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
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (650) 312-2000
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Date of fiscal year end: 2/28
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Date of reporting period: 2/28/07
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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FEBRUARY 28, 2007
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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
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
THIS DOCUMENT
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FRANKLIN TAX-FREE FUND
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE (R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why
our funds can be used to build truly diversified
allocation plans covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the 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 .................................... 17
Franklin Massachusetts Insured Tax-Free Income Fund ...................... 25
Franklin Michigan Insured Tax-Free Income Fund ........................... 33
Franklin Minnesota Insured Tax-Free Income Fund .......................... 42
Franklin Ohio Insured Tax-Free Income Fund ............................... 50
Financial Highlights and Statements of Investments ....................... 59
Financial Statements ..................................................... 122
Notes to Financial Statements ............................................ 131
Report of Independent Registered Public Accounting Firm .................. 144
Tax Designation .......................................................... 145
Board Members and Officers ............................................... 146
Shareholder Information .................................................. 151
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Annual Report
Municipal Bond Market Overview
For the 12 months ended February 28, 2007, the municipal bond market performed
well compared with the U.S. Treasury market despite Federal Reserve Board (Fed)
interest rate hikes, inflation concerns, volatile oil prices, mixed market
expectations and uncertainty regarding future economic growth. Over the year,
Treasury yields generally increased while municipal yields varied -- shorter
maturities increased, intermediate maturities were fairly flat to slightly lower
and longer-term yields decreased. Municipal yields historically have trended
with Treasury yields; however, strong demand for municipal bonds from
traditional and non-traditional investors contributed to an unusual situation
for the year under review. Longer-term municipal yields declined as Treasury
yields rose, allowing municipal bonds to outperform Treasuries. The Lehman
Brothers Municipal Bond Index returned +4.96% for the period, while the Lehman
Brothers U.S. Treasury Index returned +4.78%. 1
During the reporting period, short-term interest rates increased as the Fed
raised the federal funds target rate from 4.50% to 5.25% in three successive
hikes from March through June 2006. Since then, the Fed maintained the
short-term rate at 5.25% with an inflation risk bias, stating it is more
concerned with a potential for increased inflation than a slowing economy.
Largely as a result, Treasury yields generally rose. Many market participants
appeared to expect that the Fed was more likely to lower the federal funds
target rate than raise it. This sentiment was reflected by a flat to slightly
inverted Treasury yield curve (spread between short-term and long-term yields)
during the reporting period. On February 28, 2007, the 2-year Treasury yielded
4.65%, the 10-year 4.56% and the 30-year 4.68%. Yield for the 2-year Treasury
dropped 3 basis points (100 basis points equal one percentage point), while
yields for the 10-year increased 1 basis point and the 30-year 17 basis points,
for the one-year period.
1. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Lehman Brothers U.S. Treasury Index includes public
obligations of the U.S. Treasury with a remaining maturity of one year or
more. All issues must have at least one year to final maturity regardless
of call features, have at least $250 million par amount outstanding and be
rated investment grade (Baa3 or better). They must also be dollar
denominated, nonconvertible and publicly issued.
Annual Report | 7
During the year, the yield curve was generally flat or inverted, nominal yields
were low and credit spreads (the difference in yield between higher-grade and
lower-grade securities) narrowed. In this environment, the interest rate premium
decreased for assuming additional risk in the fixed income market, and
non-traditional municipal buyers seemed to focus on the municipal bond market.
Non-traditional or cross-over buyers typically invest in taxable securities;
however, they will enter the municipal bond market when municipal valuations are
attractive. With historically favorable intermediate- and longer-term municipal
yields versus Treasury yields, and a positive sloping yield curve (though
flatter than usual), municipal bonds offered favorable relative value for
traditional and cross-over fixed income investors. As a result, demand was
consistently strong for intermediate- to longer-term municipal bonds, which
drove performance and contributed to further flattening of the municipal yield
curve. Due to Fed tightening, short-term municipal yields increased; however,
strong demand for longer-term bonds resulted in declining longer-term yields.
According to Municipal Market Data, the 2-year municipal bond yield rose 16
basis points during the period, while 10-year and 30-year yields decreased 8 and
33 basis points. 2
Generally low interest rates continued to motivate municipal issuers to access
the debt market to finance their capital needs. In 2006, new issuance was
approximately $388 billion, which was the second-highest volume after the $408
billion issued in 2005. 3 Refunding deals, in which issuers take advantage of
lower rates to refinance higher yielding outstanding debt, declined in 2006 to
approximately $79 billion compared with $130 billion in 2005. 3 However,
issuance for new capital projects increased to approximately $260 billion in
2006 versus $222 billion in 2005. 3 As a result of narrowing credit spreads,
issuers also found it more advantageous to issue their debt without paying a
premium for bond insurance. In 2006, 49% of new bond issuance was insured
compared with 57% in 2005. 3 When credit spreads are narrow, the economic
benefit for issuers using insurance generally diminishes and bond insurers have
less flexibility in pricing. Strong demand from traditional buyers such as
mutual funds, individuals and insurance companies combined with large
participation of cross-over buyers enabled the municipal bond market to absorb
the comparatively large amount of new issuance through the year.
2. Source: Thomson Financial.
3. Source: THE BOND BUYER.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2007. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, 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 securities. 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 municipal yield curve compared to Treasuries favored the
use of longer-term bonds. Consequently, we sought to purchase bonds 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
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 as high a level of income exempt from federal income tax
as is 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. 1 The Fund invests primarily in insured Florida municipal
securities. 2
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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DIVIDEND DISTRIBUTIONS 3
Franklin Florida Insured
Tax-Free Income Fund - Class A
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MONTH DIVIDEND PER SHARE
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March 2006 3.75 cents
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April 2006 3.75 cents
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May 2006 3.75 cents
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June 2006 3.71 cents
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July 2006 3.71 cents
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August 2006 3.71 cents
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September 2006 3.71 cents
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October 2006 3.71 cents
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November 2006 3.71 cents
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December 2006 3.64 cents
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January 2007 3.64 cents
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February 2007 3.64 cents
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We are pleased to bring you Franklin Florida Insured Tax-Free Income Fund's
annual report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$10.74 on February 28, 2006, to $10.77 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 44.54 cents per share for the same period. 3 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 3.88%. An investor in
the 2007 maximum federal income tax bracket of 35.00% would need to earn a
distribution rate of 5.97% from a taxable investment to match the Fund's Class A
tax-free distribution rate.
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.
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. Fund shares are not insured by any U.S. or other government agency. They
are subject to market risks and will fluctuate in value.
3. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 60.
10 | Annual Report
STATE UPDATE
Florida's economic growth continued to be resilient even though the state has
experienced active hurricane seasons in the past. The state's growth outpaced
the nation's as measured by gross state product, population and employment.
Florida's service-based economy has a strong and competitive position in the
southeastern U.S. The state's average income levels and below-average
unemployment in recent years supported its growing population. As of February
2007, the unemployment rate was 3.3%, considerably lower than the 4.5% U.S.
rate. 4 However, the state's real estate market began showing signs of weakness.
Strong economic performance over the past several years translated to surging
revenue growth and consistent operating surpluses, which allowed for full
funding of hurricane remediation costs and offset some of the financial burden
related to rising residential property insurance prices. Record levels of
financial reserves should also help Florida manage well during a real estate
slowdown.
The state's debt burden is stable and its current tax-supported debt is $18.5
billion, which represents $1,016 per capita and 3% of personal income. Annual
debt service costs remained below its 6% target level. 5
Based on Florida's strong revenue performance, solid and conservative financial
and budget management practices, and moderate debt burden, independent credit
rating agency Standard & Poor's assigned the state's general obligation bonds
its highest rating of AAA with a stable outlook. 6
4. Source: Bureau of Labor Statistics.
5. Source: Standard & Poor's, "Research: Summary: Florida; General
Obligation," RATINGSDIRECT, 1/30/07.
6. This does not indicate Standard & Poor's rating of the Fund.
PORTFOLIO BREAKDOWN
Franklin Florida Insured
Tax-Free Income Fund
2/28/07
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% OF TOTAL
LONG-TERM INVESTMENTS*
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Utilities 23.9%
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Subject to Government Appropriations 20.4%
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Other Revenue 13.6%
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Prerefunded 11.7%
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Transportation 8.5%
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Tax-Supported 8.0%
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Hospital & Health Care 4.6%
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Housing 4.3%
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General Obligation 3.7%
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Higher Education 1.3%
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* Does not include short-term investments and other net assets.
Annual Report | 11
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 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
12 | Annual Report
Performance Summary as of 2/28/07
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A (SYMBOL: FFLTX) CHANGE 2/28/07 2/28/06
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Net Asset Value (NAV) +$0.03 $10.77 $10.74
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DISTRIBUTIONS (3/1/06-2/28/07)
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Dividend Income $0.4454
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PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE.
THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +4.55% +26.94% +70.12%
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Average Annual Total Return 2 +0.08% +3.97% +5.00%
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Avg. Ann. Total Return (3/31/07) 3 +0.29% +4.25% +5.13%
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Distribution Rate 4 3.88%
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Taxable Equivalent Distribution Rate 5 5.97%
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30-Day Standardized Yield 6 3.27%
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Taxable Equivalent Yield 5 5.03%
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Total Annual Operating Expenses 7 0.75%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
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 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.
AVERAGE ANNUAL TOTAL RETURN
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CLASS A 2/28/07
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1-Year +0.08%
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5-Year +3.97%
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10-Year +5.00%
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CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN FLORIDA INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
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3/1/1997 $9,578 $10,000 $10,000
3/31/1997 $9,419 $9,867 $10,025
4/30/1997 $9,519 $9,949 $10,038
5/31/1997 $9,658 $10,099 $10,031
6/30/1997 $9,769 $10,207 $10,044
7/31/1997 $10,095 $10,489 $10,056
8/31/1997 $9,981 $10,391 $10,075
9/30/1997 $10,093 $10,514 $10,100
10/31/1997 $10,187 $10,582 $10,125
11/30/1997 $10,260 $10,644 $10,119
12/31/1997 $10,424 $10,799 $10,107
1/31/1998 $10,538 $10,911 $10,125
2/28/1998 $10,532 $10,914 $10,144
3/31/1998 $10,545 $10,924 $10,163
4/30/1998 $10,517 $10,875 $10,182
5/31/1998 $10,663 $11,047 $10,201
6/30/1998 $10,707 $11,090 $10,213
7/31/1998 $10,751 $11,118 $10,226
8/31/1998 $10,909 $11,290 $10,238
9/30/1998 $11,016 $11,430 $10,251
10/31/1998 $11,029 $11,430 $10,276
11/30/1998 $11,105 $11,470 $10,276
12/31/1998 $11,119 $11,499 $10,269
1/31/1999 $11,217 $11,636 $10,294
2/28/1999 $11,167 $11,585 $10,307
3/31/1999 $11,189 $11,601 $10,338
4/30/1999 $11,201 $11,630 $10,414
5/31/1999 $11,138 $11,563 $10,414
6/30/1999 $10,966 $11,396 $10,414
7/31/1999 $10,986 $11,438 $10,445
8/31/1999 $10,835 $11,346 $10,470
9/30/1999 $10,780 $11,351 $10,520
10/31/1999 $10,594 $11,228 $10,539
11/30/1999 $10,702 $11,347 $10,545
12/31/1999 $10,603 $11,263 $10,545
1/31/2000 $10,547 $11,214 $10,576
2/29/2000 $10,691 $11,344 $10,639
3/31/2000 $10,992 $11,592 $10,727
4/30/2000 $10,891 $11,523 $10,733
5/31/2000 $10,779 $11,463 $10,746
6/30/2000 $11,118 $11,767 $10,802
7/31/2000 $11,311 $11,931 $10,827
8/31/2000 $11,481 $12,115 $10,827
9/30/2000 $11,379 $12,052 $10,883
10/31/2000 $11,529 $12,183 $10,902
11/30/2000 $11,644 $12,275 $10,909
12/31/2000 $12,003 $12,579 $10,902
1/31/2001 $12,026 $12,703 $10,971
2/28/2001 $12,097 $12,744 $11,015
3/31/2001 $12,202 $12,858 $11,040
4/30/2001 $12,039 $12,719 $11,084
5/31/2001 $12,133 $12,855 $11,134
6/30/2001 $12,228 $12,941 $11,153
7/31/2001 $12,453 $13,133 $11,122
8/31/2001 $12,668 $13,350 $11,122
9/30/2001 $12,620 $13,305 $11,172
10/31/2001 $12,776 $13,463 $11,134
11/30/2001 $12,668 $13,350 $11,115
12/31/2001 $12,535 $13,223 $11,071
1/31/2002 $12,704 $13,453 $11,096
2/28/2002 $12,839 $13,615 $11,140
3/31/2002 $12,606 $13,348 $11,203
4/30/2002 $12,790 $13,609 $11,266
5/31/2002 $12,877 $13,692 $11,266
6/30/2002 $12,975 $13,836 $11,272
7/31/2002 $13,123 $14,014 $11,284
8/31/2002 $13,283 $14,183 $11,322
9/30/2002 $13,645 $14,494 $11,341
10/31/2002 $13,381 $14,253 $11,360
11/30/2002 $13,341 $14,194 $11,360
12/31/2002 $13,618 $14,494 $11,335
1/31/2003 $13,592 $14,457 $11,385
2/28/2003 $13,756 $14,659 $11,472
3/31/2003 $13,792 $14,668 $11,541
4/30/2003 $13,917 $14,765 $11,516
5/31/2003 $14,249 $15,110 $11,497
6/30/2003 $14,206 $15,046 $11,510
7/31/2003 $13,618 $14,520 $11,523
8/31/2003 $13,706 $14,628 $11,566
9/30/2003 $14,056 $15,058 $11,604
10/31/2003 $13,987 $14,982 $11,591
11/30/2003 $14,155 $15,138 $11,560
12/31/2003 $14,271 $15,264 $11,548
1/31/2004 $14,374 $15,351 $11,604
2/29/2004 $14,624 $15,582 $11,667
3/31/2004 $14,580 $15,528 $11,742
4/30/2004 $14,176 $15,160 $11,779
5/31/2004 $14,093 $15,105 $11,848
6/30/2004 $14,104 $15,160 $11,886
7/31/2004 $14,304 $15,360 $11,867
8/31/2004 $14,573 $15,667 $11,873
9/30/2004 $14,680 $15,751 $11,898
10/31/2004 $14,815 $15,886 $11,961
11/30/2004 $14,675 $15,755 $11,967
12/31/2004 $14,879 $15,947 $11,924
1/31/2005 $15,085 $16,096 $11,949
2/28/2005 $15,027 $16,043 $12,018
3/31/2005 $14,955 $15,942 $12,112
4/30/2005 $15,176 $16,193 $12,193
5/31/2005 $15,300 $16,308 $12,180
6/30/2005 $15,354 $16,409 $12,187
7/31/2005 $15,310 $16,335 $12,243
8/31/2005 $15,449 $16,500 $12,306
9/30/2005 $15,333 $16,388 $12,456
10/31/2005 $15,245 $16,289 $12,481
11/30/2005 $15,314 $16,367 $12,381
12/31/2005 $15,455 $16,508 $12,331
1/31/2006 $15,466 $16,552 $12,425
2/28/2006 $15,593 $16,664 $12,450
3/31/2006 $15,488 $16,549 $12,519
4/30/2006 $15,499 $16,543 $12,625
5/31/2006 $15,524 $16,617 $12,688
6/30/2006 $15,476 $16,554 $12,713
7/31/2006 $15,633 $16,751 $12,751
8/31/2006 $15,851 $17,000 $12,776
9/30/2006 $15,951 $17,118 $12,713
10/31/2006 $16,036 $17,225 $12,644
11/30/2006 $16,196 $17,369 $12,625
12/31/2006 $16,146 $17,307 $12,644
1/31/2007 $16,095 $17,263 $12,683
2/28/2007 $16,294 $17,490 $12,751
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT
MAY INVEST A GREATER PORTION OF ITS ASSETS IN ONE ISSUER THAN A DIVERSIFIED
FUND. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 3.64 cent per share
current monthly dividend and the maximum offering price of $11.25 per
share on 2/28/07.
5. Taxable equivalent distribution rate and yield assume the 2007 maximum
federal 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
14 | Annual Report
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 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 | 15
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.00 $3.72
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.12 $3.71
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 0.74%, multiplied by
the average account value over the period, multiplied by 181/365 to
reflect the one-half year period.
16 | Annual Report
Franklin Insured Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Insured Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal income tax as is
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. 1 The Fund invests primarily in insured municipal securities. 2
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Insured Tax-Free Income Fund covers the fiscal
year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, began and ended
the 12-month reporting period at $12.32. The Fund's Class A shares paid
dividends totaling 53.09 cents per share for the same period. 3 The Performance
Summary beginning on page 19 shows that at the end of this reporting period the
Fund's Class A shares' distribution rate was 4.07% based on an annualization of
the current 4.36 cent per share dividend and the maximum offering price of
$12.87 on February 28, 2007. An investor in the 2007 maximum federal income tax
bracket of 35.00% would need to earn a distribution rate of 6.26% 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.
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.
1. Dividends are generally subject to state and local taxes, if any. For
investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. Fund shares are not insured by any U.S. or other government agency. They
are subject to market risks and will fluctuate in value.
3. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 66.
Annual Report | 17
PORTFOLIO BREAKDOWN
Franklin Insured Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 28.1%
- --------------------------------------------------------------------------------
Utilities 16.7%
- --------------------------------------------------------------------------------
General Obligation 14.3%
- --------------------------------------------------------------------------------
Transportation 10.2%
- --------------------------------------------------------------------------------
Hospital & Health Care 9.5%
- --------------------------------------------------------------------------------
Higher Education 6.8%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 5.4%
- --------------------------------------------------------------------------------
Tax-Supported 4.8%
- --------------------------------------------------------------------------------
Other Revenue 3.7%
- --------------------------------------------------------------------------------
Housing 0.3%
- --------------------------------------------------------------------------------
Corporate-Backed 0.2%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
DIVIDEND DISTRIBUTIONS**
Franklin Insured Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
----------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 2006 4.43 cents 3.86 cents 3.85 cents
- --------------------------------------------------------------------------------
April 2006 4.43 cents 3.86 cents 3.85 cents
- --------------------------------------------------------------------------------
May 2006 4.43 cents 3.86 cents 3.85 cents
- --------------------------------------------------------------------------------
June 2006 4.43 cents 3.88 cents 3.88 cents
- --------------------------------------------------------------------------------
July 2006 4.43 cents 3.88 cents 3.88 cents
- --------------------------------------------------------------------------------
August 2006 4.43 cents 3.88 cents 3.88 cents
- --------------------------------------------------------------------------------
September 2006 4.43 cents 3.90 cents 3.89 cents
- --------------------------------------------------------------------------------
October 2006 4.43 cents 3.90 cents 3.89 cents
- --------------------------------------------------------------------------------
November 2006 4.43 cents 3.90 cents 3.89 cents
- --------------------------------------------------------------------------------
December 2006 4.36 cents 3.79 cents 3.79 cents
- --------------------------------------------------------------------------------
January 2007 4.36 cents 3.79 cents 3.79 cents
- --------------------------------------------------------------------------------
February 2007 4.36 cents 3.79 cents 3.79 cents
- --------------------------------------------------------------------------------
** Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 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 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
18 | Annual Report
Performance Summary as of 2/28/07
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 that a shareholder would pay on Fund dividends, capital gain distributions,
if any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FTFIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $12.32 $12.32
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5309
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0101
- --------------------------------------------------------------------------------
TOTAL $0.5410
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBITX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $12.37 $12.37
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4641
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0101
- --------------------------------------------------------------------------------
TOTAL $0.4742
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRITX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $12.43 $12.42
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4635
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0101
- --------------------------------------------------------------------------------
TOTAL $0.4736
- --------------------------------------------------------------------------------
Annual Report | 19
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE
FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.51% +27.13% +67.91%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.05% +4.01% +4.86%
- --------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.31% +4.32% +4.93%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.07%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.26%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.38%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.20%
- ---------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.63%
- ---------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.93% +23.66% +48.41%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.07% +4.00% +5.74%
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.25% +4.33% +5.63%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.68%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.66%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.99%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.60%
- ---------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.18%
- ---------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.99% +23.75% +58.97%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.99% +4.35% +4.74%
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.31% +4.68% +4.83%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.66%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.63%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.99%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.60%
- ---------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.18%
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
20 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $9,574 $10,000 $10,000
3/31/1997 $9,485 $9,867 $10,025
4/30/1997 $9,554 $9,949 $10,038
5/31/1997 $9,663 $10,099 $10,031
6/30/1997 $9,749 $10,207 $10,044
7/31/1997 $9,979 $10,489 $10,056
8/31/1997 $9,896 $10,391 $10,075
9/30/1997 $9,997 $10,514 $10,100
10/31/1997 $10,059 $10,582 $10,125
11/30/1997 $10,128 $10,644 $10,119
12/31/1997 $10,267 $10,799 $10,107
1/31/1998 $10,354 $10,911 $10,125
2/28/1998 $10,350 $10,914 $10,144
3/31/1998 $10,371 $10,924 $10,163
4/30/1998 $10,341 $10,875 $10,182
5/31/1998 $10,490 $11,047 $10,201
6/30/1998 $10,542 $11,090 $10,213
7/31/1998 $10,570 $11,118 $10,226
8/31/1998 $10,711 $11,290 $10,238
9/30/1998 $10,835 $11,430 $10,251
10/31/1998 $10,838 $11,430 $10,276
11/30/1998 $10,875 $11,470 $10,276
12/31/1998 $10,888 $11,499 $10,269
1/31/1999 $10,987 $11,636 $10,294
2/28/1999 $10,944 $11,585 $10,307
3/31/1999 $10,972 $11,601 $10,338
4/30/1999 $10,991 $11,630 $10,414
5/31/1999 $10,937 $11,563 $10,414
6/30/1999 $10,794 $11,396 $10,414
7/31/1999 $10,812 $11,438 $10,445
8/31/1999 $10,676 $11,346 $10,470
9/30/1999 $10,658 $11,351 $10,520
10/31/1999 $10,511 $11,228 $10,539
11/30/1999 $10,613 $11,347 $10,545
12/31/1999 $10,511 $11,263 $10,545
1/31/2000 $10,446 $11,214 $10,576
2/29/2000 $10,588 $11,344 $10,639
3/31/2000 $10,843 $11,592 $10,727
4/30/2000 $10,777 $11,523 $10,733
5/31/2000 $10,701 $11,463 $10,746
6/30/2000 $10,979 $11,767 $10,802
7/31/2000 $11,153 $11,931 $10,827
8/31/2000 $11,317 $12,115 $10,827
9/30/2000 $11,240 $12,052 $10,883
10/31/2000 $11,368 $12,183 $10,902
11/30/2000 $11,466 $12,275 $10,909
12/31/2000 $11,781 $12,579 $10,902
1/31/2001 $11,850 $12,703 $10,971
2/28/2001 $11,890 $12,744 $11,015
3/31/2001 $11,979 $12,858 $11,040
4/30/2001 $11,839 $12,719 $11,084
5/31/2001 $11,959 $12,855 $11,134
6/30/2001 $12,060 $12,941 $11,153
7/31/2001 $12,232 $13,133 $11,122
8/31/2001 $12,414 $13,350 $11,122
9/30/2001 $12,363 $13,305 $11,172
10/31/2001 $12,506 $13,463 $11,134
11/30/2001 $12,434 $13,350 $11,115
12/31/2001 $12,319 $13,223 $11,071
1/31/2002 $12,504 $13,453 $11,096
2/28/2002 $12,649 $13,615 $11,140
3/31/2002 $12,427 $13,348 $11,203
4/30/2002 $12,624 $13,609 $11,266
5/31/2002 $12,686 $13,692 $11,266
6/30/2002 $12,800 $13,836 $11,272
7/31/2002 $12,946 $14,014 $11,284
8/31/2002 $13,072 $14,183 $11,322
9/30/2002 $13,358 $14,494 $11,341
10/31/2002 $13,153 $14,253 $11,360
11/30/2002 $13,129 $14,194 $11,360
12/31/2002 $13,386 $14,494 $11,335
1/31/2003 $13,362 $14,457 $11,385
2/28/2003 $13,523 $14,659 $11,472
3/31/2003 $13,564 $14,668 $11,541
4/30/2003 $13,682 $14,765 $11,516
5/31/2003 $14,009 $15,110 $11,497
6/30/2003 $13,972 $15,046 $11,510
7/31/2003 $13,444 $14,520 $11,523
8/31/2003 $13,551 $14,628 $11,566
9/30/2003 $13,904 $15,058 $11,604
10/31/2003 $13,855 $14,982 $11,591
11/30/2003 $14,008 $15,138 $11,560
12/31/2003 $14,117 $15,264 $11,548
1/31/2004 $14,213 $15,351 $11,604
2/29/2004 $14,425 $15,582 $11,667
3/31/2004 $14,374 $15,528 $11,742
4/30/2004 $14,025 $15,160 $11,779
5/31/2004 $13,963 $15,105 $11,848
6/30/2004 $13,992 $15,160 $11,886
7/31/2004 $14,161 $15,360 $11,867
8/31/2004 $14,413 $15,667 $11,873
9/30/2004 $14,490 $15,751 $11,898
10/31/2004 $14,626 $15,886 $11,961
11/30/2004 $14,503 $15,755 $11,967
12/31/2004 $14,699 $15,947 $11,924
1/31/2005 $14,872 $16,096 $11,949
2/28/2005 $14,844 $16,043 $12,018
3/31/2005 $14,766 $15,942 $12,112
4/30/2005 $14,976 $16,193 $12,193
5/31/2005 $15,079 $16,308 $12,180
6/30/2005 $15,158 $16,409 $12,187
7/31/2005 $15,116 $16,335 $12,243
8/31/2005 $15,233 $16,500 $12,306
9/30/2005 $15,140 $16,388 $12,456
10/31/2005 $15,072 $16,289 $12,481
11/30/2005 $15,139 $16,367 $12,381
12/31/2005 $15,256 $16,508 $12,331
1/31/2006 $15,274 $16,552 $12,425
2/28/2006 $15,391 $16,664 $12,450
3/31/2006 $15,309 $16,549 $12,519
4/30/2006 $15,314 $16,543 $12,625
5/31/2006 $15,357 $16,617 $12,688
6/30/2006 $15,300 $16,554 $12,713
7/31/2006 $15,458 $16,751 $12,751
8/31/2006 $15,641 $17,000 $12,776
9/30/2006 $15,749 $17,118 $12,713
10/31/2006 $15,845 $17,225 $12,644
11/30/2006 $15,979 $17,369 $12,625
12/31/2006 $15,931 $17,307 $12,644
1/31/2007 $15,897 $17,263 $12,683
2/28/2007 $16,076 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS A 2/28/07
- -------------------------------------------
1-Year +0.05%
- -------------------------------------------
5-Year +4.01%
- -------------------------------------------
10-Year +4.86%
- -------------------------------------------
CLASS B (2/1/00-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,116 $10,116 $10,059
3/31/2000 $10,355 $10,337 $10,142
4/30/2000 $10,296 $10,276 $10,148
5/31/2000 $10,220 $10,223 $10,160
6/30/2000 $10,479 $10,494 $10,213
7/31/2000 $10,640 $10,640 $10,237
8/31/2000 $10,791 $10,804 $10,237
9/30/2000 $10,722 $10,747 $10,290
10/31/2000 $10,829 $10,865 $10,308
11/30/2000 $10,927 $10,947 $10,314
12/31/2000 $11,221 $11,217 $10,308
1/31/2001 $11,282 $11,328 $10,373
2/28/2001 $11,314 $11,364 $10,415
3/31/2001 $11,403 $11,466 $10,438
4/30/2001 $11,265 $11,342 $10,480
5/31/2001 $11,373 $11,464 $10,527
6/30/2001 $11,463 $11,541 $10,545
7/31/2001 $11,630 $11,712 $10,515
8/31/2001 $11,798 $11,905 $10,515
9/30/2001 $11,744 $11,865 $10,563
10/31/2001 $11,875 $12,006 $10,527
11/30/2001 $11,801 $11,905 $10,509
12/31/2001 $11,687 $11,792 $10,468
1/31/2002 $11,857 $11,997 $10,492
2/28/2002 $11,987 $12,141 $10,533
3/31/2002 $11,773 $11,903 $10,592
4/30/2002 $11,953 $12,136 $10,652
5/31/2002 $12,015 $12,210 $10,652
6/30/2002 $12,117 $12,339 $10,658
7/31/2002 $12,240 $12,498 $10,669
8/31/2002 $12,363 $12,648 $10,705
9/30/2002 $12,627 $12,925 $10,723
10/31/2002 $12,427 $12,711 $10,741
11/30/2002 $12,399 $12,658 $10,741
12/31/2002 $12,635 $12,925 $10,717
1/31/2003 $12,607 $12,892 $10,764
2/28/2003 $12,752 $13,072 $10,847
3/31/2003 $12,785 $13,080 $10,912
4/30/2003 $12,889 $13,167 $10,889
5/31/2003 $13,191 $13,475 $10,871
6/30/2003 $13,160 $13,418 $10,883
7/31/2003 $12,649 $12,948 $10,895
8/31/2003 $12,743 $13,045 $10,936
9/30/2003 $13,068 $13,428 $10,972
10/31/2003 $13,015 $13,361 $10,960
11/30/2003 $13,152 $13,500 $10,930
12/31/2003 $13,248 $13,612 $10,918
1/31/2004 $13,333 $13,690 $10,972
2/29/2004 $13,525 $13,896 $11,031
3/31/2004 $13,472 $13,847 $11,102
4/30/2004 $13,139 $13,519 $11,137
5/31/2004 $13,076 $13,470 $11,203
6/30/2004 $13,097 $13,519 $11,238
7/31/2004 $13,248 $13,697 $11,220
8/31/2004 $13,476 $13,972 $11,226
9/30/2004 $13,542 $14,046 $11,250
10/31/2004 $13,662 $14,167 $11,309
11/30/2004 $13,541 $14,050 $11,315
12/31/2004 $13,718 $14,221 $11,274
1/31/2005 $13,883 $14,354 $11,297
2/28/2005 $13,839 $14,307 $11,363
3/31/2005 $13,772 $14,216 $11,451
4/30/2005 $13,949 $14,441 $11,528
5/31/2005 $14,049 $14,543 $11,517
6/30/2005 $14,116 $14,633 $11,523
7/31/2005 $14,060 $14,567 $11,576
8/31/2005 $14,161 $14,714 $11,635
9/30/2005 $14,069 $14,615 $11,777
10/31/2005 $14,000 $14,526 $11,801
11/30/2005 $14,067 $14,596 $11,706
12/31/2005 $14,168 $14,721 $11,659
1/31/2006 $14,178 $14,761 $11,748
2/28/2006 $14,268 $14,860 $11,771
3/31/2006 $14,186 $14,758 $11,836
4/30/2006 $14,184 $14,752 $11,937
5/31/2006 $14,217 $14,818 $11,996
6/30/2006 $14,170 $14,762 $12,020
7/31/2006 $14,297 $14,938 $12,056
8/31/2006 $14,471 $15,160 $12,079
9/30/2006 $14,553 $15,265 $12,020
10/31/2006 $14,634 $15,361 $11,955
11/30/2006 $14,763 $15,489 $11,937
12/31/2006 $14,713 $15,434 $11,955
1/31/2007 $14,675 $15,395 $11,991
2/28/2007 $14,841 $15,597 $12,056
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS B 2/28/07
- ---------------------------------------------
1-Year -0.07%
- ---------------------------------------------
5-Year +4.00%
- ---------------------------------------------
Since Inception (2/1/00) +5.74%
- ---------------------------------------------
Annual Report | 21
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS C 2/28/07
- -------------------------------------------
1-Year +2.99%
- -------------------------------------------
5-Year +4.35%
- -------------------------------------------
10-Year +4.74%
- -------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,894 $9,867 $10,025
4/30/1997 $9,969 $9,949 $10,038
5/31/1997 $10,078 $10,099 $10,031
6/30/1997 $10,161 $10,207 $10,044
7/31/1997 $10,396 $10,489 $10,056
8/31/1997 $10,305 $10,391 $10,075
9/30/1997 $10,405 $10,514 $10,100
10/31/1997 $10,463 $10,582 $10,125
11/30/1997 $10,530 $10,644 $10,119
12/31/1997 $10,677 $10,799 $10,107
1/31/1998 $10,754 $10,911 $10,125
2/28/1998 $10,753 $10,914 $10,144
3/31/1998 $10,761 $10,924 $10,163
4/30/1998 $10,725 $10,875 $10,182
5/31/1998 $10,882 $11,047 $10,201
6/30/1998 $10,931 $11,090 $10,213
7/31/1998 $10,955 $11,118 $10,226
8/31/1998 $11,096 $11,290 $10,238
9/30/1998 $11,219 $11,430 $10,251
10/31/1998 $11,217 $11,430 $10,276
11/30/1998 $11,250 $11,470 $10,276
12/31/1998 $11,258 $11,499 $10,269
1/31/1999 $11,355 $11,636 $10,294
2/28/1999 $11,306 $11,585 $10,307
3/31/1999 $11,329 $11,601 $10,338
4/30/1999 $11,342 $11,630 $10,414
5/31/1999 $11,282 $11,563 $10,414
6/30/1999 $11,130 $11,396 $10,414
7/31/1999 $11,143 $11,438 $10,445
8/31/1999 $11,008 $11,346 $10,470
9/30/1999 $10,975 $11,351 $10,520
10/31/1999 $10,811 $11,228 $10,539
11/30/1999 $10,919 $11,347 $10,545
12/31/1999 $10,810 $11,263 $10,545
1/31/2000 $10,739 $11,214 $10,576
2/29/2000 $10,878 $11,344 $10,639
3/31/2000 $11,134 $11,592 $10,727
4/30/2000 $11,061 $11,523 $10,733
5/31/2000 $10,980 $11,463 $10,746
6/30/2000 $11,258 $11,767 $10,802
7/31/2000 $11,429 $11,931 $10,827
8/31/2000 $11,592 $12,115 $10,827
9/30/2000 $11,518 $12,052 $10,883
10/31/2000 $11,632 $12,183 $10,902
11/30/2000 $11,727 $12,275 $10,909
12/31/2000 $12,051 $12,579 $10,902
1/31/2001 $12,106 $12,703 $10,971
2/28/2001 $12,141 $12,744 $11,015
3/31/2001 $12,235 $12,858 $11,040
4/30/2001 $12,088 $12,719 $11,084
5/31/2001 $12,194 $12,855 $11,134
6/30/2001 $12,290 $12,941 $11,153
7/31/2001 $12,469 $13,133 $11,122
8/31/2001 $12,648 $13,350 $11,122
9/30/2001 $12,590 $13,305 $11,172
10/31/2001 $12,729 $13,463 $11,134
11/30/2001 $12,650 $13,350 $11,115
12/31/2001 $12,529 $13,223 $11,071
1/31/2002 $12,720 $13,453 $11,096
2/28/2002 $12,849 $13,615 $11,140
3/31/2002 $12,620 $13,348 $11,203
4/30/2002 $12,812 $13,609 $11,266
5/31/2002 $12,879 $13,692 $11,266
6/30/2002 $12,988 $13,836 $11,272
7/31/2002 $13,119 $14,014 $11,284
8/31/2002 $13,250 $14,183 $11,322
9/30/2002 $13,532 $14,494 $11,341
10/31/2002 $13,319 $14,253 $11,360
11/30/2002 $13,289 $14,194 $11,360
12/31/2002 $13,542 $14,494 $11,335
1/31/2003 $13,512 $14,457 $11,385
2/28/2003 $13,678 $14,659 $11,472
3/31/2003 $13,703 $14,668 $11,541
4/30/2003 $13,815 $14,765 $11,516
5/31/2003 $14,138 $15,110 $11,497
6/30/2003 $14,104 $15,046 $11,510
7/31/2003 $13,557 $14,520 $11,523
8/31/2003 $13,657 $14,628 $11,566
9/30/2003 $14,015 $15,058 $11,604
10/31/2003 $13,958 $14,982 $11,591
11/30/2003 $14,104 $15,138 $11,560
12/31/2003 $14,206 $15,264 $11,548
1/31/2004 $14,296 $15,351 $11,604
2/29/2004 $14,501 $15,582 $11,667
3/31/2004 $14,444 $15,528 $11,742
4/30/2004 $14,078 $15,160 $11,779
5/31/2004 $14,021 $15,105 $11,848
6/30/2004 $14,032 $15,160 $11,886
7/31/2004 $14,206 $15,360 $11,867
8/31/2004 $14,449 $15,667 $11,873
9/30/2004 $14,519 $15,751 $11,898
10/31/2004 $14,648 $15,886 $11,961
11/30/2004 $14,519 $15,755 $11,967
12/31/2004 $14,707 $15,947 $11,924
1/31/2005 $14,872 $16,096 $11,949
2/28/2005 $14,836 $16,043 $12,018
3/31/2005 $14,765 $15,942 $12,112
4/30/2005 $14,954 $16,193 $12,193
5/31/2005 $15,061 $16,308 $12,180
6/30/2005 $15,133 $16,409 $12,187
7/31/2005 $15,072 $16,335 $12,243
8/31/2005 $15,181 $16,500 $12,306
9/30/2005 $15,083 $16,388 $12,456
10/31/2005 $15,009 $16,289 $12,481
11/30/2005 $15,068 $16,367 $12,381
12/31/2005 $15,176 $16,508 $12,331
1/31/2006 $15,198 $16,552 $12,425
2/28/2006 $15,295 $16,664 $12,450
3/31/2006 $15,207 $16,549 $12,519
4/30/2006 $15,205 $16,543 $12,625
5/31/2006 $15,240 $16,617 $12,688
6/30/2006 $15,189 $16,554 $12,713
7/31/2006 $15,338 $16,751 $12,751
8/31/2006 $15,511 $17,000 $12,776
9/30/2006 $15,610 $17,118 $12,713
10/31/2006 $15,698 $17,225 $12,644
11/30/2006 $15,823 $17,369 $12,625
12/31/2006 $15,769 $17,307 $12,644
1/31/2007 $15,728 $17,263 $12,683
2/28/2007 $15,897 $17,490 $12,751
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the 2007 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prere-funded. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation
rate.
22 | Annual Report
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 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 | 23
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.90 $3.22
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
- -----------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.30 $5.92
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- -----------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.00 $5.92
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- -----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.64%; 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.
24 | Annual Report
Franklin Massachusetts Insured Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Massachusetts Insured Tax-Free
Income Fund seeks to provide as high a level of income exempt from federal and
Massachusetts personal income taxes as is 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 The Fund invests
primarily in insured Massachusetts municipal securities. 2
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Massachusetts Insured Tax-Free Income
Fund's annual report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.92 on February 28, 2006, to $11.96 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 49.34 cents per share for the same period. 3 The
Performance Summary beginning on page 28 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 3.95% based on an
annualization of the current 4.11 cent per share dividend and the maximum
offering price of $12.49 on February 28, 2007. An investor in the 2007 maximum
combined effective federal and Massachusetts personal income tax bracket of
38.45% would need to earn a distribution rate of 6.42% 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.
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. Fund shares are not insured by any U.S. or other government agency. They
are subject to market risks and will fluctuate in value.
3. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 83.
Annual Report | 25
DIVIDEND DISTRIBUTIONS*
Franklin Massachusetts Insured Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.06 cents 3.51 cents
- --------------------------------------------------------------------------------
April 2006 4.06 cents 3.51 cents
- --------------------------------------------------------------------------------
May 2006 4.06 cents 3.51 cents
- --------------------------------------------------------------------------------
June 2006 4.11 cents 3.57 cents
- --------------------------------------------------------------------------------
July 2006 4.11 cents 3.57 cents
- --------------------------------------------------------------------------------
August 2006 4.11 cents 3.57 cents
- --------------------------------------------------------------------------------
September 2006 4.11 cents 3.56 cents
- --------------------------------------------------------------------------------
October 2006 4.11 cents 3.56 cents
- --------------------------------------------------------------------------------
November 2006 4.11 cents 3.56 cents
- --------------------------------------------------------------------------------
December 2006 4.11 cents 3.55 cents
- --------------------------------------------------------------------------------
January 2007 4.11 cents 3.55 cents
- --------------------------------------------------------------------------------
February 2007 4.11 cents 3.55 cents
- --------------------------------------------------------------------------------
* Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
COMMONWEALTH UPDATE
Massachusetts' deep and diverse economy continued to expand, driven by the
high-technology, financial services, education and health care sectors. Research
labs and venture capital provide an attractive environment for industries such
as biotechnology and software. Despite a relatively slow job recovery, the
commonwealth's employment gained some ground and unemployment eased. As of
February 2007, the unemployment rate was 5.3%, which was higher than the 4.5%
national rate. 4
Using budget surpluses in the past few years, Massachusetts has rebuilt its
reserve levels. Strong revenue growth came from income, sales and corporate tax
collections in fiscal year 2006. Although the fiscal year 2007 budget includes
additional new spending in education and health care, Massachusetts has taken
certain actions to reduce budget uncertainty and control spending in the past
few years. Specifically, the commonwealth devised financing options
4. Source: Bureau of Labor Statistics.
26 | Annual Report
for two former large budget commitments, the Massachusetts Bay Transportation
Authority (MBTA) and the School Building Authority (SBA). These actions ensure
financial viability for the programs while eliminating future cost uncertainties
for the commonwealth.
Massachusetts, like all states, continued to be challenged by rising health care
costs and public safety spending, contributing to its heavy debt load. Debt
service costs and pension contributions also climbed. Massachusetts' debt levels
ranked among the highest in the nation on a per-capita basis and as a percentage
of personal income.
Despite a heavy debt burden and a large though improving unfunded pension
liability, Massachusetts' effective fiscal management and an established track
record of structural budget balance enhanced its credit profile. Practices such
as monthly revenue estimates, quarterly budget reviews and five-year capital
plans played an important role in maintaining the commonwealth's fiscal
solvency. Massachusetts' positive economic and revenue trends, easing budgetary
pressures and solid reserves also contributed to independent credit rating
agency Standard & Poor's AA rating and stable outlook for its general obligation
bonds. 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.
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.
PORTFOLIO BREAKDOWN
Franklin Massachusetts Insured
Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Higher Education 22.6%
- --------------------------------------------------------------------------------
Prerefunded 22.5%
- --------------------------------------------------------------------------------
Transportation 13.9%
- --------------------------------------------------------------------------------
Other Revenue 10.0%
- --------------------------------------------------------------------------------
Utilities 9.8%
- --------------------------------------------------------------------------------
General Obligation 9.4%
- --------------------------------------------------------------------------------
Tax-Supported 6.0%
- --------------------------------------------------------------------------------
Hospital & Health Care 5.0%
- --------------------------------------------------------------------------------
Housing 0.4%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 0.4%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 27
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------
CLASS A (SYMBOL: FMISX) CHANGE 2/28/07 2/28/06
- ------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $11.96 $11.92
- ------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ------------------------------------------------------------------------------
Dividend Income $0.4934
- ------------------------------------------------------------------------------
CLASS C (SYMBOL: FMAIX) CHANGE 2/28/07 2/28/06
- ------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.05 $12.05 $12.00
- ------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ------------------------------------------------------------------------------
Dividend Income $0.4272
- ------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.59% +27.57% +68.55%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.14% +4.08% +4.90%
- --------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.59% +4.38% +5.01%
- --------------------------------------------------------------------------------------------------
Distribution Rate 4 3.95%
- --------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.42%
- --------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.30%
- --------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.36%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.67%
- --------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.07% +24.22% +59.53%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.07% +4.43% +4.78%
- --------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.41% +4.74% +4.88%
- --------------------------------------------------------------------------------------------------
Distribution Rate 4 3.56%
- --------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.78%
- --------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.91%
- --------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.73%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.22%
- --------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
28 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN
MASSACHUSETTS INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $9,577 $10,000 $10,000
3/31/1997 $9,454 $9,867 $10,025
4/30/1997 $9,530 $9,949 $10,038
5/31/1997 $9,666 $10,099 $10,031
6/30/1997 $9,771 $10,207 $10,044
7/31/1997 $10,036 $10,489 $10,056
8/31/1997 $9,944 $10,391 $10,075
9/30/1997 $10,055 $10,514 $10,100
10/31/1997 $10,107 $10,582 $10,125
11/30/1997 $10,176 $10,644 $10,119
12/31/1997 $10,323 $10,799 $10,107
1/31/1998 $10,393 $10,911 $10,125
2/28/1998 $10,392 $10,914 $10,144
3/31/1998 $10,400 $10,924 $10,163
4/30/1998 $10,381 $10,875 $10,182
5/31/1998 $10,523 $11,047 $10,201
6/30/1998 $10,585 $11,090 $10,213
7/31/1998 $10,602 $11,118 $10,226
8/31/1998 $10,737 $11,290 $10,238
9/30/1998 $10,855 $11,430 $10,251
10/31/1998 $10,817 $11,430 $10,276
11/30/1998 $10,862 $11,470 $10,276
12/31/1998 $10,879 $11,499 $10,269
1/31/1999 $10,971 $11,636 $10,294
2/28/1999 $10,951 $11,585 $10,307
3/31/1999 $10,977 $11,601 $10,338
4/30/1999 $11,002 $11,630 $10,414
5/31/1999 $10,953 $11,563 $10,414
6/30/1999 $10,799 $11,396 $10,414
7/31/1999 $10,815 $11,438 $10,445
8/31/1999 $10,660 $11,346 $10,470
9/30/1999 $10,610 $11,351 $10,520
10/31/1999 $10,453 $11,228 $10,539
11/30/1999 $10,567 $11,347 $10,545
12/31/1999 $10,467 $11,263 $10,545
1/31/2000 $10,406 $11,214 $10,576
2/29/2000 $10,580 $11,344 $10,639
3/31/2000 $10,834 $11,592 $10,727
4/30/2000 $10,752 $11,523 $10,733
5/31/2000 $10,651 $11,463 $10,746
6/30/2000 $10,968 $11,767 $10,802
7/31/2000 $11,166 $11,931 $10,827
8/31/2000 $11,315 $12,115 $10,827
9/30/2000 $11,231 $12,052 $10,883
10/31/2000 $11,381 $12,183 $10,902
11/30/2000 $11,491 $12,275 $10,909
12/31/2000 $11,858 $12,579 $10,902
1/31/2001 $11,906 $12,703 $10,971
2/28/2001 $11,955 $12,744 $11,015
3/31/2001 $12,035 $12,858 $11,040
4/30/2001 $11,865 $12,719 $11,084
5/31/2001 $11,977 $12,855 $11,134
6/30/2001 $12,099 $12,941 $11,153
7/31/2001 $12,275 $13,133 $11,122
8/31/2001 $12,484 $13,350 $11,122
9/30/2001 $12,427 $13,305 $11,172
10/31/2001 $12,572 $13,463 $11,134
11/30/2001 $12,483 $13,350 $11,115
12/31/2001 $12,350 $13,223 $11,071
1/31/2002 $12,518 $13,453 $11,096
2/28/2002 $12,655 $13,615 $11,140
3/31/2002 $12,434 $13,348 $11,203
4/30/2002 $12,605 $13,609 $11,266
5/31/2002 $12,722 $13,692 $11,266
6/30/2002 $12,817 $13,836 $11,272
7/31/2002 $12,968 $14,014 $11,284
8/31/2002 $13,130 $14,183 $11,322
9/30/2002 $13,426 $14,494 $11,341
10/31/2002 $13,186 $14,253 $11,360
11/30/2002 $13,135 $14,194 $11,360
12/31/2002 $13,411 $14,494 $11,335
1/31/2003 $13,393 $14,457 $11,385
2/28/2003 $13,568 $14,659 $11,472
3/31/2003 $13,606 $14,668 $11,541
4/30/2003 $13,725 $14,765 $11,516
5/31/2003 $14,050 $15,110 $11,497
6/30/2003 $13,996 $15,046 $11,510
7/31/2003 $13,456 $14,520 $11,523
8/31/2003 $13,564 $14,628 $11,566
9/30/2003 $13,905 $15,058 $11,604
10/31/2003 $13,850 $14,982 $11,591
11/30/2003 $14,007 $15,138 $11,560
12/31/2003 $14,116 $15,264 $11,548
1/31/2004 $14,214 $15,351 $11,604
2/29/2004 $14,407 $15,582 $11,667
3/31/2004 $14,398 $15,528 $11,742
4/30/2004 $14,055 $15,160 $11,779
5/31/2004 $13,987 $15,105 $11,848
6/30/2004 $14,015 $15,160 $11,886
7/31/2004 $14,200 $15,360 $11,867
8/31/2004 $14,446 $15,667 $11,873
9/30/2004 $14,547 $15,751 $11,898
10/31/2004 $14,673 $15,886 $11,961
11/30/2004 $14,554 $15,755 $11,967
12/31/2004 $14,742 $15,947 $11,924
1/31/2005 $14,906 $16,096 $11,949
2/28/2005 $14,885 $16,043 $12,018
3/31/2005 $14,839 $15,942 $12,112
4/30/2005 $15,078 $16,193 $12,193
5/31/2005 $15,181 $16,308 $12,180
6/30/2005 $15,259 $16,409 $12,187
7/31/2005 $15,173 $16,335 $12,243
8/31/2005 $15,327 $16,500 $12,306
9/30/2005 $15,202 $16,388 $12,456
10/31/2005 $15,115 $16,289 $12,481
11/30/2005 $15,181 $16,367 $12,381
12/31/2005 $15,311 $16,508 $12,331
1/31/2006 $15,326 $16,552 $12,425
2/28/2006 $15,444 $16,664 $12,450
3/31/2006 $15,328 $16,549 $12,519
4/30/2006 $15,355 $16,543 $12,625
5/31/2006 $15,395 $16,617 $12,688
6/30/2006 $15,344 $16,554 $12,713
7/31/2006 $15,516 $16,751 $12,751
8/31/2006 $15,729 $17,000 $12,776
9/30/2006 $15,836 $17,118 $12,713
10/31/2006 $15,918 $17,225 $12,644
11/30/2006 $16,052 $17,369 $12,625
12/31/2006 $16,000 $17,307 $12,644
1/31/2007 $15,948 $17,263 $12,683
2/28/2007 $16,142 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
CLASS A 2/28/07
- -----------------------------------------------
1-Year +0.14%
- -----------------------------------------------
5-Year +4.08%
- -----------------------------------------------
10-Year +4.90%
- -----------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN
MASSACHUSETTS INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,867 $9,867 $10,025
4/30/1997 $9,934 $9,949 $10,038
5/31/1997 $10,071 $10,099 $10,031
6/30/1997 $10,184 $10,207 $10,044
7/31/1997 $10,445 $10,489 $10,056
8/31/1997 $10,345 $10,391 $10,075
9/30/1997 $10,464 $10,514 $10,100
10/31/1997 $10,512 $10,582 $10,125
11/30/1997 $10,579 $10,644 $10,119
12/31/1997 $10,716 $10,799 $10,107
1/31/1998 $10,792 $10,911 $10,125
2/28/1998 $10,787 $10,914 $10,144
3/31/1998 $10,790 $10,924 $10,163
4/30/1998 $10,766 $10,875 $10,182
5/31/1998 $10,907 $11,047 $10,201
6/30/1998 $10,965 $11,090 $10,213
7/31/1998 $10,987 $11,118 $10,226
8/31/1998 $11,112 $11,290 $10,238
9/30/1998 $11,227 $11,430 $10,251
10/31/1998 $11,193 $11,430 $10,276
11/30/1998 $11,225 $11,470 $10,276
12/31/1998 $11,246 $11,499 $10,269
1/31/1999 $11,335 $11,636 $10,294
2/28/1999 $11,300 $11,585 $10,307
3/31/1999 $11,331 $11,601 $10,338
4/30/1999 $11,352 $11,630 $10,414
5/31/1999 $11,295 $11,563 $10,414
6/30/1999 $11,132 $11,396 $10,414
7/31/1999 $11,144 $11,438 $10,445
8/31/1999 $10,980 $11,346 $10,470
9/30/1999 $10,913 $11,351 $10,520
10/31/1999 $10,748 $11,228 $10,539
11/30/1999 $10,869 $11,347 $10,545
12/31/1999 $10,762 $11,263 $10,545
1/31/2000 $10,685 $11,214 $10,576
2/29/2000 $10,868 $11,344 $10,639
3/31/2000 $11,122 $11,592 $10,727
4/30/2000 $11,033 $11,523 $10,733
5/31/2000 $10,925 $11,463 $10,746
6/30/2000 $11,243 $11,767 $10,802
7/31/2000 $11,440 $11,931 $10,827
8/31/2000 $11,586 $12,115 $10,827
9/30/2000 $11,496 $12,052 $10,883
10/31/2000 $11,643 $12,183 $10,902
11/30/2000 $11,750 $12,275 $10,909
12/31/2000 $12,127 $12,579 $10,902
1/31/2001 $12,161 $12,703 $10,971
2/28/2001 $12,216 $12,744 $11,015
3/31/2001 $12,291 $12,858 $11,040
4/30/2001 $12,113 $12,719 $11,084
5/31/2001 $12,221 $12,855 $11,134
6/30/2001 $12,329 $12,941 $11,153
7/31/2001 $12,512 $13,133 $11,122
8/31/2001 $12,707 $13,350 $11,122
9/30/2001 $12,654 $13,305 $11,172
10/31/2001 $12,785 $13,463 $11,134
11/30/2001 $12,699 $13,350 $11,115
12/31/2001 $12,548 $13,223 $11,071
1/31/2002 $12,723 $13,453 $11,096
2/28/2002 $12,845 $13,615 $11,140
3/31/2002 $12,615 $13,348 $11,203
4/30/2002 $12,792 $13,609 $11,266
5/31/2002 $12,905 $13,692 $11,266
6/30/2002 $12,995 $13,836 $11,272
7/31/2002 $13,152 $14,014 $11,284
8/31/2002 $13,299 $14,183 $11,322
9/30/2002 $13,601 $14,494 $11,341
10/31/2002 $13,343 $14,253 $11,360
11/30/2002 $13,285 $14,194 $11,360
12/31/2002 $13,557 $14,494 $11,335
1/31/2003 $13,533 $14,457 $11,385
2/28/2003 $13,702 $14,659 $11,472
3/31/2003 $13,735 $14,668 $11,541
4/30/2003 $13,847 $14,765 $11,516
5/31/2003 $14,168 $15,110 $11,497
6/30/2003 $14,118 $15,046 $11,510
7/31/2003 $13,570 $14,520 $11,523
8/31/2003 $13,671 $14,628 $11,566
9/30/2003 $14,006 $15,058 $11,604
10/31/2003 $13,945 $14,982 $11,591
11/30/2003 $14,082 $15,138 $11,560
12/31/2003 $14,197 $15,264 $11,548
1/31/2004 $14,277 $15,351 $11,604
2/29/2004 $14,475 $15,582 $11,667
3/31/2004 $14,460 $15,528 $11,742
4/30/2004 $14,111 $15,160 $11,779
5/31/2004 $14,037 $15,105 $11,848
6/30/2004 $14,058 $15,160 $11,886
7/31/2004 $14,235 $15,360 $11,867
8/31/2004 $14,474 $15,667 $11,873
9/30/2004 $14,580 $15,751 $11,898
10/31/2004 $14,686 $15,886 $11,961
11/30/2004 $14,573 $15,755 $11,967
12/31/2004 $14,741 $15,947 $11,924
1/31/2005 $14,910 $16,096 $11,949
2/28/2005 $14,869 $16,043 $12,018
3/31/2005 $14,829 $15,942 $12,112
4/30/2005 $15,059 $16,193 $12,193
5/31/2005 $15,154 $16,308 $12,180
6/30/2005 $15,212 $16,409 $12,187
7/31/2005 $15,133 $16,335 $12,243
8/31/2005 $15,267 $16,500 $12,306
9/30/2005 $15,149 $16,388 $12,456
10/31/2005 $15,043 $16,289 $12,481
11/30/2005 $15,114 $16,367 $12,381
12/31/2005 $15,236 $16,508 $12,331
1/31/2006 $15,243 $16,552 $12,425
2/28/2006 $15,340 $16,664 $12,450
3/31/2006 $15,231 $16,549 $12,519
4/30/2006 $15,251 $16,543 $12,625
5/31/2006 $15,283 $16,617 $12,688
6/30/2006 $15,226 $16,554 $12,713
7/31/2006 $15,375 $16,751 $12,751
8/31/2006 $15,591 $17,000 $12,776
9/30/2006 $15,689 $17,118 $12,713
10/31/2006 $15,762 $17,225 $12,644
11/30/2006 $15,887 $17,369 $12,625
12/31/2006 $15,829 $17,307 $12,644
1/31/2007 $15,783 $17,263 $12,683
2/28/2007 $15,953 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
CLASS C 2/28/07
- ------------------------------------------------
1-Year +3.07%
- ------------------------------------------------
5-Year +4.43%
- ------------------------------------------------
10-Year +4.78%
- ------------------------------------------------
Annual Report | 29
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and
Massachusetts personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
30 | Annual Report
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 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 | 31
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ---------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.50 $3.37
- ---------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.36
- ---------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.50 $6.02
- ---------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.54 $6.01
- ---------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.67% and C: 1.20%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
32 | Annual Report
Franklin Michigan Insured Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Michigan Insured Tax-Free Income
Fund seeks to provide as high a level of income exempt from federal and Michigan
personal income taxes as is 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 The Fund invests primarily
in insured Michigan municipal securities. 2
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Michigan Insured Tax-Free Income Fund covers the
fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$12.27 on February 28, 2006, to $12.24 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 52.96 cents per share for the same period. 3 The
Performance Summary beginning on page 36 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 4.36 cent per share dividend and the maximum
offering price of $12.78 on February 28, 2007. An investor in the 2007 maximum
combined effective federal and Michigan personal income tax bracket of 37.54%
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 B and
C shares' performance, please see the Performance Summary.
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
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. Fund shares are not insured by any U.S. or other government agency. They
are subject to market risks and will fluctuate in value.
3. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
Annual Report | 33
DIVIDEND DISTRIBUTIONS*
Franklin Michigan Insured Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 2006 4.47 cents 3.91 cents 3.90 cents
- --------------------------------------------------------------------------------
April 2006 4.47 cents 3.91 cents 3.90 cents
- --------------------------------------------------------------------------------
May 2006 4.47 cents 3.91 cents 3.90 cents
- --------------------------------------------------------------------------------
June 2006 4.39 cents 3.84 cents 3.84 cents
- --------------------------------------------------------------------------------
July 2006 4.39 cents 3.84 cents 3.84 cents
- --------------------------------------------------------------------------------
August 2006 4.39 cents 3.84 cents 3.84 cents
- --------------------------------------------------------------------------------
September 2006 4.39 cents 3.85 cents 3.82 cents
- --------------------------------------------------------------------------------
October 2006 4.39 cents 3.85 cents 3.82 cents
- --------------------------------------------------------------------------------
November 2006 4.39 cents 3.85 cents 3.82 cents
- --------------------------------------------------------------------------------
December 2006 4.36 cents 3.79 cents 3.79 cents
- --------------------------------------------------------------------------------
January 2007 4.36 cents 3.79 cents 3.79 cents
- --------------------------------------------------------------------------------
February 2007 4.36 cents 3.79 cents 3.79 cents
- --------------------------------------------------------------------------------
* Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
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.
STATE UPDATE
Michigan suffered from significant weakness and the continued decline of the
U.S. automobile and related industries. Through past auto industry cycles it has
maintained a strong financial profile with tight controls, but chronic budgetary
stress in recent years and depleted reserves gave the state limited flexibility
to respond to possible further deterioration. Although economic reliance on the
auto industry dropped substantially in past decades, Michigan is by far the
state most dependent on this job-losing industry. Employment trends continued to
be among the worst in the country, and as of February 2007, the unemployment
rate was 6.6%, which was considerably higher than the 4.5% national rate. 4
In fiscal year 2007, spending pressure came from social services including
education, Medicaid and corrections. Although intended to stimulate long-term
economic growth, the repeal of an existing business tax exerted immediate weight
on the budget. Weakening income levels also played into the lowered
4. Source: Bureau of Labor Statistics.
34 | Annual Report
state revenue forecast, which showed an $850 million budget deficit for fiscal
year 2007. 5 Although threatened by prolonged economic underperformance,
Michigan has demonstrated commitment to fiscal solvency. The state has a proven
history of managing budget shortfalls with proactive and effective expenditure
cuts, with its spending growth ranked as one of the lowest among states.
Debt levels and pension positions remained manageable for the state.
Independent credit rating agency Moody's Investors Service assigned Michigan's
general obligation bonds a rating of Aa2 with a negative outlook, reflecting
concerns with the state's ability to maintain structurally balanced operations
in this challenging economic environment. 6
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 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.
PORTFOLIO BREAKDOWN
Franklin Michigan Insured
Tax-Free Income Fund
2/28/07
- -------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- -------------------------------------------------------------------------------
Prerefunded 44.9%
- -------------------------------------------------------------------------------
General Obligation 21.2%
- -------------------------------------------------------------------------------
Utilities 12.5%
- -------------------------------------------------------------------------------
Hospital & Health Care 7.3%
- -------------------------------------------------------------------------------
Higher Education 4.7%
- -------------------------------------------------------------------------------
Transportation 3.5%
- -------------------------------------------------------------------------------
Subject to Government Appropriations 2.3%
- -------------------------------------------------------------------------------
Tax-Supported 2.2%
- -------------------------------------------------------------------------------
Other Revenue 1.4%
- -------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
5. Source: Moody's Investors Service, "Rating Update: Michigan (State of),"
1/26/07.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 35
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FTTMX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $12.24 $12.27
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5296
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0200
- --------------------------------------------------------------------------------
TOTAL $0.5496
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBMIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $12.30 $12.33
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4628
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0200
- --------------------------------------------------------------------------------
TOTAL $0.4828
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRMTX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $12.36 $12.39
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4616
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0200
- --------------------------------------------------------------------------------
TOTAL $0.4816
- --------------------------------------------------------------------------------
36 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE
FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.35% +26.36% +68.57%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.05% +3.89% +4.91%
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.30% +4.26% +5.02%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.09%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.55%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.32%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.31%
- ---------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.64%
- ---------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.77% +23.01% +46.45%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.22% +3.89% +5.54%
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.17% +4.27% +5.45%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.71%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.94%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.92%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.67%
- ---------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.19%
- ---------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.74% +22.98% +59.51%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.74% +4.22% +4.78%
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.14% +4.60% +4.90%
- ---------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.68%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.89%
- ---------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.93%
- ---------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.69%
- ---------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.19%
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 37
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.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS A 2/28/07
- ---------------------------------------------
1-Year -0.05%
- ---------------------------------------------
5-Year +3.89%
- ---------------------------------------------
10-Year +4.91%
- ---------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN MICHIGAN INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $9,577 $10,000 $10,000
3/31/1997 $9,461 $9,867 $10,025
4/30/1997 $9,529 $9,949 $10,038
5/31/1997 $9,654 $10,099 $10,031
6/30/1997 $9,738 $10,207 $10,044
7/31/1997 $9,978 $10,489 $10,056
8/31/1997 $9,882 $10,391 $10,075
9/30/1997 $9,985 $10,514 $10,100
10/31/1997 $10,046 $10,582 $10,125
11/30/1997 $10,108 $10,644 $10,119
12/31/1997 $10,276 $10,799 $10,107
1/31/1998 $10,362 $10,911 $10,125
2/28/1998 $10,380 $10,914 $10,144
3/31/1998 $10,381 $10,924 $10,163
4/30/1998 $10,365 $10,875 $10,182
5/31/1998 $10,512 $11,047 $10,201
6/30/1998 $10,584 $11,090 $10,213
7/31/1998 $10,611 $11,118 $10,226
8/31/1998 $10,742 $11,290 $10,238
9/30/1998 $10,875 $11,430 $10,251
10/31/1998 $10,875 $11,430 $10,276
11/30/1998 $10,921 $11,470 $10,276
12/31/1998 $10,940 $11,499 $10,269
1/31/1999 $11,039 $11,636 $10,294
2/28/1999 $11,030 $11,585 $10,307
3/31/1999 $11,056 $11,601 $10,338
4/30/1999 $11,074 $11,630 $10,414
5/31/1999 $11,019 $11,563 $10,414
6/30/1999 $10,882 $11,396 $10,414
7/31/1999 $10,909 $11,438 $10,445
8/31/1999 $10,789 $11,346 $10,470
9/30/1999 $10,770 $11,351 $10,520
10/31/1999 $10,668 $11,228 $10,539
11/30/1999 $10,760 $11,347 $10,545
12/31/1999 $10,685 $11,263 $10,545
1/31/2000 $10,638 $11,214 $10,576
2/29/2000 $10,741 $11,344 $10,639
3/31/2000 $10,968 $11,592 $10,727
4/30/2000 $10,910 $11,523 $10,733
5/31/2000 $10,853 $11,463 $10,746
6/30/2000 $11,131 $11,767 $10,802
7/31/2000 $11,285 $11,931 $10,827
8/31/2000 $11,449 $12,115 $10,827
9/30/2000 $11,390 $12,052 $10,883
10/31/2000 $11,497 $12,183 $10,902
11/30/2000 $11,575 $12,275 $10,909
12/31/2000 $11,870 $12,579 $10,902
1/31/2001 $11,948 $12,703 $10,971
2/28/2001 $12,007 $12,744 $11,015
3/31/2001 $12,116 $12,858 $11,040
4/30/2001 $12,006 $12,719 $11,084
5/31/2001 $12,117 $12,855 $11,134
6/30/2001 $12,196 $12,941 $11,153
7/31/2001 $12,366 $13,133 $11,122
8/31/2001 $12,538 $13,350 $11,122
9/30/2001 $12,506 $13,305 $11,172
10/31/2001 $12,648 $13,463 $11,134
11/30/2001 $12,554 $13,350 $11,115
12/31/2001 $12,440 $13,223 $11,071
1/31/2002 $12,655 $13,453 $11,096
2/28/2002 $12,779 $13,615 $11,140
3/31/2002 $12,538 $13,348 $11,203
4/30/2002 $12,757 $13,609 $11,266
5/31/2002 $12,819 $13,692 $11,266
6/30/2002 $12,933 $13,836 $11,272
7/31/2002 $13,090 $14,014 $11,284
8/31/2002 $13,227 $14,183 $11,322
9/30/2002 $13,503 $14,494 $11,341
10/31/2002 $13,329 $14,253 $11,360
11/30/2002 $13,294 $14,194 $11,360
12/31/2002 $13,562 $14,494 $11,335
1/31/2003 $13,536 $14,457 $11,385
2/28/2003 $13,698 $14,659 $11,472
3/31/2003 $13,727 $14,668 $11,541
4/30/2003 $13,835 $14,765 $11,516
5/31/2003 $14,164 $15,110 $11,497
6/30/2003 $14,114 $15,046 $11,510
7/31/2003 $13,617 $14,520 $11,523
8/31/2003 $13,701 $14,628 $11,566
9/30/2003 $14,023 $15,058 $11,604
10/31/2003 $13,983 $14,982 $11,591
11/30/2003 $14,137 $15,138 $11,560
12/31/2003 $14,233 $15,264 $11,548
1/31/2004 $14,330 $15,351 $11,604
2/29/2004 $14,531 $15,582 $11,667
3/31/2004 $14,467 $15,528 $11,742
4/30/2004 $14,137 $15,160 $11,779
5/31/2004 $14,096 $15,105 $11,848
6/30/2004 $14,102 $15,160 $11,886
7/31/2004 $14,261 $15,360 $11,867
8/31/2004 $14,490 $15,667 $11,873
9/30/2004 $14,568 $15,751 $11,898
10/31/2004 $14,705 $15,886 $11,961
11/30/2004 $14,580 $15,755 $11,967
12/31/2004 $14,778 $15,947 $11,924
1/31/2005 $14,929 $16,096 $11,949
2/28/2005 $14,912 $16,043 $12,018
3/31/2005 $14,834 $15,942 $12,112
4/30/2005 $15,023 $16,193 $12,193
5/31/2005 $15,151 $16,308 $12,180
6/30/2005 $15,218 $16,409 $12,187
7/31/2005 $15,187 $16,335 $12,243
8/31/2005 $15,304 $16,500 $12,306
9/30/2005 $15,224 $16,388 $12,456
10/31/2005 $15,168 $16,289 $12,481
11/30/2005 $15,236 $16,367 $12,381
12/31/2005 $15,342 $16,508 $12,331
1/31/2006 $15,372 $16,552 $12,425
2/28/2006 $15,479 $16,664 $12,450
3/31/2006 $15,396 $16,549 $12,519
4/30/2006 $15,415 $16,543 $12,625
5/31/2006 $15,459 $16,617 $12,688
6/30/2006 $15,387 $16,554 $12,713
7/31/2006 $15,559 $16,751 $12,751
8/31/2006 $15,744 $17,000 $12,776
9/30/2006 $15,839 $17,118 $12,713
10/31/2006 $15,922 $17,225 $12,644
11/30/2006 $16,044 $17,369 $12,625
12/31/2006 $15,997 $17,307 $12,644
1/31/2007 $15,975 $17,263 $12,683
2/28/2007 $16,144 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS B 2/28/07
- ---------------------------------------------
1-Year -0.22%
- ---------------------------------------------
5-Year +3.89%
- ---------------------------------------------
Since Inception (2/1/00) +5.54%
- ---------------------------------------------
CLASS B (2/1/00-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN MICHIGAN INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,096 $10,116 $10,059
3/31/2000 $10,295 $10,337 $10,142
4/30/2000 $10,236 $10,276 $10,148
5/31/2000 $10,187 $10,223 $10,160
6/30/2000 $10,442 $10,494 $10,213
7/31/2000 $10,581 $10,640 $10,237
8/31/2000 $10,730 $10,804 $10,237
9/30/2000 $10,679 $10,747 $10,290
10/31/2000 $10,774 $10,865 $10,308
11/30/2000 $10,842 $10,947 $10,314
12/31/2000 $11,112 $11,217 $10,308
1/31/2001 $11,189 $11,328 $10,373
2/28/2001 $11,239 $11,364 $10,415
3/31/2001 $11,326 $11,466 $10,438
4/30/2001 $11,227 $11,342 $10,480
5/31/2001 $11,324 $11,464 $10,527
6/30/2001 $11,393 $11,541 $10,545
7/31/2001 $11,547 $11,712 $10,515
8/31/2001 $11,701 $11,905 $10,515
9/30/2001 $11,675 $11,865 $10,563
10/31/2001 $11,792 $12,006 $10,527
11/30/2001 $11,700 $11,905 $10,509
12/31/2001 $11,588 $11,792 $10,468
1/31/2002 $11,783 $11,997 $10,492
2/28/2002 $11,892 $12,141 $10,533
3/31/2002 $11,662 $11,903 $10,592
4/30/2002 $11,860 $12,136 $10,652
5/31/2002 $11,912 $12,210 $10,652
6/30/2002 $12,012 $12,339 $10,658
7/31/2002 $12,162 $12,498 $10,669
8/31/2002 $12,283 $12,648 $10,705
9/30/2002 $12,532 $12,925 $10,723
10/31/2002 $12,356 $12,711 $10,741
11/30/2002 $12,328 $12,658 $10,741
12/31/2002 $12,569 $12,925 $10,717
1/31/2003 $12,540 $12,892 $10,764
2/28/2003 $12,683 $13,072 $10,847
3/31/2003 $12,705 $13,080 $10,912
4/30/2003 $12,798 $13,167 $10,889
5/31/2003 $13,105 $13,475 $10,871
6/30/2003 $13,053 $13,418 $10,883
7/31/2003 $12,580 $12,948 $10,895
8/31/2003 $12,651 $13,045 $10,936
9/30/2003 $12,941 $13,428 $10,972
10/31/2003 $12,898 $13,361 $10,960
11/30/2003 $13,033 $13,500 $10,930
12/31/2003 $13,116 $13,612 $10,918
1/31/2004 $13,210 $13,690 $10,972
2/29/2004 $13,378 $13,896 $11,031
3/31/2004 $13,324 $13,847 $11,102
4/30/2004 $13,015 $13,519 $11,137
5/31/2004 $12,961 $13,470 $11,203
6/30/2004 $12,971 $13,519 $11,238
7/31/2004 $13,110 $13,697 $11,220
8/31/2004 $13,314 $13,972 $11,226
9/30/2004 $13,379 $14,046 $11,250
10/31/2004 $13,488 $14,167 $11,309
11/30/2004 $13,379 $14,050 $11,315
12/31/2004 $13,543 $14,221 $11,274
1/31/2005 $13,685 $14,354 $11,297
2/28/2005 $13,652 $14,307 $11,363
3/31/2005 $13,575 $14,216 $11,451
4/30/2005 $13,751 $14,441 $11,528
5/31/2005 $13,861 $14,543 $11,517
6/30/2005 $13,916 $14,633 $11,523
7/31/2005 $13,882 $14,567 $11,576
8/31/2005 $13,982 $14,714 $11,635
9/30/2005 $13,903 $14,615 $11,777
10/31/2005 $13,846 $14,526 $11,801
11/30/2005 $13,901 $14,596 $11,706
12/31/2005 $13,980 $14,721 $11,659
1/31/2006 $14,001 $14,761 $11,748
2/28/2006 $14,103 $14,860 $11,771
3/31/2006 $14,021 $14,758 $11,836
4/30/2006 $14,020 $14,752 $11,937
5/31/2006 $14,065 $14,818 $11,996
6/30/2006 $13,994 $14,762 $12,020
7/31/2006 $14,131 $14,938 $12,056
8/31/2006 $14,304 $15,160 $12,079
9/30/2006 $14,384 $15,265 $12,020
10/31/2006 $14,452 $15,361 $11,955
11/30/2006 $14,556 $15,489 $11,937
12/31/2006 $14,507 $15,434 $11,955
1/31/2007 $14,481 $15,395 $11,991
2/28/2007 $14,645 $15,597 $12,056
38 | Annual Report
Performance Summary (CONTINUED)
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN MICHIGAN INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,865 $9,867 $10,025
4/30/1997 $9,932 $9,949 $10,038
5/31/1997 $10,057 $10,099 $10,031
6/30/1997 $10,148 $10,207 $10,044
7/31/1997 $10,391 $10,489 $10,056
8/31/1997 $10,279 $10,391 $10,075
9/30/1997 $10,388 $10,514 $10,100
10/31/1997 $10,438 $10,582 $10,125
11/30/1997 $10,505 $10,644 $10,119
12/31/1997 $10,674 $10,799 $10,107
1/31/1998 $10,757 $10,911 $10,125
2/28/1998 $10,771 $10,914 $10,144
3/31/1998 $10,767 $10,924 $10,163
4/30/1998 $10,744 $10,875 $10,182
5/31/1998 $10,890 $11,047 $10,201
6/30/1998 $10,968 $11,090 $10,213
7/31/1998 $10,991 $11,118 $10,226
8/31/1998 $11,121 $11,290 $10,238
9/30/1998 $11,252 $11,430 $10,251
10/31/1998 $11,248 $11,430 $10,276
11/30/1998 $11,290 $11,470 $10,276
12/31/1998 $11,306 $11,499 $10,269
1/31/1999 $11,402 $11,636 $10,294
2/28/1999 $11,388 $11,585 $10,307
3/31/1999 $11,410 $11,601 $10,338
4/30/1999 $11,422 $11,630 $10,414
5/31/1999 $11,360 $11,563 $10,414
6/30/1999 $11,214 $11,396 $10,414
7/31/1999 $11,236 $11,438 $10,445
8/31/1999 $11,108 $11,346 $10,470
9/30/1999 $11,084 $11,351 $10,520
10/31/1999 $10,965 $11,228 $10,539
11/30/1999 $11,063 $11,347 $10,545
12/31/1999 $10,972 $11,263 $10,545
1/31/2000 $10,919 $11,214 $10,576
2/29/2000 $11,029 $11,344 $10,639
3/31/2000 $11,255 $11,592 $10,727
4/30/2000 $11,182 $11,523 $10,733
5/31/2000 $11,128 $11,463 $10,746
6/30/2000 $11,405 $11,767 $10,802
7/31/2000 $11,557 $11,931 $10,827
8/31/2000 $11,718 $12,115 $10,827
9/30/2000 $11,653 $12,052 $10,883
10/31/2000 $11,757 $12,183 $10,902
11/30/2000 $11,841 $12,275 $10,909
12/31/2000 $12,124 $12,579 $10,902
1/31/2001 $12,208 $12,703 $10,971
2/28/2001 $12,262 $12,744 $11,015
3/31/2001 $12,357 $12,858 $11,040
4/30/2001 $12,250 $12,719 $11,084
5/31/2001 $12,345 $12,855 $11,134
6/30/2001 $12,430 $12,941 $11,153
7/31/2001 $12,597 $13,133 $11,122
8/31/2001 $12,765 $13,350 $11,122
9/30/2001 $12,737 $13,305 $11,172
10/31/2001 $12,864 $13,463 $11,134
11/30/2001 $12,764 $13,350 $11,115
12/31/2001 $12,642 $13,223 $11,071
1/31/2002 $12,854 $13,453 $11,096
2/28/2002 $12,972 $13,615 $11,140
3/31/2002 $12,723 $13,348 $11,203
4/30/2002 $12,938 $13,609 $11,266
5/31/2002 $12,994 $13,692 $11,266
6/30/2002 $13,103 $13,836 $11,272
7/31/2002 $13,266 $14,014 $11,284
8/31/2002 $13,397 $14,183 $11,322
9/30/2002 $13,668 $14,494 $11,341
10/31/2002 $13,488 $14,253 $11,360
11/30/2002 $13,447 $14,194 $11,360
12/31/2002 $13,709 $14,494 $11,335
1/31/2003 $13,678 $14,457 $11,385
2/28/2003 $13,834 $14,659 $11,472
3/31/2003 $13,858 $14,668 $11,541
4/30/2003 $13,959 $14,765 $11,516
5/31/2003 $14,294 $15,110 $11,497
6/30/2003 $14,236 $15,046 $11,510
7/31/2003 $13,721 $14,520 $11,523
8/31/2003 $13,798 $14,628 $11,566
9/30/2003 $14,123 $15,058 $11,604
10/31/2003 $14,066 $14,982 $11,591
11/30/2003 $14,223 $15,138 $11,560
12/31/2003 $14,312 $15,264 $11,548
1/31/2004 $14,403 $15,351 $11,604
2/29/2004 $14,598 $15,582 $11,667
3/31/2004 $14,527 $15,528 $11,742
4/30/2004 $14,191 $15,160 $11,779
5/31/2004 $14,133 $15,105 $11,848
6/30/2004 $14,144 $15,160 $11,886
7/31/2004 $14,295 $15,360 $11,867
8/31/2004 $14,516 $15,667 $11,873
9/30/2004 $14,587 $15,751 $11,898
10/31/2004 $14,716 $15,886 $11,961
11/30/2004 $14,586 $15,755 $11,967
12/31/2004 $14,776 $15,947 $11,924
1/31/2005 $14,918 $16,096 $11,949
2/28/2005 $14,894 $16,043 $12,018
3/31/2005 $14,810 $15,942 $12,112
4/30/2005 $14,990 $16,193 $12,193
5/31/2005 $15,122 $16,308 $12,180
6/30/2005 $15,181 $16,409 $12,187
7/31/2005 $15,144 $16,335 $12,243
8/31/2005 $15,253 $16,500 $12,306
9/30/2005 $15,167 $16,388 $12,456
10/31/2005 $15,092 $16,289 $12,481
11/30/2005 $15,152 $16,367 $12,381
12/31/2005 $15,250 $16,508 $12,331
1/31/2006 $15,273 $16,552 $12,425
2/28/2006 $15,383 $16,664 $12,450
3/31/2006 $15,295 $16,549 $12,519
4/30/2006 $15,294 $16,543 $12,625
5/31/2006 $15,342 $16,617 $12,688
6/30/2006 $15,265 $16,554 $12,713
7/31/2006 $15,414 $16,751 $12,751
8/31/2006 $15,601 $17,000 $12,776
9/30/2006 $15,688 $17,118 $12,713
10/31/2006 $15,762 $17,225 $12,644
11/30/2006 $15,874 $17,369 $12,625
12/31/2006 $15,833 $17,307 $12,644
1/31/2007 $15,792 $17,263 $12,683
2/28/2007 $15,951 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +2.74%
- ----------------------------------------------
5-Year +4.22%
- ----------------------------------------------
10-Year +4.78%
- ----------------------------------------------
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Michigan
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prere-funded. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation
rate.
Annual Report | 39
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 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.
