000,000 5,641,250
Tobacco Settlement Financing Corp. Revenue, Asset Backed, Refunding,
6.00%, 6/01/37 ............................................................................ 10,000,000 9,914,300
6.125%, 6/01/42 ........................................................................... 9,050,000 8,955,880
-------------
252,402,686
-------------
154 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW MEXICO 2.6%
Farmington PCR,
Public Service Co. of New Mexico, San Juan Project, Refunding, Series A, 6.30%,
12/01/16 ................................................................................. $ 24,045,000 $ 25,808,941
Public Service Co. of New Mexico, San Juan Project, Refunding, Series D, 6.375%,
4/01/22 .................................................................................. 66,125,000 71,493,028
Public Service Co. Project, Series A, 6.60%, 10/01/29 ..................................... 6,000,000 6,639,960
Tucson Electric Power Co., Series A, 6.95%, 10/01/20 ...................................... 37,000,000 38,941,760
-------------
142,883,689
-------------
NEW YORK 8.1%
Corinth IDA Environmental Improvement Revenue, International Paper Company Project,
Refunding, Series A, 5.75%, 2/01/22 ........................................................ 2,000,000 2,069,180
MTA Revenue, Series A,
AMBAC Insured, 4.75%, 11/15/30 ............................................................ 12,500,000 12,762,250
MBIA Insured, 4.75%, 11/15/28 ............................................................. 15,000,000 15,378,900
MTA Transit Facilities Revenue, Series A, MBIA Insured, Pre-Refunded, 5.875%, 7/01/27 ........ 22,700,000 24,720,754
New York City GO,
Fiscal 2003, Series I, 5.00%, 3/01/24 ..................................................... 5,000,000 5,179,900
Fiscal 2003, Series I, 5.00%, 3/01/25 ..................................................... 9,000,000 9,317,700
Refunding, Series F, 6.00%, 8/01/11 ....................................................... 10,000,000 10,590,900
Refunding, Series H, 6.125%, 8/01/25 ...................................................... 5,485,000 5,902,408
Refunding, Series J, 6.00%, 8/01/21 ....................................................... 5,200,000 5,583,292
Series A, 6.125%, 8/01/06 ................................................................. 95,000 96,883
Series B, 7.00%, 2/01/18 .................................................................. 115,000 115,419
Series B, 6.00%, 8/15/26 .................................................................. 900,000 953,595
Series B, Pre-Refunded, 6.00%, 8/15/26 .................................................... 4,100,000 4,373,962
Series D, 7.625%, 2/01/14 ................................................................. 5,000 5,020
Series F, 7.50%, 2/01/21 .................................................................. 85,000 85,331
Series G, 7.50%, 2/01/22 .................................................................. 10,000 10,039
Series G, Pre-Refunded, 6.125%, 10/15/11 .................................................. 20,480,000 22,490,931
Series G, Pre-Refunded, 6.20%, 10/15/14 ................................................... 10,000,000 11,000,800
Series H, 6.25%, 8/01/15 .................................................................. 24,545,000 26,525,045
Series H, Pre-Refunded, 6.25%, 8/01/15 .................................................... 455,000 497,943
Series H, Pre-Refunded, 6.125%, 8/01/25 ................................................... 115,000 125,520
Series I, 6.25%, 4/15/17 .................................................................. 1,250,000 1,339,063
Series I, 6.25%, 4/15/27 .................................................................. 3,665,000 3,926,131
Series I, Pre-Refunded, 6.25%, 4/15/17 .................................................... 24,120,000 26,217,234
Series I, Pre-Refunded, 6.25%, 4/15/27 .................................................... 19,255,000 20,929,222
Series J, Pre-Refunded, 6.00%, 8/01/21 .................................................... 4,800,000 5,225,184
New York City IDA Civic Facility Revenue,
Amboy Properties Corp. Project, Refunding, 6.75%, 6/01/20 ................................. 6,790,000 6,582,090
Series C, 6.80%, 6/01/28 .................................................................. 5,000,000 5,209,700
Staten Island University Hospital Project, Series C, 6.45%, 7/01/32 ....................... 1,495,000 1,441,001
New York City IDA Special Facilities Revenue,
American Airlines Inc. Project, 6.90%, 8/01/24 ............................................ 4,000,000 3,031,600
British Airways PLC Project, 7.625%, 12/01/32 ............................................. 15,000,000 15,773,100
JFK International Airport Project, Series A, 8.00%, 8/01/12 ............................... 74,000,000 60,346,260
Annual Report | 155
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
New York City Municipal Water Finance Authority Water and Sewer System Revenue, Series E,
5.00%, 6/15/34 ............................................................................. $ 10,000,000 $ 10,348,900
New York State Dormitory Authority Revenues,
City University System, Third General Residence, Series 2, Pre-Refunded, 6.00%,
7/01/26 .................................................................................. 6,100,000 6,506,565
Mental Health Services, Refunding, Series A, 6.00%, 8/15/17 ............................... 2,300,000 2,466,267
Mental Health Services, Series A, Pre-Refunded, 6.00%, 8/15/17 ............................ 8,940,000 9,707,499
State University Educational Facilities, Pre-Refunded, 6.00%, 5/15/18 ..................... 5,000,000 5,317,300
New York State HFA Service Contract Obligation Revenue, Series A,
6.00%, 3/15/26 ............................................................................ 220,000 232,685
Pre-Refunded, 6.00%, 3/15/26 .............................................................. 4,755,000 5,109,580
New York State HFAR, Refunding, Series A, 5.90%, 11/01/05 .................................... 12,515,000 12,808,477
New York State Mortgage Agency Revenue, Homeowners Mortgage, Series 61, 5.80%,
10/01/16 ................................................................................... 5,000,000 5,189,450
New York State Urban Development Corp. Revenue, Correctional Capital Facilities, Series 7,
Pre-Refunded, 5.70%, 1/01/27 ............................................................... 4,750,000 5,113,185
Oneida County IDAR, Civic Facility, St. Elizabeth Medical, Series B, 6.00%, 12/01/19 ......... 1,000,000 992,170
Onondaga County IDA Solid Waste Disposal Facility Revenue, Solvay Paperboard LLC Project,
Refunding,
6.80%, 11/01/14 ........................................................................... 5,000,000 5,313,250
7.00%, 11/01/30 ........................................................................... 7,000,000 7,419,650
Port Authority of New York and New Jersey Special Obligation Revenue,
3rd Installment, 7.00%, 10/01/07 .......................................................... 3,700,000 3,840,452
4th Installment, Special Project, 6.75%, 10/01/11 ......................................... 925,000 983,802
5th Installment, 6.75%, 10/01/19 .......................................................... 17,500,000 18,612,475
Continental Airlines Inc., Eastern Project, La Guardia, 9.00%, 12/01/10 ................... 10,000,000 10,016,100
Continental Airlines Inc., Eastern Project, La Guardia, 9.125%, 12/01/15 .................. 27,650,000 27,698,664
Utica IDA Civic Facility Revenue, Utica College Civic Facility,
6.75%, 12/01/21 ........................................................................... 1,250,000 1,315,525
6.85%, 12/01/31 ........................................................................... 2,000,000 2,108,560
-------------
448,906,913
-------------
NORTH CAROLINA 1.9%
Charlotte Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 ............................ 15,310,000 15,922,400
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 5.75%, 1/01/26 ....................................................... 37,500,000 39,733,875
Refunding, Series B, 5.75%, 1/01/24 ....................................................... 35,750,000 37,827,790
Refunding, Series D, 6.75%, 1/01/26 ....................................................... 5,000,000 5,587,800
Series D, 6.70%, 1/01/19 .................................................................. 2,000,000 2,240,100
North Carolina HFAR, SF, Series II, FHA Insured, 6.20%,
3/01/16 ................................................................................... 1,335,000 1,375,637
9/01/17 ................................................................................... 875,000 900,944
-------------
103,588,546
-------------
156 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO 2.1%
Akron COP, Akron Municipal Baseball Stadium Project, Capital Appreciation,
6.30%, 12/01/05 ........................................................................... $ 1,700,000 $ 1,738,743
6.40%, 12/01/06 ........................................................................... 1,685,000 1,771,862
6.50%, 12/01/07 ........................................................................... 670,000 706,086
6.90%, 12/01/16 ........................................................................... 2,500,000 2,685,075
Cuyahoga County Hospital Revenue, Refunding, 5.50%, 1/01/29 .................................. 11,500,000 12,038,430
Dayton Special Facilities Revenue, Emery Air Freight Corp., Emery Worldwide Air Inc.,
Refunding,
Series C, 6.05%, 10/01/09 ................................................................. 14,250,000 15,914,827
Series E, 6.05%, 10/01/09 ................................................................. 5,250,000 5,863,358
Series F, 6.05%, 10/01/09 ................................................................. 1,000,000 1,116,830
Franklin County Health Care Facilities Revenue,
Ohio Presbyterian, Series A, 7.125%, 7/01/29 .............................................. 1,000,000 1,102,980
Presbyterian Retirement Services, Refunding, 5.50%, 7/01/17 ............................... 3,100,000 3,146,872
Presbyterian Retirement Services, Refunding, 5.50%, 7/01/21 ............................... 950,000 952,964
Presbyterian Retirement Services, Series A, 6.625%, 7/01/13 ............................... 1,000,000 1,058,930
Lucas County Health Facilities Revenue, Presbyterian Retirement Services, Refunding,
Series A,
6.625%, 7/01/14 ........................................................................... 1,000,000 1,057,110
6.75%, 7/01/20 ............................................................................ 2,000,000 2,094,800
Montgomery County Health Systems Revenue,
Series B-1, Pre-Refunded, 8.10%, 7/01/18 .................................................. 5,695,000 6,189,476
Series B-2, Pre-Refunded, 8.10%, 7/01/18 .................................................. 5,845,000 6,354,241
St. Leonard, Series B, Pre-Refunded, 8.10%, 7/01/18 ....................................... 8,700,000 9,453,754
Ohio State Air Quality Development Authority Revenue,
Dayton Power and Light Co. Project, Refunding, 6.10%, 9/01/30 ............................. 17,900,000 18,130,552
Pollution Control, Ohio Edison Co., Refunding, Series A, 5.95%, 5/15/29 ................... 13,000,000 13,043,680
PCR, Cleveland Electric, Refunding, Series B, 6.00%, 8/01/20 .............................. 6,250,000 6,528,563
Toledo Lucas County Port Authority Airport Revenue, Refunding, Bax Global Project, Series 1,
6.25%, 11/01/13 ............................................................................ 4,500,000 4,595,985
Willoughby IDR, Presbyterian Retirement Services, Refunding, Series A, 6.875%, 7/01/16 ....... 1,500,000 1,562,400
-------------
117,107,518
-------------
OKLAHOMA 0.2%
Oklahoma Development Finance Authority Revenue, Comanche County Hospital Project,
Series B, 6.60%, 7/01/31 ................................................................... 5,000,000 5,303,000
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding,
6.00%, 8/15/14 ............................................................................. 4,000,000 4,190,520
-------------
9,493,520
-------------
OREGON 2.3%
Klamath Falls Electric Revenue,
Klamath Cogeneration, senior lien, Refunding, 5.75%, 1/01/13 .............................. 13,000,000 13,426,920
Klamath Cogeneration, senior lien, Refunding, 5.875%, 1/01/16 ............................. 19,650,000 20,050,664
Klamath Cogeneration, senior lien, Refunding, 6.00%, 1/01/25 .............................. 66,060,000 66,634,061
Klamath Cogeneration Project, senior lien, 7.00%, 1/01/25 ................................. 12,600,000 13,461,336
Annual Report | 157
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON (CONT.)
Oregon State Department of Administrative Services COP, Series A, AMBAC Insured,
Pre-Refunded, 6.00%, 5/01/26 ............................................................... $ 9,400,000 $ 10,804,642
Oregon State Health Housing Educational and Cultural Facilities Authority Revenue, Linfield
College Project, Series A, 6.75%, 10/01/25 ................................................. 5,220,000 5,782,455
-------------
130,160,078
-------------
PENNSYLVANIA 6.1%
Allegheny County Hospital Development Authority Revenue, Health System,
Series A, MBIA Insured, 6.50%, 11/15/30 ................................................... 10,000,000 11,775,600
Series B, 8.65%, 11/15/05 ................................................................. 2,000,000 2,025,500
Series B, 9.25%, 11/15/15 ................................................................. 24,000,000 28,070,400
Series B, 9.25%, 11/15/22 ................................................................. 24,000,000 28,006,800
Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding,
6.10%, 7/15/20 ............................................................................ 5,500,000 5,838,415
Series A, 6.70%, 12/01/20 ................................................................. 9,400,000 9,612,628
Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 ................. 3,350,000 3,600,111
Chartiers Valley Industrial and Commercial Development Authority First Mortgage Revenue,
Asbury Health Center Project, Refunding, 7.40%, 12/01/15 ................................... 5,250,000 5,375,422
Delaware County IDAR, Resource Recovery Facility, Refunding, Series A,
6.10%, 1/01/06 ............................................................................ 2,140,000 2,181,709
6.50%, 1/01/08 ............................................................................ 425,000 448,107
6.10%, 7/01/13 ............................................................................ 20,500,000 21,476,005
6.20%, 7/01/19 ............................................................................ 6,500,000 6,779,435
Lancaster IDAR, Garden Spot Village Project, Series A, 7.625%, 5/01/31 ....................... 1,650,000 1,767,348
Lehigh County IDA, PCR,
Pennsylvania Power and Light Co. Project, Refunding, Series A, MBIA Insured, 6.15%,
8/01/29 .................................................................................. 4,000,000 4,142,440
Pennsylvania Power and Light Electrical Utilities Corp. Project, Refunding, Series A,
FGIC Insured, 4.70%, 9/01/29 ............................................................. 25,000,000 24,856,000
Pennsylvania Convention Center Authority Revenue, Refunding, Series A,
6.60%, 9/01/09 ............................................................................ 16,000,000 16,373,440
6.70%, 9/01/14 ............................................................................ 20,760,000 21,245,784
6.75%, 9/01/19 ............................................................................ 15,800,000 16,170,194
Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue, Reliant
Energy Seward, Series A, 6.75%, 12/01/36 ................................................... 65,000,000 69,598,100
Pennsylvania EDA Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%,
12/01/15 ................................................................................... 10,000,000 10,247,700
Pennsylvania State Higher Educational Facilities Authority Health Services Revenue,
Allegheny Delaware Valley Obligation Group, Series A, MBIA Insured, 5.875%, 11/15/16 ....... 13,000,000 13,776,360
Philadelphia GO, Refunding, Series B, 6.00%, 5/15/05 ......................................... 3,080,000 3,107,597
Philadelphia IDA Health Care Facility Revenue, Pauls Run, Series A, 5.85%, 5/15/13 ........... 2,200,000 2,253,174
Sayre Health Care Facilities Authority Revenue, Guthrie Health, Series A, 5.75%,
12/01/21 ................................................................................... 3,000,000 3,238,050
South Fork Municipal Authority Hospital Revenue, Conemaugh Valley Memorial Hospital
Project, Series A, MBIA Insured, 5.75%, 7/01/16 ............................................ 8,130,000 8,593,491
158 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
State Public School Building Authority School Revenue, Philadelphia School District Project,
FSA Insured, 5.00%, 6/01/33 ................................................................ $ 13,750,000 $ 14,227,812
Washington County IDA, PCR, West Pennsylvania Power Co., Series G, AMBAC Insured,
6.05%, 4/01/14 ............................................................................. 5,025,000 5,140,073
-------------
339,927,695
-------------
RHODE ISLAND 0.3%
Rhode Island State Health and Educational Building Corp. Revenue,
Hospital Financing, Lifespan Obligation Group, 6.50%, 8/15/32 ............................. 8,000,000 8,880,160
Hospital Financing, Lifespan Obligation Group, MBIA Insured, 5.75%, 5/15/23 ............... 3,500,000 3,761,030
Landmark Medical Center, Radian Insured, 5.875%, 10/01/19 ................................. 6,000,000 6,080,220
-------------
18,721,410
-------------
SOUTH CAROLINA 0.8%
Dorchester County School District No. 002 Installment Purchase Revenue, Growth Remedy
Opportunities Tax Hike, 5.25%, 12/01/29 .................................................... 16,500,000 17,110,335
Greenville County School District Installment Purchase Revenue, Building Equity Sooner
Tomorrow, Refunding, 5.00%, 12/01/28 ....................................................... 10,000,000 10,278,900
Lancaster Educational Assistance Program Inc. Revenue, School District of Lancaster County
Project, 5.00%, 12/01/26 ................................................................... 15,015,000 15,187,072
Tobacco Settlement Revenue, Management Authority, Tobacco Settlement Revenue, Series B,
6.375%, 5/15/30 ............................................................................ 3,750,000 3,861,825
-------------
46,438,132
-------------
TENNESSEE 0.1%
Hallsdale-Powell Utility District Knox County Water and Sewer Revenue, Refunding and
Improvement, Series A, FGIC Insured, 5.00%, 4/01/34 ........................................ 5,000,000 5,188,150
-------------
TEXAS 2.0%
Alliance Airport Authority Special Facilities Revenue, American Airlines Inc. Project, 7.50%,
12/01/29 ................................................................................... 15,500,000 11,129,930
Angelina and Neches River Authority Waste Disposal Revenue, Adjusted Temple Inland Forest
Products, 6.95%, 5/01/23 ................................................................... 1,750,000 1,957,025
Austin Convention Enterprises Inc. Convention Center Revenue, First Tier, Series A, 6.70%,
1/01/32 .................................................................................... 10,000,000 10,755,300
Bexar County Health Facilities Development Corp. Revenue, Incarnate Word Health Services,
FSA Insured, ETM, 6.00%, 11/15/15 .......................................................... 8,750,000 9,156,612
Brazos River Authority PCR, TXU Energy Co. Project, Refunding, Series B, 6.30%,
7/01/32 .................................................................................... 9,000,000 9,661,680
Coppell Special Assessment, Gateway Project, 8.70%, 3/01/12 .................................. 2,765,000 2,794,807
Decatur Hospital Authority Hospital Revenue, Series A, ETM, 5.75%, 9/01/29 ................... 4,870,000 5,528,180
El Paso Health Facilities Development Corp. Revenue, Senior Care Facilities, Bienvivir
Senior Health,
7.00%, 8/15/12 ............................................................................ 955,000 1,028,268
7.50%, 8/15/18 ............................................................................ 2,300,000 2,507,138
7.75%, 8/15/31 ............................................................................ 3,000,000 3,279,420
Annual Report | 159
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
Georgetown Health Facilities Development Corp. Revenue, Georgetown Healthcare System,
Refunding, 6.25%, 8/15/29 .................................................................. $ 10,975,000 $ 10,879,518
Matagorda County Naval District No. 1 Revenue, Centerpoint Energy Project, Refunding,
5.60%, 3/01/27 ............................................................................. 11,000,000 11,540,650
Nueces River Authority Environmental Improvement Revenue, Asarco Inc. Project, Refunding,
5.60%, 1/01/27 ............................................................................ 8,640,000 8,082,288
Series A, 5.60%, 4/01/18 .................................................................. 4,500,000 4,283,460
Sabine River Authority PCR,
Southwestern Electric Power Co., Refunding, MBIA Insured, 6.10%, 4/01/18 .................. 7,000,000 7,397,040
TXU Energy Co. LLC Project, Refunding, Series B, 6.15%, 8/01/22 ........................... 3,000,000 3,357,240
TXU Energy Co. Project, Refunding, Series A, 5.80%, 7/01/22 ............................... 1,000,000 1,094,100
Texas State GO, Veterans Housing Assistance, Fund I, Refunding, Series A, 6.15%,
12/01/25 ................................................................................... 7,430,000 7,607,651
-------------
112,040,307
-------------
U.S. TERRITORIES 4.1%
Children's Trust Fund Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.50%, 5/15/39 ............................................................................ 11,500,000 11,411,335
5.625%, 5/15/43 ........................................................................... 3,500,000 3,432,310
District of Columbia GO,
Refunding, Series A, 5.875%, 6/01/05 ...................................................... 2,355,000 2,373,675
Refunding, Series A, 6.00%, 6/01/07 ....................................................... 8,930,000 9,317,830
Series A, ETM, 6.00%, 6/01/07 ............................................................. 2,845,000 2,975,329
Series A, Pre-Refunded, 6.375%, 6/01/11 ................................................... 22,770,000 24,340,675
Series A, Pre-Refunded, 6.375%, 6/01/16 ................................................... 27,230,000 29,108,325
District of Columbia Hospital Revenue, Medlantic Healthcare Group, Refunding, Series A,
MBIA Insured, ETM, 5.875%, 8/15/19 ......................................................... 8,850,000 9,448,614
District of Columbia Revenue,
Carnegie Endowment, 5.75%, 11/15/26 ....................................................... 5,410,000 5,704,088
Methodist Home Issue, 6.00%, 1/01/29 ...................................................... 4,750,000 4,485,615
District of Columbia Tobacco Settlement Financing Corp. Revenue, Asset Backed Bonds,
6.50%, 5/15/33 ............................................................................. 22,000,000 22,811,580
Northern Mariana Islands Commonwealth Ports Authority Airport Revenue, senior lien,
Series A, 6.25%, 3/15/28 ................................................................... 8,885,000 9,206,193
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.60%,
3/15/28 .................................................................................... 8,325,000 8,976,681
Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.00%, 7/01/34 .................... 20,000,000 20,707,400
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series J,
5.00%, 7/01/34 ............................................................................. 11,500,000 11,862,595
Puerto Rico Electric Power Authority Power Revenue, Series NN, 5.125%, 7/01/29 ............... 11,500,000 12,026,355
Virgin Islands PFAR, sub. lien, Fund Loan Notes, Refunding, Series E,
5.75%, 10/01/13 ........................................................................... 15,000,000 15,385,350
5.875%, 10/01/18 .......................................................................... 7,000,000 7,259,070
6.00%, 10/01/22 ........................................................................... 14,500,000 14,994,160
-------------
225,827,180
-------------
160 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
UTAH 0.0%(c)
Carbon County Solid Waste Disposal Revenue, Laidlaw Environmental Services, Refunding,
Series A, 7.45%, 7/01/17 ................................................................... $ 2,500,000 $ 2,588,400
-------------
VERMONT 0.3%
Vermont Educational and Health Buildings Financing Agency Revenue, Fletcher Allen Health,
Series A, AMBAC Insured, 6.00%, 12/01/23 ................................................... 15,000,000 16,907,850
-------------
VIRGINIA 0.5%
Fairfax County EDA Transportation Contract Revenue, Route 28 Project, MBIA Insured,
5.00%, 4/01/33 ............................................................................. 5,000,000 5,218,550
Peninsula Ports Authority Coalition Terminal Revenue, Dominion Terminal Associates,
Refunding, 6.00%, 4/01/33 .................................................................. 9,000,000 9,595,800
Virginia Beach Development Authority Residential Care Facility Mortgage Revenue,
Westminster Canterbury Project, Series A,
7.125%, 11/01/23 .......................................................................... 5,000,000 5,428,750
7.25%, 11/01/32 ........................................................................... 9,000,000 9,829,260
-------------
30,072,360
-------------
WEST VIRGINIA 0.2%
West Virginia University Revenues, Improvement, West Virginia University Projects, Series C,
FGIC Insured, 5.00%, 10/01/34 .............................................................. 10,000,000 10,408,900
-------------
WISCONSIN 0.5%
Green Bay Water System Revenue, Refunding and Improvement, FSA Insured, 5.00%,
11/01/29 ................................................................................... 5,000,000 5,217,750
Kaukauna Environmental Improvement Revenue, International Paper Co. Project, Series A,
6.70%, 5/01/24 ............................................................................. 4,100,000 4,400,571
Wisconsin State Health and Educational Facilities Authority Revenue,
Fort Healthcare Inc. Project, 5.75%, 5/01/24 .............................................. 5,000,000 5,190,650
Franciscan Skemp Medical Center Inc. Project, 6.25%, 11/15/20 ............................. 9,510,000 9,877,657
New Castle Place Project, Series A, 7.00%, 12/01/31 ....................................... 2,500,000 2,596,325
-------------
27,282,953
-------------
WYOMING 0.2%
Sweetwater County PCR, Idaho Power Co. Project, Refunding, Series A, 6.05%, 7/15/26 .......... 10,500,000 11,096,190
-------------
TOTAL BONDS (COST $4,761,632,730) ............................................................ 4,946,525,337
-------------
ZERO COUPON/STEP-UP BONDS 7.9%
CALIFORNIA 6.5%
Foothill/Eastern Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, 1/15/22 .................................................. 49,115,000 18,499,165
Capital Appreciation, Refunding, 1/15/31 .................................................. 4,000,000 866,520
Capital Appreciation, Refunding, 1/15/34 .................................................. 4,500,000 811,530
Capital Appreciation, Refunding, 1/15/36 .................................................. 4,000,000 638,000
Convertible Capital Appreciation, Refunding, 1/15/23 ...................................... 35,000,000 29,537,200
Annual Report | 161
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
CALIFORNIA (CONT.)
San Francisco City and County RDA Lease Revenue, George R. Moscone Center,
7/01/09 ................................................................................... $ 3,750,000 $ 3,245,025
7/01/10 ................................................................................... 4,500,000 3,752,280
7/01/12 ................................................................................... 4,500,000 3,400,470
7/01/13 ................................................................................... 4,250,000 3,043,510
7/01/14 ................................................................................... 2,250,000 1,526,872
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, Series A, zero cpn. to 1/15/07, 5.60% thereafter,
1/15/16 .................................................................................. 22,500,000 20,189,025
junior lien, ETM, 1/01/06 ................................................................. 9,000,000 8,823,330
junior lien, ETM, 1/01/07 ................................................................. 9,400,000 8,955,192
junior lien, ETM, 1/01/08 ................................................................. 10,400,000 9,597,536
junior lien, ETM, 1/01/09 ................................................................. 21,800,000 19,269,238
junior lien, ETM, 1/01/10 ................................................................. 15,000,000 12,783,300
junior lien, ETM, 1/01/12 ................................................................. 30,100,000 23,418,703
junior lien, ETM, 1/01/24 ................................................................. 52,700,000 22,466,537
junior lien, ETM, 1/01/25 ................................................................. 45,200,000 18,273,908
junior lien, ETM, 1/01/26 ................................................................. 131,900,000 49,817,311
junior lien, ETM, 1/01/27 ................................................................. 139,100,000 49,288,694
senior lien, Refunding, Series A, 1/15/17 ................................................. 20,000,000 17,839,600
senior lien, Refunding, Series A, 1/15/23 ................................................. 20,000,000 17,496,200
senior lien, Refunding, Series A, 1/15/24 ................................................. 20,000,000 17,372,200
-------------
360,911,346
-------------
COLORADO 0.2%
E-470 Public Highway Authority Revenue, Capital Appreciation,
Series A, MBIA Insured, 9/01/28 ........................................................... 15,000,000 4,531,800
Series B, MBIA Insured, 9/01/29 ........................................................... 10,000,000 2,637,000
Series B, MBIA Insured, 9/01/30 ........................................................... 17,300,000 4,276,214
Series B, MBIA Insured, 9/01/31 ........................................................... 10,000,000 2,323,400
-------------
13,768,414
-------------
KENTUCKY 0.5%
Kentucky Economic Development Finance Authority Revenue, Norton Healthcare Inc.,
Series C, MBIA Insured, zero cpn. to 10/01/05,
6.10% thereafter, 10/01/22 ................................................................ 15,975,000 17,228,398
6.15% thereafter, 10/01/27 ................................................................ 10,000,000 10,616,100
-------------
27,844,498
-------------
NEW YORK 0.0%(c)
MAC for City of Troy Revenue, Capital Appreciation, Series C, MBIA Insured,
7/15/21 ................................................................................... 428,010 208,599
1/15/22 ................................................................................... 649,658 306,191
-------------
514,790
-------------
162 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
TENNESSEE 0.5%
Johnson City Health and Educational Facilities Board Hospital Revenue, First Mortgage
Mountain States Health, Refunding, Series A, MBIA Insured,
7/01/27 ................................................................................... $ 19,365,000 $ 6,331,387
7/01/28 ................................................................................... 19,400,000 5,978,692
7/01/29 ................................................................................... 19,365,000 5,634,053
7/01/30 ................................................................................... 19,370,000 5,317,065
Knox County Health Educational and Housing Facilities Board Hospital Facilities Revenue,
Capital Appreciation, Refunding and Improvement, Series A, FSA Insured,
1/01/25 ................................................................................... 5,000,000 1,666,900
1/01/26 ................................................................................... 2,610,000 815,703
-------------
25,743,800
-------------
TEXAS 0.2%
Texas State Turnpike Authority Revenue, Capital Appreciation, AMBAC Insured, 8/15/32 ......... 51,000,000 10,671,750
-------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $324,746,803) .......................................... 439,454,598
-------------
TOTAL LONG TERM INVESTMENTS (COST $5,086,379,533) ............................................ 5,385,979,935
-------------
SHORT TERM INVESTMENTS 2.1%
BONDS 2.1%
CALIFORNIA 0.3%
California State Department of Water Resources Power Supply Revenue,
(b)Series B-3, Daily VRDN and Put, 1.76%, 5/01/22 .......................................... 6,300,000 6,300,000
(b)Series C-7, FSA Insured, Weekly VRDN and Put, 1.84%, 5/01/22 ............................ 1,900,000 1,900,000
(b)California State GO, Kindergarten University, Series B-3, Daily VRDN and Put, 1.77%,
5/01/34 .................................................................................... 1,000,000 1,000,000
Irvine 1915 Act Special Assessment,
(b)AD No. 00-18, Series A, Daily VRDN and Put, 1.77%, 9/02/26 .............................. 1,200,000 1,200,000
(b)AD No. 03-19, Series A, Daily VRDN and Put, 1.77%, 9/02/29 .............................. 1,000,000 1,000,000
(b)Los Angeles Department of Water and Power Waterworks Revenue, Sub Series B-2,
Daily VRDN and Put, 1.77%, 7/01/35 ......................................................... 700,000 700,000
(b)Metropolitan Water District Southern California Waterworks Revenue, Refunding, Series B-1,
Daily VRDN and Put, 1.77%, 7/01/35 ......................................................... 5,800,000 5,800,000
-------------
17,900,000
-------------
FLORIDA 0.3%
(b)Jacksonville Health Facilities Authority Hospital Revenue, Series A, Daily VRDN & Put, 1.83%,
8/15/33 .................................................................................... 5,500,000 5,500,000
(b)Pinellas County Health Facilities Authority Revenue, Pooled Hospital Loan Program,
Refunding, AMBAC Insured, Daily VRDN and Put, 1.80%, 12/01/15 .............................. 8,900,000 8,900,000
-------------
14,400,000
-------------
GEORGIA 0.3%
(b)Athens-Clarke County Unified Government Authority Revenue, University of Georgia Athletic
Association Project, Daily VRDN and Put, 1.80%, 8/01/33 .................................... 2,500,000 2,500,000
Annual Report | 163
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
BONDS (CONT.)
GEORGIA (CONT.)
(b)Atlanta Downtown Development Authority Revenue, Underground Atlanta Project, Refunding,
Weekly VRDN and Daily Put, 1.83%, 10/01/16 ................................................. $ 9,500,000 $ 9,500,000
(b)Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 1.80%,
11/01/41 ................................................................................... 6,500,000 6,500,000
-------------
18,500,000
-------------
MARYLAND 0.0%(c)
(b)Maryland State EDC Revenue, U.S. Pharmacopeial Project, Series A, AMBAC Insured,
Daily VRDN and Put, 1.80%, 7/01/34 ......................................................... 500,000 500,000
-------------
MICHIGAN 0.2%
(b)Detroit Sewage Disposal Revenue, senior lien, Series B, FSA Insured, Daily VRDN and Put,
1.80%, 7/01/33 ............................................................................. 6,500,000 6,500,000
(b)University of Michigan Revenues, Refunding, Series A-2, Daily VRDN and Put, 1.83%,
12/01/24 ................................................................................... 6,000,000 6,000,000
-------------
12,500,000
-------------
NEW YORK 0.5%
New York City GO,
(b)Refunding, Series H, Sub Series H-3, Daily VRDN and Put, 1.77%, 8/01/20 ................. 1,000,000 1,000,000
(b)Sub Series A-7, Daily VRDN and Put, 1.77%, 8/01/20 ...................................... 3,800,000 3,800,000
(b)Sub Series A-7, Daily VRDN and Put, 1.77%, 8/01/21 ...................................... 1,300,000 1,300,000
(b)Sub Series E-3, Daily VRDN and Put, 1.77%, 8/01/23 ...................................... 2,000,000 2,000,000
(b)Sub Series H-1, Daily VRDN and Put, 1.77%, 3/01/34 ...................................... 9,600,000 9,600,000
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
(b)Fiscal 2003, Refunding, Sub Series C-3, Daily VRDN and Put, 1.77%, 6/15/18 .............. 5,500,000 5,500,000
(b)Series G, FGIC Insured, Daily VRDN and Put, 1.77%, 6/15/24 .............................. 3,000,000 3,000,000
-------------
26,200,000
-------------
NORTH CAROLINA 0.3%
(b)Charlotte-Mecklenberg Hospital Authority Health Care System Revenue, Series B,
Weekly VRDN and Put, 1.83%, 1/15/26 ........................................................ 8,000,000 8,000,000
(b)North Carolina State GO, Series G, Weekly VRDN and Put, 1.80%, 5/01/21 ....................... 6,595,000 6,595,000
-------------
14,595,000
-------------
OHIO 0.0%(c)
(b)Ohio State Air Quality Development Authority Revenue, PCR, Ohio Edison, Series C,
Daily VRDN and Put, 1.83%, 6/01/23 ......................................................... 2,100,000 2,100,000
-------------
TENNESSEE 0.2%
Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN
and Put, 1.80%,
(b)7/01/31 ................................................................................. 2,600,000 2,600,000
(b)1/01/33 ................................................................................. 1,100,000 1,100,000
(b)7/01/34 ................................................................................. 2,600,000 2,600,000
(b)Knox County Health Educational and Housing Facility Board Student Housing Revenue,
Volunteer Student Housing LLC Project, Weekly VRDN and Put, 1.86%, 9/01/34 ................. 2,200,000 2,200,000
164 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TENNESSEE (CONT.)
Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan Pool,
Daily VRDN and Put, 1.80%,
(b)4/01/32 .............................................................................. $ 200,000 $ 200,000
(b)7/01/34 .............................................................................. 2,700,000 2,700,000
--------------
11,400,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $118,095,000) .......................................... 118,095,000
--------------
TOTAL INVESTMENTS (COST $5,204,474,533) 99.0% ............................................. 5,504,074,935
OTHER ASSETS, LESS LIABILITIES 1.0% ....................................................... 57,712,931
--------------
NET ASSETS 100.0% ......................................................................... $5,561,787,866
==============
See Glossary of Terms on page 194.
(a) Defaulted securities. See Note 6.
(b) 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.
(c) Rounds to less than 0.05% of net assets.
Annual Report | See notes to financial statements. | 165
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.23 $ 12.03 $ 11.85 $ 11.70 $ 10.99
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.54 0.54 0.56 0.57 0.59
Net realized and unrealized gains (losses) ...... (0.05) 0.19 0.18 0.15 0.71
----------------------------------------------------------------------
Total from investment operations ................. 0.49 0.73 0.74 0.72 1.30
Less distributions from net investment income .... (0.54) (0.53) (0.56) (0.57) (0.59)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 12.18 $ 12.23 $ 12.03 $ 11.85 $ 11.70
======================================================================
Total return(b) .................................. 4.13% 6.27% 6.41% 6.35% 12.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 792,518 $ 786,938 $ 778,716 $ 731,972 $ 654,709
Ratios to average net assets:
Expenses ........................................ 0.65% 0.65% 0.65% 0.65% 0.67%
Net investment income ........................... 4.47% 4.31% 4.68% 4.86% 5.24%
Portfolio turnover rate .......................... 11.50% 8.95% 17.95% 6.11% 20.19%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
166 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.29 $ 12.09 $ 11.90 $ 11.74 $ 11.00
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.47 0.48 0.49 0.51 0.54
Net realized and unrealized gains (losses) ...... (0.05) 0.19 0.19 0.16 0.73
----------------------------------------------------------------------
Total from investment operations ................. 0.42 0.67 0.68 0.67 1.27
Less distributions from net investment income .... (0.47) (0.47) (0.49) (0.51) (0.53)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 12.24 $ 12.29 $ 12.09 $ 11.90 $ 11.74
======================================================================
Total return(b) .................................. 3.55% 5.67% 5.88% 5.82% 11.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 83,208 $ 80,303 $ 67,994 $ 36,461 $ 9,798
Ratios to average net assets:
Expenses ........................................ 1.20% 1.20% 1.20% 1.20% 1.21%
Net investment income ........................... 3.92% 4.86% 4.13% 4.31% 4.64%
Portfolio turnover rate .......................... 11.50% 8.95% 17.95% 6.11% 20.19%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 167
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.32 $ 12.11 $ 11.93 $ 11.77 $ 11.05
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.48 0.48 0.50 0.51 0.53
Net realized and unrealized gains (losses) ...... (0.06) 0.20 0.18 0.16 0.72
----------------------------------------------------------------------
Total from investment operations ................. 0.42 0.68 0.68 0.67 1.25
Less distributions from net investment income .... (0.47) (0.47) (0.50) (0.51) (0.53)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 12.27 $ 12.32 $ 12.11 $ 11.93 $ 11.77
======================================================================
Total return(b) .................................. 3.53% 5.72% 5.80% 5.81% 11.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 117,356 $ 111,847 $ 100,410 $ 74,104 $ 53,381
Ratios to average net assets:
Expenses ........................................ 1.20% 1.22% 1.18% 1.20% 1.21%
Net investment income ........................... 3.92% 4.88% 4.15% 4.31% 4.69%
Portfolio turnover rate .......................... 11.50% 8.95% 17.95% 6.11% 20.19%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
168 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.7%
BONDS 98.2%
DELAWARE 2.4%
Delaware River and Bay Authority Revenue,
FGIC Insured, 5.25%, 1/01/26 .............................................................. $ 9,000,000 $ 9,368,370
MBIA Insured, 5.00%, 1/01/27 .............................................................. 10,000,000 10,413,300
Series A, AMBAC Insured, 5.75%, 1/01/29 ................................................... 4,000,000 4,432,080
-------------
24,213,750
-------------
NEW JERSEY 72.0%
Aberdeen Township GO, Refunding, FGIC Insured, 5.70%, 2/01/22 ................................ 4,100,000 4,395,816
Allamuchy Town Board of Education COP, MBIA Insured, 6.00%, 11/01/14 ......................... 1,000,000 1,026,050
Atlantic County Improvement Authority Luxury Tax Revenue, Convention Center Project,
MBIA Insured, ETM, 7.40%, 7/01/16 ......................................................... 9,500,000 12,079,440
Bergen County Improvement Authority School District Revenue GO, Wyckoff Township
Board of Education Project, 5.00%, 4/01/32 ................................................ 3,400,000 3,564,492
Berkeley Township Board of Education GO, FSA Insured, 4.75%, 8/01/22 ......................... 1,975,000 2,039,918
Branchburg Township Board of Education GO, FGIC Insured, 5.00%,
7/15/26 .................................................................................. 1,230,000 1,281,623
7/15/27 .................................................................................. 1,300,000 1,351,610
7/15/28 .................................................................................. 1,365,000 1,416,884
7/15/29 .................................................................................. 1,440,000 1,493,107
Camden County Improvement Authority Health System Revenue, Catholic Health East, Series B,
AMBAC Insured, 5.00%, 11/15/28 ............................................................ 11,600,000 11,946,840
Cape May County IPC Financing Authority Revenue, Atlantic City Electric Co., Refunding,
Series A, MBIA Insured, 6.80%, 3/01/21 .................................................... 5,400,000 7,090,524
Carteret Board of Education COP, MBIA Insured, 5.75%, 1/15/30 ................................ 1,155,000 1,281,161
East Orange GO, Water Utility, AMBAC Insured, 5.70%,
6/15/23 .................................................................................. 1,200,000 1,306,296
6/15/24 .................................................................................. 1,385,000 1,507,683
6/15/25 .................................................................................. 1,465,000 1,594,770
Egg Harbor Township School District GO, FGIC Insured, Pre-Refunded, 5.125%, 7/15/24 .......... 4,870,000 5,427,858
Freehold Township Board of Education GO, MBIA Insured, 5.00%, 2/15/30 ........................ 1,500,000 1,550,595
Gloucester County Improvement Authority Solid Waste Resource Recovery Revenue,
Waste Management Inc. Project, Mandatory Put 12/01/09, Refunding,
Series A, 6.85%, 12/01/29 ................................................................ 1,375,000 1,550,312
Series B, 7.00%, 12/01/29 ................................................................ 1,250,000 1,417,425
Hammonton School District GO, FGIC Insured, 5.00%,
8/01/26 .................................................................................. 1,155,000 1,211,029
8/01/27 .................................................................................. 1,215,000 1,270,015
Higher Education Student Assistance Authority Student Loan Revenue, Series A, MBIA Insured,
6.15%, 6/01/19 ........................................................................... 1,815,000 1,851,590
Highland Park School District GO, Refunding, MBIA Insured, 5.125%, 2/15/25 ................... 7,120,000 7,327,833
Hoboken GO, Parking Utility, Series A, FGIC Insured, 5.00%, 1/01/23 .......................... 4,315,000 4,581,451
Hoboken New Jersey Parking Authority Parking Revenue, AMBAC Insured, Pre-Refunded, 5.30%,
5/01/27 .................................................................................. 3,600,000 4,067,928
Hudson County Improvement Authority Solid Waste Systems Revenue, Koppers Site Project,
Series A, 6.125%, 1/01/29 ................................................................. 6,510,000 6,526,796
Annual Report | 169
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW JERSEY (CONT.)