40 | 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.50 $3.21
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
- ------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,022.60 $5.92
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- ------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,022.50 $5.92
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- ------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.64%; 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 | 41
Franklin Minnesota Insured Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Minnesota Insured Tax-Free
Income Fund seeks to provide as high a level of income exempt from federal and
Minnesota personal income taxes as is 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 The Fund invests
primarily in insured Minnesota municipal securities. 2
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Minnesota Insured Tax-Free Income Fund's
annual report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$12.13 on February 28, 2006, to $12.16 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 50.07 cents per share for the same period. 3 The
Performance Summary beginning on page 45 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 3.93% based on an
annualization of the current 4.16 cent per share dividend and the maximum
offering price of $12.70 on February 28, 2007. An investor in the 2007 maximum
combined effective federal and Minnesota personal income tax bracket of 40.10%
would need to earn a distribution rate of 6.56% 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 alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. Fund shares are not insured by any U.S. or other government agency. They
are subject to market risks and will fluctuate in value.
3. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 100.
42 | Annual Report
DIVIDEND DISTRIBUTIONS 3
Franklin Minnesota Insured Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
----------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.16 cents 3.60 cents
- --------------------------------------------------------------------------------
April 2006 4.16 cents 3.60 cents
- --------------------------------------------------------------------------------
May 2006 4.16 cents 3.60 cents
- --------------------------------------------------------------------------------
June 2006 4.16 cents 3.61 cents
- --------------------------------------------------------------------------------
July 2006 4.16 cents 3.61 cents
- --------------------------------------------------------------------------------
August 2006 4.16 cents 3.61 cents
- --------------------------------------------------------------------------------
September 2006 4.16 cents 3.62 cents
- --------------------------------------------------------------------------------
October 2006 4.16 cents 3.62 cents
- --------------------------------------------------------------------------------
November 2006 4.16 cents 3.62 cents
- --------------------------------------------------------------------------------
December 2006 4.16 cents 3.59 cents
- --------------------------------------------------------------------------------
January 2007 4.16 cents 3.59 cents
- --------------------------------------------------------------------------------
February 2007 4.16 cents 3.59 cents
- --------------------------------------------------------------------------------
STATE UPDATE
Minnesota's deep and diverse economy improved during the reporting period. With
Minneapolis-St. Paul as the center of the midwest economy, the state is
supported by a large and highly educated workforce as well as strong personal
and household incomes. Job growth, though lagging the nation's, came from the
education and health sectors. The service sector provides the most jobs,
particularly health care and business services companies. As of February 2007,
the unemployment rate was 4.5%, which was the same as the national rate. 4
Although partisan gridlock with the 2006-2007 biennial budget caused the state's
first partial government shutdown in its history, Minnesota's financial picture
markedly improved with a return to fiscal stability, higher liquidity and solid
reserves. The post-shutdown budget was balanced using extensions on existing
sales taxes on liquor and rental cars, as well as the controversial 75
cent-per-pack cigarette health impact fee. Although tobacco companies sued the
state over the fee, the Minnesota Supreme Court subsequently ruled in the
state's favor. Spending increases came from per-pupil costs and higher local
4. Source: Bureau of Labor Statistics.
Annual Report | 43
PORTFOLIO BREAKDOWN
Franklin Minnesota Insured
Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 49.4%
- --------------------------------------------------------------------------------
Prerefunded 14.6%
- --------------------------------------------------------------------------------
Hospital & Health Care 12.0%
- --------------------------------------------------------------------------------
Utilities 11.5%
- --------------------------------------------------------------------------------
Housing 6.0%
- --------------------------------------------------------------------------------
Higher Education 3.8%
- --------------------------------------------------------------------------------
Other Revenue 1.0%
- --------------------------------------------------------------------------------
Tax-Supported 0.9%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 0.4%
- --------------------------------------------------------------------------------
Transportation 0.4%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
government aid to municipalities. Minnesota's extensive planning and analysis
and multiyear budgeting and cash flow projections paid off -- estimates for
fiscal year 2007 pointed to major revenue sources performing near forecast
levels and posting a $73 million surplus. 5
With a formal debt management policy in place for 20 years, Minnesota maintained
low debt ratios and had ample capacity to meet capital needs. The state's
ability to weather financial challenges and rebuild reserve levels in accordance
with its budget expectations earned independent rating agency Standard & Poor's
highest rating of AAA with a stable outlook for its general obligation bonds. 6
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 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.
5. Source: Standard & Poor's, "Research: Minnesota GO Bonds Rated `AAA';
Rebounding Economy, Strong Management Add to Financial Stability,"
RATINGSDIRECT, 10/20/06.
6. 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
44 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- -------------------------------------------------------------------------------
CLASS A (SYMBOL: FMINX) CHANGE 2/28/07 2/28/06
- -------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $12.16 $12.13
- -------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -------------------------------------------------------------------------------
Dividend Income $0.5007
- -------------------------------------------------------------------------------
CLASS C (SYMBOL: FMNIX) CHANGE 2/28/07 2/28/06
- -------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.02 $12.24 $12.22
- -------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -------------------------------------------------------------------------------
Dividend Income $0.4340
- -------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.50% +25.94% +63.83%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.04% +3.82% +4.61%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.48% +4.06% +4.67%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 3.93%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.56%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.38%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.64%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.67%
- -----------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.81% +22.56% +55.10%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.81% +4.15% +4.49%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.40% +4.39% +4.57%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 3.54%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.91%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.99%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.99%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.22%
- -----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 45
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.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS A 2/28/07
- -------------------------------------------
1-Year +0.04%
- -------------------------------------------
5-Year +3.82%
- -------------------------------------------
10-Year +4.61%
- -------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN FLORIDA INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $9,577 $10,000 $10,000
3/31/1997 $9,485 $9,867 $10,025
4/30/1997 $9,552 $9,949 $10,038
5/31/1997 $9,660 $10,099 $10,031
6/30/1997 $9,744 $10,207 $10,044
7/31/1997 $9,966 $10,489 $10,056
8/31/1997 $9,904 $10,391 $10,075
9/30/1997 $9,997 $10,514 $10,100
10/31/1997 $10,049 $10,582 $10,125
11/30/1997 $10,109 $10,644 $10,119
12/31/1997 $10,217 $10,799 $10,107
1/31/1998 $10,295 $10,911 $10,125
2/28/1998 $10,306 $10,914 $10,144
3/31/1998 $10,324 $10,924 $10,163
4/30/1998 $10,309 $10,875 $10,182
5/31/1998 $10,439 $11,047 $10,201
6/30/1998 $10,486 $11,090 $10,213
7/31/1998 $10,505 $11,118 $10,226
8/31/1998 $10,620 $11,290 $10,238
9/30/1998 $10,717 $11,430 $10,251
10/31/1998 $10,745 $11,430 $10,276
11/30/1998 $10,782 $11,470 $10,276
12/31/1998 $10,797 $11,499 $10,269
1/31/1999 $10,877 $11,636 $10,294
2/28/1999 $10,842 $11,585 $10,307
3/31/1999 $10,886 $11,601 $10,338
4/30/1999 $10,895 $11,630 $10,414
5/31/1999 $10,859 $11,563 $10,414
6/30/1999 $10,708 $11,396 $10,414
7/31/1999 $10,725 $11,438 $10,445
8/31/1999 $10,578 $11,346 $10,470
9/30/1999 $10,549 $11,351 $10,520
10/31/1999 $10,381 $11,228 $10,539
11/30/1999 $10,491 $11,347 $10,545
12/31/1999 $10,387 $11,263 $10,545
1/31/2000 $10,330 $11,214 $10,576
2/29/2000 $10,478 $11,344 $10,639
3/31/2000 $10,731 $11,592 $10,727
4/30/2000 $10,654 $11,523 $10,733
5/31/2000 $10,558 $11,463 $10,746
6/30/2000 $10,843 $11,767 $10,802
7/31/2000 $11,004 $11,931 $10,827
8/31/2000 $11,186 $12,115 $10,827
9/30/2000 $11,116 $12,052 $10,883
10/31/2000 $11,241 $12,183 $10,902
11/30/2000 $11,337 $12,275 $10,909
12/31/2000 $11,630 $12,579 $10,902
1/31/2001 $11,716 $12,703 $10,971
2/28/2001 $11,774 $12,744 $11,015
3/31/2001 $11,881 $12,858 $11,040
4/30/2001 $11,760 $12,719 $11,084
5/31/2001 $11,869 $12,855 $11,134
6/30/2001 $11,957 $12,941 $11,153
7/31/2001 $12,107 $13,133 $11,122
8/31/2001 $12,267 $13,350 $11,122
9/30/2001 $12,224 $13,305 $11,172
10/31/2001 $12,355 $13,463 $11,134
11/30/2001 $12,291 $13,350 $11,115
12/31/2001 $12,176 $13,223 $11,071
1/31/2002 $12,348 $13,453 $11,096
2/28/2002 $12,460 $13,615 $11,140
3/31/2002 $12,281 $13,348 $11,203
4/30/2002 $12,456 $13,609 $11,266
5/31/2002 $12,528 $13,692 $11,266
6/30/2002 $12,620 $13,836 $11,272
7/31/2002 $12,755 $14,014 $11,284
8/31/2002 $12,869 $14,183 $11,322
9/30/2002 $13,122 $14,494 $11,341
10/31/2002 $12,937 $14,253 $11,360
11/30/2002 $12,912 $14,194 $11,360
12/31/2002 $13,145 $14,494 $11,335
1/31/2003 $13,152 $14,457 $11,385
2/28/2003 $13,321 $14,659 $11,472
3/31/2003 $13,337 $14,668 $11,541
4/30/2003 $13,441 $14,765 $11,516
5/31/2003 $13,754 $15,110 $11,497
6/30/2003 $13,704 $15,046 $11,510
7/31/2003 $13,266 $14,520 $11,523
8/31/2003 $13,337 $14,628 $11,566
9/30/2003 $13,654 $15,058 $11,604
10/31/2003 $13,570 $14,982 $11,591
11/30/2003 $13,710 $15,138 $11,560
12/31/2003 $13,827 $15,264 $11,548
1/31/2004 $13,911 $15,351 $11,604
2/29/2004 $14,098 $15,582 $11,667
3/31/2004 $14,067 $15,528 $11,742
4/30/2004 $13,751 $15,160 $11,779
5/31/2004 $13,698 $15,105 $11,848
6/30/2004 $13,737 $15,160 $11,886
7/31/2004 $13,891 $15,360 $11,867
8/31/2004 $14,115 $15,667 $11,873
9/30/2004 $14,201 $15,751 $11,898
10/31/2004 $14,333 $15,886 $11,961
11/30/2004 $14,220 $15,755 $11,967
12/31/2004 $14,412 $15,947 $11,924
1/31/2005 $14,558 $16,096 $11,949
2/28/2005 $14,514 $16,043 $12,018
3/31/2005 $14,435 $15,942 $12,112
4/30/2005 $14,642 $16,193 $12,193
5/31/2005 $14,729 $16,308 $12,180
6/30/2005 $14,792 $16,409 $12,187
7/31/2005 $14,735 $16,335 $12,243
8/31/2005 $14,871 $16,500 $12,306
9/30/2005 $14,765 $16,388 $12,456
10/31/2005 $14,670 $16,289 $12,481
11/30/2005 $14,758 $16,367 $12,381
12/31/2005 $14,883 $16,508 $12,331
1/31/2006 $14,910 $16,552 $12,425
2/28/2006 $15,024 $16,664 $12,450
3/31/2006 $14,914 $16,549 $12,519
4/30/2006 $14,903 $16,543 $12,625
5/31/2006 $14,943 $16,617 $12,688
6/30/2006 $14,907 $16,554 $12,713
7/31/2006 $15,060 $16,751 $12,751
8/31/2006 $15,277 $17,000 $12,776
9/30/2006 $15,380 $17,118 $12,713
10/31/2006 $15,458 $17,225 $12,644
11/30/2006 $15,601 $17,369 $12,625
12/31/2006 $15,539 $17,307 $12,644
1/31/2007 $15,515 $17,263 $12,683
2/28/2007 $15,690 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS C 2/28/07
- -------------------------------------------
1-Year +2.81%
- -------------------------------------------
5-Year +4.15%
- -------------------------------------------
10-Year +4.49%
- -------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN FLORIDA INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,895 $9,867 $10,025
4/30/1997 $9,961 $9,949 $10,038
5/31/1997 $10,069 $10,099 $10,031
6/30/1997 $10,160 $10,207 $10,044
7/31/1997 $10,377 $10,489 $10,056
8/31/1997 $10,307 $10,391 $10,075
9/30/1997 $10,398 $10,514 $10,100
10/31/1997 $10,448 $10,582 $10,125
11/30/1997 $10,505 $10,644 $10,119
12/31/1997 $10,620 $10,799 $10,107
1/31/1998 $10,696 $10,911 $10,125
2/28/1998 $10,702 $10,914 $10,144
3/31/1998 $10,716 $10,924 $10,163
4/30/1998 $10,696 $10,875 $10,182
5/31/1998 $10,826 $11,047 $10,201
6/30/1998 $10,870 $11,090 $10,213
7/31/1998 $10,884 $11,118 $10,226
8/31/1998 $10,997 $11,290 $10,238
9/30/1998 $11,092 $11,430 $10,251
10/31/1998 $11,116 $11,430 $10,276
11/30/1998 $11,149 $11,470 $10,276
12/31/1998 $11,168 $11,499 $10,269
1/31/1999 $11,245 $11,636 $10,294
2/28/1999 $11,194 $11,585 $10,307
3/31/1999 $11,235 $11,601 $10,338
4/30/1999 $11,247 $11,630 $10,414
5/31/1999 $11,196 $11,563 $10,414
6/30/1999 $11,035 $11,396 $10,414
7/31/1999 $11,057 $11,438 $10,445
8/31/1999 $10,892 $11,346 $10,470
9/30/1999 $10,857 $11,351 $10,520
10/31/1999 $10,680 $11,228 $10,539
11/30/1999 $10,787 $11,347 $10,545
12/31/1999 $10,676 $11,263 $10,545
1/31/2000 $10,612 $11,214 $10,576
2/29/2000 $10,760 $11,344 $10,639
3/31/2000 $11,023 $11,592 $10,727
4/30/2000 $10,939 $11,523 $10,733
5/31/2000 $10,836 $11,463 $10,746
6/30/2000 $11,112 $11,767 $10,802
7/31/2000 $11,281 $11,931 $10,827
8/31/2000 $11,461 $12,115 $10,827
9/30/2000 $11,385 $12,052 $10,883
10/31/2000 $11,507 $12,183 $10,902
11/30/2000 $11,590 $12,275 $10,909
12/31/2000 $11,892 $12,579 $10,902
1/31/2001 $11,975 $12,703 $10,971
2/28/2001 $12,028 $12,744 $11,015
3/31/2001 $12,131 $12,858 $11,040
4/30/2001 $12,003 $12,719 $11,084
5/31/2001 $12,107 $12,855 $11,134
6/30/2001 $12,191 $12,941 $11,153
7/31/2001 $12,348 $13,133 $11,122
8/31/2001 $12,494 $13,350 $11,122
9/30/2001 $12,445 $13,305 $11,172
10/31/2001 $12,571 $13,463 $11,134
11/30/2001 $12,501 $13,350 $11,115
12/31/2001 $12,379 $13,223 $11,071
1/31/2002 $12,558 $13,453 $11,096
2/28/2002 $12,654 $13,615 $11,140
3/31/2002 $12,478 $13,348 $11,203
4/30/2002 $12,649 $13,609 $11,266
5/31/2002 $12,704 $13,692 $11,266
6/30/2002 $12,802 $13,836 $11,272
7/31/2002 $12,933 $14,014 $11,284
8/31/2002 $13,042 $14,183 $11,322
9/30/2002 $13,292 $14,494 $11,341
10/31/2002 $13,100 $14,253 $11,360
11/30/2002 $13,070 $14,194 $11,360
12/31/2002 $13,310 $14,494 $11,335
1/31/2003 $13,300 $14,457 $11,385
2/28/2003 $13,465 $14,659 $11,472
3/31/2003 $13,476 $14,668 $11,541
4/30/2003 $13,575 $14,765 $11,516
5/31/2003 $13,883 $15,110 $11,497
6/30/2003 $13,825 $15,046 $11,510
7/31/2003 $13,378 $14,520 $11,523
8/31/2003 $13,442 $14,628 $11,566
9/30/2003 $13,752 $15,058 $11,604
10/31/2003 $13,672 $14,982 $11,591
11/30/2003 $13,804 $15,138 $11,560
12/31/2003 $13,905 $15,264 $11,548
1/31/2004 $13,982 $15,351 $11,604
2/29/2004 $14,174 $15,582 $11,667
3/31/2004 $14,127 $15,528 $11,742
4/30/2004 $13,816 $15,160 $11,779
5/31/2004 $13,758 $15,105 $11,848
6/30/2004 $13,778 $15,160 $11,886
7/31/2004 $13,936 $15,360 $11,867
8/31/2004 $14,153 $15,667 $11,873
9/30/2004 $14,231 $15,751 $11,898
10/31/2004 $14,345 $15,886 $11,961
11/30/2004 $14,237 $15,755 $11,967
12/31/2004 $14,410 $15,947 $11,924
1/31/2005 $14,560 $16,096 $11,949
2/28/2005 $14,510 $16,043 $12,018
3/31/2005 $14,425 $15,942 $12,112
4/30/2005 $14,624 $16,193 $12,193
5/31/2005 $14,703 $16,308 $12,180
6/30/2005 $14,760 $16,409 $12,187
7/31/2005 $14,708 $16,335 $12,243
8/31/2005 $14,837 $16,500 $12,306
9/30/2005 $14,712 $16,388 $12,456
10/31/2005 $14,611 $16,289 $12,481
11/30/2005 $14,692 $16,367 $12,381
12/31/2005 $14,809 $16,508 $12,331
1/31/2006 $14,829 $16,552 $12,425
2/28/2006 $14,947 $16,664 $12,450
3/31/2006 $14,819 $16,549 $12,519
4/30/2006 $14,802 $16,543 $12,625
5/31/2006 $14,834 $16,617 $12,688
6/30/2006 $14,792 $16,554 $12,713
7/31/2006 $14,936 $16,751 $12,751
8/31/2006 $15,142 $17,000 $12,776
9/30/2006 $15,250 $17,118 $12,713
10/31/2006 $15,320 $17,225 $12,644
11/30/2006 $15,441 $17,369 $12,625
12/31/2006 $15,385 $17,307 $12,644
1/31/2007 $15,342 $17,263 $12,683
2/28/2007 $15,510 $17,490 $12,751
46 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Minnesota
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
Annual Report | 47
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 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.
48 | 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.20 $3.37
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.36
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.30 $6.07
- -------------------------------------------------------------------------------------------------------------
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: 1.21%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 49
Franklin Ohio Insured Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Ohio Insured Tax-Free Income
Fund seeks to provide as high a level of income exempt from federal and Ohio
personal income taxes as is 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 The Fund invests primarily
in insured Ohio municipal securities. 2
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Ohio Insured Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$12.60 on February 28, 2006, to $12.64 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 52.43 cents per share for the same period. 3 The
Performance Summary beginning on page 53 shows that at the end of this reporting
period, the Fund's Class A shares' distribution rate was 3.94% based on an
annualization of the current 4.33 cent per share dividend and the maximum
offering price of $13.20 on February 28, 2007. An investor in the 2007 maximum
combined effective federal and Ohio personal income tax bracket of 39.26% would
need to earn a distribution rate of 6.49% 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.
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
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. Fund shares are not insured by any U.S. or other government agency. They
are subject to market risks and will fluctuate in value.
3. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 109.
50 | Annual Report
DIVIDEND DISTRIBUTIONS 3
Franklin Ohio Insured Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 2006 4.40 cents 3.82 cents 3.81 cents
- --------------------------------------------------------------------------------
April 2006 4.40 cents 3.82 cents 3.81 cents
- --------------------------------------------------------------------------------
May 2006 4.40 cents 3.82 cents 3.81 cents
- --------------------------------------------------------------------------------
June 2006 4.30 cents 3.73 cents 3.73 cents
- --------------------------------------------------------------------------------
July 2006 4.30 cents 3.73 cents 3.73 cents
- --------------------------------------------------------------------------------
August 2006 4.30 cents 3.73 cents 3.73 cents
- --------------------------------------------------------------------------------
September 2006 4.40 cents 3.84 cents 3.84 cents
- --------------------------------------------------------------------------------
October 2006 4.40 cents 3.84 cents 3.84 cents
- --------------------------------------------------------------------------------
November 2006 4.40 cents 3.84 cents 3.84 cents
- --------------------------------------------------------------------------------
December 2006 4.33 cents 3.75 cents 3.73 cents
- --------------------------------------------------------------------------------
January 2007 4.33 cents 3.75 cents 3.73 cents
- --------------------------------------------------------------------------------
February 2007 4.33 cents 3.75 cents 3.73 cents
- --------------------------------------------------------------------------------
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.
STATE UPDATE
Although Ohio's economic growth, in terms of income and employment, was slower
than the nation's, the state continued to move steadily from a
manufacturing-heavy to a more balanced service- and trade-oriented economy.
Under a 10-year, state-funded economic development initiative introduced in 2003
to expand Ohio's high-tech research capabilities and generate high-paying job
opportunities, the health care and technology sectors grew, with several major
health care companies as the state's leading employers. While in decline,
manufacturing was still a significant sector and contributed to the state's
robust machinery and motor vehicle exports. As of February 2007, the
unemployment rate was 5.0%, which was higher than the 4.5% national rate. 4
4. Source: Bureau of Labor Statistics.
Annual Report | 51
PORTFOLIO BREAKDOWN
Franklin Ohio Insured
Tax-Free Income Fund
2/28/07
- -------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- -------------------------------------------------------------------------------
Prerefunded 32.4%
- -------------------------------------------------------------------------------
General Obligation 32.4%
- -------------------------------------------------------------------------------
Utilities 8.1%
- -------------------------------------------------------------------------------
Higher Education 7.9%
- -------------------------------------------------------------------------------
Transportation 5.0%
- -------------------------------------------------------------------------------
Hospital & Health Care 4.7%
- -------------------------------------------------------------------------------
Subject to Government Appropriations 3.7%
- -------------------------------------------------------------------------------
Tax-Supported 2.9%
- -------------------------------------------------------------------------------
Other Revenue 1.6%
- -------------------------------------------------------------------------------
Housing 0.7%
- -------------------------------------------------------------------------------
Corporate-Backed 0.6%
- -------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
The fiscal 2006-2007 biennium budget painted a positive financial picture for
Ohio. For fiscal year 2006, revenue receipts exceeded the conservative forecast;
for fiscal year 2007, revenue and expenditure estimates performed in line with
long-range budget expectations. The return to structural budget balance and
improving reserve levels reaffirmed Ohio's long history of committed and
disciplined fiscal management. Tax-reform measures, which included a gradual
replacement of the corporate franchise tax with a new commercial activity tax,
offered businesses significant tax relief. These steps are intended to make Ohio
more business friendly and boost economic activity.
Ohio's debt levels are moderate, and its conservative debt issuance policy is
limited by the state constitution. Independent credit rating agency Standard &
Poor's assigned Ohio's general obligation bonds a rating of AA+ with a stable
outlook, reflecting the state's successful implementation of revenue
enhancements and wide expenditure cuts in response to a slowing economic
environment. 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.
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.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
52 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FTOIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $12.64 $12.60
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5243
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0009
- --------------------------------------------------------------------------------
TOTAL $0.5252
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBOIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.05 $12.69 $12.64
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4554
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0009
- --------------------------------------------------------------------------------
TOTAL $0.4563
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FOITX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.05 $12.75 $12.70
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4545
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0009
- --------------------------------------------------------------------------------
TOTAL $0.4554
- --------------------------------------------------------------------------------
Annual Report | 53
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE
FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.61% +27.18% +67.64%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.16% +4.02% +4.85%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.57% +4.27% +4.94%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 3.94%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.49%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.29%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.42%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.65%
- -----------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.11% +23.84% +47.33%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.11% +4.03% +5.63%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.42% +4.27% +5.50%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 3.55%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.84%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.88%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.74%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.20%
- -----------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.08% +23.81% +58.88%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.08% +4.36% +4.74%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.40% +4.62% +4.83%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 3.53%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.81%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.89%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.76%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.20%
- -----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
54 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN OHIO INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $9,576 $10,000 $10,000
3/31/1997 $9,462 $9,867 $10,025
4/30/1997 $9,537 $9,949 $10,038
5/31/1997 $9,660 $10,099 $10,031
6/30/1997 $9,751 $10,207 $10,044
7/31/1997 $9,995 $10,489 $10,056
8/31/1997 $9,903 $10,391 $10,075
9/30/1997 $10,010 $10,514 $10,100
10/31/1997 $10,053 $10,582 $10,125
11/30/1997 $10,121 $10,644 $10,119
12/31/1997 $10,277 $10,799 $10,107
1/31/1998 $10,370 $10,911 $10,125
2/28/1998 $10,364 $10,914 $10,144
3/31/1998 $10,366 $10,924 $10,163
4/30/1998 $10,344 $10,875 $10,182
5/31/1998 $10,489 $11,047 $10,201
6/30/1998 $10,531 $11,090 $10,213
7/31/1998 $10,558 $11,118 $10,226
8/31/1998 $10,678 $11,290 $10,238
9/30/1998 $10,815 $11,430 $10,251
10/31/1998 $10,833 $11,430 $10,276
11/30/1998 $10,869 $11,470 $10,276
12/31/1998 $10,887 $11,499 $10,269
1/31/1999 $10,975 $11,636 $10,294
2/28/1999 $10,950 $11,585 $10,307
3/31/1999 $10,986 $11,601 $10,338
4/30/1999 $11,004 $11,630 $10,414
5/31/1999 $10,943 $11,563 $10,414
6/30/1999 $10,807 $11,396 $10,414
7/31/1999 $10,825 $11,438 $10,445
8/31/1999 $10,690 $11,346 $10,470
9/30/1999 $10,690 $11,351 $10,520
10/31/1999 $10,555 $11,228 $10,539
11/30/1999 $10,645 $11,347 $10,545
12/31/1999 $10,554 $11,263 $10,545
1/31/2000 $10,509 $11,214 $10,576
2/29/2000 $10,638 $11,344 $10,639
3/31/2000 $10,870 $11,592 $10,727
4/30/2000 $10,805 $11,523 $10,733
5/31/2000 $10,759 $11,463 $10,746
6/30/2000 $11,012 $11,767 $10,802
7/31/2000 $11,173 $11,931 $10,827
8/31/2000 $11,334 $12,115 $10,827
9/30/2000 $11,277 $12,052 $10,883
10/31/2000 $11,373 $12,183 $10,902
11/30/2000 $11,469 $12,275 $10,909
12/31/2000 $11,758 $12,579 $10,902
1/31/2001 $11,826 $12,703 $10,971
2/28/2001 $11,865 $12,744 $11,015
3/31/2001 $11,962 $12,858 $11,040
4/30/2001 $11,846 $12,719 $11,084
5/31/2001 $11,944 $12,855 $11,134
6/30/2001 $12,023 $12,941 $11,153
7/31/2001 $12,182 $13,133 $11,122
8/31/2001 $12,361 $13,350 $11,122
9/30/2001 $12,352 $13,305 $11,172
10/31/2001 $12,472 $13,463 $11,134
11/30/2001 $12,412 $13,350 $11,115
12/31/2001 $12,311 $13,223 $11,071
1/31/2002 $12,503 $13,453 $11,096
2/28/2002 $12,624 $13,615 $11,140
3/31/2002 $12,430 $13,348 $11,203
4/30/2002 $12,614 $13,609 $11,266
5/31/2002 $12,675 $13,692 $11,266
6/30/2002 $12,788 $13,836 $11,272
7/31/2002 $12,911 $14,014 $11,284
8/31/2002 $13,035 $14,183 $11,322
9/30/2002 $13,285 $14,494 $11,341
10/31/2002 $13,105 $14,253 $11,360
11/30/2002 $13,082 $14,194 $11,360
12/31/2002 $13,335 $14,494 $11,335
1/31/2003 $13,311 $14,457 $11,385
2/28/2003 $13,480 $14,659 $11,472
3/31/2003 $13,499 $14,668 $11,541
4/30/2003 $13,615 $14,765 $11,516
5/31/2003 $13,925 $15,110 $11,497
6/30/2003 $13,876 $15,046 $11,510
7/31/2003 $13,382 $14,520 $11,523
8/31/2003 $13,464 $14,628 $11,566
9/30/2003 $13,754 $15,058 $11,604
10/31/2003 $13,715 $14,982 $11,591
11/30/2003 $13,886 $15,138 $11,560
12/31/2003 $13,993 $15,264 $11,548
1/31/2004 $14,098 $15,351 $11,604
2/29/2004 $14,315 $15,582 $11,667
3/31/2004 $14,253 $15,528 $11,742
4/30/2004 $13,899 $15,160 $11,779
5/31/2004 $13,838 $15,105 $11,848
6/30/2004 $13,857 $15,160 $11,886
7/31/2004 $14,033 $15,360 $11,867
8/31/2004 $14,301 $15,667 $11,873
9/30/2004 $14,386 $15,751 $11,898
10/31/2004 $14,541 $15,886 $11,961
11/30/2004 $14,397 $15,755 $11,967
12/31/2004 $14,611 $15,947 $11,924
1/31/2005 $14,802 $16,096 $11,949
2/28/2005 $14,761 $16,043 $12,018
3/31/2005 $14,674 $15,942 $12,112
4/30/2005 $14,903 $16,193 $12,193
5/31/2005 $15,014 $16,308 $12,180
6/30/2005 $15,102 $16,409 $12,187
7/31/2005 $15,025 $16,335 $12,243
8/31/2005 $15,161 $16,500 $12,306
9/30/2005 $15,047 $16,388 $12,456
10/31/2005 $14,956 $16,289 $12,481
11/30/2005 $15,046 $16,367 $12,381
12/31/2005 $15,172 $16,508 $12,331
1/31/2006 $15,201 $16,552 $12,425
2/28/2006 $15,353 $16,664 $12,450
3/31/2006 $15,235 $16,549 $12,519
4/30/2006 $15,240 $16,543 $12,625
5/31/2006 $15,282 $16,617 $12,688
6/30/2006 $15,200 $16,554 $12,713
7/31/2006 $15,377 $16,751 $12,751
8/31/2006 $15,592 $17,000 $12,776
9/30/2006 $15,684 $17,118 $12,713
10/31/2006 $15,802 $17,225 $12,644
11/30/2006 $15,945 $17,369 $12,625
12/31/2006 $15,899 $17,307 $12,644
1/31/2007 $15,840 $17,263 $12,683
2/28/2007 $16,053 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS A 2/28/07
- -------------------------------------------
1-Year +0.16%
- -------------------------------------------
5-Year +4.02%
- -------------------------------------------
10-Year +4.85%
- -------------------------------------------
CLASS B (2/1/00-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN OHIO INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,104 $10,116 $10,059
3/31/2000 $10,319 $10,337 $10,142
4/30/2000 $10,262 $10,276 $10,148
5/31/2000 $10,214 $10,223 $10,160
6/30/2000 $10,458 $10,494 $10,213
7/31/2000 $10,596 $10,640 $10,237
8/31/2000 $10,752 $10,804 $10,237
9/30/2000 $10,694 $10,747 $10,290
10/31/2000 $10,779 $10,865 $10,308
11/30/2000 $10,874 $10,947 $10,314
12/31/2000 $11,133 $11,217 $10,308
1/31/2001 $11,192 $11,328 $10,373
2/28/2001 $11,224 $11,364 $10,415
3/31/2001 $11,310 $11,466 $10,438
4/30/2001 $11,195 $11,342 $10,480
5/31/2001 $11,291 $11,464 $10,527
6/30/2001 $11,361 $11,541 $10,545
7/31/2001 $11,505 $11,712 $10,515
8/31/2001 $11,669 $11,905 $10,515
9/30/2001 $11,655 $11,865 $10,563
10/31/2001 $11,763 $12,006 $10,527
11/30/2001 $11,701 $11,905 $10,509
12/31/2001 $11,600 $11,792 $10,468
1/31/2002 $11,784 $11,997 $10,492
2/28/2002 $11,883 $12,141 $10,533
3/31/2002 $11,705 $11,903 $10,592
4/30/2002 $11,862 $12,136 $10,652
5/31/2002 $11,915 $12,210 $10,652
6/30/2002 $12,015 $12,339 $10,658
7/31/2002 $12,135 $12,498 $10,669
8/31/2002 $12,236 $12,648 $10,705
9/30/2002 $12,473 $12,925 $10,723
10/31/2002 $12,299 $12,711 $10,741
11/30/2002 $12,272 $12,658 $10,741
12/31/2002 $12,503 $12,925 $10,717
1/31/2003 $12,475 $12,892 $10,764
2/28/2003 $12,627 $13,072 $10,847
3/31/2003 $12,638 $13,080 $10,912
4/30/2003 $12,740 $13,167 $10,889
5/31/2003 $13,034 $13,475 $10,871
6/30/2003 $12,973 $13,418 $10,883
7/31/2003 $12,507 $12,948 $10,895
8/31/2003 $12,577 $13,045 $10,936
9/30/2003 $12,841 $13,428 $10,972
10/31/2003 $12,799 $13,361 $10,960
11/30/2003 $12,952 $13,500 $10,930
12/31/2003 $13,045 $13,612 $10,918
1/31/2004 $13,137 $13,690 $10,972
2/29/2004 $13,333 $13,896 $11,031
3/31/2004 $13,269 $13,847 $11,102
4/30/2004 $12,935 $13,519 $11,137
5/31/2004 $12,871 $13,470 $11,203
6/30/2004 $12,884 $13,519 $11,238
7/31/2004 $13,051 $13,697 $11,220
8/31/2004 $13,282 $13,972 $11,226
9/30/2004 $13,356 $14,046 $11,250
10/31/2004 $13,493 $14,167 $11,309
11/30/2004 $13,364 $14,050 $11,315
12/31/2004 $13,555 $14,221 $11,274
1/31/2005 $13,715 $14,354 $11,297
2/28/2005 $13,671 $14,307 $11,363
3/31/2005 $13,583 $14,216 $11,451
4/30/2005 $13,799 $14,441 $11,528
5/31/2005 $13,896 $14,543 $11,517
6/30/2005 $13,960 $14,633 $11,523
7/31/2005 $13,893 $14,567 $11,576
8/31/2005 $14,013 $14,714 $11,635
9/30/2005 $13,901 $14,615 $11,777
10/31/2005 $13,812 $14,526 $11,801
11/30/2005 $13,877 $14,596 $11,706
12/31/2005 $13,997 $14,721 $11,659
1/31/2006 $14,007 $14,761 $11,748
2/28/2006 $14,139 $14,860 $11,771
3/31/2006 $14,036 $14,758 $11,836
4/30/2006 $14,034 $14,752 $11,937
5/31/2006 $14,066 $14,818 $11,996
6/30/2006 $13,973 $14,762 $12,020
7/31/2006 $14,140 $14,938 $12,056
8/31/2006 $14,319 $15,160 $12,079
9/30/2006 $14,408 $15,265 $12,020
10/31/2006 $14,498 $15,361 $11,955
11/30/2006 $14,634 $15,489 $11,937
12/31/2006 $14,585 $15,434 $11,955
1/31/2007 $14,525 $15,395 $11,991
2/28/2007 $14,733 $15,597 $12,056
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS B 2/28/07
- -------------------------------------------
1-Year +0.11%
- -------------------------------------------
5-Year +4.03%
- -------------------------------------------
Since Inception (2/1/00) +5.63%
- -------------------------------------------
Annual Report | 55
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS C 2/28/07
- ---------------------------------------
1-Year +3.08%
- ---------------------------------------
5-Year +4.36%
- ---------------------------------------
10-Year +4.74%
- ---------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN OHIO INSURED LEHMAN BROTHERS
DATE TAX-FREE INCOME FUND MUNICIPAL BOND INDEX 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,877 $9,867 $10,025
4/30/1997 $9,950 $9,949 $10,038
5/31/1997 $10,073 $10,099 $10,031
6/30/1997 $10,164 $10,207 $10,044
7/31/1997 $10,421 $10,489 $10,056
8/31/1997 $10,320 $10,391 $10,075
9/30/1997 $10,418 $10,514 $10,100
10/31/1997 $10,466 $10,582 $10,125
11/30/1997 $10,532 $10,644 $10,119
12/31/1997 $10,688 $10,799 $10,107
1/31/1998 $10,779 $10,911 $10,125
2/28/1998 $10,768 $10,914 $10,144
3/31/1998 $10,774 $10,924 $10,163
4/30/1998 $10,737 $10,875 $10,182
5/31/1998 $10,882 $11,047 $10,201
6/30/1998 $10,930 $11,090 $10,213
7/31/1998 $10,943 $11,118 $10,226
8/31/1998 $11,070 $11,290 $10,238
9/30/1998 $11,207 $11,430 $10,251
10/31/1998 $11,220 $11,430 $10,276
11/30/1998 $11,252 $11,470 $10,276
12/31/1998 $11,257 $11,499 $10,269
1/31/1999 $11,351 $11,636 $10,294
2/28/1999 $11,319 $11,585 $10,307
3/31/1999 $11,351 $11,601 $10,338
4/30/1999 $11,364 $11,630 $10,414
5/31/1999 $11,296 $11,563 $10,414
6/30/1999 $11,151 $11,396 $10,414
7/31/1999 $11,164 $11,438 $10,445
8/31/1999 $11,021 $11,346 $10,470
9/30/1999 $11,007 $11,351 $10,520
10/31/1999 $10,872 $11,228 $10,539
11/30/1999 $10,960 $11,347 $10,545
12/31/1999 $10,862 $11,263 $10,545
1/31/2000 $10,801 $11,214 $10,576
2/29/2000 $10,928 $11,344 $10,639
3/31/2000 $11,160 $11,592 $10,727
4/30/2000 $11,089 $11,523 $10,733
5/31/2000 $11,037 $11,463 $10,746
6/30/2000 $11,300 $11,767 $10,802
7/31/2000 $11,458 $11,931 $10,827
8/31/2000 $11,617 $12,115 $10,827
9/30/2000 $11,554 $12,052 $10,883
10/31/2000 $11,646 $12,183 $10,902
11/30/2000 $11,739 $12,275 $10,909
12/31/2000 $12,027 $12,579 $10,902
1/31/2001 $12,090 $12,703 $10,971
2/28/2001 $12,125 $12,744 $11,015
3/31/2001 $12,218 $12,858 $11,040
4/30/2001 $12,094 $12,719 $11,084
5/31/2001 $12,198 $12,855 $11,134
6/30/2001 $12,273 $12,941 $11,153
7/31/2001 $12,428 $13,133 $11,122
8/31/2001 $12,604 $13,350 $11,122
9/30/2001 $12,589 $13,305 $11,172
10/31/2001 $12,705 $13,463 $11,134
11/30/2001 $12,639 $13,350 $11,115
12/31/2001 $12,531 $13,223 $11,071
1/31/2002 $12,718 $13,453 $11,096
2/28/2002 $12,835 $13,615 $11,140
3/31/2002 $12,633 $13,348 $11,203
4/30/2002 $12,813 $13,609 $11,266
5/31/2002 $12,869 $13,692 $11,266
6/30/2002 $12,976 $13,836 $11,272
7/31/2002 $13,105 $14,014 $11,284
8/31/2002 $13,214 $14,183 $11,322
9/30/2002 $13,470 $14,494 $11,341
10/31/2002 $13,283 $14,253 $11,360
11/30/2002 $13,254 $14,194 $11,360
12/31/2002 $13,502 $14,494 $11,335
1/31/2003 $13,473 $14,457 $11,385
2/28/2003 $13,637 $14,659 $11,472
3/31/2003 $13,639 $14,668 $11,541
4/30/2003 $13,760 $14,765 $11,516
5/31/2003 $14,065 $15,110 $11,497
6/30/2003 $14,009 $15,046 $11,510
7/31/2003 $13,496 $14,520 $11,523
8/31/2003 $13,582 $14,628 $11,566
9/30/2003 $13,865 $15,058 $11,604
10/31/2003 $13,820 $14,982 $11,591
11/30/2003 $13,983 $15,138 $11,560
12/31/2003 $14,084 $15,264 $11,548
1/31/2004 $14,183 $15,351 $11,604
2/29/2004 $14,394 $15,582 $11,667
3/31/2004 $14,326 $15,528 $11,742
4/30/2004 $13,966 $15,160 $11,779
5/31/2004 $13,898 $15,105 $11,848
6/30/2004 $13,911 $15,160 $11,886
7/31/2004 $14,080 $15,360 $11,867
8/31/2004 $14,340 $15,667 $11,873
9/30/2004 $14,430 $15,751 $11,898
10/31/2004 $14,578 $15,886 $11,961
11/30/2004 $14,428 $15,755 $11,967
12/31/2004 $14,634 $15,947 $11,924
1/31/2005 $14,817 $16,096 $11,949
2/28/2005 $14,769 $16,043 $12,018
3/31/2005 $14,664 $15,942 $12,112
4/30/2005 $14,897 $16,193 $12,193
5/31/2005 $15,012 $16,308 $12,180
6/30/2005 $15,081 $16,409 $12,187
7/31/2005 $14,997 $16,335 $12,243
8/31/2005 $15,137 $16,500 $12,306
9/30/2005 $15,005 $16,388 $12,456
10/31/2005 $14,909 $16,289 $12,481
11/30/2005 $14,991 $16,367 $12,381
12/31/2005 $15,108 $16,508 $12,331
1/31/2006 $15,130 $16,552 $12,425
2/28/2006 $15,273 $16,664 $12,450
3/31/2006 $15,162 $16,549 $12,519
4/30/2006 $15,148 $16,543 $12,625
5/31/2006 $15,182 $16,617 $12,688
6/30/2006 $15,094 $16,554 $12,713
7/31/2006 $15,262 $16,751 $12,751
8/31/2006 $15,466 $17,000 $12,776
9/30/2006 $15,562 $17,118 $12,713
10/31/2006 $15,659 $17,225 $12,644
11/30/2006 $15,805 $17,369 $12,625
12/31/2006 $15,739 $17,307 $12,644
1/31/2007 $15,686 $17,263 $12,683
2/28/2007 $15,888 $17,490 $12,751
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Ohio
personal income tax rate of 39.26%, 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation
rate.
56 | Annual Report
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 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 | 57
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.60 $3.27
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
- -------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.60 $5.98
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.40 $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.
58 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 10.74 $ 10.80 $ 10.97 $ 10.76 $ 10.50
-------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.44 0.45 0.46 0.46 0.46
Net realized and unrealized gains (losses) . 0.04 (0.05) (0.17) 0.20 0.27
-------------------------------------------------------------
Total from investment operations ............ 0.48 0.40 0.29 0.66 0.73
-------------------------------------------------------------
Less distributions from net investment income (0.45) (0.46) (0.46) (0.45) (0.47)
-------------------------------------------------------------
Redemption fees ............................. -- -- -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................ $ 10.77 $ 10.74 $ 10.80 $ 10.97 $ 10.76
=============================================================
Total return c .............................. 4.55% 3.73% 2.79% 6.29% 7.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $167,548 $175,430 $149,897 $156,033 $156,973
Ratios to average net assets:
Expenses ................................... 0.74% 0.75% 0.76% 0.75% 0.76%
Net investment income ...................... 4.15% 4.16% 4.29% 4.27% 4.39%
Portfolio turnover rate ..................... 7.31% 15.80% 21.09% 11.38% 10.83%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 59
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.4%
MUNICIPAL BONDS 98.4%
FLORIDA 98.4%
Alachua County Public Improvement Revenue, AMBAC Insured, Pre-Refunded,
5.25%, 8/01/29 ........................................................................... $2,500,000 $2,617,100
Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/20 ............................ 1,000,000 1,059,150
Broward County HFAR, FSA Insured,
5.65%, 11/01/22 ......................................................................... 405,000 411,095
5.70%, 11/01/29 ......................................................................... 225,000 228,564
Broward County School Board COP,
MBIA Insured, 5.00%, 7/01/28 ............................................................ 2,000,000 2,115,220
Series A, FSA Insured, 5.00%, 7/01/22 ................................................... 2,000,000 2,106,820
Series A, FSA Insured, 5.00%, 7/01/26 ................................................... 2,850,000 2,998,713
Series A, FSA Insured, 5.00%, 7/01/30 ................................................... 2,000,000 2,131,540
Cape Coral Water and Sewer Revenue, AMBAC Insured, 5.00%, 10/01/36 ........................ 2,000,000 2,144,540
Coral Gables Health Facilities Authority Hospital Revenue, Baptist Health South Florida,
FSA Insured, 5.00%, 8/15/29 .............................................................. 1,500,000 1,591,755
Dade County HFA, MFMR, Siesta Pointe Apartments, Series A, FSA Insured, 5.75%, 9/01/29 .... 1,890,000 1,918,671
Dade County Water and Sewer System Revenue, FGIC Insured, 5.25%, 10/01/21 ................. 1,000,000 1,017,940
Daytona Beach Utility System Revenue, Refunding, Series B, FGIC Insured, 5.00%, 11/15/32 .. 1,000,000 1,060,500
Destin Capital Improvement Revenue, MBIA Insured, 5.00%, 8/01/27 .......................... 1,315,000 1,396,175
Escambia County HFA, SFMR, Multi County Program, Series A, MBIA Insured,
6.40%, 10/01/30 .......................................................................... 45,000 45,560
Escambia County Utilities Authority Utility System Revenue,
FGIC Insured, 5.00%, 1/01/31 ............................................................ 1,775,000 1,842,982
Refunding, Series B, FGIC Insured, 5.00%, 1/01/22 ....................................... 2,000,000 2,103,840
Florida HFAR, Spinnaker Cove Apartments, Series G, AMBAC Insured, 6.50%, 7/01/36 .......... 1,600,000 1,629,232
Florida HFC Revenue,
Housing Logans Pointe Apartments, Series F-1, FSA Insured, 5.90%, 12/01/19 .............. 1,205,000 1,262,961
Marina Bay Apartments, Series S, FSA Insured, 5.85%, 2/01/41 ............................ 1,070,000 1,116,096
Florida Intergovernmental Finance Commission Capital Revenue, Series A, AMBAC Insured,
5.00%, 8/01/32 ........................................................................... 3,570,000 3,756,033
Florida State Board of Education GO, Series F, MBIA Insured, 5.00%, 6/01/28 ............... 2,000,000 2,125,420
Florida State Board Regent Housing Revenue, University of Florida, FGIC Insured,
5.25%, 7/01/30 ........................................................................... 2,000,000 2,118,840
Florida State Correctional Privatization Commission COP, Series B, AMBAC Insured,
5.00%, 8/01/25 ........................................................................... 2,000,000 2,128,340
Florida State Department of Environmental Protection Preservation Revenue, Florida Forever,
Series A, MBIA Insured, 5.00%, 7/01/21 ................................................... 3,000,000 3,185,940
Florida State Department of General Services Division Facilities Management Revenue,
Florida Facilities Pool, Series B, FSA Insured, Pre-Refunded, 5.50%, 9/01/28 ............. 550,000 579,695
Gulf Breeze Revenue,
FGIC Insured, 5.80%, 12/01/20 ........................................................... 1,250,000 1,343,975
Local Government Loan Program, Series C, FGIC Insured, 6.05%, 12/01/15 .................. 1,915,000 1,937,942
Hernando County School Board COP, MBIA Insured, 5.00%, 7/01/30 ............................ 1,150,000 1,229,419
Hillsborough County School Board COP, MBIA Insured,
5.00%, 7/01/26 .......................................................................... 1,670,000 1,781,038
Pre-Refunded, 5.375%, 7/01/26 ........................................................... 1,000,000 1,039,150
Indian Trail Water Control District Improvement Revenue, MBIA Insured, 5.75%, 8/01/16 ..... 1,090,000 1,102,753
Jacksonville Capital Improvement Revenue, Refunding, Series C, AMBAC Insured,
5.00%, 10/01/25 .......................................................................... 4,000,000 4,228,600
60 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Jacksonville Guaranteed Entitlement Revenue, Refunding and Improvement, FGIC Insured,
5.00%, 10/01/32 .......................................................................... $1,000,000 $1,055,100
Jacksonville Sales Tax Revenue, Better Jacksonville, MBIA Insured, 5.00%, 10/01/30 ........ 1,500,000 1,590,345
Jacksonville Transportation Revenue, MBIA Insured, 5.00%, 10/01/26 ........................ 2,000,000 2,092,120
Jacksonville Water and Sewer Revenue, United Water Project, AMBAC Insured,
6.35%, 8/01/25 ........................................................................... 1,000,000 1,010,710
Key West Utility Board Electric Revenue, Refunding and Capital Improvement System,
MBIA Insured, 5.00%, 10/01/31 ............................................................ 1,000,000 1,078,850
Lake County School Board COP, Series A, AMBAC Insured, 5.00%, 6/01/30 ..................... 4,080,000 4,337,203
Lee County Airport Revenue,
Refunding, FSA Insured, 5.00%, 10/01/33 ................................................. 3,530,000 3,752,319
Series B, FSA Insured, Pre-Refunded, 5.75%, 10/01/33 .................................... 4,000,000 4,318,160
Lynn Haven Capital Improvement Revenue, MBIA Insured, Pre-Refunded, 5.50%, 12/01/32 ....... 2,000,000 2,147,760
Maitland CDA Revenue, AMBAC Insured, 5.00%, 7/01/34 ....................................... 2,595,000 2,752,491
Marion County Utility System Revenue, FGIC Insured, 5.00%, 12/01/31 ....................... 1,500,000 1,582,500
Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ........................ 3,000,000 3,132,870
Miami-Dade County Aviation Revenue, Miami International Airport,
Hub, Series B, FGIC Insured, 5.00%, 10/01/30 ............................................ 3,500,000 3,705,520
Refunding, Series A, CIFG Insured, 5.00%, 10/01/38 ...................................... 1,625,000 1,699,847
Series B, FGIC Insured, 5.75%, 10/01/29 ................................................. 2,500,000 2,701,475
Miami-Dade County GO, Building Better Communities Program, FGIC Insured,
5.00%, 7/01/33 ........................................................................... 2,000,000 2,137,360
Miami-Dade County Public Facilities Revenue, Jackson Health System, Series A, MBIA
Insured, 5.00%,
6/01/31 ................................................................................. 1,650,000 1,758,784
6/01/35 ................................................................................. 2,000,000 2,124,660
Nassau County Public Improvement Revenue, MBIA Insured, 5.00%, 5/01/31 .................... 5,000,000 5,206,900
Ocala Utility System Revenue, Refunding, Series A, FGIC Insured, 5.00%, 10/01/31 .......... 2,000,000 2,136,400
Ocoee Water and Sewer System Revenue, AMBAC Insured, 5.625%, 10/01/26 ..................... 4,220,000 4,308,029
Orange County School Board COP, AMBAC Insured, 5.50%, 8/01/25 ............................. 1,000,000 1,053,790
Orange County Tourist Development Tax Revenue, AMBAC Insured,
5.50%, 10/01/32 ......................................................................... 2,000,000 2,170,820
Pre-Refunded, 5.50%, 10/01/31 ........................................................... 1,000,000 1,046,250
Osceola County HFA, MFHR, Tierra Vista Apartment Project, Series A, FSA Insured,
5.70%, 12/01/17 .......................................................................... 480,000 481,622
Osceola County Tourist Development Tax Revenue, FGIC Insured, 5.00%, 10/01/32 ............. 3,000,000 3,160,680
Palm Beach County IDR, South Florida Fair Project, AMBAC Insured, 5.50%, 6/01/31 .......... 2,000,000 2,098,220
Palm Beach County Public Improvement Revenue, Convention Center Project, FGIC Insured,
Pre-Refunded, 5.125%, 11/01/30 ........................................................... 1,000,000 1,063,460
Palm Beach County School Board COP, Series A,
AMBAC Insured, 5.125%, 8/01/24 .......................................................... 5,000,000 5,304,400
FGIC Insured, Pre-Refunded, 6.00%, 8/01/22 .............................................. 3,000,000 3,251,250
Panama City Beach Utility Revenue, Refunding, AMBAC Insured, 5.00%, 6/01/32 ............... 2,000,000 2,117,600
Pembroke Pines Public Improvement Revenue,
Series A, AMBAC Insured, 5.00%, 10/01/29 ................................................ 2,000,000 2,137,580
Series B, AMBAC Insured, 5.00%, 10/01/34 ................................................ 2,000,000 2,130,840
Pinellas County Sewer Revenue, FSA Insured, 5.00%, 10/01/32 ............................... 3,000,000 3,177,120
Polk County Capital Improvement Revenue, FSA Insured, Pre-Refunded, 5.75%, 12/01/21 ....... 1,000,000 1,082,540
Annual Report | 61
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Polk County Public Facilities Revenue, MBIA Insured, 5.00%, 12/01/33 .................... $ 2,000,000 $ 2,143,100
Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/26 ..................... 1,000,000 1,046,190
Polk County Utility System Revenue, Series A, FGIC Insured, 5.00%,
10/01/30 ............................................................................. 1,000,000 1,068,110
10/01/34 ............................................................................. 2,000,000 2,130,840
Port Orange GO, MBIA Insured, 5.00%, 4/01/33 ............................................ 1,755,000 1,884,607
St. Augustine Capital Improvement Revenue, Refunding, AMBAC Insured, 5.00%, 10/01/29 .... 1,250,000 1,335,988
St. Lucie West Services District Special Assessment Revenue, Port St. Lucie, Water
Management Benefit, senior lien, Refunding, Series A, MBIA Insured, 5.25%, 5/01/25 .... 5,000,000 5,234,250
St. Lucie West Services District Utility Revenue, senior lien, MBIA Insured, 6.125%,
10/01/32 .............................................................................. 2,240,000 2,453,898
Tavares Water and Sewer Revenue, AMBAC Insured, 5.50%, 10/01/30 ......................... 1,000,000 1,054,210
University of Central Florida Athletics Assn. Inc. COP, Series A, FGIC Insured, 5.00%,
10/01/27 ............................................................................. 1,000,000 1,067,450
10/01/30 ............................................................................. 1,485,000 1,585,163
University of Central Florida COP, University of Central Florida Convocation Corp., Series A,
FGIC Insured, 5.00%, 10/01/35 ......................................................... 1,500,000 1,592,250
------------
TOTAL LONG TERM INVESTMENTS (COST $155,044,003) ......................................... 164,857,230
------------
SHORT TERM INVESTMENTS 0.3%
MUNICIPAL BONDS 0.3%
FLORIDA 0.3%
a Jacksonville Health Facilities Authority Hospital Revenue,
Baptist Medical Center Project, Daily VRDN and Put, 3.60%, 8/15/21 ................... 200,000 200,000
Genesis Rehabilitation Hospital, Refunding, Daily VRDN and Put, 3.65%, 5/01/21 ....... 300,000 300,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $500,000) ............................................ 500,000
------------
TOTAL INVESTMENTS (COST $155,544,003) 98.7% ............................................. 165,357,230
OTHER ASSETS, LESS LIABILITIES 1.3% ..................................................... 2,190,317
------------
NET ASSETS 100.0% ....................................................................... $167,547,547
============
See Selected Portfolio Abbreviations on page 121.
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.
62 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.32 $ 12.41 $ 12.62 $ 12.37 $ 12.13
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.53 0.54 0.55 0.55 0.58
Net realized and unrealized gains (losses) . 0.01 (0.10) (0.20) 0.25 0.24
-----------------------------------------------------------------------
Total from investment operations ............ 0.54 0.44 0.35 0.80 0.82
-----------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.53) (0.53) (0.55) (0.55) (0.58)
Net realized gains ......................... (0.01) -- (0.01) -- --
-----------------------------------------------------------------------
Total distributions ......................... (0.54) (0.53) (0.56) (0.55) (0.58)
-----------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
-----------------------------------------------------------------------
Net asset value, end of year ................ $ 12.32 $ 12.32 $ 12.41 $ 12.62 $ 12.37
=======================================================================
Total return c .............................. 4.51% 3.65% 2.93% 6.65% 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $1,821,006 $1,697,516 $1,602,174 $1,696,913 $1,646,355
Ratios to average net assets:
Expenses ................................... 0.63% 0.63% 0.63% 0.63% 0.62%
Net investment income ...................... 4.33% 4.37% 4.47% 4.45% 4.73%
Portfolio turnover rate ..................... 6.75% 4.94% 9.07% 9.41% 11.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 e 2003
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.37 $ 12.47 $ 12.67 $ 12.42 $ 12.17
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.46 0.47 0.48 0.49 0.51
Net realized and unrealized gains (losses) . 0.01 (0.10) (0.19) 0.24 0.25
-----------------------------------------------------------------------
Total from investment operations ............ 0.47 0.37 0.29 0.73 0.76
-----------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.46) (0.47) (0.48) (0.48) (0.51)
Net realized gains ......................... (0.01) -- (0.01) -- --
-----------------------------------------------------------------------
Total distributions ......................... (0.47) (0.47) (0.49) (0.48) (0.51)
-----------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
-----------------------------------------------------------------------
Net asset value, end of year ................ $ 12.37 $ 12.37 $ 12.47 $ 12.67 $ 12.42
=======================================================================
Total return c .............................. 3.93% 3.07% 2.35% 6.04% 6.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 83,644 $ 94,569 $ 103,378 $ 108,518 $ 82,062
Ratios to average net assets:
Expenses ................................... 1.18% 1.18% 1.18% 1.18% 1.18%
Net investment income ...................... 3.78% 3.82% 3.92% 3.90% 4.17%
Portfolio turnover rate ..................... 6.75% 4.94% 9.07% 9.41% 11.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
64 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INSURED TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.42 $ 12.51 $ 12.72 $ 12.47 $ 12.21
-------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.47 0.48 0.49 0.48 0.52
Net realized and unrealized gains (losses) . 0.01 (0.10) (0.21) 0.25 0.25
-------------------------------------------------------------
Total from investment operations ............ 0.48 0.38 0.28 0.73 0.77
-------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.46) (0.47) (0.48) (0.48) (0.51)
Net realized gains ......................... (0.01) -- (0.01) -- --
-------------------------------------------------------------
Total distributions ......................... (0.47) (0.47) (0.49) (0.48) (0.51)
-------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................ $ 12.43 $ 12.42 $ 12.51 $ 12.72 $ 12.47
=============================================================
Total return c .............................. 3.99% 3.06% 2.34% 5.99% 6.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $141,913 $147,979 $138,027 $152,833 $129,608
Ratios to average net assets:
Expenses ................................... 1.17% 1.18% 1.18% 1.20% 1.15%
Net investment income ...................... 3.79% 3.82% 3.92% 3.88% 4.20%
Portfolio turnover rate ..................... 6.75% 4.94% 9.07% 9.41% 11.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.1%
MUNICIPAL BONDS 99.1%
ALABAMA 9.5%
Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan, Series A,
AMBAC Insured, 5.25%, 8/15/21 .......................................................... $ 2,490,000 $ 2,660,565
Anniston Regional Medical Center Board Revenue, Series A, AMBAC Insured, 5.25%,
6/01/18 ................................................................................ 5,000,000 5,174,050
Bessemer GO, wts., XLCA Insured, 5.00%, 2/01/35 ......................................... 2,000,000 2,128,480
Bessemer Governmental Utility Services Corp. Water Supply Revenue, MBIA Insured, 5.25%,
6/01/32 ................................................................................ 5,000,000 5,172,150
Birmingham GO, Refunding and Capital Improvement, Series B, AMBAC Insured, 5.00%,
12/01/32 ............................................................................... 5,000,000 5,240,750
Birmingham Waterworks and Sewer Board Water and Sewer Revenue, Series A, FSA Insured,
5.00%, 1/01/40 ......................................................................... 10,000,000 10,622,000
Daphne Utilities Board Water Gas and Sewer Revenue, Series B, AMBAC Insured, 5.50%,
6/01/30 ................................................................................ 1,670,000 1,766,242
East Alabama Health Care Authority Health Care Facilities Revenue, Tax Anticipation Bond,
Series A, MBIA Insured, 5.25%, 9/01/28 ................................................. 7,000,000 7,206,850
Foley Utilities Board Utilities Revenue, FSA Insured, 5.00%, 11/01/29 ................... 10,720,000 11,440,598
Helena Utilities Board Water and Sewer Revenue, MBIA Insured,
5.25%, 4/01/27 ........................................................................ 1,805,000 1,933,534
5.25%, 4/01/33 ........................................................................ 2,695,000 2,881,764
Pre-Refunded, 5.25%, 4/01/27 .......................................................... 1,455,000 1,574,688
Pre-Refunded, 5.25%, 4/01/33 .......................................................... 2,195,000 2,375,561
Houston County Health Care Authority Revenue, Series A, AMBAC Insured, 5.125%,
10/01/24 .............................................................................. 5,855,000 6,339,326
10/01/25 .............................................................................. 6,065,000 6,561,784
Jefferson County Sewer Revenue,
Capital Improvement, wts., Series A, FGIC Insured, Pre-Refunded, 5.125%, 2/01/29 ...... 22,050,000 22,860,999
wts., Series D, FGIC Insured, Pre-Refunded, 5.00%, 2/01/32 ............................ 12,690,000 13,529,571
Limestone County Water and Sewer Authority Water Revenue, AMBAC Insured, 5.00%,
12/01/35 ............................................................................... 9,100,000 9,684,584
Madison GO, wts., Refunding, XLCA Insured, 4.75%, 12/01/36 .............................. 10,000,000 10,282,200
Muscle Shoals GO, wts., MBIA Insured, Pre-Refunded, 5.50%, 8/01/30 ...................... 2,000,000 2,154,780
Orange Beach Sewer Revenue, wts., MBIA Insured, 5.00%, 2/01/30 .......................... 5,000,000 5,340,400
Orange Beach Water Sewer and Fire Protection Authority Revenue, MBIA Insured, 5.00%,
5/15/35 ................................................................................ 3,665,000 3,871,486
Pell City GO, wts.,
Refunding, XLCA Insured, 5.00%, 2/01/24 ............................................... 1,020,000 1,091,808
XLCA Insured, 5.00%, 2/01/34 .......................................................... 5,195,000 5,512,830
Tuscaloosa GO, wts., FSA Insured, 5.00%, 1/01/30 ........................................ 8,875,000 9,416,641
University of Alabama General Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 ........... 3,000,000 3,174,960
University of Alabama University Revenues, FGIC Insured, 5.25%, 10/01/27 ................ 5,975,000 6,319,877
University of South Alabama University Revenues, Tuition,
Capital Improvement, AMBAC Insured, 5.00%, 12/01/30 ................................... 7,560,000 8,113,921
Capital Improvement, Refunding, AMBAC Insured, 5.00%, 12/01/36 ........................ 10,000,000 10,724,400
Refunding, Capital Improvement, AMBAC Insured, 5.00%, 12/01/31 ........................ 7,845,000 8,413,292
------------
193,570,091
------------
66 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ALASKA 0.5%
Alaska Energy Authority Power Revenue, Bradley Lake Project, Refunding, BIG Insured,
6.25%, 7/01/21 ...................................................................... $ 5,000 $ 5,004
Alaska Energy Authority Utilities Revenue, Refunding, FSA Insured, 5.20%, 7/01/17 .... 3,000,000 3,053,100
Alaska Industrial Development and Export Authority Revenue, Revolving Fund, Refunding,
Series A, MBIA Insured, 6.125%, 4/01/27 ............................................. 5,000,000 5,108,100
Alaska State HFC Revenue, Refunding, Series A, MBIA Insured, 6.00%, 6/01/27 .......... 2,230,000 2,282,160
-----------
10,448,364
-----------
ARIZONA 3.1%
Arizona State Municipal Financing Program COP, Series 1986-20, BIG Insured, ETM,
7.70%, 8/01/10 ...................................................................... 6,000,000 6,484,620
Cochise County USD No. 68 GO, Sierra Vista, Refunding, FGIC Insured, 7.50%, 7/01/10 .. 500,000 559,180
Downtown Phoenix Hotel Corp. Revenue,
Senior Series A, FGIC Insured, 5.00%, 7/01/36 ...................................... 15,000,000 15,944,400
Sub Series B, FGIC Insured, 5.00%, 7/01/36 ......................................... 6,450,000 6,856,092
Maricopa County IDA Hospital Facility Revenue, Samaritan Health Services, Series A,
MBIA Insured, ETM, 7.00%, 12/01/16 .................................................. 300,000 365,823
Mesa IDAR, Discovery Health System, Series A, MBIA Insured, Pre-Refunded,
5.75%, 1/01/25 ..................................................................... 18,000,000 19,171,440
5.625%, 1/01/29 .................................................................... 12,655,000 13,436,573
-----------
62,818,128
-----------
ARKANSAS 1.9%
Arkansas State Development Finance Authority Water Revenue, Refunding, Series A,
MBIA Insured, 6.50%, 7/01/10 ........................................................ 1,645,000 1,717,594
Arkansas State University Revenue, Arkansas State University, Beebe, Series B,
AMBAC Insured, 5.00%,
12/01/30 ........................................................................... 3,250,000 3,477,597
12/01/35 ........................................................................... 3,045,000 3,244,387
Little Rock School District GO,
Refunding, Series B, FSA Insured, 5.50%, 2/01/33 ................................... 3,970,000 4,147,181
Series C, FSA Insured, 5.25%, 2/01/33 .............................................. 7,790,000 8,173,034
Paragould Water and Electric Revenue, AMBAC Insured, Pre-Refunded, 5.65%, 12/01/25 ... 1,000,000 1,070,330
Pulaski Technical College Revenue, Student Tuition and Fee, FGIC Insured, 5.00%,
9/01/34 ............................................................................. 2,190,000 2,292,558
University of Arkansas University Revenues,
AMBAC Insured, 5.00%, 11/01/36 ..................................................... 8,205,000 8,781,729
Pine Bluff Campus, Refunding, Series A, AMBAC Insured, 5.00%, 12/01/35 ............. 2,000,000 2,138,540
Various Facility, Fayetteville Campus, FGIC Insured, 5.00%, 12/01/32 ............... 4,000,000 4,192,600
-----------
39,235,550
-----------
CALIFORNIA 4.7%
California State GO,
Refunding, AMBAC Insured, 5.00%, 2/01/32 ........................................... 4,750,000 4,976,765
Refunding, AMBAC Insured, 5.00%, 2/01/33 ........................................... 7,000,000 7,379,750
Refunding, MBIA Insured, 5.00%, 2/01/31 ............................................ 20,000,000 21,031,200
Refunding, MBIA Insured, 5.00%, 10/01/32 ........................................... 1,910,000 2,012,299
Various Purpose, Refunding, MBIA Insured, 4.75%, 3/01/35 ........................... 34,355,000 35,783,481
Annual Report | 67
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Corona COP, Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 ........... $15,000,000 $17,542,200
Oakland RDA Tax Allocation, Central District Redevelopment, Refunding, AMBAC Insured,
5.50%, 2/01/14 ........................................................................ 250,000 266,430
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Refunding, Series A,
MBIA Insured, 5.25%, 1/15/30 .......................................................... 4,000,000 4,084,720
Val Verde USD, COP, School Construction Project, Refunding, Series B, FGIC Insured,
5.00%, 1/01/35 ........................................................................ 2,500,000 2,650,850
-----------
95,727,695
-----------
COLORADO 2.0%
Broomfield COP, Refunding, AMBAC Insured, 6.00%, 12/01/29 .............................. 3,000,000 3,169,140
Centennial Water and Sanitation District Water and Sewer Revenue, Refunding, Series A,
FSA Insured, 5.125%, 12/01/17 ......................................................... 5,000,000 5,098,000
Colorado Health Facilities Authority Revenue, Community Provider Pooled Loan Program,
Series A, FSA Insured, 7.25%, 7/15/17 ................................................. 26,000 26,055
Denver City and County Airport Revenue,
Refunding, Series E, MBIA Insured, 5.50%, 11/15/25 ................................... 5,000,000 5,103,700
Series C, MBIA Insured, ETM, 6.125%, 11/15/25 ........................................ 3,590,000 4,463,232
Series C, MBIA Insured, ETM, 6.125%, 11/15/25 ........................................ 4,410,000 4,439,150
E-470 Public Highway Authority Revenue, Refunding, Senior Series A, MBIA Insured,
5.00%, 9/01/21 ........................................................................ 5,000,000 5,075,900
University of Colorado Hospital Authority Revenue, Refunding, Series A, AMBAC Insured,
5.20%, 11/15/17 ...................................................................... 5,425,000 5,580,046
5.25%, 11/15/22 ...................................................................... 7,800,000 8,019,570
-----------
40,974,793
-----------
FLORIDA 8.0%
Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/29 ................. 5,000,000 5,336,100
Celebration CDD, Special Assessment, Series B, MBIA Insured, 5.50%, 5/01/19 ............ 210,000 212,640
Clearwater Water and Sewer Revenue, FGIC Insured, 5.00%,
12/01/28 ............................................................................. 11,050,000 11,662,612
12/01/32 ............................................................................. 13,665,000 14,410,562
Dade County Seaport Revenue, Refunding, Series E, MBIA Insured, 8.00%, 10/01/08 ........ 200,000 213,326
Florida State Board of Education Capital Outlay GO, Public Education,
Refunding, Series E, FGIC Insured, 5.00%, 6/01/24 .................................... 5,000,000 5,269,150
Series B, FGIC Insured, 5.00%, 6/01/23 ............................................... 5,395,000 5,722,746
Florida State Board of Education GO, Series C, MBIA Insured, 5.00%, 6/01/27 ............ 4,245,000 4,498,766
Greater Orlando Aviation Authority Orlando Airport Facilities Revenue, Series B, FGIC
Insured, 5.25%, 10/01/28 .............................................................. 2,500,000 2,611,900
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/30 ......................... 5,000,000 5,228,150
Jacksonville Transportation Revenue, MBIA Insured, 5.25%, 10/01/29 ..................... 11,000,000 11,620,730
Leon County COP, AMBAC Insured, 5.00%, 7/01/25 ......................................... 8,935,000 9,595,297
Opa-Locka Capital Improvement Revenue, FGIC Insured, 6.125%, 1/01/24 ................... 1,000,000 1,000,780
Orange County School Board COP, Series A, MBIA Insured, 5.00%, 8/01/27 ................. 10,000,000 10,491,300
Orange County Tourist Development Tax Revenue, AMBAC Insured,
5.25%, 10/01/27 ...................................................................... 10,000,000 10,615,500
Pre-Refunded, 5.50%, 10/01/31 ........................................................ 1,000,000 1,046,250
68 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Orlando and Orange County Expressway Authority Expressway Revenue,
junior lien, FGIC Insured, 6.50%, 7/01/10 ................................................ $ 100,000 $ 108,867
junior lien, FGIC Insured, 6.50%, 7/01/12 ................................................ 225,000 255,751
Series B, AMBAC Insured, 5.00%, 7/01/35 .................................................. 20,000,000 21,060,800
Osceola County School Board COP, Series A, AMBAC Insured, 5.25%, 6/01/27 ................... 13,000,000 13,910,520
Pasco County Guaranteed Entitlement Revenue, Refunding, FSA Insured, 5.00%,
12/01/33 .................................................................................. 2,185,000 2,315,466
Pinellas County Health Facilities Authority Revenue, Baycare Health System, FSA Insured,
5.00%, 11/15/30 ........................................................................... 4,000,000 4,169,440
Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/24 ........................ 5,000,000 5,126,550
Port St. Lucie Utility Revenue, MBIA Insured, 5.00%, 9/01/34 ............................... 8,420,000 8,949,029
Sumter County School District Revenue, Multi-District Loan Program, FSA Insured, 7.15%,
11/01/15 .................................................................................. 245,000 306,686
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ................ 2,000,000 2,248,180
Tampa Bay Water Utility System Revenue, FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 ........ 2,000,000 2,177,100
Volusia County Educational Facility Authority Revenue, Embry Riddle Aeronautical University,
Refunding, Series B, AMBAC Insured, 5.25%, 10/15/19 ....................................... 3,500,000 3,659,285
------------
163,823,483
------------
GEORGIA 6.7%
Athens Housing Authority Student Housing Lease Revenue, University of Georgia,
East Campus, Refunding, AMBAC Insured, 5.00%, 12/01/33 .................................... 6,000,000 6,323,460
Atlanta Airport Revenue, General, Series A, FGIC Insured, Pre-Refunded, 5.50%, 1/01/26 ..... 13,750,000 14,561,112
Atlanta GO, Refunding, FGIC Insured, 5.00%, 12/01/20 ....................................... 3,775,000 3,847,140
Atlanta Water and Wastewater Revenue, Series A, FGIC Insured,
5.00%, 11/01/29 .......................................................................... 4,750,000 4,900,480
Pre-Refunded, 5.00%, 11/01/29 ............................................................ 5,250,000 5,408,603
Brunswick Water and Sewer Revenue, Refunding and Improvement, MBIA Insured,
6.10%, 10/01/14 ........................................................................... 1,535,000 1,731,004
Cherokee County Water and Sewage Authority Revenue,
FGIC Insured, 5.00%, 8/01/27 ............................................................. 1,500,000 1,555,755
MBIA Insured, 6.90%, 8/01/18 ............................................................. 15,000 15,040
Columbus Building Authority Lease Revenue, Series A, FGIC Insured, 5.00%, 1/01/31 .......... 3,500,000 3,728,060
East Point Building Authority Revenue, Water and Sewer Project, Series A, XLCA Insured,
5.00%, 2/01/30 ............................................................................ 11,360,000 12,194,846
Fulton County Development Authority Revenue, Georgia Institute of Technology Athletic Assn.,
Refunding, AMBAC Insured, 5.125%, 10/01/32 ................................................ 9,000,000 9,468,810
Georgia Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus
Regional Healthcare Systems, MBIA Insured, 5.50%, 8/01/19 ................................. 15,000,000 15,818,850
Henry County Water and Sewer Authority Revenue, FGIC Insured, Pre-Refunded, 5.625%,
2/01/30 ................................................................................... 3,500,000 3,723,300
Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Second Indenture Series,
MBIA Insured, 5.00%,
7/01/27 .................................................................................. 13,470,000 14,212,871
7/01/28 .................................................................................. 14,175,000 14,949,238
7/01/32 .................................................................................. 8,575,000 9,025,102
Rockdale County Water and Sewer Authority Revenue, Series A, MBIA Insured, Pre-Refunded,
5.375%, 7/01/29 ........................................................................... 6,350,000 6,703,505
Annual Report | 69
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
South Fulton Municipal Regional Water and Sewer Authority Water Revenue, MBIA Insured,
5.00%, 1/01/33 ........................................................................... $ 8,000,000 $ 8,415,680
------------
136,582,856
------------
HAWAII 0.6%
Hawaii County GO, Refunding and Improvement, Series A, FGIC Insured, 5.60%,
5/01/12 ................................................................................. 1,000,000 1,089,360
5/01/13 ................................................................................. 1,000,000 1,104,270
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 2,043,380
Honolulu City and County GO, Refunding, Series C, FGIC Insured, 5.00%, 7/01/20 ............ 6,250,000 6,456,625
Kauai County GO, Series A, FGIC Insured, Pre-Refunded, 6.125%, 8/01/23 .................... 1,755,000 1,894,593
------------
12,588,228
------------
ILLINOIS 0.6%
Chicago Board of Education GO, Chicago School Reform, Series A, AMBAC Insured, 5.25%,
12/01/30 ................................................................................. 2,000,000 2,058,080
Chicago Board of Education Lease COP, Refunding, Series A, MBIA Insured, 6.25%,
1/01/09 .................................................................................. 320,000 334,000
Illinois Health Facilities Authority Revenue,
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%, 11/15/28 ..... 5,000,000 5,125,950
Series 1990, FSA Insured, ETM, 7.75%, 8/15/10 ........................................... 50,000 56,629
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 4,282,080
Regional Transportation Authority Revenue, Series A, AMBAC Insured, 7.20%, 11/01/20 ....... 300,000 371,832
------------
12,228,571
------------
KANSAS 0.0% a
Kansas State Development Finance Authority Health Facilities Revenue, Stormont Vail
Healthcare Inc., Refunding, Series G, MBIA Insured, 5.80%, 11/15/21 ...................... 5,000 5,008
------------
KENTUCKY 1.8%
Jefferson County Capital Projects Corp. Lease Revenue, MBIA Insured,
5.375%, 6/01/22 ......................................................................... 2,000,000 2,046,800
5.50%, 6/01/28 .......................................................................... 750,000 767,640
Kentucky Economic Development Finance Authority Health System Revenue, Norton
Healthcare Inc.,
Refunding, Series C, MBIA Insured, 6.05%, 10/01/20 ...................................... 8,505,000 9,765,696
Series C, MBIA Insured, Pre-Refunded, 6.05%, 10/01/20 ................................... 4,255,000 4,880,357
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/26 ................................... 12,195,000 13,996,324
Louisville and Jefferson County Metropolitan Sewer District Sewer and Drain System Revenue,
Series A, MBIA Insured, 5.50%, 5/15/34 ................................................... 5,000,000 5,399,450
------------
36,856,267
------------
LOUISIANA 1.3%
Louisiana Local Government Environmental Facilities and CDA Revenue, Parking Facilities
Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/31 .......................... 5,485,000 5,822,986
Louisiana State Gas and Fuels Tax Revenue, Series A,
AMBAC Insured, 5.00%, 6/01/27 ........................................................... 10,000,000 10,434,200
FSA Insured, 4.75%, 5/01/39 ............................................................. 10,000,000 10,344,700
------------
26,601,886
------------
70 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MAINE 0.0% a
Maine State Health and Higher Educational Facilities Authority Revenue, Series C,
FSA Insured, 6.20%, 7/01/25 .............................................................. $ 100,000 $ 100,800
-----------
MARYLAND 1.7%
Baltimore Convention Center Hotel Revenue, Senior Series A, XLCA Insured, 5.00%, 9/01/32 .. 10,000,000 10,758,600
Baltimore Project Revenue, Wastewater Projects,
Refunding, FGIC Insured, 5.125%, 7/01/42 ................................................ 11,000,000 11,592,680
Series C, AMBAC Insured, 5.00%, 7/01/36 ................................................. 5,000,000 5,393,700
Baltimore Revenue, Water Project, Series A, FSA Insured, Pre-Refunded, 5.75%, 7/01/30 ..... 5,880,000 6,268,374
Maryland State Health and Higher Educational Facilities Authority Revenue, University of
Maryland Medical System, Series B, FGIC Insured, 7.00%, 7/01/22 .......................... 200,000 260,314
-----------
34,273,668
-----------
MASSACHUSETTS 3.9%
Central Berkshire Religious School District GO, Series B, FSA Insured, 5.125%, 3/01/18 .... 1,125,000 1,150,830
Massachusetts State Development Finance Agency Revenue, Boston University, Series T-1,
AMBAC Insured, 5.00%, 10/01/35 ........................................................... 10,000,000 10,704,400
Massachusetts State GO, Consolidated Loan, Series D, MBIA Insured,
ETM, 5.00%, 8/01/27 ..................................................................... 3,535,000 3,765,305
Pre-Refunded, 5.00%, 8/01/27 ............................................................ 855,000 910,703
Massachusetts State Health and Educational Facilities Authority Revenue,
Caregroup Issue, Series A, MBIA Insured, 5.00%, 7/01/25 ................................. 4,250,000 4,401,428
Caregroup Issue, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/25 ................... 750,000 845,123
Central New England Health, Series B, AMBAC Insured, 5.20%, 8/01/28 ..................... 4,415,000 4,564,404
Central New England Health, Series B, AMBAC Insured, Pre-Refunded, 5.20%, 8/01/28 .... 585,000 607,534
Harvard Pilgrim Health, Series A, FSA Insured, 5.00%, 7/01/18 ........................... 3,000,000 3,077,520
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ..................... 9,700,000 9,838,613
Simmons College, Series C, MBIA Insured, 5.125%, 10/01/28 ............................... 8,000,000 8,249,120
Massachusetts State Industrial Finance Agency Revenue, Suffolk University, AMBAC Insured,
Pre-Refunded, 5.25%, 7/01/17 ............................................................. 3,000,000 3,075,240
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project, MBIA
Insured, 5.625%,
7/01/20 ................................................................................. 1,590,000 1,628,780
7/01/21 ................................................................................. 1,560,000 1,598,048
7/01/23 ................................................................................. 2,155,000 2,207,560
7/01/24 ................................................................................. 2,910,000 2,980,975
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, sub. lien,
Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 ....................................... 2,100,000 2,144,247
Massachusetts State Water Resources Authority Revenue, Refunding, Series J, FSA Insured,
5.00%, 8/01/32 ........................................................................... 18,000,000 18,830,880
-----------
80,580,710
-----------
MICHIGAN 11.7%
Allen Park Public School District GO, School Building and Site, MBIA Insured, Pre-Refunded,
5.00%, 5/01/33 ........................................................................... 8,430,000 9,051,965
Bendle Public School District GO, School Building and Site, Refunding, FGIC Insured,
5.00%, 5/01/35 ........................................................................... 3,875,000 4,151,016
Birmingham City School District GO, School Building and Site, FSA Insured, 5.00%,
11/01/33 ................................................................................. 8,135,000 8,677,523
Annual Report | 71
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Central Michigan University Revenue, Series A, AMBAC Insured, 5.05%, 10/01/32 ............... $ 8,650,000 $ 9,175,228
Chippewa Valley Schools GO,
AMBAC Insured, Pre-Refunded, 5.00%, 5/01/27 ............................................... 1,000,000 1,015,890
School Building and Site, FSA Insured, 5.00%, 5/01/34 ..................................... 5,000,000 5,326,850
Detroit City School District GO, Series A, FSA Insured, Pre-Refunded, 5.125%, 5/01/31 ....... 6,500,000 6,943,430
Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/21 .................... 12,390,000 12,918,434
Detroit Sewage Disposal Revenue, senior lien, Series A, FGIC Insured, Pre-Refunded,
5.125%, 7/01/31 ............................................................................ 6,000,000 6,355,500
Detroit Sewer Disposal Revenue, senior lien,
Refunding, Series A, FSA Insured, 5.00%, 7/01/32 .......................................... 2,905,000 3,060,737
Series A, FSA Insured, Pre-Refunded, 5.00%, 7/01/32 ....................................... 7,095,000 7,631,027
Detroit Water Supply System Revenue, senior lien, Series A,
FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ................................................ 20,000,000 21,275,848
MBIA Insured, 5.00%, 7/01/34 .............................................................. 10,150,000 10,711,498
Ecorse Public School District GO, FGIC Insured, Pre-Refunded, 5.50%, 5/01/27 ................ 7,250,000 7,475,403
Grand Rapids Sanitation Sewer System Revenue, FGIC Insured, 5.00%, 1/01/34 .................. 18,285,000 19,398,922
Jackson County Hospital Finance Authority Revenue, W.A. Foote Memorial Hospital, Series A,
AMBAC Insured, 5.25%, 6/01/17 .............................................................. 500,000 511,345
Jonesville Community Schools GO, Refunding, MBIA Insured, 5.00%, 5/01/29 .................... 3,050,000 3,273,474
Lanse Creuse Public Schools GO, School Building and Site, FSA Insured, 5.00%, 5/01/35 ....... 10,000,000 10,646,600
Michigan Municipal Bond Authority Revenue, Clean Water Revolving, MBIA Insured, 5.00%,
10/01/23 ................................................................................... 5,095,000 5,323,154
Michigan State Building Authority Revenue, Refunding, Series IA, FGIC Insured, 5.00%,
10/15/36 ................................................................................... 10,000,000 10,766,200
Michigan State Hospital Finance Authority Revenue,
Hospital Botsford Obligation, Refunding, Series A, MBIA Insured, 5.25%, 2/15/22 ........... 2,000,000 2,065,960
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 ................ 10,000,000 10,203,500
Refunding, MBIA Insured, 5.00%, 11/15/36 .................................................. 13,000,000 13,750,880
St. John's Hospital, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ......................... 2,500,000 2,606,225
Michigan State Strategic Fund Limited Obligation Revenue, Collateral, The Detroit Edison Co.,
Fund, Pollution, Refunding, Series BB, AMBAC Insured, 7.00%, 5/01/21 ....................... 250,000 330,128
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 10,606,800
Michigan State Trunk Line Revenue, Series A, FSA Insured, Pre-Refunded, 5.25%,
11/01/30 ................................................................................... 20,000,000 21,357,800
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%, 11/15/31 .............................................................. 4,000,000 4,211,840
Saginaw Valley State University Revenue, Refunding, AMBAC Insured, 5.30%, 7/01/28 ........... 3,400,000 3,530,560
Yale Public Schools District GO, FSA Insured, Pre-Refunded, 5.375%, 5/01/27 ................. 3,845,000 3,855,458
Zeeland Public Schools GO, Refunding, MBIA Insured, 5.25%, 5/01/24 .......................... 3,180,000 3,188,045
------------
239,397,240
------------
MINNESOTA 4.6%
Eden Prairie MFHR, Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%, 1/20/31 ......... 2,000,000 2,029,600
Medford ISD No. 763 GO, Series A, FSA Insured, 5.125%, 2/01/26 .............................. 2,475,000 2,601,151
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue,
Refunding, Sub Series A, AMBAC Insured, 5.00%, 1/01/35 .................................... 18,700,000 19,764,217
Series C, FGIC Insured, Pre-Refunded, 5.25%, 1/01/26 ...................................... 8,000,000 8,458,240
Series C, FGIC Insured, Pre-Refunded, 5.25%, 1/01/32 ...................................... 4,500,000 4,757,760
72 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Minneapolis Special School District No. 001 COP, Refunding, Series B, FGIC Insured,
4.625%, 2/01/17 ....................................................................... $ 1,635,000 $ 1,690,672
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ................................... 180,000 185,954
Series A, MBIA Insured, Pre-Refunded, 5.75%, 11/15/26 ................................ 12,100,000 12,516,482
Minnesota State HFAR, Rental Housing, Refunding, Series D, MBIA Insured, 6.00%,
2/01/22 ............................................................................... 180,000 181,217
Robbinsdale ISD No. 281 GO, MBIA Insured, 5.00%, 2/01/22 ............................... 7,340,000 7,512,417
Sauk Rapids ISD No. 47 GO, Series A, MBIA Insured, 5.75%, 2/01/26 ...................... 11,850,000 12,720,975
South Washington County ISD No. 833 GO, Series B, FSA Insured, 5.00%,
2/01/22 .............................................................................. 10,970,000 11,533,638
2/01/23 .............................................................................. 6,000,000 6,305,580
Woodbury COP, Series A, AMBAC Insured, 5.35%, 2/01/21 .................................. 2,915,000 3,069,262
-----------
93,327,165
-----------
MISSISSIPPI 0.6%
Harrison County Wastewater Management District Revenue, Wastewater Treatment Facilities,
Refunding, Series A, FGIC Insured, 8.50%, 2/01/13 ..................................... 200,000 246,034
Mississippi Development Bank Special Obligation Revenue, Municipal Energy Agency,
Series A, XLCA Insured, 5.00%, 3/01/36 ................................................ 10,915,000 11,596,751
-----------
11,842,785
-----------
MISSOURI 0.1%
St. Louis School District GO, FGIC Insured, Pre-Refunded, 6.00%, 4/01/12 ............... 1,330,000 1,332,261
-----------
MONTANA 0.4%
Montana State Board of Workers Compensation Investment Program Revenue, MBIA Insured,
ETM, 6.875%, 6/01/20 .................................................................. 8,500,000 9,173,155
-----------
NEBRASKA 0.1%
Lancaster County Hospital Authority Revenue, Bryan Memorial Hospital Project No. 1,
MBIA Insured, ETM, 6.70%, 6/01/22 ..................................................... 2,500,000 3,074,075
-----------
NEVADA 0.8%
Carson City Hospital Revenue, Series B, AMBAC Insured, Pre-Refunded, 5.40%, 3/01/17 .... 1,000,000 1,010,000
Clark County GO, Series A, AMBAC Insured, 6.50%, 6/01/17 ............................... 250,000 303,948
Clark County School District GO, Series A, MBIA Insured, 7.00%, 6/01/10 ................ 4,000,000 4,395,280
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 5,328,850
Truckee Meadows Water Authority Revenue, Series A, FSA Insured, Pre-Refunded, 5.125%,
7/01/30 ............................................................................... 5,000,000 5,296,250
-----------
16,334,328
-----------
NEW JERSEY 1.9%
Essex County Improvement Authority Revenue, Garden State Cancer Center Project,
AMBAC Insured, 6.00%, 12/01/20 ........................................................ 2,525,000 2,552,649
Middlesex County COP, MBIA Insured, 5.30%, 6/15/29 ..................................... 3,575,000 3,721,539
New Brunswick Parking Authority Revenue, Guaranteed Parking, Series A, MBIA Insured,
5.00%, 9/01/34 ........................................................................ 1,500,000 1,577,790
Annual Report | 73
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey EDA Revenue,
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 ............... $ 3,450,000 $ 3,678,217
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 ............... 21,250,000 22,586,200
Municipal Rehabilitation, Series A, AMBAC Insured, 5.00%, 4/01/28 ..................... 4,000,000 4,215,840
New Jersey State Turnpike Authority Turnpike Revenue,
2005, Refunding, Series C, AMBAC Insured, 6.50%, 1/01/16 .............................. 50,000 57,881
2005, Series C, AMBAC Insured, ETM, 6.50%, 1/01/16 .................................... 20,000 23,342
Series C, AMBAC Insured, Pre-Refunded, 6.50%, 1/01/16 ................................. 230,000 268,433
------------
38,681,891
------------
NEW YORK 5.4%
Central Square GO, Central School District, FGIC Insured, ETM, 6.50%, 6/15/10 ........... 900,000 980,829
Dutchess County IDA Civic Facility Revenue, Bard College Project, AMBAC Insured, 5.375%,
6/01/27 ................................................................................ 3,945,000 4,037,510
MTA Revenue, Series B, MBIA Insured, 5.00%, 11/15/28 .................................... 20,000,000 21,211,600
MTA Service Contract Revenue, Series B, MBIA Insured, 5.00%, 1/01/31 .................... 7,000,000 7,352,730
Nassau Health Care Corp. Health System Revenue, Nassau County Guaranteed, FSA Insured,
Pre-Refunded, 5.75%, 8/01/29 ........................................................... 5,000,000 5,340,800
New York City Municipal Water Finance Authority Water and Sewer System Revenue, Series B,
AMBAC Insured, Pre-Refunded, 5.25%, 6/15/29 ........................................... 5,000,000 5,073,050
FGIC Insured, Pre-Refunded, 5.25%, 6/15/29 ............................................ 10,405,000 10,557,017
New York City Transitional Finance Authority Revenue, Future Tax Secured,
Refunding, Series B, MBIA Insured, 5.00%, 8/01/32 ..................................... 2,230,000 2,366,476
Series A, FGIC Insured, 5.125%, 8/01/33 ............................................... 14,590,000 15,645,149
New York State Dormitory Authority Revenues,
Mental Health Services Facilities Improvement, Series B, MBIA Insured, 5.25%, 8/15/31 . 6,310,000 6,709,991
Mental Health Services Facilities Improvement, Series B, MBIA Insured, Pre-Refunded,
5.25%, 8/15/31 ...................................................................... 5,935,000 6,338,817
Pace University, MBIA Insured, Pre-Refunded, 5.70%, 7/01/22 ........................... 7,500,000 7,700,025
Pace University, MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ........................... 2,500,000 2,567,075
Supported Debt, Mental Health Services Facilities Improvement, Series B, MBIA Insured,
Pre-Refunded, 5.25%, 8/15/31 ........................................................ 2,755,000 2,942,450
Vassar Brothers Hospital, FSA Insured, 5.375%, 7/01/25 ................................ 4,000,000 4,133,160
Triborough Bridge and Tunnel Authority Revenues, Refunding, MBIA Insured, 5.00%,
11/15/32 ............................................................................... 5,000,000 5,288,600
Upper Mohawk Valley Regional Water Finance Authority Water Systems Revenue, Series A,
FSA Insured, Pre-Refunded, 5.125%, 10/01/26 ............................................ 1,495,000 1,523,256
------------
109,768,535
------------
NORTH CAROLINA 0.7%
North Carolina Medical Care Commission Hospital Revenue, Rex Healthcare Project,
AMBAC Insured, 5.00%, 6/01/17 .......................................................... 5,000,000 5,132,250
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, MBIA Insured,
ETM, 6.50%, 1/01/10 .................................................................... 20,000 21,531
Raleigh Durham Airport Authority Airport Revenue, Series A, FGIC Insured, 5.00%,
11/01/25 .............................................................................. 5,000,000 5,239,650
11/01/31 .............................................................................. 4,000,000 4,184,480
------------
14,577,911
------------
74 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
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 $ 5,538,225
------------
OHIO 6.0%
Akron Income Tax Revenue, Community Learning Centers, Series A, FGIC Insured, 5.00%,
12/01/33 .............................................................................. 5,000,000 5,295,550
Cleveland Airport System Revenue, Series A, FSA Insured,
5.125%, 1/01/27 ...................................................................... 4,000,000 4,069,640
5.00%, 1/01/31 ....................................................................... 13,780,000 14,238,461
Pre-Refunded, 5.00%, 1/01/31 ......................................................... 1,625,000 1,699,246
Cleveland Waterworks Revenue,
2005, Refunding and Improvement, Series I, FSA Insured, 5.00%, 1/01/23 ............... 1,460,000 1,487,171
2005, Refunding and Improvement, Series I, FSA Insured, Pre-Refunded, 5.00%,
1/01/23 ............................................................................. 120,000 122,528
Series I, FSA Insured, Pre-Refunded, 5.00%, 1/01/23 .................................. 1,170,000 1,194,652
Columbus City School District GO, School Facilities Construction and Improvement,
FGIC Insured, Pre-Refunded, 5.00%,
12/01/28 ............................................................................. 8,000,000 8,597,280
12/01/31 ............................................................................. 10,295,000 11,063,625
Elyria GO, FGIC Insured, Pre-Refunded, 5.40%, 12/01/17 .................................. 2,400,000 2,431,968
Fairview Park City School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/29 ............................................................................. 1,460,000 1,566,828
12/01/33 ............................................................................. 2,000,000 2,140,540
Hamilton County Sales Tax Revenue, Hamilton County Football, Project B, MBIA Insured,
Pre-Refunded, 5.00%, 12/01/27 ......................................................... 3,250,000 3,336,352
Hamilton Wastewater System Revenue, Series A, FSA Insured, Pre-Refunded, 5.15%,
10/15/17 .............................................................................. 3,015,000 3,116,817
Jefferson Area Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.00%, 12/01/31 ......................................................... 4,085,000 4,377,976
Licking Heights Local School District GO, School Facilities Construction and Improvement,
Series A, FGIC Insured, Pre-Refunded, 5.625%, 12/01/28 ................................ 3,465,000 3,705,679
Lucas County Hospital Revenue, Promedica Healthcare Obligation Group, Refunding,
AMBAC Insured, 5.375%, 11/15/29 ....................................................... 5,000,000 5,197,750
Maumee City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/27 .......................................................... 3,250,000 3,455,920
Medina City School District GO, FGIC Insured, Pre-Refunded, 5.25%, 12/01/28 ............. 7,500,000 7,819,575
Ohio State GO, Common Schools, FSA Insured, 5.00%, 9/15/21 .............................. 3,230,000 3,411,817
Olentangy Local School District GO, School Facilities Construction and Improvement,
Series A, FGIC Insured, Pre-Refunded, 5.25%, 12/01/32 ................................. 11,450,000 12,590,305
Reynoldsburg City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/31 .......................................................... 4,000,000 4,263,720
Springfield City School District GO, FGIC Insured, Pre-Refunded, 5.20%, 12/01/23 ........ 3,860,000 4,186,556
Streetsboro City School District GO, School Improvement, MBIA Insured, 5.125%, 12/01/21 . 3,700,000 3,918,781
Toledo City School District GO, School Facilities Improvement, Series B, FGIC Insured,
5.00%, 12/01/32 ....................................................................... 4,000,000 4,243,720
University of Cincinnati COP, University Center Project, MBIA Insured, Pre-Refunded,
5.125%, 6/01/24 ....................................................................... 2,950,000 2,960,679
West Holmes Local School District GO, MBIA Insured, Pre-Refunded, 5.375%, 12/01/17 ...... 3,100,000 3,143,772
------------
123,636,908
------------
Annual Report | 75
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OKLAHOMA 0.1%
McGee Creek Authority Water Revenue, MBIA Insured, 6.00%, 1/01/23 ...................... $ 300,000 $ 355,980
Okmulgee County Governmental Building Authority Sales Tax Revenue, first mortgage,
MBIA Insured, Pre-Refunded, 6.20%, 3/01/20 ............................................ 1,625,000 1,697,378
-----------
2,053,358
-----------
OREGON 1.0%
Josephine County School District No. 7 GO, FGIC Insured, 5.70%, 6/01/13 ................ 5,000,000 5,024,850
Ontario Catholic Health Revenue, Holy Rosary Medical Center, MBIA Insured, 5.50%,
11/15/12 .............................................................................. 700,000 707,385
Oregon Health and Science University Revenue,
Refunding, Series B, MBIA Insured, 5.25%, 7/01/15 .................................... 460,000 466,845
Series A, MBIA Insured, 5.00%, 7/01/32 ............................................... 8,000,000 8,419,920
Oregon State Department of Administrative Services COP, Series A, AMBAC Insured,
Pre-Refunded, 5.80%, 5/01/24 .......................................................... 5,000,000 5,066,600
-----------
19,685,600
-----------
PENNSYLVANIA 1.5%
Allegheny County Hospital Development Authority Revenue, Health System, Refunding,
Series A, MBIA Insured, 6.50%, 11/15/30 ............................................... 10,000,000 11,059,200
Pennsylvania Convention Center Authority Revenue, Series A, FGIC Insured, ETM, 6.00%,
9/01/19 ............................................................................... 500,000 599,315
Philadelphia Gas Works Revenue, 1998 General Ordinance, Fourth Series, FSA Insured,
5.00%, 8/01/32 ........................................................................ 4,000,000 4,217,000
Philadelphia Water and Wastewater Revenue, Series A, FGIC Insured, 5.25%, 11/01/24 ..... 2,000,000 2,146,240
Pittsburgh and Allegheny County Public Auditorium Revenue, Regional Asset District Sales
Tax, AMBAC Insured, 5.25%, 2/01/31 .................................................... 6,000,000 6,248,580
Pittsburgh Water and Sewer Authority Revenue, FGIC Insured, ETM, 7.25%, 9/01/14 ........ 85,000 95,749
State Public School Building Authority School Revenue, Philadelphia School District
Project,
FSA Insured, Pre-Refunded, 5.00%, 6/01/33 ............................................. 5,000,000 5,373,300
-----------
29,739,384
-----------
RHODE ISLAND 0.9%
Providence GO, Series A, FSA Insured, Pre-Refunded, 5.70%, 7/15/19 ..................... 3,000,000 3,052,320
Rhode Island Clean Water Finance Agency Revenue, Cranston Wastewater Treatment System,
MBIA Insured, 5.80%, 9/01/22 .......................................................... 7,785,000 8,003,681
Rhode Island State EDC Special Facility Revenue, first lien, Rhode Island Airport Corp.