Jackson Township School District GO, FGIC Insured, 5.00%, 4/15/25 ............................ $ 3,000,000 $ 3,161,280
Jersey City GO,
FSA Insured, Pre-Refunded, 5.00%, 3/01/21 ................................................. 1,500,000 1,636,005
Series A, FSA Insured, 5.625%, 3/01/20 .................................................... 1,000,000 1,102,110
Lafayette Yard Community Development Revenue, Hotel/Conference Center Project-Trenton
Guaranteed, MBIA Insured, Pre-Refunded,
6.00%, 4/01/29 ........................................................................... 1,750,000 2,007,897
5.80%, 4/01/35 ........................................................................... 2,520,000 2,867,810
Middlesex County COP, MBIA Insured, 5.00%, 8/01/31 ........................................... 3,250,000 3,348,637
Middlesex County Improvement Authority Revenue, Administration Building Residential Project,
FNMA Insured,
5.25%, 7/01/21 ........................................................................... 750,000 802,777
5.35%, 7/01/34 ........................................................................... 1,575,000 1,657,656
Middletown Township GO, Board of Education, MBIA Insured, Pre-Refunded, 5.85%,
8/01/24 .................................................................................. 4,295,000 4,620,131
8/01/25 .................................................................................. 5,000 5,379
Monroe Township Municipal Utilities Authority Middlesex County Revenue, Refunding,
FGIC Insured, 5.00%, 2/01/26 .............................................................. 1,000,000 1,039,330
Mount Olive Township Board of Education GO, MBIA Insured, 5.00%, 7/15/29 ..................... 7,875,000 8,277,334
New Brunswick Parking Authority Revenue, Guaranteed Parking, Series A, MBIA Insured, 5.00%,
9/01/34 ................................................................................... 1,850,000 1,920,208
New Jersey EDA Heating and Cooling Revenue, Trigen-Trenton Project, Series B, 6.20%,
12/01/07 .................................................................................. 2,660,000 2,673,034
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 5,627,000
New Jersey EDA Natural Gas Facilities Revenue, New Jersey Natural Gas Co. Project, Series A,
AMBAC Insured, 6.25%, 8/01/24 ............................................................. 8,200,000 8,389,748
New Jersey EDA Revenue,
Cigarette Tax, 5.50%, 6/15/24 ............................................................ 5,000,000 5,197,050
Hillcrest Health Services System Project, Refunding, AMBAC Insured, 5.375%, 1/01/16 ...... 2,500,000 2,676,675
Jewish Community Housing Corp. Metropolitan Project, 5.90%, 12/01/31 ..................... 5,110,000 5,478,431
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 .................. 12,500,000 13,058,250
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 .................. 10,000,000 10,415,500
Municipal Rehabilitation, Series A, AMBAC Insured, 5.00%, 4/01/28 ........................ 14,545,000 15,192,689
School Facilities Construction, Series A, AMBAC Insured, Pre-Refunded, 5.00%,
6/15/21 ................................................................................. 15,000,000 16,525,050
School Facilities Construction, Series C, MBIA Insured, 4.75%, 6/15/25 ................... 16,500,000 16,907,220
Tranportation Project Sub Lease, Series A, FSA Insured, Pre-Refunded, 5.25%, 5/01/17 ..... 5,000,000 5,453,150
Transporation Project Sub Lease, Series A, FSA Insured, Pre-Refunded, 5.00%, 5/01/18 ..... 2,000,000 2,161,820
New Jersey EDA School Revenue, Blair Academy, 1995 Project, Series A, 5.85%, 9/01/16 ......... 1,640,000 1,663,337
New Jersey EDA State Lease Revenue, Liberty State Park Lease Rental, Refunding,
AMBAC Insured, 5.75%, 3/15/20 ............................................................. 4,605,000 4,843,539
New Jersey EDA Water Facilities Revenue, Hackensack Water Co. Project, Refunding, Series A,
MBIA Insured, 5.80%, 3/01/24 .............................................................. 1,000,000 1,012,890
New Jersey EDA, PCR, Jersey Central Power and Light, 7.10%, 7/01/15 .......................... 550,000 560,505
170 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW JERSEY (CONT.)
New Jersey Health Care Facilities Financing Authority Revenue,
5.75%, 7/01/28 ............................................................................ $ 11,000,000 $ 11,217,580
Atlantic City Medical Center, Refunding, 5.75%, 7/01/25 ................................... 5,000,000 5,302,850
Atlantic Health Systems, Series A, AMBAC Insured, 5.00%, 7/01/27 .......................... 7,500,000 7,686,975
Burdette Tomlin Memorial Hospital, 5.50%, 7/01/29 ......................................... 5,725,000 5,930,070
Cathedral Health Services, Refunding, MBIA Insured, 5.25%, 8/01/21 ........................ 5,000,000 5,280,350
East Orange General Hospital, Series B, 7.75%, 7/01/20 .................................... 4,710,000 4,710,565
Englewood Hospital, MBIA Insured, 5.00%, 8/01/31 .......................................... 7,330,000 7,581,859
Franciscan St. Mary's Hospital, ETM, 5.875%, 7/01/12 ...................................... 3,550,000 3,856,862
Hackensack University Medical Center, 6.00%, 1/01/34 ...................................... 10,000,000 10,555,000
Holy Name Hospital, 6.00%, 7/01/25 ........................................................ 3,000,000 3,123,780
Holy Name Hospital, AMBAC Insured, 5.25%, 7/01/20 ......................................... 3,000,000 3,192,480
Jersey City Medical Center, AMBAC Insured, 5.00%, 8/01/31 ................................. 7,000,000 7,212,450
JFK Medical Center/Hartwyck, Refunding, MBIA Insured, 5.00%, 7/01/25 ...................... 7,855,000 8,116,257
Medical Center at Princeton Obligation Group, AMBAC Insured, 5.00%, 7/01/28 ............... 7,000,000 7,199,780
Meridian Health Systems Obligation Group, FSA Insured, 5.375%, 7/01/24 .................... 6,500,000 6,959,875
Meridian Health Systems Obligation Group, FSA Insured, 5.25%, 7/01/29 ..................... 20,000,000 21,021,400
Pascack Valley Hospital Assn., 5.125%, 7/01/28 ............................................ 4,400,000 3,543,540
Robert Wood Johnson University Hospital, 5.75%, 7/01/25 ................................... 5,000,000 5,410,850
South Jersey Hospital, 5.875%, 7/01/21 .................................................... 10,000,000 10,555,600
South Jersey Hospital, 6.00%, 7/01/32 ..................................................... 18,600,000 19,646,250
Southern Ocean County Hospital, FSA Insured, 5.00%, 7/01/27 ............................... 2,000,000 2,047,800
St. Joseph's Hospital and Medical Center, Refunding, Connie Lee Insured, 5.75%,
7/01/16 .................................................................................. 1,000,000 1,057,010
St. Joseph's Hospital and Medical Center, Refunding, Connie Lee Insured, 6.00%,
7/01/26 .................................................................................. 1,000,000 1,060,250
St. Peters University Hospital, Series A, 6.875%, 7/01/30 ................................. 1,500,000 1,661,745
New Jersey State Building Authority State Building Revenue, Refunding, 5.00%, 6/15/15 ........ 5,000,000 5,267,800
New Jersey State Building Authority State Revenue, Series A, FSA Insured, Pre-Refunded,
5.00%, 12/15/22 ............................................................................. 1,000,000 1,107,840
New Jersey State Educational Facilities Authority Revenue,
Capital Improvement Funding Project, Series A, FSA Insured, 5.00%, 9/01/20 ................ 8,000,000 8,367,040
FGIC Insured, 5.50%, 7/01/30 .............................................................. 6,615,000 7,182,302
Kean University, Series D, FGIC Insured, 5.00%, 7/01/33 ................................... 10,000,000 10,406,900
Montclair State University, Refunding, Series L, MBIA Insured, 5.00%, 7/01/34 ............. 6,175,000 6,460,409
Montclair State University, Series F, FGIC Insured, 5.00%, 7/01/31 ........................ 5,000,000 5,163,850
Princeton University, Refunding, Series D, 5.00%, 7/01/29 ................................. 1,000,000 1,050,910
Ramapo College of New Jersey, Series D, AMBAC Insured, 5.00%, 7/01/25 ..................... 1,000,000 1,046,820
Ramapo College of New Jersey, Series D, AMBAC Insured, 5.00%, 7/01/31 ..................... 1,500,000 1,549,155
Ramapo College of New Jersey, Series E, FGIC Insured, 5.00%, 7/01/34 ...................... 2,000,000 2,089,320
Rowan College, Series E, AMBAC Insured, Pre-Refunded, 6.00%, 7/01/26 ...................... 9,810,000 10,368,778
Rowan University, Series C, FGIC Insured, 5.00%, 7/01/31 .................................. 2,000,000 2,074,360
Rowan University, Series K, FGIC Insured, 5.00%, 7/01/27 .................................. 1,000,000 1,042,900
Rowan University, Series K, FGIC Insured, 5.00%, 7/01/33 .................................. 1,000,000 1,036,540
Seton Hall University Project, Series G, AMBAC Insured, 5.00%, 7/01/26 .................... 1,870,000 1,948,054
Stevens Institute of Technology, Series I, 5.00%, 7/01/18 ................................. 1,100,000 1,143,538
Stevens Institute of Technology, Series I, 5.00%, 7/01/28 ................................. 1,575,000 1,593,979
University of Medical Dentistry, Series C, AMBAC Insured, 5.125%, 12/01/29 ................ 2,700,000 2,792,151
Annual Report | 171
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW JERSEY (CONT.)
New Jersey State Highway Authority Garden State Parkway General Revenue, ETM, 6.20%,
1/01/10 .................................................................................... $ 5,000,000 $ 5,576,150
New Jersey State Housing and Mortgage Finance Agency MFHR,
Refunding, Series A, AMBAC Insured, 6.00%, 11/01/14 ....................................... 5,000,000 5,113,800
Refunding, Series A, AMBAC Insured, 6.05%, 11/01/20 ....................................... 11,275,000 11,523,276
Series A1, FSA Insured, 6.35%, 11/01/31 ................................................... 2,000,000 2,126,200
Series B, FSA Insured, 6.25%, 11/01/26 .................................................... 1,480,000 1,572,944
Series D, FSA Insured, 5.50%, 5/01/22 ..................................................... 920,000 946,800
Series E1, FSA Insured, 5.70%, 5/01/20 .................................................... 2,790,000 2,950,453
Series E1, FSA Insured, 5.75%, 5/01/25 .................................................... 1,295,000 1,363,026
New Jersey State Housing and Mortgage Finance Agency Revenue, Home Buyer,
Series CC, MBIA Insured, 5.875%, 10/01/31 ................................................. 2,045,000 2,047,904
Series U, MBIA Insured, 5.85%, 4/01/29 .................................................... 4,275,000 4,395,470
New Jersey State Transportation Corp. COP, Federal Transportation Administration Grants,
Series A, AMBAC Insured, Pre-Refunded, 6.125%, 9/15/15 ..................................... 2,000,000 2,254,920
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System, Series B,
MBIA Insured, Pre-Refunded, 5.00%, 12/15/21 ................................................ 10,000,000 11,025,200
New Jersey State Turnpike Authority Turnpike Revenue, Series A,
AMBAC Insured, 5.00%, 1/01/30 ............................................................. 13,500,000 14,077,935
FGIC Insured, 5.00%, 1/01/27 .............................................................. 6,500,000 6,796,790
MBIA Insured, 5.60%, 1/01/22 .............................................................. 7,500,000 8,197,125
MBIA Insured, 5.50%, 1/01/25 .............................................................. 16,300,000 17,720,545
Newark Housing Authority Port Authority Revenue, Newark Marine Terminal, MBIA Insured,
5.00%, 1/01/26 ............................................................................ 3,245,000 3,419,970
5.50%, 1/01/27 ............................................................................ 3,240,000 3,567,888
5.50%, 1/01/28 ............................................................................ 2,000,000 2,188,460
5.00%, 1/01/34 ............................................................................ 19,450,000 20,222,749
North Brunswick Township Board of Education GO, Refunding, FGIC Insured, 5.00%,
2/01/15 ................................................................................... 2,000,000 2,078,560
North Hudson Sewer Authority New Jersey Sewer Revenue, Series C, MBIA Insured, 5.00%,
8/01/22 ................................................................................... 1,000,000 1,047,380
8/01/31 ................................................................................... 1,000,000 1,033,160
North Plainfield Board of Education GO, FSA Insured, 4.875%, 8/15/25 ......................... 1,020,000 1,052,711
Ocean County Board of Education GO, Cape May, FGIC Insured, 5.00%,
4/01/21 ................................................................................... 2,155,000 2,261,888
4/01/22 ................................................................................... 2,142,000 2,241,196
Passaic Valley Sewer Commissioners GO, Sewer System, Refunding, Series E, AMBAC Insured,
5.75%, 12/01/22 ............................................................................ 8,925,000 9,987,343
Rutgers State University COP, AMBAC Insured, 5.00%, 1/01/34 .................................. 1,000,000 1,039,730
South Brunswick Township Board of Education GO, Refunding, Series AA, FGIC Insured, 5.50%,
8/01/24 .................................................................................... 1,720,000 1,793,960
South Jersey Transportation Authority Transportation Systems Revenue, AMBAC Insured, 5.00%,
11/01/29 ................................................................................... 12,000,000 12,418,200
Tobacco Settlement Financing Corp. Revenue, Asset Backed, Refunding, 6.00%, 6/01/37 .......... 13,000,000 12,888,590
Union County Utilities Authority Solid Waste Revenue, sub. lease, Ogden Martin, Series A,
AMBAC Insured, 5.35%, 6/01/23 .............................................................. 2,705,000 2,831,946
172 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW JERSEY (CONT.)
University of Medicine and Dentistry COP,
AMBAC Insured, 5.00%, 4/15/32 ............................................................. $ 4,625,000 $ 4,796,495
MBIA Insured, 5.00%, 6/15/29 .............................................................. 4,090,000 4,275,113
MBIA Insured, 5.00%, 6/15/36 .............................................................. 9,000,000 9,365,580
Series A, MBIA Insured, 5.00%, 9/01/22 .................................................... 1,700,000 1,827,908
University of Medicine and Dentistry Revenue, Series A, AMBAC Insured, 5.00%,
12/01/24 .................................................................................. 2,500,000 2,639,350
12/01/31 .................................................................................. 29,395,000 30,539,935
Washington Township Board of Education GO, Mercer County, FGIC Insured, 5.00%,
1/01/28 .................................................................................... 4,497,000 4,678,589
West Orange County Board of Education COP, MBIA Insured, Pre-Refunded, 5.625%,
10/01/29 ................................................................................... 2,000,000 2,241,320
Woodbridge Township GO, FGIC Insured, 5.00%, 7/15/24 ......................................... 1,220,000 1,283,013
-------------
715,474,884
-------------
NEW YORK 5.1%
Port Authority of New York and New Jersey Revenue,
120th Series, MBIA Insured, 5.50%, 10/15/35 ............................................... 5,000,000 5,163,850
121st Series, MBIA Insured, 5.375%, 10/15/35 .............................................. 3,000,000 3,216,660
Consolidated, 109th Series, FSA Insured, 5.375%, 7/15/27 .................................. 2,500,000 2,639,000
Consolidated, 125th Series, FSA Insured, 5.00%, 4/15/32 ................................... 23,950,000 25,024,397
Consolidated, Refunding, 135th Series, XLCA Insured, 5.00%, 9/15/29 ....................... 3,500,000 3,670,695
Port Authority of New York and New Jersey Special Obligation Revenue,
4th Installment, Special Project, 6.75%, 10/01/11 ......................................... 2,500,000 2,658,925
John F. Kennedy International Air Terminal, MBIA Insured, 5.75%, 12/01/22 ................. 8,000,000 8,662,640
-------------
51,036,167
-------------
PENNSYLVANIA 2.1%
Delaware River Port Authority Pennsylvania and New Jersey Delaware River Bridges Revenue,
FSA Insured, 5.75%,
1/01/22 ................................................................................... 8,500,000 9,413,920
1/01/26 ................................................................................... 10,000,000 11,070,500
-------------
20,484,420
-------------
U.S. TERRITORIES 16.6%
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, 5.125%, 7/01/30 .............................................................. 8,350,000 8,841,397
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ................................................ 13,655,000 15,141,074
Series A, 5.00%, 7/01/29 .................................................................. 10,000,000 10,384,600
Series A, FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 ...................................... 3,000,000 3,323,250
Series A, Pre-Refunded, 5.00%, 7/01/27 .................................................... 11,555,000 12,800,051
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series B, Pre-Refunded, 6.00%, 7/01/39 .................................................... 10,000,000 11,514,500
Series D, 5.375%, 7/01/36 ................................................................. 5,000,000 5,328,000
Series D, 5.25%, 7/01/38 .................................................................. 5,000,000 5,228,400
Annual Report | 173
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES (CONT.)
Puerto Rico Commonwealth Infrastructure Financing Authority Special Obligation Bonds,
Series A, ETM, 5.50%, 10/01/32 ............................................................. $ 1,000,000 $ 1,096,500
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
7.50%, 7/01/09 ............................................................................ 20,000 20,088
AMBAC Insured, 5.00%, 7/01/28 ............................................................. 15,000,000 15,429,150
Puerto Rico Electric Power Authority Power Revenue,
Series II, 5.25%, 7/01/31 ................................................................. 18,000,000 19,043,100
Series X, Pre-Refunded, 6.00%, 7/01/15 .................................................... 2,000,000 2,065,800
Series X, Pre-Refunded, 6.125%, 7/01/21 ................................................... 5,000,000 5,166,500
Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 .......................... 2,160,000 2,160,821
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Revenue, University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 .................. 1,000,000 1,030,550
Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D,
5.375%, 7/01/33 ........................................................................... 6,830,000 7,278,048
Pre-Refunded, 5.375%, 7/01/33 ............................................................. 18,170,000 20,316,967
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series A,
MBIA Insured, Pre-Refunded, 5.00%, 8/01/29 ................................................. 5,000,000 5,499,550
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 ........................... 5,000,000 5,169,000
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/15 ........................ 2,500,000 2,636,050
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ........................ 3,045,000 3,186,897
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/22 ........................ 2,000,000 2,068,980
-------------
164,729,273
-------------
TOTAL BONDS (COST $911,507,381) .............................................................. 975,938,494
-------------
ZERO COUPON BONDS 0.5%
NEW JERSEY 0.5%
Middlesex County COP, MBIA Insured, 6/15/24 .................................................. 1,000,000 410,580
New Jersey State Turnpike Authority Turnpike Revenue, Growth and Income Securities, Series B,
AMBAC Insured, 1/01/35 ..................................................................... 7,500,000 4,687,950
-------------
TOTAL ZERO COUPON BONDS (COST $4,879,705) .................................................... 5,098,530
-------------
TOTAL LONG TERM INVESTMENTS (COST $916,387,086) .............................................. 981,037,024
-------------
174 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 0.3%
BONDS 0.3%
NEW JERSEY 0.2%
(a)New Jersey EDA Revenue, Refunding, First Mortgage Franciscan, Weekly VRDN and Put,
1.82%, 10/01/12 ............................................................................ $ 150,000 $ 150,000
(a)New Jersey Sports and Exposition Authority State Contract Revenue, Refunding, Series B-2,
MBIA Insured, Weekly VRDN and Put, 1.80%, 3/01/21 .......,.................................. 1,875,000 1,875,000
-------------
2,025,000
-------------
U.S. TERRITORIES 0.1%
(a)Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 1.83%, 7/01/28 ............................... 500,000 500,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $2,525,000) ............................................... 2,525,000
-------------
TOTAL INVESTMENTS (COST $918,912,086) 99.0% .................................................. 983,562,024
OTHER ASSETS, LESS LIABILITIES 1.0% .......................................................... 9,519,656
-------------
NET ASSETS 100.0% ............................................................................ $ 993,081,680
=============
See Glossary of Terms on page 194.
(a) 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.