Project, CIFG Insured, 5.00%, 7/01/31 ................................................. 5,730,000 6,103,023
Rhode Island State Health and Educational Building Corp. Revenue, Hospital Financing,
Lifespan Obligation Group,
MBIA Insured, Pre-Refunded, 5.75%, 5/15/23 ........................................... 1,650,000 1,689,583
Refunding, MBIA Insured, 5.75%, 5/15/23 .............................................. 100,000 102,345
-----------
18,950,952
-----------
SOUTH CAROLINA 0.4%
Piedmont Municipal Power Agency Electric Revenue, Refunding, FGIC Insured, 6.25%,
1/01/21 ............................................................................... 200,000 249,596
Richland County Hospital Facilities Revenue, Community Provider, Pooled Loan Program,
Series A, FSA Insured, ETM, 7.125%, 7/01/17 ........................................... 2,760,000 3,161,138
76 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
SOUTH CAROLINA (CONTINUED)
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 $ 5,350,350
Spartanburg Sanitation Sewer District Sewer System Revenue, MBIA Insured, Pre-Refunded,
5.50%, 6/01/27 ........................................................................ 500,000 507,205
-----------
9,268,289
-----------
SOUTH DAKOTA 0.6%
Brookings COP, Refunding, AMBAC Insured, 5.10%, 12/01/18 ............................... 5,000,000 5,199,150
Grant County PCR, Refunding, MBIA Insured, 5.90%, 6/01/23 .............................. 4,800,000 4,803,264
South Dakota Lease Revenue, Series A, FSA Insured, 6.75%, 12/15/16 ..................... 2,720,000 3,098,842
-----------
13,101,256
-----------
TENNESSEE 0.6%
Johnson City Health and Educational Facilities Board Hospital Revenue,
Medical Center Hospital, Refunding and Improvement, MBIA Insured, ETM, 5.25%,
7/01/28 ............................................................................ 8,500,000 8,749,900
Series 2000 A, MBIA Insured, Pre-Refunded, 5.125%, 7/01/25 ........................... 2,780,000 2,860,648
-----------
11,610,548
-----------
TEXAS 9.1%
Austin Hotel Occupancy Tax Revenue, sub. lien, AMBAC Insured, Pre-Refunded,
5.625%, 11/15/21 ..................................................................... 2,355,000 2,476,282
5.80%, 11/15/29 ...................................................................... 13,750,000 14,519,312
Austin Water and Wastewater System Revenue, Refunding, Series B, FSA Insured,
5.125%, 5/15/27 ...................................................................... 11,125,000 11,655,774
5.25%, 5/15/31 ....................................................................... 5,000,000 5,254,600
Bell County Health Facilities Development Corp. Revenue, Hospital, Cook Children's
Medical Center, Refunding, FSA Insured, 5.30%, 12/01/23 ............................... 5,000,000 5,199,450
Coastal Bend Health Facilities Development Corp. Revenue, Series B, AMBAC Insured, ETM,
6.30%, 1/01/17 ........................................................................ 11,305,000 12,588,231
Dallas-Fort Worth International Airport Revenue,
Joint Series A, FGIC Insured, 6.00%, 11/01/21 ........................................ 2,210,000 2,330,445
Refunding and Improvement, Joint Series A, FGIC Insured, 5.625%, 11/01/21 ............ 12,000,000 12,809,640
Harris County Health Facilities Development Corp. Revenue, Christus Health, Series A,
MBIA Insured, Pre-Refunded, 5.375%, 7/01/29 ........................................... 22,000,000 23,053,800
Harris County Hospital District Mortgage Revenue, AMBAC Insured,
7.40%, 2/15/10 ....................................................................... 735,000 782,679
ETM, 7.40%, 2/15/10 .................................................................. 215,000 226,619
Harris County Houston Sports Authority Revenue, senior lien, Series G, MBIA Insured,
5.25%, 11/15/30 ....................................................................... 21,325,000 22,501,074
Houston Airport System Revenue, sub. lien, Refunding, Series B, FSA Insured, 5.50%,
7/01/30 ............................................................................... 4,700,000 4,970,955
Houston Water and Sewer System Revenue, junior lien,
Series B, FGIC Insured, Pre-Refunded, 5.75%, 12/01/30 ................................ 10,000,000 10,730,700
Series C, FGIC Insured, Pre-Refunded, 5.375%, 12/01/27 ............................... 6,800,000 6,954,564
Laredo ISD Public Facility Corp. Lease Revenue, Series C, AMBAC Insured, 5.00%, 8/01/29 1,000,000 1,038,760
Matagorda County Navigation District No. 1 Revenue, Houston Industries Inc. Project,
Refunding,
Series A, MBIA Insured, 5.25%, 11/01/29 .............................................. 3,185,000 3,233,699
Series B, MBIA Insured, 5.15%, 11/01/29 .............................................. 2,750,000 2,787,675
Annual Report | 77
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
North Harris County Regional Water Authority Revenue, senior lien, FGIC Insured, 5.00%,
12/15/33 ................................................................................... $10,000,000 $ 10,533,300
Palo Duro River Authority GO, Refunding, FSA Insured, 6.375%, 8/01/08 ....................... 2,605,000 2,658,142
Pflugerville GO, FGIC Insured,
5.25%, 8/01/27 ............................................................................ 3,320,000 3,539,751
5.20%, 8/01/32 ............................................................................ 3,000,000 3,176,310
Portland Community Center Complex Development Corp. Sales Tax Revenue, Refunding,
AMBAC Insured, 5.45%, 2/15/25 .............................................................. 1,450,000 1,472,490
San Marcos Waterworks and Sewer Systems Revenue, Series 1998, FSA Insured,
Pre-Refunded, 5.125%, 8/15/20 .............................................................. 2,870,000 2,889,659
Smithville HDC Mortgage Revenue, Smithville Retirement, Refunding, Series A, MBIA Insured,
6.40%, 1/01/22 ............................................................................. 855,000 868,449
Tarrant County Health Facilities Development Corp. Health Systems Revenue, Harris Methodist
Health System, MBIA Insured, ETM, 6.00%, 9/01/24 ........................................... 3,250,000 3,876,632
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical Center
Project,
Series B, FSA Insured, 5.50%, 11/01/17 .................................................... 1,000,000 1,028,450
Series C, FSA Insured, 5.60%, 11/01/27 .................................................... 1,430,000 1,473,672
Series D, FSA Insured, 5.375%, 11/01/27 ................................................... 8,500,000 8,852,835
United ISD, GO, 5.125%, 8/15/26 ............................................................. 3,000,000 3,162,090
------------
186,646,039
------------
UTAH 0.7%
Intermountain Power Agency Power Supply Revenue, Series B,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/19 ................................................ 950,000 975,336
Refunding, MBIA Insured, 5.75%, 7/01/19 ................................................... 2,300,000 2,360,421
Provo Electric System Revenue, Series A, AMBAC Insured, ETM, 10.375%, 9/15/15 ............... 35,000 44,974
Utah County Hospital Revenue, IHC Health Services Inc., MBIA Insured, ETM, 5.25%,
8/15/21 ................................................................................... 5,000,000 5,086,200
8/15/26 ................................................................................... 5,000,000 5,077,500
------------
13,544,431
------------
VIRGINIA 0.8%
Front Royal and Warren County IDA Lease Revenue, School and Capital Improvement,
Series B, FSA Insured, 5.00%, 4/01/35 ...................................................... 6,000,000 6,377,640
Middle River Regional Jail Authority Jail Facility Revenue, MBIA Insured, 5.00%, 5/15/28 .... 3,510,000 3,765,142
Spotsylvania County Water and Sewer System Revenue, MBIA Insured, Pre-Refunded, 5.40%,
6/01/27 .................................................................................... 3,850,000 3,942,785
Winchester IDA Educational Facilities Revenue, first mortgage, Shenandoah University Project,
MBIA Insured,
5.00%, 10/01/18 ........................................................................... 1,000,000 1,037,590
5.25%, 10/01/28 ........................................................................... 1,420,000 1,477,197
------------
16,600,354
------------
WASHINGTON 2.2%
King County Sewer Revenue, Refunding, Series A, FGIC Insured, 5.00%, 1/01/35 ................ 6,420,000 6,753,198
Pierce County GO, School District No. 003 Puyallup, FGIC Insured, Pre-Refunded, 5.70%,
12/01/15 ................................................................................... 1,000,000 1,015,480
Port of Longview GO, MBIA Insured, 6.00%, 11/01/15 .......................................... 2,000,000 2,003,500
Seattle Water System Revenue, FGIC Insured, Pre-Refunded, 5.625%, 8/01/26 ................... 2,000,000 2,055,880
78 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
WASHINGTON (CONTINUED)
Snohomish County PUD No. 1 Electric Revenue, Generation System, FGIC Insured, ETM,
6.65%, 1/01/16 ........................................................................ $ 4,250,000 $ 4,938,202
Tacoma GO, Series A, MBIA Insured, Pre-Refunded, 5.625%, 12/01/22 ...................... 3,400,000 3,450,796
Washington State GO, Various Purpose, Series C, FSA Insured, 5.25%, 1/01/26 ............ 6,000,000 6,365,700
Washington State Health Care Facilities Authority Revenue,
Providence Services, MBIA Insured, Pre-Refunded, 5.50%, 12/01/26 ..................... 5,000,000 5,290,700
Swedish Health Services, Refunding, AMBAC Insured, 5.50%, 11/15/28 ................... 13,000,000 13,437,190
--------------
45,310,646
--------------
WEST VIRGINIA 2.1%
Harrison County Community Solid Waste Disposal Revenue, Potomac Edison Co., Series C,
AMBAC Insured, 6.75%, 8/01/24 ......................................................... 11,560,000 11,589,478
Shepherd University Board of Governors Revenue, Residence Facilities Projects, MBIA
Insured, 5.00%, 6/01/35 ............................................................... 9,445,000 10,060,908
West Virginia State GO, Series A, FGIC Insured, Pre-Refunded, 5.00%, 11/01/21 .......... 5,000,000 5,207,200
West Virginia State Water Development Authority Water Development Revenue, Loan
Program II, Refunding, Series C-II, FGIC Insured, 5.00%, 11/01/36 ..................... 5,000,000 5,321,100
b West Virginia Water Development Authority Infrastructure Revenue, West Virginia
Infrastructure Jobs Program, Series A, FSA Insured, 4.75%, 10/01/45 ................... 11,405,000 11,704,723
--------------
43,883,409
--------------
WISCONSIN 0.2%
Superior Limited Obligation Revenue, Midwest Energy Resources, Refunding, Series E,
FGIC Insured, 6.90%, 8/01/21 .......................................................... 3,000,000 3,941,610
--------------
U.S. TERRITORY 0.0% a
DISTRICT OF COLUMBIA 0.0% a
District of Columbia HFA, RMR, Series 1986-1, FGIC Insured, 7.75%, 9/01/16 ............. 160,000 161,794
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,921,350,897) ...................................... 2,027,598,247
--------------
SHORT TERM INVESTMENTS 0.5%
MUNICIPAL BONDS 0.5%
ALABAMA 0.0% a
c Homewood Educational Building Authority Revenue, Educational Facilities, Samford
University, AMBAC Insured, Daily VRDN and Put, 3.60%, 12/01/21 ........................ 500,000 500,000
--------------
CONNECTICUT 0.4%
c Connecticut State Health and Educational Facilities Authority Revenue, Yale University,
Series T-1, Daily VRDN and Put, 3.62%, 7/01/29 ....................................... 4,400,000 4,400,000
Series V-2, Daily VRDN and Put, 3.62%, 7/01/36 ....................................... 4,025,000 4,025,000
--------------
8,425,000
--------------
FLORIDA 0.0% a
c Pinellas County Health Facilities Authority Revenue, Pooled Hospital Loan Program,
Refunding, AMBAC Insured, Daily VRDN and Put, 3.67%, 12/01/15 ......................... 100,000 100,000
--------------
GEORGIA 0.1%
c Hapeville IDAR, Hapeville Hotel Ltd., Daily VRDN and Put, 3.57%, 11/01/15 .............. 800,000 800,000
--------------
Annual Report | 79
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS 0.0% a
c Massachusetts State GO, Consolidated Loan, Series B, Daily VRDN and Put, 3.66%,
3/01/26 ...................................................................... $ 700,000 $ 700,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $10,525,000) ................................ 10,525,000
--------------
TOTAL INVESTMENTS (COST $1,931,875,897) 99.6% .................................. 2,038,123,247
OTHER ASSETS, LESS LIABILITIES 0.4% ............................................ 8,439,710
--------------
NET ASSETS 100.0% .............................................................. $2,046,562,957
==============
See Selected Portfolio Abbreviations on page 121.
a Rounds to less than 0.1% of net assets.
b See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
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.
80 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.92 $ 11.98 $ 12.11 $ 11.91 $ 11.64
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.49 0.50 0.52 0.52 0.54
Net realized and unrealized gains (losses) . 0.04 (0.06) (0.13) 0.20 0.27
------------------------------------------------------------
Total from investment operations ............ 0.53 0.44 0.39 0.72 0.81
------------------------------------------------------------
Less distributions from net investment income (0.49) (0.50) (0.52) (0.52) (0.54)
------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 11.96 $ 11.92 $ 11.98 $ 12.11 $ 11.91
============================================================
Total return c .............................. 4.59% 3.71% 3.35% 6.16% 7.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $467,299 $450,425 $442,842 $432,467 $426,319
Ratios to average net assets:
Expenses ................................... 0.66% 0.67% 0.67% 0.67% 0.67%
Net investment income ...................... 4.16% 4.21% 4.35% 4.36% 4.59%
Portfolio turnover rate ..................... 14.41% 17.65% 9.54% 10.99% 16.23%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 81
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.00 $ 12.06 $ 12.19 $ 11.98 $ 11.70
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.43 0.44 0.45 0.46 0.48
Net realized and unrealized gains (losses) . 0.05 (0.07) (0.13) 0.20 0.28
------------------------------------------------------------
Total from investment operations ............ 0.48 0.37 0.32 0.66 0.76
------------------------------------------------------------
Less distributions from net investment income (0.43) (0.43) (0.45) (0.45) (0.48)
------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 12.05 $ 12.00 $ 12.06 $ 12.19 $ 11.98
============================================================
Total return c .............................. 4.07% 3.13% 2.75% 5.62% 6.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 59,247 $ 57,063 $ 50,272 $ 48,268 $ 43,002
Ratios to average net assets:
Expenses ................................... 1.20% 1.22% 1.22% 1.23% 1.21%
Net investment income ...................... 3.62% 3.66% 3.80% 3.80% 4.05%
Portfolio turnover rate ..................... 14.41% 17.65% 9.54% 10.99% 16.23%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
82 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.3%
MUNICIPAL BONDS 98.3%
MASSACHUSETTS 98.3%
Auburn GO, AMBAC Insured, 5.125%, 6/01/24 ................................................. $ 1,465,000 $ 1,576,194
Boston Convention Center Act of 1997 Revenue, Special Obligation, Series A, AMBAC Insured,
5.00%, 5/01/27 ........................................................................... 3,970,000 4,194,742
Boston GO, Series A, MBIA Insured, 5.00%,
2/01/21 ................................................................................. 3,000,000 3,143,220
2/01/22 ................................................................................. 2,940,000 3,076,328
Chelsea GO, State Qualified, Refunding, AMBAC Insured, 5.125%, 6/15/16 .................... 1,750,000 1,797,670
Dudley Charlton Regional School District GO, Series B, FGIC Insured, 5.25%, 5/01/19 ....... 3,140,000 3,576,491
Foxborough Stadium Infrastructure Improvement Revenue, 5.75%, 6/01/25 ..................... 4,000,000 4,265,680
Greater Lawrence Sanitary District GO, MBIA Insured, Pre-Refunded, 5.625%, 6/15/20 ........ 1,000,000 1,070,280
Holyoke Gas and Electric Department Revenue, Series A, MBIA Insured, 5.00%, 12/01/26 ...... 9,805,000 10,406,046
Kingston GO, FGIC Insured, Pre-Refunded, 5.50%, 11/15/19 .................................. 2,055,000 2,165,908
Lawrence GO,
AMBAC Insured, Pre-Refunded, 5.00%, 2/01/21 ............................................. 1,000,000 1,049,440
State Qualified, Refunding, FSA Insured, 5.00%, 2/01/21 ................................. 4,000,000 4,358,520
Lowell GO,
FGIC Insured, Pre-Refunded, 5.85%, 2/15/20 .............................................. 1,595,000 1,707,814
State Qualified, AMBAC Insured, 5.00%, 2/01/21 .......................................... 1,330,000 1,407,539
State Qualified, AMBAC Insured, 5.00%, 2/01/22 .......................................... 1,405,000 1,484,973
Ludlow GO, School Project, Limited Tax, MBIA Insured,
7.30%, 11/01/07 ......................................................................... 210,000 214,962
7.30%, 11/01/08 ......................................................................... 210,000 222,331
7.40%, 11/01/09 ......................................................................... 210,000 230,080
Mansfield GO, Municipal Purpose Loan, FGIC Insured, Pre-Refunded, 5.125%, 8/15/17 ......... 1,685,000 1,713,123
Martha's Vineyard Land Bank Revenue, AMBAC Insured,
4.875%, 5/01/22 ......................................................................... 2,000,000 2,115,800
5.00%, 5/01/32 .......................................................................... 2,000,000 2,110,300
5.00%, 5/01/34 .......................................................................... 7,000,000 7,422,520
Massachusetts Bay Transportation Authority Revenue, General Transportation System,
Series C, FGIC Insured, 5.25%, 3/01/15 .................................................. 2,000,000 2,212,720
Series D, MBIA Insured, 5.00%, 3/01/27 .................................................. 5,000,000 5,050,000
Massachusetts Bay Transportation Authority Sales Tax Revenue, Refunding, Senior Series A,
FGIC Insured, 5.00%, 7/01/27 ............................................................. 5,000,000 5,321,100
Massachusetts State College Building Authority Project Revenue,
Capital Assurance, Refunding, Series A, XLCA Insured, 5.00%, 5/01/43 .................... 2,000,000 2,090,300
Refunding, Series B, XLCA Insured, 5.50%, 5/01/39 ....................................... 5,000,000 6,244,050
Series 1, MBIA Insured, ETM, 5.375%, 5/01/23 ............................................ 5,000,000 5,186,250
Series A, AMBAC Insured, 5.00%, 5/01/36 ................................................. 8,000,000 8,557,200
Massachusetts State Development Finance Agency Revenue,
Boston University, Series T-1, AMBAC Insured, 5.00%, 10/01/35 ........................... 3,600,000 3,853,584
Boston University, Series T-1, AMBAC Insured, 5.00%, 10/01/39 ........................... 25,305,000 27,011,822
Brandeis University, Series K, FGIC Insured, 4.75%, 10/01/28 ............................ 2,000,000 2,062,540
Massachusetts/Saltonstall Redevelopment Building Corp., Series A, MBIA Insured,
5.125%, 2/01/34 ....................................................................... 22,400,000 23,542,176
MBIA Insured, 5.20%, 7/01/32 ............................................................ 2,250,000 2,413,822
Series A, AMBAC Insured, Pre-Refunded, 5.375%, 1/01/42 .................................. 4,000,000 4,337,800
Series A, GNMA Secured, 6.90%, 10/20/41 ................................................. 2,090,000 2,388,933
Western New England, Series A, Assured Guaranty, 5.00%, 9/01/33 ......................... 9,000,000 9,549,180
Annual Report | 83
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State Development Finance Agency Revenue, (continued)
Western New England College, AMBAC Insured, Pre-Refunded, 5.25%, 7/01/20 ................ $ 1,500,000 $ 1,602,435
Massachusetts State GO,
Consolidated Loan, Series A, FSA Insured, Pre-Refunded, 5.00%, 3/01/24 .................. 5,000,000 5,453,250
Consolidated Loan, Series C, FGIC Insured, Pre-Refunded, 5.25%, 11/01/30 ................ 9,645,000 10,421,519
Consolidated Loan, Series D, MBIA Insured, ETM, 5.00%, 8/01/27 .......................... 3,430,000 3,653,464
Consolidated Loan, Series D, MBIA Insured, Pre-Refunded, 5.00%, 8/01/27 ................. 965,000 1,027,870
MBIA Insured, Pre-Refunded, 5.00%, 8/01/22 .............................................. 4,100,000 4,367,115
Refunding, Series B, FSA Insured, 5.25%, 9/01/21 ........................................ 10,000,000 11,507,500
Massachusetts State Health and Educational Facilities Authority Revenue,
Boston College, Series N, MBIA Insured, 5.125%, 6/01/33 ................................. 5,000,000 5,324,600
Brandeis University, Refunding, Series I, MBIA Insured, 4.75%, 10/01/20 ................. 3,000,000 3,068,520
Cable Housing and Health Services, Series A, MBIA Insured, 5.25%, 7/01/23 ............... 1,000,000 1,000,670
Catholic Health East, Series A, AMBAC Insured, 5.00%, 11/15/28 .......................... 6,575,000 6,769,949
Harvard University, Series FF, 5.125%, 7/15/37 .......................................... 3,000,000 3,183,540
New England Medical Center Hospital, Series H, FGIC Insured, 5.00%, 5/15/22 ............. 10,000,000 10,478,600
Northeastern University, Series I, MBIA Insured, 5.00%, 10/01/29 ........................ 1,250,000 1,297,425
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ..................... 5,000,000 5,071,450
Springfield College, AMBAC Insured, 5.00%, 10/15/27 ..................................... 2,500,000 2,544,575
Tufts University, Series I, 5.25%, 2/15/30 .............................................. 4,000,000 4,215,000
University of Massachusetts, Series C, FGIC Insured, 5.125%, 10/01/34 ................... 3,000,000 3,174,690
University of Massachusetts, Worcester Campus, Series B, FGIC Insured, Pre-Refunded,
5.25%, 10/01/31 ....................................................................... 3,500,000 3,736,810
University of Massachusetts Project, Series A, FGIC Insured, Pre-Refunded, 5.875%,
10/01/29 .............................................................................. 4,000,000 4,334,760
University of Massachusetts Project, Series C, MBIA Insured, Pre-Refunded, 5.25%,
10/01/31 .............................................................................. 1,500,000 1,620,765
Wellesley College, Series F, 5.125%, 7/01/39 ............................................ 7,500,000 7,761,750
Wheelock College, Series B, MBIA Insured, 5.625%, 10/01/30 .............................. 1,770,000 1,883,599
Worcester City Campus Corp., Series F, FGIC Insured, 4.75%, 10/01/36 .................... 3,030,000 3,152,866
Massachusetts State HFA, MFHR, Section 8 Assisted, Series A, GNMA Secured, ETM, 7.00%,
4/01/21 .................................................................................. 430,000 559,108
Massachusetts State HFA Housing Revenue, Rental, Series A, AMBAC Insured, 5.95%,
7/01/30 .................................................................................. 2,000,000 2,129,540
Massachusetts State Industrial Finance Agency Electrical Utility Revenue, Nantucket
Electric Co., Series A, AMBAC Insured, 5.875%, 7/01/17 ................................... 4,000,000 4,083,640
Massachusetts State Industrial Finance Agency Revenue,
Simons Rock College, AMBAC Insured, 5.50%, 6/01/27 ...................................... 1,560,000 1,596,083
St. Mark's School Issue, MBIA Insured, 5.375%, 1/01/21 .................................. 2,665,000 2,698,739
Suffolk University, AMBAC Insured, Pre-Refunded, 5.25%, 7/01/27 ......................... 4,000,000 4,100,320
Trustees Deerfield Academy, 5.25%, 10/01/27 ............................................. 2,800,000 2,881,536
Western New England College, AMBAC Insured, Pre-Refunded, 5.00%, 7/01/28 ................ 4,000,000 4,148,840
WGBH Educational Foundation, Refunding, AMBAC Insured, 5.00%, 3/01/28 ................... 2,500,000 2,576,750
Worcester Polytechnical Institute, Refunding, MBIA Insured, 5.125%, 9/01/17 ............. 3,720,000 3,818,506
Worcester Polytechnical Institute, Refunding, Series II, MBIA Insured, 5.50%, 9/01/21 ... 2,000,000 2,055,960
Worcester Polytechnical Institute, Refunding, Series II, MBIA Insured, 5.125%, 9/01/27 .. 4,000,000 4,107,400
84 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State Port Authority Revenue,
Series A, AMBAC Insured, 5.00%, 7/01/35 ................................................. $ 14,915,000 $ 15,895,960
Series A, FSA Insured, 5.125%, 7/01/17 .................................................. 2,000,000 2,082,940
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/19 ...................... 2,215,000 2,269,245
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/22 ...................... 2,000,000 2,048,780
Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/29 ....................... 7,450,000 7,634,685
Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/39 ....................... 845,000 865,948
US Airways Project, MBIA Insured, 6.00%, 9/01/21 ........................................ 4,700,000 4,947,173
US Airways Project, Series A, MBIA Insured, 5.875%, 9/01/23 ............................. 4,500,000 4,592,295
Massachusetts State School Building Authority Dedicated Sales Tax Revenue, Series A,
FSA Insured, 5.00%, 8/15/30 .............................................................. 13,250,000 14,171,670
Massachusetts State Special Obligation Dedicated Tax Revenue,
FGIC Insured, Pre-Refunded, 5.25%, 1/01/29 .............................................. 5,000,000 5,466,400
Refunding, FGIC Insured, 5.50%, 1/01/25 ................................................. 5,615,000 6,728,735
Refunding, FGIC Insured, 5.50%, 1/01/34 ................................................. 8,400,000 10,255,056
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue,
Refunding, Series A, MBIA Insured, 5.00%, 1/01/37 ....................................... 9,000,000 9,179,370
sub. lien, Refunding, Series B, MBIA Insured, 5.25%, 1/01/29 ............................ 4,600,000 4,697,474
sub. lien, Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 ........................... 10,000,000 10,210,700
Massachusetts State Water Pollution Abatement Trust Revenue,
Pool Program Bonds, Series 6, 5.50%, 8/01/30 ............................................ 2,620,000 2,782,257
Pool Program Bonds, Series 6, Pre-Refunded, 5.50%, 8/01/30 .............................. 1,075,000 1,148,681
Pool Program Bonds, Series 7, 5.125%, 2/01/31 ........................................... 4,300,000 4,520,074
Pool Program Bonds, Series 7, Pre-Refunded, 5.125%, 2/01/31 ............................. 1,700,000 1,801,133
Water Revenue Authority Program, Refunding, Sub Series A, 5.75%, 8/01/29 ................ 3,995,000 4,212,608
Water Revenue Authority Program, Sub Series A, Pre-Refunded, 5.75%, 8/01/29 ............. 1,005,000 1,063,551
Massachusetts State Water Resources Authority Revenue,
General, Refunding, Series A, MBIA Insured, 5.00%, 8/01/34 .............................. 10,700,000 11,546,370
Refunding, Series J, FSA Insured, 5.00%, 8/01/32 ........................................ 9,000,000 9,415,440
Series A, FGIC Insured, Pre-Refunded, 5.75%, 8/01/39 .................................... 9,275,000 9,978,230
Series A, FSA Insured, 4.50%, 8/01/46 ................................................... 1,000,000 1,004,730
Milford GO, FSA Insured, 5.125%, 12/15/26 ................................................. 1,030,000 1,135,328
Monson GO, AMBAC Insured, 5.25%, 11/01/23 ................................................. 1,675,000 1,838,932
New Bedford GO, Municipal Purpose Loan, FGIC Insured, 5.00%, 5/01/21 ...................... 3,685,000 3,902,341
Plymouth County COP, Correctional Facility Project, Refunding, AMBAC Insured, 5.125%,
10/01/18 ................................................................................. 2,000,000 2,088,860
Route 3 North Transportation Improvement Assn. Lease Revenue, MBIA Insured, Pre-Refunded,
5.375%, 6/15/33 .......................................................................... 15,475,000 16,306,472
Salisbury GO, MBIA Insured, Pre-Refunded, 5.30%, 3/15/27 .................................. 2,795,000 3,029,696
Shrewsbury GO, Municipal Purpose Loan, 5.00%, 8/15/20 ..................................... 2,075,000 2,204,833
Springfield GO,
Municipal Purpose Loan, FGIC Insured, Pre-Refunded, 5.00%, 8/01/21 ...................... 5,000,000 5,319,100
Municipal Purpose Loan, FSA Insured, Pre-Refunded, 5.00%, 11/15/18 ...................... 1,500,000 1,548,765
State Qualified Municipal Purpose Loan, FSA Insured, 4.50%, 8/01/26 ..................... 2,000,000 2,056,320
Springfield Water and Sewer Commission Revenue, Series A, AMBAC Insured, 5.00%,
11/01/21 ................................................................................. 2,775,000 2,947,577
Annual Report | 85
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
University Building Authority Project Revenue, Refunding, Senior Series 1, AMBAC Insured,
5.25%,
11/01/23 ............................................................................... $ 2,155,000 $ 2,357,010
11/01/28 ............................................................................... 5,035,000 5,506,981
University of Massachusetts Building Authority Project Revenue, Senior Series 2004-1,
AMBAC Insured, Pre-Refunded, 5.25%, 11/01/29 ............................................ 3,000,000 3,313,710
Whitman Hanson Regional School District GO, Refunding, FGIC Insured, 5.00%, 6/15/21 ....... 1,960,000 2,081,402
Winthrop GO, AMBAC Insured, 5.00%, 11/01/20 ............................................... 1,230,000 1,311,389
Worcester GO, Refunding, Series E, MBIA Insured, 6.00%, 10/01/15 .......................... 1,335,000 1,350,459
------------
TOTAL LONG TERM INVESTMENTS (COST $487,402,406) ........................................... 517,359,262
------------
SHORT TERM INVESTMENTS 0.8%
MUNICIPAL BONDS 0.8%
MASSACHUSETTS 0.7%
a Massachusetts State GO, Consolidated Loan,
Series A, Daily VRDN and Put, 3.66%, 3/01/26 ........................................... 500,000 500,000
Series B, Daily VRDN and Put, 3.66%, 3/01/26 ........................................... 600,000 600,000
a Massachusetts State Health and Educational Facilities Authority Revenue, Capital Assets
Program,
Series D, MBIA Insured, Daily VRDN and Put, 3.63%, 1/01/35 ............................. 780,000 780,000
Series E, Daily VRDN and Put, 3.53%, 1/01/35 ........................................... 1,100,000 1,100,000
a Massachusetts State Water Resources Authority Revenue, Multi Modal, General, Refunding,
Sub Series C, Daily VRDN and Put, 3.66%, 8/01/20 ........................................ 900,000 900,000
------------
3,880,000
------------
U.S. TERRITORIES 0.1%
PUERTO RICO 0.1%
a Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA
Insured, Weekly VRDN and Put, 3.34%, 12/01/15 ........................................... 400,000 400,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $4,280,000) ............................................ 4,280,000
------------
TOTAL INVESTMENTS (COST $491,682,406) 99.1% ............................................... 521,639,262
OTHER ASSETS, LESS LIABILITIES 0.9% ....................................................... 4,906,999
------------
NET ASSETS 100.0% ......................................................................... $526,546,261
============
See Selected Portfolio Abbreviations on page 121.
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.
86 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.27 $ 12.35 $ 12.58 $ 12.46 $ 12.25
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.53 0.54 0.55 0.55 0.57
Net realized and unrealized gains (losses) . (0.01) (0.08) (0.23) 0.18 0.28
----------------------------------------------------------------------
Total from investment operations ............ 0.52 0.46 0.32 0.73 0.85
----------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.53) (0.54) (0.55) (0.54) (0.57)
Net realized gains ......................... (0.02) -- -- (0.07) (0.07)
----------------------------------------------------------------------
Total distributions ......................... (0.55) (0.54) (0.55) (0.61) (0.64)
----------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
----------------------------------------------------------------------
Net asset value, end of year ................ $ 12.24 $ 12.27 $ 12.35 $ 12.58 $ 12.46
======================================================================
Total return c .............................. 4.35% 3.77% 2.65% 6.06% 7.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $1,260,755 $1,230,439 $1,199,126 $1,248,975 $1,253,847
Ratios to average net assets:
Expenses ................................... 0.64% 0.64% 0.64% 0.64% 0.64%
Net investment income ...................... 4.34% 4.38% 4.45% 4.42% 4.62%
Portfolio turnover rate ..................... 7.97% 6.55% 9.40% 11.29% 13.22%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 87
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
-------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 e 2003
-------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.33 $ 12.40 $ 12.63 $ 12.51 $ 12.29
-------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.46 0.47 0.48 0.48 0.50
Net realized and unrealized gains (losses) . (0.01) (0.07) (0.23) 0.19 0.30
-------------------------------------------------------
Total from investment operations ............ 0.45 0.40 0.25 0.67 0.80
-------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.46) (0.47) (0.48) (0.48) (0.51)
Net realized gains ......................... (0.02) -- -- (0.07) (0.07)
-------------------------------------------------------
Total distributions ......................... (0.48) (0.47) (0.48) (0.55) (0.58)
-------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
-------------------------------------------------------
Net asset value, end of year ................ $ 12.30 $ 12.33 $ 12.40 $ 12.63 $ 12.51
=======================================================
Total return c .............................. 3.77% 3.27% 2.08% 5.46% 6.64%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $45,664 $51,285 $54,867 $58,687 $49,931
Ratios to average net assets:
Expenses ................................... 1.19% 1.19% 1.19% 1.19% 1.19%
Net investment income ...................... 3.79% 3.83% 3.90% 3.87% 4.07%
Portfolio turnover rate ..................... 7.97% 6.55% 9.40% 11.29% 13.22%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
88 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.39 $ 12.46 $ 12.69 $ 12.56 $ 12.34
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.47 0.48 0.48 0.48 0.51
Net realized and unrealized gains (losses) . (0.02) (0.08) (0.23) 0.19 0.29
------------------------------------------------------------
Total from investment operations ............ 0.45 0.40 0.25 0.67 0.80
------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.46) (0.47) (0.48) (0.47) (0.51)
Net realized gains ......................... (0.02) -- -- (0.07) (0.07)
------------------------------------------------------------
Total distributions ......................... (0.48) (0.47) (0.48) (0.54) (0.58)
------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 12.36 $ 12.39 $ 12.46 $ 12.69 $ 12.56
============================================================
Total return c .............................. 3.74% 3.25% 2.06% 5.50% 6.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $126,535 $123,024 $108,308 $116,544 $110,159
Ratios to average net assets:
Expenses ................................... 1.19% 1.19% 1.19% 1.22% 1.16%
Net investment income ...................... 3.79% 3.83% 3.90% 3.84% 4.10%
Portfolio turnover rate ..................... 7.97% 6.55% 9.40% 11.29% 13.22%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 89
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.7%
MUNICIPAL BONDS 98.7%
MICHIGAN 92.2%
Adrian City School District GO, FSA Insured, 5.00%,
5/01/26 ................................................................................. $ 1,960,000 $ 2,122,660
5/01/29 ................................................................................. 2,125,000 2,301,354
5/01/34 ................................................................................. 6,690,000 7,245,203
Allegan Public School GO, AMBAC Insured, Pre-Refunded, 5.75%, 5/01/22 ..................... 4,165,000 4,178,703
Allendale Public School District GO,
2006, School Building and Site, FGIC Insured, Pre-Refunded, 5.125%, 5/01/27 ............. 3,225,000 3,448,106
School Building and Site, FGIC Insured, Pre-Refunded, 5.125%, 5/01/27 ................... 3,225,000 3,448,106
School Building and Site, FGIC Insured, Pre-Refunded, 5.125%, 5/01/32 ................... 5,490,000 5,869,798
Alpena Public Schools GO, MBIA Insured, Pre-Refunded, 5.625%, 5/01/22 ..................... 1,665,000 1,670,162
Anchor Bay School District GO, School Building and Site,
Series I, FGIC Insured, Pre-Refunded, 6.00%, 5/01/29 .................................... 2,000,000 2,098,580
Series II, FGIC Insured, Pre-Refunded, 5.70%, 5/01/25 ................................... 5,000,000 5,307,250
Series II, FGIC Insured, Pre-Refunded, 5.75%, 5/01/30 ................................... 3,750,000 3,985,950
Avondale School District GO,
AMBAC Insured, Pre-Refunded, 5.75%, 5/01/22 ............................................. 4,000,000 4,013,160
School Building and Site, FSA Insured, 5.00%, 5/01/29 ................................... 9,000,000 9,506,430
Bay City School District GO, School Building and Site, FSA Insured, 5.00%, 5/01/31 ........ 6,000,000 6,470,220
Birmingham City School District GO, School Building and Site, FSA Insured, 5.00%,
11/01/27 ................................................................................ 5,000,000 5,353,900
11/01/33 ................................................................................ 2,590,000 2,762,727
Brown City Community School District GO, Building and Site, FGIC Insured,
5.00%, 5/01/31 .......................................................................... 3,200,000 3,337,312
Pre-Refunded, 5.00%, 5/01/26 ............................................................ 4,445,000 4,703,477
Caledonia Community Schools GO, MBIA Insured, Pre-Refunded, 5.85%, 5/01/22 ................ 4,500,000 4,515,525
Carman-Ainsworth Community School District GO, FGIC Insured,
5.00%, 5/01/27 .......................................................................... 1,400,000 1,465,898
Pre-Refunded, 5.00%, 5/01/27 ............................................................ 1,550,000 1,648,208
Central Michigan University Revenue,
FGIC Insured, 5.00%, 10/01/27 ........................................................... 500,000 508,065
General, AMBAC Insured, 5.00%, 10/01/34 ................................................. 8,905,000 9,545,626
Series A, AMBAC Insured, 5.05%, 10/01/32 ................................................ 10,000,000 10,607,200
Central Montcalm Public School GO, MBIA Insured, Pre-Refunded, 6.00%, 5/01/29 ............. 1,400,000 1,469,006
Charles Stewart Mott Community College GO, FGIC Insured, Pre-Refunded, 5.50%, 5/01/21 ..... 3,550,000 3,747,167
Charlotte Public School District GO, FGIC Insured, Pre-Refunded, 5.375%, 5/01/29 .......... 5,000,000 5,182,250
Chippewa Valley Schools GO, School Building and Site, FSA Insured, 5.00%, 5/01/34 ......... 6,500,000 6,924,905
Coopersville Area Public Schools, School Building and Site, FSA Insured, 5.00%, 5/01/31 . 5,000,000 5,371,950
De Witt Public Schools GO, AMBAC Insured, Pre-Refunded, 5.70%, 5/01/21 .................... 6,905,000 6,927,234
Dearborn EDC Hospital Revenue, Oakwood Obligation Group,
Refunding, Series A, MBIA Insured, 5.25%, 8/15/21 ....................................... 1,000,000 1,001,240
Series A, FGIC Insured, 5.75%, 11/15/15 ................................................. 100,000 101,068
Detroit City School District GO,
School Building and Site Improvements, Series A, FGIC Insured, Pre-Refunded, 5.00%,
5/01/23 ............................................................................... 2,650,000 2,845,517
School Building and Site Improvements, Series B, FGIC Insured, 5.00%, 5/01/25 ........... 2,000,000 2,110,300
Series A, FSA Insured, 6.00%, 5/01/29 ................................................... 10,000,000 12,500,500
Series A, FSA Insured, Pre-Refunded, 5.125%, 5/01/31 .................................... 38,330,000 40,944,873
Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/20 .................. 10,610,000 11,076,097
90 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Detroit Sewage Disposal Revenue, Series A, MBIA Insured, Pre-Refunded,
5.50%, 7/01/20 .......................................................................... $ 215,000 $ 218,438
5.00%, 7/01/27 .......................................................................... 22,000,000 22,317,020
Detroit Sewer Disposal Revenue, senior lien,
Refunding, Series A, FSA Insured, 5.00%, 7/01/32 ........................................ 4,545,000 4,788,657
Series A, FSA Insured, Pre-Refunded, 5.00%, 7/01/32 ..................................... 11,755,000 12,643,090
Detroit Water Supply System Revenue,
FGIC Insured, ETM, 6.25%, 7/01/12 ....................................................... 1,455,000 1,549,546
second lien, Series B, FGIC Insured, 5.50%, 7/01/33 ..................................... 20,000,000 21,653,800
second lien, Series B, MBIA Insured, 5.00%, 7/01/34 ..................................... 8,875,000 9,365,965
senior lien, Series A, FGIC Insured, 5.00%, 7/01/30 ..................................... 11,400,000 11,870,706
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/01/29 ...................... 1,500,000 1,603,440
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ....................... 9,625,000 10,239,020
senior lien, Series A, MBIA Insured, 5.00%, 7/01/27 ..................................... 4,930,000 4,995,569
senior lien, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/27 ....................... 820,000 831,816
Series B, MBIA Insured, Pre-Refunded, 5.00%, 7/01/34 .................................... 5,270,000 5,668,148
Detroit/Wayne County Stadium Authority Revenue, FGIC Insured, 5.25%, 2/01/27 .............. 5,500,000 5,640,195
East Grand Rapids Public School District GO, FSA Insured, Pre-Refunded, 6.00%, 5/01/29 .... 4,775,000 5,010,360
Eastern Michigan University Revenues, Refunding, Series A, FGIC Insured, Pre-Refunded,
5.00%,
6/01/28 ................................................................................ 6,730,000 7,232,462
6/01/33 ................................................................................ 14,700,000 15,797,502
Eaton Rapids Public Schools GO, School Building and Site, FSA Insured,
5.00%, 5/01/26 .......................................................................... 2,700,000 2,876,823
5.00%, 5/01/29 .......................................................................... 820,000 870,545
Pre-Refunded, 5.00%, 5/01/29 ............................................................ 1,930,000 2,090,171
Ecorse Public School District GO, FGIC Insured, Pre-Refunded, 5.50%, 5/01/17 .............. 5,000,000 5,155,450
Farmington Hills EDC Revenue, Botsford Continuing Care, Series A, MBIA Insured, 5.75%,
2/15/25 .................................................................................. 100,000 100,164
Fennville Public Schools GO, School Building and Site, FGIC Insured,
5.00%, 5/01/30 .......................................................................... 3,200,000 3,397,248
Pre-Refunded, 5.00%, 5/01/34 ............................................................ 3,250,000 3,442,043
Ferris State University Revenue,
AMBAC Insured, Pre-Refunded, 5.85%, 10/01/22 ............................................ 2,500,000 2,528,925
AMBAC Insured, Pre-Refunded, 5.90%, 10/01/26 ............................................ 6,840,000 6,919,344
FGIC Insured, 5.25%, 10/01/26 ........................................................... 1,500,000 1,582,455
FGIC Insured, 5.25%, 10/01/31 ........................................................... 3,255,000 3,418,889
Fowlerville Community School District GO, FGIC Insured, 5.00%,
5/01/30 ................................................................................. 1,990,000 2,116,484
5/01/34 ................................................................................. 8,145,000 8,652,271
Genesee County GO, Water Supply System, AMBAC Insured, 5.00%, 11/01/30 .................... 4,000,000 4,274,960
Gladstone Area Public Schools GO, AMBAC Insured, Pre-Refunded, 5.50%, 5/01/26 ............. 1,500,000 1,504,365
Grand Blanc Community Schools GO, School Building and Site, FSA Insured, 5.00%,
5/01/28 .................................................................................. 4,250,000 4,528,332
Grand Rapids Building Authority GO, AMBAC Insured, 5.50%, 8/01/20 ......................... 2,000,000 2,112,820
Grand Rapids Building Authority Revenue, AMBAC Insured, Series A,
5.00%, 10/01/28 ......................................................................... 3,590,000 3,771,295
Pre-Refunded, 5.00%, 10/01/28 ........................................................... 2,410,000 2,573,904
Annual Report | 91
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Grand Rapids Downtown Development Authority Tax Increment Revenue, MBIA Insured,
6.875%, 6/01/24 .......................................................................... $ 7,500,000 $ 7,511,250
Grand Rapids Sanitation Sewer System Revenue, MBIA Insured, 5.00%,
1/01/30 ................................................................................. 7,500,000 8,048,025
1/01/34 ................................................................................. 7,795,000 8,341,741
Grand Rapids Water Supply Revenue, FGIC Insured, 5.00%, 1/01/35 ........................... 3,500,000 3,755,150
Grosse Ile Township School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 ........ 5,250,000 5,269,320
Hamilton Community School District GO, FGIC Insured, 5.00%, 5/01/24 ....................... 2,000,000 2,028,360
Hancock Hospital Finance Authority Revenue, Portage Health, MBIA Insured, Pre-Refunded,
5.45%, 8/01/47 ........................................................................... 4,400,000 4,495,876
Hartland Consolidated School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/29 ...... 30,000,000 32,109,300
Haslett Public School District GO, MBIA Insured, Pre-Refunded, 5.70%, 5/01/26 ............. 3,900,000 3,912,558
Hazel Park Building Authority Revenue, Ice Arena, AMBAC Insured, 4.70%, 4/01/24 ........... 700,000 700,343
Hazel Park School District GO, FSA Insured, 5.00%,
5/01/27 ................................................................................. 9,000,000 9,453,600
5/01/32 ................................................................................. 12,475,000 13,091,889
Healthsource Saginaw Inc. Saginaw County GO, MBIA Insured, 5.00%, 5/01/29 ................. 4,145,000 4,415,959
Hopkins Public Schools GO, FGIC Insured, Pre-Refunded,
5.70%, 5/01/21 .......................................................................... 2,025,000 2,031,521
5.50%, 5/01/26 .......................................................................... 505,000 506,470
5.50%, 5/01/26 .......................................................................... 495,000 496,440
Howell Public Schools GO, MBIA Insured, Pre-Refunded,
5.875%, 5/01/22 ......................................................................... 2,000,000 2,093,440
6.00%, 5/01/25 .......................................................................... 1,600,000 1,605,888
Huron School District GO, FSA Insured, Pre-Refunded,
5.25%, 5/01/21 .......................................................................... 1,500,000 1,592,880
5.375%, 5/01/26 ......................................................................... 2,500,000 2,666,750
Huron Valley School District GO, FGIC Insured, Pre-Refunded,
5.875%, 5/01/16 ......................................................................... 100,000 100,349
5.75%, 5/01/22 .......................................................................... 2,450,000 2,458,061
Jackson Brownfield RDAR, FGIC Insured,
5.125%, 6/01/22 ......................................................................... 2,290,000 2,432,782
5.125%, 6/01/24 ......................................................................... 1,215,000 1,290,755
5.25%, 6/01/26 .......................................................................... 2,820,000 3,015,172
5.375%, 6/01/30 ......................................................................... 5,830,000 6,299,490
Jackson Public Schools GO, School Building and Site, Refunding, FSA Insured, 5.00%,
5/01/34 .................................................................................. 6,620,000 7,011,176
Kalamazoo City School District GO, Building and Site, FSA Insured, 5.00%, 5/01/21 ......... 4,000,000 4,209,440
Kalamazoo Hospital Finance Authority Hospital Facility Revenue,
Borgess Medical Center, Series A, AMBAC Insured, ETM, 5.625%, 6/01/14 ................... 3,805,000 4,067,735
Bronson Methodist Hospital, MBIA Insured, Pre-Refunded, 5.25%, 5/15/18 .................. 115,000 118,322
Bronson Methodist Hospital, MBIA Insured, Pre-Refunded, 5.50%, 5/15/28 .................. 10,000,000 10,317,800
Bronson Methodist Hospital, Refunding, MBIA Insured, 5.25%, 5/15/18 ..................... 135,000 138,548
Kent County Building Authority GO, Pre-Refunded, 5.00%, 6/01/26 ........................... 21,885,000 22,257,045
Lake Shore Public Schools GO, Macomb County, FSA Insured, Pre-Refunded, 5.50%,
5/01/20 .................................................................................. 2,000,000 2,005,820
Lake St. Clair Shores Drain District GO, Series A, MBIA Insured, 5.125%, 10/01/29 ......... 1,000,000 1,041,130
Lake Superior State University Revenue, Refunding, AMBAC Insured, 5.25%, 11/15/31 ......... 3,320,000 3,510,369
92 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Lakeview Community Schools GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/16 ................. $ 100,000 $ 100,329
Lenawee County Hospital Finance Authority Hospital Revenue, Lenawee Health Alliance,
Refunding, Series A, AMBAC Insured, 5.20%, 7/01/19 ....................................... 2,115,000 2,209,096
Lincoln Consolidated School District GO, FSA Insured, Pre-Refunded, 5.00%, 5/01/28 ........ 1,000,000 1,015,890
Lincoln Park School District GO,
FGIC Insured, Pre-Refunded, 5.00%, 5/01/26 .............................................. 255,000 259,052
Refunding, FGIC Insured, 5.00%, 5/01/26 ................................................. 645,000 652,759
Livonia Municipal Building Authority GO, FGIC Insured, Pre-Refunded, 5.25%, 5/01/30 ....... 3,950,000 4,140,192
Lowell Area Schools GO, FGIC Insured, Pre-Refunded, 5.625%,
5/01/25 ................................................................................. 3,125,000 3,310,094
5/01/30 ................................................................................. 3,250,000 3,442,498
Merrill Community School District GO, FGIC Insured, Pre-Refunded, 5.60%, 5/01/26 .......... 4,000,000 4,012,280
Michigan Higher Education Student Loan Authority Revenue, Series XVII-E, AMBAC Insured,
5.40%, 6/01/19 .......................................................................... 5,000,000 5,182,500
5.50%, 6/01/25 .......................................................................... 5,000,000 5,222,400
Michigan Municipal Bond Authority Revenue,
Clean Water State Revolving Fund, 5.00%, 10/01/24 ....................................... 11,355,000 12,044,930
Local Government Loan Program, Series C, MBIA Insured, 6.00%, 11/01/10 .................. 3,790,000 3,813,195
Michigan State Building Authority Revenue,
Facilities Program, Refunding, Series I, AMBAC Insured, 5.00%, 10/15/33 ................. 2,500,000 2,672,975
Facilities Program, Refunding, Series I, FSA Insured, 4.75%, 10/15/18 ................... 3,000,000 3,064,110
Facilities Program, Refunding, Series I, FSA Insured, 5.00%, 10/15/24 ................... 5,000,000 5,223,400
Facilities Program, Series III, FSA Insured, Pre-Refunded, 5.00%, 10/15/26 .............. 14,000,000 14,957,880
Refunding, AMBAC Insured, 5.00%, 10/15/33 ............................................... 16,000,000 17,107,040
Michigan State Comprehensive Transportation Revenue, Refunding, FSA Insured, 5.00%,
5/15/31 .................................................................................. 8,000,000 8,622,720
Michigan State COP, AMBAC Insured, Pre-Refunded, 5.50%, 6/01/27 ........................... 12,000,000 12,682,920
Michigan State HDA Rental Housing Revenue, Refunding, Series A, AMBAC Insured, 6.00%,
4/01/16 .................................................................................. 200,000 204,234
Michigan State Hospital Finance Authority Revenue,
Ascension Health Credit, Series A, MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 ......... 15,175,000 16,279,285
Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured, 5.50%,
8/15/24 ............................................................................... 15,000,000 15,400,950
Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured, 5.25%,
8/15/27 ............................................................................... 10,000,000 10,254,600
Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.375%, 8/15/26 .................... 6,000,000 6,067,860
Mercy Health Services, Series R, AMBAC Insured, ETM, 5.375%, 8/15/26 .................... 1,750,000 1,769,793
Mercy Health Services, Series T, MBIA Insured, Pre-Refunded, 5.75%, 8/15/15 ............. 10,525,000 10,729,395
Mercy Health Services, Series U, ETM, 5.75%, 8/15/26 .................................... 300,000 304,383
Mercy Health Services, Series W, FSA Insured, ETM, 5.25%, 8/15/27 ....................... 8,605,000 8,746,380
Mercy Health Services, Series X, MBIA Insured, Pre-Refunded, 6.00%, 8/15/34 ............. 11,000,000 11,707,740
Mercy Mount Clemens Corp., Refunding, Series A, MBIA Insured, 5.75%, 5/15/29 ............ 4,890,000 5,121,004
Mid-Michigan Health, AMBAC Insured, 5.00%, 4/15/24 ...................................... 7,065,000 7,395,006
Mid-Michigan Health, AMBAC Insured, 5.00%, 4/15/32 ...................................... 1,000,000 1,044,360
Mid-Michigan Obligation Group, Refunding, Series A, FSA Insured, 5.375%, 6/01/27 ........ 7,500,000 7,721,175
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ............. 7,500,000 7,701,750
Refunding, MBIA Insured, 5.00%, 11/15/36 ................................................ 6,500,000 6,875,440
St. John's Health System, Series A, AMBAC Insured, ETM, 5.125%, 5/15/17 ................. 14,500,000 14,837,850
Annual Report | 93
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Michigan State Hospital Finance Authority Revenue (continued)
St. John's Hospital, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ....................... $ 3,445,000 $ 3,591,378
St. John's Hospital, Series A, AMBAC Insured, ETM, 6.25%, 5/15/14 ....................... 9,545,000 10,295,905
Michigan State Strategic Fund Limited Obligation Revenue, Collateral, The Detroit Edison Co.,
Fund, Pollution, Refunding,
Series AA, FGIC Insured, 6.95%, 5/01/11 ................................................. 5,000,000 5,620,300
Series BB, AMBAC Insured, 7.00%, 5/01/21 ................................................ 3,000,000 3,961,530
Michigan State Strategic Fund Resources Recovery Limited Obligation Revenue, Detroit
Education Exempt Facilities, Refunding, Series D, XLCA Insured, 5.25%, 12/15/32 .......... 12,350,000 13,099,398
Michigan State Trunk Line Revenue,
Refunding, Series A, MBIA Insured, 4.75%, 11/01/20 ...................................... 3,300,000 3,376,956
Refunding, Series A, MBIA Insured, 5.00%, 11/01/26 ...................................... 3,050,000 3,133,235
Series A, FSA Insured, Pre-Refunded, 5.00%, 11/01/25 .................................... 16,265,000 17,196,497
Series A, FSA Insured, Pre-Refunded, 5.25%, 11/01/30 .................................... 34,680,000 37,034,425
Michigan Technological University Revenue, General, Series A, MBIA Insured, 5.00%,
10/01/34 ................................................................................. 3,675,000 3,885,431
Milan Area Schools GO, Series A, FGIC Insured, Pre-Refunded, 5.75%, 5/01/24 ............... 3,500,000 3,718,085
Northview Public Schools District GO,
MBIA Insured, 5.80%, 5/01/21 ............................................................ 235,000 236,908
Refunding, FGIC Insured, 5.00%, 5/01/21 ................................................. 3,450,000 3,506,787
Oakridge Public Schools GO, FSA Insured, Pre-Refunded,
5.00%, 5/01/23 .......................................................................... 500,000 507,945
5.125%, 5/01/28 ......................................................................... 500,000 508,645
Otsego Public Schools District GO, School Building and Site, FSA Insured, 5.00%, 5/01/34 .. 9,835,000 10,447,524
Ovid Elsie Area Schools GO, School Building and Site, MBIA Insured, Pre-Refunded, 5.00%,
5/01/32 .................................................................................. 7,775,000 8,310,697
Oxford Area Community School District GO, FSA Insured, Pre-Refunded, 5.00%,
5/01/26 ................................................................................. 5,425,000 5,740,464
5/01/31 ................................................................................. 4,865,000 5,147,900
Pennfield School District GO, School Building and Site, FGIC Insured,
5.00%, 5/01/29 .......................................................................... 505,000 536,128
Pre-Refunded, 5.00%, 5/01/29 ............................................................ 645,000 698,529
Pre-Refunded, 5.00%, 5/01/34 ............................................................ 2,500,000 2,707,475
Pinckney Community Schools GO, Refunding, FSA Insured, 5.00%, 5/01/26 ..................... 2,955,000 3,148,523
Pontiac General Building Authority GO, FGIC Insured, Pre-Refunded, 5.375%,
6/01/23 ................................................................................. 1,620,000 1,752,872
6/01/27 ................................................................................. 2,635,000 2,851,123
Port Huron GO, Limited Tax, AMBAC Insured, 5.00%, 10/01/22 ................................ 1,600,000 1,674,368
River Rouge School District GO, Refunding, FGIC Insured, 5.00%, 5/01/22 ................... 6,575,000 6,938,597
Rockford Public Schools GO, FGIC Insured, Pre-Refunded, 5.25%,
5/01/22 ................................................................................. 1,250,000 1,253,163
5/01/27 ................................................................................. 3,000,000 3,007,590
Roseville School District GO, School Building and Site, Refunding, FSA Insured, 5.00%,
5/01/31 .................................................................................. 5,000,000 5,383,900
94 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%,
11/15/31 ................................................................................ $ 12,750,000 $ 13,425,240
11/15/35 ................................................................................ 17,600,000 18,424,560
Saginaw City School District GO, School Building and Site, FSA Insured, 5.00%, 5/01/36 .... 6,950,000 7,445,048
Saginaw Hospital Finance Authority Revenue, Covenant Medical Center, Refunding, Series E,
MBIA Insured,
5.375%, 7/01/19 ......................................................................... 4,850,000 5,101,181
5.50%, 7/01/24 .......................................................................... 1,750,000 1,825,495
Saginaw Valley State University Revenue,
General, AMBAC Insured, Pre-Refunded, 5.25%, 7/01/19 .................................... 2,195,000 2,283,700
General, Refunding, AMBAC Insured, 5.25%, 7/01/19 ....................................... 345,000 358,303
Series A, MBIA Insured, 5.125%, 7/01/30 ................................................. 4,315,000 4,484,795
Schoolcraft Community School District GO, FGIC Insured, Pre-Refunded,
5.75%, 5/01/21 .......................................................................... 3,575,000 3,586,762
5.375%, 5/01/26 ......................................................................... 1,000,000 1,002,720
South Macomb Disposal Authority Revenue, AMBAC Insured, 5.25%, 9/01/20 .................... 2,000,000 2,099,240
South Redford School District GO,
FGIC Insured, Pre-Refunded, 5.50%, 5/01/22 .............................................. 3,155,000 3,164,181
School Building and Site, MBIA Insured, 5.00%, 5/01/30 .................................. 3,500,000 3,733,800
Southfield Library Building Authority GO, Refunding, MBIA Insured, 5.00%, 5/01/30 ......... 6,535,000 6,985,588
Sparta Area Schools GO, School Building and Site, FGIC Insured, Pre-Refunded, 5.00%,
5/01/30 .................................................................................. 2,730,000 2,956,563
St. Clair County EDC, PCR, The Detroit Edison Co., Refunding, Series AA, AMBAC Insured,
6.40%, 8/01/24 ........................................................................... 10,000,000 10,554,600
Sturgis Public School District GO, Refunding, FGIC Insured, 5.00%, 5/01/30 ................ 4,715,000 5,057,073
Taylor Brownfield RDA, GO, Tax Increment, Series A, MBIA Insured, 5.00%,
5/01/29 ................................................................................. 2,900,000 3,091,661
5/01/34 ................................................................................. 3,945,000 4,191,641
Taylor Tax Increment Finance Authority Revenue, FSA Insured, 5.00%, 5/01/21 ............... 2,595,000 2,706,429
Tecumseh Public Schools GO, FGIC Insured, Pre-Refunded, 5.50%,
5/01/25 ................................................................................. 5,925,000 6,254,074
5/01/30 ................................................................................. 4,500,000 4,749,930
Thornapple Kellogg School GO, School Building and Site,
FSA Insured, Pre-Refunded, 5.00%, 5/01/28 ............................................... 6,250,000 6,680,625
Refunding, FSA Insured, 5.00%, 5/01/23 .................................................. 4,000,000 4,217,040
Troy City School District GO, School Building and Site, MBIA Insured, 5.00%, 5/01/26 ...... 7,100,000 7,667,716
Warren Consolidated School District GO, FSA Insured,
4.875%, 5/01/22 ......................................................................... 11,850,000 12,336,916
Pre-Refunded, 5.00%, 5/01/26 ............................................................ 14,450,000 15,290,267
Warren Water and Sewer Revenue, FSA Insured, Pre-Refunded, 5.125%, 11/01/23 ............... 2,450,000 2,605,477
Wayne Charter County Airport Hotel GO, Detroit Metropolitan Airport, Series A, MBIA Insured,
5.25%, 12/01/25 ......................................................................... 17,000,000 18,170,450
5.00%, 12/01/30 ......................................................................... 10,750,000 11,301,367
Wayne Charter County Airport Revenue, Detroit Metropolitan Wayne County, Series A,
MBIA Insured, 5.25%, 12/01/18 ............................................................ 5,500,000 5,669,125
Annual Report | 95
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Wayne State University Revenues,
FGIC Insured, 5.125%, 11/15/29 ........................................................ $17,900,000 $ 18,634,616
General, AMBAC Insured, 5.00%, 11/15/30 ............................................... 3,925,000 4,250,736
General, AMBAC Insured, 5.00%, 11/15/36 ............................................... 6,000,000 6,472,920
West Bloomfield School District GO, FGIC Insured, Pre-Refunded, 6.00%,
5/01/19 ............................................................................... 2,100,000 2,247,651
5/01/20 ............................................................................... 2,000,000 2,140,620
West Branch Rose City Area School District GO, FGIC Insured, 5.50%, 5/01/24 ............. 1,400,000 1,454,628
West Ottawa Public School District GO,
FGIC Insured, 5.60%, 5/01/21 .......................................................... 695,000 696,897
FGIC Insured, 5.60%, 5/01/26 .......................................................... 3,575,000 3,584,438
FGIC Insured, Pre-Refunded, 5.60%, 5/01/26 ............................................ 6,000,000 6,018,420
School Building Site, Refunding, MBIA Insured, 5.00%, 5/01/32 ......................... 6,025,000 6,348,783
Western Townships Utilities Authority GO, Sewer Disposal System, FGIC Insured, 4.75%,
1/01/23 ................................................................................ 8,500,000 8,841,190
Whitmore Lake Public School District GO, FGIC Insured, 5.00%, 5/01/32 ................... 9,375,000 9,892,031
Willow Run Community Schools GO, FSA Insured, 5.00%, 5/01/31 ............................ 12,550,000 13,035,183
Wyoming Public Schools GO, FGIC Insured, Pre-Refunded, 5.125%, 5/01/23 .................. 5,750,000 5,849,417
Wyoming Sewer Disposal System Revenue, Refunding, MBIA Insured, 5.00%, 6/01/27 .......... 5,700,000 6,108,804
Ypsilanti Community Utilities GO, Sanitation Sewer System No. 3, FGIC Insured, 5.00%,
5/01/32 ................................................................................ 6,065,000 6,350,480
Ypsilanti School District GO, FGIC Insured, Pre-Refunded,
5.75%, 5/01/20 ........................................................................ 4,700,000 4,715,463
5.375%, 5/01/26 ....................................................................... 6,750,000 6,768,360
Ypsilanti Water and Sewer Disposal System Revenue, Series C, AMBAC Insured, Pre-Refunded,
5.00%, 9/01/27 ......................................................................... 2,115,000 2,256,938
Zeeland Public Schools GO, Refunding, FGIC Insured, 5.00%, 5/01/25 ...................... 3,350,000 3,593,043
--------------
1,321,910,631
--------------
U.S. TERRITORIES 6.5%
PUERTO RICO 6.5%
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series D, FSA Insured, 5.00%, 7/01/32 ...................................... 20,000,000 21,161,400
Series B, MBIA Insured, Pre-Refunded, 5.875%, 7/01/35 ................................. 25,000,000 27,011,000
Puerto Rico Electric Power Authority Power Revenue,
Series NN, MBIA Insured, 5.00%, 7/01/32 ............................................... 20,800,000 21,998,288
Series RR, FGIC Insured, 5.00%, 7/01/35 ............................................... 14,000,000 14,992,180
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 .............. 7,950,000 7,958,109
--------------
TOTAL U.S. TERRITORIES .................................................................. 93,120,977
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,337,290,133) ....................................... 1,415,031,608
--------------
96 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 0.1%
MUNICIPAL BONDS 0.1%
MICHIGAN 0.1%
a Detroit Sewage Disposal Revenue, senior lien, Series B, FSA Insured, Daily VRDN and Put,
3.66%, 7/01/33 ........................................................................ $ 825,000 $ 825,000
a Michigan State University Revenues, Series A, Daily VRDN and Put, 3.66%, 8/15/32 ........ 520,000 520,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $1,345,000) .......................................... 1,345,000
--------------
TOTAL INVESTMENTS (COST $1,338,635,133) 98.8% ........................................... 1,416,376,608
OTHER ASSETS, LESS LIABILITIES 1.2% ..................................................... 16,578,019
--------------
NET ASSETS 100.0% ....................................................................... $1,432,954,627
==============
See Selected Portfolio Abbreviations on page 121.
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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 97
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.13 $ 12.23 $ 12.39 $ 12.23 $ 11.99
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.50 0.51 0.53 0.54 0.56
Net realized and unrealized gains (losses) . 0.03 (0.10) (0.16) 0.15 0.25
------------------------------------------------------------
Total from investment operations ............ 0.53 0.41 0.37 0.69 0.81
------------------------------------------------------------
Less distributions from net investment income (0.50) (0.51) (0.53) (0.53) (0.57)
------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 12.16 $ 12.13 $ 12.23 $ 12.39 $ 12.23
============================================================
Total return c .............................. 4.50% 3.48% 2.99% 5.81% 6.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $539,643 $528,660 $515,780 $528,609 $524,076
Ratios to average net assets:
Expenses ................................... 0.66% 0.67% 0.67% 0.67% 0.67%
Net investment income ...................... 4.15% 4.17% 4.35% 4.39% 4.64%
Portfolio turnover rate ..................... 14.24% 13.03% 12.06% 10.77% 13.28%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
98 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.22 $ 12.31 $ 12.47 $ 12.30 $ 12.05
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.44 0.44 0.46 0.47 0.50
Net realized and unrealized gains (losses) . 0.01 (0.09) (0.16) 0.16 0.25
------------------------------------------------------------
Total from investment operations ............ 0.45 0.35 0.30 0.63 0.75
------------------------------------------------------------
Less distributions from net investment income (0.43) (0.44) (0.46) (0.46) (0.50)
------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 12.24 $ 12.22 $ 12.31 $ 12.47 $ 12.30
============================================================
Total return c .............................. 3.81% 2.98% 2.40% 5.25% 6.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 64,873 $ 64,900 $ 59,682 $ 59,389 $ 54,704
Ratios to average net assets:
Expenses ................................... 1.21% 1.22% 1.22% 1.26% 1.17%
Net investment income ...................... 3.60% 3.62% 3.80% 3.80% 4.14%
Portfolio turnover rate ..................... 14.24% 13.03% 12.06% 10.77% 13.28%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.6%
MUNICIPAL BONDS 99.6%
MINNESOTA 96.6%
Alexandria Lake Area Sanitation District Sanitation Sewer Board GO, Facilities, Series A,
XLCA Insured, 4.375%, 2/01/25 ............................................................ $ 1,025,000 $ 1,038,551
Anoka County Housing and RDA, GO, Housing Development, Refunding, AMBAC Insured,
4.875%, 2/01/24 ......................................................................... 2,195,000 2,315,264
5.00%, 2/01/34 .......................................................................... 2,000,000 2,115,860
Anoka-Hennepin ISD No. 11 GO, School District Credit Enhancement Program, Series A,
FSA Insured, 5.00%, 2/01/20 .............................................................. 6,130,000 6,414,861
Bemidji Health Care Facilities First Mortgage Revenue, North Country Health Services, Radian
Insured, 5.00%, 9/01/24 .................................................................. 2,000,000 2,084,660
Bemidji Lease Revenue, Minnesota State Bureau of Criminal Apprehension, MBIA Insured,
5.70%, 12/01/17 .......................................................................... 120,000 124,183
Bloomington ISD No. 271 GO, School Building, Refunding, Series C, FSA Insured, 4.25%,
2/01/24 .................................................................................. 3,635,000 3,650,958
Bloomington Port Authority Lease Revenue, City Hall Lease Obligation, 5.00%, 2/01/18 ....... 1,045,000 1,091,241
Brooklyn Center ISD No. 286 GO, FGIC Insured, 5.00%, 2/01/22 ............................... 1,000,000 1,056,880
Buffalo ISD No. 877 GO, Refunding, MBIA Insured, 5.00%, 2/01/22 ............................ 4,255,000 4,368,353
Burnsville MFR, Coventry Court, Refunding, Series A, GNMA Secured,
5.90%, 9/20/19 .......................................................................... 400,000 421,432
5.95%, 9/20/29 .......................................................................... 1,275,000 1,341,045
6.00%, 9/20/34 .......................................................................... 1,000,000 1,052,250
Byron ISD No. 531 GO, School Building, Series A, FGIC Insured, 5.00%, 2/01/24 .............. 2,015,000 2,160,322
Cambridge ISD No. 911 GO,
Capital Appreciation, Series B, MBIA Insured, zero cpn., 2/01/30 ........................ 2,240,000 736,579
Series A, MBIA Insured, 4.25%, 2/01/24 .................................................. 1,235,000 1,244,040
Cass Lake ISD No. 115 GO, Refunding, FGIC Insured, 5.00%, 2/01/22 .......................... 3,805,000 4,036,116
Centennial ISD No. 012 GO, Series A, FSA Insured, 5.00%, 2/01/21 ........................... 1,000,000 1,051,840
Chaska ISD No. 112 GO, School Building, Series A, MBIA Insured, 4.50%, 2/01/28 ............. 10,000,000 10,191,900
Chisago County GO, Capital Improvement, Series A, MBIA Insured, 4.75%, 2/01/26 ............. 3,615,000 3,808,005
Cohasset PCR, Collateral Allete Project, Refunding, Radian Insured, 4.95%, 7/01/22 ......... 3,010,000 3,139,280
Commissioner of Iron Range Resources and Rehabilitation Educational Facilities Revenue,
XLCA Insured, 4.50%, 10/01/21 ............................................................ 1,290,000 1,328,339
Dakota County Housing and RDA, SFMR, GNMA Secured,
5.75%, 4/01/18 .......................................................................... 175,000 178,505
5.85%, 10/01/30 ......................................................................... 300,000 306,072
Deer River ISD No. 317 GO, FSA Insured, 6.00%, 2/01/25 ..................................... 1,325,000 1,408,170
Eagan GO, Recreational Facilities, Series A, MBIA Insured, 5.00%, 2/01/21 .................. 3,075,000 3,234,408
Eagan MFHR, Forest Ridge Apartments, Refunding, Series A, GNMA Secured,
5.95%, 9/20/29 .......................................................................... 1,700,000 1,787,040
6.00%, 9/20/34 .......................................................................... 1,480,000 1,555,865
Eden Prairie MFHR,
Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%, 1/20/31 ........................ 2,000,000 2,029,600
Parkway Apartments Project, Refunding, Series A, GNMA Secured, 5.80%, 2/20/32 ........... 7,380,000 7,636,234
a Elk River ISD Number 728 GO, School Building, Refunding, Series A, FSA Insured, 4.25%,
2/01/24 .................................................................................. 6,265,000 6,295,009
Farmington ISD No. 192 GO,
MBIA Insured, 5.25%, 2/01/24 ............................................................ 5,915,000 6,243,164
School Building, Series B, FSA Insured, 5.00%, 2/01/23 .................................. 3,000,000 3,222,540
School Building, Series B, FSA Insured, 4.75%, 2/01/27 .................................. 17,075,000 17,960,509
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Ham Lake GO, Anoka County Housing, Senior Housing Project, Series B, MBIA Insured,
6.10%, 1/01/26 ........................................................................... $ 2,180,000 $ 2,190,311
Hastings ISD No. 200 GO, Refunding, Series A, FSA Insured, 4.50%, 2/01/22 ................. 2,700,000 2,781,405
Hibbing Health Care Facilities Revenue, The Duluth Clinic Ltd., FSA Insured, Pre-Refunded,
5.00%, 11/01/25 .......................................................................... 8,000,000 8,632,640
Hopkins Elderly Housing Revenue, St. Therese Project, Refunding, Series A, GNMA Secured,
5.60%, 11/20/17 ......................................................................... 750,000 771,390
5.70%, 11/20/32 ......................................................................... 3,000,000 3,082,740
Hopkins ISD No. 270 GO, FGIC Insured, 5.125%, 2/01/22 ..................................... 3,880,000 4,122,267
Hubbard County Housing and RDA, GO, Heritage Center Project, MBIA Insured, 5.50%,
8/01/27 .................................................................................. 1,085,000 1,146,910
Lake Crystal Wellcome Memorial Area Schools ISD No. 2071 GO, School Building, Series B,
MBIA Insured, 5.00%, 2/01/34 ............................................................. 3,285,000 3,519,450
Lake Superior ISD No. 381 GO, Series A, FSA Insured, 5.00%, 4/01/23 ....................... 4,195,000 4,477,282
Lakeview ISD No. 2167 GO, MBIA Insured, 5.25%, 2/01/26 .................................... 3,705,000 3,910,553
Lakeville ISD No. 194 GO, Series A, FGIC Insured, 5.00%, 2/01/23 .......................... 10,180,000 10,848,113
Mahtomedi ISD No. 832 GO, FSA Insured, 5.00%, 2/01/18 ..................................... 3,240,000 3,418,330
Maple Grove HDA Municipal Facility Lease Revenue, AMBAC Insured, Pre-Refunded, 5.55%,
2/01/17 .................................................................................. 280,000 284,861
Medford ISD No. 763 GO, Series A, FSA Insured, 5.125%, 2/01/29 ............................ 2,700,000 2,837,619
Metropolitan Council Minneapolis-St. Paul Metropolitan Area GO, Wastewater, Series B, 4.50%,
12/01/26 ................................................................................. 5,000,000 5,119,500
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue,
Series A, AMBAC Insured, Pre-Refunded, 5.20%, 1/01/24 ................................... 5,000,000 5,113,350
Series A, FGIC Insured, Pre-Refunded, 5.125%, 1/01/31 ................................... 7,000,000 7,251,860
Series A, FGIC Insured, Pre-Refunded, 5.25%, 1/01/32 .................................... 7,000,000 7,400,960
Series C, FGIC Insured, Pre-Refunded, 5.25%, 1/01/26 .................................... 2,000,000 2,114,560
Series C, FGIC Insured, Pre-Refunded, 5.25%, 1/01/32 .................................... 9,000,000 9,515,520
Minneapolis CDA and St. Paul Housing and RDAR, Health Care Facilities, Carondelet, Series B,
BIG Insured, Pre-Refunded, 8.875%, 11/01/15 .............................................. 650,000 757,920
Minneapolis GO,
Sports Arena Project, Refunding, 5.125%, 10/01/20 ....................................... 8,340,000 8,479,445
Sports Arena Project, Refunding, 5.20%, 10/01/24 ........................................ 3,750,000 3,815,625
Various Purpose, 5.125%, 12/01/28 ....................................................... 3,000,000 3,177,390
Minneapolis Health Care Revenue, Fairview Health Services, AMBAC Insured, 5.00%,
11/15/34 ................................................................................. 12,645,000 13,479,064
Minneapolis MFR, Riverside Plaza, Refunding, GNMA Secured, 5.20%, 12/20/30 ................ 5,000,000 5,058,050
Minneapolis Revenue, University Gateway Project, Series A, Pre-Refunded, 5.25%, 12/01/24 .. 3,000,000 3,036,270
Minneapolis Special School District No. 001 COP,
Refunding, Series A, MBIA Insured, 4.50%, 2/01/21 ....................................... 2,715,000 2,797,780
Series A, FSA Insured, 5.00%, 2/01/21 ................................................... 1,950,000 2,050,191
Minnesota Agriculture and Economic Development Board Revenue,
Benedictine Health, Refunding, Series A, MBIA Insured, 5.125%, 2/15/29 .................. 14,625,000 15,228,281
Evangelical Lutheran Good Samaritan, Society Project, AMBAC Insured, 5.15%, 12/01/22 .... 4,870,000 5,015,516
Evangelical Lutheran Good Samaritan, Society Project, AMBAC Insured, Pre-Refunded,
5.15%, 12/01/22 ....................................................................... 310,000 319,610
Health Care System, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 .................. 365,000 377,074
Health Care System, Series A, MBIA Insured, Pre-Refunded, 5.75%, 11/15/26 ............... 17,635,000 18,241,997
Annual Report | 101
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Minnesota State Colleges and University Revenue, Fund, Series A, MBIA Insured, 5.00%,
10/01/22 ................................................................................... $ 1,745,000 $ 1,890,289
10/01/23 ................................................................................... 1,825,000 1,975,563
10/01/24 ................................................................................... 1,900,000 2,053,862
10/01/25 ................................................................................... 1,155,000 1,247,666
10/01/26 ................................................................................... 1,715,000 1,849,988
10/01/32 ................................................................................... 5,540,000 5,946,858
Minnesota State GO, 5.00%, 6/01/26 ........................................................... 14,585,000 15,854,187
Minnesota State HFAR,
Rental Housing, Refunding, Series D, MBIA Insured, 5.90%, 8/01/15 .......................... 730,000 735,205
Rental Housing, Refunding, Series D, MBIA Insured, 5.95%, 2/01/18 .......................... 225,000 226,566
Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 .......................... 230,000 231,555
SFM, Series B, 5.00%, 7/01/13 .............................................................. 55,000 56,205
SFM, Series D, 5.45%, 1/01/26 .............................................................. 2,175,000 2,212,736
SFM, Series E, AMBAC Insured, 5.40%, 1/01/25 ............................................... 3,140,000 3,191,056
SFM, Series G, AMBAC Insured, 6.25%, 7/01/26 ............................................... 315,000 318,563
Minnesota State Higher Education Facilities Authority Revenue,
Bethel, Mandatory Put 4/01/19, Refunding, 5.10%, 4/01/28 ................................... 7,700,000 7,776,538
St. John's University, Series 5-I, MBIA Insured, Pre-Refunded, 5.25%, 10/01/21 ............. 1,750,000 1,868,405
St. John's University, Series 5-I, MBIA Insured, Pre-Refunded, 5.25%, 10/01/26 ............. 1,500,000 1,601,490
Minnetonka MFHR, Cedar Hills Project, Refunding, Series A, GNMA Secured,
5.90%, 10/20/19 ............................................................................ 1,750,000 1,843,730
5.95%, 10/20/29 ............................................................................ 5,955,000 6,272,163
Moorhead EDA, GO, Tax Increment, Series A, MBIA Insured, 5.25%, 2/01/28 ...................... 1,890,000 1,991,342
New Brighton GO, Tax Increment, Series A, MBIA Insured, 5.00%, 2/01/32 ....................... 4,110,000 4,425,854
New Hope MFR, North Ridge, Series A, GNMA Secured, Pre-Refunded,
6.05%, 1/01/17 ............................................................................. 390,000 394,274
6.20%, 1/01/31 ............................................................................. 5,470,000 5,529,021
Nobles County Housing and RDA Public Project Revenue, Annual Appropriation Lease Obligation,
AMBAC Insured, Pre-Refunded, 5.625%, 2/01/22 ................................................ 1,230,000 1,297,392
Northern Municipal Power Agency Electric System Revenue, Refunding, FSA Insured, 5.00%,
1/01/12 ..................................................................................... 1,030,000 1,061,786
Osseo ISD No. 279 GO, Series A, FSA Insured, 5.00%, 2/01/20 .................................. 3,000,000 3,158,250
Park Rapids ISD No. 309 GO, MBIA Insured,
4.75%, 2/01/21 ............................................................................. 2,500,000 2,547,325
5.00%, 2/01/25 ............................................................................. 3,000,000 3,070,470
Pine City Health Care and Housing Revenue, North Branch, Series A, GNMA Secured, 5.00%,
10/20/38 .................................................................................... 4,280,000 4,425,092
Pipestone-Jasper ISD No. 2689 GO, Refunding, Series 2004-A, FSA Insured, 5.00%,
3/01/20 ..................................................................................... 1,595,000 1,710,494
Plymouth Health Facilities Revenue, Westhealth Project, Series A, FSA Insured,
6.25%, 6/01/16 ............................................................................. 1,600,000 1,609,472
6.125%, 6/01/24 ............................................................................ 1,815,000 1,825,218
Prior Lake ISD No. 719 GO,
FGIC Insured, 5.125%, 2/01/19 .............................................................. 1,140,000 1,210,121
FSA Insured, 5.50%, 2/01/20 ................................................................ 2,255,000 2,370,839
FSA Insured, 5.50%, 2/01/21 ................................................................ 2,590,000 2,723,048
Series C, MBIA Insured, 5.00%, 2/01/21 ..................................................... 2,000,000 2,113,200
Series C, MBIA Insured, 5.00%, 2/01/23 ..................................................... 6,025,000 6,359,990
102 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Robbinsdale GO, Housing Development, Senior Housing Project, Series B, FGIC Insured,
Pre-Refunded, 5.875%, 1/01/31 ............................................................... $ 2,160,000 $ 2,289,427
Robbinsdale ISD No. 281 GO, Refunding, Series A, MBIA Insured, 4.50%,
2/01/21 .................................................................................... 3,420,000 3,512,648
2/01/22 .................................................................................... 3,000,000 3,078,090
Rochester Electric Utility Revenue, AMBAC Insured, 5.25%, 12/01/24 ........................... 3,000,000 3,187,740
Rochester Health Care Facilities Revenue, Mayo Foundation, Refunding, Series B, 5.50%,
11/15/27 .................................................................................... 4,000,000 4,122,360
Rochester ISD No. 535 GO, Series A, MBIA Insured, 5.00%,
2/01/28 .................................................................................... 1,385,000 1,479,969
2/01/29 .................................................................................... 1,455,000 1,553,751
Rosemount ISD No. 196 GO, Series A, MBIA Insured, 4.70%, 2/01/25 ............................. 1,000,000 1,038,600
Rush City ISD No. 139 GO, School Building, MBIA Insured,
5.00%, 2/01/21 ............................................................................. 1,680,000 1,784,362
5.125%, 2/01/26 ............................................................................ 4,245,000 4,534,467
Sartell ISD No. 748 GO, Refunding, Series A, FSA Insured,
4.125%, 8/01/20 ............................................................................ 1,785,000 1,807,973
4.25%, 2/01/22 ............................................................................. 2,810,000 2,851,925
Sauk Rapids ISD No. 47 GO,
School Building, Refunding, Series A, FSA Insured, 5.00%, 2/01/22 .......................... 2,200,000 2,380,510
School Building, Refunding, Series A, FSA Insured, 4.50%, 2/01/25 .......................... 2,175,000 2,237,662
Series A, MBIA Insured, 5.75%, 2/01/23 ..................................................... 2,740,000 2,941,390
Series A, MBIA Insured, 5.75%, 2/01/26 ..................................................... 5,000,000 5,367,500
Scott County GO, MBIA Insured, 5.00%, 2/01/33 ................................................ 5,555,000 5,841,416
Scott County Housing and Redevelopment Authority Facilities Lease Revenue, AMBAC Insured,
5.70%, 2/01/29 .............................................................................. 1,380,000 1,450,394
Scott County Housing and Redevelopment Authority GO,
River City Centre Project, Series A, FSA Insured, Pre-Refunded, 5.375%, 2/01/27 ............ 1,520,000 1,544,046
Savage City, Hamilton Apartments Project, AMBAC Insured, Pre-Refunded, 5.70%,
2/01/33 .................................................................................. 2,285,000 2,394,543
Scott County Housing and Redevelopment Authority Special Benefits Tax Revenue Balloon,
River City Centre Project, Series B, AMBAC Insured, Pre-Refunded, 5.50%, 2/01/27 ............ 675,000 686,421
Scott County Housing and Redevelopment Authority Tax Increment Development Revenue,
River City Centre Project, Series E, FSA Insured, Pre-Refunded, 5.375%, 2/01/25 ............. 1,170,000 1,188,509
Shakopee Public Utilities Commission Public Utilities Revenue, MBIA Insured, Pre-Refunded,
6.00%, 2/01/28 .............................................................................. 2,530,000 2,639,802
South Washington County ISD No. 833 GO, Series B, FSA Insured, 5.00%, 2/01/23 ................ 4,000,000 4,203,720
Southeastern Multi-County Housing and RDAR, Housing Development, Goodhue County
Apartments, Series B, MBIA Insured, 5.75%, 1/01/31 .......................................... 2,415,000 2,483,683
Southern Minnesota Municipal Power Agency Power Supply System Revenue,
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/19 ................ 5,875,000 3,623,406
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/20 ................ 14,035,000 8,288,510
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/23 ................ 4,000,000 2,072,280
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/26 ................ 5,000,000 2,261,500
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/27 ................ 6,600,000 2,845,326
Capital Appreciation, Refunding, Series C, AMBAC Insured, zero cpn., 1/01/18 ............... 15,935,000 10,259,750
Series A, MBIA Insured, ETM, 5.75%, 1/01/18 ................................................ 1,000,000 1,104,920
St. Clair ISD No. 75 GO, MBIA Insured, 5.70%, 4/01/22 ........................................ 2,250,000 2,338,448
Annual Report | 103
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
St. Cloud Health Care Revenue, St. Cloud Hospital Obligation, Group A, FSA Insured, 5.875%,
5/01/30 ..................................................................................... $ 17,785,000 $ 18,991,179
St. Cloud Hospital Facilities Revenue, St. Cloud Hospital, Refunding, Series A, AMBAC Insured,
5.00%, 7/01/15 .............................................................................. 1,165,000 1,175,660
St. Cloud Housing and RDA Sales Tax Revenue, Paramount Theater Project, Refunding, Series A,
FGIC Insured, 5.00%, 3/01/22 ................................................................ 1,000,000 1,011,920
St. Michael ISD No. 885 GO,
FSA Insured, 5.00%, 2/01/23 ................................................................ 3,300,000 3,487,704
School Building, Refunding, FSA Insured, 5.00%, 2/01/24 .................................... 3,735,000 4,021,362
School Building, Series A, FSA Insured, 4.75%, 2/01/29 ..................................... 5,000,000 5,232,650
St. Paul ISD No. 625 GO,
School Building, Series B, FSA Insured, 4.25%, 2/01/21 ..................................... 1,000,000 1,018,130
Series C, FSA Insured, 6.00%, 2/01/20 ...................................................... 1,600,000 1,666,752
St. Peter GO, Hospital, Series A, MBIA Insured, 5.00%, 9/01/32 ............................... 6,805,000 7,042,426
Upsala ISD No. 487 GO, School Building, FGIC Insured, 5.00%, 2/01/22 ......................... 1,140,000 1,214,818
Walker-Hakensack-Akeley ISD No. 113 GO, Series A, FSA Insured, 6.00%,
2/01/23 .................................................................................... 1,160,000 1,232,813
2/01/25 .................................................................................... 1,300,000 1,381,601
Washington County GO, Capital Improvement Plan, Series A, 4.75%, 2/01/22 ..................... 3,200,000 3,342,144
Washington County Housing and RDAR, Government Housing, Landfall Terrace Project,
Refunding,
5.35%, 2/01/22 ............................................................................. 1,000,000 1,013,630
5.40%, 8/01/27 ............................................................................. 2,015,000 2,042,988
Watertown ISD No. 111 GO, Series A, FSA Insured, 5.00%, 2/01/24 .............................. 2,725,000 2,933,926
Western Minnesota Municipal Power Agency Revenue,
MBIA Insured, 5.00%, 1/01/26 ............................................................... 8,565,000 9,032,820
Refunding, Series A, AMBAC Insured, 5.50%, 1/01/12 ......................................... 2,745,000 2,785,653
Refunding, Series A, AMBAC Insured, 5.50%, 1/01/13 ......................................... 4,500,000 4,566,645
Series A, FSA Insured, 5.00%, 1/01/36 ...................................................... 5,000,000 5,339,700
Series A, MBIA Insured, 5.00%, 1/01/30 ..................................................... 5,200,000 5,470,192
Willmar GO, Rice Memorial Hospital Project, FSA Insured, 5.00%,
2/01/19 .................................................................................... 2,000,000 2,126,900
2/01/22 .................................................................................... 2,550,000 2,703,510
2/01/25 .................................................................................... 3,000,000 3,174,090
2/01/32 .................................................................................... 5,415,000 5,694,197
Worthington ISD No. 518 GO, Series A, FSA Insured, 5.00%, 2/01/24 ............................ 5,000,000 5,117,450
------------
584,194,630
------------
U.S. TERRITORIES 3.0%
PUERTO RICO 2.6%
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.00%, 7/01/23 .................................................. 1,545,000 1,632,061
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ................................................. 580,000 615,560
Refunding, FSA Insured, 5.00%, 7/01/23 ..................................................... 955,000 1,005,682
Refunding, FSA Insured, 5.125%, 7/01/30 .................................................... 420,000 442,310
Puerto Rico Electric Power Authority Power Revenue, Refunding, Series SS, MBIA Insured,
5.00%, 7/01/25 .............................................................................. 5,000,000 5,387,400
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/30 .......... 1,000,000 1,075,930
104 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico PBA Guaranteed Revenue, Government Facilities, Refunding, Series F, XLCA
Insured, 5.25%, 7/01/25 .............................................................. $2,500,000 $ 2,920,800
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ............. 1,215,000 1,216,239
Puerto Rico Public Finance Corp. Commonwealth Revenue, Series E, AMBAC Insured,
5.50%, 8/01/27 ...................................................................... 625,000 759,825
ETM, 5.50%, 8/01/27 ................................................................. 375,000 455,303
-------------
15,511,110
-------------
VIRGIN ISLANDS 0.4%
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, FSA Insured, 5.25%,
10/01/20 ............................................................................ 1,160,000 1,277,763
10/01/21 ............................................................................ 1,000,000 1,100,130
-------------
2,377,893
-------------
TOTAL U.S. TERRITORIES ................................................................. 17,889,003
-------------
TOTAL LONG TERM INVESTMENTS (COST $574,942,822) ........................................ 602,083,633
-------------
SHORT TERM INVESTMENTS 0.7%
MUNICIPAL BONDS 0.7%
MINNESOTA 0.5%
b Hennepin County GO, Refunding, Series A, Weekly VRDN and Put, 3.50%, 12/01/25 .......... 1,000,000 1,000,000
b Minneapolis GO,
Block E Bonds, Series A, Weekly VRDN and Put, 3.50%, 3/01/27 ........................ 570,000 570,000
Convention Center, Weekly VRDN and Put, 3.50%, 12/01/18 ............................. 300,000 300,000
Library, Weekly VRDN and Put, 3.50%, 12/01/32 ....................................... 100,000 100,000
b Minneapolis Revenue, Adjusted Guthrie Theater Project, Series A, Weekly VRDN and Put,
3.50%, 10/01/23 ...................................................................... 560,000 560,000
b Minneapolis State Revenue, Refunding, Weekly VRDN and Daily Put, 3.50%, 12/01/18 ....... 550,000 550,000
-------------
3,080,000
-------------
U.S. TERRITORIES 0.2%
PUERTO RICO 0.2%
b Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured,
Weekly VRDN and Put, 3.34%, 12/01/15 ................................................. 1,200,000 1,200,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $4,280,000) ......................................... 4,280,000
-------------
TOTAL INVESTMENTS (COST $579,222,822) 100.3% ........................................... 606,363,633
OTHER ASSETS, LESS LIABILITIES (0.3)% .................................................. (1,847,488)
-------------
NET ASSETS 100.0% ...................................................................... $ 604,516,145
=============
See Selected Portfolio Abbreviations on page 121.
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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 105
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 f 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.60 $ 12.64 $ 12.81 $ 12.60 $ 12.37
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.52 0.53 0.54 0.55 0.57
Net realized and unrealized gains (losses) . 0.04 (0.04) (0.16) 0.20 0.24
------------------------------------------------------------
Total from investment operations ............ 0.56 0.49 0.38 0.75 0.81
------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.52) (0.53) (0.54) (0.54) (0.58)
Net realized gains ......................... -- d -- (0.01) -- g --
------------------------------------------------------------
Total distributions ......................... (0.52) (0.53) (0.55) (0.54) (0.58)
------------------------------------------------------------
Redemption fees ............................. -- e -- e -- e -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 12.64 $ 12.60 $ 12.64 $ 12.81 $ 12.60
============================================================
Total return c .............................. 4.61% 3.98% 3.15% 6.17% 6.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $980,493 $901,614 $849,970 $852,182 $822,031
Ratios to average net assets:
Expenses ................................... 0.65% 0.65% 0.65% 0.65% 0.65%
Net investment income ...................... 4.17% 4.20% 4.36% 4.38% 4.64%
Portfolio turnover rate ..................... 10.55% 16.44% 19.87% 14.89% 13.40%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d The Fund made a capital gain distribution of $0.0009.
e Amount rounds to less than $0.01 per share.
f For the year ended February 29.
g The Fund made a capital gain distribution of $0.0027.
106 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 f 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.64 $ 12.68 $ 12.85 $ 12.64 $ 12.40
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.45 0.46 0.48 0.48 0.51
Net realized and unrealized gains (losses) . 0.06 (0.04) (0.17) 0.21 0.25
------------------------------------------------------------
Total from investment operations ............ 0.51 0.42 0.31 0.69 0.76
------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.46) (0.46) (0.47) (0.48) (0.52)
Net realized gains ......................... -- d -- (0.01) -- g --
------------------------------------------------------------
Total distributions ......................... (0.46) (0.46) (0.48) (0.48) (0.52)
------------------------------------------------------------
Redemption fees ............................. -- e -- e -- e -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 12.69 $ 12.64 $ 12.68 $ 12.85 $ 12.64
============================================================
Total return c .............................. 4.11% 3.41% 2.56% 5.57% 6.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 51,897 $ 56,478 $ 60,264 $ 60,869 $ 44,222
Ratios to average net assets:
Expenses ................................... 1.20% 1.20% 1.20% 1.20% 1.20%
Net investment income ...................... 3.62% 3.65% 3.81% 3.83% 4.09%
Portfolio turnover rate ..................... 10.55% 16.44% 19.87% 14.89% 13.40%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d The Fund made a capital gain distribution of $0.0009.
e Amount rounds to less than $0.01 per share.
f For the year ended February 29.
g The Fund made a capital gain distribution of $0.0027.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 107
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 f 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.70 $ 12.74 $ 12.90 $ 12.69 $ 12.45
------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.46 0.46 0.48 0.48 0.51
Net realized and unrealized gains (losses) . 0.04 (0.04) (0.16) 0.20 0.25
------------------------------------------------------------
Total from investment operations ............ 0.50 0.42 0.32 0.68 0.76
------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.45) (0.46) (0.47) (0.47) (0.52)
Net realized gains ......................... -- d -- (0.01) -- g --
------------------------------------------------------------
Total distributions ......................... (0.45) (0.46) (0.48) (0.47) (0.52)
------------------------------------------------------------
Redemption fees ............................. -- e -- e -- e -- --
------------------------------------------------------------
Net asset value, end of year ................ $ 12.75 $ 12.70 $ 12.74 $ 12.90 $ 12.69
============================================================
Total return c .............................. 4.08% 3.38% 2.64% 5.53% 6.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $143,804 $130,540 $108,617 $108,062 $ 91,189
Ratios to average net assets:
Expenses ................................... 1.20% 1.20% 1.20% 1.22% 1.17%
Net investment income ...................... 3.62% 3.65% 3.81% 3.81% 4.12%
Portfolio turnover rate ..................... 10.55% 16.44% 19.87% 14.89% 13.40%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d The Fund made a capital gain distribution of $0.0009.
e Amount rounds to less than $0.01 per share.
f For the year ended February 29.
g The Fund made a capital gain distribution of $0.0027.
108 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.5%
MUNICIPAL BONDS 99.5%
OHIO 97.2%
Akron Bath Copley Joint Township Hospital District Revenue, Hospital Improvement Children's
Hospital Center, FSA Insured, 5.00%, 11/15/22 ............................................... $ 5,000,000 $ 5,270,900
Akron GO, Improvement, FGIC Insured, 5.00%,
12/01/20 ................................................................................... 2,150,000 2,300,672
12/01/21 ................................................................................... 2,255,000 2,411,655
12/01/22 ................................................................................... 1,185,000 1,263,696
Akron Income Tax Revenue, Community Learning Centers, Series A, FGIC Insured, 5.00%,
12/01/22 ................................................................................... 2,460,000 2,623,369
12/01/24 ................................................................................... 3,200,000 3,402,752
12/01/33 ................................................................................... 8,005,000 8,478,176
Anthony Wayne Local School District GO,
Refunding, FSA Insured, 5.00%, 12/01/24 .................................................... 3,200,000 3,374,592
School Facilities Construction and Improvement, FSA Insured, Pre-Refunded,
5.65%, 12/01/21 .......................................................................... 1,845,000 1,990,903
School Facilities Construction and Improvement, FSA Insured, Pre-Refunded,
5.70%, 12/01/25 .......................................................................... 2,335,000 2,523,691
School Facilities Construction and Improvement, Refunding, FSA Insured,
5.65%, 12/01/21 .......................................................................... 645,000 693,420
School Facilities Construction and Improvement, Refunding, FSA Insured,
5.125%, 12/01/30 ......................................................................... 2,535,000 2,668,037
Athens City School District GO, School Facilities Construction and Improvement, FSA Insured,
Pre-Refunded, 6.00%, 12/01/24 ............................................................... 2,345,000 2,558,887
Aurora City School District COP, MBIA Insured, Pre-Refunded,
6.10%, 12/01/19 ............................................................................ 1,825,000 1,959,411
6.15%, 12/01/24 ............................................................................ 1,670,000 1,795,167
Austintown Local School District GO, School Improvement, FSA Insured, 5.125%,
12/01/30 .................................................................................... 7,715,000 8,340,609
Avon Lake City School District GO, FGIC Insured, Pre-Refunded, 5.50%, 12/01/26 ............... 4,000,000 4,268,840
Avon Lake Water System Revenue, Series A, AMBAC Insured, Pre-Refunded,
5.75%, 10/01/26 ............................................................................. 2,020,000 2,162,895
Avon Local School District GO, School Improvement, MBIA Insured, Pre-Refunded, 5.25%,
12/01/23 ................................................................................... 1,000,000 1,094,770
12/01/29 ................................................................................... 2,295,000 2,512,497
Bluffton Exempted Village School District GO, Improvement, AMBAC Insured,
5.50%, 12/01/28 ............................................................................. 1,190,000 1,459,333
Bowling Green MFHR, Village Apartments, Refunding, Series A, GNMA Secured,
5.40%, 9/20/36 .............................................................................. 2,940,000 3,069,066
Brookville Local School District GO, FSA Insured, Pre-Refunded,
5.25%, 12/01/22 ............................................................................ 1,075,000 1,176,878
5.00%, 12/01/31 ............................................................................ 3,000,000 3,239,850
Buckeye Local School District GO, Construction and Improvement Bonds, FGIC Insured,
5.50%, 12/01/25 ............................................................................. 750,000 794,273
Bucyrus City School District GO, School Improvement, Refunding, FSA Insured,
5.00%, 12/01/30 ............................................................................. 5,120,000 5,525,043
Butler County GO, Judgment Bonds, FSA Insured, 4.75%, 12/01/26 ............................... 4,000,000 4,146,720
Butler County Hospital Facilities Revenue, Cincinnati Childrens Hospital, Series K,
FGIC Insured, 5.00%, 5/15/31 ................................................................ 10,000,000 10,667,300
Annual Report | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Butler County Transportation Improvement District Revenue, Highway, XLCA Insured,
4.75%, 12/01/28 ............................................................................ $ 6,845,000 $ 7,173,355
5.00%, 12/01/31 ............................................................................ 12,540,000 13,545,583
Canal Winchester Local School District GO, Capital Appreciation, MBIA Insured, zero cpn.,
12/01/32 ................................................................................... 1,455,000 474,621
12/01/33 ................................................................................... 2,000,000 622,980
Central Local School District GO, Classroom Facilities, FSA Insured, 5.75%, 12/01/22 ......... 1,555,000 1,676,554
Chillicothe City School District GO,
Capital Appreciation, Refunding, FGIC Insured, zero cpn., 12/01/22 ......................... 1,905,000 984,256
Capital Appreciation, Refunding, FGIC Insured, zero cpn., 12/01/23 ......................... 1,905,000 940,727
Capital Appreciation, Refunding, FGIC Insured, zero cpn., 12/01/24 ......................... 1,905,000 898,760
School Improvement, FGIC Insured, Pre-Refunded, 5.00%, 12/01/32 ............................ 7,395,000 8,051,972
Cincinnati City School District COP, School Improvement Project, FSA Insured, 5.00%,
12/15/27 ................................................................................... 5,000,000 5,388,450
12/15/32 ................................................................................... 3,000,000 3,220,530
Cincinnati City School District GO, Classroom Facilities Construction and Improvement,
FSA Insured,
5.00%, 12/01/22 ............................................................................ 9,510,000 10,072,802
Pre-Refunded, 5.00%, 12/01/25 .............................................................. 10,660,000 11,512,267
Pre-Refunded, 5.00%, 12/01/27 .............................................................. 2,500,000 2,699,875
Cincinnati Technical College Revenue, AMBAC Insured,
5.25%, 10/01/23 ............................................................................ 2,510,000 2,722,873
5.00%, 10/01/28 ............................................................................ 2,715,000 2,878,524
Circleville GO, Capital Facilities Improvement, AMBAC Insured, 5.625%, 12/01/20 .............. 2,035,000 2,210,458
Cleveland Municipal School District GO, FSA Insured, 5.00%, 12/01/27 ......................... 4,000,000 4,269,760
Cleveland State University General Receipt Revenue, FGIC Insured,
5.25%, 6/01/24 ............................................................................. 1,000,000 1,090,950
5.00%, 6/01/34 ............................................................................. 5,000,000 5,317,750
Cleveland Waterworks Revenue,
Refunding and Improvement, Series I, FSA Insured, 5.00%, 1/01/28 ........................... 6,715,000 6,836,676
Series I, FSA Insured, Pre-Refunded, 5.00%, 1/01/28 ........................................ 4,785,000 4,885,820
Series K, FGIC Insured, Pre-Refunded, 5.00%, 1/01/22 ....................................... 2,075,000 2,198,670
Series K, FGIC Insured, Pre-Refunded, 5.00%, 1/01/23 ....................................... 4,285,000 4,540,386
Series K, FGIC Insured, Pre-Refunded, 5.00%, 1/01/25 ....................................... 8,150,000 8,635,740
Cleveland-Cuyahoga County Port Authority Revenue, Student Housing, Euclid Avenue
Housing Corp., Fenn Project, AMBAC Insured, 5.00%,
8/01/25 .................................................................................... 2,440,000 2,607,238
8/01/28 .................................................................................... 2,145,000 2,295,193
Clyde-Green Springs Exempted Village School District GO, School Facilities Construction,
Refunding and Improvement, MBIA Insured, 5.125%, 12/01/32 ................................... 1,000,000 1,070,700
Columbus City School District GO, Linden Elementary Construction, FSA Insured,
5.00%, 12/01/28 ............................................................................. 900,000 940,428
Columbus Municipal Airport Authority Revenue, Airport Improvement, Port Columbus
International, Series B, AMBAC Insured, 5.00%, 1/01/18 ...................................... 3,565,000 3,631,951
Columbus Tax Increment Financing Revenue, Easton Project, AMBAC Insured, Pre-Refunded,
5.30%, 12/01/19 ............................................................................. 1,500,000 1,568,145
110 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Crawford County GO, Refunding, AMBAC Insured, 5.25%, 12/01/31 ................................ $ 1,330,000 $ 1,422,156
Cuyahoga Community College District General Receipts Revenue, Series A, AMBAC Insured,
5.00 %,
12/01/22 .................................................................................. 1,000,000 1,064,560
12/01/32 .................................................................................. 3,000,000 3,179,130
Cuyahoga County Hospital Revenue, University Hospitals Health System Inc., AMBAC Insured,
5.40%, 1/15/19 ............................................................................ 1,500,000 1,578,855
5.50%, 1/15/30 ............................................................................ 1,760,000 1,834,448
Cuyahoga County MFHR, Rockefeller Park Project, Series A, GNMA Secured, 5.75%,
1/20/29 .................................................................................... 1,000,000 1,052,020
Cuyahoga County Utility System Revenue,
AMBAC Insured, 5.125%, 2/15/28 ............................................................ 1,000,000 1,030,510
Medical Center Co. Project, Refunding, Series B, MBIA Insured, 6.10%, 8/15/15 ............. 2,945,000 2,976,423
Darke County GO, Real Estate Acquisition and Improvement, FGIC Insured, 5.125%,
12/01/27 .................................................................................... 1,020,000 1,085,790
Dayton City School District GO, School Facilities Construction and Improvement, Series A,
FGIC Insured,
4.75%, 12/01/25 ........................................................................... 9,400,000 9,732,760
5.00%, 12/01/29 ........................................................................... 8,275,000 8,774,313
Deerefield Township Tax Increment Revenue, Refunding, Series B, MBIA Insured,
5.00%, 12/01/25 ............................................................................ 1,000,000 1,054,110
Eastlake GO, Capital Facilities, MBIA Insured, 5.00%, 12/01/27 ............................... 1,950,000 2,057,172
Eaton City School District GO, FGIC Insured, Pre-Refunded, 5.00%, 12/01/25 ................... 1,250,000 1,347,425
Edgewood City School District GO, School Improvement, Refunding, FSA Insured,
5.00%, 12/01/24 ............................................................................ 2,220,000 2,387,321
Fairborn Ohio City School District GO, School Improvement, FSA Insured, 5.00%,
12/01/23 .................................................................................. 1,205,000 1,301,111
12/01/24 .................................................................................. 1,265,000 1,364,872
12/01/25 .................................................................................. 1,330,000 1,433,940
Fairfield County GO, FGIC Insured, 5.00%, 12/01/20 ........................................... 1,600,000 1,704,752
Fairless Ohio Local School District GO, Various Purpose School Facilities Construction,
FSA Insured, 5.00%, 12/01/28 ............................................................... 2,085,000 2,222,464
Field Local School District GO, School Facilities Construction and Improvement,
AMBAC Insured, 5.00%, 12/01/27 ............................................................. 1,290,000 1,377,836
Finneytown Local School District GO, FGIC Insured, 5.80%, 12/01/24 ........................... 1,980,000 2,049,637
Franklin County Convention Facilities Authority Revenue, Tax and Lease Revenue Anticipation
Bonds, Refunding, AMBAC Insured, 5.00%,
12/01/23 .................................................................................. 6,910,000 7,462,593
12/01/24 .................................................................................. 7,255,000 7,824,010
Franklin County Hospital Revenue,
Children's Hospital Project, AMBAC Insured, Pre-Refunded, 5.50%, 5/01/21 .................. 3,365,000 3,634,503
Children's Hospital Project, AMBAC Insured, Pre-Refunded, 5.50%, 5/01/28 .................. 4,265,000 4,606,584
OhioHealth Corp., Refunding, Series C, MBIA Insured, 5.00%, 5/15/33 ....................... 5,250,000 5,508,772
Franklin County Ohio Hospital Revenue, The Children's Hospital, FGIC Insured,
5.00%, 5/01/35 ............................................................................. 10,000,000 10,589,600
Franklin GO, MBIA Insured, 5.25%, 12/01/27 ................................................... 1,500,000 1,607,115
Annual Report | 111
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Garfield Heights GO, Various Purpose, Refunding and Improvement, FGIC Insured,
5.00%, 12/01/27 ............................................................................. $ 2,655,000 $ 2,843,425
Georgetown Exempted Village School District GO, Classroom Facilities, FSA Insured,
5.125%, 12/01/31 ............................................................................ 1,000,000 1,080,400
Graham Local School District GO, School Improvement, Refunding, MBIA Insured,
5.00%, 12/01/33 ............................................................................. 6,055,000 6,502,101
Grand Valley Local School District GO, Classroom Facilities Improvement, FGIC Insured,
5.00%, 12/01/24 ............................................................................. 1,300,000 1,371,448
Greater Cleveland Regional Transit Authority GO, Capital Improvement, Series A, MBIA Insured,
Pre-Refunded, 5.125%, 12/01/21 .............................................................. 1,750,000 1,862,858
Green Community Learning Centers Income Tax Revenue, MBIA Insured, 5.00%,
12/01/27 ................................................................................... 1,205,000 1,286,265
12/01/28 ................................................................................... 1,265,000 1,347,845
12/01/32 ................................................................................... 2,675,000 2,844,996
Greene County GO, AMBAC Insured, Pre-Refunded, 5.00%,
12/01/22 ................................................................................... 1,475,000 1,559,960
12/01/28 ................................................................................... 2,620,000 2,759,882
Greene County Sewer System Revenue, Governmental Enterprise,
AMBAC Insured, Pre-Refunded, 5.625%, 12/01/25 .............................................. 1,890,000 2,037,817
MBIA Insured, Pre-Refunded, 5.25%, 12/01/25 ................................................ 5,000,000 5,233,300
Greene County Water System Revenue,
Governmental Enterprise, MBIA Insured, 5.25%, 12/01/21 ..................................... 5,400,000 5,803,380
Series A, FGIC Insured, Pre-Refunded, 6.125%, 12/01/21 ..................................... 2,100,000 2,179,884
Guernsey County GO, Refunding, FGIC Insured, 5.00%, 12/01/23 ................................. 2,690,000 2,839,268
Hamilton County Convention Facilities Authority Revenue,
FGIC Insured, 5.00%, 12/01/24 .............................................................. 2,795,000 2,981,678
FGIC Insured, 5.00%, 12/01/28 .............................................................. 5,400,000 5,739,660
second lien, FGIC Insured, 5.00%, 12/01/33 ................................................. 7,235,000 7,666,712
Hamilton County Hospital Facilities Revenue, Cincinnati Children's Hospital, Series J,
FGIC Insured, 5.25%, 5/15/34 ................................................................ 5,000,000 5,380,600
Hamilton County Sales Tax Revenue,
Refunding, Sub Series B, AMBAC Insured, 5.25%, 12/01/32 .................................... 3,965,000 4,156,351
Refunding, Sub Series B, AMBAC Insured, 5.60%, 12/01/32 .................................... 245,000 260,134
Sub Series B, AMBAC Insured, Pre-Refunded, 5.25%, 12/01/32 ................................. 15,755,000 16,644,527
Sub Series B, AMBAC Insured, Pre-Refunded, 5.60%, 12/01/32 ................................. 955,000 1,020,513
Hamilton County Sewer System Revenue,
Improvement, Series A, MBIA Insured, Pre-Refunded, 5.25%, 12/01/21 ......................... 1,000,000 1,069,890
Metropolitan Sewer District Improvement, Series B, MBIA Insured, 5.00%, 12/01/30 ........... 4,000,000 4,304,560
Hamilton GO, One Renaissance Center, Series A, AMBAC Insured, 5.25%,
11/01/18 ................................................................................... 1,010,000 1,084,851
11/01/19 ................................................................................... 1,015,000 1,091,582
11/01/20 ................................................................................... 1,120,000 1,203,507
11/01/21 ................................................................................... 1,180,000 1,266,931
Hamilton Wastewater System Revenue, Series A, FSA Insured, Pre-Refunded,
5.20%, 10/15/23 ............................................................................. 7,275,000 7,526,351
Heath City School District GO, School Improvement, Series A, FGIC Insured, Pre-Refunded,
5.60%, 12/01/21 ............................................................................ 1,000,000 1,068,600
5.50%, 12/01/27 ............................................................................ 1,170,000 1,246,202
112 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Highland Local School District GO, School Improvement, FSA Insured, Pre-Refunded, 5.00%,
12/01/23 ................................................................................... $ 3,680,000 $ 3,897,488
12/01/26 ................................................................................... 3,675,000 3,892,192
Hilliard School District GO,
Capital Appreciation, School Construction, Refunding, MBIA Insured, zero cpn.,
12/01/19 ................................................................................. 2,190,000 1,280,077
Capital Appreciation, School Construction, Refunding, MBIA Insured, zero cpn.,
12/01/20 ................................................................................. 4,525,000 2,525,538
School Improvement, FGIC Insured, Pre-Refunded, 5.75%, 12/01/28 ............................ 4,000,000 4,330,160
School Improvement, Series A, FGIC Insured, 5.25%, 12/01/28 ................................ 3,010,000 3,214,530
Huber Heights Water System Revenue, Refunding and Improvement, MBIA Insured, 5.00%,
12/01/27 ................................................................................... 3,205,000 3,458,836
12/01/30 ................................................................................... 2,250,000 2,421,315
Hudson City School District COP, MBIA Insured, 5.00%, 6/01/34 ................................ 6,720,000 7,138,320
Independence Local School District GO, FGIC Insured, 5.25%, 12/01/21 ......................... 1,390,000 1,508,164
Ironton City School District GO, MBIA Insured, 5.00%, 12/01/34 ............................... 5,130,000 5,540,143
Jackson Center Local School District Shelby County GO, Facilities Construction and
Improvement, MBIA Insured, 5.00%, 12/01/28 .................................................. 1,175,000 1,237,534
Jackson City School District GO, School Improvement, MBIA Insured, Pre-Refunded,
5.25%, 12/01/27 ............................................................................. 3,000,000 3,189,180
Jackson Local School District GO, Stark and Summit Counties Local School District,
FSA Insured, Pre-Refunded,
5.50%, 12/01/20 ............................................................................ 4,000,000 4,260,520
5.625%, 12/01/25 ........................................................................... 3,500,000 3,743,110
Jefferson Local School District Madison County School Construction GO, FGIC Insured,
5.00%, 12/01/25 ............................................................................. 1,200,000 1,284,888
Jonathan Alder Local School District GO, School Facilities Construction and Improvement,
MBIA Insured, 4.75%, 12/01/22 .............................................................. 1,105,000 1,150,515
MBIA Insured, Pre-Refunded, 5.00%, 12/01/27 ................................................ 3,895,000 4,166,910
MBIA Insured, Pre-Refunded, 5.00%, 12/01/30 ................................................ 3,320,000 3,551,769
Refunding, MBIA Insured, 5.00%, 12/01/27 ................................................... 2,300,000 2,420,382
Kenston Local School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/24 ................................................................................... 2,380,000 2,520,896
12/01/25 ................................................................................... 2,500,000 2,646,575
Kettering City School District GO, School Improvement, FSA Insured, 5.00%,
12/01/28 ................................................................................... 2,970,000 3,164,505
12/01/31 ................................................................................... 2,595,000 2,761,573
Keystone Local School District Lorain County GO, School Improvement, FSA Insured,
5.00%, 12/01/30 ............................................................................. 6,170,000 6,570,063
Lake County Hospital Facilities Revenue, Lake Hospital System Inc., AMBAC Insured,
5.00%, 8/15/23 .............................................................................. 1,500,000 1,535,835
Lake Ohio Local School District GO, MBIA Insured, Pre-Refunded,
5.30%, 12/01/21 ............................................................................ 1,575,000 1,701,756
5.375%, 12/01/25 ........................................................................... 1,900,000 2,059,068
Lakewood City School District GO, School Improvement, FSA Insured, 5.125%, 12/01/31 .......... 21,900,000 23,645,649
Lakota Local School District GO, FSA Insured, 5.00%, 12/01/29 ................................ 8,365,000 9,008,268
Lebanon City School District GO, FSA Insured, Pre-Refunded, 5.00%, 12/01/29 .................. 6,250,000 6,619,375
Annual Report | 113
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Licking County Joint Vocational School District GO, School Facilities Construction and
Improvement, MBIA Insured,
5.00%, 12/01/21 ............................................................................ $ 2,200,000 $ 2,332,528
4.75%, 12/01/23 ............................................................................ 2,230,000 2,319,512
Licking Heights Local School District GO, School Facilities Construction and Improvement,
Refunding, Series A, MBIA Insured, 5.00%, 12/01/24 ......................................... 2,085,000 2,234,536
Refunding, Series A, MBIA Insured, 5.00%, 12/01/25 ......................................... 2,215,000 2,372,243
Refunding, Series A, MBIA Insured, 5.00%, 12/01/26 ......................................... 2,345,000 2,508,071
Series A, FGIC Insured, Pre-Refunded, 5.625%, 12/01/28 ..................................... 4,000,000 4,277,840
Little Miami Local School District GO,
a Refunding, FSA Insured, 4.50%, 12/01/34 ................................................... 20,255,000 20,586,372
School Improvement, FSA Insured, 5.00%, 12/01/34 ........................................... 4,000,000 4,414,880
Logan Hocking Local School District GO, Construction and Improvement, MBIA Insured,
Pre-Refunded, 5.00%,
12/01/22 ................................................................................... 1,200,000 1,270,920
12/01/29 ................................................................................... 1,000,000 1,059,100
London City School District GO, School Facilities Construction and Improvement,
FGIC Insured, Pre-Refunded, 5.00%,
12/01/22 ................................................................................... 700,000 741,370
12/01/29 ................................................................................... 1,500,000 1,588,650
Lorain County GO, Sewer System Improvement, MBIA Insured, 5.00%, 12/01/19 .................... 1,640,000 1,738,236
Lorain County Health Facilities Revenue, Catholic Healthcare Partners, Series A,
AMBAC Insured, 5.50%, 9/01/29 ............................................................... 6,250,000 6,581,687
Lorain County Hospital Revenue, Catholic Healthcare Partners, Refunding, Series B,
MBIA Insured, 5.50%, 9/01/27 ................................................................ 5,000,000 5,137,200
Lorain GO, Urban Renewal, MBIA Insured, 5.70%, 12/01/28 ...................................... 1,050,000 1,119,993
Louisville City School District GO, FGIC Insured, 5.00%, 12/01/24 ............................ 3,500,000 3,661,840
Loveland City School District GO, Series A, MBIA Insured, Pre-Refunded, 5.00%, 12/01/24 ...... 4,000,000 4,180,880
Lucas County GO, 8.00%,
12/01/08 ................................................................................... 110,000 117,943
12/01/09 ................................................................................... 120,000 132,324
12/01/10 ................................................................................... 220,000 250,340
Lucas County Hospital Revenue, Promedica Healthcare Obligation Group,
MBIA Insured, ETM, 5.75%, 11/15/14 ......................................................... 4,460,000 4,567,709
Refunding, AMBAC Insured, 5.375%, 11/15/29 ................................................. 750,000 779,663
Refunding, MBIA Insured, 5.75%, 11/15/14 ................................................... 300,000 306,399
Mad River Local School District GO, Classroom Facilities, FGIC Insured, Pre-Refunded,
5.125%, 12/01/24 ............................................................................ 4,180,000 4,498,641
Madison Local School District Butler County GO,
MBIA Insured, Pre-Refunded, 5.75%, 12/01/26 ................................................ 1,000,000 1,064,610
School Improvement, FGIC Insured, 5.60%, 12/01/26 .......................................... 1,120,000 1,199,710
Mahoning County Hospital Facilities Revenue, Western Reserve Care, MBIA Insured, ETM,
5.50%, 10/15/25 ............................................................................. 4,750,000 5,541,540
Mahoning County Sewer System Revenue, AMBAC Insured, 5.375%, 12/01/18 ........................ 1,905,000 2,031,968
114 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Marion County City School District GO, School Facilities Construction and Improvement
Project, FSA Insured,
5.55%, 12/01/20
$ 1,000,000 $ 1,071,980
5.625%, 12/01/22 ........................................................................... 1,100,000 1,181,235
Marion County GO, AMBAC Insured, 5.05%, 12/01/31 ............................................. 1,500,000 1,604,535
Martins Ferry City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/32 ................................................................ 3,610,000 3,866,274
Marysville Exempted Village School District COP, School Facilities Project, MBIA Insured,
Pre-Refunded, 5.25%,
12/01/28 ................................................................................... 2,120,000 2,354,578
12/01/30 ................................................................................... 2,650,000 2,943,223
Marysville Exempted Village School District GO,
Capital Appreciation, Refunding, MBIA Insured, zero cpn., 12/01/20 ......................... 1,000,000 565,690
Capital Appreciation, Refunding, MBIA Insured, zero cpn., 12/01/21 ......................... 1,000,000 541,150
FSA Insured, Pre-Refunded, 5.30%, 12/01/21 ................................................. 2,000,000 2,133,880
FSA Insured, Pre-Refunded, 5.35%, 12/01/25 ................................................. 2,010,000 2,148,047
FSA Insured, Pre-Refunded, 5.375%, 12/01/29 ................................................ 2,465,000 2,636,416
Refunding, MBIA Insured, 5.00%, 12/01/29 ................................................... 1,000,000 1,053,390
School Improvement, AMBAC Insured, Pre-Refunded, 6.00%, 12/01/29 ........................... 2,890,000 3,153,597
Marysville Wastewater Treatment System Revenue,
first mortgage, MBIA Insured, Pre-Refunded, 5.00%, 12/01/35 ................................ 4,780,000 5,247,627
Refunding, XLCA Insured, 4.75%, 12/01/46 ................................................... 10,000,000 10,306,200
Mason City School District GO, School Improvement,
FSA Insured, 5.00%, 12/01/31 ............................................................... 5,000,000 5,419,100
MBIA Insured, Pre-Refunded, 5.00%, 12/01/20 ................................................ 5,495,000 5,819,754
Maumee City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/27 ................................................................ 3,610,000 3,838,730
Medina City School District GO, Refunding, MBIA Insured, 5.00%, 12/01/27 ..................... 2,015,000 2,159,516
Medina GO, 5.00%, 12/01/22 ................................................................... 1,100,000 1,175,614
Miami University General Receipts Revenue, Refunding, AMBAC Insured, 5.00%,
12/01/22 .................................................................................... 1,675,000 1,786,237
Middletown City School District GO, FGIC Insured, 5.00%, 12/01/31 ............................ 14,975,000 16,172,251
Milford Exempted Village School District GO, School Improvement, FSA Insured,
5.00%, 12/01/22 ............................................................................ 2,000,000 2,096,880
5.125%, 12/01/30 ........................................................................... 7,325,000 7,709,416
Minerva Local School District GO, Classroom Facilities, MBIA Insured, Pre-Refunded,
5.30%, 12/01/29 ............................................................................. 1,300,000 1,410,786
Minster School District School Facilities and Construction GO, FSA Insured, Pre-Refunded,
5.70%, 12/01/23 ............................................................................ 3,190,000 3,447,784
5.75%, 12/01/27 ............................................................................ 3,260,000 3,529,080
Monroe Local School District GO,
AMBAC Insured, Pre-Refunded, 5.00%, 12/01/23 ............................................... 1,000,000 1,069,810
School Improvement, Refunding, AMBAC Insured, 4.50%, 12/01/29 .............................. 5,115,000 5,195,408
Morley Library District GO, Lake County District Library, Library Improvement, AMBAC Insured,
4.75%, 12/01/21 ............................................................................. 1,000,000 1,042,750
Annual Report | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
New Albany Community Authority Community Facilities Revenue, Refunding, Series B,
AMBAC Insured,
5.125%, 10/01/21 ........................................................................... $ 3,000,000 $ 3,188,850
5.20%, 10/01/24 ............................................................................ 5,000,000 5,339,050
New Lexington HDC Mortgage Revenue, Lincoln Park, Refunding, Series A, MBIA Insured,
5.85%, 1/01/21 .............................................................................. 830,000 836,565
Newark City School District GO, School Improvement, Series A, FGIC Insured,
5.00%, 12/01/33 ............................................................................. 5,535,000 5,943,704
Nordonia Hills Local School District GO, School Improvement, AMBAC Insured, Pre-Refunded,
5.45%, 12/01/25 ............................................................................. 3,035,000 3,253,945
Oak Hills Local School District GO, MBIA Insured, Pre-Refunded, 5.45%, 12/01/21 .............. 5,000,000 5,117,100
Ohio Capital Corp. HMR, Refunding, Series G, MBIA Insured, 6.35%, 7/01/22 .................... 560,000 568,809
Ohio Center Local Government Capital Asset Financing Program Fractionalized Interests GO,
FSA Insured,
4.875%, 12/01/18 ........................................................................... 1,255,000 1,334,479
5.25%, 12/01/23 ............................................................................ 1,410,000 1,534,827
Ohio HFA,
MFHR, Wind River Apartment Project, Series A, GNMA Secured, 5.65%, 5/01/32 ................. 2,035,000 2,088,541
RMR, Series C, GNMA Secured, 5.75%, 9/01/30 ................................................ 655,000 668,035
Ohio State Air Quality Development Authority Revenue,
Cincinnati Gas and Electric, Refunding, Series B, MBIA Insured, 5.45%, 1/01/24 ............. 3,500,000 3,501,855
JMG Funding LP Project, AMBAC Insured, 5.625%, 10/01/22 .................................... 6,875,000 7,019,512
Ohio Power Co., Refunding, Series C, AMBAC Insured, 5.15%, 5/01/26 ......................... 9,075,000 9,377,016
Pollution Control, Dayton Power, Refunding, Series B, FGIC Insured, 4.80%, 1/01/34 ......... 26,270,000 27,365,984
Ohio State Building Authority Revenue,
Adult Correctional Facilities, Series A, AMBAC Insured, Pre-Refunded, 5.60%, 4/01/16 ....... 2,000,000 2,022,780
State Facilities, Administration Building Fund Project, Refunding, Series A, FSA Insured,
5.00%, 4/01/22 ........................................................................... 3,100,000 3,259,836
State Facilities, Adult Correction, Series A, FSA Insured, 5.00%, 4/01/24 .................. 5,390,000 5,789,345
Ohio State Department of Transportation COP, Panhandle Rail Line Project, FSA Insured,
6.50%, 4/15/12 .............................................................................. 795,000 795,843
Ohio State GO, Common Schools, Series B, 4.625%, 9/15/22 ..................................... 5,000,000 5,166,300
Ohio State Higher Educational Facility Commission Revenue,
FGIC Insured, 5.00%, 5/01/23 ............................................................... 8,460,000 8,959,732
Higher Educational Facility, Oberlin College, AMBAC Insured, Pre-Refunded,
5.00%, 10/01/26 .......................................................................... 8,000,000 8,345,600
Higher Educational Facility, Xavier University Project, CIFG Insured, 5.00%, 5/01/23 ....... 3,385,000 3,626,114
Higher Educational Facility, Xavier University Project, CIFG Insured, 5.00%, 5/01/24 ....... 2,000,000 2,142,460
University of Dayton Project, XLCA Insured, 5.00%, 12/01/34 ................................ 8,500,000 9,060,405
Xavier University Higher Educational Facility, MBIA Insured, Pre-Refunded,
5.375%, 5/15/22 .......................................................................... 3,500,000 3,581,445
Ohio State Higher Educational Facility Revenue,
Case Western Reserve University Project, Series A, AMBAC Insured, 5.00%, 12/01/34 .......... 4,935,000 5,223,697
Otterbein College Project, CIFG Insured, 5.00%, 12/01/25 ................................... 2,205,000 2,369,515
Otterbein College Project, CIFG Insured, 5.00%, 12/01/35 ................................... 3,225,000 3,445,945
Ohio State Turnpike Commission Turnpike Revenue, AMBAC Insured, 5.25%, 2/15/31 ............... 16,425,000 17,234,095
116 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Ohio State University General Receipts Athens Revenue,
FSA Insured, Pre-Refunded, 5.00%, 12/01/24 ................................................. $ 3,025,000 $ 3,134,354
MBIA Insured, 5.00%, 12/01/24 .............................................................. 2,155,000 2,300,333
Ohio State University General Receipts Revenue,
Series A, 5.125%, 12/01/31 ................................................................. 2,500,000 2,654,650
State University Ohio, Series B, MBIA Insured, 5.00%, 6/01/33 .............................. 5,255,000 5,551,224
Ohio State Water Development Authority Pollution Control Facilities Revenue, Water Control
Loan Fund, Water Quality Series, MBIA Insured, Pre-Refunded, 5.125%, 6/01/19 ................ 5,000,000 5,105,350
Ohio State Water Development Authority Revenue,
Drinking Water Fund, Leverage, Pre-Refunded, 5.00%, 6/01/23 ................................ 2,255,000 2,412,422
Pure Water, Series I, AMBAC Insured, ETM, 7.00%, 12/01/09 .................................. 1,215,000 1,267,294
Olentangy Local School District GO,
BIG Insured, 7.75%, 12/01/08 ............................................................... 375,000 400,973
BIG Insured, 7.75%, 12/01/09 ............................................................... 375,000 414,491
BIG Insured, 7.75%, 12/01/10 ............................................................... 375,000 427,826
FSA Insured, 5.00%, 12/01/25 ............................................................... 45,000 47,322
FSA Insured, 5.00%, 12/01/30 ............................................................... 7,000,000 7,577,220
FSA Insured, Pre-Refunded, 5.00%, 12/01/25 ................................................. 1,790,000 1,902,797
FSA Insured, Pre-Refunded, 5.00%, 12/01/30 ................................................. 3,910,000 4,147,923
Refunding, FSA Insured, 5.00%, 12/01/30 .................................................... 90,000 94,341
School Facilities Construction and Improvement, FSA Insured, Pre-Refunded,
5.625%, 12/01/27 ......................................................................... 4,500,000 4,812,570
School Facilities Construction and Improvement, Series A, FGIC Insured, Pre-Refunded,
5.25%, 12/01/32 .......................................................................... 11,200,000 12,315,408
Ottawa and Glandorf Local School District GO, School Facilities Construction and
Improvement, MBIA Insured, Pre-Refunded, 5.25%, 12/01/23 .................................... 2,175,000 2,354,764
Perrysburg Exempted Village School District GO,
Refunding, FSA Insured, Series B, 5.00%, 12/01/25 .......................................... 2,235,000 2,317,673
Series B, FSA Insured, Pre-Refunded, 5.00%, 12/01/25 ....................................... 2,765,000 2,890,033
Pickerington Local School District GO,
AMBAC Insured, Pre-Refunded, 5.00%, 12/01/25 ............................................... 7,000,000 7,316,540
School Facilities Construction and Improvement, FGIC Insured, Pre-Refunded,
5.00%, 12/01/28 .......................................................................... 3,000,000 3,177,300
Plain Local School District GO, FGIC Insured,
6.00%, 12/01/25 ............................................................................ 800,000 868,904
Pre-Refunded, 6.00%, 12/01/25 .............................................................. 3,700,000 4,041,399
Plainesville City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/28 ...... 2,515,000 2,689,466
Princeton City School District GO, MBIA Insured, Pre-Refunded, 5.00%,
12/01/25 ................................................................................... 1,700,000 1,835,915
12/01/26 ................................................................................... 2,725,000 2,942,864
12/01/30 ................................................................................... 2,260,000 2,440,687
Ravenna City School District GO, School Improvement, FSA Insured, 5.00%, 1/15/31 ............. 1,710,000 1,840,969
Ridgewood Local School District GO, School Facilities Improvement, FSA Insured,
Pre-Refunded, 6.00%, 12/01/24 ............................................................... 1,730,000 1,887,793
Rittman Exempted Village School District GO, School Improvement, FSA Insured,
5.125%, 12/01/31 ............................................................................ 1,000,000 1,056,990
Annual Report | 117
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Riverside Local School District GO, School Facilities Construction and Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 12/01/22 ................................................. $ 1,000,000 $ 1,082,540
Rural Lorain County Water Authority Water Resource Revenue, AMBAC Insured, Pre-Refunded,
5.875%, 10/01/24 ............................................................................ 3,100,000 3,299,981
Shaker Heights GO, Urban Renewal, Refunding, AMBAC Insured,
5.00%, 12/01/21 ............................................................................ 1,225,000 1,310,101
5.25%, 12/01/26 ............................................................................ 725,000 782,913
Sidney City School District GO, School Improvement, Refunding,
FGIC Insured, 5.125%, 12/01/28 ............................................................. 1,425,000 1,511,640
Series B, FGIC Insured, 5.25%, 12/01/23 .................................................... 1,780,000 1,907,359
Series B, FGIC Insured, 5.25%, 12/01/28 .................................................... 1,000,000 1,067,950
South-Western City School District of Ohio Franklin and Pickway Counties GO, FGIC Insured,
ETM, 7.875%, 12/01/07 ....................................................................... 600,000 618,618
Springboro Sewer System Revenue, Mortgage, MBIA Insured, 5.00%,
6/01/25 .................................................................................... 1,000,000 1,066,790
6/01/27 .................................................................................... 1,095,000 1,168,847
St. Henry Local Consolidated School District GO, MBIA Insured, Pre-Refunded,
5.75%, 12/01/22 ............................................................................. 1,515,000 1,640,048
Steubenville City School District GO, School Facilities and Implementation, MBIA Insured,
5.60%, 12/01/22 ............................................................................. 1,500,000 1,608,390
Streetsboro City School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/25 .................................................................................... 2,500,000 2,614,500
Strongsville City School District COP, CIFG Insured, 5.00%, 12/01/34 ......................... 2,355,000 2,510,265
Struthers City School District GO, Refunding, AMBAC Insured, 5.50%, 12/01/22 ................. 1,950,000 2,084,160
Summit County GO, Sanitary Sewer System Improvement, FGIC Insured, Pre-Refunded,
5.25%, 12/01/21 ............................................................................. 4,505,000 4,853,777
Swanton Local School District GO, School Improvement, FGIC Insured, Pre-Refunded,
5.25%, 12/01/25 ............................................................................. 1,895,000 2,043,416
Sycamore Community City School District COP, Blue Ash Elementary School Project,
AMBAC Insured, 5.125%, 12/01/25 ............................................................. 1,000,000 1,056,460
Sylvania City School District GO,
Refunding, FGIC Insured, 5.00%, 12/01/22 ................................................... 1,550,000 1,638,009
Various Purpose, FGIC Insured, Pre-Refunded, 5.30%, 12/01/20 ............................... 2,225,000 2,404,068
Toledo City School District GO, School Facilities Improvement,
FSA Insured, 5.00%, 12/01/23 ............................................................... 1,500,000 1,593,210
Series B, FGIC Insured, 5.00%, 12/01/27 .................................................... 1,925,000 2,046,968
Toledo Sewer System Revenue, AMBAC Insured, 5.00%,
11/15/22 ................................................................................... 1,000,000 1,066,030
11/15/23 ................................................................................... 1,000,000 1,063,600
Toledo Special Obligation, Industrial Development, Vehicle Storage Project, AMBAC Insured,
5.25%, 12/01/26 ............................................................................. 1,500,000 1,656,285
Toledo Waterworks Revenue, MBIA Insured, 5.00%, 11/15/30 ..................................... 6,425,000 6,887,664
Trenton Water System Revenue, Improvement, FSA Insured, 5.125%, 12/01/34 ..................... 2,750,000 2,963,483
Tri-Valley Local School District GO, FGIC Insured,
5.25%, 12/01/29 ............................................................................ 1,305,000 1,391,495
Pre-Refunded, 5.25%, 12/01/29 .............................................................. 7,225,000 7,774,895
Trotwood-Madison City School District GO, School Improvement, FGIC Insured, Pre-Refunded,
5.375%, 12/01/22 ............................................................................ 1,685,000 1,835,083
118 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Trumbull County GO, Refunding, MBIA Insured, 5.20%, 12/01/20 ................................. $ 1,475,000 $ 1,592,395
Twinsburg GO,
Golf Course, Refunding, FGIC Insured, 5.00%, 12/01/21 ...................................... 1,000,000 1,050,650
Park Land and Conservation, FGIC Insured, 5.00%, 12/01/21 .................................. 1,000,000 1,050,650
Union County GO, MBIA Insured, 5.00%, 12/01/33 ............................................... 2,895,000 3,048,638
University of Akron General Receipts Revenue, FGIC Insured,
4.75%, 1/01/25 ............................................................................. 1,080,000 1,124,615
5.00%, 1/01/28 ............................................................................. 1,475,000 1,566,745
5.00%, 1/01/35 ............................................................................. 5,250,000 5,563,687
Pre-Refunded, 5.70%, 1/01/24 ............................................................... 7,050,000 7,503,385
Pre-Refunded, 5.75%, 1/01/29 ............................................................... 1,500,000 1,598,460
University of Cincinnati COP, Jefferson Avenue Residence Hall, MBIA Insured,
5.125%, 6/01/28 ............................................................................. 7,400,000 7,704,288
University of Cincinnati General Receipts Revenue,
AMBAC Insured, 5.00%, 6/01/31 .............................................................. 1,350,000 1,422,077
Series A, AMBAC Insured, 5.00%, 6/01/23 .................................................... 1,845,000 1,970,626
Series A, AMBAC Insured, 5.00%, 6/01/24 .................................................... 1,940,000 2,070,834
Series A, AMBAC Insured, 5.00%, 6/01/25 .................................................... 2,005,000 2,138,914
Series AD, MBIA Insured, Pre-Refunded, 5.125%, 6/01/20 ..................................... 1,500,000 1,505,430
University of Toledo General Receipts Bonds Revenue, Series A, AMBAC Insured,
4.50%, 6/01/30 .............................................................................. 5,000,000 5,074,600
Upper Scioto Valley Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.25%, 12/01/25 ............................................................... 1,160,000 1,235,180
Van Wert City School District GO, School Improvement, FGIC Insured,
5.00%, 12/01/27 ............................................................................ 4,805,000 5,069,083
Pre-Refunded, 5.00%, 12/01/30 .............................................................. 2,500,000 2,632,150
Wadsworth City School District GO, FGIC Insured, Pre-Refunded, 5.75%, 12/01/22 ............... 1,200,000 1,288,068
Warren City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/28 ............ 3,000,000 3,196,470
Warrensville Heights City School District GO, School Improvement, FGIC Insured,
5.625%, 12/01/20 ........................................................................... 3,500,000 3,760,995
5.75%, 12/01/24 ............................................................................ 2,750,000 2,961,970
Waterville GO, Refunding, MBIA Insured, 5.05%, 12/01/26 ...................................... 1,085,000 1,145,684
Wausen Exempted Village School District GO, School Improvement, MBIA Insured,
Pre-Refunded, 5.50%, 12/01/17 ............................................................... 1,800,000 1,825,866
West Chester Township GO, AMBAC Insured, 5.00%, 12/01/25 ..................................... 1,500,000 1,568,700
West Muskingum Local School District School Facilities GO, FGIC Insured, 5.00%, 12/01/24 ..... 2,750,000 2,924,240
Westfall Local School District GO, School Facilities Construction Improvement, FGIC Insured,
Pre-Refunded, 6.00%, 12/01/22 ............................................................... 2,850,000 3,055,371
Wheelersburg Local School District GO, School Improvement, FSA Insured, 5.00%, 12/01/32 ...... 1,400,000 1,499,386
Wilmington Water Revenue, first mortgage, System, AMBAC Insured, 5.25%, 6/15/29 .............. 3,320,000 3,409,673
Woodmore Local School District GO, Refunding, AMBAC Insured, 5.65%, 12/01/08 ................. 500,000 502,390
Zanesville City School District GO, School Improvement, MBIA Insured,
4.75%, 12/01/22 ............................................................................ 5,500,000 5,770,490
4.75%, 12/01/26 ............................................................................ 3,250,000 3,396,185
5.05%, 12/01/29 ............................................................................ 3,500,000 3,723,720
--------------
1,142,899,772
--------------
Annual Report | 119
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 2.3%
PUERTO RICO 2.3%
Puerto Rico Commonwealth GO, Public Improvement, Series A, FGIC Insured, Pre-Refunded,
5.00%, 7/01/32 ............................................................................. $ 10,000,000 $ 10,677,100
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 ................... 11,000,000 11,007,920
University of Puerto Rico Revenues, Series M, MBIA Insured, Pre-Refunded, 5.25%,
6/01/25 .................................................................................... 6,000,000 6,046,920
---------------
TOTAL U.S. TERRITORIES ....................................................................... 27,731,940
---------------
TOTAL LONG TERM INVESTMENTS (COST $1,108,910,136) ............................................ 1,170,631,712
---------------
SHORT TERM INVESTMENTS 1.1%
OHIO 0.9%
b Ohio State Air Quality Development Authority Revenue, Pollution Control, Ohio Edison Co.,
Series C, Daily VRDN and Put, 3.63%, 6/01/23 ............................................... 1,900,000 1,900,000
b Ohio State Higher Educational Facility Revenue, Case Western Reserve University,
Series A, Daily VRDN and Put, 3.66%, 10/01/31 .............................................. 1,000,000 1,000,000
b Ohio State Water Development Authority Pollution Control Facilities Revenue, First Energy
General Corp., Refunding, Series A, Daily VRDN and Put, 3.64%, 5/15/19 ..................... 7,070,000 7,070,000
---------------
9,970,000
---------------
U.S. TERRITORIES 0.2%
PUERTO RICO 0.2%
b Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA
Insured, Weekly VRDN and Put, 3.34%, 12/01/15 .............................................. 1,500,000 1,500,000
b Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 3.42%, 7/01/28 ............................... 1,300,000 1,300,000
---------------
2,800,000
---------------
TOTAL SHORT TERM INVESTMENTS (COST $12,770,000) .............................................. 12,770,000
---------------
TOTAL INVESTMENTS (COST $1,121,680,136) 100.6% ............................................... 1,183,401,712
OTHER ASSETS, LESS LIABILITIES (0.6)% ........................................................ (7,207,313)
---------------
NET ASSETS 100.0% ............................................................................ $ 1,176,194,399
===============
See Selected Portfolio Abbreviations on page 121.
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.
120 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
SELECTED PORTFOLIO ABBREVIATIONS
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
CIFG - CDC IXIS Financial Guaranty
COP - Certificate of Participation
EDA - Economic Development Authority
EDC - Economic Development Corp.
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assurance Inc.
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 Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
IDA - Industrial Development Authority/Agency
IDAR - Individual Development Authority Revenue
IDR - Industrial Development Revenue
ISD - Independent School District
MBIA - Municipal Bond Investors Assurance Corp.