Annual Report | See notes to financial statements. | 175
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN OREGON TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.95 $ 11.69 $ 11.52 $ 11.42 $ 10.81
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.52 0.54 0.53 0.55 0.58
Net realized and unrealized gains (losses) ...... (0.04) 0.24 0.18 0.11 0.61
----------------------------------------------------------------------
Total from investment operations ................. 0.48 0.78 0.71 0.66 1.19
Less distributions from net investment income .... (0.53) (0.52) (0.54) (0.56) (0.58)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.90 $ 11.95 $ 11.69 $ 11.52 $ 11.42
======================================================================
Total return(b) .................................. 4.15% 6.87% 6.32% 5.95% 11.25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 570,324 $ 554,871 $ 559,531 $ 513,733 $ 457,613
Ratios to average net assets:
Expenses ........................................ 0.65% 0.65% 0.65% 0.67% 0.67%
Net investment income ........................... 4.40% 4.62% 4.63% 4.79% 5.20%
Portfolio turnover rate .......................... 10.45% 4.82% 8.92% 19.36% 16.22%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
176 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.06 $ 11.79 $ 11.61 $ 11.50 $ 10.88
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.46 0.48 0.48 0.49 0.52
Net realized and unrealized gains (losses) ...... (0.05) 0.25 0.18 0.12 0.62
----------------------------------------------------------------------
Total from investment operations ................. 0.41 0.73 0.66 0.61 1.14
Less distributions from net investment income .... (0.46) (0.46) (0.48) (0.50) (0.52)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 12.01 $ 12.06 $ 11.79 $ 11.61 $ 11.50
======================================================================
Total return(b) .................................. 3.55% 6.30% 5.79% 5.50% 10.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 75,266 $ 80,108 $ 75,491 $ 56,449 $ 38,733
Ratios to average net assets:
Expenses ........................................ 1.20% 1.22% 1.17% 1.22% 1.22%
Net investment income ........................... 3.85% 4.05% 4.11% 4.24% 4.65%
Portfolio turnover rate .......................... 10.45% 4.82% 8.92% 19.36% 16.22%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 177
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.1%
BONDS 98.2%
OREGON 80.2%
Bend Sewer Revenue, AMBAC Insured, 5.375%, 10/01/20 .......................................... $ 1,550,000 $ 1,684,602
Benton and Linn County School District No. 509J GO, Corvallis, FSA Insured, 5.00%,
6/01/22 .................................................................................... 5,000,000 5,322,600
Benton County Hospital Facilities Authority Revenue, Samaritan Health Services Project,
Refunding,
5.20%, 10/01/17 ........................................................................... 4,000,000 4,163,240
5.125%, 10/01/28 .......................................................................... 4,500,000 4,579,470
Clackamas County Hospital Facilities Authority Revenue,
Gross Willamette Falls, Refunding, 5.75%, 4/01/15 ......................................... 2,250,000 2,279,880
Kaiser Permanente, Series A, ETM, 5.375%, 4/01/14 ......................................... 2,500,000 2,738,275
Willamette Falls Hospital Project, 6.00%, 4/01/19 ......................................... 1,000,000 1,047,620
Willamette View Inc. Project, Refunding, 6.10%, 11/01/12 .................................. 500,000 510,085
Willamette View Inc. Project, Refunding, 6.30%, 11/01/21 .................................. 1,500,000 1,516,695
Clackamas County School District No. 007J Lake Oswego GO, MBIA Insured, 5.00%,
6/01/26 .................................................................................... 5,000,000 5,225,750
Clackamas County School District No. 62C Oregon City GO, Refunding, FSA Insured, 5.00%,
6/15/20 .................................................................................... 2,560,000 2,762,931
Clackamas County School District No. 86 GO,
Canby, 5.25%, 6/15/20 ..................................................................... 3,000,000 3,308,880
Refunding, FGIC Insured, 5.00%, 6/15/20 ................................................... 2,000,000 2,153,700
Clackamas County School District No. 108 GO, FSA Insured, 5.00%, 6/15/25 ..................... 5,000,000 5,232,650
Coos County School District No. 13 GO, North Bend, FSA Insured, 5.00%, 6/15/22 ............... 2,520,000 2,666,286
Curry County School District No. 17-C Brookings Harbor GO, Pre-Refunded, 5.375%,
12/15/20 ................................................................................... 2,750,000 3,071,062
Deschutes and Jefferson Counties School District No. 02J Redmond GO, Series A, FGIC Insured,
5.00%, 6/15/21 ............................................................................. 1,000,000 1,071,240
Deschutes County Administrative School District No. 1 GO, Series A, FSA Insured, 5.125%,
6/15/21 .................................................................................... 3,500,000 3,728,655
Deschutes County Hospital Facilities Authority Hospital Revenue, St. Charles Medical Center,
6.00%, 1/01/13 ............................................................................. 3,000,000 3,045,810
Emerald Peoples Utility District Revenue, Refunding, Series A, FSA Insured, 5.25%,
11/01/21 ................................................................................... 1,000,000 1,099,140
Eugene Public Safety Facilities GO, FGIC Insured, 5.70%, 6/01/16 ............................. 500,000 518,900
Eugene Trojan Nuclear Project Revenue, Refunding, 5.90%, 9/01/09 ............................. 490,000 503,058
Gresham Stormwater Revenue, FGIC Insured, 5.30%, 5/01/21 ..................................... 1,190,000 1,291,245
High Desert Education Service District GO, AMBAC Insured, 4.50%, 6/01/30 ..................... 1,010,000 1,000,900
Hillsboro GO, AMBAC Insured, 5.00%, 6/01/29 .................................................. 5,360,000 5,618,352
Hillsboro Hospital Facility Authority Revenue, Hospital Tuality Healthcare Project,
Radian Insured, 5.375%,
10/01/26 .................................................................................. 2,000,000 2,127,860
10/01/31 .................................................................................. 2,000,000 2,119,620
Jackson County School District No. 4 GO, Phoenix-Talent District, FSA Insured, 5.00%,
6/15/20 .................................................................................... 2,000,000 2,119,160
Jackson County School District No. 6 Central Point GO, Refunding, FSA Insured, 4.75%,
6/15/20 .................................................................................... 2,155,000 2,267,232
Jackson County School District No. 9 Eagle Point GO, 5.00%,
6/15/20 ................................................................................... 1,680,000 1,775,290
6/15/21 ................................................................................... 1,500,000 1,579,965
178 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON (CONT.)
Josephine County Unit School District Three Rivers GO,Refunding, FGIC Insured, 5.00%,
12/15/20 ................................................................................... $ 1,500,000 $ 1,652,100
Klamath Falls Inter Community Hospital Authority Revenue, Merle West Medical Center Project,
Refunding, 6.25%, 9/01/31 .................................................................. 5,250,000 5,583,900
Lane and Douglas Counties School District No. 045J3 GO, South Lane District, Refunding,
FSA Insured, 4.75%, 6/15/25 ................................................................ 3,510,000 3,612,071
Lane County School District No. 052 Bethel GO, Refunding, FSA Insured, 5.00%, 6/15/20 ........ 5,700,000 6,086,460
Lane County School District No. 4J Eugene GO, FSA Insured, 4.75%, 7/01/22 .................... 5,150,000 5,336,636
Linn County Community School District No. 9 GO,
Lebanon, FGIC Insured, 5.55%, 6/15/21 ..................................................... 1,155,000 1,298,289
Lebanon, FGIC Insured, 5.60%, 6/15/30 ..................................................... 9,495,000 10,563,662
MBIA Insured, Pre-Refunded, 5.375%, 6/15/30 ............................................... 5,000,000 5,545,050
Linn County School District No. 55 GO, Sweet Home, FSA Insured, 5.00%, 6/15/29 ............... 1,000,000 1,038,680
Marion County Housing Authority Revenue, Elliott Residence Project, GNMA Secured, 7.50%,
10/20/25 ................................................................................... 1,150,000 1,233,202
Medford Hospital Facilities Authority Revenue, Asante Health System, Series A, MBIA Insured,
5.00%,
8/15/18 ................................................................................... 8,000,000 8,441,520
8/15/24 ................................................................................... 5,300,000 5,473,681
Multnomah County COP, Series A, Pre-Refunded, 4.75%, 8/01/16 ................................. 1,000,000 1,074,340
Multnomah County Educational Facilities Revenue, University of Portland Project, 6.00%,
4/01/25 .................................................................................... 2,000,000 2,163,960
Multnomah County GO, Refunding, AMBAC Insured, 4.50%, 8/01/19 ................................ 1,500,000 1,558,290
(a)Multnomah County School District No. 007 Reynolds GO, Refunding, MBIA Insured, 5.00%,
6/15/20 .................................................................................... 2,000,000 2,226,920
Multnomah County School District No. 40 GO, FSA Insured, 5.00%, 12/01/20 ..................... 3,490,000 3,672,806
Multnomah-Clackamas Counties Centennial School District No. 28-302 GO, FGIC Insured,
5.00%, 6/15/21 ............................................................................. 5,000,000 5,508,350
Northern Wasco County Peoples Utilities District Hydroelectric Revenue, McNary Dam Fishway
Project, 5.20%, 12/01/24 ................................................................... 5,000,000 5,076,250
Oak Lodge Water District GO, AMBAC Insured,
7.40%, 12/01/08 ........................................................................... 215,000 217,707
7.50%, 12/01/09 ........................................................................... 215,000 217,758
Oregon City Sewer Revenue, Pre-Refunded, 6.875%, 10/01/19 .................................... 4,000,000 4,147,840
Oregon Coast Community College District GO, MBIA Insured, 5.00%, 6/15/23 ..................... 3,745,000 4,002,843
Oregon Health Sciences University Revenue, Series A, MBIA Insured, 5.00%, 7/01/32 ............ 23,750,000 24,715,438
Oregon State Board of Higher Education GO, Refunding,
5.00%, 8/01/31 ............................................................................ 2,000,000 2,059,560
Series E, 5.00%, 8/01/29 .................................................................. 7,745,000 8,057,201
Oregon State Department of Administrative Services COP,
FSA Insured, 4.375%, 5/01/25 .............................................................. 1,235,000 1,234,111
FSA Insured, 4.625%, 5/01/30 .............................................................. 7,795,000 7,861,258
Refunding, Series A, AMBAC Insured, 5.00%, 5/01/24 ........................................ 10,000,000 10,404,800
Refunding, Series B, AMBAC Insured, 5.00%, 5/01/26 ........................................ 7,500,000 7,881,525
Refunding, Series B, FSA Insured, 5.00%, 5/01/21 .......................................... 1,930,000 2,058,403
Refunding, Series B, FSA Insured, 4.25%, 5/01/24 .......................................... 1,890,000 1,867,925
Series A, AMBAC Insured, Pre-Refunded, 6.00%, 5/01/26 ..................................... 2,000,000 2,298,860
Series A, FSA Insured, 4.25%, 5/01/23 ..................................................... 1,095,000 1,090,828
Annual Report | 179
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON (CONT.)
Oregon State Department of Transportation Highway Usertax Revenue, Series A, 5.00%,
11/15/28 ................................................................................... $ 5,000,000 $ 5,262,750
Oregon State Department of Transportation Usertax Revenue,
Refunding, Series A, 5.00%, 11/15/22 ...................................................... 1,200,000 1,284,660
Refunding, Series A, 5.00%, 11/15/23 ...................................................... 1,260,000 1,342,656
Refunding, Series A, 5.00%, 11/15/25 ...................................................... 1,295,000 1,377,828
Refunding, Series A, 5.00%, 11/15/29 ...................................................... 3,330,000 3,496,900
Series A, 5.125%, 11/15/23 ................................................................ 5,000,000 5,362,450
Series A, 5.125%, 11/15/26 ................................................................ 14,200,000 15,113,344
Oregon State EDR, Georgia Pacific Corp. Project, Series CLVII, 6.35%, 8/01/25 ................ 7,910,000 7,962,206
Oregon State GO,
Board of Higher Education, Baccalaureate, Series A, 5.00%, 8/01/27 ........................ 6,000,000 6,174,000
Board of Higher Education, Refunding, Series D, 5.00%, 8/01/24 ............................ 3,620,000 3,840,205
Board of Higher Education, Series A, Pre-Refunded, 5.65%, 8/01/27 ......................... 4,440,000 4,797,198
Board of Higher Education, Series C, Pre-Refunded, 5.65%, 8/01/27 ......................... 1,460,000 1,577,457
Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/15 .......................... 910,000 933,824
Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/21 .......................... 455,000 466,439
Elderly and Disabled Housing Authority, Series A, 5.375%, 8/01/28 ......................... 1,655,000 1,692,353
Elderly and Disabled Housing Authority, Series B, 6.10%, 8/01/17 .......................... 1,410,000 1,442,204
Elderly and Disabled Housing Authority, Series B, 6.25%, 8/01/23 .......................... 2,015,000 2,050,383
Elderly and Disabled Housing Authority, Series B, 6.375%, 8/01/24 ......................... 135,000 135,448
Elderly and Disabled Housing Authority, Series C, 6.50%, 8/01/22 .......................... 335,000 336,136
State Board of Higher Education, Series A, 5.50%, 8/01/29 ................................. 2,000,000 2,142,800
State Board of Higher Education, Series A, Pre-Refunded, 5.60%, 8/01/25 ................... 8,000,000 8,944,480
Veteran's Welfare, Series 75, 5.85%, 10/01/15 ............................................. 325,000 333,665
Veteran's Welfare, Series 75, 5.875%, 10/01/18 ............................................ 165,000 169,231
Veteran's Welfare, Series 75, 6.00%, 4/01/27 .............................................. 615,000 630,418
Veteran's Welfare, Series 76-A, 6.05%, 10/01/28 ........................................... 1,030,000 1,044,760
Veteran's Welfare, Series 77, 5.30%, 10/01/29 ............................................. 2,570,000 2,623,713
Veteran's Welfare, Series A, 5.70%, 10/01/32 .............................................. 3,470,000 3,566,778
Oregon State Health Housing Educational and Cultural Facilities Authority Revenue,
Peacehealth, AMBAC Insured, 5.00%, 11/15/26 ............................................... 5,500,000 5,760,755
Reed College Project, Series A, 5.75%, 7/01/32 ............................................ 10,735,000 11,774,255
Oregon State Housing and Community Services Department HFR, Multi-Unit,
Series A, FHA Insured, 6.80%, 7/01/13 ..................................................... 5,810,000 5,826,268
Series C, FHA Insured, 6.85%, 7/01/22 ..................................................... 180,000 180,526
Oregon State Housing and Community Services Department MFHR,
Series A, 6.15%, 7/01/21 .................................................................. 910,000 944,434
Series B, 6.00%, 7/01/31 .................................................................. 5,000,000 5,211,750
Oregon State Housing and Community Services Department Mortgage Revenue, SFM Program,
Series A, 6.35%, 7/01/14 .................................................................. 845,000 857,599
Series A, 6.40%, 7/01/18 .................................................................. 430,000 436,166
Series A, 6.45%, 7/01/26 .................................................................. 965,000 987,263
Series C, 6.20%, 7/01/15 .................................................................. 745,000 762,269
Series C, 6.40%, 7/01/26 .................................................................. 435,000 445,027
Series D, 6.80%, 7/01/27 .................................................................. 855,000 871,202
Series H, FHA Insured, 5.75%, 7/01/30 ..................................................... 2,595,000 2,663,949
180 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON (CONT.)
Polk Marion and Benton Counties School District No. 13J GO, FSA Insured, Pre-Refunded,
5.80%, 6/15/20 ............................................................................. $ 1,985,000 $ 2,242,177
Port Astoria PCR, James River Project, Refunding, 6.55%, 2/01/15 ............................. 945,000 951,256
Port of Portland International Airport Revenue, Portland International Airport,
Refunding, Series D, FGIC Insured, 5.00%, 7/01/23 ......................................... 3,000,000 3,094,470
Series 7B, MBIA Insured, Pre-Refunded, 7.10%, 7/01/21 ..................................... 2,800,000 3,392,144
Series 12C, FGIC Insured, 5.00%, 7/01/18 .................................................. 1,500,000 1,588,035
Series A, AMBAC Insured, 5.50%, 7/01/24 ................................................... 22,000,000 23,913,340
Port St. Helens PCR,
Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/27 ................................... 4,750,000 4,743,493
Portland General Electric Co. Project, Series A, 5.25%, 8/01/14 ........................... 3,600,000 3,573,468
Portland Community College District GO, Series B, 5.00%,
6/01/20 ................................................................................... 7,185,000 7,594,401
6/01/21 ................................................................................... 6,290,000 6,623,496
Portland GO,
Central City Streetcar Project, Series A, 4.75%, 4/01/21 ................................. 3,600,000 3,680,136
Limited Tax, Series A, 5.00%, 4/01/18 .................................................... 1,000,000 1,044,570
Limited Tax, Series A, 5.00%, 6/01/24 .................................................... 10,000,000 10,507,400
Limited Tax, Series A, MBIA Insured, 5.125%, 6/01/30 ..................................... 6,315,000 6,664,093
Portland Housing Authority MFR,
Berry Ridge Project, 6.30%, 5/01/29 ....................................................... 1,500,000 1,562,745
Housing-Lovejoy Station Apartments Project, MBIA Insured, 6.00%, 7/01/33 .................. 2,000,000 2,105,160
Portland Hydroelectric Power Revenue, Bull Run Project, Series C, 7.00%, 10/01/16 ............ 635,000 637,699
Portland MFHR, Civic Stadium Housing Project, Series A, 6.00%, 3/01/17 ....................... 1,000,000 1,030,350
Portland MFR, Housing Garden Park Estates Project, Series A, GNMA Secured, 5.875%,
3/20/37 .................................................................................... 3,175,000 3,283,934
Portland River District Urban Renewal and Redevelopment Revenue, Series A, AMBAC Insured,
5.00%, 6/15/21 ............................................................................. 3,000,000 3,205,230
Portland Sewer System Revenue,
first lien, Series A, FSA Insured, 5.00%, 10/01/24 ........................................ 6,235,000 6,645,076
Refunding, Series A, FSA Insured, 5.00%, 6/01/23 .......................................... 2,500,000 2,655,900
Portland Urban Renewal and Redevelopment Revenue, Interstate Corridor, Series A,
FGIC Insured, 5.00%,
6/15/24 ................................................................................... 1,295,000 1,379,602
6/15/25 ................................................................................... 1,195,000 1,268,959
Portland Urban Renewal and Redevelopment Tax Allocation, Convention Center, Series A,
AMBAC Insured, 5.50%, 6/15/20 .............................................................. 3,000,000 3,287,580
Redmond GO, Series C, MBIA Insured, 5.00%, 6/01/33 ........................................... 1,260,000 1,310,828
Rogue Community College District GO, Refunding, MBIA Insured, 5.00%, 6/15/25 ................. 1,200,000 1,279,428
Salem-Keizer School District No. 24J GO, Pre-Refunded, 5.00%, 6/01/19 ........................ 9,500,000 10,282,990
Southwestern Community College District GO, MBIA Insured, 5.00%, 6/01/28 ..................... 1,100,000 1,153,020
Tri-County Metropolitan Transportation District Revenue, Limited Obligation, Airport Light
Rail, Series 1, 5.65%, 6/01/29 ............................................................. 14,080,000 14,825,958
Washington and Clackamas Counties School District No. 23 GO, MBIA Insured, 5.00%,
6/15/22 .................................................................................... 7,000,000 7,406,350
Washington County Clean Water Services Sewer Revenue, senior lien, FGIC Insured, 5.00%,
10/01/19 ................................................................................... 3,905,000 4,158,981
Washington County GO, 5.00%, 6/01/26 ......................................................... 10,000,000 10,368,000
Annual Report | 181
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON (CONT.)
Washington County School District No. 48J Beaverton GO, 5.00%, 6/01/22 ....................... $ 4,155,000 $ 4,384,398
Washington County School District No. 88 J Sherwood GO, FSA Insured, Pre-Refunded, 6.10%,
6/01/12 .................................................................................... 190,000 191,938
Washington County Unified Sewer Agency Revenue, senior lien, Series A, 6.20%, 10/01/10 ....... 470,000 471,711
Washington Multnomah and Yamhill Counties School District No. 1J Hillsboro GO, FSA Insured,
5.60%, 4/01/20 ............................................................................. 1,000,000 1,093,970
-------------
517,820,412
-------------
U.S. TERRITORIES 18.0%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.625%, 5/15/43 ............................................................................ 10,000,000 9,806,600
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured,
Pre-Refunded, 9.00%, 7/01/09 ............................................................... 40,000 40,897
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.00%, 7/01/29 ............................................................................ 10,000,000 10,384,600
5.125%, 7/01/31 ........................................................................... 9,885,000 10,210,315
Pre-Refunded, 5.00%, 7/01/27 .............................................................. 10,000,000 11,077,500
Pre-Refunded, 5.125%, 7/01/31 ............................................................. 5,115,000 5,671,665
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
5.50%, 7/01/36 ............................................................................ 13,000,000 14,227,590
Pre-Refunded, 5.50%, 7/01/26 .............................................................. 4,275,000 4,511,450
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, 5.375%, 7/01/36 .................................................................. 10,000,000 10,656,000
Puerto Rico Electric Power Authority Power Revenue,
Series II, 5.25%, 7/01/31 ................................................................. 12,000,000 12,695,400
Series II, FSA Insured, 5.125%, 7/01/26 ................................................... 9,150,000 9,785,559
Series X, Pre-Refunded, 6.00%, 7/01/15 .................................................... 2,500,000 2,582,250
Puerto Rico HFC Revenue, Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%,
12/01/26 ................................................................................... 395,000 400,408
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
5.50%, 8/01/29 ............................................................................ 1,285,000 1,388,250
Pre-Refunded, 5.50%, 8/01/29 .............................................................. 3,715,000 4,184,502
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/15 .................................................................................. 1,635,000 1,723,977
10/01/18 .................................................................................. 2,400,000 2,511,840
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/18 ................................................................................... 2,500,000 2,533,350
7/01/21 ................................................................................... 1,400,000 1,415,414
-------------
115,807,567
-------------
TOTAL BONDS (COST $595,423,339) .............................................................. 633,627,979
-------------
182 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON BONDS 0.9%
OREGON 0.9%
Oregon Health Sciences University Revenue, Capital Appreciation, Refunding, Series A,
MBIA Insured, 7/01/21 ...................................................................... $ 11,480,000 $ 5,385,268
Portland GO, Limited Tax, Series B, 6/01/21 .................................................. 1,000,000 476,180
-------------
TOTAL ZERO COUPON BONDS (COST $5,114,073) .................................................... 5,861,448
-------------
TOTAL LONG TERM INVESTMENTS (COST $600,537,412) .............................................. 639,489,427
-------------
SHORT TERM INVESTMENTS 0.3%
BONDS 0.3%
OREGON 0.2%
(b)Oregon State Health Housing Educational and Cultural Facilities Authority Revenue,
Guide Dogs for the Blind, Series A, Weekly VRDN and Put, 1.85%, 7/01/25 .................... 1,000,000 1,000,000
(b)Umatilla County Hospital Facilities Authority Hospital Revenue, Catholic Health, Series B,
Weekly VRDN and Put, 1.86%, 12/01/24 ....................................................... 600,000 600,000
-------------
1,600,000
-------------
U.S. TERRITORIES 0.1%
(b)Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured,
Weekly VRDN and Put, 1.78%, 12/01/15 ....................................................... 500,000 500,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $2,100,000) ............................................... 2,100,000
-------------
TOTAL INVESTMENTS (COST $602,637,412) 99.4% .................................................. 641,589,427
OTHER ASSETS, LESS LIABILITIES .6% ........................................................... 4,001,212
-------------
NET ASSETS 100.0% ............................................................................ $ 645,590,639
=============
See Glossary of Terms on page 194.