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
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
USD - Unified/Union School District
XLCA - XL Capital Assurance
Annual Report |
The accompanying notes are an integral part of these financial statements. | 121
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2007
------------------------------------------------------------------------
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 .................................... $ 155,544,003 $ 1,931,875,897 $ 491,682,406 $ 1,338,635,133
========================================================================
Value ................................... $ 165,357,230 $ 2,038,123,247 $ 521,639,262 $ 1,416,376,608
Cash ..................................... 80,956 16,343 77,938 73,885
Receivables:
Capital shares sold ..................... 274,754 2,619,854 851,427 2,195,913
Interest ................................ 2,312,068 24,122,065 6,119,950 19,419,861
------------------------------------------------------------------------
Total assets ...................... 168,025,008 2,064,881,509 528,688,577 1,438,066,267
------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ......... -- 11,606,526 -- --
Capital shares redeemed ................. 182,808 3,351,089 1,262,490 2,689,295
Affiliates .............................. 95,402 1,083,436 294,480 784,139
Distributions to shareholders ........... 167,270 2,109,360 525,980 1,487,437
Accrued expenses and other liabilities ... 31,981 168,141 59,366 150,769
------------------------------------------------------------------------
Total liabilities ................. 477,461 18,318,552 2,142,316 5,111,640
------------------------------------------------------------------------
Net assets, at value ............ $ 167,547,547 $ 2,046,562,957 $ 526,546,261 $ 1,432,954,627
========================================================================
Net assets consist of:
Paid-in capital .......................... $ 158,908,931 $ 1,941,412,356 $ 496,949,768 $ 1,355,851,227
Distributions in excess of net investment
income ................................. (107,368) (1,378,836) (127,873) (638,075)
Net unrealized appreciation (depreciation) 9,813,227 106,247,350 29,956,856 77,741,475
Accumulated net realized gain (loss) ..... (1,067,243) 282,087 (232,490) --
------------------------------------------------------------------------
Net assets, at value ............ $ 167,547,547 $ 2,046,562,957 $ 526,546,261 $ 1,432,954,627
========================================================================
122 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
---------------------------------------------------------------
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 ..................... $167,547,547 $ 1,821,005,828 $467,299,295 $ 1,260,755,252
===============================================================
Shares outstanding ....................... 15,562,632 147,859,582 39,067,785 103,013,650
===============================================================
Net asset value per share a .............. $ 10.77 $ 12.32 $ 11.96 $ 12.24
===============================================================
Maximum offering price per share
(net asset value per share / 95.75%) .... $ 11.25 $ 12.87 $ 12.49 $ 12.78
===============================================================
CLASS B:
Net assets, at value ..................... -- $ 83,644,362 -- $ 45,664,291
===============================================================
Shares outstanding ....................... -- 6,759,903 -- 3,713,020
===============================================================
Net asset value and maximum offering price
per share a ............................. -- $ 12.37 -- $ 12.30
===============================================================
CLASS C:
Net assets, at value ..................... -- $ 141,912,767 $ 59,246,966 $ 126,535,084
================================================================
Shares outstanding ....................... -- 11,419,875 4,915,591 10,236,378
===============================================================
Net asset value and maximum offering price
per share a ............................. -- $ 12.43 $ 12.05 $ 12.36
===============================================================
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 |
The accompanying notes are an integral part of these financial statements. | 123
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
--------------------------------------
FRANKLIN FRANKLIN
MINNESOTA OHIO
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
--------------------------------------
Assets:
Investments in securities:
Cost .......................................... $ 579,222,822 $ 1,121,680,136
======================================
Value ......................................... $ 606,363,633 $ 1,183,401,712
Cash ........................................... 32,831 46,691
Receivables:
Capital shares sold ........................... 874,829 3,931,458
Interest ...................................... 5,148,263 13,758,410
--------------------------------------
Total assets ............................ 612,419,556 1,201,138,271
--------------------------------------
Liabilities:
Payables:
Investment securities purchased ............... 6,213,982 20,384,429
Capital shares redeemed ....................... 680,852 2,602,149
Affiliates .................................... 336,973 669,042
Distributions to shareholders ................. 603,510 1,162,155
Accrued expenses and other liabilities ......... 68,094 126,097
--------------------------------------
Total liabilities ....................... 7,903,411 24,943,872
--------------------------------------
Net assets, at value .................. $ 604,516,145 $ 1,176,194,399
======================================
Net assets consist of:
Paid-in capital ................................ $ 580,560,752 $ 1,114,732,760
Distributions in excess of net investment income (360,151) (670,700)
Net unrealized appreciation (depreciation) ..... 27,140,811 61,721,576
Accumulated net realized gain (loss) ........... (2,825,267) 410,763
--------------------------------------
Net assets, at value .................. $ 604,516,145 $ 1,176,194,399
======================================
124 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
------------------------------------
FRANKLIN FRANKLIN
MINNESOTA OHIO
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
------------------------------------
CLASS A:
Net assets, at value ................................................ $ 539,642,726 $ 980,493,340
====================================
Shares outstanding .................................................. 44,393,028 77,544,163
====================================
Net asset value per share a ......................................... $ 12.16 $ 12.64
====================================
Maximum offering price per share (net asset value per share / 95.75%) $ 12.70 $ 13.20
====================================
CLASS B:
Net assets, at value ................................................ -- $ 51,897,450
====================================
Shares outstanding .................................................. -- 4,088,671
====================================
Net asset value and maximum offering price per share a .............. -- $ 12.69
====================================
CLASS C:
Net assets, at value ................................................ $ 64,873,419 $ 143,803,609
====================================
Shares outstanding .................................................. 5,298,864 11,276,600
====================================
Net asset value and maximum offering price per share a .............. $ 12.24 $ 12.75
====================================
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 |
The accompanying notes are an integral part of these financial statements. | 125
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2007
-------------------------------------------------------------------
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 ........................................... $ 8,335,048 $ 98,110,530 $ 24,629,999 $ 70,082,593
-------------------------------------------------------------------
Expenses:
Management fees (Note 3a) .......................... 976,450 9,188,497 2,551,776 6,603,604
Distribution fees: (Note 3c)
Class A ........................................... 170,523 1,748,352 450,429 1,237,176
Class B ........................................... -- 573,516 -- 310,318
Class C ........................................... -- 916,459 377,007 804,925
Transfer agent fees (Note 3e) ...................... 48,694 819,061 197,673 667,550
Custodian fees ..................................... 2,535 28,754 8,237 20,814
Reports to shareholders ............................ 5,781 138,846 28,799 90,894
Registration and filing fees ....................... 9,161 133,862 20,077 31,231
Professional fees .................................. 22,658 58,283 28,443 47,865
Trustees' fees and expenses ........................ 1,376 15,482 4,011 11,117
Other .............................................. 26,313 117,470 38,862 81,840
-------------------------------------------------------------------
Total expenses .............................. 1,263,491 13,738,582 3,705,314 9,907,334
-------------------------------------------------------------------
Net investment income .................... 7,071,557 84,371,948 20,924,685 60,175,259
-------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .......... 298,089 1,851,693 312,436 2,368,163
Net change in unrealized appreciation (depreciation)
on investments .................................... (7,722) 685,560 1,696,454 (3,365,731)
-------------------------------------------------------------------
Net realized and unrealized gain (loss) ............. 290,367 2,537,253 2,008,890 (997,568)
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .................................... $ 7,361,924 $ 86,909,201 $ 22,933,575 $ 59,177,691
===================================================================
126 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2007
-------------------------------
FRANKLIN FRANKLIN
MINNESOTA OHIO
INSURED INSURED
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
-------------------------------
Investment income:
Interest .......................................................... $ 28,506,881 $ 53,872,117
-------------------------------
Expenses:
Management fees (Note 3a) ......................................... 2,918,939 5,309,875
Distribution fees: (Note 3c)
Class A .......................................................... 528,500 929,866
Class B .......................................................... -- 348,955
Class C .......................................................... 410,573 879,962
Transfer agent fees (Note 3e) ..................................... 270,383 525,486
Custodian fees .................................................... 8,901 16,837
Reports to shareholders ........................................... 36,547 76,286
Registration and filing fees ...................................... 16,292 28,676
Professional fees ................................................. 28,507 43,820
Trustees' fees and expenses ....................................... 4,677 8,722
Other ............................................................. 54,042 102,336
-------------------------------
Total expenses ............................................. 4,277,361 8,270,821
-------------------------------
Net investment income ................................... 24,229,520 45,601,296
-------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ......................... (1,339,608) 406,449
Net change in unrealized appreciation (depreciation) on investments 2,474,383 4,944,696
-------------------------------
Net realized and unrealized gain (loss) ............................ 1,134,775 5,351,145
-------------------------------
Net increase (decrease) in net assets resulting from operations .... $ 25,364,295 $ 50,952,441
===============================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 127
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------------------------------------------------
FRANKLIN FLORIDA FRANKLIN
INSURED TAX-FREE INCOM FUND INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 7,071,557 $ 6,604,403 $ 84,371,948 $ 80,542,442
Net realized gain (loss) from investments .. 298,089 204,688 1,851,693 1,654,642
Net change in unrealized appreciation
(depreciation) on investments ............. (7,722) (884,008) 685,560 (16,631,099)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ 7,361,924 5,925,083 86,909,201 65,565,985
-----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................... (7,127,291) (6,689,864) (75,858,368) (70,425,094)
Class B ................................... -- -- (3,349,811) (3,725,214)
Class C ................................... -- -- (5,354,642) (5,422,518)
Net realized gains:
Class A ................................... -- -- (1,465,090) --
Class B ................................... -- -- (70,292) --
Class C ................................... -- -- (114,491) --
-----------------------------------------------------------------------------
Total distributions to shareholders .......... (7,127,291) (6,689,864) (86,212,694) (79,572,826)
-----------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................... (8,116,916) 26,297,572 122,695,046 107,493,780
Class B .................................... -- -- (10,848,312) (8,062,143)
Class C .................................... -- -- (6,050,024) 11,058,746
-----------------------------------------------------------------------------
Total capital share transactions ............. (8,116,916) 26,297,572 105,796,710 110,490,383
-----------------------------------------------------------------------------
Redemption fees .............................. -- -- 5,205 1,914
-----------------------------------------------------------------------------
Net increase (decrease) in net assets .. (7,882,283) 25,532,791 106,498,422 96,485,456
Net assets:
Beginning of year ............................ 175,429,830 149,897,039 1,940,064,535 1,843,579,079
-----------------------------------------------------------------------------
End of year .................................. $ 167,547,547 $ 175,429,830 $ 2,046,562,957 $ 1,940,064,535
=============================================================================
Distributions in excess of net investment income
included in net assets:
End of year ................................ $ (107,368) $ (52,009) $ (1,378,836) $ (1,189,195)
=============================================================================
128 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------------------
FRANKLIN MASSACHUSETTS FRANKLIN MICHIGAN
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 20,924,685 $ 20,128,511 $ 60,175,259 $ 59,597,576
Net realized gain (loss) from investments .. 312,436 880,842 2,368,163 729,588
Net change in unrealized appreciation
(depreciation) on investments ............. 1,696,454 (3,758,067) (3,365,731) (9,828,625)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ 22,933,575 17,251,286 59,177,691 50,498,539
-----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................... (18,795,595) (17,950,593) (53,789,832) (52,761,670)
Class B ................................... -- -- (1,818,881) (2,021,778)
Class C ................................... (2,093,334) (1,901,135) (4,662,236) (4,405,037)
Net realized gains:
Class A ................................... -- -- (2,046,817) --
Class B ................................... -- -- (75,194) --
Class C ................................... -- -- (205,032) --
-----------------------------------------------------------------------------
Total distributions to shareholders ............ (20,888,929) (19,851,728) (62,597,992) (59,188,485)
-----------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ................................... 15,093,137 29,907,208 33,316,191 38,941,085
Class B ................................... -- -- (5,473,156) (3,249,398)
Class C ................................... 1,920,471 7,065,507 3,781,617 15,443,737
-----------------------------------------------------------------------------
Total capital share transactions ............... 17,013,608 36,972,715 31,624,652 51,135,424
-----------------------------------------------------------------------------
Redemption fees ................................ 14 1,813 2,526 835
-----------------------------------------------------------------------------
Net increase (decrease) in net assets .. 19,058,268 34,374,086 28,206,877 42,446,313
Net assets:
Beginning of year ............................ 507,487,993 473,113,907 1,404,747,750 1,362,301,437
-----------------------------------------------------------------------------
End of year .................................. $ 526,546,261 $ 507,487,993 $ 1,432,954,627 $ 1,404,747,750
=============================================================================
Distributions in excess of net investment income
included in net assets:
End of year ................................ $ (127,873) $ (138,222) $ (638,075) $ (544,761)
=============================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 129
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------------------
FRANKLIN MINNESOTA FRANKLIN OHIO
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
-----------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ....................... $ 24,229,520 $ 24,004,573 $ 45,601,296 $ 42,902,048
Net realized gain (loss) from investments ... (1,339,608) 493,089 406,449 117,597
Net change in unrealized appreciation
(depreciation) on investments .............. 2,474,383 (4,972,494) 4,944,696 (3,263,484)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............... 25,364,295 19,525,168 50,952,441 39,756,161
-----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................... (21,977,394) (21,680,983) (38,958,440) (36,680,704)
Class B .................................... -- -- (1,956,091) (2,133,888)
Class C .................................... (2,275,328) (2,252,502) (4,876,325) (4,316,858)
Net realized gains:
Class A .................................... -- -- (66,058) --
Class B .................................... -- -- (3,947) --
Class C .................................... -- -- (9,567) --
-----------------------------------------------------------------------------
Total distributions to shareholders ........... (24,252,722) (23,933,485) (45,870,428) (43,131,450)
-----------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................... 9,990,232 16,818,991 74,632,821 54,475,327
Class B .................................... -- -- (4,746,942) (3,587,223)
Class C .................................... (147,351) 5,683,255 12,594,757 22,263,643
-----------------------------------------------------------------------------
Total capital share transactions .............. 9,842,881 22,502,246 82,480,636 73,151,747
-----------------------------------------------------------------------------
Redemption fees ............................... 1,472 4,158 606 3,307
-----------------------------------------------------------------------------
Net increase (decrease) in net assets .... 10,955,926 18,098,087 87,563,255 69,779,765
Net assets:
Beginning of year ............................ 593,560,219 575,462,132 1,088,631,144 1,018,851,379
-----------------------------------------------------------------------------
End of year .................................. $ 604,516,145 $ 593,560,219 $ 1,176,194,399 $ 1,088,631,144
=============================================================================
Distributions in excess of net investment income
included in net assets:
End of year ................................ $ (360,151) $ (322,701) $ (670,700) $ (473,206)
=============================================================================
130 | The accompanying notes are an integral part of these 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 amended, (the 1940 Act) as an open-end investment company,
consisting of twenty-five separate funds. All funds included in this report (the
Funds) are diversified, except the Franklin Florida Insured Tax-Free Income
Fund, which is non-diversified. The financial statements of the remaining funds
in the Trust are presented separately. The classes of shares offered within each
of the Funds are indicated below. 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
Income Fund Income Fund Fund
Franklin Minnesota Insured Tax-Free Franklin Michigan Insured Tax-Free
Income Fund Income Fund
Franklin Ohio Insured Tax-Free
Income Fund
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 may utilize independent pricing services,
quotations from bond dealers, and information with respect to bond and note
transactions, to assist in determining a current market value for each security.
The 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. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Trust's Board of
Trustees.
Annual Report | 131
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its income and net
realized gains.
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividends from net investment income are normally declared daily and
distributed monthly to shareholders. Distributions from realized capital gains
and other distributions, if any, are recorded on the ex-dividend date.
Distributions to shareholders are determined according to income tax regulations
(tax basis). Distributable earnings determined on a tax basis may differ from
earnings recorded in accordance with accounting principles generally accepted in
the United States. These differences may be permanent or temporary. Permanent
differences are reclassified among capital accounts to reflect their tax
character. These reclassifications have no impact on net assets or the results
of operations. Temporary differences are not reclassified, as they may reverse
in subsequent periods.
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 of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.
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 or a
secondary insurance policy. Some municipal securities in the Funds are secured
by collateral guaranteed by an agency of the U.S. government.
132 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. INSURANCE (CONTINUED)
Depending on the type of coverage, premiums for insurance are either added to
the cost basis of the security 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
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities 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. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2007, 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, 2007
Shares sold .................... 2,175,680 $ 23,205,793 24,333,710 $ 297,487,126
Shares issued in reinvestment of
distributions ................. 346,000 3,689,307 3,747,782 45,845,016
Shares redeemed ................ (3,286,060) (35,012,016) (18,043,172) (220,637,096)
-------------------------------------------------------------------
Net increase (decrease) ........ (764,380) $ (8,116,916) 10,038,320 $ 122,695,046
===================================================================
Annual Report | 133
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------------
FRANKLIN FLORIDA FRANKLIN
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS A SHARES (CONTINUED):
Year ended February 28, 2006
Shares sold .................... 4,289,179 $ 46,134,494 20,512,515 $ 253,115,608
Shares issued in reinvestment of
distributions ................. 322,442 3,471,518 3,156,478 39,007,144
Shares redeemed ................ (2,167,173) (23,308,440) (14,956,509) (184,628,972)
-----------------------------------------------------------------
Net increase (decrease) ........ 2,444,448 $ 26,297,572 8,712,484 $ 107,493,780
=================================================================
CLASS B SHARES:
Year ended February 28, 2007
Shares sold .................... 37,490 $ 460,935
Shares issued in reinvestment of
distributions ................. 173,519 2,131,773
Shares redeemed ................ (1,094,078) (13,441,020)
--------------------------------
Net increase (decrease) ........ $ (883,069) (10,848,312)
================================
Year ended February 28, 2006
Shares sold .................... 53,765 $ 668,671
Shares issued in reinvestment of
distributions ................. 186,436 2,315,200
Shares redeemed ................ (890,647) (11,046,014)
--------------------------------
Net increase (decrease) ........ (650,446) $ (8,062,143)
================================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold .................... 1,669,874 $ 20,602,046
Shares issued in reinvestment of
distributions ................. 283,071 3,492,564
Shares redeemed ................ (2,444,521) (30,144,634)
--------------------------------
Net increase (decrease) ........ (491,576) $ (6,050,024)
================================
Year ended February 28, 2006
Shares sold .................... 2,717,167 $ 33,908,544
Shares issued in reinvestment of
distributions ................. 275,874 3,438,742
Shares redeemed ................ (2,112,496) (26,288,540)
--------------------------------
Net increase (decrease) ........ 880,545 $ 11,058,746
================================
-----------------------------------------------------------------
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, 2007
Shares sold .................... 5,235,943 $ 62,085,219 10,901,624 $ 132,782,327
Shares issued in reinvestment of
distributions ................. 879,562 10,423,251 2,799,767 34,090,992
Shares redeemed ................ (4,845,890) (57,415,333) (10,972,592) (133,557,128)
-----------------------------------------------------------------
Net increase (decrease) ........ 1,269,615 $ 15,093,137 2,728,799 $ 33,316,191
=================================================================
Year ended February 28, 2006
Shares sold .................... 5,805,602 $ 69,386,820 11,262,333 $ 138,528,236
Shares issued in reinvestment of
distributions ................. 836,209 10,004,961 2,594,482 31,915,705
Shares redeemed ................ (4,138,640) (49,484,573) (10,694,374) (131,502,856)
-----------------------------------------------------------------
Net increase (decrease) ........ 2,503,171 $ 29,907,208 3,162,441 $ 38,941,085
=================================================================
134 | Annual Report
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, 2007
Shares sold .................... 34,787 $ 422,950
Shares issued in reinvestment of
distributions ................. 109,336 1,337,603
Shares redeemed ................ (591,307) (7,233,709)
------------------------------
Net increase (decrease) ........ (447,184) $ (5,473,156)
==============================
Year ended February 28, 2006
Shares sold .................... 17,120 $ 211,398
Shares issued in reinvestment of
distributions ................. 114,392 1,414,147
Shares redeemed ................ (394,952) (4,874,943)
------------------------------
Net increase (decrease) ........ (263,440) $ (3,249,398)
==============================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold .................... 895,802 $ 10,691,157 2,088,459 $ 25,688,799
Shares issued in reinvestment of
distributions ................. 114,806 1,370,865 282,821 3,477,203
Shares redeemed ................ (849,079) (10,141,551) (2,067,097) (25,384,385)
--------------------------------------------------------------------
Net increase (decrease) ........ 161,529 $ 1,920,471 304,183 $ 3,781,617
====================================================================
Year ended February 28, 2006
Shares sold .................... 1,208,959 $ 14,548,081 2,252,824 $ 27,999,225
Shares issued in reinvestment of
distributions ................. 106,140 1,278,950 247,225 3,069,179
Shares redeemed ................ (728,129) (8,761,524) (1,260,740) (15,624,667)
--------------------------------------------------------------------
Net increase (decrease) ........ 586,970 $ 7,065,507 1,239,309 $ 15,443,737
====================================================================
--------------------------------------------------------------------
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, 2007
Shares sold .................... 4,603,325 $ 55,441,747 12,249,238 $ 153,215,641
Shares issued in reinvestment of
distributions ................. 1,164,738 14,025,916 1,890,728 23,636,806
Shares redeemed ................ (4,942,458) (59,477,431) (8,177,132) (102,219,626)
--------------------------------------------------------------------
Net increase (decrease) ........ 825,605 $ 9,990,232 5,962,834 $ 74,632,821
====================================================================
Year ended February 28, 2006
Shares sold .................... 5,310,970 $ 64,513,653 10,320,636 $ 129,957,945
Shares issued in reinvestment of
distributions ................. 1,113,423 13,532,164 1,724,832 21,727,747
Shares redeemed ................ (5,047,390) (61,226,826) (7,726,005) (97,210,365)
--------------------------------------------------------------------
Net increase (decrease) ........ 1,377,003 $ 16,818,991 4,319,463 $ 54,475,327
====================================================================
Annual Report | 135
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, 2007
Shares sold .................... 17,331 $ 217,326
Shares issued in reinvestment of
distributions ................. 108,062 1,355,657
Shares redeemed ................ (503,801) (6,319,925)
--------------------------------
Net increase (decrease) ........ (378,408) $ (4,746,942)
================================
Year ended February 28, 2006
Shares sold .................... 27,730 $ 349,828
Shares issued in reinvestment of
distributions ................. 118,721 1,501,501
Shares redeemed ................ (430,321) (5,438,552)
--------------------------------
Net increase (decrease) ........ (283,870) $ (3,587,223)
================================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold .................... 797,447 $ 9,674,198 2,772,398 $ 34,975,857
Shares issued in reinvestment of
distributions ................. 111,422 1,350,967 249,595 3,146,891
Shares redeemed ................ (922,487) (11,172,516) (2,025,512) (25,527,991)
------------------------------------------------------------------
Net increase (decrease) ........ (13,618) $ (147,351) 996,481 $ 12,594,757
==================================================================
Year ended February 28, 2006
Shares sold .................... 1,140,353 $ 13,958,714 2,754,832 $ 34,968,344
Shares issued in reinvestment of
distributions ................. 116,443 1,424,517 217,176 2,757,630
Shares redeemed ................ (794,372) (9,699,976) (1,220,740) (15,462,331)
------------------------------------------------------------------
Net increase (decrease) ........ 462,424 $ 5,683,255 1,751,268 $ 22,263,643
==================================================================
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
136 | Annual Report
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 each of the Funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% In excess of $20 billion
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the 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 Trust's Board of Trustees has adopted distribution plans for each share
class pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A
reimbursement distribution plans, the Funds reimburse Distributors for costs
incurred in connection with the servicing, sale and distribution of the Funds'
shares up to the maximum annual plan rate for each class. Under the Class A
reimbursement distribution plans, costs exceeding the maximum for the current
plan year cannot be reimbursed in subsequent periods.
In addition, under the Funds' compensation distribution plans, the Funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
-------------------------------------------------------------
FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------
Reimbursement Plans:
Class A ................. 0.15% 0.10% 0.10%
Compensation Plans:
Class B ................. -- 0.65% --
Class C ................. -- 0.65% 0.65%
Annual Report | 137
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
-------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MICHIGAN MINNESOTA OHIO
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------
Reimbursement Plans:
Class A ................. 0.10% 0.10% 0.10%
Compensation Plans:
Class B ................. 0.65% -- 0.65%
Class C ................. 0.65% 0.65% 0.65%
For the Franklin Florida Insured Tax-Free Income Fund, Distributors has agreed
to limit the current rate to 0.10% per year.
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
FLORIDA FRANKLIN MASSACHUSETTS
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers .................... $56,441 $374,231 $116,762
Contingent deferred sales charges retained ...... $12,095 $226,481 $10,128
--------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MICHIGAN MINNESOTA OHIO
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers .................... $355,618 $130,192 $401,961
Contingent deferred sales charges retained ...... $100,023 $4,829 $124,716
138 | 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 retained by Investor Services:
---------------------------------------------------------------
FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------------
Transfer agent fees ................... $31,774 $545,638 $128,040
---------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MICHIGAN MINNESOTA OHIO
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------------
Transfer agent fees ..... ............. $459,222 $189,356 $347,443
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At February 28, 2007, the capital loss carryforwards were as
follows:
---------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
FLORIDA MASSACHUSETTS MINNESOTA
INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------
Capital loss carryforwards expiring in:
2009 ................................ $ 470,951 $ -- $ 561,506
2010 ................................ 256,409 -- 788,761
2013 ................................ 339,883 232,490 --
2015 ................................ -- -- 1,475,000
---------------------------------------------------------
$1,067,243 $ 232,490 $2,825,267
=========================================================
During the year ended February 28, 2007, the Franklin Florida Insured Tax-Free
Income Fund, the Franklin Massachusetts Insured Tax-Free Income Fund, and the
Franklin Michigan Insured Tax-Free Income Fund utilized $73,974, $219,087, and
$46,093, respectively, of capital loss carryforwards.
Annual Report | 139
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, 2007
and 2006, was as follows:
--------------------------------------------------------------
FRANKLIN FLORIDA INSURED FRANKLIN
TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
Distributions paid from:
Tax exempt income ..................... $7,127,291 $6,689,864 $84,562,821 $79,572,826
Long term capital gain ................ -- -- 1,649,873 --
--------------------------------------------------------------
$7,127,291 $6,689,864 $86,212,694 $79,572,826
==============================================================
---------------------------------------------------------------
FRANKLIN MASSACHUSETTS FRANKLIN MICHIGAN
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
---------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------
Distributions paid from:
Tax exempt income ..................... $20,888,929 $19,851,728 $60,270,949 $59,188,485
Long term capital gain ................ -- -- 2,327,043 --
---------------------------------------------------------------
$20,888,929 $19,851,728 $62,597,992 $59,188,485
===============================================================
---------------------------------------------------------------
FRANKLIN MINNESOTA FRANKLIN OHIO
INSURED TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
---------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------
Distributions paid from:
Tax exempt income ..................... $24,252,722 $23,933,485 $45,790,856 $43,131,450
Long term capital gain ................ -- -- 79,572 --
---------------------------------------------------------------
$24,252,722 $23,933,485 $45,870,428 $43,131,450
===============================================================
At February 28, 2007, the cost of investments, net unrealized appreciation
(depreciation), undistributed tax exempt income and undistributed long term
capital gains for income tax purposes were as follows:
------------------------------------------------------------
FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------
Cost of investments ...................... $ 155,542,160 $ 1,931,754,153 $ 491,556,800
============================================================
Unrealized appreciation .................. 9,815,070 106,369,094 30,082,462
Unrealized depreciation .................. -- -- --
------------------------------------------------------------
Net unrealized appreciation (depreciation) $ 9,815,070 $ 106,369,094 $ 30,082,462
============================================================
Undistributed tax exempt income .......... $ 58,059 $ 608,780 $ 272,501
Undistributed long term capital gains .... -- 282,087 --
------------------------------------------------------------
Distributable earnings ................... $ 58,059 $ 890,867 $ 272,501
============================================================
140 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MICHIGAN MINNESOTA OHIO INSURED
INSURED TAX-FREE INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------
Cost of investments ...................... $ 1,338,456,705 $ 579,153,470 $ 1,121,607,655
============================================================
Unrealized appreciation .................. 77,919,903 27,210,163 61,794,057
Unrealized depreciation .................. -- -- --
------------------------------------------------------------
Net unrealized appreciation (depreciation) $ 77,919,903 27,210,163 61,794,057
============================================================
Undistributed tax exempt income .......... $ 670,934 $ 174,009 $ 418,973
Undistributed long term capital gains .... -- -- 410,763
------------------------------------------------------------
Distributable earnings ................... $ 670,934 $ 174,009 $ 829,736
============================================================
Net investment income and net realized gains (losses) differ for financial
statement and tax purposes primarily due to differing treatment of bond
discounts.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended February 28, 2007, were as follows:
------------------------------------------------------------
FRANKLIN FRANKLIN
FLORIDA FRANKLIN MASSACHUSETTS
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------
Purchases ................................ $ 12,285,574 $ 248,197,222 $ 74,775,289
Sales .................................... $ 18,779,442 $ 131,769,860 $ 72,697,413
------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MICHIGAN MINNESOTA OHIO
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------
Purchases ................................ $ 142,796,752 $ 95,193,993 $ 214,303,575
Sales .................................... $ 110,901,950 $ 83,794,228 $ 117,678,716
6. CONCENTRATION OF RISK
Each of the Funds invests a large percentage of its total assets in obligations
of issuers within its respective state and U.S. territories, 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 and U.S. territories.
Annual Report | 141
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), 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 ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006. The Trust did not participate in that
settlement.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
142 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Funds
are currently evaluating the impact, if any, of applying the various provisions
of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
Annual Report | 143
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 Franklin Tax-Free Trust, hereafter
referred to as the "Funds") at February 28, 2007, 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 five years in the period then ended, 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, 2007 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 13, 2007
144 | Annual Report
Franklin Tax-Free Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code (Code), the Funds
designate 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended February 28, 2007. A portion
of the Funds' exempt-interest dividends may be subject to the federal
alternative minimum tax. In January 2008, shareholders will be notified of
amounts for use in preparing their 2007 income tax returns.
Under Section 852(b)(3)(C) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as long term capital gain
dividends for the fiscal year ended February 28, 2007:
---------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
INSURED MICHIGAN OHIO
TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------
$1,851,990 $2,319,694 $413,242
Annual Report | 145
Franklin Tax-Free Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth 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. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1984 142 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).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation) (exploration
San Mateo, CA 94403-1906 and refining of oil 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 (1929) Trustee Since 1984 116 Director, Center for Creative Land
One Franklin Parkway 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).
- ------------------------------------------------------------------------------------------------------------------------------------
146 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2005 103 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation) (exploration
San Mateo, CA 94403-1906 and refining of oil and gas) and
Sentient Jet (private jet service); and
FORMERLY, Director, Becton Dickinson
and Company (medical technology),
Cooper Industries, Inc. (electrical
products and tools and hardware),
Health Net, Inc. (formerly, Foundation
Health) (integrated managed care),
The Hertz Corporation (car rental),
Pacific Southwest Airlines, The RCA
Corporation, Unicom (formerly,
Commonwealth Edison), UAL
Corporation (airlines) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Since 1984 142 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.; Director, Templeton Worldwide,
Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.
and of 41 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 126 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.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 147
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (1959) 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.
- ------------------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (1965) 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 (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President -
- AML AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 30 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).
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and 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 some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
148 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services,
LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of
Franklin Resources, Inc. and of 46 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).
- ------------------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company;
and officer of 30 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 149
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
Financial
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987
and 1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (1961) Vice PresidentSince 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 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Prior to February 28, 2007 S. Joseph Fortunato and Gordon S. Macklin
ceased to be director of the Fund.
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.
150 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, the Board of Trustees ("Board"), including
a majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate tax-exempt funds within
the Trust (the "Fund(s)"). In reaching this decision, the Board took into
account information furnished throughout the year at regular Board meetings, as
well as information prepared specifically in connection with the annual renewal
review process. Information furnished and discussed throughout the year included
investment performance reports and related financial information for each Fund,
as well as periodic reports on shareholder services, legal, compliance, pricing
and other services provided by the Investment Manager ("Manager") and its
affiliates. Information furnished specifically in connection with the renewal
process included a report for each Fund prepared by Lipper, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper reports compared each Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager and its affiliates including management's
explanation of differences where relevant and a three-year expense analysis with
an explanation for any increase in expense ratios. Additional material
accompanying such report was a memorandum prepared by management describing
project initiatives and capital investments relating to the services provided to
the Funds by the Franklin Templeton Investments organization, as well as a
memorandum relating to economies of scale and a comparative analysis concerning
transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. The Board also noted the extent of benefits provided Fund
shareholders from
Annual Report | 151
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
being part of the Franklin Templeton family of funds, including the right to
exchange investments between the same class of funds without a sales charge, the
ability to reinvest Fund dividends into other funds and the right to combine
holdings in other funds to obtain a reduced sales charge. Favorable
consideration was given to management's continuous efforts and expenditures in
establishing back-up systems and recovery procedures to function in the event of
a natural disaster, it being noted that such systems and procedures had
functioned smoothly during the Florida hurricanes and blackouts experienced in
recent years. Consideration was also given to the experience of each Fund's
portfolio management team, the number of accounts managed and general method of
compensation. In this latter respect, the Board noted that a primary factor in
management's determination of a portfolio manager's bonus compensation was the
relative investment performance of the funds he or she managed and that a
portion of such bonus was required to be invested in a pre-designated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties, the high industry ranking given to the
Franklin Templeton website and the firsthand experience of individual members of
the Board who deal with the shareholder services department in their capacities
as shareholders in one or more of the various Franklin Templeton Funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of each Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each Fund showed its
investment performance or that of its Class A shares for Funds having multiple
share classes, in comparison to a performance universe selected by Lipper.
Comparative performance for each Fund was shown for the one-year period ended
December 31, 2006, and for additional periods ended that date up to ten years
depending on when a particular Fund commenced operations. Investment performance
was shown on an income return basis, as well as a total return basis for each
Fund. The Lipper reports showed that the income return for each Fund was either
in the highest quintile or second-highest quintile of its performance universe
during the one-year period, as well as during each of the previous year periods
shown on an annualized basis. The Lipper reports showed the total return for
each Fund to be in the upper half with most being in either the highest quintile
or second-highest quintile of their performance universe for the one-year period
with varying results for prior periods, depending on the particular Fund. The
Board expressed satisfaction with such performance, noting that the investment
objective of each of the Funds is to obtain a high level of tax-exempt income.
COMPARATIVE EXPENSES. Consideration was given to the management fee and total
expense ratios of each Fund in comparison with those of a group of funds
selected by Lipper as its appropriate Lipper expense group. Prior to making such
comparisons, the Board relied upon a survey
152 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
showing that the scope of services covered under a Fund's investment management
agreement was similar to those provided by fund managers to other mutual fund
groups. In reviewing comparative costs, emphasis was given to the contractual
investment management fee charged each Fund in comparison with the contractual
investment management fee that would have been charged by other funds within its
Lipper expense group assuming they were the same size as the Fund, as well as
the actual total expenses of the Fund in comparison with those of its Lipper
expense group. The Lipper contractual investment management fee analysis
includes an administrative charge as being part of the investment management
fee, and total expenses, for comparative consistency, are shown by Lipper for
fund Class A shares for funds having multiple share classes. The Lipper report
showed that the contractual investment management fee rate for each Fund, with
the exception of the Fund discussed below, was in the lower half of its Lipper
expense group and that the actual total expense rate for all Funds was in the
least expensive quintile of their respective Lipper expense groups. The
contractual investment management fee rate for Franklin Florida Insured Tax-Free
Income Fund was within six basis points of the median for its respective Lipper
expense group. This Fund is among the smallest funds within Franklin Tax-Free
Trust. Based on the above, the Board was satisfied with the investment
management fee and total expenses of each Fund in comparison to its Lipper
expense group as shown in the Lipper reports.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. Specific attention was given to the methodology
followed in allocating costs to each Fund, it being recognized that allocation
methodologies are inherently subjective and various allocation methodologies may
each be reasonable while producing different results. In this respect, the Board
noted that while being continuously refined and reflecting changes in the
Manager's own cost accounting, such allocation methodology was consistent with
that followed in profitability report presentations for the Funds made in prior
years and that the Funds' independent registered public accounting firm had been
engaged by the Manager to perform certain procedures on a biennial basis,
specified and approved by the Manager and the Funds' Board solely for their
purposes and use in reference to the profitability analysis. In reviewing and
discussing such analysis, management discussed with the Board its belief that
costs incurred in establishing the infrastructure necessary to the type of
mutual fund operations conducted by the Manager and its affiliates may not be
fully reflected in the expenses allocated to each Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Funds, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board
considered a third-party study comparing the profitability of the Manager's
parent on an overall basis as compared to other publicly held managers broken
down to show profitability
Annual Report | 153
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
from management operations exclusive of distribution expenses, as well as
profitability including distribution expenses. The Board also considered the
extent to which the Manager and its affiliates might derive ancillary benefits
from fund operations, including interest in a joint venture entity which
financed up-front commissions paid to brokers/dealers who sold fund Class B
shares prior to February 2005, when the offering of such shares was
discontinued. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to each Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing any precise
determination is inherently subjective, the Board noted that based upon the Fund
profitability analysis, it appears that as some funds get larger, at some point
economies of scale do result in the Manager realizing a larger profit margin on
management services provided such fund. The Board also noted that any economies
of scale are shared with each of these Funds and their shareholders through
management fee breakpoints existing in each of the Funds' investment management
agreements, so that as a Fund grows in size, its effective management fee rate
declines. The fee structure under the investment management agreement with each
Fund provides an initial fee of 0.65% on the first $100 million of assets; 0.50%
on the next $150 million of assets; 0.45% on assets in excess of $250 million;
with additional breakpoints beginning at the $10 billion asset level thereafter.
In reviewing such structure, management stated its belief that this fee
structure reaches a relatively low rate quickly as a Fund grows and that such
low rate, in effect, reflects anticipated economies of scale as a Fund's assets
increase. In support of such position, management pointed out the favorable
effective management fee and total expense comparisons for each Fund within its
Lipper expense group as previously discussed under "Comparative Expenses." The
Board believed that to the extent economies of scale may be realized by the
Manager and its affiliates, the schedule of fees under the investment management
agreement for each Fund provided a sharing of benefits with the Fund and its
shareholders.
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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the 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.
154 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
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.
155 | Annual Report
Annual Report | 155
This page intentionally left blank.
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund Federal
Intermediate-Term Tax-Free Income Fund New York
Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution. 01/07
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
|_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
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 A2007 04/07
[GRAPHIC OMITTED]
FEBRUARY 28, 2007
- --------------------------------------------------------------------------------
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
Franklin Virginia
Tax-Free Income Fund
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER TAX - FREE INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
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 TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why
our funds can be used to build truly diversified
allocation plans covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the semiannual 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 .................................... 19
Franklin Georgia Tax-Free Income Fund .................................... 28
Franklin Kentucky Tax-Free Income Fund ................................... 37
Franklin Louisiana Tax-Free Income Fund .................................. 46
Franklin Maryland Tax-Free Income Fund ................................... 55
Franklin Missouri Tax-Free Income Fund ................................... 65
Franklin North Carolina Tax-Free Income Fund ............................. 73
Franklin Virginia Tax-Free Income Fund ................................... 82
Financial Highlights and Statements of Investments ....................... 91
Financial Statements ..................................................... 155
Notes to Financial Statements ............................................ 166
Report of Independent Registered Public Accounting Firm .................. 182
Tax Designation .......................................................... 183
Board Members and Officers ............................................... 184
Shareholder Information .................................................. 189
- --------------------------------------------------------------------------------
Annual Report
Municipal Bond Market Overview
For the 12 months ended February 28, 2007, the municipal bond market performed
well compared with the U.S. Treasury market despite Federal Reserve Board (Fed)
interest rate hikes, inflation concerns, volatile oil prices, mixed market
expectations and uncertainty regarding future economic growth. Over the year,
Treasury yields generally increased while municipal yields varied -- shorter
maturities increased, intermediate maturities were fairly flat to slightly lower
and longer-term yields decreased. Municipal yields historically have trended
with Treasury yields; however, strong demand for municipal bonds from
traditional and non-traditional investors contributed to an unusual situation
for the year under review. Longer-term municipal yields declined as Treasury
yields rose, allowing municipal bonds to outperform Treasuries. The Lehman
Brothers Municipal Bond Index returned +4.96% for the period, while the Lehman
Brothers U.S. Treasury Index returned +4.78%. 1
During the reporting period, short-term interest rates increased as the Fed
raised the federal funds target rate from 4.50% to 5.25% in three successive
hikes from March through June 2006. Since then, the Fed maintained the
short-term rate at 5.25% with an inflation risk bias, stating it is more
concerned with a potential for increased inflation than a slowing economy.
Largely as a result, Treasury yields generally rose. Many market participants
appeared to expect that the Fed was more likely to lower the federal funds
target rate than raise it. This sentiment was reflected by a flat to slightly
inverted Treasury yield curve (spread between short-term and long-term yields)
during the reporting period. On February 28, 2007, the 2-year Treasury yielded
4.65%, the 10-year 4.56% and the 30-year 4.68%. Yield for the 2-year Treasury
dropped 3 basis points (100 basis points equal one percentage point), while
yields for the 10-year increased 1 basis point and the 30-year 17 basis points,
for the one-year period.
1. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Lehman Brothers U.S. Treasury Index includes public
obligations of the U.S. Treasury with a remaining maturity of one year or
more. All issues must have at least one year to final maturity regardless
of call features, have at least $250 million par amount outstanding and be
rated investment grade (Baa3 or better). They must also be dollar
denominated, nonconvertible and publicly issued.
Annual Report | 7
During the year, the yield curve was generally flat or inverted, nominal yields
were low and credit spreads (the difference in yield between higher-grade and
lower-grade securities) narrowed. In this environment, the interest rate premium
decreased for assuming additional risk in the fixed income market, and
non-traditional municipal buyers seemed to focus on the municipal bond market.
Non-traditional or cross-over buyers typically invest in taxable securities;
however, they will enter the municipal bond market when municipal valuations are
attractive. With historically favorable intermediate- and longer-term municipal
yields versus Treasury yields, and a positive sloping yield curve (though
flatter than usual), municipal bonds offered favorable relative value for
traditional and cross-over fixed income investors. As a result, demand was
consistently strong for intermediate- to longer-term municipal bonds over the
year, which drove performance and contributed to further flattening of the
municipal yield curve. Due to Fed tightening, short-term municipal yields
increased; however, strong demand for longer-term bonds resulted in declining
longer-term yields. According to Municipal Market Data, the 2-year municipal
yield rose 16 basis points during the period, while 10-year and 30-year yields
decreased 8 and 33 basis points. 2
Generally low interest rates continued to motivate municipal issuers to access
the debt market to finance their capital needs. In 2006, new issuance was
approximately $388 billion, which was the second-highest volume after the $408
billion issued in 2005. 3 Refunding deals, in which issuers take advantage of
lower rates to refinance higher yielding outstanding debt, declined in 2006 to
approximately $79 billion compared with $130 billion in 2005. 3 However,
issuance for new capital projects increased to approximately $260 billion in
2006 versus $222 billion in 2005. 3 As a result of narrowing credit spreads,
issuers also found it more advantageous to issue their debt without paying a
premium for bond insurance. In 2006, 49% of new bond issuance was insured
compared with 57% in 2005. 3 When credit spreads are narrow, the economic
benefit for issuers using insurance generally diminishes and bond insurers have
less flexibility in pricing. Strong demand from traditional buyers such as
mutual funds, individuals and insurance companies combined with large
participation of cross-over buyers enabled the municipal bond market to absorb
the comparatively large amount of new issuance through the year.
2. Source: Thomson Financial.
3. Source: THE BOND BUYER.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2007. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, 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 securities. 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 positive sloping municipal yield curve compared to Treasuries
favored the use of longer-term bonds. Consequently, we sought to purchase bonds
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
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 as high a level of income exempt from federal and Alabama
personal income taxes as is 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
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Alabama Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ................................... 65.1%
A ..................................... 3.2%
BBB ................................... 6.2%
Not Rated by S&P ...................... 25.5%
* 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 24.6% 0.1%
BBB or Baa 0.4% --
Below Investment Grade 0.4% --
- -----------------------------------------------------
Total 25.4% 0.1%
- -----------------------------------------------------
We are pleased to bring you Franklin Alabama Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 93.
10 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Alabama Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.04 cents 3.51 cents
- --------------------------------------------------------------------------------
April 2006 4.04 cents 3.51 cents
- --------------------------------------------------------------------------------
May 2006 4.04 cents 3.51 cents
- --------------------------------------------------------------------------------
June 2006 4.04 cents 3.51 cents
- --------------------------------------------------------------------------------
July 2006 4.04 cents 3.51 cents
- --------------------------------------------------------------------------------
August 2006 4.04 cents 3.51 cents
- --------------------------------------------------------------------------------
September 2006 4.04 cents 3.52 cents
- --------------------------------------------------------------------------------
October 2006 4.04 cents 3.52 cents
- --------------------------------------------------------------------------------
November 2006 4.04 cents 3.52 cents
- --------------------------------------------------------------------------------
December 2006 3.97 cents 3.44 cents
- --------------------------------------------------------------------------------
January 2007 3.97 cents 3.44 cents
- --------------------------------------------------------------------------------
February 2007 3.97 cents 3.44 cents
- --------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.49 on February 28, 2006, to $11.51 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 48.38 cents per share for the reporting period. 2
The Performance Summary beginning on page 14 shows that at the end of this
reporting period the Fund's Class A shares' distribution rate was 3.86% based on
an annualization of the current 3.87 cent per share dividend and the maximum
offering price of $12.02 on February 28, 2007. An investor in the 2007 maximum
combined effective federal and Alabama personal income tax bracket of 38.25%
would need to earn a distribution rate of 6.25% 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.
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
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 | 11
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.
STATE UPDATE
Alabama's economy strengthened in 2006 as employment trends improved along with
the state's diversifying economic base. Statewide, the business services, high
technology and health care sectors grew significantly. So did the automotive
industry (part of the durable manufacturing sector), which remained prominent in
the Heart of Dixie's economic engine. These areas helped offset losses in the
state's traditional textiles, apparel, and food processing industries. As of
February 28, 2007, Alabama's 3.3% unemployment rate was not only lower than the
4.5% national average, but the lowest in the state's recorded history. 3 The
state was successful in recruiting new industries while expanding its existing
industrial base, allowing for the addition of more than 100,000 new jobs over
the past three years, an estimated 40,000 of which were generated in 2006. 4
Personal income levels also improved but remained below average at 76% of
national levels. 5
State revenues exceeded forecasts and are expected to result in larger general
and education fund balances. This was achieved largely through a combination of
positive demographic and employment trends and a series of spending cuts and
other legislative acts of fiscal discipline. Alabama's record deficit of fiscal
year 2003 completely reversed and, by fiscal year-end 2006, its budget stood at
an all-time record surplus. Officials estimated fiscal year 2006 general fund
revenues at $1.8 billion, a 14.5% increase in total revenues from fiscal year
2005, which would contribute another $95 million to the general fund surplus. 5
Despite the recent revenue uptick, funding challenges remained for the state's
Medicaid and retirement systems. In his 2006 state of the state address,
Governor Bob Riley introduced proposals to harness Alabama's record surplus via
increased spending to the education and justice systems, while at the same time
rolling out an income tax relief plan amounting to $200 million over the next
five years. 4
3. Source: Bureau of Labor Statistics.
4. Source: "Alabama State of the State Address 2006," STATELINE.ORG, 1/10/06.
5. Source: Standard & Poor's, "Research: State Review: Alabama,"
RATINGSDIRECT, 12/11/06.
12 | Annual Report
Alabama is an infrequent issuer of general obligation debt, and tax-supported
debt was an estimated $2.2 billion at year-end 2006. 5 Consequently, the state's
total tax-supported debt obligation remains low at roughly $500 per capita and
1.7% of personal income compared with the national median of $754 per capita, or
2.5% of personal income. 5
Alabama's AA credit rating and stable outlook, assigned by independent credit
rating agency Standard & Poor's (S&P), was largely the result of the state's low
debt burden and conservative fiscal management, its growing and increasingly
diversified economic base and S&P's expectations of continued economic
strength. 6
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.
PORTFOLIO BREAKDOWN
Franklin Alabama Tax-Free Income Fund 2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 22.8%
- --------------------------------------------------------------------------------
Utilities 20.5%
- --------------------------------------------------------------------------------
Prerefunded 20.3%
- --------------------------------------------------------------------------------
Higher Education 14.8%
- --------------------------------------------------------------------------------
Hospital & Health Care 11.2%
- --------------------------------------------------------------------------------
Tax-Supported 5.4%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 4.1%
- --------------------------------------------------------------------------------
Corporate-Backed 0.7%
- --------------------------------------------------------------------------------
Housing 0.2%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
6. 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 13
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRALX) CHANGE 2/28/07 2/28/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.02 $11.51 $11.49
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4838
- -----------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FALEX) CHANGE 2/28/07 2/28/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.02 $11.60 $11.58
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $0.4203
- -----------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.50% +28.05% +61.95%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.06% +4.16% +4.48%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.09% +4.41% +4.54%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 3.86%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.25%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.28%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.31%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.72%
- -----------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.89% +24.57% +53.30%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.89% +4.49% +4.36%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.04% +4.77% +4.43%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 3.46%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.60%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.92%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.73%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.27%
- -----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
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.
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
CLASS A 2/28/07
- ------------------------------------------------
1-Year +0.06%
- ------------------------------------------------
5-Year +4.16%
- ------------------------------------------------
10-Year +4.48%
- ------------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Alabama Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
---------- -------------------- ----------------------- -------
3/1/1997 $9,576 $10,000 $10,000
3/31/1997 $9,490 $9,867 $10,025
4/30/1997 $9,568 $9,949 $10,038
5/31/1997 $9,671 $10,099 $10,031
6/30/1997 $9,773 $10,207 $10,044
7/31/1997 $10,011 $10,489 $10,056
8/31/1997 $9,940 $10,391 $10,075
9/30/1997 $10,062 $10,514 $10,100
10/31/1997 $10,126 $10,582 $10,125
11/30/1997 $10,198 $10,644 $10,119
12/31/1997 $10,335 $10,799 $10,107
1/31/1998 $10,415 $10,911 $10,125
2/28/1998 $10,418 $10,914 $10,144
3/31/1998 $10,438 $10,924 $10,163
4/30/1998 $10,423 $10,875 $10,182
5/31/1998 $10,390 $11,047 $10,201
6/30/1998 $10,380 $11,090 $10,213
7/31/1998 $10,409 $11,118 $10,226
8/31/1998 $10,537 $11,290 $10,238
9/30/1998 $10,637 $11,430 $10,251
10/31/1998 $10,630 $11,430 $10,276
11/30/1998 $10,668 $11,470 $10,276
12/31/1998 $10,688 $11,499 $10,269
1/31/1999 $10,780 $11,636 $10,294
2/28/1999 $10,754 $11,585 $10,307
3/31/1999 $10,790 $11,601 $10,338
4/30/1999 $10,809 $11,630 $10,414
5/31/1999 $10,772 $11,563 $10,414
6/30/1999 $10,638 $11,396 $10,414
7/31/1999 $10,657 $11,438 $10,445
8/31/1999 $10,506 $11,346 $10,470
9/30/1999 $10,506 $11,351 $10,520
10/31/1999 $10,364 $11,228 $10,539
11/30/1999 $10,411 $11,347 $10,545
12/31/1999 $10,296 $11,263 $10,545
1/31/2000 $10,199 $11,214 $10,576
2/29/2000 $10,325 $11,344 $10,639
3/31/2000 $10,569 $11,592 $10,727
4/30/2000 $10,511 $11,523 $10,733
5/31/2000 $10,462 $11,463 $10,746
6/30/2000 $10,710 $11,767 $10,802
7/31/2000 $10,830 $11,931 $10,827
8/31/2000 $10,990 $12,115 $10,827
9/30/2000 $10,911 $12,052 $10,883
10/31/2000 $11,019 $12,183 $10,902
11/30/2000 $11,108 $12,275 $10,909
12/31/2000 $11,309 $12,579 $10,902
1/31/2001 $11,326 $12,703 $10,971
2/28/2001 $11,375 $12,744 $11,015
3/31/2001 $11,444 $12,858 $11,040
4/30/2001 $11,329 $12,719 $11,084
5/31/2001 $11,440 $12,855 $11,134
6/30/2001 $11,551 $12,941 $11,153
7/31/2001 $11,726 $13,133 $11,122
8/31/2001 $11,934 $13,350 $11,122
9/30/2001 $11,889 $13,305 $11,172
10/31/2001 $12,034 $13,463 $11,134
11/30/2001 $11,967 $13,350 $11,115
12/31/2001 $11,845 $13,223 $11,071
1/31/2002 $11,978 $13,453 $11,096
2/28/2002 $12,112 $13,615 $11,140
3/31/2002 $11,924 $13,348 $11,203
4/30/2002 $12,072 $13,609 $11,266
5/31/2002 $12,165 $13,692 $11,266
6/30/2002 $12,270 $13,836 $11,272
7/31/2002 $12,419 $14,014 $11,284
8/31/2002 $12,536 $14,183 $11,322
9/30/2002 $12,819 $14,494 $11,341
10/31/2002 $12,659 $14,253 $11,360
11/30/2002 $12,631 $14,194 $11,360
12/31/2002 $12,872 $14,494 $11,335
1/31/2003 $12,877 $14,457 $11,385
2/28/2003 $13,029 $14,659 $11,472
3/31/2003 $13,068 $14,668 $11,541
4/30/2003 $13,187 $14,765 $11,516
5/31/2003 $13,465 $15,110 $11,497
6/30/2003 $13,435 $15,046 $11,510
7/31/2003 $12,943 $14,520 $11,523
8/31/2003 $13,086 $14,628 $11,566
9/30/2003 $13,461 $15,058 $11,604
10/31/2003 $13,373 $14,982 $11,591
11/30/2003 $13,517 $15,138 $11,560
12/31/2003 $13,636 $15,264 $11,548
1/31/2004 $13,732 $15,351 $11,604
2/29/2004 $13,935 $15,582 $11,667
3/31/2004 $13,912 $15,528 $11,742
4/30/2004 $13,569 $15,160 $11,779
5/31/2004 $13,536 $15,105 $11,848
6/30/2004 $13,598 $15,160 $11,886
7/31/2004 $13,768 $15,360 $11,867
8/31/2004 $14,000 $15,667 $11,873
9/30/2004 $14,087 $15,751 $11,898
10/31/2004 $14,211 $15,886 $11,961
11/30/2004 $14,091 $15,755 $11,967
12/31/2004 $14,265 $15,947 $11,924
1/31/2005 $14,415 $16,096 $11,949
2/28/2005 $14,369 $16,043 $12,018
3/31/2005 $14,297 $15,942 $12,112
4/30/2005 $14,486 $16,193 $12,193
5/31/2005 $14,576 $16,308 $12,180
6/30/2005 $14,641 $16,409 $12,187
7/31/2005 $14,593 $16,335 $12,243
8/31/2005 $14,710 $16,500 $12,306
9/30/2005 $14,623 $16,388 $12,456
10/31/2005 $14,536 $16,289 $12,481
11/30/2005 $14,601 $16,367 $12,381
12/31/2005 $14,717 $16,508 $12,331
1/31/2006 $14,744 $16,552 $12,425
2/28/2006 $14,849 $16,664 $12,450
3/31/2006 $14,784 $16,549 $12,519
4/30/2006 $14,785 $16,543 $12,625
5/31/2006 $14,824 $16,617 $12,688
6/30/2006 $14,773 $16,554 $12,713
7/31/2006 $14,917 $16,751 $12,751
8/31/2006 $15,102 $17,000 $12,776
9/30/2006 $15,195 $17,118 $12,713
10/31/2006 $15,276 $17,225 $12,644
11/30/2006 $15,409 $17,369 $12,625
12/31/2006 $15,355 $17,307 $12,644
1/31/2007 $15,328 $17,263 $12,683
2/28/2007 $15,507 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
CLASS C 2/28/07
- ------------------------------------------------
1-Year +2.89%
- ------------------------------------------------
5-Year +4.49%
- ------------------------------------------------
10-Year +4.36%
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Alabama Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
---------- -------------------- ----------------------- -------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,906 $9,867 $10,025
4/30/1997 $9,983 $9,949 $10,038
5/31/1997 $10,085 $10,099 $10,031
6/30/1997 $10,186 $10,207 $10,044
7/31/1997 $10,429 $10,489 $10,056
8/31/1997 $10,350 $10,391 $10,075
9/30/1997 $10,472 $10,514 $10,100
10/31/1997 $10,533 $10,582 $10,125
11/30/1997 $10,603 $10,644 $10,119
12/31/1997 $10,749 $10,799 $10,107
1/31/1998 $10,818 $10,911 $10,125
2/28/1998 $10,824 $10,914 $10,144
3/31/1998 $10,831 $10,924 $10,163
4/30/1998 $10,819 $10,875 $10,182
5/31/1998 $10,772 $11,047 $10,201
6/30/1998 $10,765 $11,090 $10,213
7/31/1998 $10,790 $11,118 $10,226
8/31/1998 $10,917 $11,290 $10,238
9/30/1998 $11,015 $11,430 $10,251
10/31/1998 $11,002 $11,430 $10,276
11/30/1998 $11,036 $11,470 $10,276
12/31/1998 $11,052 $11,499 $10,269
1/31/1999 $11,142 $11,636 $10,294
2/28/1999 $11,110 $11,585 $10,307
3/31/1999 $11,142 $11,601 $10,338
4/30/1999 $11,165 $11,630 $10,414
5/31/1999 $11,111 $11,563 $10,414
6/30/1999 $10,979 $11,396 $10,414
7/31/1999 $10,983 $11,438 $10,445
8/31/1999 $10,823 $11,346 $10,470
9/30/1999 $10,828 $11,351 $10,520
10/31/1999 $10,658 $11,228 $10,539
11/30/1999 $10,711 $11,347 $10,545
12/31/1999 $10,588 $11,263 $10,545
1/31/2000 $10,484 $11,214 $10,576
2/29/2000 $10,608 $11,344 $10,639
3/31/2000 $10,852 $11,592 $10,727
4/30/2000 $10,788 $11,523 $10,733
5/31/2000 $10,734 $11,463 $10,746
6/30/2000 $10,981 $11,767 $10,802
7/31/2000 $11,109 $11,931 $10,827
8/31/2000 $11,257 $12,115 $10,827
9/30/2000 $11,171 $12,052 $10,883
10/31/2000 $11,276 $12,183 $10,902
11/30/2000 $11,362 $12,275 $10,909
12/31/2000 $11,571 $12,579 $10,902
1/31/2001 $11,573 $12,703 $10,971
2/28/2001 $11,617 $12,744 $11,015
3/31/2001 $11,682 $12,858 $11,040
4/30/2001 $11,559 $12,719 $11,084
5/31/2001 $11,677 $12,855 $11,134
6/30/2001 $11,774 $12,941 $11,153
7/31/2001 $11,957 $13,133 $11,122
8/31/2001 $12,162 $13,350 $11,122
9/30/2001 $12,111 $13,305 $11,172
10/31/2001 $12,252 $13,463 $11,134
11/30/2001 $12,179 $13,350 $11,115
12/31/2001 $12,038 $13,223 $11,071
1/31/2002 $12,178 $13,453 $11,096
2/28/2002 $12,308 $13,615 $11,140
3/31/2002 $12,113 $13,348 $11,203
4/30/2002 $12,256 $13,609 $11,266
5/31/2002 $12,345 $13,692 $11,266
6/30/2002 $12,445 $13,836 $11,272
7/31/2002 $12,600 $14,014 $11,284
8/31/2002 $12,701 $14,183 $11,322
9/30/2002 $12,991 $14,494 $11,341
10/31/2002 $12,813 $14,253 $11,360
11/30/2002 $12,780 $14,194 $11,360
12/31/2002 $13,028 $14,494 $11,335
1/31/2003 $13,016 $14,457 $11,385
2/28/2003 $13,174 $14,659 $11,472
3/31/2003 $13,195 $14,668 $11,541
4/30/2003 $13,309 $14,765 $11,516
5/31/2003 $13,594 $15,110 $11,497
6/30/2003 $13,557 $15,046 $11,510
7/31/2003 $13,057 $14,520 $11,523
8/31/2003 $13,193 $14,628 $11,566
9/30/2003 $13,574 $15,058 $11,604
10/31/2003 $13,467 $14,982 $11,591
11/30/2003 $13,604 $15,138 $11,560
12/31/2003 $13,716 $15,264 $11,548
1/31/2004 $13,805 $15,351 $11,604
2/29/2004 $14,001 $15,582 $11,667
3/31/2004 $13,974 $15,528 $11,742
4/30/2004 $13,626 $15,160 $11,779
5/31/2004 $13,587 $15,105 $11,848
6/30/2004 $13,643 $15,160 $11,886
7/31/2004 $13,807 $15,360 $11,867
8/31/2004 $14,043 $15,667 $11,873
9/30/2004 $14,124 $15,751 $11,898
10/31/2004 $14,228 $15,886 $11,961
11/30/2004 $14,115 $15,755 $11,967
12/31/2004 $14,281 $15,947 $11,924
1/31/2005 $14,423 $16,096 $11,949
2/28/2005 $14,370 $16,043 $12,018
3/31/2005 $14,292 $15,942 $12,112
4/30/2005 $14,472 $16,193 $12,193
5/31/2005 $14,554 $16,308 $12,180
6/30/2005 $14,613 $16,409 $12,187
7/31/2005 $14,559 $16,335 $12,243
8/31/2005 $14,668 $16,500 $12,306
9/30/2005 $14,575 $16,388 $12,456
10/31/2005 $14,483 $16,289 $12,481
11/30/2005 $14,541 $16,367 $12,381
12/31/2005 $14,649 $16,508 $12,331
1/31/2006 $14,669 $16,552 $12,425
2/28/2006 $14,765 $16,664 $12,450
3/31/2006 $14,695 $16,549 $12,519
4/30/2006 $14,689 $16,543 $12,625
5/31/2006 $14,721 $16,617 $12,688
6/30/2006 $14,663 $16,554 $12,713
7/31/2006 $14,799 $16,751 $12,751
8/31/2006 $14,974 $17,000 $12,776
9/30/2006 $15,071 $17,118 $12,713
10/31/2006 $15,144 $17,225 $12,644
11/30/2006 $15,268 $17,369 $12,625
12/31/2006 $15,208 $17,307 $12,644
1/31/2007 $15,161 $17,263 $12,683
2/28/2007 $15,330 $17,490 $12,751
Annual Report | 15
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Alabama
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
16 | Annual Report
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 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.10 $3.62
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.22 $3.61
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.10 $6.32
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.31
- ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.72% and C: 1.26%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
18 | Annual Report
Franklin Florida Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Florida Tax-Free Income Fund
seeks as high a level of income exempt from federal income tax as is 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
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Florida Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ................................. 61.5%
AA .................................. 3.5%
A ................................... 8.9%
BBB ................................. 9.0%
Not Rated by S&P .................... 17.1%
* 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 8.2% 0.3% 0.8%
AA or Aa 0.8% -- --
A 3.0% 0.5% --
BBB or Baa 1.0% 2.0% 0.5%
- --------------------------------------------------
Total 13.0% 2.8% 1.3%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Florida Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 100.
Annual Report | 19
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
DIVIDEND DISTRIBUTIONS 2
Franklin Florida Tax-Free Income Fund
- -------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------------------------------
MONTH CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
March 2006 4.50 cents 3.95 cents 3.95 cents
- -------------------------------------------------------------------------------
April 2006 4.50 cents 3.95 cents 3.95 cents
- -------------------------------------------------------------------------------
May 2006 4.50 cents 3.95 cents 3.95 cents
- -------------------------------------------------------------------------------
June 2006 4.46 cents 3.92 cents 3.92 cents
- -------------------------------------------------------------------------------
July 2006 4.46 cents 3.92 cents 3.92 cents
- -------------------------------------------------------------------------------
August 2006 4.46 cents 3.92 cents 3.92 cents
- -------------------------------------------------------------------------------
September 2006 4.46 cents 3.92 cents 3.92 cents
- -------------------------------------------------------------------------------
October 2006 4.46 cents 3.92 cents 3.92 cents
- -------------------------------------------------------------------------------
November 2006 4.46 cents 3.92 cents 3.92 cents
- -------------------------------------------------------------------------------
December 2006 4.46 cents 3.91 cents 3.90 cents
- -------------------------------------------------------------------------------
January 2007 4.46 cents 3.91 cents 3.90 cents
- -------------------------------------------------------------------------------
February 2007 4.46 cents 3.91 cents 3.90 cents
- -------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.93 on February 28, 2006, to $11.94 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 53.80 cents per share for the same period. 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 4.30% based on an
annualization of the current 4.46 cent per share dividend and the maximum
offering price of $12.47 on February 28, 2007. An investor in the 2007 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
6.62% 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.
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 cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
20 | Annual Report
STATE UPDATE
Florida's economic growth continued to be resilient even though the state has
experienced active hurricane seasons in the past. The state's growth outpaced
the nation's as measured by gross state product, population and employment.
Florida's service-based economy has a strong and competitive position in the
southeastern U.S. The state's average income levels and below-average
unemployment in recent years supported its growing population. As of February
2007, the unemployment rate was 3.3%, considerably lower than the 4.5% U.S.
rate. 3 However, the state's real estate market began showing signs of weakness.
Strong economic performance over the past several years translated to surging
revenue growth and consistent operating surpluses, which allowed for full
funding of hurricane remediation costs and offset some of the financial burden
related to rising residential property insurance prices. Record levels of
financial reserves should also help Florida manage well during a real estate
slowdown.
The state's debt burden is stable and its current tax-supported debt is $18.5
billion, which represents $1,016 per capita and 3% of personal income. Annual
debt service costs remained below its 6% target level. 4
Based on Florida's strong revenue performance, solid and conservative financial
and budget management practices, and moderate debt burden, independent credit
rating agency Standard & Poor's assigned the state's general obligation bonds
its highest rating of AAA with a stable outlook. 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.
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.
PORTFOLIO BREAKDOWN
Franklin Florida Tax-Free Income Fund
2/28/07
- -------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- -------------------------------------------------------------------------------
Prerefunded 22.4%
- -------------------------------------------------------------------------------
Hospital & Health Care 14.4%
- -------------------------------------------------------------------------------
Transportation 13.0%
- -------------------------------------------------------------------------------
Utilities 12.6%
- -------------------------------------------------------------------------------
Subject to Government Appropriations 10.1%
- -------------------------------------------------------------------------------
General Obligation 7.9%
- -------------------------------------------------------------------------------
Tax-Supported 6.7%
- -------------------------------------------------------------------------------
Other Revenue 5.7%
- -------------------------------------------------------------------------------
Housing 3.8%
- -------------------------------------------------------------------------------
Higher Education 3.1%
- -------------------------------------------------------------------------------
Corporate-Backed 0.3%
- -------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
3. Source: Bureau of Labor Statistics.
4. Source: Standard & Poor's, "Research: Summary: Florida; General
Obligation," RATINGSDIRECT, 1/30/07.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 21
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRFLX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $11.94 $11.93
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5380
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FRFBX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 +$12.02 $12.01
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4724
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRFIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.02 +$12.09 $12.07
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4720
- --------------------------------------------------------------------------------
22 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE
FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.64% +28.49% +69.59%
- ----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.19% +4.23% +4.97%
- ----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.63% +4.55% +5.06%
- ----------------------------------------------------------------------------------------------------
Distribution Rate 4 4.30%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.62%
- ----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.50%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.38%
- ----------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.62%
- ----------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.12% +25.12% +49.90%
- ----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.12% +4.25% +5.89%
- ----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.54% +4.59% +5.78%
- ----------------------------------------------------------------------------------------------------
Distribution Rate 4 3.90%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.00%
- ----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.15%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.85%
- ----------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.17%
- ----------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.18% +25.06% +60.76%
- ----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.18% +4.57% +4.86%
- ----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.60% +4.91% +4.96%
- ----------------------------------------------------------------------------------------------------
Distribution Rate 4 3.87%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.95%
- ----------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.14%
- ----------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.83%
- ----------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.17%
- ----------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 23
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.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS A 2/28/07
- ---------------------------------------
1-Year +0.19%
- ---------------------------------------
5-Year +4.23%
- ---------------------------------------
10-Year +4.97%
- ---------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Florida Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ----------- ---------------------- ---------------------- ---------
3/1/1997 $9,579 $10,000 $10,000
3/31/1997 $9,468 $9,867 $10,025
4/30/1997 $9,557 $9,949 $10,038
5/31/1997 $9,663 $10,099 $10,031
6/30/1997 $9,761 $10,207 $10,044
7/31/1997 $9,995 $10,489 $10,056
8/31/1997 $9,925 $10,391 $10,075
9/30/1997 $9,996 $10,514 $10,100
10/31/1997 $10,060 $10,582 $10,125
11/30/1997 $10,123 $10,644 $10,119
12/31/1997 $10,264 $10,799 $10,107
1/31/1998 $10,371 $10,911 $10,125
2/28/1998 $10,382 $10,914 $10,144
3/31/1998 $10,401 $10,924 $10,163
4/30/1998 $10,385 $10,875 $10,182
5/31/1998 $10,510 $11,047 $10,201
6/30/1998 $10,548 $11,090 $10,213
7/31/1998 $10,585 $11,118 $10,226
8/31/1998 $10,721 $11,290 $10,238
9/30/1998 $10,822 $11,430 $10,251
10/31/1998 $10,832 $11,430 $10,276
11/30/1998 $10,880 $11,470 $10,276
12/31/1998 $10,915 $11,499 $10,269
1/31/1999 $10,999 $11,636 $10,294
2/28/1999 $10,981 $11,585 $10,307
3/31/1999 $10,990 $11,601 $10,338
4/30/1999 $11,018 $11,630 $10,414
5/31/1999 $10,962 $11,563 $10,414
6/30/1999 $10,822 $11,396 $10,414
7/31/1999 $10,831 $11,438 $10,445
8/31/1999 $10,738 $11,346 $10,470
9/30/1999 $10,699 $11,351 $10,520
10/31/1999 $10,547 $11,228 $10,539
11/30/1999 $10,633 $11,347 $10,545
12/31/1999 $10,547 $11,263 $10,545
1/31/2000 $10,479 $11,214 $10,576
2/29/2000 $10,586 $11,344 $10,639
3/31/2000 $10,820 $11,592 $10,727
4/30/2000 $10,761 $11,523 $10,733
5/31/2000 $10,693 $11,463 $10,746
6/30/2000 $10,959 $11,767 $10,802
7/31/2000 $11,118 $11,931 $10,827
8/31/2000 $11,268 $12,115 $10,827
9/30/2000 $11,218 $12,052 $10,883
10/31/2000 $11,329 $12,183 $10,902
11/30/2000 $11,421 $12,275 $10,909
12/31/2000 $11,705 $12,579 $10,902
1/31/2001 $11,776 $12,703 $10,971
2/28/2001 $11,838 $12,744 $11,015
3/31/2001 $11,941 $12,858 $11,040
4/30/2001 $11,828 $12,719 $11,084
5/31/2001 $11,942 $12,855 $11,134
6/30/2001 $12,025 $12,941 $11,153
7/31/2001 $12,224 $13,133 $11,122
8/31/2001 $12,423 $13,350 $11,122
9/30/2001 $12,392 $13,305 $11,172
10/31/2001 $12,550 $13,463 $11,134
11/30/2001 $12,443 $13,350 $11,115
12/31/2001 $12,325 $13,223 $11,071
1/31/2002 $12,516 $13,453 $11,096
2/28/2002 $12,645 $13,615 $11,140
3/31/2002 $12,427 $13,348 $11,203
4/30/2002 $12,620 $13,609 $11,266
5/31/2002 $12,695 $13,692 $11,266
6/30/2002 $12,814 $13,836 $11,272
7/31/2002 $12,965 $14,014 $11,284
8/31/2002 $13,129 $14,183 $11,322
9/30/2002 $13,448 $14,494 $11,341
10/31/2002 $13,180 $14,253 $11,360
11/30/2002 $13,121 $14,194 $11,360
12/31/2002 $13,399 $14,494 $11,335
1/31/2003 $13,396 $14,457 $11,385
2/28/2003 $13,573 $14,659 $11,472
3/31/2003 $13,603 $14,668 $11,541
4/30/2003 $13,713 $14,765 $11,516
5/31/2003 $14,040 $15,110 $11,497
6/30/2003 $14,001 $15,046 $11,510
7/31/2003 $13,478 $14,520 $11,523
8/31/2003 $13,566 $14,628 $11,566
9/30/2003 $13,922 $15,058 $11,604
10/31/2003 $13,848 $14,982 $11,591
11/30/2003 $14,019 $15,138 $11,560
12/31/2003 $14,132 $15,264 $11,548
1/31/2004 $14,245 $15,351 $11,604
2/29/2004 $14,454 $15,582 $11,667
3/31/2004 $14,413 $15,528 $11,742
4/30/2004 $14,062 $15,160 $11,779
5/31/2004 $13,998 $15,105 $11,848
6/30/2004 $14,030 $15,160 $11,886
7/31/2004 $14,230 $15,360 $11,867
8/31/2004 $14,492 $15,667 $11,873
9/30/2004 $14,596 $15,751 $11,898
10/31/2004 $14,726 $15,886 $11,961
11/30/2004 $14,622 $15,755 $11,967
12/31/2004 $14,802 $15,947 $11,924
1/31/2005 $14,970 $16,096 $11,949
2/28/2005 $14,928 $16,043 $12,018
3/31/2005 $14,873 $15,942 $12,112
4/30/2005 $15,080 $16,193 $12,193
5/31/2005 $15,201 $16,308 $12,180
6/30/2005 $15,271 $16,409 $12,187
7/31/2005 $15,203 $16,335 $12,243
8/31/2005 $15,350 $16,500 $12,306
9/30/2005 $15,255 $16,388 $12,456
10/31/2005 $15,198 $16,289 $12,481
11/30/2005 $15,256 $16,367 $12,381
12/31/2005 $15,379 $16,508 $12,331
1/31/2006 $15,411 $16,552 $12,425
2/28/2006 $15,535 $16,664 $12,450
3/31/2006 $15,437 $16,549 $12,519
4/30/2006 $15,456 $16,543 $12,625
5/31/2006 $15,502 $16,617 $12,688
6/30/2006 $15,469 $16,554 $12,713
7/31/2006 $15,620 $16,751 $12,751
8/31/2006 $15,812 $17,000 $12,776
9/30/2006 $15,925 $17,118 $12,713
10/31/2006 $16,012 $17,225 $12,644
11/30/2006 $16,152 $17,369 $12,625
12/31/2006 $16,105 $17,307 $12,644
1/31/2007 $16,070 $17,263 $12,683
2/28/2007 $16,244 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS B 2/28/07
- ---------------------------------------
1-Year +0.12%
- ---------------------------------------
5-Year +4.25%
- ---------------------------------------
Since Inception (2/1/00) +5.89%
- ---------------------------------------
CLASS B (2/1/00-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Florida Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ----------- ---------------------- ---------------------- ---------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,102 $10,116 $10,059
3/31/2000 $10,329 $10,337 $10,142
4/30/2000 $10,269 $10,276 $10,148
5/31/2000 $10,199 $10,223 $10,160
6/30/2000 $10,457 $10,494 $10,213
7/31/2000 $10,603 $10,640 $10,237
8/31/2000 $10,741 $10,804 $10,237
9/30/2000 $10,688 $10,747 $10,290
10/31/2000 $10,793 $10,865 $10,308
11/30/2000 $10,884 $10,947 $10,314
12/31/2000 $11,139 $11,217 $10,308
1/31/2001 $11,212 $11,328 $10,373
2/28/2001 $11,265 $11,364 $10,415
3/31/2001 $11,357 $11,466 $10,438
4/30/2001 $11,254 $11,342 $10,480
5/31/2001 $11,347 $11,464 $10,527
6/30/2001 $11,420 $11,541 $10,545
7/31/2001 $11,613 $11,712 $10,515
8/31/2001 $11,797 $11,905 $10,515
9/30/2001 $11,762 $11,865 $10,563
10/31/2001 $11,896 $12,006 $10,527
11/30/2001 $11,810 $11,905 $10,509
12/31/2001 $11,693 $11,792 $10,468
1/31/2002 $11,868 $11,997 $10,492
2/28/2002 $11,983 $12,141 $10,533
3/31/2002 $11,761 $11,903 $10,592
4/30/2002 $11,938 $12,136 $10,652
5/31/2002 $12,013 $12,210 $10,652
6/30/2002 $12,119 $12,339 $10,658
7/31/2002 $12,256 $12,498 $10,669
8/31/2002 $12,405 $12,648 $10,705
9/30/2002 $12,710 $12,925 $10,723
10/31/2002 $12,441 $12,711 $10,741
11/30/2002 $12,381 $12,658 $10,741
12/31/2002 $12,647 $12,925 $10,717
1/31/2003 $12,627 $12,892 $10,764
2/28/2003 $12,798 $13,072 $10,847
3/31/2003 $12,820 $13,080 $10,912
4/30/2003 $12,918 $13,167 $10,889
5/31/2003 $13,218 $13,475 $10,871
6/30/2003 $13,176 $13,418 $10,883
7/31/2003 $12,669 $12,948 $10,895
8/31/2003 $12,756 $13,045 $10,936
9/30/2003 $13,083 $13,428 $10,972
10/31/2003 $13,007 $13,361 $10,960
11/30/2003 $13,161 $13,500 $10,930
12/31/2003 $13,261 $13,612 $10,918
1/31/2004 $13,361 $13,690 $10,972
2/29/2004 $13,561 $13,896 $11,031
3/31/2004 $13,517 $13,847 $11,102
4/30/2004 $13,173 $13,519 $11,137
5/31/2004 $13,107 $13,470 $11,203
6/30/2004 $13,129 $13,519 $11,238
7/31/2004 $13,308 $13,697 $11,220
8/31/2004 $13,556 $13,972 $11,226
9/30/2004 $13,646 $14,046 $11,250
10/31/2004 $13,760 $14,167 $11,309
11/30/2004 $13,647 $14,050 $11,315
12/31/2004 $13,830 $14,221 $11,274
1/31/2005 $13,968 $14,354 $11,297
2/28/2005 $13,922 $14,307 $11,363
3/31/2005 $13,865 $14,216 $11,451
4/30/2005 $14,062 $14,441 $11,528
5/31/2005 $14,155 $14,543 $11,517
6/30/2005 $14,226 $14,633 $11,523
7/31/2005 $14,145 $14,567 $11,576
8/31/2005 $14,274 $14,714 $11,635
9/30/2005 $14,181 $14,615 $11,777
10/31/2005 $14,121 $14,526 $11,801
11/30/2005 $14,169 $14,596 $11,706
12/31/2005 $14,287 $14,721 $11,659
1/31/2006 $14,299 $14,761 $11,748
2/28/2006 $14,406 $14,860 $11,771
3/31/2006 $14,309 $14,758 $11,836
4/30/2006 $14,321 $14,752 $11,937
5/31/2006 $14,356 $14,818 $11,996
6/30/2006 $14,319 $14,762 $12,020
7/31/2006 $14,452 $14,938 $12,056
8/31/2006 $14,634 $15,160 $12,079
9/30/2006 $14,731 $15,265 $12,020
10/31/2006 $14,804 $15,361 $11,955
11/30/2006 $14,914 $15,489 $11,937
12/31/2006 $14,875 $15,434 $11,955
1/31/2007 $14,837 $15,395 $11,991
2/28/2007 $14,990 $15,597 $12,056
24 | Annual Report
Performance Summary (CONTINUED)
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Florida Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ----------- ---------------------- ---------------------- ---------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,884 $9,867 $10,025
4/30/1997 $9,972 $9,949 $10,038
5/31/1997 $10,078 $10,099 $10,031
6/30/1997 $10,175 $10,207 $10,044
7/31/1997 $10,420 $10,489 $10,056
8/31/1997 $10,333 $10,391 $10,075
9/30/1997 $10,411 $10,514 $10,100
10/31/1997 $10,472 $10,582 $10,125
11/30/1997 $10,533 $10,644 $10,119
12/31/1997 $10,673 $10,799 $10,107
1/31/1998 $10,778 $10,911 $10,125
2/28/1998 $10,784 $10,914 $10,144
3/31/1998 $10,799 $10,924 $10,163
4/30/1998 $10,777 $10,875 $10,182
5/31/1998 $10,902 $11,047 $10,201
6/30/1998 $10,944 $11,090 $10,213
7/31/1998 $10,968 $11,118 $10,226
8/31/1998 $11,112 $11,290 $10,238
9/30/1998 $11,201 $11,430 $10,251
10/31/1998 $11,207 $11,430 $10,276
11/30/1998 $11,260 $11,470 $10,276
12/31/1998 $11,282 $11,499 $10,269
1/31/1999 $11,371 $11,636 $10,294
2/28/1999 $11,348 $11,585 $10,307
3/31/1999 $11,352 $11,601 $10,338
4/30/1999 $11,375 $11,630 $10,414
5/31/1999 $11,312 $11,563 $10,414
6/30/1999 $11,165 $11,396 $10,414
7/31/1999 $11,169 $11,438 $10,445
8/31/1999 $11,058 $11,346 $10,470
9/30/1999 $11,014 $11,351 $10,520
10/31/1999 $10,854 $11,228 $10,539
11/30/1999 $10,946 $11,347 $10,545
12/31/1999 $10,853 $11,263 $10,545
1/31/2000 $10,769 $11,214 $10,576
2/29/2000 $10,872 $11,344 $10,639
3/31/2000 $11,116 $11,592 $10,727
4/30/2000 $11,041 $11,523 $10,733
5/31/2000 $10,967 $11,463 $10,746
6/30/2000 $11,243 $11,767 $10,802
7/31/2000 $11,400 $11,931 $10,827
8/31/2000 $11,547 $12,115 $10,827
9/30/2000 $11,491 $12,052 $10,883
10/31/2000 $11,598 $12,183 $10,902
11/30/2000 $11,696 $12,275 $10,909
12/31/2000 $11,969 $12,579 $10,902
1/31/2001 $12,046 $12,703 $10,971
2/28/2001 $12,103 $12,744 $11,015
3/31/2001 $12,202 $12,858 $11,040
4/30/2001 $12,082 $12,719 $11,084
5/31/2001 $12,181 $12,855 $11,134
6/30/2001 $12,270 $12,941 $11,153
7/31/2001 $12,465 $13,133 $11,122
8/31/2001 $12,661 $13,350 $11,122
9/30/2001 $12,623 $13,305 $11,172
10/31/2001 $12,777 $13,463 $11,134
11/30/2001 $12,675 $13,350 $11,115
12/31/2001 $12,539 $13,223 $11,071
1/31/2002 $12,737 $13,453 $11,096
2/28/2002 $12,860 $13,615 $11,140
3/31/2002 $12,624 $13,348 $11,203
4/30/2002 $12,813 $13,609 $11,266
5/31/2002 $12,882 $13,692 $11,266
6/30/2002 $12,995 $13,836 $11,272
7/31/2002 $13,152 $14,014 $11,284
8/31/2002 $13,311 $14,183 $11,322
9/30/2002 $13,636 $14,494 $11,341
10/31/2002 $13,350 $14,253 $11,360
11/30/2002 $13,285 $14,194 $11,360
12/31/2002 $13,569 $14,494 $11,335
1/31/2003 $13,548 $14,457 $11,385
2/28/2003 $13,719 $14,659 $11,472
3/31/2003 $13,744 $14,668 $11,541
4/30/2003 $13,860 $14,765 $11,516
5/31/2003 $14,170 $15,110 $11,497
6/30/2003 $14,135 $15,046 $11,510
7/31/2003 $13,593 $14,520 $11,523
8/31/2003 $13,674 $14,628 $11,566
9/30/2003 $14,033 $15,058 $11,604
10/31/2003 $13,952 $14,982 $11,591
11/30/2003 $14,115 $15,138 $11,560
12/31/2003 $14,222 $15,264 $11,548
1/31/2004 $14,329 $15,351 $11,604
2/29/2004 $14,532 $15,582 $11,667
3/31/2004 $14,485 $15,528 $11,742
4/30/2004 $14,131 $15,160 $11,779
5/31/2004 $14,062 $15,105 $11,848
6/30/2004 $14,085 $15,160 $11,886
7/31/2004 $14,276 $15,360 $11,867
8/31/2004 $14,528 $15,667 $11,873
9/30/2004 $14,624 $15,751 $11,898
10/31/2004 $14,757 $15,886 $11,961
11/30/2004 $14,636 $15,755 $11,967
12/31/2004 $14,819 $15,947 $11,924
1/31/2005 $14,978 $16,096 $11,949
2/28/2005 $14,929 $16,043 $12,018
3/31/2005 $14,868 $15,942 $12,112
4/30/2005 $15,078 $16,193 $12,193
5/31/2005 $15,190 $16,308 $12,180
6/30/2005 $15,253 $16,409 $12,187
7/31/2005 $15,179 $16,335 $12,243
8/31/2005 $15,318 $16,500 $12,306
9/30/2005 $15,217 $16,388 $12,456
10/31/2005 $15,141 $16,289 $12,481
11/30/2005 $15,204 $16,367 $12,381
12/31/2005 $15,318 $16,508 $12,331
1/31/2006 $15,343 $16,552 $12,425
2/28/2006 $15,445 $16,664 $12,450
3/31/2006 $15,341 $16,549 $12,519
4/30/2006 $15,366 $16,543 $12,625
5/31/2006 $15,404 $16,617 $12,688
6/30/2006 $15,352 $16,554 $12,713
7/31/2006 $15,506 $16,751 $12,751
8/31/2006 $15,687 $17,000 $12,776
9/30/2006 $15,791 $17,118 $12,713
10/31/2006 $15,869 $17,225 $12,644
11/30/2006 $15,999 $17,369 $12,625
12/31/2006 $15,958 $17,307 $12,644
1/31/2007 $15,904 $17,263 $12,683
2/28/2007 $16,076 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS C 2/28/07
- -------------------------------------------------
1-Year +3.18%
- -------------------------------------------------
5-Year +4.57%
- -------------------------------------------------
10-Year +4.86%
- -------------------------------------------------
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the 2007 maximum
federal income tax rate 35.00%.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the month ended 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
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 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.60 $3.12
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.72 $3.11
- ---------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.70 $5.87
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.30 $5.77
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.09 $5.76
- ---------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.62%; B: 1.17%; and C: 1.15%), 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 as high a level of income exempt from federal and Georgia
personal income taxes as is 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 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 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ...................... 65.5%
AA ....................... 9.7%
A ........................ 2.8%
BBB ...................... 3.0%
Below Investment Grade ... 1.7%
Not Rated by S&P ......... 17.3%
* 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 15.1%
AA or Aa 1.4%
BBB or Baa 0.8%
- ------------------------------------
Total 17.3%
We are pleased to bring you Franklin Georgia Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
- --------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$12.13 on February 28, 2006, to $12.20 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 110.
28 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Georgia Tax-Free Income Fund
- ------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------------------
MONTH CLASS A CLASS C
- ------------------------------------------------------------------------------
March 2006 4.15 cents 3.58 cents
- ------------------------------------------------------------------------------
April 2006 4.15 cents 3.58 cents
- ------------------------------------------------------------------------------
May 2006 4.15 cents 3.58 cents
- ------------------------------------------------------------------------------
June 2006 4.10 cents 3.55 cents
- ------------------------------------------------------------------------------
July 2006 4.10 cents 3.55 cents
- ------------------------------------------------------------------------------
August 2006 4.10 cents 3.55 cents
- ------------------------------------------------------------------------------
September 2006 4.10 cents 3.55 cents
- ------------------------------------------------------------------------------
October 2006 4.10 cents 3.55 cents
- ------------------------------------------------------------------------------
November 2006 4.10 cents 3.55 cents
- ------------------------------------------------------------------------------
December 2006 4.10 cents 3.53 cents
- ------------------------------------------------------------------------------
January 2007 4.10 cents 3.53 cents
- ------------------------------------------------------------------------------
February 2007 4.10 cents 3.53 cents
- ------------------------------------------------------------------------------
Class A shares paid dividends totaling 49.49 cents per share for the reporting
period. 2 The Performance Summary beginning on page 32 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.86%
based on an annualization of the current 4.10 cent per share dividend and the
maximum offering price of $12.74 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Georgia personal income tax bracket of
38.90% would need to earn a distribution rate of 6.32% 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.
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.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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
STATE UPDATE
Georgia's ongoing and broad-based economic recovery translated into job growth
within nearly every sector except information technology and manufacturing,
which contracted. Industries leading the state's recovery included leisure;
construction; and data, professional and business services, all of which posted
double-digit growth over the past three fiscal years. Expected job losses from
the bankruptcy of Delta Air Lines, Georgia's second-largest employer, and from
General Motors' and Ford Motor's manufacturing plant closings, could be offset
by potential job gains from Kia Motors' plant opening and its suppliers.
Furthermore, many companies -- including Aflac, Gulfstream and Hewlett Packard
- -- have recently located or expanded into Georgia, as part of a record $5.76
billion worth of new investment the state received during calendar year 2006. 3
Efforts to stimulate geographical diversification outside of the Atlanta
metropolitan area continued, and along with a diversified economy, limited the
impact a few large employers have on the state. As of February 2007, Georgia's
unemployment rate was 4.3%, which was lower than the 4.5% national rate. 4
With its strong economy, Georgia stabilized financial operations with
significant tax revenue growth and tight spending controls. Individual income
and general sales tax collections in fiscal year 2006 exceeded fiscal year 2005
levels. In particular, corporate income tax receipts recorded a dramatic rise.
With all revenue streams combined, the state produced an estimated fiscal year
2006 operating surplus of almost $640 million. 5 The state's top priority for
this windfall was replenishment of fund reserves that were nearly depleted just
a few years ago. In particular, $483 million of the surplus was used to boost
the revenue shortfall reserve balance to $740 million, its highest level since
2001, though still below its pre-recession high. 5 Education, Medicaid and
corrections spending increased, but based on the state's history of strong
financial management, Georgia had a solid financial outlook.
Bound by the state constitution, Georgia's formal debt-management policy
controlled debt issuance volume and maintained a moderate debt burden. The state
carries $784 of net tax-supported debt per capita, compared with the national
median of $754, and its debt amounts to 2.7% of personal income compared with
the national median of 2.5%. 5 Given the state's solid job growth, healthy
revenue, reestablishment of budget reserves and strong financial monitoring and
3. Source: "Georgia State of the State Address 2007," STATELINE.ORG, 1/10/07.
4. Source: Bureau of Labor Statistics.
5. Source: Moody's Investors Service, "New Issue: Georgia (State of),"
12/13/06.
30 | Annual Report
oversight, independent credit rating agency Standard & Poor's assigned Georgia's
general obligation bonds its highest rating of AAA with a stable outlook. 6
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.
PORTFOLIO BREAKDOWN
Franklin Georgia Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 24.7%
- --------------------------------------------------------------------------------
Utilities 24.6%
- --------------------------------------------------------------------------------
Higher Education 18.9%
- --------------------------------------------------------------------------------
Hospital & Health Care 13.5%
- --------------------------------------------------------------------------------
General Obligation 5.2%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 4.3%
- --------------------------------------------------------------------------------
Housing 2.5%
- --------------------------------------------------------------------------------
Other Revenue 2.3%
- --------------------------------------------------------------------------------
Transportation 2.0%
- --------------------------------------------------------------------------------
Tax-Supported 1.4%
- --------------------------------------------------------------------------------
Corporate-Backed 0.6%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
6. 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 31
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- -------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FTGAX) CHANGE 2/28/07 2/28/06
- -------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.20 $12.13
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -------------------------------------------------------------------------------------------
Dividend Income $0.4949
- -------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FGAIX) CHANGE 2/28/07 2/28/06
- -------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.31 $12.24
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -------------------------------------------------------------------------------------------
Dividend Income $0.4275
- -------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.79% +28.03% +66.07%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.32% +4.15% +4.74%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.59% +4.41% +4.79%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.86%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.32%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.26%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.34%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.74%
- ---------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.16% +24.62% +57.25%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.16% +4.50% +4.63%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.58% +4.78% +4.68%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.46%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.66%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.87%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.70%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.29%
- ---------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
32 | 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.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
CLASS A 2/28/07
- -----------------------------------------------
1-Year +0.32%
- -----------------------------------------------
5-Year +4.15%
- -----------------------------------------------
10-Year +4.74%
- -----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Georgia Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ----------- ---------------------- ----------------------- --------
3/1/1997 $9,572 $10,000 $10,000
3/31/1997 $9,486 $9,867 $10,025
4/30/1997 $9,561 $9,949 $10,038
5/31/1997 $9,661 $10,099 $10,031
6/30/1997 $9,745 $10,207 $10,044
7/31/1997 $9,953 $10,489 $10,056
8/31/1997 $9,890 $10,391 $10,075
9/30/1997 $9,992 $10,514 $10,100
10/31/1997 $10,045 $10,582 $10,125
11/30/1997 $10,114 $10,644 $10,119
12/31/1997 $10,234 $10,799 $10,107
1/31/1998 $10,312 $10,911 $10,125
2/28/1998 $10,315 $10,914 $10,144
3/31/1998 $10,333 $10,924 $10,163
4/30/1998 $10,327 $10,875 $10,182
5/31/1998 $10,457 $11,047 $10,201
6/30/1998 $10,489 $11,090 $10,213
7/31/1998 $10,508 $11,118 $10,226
8/31/1998 $10,632 $11,290 $10,238
9/30/1998 $10,755 $11,430 $10,251
10/31/1998 $10,730 $11,430 $10,276
11/30/1998 $10,775 $11,470 $10,276
12/31/1998 $10,811 $11,499 $10,269
1/31/1999 $10,891 $11,636 $10,294
2/28/1999 $10,855 $11,585 $10,307
3/31/1999 $10,873 $11,601 $10,338
4/30/1999 $10,908 $11,630 $10,414
5/31/1999 $10,854 $11,563 $10,414
6/30/1999 $10,709 $11,396 $10,414
7/31/1999 $10,717 $11,438 $10,445
8/31/1999 $10,588 $11,346 $10,470
9/30/1999 $10,560 $11,351 $10,520
10/31/1999 $10,411 $11,228 $10,539
11/30/1999 $10,485 $11,347 $10,545
12/31/1999 $10,391 $11,263 $10,545
1/31/2000 $10,296 $11,214 $10,576
2/29/2000 $10,447 $11,344 $10,639
3/31/2000 $10,693 $11,592 $10,727
4/30/2000 $10,645 $11,523 $10,733
5/31/2000 $10,578 $11,463 $10,746
6/30/2000 $10,856 $11,767 $10,802
7/31/2000 $10,981 $11,931 $10,827
8/31/2000 $11,155 $12,115 $10,827
9/30/2000 $11,076 $12,052 $10,883
10/31/2000 $11,211 $12,183 $10,902
11/30/2000 $11,309 $12,275 $10,909
12/31/2000 $11,583 $12,579 $10,902
1/31/2001 $11,651 $12,703 $10,971
2/28/2001 $11,700 $12,744 $11,015
3/31/2001 $11,808 $12,858 $11,040
4/30/2001 $11,686 $12,719 $11,084
5/31/2001 $11,785 $12,855 $11,134
6/30/2001 $11,884 $12,941 $11,153
7/31/2001 $12,055 $13,133 $11,122
8/31/2001 $12,246 $13,350 $11,122
9/30/2001 $12,162 $13,305 $11,172
10/31/2001 $12,335 $13,463 $11,134
11/30/2001 $12,239 $13,350 $11,115
12/31/2001 $12,123 $13,223 $11,071
1/31/2002 $12,275 $13,453 $11,096
2/28/2002 $12,418 $13,615 $11,140
3/31/2002 $12,205 $13,348 $11,203
4/30/2002 $12,360 $13,609 $11,266
5/31/2002 $12,421 $13,692 $11,266
6/30/2002 $12,523 $13,836 $11,272
7/31/2002 $12,669 $14,014 $11,284
8/31/2002 $12,784 $14,183 $11,322
9/30/2002 $13,059 $14,494 $11,341
10/31/2002 $12,787 $14,253 $11,360
11/30/2002 $12,762 $14,194 $11,360
12/31/2002 $13,019 $14,494 $11,335
1/31/2003 $12,994 $14,457 $11,385
2/28/2003 $13,166 $14,659 $11,472
3/31/2003 $13,174 $14,668 $11,541
4/30/2003 $13,313 $14,765 $11,516
5/31/2003 $13,631 $15,110 $11,497
6/30/2003 $13,658 $15,046 $11,510
7/31/2003 $13,094 $14,520 $11,523
8/31/2003 $13,211 $14,628 $11,566
9/30/2003 $13,599 $15,058 $11,604
10/31/2003 $13,492 $14,982 $11,591
11/30/2003 $13,645 $15,138 $11,560
12/31/2003 $13,775 $15,264 $11,548
1/31/2004 $13,881 $15,351 $11,604
2/29/2004 $14,092 $15,582 $11,667
3/31/2004 $14,050 $15,528 $11,742
4/30/2004 $13,697 $15,160 $11,779
5/31/2004 $13,644 $15,105 $11,848
6/30/2004 $13,695 $15,160 $11,886
7/31/2004 $13,874 $15,360 $11,867
8/31/2004 $14,136 $15,667 $11,873
9/30/2004 $14,235 $15,751 $11,898
10/31/2004 $14,381 $15,886 $11,961
11/30/2004 $14,231 $15,755 $11,967
12/31/2004 $14,450 $15,947 $11,924
1/31/2005 $14,657 $16,096 $11,949
2/28/2005 $14,602 $16,043 $12,018
3/31/2005 $14,522 $15,942 $12,112
4/30/2005 $14,755 $16,193 $12,193
5/31/2005 $14,868 $16,308 $12,180
6/30/2005 $14,921 $16,409 $12,187
7/31/2005 $14,864 $16,335 $12,243
8/31/2005 $15,027 $16,500 $12,306
9/30/2005 $14,907 $16,388 $12,456
10/31/2005 $14,812 $16,289 $12,481
11/30/2005 $14,875 $16,367 $12,381
12/31/2005 $15,026 $16,508 $12,331
1/31/2006 $15,052 $16,552 $12,425
2/28/2006 $15,179 $16,664 $12,450
3/31/2006 $15,068 $16,549 $12,519
4/30/2006 $15,070 $16,543 $12,625
5/31/2006 $15,109 $16,617 $12,688
6/30/2006 $15,047 $16,554 $12,713
7/31/2006 $15,188 $16,751 $12,751
8/31/2006 $15,419 $17,000 $12,776
9/30/2006 $15,535 $17,118 $12,713
10/31/2006 $15,627 $17,225 $12,644
11/30/2006 $15,795 $17,369 $12,625
12/31/2006 $15,732 $17,307 $12,644
1/31/2007 $15,694 $17,263 $12,683
2/28/2007 $15,897 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/07
- -----------------------------------------------
1-Year +3.16%
- -----------------------------------------------
5-Year +4.50%
- -----------------------------------------------
10-Year +4.63%
- -----------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Georgia Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ----------- ---------------------- ----------------------- --------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,906 $9,867 $10,025
4/30/1997 $9,971 $9,949 $10,038
5/31/1997 $10,079 $10,099 $10,031
6/30/1997 $10,161 $10,207 $10,044
7/31/1997 $10,372 $10,489 $10,056
8/31/1997 $10,302 $10,391 $10,075
9/30/1997 $10,403 $10,514 $10,100
10/31/1997 $10,452 $10,582 $10,125
11/30/1997 $10,519 $10,644 $10,119
12/31/1997 $10,647 $10,799 $10,107
1/31/1998 $10,714 $10,911 $10,125
2/28/1998 $10,721 $10,914 $10,144
3/31/1998 $10,726 $10,924 $10,163
4/30/1998 $10,714 $10,875 $10,182
5/31/1998 $10,844 $11,047 $10,201
6/30/1998 $10,880 $11,090 $10,213
7/31/1998 $10,895 $11,118 $10,226
8/31/1998 $11,018 $11,290 $10,238
9/30/1998 $11,140 $11,430 $10,251
10/31/1998 $11,108 $11,430 $10,276
11/30/1998 $11,150 $11,470 $10,276
12/31/1998 $11,182 $11,499 $10,269
1/31/1999 $11,268 $11,636 $10,294
2/28/1999 $11,226 $11,585 $10,307
3/31/1999 $11,239 $11,601 $10,338
4/30/1999 $11,262 $11,630 $10,414
5/31/1999 $11,200 $11,563 $10,414
6/30/1999 $11,047 $11,396 $10,414
7/31/1999 $11,051 $11,438 $10,445
8/31/1999 $10,913 $11,346 $10,470
9/30/1999 $10,878 $11,351 $10,520
10/31/1999 $10,720 $11,228 $10,539
11/30/1999 $10,799 $11,347 $10,545
12/31/1999 $10,688 $11,263 $10,545
1/31/2000 $10,587 $11,214 $10,576
2/29/2000 $10,736 $11,344 $10,639
3/31/2000 $10,983 $11,592 $10,727
4/30/2000 $10,929 $11,523 $10,733
5/31/2000 $10,856 $11,463 $10,746
6/30/2000 $11,134 $11,767 $10,802
7/31/2000 $11,267 $11,931 $10,827
8/31/2000 $11,429 $12,115 $10,827
9/30/2000 $11,344 $12,052 $10,883
10/31/2000 $11,477 $12,183 $10,902
11/30/2000 $11,571 $12,275 $10,909
12/31/2000 $11,855 $12,579 $10,902
1/31/2001 $11,918 $12,703 $10,971
2/28/2001 $11,962 $12,744 $11,015
3/31/2001 $12,065 $12,858 $11,040
4/30/2001 $11,926 $12,719 $11,084
5/31/2001 $12,030 $12,855 $11,134
6/30/2001 $12,125 $12,941 $11,153
7/31/2001 $12,293 $13,133 $11,122
8/31/2001 $12,482 $13,350 $11,122
9/30/2001 $12,391 $13,305 $11,172
10/31/2001 $12,560 $13,463 $11,134
11/30/2001 $12,458 $13,350 $11,115
12/31/2001 $12,334 $13,223 $11,071
1/31/2002 $12,482 $13,453 $11,096
2/28/2002 $12,621 $13,615 $11,140
3/31/2002 $12,400 $13,348 $11,203
4/30/2002 $12,561 $13,609 $11,266
5/31/2002 $12,606 $13,692 $11,266
6/30/2002 $12,714 $13,836 $11,272
7/31/2002 $12,856 $14,014 $11,284
8/31/2002 $12,965 $14,183 $11,322
9/30/2002 $13,248 $14,494 $11,341
10/31/2002 $12,957 $14,253 $11,360
11/30/2002 $12,915 $14,194 $11,360
12/31/2002 $13,179 $14,494 $11,335
1/31/2003 $13,148 $14,457 $11,385
2/28/2003 $13,315 $14,659 $11,472
3/31/2003 $13,316 $14,668 $11,541
4/30/2003 $13,451 $14,765 $11,516
5/31/2003 $13,774 $15,110 $11,497
6/30/2003 $13,784 $15,046 $11,510
7/31/2003 $13,212 $14,520 $11,523
8/31/2003 $13,322 $14,628 $11,566
9/30/2003 $13,715 $15,058 $11,604
10/31/2003 $13,590 $14,982 $11,591
11/30/2003 $13,747 $15,138 $11,560
12/31/2003 $13,871 $15,264 $11,548
1/31/2004 $13,960 $15,351 $11,604
2/29/2004 $14,175 $15,582 $11,667
3/31/2004 $14,127 $15,528 $11,742
4/30/2004 $13,769 $15,160 $11,779
5/31/2004 $13,710 $15,105 $11,848
6/30/2004 $13,743 $15,160 $11,886
7/31/2004 $13,927 $15,360 $11,867
8/31/2004 $14,181 $15,667 $11,873
9/30/2004 $14,273 $15,751 $11,898
10/31/2004 $14,412 $15,886 $11,961
11/30/2004 $14,257 $15,755 $11,967
12/31/2004 $14,467 $15,947 $11,924
1/31/2005 $14,678 $16,096 $11,949
2/28/2005 $14,604 $16,043 $12,018
3/31/2005 $14,519 $15,942 $12,112
4/30/2005 $14,755 $16,193 $12,193
5/31/2005 $14,860 $16,308 $12,180
6/30/2005 $14,906 $16,409 $12,187
7/31/2005 $14,843 $16,335 $12,243
8/31/2005 $14,997 $16,500 $12,306
9/30/2005 $14,872 $16,388 $12,456
10/31/2005 $14,758 $16,289 $12,481
11/30/2005 $14,827 $16,367 $12,381
12/31/2005 $14,968 $16,508 $12,331
1/31/2006 $14,975 $16,552 $12,425
2/28/2006 $15,105 $16,664 $12,450
3/31/2006 $14,976 $16,549 $12,519
4/30/2006 $14,971 $16,543 $12,625
5/31/2006 $15,015 $16,617 $12,688
6/30/2006 $14,935 $16,554 $12,713
7/31/2006 $15,079 $16,751 $12,751
8/31/2006 $15,299 $17,000 $12,776
9/30/2006 $15,407 $17,118 $12,713
10/31/2006 $15,490 $17,225 $12,644
11/30/2006 $15,661 $17,369 $12,625
12/31/2006 $15,591 $17,307 $12,644
1/31/2007 $15,547 $17,263 $12,683
2/28/2007 $15,725 $17,490 $12,751
Annual Report | 33
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Georgia
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
34 | Annual Report
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 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 | 35
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.10 $3.68
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.17 $3.66
- ------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.00 $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:
0.73% and C: 1.27%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
36 | Annual Report
Franklin Kentucky Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Kentucky Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and Kentucky
personal income taxes as is 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 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 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ................................. 50.4%
AA .................................. 8.3%
A ................................... 5.2%
BBB ................................. 8.2%
Below Investment Grade .............. 1.4%
Not Rated by S&P .................... 26.5%
* 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 18.3% --
AA or Aa 4.4% --
A -- 1.1%
BBB or Baa 2.7% --
- -------------------------------------------------------
Total 25.4% 1.1%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Kentucky Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.39 on February 28, 2006, to $11.44 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 115.
Annual Report | 37
DIVIDEND DISTRIBUTIONS 2
Franklin Kentucky Tax-Free Income Fund
Class A
- --------------------------------------------------------------------------------
MONTH DIVIDEND PER SHARE
- --------------------------------------------------------------------------------
March 2006 3.85 cents
- --------------------------------------------------------------------------------
April 2006 3.85 cents
- --------------------------------------------------------------------------------
May 2006 3.85 cents
- --------------------------------------------------------------------------------
June 2006 3.80 cents
- --------------------------------------------------------------------------------
July 2006 3.80 cents
- --------------------------------------------------------------------------------
August 2006 3.80 cents
- --------------------------------------------------------------------------------
September 2006 3.80 cents
- --------------------------------------------------------------------------------
October 2006 3.80 cents
- --------------------------------------------------------------------------------
November 2006 3.80 cents
- --------------------------------------------------------------------------------
December 2006 3.75 cents
- --------------------------------------------------------------------------------
January 2007 3.75 cents
- --------------------------------------------------------------------------------
February 2007 3.75 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 45.72 cents per share for the reporting
period. 2 The Performance Summary beginning on page 41 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.77%. An
investor in the 2007 maximum combined effective federal and Kentucky personal
income tax bracket of 38.90% would need to earn a distribution rate of 6.17%
from a taxable investment to match the Fund's Class A tax-free distribution
rate.
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.
COMMONWEALTH UPDATE
Kentucky's relatively diverse economy strengthened, reflecting increasing
non-farm payroll employment growth following years of declines. Many lower-paid
coal mining, tobacco and apparel jobs were replaced by jobs in higher wage
sectors including auto manufacturing, transportation equipment, air transport,
and health and business services. While the health care and distribution sectors
were solid, the manufacturing sector remained weak but highly diversified. The
commonwealth's economy is vulnerable to a weakening domestic auto manufacturing
sector, as Ford is one of Kentucky's top employers. Toyota is also a major
employer, which offers some cushion against the impact of Ford's recent
difficulties. UPS (United Parcel Service of America), the commonwealth's leading
employer, recently announced a $1 billion expansion plan. Growth in agriscience
research took off, and the commonwealth is now home to many major agriscience
companies. Despite these improving trends, Kentucky was forecast to lag the
nation in employment and income growth in the near term. Unemployment was also
expected to increase. In February 2007, Kentucky's unemployment rate was 5.7%,
which was higher than the 4.5% national rate. 3
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
38 | Annual Report
Kentucky's finances have improved and included strengthening revenues that have
outperformed estimates, a trend that appears to be continuing. In January 2007,
consensus revenue estimates were revised upward, boosting general fund revenues
for fiscal years 2007 and 2008 by nearly $232 million and $169 million,
respectively. 4 Most of the increase was related to better-than-expected
corporate income tax collections. After draw-downs in recent years, the
commonwealth's Budget Reserve Trust Fund (BRTF) balance improved to $231 million
(about 3% of revenues), up from $0 in fiscal year 2003 and marked the BRTF's
largest balance ever. 4 Despite improved financial performance, Kentucky's
budget continues to show a structural budget imbalance, with recurring
expenditures estimated to exceed recurring revenues by about $453 million, or 5%
of revenues, in fiscal year 2008. 4 The budget relies on the availability of a
large fiscal 2007 ending balance to cover the gap. Expenditures related to
Medicaid, employee health care and pension costs are three of the commonwealth's
top outlay concerns, just as they have been in past years. The 2006-2008
biennial budget also continues the implementation of a recently-enacted tax
modernization plan, which lowers various tax rates, including many corporate
taxes, to stimulate further economic growth. The plan aims to improve the
Bluegrass State's employment base and revenue stream.
Kentucky's debt burden is above the national average. Its debt as a percentage
of personal income was 4.5%, well in excess of the 2006 debt median of 2.5% for
all states. 4 Commonwealth debt per capita was $1,225 compared to the 2006
50-state debt median of $754. 4 Commonwealth debt levels will remain high, as $2
billion of new debt was authorized in the current biennium for various projects,
and more is being contemplated in the current legislative session.
Kentucky's long-term credit outlook is stable, supported by an ongoing trend of
strong financial control. The outlook also reflects a trend of economic growth
and strengthened finances that have improved the commonwealth's fiscal
condition. Independent credit rating agency Standard & Poor's expects these
trends to continue, and assigned Kentucky an issuer credit rating of AA-. 5
PORTFOLIO BREAKDOWN
Franklin Kentucky Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Subject to Government Appropriations 25.3%
- --------------------------------------------------------------------------------
Utilities 24.0%
- --------------------------------------------------------------------------------
Prerefunded 14.5%
- --------------------------------------------------------------------------------
General Obligation 10.4%
- --------------------------------------------------------------------------------
Higher Education 5.8%
- --------------------------------------------------------------------------------
Housing 5.4%
- --------------------------------------------------------------------------------
Hospital & Health Care 4.7%
- --------------------------------------------------------------------------------
Tax-Supported 4.4%
- --------------------------------------------------------------------------------
Transportation 3.1%
- --------------------------------------------------------------------------------
Other Revenue 2.4%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
4. Source: Moody's Investors Service, "New Issue: Kentucky (Commonwealth
of)," 2/7/07.
5. This does not indicate Standard & Poor's rating of the Fund.
Annual Report | 39
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 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
40 | Annual Report
Performance Summary as of 2/28/07
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRKYX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.05 $11.44 $11.39
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4572
- --------------------------------------------------------------------------------
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE.
THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------
Cumulative Total Return 2 +4.57% +27.42% +66.99%
- -------------------------------------------------------------------------------------
Average Annual Total Return 3 +0.09% +4.07% +4.81%
- -------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +0.46% +4.33% +4.91%
- -------------------------------------------------------------------------------------
Distribution Rate 5 3.77%
- -------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 6 6.17%
- -------------------------------------------------------------------------------------
30-Day Standardized Yield 7 3.34%
- -------------------------------------------------------------------------------------
Taxable Equivalent Yield 6 5.47%
- -------------------------------------------------------------------------------------
Total Annual Operating Expenses 8
- -------------------------------------------------------------------------------------
Without Waiver 0.78%
- -------------------------------------------------------------------------------------
With Waiver 0.75%
- -------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
THE FUND'S MANAGER HAS AGREED IN ADVANCE TO VOLUNTARILY WAIVE OR LIMIT ITS FEES
AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND.
THE FUND'S MANAGER MAY END THIS ARRANGEMENT AT ANY TIME.
Annual Report | 41
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.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
CLASS A 2/28/07
- --------------------------------------------------
1-Year +0.09%
- --------------------------------------------------
5-Year +4.07%
- --------------------------------------------------
10-Year +4.81%
- --------------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Kentucky Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 9 CPI 9
---------- ------------------ --------------------------- ---------
3/1/1997 $9,575 $10,000 $10,000
3/31/1997 $9,446 $9,867 $10,025
4/30/1997 $9,534 $9,949 $10,038
5/31/1997 $9,666 $10,099 $10,031
6/30/1997 $9,772 $10,207 $10,044
7/31/1997 $10,038 $10,489 $10,056
8/31/1997 $9,968 $10,391 $10,075
9/30/1997 $10,085 $10,514 $10,100
10/31/1997 $10,140 $10,582 $10,125
11/30/1997 $10,222 $10,644 $10,119
12/31/1997 $10,375 $10,799 $10,107
1/31/1998 $10,466 $10,911 $10,125
2/28/1998 $10,475 $10,914 $10,144
3/31/1998 $10,502 $10,924 $10,163
4/30/1998 $10,465 $10,875 $10,182
5/31/1998 $10,632 $11,047 $10,201
6/30/1998 $10,678 $11,090 $10,213
7/31/1998 $10,697 $11,118 $10,226
8/31/1998 $10,846 $11,290 $10,238
9/30/1998 $10,969 $11,430 $10,251
10/31/1998 $10,940 $11,430 $10,276
11/30/1998 $10,978 $11,470 $10,276
12/31/1998 $11,007 $11,499 $10,269
1/31/1999 $11,112 $11,636 $10,294
2/28/1999 $11,054 $11,585 $10,307
3/31/1999 $11,082 $11,601 $10,338
4/30/1999 $11,100 $11,630 $10,414
5/31/1999 $11,040 $11,563 $10,414
6/30/1999 $10,882 $11,396 $10,414
7/31/1999 $10,890 $11,438 $10,445
8/31/1999 $10,751 $11,346 $10,470
9/30/1999 $10,729 $11,351 $10,520
10/31/1999 $10,558 $11,228 $10,539
11/30/1999 $10,636 $11,347 $10,545
12/31/1999 $10,534 $11,263 $10,545
1/31/2000 $10,441 $11,214 $10,576
2/29/2000 $10,592 $11,344 $10,639
3/31/2000 $10,854 $11,592 $10,727
4/30/2000 $10,740 $11,523 $10,733
5/31/2000 $10,615 $11,463 $10,746
6/30/2000 $10,912 $11,767 $10,802
7/31/2000 $11,097 $11,931 $10,827
8/31/2000 $11,283 $12,115 $10,827
9/30/2000 $11,197 $12,052 $10,883
10/31/2000 $11,331 $12,183 $10,902
11/30/2000 $11,435 $12,275 $10,909
12/31/2000 $11,751 $12,579 $10,902
1/31/2001 $11,802 $12,703 $10,971
2/28/2001 $11,832 $12,744 $11,015
3/31/2001 $11,947 $12,858 $11,040
4/30/2001 $11,794 $12,719 $11,084
5/31/2001 $11,921 $12,855 $11,134
6/30/2001 $12,038 $12,941 $11,153
7/31/2001 $12,220 $13,133 $11,122
8/31/2001 $12,403 $13,350 $11,122
9/30/2001 $12,268 $13,305 $11,172
10/31/2001 $12,442 $13,463 $11,134
11/30/2001 $12,350 $13,350 $11,115
12/31/2001 $12,219 $13,223 $11,071
1/31/2002 $12,401 $13,453 $11,096
2/28/2002 $12,551 $13,615 $11,140
3/31/2002 $12,353 $13,348 $11,203
4/30/2002 $12,550 $13,609 $11,266
5/31/2002 $12,623 $13,692 $11,266
6/30/2002 $12,764 $13,836 $11,272
7/31/2002 $12,907 $14,014 $11,284
8/31/2002 $13,026 $14,183 $11,322
9/30/2002 $13,262 $14,494 $11,341
10/31/2002 $12,989 $14,253 $11,360
11/30/2002 $12,947 $14,194 $11,360
12/31/2002 $13,232 $14,494 $11,335
1/31/2003 $13,176 $14,457 $11,385
2/28/2003 $13,355 $14,659 $11,472
3/31/2003 $13,346 $14,668 $11,541
4/30/2003 $13,420 $14,765 $11,516
5/31/2003 $13,744 $15,110 $11,497
6/30/2003 $13,697 $15,046 $11,510
7/31/2003 $13,146 $14,520 $11,523
8/31/2003 $13,268 $14,628 $11,566
9/30/2003 $13,718 $15,058 $11,604
10/31/2003 $13,635 $14,982 $11,591
11/30/2003 $13,783 $15,138 $11,560
12/31/2003 $13,919 $15,264 $11,548
1/31/2004 $13,994 $15,351 $11,604
2/29/2004 $14,218 $15,582 $11,667
3/31/2004 $14,207 $15,528 $11,742
4/30/2004 $13,849 $15,160 $11,779
5/31/2004 $13,752 $15,105 $11,848
6/30/2004 $13,814 $15,160 $11,886
7/31/2004 $14,015 $15,360 $11,867
8/31/2004 $14,254 $15,667 $11,873
9/30/2004 $14,406 $15,751 $11,898
10/31/2004 $14,482 $15,886 $11,961
11/30/2004 $14,380 $15,755 $11,967
12/31/2004 $14,571 $15,947 $11,924
1/31/2005 $14,750 $16,096 $11,949
2/28/2005 $14,712 $16,043 $12,018
3/31/2005 $14,634 $15,942 $12,112
4/30/2005 $14,879 $16,193 $12,193
5/31/2005 $14,969 $16,308 $12,180
6/30/2005 $15,034 $16,409 $12,187
7/31/2005 $14,981 $16,335 $12,243
8/31/2005 $15,125 $16,500 $12,306
9/30/2005 $15,031 $16,388 $12,456
10/31/2005 $14,937 $16,289 $12,481
11/30/2005 $15,001 $16,367 $12,381
12/31/2005 $15,146 $16,508 $12,331
1/31/2006 $15,170 $16,552 $12,425
2/28/2006 $15,302 $16,664 $12,450
3/31/2006 $15,192 $16,549 $12,519
4/30/2006 $15,177 $16,543 $12,625
5/31/2006 $15,229 $16,617 $12,688
6/30/2006 $15,199 $16,554 $12,713
7/31/2006 $15,346 $16,751 $12,751
8/31/2006 $15,549 $17,000 $12,776
9/30/2006 $15,655 $17,118 $12,713
10/31/2006 $15,749 $17,225 $12,644
11/30/2006 $15,899 $17,369 $12,625
12/31/2006 $15,840 $17,307 $12,644
1/31/2007 $15,808 $17,263 $12,683
2/28/2007 $15,990 $17,490 $12,751
42 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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. If the Fund's
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
3.29%. The manager may end this arrangement at any time upon notice to the
Fund's board.
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 3.75 cent per share
current monthly dividend and the maximum offering price of $11.95 per
share on 2/28/07.
6. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Kentucky
personal income tax rate 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 2/28/07.
8. Figures are as stated in the Fund's prospectus current as of the date of
this report.
9. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
Annual Report | 43
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 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.
44 | 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.80 $3.77
- -----------------------------------------------------------------------------------------------------------
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 | 45
Franklin Louisiana Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Louisiana Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and Louisiana
personal income taxes as is 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 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
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- --------------------------------------------------------------------------------
AAA 80.0%
- --------------------------------------------------------------------------------
AA 0.3%
- --------------------------------------------------------------------------------
BBB 9.3%
- --------------------------------------------------------------------------------
Below Investment Grade 1.9%
- --------------------------------------------------------------------------------
Not Rated by S&P 8.5%
- --------------------------------------------------------------------------------
* 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 6.7% 0.7%
A 1.1% --
- ----------------------------------------------------
Total 7.8% 0.7%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Louisiana Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.52 on February 28, 2006, to $11.61 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 48.75 cents per share for the reporting
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 121.
46 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Louisiana Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.10 cents 3.56 cents
- --------------------------------------------------------------------------------
April 2006 4.10 cents 3.56 cents
- --------------------------------------------------------------------------------
May 2006 4.10 cents 3.56 cents
- --------------------------------------------------------------------------------
June 2006 4.06 cents 3.53 cents
- --------------------------------------------------------------------------------
July 2006 4.06 cents 3.53 cents
- --------------------------------------------------------------------------------
August 2006 4.06 cents 3.53 cents
- --------------------------------------------------------------------------------
September 2006 4.06 cents 3.55 cents
- --------------------------------------------------------------------------------
October 2006 4.06 cents 3.55 cents
- --------------------------------------------------------------------------------
November 2006 4.06 cents 3.55 cents
- --------------------------------------------------------------------------------
December 2006 3.99 cents 3.46 cents
- --------------------------------------------------------------------------------
January 2007 3.99 cents 3.46 cents
- --------------------------------------------------------------------------------
February 2007 3.99 cents 3.46 cents
- --------------------------------------------------------------------------------
period. 2 The Performance Summary beginning on page 50 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.95%
based on an annualization of the current 3.99 cent per share dividend and the
maximum offering price of $12.13 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Louisiana personal income tax bracket of
38.90% would need to earn a distribution rate of 6.46% 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.
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.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 | 47
PORTFOLIO BREAKDOWN
Franklin Louisiana Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Tax-Supported 18.8%
- --------------------------------------------------------------------------------
Higher Education 14.7%
- --------------------------------------------------------------------------------
Utilities 13.3%
- --------------------------------------------------------------------------------
Prerefunded 11.3%
- --------------------------------------------------------------------------------
General Obligation 10.2%
- --------------------------------------------------------------------------------
Other Revenue 8.3%
- --------------------------------------------------------------------------------
Hospital & Health Care 8.2%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 6.3%
- --------------------------------------------------------------------------------
Housing 5.2%
- --------------------------------------------------------------------------------
Transportation 2.2%
- --------------------------------------------------------------------------------
Corporate-Backed 1.5%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
STATE UPDATE
Louisiana continues to rebuild its economy in the fallout of the 2005 hurricane
disasters. The recovery of New Orleans' population and infrastructure is moving
slowly, but adjacent parishes have taken on growth in population and economic
activity at a great rate. With state government straining to deliver normal
services, let alone drive the recovery of infrastructure and the basics of daily
life in New Orleans, full economic recovery, however that might be defined, will
take years. Among several measures enacted to provide relief, the federal
government continued to deliver emergency and levee restoration services while
creating a funding program under the Gulf Opportunity Zone Act aimed at
rebuilding the hurricane-ravaged parts of the state. Statewide, Louisiana
struggled with large-scale net out-migration and declining gross state product,
as well as falling employment and personal income growth rates. However, the
state's unemployment rate was 3.9% in February 2007, below the 4.5% national
rate. 3 Most of the state's key industries -- including energy, tourism,
chemicals, and fishing and seafood production -- are operating, though some are
still not up to pre-disaster levels. For example, the majority of offshore oil
and gas production has returned, although about 10% of capacity remains
inaccessible at this time. 4
Despite the severe hit to Louisiana's economy, most economically generated
revenues held steady or increased since the hurricanes. Revenue performance
benefited from the relief and rebuilding activity of individuals, businesses and
all levels of government. Emergency assistance and rebuilding of critical
infrastructure provided an inflow of capital, while reconstruction and
refurnishing expenditures offered a further boost to revenue streams such as
hotel, sales and fuel taxes. Liquidity remained strong, as the state's major
non-general fund reserves exceeded $2 billion at the end of fiscal year 2006,
aided by revenue collections that surpassed estimates by about $1 billion. 4
Rainy day operating reserve funds have also improved along with increasing
general fund revenues.
The state's balanced budget for fiscal year 2007, which began July 1, 2006,
reflected a 57% increase in federal funding, mainly hurricane-related monies for
housing rehabilitation. 4 The federal government recently enacted several
measures that led to private activity bonding authority, community development
block grants, levee construction appropriations and disaster recovery aid.
3. Source: Bureau of Labor Statistics.
4. Source: Standard & Poor's, "State Review: Louisiana," RATINGSDIRECT,
8/28/06.
48 | Annual Report
Without federal funding, Louisiana's budget is still somewhat structurally weak,
which could be exacerbated by the potential revenue declines and rising
expenditures associated with relief, recovery, and education outlays. Debt
levels are expected to rise as infrastructure projects and debt service
assistance provisions for local governments triggered the issuance of additional
general obligation (GO) debt in 2006.
Standard & Poor's, an independent credit rating agency, maintained its A rating
for Louisiana's GO bonds, but recently upgraded its outlook for the state from
negative to stable. 5 The rating and outlook reflected some improvement in the
state's ongoing challenges, including the pace and extent of economic recovery
in New Orleans, the state's major economic center. The effects of reduced
economic activity in the Gulf Coast region on the state's finances were
uncertain, and although revenue performance since the hurricanes significantly
exceeded expectations, it was unclear whether economic activity would be
sustained for years to come.
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 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.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 49
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------
CLASS A (SYMBOL: FKLAX) CHANGE 2/28/07 2/28/06
- ------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.09 $11.61 $11.52
- ------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ------------------------------------------------------------------------------
Dividend Income $0.4875
- ------------------------------------------------------------------------------
CLASS C (SYMBOL: FLAIX) CHANGE 2/28/07 2/28/06
- ------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.10 $11.73 $11.63
- ------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ------------------------------------------------------------------------------
Dividend Income $0.4240
- ------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +5.14% +27.57% +67.26%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.68% +4.07% +4.82%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.89% +4.37% +4.87%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.95%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.46%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.35%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.48%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.73%
- ---------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.61% +24.15% +58.63%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.61% +4.42% +4.72%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.86% +4.69% +4.77%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.52%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.76%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.07%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.02%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.28%
- ---------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
50 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Louisiana Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ------------ ---------------------- ---------------------- ------------
3/1/1997 $9,577 $10,000 $10,000
3/31/1997 $9,496 $9,867 $10,025
4/30/1997 $9,559 $9,949 $10,038
5/31/1997 $9,665 $10,099 $10,031
6/30/1997 $9,771 $10,207 $10,044
7/31/1997 $9,990 $10,489 $10,056
8/31/1997 $9,933 $10,391 $10,075
9/30/1997 $10,049 $10,514 $10,100
10/31/1997 $10,113 $10,582 $10,125
11/30/1997 $10,177 $10,644 $10,119
12/31/1997 $10,321 $10,799 $10,107
1/31/1998 $10,395 $10,911 $10,125
2/28/1998 $10,388 $10,914 $10,144
3/31/1998 $10,408 $10,924 $10,163
4/30/1998 $10,382 $10,875 $10,182
5/31/1998 $10,520 $11,047 $10,201
6/30/1998 $10,558 $11,090 $10,213
7/31/1998 $10,569 $11,118 $10,226
8/31/1998 $10,708 $11,290 $10,238
9/30/1998 $10,829 $11,430 $10,251
10/31/1998 $10,802 $11,430 $10,276
11/30/1998 $10,840 $11,470 $10,276
12/31/1998 $10,877 $11,499 $10,269
1/31/1999 $10,971 $11,636 $10,294
2/28/1999 $10,933 $11,585 $10,307
3/31/1999 $10,961 $11,601 $10,338
4/30/1999 $10,988 $11,630 $10,414
5/31/1999 $10,930 $11,563 $10,414
6/30/1999 $10,785 $11,396 $10,414
7/31/1999 $10,784 $11,438 $10,445
8/31/1999 $10,639 $11,346 $10,470
9/30/1999 $10,628 $11,351 $10,520
10/31/1999 $10,462 $11,228 $10,539
11/30/1999 $10,548 $11,347 $10,545
12/31/1999 $10,449 $11,263 $10,545
1/31/2000 $10,359 $11,214 $10,576
2/29/2000 $10,497 $11,344 $10,639
3/31/2000 $10,755 $11,592 $10,727
4/30/2000 $10,684 $11,523 $10,733
5/31/2000 $10,613 $11,463 $10,746
6/30/2000 $10,884 $11,767 $10,802
7/31/2000 $11,025 $11,931 $10,827
8/31/2000 $11,197 $12,115 $10,827
9/30/2000 $11,144 $12,052 $10,883
10/31/2000 $11,277 $12,183 $10,902
11/30/2000 $11,399 $12,275 $10,909
12/31/2000 $11,677 $12,579 $10,902
1/31/2001 $11,728 $12,703 $10,971
2/28/2001 $11,768 $12,744 $11,015
3/31/2001 $11,860 $12,858 $11,040
4/30/2001 $11,742 $12,719 $11,084
5/31/2001 $11,867 $12,855 $11,134
6/30/2001 $11,938 $12,941 $11,153
7/31/2001 $12,138 $13,133 $11,122
8/31/2001 $12,317 $13,350 $11,122
9/30/2001 $12,271 $13,305 $11,172
10/31/2001 $12,462 $13,463 $11,134
11/30/2001 $12,383 $13,350 $11,115
12/31/2001 $12,248 $13,223 $11,071
1/31/2002 $12,420 $13,453 $11,096
2/28/2002 $12,559 $13,615 $11,140
3/31/2002 $12,356 $13,348 $11,203
4/30/2002 $12,562 $13,609 $11,266
5/31/2002 $12,614 $13,692 $11,266
6/30/2002 $12,743 $13,836 $11,272
7/31/2002 $12,884 $14,014 $11,284
8/31/2002 $12,993 $14,183 $11,322
9/30/2002 $13,260 $14,494 $11,341
10/31/2002 $13,051 $14,253 $11,360
11/30/2002 $13,012 $14,194 $11,360
12/31/2002 $13,260 $14,494 $11,335
1/31/2003 $13,232 $14,457 $11,385
2/28/2003 $13,378 $14,659 $11,472
3/31/2003 $13,396 $14,668 $11,541
4/30/2003 $13,495 $14,765 $11,516
5/31/2003 $13,805 $15,110 $11,497
6/30/2003 $13,751 $15,046 $11,510
7/31/2003 $13,250 $14,520 $11,523
8/31/2003 $13,396 $14,628 $11,566
9/30/2003 $13,792 $15,058 $11,604
10/31/2003 $13,690 $14,982 $11,591
11/30/2003 $13,825 $15,138 $11,560
12/31/2003 $13,950 $15,264 $11,548
1/31/2004 $14,134 $15,351 $11,604
2/29/2004 $14,320 $15,582 $11,667
3/31/2004 $14,299 $15,528 $11,742
4/30/2004 $13,961 $15,160 $11,779
5/31/2004 $13,941 $15,105 $11,848
6/30/2004 $13,981 $15,160 $11,886
7/31/2004 $14,156 $15,360 $11,867
8/31/2004 $14,407 $15,667 $11,873
9/30/2004 $14,484 $15,751 $11,898
10/31/2004 $14,637 $15,886 $11,961
11/30/2004 $14,503 $15,755 $11,967
12/31/2004 $14,694 $15,947 $11,924
1/31/2005 $14,861 $16,096 $11,949
2/28/2005 $14,801 $16,043 $12,018
3/31/2005 $14,728 $15,942 $12,112
4/30/2005 $14,947 $16,193 $12,193
5/31/2005 $15,040 $16,308 $12,180
6/30/2005 $15,108 $16,409 $12,187
7/31/2005 $15,047 $16,335 $12,243
8/31/2005 $15,166 $16,500 $12,306
9/30/2005 $14,987 $16,388 $12,456
10/31/2005 $14,884 $16,289 $12,481
11/30/2005 $14,964 $16,367 $12,381
12/31/2005 $15,096 $16,508 $12,331
1/31/2006 $15,124 $16,552 $12,425
2/28/2006 $15,244 $16,664 $12,450
3/31/2006 $15,152 $16,549 $12,519
4/30/2006 $15,153 $16,543 $12,625
5/31/2006 $15,208 $16,617 $12,688
6/30/2006 $15,222 $16,554 $12,713
7/31/2006 $15,357 $16,751 $12,751
8/31/2006 $15,574 $17,000 $12,776
9/30/2006 $15,683 $17,118 $12,713
10/31/2006 $15,779 $17,225 $12,644
11/30/2006 $15,916 $17,369 $12,625
12/31/2006 $15,875 $17,307 $12,644
1/31/2007 $15,847 $17,263 $12,683
2/28/2007 $16,018 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS A 2/28/07
- -------------------------------------------------
1-Year +0.68%
- -------------------------------------------------
5-Year +4.07%
- -------------------------------------------------
10-Year +4.82%
- -------------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Louisiana Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ------------ ---------------------- ---------------------- ------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,918 $9,867 $10,025
4/30/1997 $9,979 $9,949 $10,038
5/31/1997 $10,094 $10,099 $10,031
6/30/1997 $10,190 $10,207 $10,044
7/31/1997 $10,423 $10,489 $10,056
8/31/1997 $10,359 $10,391 $10,075
9/30/1997 $10,466 $10,514 $10,100
10/31/1997 $10,528 $10,582 $10,125
11/30/1997 $10,590 $10,644 $10,119
12/31/1997 $10,734 $10,799 $10,107
1/31/1998 $10,805 $10,911 $10,125
2/28/1998 $10,802 $10,914 $10,144
3/31/1998 $10,808 $10,924 $10,163
4/30/1998 $10,777 $10,875 $10,182
5/31/1998 $10,923 $11,047 $10,201
6/30/1998 $10,957 $11,090 $10,213
7/31/1998 $10,963 $11,118 $10,226
8/31/1998 $11,102 $11,290 $10,238
9/30/1998 $11,211 $11,430 $10,251
10/31/1998 $11,188 $11,430 $10,276
11/30/1998 $11,222 $11,470 $10,276
12/31/1998 $11,246 $11,499 $10,269
1/31/1999 $11,346 $11,636 $10,294
2/28/1999 $11,302 $11,585 $10,307
3/31/1999 $11,335 $11,601 $10,338
4/30/1999 $11,347 $11,630 $10,414
5/31/1999 $11,282 $11,563 $10,414
6/30/1999 $11,129 $11,396 $10,414
7/31/1999 $11,122 $11,438 $10,445
8/31/1999 $10,968 $11,346 $10,470
9/30/1999 $10,952 $11,351 $10,520
10/31/1999 $10,777 $11,228 $10,539
11/30/1999 $10,861 $11,347 $10,545
12/31/1999 $10,754 $11,263 $10,545
1/31/2000 $10,658 $11,214 $10,576
2/29/2000 $10,794 $11,344 $10,639
3/31/2000 $11,052 $11,592 $10,727
4/30/2000 $10,975 $11,523 $10,733
5/31/2000 $10,898 $11,463 $10,746
6/30/2000 $11,169 $11,767 $10,802
7/31/2000 $11,308 $11,931 $10,827
8/31/2000 $11,488 $12,115 $10,827
9/30/2000 $11,419 $12,052 $10,883
10/31/2000 $11,548 $12,183 $10,902
11/30/2000 $11,667 $12,275 $10,909
12/31/2000 $11,955 $12,579 $10,902
1/31/2001 $12,001 $12,703 $10,971
2/28/2001 $12,037 $12,744 $11,015
3/31/2001 $12,124 $12,858 $11,040
4/30/2001 $11,999 $12,719 $11,084
5/31/2001 $12,120 $12,855 $11,134
6/30/2001 $12,197 $12,941 $11,153
7/31/2001 $12,383 $13,133 $11,122
8/31/2001 $12,570 $13,350 $11,122
9/30/2001 $12,507 $13,305 $11,172
10/31/2001 $12,695 $13,463 $11,134
11/30/2001 $12,620 $13,350 $11,115
12/31/2001 $12,467 $13,223 $11,071
1/31/2002 $12,634 $13,453 $11,096
2/28/2002 $12,780 $13,615 $11,140
3/31/2002 $12,569 $13,348 $11,203
4/30/2002 $12,771 $13,609 $11,266
5/31/2002 $12,817 $13,692 $11,266
6/30/2002 $12,942 $13,836 $11,272
7/31/2002 $13,078 $14,014 $11,284
8/31/2002 $13,181 $14,183 $11,322
9/30/2002 $13,444 $14,494 $11,341
10/31/2002 $13,228 $14,253 $11,360
11/30/2002 $13,194 $14,194 $11,360
12/31/2002 $13,426 $14,494 $11,335
1/31/2003 $13,404 $14,457 $11,385
2/28/2003 $13,544 $14,659 $11,472
3/31/2003 $13,556 $14,668 $11,541
4/30/2003 $13,650 $14,765 $11,516
5/31/2003 $13,955 $15,110 $11,497
6/30/2003 $13,895 $15,046 $11,510
7/31/2003 $13,385 $14,520 $11,523
8/31/2003 $13,513 $14,628 $11,566
9/30/2003 $13,914 $15,058 $11,604
10/31/2003 $13,792 $14,982 $11,591
11/30/2003 $13,933 $15,138 $11,560
12/31/2003 $14,050 $15,264 $11,548
1/31/2004 $14,228 $15,351 $11,604
2/29/2004 $14,406 $15,582 $11,667
3/31/2004 $14,378 $15,528 $11,742
4/30/2004 $14,047 $15,160 $11,779
5/31/2004 $14,008 $15,105 $11,848
6/30/2004 $14,054 $15,160 $11,886
7/31/2004 $14,210 $15,360 $11,867
8/31/2004 $14,452 $15,667 $11,873
9/30/2004 $14,535 $15,751 $11,898
10/31/2004 $14,668 $15,886 $11,961
11/30/2004 $14,528 $15,755 $11,967
12/31/2004 $14,724 $15,947 $11,924
1/31/2005 $14,882 $16,096 $11,949
2/28/2005 $14,816 $16,043 $12,018
3/31/2005 $14,737 $15,942 $12,112
4/30/2005 $14,947 $16,193 $12,193
5/31/2005 $15,032 $16,308 $12,180
6/30/2005 $15,092 $16,409 $12,187
7/31/2005 $15,025 $16,335 $12,243
8/31/2005 $15,149 $16,500 $12,306
9/30/2005 $14,952 $16,388 $12,456
10/31/2005 $14,844 $16,289 $12,481
11/30/2005 $14,916 $16,367 $12,381
12/31/2005 $15,040 $16,508 $12,331
1/31/2006 $15,060 $16,552 $12,425
2/28/2006 $15,172 $16,664 $12,450
3/31/2006 $15,074 $16,549 $12,519
4/30/2006 $15,069 $16,543 $12,625
5/31/2006 $15,115 $16,617 $12,688
6/30/2006 $15,122 $16,554 $12,713
7/31/2006 $15,248 $16,751 $12,751
8/31/2006 $15,467 $17,000 $12,776
9/30/2006 $15,568 $17,118 $12,713
10/31/2006 $15,642 $17,225 $12,644
11/30/2006 $15,783 $17,369 $12,625
12/31/2006 $15,736 $17,307 $12,644
1/31/2007 $15,701 $17,263 $12,683
2/28/2007 $15,863 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS C 2/28/07
- -------------------------------------------------
1-Year +3.61%
- -------------------------------------------------
5-Year +4.42%
- -------------------------------------------------
10-Year +4.72%
- -------------------------------------------------
Annual Report | 51
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Louisiana
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
52 | 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 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 | 53
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.80 $3.67
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.17 $3.66
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.80 $6.43
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.45 $6.41
- ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.73% and C: 1.28%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
54 | Annual Report
Franklin Maryland Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Maryland Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and Maryland
state and local personal income taxes as is 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
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Maryland Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA 56.1%
AA 15.5%
A 9.0%
BBB 4.2%
Not Rated by S&P 15.2%
- --------------------------------------------------------------------------------
* 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 3.1% --
AA or Aa 3.3% --
A 1.2% --
BBB or Baa 6.3% 1.3%
- -----------------------------------------------------------
Total 13.9% 1.3%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Maryland Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 127.
Annual Report | 55
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
DIVIDEND DISTRIBUTIONS 2
Franklin Maryland Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.14 cents 3.59 cents
- --------------------------------------------------------------------------------
April 2006 4.14 cents 3.59 cents
- --------------------------------------------------------------------------------
May 2006 4.14 cents 3.59 cents
- --------------------------------------------------------------------------------
June 2006 4.19 cents 3.66 cents
- --------------------------------------------------------------------------------
July 2006 4.19 cents 3.66 cents
- --------------------------------------------------------------------------------
August 2006 4.19 cents 3.66 cents
- --------------------------------------------------------------------------------
September 2006 4.16 cents 3.64 cents
- --------------------------------------------------------------------------------
October 2006 4.16 cents 3.64 cents
- --------------------------------------------------------------------------------
November 2006 4.16 cents 3.64 cents
- --------------------------------------------------------------------------------
December 2006 4.06 cents 3.51 cents
- --------------------------------------------------------------------------------
January 2007 4.06 cents 3.51 cents
- --------------------------------------------------------------------------------
February 2007 4.06 cents 3.51 cents
- --------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.77 on February 28, 2006, to $11.84 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 49.78 cents per share for the reporting period. 2
The Performance Summary beginning on page 60 shows that at the end of this
reporting period the Fund's Class A shares' distribution rate was 3.94% based on
an annualization of the current 4.06 cent per share dividend and the maximum
offering price of $12.37 on February 28, 2007. An investor in the 2007 maximum
combined effective federal and Maryland state and local personal income tax
bracket of 40.17% would need to earn a distribution rate of 6.59% 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.
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
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
56 | Annual Report
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.
STATE UPDATE
Maryland's diverse economy and employment trends continued to flourish, helping
it outperform the national economy for a fifth straight year. The state's broad
economic base, anchored by government; construction; leisure and hospitality;
and business, education and health services, gained from a mature infrastructure
and is projected to maintain strong employment growth. The state's high wealth
and personal income levels supported a strong though cooled residential housing
market. Because of the growing job market, state in-migration remained steady
and also contributed to housing demand levels. With a well-educated labor force
and personal income levels that are fourth-highest in the nation, Maryland is
the second wealthiest state in the union. 3 State unemployment was under control
at 3.8% in February 2007, lower than the 4.5% national rate. 4 While Maryland's
economy has diversified in recent years, it continues to be proportionally more
affected by federal government activities than almost any other state.
Maryland's strong economy produced unexpectedly high corporate and personal
income tax revenue growth, up 7.3% in fiscal year 2006. 5 This led to a $911
million general fund operating surplus in fiscal year 2006, stabilizing state
finances and allowing further expansion of the rainy day fund and other reserve
coffers. 3 The state's use of a five-year financial plan provides the basis for
future fiscal decisions and recognizes budget gaps years in advance. Quarterly
monitoring and reporting of key revenues allows the state to make midyear
adjustments if necessary to maintain balance. Spending pressure from education,
Medicaid, corrections and homeland security remain, but Maryland's conservative
and proactive fiscal practices should be able to address those issues
accordingly. Such budgetary prudence may be brought to bear in fiscal years 2007
and 2008, as the state conservatively projected lowered growth rates at fiscal
year-end 2006 in the face of structural deficits
3. Source: Standard & Poor's, "Research: Maryland; General Obligation,"
RATINGSDIRECT, 2/16/07.
4. Source: Bureau of Labor Statistics.
5. Source: Moody's Investors Service, "New Issue: Maryland (State of),"
2/21/07.
Annual Report | 57
PORTFOLIO BREAKDOWN
Franklin Maryland Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Hospital & Health Care 21.1%
- --------------------------------------------------------------------------------
Prerefunded 18.6%
- --------------------------------------------------------------------------------
Higher Education 15.9%
- --------------------------------------------------------------------------------
Transportation 11.8%
- --------------------------------------------------------------------------------
Utilities 11.4%
- --------------------------------------------------------------------------------
Other Revenue 7.4%
- --------------------------------------------------------------------------------
General Obligation 6.5%
- --------------------------------------------------------------------------------
Housing 3.0%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 2.8%
- --------------------------------------------------------------------------------
Tax-Supported 1.1%
- --------------------------------------------------------------------------------
Corporate-Backed 0.4%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
amounting to more than $4 billion in the years to come. 6 Legislators factored
into their reduced assessment the impact of slowing capital gains-related
revenues and potential weakening of the housing market. Midway through fiscal
year 2007, however, this projection was revised downward by another $394
million, reflecting recent unforeseen drops in corporate income taxes, as well
as reduced sales tax collections largely due to a predicted slowdown in the
construction sector. With weakening state revenues, Maryland faces continued
spending pressures and will rely on non-recurring resources to balance the
fiscal year 2008 budget plan. As it seeks to restore structural budget balance,
potential future budget gaps have yet to be addressed. In the past, the state's
considerable financial management abilities have solved sizable projected
deficits, which bodes well for its ability to handle any looming budget
challenges.
Maryland's debt burden has declined relative to prior years, but remains above
average. Maryland has long been one of the more heavily indebted states, and in
2006 its debt as a percentage of personal income, an indicator of debt
affordability, placed Maryland 20th among the 50 states, representing a
significant improvement over levels seen in the 1980s and 1990s. The state's
debt-affordability policy limits issuance and has a current cap limiting debt to
within 3.2% of personal income and debt service to within 8% of revenues. 5
Independent credit rating agency Standard & Poor's assigned Maryland's general
obligation bonds its highest credit rating of AAA with a stable outlook. 7 The
rating reflected the state's strong liquidity and sound financial operations
enhanced by a clearly defined debt-affordability model.
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.
6. Source: "Maryland State of the State Address 2007," STATELINE.ORG,
1/31/07.
7. This does not indicate Standard & Poor's rating of the Fund.
58 | Annual Report
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 59
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FMDTX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $11.84 $11.77
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4978
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FMDIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $11.99 $11.91
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4331
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.96% +28.14% +68.63%
- --------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.52% +4.18% +4.91%
- --------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.63% +4.43% +4.99%
- --------------------------------------------------------------------------------------------
Distribution Rate 4 3.94%
- --------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.59%
- --------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.38%
- --------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.65%
- --------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.69%
- --------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.42% +24.74% +59.89%
- --------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.42% +4.52% +4.80%
- --------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.57% +4.77% +4.88%
- --------------------------------------------------------------------------------------------
Distribution Rate 4 3.49%
- --------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.83%
- --------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.04%
- --------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.08%
- --------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.24%
- --------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
60 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Maryland Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
---------- ---------------------- ---------------------- ----------
3/1/1997 $9,577 $10,000 $10,000
3/31/1997 $9,460 $9,867 $10,025
4/30/1997 $9,539 $9,949 $10,038
5/31/1997 $9,660 $10,099 $10,031
6/30/1997 $9,754 $10,207 $10,044
7/31/1997 $9,995 $10,489 $10,056
8/31/1997 $9,926 $10,391 $10,075
9/30/1997 $10,039 $10,514 $10,100
10/31/1997 $10,092 $10,582 $10,125
11/30/1997 $10,162 $10,644 $10,119
12/31/1997 $10,293 $10,799 $10,107
1/31/1998 $10,371 $10,911 $10,125
2/28/1998 $10,370 $10,914 $10,144
3/31/1998 $10,387 $10,924 $10,163
4/30/1998 $10,377 $10,875 $10,182
5/31/1998 $10,520 $11,047 $10,201
6/30/1998 $10,568 $11,090 $10,213
7/31/1998 $10,595 $11,118 $10,226
8/31/1998 $10,731 $11,290 $10,238
9/30/1998 $10,840 $11,430 $10,251
10/31/1998 $10,848 $11,430 $10,276
11/30/1998 $10,875 $11,470 $10,276
12/31/1998 $10,898 $11,499 $10,269
1/31/1999 $10,989 $11,636 $10,294
2/28/1999 $10,958 $11,585 $10,307
3/31/1999 $10,973 $11,601 $10,338
4/30/1999 $11,016 $11,630 $10,414
5/31/1999 $10,965 $11,563 $10,414
6/30/1999 $10,809 $11,396 $10,414
7/31/1999 $10,833 $11,438 $10,445
8/31/1999 $10,666 $11,346 $10,470
9/30/1999 $10,643 $11,351 $10,520
10/31/1999 $10,474 $11,228 $10,539
11/30/1999 $10,577 $11,347 $10,545
12/31/1999 $10,476 $11,263 $10,545
1/31/2000 $10,404 $11,214 $10,576
2/29/2000 $10,529 $11,344 $10,639
3/31/2000 $10,773 $11,592 $10,727
4/30/2000 $10,740 $11,523 $10,733
5/31/2000 $10,647 $11,463 $10,746
6/30/2000 $10,916 $11,767 $10,802
7/31/2000 $11,084 $11,931 $10,827
8/31/2000 $11,274 $12,115 $10,827
9/30/2000 $11,241 $12,052 $10,883
10/31/2000 $11,350 $12,183 $10,902
11/30/2000 $11,450 $12,275 $10,909
12/31/2000 $11,705 $12,579 $10,902
1/31/2001 $11,775 $12,703 $10,971
2/28/2001 $11,844 $12,744 $11,015
3/31/2001 $11,925 $12,858 $11,040
4/30/2001 $11,827 $12,719 $11,084
5/31/2001 $11,929 $12,855 $11,134
6/30/2001 $12,031 $12,941 $11,153
7/31/2001 $12,196 $13,133 $11,122
8/31/2001 $12,384 $13,350 $11,122
9/30/2001 $12,348 $13,305 $11,172
10/31/2001 $12,494 $13,463 $11,134
11/30/2001 $12,415 $13,350 $11,115
12/31/2001 $12,301 $13,223 $11,071
1/31/2002 $12,470 $13,453 $11,096
2/28/2002 $12,606 $13,615 $11,140
3/31/2002 $12,393 $13,348 $11,203
4/30/2002 $12,586 $13,609 $11,266
5/31/2002 $12,713 $13,692 $11,266
6/30/2002 $12,819 $13,836 $11,272
7/31/2002 $12,970 $14,014 $11,284
8/31/2002 $13,099 $14,183 $11,322
9/30/2002 $13,352 $14,494 $11,341
10/31/2002 $13,134 $14,253 $11,360
11/30/2002 $13,106 $14,194 $11,360
12/31/2002 $13,351 $14,494 $11,335
1/31/2003 $13,357 $14,457 $11,385
2/28/2003 $13,511 $14,659 $11,472
3/31/2003 $13,528 $14,668 $11,541
4/30/2003 $13,637 $14,765 $11,516
5/31/2003 $13,920 $15,110 $11,497
6/30/2003 $13,878 $15,046 $11,510
7/31/2003 $13,393 $14,520 $11,523
8/31/2003 $13,514 $14,628 $11,566
9/30/2003 $13,825 $15,058 $11,604
10/31/2003 $13,759 $14,982 $11,591
11/30/2003 $13,905 $15,138 $11,560
12/31/2003 $14,028 $15,264 $11,548
1/31/2004 $14,104 $15,351 $11,604
2/29/2004 $14,311 $15,582 $11,667
3/31/2004 $14,278 $15,528 $11,742
4/30/2004 $13,968 $15,160 $11,779
5/31/2004 $13,924 $15,105 $11,848
6/30/2004 $13,964 $15,160 $11,886
7/31/2004 $14,125 $15,360 $11,867
8/31/2004 $14,361 $15,667 $11,873
9/30/2004 $14,450 $15,751 $11,898
10/31/2004 $14,564 $15,886 $11,961
11/30/2004 $14,456 $15,755 $11,967
12/31/2004 $14,632 $15,947 $11,924
1/31/2005 $14,810 $16,096 $11,949
2/28/2005 $14,788 $16,043 $12,018
3/31/2005 $14,729 $15,942 $12,112
4/30/2005 $14,946 $16,193 $12,193
5/31/2005 $15,049 $16,308 $12,180
6/30/2005 $15,128 $16,409 $12,187
7/31/2005 $15,080 $16,335 $12,243
8/31/2005 $15,223 $16,500 $12,306
9/30/2005 $15,125 $16,388 $12,456
10/31/2005 $15,063 $16,289 $12,481
11/30/2005 $15,117 $16,367 $12,381
12/31/2005 $15,250 $16,508 $12,331
1/31/2006 $15,278 $16,552 $12,425
2/28/2006 $15,398 $16,664 $12,450
3/31/2006 $15,295 $16,549 $12,519
4/30/2006 $15,297 $16,543 $12,625
5/31/2006 $15,338 $16,617 $12,688
6/30/2006 $15,274 $16,554 $12,713
7/31/2006 $15,450 $16,751 $12,751
8/31/2006 $15,665 $17,000 $12,776
9/30/2006 $15,774 $17,118 $12,713
10/31/2006 $15,884 $17,225 $12,644
11/30/2006 $16,035 $17,369 $12,625
12/31/2006 $15,981 $17,307 $12,644
1/31/2007 $15,941 $17,263 $12,683
2/28/2007 $16,150 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS A 2/28/07
- -------------------------------------------------
1-Year +0.52%
- -------------------------------------------------
5-Year +4.18%
- -------------------------------------------------
10-Year +4.91%
- -------------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Maryland Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ------------ -------------------- ----------------------- --------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,873 $9,867 $10,025
4/30/1997 $9,950 $9,949 $10,038
5/31/1997 $10,080 $10,099 $10,031
6/30/1997 $10,172 $10,207 $10,044
7/31/1997 $10,417 $10,489 $10,056
8/31/1997 $10,341 $10,391 $10,075
9/30/1997 $10,453 $10,514 $10,100
10/31/1997 $10,502 $10,582 $10,125
11/30/1997 $10,570 $10,644 $10,119
12/31/1997 $10,710 $10,799 $10,107
1/31/1998 $10,777 $10,911 $10,125
2/28/1998 $10,770 $10,914 $10,144
3/31/1998 $10,792 $10,924 $10,163
4/30/1998 $10,767 $10,875 $10,182
5/31/1998 $10,919 $11,047 $10,201
6/30/1998 $10,963 $11,090 $10,213
7/31/1998 $10,985 $11,118 $10,226
8/31/1998 $11,120 $11,290 $10,238
9/30/1998 $11,227 $11,430 $10,251
10/31/1998 $11,231 $11,430 $10,276
11/30/1998 $11,253 $11,470 $10,276
12/31/1998 $11,272 $11,499 $10,269
1/31/1999 $11,360 $11,636 $10,294
2/28/1999 $11,323 $11,585 $10,307
3/31/1999 $11,343 $11,601 $10,338
4/30/1999 $11,372 $11,630 $10,414
5/31/1999 $11,314 $11,563 $10,414
6/30/1999 $11,149 $11,396 $10,414
7/31/1999 $11,169 $11,438 $10,445
8/31/1999 $10,993 $11,346 $10,470
9/30/1999 $10,964 $11,351 $10,520
10/31/1999 $10,787 $11,228 $10,539
11/30/1999 $10,887 $11,347 $10,545
12/31/1999 $10,779 $11,263 $10,545
1/31/2000 $10,700 $11,214 $10,576
2/29/2000 $10,823 $11,344 $10,639
3/31/2000 $11,077 $11,592 $10,727
4/30/2000 $11,028 $11,523 $10,733
5/31/2000 $10,939 $11,463 $10,746
6/30/2000 $11,207 $11,767 $10,802
7/31/2000 $11,364 $11,931 $10,827
8/31/2000 $11,552 $12,115 $10,827
9/30/2000 $11,513 $12,052 $10,883
10/31/2000 $11,630 $12,183 $10,902
11/30/2000 $11,726 $12,275 $10,909
12/31/2000 $11,979 $12,579 $10,902
1/31/2001 $12,044 $12,703 $10,971
2/28/2001 $12,109 $12,744 $11,015
3/31/2001 $12,194 $12,858 $11,040
4/30/2001 $12,079 $12,719 $11,084
5/31/2001 $12,187 $12,855 $11,134
6/30/2001 $12,284 $12,941 $11,153
7/31/2001 $12,446 $13,133 $11,122
8/31/2001 $12,630 $13,350 $11,122
9/30/2001 $12,588 $13,305 $11,172
10/31/2001 $12,730 $13,463 $11,134
11/30/2001 $12,644 $13,350 $11,115
12/31/2001 $12,524 $13,223 $11,071
1/31/2002 $12,688 $13,453 $11,096
2/28/2002 $12,820 $13,615 $11,140
3/31/2002 $12,599 $13,348 $11,203
4/30/2002 $12,787 $13,609 $11,266
5/31/2002 $12,909 $13,692 $11,266
6/30/2002 $13,021 $13,836 $11,272
7/31/2002 $13,155 $14,014 $11,284
8/31/2002 $13,290 $14,183 $11,322
9/30/2002 $13,538 $14,494 $11,341
10/31/2002 $13,313 $14,253 $11,360
11/30/2002 $13,279 $14,194 $11,360
12/31/2002 $13,519 $14,494 $11,335
1/31/2003 $13,518 $14,457 $11,385
2/28/2003 $13,667 $14,659 $11,472
3/31/2003 $13,678 $14,668 $11,541
4/30/2003 $13,781 $14,765 $11,516
5/31/2003 $14,070 $15,110 $11,497
6/30/2003 $14,010 $15,046 $11,510
7/31/2003 $13,519 $14,520 $11,523
8/31/2003 $13,635 $14,628 $11,566
9/30/2003 $13,938 $15,058 $11,604
10/31/2003 $13,866 $14,982 $11,591
11/30/2003 $14,005 $15,138 $11,560
12/31/2003 $14,120 $15,264 $11,548
1/31/2004 $14,200 $15,351 $11,604
2/29/2004 $14,399 $15,582 $11,667
3/31/2004 $14,360 $15,528 $11,742
4/30/2004 $14,032 $15,160 $11,779
5/31/2004 $13,981 $15,105 $11,848
6/30/2004 $14,026 $15,160 $11,886
7/31/2004 $14,168 $15,360 $11,867
8/31/2004 $14,408 $15,667 $11,873
9/30/2004 $14,490 $15,751 $11,898
10/31/2004 $14,597 $15,886 $11,961
11/30/2004 $14,483 $15,755 $11,967
12/31/2004 $14,664 $15,947 $11,924
1/31/2005 $14,833 $16,096 $11,949
2/28/2005 $14,792 $16,043 $12,018
3/31/2005 $14,739 $15,942 $12,112
4/30/2005 $14,934 $16,193 $12,193
5/31/2005 $15,042 $16,308 $12,180
6/30/2005 $15,100 $16,409 $12,187
7/31/2005 $15,046 $16,335 $12,243
8/31/2005 $15,193 $16,500 $12,306
9/30/2005 $15,089 $16,388 $12,456
10/31/2005 $15,009 $16,289 $12,481
11/30/2005 $15,068 $16,367 $12,381
12/31/2005 $15,191 $16,508 $12,331
1/31/2006 $15,212 $16,552 $12,425
2/28/2006 $15,323 $16,664 $12,450
3/31/2006 $15,215 $16,549 $12,519
4/30/2006 $15,209 $16,543 $12,625
5/31/2006 $15,243 $16,617 $12,688
6/30/2006 $15,173 $16,554 $12,713
7/31/2006 $15,338 $16,751 $12,751
8/31/2006 $15,543 $17,000 $12,776
9/30/2006 $15,643 $17,118 $12,713
10/31/2006 $15,744 $17,225 $12,644
11/30/2006 $15,898 $17,369 $12,625
12/31/2006 $15,838 $17,307 $12,644
1/31/2007 $15,779 $17,263 $12,683
2/28/2007 $15,989 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS C 2/28/07
- -------------------------------------------------
1-Year +3.42%
- -------------------------------------------------
5-Year +4.52%
- -------------------------------------------------
10-Year +4.80%
- -------------------------------------------------
Annual Report | 61
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT
MAY INVEST A GREATER PORTION OF ITS ASSETS IN ONE ISSUER THAN A DIVERSIFIED
FUND. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Maryland
state and local personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
62 | Annual Report
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 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 | 63
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.30 $ 3.42
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.42 $ 3.41
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.10 $ 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.
64 | Annual Report
Franklin Missouri Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Missouri Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and Missouri
personal income taxes as is 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 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
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- --------------------------------------------------------------------------------
AAA 47.9%
- --------------------------------------------------------------------------------
AA 14.0%
- --------------------------------------------------------------------------------
A 7.0%
- --------------------------------------------------------------------------------
BBB 12.6%
- --------------------------------------------------------------------------------
Below Investment Grade 0.6%
- --------------------------------------------------------------------------------
Not Rated by S&P 17.9%
- --------------------------------------------------------------------------------
* 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 11.8% -- 0.8%
A -- 2.7% --
BBB or Baa 1.0% 0.2% 1.4%
- ---------------------------------------------------------
Total 12.8% 2.9% 2.2%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Missouri Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$12.31 on February 28, 2006, to $12.37 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 52.01 cents per share for the same
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 133.
Annual Report | 65
DIVIDEND DISTRIBUTIONS 2
Franklin Missouri Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.37 cents 3.81 cents
- --------------------------------------------------------------------------------
April 2006 4.37 cents 3.81 cents
- --------------------------------------------------------------------------------
May 2006 4.37 cents 3.81 cents
- --------------------------------------------------------------------------------
June 2006 4.32 cents 3.77 cents
- --------------------------------------------------------------------------------
July 2006 4.32 cents 3.77 cents
- --------------------------------------------------------------------------------
August 2006 4.32 cents 3.77 cents
- --------------------------------------------------------------------------------
September 2006 4.32 cents 3.76 cents
- --------------------------------------------------------------------------------
October 2006 4.32 cents 3.76 cents
- --------------------------------------------------------------------------------
November 2006 4.32 cents 3.76 cents
- --------------------------------------------------------------------------------
December 2006 4.28 cents 3.72 cents
- --------------------------------------------------------------------------------
January 2007 4.28 cents 3.72 cents
- --------------------------------------------------------------------------------
February 2007 4.28 cents 3.72 cents
- --------------------------------------------------------------------------------
period. 2 The Performance Summary beginning on page 68 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.98%
based on an annualization of the current 4.28 cent per share dividend and the
maximum offering price of $12.92 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Missouri 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. For the Fund's Class C
shares' performance, please see the Performance Summary.
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 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.
STATE UPDATE
Missouri's diverse economy derives much of its strength from its location at the
nation's geographic center, giving it an advantage in trade and manufacturing.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
66 | Annual Report
The state's major employment sectors are services, trade, manufacturing and
government. Durable and consumer goods manufacturing is a key component of
Missouri's economy. However, the state's income levels were just below the
national average and unemployment was above the nation's. Missouri's
unemployment rate for February 2007 was 5.0% compared with the 4.5% U.S. rate. 3
Missouri's fiscal year 2006 budget was balanced using $1.1 billion in budget
reductions from various state agencies and no tax increases or one-time revenue
sources. 4 To match expenditures with anticipated revenues, the budget called
for staff cuts and statute changes to reduce Medicaid costs. However, basic aid
for elementary and secondary education was increased, reflecting the governor's
emphasis on education.
The state's net sales tax revenues and net personal income taxes came in above
budgeted levels for the first seven months of fiscal year 2006 with no
expenditures withheld. Missouri projected that the budget reserve fund would be
fully funded at 2006 fiscal year-end as required by state law.
Independent credit rating agency Standard & Poor's assigned Missouri's general
obligation bonds its highest rating of AAA with a stable outlook. 5 The rating
and outlook reflect Missouri's strong and diverse economic base, excellent
financial management, high reserve levels and low debt burden.
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.