(a) See Note 1(b) regarding securities purchased on a delayed delivery basis.
(b) 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.
Annual Report | See notes to financial statements. | 183
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.62 $ 10.51 $ 10.29 $ 10.12 $ 9.55
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.47 0.47 0.50 0.52 0.53
Net realized and unrealized gains (losses) ...... (0.15) 0.11 0.22 0.17 0.56
----------------------------------------------------------------------
Total from investment operations ................. 0.32 0.58 0.72 0.69 1.09
Less distributions from net investment income .... (0.46) (0.47) (0.50) (0.52) (0.52)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 10.48 $ 10.62 $ 10.51 $ 10.29 $ 10.12
======================================================================
Total return(b) .................................. 3.19% 5.66% 7.23% 7.01% 11.73%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 693,804 $ 732,998 $ 722,865 $ 676,684 $ 649,603
Ratios to average net assets:
Expenses ........................................ 0.66% 0.66% 0.66% 0.67% 0.67%
Net investment income ........................... 4.52% 4.51% 4.82% 5.07% 5.40%
Portfolio turnover rate .......................... 7.48% 17.63% 6.60% 11.23% 7.56%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
184 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.65 $ 10.54 $ 10.31 $ 10.13 $ 9.55
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.41 0.42 0.44 0.46 0.48
Net realized and unrealized gains (losses) ...... (0.14) 0.10 0.24 0.18 0.57
----------------------------------------------------------------------
Total from investment operations ................. 0.27 0.52 0.68 0.64 1.05
Less distributions from net investment income .... (0.41) (0.41) (0.45) (0.46) (0.47)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 10.51 $ 10.65 $ 10.54 $ 10.31 $ 10.13
======================================================================
Total return(b) .................................. 2.61% 5.06% 6.74% 6.50% 11.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 51,913 $ 50,112 $ 36,575 $ 16,408 $ 3,205
Ratios to average net assets:
Expenses ........................................ 1.21% 1.21% 1.21% 1.22% 1.22%
Net investment income ........................... 3.97% 3.96% 4.27% 4.50% 4.85%
Portfolio turnover rate .......................... 7.48% 17.63% 6.60% 11.23% 7.56%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
Annual Report | See notes to financial statements. | 185
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2005 2004(d) 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.69 $ 10.58 $ 10.35 $ 10.18 $ 9.60
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ........................ 0.42 0.42 0.45 0.46 0.48
Net realized and unrealized gains (losses) ...... (0.15) 0.10 0.23 0.17 0.57
----------------------------------------------------------------------
Total from investment operations ................. 0.27 0.52 0.68 0.63 1.05
Less distributions from net investment income .... (0.40) (0.41) (0.45) (0.46) (0.47)
Redemption fees .................................. --(c) -- -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 10.56 $ 10.69 $ 10.58 $ 10.35 $ 10.18
======================================================================
Total return(b) .................................. 2.69% 5.04% 6.71% 6.38% 11.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 79,551 $ 81,137 $ 74,605 $ 55,692 $ 43,907
Ratios to average net assets:
Expenses ........................................ 1.21% 1.23% 1.19% 1.22% 1.22%
Net investment income ........................... 3.97% 3.94% 4.29% 4.52% 4.85%
Portfolio turnover rate .......................... 7.48% 17.63% 6.60% 11.23% 7.56%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge.
(c) Amount is less than $0.01 per share.
(d) For the year ended February 29.
186 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.7%
BONDS 98.0%
PENNSYLVANIA 91.0%
Allegheny County Airport Authority Airport Revenue, Pittsburgh International Airport,
Refunding, FGIC Insured, 5.75%, 1/01/18 .................................................... $ 1,000,000 $ 1,068,880
Allegheny County Airport Revenue, Pittsburgh International Airport, Refunding, Series B,
MBIA Insured, 5.00%, 1/01/19 ............................................................... 6,000,000 6,212,820
Allegheny County COP, AMBAC Insured, 5.00%, 12/01/28 ......................................... 4,000,000 4,141,160
Allegheny County GO, MBIA Insured, Pre-Refunded, 5.00%, 11/01/27 ............................. 1,420,000 1,574,070
Allegheny County Higher Education Building Authority Revenue, Duquesne University Project,
AMBAC Insured, 5.00%, 3/01/21 .............................................................. 1,000,000 1,029,670
Allegheny County Hospital Development Authority Revenue,
Allegheny General Hospital Project, Series A, MBIA Insured, Pre-Refunded, 6.25%,
9/01/20 .................................................................................. 10,000,000 10,878,600
Allegheny Hospital, South Hills Health System, Series A, MBIA Insured, 5.875%,
5/01/26 .................................................................................. 1,700,000 1,791,953
Health Center, Canterbury Place, AMBAC Insured, 5.375%, 12/01/21 .......................... 4,500,000 4,783,770
Health System, Series A, MBIA Insured, 6.50%, 11/15/30 .................................... 10,000,000 11,775,600
University of Pittsburgh Health Center, Refunding, Series A, MBIA Insured, 5.625%,
4/01/27 .................................................................................. 10,450,000 11,172,826
Allegheny County IDAR,
Environmental Improvement, USX Corp., Refunding, 6.10%, 1/15/18 ........................... 2,000,000 2,136,980
Environmental Improvement, USX Corp., Refunding, 5.50%, 12/01/29 .......................... 10,000,000 10,335,900
Environmental Improvement, USX Corp., Refunding, 5.60%, 9/01/30 ........................... 7,530,000 7,737,527
Series A, MBIA Insured, 5.00%, 11/01/29 ................................................... 5,000,000 5,189,750
Series B, MBIA Insured, 5.00%, 11/01/29 ................................................... 9,000,000 9,383,130
Allegheny County Port Authority Special Revenue, Transportation,
FGIC Insured, 5.00%, 3/01/25 .............................................................. 13,250,000 13,845,852
FGIC Insured, 5.00%, 3/01/29 .............................................................. 16,500,000 17,080,470
MBIA Insured, Pre-Refunded, 6.125%, 3/01/29 ............................................... 15,000,000 16,964,100
Allegheny County Residential Finance Authority Mortgage Revenue,
Ladies Grand Army Republic Health Facilities Project, Series G, FHA Insured, 6.35%,
10/01/36 ................................................................................. 1,790,000 1,833,103
SF, Series FF-2, GNMA Secured, 6.00%, 11/01/31 ............................................ 3,435,000 3,552,683
SF, Series II-2, GNMA Secured, 5.90%, 11/01/32 ............................................ 1,100,000 1,133,990
SFM, Series DD-1, GNMA Secured, 5.35%, 11/01/19 ........................................... 295,000 301,472
SFM, Series DD-2, GNMA Secured, 5.40%, 11/01/29 ........................................... 1,500,000 1,526,205
SFMR, Series T, GNMA Secured, 6.95%, 5/01/17 .............................................. 545,000 545,234
Allegheny Valley School District GO, MBIA Insured, 5.00%, 11/01/28 ........................... 1,550,000 1,627,438
Armstrong County GO, MBIA Insured, 5.40%, 6/01/31 ............................................ 2,500,000 2,660,300
Bensalem Township GO, Refunding, FGIC Insured, 5.75%, 12/01/16 ............................... 3,000,000 3,089,820
Berwick Area School District GO, Series A, FGIC Insured, 5.00%, 10/01/25 ..................... 1,000,000 1,042,610
Bradford County IDA Solid Waste Disposal Revenue, International Paper Co. Projects, Series A,
6.60%, 3/01/19 ............................................................................. 2,500,000 2,590,575
Bucks County IDAR, AMBAC Insured, 5.125%, 9/15/31 ............................................ 3,675,000 3,837,545
Butler Area School District GO, FSA Insured, 5.00%, 4/01/31 .................................. 4,000,000 4,165,720
Cambria County IDA, PCR, Pennsylvania Electric Co. Project, Refunding, Series A, MBIA Insured,
5.80%, 11/01/20 ............................................................................ 5,000,000 5,211,450
Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 ................. 3,700,000 3,976,242
Annual Report | 187
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
Chartiers Valley Industrial and Commercial Development Authority First Mortgage Revenue,
Asbury Place Project, Pre-Refunded, 6.50%, 2/01/36 ......................................... $ 4,025,000 $ 4,236,232
Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding,
5.40%, 7/01/07 ............................................................................ 1,000,000 1,001,870
5.55%, 7/01/09 ............................................................................ 2,365,000 2,375,619
5.60%, 7/01/10 ............................................................................ 600,000 600,174
5.75%, 7/01/12 ............................................................................ 1,795,000 1,798,231
5.75%, 7/01/17 ............................................................................ 700,000 684,243
5.625%, 7/01/21 ........................................................................... 1,500,000 1,410,615
Council Rock School District GO, Series A, MBIA Insured, 5.00%, 11/15/22 ..................... 5,180,000 5,444,232
Cumberland County Municipal Authority College Revenue, Dickinson College, Series A,
AMBAC Insured, 5.50%, 11/01/30 ............................................................. 1,200,000 1,300,428
Dauphin County General Authority Health System Revenue, Pinnacle Health System Project,
Refunding, MBIA Insured, 5.50%, 5/15/17 .................................................... 2,000,000 2,117,720
Dauphin County General Authority Hospital Revenue, Hapsco-Western Hospital Project,
Refunding,
Series A, MBIA Insured, 6.50%, 7/01/12 .................................................... 4,500,000 4,517,685
Series B, MBIA Insured, ETM, 6.25%, 7/01/16 ............................................... 5,000,000 5,866,200
Dauphin County General Authority Revenue, Mandatory Put 12/01/05, Sub Series 3,
AMBAC Insured, 4.75%, 6/01/26 .............................................................. 1,000,000 1,018,170
Deer Lakes School District GO, Series A, FSA Insured, 5.00%, 1/15/23 ......................... 1,000,000 1,062,720
Delaware County Authority College Revenue,
Cabrini College, Radian Insured, 5.875%, 7/01/29 .......................................... 6,385,000 6,937,941
Eastern College, Series C, 5.625%, 10/01/28 ............................................... 2,210,000 2,231,614
Haverford College, 5.75%, 11/15/29 ........................................................ 3,500,000 3,895,780
Haverford College, 6.00%, 11/15/30 ........................................................ 1,750,000 1,993,425
Delaware County Authority Revenue,
Dunwoody Village Project, 6.25%, 4/01/30 .................................................. 1,800,000 1,892,304
Health Facilities, Mercy Health Corp. Project, ETM, 6.00%, 12/15/26 ....................... 10,800,000 11,432,340
Delaware County IDAR, Philadelphia Suburban Water Co. Project, FGIC Insured, 6.00%,
6/01/29 .................................................................................... 2,000,000 2,219,440
Delaware County University Authority Revenue, Villanova University, Series A, MBIA Insured,
5.00%, 12/01/28 ............................................................................ 3,000,000 3,105,870
Delaware Valley Regional Finance Authority Local Government Revenue, Series B,
AMBAC Insured, 5.60%, 7/01/17 .............................................................. 5,000,000 5,804,050
Erie County IDA Environmental Improvement Revenue, International Paper Co. Project,
Refunding, Series B, 6.00%, 9/01/16 ........................................................ 600,000 645,954
Erie GO, Series E, FGIC Insured, 5.25%, 11/15/25 ............................................. 5,000,000 5,348,700
Erie School District GO, AMBAC Insured, Pre-Refunded, 5.80%, 9/01/29 ......................... 3,000,000 3,403,080
Greater Johnstown School District GO, Series C, MBIA Insured, 5.125%, 8/01/25 ................ 3,625,000 3,830,864
Hazleton Area School District GO, Series B, FGIC Insured, 5.00%, 3/01/23 ..................... 4,455,000 4,573,236
Hazleton Health Services Authority Hospital Revenue, Hazleton General Hospital, 5.50%,
7/01/27 .................................................................................... 1,500,000 1,311,660
Indiana County IDAR, Indiana University of Pennsylvania, Refunding, AMBAC Insured, 5.00%,
11/01/29 ................................................................................... 1,250,000 1,309,437
Johnstown RDA Sewer Revenue, Series A, FSA Insured, 5.00%, 8/15/34 ........................... 1,825,000 1,903,128
188 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
Lancaster County Hospital Authority Revenue, Health Center, Willow Valley Retirement Project,
5.875%, 6/01/21 ............................................................................ $ 1,000,000 $ 1,056,510
Latrobe IDAR, Saint Vincent College Project, 5.70%, 5/01/31 .................................. 1,500,000 1,575,810
Lehigh County General Purpose Authority Revenues,
Good Shepherd Rehabilitation Hospital, Refunding, AMBAC Insured, 5.25%, 11/15/27 .......... 5,000,000 5,195,550
Lehigh Valley Hospital, Health Network, Series A, MBIA Insured, 5.00%, 7/01/28 ............ 4,000,000 4,088,600
Lehigh Valley Hospital, Health Network, Series B, FSA Insured, 5.25%, 7/01/19 ............. 2,750,000 2,990,707
Lehigh Valley Hospital, Refunding, Series A, MBIA Insured, 5.875%, 7/01/15 ................ 1,000,000 1,030,660
Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding,
Series A, MBIA Insured, 6.15%, 8/01/29 .................................................... 5,550,000 5,747,636
Series B, MBIA Insured, 6.40%, 9/01/29 .................................................... 10,000,000 10,209,800
Lower Merion Township School District GO, Refunding, 4.375%, 5/15/18 ......................... 1,000,000 1,020,820
Luzerne County GO, Series D, FGIC Insured, 5.00%, 11/15/26 ................................... 2,000,000 2,073,060
Lycoming County Authority College Revenue, Pennsylvania College of Technology,
AMBAC Insured, 5.25%, 5/01/32 ............................................................. 5,030,000 5,321,539
Refunding, AMBAC Insured, 5.35%, 7/01/26 .................................................. 2,400,000 2,592,696
Mercer County GO, FGIC Insured, 5.00%, 10/01/31 .............................................. 2,000,000 2,063,220
Mercer County IDA Water Facilities Revenue, MBIA Insured, 6.00%, 7/01/30 ..................... 5,000,000 5,576,750
Montgomery County GO, 5.00%, 9/15/22 ......................................................... 3,335,000 3,519,159
Montgomery County Higher Education and Health Authority Revenue, Faulkeways at Gwynedd
Project, 6.75%,
11/15/24 .................................................................................. 400,000 426,080
11/15/30 .................................................................................. 1,000,000 1,063,490
Montgomery County IDA Retirement Community Revenue,
Act Retirement-Life Communities, 5.25%, 11/15/28 .......................................... 5,000,000 5,004,450
Adult Community Total Services, Refunding, Series A, 5.875%, 11/15/22 ..................... 4,850,000 4,976,488
Adult Community Total Services, Series B, 5.75%, 11/15/17 ................................. 4,000,000 4,202,040
Mount Pleasant Business District Authority Hospital Revenue, Frick Hospital, Refunding,
5.70%, 12/01/13 ........................................................................... 1,205,000 1,247,332
5.75%, 12/01/17 ........................................................................... 500,000 512,865
5.75%, 12/01/27 ........................................................................... 1,600,000 1,605,760
Muhlenberg School District GO, Series AA, FGIC Insured,
5.00%, 9/01/22 ............................................................................ 1,390,000 1,468,188
Pre-Refunded, 6.00%, 9/01/23 .............................................................. 4,000,000 4,577,560
New Wilmington Municipal Authority College Revenue, Westminster College, 5.35%,
3/01/28 .................................................................................... 2,250,000 2,274,750
Norristown Area School District GO, FGIC Insured, 5.00%, 9/01/27 ............................. 5,000,000 5,227,750
Northampton Boro Municipal Authority Water Revenue, MBIA Insured, 5.00%, 5/15/34 ............. 2,400,000 2,496,768
Northampton County IDAR, Pollution Control, Metropolitan Edison Co., Refunding, Series A,
MBIA Insured, 6.10%, 7/15/21 ............................................................... 6,100,000 6,306,241
Norwin School District GO,
FGIC Insured, Pre-Refunded, 6.00%, 4/01/30 ................................................ 5,000,000 5,693,900
Series A, MBIA Insured, 5.00%, 4/01/30 .................................................... 1,000,000 1,030,050
Series B, MBIA Insured, 5.00%, 4/01/31 .................................................... 6,390,000 6,553,776
Pennsbury School District GO, FGIC Insured, 5.00%, 1/15/22 ................................... 2,835,000 2,992,002
Pennsylvania Convention Center Authority Revenue, Refunding, Series A, 6.60%, 9/01/09 ........ 5,000,000 5,116,700
Annual Report | 189
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue,
MacMillan LP Project, Pre-Refunded, 7.60%, 12/01/20 ........................................ $ 3,000,000 $ 3,173,670
Pennsylvania Economic Development Financing Authority Revenue, Lincoln University, Series A,
FGIC Insured, 5.00%, 6/01/33 ............................................................... 3,325,000 3,459,596
Pennsylvania EDA Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%,
12/01/15 ................................................................................... 5,000,000 5,123,850
Pennsylvania HFAR,
SF, 5.25%, 4/01/21 ........................................................................ 7,000,000 7,090,790
SFM, Series 67A, 5.85%, 10/01/18 .......................................................... 1,405,000 1,455,959
Pennsylvania Intergovernmental Cooperative Authority Special Tax Revenue, Philadelphia
Funding Program, FGIC Insured, Pre-Refunded, 7.00%, 6/15/14 ................................ 6,000,000 6,086,100
Pennsylvania State Higher Educational Facilities Authority College and University Revenues,
Allegheny College, Series B, 6.125%, 11/01/13 ............................................. 90,000 90,672
Marywood University Project, MBIA Insured, 5.65%, 6/01/25 ................................. 2,500,000 2,803,675
Pennsylvania State Higher Educational Facilities Authority Health Services Revenue,
Allegheny Delaware Valley Obligation Group, Refunding, Series A, MBIA Insured, 5.875%,
11/15/21 ................................................................................. 17,000,000 18,015,240
University of Pennsylvania Health Services, Refunding, Series A, 5.75%, 1/01/22 ........... 10,000,000 10,374,000
Pennsylvania State Higher Educational Facilities Authority Revenue,
Bryn Mawr College, AMBAC Insured, 5.125%, 12/01/29 ........................................ 1,500,000 1,567,800
Drexel University, Refunding, MBIA Insured, 5.75%, 5/01/22 ................................ 4,000,000 4,322,720
Drexel University, Series A, 5.00%, 5/01/20 ............................................... 1,485,000 1,555,122
Drexel University, Series A, 5.20%, 5/01/29 ............................................... 750,000 789,615
Philadelphia College of Textiles and Science, 6.75%, 4/01/20 .............................. 3,040,000 3,129,802
State System of Higher Education, Series N, MBIA Insured, Pre-Refunded, 5.80%,
6/15/24 .................................................................................. 4,000,000 4,172,760
State System of Higher Education, Series R, FSA Insured, 5.00%, 6/15/24 ................... 3,140,000 3,307,802
Temple University, 7.40%, 10/01/10 ........................................................ 30,000 30,137
Temple University, First Series, MBIA Insured, 5.00%, 7/15/31 ............................. 3,000,000 3,104,430
University Sciences Philadelphia, Series A, XLCA Insured, 5.00%, 11/01/36 ................. 8,315,000 8,657,495
Widener University, 5.00%, 7/15/31 ........................................................ 500,000 504,805
Pennsylvania State Public School Building Authority Revenue,
Career Institute of Technology, FGIC Insured, 5.00%, 11/15/28 ............................. 1,000,000 1,047,980
Central Montgomery County Area, FGIC Insured, 5.00%, 5/15/24 .............................. 2,500,000 2,649,200
Lehigh Career and Technical Institution, MBIA Insured, 5.00%, 10/01/31 .................... 1,000,000 1,031,610
Pennsylvania State Turnpike Commission Oil Franchise Tax Revenue, Series B, MBIA Insured,
5.00%,
12/01/24 .................................................................................. 1,655,000 1,749,716
12/01/31 .................................................................................. 5,000,000 5,200,750
Pennsylvania State Turnpike Commission Revenue, AMBAC Insured, 5.00%,
7/15/28 ................................................................................... 10,000,000 10,427,900
7/15/31 ................................................................................... 13,820,000 14,348,891
Pennsylvania State Turnpike Commission Turnpike Revenue,
Series A, AMBAC Insured, 5.00%, 12/01/34 .................................................. 5,000,000 5,219,200
Series R, AMBAC Insured, 5.00%, 12/01/26 .................................................. 2,000,000 2,099,680
Pennsylvania State Turnpike Oil Commission Franchise Tax Revenue, Series R, AMBAC Insured,
5.00%, 12/01/30 ............................................................................ 11,125,000 11,573,226
190 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
Pennsylvania State University Revenue, 5.00%, 9/01/35 ........................................ $ 1,000,000 $ 1,045,720
Philadelphia Airport Revenue, Philadelphia Airport System, Series A, AMBAC Insured, 6.10%,
6/15/25 .................................................................................... 5,000,000 5,148,900
Philadelphia Authority For IDR, Series B, AMBAC Insured, 5.25%, 7/01/31 ...................... 2,000,000 2,120,580
Philadelphia Gas Works Revenue, 12th Series B, MBIA Insured, ETM, 7.00%, 5/15/20 ............. 1,000,000 1,239,230
Philadelphia Hospitals and Higher Educational Facilities Authority Revenue,
Frankford Hospital, Series A, ETM, 6.00%, 6/01/14 ......................................... 2,305,000 2,327,266
Temple University Hospital, 5.875%, 11/15/23 .............................................. 5,000,000 5,028,350
Philadelphia Housing Authority Capital Fund Program Revenue, Series A, FSA Insured, 5.00%,
12/01/21 ................................................................................... 5,000,000 5,338,950
Philadelphia IDA Lease Revenue, Series B, FSA Insured, 5.125%, 10/01/26 ...................... 12,000,000 12,721,680
Philadelphia Parking Authority Parking Revenue, Airport, FSA Insured, 5.25%,
9/01/22 ................................................................................... 3,250,000 3,471,845
9/01/29 ................................................................................... 13,000,000 13,856,830
(a)Philadelphia RDA Revenue, Neighborhood Transformation, Series C, FGIC Insured, 5.00%,
4/15/31 .................................................................................... 4,000,000 4,170,840
Philadelphia School District GO,
Series B, AMBAC Insured, Pre-Refunded, 5.375%, 4/01/19 .................................... 1,000,000 1,057,420
Series C, MBIA Insured, Pre-Refunded, 5.75%, 3/01/29 ...................................... 8,000,000 8,981,840
Series D, FGIC Insured, 5.125%, 6/01/34 ................................................... 5,000,000 5,295,950
Philadelphia Water and Wastewater Revenue, Series A, FGIC Insured, 5.00%, 11/01/31 ........... 7,515,000 7,785,315
Pittsburgh Public Parking Authority Parking Revenue, AMBAC Insured, 6.00%, 12/01/24 .......... 2,000,000 2,251,820
Pittsburgh Urban RDA Mortgage Revenue,
Series C, GNMA Secured, 5.70%, 4/01/30 .................................................... 1,370,000 1,398,592
Series D, 6.25%, 10/01/17 ................................................................. 1,695,000 1,750,104
Pittsburgh Urban RDA Tax Allocation, 6.10%, 5/01/19 .......................................... 1,000,000 1,101,440
Pittsburgh Water and Sewer System Authority Revenue, Refunding, FGIC Insured, ETM, 7.25%,
9/01/14 .................................................................................... 1,250,000 1,486,475
Plum Boro School District GO, FGIC Insured, 5.25%, 9/15/30 ................................... 8,870,000 9,355,721
Sayre Health Care Facilities Authority Revenue, Guthrie Health, Series A, 5.875%, 12/01/31 ... 2,500,000 2,640,450
Seneca Valley School District GO, MBIA Insured, 5.375%, 1/01/21 .............................. 2,000,000 2,182,740
South Fork Municipal Authority Hospital Revenue, Conemaugh Valley Memorial Hospital Project,
Series A, MBIA Insured, 5.75%, 7/01/26 ..................................................... 10,000,000 10,570,100
Southcentral General Authority Revenue, Wellspan Health Obligated, Refunding, MBIA Insured,
5.25%, 5/15/31 ............................................................................. 10,000,000 10,487,600
Southeastern Pennsylvania Transportation Authority Special Revenue, FGIC Insured, 5.375%,
3/01/22 .................................................................................... 3,000,000 3,203,760
Southern Lehigh School District GO, Series A, FGIC Insured, 5.00%, 9/01/25 ................... 6,900,000 7,229,130
State Public School Building Authority College Revenue, Westmoreland County Community
College, FGIC Insured, 5.25%, 10/15/22 ..................................................... 2,170,000 2,355,383
Annual Report | 191
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
State Public School Building Authority School Revenue,
Daniel Boone School District Project, MBIA Insured, 5.00%, 4/01/28 ........................ $ 10,000,000 $ 10,431,500
Northwestern School District Project, Series E, FGIC Insured, 5.75%, 1/15/19 .............. 3,000,000 3,282,900
Philadelphia School District Project, FSA Insured, 5.00%, 6/01/33 ......................... 37,170,000 38,461,658
Susquehanna Area Regional Airport Authority Revenue, Series A, AMBAC Insured, 5.00%,
1/01/28 .................................................................................... 2,000,000 2,037,480
University of Pittsburgh Revenue, Higher Education, Refunding, Series B, MBIA Insured, 5.00%,
6/01/21 .................................................................................... 10,000,000 10,398,100
Upper St. Clair Township School District GO,
FSA Insured, 5.00%, 7/15/28 ............................................................... 1,000,000 1,039,900
Refunding, 5.20%, 7/15/27 ................................................................. 5,000,000 5,297,550
Washington County Authority Revenue, Capital Projects and Equipment Program, Refunding,
AMBAC Insured, 6.15%, 12/01/29 ............................................................. 2,200,000 2,318,162
Washington County GO, Series A, AMBAC Insured, 5.125%, 9/01/27 ............................... 5,000,000 5,281,550
West Allegheny School District GO, Refunding, Series D, FGIC Insured, 4.75%,
9/01/19 ................................................................................... 2,000,000 2,084,540
9/01/20 ................................................................................... 3,805,000 3,954,080
-------------
750,664,758
-------------
U.S. TERRITORIES 7.0%
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.00%, 7/01/29 ............................................................................ 4,000,000 4,153,840
5.00%, 7/01/33 ............................................................................ 30,000,000 30,862,500
Pre-Refunded, 5.00%, 7/01/27 .............................................................. 10,590,000 11,731,072
Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series I, 5.00%, 7/01/36 ......... 5,950,000 6,137,604
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 ......... 5,000,000 5,169,000
-------------
58,054,016
-------------
TOTAL BONDS (COST $759,988,162) .............................................................. 808,718,774
-------------
ZERO COUPON/STEP-UP BONDS 0.7%
PENNSYLVANIA 0.7%
Pennsylvania HFA, SFMR,
Series 63A, 4/01/30 ....................................................................... 10,885,000 2,677,165
Series 64, zero cpn. to 10/01/08, 5.25% thereafter, 4/01/30 ............................... 4,040,000 3,371,259
-------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $6,145,370) ............................................ 6,048,424
-------------
TOTAL LONG TERM INVESTMENTS (COST $766,133,532) .............................................. 814,767,198
-------------
192 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 0.3%
BONDS 0.3%
PENNSYLVANIA 0.3%
(b)Lehigh County General Purpose Authority Revenues, St. Lukes Hospital Project, Daily VRDN
and Put, 1.79%, 7/01/31 .................................................................... $ 2,200,000 $ 2,200,000