PORTFOLIO BREAKDOWN
Franklin Missouri Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 19.0%
- --------------------------------------------------------------------------------
Utilities 17.8%
- --------------------------------------------------------------------------------
Hospital & Health Care 17.2%
- --------------------------------------------------------------------------------
Higher Education 14.9%
- --------------------------------------------------------------------------------
General Obligation 10.3%
- --------------------------------------------------------------------------------
Tax-Supported 9.6%
- --------------------------------------------------------------------------------
Corporate-Backed 2.9%
- --------------------------------------------------------------------------------
Transportation 2.8%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 2.6%
- --------------------------------------------------------------------------------
Other Revenue 1.5%
- --------------------------------------------------------------------------------
Housing 1.4%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
3. Source: Bureau of Labor Statistics.
4. Source: Standard & Poor's, "Research: State Review: Missouri,"
RATINGSDIRECT, 5/12/06.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 67
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRMOX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $12.37 $12.31
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5201
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FMOIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $12.45 $12.39
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4529
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.85% +28.74% +70.24%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.37% +4.28% +5.00%
- ------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.70% +4.61% +5.06%
- ------------------------------------------------------------------------------------------------
Distribution Rate 4 3.98%
- ------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.51%
- ------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.42%
- ------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.60%
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.66%
- ------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.25% +25.29% +61.51%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.25% +4.61% +4.91%
- ------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.65% +4.95% +4.96%
- ------------------------------------------------------------------------------------------------
Distribution Rate 4 3.57%
- ------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.84%
- ------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.05%
- ------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.99%
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.21%
- ------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
68 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Missouri Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
----------- --------------------- ---------------------- ----------
3/1/1997 $9,571 $10,000 $10,000
3/31/1997 $9,477 $9,867 $10,025
4/30/1997 $9,578 $9,949 $10,038
5/31/1997 $9,696 $10,099 $10,031
6/30/1997 $9,788 $10,207 $10,044
7/31/1997 $10,022 $10,489 $10,056
8/31/1997 $9,951 $10,391 $10,075
9/30/1997 $10,079 $10,514 $10,100
10/31/1997 $10,133 $10,582 $10,125
11/30/1997 $10,203 $10,644 $10,119
12/31/1997 $10,352 $10,799 $10,107
1/31/1998 $10,430 $10,911 $10,125
2/28/1998 $10,474 $10,914 $10,144
3/31/1998 $10,484 $10,924 $10,163
4/30/1998 $10,460 $10,875 $10,182
5/31/1998 $10,600 $11,047 $10,201
6/30/1998 $10,638 $11,090 $10,213
7/31/1998 $10,648 $11,118 $10,226
8/31/1998 $10,782 $11,290 $10,238
9/30/1998 $10,907 $11,430 $10,251
10/31/1998 $10,882 $11,430 $10,276
11/30/1998 $10,910 $11,470 $10,276
12/31/1998 $10,948 $11,499 $10,269
1/31/1999 $11,047 $11,636 $10,294
2/28/1999 $11,012 $11,585 $10,307
3/31/1999 $11,039 $11,601 $10,338
4/30/1999 $11,057 $11,630 $10,414
5/31/1999 $10,993 $11,563 $10,414
6/30/1999 $10,822 $11,396 $10,414
7/31/1999 $10,841 $11,438 $10,445
8/31/1999 $10,684 $11,346 $10,470
9/30/1999 $10,665 $11,351 $10,520
10/31/1999 $10,488 $11,228 $10,539
11/30/1999 $10,591 $11,347 $10,545
12/31/1999 $10,468 $11,263 $10,545
1/31/2000 $10,364 $11,214 $10,576
2/29/2000 $10,497 $11,344 $10,639
3/31/2000 $10,764 $11,592 $10,727
4/30/2000 $10,697 $11,523 $10,733
5/31/2000 $10,621 $11,463 $10,746
6/30/2000 $10,910 $11,767 $10,802
7/31/2000 $11,066 $11,931 $10,827
8/31/2000 $11,261 $12,115 $10,827
9/30/2000 $11,192 $12,052 $10,883
10/31/2000 $11,310 $12,183 $10,902
11/30/2000 $11,409 $12,275 $10,909
12/31/2000 $11,696 $12,579 $10,902
1/31/2001 $11,766 $12,703 $10,971
2/28/2001 $11,816 $12,744 $11,015
3/31/2001 $11,906 $12,858 $11,040
4/30/2001 $11,794 $12,719 $11,084
5/31/2001 $11,905 $12,855 $11,134
6/30/2001 $11,996 $12,941 $11,153
7/31/2001 $12,190 $13,133 $11,122
8/31/2001 $12,446 $13,350 $11,122
9/30/2001 $12,382 $13,305 $11,172
10/31/2001 $12,546 $13,463 $11,134
11/30/2001 $12,441 $13,350 $11,115
12/31/2001 $12,283 $13,223 $11,071
1/31/2002 $12,522 $13,453 $11,096
2/28/2002 $12,657 $13,615 $11,140
3/31/2002 $12,402 $13,348 $11,203
4/30/2002 $12,613 $13,609 $11,266
5/31/2002 $12,686 $13,692 $11,266
6/30/2002 $12,813 $13,836 $11,272
7/31/2002 $12,982 $14,014 $11,284
8/31/2002 $13,121 $14,183 $11,322
9/30/2002 $13,410 $14,494 $11,341
10/31/2002 $13,169 $14,253 $11,360
11/30/2002 $13,134 $14,194 $11,360
12/31/2002 $13,372 $14,494 $11,335
1/31/2003 $13,358 $14,457 $11,385
2/28/2003 $13,532 $14,659 $11,472
3/31/2003 $13,540 $14,668 $11,541
4/30/2003 $13,647 $14,765 $11,516
5/31/2003 $13,967 $15,110 $11,497
6/30/2003 $13,907 $15,046 $11,510
7/31/2003 $13,373 $14,520 $11,523
8/31/2003 $13,504 $14,628 $11,566
9/30/2003 $13,851 $15,058 $11,604
10/31/2003 $13,779 $14,982 $11,591
11/30/2003 $13,945 $15,138 $11,560
12/31/2003 $14,077 $15,264 $11,548
1/31/2004 $14,163 $15,351 $11,604
2/29/2004 $14,399 $15,582 $11,667
3/31/2004 $14,346 $15,528 $11,742
4/30/2004 $13,980 $15,160 $11,779
5/31/2004 $13,927 $15,105 $11,848
6/30/2004 $13,956 $15,160 $11,886
7/31/2004 $14,162 $15,360 $11,867
8/31/2004 $14,415 $15,667 $11,873
9/30/2004 $14,503 $15,751 $11,898
10/31/2004 $14,651 $15,886 $11,961
11/30/2004 $14,526 $15,755 $11,967
12/31/2004 $14,735 $15,947 $11,924
1/31/2005 $14,933 $16,096 $11,949
2/28/2005 $14,902 $16,043 $12,018
3/31/2005 $14,835 $15,942 $12,112
4/30/2005 $15,071 $16,193 $12,193
5/31/2005 $15,187 $16,308 $12,180
6/30/2005 $15,266 $16,409 $12,187
7/31/2005 $15,260 $16,335 $12,243
8/31/2005 $15,414 $16,500 $12,306
9/30/2005 $15,270 $16,388 $12,456
10/31/2005 $15,151 $16,289 $12,481
11/30/2005 $15,206 $16,367 $12,381
12/31/2005 $15,374 $16,508 $12,331
1/31/2006 $15,392 $16,552 $12,425
2/28/2006 $15,548 $16,664 $12,450
3/31/2006 $15,426 $16,549 $12,519
4/30/2006 $15,418 $16,543 $12,625
5/31/2006 $15,448 $16,617 $12,688
6/30/2006 $15,388 $16,554 $12,713
7/31/2006 $15,572 $16,751 $12,751
8/31/2006 $15,807 $17,000 $12,776
9/30/2006 $15,915 $17,118 $12,713
10/31/2006 $16,023 $17,225 $12,644
11/30/2006 $16,183 $17,369 $12,625
12/31/2006 $16,122 $17,307 $12,644
1/31/2007 $16,073 $17,263 $12,683
2/28/2007 $16,294 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
CLASS A 2/28/07
- --------------------------------------
1-Year +0.37%
- --------------------------------------
5-Year +4.28%
- --------------------------------------
10-Year +5.00%
- --------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Missouri Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
----------- --------------------- ---------------------- --------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,902 $9,867 $10,025
4/30/1997 $10,003 $9,949 $10,038
5/31/1997 $10,121 $10,099 $10,031
6/30/1997 $10,212 $10,207 $10,044
7/31/1997 $10,459 $10,489 $10,056
8/31/1997 $10,380 $10,391 $10,075
9/30/1997 $10,509 $10,514 $10,100
10/31/1997 $10,560 $10,582 $10,125
11/30/1997 $10,628 $10,644 $10,119
12/31/1997 $10,777 $10,799 $10,107
1/31/1998 $10,853 $10,911 $10,125
2/28/1998 $10,894 $10,914 $10,144
3/31/1998 $10,900 $10,924 $10,163
4/30/1998 $10,870 $10,875 $10,182
5/31/1998 $11,010 $11,047 $10,201
6/30/1998 $11,052 $11,090 $10,213
7/31/1998 $11,058 $11,118 $10,226
8/31/1998 $11,191 $11,290 $10,238
9/30/1998 $11,306 $11,430 $10,251
10/31/1998 $11,274 $11,430 $10,276
11/30/1998 $11,307 $11,470 $10,276
12/31/1998 $11,331 $11,499 $10,269
1/31/1999 $11,428 $11,636 $10,294
2/28/1999 $11,395 $11,585 $10,307
3/31/1999 $11,418 $11,601 $10,338
4/30/1999 $11,422 $11,630 $10,414
5/31/1999 $11,360 $11,563 $10,414
6/30/1999 $11,170 $11,396 $10,414
7/31/1999 $11,183 $11,438 $10,445
8/31/1999 $11,027 $11,346 $10,470
9/30/1999 $10,993 $11,351 $10,520
10/31/1999 $10,816 $11,228 $10,539
11/30/1999 $10,906 $11,347 $10,545
12/31/1999 $10,776 $11,263 $10,545
1/31/2000 $10,665 $11,214 $10,576
2/29/2000 $10,796 $11,344 $10,639
3/31/2000 $11,065 $11,592 $10,727
4/30/2000 $10,991 $11,523 $10,733
5/31/2000 $10,917 $11,463 $10,746
6/30/2000 $11,199 $11,767 $10,802
7/31/2000 $11,363 $11,931 $10,827
8/31/2000 $11,547 $12,115 $10,827
9/30/2000 $11,481 $12,052 $10,883
10/31/2000 $11,597 $12,183 $10,902
11/30/2000 $11,693 $12,275 $10,909
12/31/2000 $11,980 $12,579 $10,902
1/31/2001 $12,046 $12,703 $10,971
2/28/2001 $12,091 $12,744 $11,015
3/31/2001 $12,187 $12,858 $11,040
4/30/2001 $12,058 $12,719 $11,084
5/31/2001 $12,165 $12,855 $11,134
6/30/2001 $12,252 $12,941 $11,153
7/31/2001 $12,443 $13,133 $11,122
8/31/2001 $12,698 $13,350 $11,122
9/30/2001 $12,639 $13,305 $11,172
10/31/2001 $12,800 $13,463 $11,134
11/30/2001 $12,687 $13,350 $11,115
12/31/2001 $12,521 $13,223 $11,071
1/31/2002 $12,747 $13,453 $11,096
2/28/2002 $12,889 $13,615 $11,140
3/31/2002 $12,624 $13,348 $11,203
4/30/2002 $12,831 $13,609 $11,266
5/31/2002 $12,899 $13,692 $11,266
6/30/2002 $13,021 $13,836 $11,272
7/31/2002 $13,188 $14,014 $11,284
8/31/2002 $13,322 $14,183 $11,322
9/30/2002 $13,608 $14,494 $11,341
10/31/2002 $13,359 $14,253 $11,360
11/30/2002 $13,317 $14,194 $11,360
12/31/2002 $13,551 $14,494 $11,335
1/31/2003 $13,531 $14,457 $11,385
2/28/2003 $13,701 $14,659 $11,472
3/31/2003 $13,702 $14,668 $11,541
4/30/2003 $13,805 $14,765 $11,516
5/31/2003 $14,121 $15,110 $11,497
6/30/2003 $14,066 $15,046 $11,510
7/31/2003 $13,512 $14,520 $11,523
8/31/2003 $13,636 $14,628 $11,566
9/30/2003 $13,977 $15,058 $11,604
10/31/2003 $13,908 $14,982 $11,591
11/30/2003 $14,068 $15,138 $11,560
12/31/2003 $14,182 $15,264 $11,548
1/31/2004 $14,274 $15,351 $11,604
2/29/2004 $14,493 $15,582 $11,667
3/31/2004 $14,445 $15,528 $11,742
4/30/2004 $14,071 $15,160 $11,779
5/31/2004 $14,012 $15,105 $11,848
6/30/2004 $14,035 $15,160 $11,886
7/31/2004 $14,222 $15,360 $11,867
8/31/2004 $14,480 $15,667 $11,873
9/30/2004 $14,561 $15,751 $11,898
10/31/2004 $14,703 $15,886 $11,961
11/30/2004 $14,571 $15,755 $11,967
12/31/2004 $14,772 $15,947 $11,924
1/31/2005 $14,962 $16,096 $11,949
2/28/2005 $14,925 $16,043 $12,018
3/31/2005 $14,851 $15,942 $12,112
4/30/2005 $15,079 $16,193 $12,193
5/31/2005 $15,199 $16,308 $12,180
6/30/2005 $15,259 $16,409 $12,187
7/31/2005 $15,246 $16,335 $12,243
8/31/2005 $15,392 $16,500 $12,306
9/30/2005 $15,242 $16,388 $12,456
10/31/2005 $15,130 $16,289 $12,481
11/30/2005 $15,165 $16,367 $12,381
12/31/2005 $15,324 $16,508 $12,331
1/31/2006 $15,335 $16,552 $12,425
2/28/2006 $15,495 $16,664 $12,450
3/31/2006 $15,355 $16,549 $12,519
4/30/2006 $15,340 $16,543 $12,625
5/31/2006 $15,363 $16,617 $12,688
6/30/2006 $15,297 $16,554 $12,713
7/31/2006 $15,471 $16,751 $12,751
8/31/2006 $15,697 $17,000 $12,776
9/30/2006 $15,809 $17,118 $12,713
10/31/2006 $15,908 $17,225 $12,644
11/30/2006 $16,059 $17,369 $12,625
12/31/2006 $15,978 $17,307 $12,644
1/31/2007 $15,936 $17,263 $12,683
2/28/2007 $16,151 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 2/28/07
- --------------------------------------
1-Year +3.25%
- --------------------------------------
5-Year +4.61%
- --------------------------------------
10-Year +4.91%
- --------------------------------------
Annual Report | 69
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Missouri
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
70 | Annual Report
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 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 | 71
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.90 $3.32
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
- ------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.80 $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:
0.66% and C: 1.20%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
72 | Annual Report
Franklin North Carolina Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin North Carolina Tax-Free Income
Fund seeks to provide as high a level of income exempt from federal and North
Carolina personal income taxes as is 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 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 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA 66.0%
AA 14.6%
A 1.9%
BBB 9.7%
Not Rated by S&P 7.8%
* 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 6.3% --
BBB or Baa 1.1% 0.2%
Below Investment Grade 0.2% --
- ---------------------------------------------------------
Total 7.6% 0.2%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin North Carolina Tax-Free Income Fund's
annual report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$12.31 on February 28, 2006, to $12.38 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 141.
Annual Report | 73
DIVIDEND DISTRIBUTIONS 2
Franklin North Carolina Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.33 cents 3.76 cents
- --------------------------------------------------------------------------------
April 2006 4.33 cents 3.76 cents
- --------------------------------------------------------------------------------
May 2006 4.33 cents 3.76 cents
- --------------------------------------------------------------------------------
June 2006 4.29 cents 3.73 cents
- --------------------------------------------------------------------------------
July 2006 4.29 cents 3.73 cents
- --------------------------------------------------------------------------------
August 2006 4.29 cents 3.73 cents
- --------------------------------------------------------------------------------
September 2006 4.29 cents 3.73 cents
- --------------------------------------------------------------------------------
October 2006 4.29 cents 3.73 cents
- --------------------------------------------------------------------------------
November 2006 4.29 cents 3.73 cents
- --------------------------------------------------------------------------------
December 2006 4.25 cents 3.67 cents
- --------------------------------------------------------------------------------
January 2007 4.25 cents 3.67 cents
- --------------------------------------------------------------------------------
February 2007 4.25 cents 3.67 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 51.60 cents per share for the same
period. 2 The Performance Summary beginning on page 77 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.89%
based on an annualization of the current 4.19 cent per share dividend and the
maximum offering price of $12.93 on February 28, 2007. An investor in the 2007
maximum combined effective federal and North Carolina personal income tax
bracket of 40.20% 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. For the
Fund's Class C shares' performance, please see the Performance Summary.
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 cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
74 | Annual Report
STATE UPDATE
North Carolina's diversified economy expanded at a healthy pace that exceeded
national rates. In particular, the services sector, including business and
professional, education and health, and leisure, showed strong growth. The
state's labor force expanded and employment gains accelerated. Unemployment
steadily declined and the state's unemployment rate in February 2007 was the
same as the 4.5% national rate. 3
An improving economy, conservative budgeting and tight expenditure controls
contributed to the state's strong financial performance. Tax revenues exceeded
budget forecasts by 6.5% in fiscal year 2006, and were 13.2% higher than fiscal
year 2005 revenues, resulting in a $940 million surplus. 4 The state's reserve
levels rose and the general fund balance achieved a positive position.
While historically moderate, North Carolina's net tax-supported debt increased
significantly in recent years partly due to large issuances for higher education
capital projects. Despite this sizable increase, the state's debt burden, at
$818 per capita and 2.6% of personal income, remained moderate compared with
those of other states. 5
Independent credit rating agency Standard & Poor's assigned North Carolina its
highest AAA rating with a stable outlook. 6 In February 2007, another
independent rating agency, Moody's Investors Service, upgraded the state's
rating from AA1 to Aaa, and changed its outlook from positive to stable. 7 The
upgrade reflects North Carolina's recent economic gains, improved financial
performance, replenishment of depleted reserves and effective fiscal management.
PORTFOLIO BREAKDOWN
Franklin North Carolina Tax-Free
Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Hospital & Health Care 19.5%
- --------------------------------------------------------------------------------
Prerefunded 16.9%
- --------------------------------------------------------------------------------
Utilities 16.8%
- --------------------------------------------------------------------------------
Higher Education 13.3%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 11.3%
- --------------------------------------------------------------------------------
Transportation 10.3%
- --------------------------------------------------------------------------------
Other Revenue 4.5%
- --------------------------------------------------------------------------------
General Obligation 3.3%
- --------------------------------------------------------------------------------
Housing 1.6%
- --------------------------------------------------------------------------------
Corporate-Backed 1.3%
- --------------------------------------------------------------------------------
Tax-Supported 1.2%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
3. Source: Bureau of Labor Statistics.
4. Source: Moody's Investors Service, "Rating Update: North Carolina (State
of)," 1/12/07.
5. Source: Standard & Poor's, "Research: State Review: North Carolina,"
RATINGSDIRECT, 2/13/07.
6. This does not indicate Standard & Poor's rating of the Fund.
7. This does not indicate Moody's rating of the Fund.
Annual Report | 75
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 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
76 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FXNCX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.38 $12.31
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5160
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FNCIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.51 $12.44
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4478
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.89% +29.03% +69.94%
- ----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.40% +4.32% +4.99%
- ----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.58% +4.62% +5.04%
- ----------------------------------------------------------------------------------------------
Distribution Rate 4 3.89%
- ----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.51%
- ----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.32%
- ----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.55%
- ----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.66%
- ----------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.26% +25.62% +61.06%
- ----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.26% +4.67% +4.88%
- ----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.50% +4.97% +4.93%
- ----------------------------------------------------------------------------------------------
Distribution Rate 4 3.49%
- ----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.84%
- ----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.92%
- ----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.88%
- ----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.21%
- ----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 77
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.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS A 2/28/07
- --------------------------------------------
1-Year +0.40%
- --------------------------------------------
5-Year +4.32%
- --------------------------------------------
10-Year +4.99%
- --------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin North Carolina Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
--------- ----------------------- ---------------------- --------
3/1/1997 $9,576 $10,000 $10,000
3/31/1997 $9,487 $9,867 $10,025
4/30/1997 $9,571 $9,949 $10,038
5/31/1997 $9,680 $10,099 $10,031
6/30/1997 $9,781 $10,207 $10,044
7/31/1997 $9,998 $10,489 $10,056
8/31/1997 $9,942 $10,391 $10,075
9/30/1997 $10,044 $10,514 $10,100
10/31/1997 $10,113 $10,582 $10,125
11/30/1997 $10,183 $10,644 $10,119
12/31/1997 $10,329 $10,799 $10,107
1/31/1998 $10,416 $10,911 $10,125
2/28/1998 $10,417 $10,914 $10,144
3/31/1998 $10,435 $10,924 $10,163
4/30/1998 $10,419 $10,875 $10,182
5/31/1998 $10,559 $11,047 $10,201
6/30/1998 $10,603 $11,090 $10,213
7/31/1998 $10,630 $11,118 $10,226
8/31/1998 $10,763 $11,290 $10,238
9/30/1998 $10,896 $11,430 $10,251
10/31/1998 $10,888 $11,430 $10,276
11/30/1998 $10,916 $11,470 $10,276
12/31/1998 $10,943 $11,499 $10,269
1/31/1999 $11,042 $11,636 $10,294
2/28/1999 $10,996 $11,585 $10,307
3/31/1999 $11,014 $11,601 $10,338
4/30/1999 $11,032 $11,630 $10,414
5/31/1999 $10,976 $11,563 $10,414
6/30/1999 $10,802 $11,396 $10,414
7/31/1999 $10,810 $11,438 $10,445
8/31/1999 $10,690 $11,346 $10,470
9/30/1999 $10,671 $11,351 $10,520
10/31/1999 $10,512 $11,228 $10,539
11/30/1999 $10,596 $11,347 $10,545
12/31/1999 $10,473 $11,263 $10,545
1/31/2000 $10,387 $11,214 $10,576
2/29/2000 $10,510 $11,344 $10,639
3/31/2000 $10,767 $11,592 $10,727
4/30/2000 $10,700 $11,523 $10,733
5/31/2000 $10,642 $11,463 $10,746
6/30/2000 $10,912 $11,767 $10,802
7/31/2000 $11,077 $11,931 $10,827
8/31/2000 $11,242 $12,115 $10,827
9/30/2000 $11,183 $12,052 $10,883
10/31/2000 $11,311 $12,183 $10,902
11/30/2000 $11,410 $12,275 $10,909
12/31/2000 $11,688 $12,579 $10,902
1/31/2001 $11,768 $12,703 $10,971
2/28/2001 $11,818 $12,744 $11,015
3/31/2001 $11,908 $12,858 $11,040
4/30/2001 $11,767 $12,719 $11,084
5/31/2001 $11,879 $12,855 $11,134
6/30/2001 $11,980 $12,941 $11,153
7/31/2001 $12,206 $13,133 $11,122
8/31/2001 $12,390 $13,350 $11,122
9/30/2001 $12,328 $13,305 $11,172
10/31/2001 $12,482 $13,463 $11,134
11/30/2001 $12,398 $13,350 $11,115
12/31/2001 $12,261 $13,223 $11,071
1/31/2002 $12,457 $13,453 $11,096
2/28/2002 $12,613 $13,615 $11,140
3/31/2002 $12,378 $13,348 $11,203
4/30/2002 $12,598 $13,609 $11,266
5/31/2002 $12,659 $13,692 $11,266
6/30/2002 $12,773 $13,836 $11,272
7/31/2002 $12,930 $14,014 $11,284
8/31/2002 $13,088 $14,183 $11,322
9/30/2002 $13,387 $14,494 $11,341
10/31/2002 $13,167 $14,253 $11,360
11/30/2002 $13,130 $14,194 $11,360
12/31/2002 $13,400 $14,494 $11,335
1/31/2003 $13,364 $14,457 $11,385
2/28/2003 $13,525 $14,659 $11,472
3/31/2003 $13,522 $14,668 $11,541
4/30/2003 $13,595 $14,765 $11,516
5/31/2003 $13,914 $15,110 $11,497
6/30/2003 $13,877 $15,046 $11,510
7/31/2003 $13,389 $14,520 $11,523
8/31/2003 $13,496 $14,628 $11,566
9/30/2003 $13,842 $15,058 $11,604
10/31/2003 $13,780 $14,982 $11,591
11/30/2003 $13,946 $15,138 $11,560
12/31/2003 $14,066 $15,264 $11,548
1/31/2004 $14,152 $15,351 $11,604
2/29/2004 $14,354 $15,582 $11,667
3/31/2004 $14,348 $15,528 $11,742
4/30/2004 $14,017 $15,160 $11,779
5/31/2004 $13,966 $15,105 $11,848
6/30/2004 $14,031 $15,160 $11,886
7/31/2004 $14,224 $15,360 $11,867
8/31/2004 $14,466 $15,667 $11,873
9/30/2004 $14,555 $15,751 $11,898
10/31/2004 $14,692 $15,886 $11,961
11/30/2004 $14,579 $15,755 $11,967
12/31/2004 $14,764 $15,947 $11,924
1/31/2005 $14,962 $16,096 $11,949
2/28/2005 $14,944 $16,043 $12,018
3/31/2005 $14,865 $15,942 $12,112
4/30/2005 $15,076 $16,193 $12,193
5/31/2005 $15,179 $16,308 $12,180
6/30/2005 $15,258 $16,409 $12,187
7/31/2005 $15,215 $16,335 $12,243
8/31/2005 $15,343 $16,500 $12,306
9/30/2005 $15,249 $16,388 $12,456
10/31/2005 $15,180 $16,289 $12,481
11/30/2005 $15,233 $16,367 $12,381
12/31/2005 $15,362 $16,508 $12,331
1/31/2006 $15,391 $16,552 $12,425
2/28/2006 $15,521 $16,664 $12,450
3/31/2006 $15,424 $16,549 $12,519
4/30/2006 $15,428 $16,543 $12,625
5/31/2006 $15,471 $16,617 $12,688
6/30/2006 $15,410 $16,554 $12,713
7/31/2006 $15,581 $16,751 $12,751
8/31/2006 $15,803 $17,000 $12,776
9/30/2006 $15,909 $17,118 $12,713
10/31/2006 $16,017 $17,225 $12,644
11/30/2006 $16,177 $17,369 $12,625
12/31/2006 $16,115 $17,307 $12,644
1/31/2007 $16,066 $17,263 $12,683
2/28/2007 $16,272 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS C 2/28/07
- --------------------------------------------
1-Year +3.26%
- --------------------------------------------
5-Year +4.67%
- --------------------------------------------
10-Year +4.88%
- --------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin North Carolina Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
--------- ----------------------- ------------------------ ---------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,902 $9,867 $10,025
4/30/1997 $9,985 $9,949 $10,038
5/31/1997 $10,102 $10,099 $10,031
6/30/1997 $10,193 $10,207 $10,044
7/31/1997 $10,423 $10,489 $10,056
8/31/1997 $10,350 $10,391 $10,075
9/30/1997 $10,460 $10,514 $10,100
10/31/1997 $10,518 $10,582 $10,125
11/30/1997 $10,594 $10,644 $10,119
12/31/1997 $10,731 $10,799 $10,107
1/31/1998 $10,825 $10,911 $10,125
2/28/1998 $10,822 $10,914 $10,144
3/31/1998 $10,835 $10,924 $10,163
4/30/1998 $10,813 $10,875 $10,182
5/31/1998 $10,961 $11,047 $10,201
6/30/1998 $11,001 $11,090 $10,213
7/31/1998 $11,024 $11,118 $10,226
8/31/1998 $11,156 $11,290 $10,238
9/30/1998 $11,280 $11,430 $10,251
10/31/1998 $11,267 $11,430 $10,276
11/30/1998 $11,299 $11,470 $10,276
12/31/1998 $11,322 $11,499 $10,269
1/31/1999 $11,419 $11,636 $10,294
2/28/1999 $11,367 $11,585 $10,307
3/31/1999 $11,380 $11,601 $10,338
4/30/1999 $11,392 $11,630 $10,414
5/31/1999 $11,330 $11,563 $10,414
6/30/1999 $11,137 $11,396 $10,414
7/31/1999 $11,149 $11,438 $10,445
8/31/1999 $11,011 $11,346 $10,470
9/30/1999 $10,996 $11,351 $10,520
10/31/1999 $10,819 $11,228 $10,539
11/30/1999 $10,899 $11,347 $10,545
12/31/1999 $10,769 $11,263 $10,545
1/31/2000 $10,677 $11,214 $10,576
2/29/2000 $10,807 $11,344 $10,639
3/31/2000 $11,065 $11,592 $10,727
4/30/2000 $10,991 $11,523 $10,733
5/31/2000 $10,917 $11,463 $10,746
6/30/2000 $11,197 $11,767 $10,802
7/31/2000 $11,360 $11,931 $10,827
8/31/2000 $11,523 $12,115 $10,827
9/30/2000 $11,458 $12,052 $10,883
10/31/2000 $11,583 $12,183 $10,902
11/30/2000 $11,679 $12,275 $10,909
12/31/2000 $11,955 $12,579 $10,902
1/31/2001 $12,041 $12,703 $10,971
2/28/2001 $12,087 $12,744 $11,015
3/31/2001 $12,172 $12,858 $11,040
4/30/2001 $12,013 $12,719 $11,084
5/31/2001 $12,130 $12,855 $11,134
6/30/2001 $12,228 $12,941 $11,153
7/31/2001 $12,450 $13,133 $11,122
8/31/2001 $12,632 $13,350 $11,122
9/30/2001 $12,563 $13,305 $11,172
10/31/2001 $12,713 $13,463 $11,134
11/30/2001 $12,622 $13,350 $11,115
12/31/2001 $12,478 $13,223 $11,071
1/31/2002 $12,681 $13,453 $11,096
2/28/2002 $12,821 $13,615 $11,140
3/31/2002 $12,578 $13,348 $11,203
4/30/2002 $12,794 $13,609 $11,266
5/31/2002 $12,861 $13,692 $11,266
6/30/2002 $12,969 $13,836 $11,272
7/31/2002 $13,121 $14,014 $11,284
8/31/2002 $13,274 $14,183 $11,322
9/30/2002 $13,580 $14,494 $11,341
10/31/2002 $13,342 $14,253 $11,360
11/30/2002 $13,299 $14,194 $11,360
12/31/2002 $13,564 $14,494 $11,335
1/31/2003 $13,521 $14,457 $11,385
2/28/2003 $13,688 $14,659 $11,472
3/31/2003 $13,667 $14,668 $11,541
4/30/2003 $13,746 $14,765 $11,516
5/31/2003 $14,060 $15,110 $11,497
6/30/2003 $14,016 $15,046 $11,510
7/31/2003 $13,511 $14,520 $11,523
8/31/2003 $13,622 $14,628 $11,566
9/30/2003 $13,949 $15,058 $11,604
10/31/2003 $13,880 $14,982 $11,591
11/30/2003 $14,049 $15,138 $11,560
12/31/2003 $14,163 $15,264 $11,548
1/31/2004 $14,242 $15,351 $11,604
2/29/2004 $14,448 $15,582 $11,667
3/31/2004 $14,424 $15,528 $11,742
4/30/2004 $14,088 $15,160 $11,779
5/31/2004 $14,029 $15,105 $11,848
6/30/2004 $14,087 $15,160 $11,886
7/31/2004 $14,274 $15,360 $11,867
8/31/2004 $14,520 $15,667 $11,873
9/30/2004 $14,590 $15,751 $11,898
10/31/2004 $14,719 $15,886 $11,961
11/30/2004 $14,612 $15,755 $11,967
12/31/2004 $14,789 $15,947 $11,924
1/31/2005 $14,966 $16,096 $11,949
2/28/2005 $14,941 $16,043 $12,018
3/31/2005 $14,868 $15,942 $12,112
4/30/2005 $15,070 $16,193 $12,193
5/31/2005 $15,165 $16,308 $12,180
6/30/2005 $15,236 $16,409 $12,187
7/31/2005 $15,186 $16,335 $12,243
8/31/2005 $15,307 $16,500 $12,306
9/30/2005 $15,207 $16,388 $12,456
10/31/2005 $15,131 $16,289 $12,481
11/30/2005 $15,177 $16,367 $12,381
12/31/2005 $15,298 $16,508 $12,331
1/31/2006 $15,319 $16,552 $12,425
2/28/2006 $15,453 $16,664 $12,450
3/31/2006 $15,338 $16,549 $12,519
4/30/2006 $15,335 $16,543 $12,625
5/31/2006 $15,369 $16,617 $12,688
6/30/2006 $15,303 $16,554 $12,713
7/31/2006 $15,476 $16,751 $12,751
8/31/2006 $15,687 $17,000 $12,776
9/30/2006 $15,772 $17,118 $12,713
10/31/2006 $15,883 $17,225 $12,644
11/30/2006 $16,020 $17,369 $12,625
12/31/2006 $15,952 $17,307 $12,644
1/31/2007 $15,909 $17,263 $12,683
2/28/2007 $16,106 $17,490 $12,751
78 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and North
Carolina personal income tax rate of 40.20%, 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
Annual Report | 79
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 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.
80 | 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,048.90 $3.35
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
- ------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,042.60 $6.13
- ------------------------------------------------------------------------------------------------------
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 | 81
Franklin Virginia Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Virginia Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and Virginia
personal income taxes as is 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 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
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ..................... 63.1%
AA ...................... 17.3%
A ....................... 2.7%
BBB ..................... 6.3%
Not Rated by S&P ........ 10.6%
* 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 2.5% --
AA or Aa 1.0% --
A 3.3% --
BBB or Baa 2.2% 0.3%
Below Investment Grade 1.3% --
- ---------------------------------------------
Total 10.3% 0.3%
- --------------------------------------------------------------------------------
This annual report for Franklin Virginia Tax-Free Income Fund covers the fiscal
year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, began and ended
the reporting period at $11.85. The Fund's Class A shares paid dividends
totaling
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 149.
82 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Virginia Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.19 cents 3.64 cents
- --------------------------------------------------------------------------------
April 2006 4.19 cents 3.64 cents
- --------------------------------------------------------------------------------
May 2006 4.19 cents 3.64 cents
- --------------------------------------------------------------------------------
June 2006 4.19 cents 3.64 cents
- --------------------------------------------------------------------------------
July 2006 4.19 cents 3.64 cents
- --------------------------------------------------------------------------------
August 2006 4.19 cents 3.64 cents
- --------------------------------------------------------------------------------
September 2006 4.19 cents 3.65 cents
- --------------------------------------------------------------------------------
October 2006 4.19 cents 3.65 cents
- --------------------------------------------------------------------------------
November 2006 4.19 cents 3.65 cents
- --------------------------------------------------------------------------------
December 2006 4.17 cents 3.63 cents
- --------------------------------------------------------------------------------
January 2007 4.17 cents 3.63 cents
- --------------------------------------------------------------------------------
February 2007 4.17 cents 3.63 cents
- --------------------------------------------------------------------------------
50.37 cents per share for the same period. 2 The Performance Summary beginning
on page 86 shows that at the end of this reporting period the Fund's Class A
shares' distribution rate was 4.04% based on an annualization of the current
4.17 cent per share dividend and the maximum offering price of $12.38 on
February 28, 2007. An investor in the 2007 maximum combined effective federal
and Virginia personal income tax bracket of 38.74% would need to earn a
distribution rate of 6.59% 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.
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 cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 | 83
COMMONWEALTH UPDATE
Virginia's strong and diverse economy grew at a faster pace than the national
average. The commonwealth outperformed in terms of income and job growth.
Defense and other federal spending remained a growth stimulant. Income levels
were above average with median household effective buying income and per capita
personal income both at about 110% of U.S. levels. 3 Unemployment trends
continued to improve and Virginia's unemployment rate of 2.9% in February 2007
was well below the national rate of 4.5%. 4
The commonwealth's financial position improved due to its growing economy, a
half-cent sales tax increase and conservative budgeting. General fund revenue
collections were strong in fiscal year 2006, increasing 8.4% compared with the
previous year, and exceeding the budgeted revenue forecast by about 1%. 5
Additionally, Virginia's solid fiscal year 2006 revenue growth allowed it to
boost its revenue stabilization fund to more than $1 billion, reaching the
constitutional cap for the first time and equaling slightly more than 7% of
fiscal year 2006 general revenues. 5 Through September 2006, fiscal year 2007
general fund revenues were up 7.6% compared with the same period during the
previous year. 5
A debt affordability model controls the commonwealth's relatively low but
growing debt burden. Virginia's net tax-supported debt totaled $4.5 billion,
with net tax-supported debt per capita at $601 and net tax-supported debt at
1.7% of personal income. 5 By comparison, the 50-state medians were $754 and
2.5%. 6
Independent credit rating agencies Standard & Poor's and Moody's Investors
Service assigned Virginia ratings of AAA and Aaa with stable outlooks. 7 These
highest ratings reflect the commonwealth's sound economy, strong financial
operations, proactive and conservative fiscal practices and manageable debt
burden.
3. Source: Standard & Poor's, "Research: State Review: Virginia,"
RATINGSDIRECT, 10/31/06.
4. Source: Bureau of Labor Statistics.
5. Source: Moody's Investors Service, "New Issue: Virginia (Commonwealth
of)," 10/31/06.
6. Source: Moody's Investors Service, "New Issue: Georgia (State of),"
12/13/06.
7. These do not indicate ratings of the Fund.
84 | 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.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
PORTFOLIO BREAKDOWN
Franklin Virginia Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 25.8%
- --------------------------------------------------------------------------------
Utilities 17.2%
- --------------------------------------------------------------------------------
Transportation 11.6%
- --------------------------------------------------------------------------------
Hospital & Health Care 8.4%
- --------------------------------------------------------------------------------
Other Revenue 8.0%
- --------------------------------------------------------------------------------
General Obligation 7.6%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 6.0%
- --------------------------------------------------------------------------------
Higher Education 5.7%
- --------------------------------------------------------------------------------
Housing 4.6%
- --------------------------------------------------------------------------------
Tax-Supported 2.6%
- --------------------------------------------------------------------------------
Corporate-Backed 2.5%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
Annual Report | 85
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------
CLASS A (SYMBOL: FRVAX) CHANGE 2/28/07 2/28/06
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $11.85 $11.85
- -----------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -----------------------------------------------------------------------------
Dividend Income $0.5037
- -----------------------------------------------------------------------------
CLASS C (SYMBOL: FVAIX) CHANGE 2/28/07 2/28/06
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $11.97 $11.96
- -----------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- -----------------------------------------------------------------------------
Dividend Income $0.4381
- -----------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.37% +28.23% +65.91%
- -------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.10% +4.19% +4.73%
- -------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.27% +4.50% +4.82%
- -------------------------------------------------------------------------------------
Distribution Rate 4 4.04%
- -------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.59%
- -------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.34%
- -------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.45%
- -------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.67%
- -------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.84% +24.68% +57.20%
- -------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.84% +4.51% +4.63%
- -------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.17% +4.84% +4.70%
- -------------------------------------------------------------------------------------
Distribution Rate 4 3.63%
- -------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.93%
- -------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.98%
- -------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.86%
- -------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.22%
- -------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
86 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Virginia Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ------------ ---------------------- ---------------------- -------
3/1/1997 $9,573 $10,000 $10,000
3/31/1997 $9,477 $9,867 $10,025
4/30/1997 $9,555 $9,949 $10,038
5/31/1997 $9,674 $10,099 $10,031
6/30/1997 $9,755 $10,207 $10,044
7/31/1997 $9,985 $10,489 $10,056
8/31/1997 $9,904 $10,391 $10,075
9/30/1997 $10,016 $10,514 $10,100
10/31/1997 $10,077 $10,582 $10,125
11/30/1997 $10,156 $10,644 $10,119
12/31/1997 $10,292 $10,799 $10,107
1/31/1998 $10,380 $10,911 $10,125
2/28/1998 $10,390 $10,914 $10,144
3/31/1998 $10,409 $10,924 $10,163
4/30/1998 $10,365 $10,875 $10,182
5/31/1998 $10,525 $11,047 $10,201
6/30/1998 $10,577 $11,090 $10,213
7/31/1998 $10,605 $11,118 $10,226
8/31/1998 $10,740 $11,290 $10,238
9/30/1998 $10,857 $11,430 $10,251
10/31/1998 $10,830 $11,430 $10,276
11/30/1998 $10,866 $11,470 $10,276
12/31/1998 $10,891 $11,499 $10,269
1/31/1999 $10,991 $11,636 $10,294
2/28/1999 $10,953 $11,585 $10,307
3/31/1999 $10,971 $11,601 $10,338
4/30/1999 $10,988 $11,630 $10,414
5/31/1999 $10,940 $11,563 $10,414
6/30/1999 $10,770 $11,396 $10,414
7/31/1999 $10,787 $11,438 $10,445
8/31/1999 $10,635 $11,346 $10,470
9/30/1999 $10,624 $11,351 $10,520
10/31/1999 $10,452 $11,228 $10,539
11/30/1999 $10,546 $11,347 $10,545
12/31/1999 $10,439 $11,263 $10,545
1/31/2000 $10,341 $11,214 $10,576
2/29/2000 $10,475 $11,344 $10,639
3/31/2000 $10,775 $11,592 $10,727
4/30/2000 $10,705 $11,523 $10,733
5/31/2000 $10,625 $11,463 $10,746
6/30/2000 $10,909 $11,767 $10,802
7/31/2000 $11,047 $11,931 $10,827
8/31/2000 $11,224 $12,115 $10,827
9/30/2000 $11,154 $12,052 $10,883
10/31/2000 $11,274 $12,183 $10,902
11/30/2000 $11,323 $12,275 $10,909
12/31/2000 $11,565 $12,579 $10,902
1/31/2001 $11,636 $12,703 $10,971
2/28/2001 $11,717 $12,744 $11,015
3/31/2001 $11,818 $12,858 $11,040
4/30/2001 $11,693 $12,719 $11,084
5/31/2001 $11,805 $12,855 $11,134
6/30/2001 $11,887 $12,941 $11,153
7/31/2001 $12,062 $13,133 $11,122
8/31/2001 $12,228 $13,350 $11,122
9/30/2001 $12,151 $13,305 $11,172
10/31/2001 $12,307 $13,463 $11,134
11/30/2001 $12,240 $13,350 $11,115
12/31/2001 $12,076 $13,223 $11,071
1/31/2002 $12,263 $13,453 $11,096
2/28/2002 $12,387 $13,615 $11,140
3/31/2002 $12,178 $13,348 $11,203
4/30/2002 $12,357 $13,609 $11,266
5/31/2002 $12,429 $13,692 $11,266
6/30/2002 $12,533 $13,836 $11,272
7/31/2002 $12,681 $14,014 $11,284
8/31/2002 $12,797 $14,183 $11,322
9/30/2002 $13,045 $14,494 $11,341
10/31/2002 $12,775 $14,253 $11,360
11/30/2002 $12,737 $14,194 $11,360
12/31/2002 $13,011 $14,494 $11,335
1/31/2003 $12,959 $14,457 $11,385
2/28/2003 $13,121 $14,659 $11,472
3/31/2003 $13,148 $14,668 $11,541
4/30/2003 $13,277 $14,765 $11,516
5/31/2003 $13,611 $15,110 $11,497
6/30/2003 $13,569 $15,046 $11,510
7/31/2003 $13,080 $14,520 $11,523
8/31/2003 $13,199 $14,628 $11,566
9/30/2003 $13,503 $15,058 $11,604
10/31/2003 $13,484 $14,982 $11,591
11/30/2003 $13,639 $15,138 $11,560
12/31/2003 $13,759 $15,264 $11,548
1/31/2004 $13,855 $15,351 $11,604
2/29/2004 $14,069 $15,582 $11,667
3/31/2004 $14,048 $15,528 $11,742
4/30/2004 $13,708 $15,160 $11,779
5/31/2004 $13,699 $15,105 $11,848
6/30/2004 $13,738 $15,160 $11,886
7/31/2004 $13,921 $15,360 $11,867
8/31/2004 $14,164 $15,667 $11,873
9/30/2004 $14,251 $15,751 $11,898
10/31/2004 $14,399 $15,886 $11,961
11/30/2004 $14,280 $15,755 $11,967
12/31/2004 $14,504 $15,947 $11,924
1/31/2005 $14,679 $16,096 $11,949
2/28/2005 $14,658 $16,043 $12,018
3/31/2005 $14,612 $15,942 $12,112
4/30/2005 $14,814 $16,193 $12,193
5/31/2005 $14,905 $16,308 $12,180
6/30/2005 $14,996 $16,409 $12,187
7/31/2005 $14,938 $16,335 $12,243
8/31/2005 $15,055 $16,500 $12,306
9/30/2005 $14,983 $16,388 $12,456
10/31/2005 $14,910 $16,289 $12,481
11/30/2005 $14,951 $16,367 $12,381
12/31/2005 $15,068 $16,508 $12,331
1/31/2006 $15,096 $16,552 $12,425
2/28/2006 $15,227 $16,664 $12,450
3/31/2006 $15,139 $16,549 $12,519
4/30/2006 $15,142 $16,543 $12,625
5/31/2006 $15,183 $16,617 $12,688
6/30/2006 $15,134 $16,554 $12,713
7/31/2006 $15,279 $16,751 $12,751
8/31/2006 $15,465 $17,000 $12,776
9/30/2006 $15,560 $17,118 $12,713
10/31/2006 $15,655 $17,225 $12,644
11/30/2006 $15,776 $17,369 $12,625
12/31/2006 $15,739 $17,307 $12,644
1/31/2007 $15,701 $17,263 $12,683
2/28/2007 $15,882 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS A 2/28/07
- -------------------------------------------------
1-Year -0.10%
- -------------------------------------------------
5-Year +4.19%
- -------------------------------------------------
10-Year +4.73%
- -------------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Virginia Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ------------ ---------------------- ---------------------- -------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $9,905 $9,867 $10,025
4/30/1997 $9,981 $9,949 $10,038
5/31/1997 $10,101 $10,099 $10,031
6/30/1997 $10,171 $10,207 $10,044
7/31/1997 $10,414 $10,489 $10,056
8/31/1997 $10,325 $10,391 $10,075
9/30/1997 $10,427 $10,514 $10,100
10/31/1997 $10,494 $10,582 $10,125
11/30/1997 $10,571 $10,644 $10,119
12/31/1997 $10,706 $10,799 $10,107
1/31/1998 $10,793 $10,911 $10,125
2/28/1998 $10,798 $10,914 $10,144
3/31/1998 $10,812 $10,924 $10,163
4/30/1998 $10,763 $10,875 $10,182
5/31/1998 $10,932 $11,047 $10,201
6/30/1998 $10,981 $11,090 $10,213
7/31/1998 $10,995 $11,118 $10,226
8/31/1998 $11,129 $11,290 $10,238
9/30/1998 $11,254 $11,430 $10,251
10/31/1998 $11,220 $11,430 $10,276
11/30/1998 $11,253 $11,470 $10,276
12/31/1998 $11,273 $11,499 $10,269
1/31/1999 $11,370 $11,636 $10,294
2/28/1999 $11,317 $11,585 $10,307
3/31/1999 $11,338 $11,601 $10,338
4/30/1999 $11,360 $11,630 $10,414
5/31/1999 $11,296 $11,563 $10,414
6/30/1999 $11,117 $11,396 $10,414
7/31/1999 $11,129 $11,438 $10,445
8/31/1999 $10,968 $11,346 $10,470
9/30/1999 $10,942 $11,351 $10,520
10/31/1999 $10,771 $11,228 $10,539
11/30/1999 $10,862 $11,347 $10,545
12/31/1999 $10,738 $11,263 $10,545
1/31/2000 $10,643 $11,214 $10,576
2/29/2000 $10,765 $11,344 $10,639
3/31/2000 $11,076 $11,592 $10,727
4/30/2000 $11,000 $11,523 $10,733
5/31/2000 $10,915 $11,463 $10,746
6/30/2000 $11,199 $11,767 $10,802
7/31/2000 $11,334 $11,931 $10,827
8/31/2000 $11,510 $12,115 $10,827
9/30/2000 $11,433 $12,052 $10,883
10/31/2000 $11,550 $12,183 $10,902
11/30/2000 $11,595 $12,275 $10,909
12/31/2000 $11,836 $12,579 $10,902
1/31/2001 $11,902 $12,703 $10,971
2/28/2001 $11,979 $12,744 $11,015
3/31/2001 $12,086 $12,858 $11,040
4/30/2001 $11,954 $12,719 $11,084
5/31/2001 $12,052 $12,855 $11,134
6/30/2001 $12,139 $12,941 $11,153
7/31/2001 $12,311 $13,133 $11,122
8/31/2001 $12,463 $13,350 $11,122
9/30/2001 $12,390 $13,305 $11,172
10/31/2001 $12,542 $13,463 $11,134
11/30/2001 $12,469 $13,350 $11,115
12/31/2001 $12,297 $13,223 $11,071
1/31/2002 $12,481 $13,453 $11,096
2/28/2002 $12,611 $13,615 $11,140
3/31/2002 $12,383 $13,348 $11,203
4/30/2002 $12,569 $13,609 $11,266
5/31/2002 $12,624 $13,692 $11,266
6/30/2002 $12,723 $13,836 $11,272
7/31/2002 $12,867 $14,014 $11,284
8/31/2002 $12,978 $14,183 $11,322
9/30/2002 $13,233 $14,494 $11,341
10/31/2002 $12,955 $14,253 $11,360
11/30/2002 $12,911 $14,194 $11,360
12/31/2002 $13,169 $14,494 $11,335
1/31/2003 $13,123 $14,457 $11,385
2/28/2003 $13,279 $14,659 $11,472
3/31/2003 $13,301 $14,668 $11,541
4/30/2003 $13,424 $14,765 $11,516
5/31/2003 $13,752 $15,110 $11,497
6/30/2003 $13,704 $15,046 $11,510
7/31/2003 $13,209 $14,520 $11,523
8/31/2003 $13,321 $14,628 $11,566
9/30/2003 $13,619 $15,058 $11,604
10/31/2003 $13,594 $14,982 $11,591
11/30/2003 $13,743 $15,138 $11,560
12/31/2003 $13,855 $15,264 $11,548
1/31/2004 $13,944 $15,351 $11,604
2/29/2004 $14,151 $15,582 $11,667
3/31/2004 $14,124 $15,528 $11,742
4/30/2004 $13,778 $15,160 $11,779
5/31/2004 $13,774 $15,105 $11,848
6/30/2004 $13,795 $15,160 $11,886
7/31/2004 $13,970 $15,360 $11,867
8/31/2004 $14,218 $15,667 $11,873
9/30/2004 $14,298 $15,751 $11,898
10/31/2004 $14,439 $15,886 $11,961
11/30/2004 $14,315 $15,755 $11,967
12/31/2004 $14,530 $15,947 $11,924
1/31/2005 $14,697 $16,096 $11,949
2/28/2005 $14,669 $16,043 $12,018
3/31/2005 $14,617 $15,942 $12,112
4/30/2005 $14,810 $16,193 $12,193
5/31/2005 $14,904 $16,308 $12,180
6/30/2005 $14,976 $16,409 $12,187
7/31/2005 $14,923 $16,335 $12,243
8/31/2005 $15,032 $16,500 $12,306
9/30/2005 $14,942 $16,388 $12,456
10/31/2005 $14,876 $16,289 $12,481
11/30/2005 $14,910 $16,367 $12,381
12/31/2005 $15,019 $16,508 $12,331
1/31/2006 $15,040 $16,552 $12,425
2/28/2006 $15,149 $16,664 $12,450
3/31/2006 $15,056 $16,549 $12,519
4/30/2006 $15,064 $16,543 $12,625
5/31/2006 $15,098 $16,617 $12,688
6/30/2006 $15,042 $16,554 $12,713
7/31/2006 $15,178 $16,751 $12,751
8/31/2006 $15,354 $17,000 $12,776
9/30/2006 $15,440 $17,118 $12,713
10/31/2006 $15,526 $17,225 $12,644
11/30/2006 $15,651 $17,369 $12,625
12/31/2006 $15,594 $17,307 $12,644
1/31/2007 $15,550 $17,263 $12,683
2/28/2007 $15,720 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------
CLASS C 2/28/07
- -------------------------------------------------
1-Year +2.84%
- -------------------------------------------------
5-Year +4.51%
- -------------------------------------------------
10-Year +4.63%
- -------------------------------------------------
Annual Report | 87
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Virginia
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
88 | Annual Report
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 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 | 89
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.30 $3.37
- ---------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.36
- ---------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.20 $6.07
- ---------------------------------------------------------------------------------------------------------------------
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: 1.21%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
90 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN ALABAMA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.49 $ 11.61 $ 11.76 $ 11.50 $ 11.22
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.48 0.50 0.51 0.52 0.54
Net realized and unrealized gains (losses) . 0.02 (0.12) (0.16) 0.26 0.28
--------------------------------------------------------------------
Total from investment operations ............ 0.50 0.38 0.35 0.78 0.82
--------------------------------------------------------------------
Less distributions from net investment income (0.48) (0.50) (0.50) (0.52) (0.54)
--------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- -- --
--------------------------------------------------------------------
Net asset value, end of year ................ $ 11.51 $ 11.49 $ 11.61 $ 11.76 $ 11.50
====================================================================
Total return c .............................. 4.50% 3.34% 3.12% 6.92% 7.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $244,272 $237,848 $225,258 $236,225 $228,746
Ratios to average net assets:
Expenses ................................... 0.71% 0.72% 0.72% 0.72% 0.73%
Net investment income ...................... 4.23% 4.31% 4.39% 4.47% 4.81%
Portfolio turnover rate ..................... 16.04% 12.86% 8.53% 12.53% 17.10%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 91
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ALABAMA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.58 $ 11.70 $ 11.84 $ 11.58 $ 11.29
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.42 0.44 0.45 0.45 0.49
Net realized and unrealized gains (losses) . 0.02 (0.12) (0.15) 0.26 0.28
--------------------------------------------------------------------
Total from investment operations ............ 0.44 0.32 0.30 0.71 0.77
--------------------------------------------------------------------
Less distributions from net investment income (0.42) (0.44) (0.44) (0.45) (0.48)
--------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- -- --
--------------------------------------------------------------------
Net asset value, end of year ................ $ 11.60 $ 11.58 $ 11.70 $ 11.84 $ 11.58
====================================================================
Total return c .............................. 3.89% 2.75% 2.63% 6.25% 7.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 38,094 $ 35,638 $ 31,702 $ 30,504 $ 25,258
Ratios to average net assets:
Expenses ................................... 1.26% 1.27% 1.27% 1.29% 1.26%
Net investment income ...................... 3.68% 3.76% 3.84% 3.90% 4.28%
Portfolio turnover rate ..................... 16.04% 12.86% 8.53% 12.53% 17.10%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
92 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 101.1%
MUNICIPAL BONDS 101.1%
ALABAMA 92.3%
Alabama Building Renovation Finance Authority Revenue, Refunding, AMBAC Insured,
5.625%, 9/01/24 ........................................................................... $2,500,000 $2,650,425
Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan, Series A,
AMBAC Insured, 5.25%, 8/15/24 ............................................................. 1,755,000 1,871,128
Alabama HFA, SFMR, Refunding, Series D-2, GNMA Secured, 5.75%, 10/01/23 ...................... 625,000 636,069
Alabama State Docks Department Docks Facilities Revenue, MBIA Insured, Pre-Refunded,
5.50%, 10/01/22 ........................................................................... 1,000,000 1,047,980
Alabama Water Pollution Control Authority Revenue, Revolving Fund Loan, Series A, AMBAC
Insured, 5.00%, 8/15/23 ................................................................... 4,435,000 4,684,291
Alabaster GO, wts., AMBAC Insured, Pre-Refunded, 5.00%, 9/01/24 .............................. 3,470,000 3,684,481
Alabaster Sewer Revenue, AMBAC Insured, 5.00%, 4/01/29 ....................................... 2,055,000 2,177,848
Athens GO, wts., XLCA Insured, 5.00%, 2/01/36 ................................................ 2,560,000 2,693,274
Auburn GO, Refunding, FSA Insured, 5.00%, 1/01/24 ............................................ 1,500,000 1,556,355
Auburn University General Fee Revenue,
AMBAC Insured, 5.00%, 6/01/34 ............................................................ 2,000,000 2,109,080
Series A, FSA Insured, 5.00%, 6/01/32 .................................................... 5,590,000 5,995,554
Auburn University Revenues, Athletic, Series A, FSA Insured, 5.00%, 4/01/32 .................. 2,000,000 2,115,760
Baldwin County Eastern Shore Health Care Authority Hospital Revenue, Pre-Refunded,
5.75%, 4/01/27 ............................................................................ 1,000,000 1,041,090
Bessemer GO, wts., XLCA Insured, 5.00%, 2/01/35 .............................................. 1,990,000 2,117,838
Birmingham GO, Refunding and Capital Improvement, Series B, AMBAC Insured, 5.00%,
12/01/32 .................................................................................. 7,000,000 7,337,050
Birmingham Southern College Private Educational Building Authority Tuition Revenue,
Refunding, 5.35%, 12/01/19 ................................................................ 1,000,000 1,010,820
Central Elmore Water and Sewer Authority Revenue, Water, MBIA Insured, 5.00%, 1/01/29 ........ 4,290,000 4,583,007
Clarke and Mobile Counties Gas District Revenue, AMBAC Insured, Pre-Refunded, 5.875%,
12/01/23 .................................................................................. 4,000,000 4,307,640
Coffee County PBA, Building Revenue, MBIA Insured, 5.00%, 9/01/27 ............................ 2,145,000 2,260,251
Cullman and Jefferson Counties Gas District Gas Revenue, MBIA Insured, 5.85%, 7/01/24 ........ 2,000,000 2,164,620
DCH Health Care Authority Health Care Facilities Revenue, 5.125%, 6/01/36 .................... 4,330,000 4,579,408
Etowah County Board of Education Special Tax, School wts., FSA Insured, 5.00%,
9/01/24 .................................................................................. 4,235,000 4,487,321
9/01/28 .................................................................................. 2,000,000 2,112,140
9/01/33 .................................................................................. 2,500,000 2,632,875
Fairfield GO, wts., Refunding, AMBAC Insured, 5.00%, 2/01/29 ................................. 1,500,000 1,587,825
Fairfield IDB Environmental Improvement Revenue, USX Corp. Project, Refunding, 5.45%,
9/01/14 ................................................................................... 2,000,000 2,072,840
Florence Electric Revenue, wts., FSA Insured, 5.25%, 6/01/19 ................................. 1,415,000 1,470,624
Florence GO, wts., Series B, FGIC Insured, 5.00%, 9/01/23 .................................... 2,500,000 2,666,650
Franklin County GO, wts., Series B, AMBAC Insured, 5.125%, 10/01/33 .......................... 2,000,000 2,133,620
Gulf Shores GO, wts., AMBAC Insured, 6.00%, 9/01/21 .......................................... 770,000 779,186
a Homewood Educational Building Authority Revenue, Educational Facilities, Samford University,
Series A, MBIA Insured, 5.00%, 12/01/34 ................................................... 5,000,000 5,329,050
Houston County Health Care Authority Revenue,
AMBAC Insured, Pre-Refunded, 6.125%, 10/01/25 ............................................ 1,000,000 1,070,590
AMBAC Insured, Pre-Refunded, 6.25%, 10/01/30 ............................................. 3,150,000 3,381,966
Series A, AMBAC Insured, 5.25%, 10/01/30 ................................................. 5,000,000 5,449,550
Annual Report | 93
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ALABAMA (CONTINUED)
Huntsville Capital Improvement GO, Series A, AMBAC Insured, 5.00%, 2/01/23 ................... $1,000,000 $1,055,870
Huntsville Health Care Authority Revenue, Series A, MBIA Insured,
5.40%, 6/01/22 ............................................................................ 4,000,000 4,332,920
5.00%, 6/01/24 ............................................................................ 1,100,000 1,174,899
5.50%, 6/01/27 ............................................................................ 3,820,000 4,153,830
Huntsville PBA, Lease Revenue, Municipal Justice and Public Safety Center, MBIA Insured,
5.00%,
10/01/25 .................................................................................. 5,000,000 5,297,800
10/01/29 .................................................................................. 4,000,000 4,224,320
Jacksonville State University Revenue, Tuition and Fee, MBIA Insured, 5.00%, 12/01/22 ........ 3,000,000 3,153,390
Jefferson County Limited Obligation School Warrant Revenue, Series A, 5.00%, 1/01/24 ......... 2,000,000 2,113,380
Jefferson County Sewer Revenue,
Capital Improvement wts., Series A, FGIC Insured, Pre-Refunded, 5.375%, 2/01/36 ........... 6,000,000 6,250,260
wts., ETM, 7.50%, 9/01/13 ................................................................. 200,000 219,112
wts., Series D, FGIC Insured, Pre-Refunded, 5.00%, 2/01/32 ................................ 3,000,000 3,198,480
Lauderdale County and Florence Health Care Authority Revenue, Coffee Health Group, Series A,
MBIA Insured,
5.625%, 7/01/21 ........................................................................... 3,000,000 3,209,460
5.375%, 7/01/29 ........................................................................... 3,095,000 3,235,482
Pre-Refunded, 5.375%, 7/01/29 ............................................................. 1,905,000 1,996,250
Limestone County Water and Sewer Authority Water Revenue, AMBAC Insured, 5.00%,
12/01/29 .................................................................................. 1,540,000 1,643,657
12/01/31 .................................................................................. 3,910,000 4,158,168
Madison County Board of Education Capital Outlay GO, Tax Anticipation wts., Series A, AMBAC
Insured, 5.00%, 9/01/34 .................................................................... 2,000,000 2,119,020
Madison GO, wts.,
AMBAC Insured, Pre-Refunded, 5.35%, 2/01/26 ............................................... 2,410,000 2,580,532
Refunding, XLCA Insured, 4.75%, 12/01/36 .................................................. 2,455,000 2,524,280
Madison Water and Wastewater Board Water and Sewer Revenue, Refunding, Series A, XLCA
Insured, 4.75%, 12/01/31 ................................................................... 8,485,000 8,758,387
Marshall County Health Care Authority Hospital Revenue, Series A, 5.75%, 1/01/32 ............. 2,170,000 2,307,643
Mobile County Board School Commissioners GO, Capital Outlay wts., Series B, AMBAC Insured,
5.10%, 3/01/22 ............................................................................ 2,265,000 2,387,604
5.125%, 3/01/31 ........................................................................... 8,230,000 8,683,061
a Montgomery County GO, wts., XLCA Insured, 5.00%, 3/01/28 ..................................... 5,040,000 5,404,442
Montgomery Medical Clinic Board Health Care Facilities Revenue, Jackson Hospital and Clinic,
AMBAC Insured, Pre-Refunded, 6.00%, 3/01/26 ............................................... 6,000,000 6,060,000
Morgan County GO, wts., AMBAC Insured, 5.00%, 4/01/29 ........................................ 1,975,000 2,093,066
Moulton Water Works Board Water Revenue, MBIA Insured, 5.375%, 1/01/32 ....................... 1,935,000 2,071,611
Muscle Shoals GO, wts., MBIA Insured, Pre-Refunded, 5.50%, 8/01/30 ........................... 2,150,000 2,316,389
Orange Beach Sewer Revenue, wts., MBIA Insured, 5.00%, 2/01/30 ............................... 5,000,000 5,340,400
Orange Beach Water Sewer and Fire Protection Authority Revenue, MBIA Insured, 5.00%,
5/15/30 ................................................................................... 1,500,000 1,595,220
5/15/35 ................................................................................... 2,000,000 2,112,680
Oxford GO, School wts., AMBAC Insured, Pre-Refunded, 6.00%, 5/01/30 .......................... 4,275,000 4,564,888
Sheffield GO, wts., AMBAC Insured, 5.125%, 5/01/33 ........................................... 2,610,000 2,774,534
94 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ALABAMA (CONTINUED)
St. Clair County Board of Education wts., Tax Anticipation wts.,
Refunding, Series C, FSA Insured, 5.85%, 2/01/29 ........................................... $1,530,000 $ 1,600,732
Series C, FSA Insured, Pre-Refunded, 5.85%, 2/01/29 ........................................ 3,285,000 3,450,498
Sylacauga GO, wts., AMBAC Insured, Pre-Refunded, 5.50%, 6/01/25 ............................... 1,700,000 1,813,509
Tallahassee GO, Water Gas and Sewer wts., AMBAC Insured, Pre-Refunded, 5.25%, 5/01/31 ......... 1,135,000 1,207,810
Troy Public Educational Building Authority Dormitory Revenue, Troy University Housing LLC
Project, Series A, CIFG Insured, 5.00%, 9/01/32 ............................................. 5,000,000 5,310,350
Troy State University Student Fee Revenue, MBIA Insured, 5.00%, 11/01/21 ...................... 2,215,000 2,331,730
Trussville GO, wts., Series A, FGIC Insured, 5.00%, 10/01/36 .................................. 4,740,000 5,031,510
University of Alabama General Revenue, Series A,
MBIA Insured, 5.00%, 7/01/29 ............................................................... 1,000,000 1,062,880
XLCA Insured, 5.00%, 7/01/32 ............................................................... 5,600,000 5,992,896
University of Montevallo Revenue, FSA Insured, Pre-Refunded, 5.30%, 5/01/22 ................... 1,940,000 2,072,793
University of North Alabama Revenue,
General Fee, Series A, FSA Insured, 5.375%, 11/01/17 ....................................... 4,395,000 4,579,107
Student Housing, FGIC Insured, 5.00%, 11/01/29 ............................................. 2,995,000 3,164,757
Valley Special Care Facilities Financing Authority Revenue, Lanier Memorial Hospital, Series A,
5.65%, 11/01/22 ............................................................................. 3,465,000 3,535,651
Warrior River Water Authority Water Revenue, FSA Insured,
5.40%, 8/01/29 ............................................................................. 4,250,000 4,444,777
5.50%, 8/01/34 ............................................................................. 4,735,000 4,960,623
West Morgan East Lawrence Water Authority Water Revenue, Refunding, FSA Insured, 5.00%,
8/15/23 ..................................................................................... 1,080,000 1,194,080
------------
260,662,944
------------
U.S. TERRITORIES 8.8%
PUERTO RICO 7.3%
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.25%, 7/01/27 .................................................. 1,495,000 1,594,074
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ................................................. 1,885,000 2,000,569
Refunding, FSA Insured, 5.25%, 7/01/27 ..................................................... 1,005,000 1,064,174
Refunding, FSA Insured, 5.125%, 7/01/30 .................................................... 1,115,000 1,174,229
Series A, 5.125%, 7/01/31 .................................................................. 3,550,000 3,682,628
Series A, Pre-Refunded, 5.125%, 7/01/31 .................................................... 1,450,000 1,538,900
Puerto Rico Electric Power Authority Power Revenue, Series II, FSA Insured, 5.125%,
7/01/26 ..................................................................................... 5,000,000 5,347,200
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.25%, 7/01/27 ........................................................ 760,000 802,112
Refunding, Series G, 5.00%, 7/01/26 ........................................................ 1,000,000 1,043,070
Series D, Pre-Refunded, 5.25%, 7/01/27 ..................................................... 2,305,000 2,480,664
------------
20,727,620
------------
Annual Report | 95
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS 1.5%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/13 ................................................................................. $ 1,700,000 $ 1,758,616
10/01/22 ................................................................................. 2,300,000 2,376,084
-------------
4,134,700
-------------
TOTAL U.S. TERRITORIES ....................................................................... 24,862,320
-------------
TOTAL LONG TERM INVESTMENTS (COST $271,980,184) .............................................. 285,525,264
-------------
SHORT TERM INVESTMENT (COST $1,300,000) 0.5%
MUNICIPAL BOND 0.5%
ALABAMA 0.5%
b Homewood Educational Building Authority Revenue, Educational Facilities, Samford University,
AMBAC Insured, Daily VRDN and Put, 3.60%, 12/01/21 ........................................ 1,300,000 1,300,000
-------------
TOTAL INVESTMENTS (COST $273,280,184) 101.6% ................................................. 286,825,264
OTHER ASSETS, LESS LIABILITIES (1.6)% ........................................................ (4,459,462)
-------------
NET ASSETS 100.0% ............................................................................ $ 282,365,802
=============
See Selected Portfolio Abbreviations on page 154.
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.
96 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FLORIDA TAX-FREE INCOME FUND
------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.93 $ 12.00 $ 12.17 $ 11.97 $ 11.71
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.53 0.54 0.55 0.56 0.57
Net realized and unrealized gains (losses) . 0.02 (0.06) (0.17) 0.20 0.26
------------------------------------------------------------------------------
Total from investment operations ............ 0.55 0.48 0.38 0.76 0.83
------------------------------------------------------------------------------
Less distributions from net investment income (0.54) (0.55) (0.55) (0.56) (0.57)
------------------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
------------------------------------------------------------------------------
Net asset value, end of year ................ $ 11.94 $ 11.93 $ 12.00 $ 12.17 $ 11.97
==============================================================================
Total return c .............................. 4.64% 4.07% 3.28% 6.47% 7.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $1,476,477 $1,533,884 $1,488,979 $1,594,007 $1,624,544
Ratios to average net assets:
Expenses ................................... 0.61% 0.62% 0.62% 0.62% 0.61%
Net investment income ...................... 4.51% 4.54% 4.67% 4.65% 4.87%
Portfolio turnover rate ..................... 6.90% 9.37% 4.15% 6.89% 16.84%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 97
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLORIDA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.01 $ 12.08 $ 12.25 $ 12.04 $ 11.77
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.47 0.48 0.49 0.50 0.51
Net realized and unrealized gains (losses) . 0.01 (0.07) (0.18) 0.20 0.27
--------------------------------------------------------------------
Total from investment operations ............ 0.48 0.41 0.31 0.70 0.78
--------------------------------------------------------------------
Less distributions from net investment income (0.47) (0.48) (0.48) (0.49) (0.51)
--------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ................ $ 12.02 $ 12.01 $ 12.08 $ 12.25 $ 12.04
====================================================================
Total return c .............................. 4.12% 3.48% 2.66% 5.94% 6.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 59,481 $ 68,109 $ 74,311 $ 76,208 $ 55,167
Ratios to average net assets:
Expenses ................................... 1.16% 1.17% 1.17% 1.17% 1.16%
Net investment income ...................... 3.96% 3.99% 4.12% 4.10% 4.32%
Portfolio turnover rate ..................... 6.90% 9.37% 4.15% 6.89% 16.84%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
98 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLORIDA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.07 $ 12.14 $ 12.30 $ 12.09 $ 11.83
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.48 0.48 0.49 0.50 0.51
Net realized and unrealized gains (losses) . 0.01 (0.07) (0.17) 0.20 0.26
--------------------------------------------------------------------
Total from investment operations ............ 0.49 0.41 0.32 0.70 0.77
--------------------------------------------------------------------
Less distributions from net investment income (0.47) (0.48) (0.48) (0.49) (0.51)
--------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ................ $ 12.09 $ 12.07 $ 12.14 $ 12.30 $ 12.09
====================================================================
Total return c .............................. 4.18% 3.45% 2.74% 5.90% 6.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $136,712 $140,508 $124,949 $124,727 $113,644
Ratios to average net assets:
Expenses ................................... 1.15% 1.17% 1.17% 1.17% 1.16%
Net investment income ...................... 3.97% 3.99% 4.12% 4.10% 4.32%
Portfolio turnover rate ..................... 6.90% 9.37% 4.15% 6.89% 16.84%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS 98.8%
FLORIDA 92.4%
Alachua County Health Facilities Authority Revenue, Shands Teaching Hospital,
Series A, MBIA Insured, 5.80%, 12/01/26 .................................................. $10,000,000 $10,214,500
Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/21 ............................. 2,000,000 2,120,760
Brevard County Health Facilities Authority Health Care Facilities Revenue, Health First Inc.