(b)York General Authority Pooled Financing Revenue, Sub Series A, AMBAC Insured, Weekly VRDN
and Put, 1.86%, 9/01/26 .................................................................... 300,000 300,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $2,500,000) ............................................... 2,500,000
-------------
TOTAL INVESTMENTS (COST $768,633,532) 99.0% .................................................. 817,267,198
OTHER ASSETS, LESS LIABILITIES 1.0% .......................................................... 8,000,923
-------------
NET ASSETS 100.0% ............................................................................ $ 825,268,121
=============
See Glossary of Terms on page 194.
(a) See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
(b) 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.
Annual Report | See notes to financial statements. | 193
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (CONTINUED)
GLOSSARY OF TERMS
1915 ACT - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
ACA - American Capital Access Holdings Inc.
ACES - Adjustable Convertible Exempt Securities
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
BIG - Bond Investors Insurance Co. (acquired by MBIA in
1989 and no longer does business under this name)
CDA - Community Development Authority/Agency
CDD - Community Development District
CFD - Community Facilities District
COP - Certificate of Participation
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority/Agency Revenue
HFR - Housing Finance Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
ID - Improvement District
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
IDB - Industrial Development Bond/Board
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
LLC - Limited Liability Corp.
LP - Limited Partnership
MAC - Municipal Assistance Corp.
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
MF - Multi-Family
MFH - Multi-Family Housing
MFHR - Multi-Family Housing Revenue
MFR - Multi-Family Revenue
MTA - Metropolitan Transit Authority
MUD - Municipal Utility District
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFAR - Public Financing Authority Revenue
RAN - Revenue Anticipation Notes
RDA - Redevelopment Agency/Authority
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
UHSD - Unified/Union High School District
USD - Unified/Union School District
XLCA - XL Capital Assurance
194 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2005
----------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT DOUBLE
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------------
Assets:
Investments in securities:
Cost ...................................................... $ 850,230,375 $ 354,565,860 $ 270,870,045 $ 330,601,467
================================================================
Value ..................................................... 909,905,705 380,605,755 287,085,300 349,872,878
Cash ....................................................... 4,336,132 772,721 262,799 1,447,830
Receivables:
Investment securities sold ................................ -- 6,269,726 -- --
Capital shares sold ....................................... 1,415,054 682,323 281,185 2,368,362
Interest .................................................. 10,199,087 5,521,102 3,413,107 4,069,735
----------------------------------------------------------------
Total assets .......................................... 925,855,978 393,851,627 291,042,391 357,758,805
----------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... -- 5,353,799 -- 1,573,685
Capital shares redeemed ................................... 3,719,332 260,528 369,916 378,950
Affiliates ................................................ 472,954 226,996 176,303 212,400
Distributions to shareholders .............................. 1,159,357 505,359 228,733 430,312
Other liabilities .......................................... 87,864 41,584 39,668 47,479
----------------------------------------------------------------
Total liabilities ..................................... 5,439,507 6,388,266 814,620 2,642,826
----------------------------------------------------------------
Net assets, at value ................................. $ 920,416,471 $ 387,463,361 $ 290,227,771 $ 355,115,979
================================================================
Net assets consist of:
Undistributed net investment income (distributions in
excess of net investment income) .......................... $ (854,672) $ (188,421) $ 12,336 $ (291,461)
Net unrealized appreciation (depreciation) ................. 59,675,330 26,039,895 16,215,255 19,271,411
Accumulated net realized gain (loss) ....................... (20,108,487) (7,490,312) (5,972,411) (200,921)
Capital shares ............................................. 881,704,300 369,102,199 279,972,591 336,336,950
----------------------------------------------------------------
Net assets, at value ................................. $ 920,416,471 $ 387,463,361 $ 290,227,771 $ 355,115,979
================================================================
Annual Report | See notes to financial statements. | 195
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
----------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT DOUBLE
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------------
CLASS A:
Net assets, at value ....................................... $ 852,608,067 $ 346,588,843 $ 249,286,141 $ 309,495,003
================================================================
Shares outstanding ......................................... 76,031,101 28,775,592 22,441,471 25,815,648
================================================================
Net asset value per share(a) ............................... $ 11.21 $ 12.04 $ 11.11 $ 11.99
================================================================
Maximum offering price per share (net asset value
per share / 95.75%) ....................................... $ 11.71 $ 12.57 $ 11.60 $ 12.52
================================================================
CLASS B:
Net assets, at value ....................................... $ 23,753,310 -- -- --
================================================================
Shares outstanding ......................................... 2,106,834 -- -- --
================================================================
Net asset value and maximum offering price per share(a) .... $ 11.27 -- -- --
================================================================
CLASS C:
Net assets, at value ....................................... $ 44,055,094 $ 40,874,518 $ 40,941,630 $ 45,620,976
================================================================
Shares outstanding ......................................... 3,892,517 3,370,782 3,668,989 3,793,557
================================================================
Net asset value and maximum offering price per share(a) .... $ 11.32 $ 12.13 $ 11.16 $ 12.03
================================================================
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
196 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
-------------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE-TERM LIMITED-TERM HIGH YIELD NEW JERSEY
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------
Assets:
Investments in securities:
Cost ...................................................... $ 498,272,804 $ 35,500,405 $5,204,474,533 $ 918,912,086
===================================================================
Value ..................................................... 516,499,043 35,312,130 5,504,074,935 983,562,024
Cash ....................................................... 78,599 89,872 179,125 49,046
Receivables:
Capital shares sold ....................................... 2,533,523 32,597 13,794,558 1,680,704
Interest .................................................. 5,617,295 232,819 87,590,382 10,749,572
Affiliates ................................................ -- 4,931 -- --
-------------------------------------------------------------------
Total assets .......................................... 524,728,460 35,672,349 5,605,639,000 996,041,346
-------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... 4,479,395 -- 24,085,702 --
Capital shares redeemed ................................... 1,983,396 2,361,914 10,848,423 1,500,146
Affiliates ................................................ 279,126 23,510 3,044,876 576,078
Distributions to shareholders .............................. 546,785 18,433 5,378,483 787,848
Other liabilities .......................................... 61,766 14,269 493,650 95,594
-------------------------------------------------------------------
Total liabilities ..................................... 7,350,468 2,418,126 43,851,134 2,959,666
-------------------------------------------------------------------
Net assets, at value ................................. $ 517,377,992 $ 33,254,223 $5,561,787,866 $ 993,081,680
===================================================================
Net assets consist of:
Undistributed net investment income (distributions in
excess of net investment income) .......................... $ (311,780) $ 50,665 $ 377,426 $ 231,646
Net unrealized appreciation (depreciation) ................. 18,226,239 (188,275) 299,600,402 64,649,938
Accumulated net realized gain (loss) ....................... (4,842,436) 206 (397,425,403) (3,330,001)
Capital shares ............................................. 504,305,969 33,391,627 5,659,235,441 931,530,097
-------------------------------------------------------------------
Net assets, at value ................................. $ 517,377,992 $ 33,254,223 $5,561,787,866 $ 993,081,680
===================================================================
Annual Report | See notes to financial statements. | 197
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
-------------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE-TERM LIMITED-TERM HIGH YIELD NEW JERSEY
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------
CLASS A:
Net assets, at value ....................................... $ 493,993,546 $ 33,254,223 $4,714,803,891 $ 792,517,894
===================================================================
Shares outstanding ......................................... 42,907,242 3,327,444 436,270,999 65,077,113
===================================================================
Net asset value per share(a) ............................... $ 11.51 $ 9.99 $ 10.81 $ 12.18
===================================================================
Maximum offering price per share (net asset value
per share / 97.75%, 100%, 95.75% and 95.75%,
respectively) ............................................. $ 11.77 $ 9.99 $ 11.29 $ 12.72
===================================================================
CLASS B:
Net assets, at value ....................................... -- -- $ 258,063,368 $ 83,208,091
===================================================================
Shares outstanding ......................................... -- -- 23,732,866 6,796,484
===================================================================
Net asset value and maximum offering price
per share(a) .............................................. -- -- $ 10.87 $ 12.24
===================================================================
CLASS C:
Net assets, at value ....................................... $ 23,384,446 -- $ 588,920,607 $ 117,355,695
===================================================================
Shares outstanding ......................................... 2,028,027 -- 53,964,813 9,565,877
===================================================================
Net asset value and maximum offering price
per share(a) .............................................. $ 11.53 -- $ 10.91 $ 12.27
===================================================================
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
198 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
------------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------
Assets:
Investments in securities:
Cost ...................................................... $ 602,637,412 $ 768,633,532
==============================
Value ..................................................... 641,589,427 817,267,198
Cash ....................................................... 38,464 1,716,162
Receivables:
Capital shares sold ....................................... 862,277 1,038,494
Interest .................................................. 6,942,772 12,573,501
------------------------------
Total assets .......................................... 649,432,940 832,595,355
------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... 2,224,540 4,200,760
Capital shares redeemed ................................... 686,765 1,495,348
Affiliates ................................................ 353,233 471,546
Distributions to shareholders .............................. 510,213 1,057,204
Other liabilities .......................................... 67,550 102,376
------------------------------
Total liabilities ..................................... 3,842,301 7,327,234
------------------------------
Net assets, at value ................................. $ 645,590,639 $ 825,268,121
==============================
Net assets consist of:
Undistributed net investment income (distributions
in excess of net investment income) ....................... $ 452,150 $ (165,121)
Net unrealized appreciation (depreciation) ................. 38,952,015 48,633,666
Accumulated net realized gain (loss) ....................... (7,019,217) (10,782,727)
Capital shares ............................................. 613,205,691 787,582,303
------------------------------
Net assets, at value ................................. $ 645,590,639 $ 825,268,121
==============================
Annual Report | See notes to financial statements. | 199
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2005
------------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------
CLASS A:
Net assets, at value ....................................... $ 570,324,209 $ 693,803,855
==============================
Shares outstanding ......................................... 47,914,987 66,193,676
==============================
Net asset value per share(a) ............................... $ 11.90 $ 10.48
==============================
Maximum offering price per share (net asset value
per share / 95.75%) ....................................... $ 12.43 $ 10.95
==============================
CLASS B:
Net assets, at value ....................................... -- $ 51,913,488
==============================
Shares outstanding ......................................... -- 4,937,112
==============================
Net asset value and maximum offering price per share(a) .... -- $ 10.51
==============================
CLASS C:
Net assets, at value ....................................... $ 75,266,430 $ 79,550,778
==============================
Shares outstanding ......................................... 6,267,410 7,536,162
==============================
Net asset value and maximum offering price per share(a) .... $ 12.01 $ 10.56
==============================
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
200 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2005
----------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT DOUBLE
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------------
Investment income:
Interest ................................................... $ 47,491,157 $ 19,294,772 $ 15,099,715 $ 16,944,541
----------------------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 4,391,683 1,919,282 1,562,525 1,767,594
Distribution fees: (Note 3)
Class A ................................................... 853,294 328,672 251,730 291,897
Class B ................................................... 153,547 -- -- --
Class C ................................................... 274,337 266,733 257,229 284,181
Transfer agent fees (Note 3) ............................... 330,520 161,636 133,801 193,935
Custodian fees ............................................. 15,355 5,565 4,845 5,686
Reports to shareholders .................................... 50,243 23,661 22,078 32,354
Registration and filing fees ............................... 25,053 8,043 9,232 42,920
Professional fees .......................................... 24,544 17,807 17,922 18,712
Trustees' fees and expenses ................................ 8,959 3,577 2,840 3,235
Pricing fees ............................................... 32,354 19,344 15,882 13,922
Other ...................................................... 42,337 16,726 11,977 13,300
----------------------------------------------------------------
Total expenses ........................................ 6,202,226 2,771,046 2,290,061 2,667,736
----------------------------------------------------------------
Net investment income ................................ 41,288,931 16,523,726 12,809,654 14,276,805
----------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .................. 1,727,327 206,978 796,427 (208,136)
Net change in unrealized appreciation (depreciation)
on investments ............................................ (3,113,142) (4,938,491) (1,654,695) (1,635,143)
----------------------------------------------------------------
Net realized and unrealized gain (loss) ..................... (1,385,815) (4,731,513) (858,268) (1,843,279)
----------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 39,903,116 $ 11,792,213 $ 11,951,386 $ 12,433,526
================================================================
Annual Report | See notes to financial statements. | 201
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2005
-------------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE-TERM LIMITED-TERM HIGH YIELD NEW JERSEY
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------
Investment income:
Interest ................................................... $ 20,887,976 $ 619,314 $ 322,491,005 $ 48,856,157
-------------------------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 2,414,792 155,408 24,253,538 4,549,032
Administrative fees (Note 3) ............................... -- 62,144 -- --
Distribution fees: (Note 3)
Class A ................................................... 458,866 46,537 4,257,896 761,237
Class B ................................................... -- -- 1,616,750 517,546
Class C ................................................... 111,484 -- 3,638,114 717,409
Transfer agent fees (Note 3) ............................... 223,368 11,137 2,593,239 464,136
Custodian fees ............................................. 7,319 575 90,068 16,121
Reports to shareholders .................................... 37,540 600 379,576 67,492
Registration and filing fees ............................... 64,553 35,912 154,706 19,261
Amortization of offering costs ............................. -- 6,679 -- --
Professional fees .......................................... 21,692 13,334 100,342 26,544
Trustees' fees and expenses ................................ 4,546 334 51,048 9,200
Pricing fees ............................................... 36,454 19,211 132,874 33,043
Other ...................................................... 18,696 72 224,856 40,640
-------------------------------------------------------------------
Total expenses ........................................ 3,399,310 351,943 37,493,007 7,221,661
Expenses waived/paid by affiliate (Note 3) ............ -- (196,991) -- --
-------------------------------------------------------------------
Net expenses ......................................... 3,399,310 154,952 37,493,007 7,221,661
-------------------------------------------------------------------
Net investment income ............................... 17,488,666 464,362 284,997,998 41,634,496
-------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .................. (179,875) 206 (11,796,989) 156,918
Net change in unrealized appreciation (depreciation)
on investments ............................................ (9,898,425) (381,041) 29,290,187 (5,010,006)
-------------------------------------------------------------------
Net realized and unrealized gain (loss) ..................... (10,078,300) (380,835) 17,493,198 (4,853,088)
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ............................................ $ 7,410,366 $ 83,527 $ 302,491,196 $ 36,781,408
===================================================================
202 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2005
------------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------
Investment income:
Interest ................................................... $ 31,657,757 $ 42,688,440
------------------------------
Expenses:
Management fees (Note 3) ................................... 3,070,648 3,947,346
Distribution fees: (Note 3)
Class A ................................................... 549,327 691,511
Class B ................................................... -- 326,485
Class C ................................................... 488,303 512,627
Transfer agent fees (Note 3) ............................... 261,417 486,779
Custodian fees ............................................. 10,583 12,193
Reports to shareholders .................................... 43,906 72,486
Registration and filing fees ............................... 7,452 14,639
Professional fees .......................................... 19,876 24,188
Trustees' fees and expenses ................................ 6,021 7,987
Pricing fees ............................................... 27,939 31,306
Other ...................................................... 25,158 37,230
------------------------------
Total expenses ........................................ 4,510,630 6,164,777
------------------------------
Net investment income ................................ 27,147,127 36,523,663
------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .................. 781,256 (902,014)
Net change in unrealized appreciation (depreciation)
on investments ............................................ (3,140,388) (11,875,511)
------------------------------
Net realized and unrealized gain (loss) ..................... (2,359,132) (12,777,525)
------------------------------
Net increase (decrease) in net assets resulting from
operations ................................................ $ 24,787,995 $ 23,746,138
==============================
Annual Report | See notes to financial statements. | 203
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended February 28, 2005 and February 29, 2004
----------------------------------------------------------------
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 41,288,931 $ 44,369,039 $ 16,523,726 $ 17,015,255
Net realized gain (loss) from investments ................. 1,727,327 (20,658,598) 206,978 (4,268,593)
Net change in unrealized appreciation (depreciation)
on investments ........................................... (3,113,142) 48,316,889 (4,938,491) 10,100,721
----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... 39,903,116 72,027,330 11,792,213 22,847,383
----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................. (38,667,506) (41,679,586) (15,082,471) (15,005,597)
Class B .................................................. (935,269) (960,327) -- --
Class C .................................................. (1,657,454) (1,665,537) (1,645,251) (1,680,274)
----------------------------------------------------------------
Total distributions to shareholders ........................ (41,260,229) (44,305,450) (16,727,722) (16,685,871)
----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................................. (46,750,859) (5,539,682) 11,804,223) (12,213,413)
Class B .................................................. (1,809,447) 4,251,835 -- --
Class C .................................................. 1,042,649 4,484,816 (1,614,541) (1,385,337)
----------------------------------------------------------------
Total capital share transactions ........................... (47,517,657) 3,196,969 10,189,682 (13,598,750)
----------------------------------------------------------------
Redemption fees ............................................ 786 -- 429 --
----------------------------------------------------------------
Net increase (decrease) in net assets ................. (48,873,984) 30,918,849 5,254,602 (7,437,238)
Net assets:
Beginning of year .......................................... 969,290,455 938,371,606 382,208,759 389,645,997
----------------------------------------------------------------
End of year ................................................ $ 920,416,471 $ 969,290,455 $ 387,463,361 $ 382,208,759
================================================================
Undistributed net investment income (distributions in
excess of net investment income) included in net assets:
End of year .............................................. $ (854,672) $ (763,973) $ (188,421) $ 36,763
================================================================
204 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005 and February 29, 2004
----------------------------------------------------------------
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 12,809,654 $ 13,643,214 $ 14,276,805 $ 13,923,913
Net realized gain (loss) from investments ................. 796,427 (3,507,772) (208,136 576,099
Net change in unrealized appreciation (depreciation)
on investments ........................................... (1,654,695) 3,545,453 (1,635,143) 5,153,880
----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... 11,951,386 13,680,895 12,433,526 19,653,892
----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................. (11,092,234) (11,965,537) (12,689,625) (12,518,487)
Class C .................................................. (1,511,304) (1,720,192) (1,653,747) (1,486,625)
Net realized gains:
Class A .................................................. -- -- (512,949) (801,023)
Class C .................................................. -- -- (78,981) (110,991)
----------------------------------------------------------------
Total distributions to shareholders ........................ (12,603,538) (13,685,729) (14,935,302) (14,917,126)
----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................................. (16,092,920) (13,448,720) 12,878,744 21,517,610
Class C .................................................. (1,698,306) (3,410,293) 434,818 14,074,696
----------------------------------------------------------------
Total capital share transactions ........................... (17,791,226) (16,859,013) 13,313,562 35,592,306
----------------------------------------------------------------
Redemption fees ............................................ 46 -- 11 --
----------------------------------------------------------------
Net increase (decrease) in net assets ................. (18,443,332) (16,863,847) 10,811,797 40,329,072
Net assets:
Beginning of year .......................................... 308,671,103 325,534,950 344,304,182 303,975,110
----------------------------------------------------------------
End of year ................................................ $ 290,227,771 $ 308,671,103 $ 355,115,979 $ 344,304,182
================================================================
Undistributed net investment income (distributions in
excess of net investment income) included in net assets:
End of year .............................................. $ 12,336 $ (193,783) $ (291,461) $ (217,680)
================================================================
Annual Report | See notes to financial statements. | 205
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005 and February 29, 2004
----------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
2005 2004 2005 2004(a)
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 17,488,666 $ 15,594,045 $ 464,362 $ 106,002
Net realized gain (loss) from investments ................. (179,875) (668,601) 206 --
Net change in unrealized appreciation (depreciation)
on investments ........................................... (9,898,425) 11,104,148 (381,041) 192,766
----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... 7,410,366 26,029,592 83,527 298,768
----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................. (16,962,096) (15,561,514) (448,664) (98,401)
Class C .................................................. (532,561) (130,067) -- --
----------------------------------------------------------------
Total distributions to shareholders ........................ (17,494,657) (15,691,581) (448,664) (98,401)
----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................................. 48,951,903 79,906,840 9,337,704 24,081,236
Class C .................................................. 12,385,654 10,835,484 -- --
----------------------------------------------------------------
Total capital share transactions ........................... 61,337,557 90,742,324 9,337,704 24,081,236
----------------------------------------------------------------
Redemption fees ............................................ 1,239 -- 53 --
----------------------------------------------------------------
Net increase (decrease) in net assets ................. 51,254,505 101,080,335 8,972,620 24,281,603
Net assets:
Beginning of year .......................................... 466,123,487 365,043,152 24,281,603 --
----------------------------------------------------------------
End of year ................................................ $ 517,377,992 $ 466,123,487 $ 33,254,223 $ 24,281,603
================================================================
Undistributed net investment income (distributions in
excess of net investment income) included in net assets:
End of year ............................................... $ (311,780) $ (294,830) $ 50,665 $ 28,288
================================================================
(a) For the period September 2, 2003 (commencement of operations) to February
29, 2004.
206 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005 and February 29, 2004
-----------------------------------------------------------------
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-----------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 284,997,998 $ 286,526,945 $ 41,634,496 $ 42,468,053
Net realized gain (loss) from investments ................. (11,796,989) (38,082,554) 156,918 (2,542,310)
Net change in unrealized appreciation
(depreciation) on investments ............................ 29,290,187 228,390,197 (5,010,006) 17,189,050
-----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............................ 302,491,196 476,834,588 36,781,408 57,114,793
-----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................. (248,448,873) (248,671,196) (34,104,152) (34,707,901)
Class B .................................................. (12,281,729) (11,645,618) (3,122,545) (2,905,134)
Class C .................................................. (27,436,196) (26,532,844) (4,294,186) (4,103,439)
-----------------------------------------------------------------
Total distributions to shareholders ........................ (288,166,798) (286,849,658) (41,520,883) (41,716,474)
-----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................................. 132,203,769 (825,832) 9,504,530 (4,144,978)
Class B .................................................. 6,439,759 30,081,118 3,230,492 11,028,108
Class C .................................................. 21,983,330 36,679,192 5,996,810 9,687,573
-----------------------------------------------------------------
Total capital share transactions ........................... 160,626,858 65,934,478 18,731,832 16,570,703
-----------------------------------------------------------------
Redemption fees ............................................ 4,393 -- 1,071 --
-----------------------------------------------------------------
Net increase (decrease) in net assets ................. 174,955,649 255,919,408 13,993,428 31,969,022
Net assets:
Beginning of year .......................................... 5,386,832,217 5,130,912,809 979,088,252 947,119,230
-----------------------------------------------------------------
End of year ................................................ $5,561,787,866 $5,386,832,217 $ 993,081,680 $ 979,088,252
=================================================================
Undistributed net investment income included in net assets:
End of year ............................................... $ 377,426 $ 3,600,097 $ 231,646 $ 141,350
=================================================================
Annual Report | See notes to financial statements. | 207
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the years ended February 28, 2005 and February 29, 2004
----------------------------------------------------------------
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 27,147,127 $ 28,647,818 $ 36,523,663 $ 37,611,322
Net realized gain (loss) from investments ................. 781,256 (1,314,156) (902,014) 550,793
Net change in unrealized appreciation (depreciation)
on investments ........................................... (3,140,388) 13,960,130 (11,875,511) 7,829,296
----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... 24,787,995 41,293,792 23,746,138 45,991,411
----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................. (24,742,852) (24,553,481) (31,034,808) (32,515,147)
Class B .................................................. -- -- (1,967,837) (1,754,982)
Class C .................................................. (2,947,314) (3,058,350) (3,072,697) (3,025,043)
----------------------------------------------------------------
Total distributions to shareholders ........................ (27,690,166) (27,611,831) (36,075,342) (37,295,172)
----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................................. 17,883,809 (16,629,365) (28,676,995) 2,769,101
Class B .................................................. -- -- 2,461,581 13,027,305
Class C .................................................. (4,370,057) 2,904,472 (434,738 5,710,499
----------------------------------------------------------------
Total capital share transactions ........................... 13,513,752 (13,724,893) (26,650,152) 21,506,905
----------------------------------------------------------------
Redemption fees ............................................ 24 -- 57 --
----------------------------------------------------------------
Net increase (decrease) in net assets ................. 10,611,605 (42,932) (38,979,299) 30,203,144
Net assets:
Beginning of year .......................................... 634,979,034 635,021,966 864,247,420 834,044,276
----------------------------------------------------------------
End of year ................................................ $ 645,590,639 $ 634,979,034 $ 825,268,121 $ 864,247,420
================================================================
Undistributed net investment income (distributions in
excess of net investment income) included in net assets:
End of year ............................................... $ 452,150 $ 1,034,875 $ (165,121) $ (587,643)
================================================================
208 | See notes to financial statements. | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Free Trust (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of twenty-five
separate series. All funds included in this report (the Funds) are diversified
except the Franklin Connecticut Tax-Free Income Fund and the Franklin Federal
Intermediate-Term Tax-Free Income Fund. The financial statements of the
remaining funds in the series are presented separately. The investment objective
of the Funds is to provide tax-free income.
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange. The Trust'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 Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. 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 Trust's Board of Trustees.
B. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds 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
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
C. INCOME TAXES
No provision has been made for U.S. income taxes because each fund's policy is
to qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute substantially all of its income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
Annual Report | 209
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividends from net investment income are normally declared daily and
distributed monthly to shareholders. Other distributions are recorded on the
ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets. Other expenses are
charged to each fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
E. OFFERING COSTS
Offering costs are amortized on a straight line basis over twelve months.
F. 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.
G. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of the Funds' shares held five
trading days or less may be subject to the Funds' redemption fee, which is 2% of
the amount redeemed. Such fees are retained by the Funds and accounted for as
additional paid-in capital as noted in the Statements of Changes in Net Assets.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liability arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. However, based on experience, the
Trust expects the risk of loss to be remote.
210 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective March 1, 2005, Class B shares will no longer be offered except to
existing Class B shareholders through reinvested distributions or exchanges to
other Franklin Templeton funds' Class B shares, as permitted by the applicable
fund prospectus. 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.
- --------------------------------------------------------------------------------------------------------------
CLASS A CLASS A & CLASS C CLASS A, CLASS B, & CLASS C
- --------------------------------------------------------------------------------------------------------------
Franklin Federal Limited-Term Franklin Colorado Tax-Free Franklin Arizona Tax-Free
Tax-Free Income Fund Income Fund Income Fund
Franklin Connecticut Tax-Free Franklin High Yield Tax-Free
Income Fund Income Fund
Franklin Double Tax-Free Franklin New Jersey Tax-Free
Income Fund Income Fund
Franklin Federal Intermediate-Term Franklin Pennsylvania Tax-Free
Tax-Free Income Fund Income Fund
Franklin Oregon Tax-Free Income Fund
At February 28, 2005, there were an unlimited number of shares authorized (no
par value). Transactions in the Funds' shares were as follows:
------------------------------------------------------------
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ...................... 7,587,121 $ 83,732,888 4,648,949 $ 55,685,833
Shares issued in reinvestment
of distributions ................ 1,686,963 18,571,170 655,283 7,812,275
Shares redeemed .................. (13,592,293) (149,054,917) (4,354,723) (51,693,885)
------------------------------------------------------------
Net increase (decrease) .......... (4,318,209) $(46,750,859) 949,509 $ 11,804,223
============================================================
Year ended February 29, 2004
Shares sold ...................... 8,735,575 $ 95,537,851 3,254,151 $ 38,882,997
Shares issued in reinvestment
of distributions ................ 1,736,551 19,003,550 646,860 7,744,688
Shares redeemed .................. (11,015,009) (120,081,083) (4,932,337) (58,841,098)
------------------------------------------------------------
Net increase (decrease) .......... (542,883) $ (5,539,682) (1,031,326) $ (12,213,413)
============================================================
CLASS B SHARES:
Year ended February 28, 2005
Shares sold ...................... 275,921 $ 3,047,545
Shares issued in reinvestment
of distributions ................ 50,585 559,965
Shares redeemed .................. (493,983) (5,416,957)
--------------------------
Net increase (decrease) .......... (167,477) $ (1,809,447)
==========================
Annual Report | 211
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
Year ended February 29, 2004
Shares sold ...................... 581,071 $ 6,381,331
Shares issued in reinvestment
of distributions ................ 52,462 576,757
Shares redeemed .................. (247,507) (2,706,253)
--------------------------
Net increase (decrease) .......... 386,026 $ 4,251,835
==========================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ...................... 794,345 $ 8,850,669 513,117 $ 6,180,989
Shares issued in reinvestment
of distributions ................ 84,234 935,937 81,857 981,964
Shares redeemed .................. (791,281) (8,743,957) (735,871) (8,777,494)
------------------------------------------------------------
Net increase (decrease) .......... 87,298 $ 1,042,649 (140,897) $ (1,614,541)
============================================================
Year ended February 29, 2004
Shares sold ...................... 1,080,396 $ 11,900,539 674,057 $ 8,115,169
Shares issued in reinvestment
of distributions ................ 79,989 882,919 83,462 1,005,519
Shares redeemed .................. (755,318) (8,298,642) (879,907) (10,506,025)
------------------------------------------------------------
Net increase (decrease) .......... 405,067 $ 4,484,816 (122,388) $ (1,385,337)
============================================================
-----------------------------------------------------------
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ...................... 2,067,875 $ 22,577,680 3,999,188 $ 47,467,574
Shares issued in reinvestment
of distributions ................ 545,179 5,967,680 648,279 7,643,964
Shares redeemed .................. (4,082,617) (44,638,280) (3,595,244) (42,232,794)
-----------------------------------------------------------
Net increase (decrease) .......... (1,469,563) $(16,092,920) 1,052,223 $ 12,878,744
===========================================================
Year ended February 29, 2004
Shares sold ...................... 2,373,240 $ 26,111,250 4,544,617 $ 53,808,605
Shares issued in reinvestment
of distributions ................ 572,407 6,290,430 634,766 7,509,425
Shares redeemed .................. (4,184,405) (45,850,400) (3,376,545) (39,800,420)
-----------------------------------------------------------
Net increase (decrease) .......... (1,238,758) $(13,448,720) 1,802,838 $ 21,517,610
===========================================================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ...................... 549,629 $ 6,071,791 845,866 $ 10,029,861
Shares issued in reinvestment
of distributions ................ 92,823 1,020,490 89,667 1,060,058
Shares redeemed .................. (808,109) (8,790,587) (908,660) (10,655,101)
-----------------------------------------------------------
Net increase (decrease) .......... (165,657) $ (1,698,306) 26,873 $ 434,818
===========================================================
212 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
Year ended February 29, 2004
Shares sold ...................... 554,560 $ 6,101,720 1,587,295 $ 18,884,441
Shares issued in reinvestment
of distributions ................ 106,841 1,179,391 77,046 914,123
Shares redeemed .................. (976,503) (10,691,404) (484,030) (5,723,868)
------------------------------------------------------------
Net increase (decrease) .......... (315,102) $ (3,410,293) 1,180,311 $ 14,074,696
============================================================
------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ...................... 14,052,916 $161,358,688 3,731,769 $ 37,422,908
Shares issued in reinvestment
of distributions ................ 930,492 10,695,590 31,162 312,538
Shares redeemed .................. (10,777,438) (123,102,375) (2,834,042) (28,397,742)
------------------------------------------------------------
Net increase (decrease) .......... 4,205,970 $ 48,951,903 928,889 $ 9,337,704
============================================================
Year ended February 29, 2004(a)
Shares sold ...................... 17,039,206 $196,412,368 3,084,547 $ 30,994,328
Shares issued in reinvestment
of distributions ................ 864,153 9,965,937 5,355 54,054
Shares redeemed (11,010,241) (126,471,465) (691,347) (6,967,146)
------------------------------------------------------------
Net increase (decrease) .......... 6,893,118 $ 79,906,840 2,398,555 $ 24,081,236
============================================================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ...................... 1,315,567 $ 15,089,187
Shares issued in reinvestment
of distributions ................ 35,726 411,514
Shares redeemed .................. (273,279) (3,115,047)
--------------------------
Net increase (decrease) .......... 1,078,014 $ 12,385,654
==========================
Period ended February 29, 2004(b)
Shares sold ...................... 1,004,690 $ 11,462,123
Shares issued in reinvestment
of distributions ................ 8,570 99,271
Shares redeemed .................. (63,247) (725,910)
--------------------------
Net increase (decrease) .......... 950,013 $ 10,835,484
==========================
Annual Report | 213
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ...................... 56,251,855 $599,282,094 8,588,493 $ 103,296,440
Shares issued in reinvestment
of distributions ................ 11,957,112 127,043,112 1,678,694 20,179,266
Shares redeemed .................. (56,044,239) (594,121,437) (9,536,882) (113,971,176)
------------------------------------------------------------
Net increase (decrease) .......... 12,164,728 $132,203,769 730,305 $ 9,504,530
============================================================
Year ended February 29, 2004
Shares sold ...................... 45,915,940 $481,986,570 8,135,000 $ 97,682,596
Shares issued in reinvestment
of distributions ................ 11,809,635 123,756,632 1,666,071 20,017,987
Shares redeemed .................. (58,066,409) (606,569,034) (10,189,229) (121,845,561)
------------------------------------------------------------
Net increase (decrease) .......... (340,834) $ (825,832) (388,158) $ (4,144,978)
============================================================
CLASS B SHARES:
Year ended February 28, 2005
Shares sold ...................... 2,914,068 $ 31,127,892 924,871 $ 11,185,470
Shares issued in reinvestment
of distributions ................ 627,368 6,703,996 170,492 2,060,381
Shares redeemed .................. (2,953,231) (31,392,129) (831,971) (10,015,359)
------------------------------------------------------------
Net increase (decrease) .......... 588,205 $ 6,439,759 263,392 $ 3,230,492
============================================================
Year ended February 29, 2004
Shares sold ...................... 4,708,755 $ 49,618,591 1,402,778 $ 16,966,765
Shares issued in reinvestment
of distributions ................ 595,624 6,279,212 157,812 1,905,305
Shares redeemed .................. (2,456,024) (25,816,685) (652,919) (7,843,962)
------------------------------------------------------------
Net increase (decrease) .......... 2,848,355 $ 30,081,118 907,671 $ 11,028,108
============================================================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ...................... 10,092,004 $108,556,344 1,942,760 $ 23,583,371
Shares issued in reinvestment
of distributions ................ 1,462,817 15,690,622 232,478 2,815,002
Shares redeemed .................. (9,556,507) (102,263,636) (1,691,439) (20,401,563)
------------------------------------------------------------
Net increase (decrease) .......... 1,998,314 $ 21,983,330 483,799 $ 5,996,810
============================================================
Year ended February 29, 2004
Shares sold ...................... 10,121,982 $107,220,157 2,573,609 $ 31,154,172
Shares issued in reinvestment
of distributions ................ 1,456,622 15,401,856 217,959 2,636,336
Shares redeemed .................. (8,144,304) (85,942,821) (2,001,064) (24,102,935)
------------------------------------------------------------
Net increase (decrease) .......... 3,434,300 $ 36,679,192 790,504 $ 9,687,573
============================================================
214 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2005
Shares sold ...................... 6,443,827 $ 75,822,532 5,634,383 $ 58,622,685
Shares issued in reinvestment
of distributions ................ 1,279,124 15,041,204 1,642,395 17,060,437
Shares redeemed .................. (6,228,102) (72,979,927) (10,092,555) (104,360,117)
-----------------------------------------------------------
Net increase (decrease) .......... 1,494,849 $17,883,809 (2,815,777) $ (28,676,995)
===========================================================
Year ended February 29, 2004
Shares sold ...................... 5,072,675 $ 59,385,944 7,437,800 $ 77,974,452
Shares issued in reinvestment
of distributions ................ 1,255,455 14,705,775 1,686,506 17,700,608
Shares redeemed .................. (7,778,597) (90,721,084) (8,883,382) (92,905,959)
-----------------------------------------------------------
Net increase (decrease) .......... (1,450,467) $(16,629,365) 240,924 $ 2,769,101
===========================================================
CLASS B SHARES:
Year ended February 28, 2005
Shares sold ...................... 568,298 $ 5,944,173
Shares issued in reinvestment
of distributions ................ 113,405 1,181,707
Shares redeemed .................. (448,979) (4,664,299)
--------------------------
Net increase (decrease) .......... 232,724 $ 2,461,581
==========================
Year ended February 29, 2004
Shares sold ...................... 1,603,965 $ 16,892,699
Shares issued in reinvestment
of distributions ................ 104,293 1,097,423
Shares redeemed .................. (474,513) (4,962,817)
--------------------------
Net increase (decrease) .......... 1,233,745 $ 13,027,305
==========================
CLASS C SHARES:
Year ended February 28, 2005
Shares sold ...................... 796,153 $ 9,439,734 1,241,307 $ 13,046,278
Shares issued in reinvestment
of distributions ................ 156,824 1,860,200 188,760 1,973,839
Shares redeemed .................. (1,330,206) (15,669,991) (1,482,117) (15,454,855)
-----------------------------------------------------------
Net increase (decrease) .......... (377,229) $ (4,370,057) (52,050) $ (434,738)
===========================================================
Year ended February 29, 2004
Shares sold ...................... 1,202,251 $ 14,208,193 1,805,858 $ 19,082,893
Shares issued in reinvestment
of distributions ................ 167,648 1,980,055 184,442 1,948,269
Shares redeemed .................. (1,130,336) (13,283,776) (1,454,355) (15,320,663)
-----------------------------------------------------------
Net increase (decrease) .......... 239,563 $ 2,904,472 535,945 $ 5,710,499
===========================================================
(a) For the period September 2, 2003 (commencement of operations) to February
29, 2004 for the Franklin Federal Limited-Term Tax-Free Income Fund.
(b) For the period July 1, 2003 (effective date) to February 29, 2004.
Annual Report | 215
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (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
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- ---------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ---------------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Funds, except the Franklin Federal Limited-Term Tax-Free Income Fund, pay an
investment management fee to Advisers based on the month-end net assets of the
Funds as follows:
- ---------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ---------------------------------------------------------------------------
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% In excess of $250 million
The Franklin Federal Limited-Term Tax-Free Income Fund pays an investment
management fee to Advisers based on the average daily net assets of the fund as
follows:
- ---------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ---------------------------------------------------------------------------
0.500% First $100 million
0.450% Over $100 million, up to and including $250 million
0.425% Over $250 million, up to and including $500 million
0.400% In excess of $500 million
B. ADMINISTRATIVE FEES
The Franklin Federal Limited-Term Tax-Free Income Fund pays an administrative
fee to FT Services of 0.20% per year of the average daily net assets of the
fund.
Under an agreement with Advisers, FT Services provides administrative services
to all the Funds except the Franklin Federal Limited-Term Tax-Free Income Fund.
The fee is paid by Advisers based on average daily net assets, and is not an
additional expense of the Funds.
For the Franklin Federal Limited-Term Tax-Free Income Fund, FT Services agreed
in advance to voluntarily waive administrative fees, as noted in the Statements
of Operations. Additionally, Advisers agreed in advance to voluntarily waive a
portion of management fees as noted in the Statement of Operations. Total
expenses waived by FT Services and Advisers are not subject to reimbursement by
the fund subsequent to the fund's fiscal year end.
216 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Funds, except the Franklin Federal Limited-Term Tax-Free Income Fund,
reimburse Distributors up to 0.10%, 0.65%, and 0.65% per year of their average
daily net assets of Class A, Class B, and Class C, respectively, for costs
incurred in marketing the Funds' shares under a Rule 12b-1 plan.
The Franklin Federal Limited-Term Tax-Free Income Fund reimburses Distributors
up to 0.15% per year of its average daily net assets for costs incurred in
marketing the fund's shares under a Rule 12b-1 plan.
Under the Class A distribution plan, costs exceeding the maximum for the current
plan year cannot be reimbursed in subsequent periods.
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the year:
--------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT DOUBLE
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Net sales charges received .......... $ 233,647 $ 86,919 $ 67,323 $ 132,732
Contingent deferred sales charges
retained .......................... $ 68,865 $ 5,698 $ 5,679 $ 23,855
--------------------------------------------------------------
--------------------------------------------------------------
FRANKLIN FRANKLIN
FEDERAL FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE- LIMITED-TERM HIGH-YIELD NEW JERSEY
TERM TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Net sales charges received .......... $ 77,801 $ -- $ 1,269,317 $ 233,482
Contingent deferred sales
charges retained .................. $ 9,515 $ 268 $ 473,659 $ 167,857
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Net sales charges received .......... $ 209,177 $ 173,992
Contingent deferred sales
charges retained .................. $ 13,449 $ 75,548
Annual Report | 217
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were paid to Investor Services:
--------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT DOUBLE
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Transfer agent fees ................. $ 211,559 $ 110,842 $ 90,576 $ 134,028
--------------------------------------------------------------
FRANKLIN FRANKLIN
FEDERAL FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE- LIMITED-TERM HIGH-YIELD NEW JERSEY
TERM TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Transfer agent fees ................. $ 139,207 $ 8,127 $ 1,762,845 $ 313,615
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Transfer agent fees ................. $ 179,217 $ 336,480
4. INCOME TAXES
At February 28, 2005, the following funds had tax basis capital losses which may
be carried over to offset future capital gains. Such losses expire as follows:
--------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT DOUBLE
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Capital loss carryovers expiring in:
2008 ............................... $ -- $ 1,188,685 $ 2,457,013 $ --
2009 ............................... -- 1,524,288 427,481 --
2011 ............................... -- 81,665 53,698 --
2012 ............................... 20,108,487 4,695,674 3,034,219 --
2013 ............................... -- -- -- 200,921
--------------------------------------------------------------
$ 20,108,487 $ 7,490,312 $ 5,972,411 $ 200,921
==============================================================
218 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
----------------------------------------------
FRANKLIN
FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE- HIGH-YIELD NEW JERSEY
TERM TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Capital loss carryovers expiring in:
2006 ............................... $ 95,778 $ -- $ --
2008 ............................... 314,284 37,171,665 --
2009 ............................... 1,207,419 73,985,675 251,316
2010 ............................... 614,893 63,519,381 --
2011 ............................... -- 131,377,453 --
2012 ............................... 2,156,839 50,621,589 2,933,869
2013 ............................... 373,568 35,250,377 --
----------------------------------------------
$ 4,762,781 $391,926,140 $ 3,185,185
==============================================
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Capital loss carryovers expiring in:
2008 ............................... $ 1,737,485 $ 1,499,688
2009 ............................... 966,007 3,680,545
2010 ............................... 1,860,003 4,726,279
2012 ............................... 2,455,722 --
2013 ............................... -- 876,215
----------------------------
$ 7,019,217 $ 10,782,727
============================
On February 28, 2005, the Franklin Connecticut Tax-Free Income Fund and the
Franklin Federal Intermediate-Term Tax-Free Income Fund had expired capital loss
carryovers of $228,817 and $99,478, respectively, which were reclassified to
paid-in capital.
At February 28, 2005, the following funds had deferred capital losses occurring
subsequent to October 31, 2004. For tax purposes, such losses will be reflected
in the year ending February 28, 2006.
---------------------------------------------
FRANKLIN
FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE- HIGH-YIELD NEW JERSEY
TERM TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------
$ 79,655 $ 5,040,264 $ 42,566
Annual Report | 219
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended February 28, 2005
and February 29, 2004, was as follows:
--------------------------------------------------------------
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------
Distributions paid from -
tax exempt income .................. $ 41,260,229 $ 44,305,450 $ 16,727,722 $ 16,685,871
==============================================================
--------------------------------------------------------------
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------
Distributions paid from:
Tax exempt income .................. $ 12,603,538 $ 13,685,729 $ 14,343,372 $ 14,005,112
Long term capital gain ............. -- -- 591,930 912,014
--------------------------------------------------------------
$ 12,603,538 $ 13,685,729 $ 14,935,302 $ 14,917,126
==============================================================
--------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2005 2004 2005 2004(a)
--------------------------------------------------------------
Distributions paid from -
tax exempt income .................. $ 17,494,657 $ 15,691,581 $ 448,664 $ 98,401
==============================================================
--------------------------------------------------------------
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------
Distributions paid from -
tax exempt income .................. $288,166,798 $286,849,658 $ 41,520,883 $ 41,716,474
==============================================================
--------------------------------------------------------------
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------
Distributions paid from -
tax exempt income .................. $ 27,690,166 $ 27,611,831 $ 36,075,342 $ 37,295,172
==============================================================
(a) For the period September 2, 2003 (commencement of operations) to
February 29, 2004 for the Franklin Federal Limited-Term Tax-Free Income Fund.
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, bond discounts,
and offering costs.
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.
220 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
At February 28, 2005, the cost of investments, net unrealized appreciation
(depreciation), undistributed tax exempt and ordinary income and undistributed
short term and long term capital gains for income tax purposes were as follows:
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------
Cost of investments ............................. $850,161,337 $354,523,195 $270,857,765
==============================================
Unrealized appreciation ......................... $ 61,154,768 $ 26,156,026 $ 17,102,374
Unrealized depreciation ......................... (1,410,400) (73,466) (874,839)
----------------------------------------------
Net unrealized appreciation (depreciation) ...... $ 59,744,368 $ 26,082,560 $ 16,227,535
==============================================
Undistributed tax exempt income ................. $ 221,203 $ 274,274 $ 228,789
Undistributed ordinary income ................... 14,443 -- --
----------------------------------------------
Distributable earnings .......................... $ 235,646 $ 274,274 $ 228,789
==============================================
-------------------------------------------------
FRANKLIN FRANKLIN FEDERAL FRANKLIN FEDERAL
DOUBLE INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------
Cost of investments ............................. $ 330,576,596 $498,259,468 $ 35,500,214
=================================================
Unrealized appreciation ......................... $ 19,623,844 $ 18,791,875 $48,763
Unrealized depreciation ......................... (327,562) (552,300) (236,847)
-------------------------------------------------
Net unrealized appreciation (depreciation) ...... $ 19,296,282 $ 18,239,575 $ (188,084)
=================================================
Undistributed tax exempt income ................. $ 113,980 $ 221,669 $68,907
Undistributed short term capital gains .......... -- -- 113
Undistributed long term capital gains ........... -- -- 93
-------------------------------------------------
Distributable earnings .......................... $ 113,980 $ 221,669 $69,113
=================================================
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
HIGH YIELD NEW JERSEY OREGON
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------
Cost of investments ............................. $ 5,202,154,645 $918,900,658 $602,598,322
=================================================
Unrealized appreciation ......................... $ 380,131,410 $ 65,453,208 $ 39,101,795
Unrealized depreciation ......................... (78,211,120) (791,842) (110,690)
-------------------------------------------------
Net unrealized appreciation (depreciation) ...... $ 301,920,290 $ 64,661,366 $ 38,991,105
=================================================
Undistributed tax exempt income ................. $ 4,458,885 $ 905,817 $ 923,272
Undistributed ordinary income ................... 14,882 -- --
-------------------------------------------------
Distributable earnings .......................... $ 4,473,767 $ 905,817 $ 923,272
=================================================
Annual Report | 221
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
------------
FRANKLIN
PENNSYLVANIA
TAX-FREE
INCOME FUND
------------
Cost of investments ............................. $768,588,343
============
Unrealized appreciation ......................... $ 49,011,428
Unrealized depreciation ......................... (332,573)
------------
Net unrealized appreciation (depreciation) ...... $ 48,678,855
============
Distributable earnings -
undistributed tax exempt income ................ $ 846,895
============
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended February 28, 2005, were as follows:
--------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT DOUBLE
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Purchases .......................... $254,962,118 $120,300,077 $ 8,018,636 $ 47,249,804
Sales .............................. $288,650,081 $110,195,162 $ 24,657,454 $ 34,708,938
--------------------------------------------------------------
FRANKLIN FRANKLIN
FEDERAL FEDERAL FRANKLIN FRANKLIN
INTERMEDIATE- LIMITED-TERM HIGH-YIELD NEW JERSEY
TERM TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Purchases .......................... $105,044,832 $ 12,482,986 $669,614,795 $128,291,210
Sales .............................. $ 43,449,091 $ 3,740,050 $442,551,068 $108,424,014
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Purchases .......................... $ 85,290,022 $ 60,680,398
Sales .............................. $ 64,498,316 $ 80,410,487
222 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin High Yield Tax-Free Income Fund has 41.7% of its portfolio invested
in below investment grade and comparable quality unrated high yield securities,
which tend to be more sensitive to economic conditions than higher rated
securities. The risk of loss due to default by the issuer may be significantly
greater for the holders of high yielding securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
The fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At February 28, 2005, the value of these
securities was $18,180,525, representing 0.33% of the fund's net assets. The
fund discontinues accruing income on securities for which income has been deemed
uncollectible and provides an estimate for losses on interest receivable. For
information as to specific securities, see the accompanying Statement of
Investments.
Each of the Funds invest a large percentage of their total assets in obligations
of issuers within their respective states, except for the Franklin Federal
Intermediate-Term Tax-Free Income Fund, the Franklin Federal Limited-Term
Tax-Free Income Fund and the Franklin High Yield Tax-Free Income Fund. Such
concentration may subject the Funds to risks associated with industrial or
regional matters, and economic, political or legal developments occurring within
those states.
7. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
Annual Report | 223
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing, in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing", failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
224 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On November 17, 2004, Franklin Resources, Inc. announced that Franklin Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
The SEC's Second Order and the CAGO settlement agreement concerning marketing
support payments provide that the distribution of settlement monies are to be
made to the relevant funds, not to individual shareholders. The independent
distribution consultant has substantially completed preparation of these
distribution plans. The CAGO has approved the distribution plan pertaining to
the distribution of the monies owed under the CAGO settlement agreement and, in
accordance with the terms and conditions of that settlement, the monies were
disbursed to the participating funds. The Trust did not participate in the CAGO
settlement. The SEC has not yet approved the distribution plan pertaining to the
Second Order. When approved, disbursements of settlement monies under the SEC's
Second Order will be made promptly in accordance with the terms and conditions
of that order.
Annual Report | 225
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS
The Company, and other funds, and certain current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York and Florida, alleging
violations of various federal securities laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
The Company and fund management strongly believe that the claims made in each of
the lawsuits identified above are without merit and intend to vigorously defend
against them. The Company cannot predict with certainty, however, the eventual
outcome of the remaining governmental investigations or private lawsuits, nor
whether they will have a material negative impact on the Company. Public trust
and confidence are critical to the Company's business and any material loss of
investor and/or client confidence could result in a significant decline in
assets under management by the Company, which would have an adverse effect on
the Company's future financial results. If the Company finds that it bears
responsibility for any unlawful or inappropriate conduct that caused losses to
the Trust, it is committed to making the Trust or its shareholders whole, as
appropriate. The Company is committed to taking all appropriate actions to
protect the interests of its funds' shareholders.
226 | Annual Report
Franklin Tax-Free Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE FRANKLIN TAX-FREE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Arizona Tax-Free Income
Fund, Franklin Colorado Tax-Free Income Fund, Franklin Connecticut Tax-Free
Income Fund, Franklin Double Tax-Free Income Fund, Franklin Federal
Intermediate-Term Tax-Free Income Fund, Franklin Federal Limited-Term Tax-Free
Income Fund, Franklin High Yield Tax-Free Income Fund, Franklin New Jersey
Tax-Free Income Fund, Franklin Oregon Tax-Free Income Fund and Franklin
Pennsylvania Tax-Free Income Fund (separate portfolios of The Franklin Tax-Free
Trust, hereafter referred to as the "Funds") at February 28, 2005, the results
of each of their operations for the year then ended, the changes in each of
their net assets for each of the two years in the period then ended and the
financial highlights for each of the periods presented, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2005 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 11, 2005
Annual Report | 227
Franklin Tax-Free Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code (Code), the Funds hereby
designate 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended February 28, 2005. A portion
of the Funds' exempt-interest dividends may be subject to the federal
alternative minimum tax. In January 2006, shareholders will be notified of
amounts for use in preparing their 2005 income tax returns.
Under Section 852(b)(3)(C) of the Code, the Franklin Federal Limited-Term
Tax-Free Income Fund hereby designates $93 as a capital gain dividend for the
fiscal year ended February 28, 2005.
228 | Annual Report
Board Members and Officers
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Trust, principal occupations during the
past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Each board member will serve until
that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK H. ABBOTT, III (83) Trustee Since 1984 115 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Abbott Corporation (an investment company).
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (72) Trustee Since 1984 143 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) Trustee Since 1989 144 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (53) Trustee Since 1998 98 Director, Amerada Hess Corporation
One Franklin Parkway (exploration and refining of oil
San Mateo, CA 94403-1906 and gas), H.J. Heinz Company
(processed foods and allied
products), RTI International Metals,
Inc. (manufacture and distribution
of titanium), Canadian National
Railway (railroad), and White
Mountains Insurance Group, Ltd.
(holding company).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary
of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (75) Trustee Since 1984 117 Director, The California Center for
One Franklin Parkway Land Recycling (redevelopment).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 229
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Trustee Since 1992 143 Director, Martek Biosciences
One Franklin Parkway Corporation, MedImmune, Inc.
San Mateo, CA 94403-1906 (biotechnology), and Overstock.com
(Internet services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding com-
pany) (1987-2004) and Spacehab, Inc.
(aerospace services) (1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004);
Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and
President, National Association of Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (72) Trustee Since 1984 143 None
One Franklin Parkway and Chairman
San Mateo, CA 94403-1906 of the Board
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be,
of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (64) Trustee, Trustee since 127 None
One Franklin Parkway President and 1984, President
San Mateo, CA 94403-1906 Chief since 1993 and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice
President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
230 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (45) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) Vice President Since 1986 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services,
Inc.; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc.
and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (40) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (42) Treasurer Since July 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 34 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and
Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton
Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (44) Vice President Since 1995 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin
Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice
President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.;
Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial
Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 231
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources,
Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer
and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc.,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in
Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission
(1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue - AML
Rockefeller Center Compliance
New York, NY 10020-2302
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals, Inc.
and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources,
Inc. and of 48 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable None
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director,
Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
232 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (43) Vice President Since 2000 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments trust
complex. These portfolios have a common investment adviser or affiliated
investment advisers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested
persons of the Fund under the federal securities laws due to their positions as
officers and directors and major shareholders of Franklin Resources, Inc., which
is the parent company of the Fund's adviser and distributor.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR
OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF
TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF
QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF
VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER
IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN
ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF
PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER
AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF
SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE
HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION
WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND
EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY
OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE
AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION
RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 233
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust'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 Trust 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.
234 | Annual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)
VALUE
Franklin Balance Sheet Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund(4)
Franklin's AGE High Income
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(4),(5)
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
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
Arizona
California(8)
Colorado
Connecticut
Florida(8)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
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 por- tion 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
(5) Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and strategy
remained the same.
(6) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7) Portfolio of insured municipal securities.
(8) These funds are available in two or more variations, including long-term
portfolios, portfo- lios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
(9) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/05 Not part of the annual report
[LOGO](R)
FRANKLIN(R) TEMPLETON(R) One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN TAX-FREE TRUST
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.
TF3 A2005 04/05
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 11(A), the Registrant is attaching as an exhibit a copy of
its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is Frank W. T. LaHaye and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the
principal accountant in connection with statutory and regulatory filings or
engagements were $70,037 for the fiscal year ended February 28, 2005 and
$895,414 for the fiscal year ended February 29, 2004.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of Item 4.
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control
with the investment adviser that provides ongoing services to the registrant
that are reasonably related to the performance of the audit of their
financial statements were $3,579 for the fiscal year ended February 28, 2005
and $47,910 for the fiscal year ended February 29, 2004. The services for
which these fees were paid included attestation services.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance,
tax advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser
and any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $5,253 for the fiscal year ended
February 28, 2005 and $0 for the fiscal year ended February 29, 2004. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended February 28,
2005 and $9,925 for the fiscal year ended February 29, 2004. The services
for which these fees were paid included review of materials provided to the
fund Board in connection with the investment management contract renewal
process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser
and any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not
reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended
February 28, 2005 and $90,075 for the fiscal year ended February 29, 2004.
The services for which these fees were paid included review of materials
provided to the fund Board in connection with the investment management
contract renewal process.
(e) (1) The registrant's audit committee is directly responsible for
approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to
any entity that controls, is controlled by or is under common control with
the registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a
designated member or members of the committee; provided the policies and
procedures are detailed as to the particular service and the committee is
informed of each service and such policies and procedures do not include
delegation of audit committee responsibilities, as contemplated under the
Securities Exchange Act of 1934, to management; subject, in the case of (ii)
through (iv), to any waivers, exceptions or exemptions that may be available
under applicable law or rules.
(e) (2) None of the services provided to the registrant described in
paragraphs (b)-(d) of Item 4 were pre-approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for
services rendered by the principal accountant to the registrant and the
registrant's investment adviser and any entity controlling, controlled by or
under common control with the investment adviser that provides ongoing
services to the registrant were $8,832 for the fiscal year ended February 28,
2005 and $147,910 for the fiscal year ended February 29, 2004.
(h) No disclosures are required by this Item 4(h).
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. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 10. 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 11. EXHIBITS.
(A) Code of Ethics
(B) (1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(B) (2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN TAX-FREE TRUST
By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date April 25, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date April 25, 2005
By /s/Galen G. Vetter
Chief Financial Officer
Date April 25, 2005