Project, MBIA Insured, 5.00%, 4/01/26 .................................................... 5,000,000 5,229,700
Brevard County School Board COP,
AMBAC Insured, 5.00%, 7/01/26 ........................................................... 10,000,000 10,503,900
Refunding, Series A, AMBAC Insured, 5.40%, 7/01/11 ...................................... 4,415,000 4,688,465
Series A, FGIC Insured, 5.00%, 7/01/30 .................................................. 4,500,000 4,787,010
Broward County Educational Facilities Authority Revenue, Educational Facilities, Nova
Southeastern, Refunding, Series B, 5.60%, 4/01/29 ........................................ 3,180,000 3,399,706
Broward County Health Facilities Authority Revenue, Catholic Health Services, Refunding,
5.50%, 8/15/20 ........................................................................... 9,360,000 9,959,695
Broward County HFA,
MFHR, Bridgewater Place Apartments Project, Series A, 5.45%, 10/01/34 ................... 3,000,000 3,098,970
MFHR, Cross Keys Apartments Project, Series A, 5.80%, 10/01/33 .......................... 1,980,000 2,040,944
MFHR, Cross Keys Apartments Project, Series A, 5.85%, 4/01/39 ........................... 5,730,000 5,904,650
MFHR, Stirling Apartments Phase II, Series A, 5.35%, 10/01/29 ........................... 995,000 1,014,034
MFHR, Stirling Apartments Phase II, Series A, 5.40%, 4/01/39 ............................ 1,990,000 2,021,522
SFMR, Refunding, Series B, FHA Insured, zero cpn., 4/01/29 .............................. 430,000 93,856
Broward County HFAR, Series D,
6.90%, 6/01/09 .......................................................................... 15,000 15,030
7.375%, 6/01/21 ......................................................................... 110,000 110,362
Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/26 ..................... 21,500,000 22,621,870
Broward County Water and Sewer Utility Revenue, Refunding, Series A, AMBAC Insured,
zero cpn., 10/01/08 ...................................................................... 1,235,000 1,137,978
Cape Canaveral Hospital District Revenue COP, Refunding, 5.25%, 1/01/28 .................... 3,500,000 3,559,570
Celebration CDD, Special Assessment, Series A, MBIA Insured, 5.50%, 5/01/18 ................ 1,460,000 1,478,425
Citrus County Hospital Board Revenue, Citrus Memorial Hospital, Refunding, 6.25%,
8/15/23 .................................................................................. 9,595,000 10,446,652
Clearwater MFR, Rental Housing, Drew Gardens Projects, Refunding, Series A, FHA Insured,
6.50%, 10/01/25 .......................................................................... 2,435,000 2,438,458
Clermont Water and Sewer Revenue, Refunding, FSA Insured, 5.375%, 12/01/30 ................. 5,000,000 5,193,450
Crossing at Fleming Island CDD, Florida Special Assessment Revenue, Refunding, Series B,
MBIA Insured, 5.80%, 5/01/16 ............................................................. 5,980,000 6,401,889
Dade County Aviation Revenue, Miami International Airport,
Series B, FSA Insured, 5.125%, 10/01/22 ................................................. 4,750,000 4,849,702
Series C, FSA Insured, 5.125%, 10/01/27 ................................................. 9,550,000 9,766,880
Dade County Water and Sewer System Revenue, FGIC Insured, 5.25%, 10/01/26 .................. 13,000,000 13,229,580
Daytona Beach Utility System Revenue, Refunding, Series B, FGIC Insured, 5.00%,
11/15/32 ................................................................................. 3,250,000 3,446,625
Duval County HFA, MFHR, Mortgage, Eagles Point North, Series A, MBIA Insured,
5.60%, 7/01/17 .......................................................................... 1,000,000 1,025,330
5.70%, 7/01/27 .......................................................................... 2,000,000 2,041,040
Enterprise CDD, Water and Sewer Revenue, MBIA Insured, 5.50%, 5/01/26 ...................... 3,000,000 3,129,570
Escambia County Health Facilities Authority Health Facility Revenue,
Baptist Hospital and Baptist Manor, 5.125%, 10/01/19 .................................... 8,750,000 8,933,487
Florida Health Care Facility Loan VHA Project, AMBAC Insured, 5.95%, 7/01/20 ............ 1,235,000 1,321,450
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Escambia County Health Facilities Authority Revenue, Ascension Health Credit, Series A-2,
AMBAC Insured, Pre-Refunded, 5.75%, 11/15/29 ............................................. $25,000,000 $26,514,500
Escambia County HFA, SFMR, Multi County Program, Series A, MBIA Insured, 6.40%,
10/01/30 ................................................................................. 305,000 308,794
Escambia County HFA Dormitory Revenue, University of West Florida Foundation Inc. Project,
Refunding, MBIA Insured, 5.00%, 6/01/31 .................................................. 6,580,000 7,037,573
Florida HFAR,
General Mortgage, Refunding, Series A, FHA Insured, 6.40%, 6/01/24 ...................... 240,000 240,842
Homeowner Mortgage, Series 1, MBIA Insured, 5.625%, 7/01/17 ............................. 1,760,000 1,802,240
MFH, Driftwood Terrace Project, Series I, 7.65%, 12/20/31 ............................... 3,215,000 3,233,326
Reserve at Kanapaha, Series G, AMBAC Insured, 5.70%, 7/01/37 ............................ 5,000,000 5,114,750
Reserve at Northshore, Series H, AMBAC Insured, 5.70%, 5/01/37 .......................... 2,000,000 2,052,340
Riverfront Apartments, Series A, AMBAC Insured, 6.25%, 4/01/37 .......................... 1,300,000 1,327,209
Florida HFC Revenue,
Brenwood Trace Apartments, Series E-1, FSA Insured, 5.65%, 6/01/19 ...................... 1,245,000 1,299,581
Brenwood Trace Apartments, Series E-1, FSA Insured, 5.80%, 12/01/38 ..................... 4,965,000 5,174,225
Capital Appreciation, Homeowner Mortgage, Series 4, FSA Insured, zero cpn., 7/01/30 ..... 2,565,000 514,436
Deer Meadows Apartments, Series R, FNMA Insured, 6.00%, 5/01/32 ......................... 3,440,000 3,618,949
Deferred Interest, Homeowner Mortgage, Series 1, MBIA Insured, zero cpn., 7/01/17 ....... 1,365,000 796,860
Deferred Interest, Homeowner Mortgage, Series 2, MBIA Insured, zero cpn., 1/01/29 ....... 16,955,000 5,073,783
Homeowner Mortgage, Series 4, FSA Insured, 6.25%, 7/01/22 ............................... 1,505,000 1,571,280
Housing-Waverly Apartments, Series C-1, FSA Insured, 6.50%, 7/01/40 ..................... 3,000,000 3,182,160
Florida Intergovernmental Finance Commission Capital Revenue, Series C-1, AMBAC Insured,
5.00%, 2/01/21 ........................................................................... 1,355,000 1,416,964
Florida Municipal Loan Council Revenue, Series B, MBIA Insured, Pre-Refunded, 5.75%,
11/01/29 ................................................................................. 1,500,000 1,594,545
Florida Ports Financing Commission Revenue, State Transportation Trust Fund, Intermodal
Program, FGIC Insured, 5.50%, 10/01/23 ................................................... 7,000,000 7,278,880
Florida State Board of Education Capital Outlay GO, Public Education,
Refunding, Series D, 5.75%, 6/01/22 ..................................................... 25,900,000 27,653,171
Refunding, Series D, 6.00%, 6/01/23 ..................................................... 15,000,000 18,720,750
Refunding, Series G, FGIC Insured, 5.00%, 6/01/31 ....................................... 5,000,000 5,294,000
Series C, FGIC Insured, Pre-Refunded, 5.75%, 6/01/29 .................................... 5,000,000 5,366,950
Florida State Board of Education GO, Series F, MBIA Insured, 5.00%, 6/01/28 ................ 20,000,000 21,254,200
Florida State Board of Education Lottery Revenue, Series A, FGIC Insured, 5.00%, 7/01/20 ... 7,000,000 7,503,720
Florida State Board of Education Public Education GO, Refunding, Series C, AMBAC Insured,
5.00%, 6/01/34 ........................................................................... 15,000,000 16,054,050
Florida State Board Regent Housing Revenue,
University of Central Florida, AMBAC Insured, 5.75%, 10/01/29 ........................... 8,650,000 9,142,271
University of Florida, FGIC Insured, 5.75%, 7/01/25 ..................................... 3,400,000 3,654,762
University of Florida, FGIC Insured, 5.25%, 7/01/30 ..................................... 2,060,000 2,182,405
Florida State Department of Environmental Protection Preservation Revenue, Florida Forever,
Series A, MBIA Insured, 5.00%, 7/01/21 ................................................... 4,000,000 4,247,920
Florida State Department of General Services Division Facilities Management Revenue,
Florida Facilities Pool, Series B, FSA Insured, Pre-Refunded, 5.50%, 9/01/28 ............. 10,000,000 10,539,900
Florida State Department of Transportation GO, Right of Way, Series A, 4.75%, 7/01/24 ...... 6,000,000 6,236,520
Florida State Mid-Bay Bridge Authority Revenue,
Exchangeable, Refunding, Series D, 6.10%, 10/01/22 ...................................... 13,695,000 14,204,317
Exchangeable, Series A, 5.95%, 10/01/13 ................................................. 10,380,000 10,898,273
Annual Report | 101
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Florida State Mid-Bay Bridge Authority Revenue, (continued)
Exchangeable, Series A, 6.05%, 10/01/22 ................................................. $ 7,000,000 $ 7,274,050
Exchangeable, Series D, ETM, 6.10%, 10/01/22 ............................................ 3,545,000 4,323,305
Series A, AMBAC Insured, Pre-Refunded, zero cpn., 10/01/25 .............................. 9,845,000 4,280,114
Series A, AMBAC Insured, Pre-Refunded, zero cpn., 10/01/26 .............................. 2,500,000 1,029,475
Series A, ETM, 6.875%, 10/01/22 ......................................................... 6,000,000 7,794,660
Florida State Municipal Power Agency Revenue, Stanton II Project, Refunding, AMBAC
Insured, 5.00%, 10/01/26 ................................................................. 5,000,000 5,275,500
Florida State Turnpike Authority Turnpike Revenue, Department of Transportation, Series B,
5.00%, 7/01/30 ........................................................................... 3,455,000 3,597,070
Fort Pierce Utilities Authority Revenue,
AMBAC Insured, 5.00%, 10/01/27 .......................................................... 7,000,000 7,354,340
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/20 ...................... 3,090,000 1,753,081
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/21 ...................... 2,585,000 1,404,586
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/22 ...................... 3,090,000 1,605,255
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/23 ...................... 3,060,000 1,519,259
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/24 ...................... 2,560,000 1,214,259
Halifax Hospital Medical Center Hospital Revenue, Refunding and Improvement, Series A,
5.00%, 6/01/38 ........................................................................... 11,395,000 11,742,775
Hernando County School Board COP, MBIA Insured, 5.00%, 7/01/35 ............................. 12,050,000 12,826,984
Hialeah Housing Authority Revenue, Affordable Housing Program, Refunding, GNMA Secured,
5.30%, 12/20/18 .......................................................................... 1,240,000 1,317,128
Highlands County Health Facilities Authority Revenue, Adventist Health Systems,
Pre-Refunded, 5.25%, 11/15/20 ........................................................... 10,000,000 10,362,500
Series A, Pre-Refunded, 6.00%, 11/15/31 ................................................. 16,000,000 17,742,720
Hillsborough County Assessment Revenue, Capacity Assessment Special, FSA Insured,
5.125%, 3/01/20 .......................................................................... 1,000,000 1,046,330
Hillsborough County HFA Mortgage Revenue, SF, Series A,
GNMA Secured, 5.875%, 4/01/30 ........................................................... 995,000 1,022,890
zero cpn., 4/01/32 ...................................................................... 625,000 134,331
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, 5.50%, 10/01/23 ....... 16,000,000 16,925,600
Hillsborough County IDAR, Tampa General Hospital Project, Refunding, Series B, 5.40%,
10/01/28 ................................................................................. 7,000,000 7,511,070
Hillsborough County School Board COP,
Master Lease Program, Series A, MBIA Insured, 5.375%, 7/01/21 ........................... 5,000,000 5,147,250
Master Lease Program, Series A, MBIA Insured, 5.25%, 7/01/22 ............................ 5,000,000 5,134,050
MBIA Insured, 5.00%, 7/01/26 ............................................................ 10,830,000 11,550,087
MBIA Insured, 5.00%, 7/01/29 ............................................................ 10,000,000 10,558,900
MBIA Insured, Pre-Refunded, 5.375%, 7/01/26 ............................................. 8,000,000 8,313,200
Indian River County Hospital District Revenue, Refunding, FSA Insured, 5.70%,
10/01/15 ................................................................................. 1,000,000 1,021,280
Jacksonville Capital Improvement Revenue,
Refunding, Series C, AMBAC Insured, 5.00%, 10/01/25 ..................................... 3,460,000 3,657,739
Series A, AMBAC Insured, 5.00%, 10/01/30 ................................................ 10,000,000 10,489,700
Jacksonville Economic Development Commission Health Care Facilities Revenue, Mayo Clinic,
5.00%, 11/15/36 .......................................................................... 20,000,000 21,052,800
Jacksonville Guaranteed Entitlement Revenue, Refunding and Improvement, FGIC Insured,
5.00%, 10/01/32 .......................................................................... 17,250,000 18,200,475
102 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/23 ............................. $ 5,000,000 $ 5,253,800
Jacksonville Transportation Revenue, MBIA Insured,
5.25%, 10/01/29 ......................................................................... 17,955,000 18,968,201
5.00%, 10/01/31 ......................................................................... 25,000,000 26,130,000
Jacksonville Water and Sewer System Revenue, Refunding, Series A, MBIA Insured, 5.00%,
10/01/25 ................................................................................. 1,500,000 1,599,135
Kissimmee Water and Sewer Revenue, AMBAC Insured, ETM, 6.00%, 10/01/15 ..................... 5,000,000 5,013,650
Lakeland Electric and Water Revenue, Capital Appreciation, ETM, zero cpn., 10/01/14 ........ 5,770,000 4,310,017
Lakeland Hospital System Revenue, Lakeland Regional Health System,
Pre-Refunded, 5.75%, 11/15/27 ........................................................... 6,925,000 7,718,813
Pre-Refunded, 5.50%, 11/15/32 ........................................................... 12,070,000 13,299,692
Series A, MBIA Insured, Pre-Refunded, 5.50%, 11/15/26 ................................... 10,000,000 10,574,000
Lee County Airport Revenue,
Refunding, FSA Insured, 5.00%, 10/01/33 ................................................. 20,000,000 21,259,600
Series A, FSA Insured, 6.00%, 10/01/32 .................................................. 11,405,000 12,271,666
Lee County Hospital Board of Directors Hospital Revenue, Lee Memorial Health System,
Series A, MBIA Insured, Pre-Refunded, 5.875%, 4/01/24 .................................... 11,500,000 11,747,940
Lee County IDA Health Care Facilities Revenue, Shell Point Village Project, Refunding,
Series A, 5.50%,
11/15/21 ................................................................................ 7,500,000 7,723,500
11/15/29 ................................................................................ 4,000,000 4,114,080
Lee County School Board COP, Series A, FSA Insured, 5.00%, 8/01/28 ......................... 7,500,000 7,992,075
Lee Memorial Health System Hospital Revenue, Refunding, Series A, MBIA Insured, 5.00%,
4/01/24 .................................................................................. 15,000,000 16,004,400
Lessburg Hospital Revenue, Leesburg Regional Medical Center Project, 5.50%, 7/01/32 ........ 4,150,000 4,350,196
Marion County Utility System Revenue,
FGIC Insured, 5.00%, 12/01/31 ........................................................... 5,000,000 5,275,000
Series A, MBIA Insured, 5.00%, 12/01/28 ................................................. 5,000,000 5,319,850
Melbourne Water and Sewer Revenue,
Capital Appreciation, FGIC Insured, ETM, zero cpn., 10/01/26 ............................ 1,500,000 664,935
Capital Appreciation, Refunding, Series B, FGIC Insured, zero cpn., 10/01/22 ............ 1,785,000 927,308
Capital Appreciation, Refunding, Series B, FGIC Insured, zero cpn., 10/01/26 ............ 4,500,000 1,945,755
FGIC Insured, Pre-Refunded, 5.25%, 10/01/30 ............................................. 6,000,000 6,377,580
Miami Beach Special Obligation, Subordinated, FGIC Insured, ETM, 7.375%, 12/01/08 .......... 610,000 615,295
Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ......................... 7,000,000 7,310,030
Miami-Dade County Aviation Revenue, Miami International Airport,
Hub, Series B, FGIC Insured, 5.00%, 10/01/30 ............................................ 4,440,000 4,700,717
Refunding, FGIC Insured, 5.375%, 10/01/27 ............................................... 5,000,000 5,301,750
Refunding, FGIC Insured, 5.375%, 10/01/32 ............................................... 5,000,000 5,296,650
Refunding, Series A, XLCA Insured, 5.00%, 10/01/37 ...................................... 10,000,000 10,460,600
Miami-Dade County Educational Facilities Authority Revenue, Series A, AMBAC Insured,
5.75%, 4/01/29 ........................................................................... 10,000,000 10,640,200
Miami-Dade County HFA,
MFHR, Cedar Grove Apartments, FSA Insured, 5.50%, 8/01/27 ............................... 2,015,000 2,084,054
MFMR, Villa Esperanza Apartments Project, 5.25%, 10/01/19 ............................... 430,000 439,950
MFMR, Villa Esperanza Apartments Project, 5.40%, 10/01/33 ............................... 1,500,000 1,532,715
Miami-Dade County IDAR, Airis Miami ll LLC Project, AMBAC Insured, 6.00%, 10/15/25 ......... 4,500,000 4,783,320
Miami-Dade County Public Facilities Revenue, Jackson Health System, Series A, MBIA
Insured, 5.00%, 6/01/35 .................................................................. 20,970,000 22,277,060
Annual Report | 103
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Miami-Dade County Special Obligation Revenue,
Juvenile Courthouse Project, Series A, AMBAC Insured, 5.00%, 4/01/35 .................... $ 5,000,000 $ 5,267,050
Sub Series B, MBIA Insured, zero cpn., 10/01/36 ......................................... 5,635,000 1,181,603
Sub Series C, MBIA Insured, zero cpn., 10/01/28 ......................................... 8,305,000 2,686,418
sub. lien, Refunding, Series A, MBIA Insured, zero cpn., 10/01/25 ....................... 22,365,000 8,697,972
North Broward Hospital District Revenue,
Improvement, 6.00%, 1/15/31 ............................................................. 2,290,000 2,474,437
Improvement, Pre-Refunded, 6.00%, 1/15/31 ............................................... 23,240,000 25,303,480
Refunding, MBIA Insured, 5.375%, 1/15/24 ................................................ 6,055,000 6,123,785
Refunding, MBIA Insured, 5.75%, 1/15/27 ................................................. 11,720,000 11,856,655
North Miami Health Facilities Authority Revenue, Catholic Health Services Obligation Group,
6.00%,
8/15/16 ................................................................................. 2,000,000 2,037,980
8/15/24 ................................................................................. 1,750,000 1,785,508
Orange County Health Facilities Authority Revenue,
Adventist Health System Inc., Pre-Refunded, 6.375%, 11/15/20 ............................ 3,000,000 3,301,830
Adventist Health System Inc., Pre-Refunded, 6.25%, 11/15/24 ............................. 5,500,000 6,210,820
Adventist Health System Inc., Pre-Refunded, 6.50%, 11/15/30 ............................. 10,750,000 11,877,567
Hospital, Adventist Health System Inc., Pre-Refunded, 5.625%, 11/15/32 .................. 15,000,000 16,583,100
Hospital, Orlando Regional Healthcare, Series B, 5.125%, 11/15/39 ....................... 5,000,000 5,302,450
Orlando Regional Healthcare System, Pre-Refunded, 6.00%, 12/01/29 ....................... 6,000,000 6,720,420
Orlando Regional Healthcare System, Refunding, Series E, 6.00%, 10/01/26 ................ 11,750,000 12,519,860
Orlando Regional Healthcare System, Series E, Pre-Refunded, 6.00%, 10/01/26 ............. 250,000 266,760
Orange County HFA Homeowner Revenue, Series C-1, GNMA Secured, 5.70%, 9/01/26 .............. 630,000 631,802
Orange County School Board COP, Series A, MBIA Insured, 5.00%, 8/01/27 ..................... 12,000,000 12,589,560
Orange County Tourist Development Tax Revenue,
AMBAC Insured, 5.50%, 10/01/32 .......................................................... 20,000,000 21,708,200
AMBAC Insured, Pre-Refunded, 5.50%, 10/01/31 ............................................ 10,500,000 10,985,625
Refunding, AMBAC Insured, 5.00%, 10/01/31 ............................................... 5,000,000 5,341,000
Refunding, MBIA Insured, 5.125%, 10/01/20 ............................................... 10,000,000 10,171,300
Refunding, XLCA Insured, 5.00%, 10/01/31 ................................................ 12,970,000 13,939,248
senior lien, AMBAC Insured, 5.125%, 10/01/25 ............................................ 5,500,000 5,861,900
senior lien, AMBAC Insured, 5.125%, 10/01/30 ............................................ 10,000,000 10,634,200
Orlando and Orange County Expressway Authority Expressway Revenue,
junior lien, FGIC Insured, 5.00%, 7/01/28 ............................................... 8,000,000 8,196,240
senior lien, AMBAC Insured, ETM, 7.625%, 7/01/18 ........................................ 265,000 279,901
Series B, AMBAC Insured, 5.00%, 7/01/35 ................................................. 9,185,000 9,672,172
Osceola County IDAR, Community Provider Pooled Loan Program,
Series A, FSA Insured, 7.75%, 7/01/10 ................................................... 619,000 619,786
Series C, FSA Insured, 7.60%, 7/01/10 ................................................... 311,000 311,379
Osceola County Sales Tax Revenue, FSA Insured, 5.00%, 4/01/24 .............................. 10,000,000 10,296,900
Osceola County Tourist Development Tax Revenue, FGIC Insured, 5.00%, 10/01/32 .............. 10,000,000 10,535,600
Palm Beach County Financing Authority MFR, Housing Windsor Park Apartment Project,
Series A, 5.90%, 6/01/38 ................................................................. 985,000 1,014,678
Palm Beach County HFAR, Acts Retirement-Life Communities, 5.125%, 11/15/29 ................. 3,650,000 3,715,043
Palm Beach County IDR, South Florida Fair Project, AMBAC Insured, 5.50%, 6/01/31 ........... 5,000,000 5,245,550
Palm Beach County Public Improvement Revenue, Convention Center Project, FGIC Insured,
Pre-Refunded, 5.125%, 11/01/30 ........................................................... 6,250,000 6,646,625
104 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Palm Beach County School Board COP,
Series A, AMBAC Insured, 5.125%, 8/01/24 ................................................ $15,000,000 $15,913,200
Series A, FGIC Insured, Pre-Refunded, 6.00%, 8/01/22 .................................... 5,000,000 5,418,750
Series A, FSA Insured, 5.00%, 8/01/31 ................................................... 17,500,000 18,718,350
Series C, FSA Insured, 5.00%, 8/01/27 ................................................... 10,000,000 10,451,800
Panama City Beach Utility Revenue, Refunding, AMBAC Insured, 5.00%,
6/01/27 ................................................................................. 4,450,000 4,718,202
6/01/32 ................................................................................. 2,795,000 2,959,346
Pensacola Airport Revenue, Series A, MBIA Insured, Pre-Refunded, 5.75%, 10/01/27 ........... 5,615,000 5,794,231
Pinellas County Health Facilities Authority Revenue, Baycare Health System, FSA Insured,
5.00%, 11/15/30 .......................................................................... 11,500,000 11,987,140
Pinellas County HFA, SFHR, Multi County, Series B-1, GNMA Insured, zero cpn., 9/01/31 ...... 425,000 84,456
Polk County Capital Improvement Revenue, FSA Insured, Pre-Refunded, 5.75%,
12/01/21 ................................................................................. 2,350,000 2,543,969
Polk County IDAR, Solid Waste Disposal Facility, Tampa Electric Co. Project, 5.85%,
12/01/30 ................................................................................. 15,000,000 15,343,950
Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/26 ........................ 4,000,000 4,184,760
Polk County Utility System Revenue, Series A, FGIC Insured, 5.00%, 10/01/34 ................ 1,000,000 1,065,420
Port Everglades Authority Port Improvement Revenue, Capital Appreciation,
ETM, zero cpn., 9/01/10 ................................................................. 25,475,000 21,390,848
zero cpn., 9/01/10 ...................................................................... 13,020,000 10,319,001
Port St. Lucie Utility Revenue,
MBIA Insured, Pre-Refunded, zero cpn., 9/01/29 .......................................... 20,000,000 5,906,600
System, Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 9/01/32 ..... 5,000,000 1,545,400
System, Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 9/01/33 ..... 5,000,000 1,472,000
System, Refunding, Series A, MBIA Insured, 5.00%, 9/01/30 ............................... 11,580,000 12,496,325
System, Refunding, Series A, MBIA Insured, 5.00%, 9/01/31 ............................... 8,805,000 9,494,520
Sarasota County Utility System Revenue, FGIC Insured, Pre-Refunded, 5.75%, 10/01/27 ........ 18,000,000 18,398,160
Sarasota Special Obligated Revenue, Refunding, AMBAC Insured, zero cpn.,
11/01/09 ................................................................................ 1,365,000 1,233,537
11/01/12 ................................................................................ 1,780,000 1,433,879
11/01/15 ................................................................................ 2,180,000 1,545,991
South Broward Hospital District Revenue,
5.60%, 5/01/27 .......................................................................... 5,000,000 5,448,900
5.625%, 5/01/32 ......................................................................... 16,250,000 17,569,175
St. Johns County Water and Sewer Revenue, Capital Appreciation, AMBAC Insured, zero cpn.,
6/01/22 ................................................................................. 4,000,000 1,916,200
6/01/23 ................................................................................. 4,255,000 1,924,664
6/01/24 ................................................................................. 1,500,000 640,845
6/01/25 ................................................................................. 2,130,000 859,221
St. Lucie West Services District Utility Revenue, senior lien, MBIA Insured, 6.125%,
10/01/32 ................................................................................. 10,000,000 10,954,900
St. Petersburg Public Utilities Revenue, Refunding, MBIA Insured, 5.00%, 10/01/35 .......... 10,795,000 11,547,304
Sumter County Capital Improvement Revenue, AMBAC Insured, 5.00%, 6/01/30 ................... 3,520,000 3,778,192
Sunrise Lakes Recreation District GO, Phase 4, Refunding, AMBAC Insured, 5.25%,
8/01/24 .................................................................................. 4,320,000 4,386,701
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ................ 2,550,000 2,866,430
Tallahassee Energy System Revenue, MBIA Insured, 5.00%, 10/01/35 ........................... 10,000,000 10,726,900
Annual Report | 105
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Tamarac Sales Tax Revenue, FGIC Insured, 5.00%, 4/01/22 ..................................... $ 2,490,000 $ 2,631,308
Tampa Bay Water Utility System Revenue,
FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 .............................................. 15,000,000 16,328,250
Series B, FGIC Insured, 5.00%, 10/01/31 .................................................. 10,000,000 10,452,000
Tampa Sports Authority Revenue, Guaranteed Package, Tampa Bay Arena Project,
MBIA Insured,
6.00%, 10/01/15 .......................................................................... 1,000,000 1,116,630
6.05%, 10/01/20 .......................................................................... 1,715,000 2,056,114
6.10%, 10/01/26 .......................................................................... 2,695,000 3,361,393
Tampa Water and Sewer Revenue, sub. lien, Series A, AMBAC Insured, ETM, 7.25%,
10/01/16 .................................................................................. 1,330,000 1,578,484
University of Central Florida COP, University of Central Florida Convocation Corp., Series A,
FGIC Insured, 5.00%, 10/01/35 ............................................................. 8,820,000 9,362,430
Viera East CDD, Water and Sewer Revenue, 6.75%, 5/01/09 ..................................... 1,540,000 1,560,035
Viera East CDD Special Assessment,
Refunding, 7.00%, 5/01/26 ................................................................ 6,790,000 7,394,989
Series B, ETM, 6.75%, 5/01/14 ............................................................ 5,360,000 5,888,818
Village Center CDD Recreational Revenue, Series A, MBIA Insured, 5.20%, 11/01/25 ............ 10,000,000 10,671,200
Volusia County Educational Facility Authority Revenue, Educational Facilities,
Embry Riddle University, Refunding, Series B, AMBAC Insured, 5.25%, 10/15/22 ............. 2,000,000 2,087,960
Stetson University Inc. Project, AMBAC Insured, 5.25%, 6/01/29 ........................... 5,000,000 5,191,100
Volusia County School Board COP, Master Lease Program, FSA Insured, 5.50%, 8/01/24 .......... 5,000,000 5,243,850
West Lake CDD, Special Assessment Revenue, MBIA Insured, 5.75%, 5/01/17 ..................... 1,845,000 1,942,527
West Orange Healthcare District Revenue, Series A, 5.65%, 2/01/22 ........................... 10,850,000 11,442,844
West Palm Beach CRDA Revenue, Northwood Pleasant Community Redevelopment, 5.00%,
3/01/35 ................................................................................... 1,000,000 1,047,170
West Palm Beach Utility System Revenue, FGIC Insured, Pre-Refunded, 5.50%,
10/01/29 .................................................................................. 4,000,000 4,082,880
--------------
1,545,871,456
--------------
U.S. TERRITORIES 6.4%
PUERTO RICO 5.8%
Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.00%,
7/01/25 .................................................................................. 5,000,000 5,259,250
7/01/29 .................................................................................. 10,000,000 10,505,600
7/01/33 .................................................................................. 13,000,000 13,564,070
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series K, 5.00%, 7/01/30 ...................................................... 5,000,000 5,274,600
Series A, MBIA Insured, 5.00%, 7/01/38 ................................................... 12,800,000 13,094,016
Series B, Pre-Refunded, 6.00%, 7/01/39 ................................................... 5,000,000 5,421,600
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................................. 5,000,000 5,428,650
Series G, 5.00%, 7/01/33 ................................................................. 5,000,000 5,330,950
Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 ............... 15,000,000 15,996,600
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 6,434,481
106 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES ((CO)(NT)(IN)(UE)D) 14P1.5
PUERTO RICO (CONTINUED)
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 .................................................... $ 1,210,000 $ 1,284,802
Series D, Pre-Refunded, 5.375%, 7/01/33 ................................................. 3,790,000 4,101,538
Series I, 5.00%, 7/01/36 ................................................................ 5,000,000 5,239,950
--------------
96,936,107
--------------
VIRGIN ISLANDS 0.6%
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 ....... 10,000,000 10,607,200
--------------
TOTAL U.S. TERRITORIES ..................................................................... 107,543,307
--------------
TOTAL INVESTMENTS (COST $1,540,255,422) 98.8% .............................................. 1,653,414,763
OTHER ASSETS, LESS LIABILITIES 1.2% ........................................................ 19,254,907
--------------
NET ASSETS 100.0% .......................................................................... $1,672,669,670
==============
See Selected Portfolio Abbreviations on page 154.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 107
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN GEORGIA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.13 $ 12.17 $ 12.27 $ 11.99 $ 11.86
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.50 0.51 0.53 0.54 0.56
Net realized and unrealized gains (losses) . 0.06 (0.04) (0.10) 0.28 0.13
--------------------------------------------------------------------
Total from investment operations ............ 0.56 0.47 0.43 0.82 0.69
--------------------------------------------------------------------
Less distributions from net investment income (0.49) (0.51) (0.53) (0.54) (0.56)
--------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ................ $ 12.20 $ 12.13 $ 12.17 $ 12.27 $ 11.99
====================================================================
Total return c .............................. 4.79% 3.91% 3.65% 7.00% 6.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $220,989 $205,875 $170,407 $176,193 $171,381
Ratios to average net assets:
Expenses ................................... 0.73% 0.74% 0.75% 0.75% 0.74%
Net investment income ...................... 4.13% 4.18% 4.40% 4.49% 4.76%
Portfolio turnover rate ..................... 4.50% 8.54% 22.50% 11.83% 10.56%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
108 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GEORGIA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.24 $ 12.27 $ 12.37 $ 12.08 $ 11.94
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.44 0.44 0.47 0.47 0.50
Net realized and unrealized gains (losses) . 0.06 (0.03) (0.11) 0.29 0.14
--------------------------------------------------------------------
Total from investment operations ............ 0.50 0.41 0.36 0.76 0.64
--------------------------------------------------------------------
Less distributions from net investment income (0.43) (0.44) (0.46) (0.47) (0.50)
--------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ................ $ 12.31 $ 12.24 $ 12.27 $ 12.37 $ 12.08
====================================================================
Total return c .............................. 4.16% 3.39% 3.05% 6.44% 5.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 50,700 $ 43,983 $ 37,017 $ 35,645 $ 32,422
Ratios to average net assets:
Expenses ................................... 1.28% 1.29% 1.30% 1.32% 1.27%
Net investment income ...................... 3.58% 3.63% 3.85% 3.92% 4.23%
Portfolio turnover rate ..................... 4.50% 8.54% 22.50% 11.83% 10.56%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.3%
MUNICIPAL BONDS 98.3%
GEORGIA 97.0%
Albany-Dougherty Inner City Authority Revenue, Albany State University Student Housing,
Series A, XLCA Insured, 5.00%, 7/01/29 ....................................................... $ 4,000,000 $ 4,265,960
Atkinson/Coffee Counties Joint Development Authority Revenue, South Georgia College Real
Estate Foundation LLC Project, CIFG Insured, 5.00%, 6/01/29 .................................. 2,000,000 2,140,520
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien, Refunding, Series C,
FSA Insured, 5.00%, 1/01/33 .................................................................. 5,000,000 5,275,400
Atlanta Airport Revenue, General, Series A, FGIC Insured, Pre-Refunded,
5.50%, 1/01/26 .............................................................................. 5,000,000 5,294,950
5.60%, 1/01/30 .............................................................................. 5,000,000 5,308,250
Atlanta and Fulton County Recreation Authority Revenue, AMBAC Insured, Pre-Refunded,
5.50%, 12/01/20 .............................................................................. 1,500,000 1,610,820
Atlanta Development Authority Revenue,
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/26 ............... 2,555,000 2,894,151
Yamacraw Design Center Project, Series A, MBIA Insured, Pre-Refunded, 5.125%,
1/01/23 .................................................................................... 4,150,000 4,406,885
Atlanta Public Safety and Judicial Facilities Authority Revenue, Public Safety Facility Project,
FSA Insured, 5.00%, 12/01/26 ................................................................. 1,140,000 1,239,773
Atlanta Urban Residential Finance Authority MFHR, Fulton Cotton Mill, GNMA Secured,
6.00%, 5/20/17 .............................................................................. 1,040,000 1,063,816
6.125%, 5/20/27 ............................................................................. 1,560,000 1,595,116
Atlanta Water and Wastewater Revenue,
FSA Insured, 5.00%, 11/01/24 ................................................................ 4,000,000 4,296,800
Refunding, Series A, MBIA Insured, 5.00%, 11/01/33 .......................................... 8,000,000 8,391,760
Augusta Water and Sewer Revenue, Refunding, FSA Insured, 5.00%, 10/01/32 ....................... 5,000,000 5,265,250
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center,
5.25%, 12/01/22 ............................................................................. 2,500,000 2,508,375
5.375%, 12/01/28 ............................................................................ 2,000,000 2,011,580
Bulloch County Development Authority Lease Revenue, Georgia Southern University,
XLCA Insured, 5.00%, 8/01/27 ................................................................. 5,000,000 5,340,700
Cherokee County Water and Sewage Authority Revenue, MBIA Insured, 6.90%, 8/01/18 ............... 10,000 10,027
Clayton County Development Authority Revenue,
Gateway Village Project, Series A, Pre-Refunded, 6.00%, 8/01/23 ............................. 3,500,000 3,756,025
Refunding, Series A, MBIA Insured, 5.00%, 8/01/23 ........................................... 2,310,000 2,490,550
Clayton County MFHR, Pointe Clear Apartments Project, FSA Insured, 5.70%, 7/01/23 .............. 930,000 951,344
Cobb County Development Authority Parking Revenue, Kennesaw State University Foundation
Inc. Project, MBIA Insured, 5.00%, 7/15/29 ................................................... 2,000,000 2,119,800
Cobb County Development Authority University Facilities Revenue, Kennesaw State University,
Sub Series D, MBIA Insured, 5.00%, 7/15/29 ................................................... 8,000,000 8,531,680
College Park Business and IDAR, Civic Center Project, AMBAC Insured, Pre-Refunded,
5.75%, 9/01/26 ............................................................................... 2,000,000 2,173,740
Columbia County GO, Courthouse/Detention Center Projects, Pre-Refunded, 5.00%, 2/01/24 ......... 2,000,000 2,063,760
Columbia County Water and Sewer Revenue, FSA Insured, 5.00%, 6/01/24 ........................... 1,130,000 1,209,880
Columbus Water and Sewage Revenue, Refunding, MBIA Insured, 5.00%, 5/01/25 ..................... 1,000,000 1,071,930
DeKalb County Housing Authority MFHR, Castaway Apartments, Series A, GNMA Secured,
5.40%, 2/20/29 ............................................................................... 1,980,000 2,096,820
DeKalb County Public Safety and Judicial Facilities Authority Revenue, Public Safety and
Judicial Facility Project, 5.00%, 12/01/29 ................................................... 2,000,000 2,129,120
110 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
DeKalb County Water and Sewer Revenue,
Pre-Refunded, 5.125%, 10/01/31 .......................................................... $ 6,500,000 $ 6,882,070
Refunding, Series B, FSA Insured, 5.00%, 10/01/35 ....................................... 7,000,000 7,933,450
Douglasville-Douglas County Water and Sewer Authority Water and Sewer Revenue, MBIA Insured,
5.00%, 6/01/29 ........................................................................... 3,410,000 3,659,203
East Point Building Authority Revenue, Water and Sewer Project, Series A, XLCA Insured,
5.00%, 2/01/34 ........................................................................... 5,480,000 5,865,792
Fayette County PFAR, Criminal Justice Center Project, Refunding, 5.00%, 6/01/26 ............ 3,000,000 3,155,490
Fayette County School District GO, zero cpn. to 9/01/10,
4.75% thereafter, 3/01/21 ............................................................... 1,355,000 1,190,652
4.95% thereafter, 3/01/25 ............................................................... 1,000,000 879,090
Forsyth County GO, Pre-Refunded, 5.75%, 2/01/19 ............................................ 1,500,000 1,613,475
Fulton County Development Authority Revenue,
Georgia Tech Foundation Funding, SACII Project, Series A, 5.25%, 11/01/30 ............... 5,000,000 5,343,850
Georgia Tech Foundation Funding, Series A, 5.00%, 11/01/31 .............................. 3,000,000 3,139,770
Molecular Science Building Project, MBIA Insured, 5.00%, 5/01/25 ........................ 2,240,000 2,393,888
Fulton County Water and Sewer Revenue, FGIC Insured, 5.00%, 1/01/30 ........................ 2,500,000 2,653,975
Gainesville and Hall County Hospital Authority Revenue Anticipation Certificates, Northeast
Health System Inc. Project, Refunding, 5.50%, 5/15/31 .................................... 2,500,000 2,616,775
Georgia Municipal Assn. Inc. COP, City Court Atlanta Project, AMBAC Insured, 5.25%,
12/01/26 ................................................................................. 2,000,000 2,155,860
Georgia Municipal Electric Authority Power Revenue,
Project 1, Refunding, Sub Series A, MBIA Insured, 5.00%, 1/01/26 ........................ 2,855,000 3,094,506
Series W, 6.60%, 1/01/18 ................................................................ 955,000 1,101,440
Series W, ETM, 6.60%, 1/01/18 ........................................................... 45,000 51,696
Georgia Municipal Gas Authority Gas Revenue, City of Toccoa Project, AMBAC Insured, 5.00%,
6/01/24 .................................................................................. 1,000,000 1,039,470
Georgia Private Colleges and Universities Authority Student Housing Revenue, Mercer Housing
Corp. Project, Series A, 6.00%, 6/01/24 .................................................. 2,550,000 2,719,065
Georgia School Board Assn. Inc. COP, DeKalb County Public School Project, MBIA Insured,
5.00%, 12/01/25 .......................................................................... 2,600,000 2,801,942
Georgia State HFAR, MF, Lake Vista Apartments Project, Series A, FSA Insured, 5.95%,
1/01/27 .................................................................................. 1,000,000 1,025,020
Gwinnett County Development Authority COP, Gwinnett County Public Schools Project, MBIA
Insured, 5.00%, 1/01/24 .................................................................. 8,500,000 9,176,430
Gwinnett County Hospital Authority Revenue, Anticipation Certificates, Gwinnett Hospital
Systems Inc. Project, Series B, MBIA Insured, 5.30%, 9/01/27 ............................. 3,750,000 4,022,962
Gwinnett County Water and Sewer Authority Revenue, Pre-Refunded, 5.25%, 8/01/25 ............ 2,795,000 3,013,904
Habersham County School District GO, MBIA Insured, 5.00%, 4/01/28 .......................... 2,750,000 2,970,467
Henry County Hospital Authority Revenue, Henry Medical Center Inc. Project, Refunding,
AMBAC Insured, 6.00%, 7/01/29 ............................................................ 5,000,000 5,403,700
Hogansville Combined Public Utility System Revenue, Refunding, FSA Insured, 6.00%,
10/01/23 ................................................................................. 3,300,000 4,005,177
Jackson County School District GO, MBIA Insured, 5.00%, 3/01/25 ............................ 3,000,000 3,226,770
Marietta Development Authority Revenue, first mortgage, Life College Inc.,
Refunding, Series A, FSA Insured, 5.75%, 9/01/14 ........................................ 1,800,000 1,818,162
Refunding, Series A, FSA Insured, 5.80%, 9/01/19 ........................................ 1,100,000 1,111,363
Annual Report | 111
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Marietta Development Authority Revenue, first mortgage, Life College Inc., (continued)
Refunding, Series A, FSA Insured, 5.95%, 9/01/19 ........................................ $ 1,000,000 $ 1,011,050
Series B, FSA Insured, 5.75%, 9/01/14 ................................................... 800,000 808,072
Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus Regional
Healthcare System, MBIA Insured, 5.50%, 8/01/25 .......................................... 6,000,000 6,318,960
Meriwether County PFAR, Meriwether County Schools Project, MBIA Insured, 5.85%, 10/01/26 ... 1,000,000 1,060,090
Monroe County Development Authority PCR, Oglethorpe Power Co., Scherer Project, Refunding,
Series A, 6.80%, 1/01/12 ................................................................. 1,500,000 1,693,650
Municipal Electricity Authority Revenue, Project 1, Sub Series E, MBIA Insured, 5.00%,
1/01/25 .................................................................................. 2,315,000 2,496,241
Newnan Water Sewer and Light Commission Public Utilities Revenue, Series B, AMBAC Insured,
4.50%, 1/01/36 ........................................................................... 2,000,000 2,018,880
Newton County Hospital Authority Revenue, Newton Health System Project 1999, AMBAC
Insured, 6.10%, 2/01/24 .................................................................. 4,500,000 4,804,380
Newton County IDAR, Georgia Perimeter College Foundation Real Estate Newton, CIFG Insured,
5.00%, 6/01/24 ........................................................................... 3,150,000 3,386,092
Peach County Development Authority Student Housing Facilities Revenue, Fort Valley State
University Foundation Property LLC, AMBAC Insured, 5.00%, 6/01/34 ........................ 3,000,000 3,217,650
Private Colleges and Universities Authority Revenue,
Emory University Project, Series A, Pre-Refunded, 5.50%, 11/01/25 ....................... 10,000,000 10,562,300
Mercer University Project, Refunding, Series A, 5.375%, 10/01/29 ........................ 2,000,000 2,061,300
Richmond County Development Authority, Solid Waste Disposal Revenue, International Paper Co.
Project, 5.80%, 12/01/20 ................................................................. 1,500,000 1,542,600
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 1,070,140
Rockdale County Water and Sewer Authority Revenue,
FSA Insured, 5.00%, 7/01/29 ............................................................. 4,000,000 4,295,200
Series A, MBIA Insured, Pre-Refunded, 5.375%, 7/01/29 ................................... 5,000,000 5,278,350
Savannah EDA Revenue,
Armstrong Center LLC Project, Series A, XLCA Insured, 5.00%, 12/01/30 ................... 2,125,000 2,270,584
XLCA Insured, 5.00%, 7/01/29 ............................................................ 3,000,000 3,199,470
South Fulton Municipal Regional Water and Sewer Authority Water Revenue, MBIA Insured,
5.00%, 1/01/33 ........................................................................... 3,500,000 3,681,860
Suwanee GO, MBIA Insured, Pre-Refunded, 5.25%, 1/01/32 ..................................... 3,000,000 3,211,710
Upper Oconee Basin Water Authority Revenue,
FGIC Insured, Pre-Refunded, 5.25%, 7/01/27 .............................................. 1,550,000 1,612,635
Refunding, MBIA Insured, 5.00%, 7/01/26 ................................................. 1,000,000 1,073,070
Valdosta and Lowndes County Hospital Authority Revenue, Certificates, South Georgia Medical
Center Project,
5.00%, 10/01/33 ......................................................................... 2,000,000 2,109,180
AMBAC Insured, 5.25%, 10/01/27 .......................................................... 3,000,000 3,218,940
Walton County Water and Sewer Authority Revenue, Refunding and Improvement, MBIA Insured,
6.00%, 2/01/21 ........................................................................... 750,000 758,933
Ware County Hospital Authority Revenue, Anticipation Certificates, MBIA Insured, 5.25%,
3/01/25 .................................................................................. 3,000,000 3,206,610
-----------
263,548,143
-----------
112 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 1.3%
VIRGIN ISLANDS 1.3%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.40%, 10/01/12 .......................................................................... $ 850,000 $ 878,288
5.50%, 10/01/22 .......................................................................... 1,200,000 1,239,696
5.625%, 10/01/25 ......................................................................... 1,530,000 1,583,274
------------
TOTAL U.S. TERRITORIES ....................................................................... 3,701,258
------------
TOTAL LONG TERM INVESTMENTS (COST $251,902,678) .............................................. 267,249,401
------------
SHORT TERM INVESTMENTS 0.7%
MUNICIPAL BONDS 0.7%
GEORGIA 0.7%
a Athens-Clarke County Unified Government Development Authority Revenue, University of
Georgia Athletic Assn. Project,
Daily VRDN and Put, 3.64%, 8/01/33 ....................................................... 800,000 800,000
Series B, Daily VRDN and Put, 3.64%, 7/01/35 ............................................. 400,000 400,000
a Atlanta Downtown Development Authority Revenue, Underground Atlanta Project, Refunding,
AMBAC Insured, Weekly VRDN and Put, 3.64%, 10/01/16 ....................................... 110,000 110,000
a Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 3.66%,
11/01/41 .................................................................................. 500,000 500,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,810,000) ............................................... 1,810,000
------------
TOTAL INVESTMENTS (COST $253,712,678) 99.0% .................................................. 269,059,401
OTHER ASSETS, LESS LIABILITIES 1.0% .......................................................... 2,630,178
------------
NET ASSETS 100.0% ............................................................................ $271,689,579
============
See Selected Portfolio Abbreviations on page 154.
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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 113
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN KENTUCKY TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 11.39 $ 11.41 $ 11.51 $ 11.30 $ 11.13
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.45 0.47 0.48 0.50 0.52
Net realized and unrealized gains (losses) ....... 0.06 (0.02) (0.10) 0.21 0.17
--------------------------------------------------------------------
Total from investment operations .................. 0.51 0.45 0.38 0.71 0.69
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.46) (0.47) (0.48) (0.50) (0.52)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 11.44 $ 11.39 $ 11.41 $ 11.51 $ 11.30
====================================================================
Total return c .................................... 4.57% 4.01% 3.47% 6.43% 6.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $148,224 $128,254 $112,941 $118,797 $114,541
Ratios to average net assets:
Expenses before waiver and payments by affiliates 0.77% 0.78% 0.79% 0.78% 0.80%
Expenses net of waiver and payments by affiliates 0.75% 0.75% 0.71% 0.60% 0.60%
Net investment income ............................ 4.02% 4.10% 4.30% 4.44% 4.67%
Portfolio turnover rate ........................... 2.28% 9.43% 12.48% 11.87% 7.34%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
114 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.5%
MUNICIPAL BONDS 98.5%
KENTUCKY 80.7%
Bellevue GO, Public Project, Harbor Greene Project, XLCA Insured, 5.00%, 2/01/34 ............... $ 1,065,000 $ 1,125,375
Boone County GO, Public Project, 5.00%,
4/01/20 ..................................................................................... 1,310,000 1,386,818
4/01/21 ..................................................................................... 1,000,000 1,056,750
Boone County PCR, Collateralized, Dayton Power and Light Co., Refunding, Series A,
FGIC Insured, 4.70%, 1/01/28 ................................................................. 3,000,000 3,127,830
Boone Florence Water Commission Water Supply Systems Revenue, Refunding, FGIC Insured,
5.00%,
12/01/22 .................................................................................... 1,200,000 1,269,744
12/01/27 .................................................................................... 2,000,000 2,108,220
Bowling Green ISD Finance Corp. School Building Revenue, 5.75%, 1/01/20 ........................ 1,140,000 1,209,768
Campbell and Kenton Counties Sanitation District No. 1 Sanitation District Revenue, Series A,
FSA Insured, 5.00%,
8/01/19 ..................................................................................... 1,500,000 1,586,295
8/01/24 ..................................................................................... 2,000,000 2,107,560
Campbell County School District Finance Corp. School Building Revenue, FSA Insured, 5.00%,
8/01/26 ..................................................................................... 2,845,000 3,075,360
Christian County Public Courthouse Corp. Lease Revenue, District Court Facilities Project,
5.125%, 8/01/20 ............................................................................. 1,015,000 1,074,641
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 2,057,680
Fayette County School District Finance Corp. School Building Revenue,
Pre-Refunded, 5.50%, 9/01/18 ................................................................ 2,500,000 2,635,350
Refunding, Series B, FSA Insured, 4.00%, 1/01/17 ............................................ 500,000 507,030
Series A, AMBAC Insured, 5.25%, 4/01/20 ..................................................... 2,160,000 2,310,811
Florence GO, Public Project, Series A, FGIC Insured, 5.00%, 11/01/32 ........................... 1,000,000 1,047,070
Greater Kentucky Housing Assistance Corp. Mortgage Revenue, Section 8 Assisted Projects,
Refunding, Series A, MBIA Insured, 6.10%, 1/01/24 ............................................ 405,000 407,114
Hardin County School District Finance Corp. School Building Revenue, Pre-Refunded, 5.75%,
2/01/20 ...................................................................................... 1,500,000 1,600,830
Hardin County Water District No. 2 Water System Revenue, Series A, AMBAC Insured, 5.00%,
1/01/31 ...................................................................................... 2,620,000 2,702,530
Harlan County Justice Center Revenue, First Judicial Center Project, AMBAC Insured, 5.00%,
3/01/25 ...................................................................................... 1,330,000 1,408,723
Henry County Water District No. 2 Water Revenue, Refunding, MBIA Insured, 4.75%,
1/01/28 ...................................................................................... 2,035,000 2,089,212
Jefferson County Health Facilities Revenue, Jewish Hospital Healthcare Services Inc., Refunding,
AMBAC Insured, 5.75%, 1/01/26 ................................................................ 1,000,000 1,021,580
Jefferson County School District Financial Corp. School Building Revenue, Series A, FSA Insured,
Pre-Refunded, 5.25%, 7/01/18 ................................................................. 1,500,000 1,578,510
Kenton County Airport Board Airport Revenue, Cincinnati/Northern Kentucky International Airport,
Series B, MBIA Insured, 5.75%, 3/01/13 ....................................................... 1,230,000 1,244,416
Kentucky Area Development Districts Financing Trust Lease Acquisition Program COP, Series L,
XLCA Insured, 5.00%, 11/01/29 ................................................................ 1,000,000 1,072,500
Kentucky Area Development Districts Financing Trust Lease Program Revenue, City of Ewing,
Series A, 6.00%, 6/01/30 ..................................................................... 2,000,000 2,166,260
Series C, 6.00%, 6/01/30 ..................................................................... 1,285,000 1,391,822
Series E, 5.70%, 6/01/22 ..................................................................... 1,000,000 1,080,780
Annual Report | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
KENTUCKY (CONTINUED)
Kentucky Asset/Liability Commission General Receipts Revenue, University of Kentucky,
Project Notes, FGIC Insured, 5.00%, 10/01/25 ................................................ $ 3,000,000 $ 3,254,340
Kentucky Economic Development Finance Authority Health System Revenue, Norton
Healthcare Inc.,
Refunding, Series C, MBIA Insured, 6.15%, 10/01/24 ......................................... 160,000 183,938
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/24 ...................................... 245,000 282,429
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/25 ...................................... 935,000 1,074,287
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 ................ 2,000,000 2,028,720
Kentucky Economic Development Finance Authority Revenue, Catholic Health Project,
Refunding and Improvement, Series A, Pre-Refunded, 5.00%, 12/01/18 .......................... 2,000,000 2,052,660
Kentucky Housing Corp. Housing Revenue,
Refunding, Series P, 4.60%, 7/01/34 ........................................................ 1,205,000 1,218,086
Series A, 4.60%, 7/01/32 ................................................................... 2,000,000 2,004,400
Series U, 4.90%, 7/01/32 ................................................................... 4,115,000 4,198,082
Kentucky Infrastructure Authority Revenue, Series A, 5.00%,
6/01/19 .................................................................................... 1,140,000 1,195,757
6/01/20 .................................................................................... 1,250,000 1,310,138
6/01/21 .................................................................................... 1,190,000 1,246,299
Kentucky Rural Water Finance Corp. Public Project Revenue,
Flexible Term Program, Series A, 5.00%, 2/01/26 ............................................ 1,055,000 1,111,105
Multimodal, Flexible Term Program, Series I, 5.00%, 2/01/34 ................................ 1,500,000 1,580,640
Kentucky State Property and Buildings Commission Revenues,
Project No. 62, Refunding, Second Series, 5.25%, 10/01/18 .................................. 3,540,000 3,748,294
Project No. 64, MBIA Insured, Pre-Refunded, 5.50%, 5/01/17 ................................. 1,535,000 1,608,158
Project No. 69, Series A, FSA Insured, Pre-Refunded, 5.00%, 8/01/21 ........................ 2,300,000 2,427,144
Project No. 77, MBIA Insured, Pre-Refunded, 5.00%, 8/01/23 ................................. 1,100,000 1,184,106
Kentucky State Turnpike Authority Economic Development Road Revenue, Revitalization Project,
Series A, AMBAC Insured, 5.00%, 7/01/25 ..................................................... 2,000,000 2,156,440
Lawrenceburg Water and Sewer Revenue, MBIA Insured, 5.00%, 10/01/28 ........................... 1,730,000 1,835,219
Louisville and Jefferson County Metropolitan Government Industrial Building Revenue, Sisters of
Mercy, Cincinnati, 5.00%, 10/01/35 .......................................................... 1,500,000 1,572,030
Louisville and Jefferson County Metropolitan Sewer District Sewer and Drainage System Revenue,
Series A,
AMBAC Insured, 5.00%, 5/15/36 .............................................................. 3,000,000 3,212,040
FGIC Insured, 5.00%, 5/15/30 ............................................................... 2,750,000 2,810,747
FGIC Insured, 5.00%, 5/15/38 ............................................................... 3,000,000 3,190,920
Louisville and Jefferson County Student Housing Revenue, University of Louisville, Phase 3-A,
AMBAC Insured, 5.00%, 6/01/34 .............................................................. 3,755,000 4,016,123
Series A, AMBAC Insured, 5.00%, 6/01/25 .................................................... 1,000,000 1,077,550
Louisville Parking Authority of River City Revenue, MBIA Insured, 5.00%, 6/01/29 .............. 3,290,000 3,451,835
Louisville Waterworks Board Water System Revenue, Louisville Water Co., Refunding,
FSA Insured,
5.25%, 11/15/24 ............................................................................ 2,500,000 2,622,825
5.50%, 11/15/25 ............................................................................ 2,000,000 2,111,100
McCracken County Hospital Revenue, Mercy Health System, Refunding, Series A, MBIA Insured,
6.40%, 11/01/07 ............................................................................. 500,000 500,605
116 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
KENTUCKY (CONTINUED)
Murray Hospital Facilities Revenue, Murray, Calloway County Public Hospital, 5.125%,
8/01/37 ................................................................................... $ 3,000,000 $ 3,126,420
Northern Kentucky University COP, AMBAC Insured, 5.00%, 12/01/27 ............................. 1,500,000 1,581,660
Northern Kentucky Water Service District Revenue, MBIA Insured, 4.875%, 2/01/20 .............. 1,270,000 1,305,966
Oldham County School District Finance Corp. School Building Revenue, MBIA Insured, 5.00%,
5/01/24 ................................................................................... 5,680,000 6,077,543
Russell Health System Revenue, Our Lady of Bellefonte, Pre-Refunded, 5.50%, 7/01/15 .......... 800,000 829,824
a Warren County Hospital Facility Revenue, Community Hospital Corporation Project, Refunding,
Series A, 5.00%, 8/01/29 .................................................................. 1,000,000 1,037,680
------------
119,675,689
------------
U.S. TERRITORIES 17.8%
PUERTO RICO 13.4%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds,
Refunding, 5.375%, 5/15/33 ................................................................ 1,780,000 1,856,326
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.125%, 7/01/31 .......................................................................... 3,125,000 3,241,750
Pre-Refunded, 5.125%, 7/01/31 ............................................................ 1,875,000 1,989,956
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................................. 2,500,000 2,714,325
Series K, 5.00%, 7/01/27 ................................................................. 3,000,000 3,171,240
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/30 .......... 5,000,000 5,379,650
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.25%, 7/01/36 ...................................................... 455,000 479,097
Series D, Pre-Refunded, 5.25%, 7/01/36 ................................................... 995,000 1,070,829
------------
19,903,173
------------
VIRGIN ISLANDS 4.4%
Virgin Islands PFAR,
Gross Receipts Taxes Loan Notes, FGIC Insured, 5.00%, 10/01/28 ........................... 4,000,000 4,345,240
senior lien, Fund Loan Notes, Refunding, Series A, 5.625%, 10/01/25 ...................... 2,000,000 2,069,640
------------
6,414,880
------------
TOTAL U.S. TERRITORIES ....................................................................... 26,318,053
------------
TOTAL LONG TERM INVESTMENTS (COST $139,271,385) .............................................. 145,993,742
------------
SHORT TERM INVESTMENTS 1.0%
MUNICIPAL BONDS 1.0%
KENTUCKY 0.6%
b Breckinridge County Lease Program Revenue, Kentucky Assn. Counties Leasing Trust, Series A,
Weekly VRDN and Put, 3.64%, 2/01/32 ....................................................... 366,000 366,000
b Shelby County Lease Revenue, Series A, Daily VRDN and Put, 3.64%, 9/01/34 .................... 565,000 565,000
------------
931,000
------------
Annual Report | 117
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 0.4%
PUERTO RICO 0.4%
b Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured,
Weekly VRDN and Put, 3.34%, 12/01/15 ...................................................... $ 500,000 $ 500,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,431,000) ............................................... 1,431,000
------------
TOTAL INVESTMENTS (COST $140,702,385) 99.5% .................................................. 147,424,742
OTHER ASSETS, LESS LIABILITIES 0.5% .......................................................... 799,668
------------
NET ASSETS 100.0% ............................................................................ $148,224,410
============
See Selected Portfolio Abbreviations on page 154.
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.
118 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.52 $ 11.68 $ 11.81 $ 11.55 $ 11.38
----------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.48 0.50 0.52 0.53 0.55
Net realized and unrealized gains (losses) . 0.10 (0.16) (0.14) 0.26 0.17
----------------------------------------------------------------
Total from investment operations ............ 0.58 0.34 0.38 0.79 0.72
----------------------------------------------------------------
Less distributions from net investment income (0.49) (0.50) (0.51) (0.53) (0.55)
----------------------------------------------------------------
Redemption fees ............................. -- d -- -- d -- --
----------------------------------------------------------------
Net asset value, end of year ................ $ 11.61 $ 11.52 $ 11.68 $ 11.81 $ 11.55
================================================================
Total return c .............................. 5.14% 2.99% 3.36% 7.01% 6.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $220,927 $188,333 $188,659 $185,987 $177,211
Ratios to average net assets:
Expenses ................................... 0.73% 0.73% 0.73% 0.73% 0.74%
Net investment income ...................... 4.22% 4.30% 4.49% 4.56% 4.84%
Portfolio turnover rate ..................... 5.71% 9.78% 8.67% 16.35% 12.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 119
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.63 $ 11.79 $ 11.91 $ 11.65 $ 11.47
----------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.43 0.44 0.46 0.46 0.49
Net realized and unrealized gains (losses) . 0.09 (0.16) (0.13) 0.26 0.18
----------------------------------------------------------------
Total from investment operations ............ 0.52 0.28 0.33 0.72 0.67
----------------------------------------------------------------
Less distributions from net investment income (0.42) (0.44) (0.45) (0.46) (0.49)
----------------------------------------------------------------
Redemption fees ............................. -- d -- -- d -- --
----------------------------------------------------------------
Net asset value, end of year ................ $ 11.73 $ 11.63 $ 11.79 $ 11.91 $ 11.65
================================================================
Total return c .............................. 4.61% 2.40% 2.84% 6.34% 5.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 29,028 $ 23,319 $ 19,196 $ 20,768 $ 20,503
Ratios to average net assets:
Expenses ................................... 1.28% 1.28% 1.28% 1.29% 1.28%
Net investment income ...................... 3.67% 3.75% 3.94% 4.00% 4.30%
Portfolio turnover rate ..................... 5.71% 9.78% 8.67% 16.35% 12.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
120 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.4%
MUNICIPAL BONDS 96.4%
LOUISIANA 92.4%
Bossier City Public Improvement Sales and Use Tax Revenue, FGIC Insured, Pre-Refunded,
5.00%,
12/01/19 ................................................................................... $ 1,145,000 $ 1,173,671
12/01/21 ................................................................................... 1,875,000 1,921,950
12/01/22 ................................................................................... 1,515,000 1,552,936
Bossier Parish Sales and Use Tax Revenue, AMBAC Insured, 5.00%, 7/01/20 ....................... 1,900,000 2,024,564
Calcasieu Parish Public Trust Authority Student Lease Revenue, McNeese Student Housing
Project, MBIA Insured, 5.25%,
5/01/21 .................................................................................... 1,505,000 1,605,745
5/01/33 .................................................................................... 2,500,000 2,641,600
De Soto Parish Environmental Improvement Revenue, International Paper Co. Project, Series A,
5.65%, 12/01/21 ............................................................................. 1,000,000 1,025,360
De Soto Parish PCR, Cleco Utility Group Inc. Project, Refunding, AMBAC Insured, 5.875%,
9/01/29 ..................................................................................... 11,500,000 12,265,325
Denham Spring Livingston Housing and Mortgage Finance Authority SFHR, Series A,
FHA Insured, ETM, 7.20%, 8/01/10 ............................................................ 1,380,000 1,533,622
East Baton Rouge Mortgage Finance Authority Revenue, SFM Purchase, Refunding, Series A,
6.10%, 10/01/29 ............................................................................. 195,000 198,058
East Baton Rouge Parish Park and Recreation District GO, FSA Insured, 5.00%, 5/01/25 .......... 3,325,000 3,547,110
East Baton Rouge Parish Sales and Use Tax Revenue, Public Improvement, Series ST,
FGIC Insured, Pre-Refunded, 5.00%, 2/01/20 .................................................. 1,000,000 1,058,120
East Baton Rouge Parish Sales Tax Revenue, Public Improvement, Refunding, Series A,
AMBAC Insured, 5.00%, 2/01/24 ............................................................... 2,000,000 2,139,940
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 5,212,500
Greater New Orleans Expressway Commission Revenue, Refunding, AMBAC Insured, 5.00%,
11/01/27 .................................................................................... 5,000,000 5,283,400
Jefferson Parish Revenue, Public Improvement, 24th Judicial District Project, MBIA Insured,
5.00%, 4/01/29 .............................................................................. 3,060,000 3,239,071
Jefferson Parish West Jefferson Park and Community Center Revenue, MBIA Insured, 5.00%,
10/01/29 .................................................................................... 2,925,000 3,106,525
Jefferson Sales Tax District Special Sales Tax Revenue,
AMBAC Insured, 5.00%, 12/01/22 ............................................................. 2,000,000 2,152,280
Refunding, FSA Insured, 5.00%, 12/01/22 .................................................... 3,000,000 3,086,940
Special Tax Bond, AMBAC Insured, 5.00%, 12/01/20 ........................................... 4,195,000 4,396,360
Lafayette Public Trust Financing Authority Revenue, Ragin' Cajun Facilities Inc. Project,
MBIA Insured, 5.00%, 10/01/22 ............................................................... 1,500,000 1,604,505
Lafayette Public Trust Financing Authority SFMR, Series A, ETM, 7.20%, 4/01/11 ................ 30,000 33,814
Lafayette Utilities Revenue, MBIA Insured, 5.00%, 11/01/28 .................................... 5,000,000 5,316,500
Lafourche Parish Home Mortgage Authority SFMR, ETM, 7.40%, 7/01/10 ............................ 55,000 58,071
Livingston Parish Waterworks Revenue, Ward Two Water District, AMBAC Insured, 5.125%,
4/01/29 ..................................................................................... 2,200,000 2,391,444
Louisiana HFA Mortgage Revenue, SF, Series A-1, GNMA Secured, 5.45%, 12/01/20 ................. 510,000 510,184
Louisiana Local Government Environmental Facilities and CDA Revenue,
Baton Rouge Apartments, Series A, MBIA Insured, 6.375%, 1/01/30 ............................ 4,265,000 4,536,723
Delgado Community College Foundation Project, AMBAC Insured, 6.00%, 10/01/29 ............... 1,000,000 1,071,040
Denham Springs Sewer Project, AMBAC Insured, 4.75%, 12/01/31 ............................... 5,040,000 5,222,650
Jefferson Parking Garage Project, AMBAC Insured, 5.00%, 9/01/21 ............................ 2,215,000 2,314,431
Annual Report | 121
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
LOUISIANA (CONTINUED)
Louisiana Local Government Environmental Facilities and CDA Revenue, (continued)
Livingston Parish Road, AMBAC Insured, 5.00%, 3/01/21 ...................................... $ 4,040,000 $ 4,374,229
MBIA Insured, 5.00%, 12/01/26 .............................................................. 3,000,000 3,152,310
Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/26 ......... 2,000,000 2,126,700
Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/31 ......... 2,000,000 2,123,240
Southeastern Louisiana Student Housing, Series A, MBIA Insured, 5.00%, 8/01/27 ............. 3,000,000 3,168,870
Louisiana Local Government Environmental Facilities GO, AMBAC Insured, 5.25%, 4/01/29 ......... 1,000,000 1,085,480
Louisiana Public Facilities Authority Hospital Revenue,
Franciscan Missionaries, Series C, MBIA Insured, 5.00%, 7/01/19 ............................ 595,000 608,048
Franciscan Missionaries, Series C, MBIA Insured, Pre-Refunded, 5.00%, 7/01/19 .............. 3,155,000 3,242,299
Pendleton Memorial Methodist, Pre-Refunded, 5.25%, 6/01/28 ................................. 4,500,000 4,629,195
Touro Infirmary Project, Series A, 5.625%, 8/15/29 ......................................... 6,000,000 6,039,840
Louisiana Public Facilities Authority Revenue,
Centenary College Project, Refunding, 5.75%, 2/01/29 ....................................... 7,300,000 7,549,149
Dillard University Project, Refunding, AMBAC Insured, 5.00%, 2/01/18 ....................... 1,500,000 1,543,725
Dillard University Project, Series A, AMBAC Insured, 5.30%, 8/01/26 ........................ 1,540,000 1,647,199
FHA Insured Mortgage, Baton Rouge General, MBIA Insured, 5.25%, 7/01/33 .................... 5,000,000 5,383,200
Grambling University Project, Black and Gold Facilities Project, Series A, CIFG Insured,
5.00%, 7/01/30 ............................................................................ 5,000,000 5,325,500
Mortgage Purchase, HFA, Refunding, Series A, FNMA Insured, 6.40%, 7/20/20 .................. 1,900,000 1,912,635
Ochsner Clinic Foundation Project, Refunding, Series B, 5.75%, 5/15/23 ..................... 2,500,000 2,699,125
Tulane University, Refunding, Series A, AMBAC Insured, 5.125%, 7/01/27 ..................... 3,000,000 3,169,020
Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/17 ............ 1,000,000 1,026,780
Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/27 ............ 6,015,000 6,170,728
Louisiana State Citizens Property Insurance Corp. Assessment Revenue, Series B,
AMBAC Insured, 5.00%, 6/01/23 ............................................................... 5,000,000 5,406,800
Louisiana State Gas and Fuels Tax Revenue, Series A,
AMBAC Insured, 5.00%, 6/01/27 .............................................................. 3,500,000 3,651,970
FGIC Insured, 5.00%, 5/01/27 ............................................................... 2,000,000 2,127,880
FSA Insured, 5.00%, 5/01/31 ................................................................ 10,000,000 10,751,900
Louisiana State GO, Match, Refunding, Series B, CIFG Insured, 5.00%,
7/15/24 .................................................................................... 3,475,000 3,738,335
7/15/25 .................................................................................... 2,765,000 2,967,840
Louisiana State Office Facilities Corp. Lease Revenue, Capital Complex Program,
AMBAC Insured, 5.00%, 5/01/21 .............................................................. 2,500,000 2,625,725
Series A, MBIA Insured, 5.375%, 3/01/19 .................................................... 3,000,000 3,115,770
Louisiana State University and Agricultural and Mechanical College Board Revenue,
AMBAC Insured, 5.00%, 7/01/22 .............................................................. 5,000,000 5,338,650
Auxiliary, FGIC Insured, 5.00%, 7/01/31 .................................................... 3,000,000 3,216,870
Auxiliary, Series B, AMBAC Insured, 5.00%, 7/01/27 ......................................... 1,500,000 1,592,355
Monroe Sales and Use Tax Revenue, FGIC Insured, 5.25%, 7/01/23 ................................ 1,535,000 1,667,164
New Orleans GO,
Drain Systems, AMBAC Insured, 5.00%, 12/01/18 .............................................. 1,000,000 1,022,660
Public Improvement, AMBAC Insured, 5.25%, 12/01/29 ......................................... 1,485,000 1,597,177
Public Improvement, FGIC Insured, 5.25%, 12/01/21 .......................................... 1,295,000 1,386,103
Public Improvement, FGIC Insured, 5.125%, 12/01/26 ......................................... 2,000,000 2,098,780
Refunding, MBIA Insured, 5.125%, 9/01/21 ................................................... 2,000,000 2,120,000
122 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
LOUISIANA (CONTINUED)
Orleans Levee District Revenue, Levee Improvement, Refunding, FSA Insured, 5.95%,
11/01/14 .................................................................................... $ 580,000 $ 591,710
Orleans Parish Parishwide School District GO, Refunding, Series B, FGIC Insured, 5.50%,
9/01/20 ..................................................................................... 1,000,000 1,015,950
Orleans Parish School Board GO, Series 95, FGIC Insured, 5.375%, 9/01/18 ...................... 1,950,000 1,952,788
Ouachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical Center,
Refunding, FSA Insured, 5.75%, 5/15/21 ...................................................... 2,500,000 2,659,125
Ouachita Parish West Ouachita Parish School District Sales and Use Tax Revenue, FGIC Insured,
Pre-Refunded, 5.75%, 9/01/24 ................................................................ 1,410,000 1,532,487
Rapides Parish Housing and Mortgage Finance Authority Revenue, SFM Purchase, FHA Insured,
ETM, 7.25%, 8/01/10 ......................................................................... 595,000 628,028
Shreveport Certificates of Indebtedness Revenue, Refunding, Series A, AMBAC Insured, 5.00%,
10/01/16 .................................................................................... 1,000,000 1,047,270
St. Bernard Home Mortgage Authority Revenue, SF, Series A, FGIC Insured, ETM, 7.50%,
9/01/10 ..................................................................................... 435,000 489,849
St. Charles Parish Consolidated Waterworks and Wastewater District No. 1 Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ............................................................... 6,485,000 6,954,903
St. John's Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 .................. 2,500,000 2,592,600
St. Tammany's Public Trust Financing Authority SFMR, Series A, ETM, 7.20%,
7/01/10 .................................................................................... 40,000 41,994
7/01/11 .................................................................................... 50,000 57,078
State Colleges and Universities Lease Revenue, University of Southwestern Louisiana,
Cajundome, MBIA Insured, Pre-Refunded, 5.65%, 9/01/26 ....................................... 3,080,000 3,171,599
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 2,359,251
University of Louisiana System Board of Supervisors Lease Revenue,
LaFayette Cajundome Convention, MBIA Insured, Pre-Refunded, 6.25%, 9/01/29 ................. 1,200,000 1,297,020
Northwestern State University Wellness, AMBAC Insured, 5.10%, 4/01/24 ...................... 1,000,000 1,043,731
------------
231,063,073
------------
U.S. TERRITORIES 4.0%
PUERTO RICO 2.7%
Puerto Rico Commonwealth GO, Public Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ................................................. 4,400,000 4,687,804
Series A, 5.00%, 7/01/33 ................................................................... 2,000,000 2,086,780
------------
6,774,584
------------
VIRGIN ISLANDS 1.3%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ....... 3,000,000 3,098,340
------------
TOTAL U.S. TERRITORIES ........................................................................ 9,872,924
------------
TOTAL LONG TERM INVESTMENTS (COST $229,831,691) ............................................... 240,935,997
------------
Annual Report | 123
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 2.3%
MUNICIPAL BONDS 2.3%
LOUISIANA 2.3%
a Louisiana Public Facilities Authority Revenue, Kenner Hotel Ltd., Daily VRDN and Put, 3.63%,
12/01/15 .................................................................................. $5,200,000 $ 5,200,000
a Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project,
First Stage, ACES, Refunding, Daily VRDN and Put, 3.66%, 9/01/17 .......................... 500,000 500,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $5,700,000) ............................................... 5,700,000
------------
TOTAL INVESTMENTS (COST $235,531,691) 98.7% .................................................. 246,635,997
OTHER ASSETS, LESS LIABILITIES 1.3% .......................................................... 3,318,460
------------
NET ASSETS 100.0% ............................................................................ $249,954,457
============
See Selected Portfolio Abbreviations on page 154.
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.
124 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MARYLAND TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 11.77 $ 11.80 $ 11.93 $ 11.78 $ 11.52
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.49 0.51 0.51 0.52 0.54
Net realized and unrealized gains (losses) ....... 0.08 (0.03) (0.13) 0.16 0.26
--------------------------------------------------------------------
Total from investment operations .................. 0.57 0.48 0.38 0.68 0.80
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.50) (0.51) (0.51) (0.53) (0.54)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 11.84 $ 11.77 $ 11.80 $ 11.93 $ 11.78
====================================================================
Total return c .................................... 4.96% 4.11% 3.34% 5.89% 7.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $410,890 $369,205 $332,943 $340,237 $322,873
Ratios to average net assets:
Expenses ......................................... 0.68% 0.69% 0.70% 0.70% 0.70%
Net investment income ............................ 4.21% 4.29% 4.40% 4.43% 4.65%
Portfolio turnover rate ........................... 7.84% 8.00% 12.03% 10.56% 6.30%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 125
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MARYLAND TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 11.91 $ 11.93 $ 12.05 $ 11.90 $ 11.63
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.43 0.45 0.46 0.46 0.48
Net realized and unrealized gains (losses) ....... 0.08 (0.03) (0.13) 0.15 0.27
--------------------------------------------------------------------
Total from investment operations .................. 0.51 0.42 0.33 0.61 0.75
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.43) (0.44) (0.45) (0.46) (0.48)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 11.99 $ 11.91 $ 11.93 $ 12.05 $ 11.90
====================================================================
Total return c .................................... 4.42% 3.57% 2.73% 5.33% 6.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 71,937 $ 59,915 $ 48,997 $ 49,739 $ 48,305
Ratios to average net assets:
Expenses ......................................... 1.23% 1.24% 1.25% 1.28% 1.22%
Net investment income ............................ 3.66% 3.74% 3.85% 3.85% 4.13%
Portfolio turnover rate ........................... 7.84% 8.00% 12.03% 10.56% 6.30%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
126 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.4%
MUNICIPAL BONDS 98.4%
MARYLAND 86.0%
Anne Arundel County GO, Refunding, 4.625%, 3/01/32 ............................................ $ 2,000,000 $ 2,081,100
Baltimore Convention Center Hotel Revenue, Senior Series A, XLCA Insured, 5.25%,
9/01/39 ..................................................................................... 25,095,000 27,406,501
Baltimore County Metropolitan 68th District GO, Refunding, 5.00%, 8/01/32 ..................... 1,000,000 1,060,610
Baltimore Economic Development Lease Revenue, Armistead Partnership, Refunding,
Series A, 7.00%, 8/01/11 .................................................................... 2,025,000 2,030,589
Baltimore GO, Consolidated Public Improvement,
Series A, FGIC Insured, Pre-Refunded, 5.30%, 10/15/17 ...................................... 1,500,000 1,545,030
Series A, FSA Insured, Pre-Refunded, 5.25%, 10/15/17 ....................................... 3,300,000 3,494,535
Series B, 7.15%, 10/15/08 .................................................................. 1,000,000 1,054,070
Baltimore Port Facilities Revenue, Consolidated Coal Sales, Refunding, Series A, 6.50%,
10/01/11 .................................................................................... 1,850,000 1,929,328
Baltimore Project Revenue,
Wastewater Projects, Refunding, FGIC Insured, 5.125%, 7/01/42 .............................. 7,630,000 8,041,105
Wastewater Projects, Series B, FGIC Insured, Pre-Refunded, 5.00%, 7/01/28 .................. 4,000,000 4,141,880
Wastewater Projects, Series B, MBIA Insured, 5.00%, 7/01/35 ................................ 2,600,000 2,786,160
Wastewater Projects, Series C, AMBAC Insured, 5.00%, 7/01/31 ............................... 5,000,000 5,418,000
Wastewater Projects, Series C, AMBAC Insured, 5.00%, 7/01/36 ............................... 6,125,000 6,607,283
Water Projects, Series A, MBIA Insured, 5.00%, 7/01/35 ..................................... 4,240,000 4,546,722
Baltimore Revenue,
Wastewater Project, Series A, FGIC Insured, Pre-Refunded, 5.80%, 7/01/15 ................... 5,000,000 5,242,650
Water Project, Series A, FSA Insured, Pre-Refunded, 5.75%, 7/01/30 ......................... 10,000,000 10,660,500
Carroll County Revenue, Fairhaven and Copper Ridge, Refunding, Series A, Radian Insured,
5.375%, 1/01/16 ............................................................................ 2,000,000 2,081,060
5.50%, 1/01/19 ............................................................................. 1,000,000 1,031,780
5.625%, 1/01/25 ............................................................................ 2,000,000 2,093,780
Harford County GO, Consolidated Public Improvement, 4.45%, 1/15/17 ............................ 1,125,000 1,163,171
Maryland Environmental Services COP, Water and Waste Facilities, Series A, 6.70%, 6/01/11 ..... 1,900,000 1,901,786
Maryland State CDA Department of Housing and CDR,
Housing, Series A, 6.00%, 7/01/32 .......................................................... 4,000,000 4,124,960
Residential, Series D, 5.25%, 9/01/29 ...................................................... 3,460,000 3,523,422
Series B, 5.35%, 9/01/30 ................................................................... 815,000 830,061
SF Program, First Series, 5.00%, 4/01/17 ................................................... 40,000 41,104
SF Program, Second Series, 5.00%, 4/01/17 .................................................. 3,000,000 3,076,980
Maryland State EDC Student Housing Revenue,
University of Maryland Baltimore County Project, Refunding, XLCA Insured, 5.00%,
7/01/30 ................................................................................... 3,245,000 3,492,658
University of Maryland Baltimore County Project, Refunding, XLCA Insured, 5.00%,
7/01/35 ................................................................................... 3,675,000 3,931,846
University of Maryland College Park Projects, Refunding, CIFG Insured, 5.00%, 6/01/25 ...... 2,500,000 2,689,375
University of Maryland College Park Projects, Refunding, CIFG Insured, 5.00%, 6/01/28 ...... 2,000,000 2,146,700
University of Maryland College Park Projects, Refunding, CIFG Insured, 5.00%, 6/01/33 ...... 3,000,000 3,208,110
Maryland State EDC Utility Infrastructure Revenue, University College Park Project, AMBAC
Insured, 5.00%, 7/01/19 ..................................................................... 1,710,000 1,797,962
Maryland State Energy Financing Administration Solid Waste Disposal Revenue, Limited
Obligation, Wheelabrator Water Projects, 6.45%, 12/01/16 .................................... 3,000,000 3,071,610
Annual Report | 127
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MARYLAND (CONTINUED)
Maryland State Health and Higher Educational Facilities Authority Revenue,
Anne Arundel Health System, Series A, 5.125%, 7/01/34 ...................................... $ 2,500,000 $ 2,621,825
Anne Arundel Medical Center, FSA Insured, 5.125%, 7/01/33 .................................. 8,365,000 8,586,840
Carroll County General Hospital, 6.00%, 7/01/26 ............................................ 2,000,000 2,144,340
Carroll County General Hospital, 5.80%, 7/01/32 ............................................ 5,000,000 5,338,350
Catholic Health Initiatives, Series A, 6.00%, 12/01/20 ..................................... 715,000 775,174
Catholic Health Initiatives, Series A, ETM, 6.00%, 12/01/20 ................................ 2,205,000 2,382,811
Catholic Health Initiatives, Series A, ETM, 6.00%, 12/01/24 ................................ 2,025,000 2,181,857
Charity Obligation Group, Series A, Pre-Refunded, 5.00%, 11/01/19 .......................... 1,515,000 1,572,570
Charity Obligation Group, Series A, Pre-Refunded, 5.00%, 11/01/29 .......................... 2,250,000 2,335,500
Doctors Community Hospital, Refunding, Series A, 5.00%, 7/01/20 ............................ 5,000,000 5,284,700
Doctors Community Hospital, Series A, 5.00%, 7/01/29 ....................................... 5,000,000 5,238,000
Edenwald, Series A, 5.40%, 1/01/31 ......................................................... 1,000,000 1,049,200
Helix Health Issue, AMBAC Insured, ETM, 5.00%, 7/01/27 ..................................... 11,000,000 12,317,580
Johns Hopkins Medical Institutions, Series A, 5.00%, 5/15/37 ............................... 9,395,000 9,977,960
Johns Hopkins University, Series A, 5.00%, 7/01/32 ......................................... 29,000,000 30,277,160
Johns Hopkins University Issue, Pre-Refunded, 6.00%, 7/01/39 ............................... 5,000,000 5,310,750
Loyola College, Series A, 5.00%, 10/01/40 .................................................. 8,525,000 8,955,086
Maryland Institute College of Art, 5.00%, 6/01/35 .......................................... 2,000,000 2,091,700
Maryland Institute College of Art, 5.625%, 6/01/36 ......................................... 3,600,000 3,792,744
Maryland Institute College of Art, 5.00%, 6/01/40 .......................................... 6,000,000 6,261,240
Mercy Medical Center, Refunding, 5.625%, 7/01/31 ........................................... 5,500,000 5,744,585
North Arundel Hospital, Pre-Refunded, 6.50%, 7/01/26 ....................................... 1,000,000 1,097,540
North Arundel Hospital, Pre-Refunded, 6.50%, 7/01/31 ....................................... 1,320,000 1,448,753
Parking, Johns Hopkins Medical Institutions, AMBAC Insured, 5.00%, 7/01/27 ................. 655,000 685,228
Parking, Johns Hopkins Medical Institutions, AMBAC Insured, 5.00%, 7/01/34 ................. 5,000,000 5,330,750
Peninsula Regional Medical Center, 5.00%, 7/01/36 .......................................... 7,000,000 7,356,160
Roland Park Place Project, Refunding, 5.625%, 7/01/18 ...................................... 2,500,000 2,507,375
Roland Park Place Project, Refunding, 5.625%, 7/01/24 ...................................... 2,680,000 2,687,048
Union Hospital Cecil County Issue, 5.00%, 7/01/35 .......................................... 3,015,000 3,148,293
University of Maryland Medical System, Pre-Refunded, 6.75%, 7/01/30 ........................ 11,000,000 12,158,300
Upper Chesapeake Hospitals, Series A, FSA Insured, 5.375%, 1/01/28 ......................... 5,000,000 5,124,900
Upper Chesapeake Hospitals, Series A, FSA Insured, 5.125%, 1/01/33 ......................... 7,100,000 7,241,006
Western Maryland Health, Series A, MBIA Insured, 4.75%, 7/01/36 ............................ 19,500,000 20,303,985
Maryland State Stadium Authority Sports Facilities Lease Revenue, AMBAC Insured,
5.75%, 3/01/22 ............................................................................. 5,000,000 5,000,000
5.80%, 3/01/26 ............................................................................. 2,045,000 2,045,000
Maryland State Transportation Authority Lease Revenue, Metrorail Parking Project, AMBAC
Insured, 5.00%, 7/01/28 ..................................................................... 3,975,000 4,250,984
Maryland State Transportation Authority Parking Revenue, AMBAC Insured, 5.00%, 3/01/27 ........ 8,000,000 8,431,600
Maryland State Transportation Authority Transportation Facility Projects Revenue, FSA Insured,
5.00%,
7/01/27 .................................................................................... 5,890,000 6,302,771
7/01/31 .................................................................................... 7,455,000 7,957,914
7/01/32 .................................................................................... 7,165,000 7,643,622
7/01/34 .................................................................................... 7,500,000 7,996,125
128 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MARYLAND (CONTINUED)
Montgomery County GO,
4.75%, 4/01/22 ............................................................................. $ 3,000,000 $ 3,173,310
Consolidated, Public Improvement, Series A, 5.00%, 6/01/24 ................................. 5,000,000 5,428,100
Pre-Refunded, 4.75%, 2/01/17 ............................................................... 5,000,000 5,245,500
Montgomery County Housing Opportunities Commission MFHR, Series B, FHA Insured,
6.00%, 7/01/37 .............................................................................. 2,500,000 2,545,375
Morgan State University Maryland and Auxiliary Facilities Fees Revenue, Series A, FGIC Insured,
5.00%, 7/01/32 .............................................................................. 6,450,000 6,829,002
Prince George's County GO, Consolidated Public Improvement,
4.40%, 9/15/22 ............................................................................. 10,000,000 10,290,500
MBIA Insured, 5.00%, 4/15/18 ............................................................... 2,100,000 2,152,773
Prince George's County IDA Lease Revenue, Upper Marlboro Justice, Series B, MBIA Insured,
4.75%, 6/30/30 .............................................................................. 4,000,000 4,118,520
St. Mary's College Revenue, Academic Fees and Auxiliary Fees Project, Series A, AMBAC Insured,
Pre-Refunded, 5.55%, 9/01/30 ................................................................ 2,000,000 2,126,380
Westminster Education Facilities Revenue, McDaniel College Inc., Pre-Refunded, 5.50%,
4/01/27 .................................................................................... 425,000 462,965
4/01/32 .................................................................................... 1,500,000 1,633,995
------------
415,216,174
------------
U.S. TERRITORIES 12.4%
PUERTO RICO 10.9%
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.25%, 7/01/27 .................................................. 1,520,000 1,620,730
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ................................................. 4,360,000 4,627,312
Refunding, FSA Insured, 5.25%, 7/01/27 ..................................................... 1,015,000 1,074,763
Refunding, FSA Insured, 5.125%, 7/01/30 .................................................... 2,870,000 3,022,454
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, Pre-Refunded, 5.25%, 7/01/38 ..................................................... 5,000,000 5,398,600
Series G, 5.00%, 7/01/33 ................................................................... 7,000,000 7,463,330
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ............................................................... 5,000,000 5,409,900
Puerto Rico Electric Power Authority Power Revenue,
Refunding, Series SS, FSA Insured, 5.00%, 7/01/30 .......................................... 5,000,000 5,372,700
Series HH, FSA Insured, 5.25%, 7/01/29 ..................................................... 10,780,000 11,437,904
Series II, 5.25%, 7/01/31 .................................................................. 3,000,000 3,199,320
Series RR, XLCA Insured, 5.00%, 7/01/30 .................................................... 2,000,000 2,141,740
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.25%, 7/01/36 ........................................................ 520,000 547,539
Series D, Pre-Refunded, 5.25%, 7/01/36 ..................................................... 1,480,000 1,592,791
------------
52,909,083
------------
Annual Report | 129
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS 1.5%
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, FSA Insured, 5.00%, 10/01/22 ............................. $ 2,000,000 $ 2,157,960
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ....................... 1,700,000 1,755,726
senior lien, Refunding, Series A, 5.50%, 10/01/14 ........................................ 3,300,000 3,410,715
------------
7,324,401
------------
TOTAL U.S. TERRITORIES ....................................................................... 60,233,484
------------
TOTAL LONG TERM INVESTMENTS (COST $453,245,074) .............................................. 475,449,658
------------
SHORT TERM INVESTMENTS 0.4%
MUNICIPAL BONDS 0.4%
MARYLAND 0.4%
a Maryland State EDC Revenue,
Multi-Modal, U.S. Pharmacopeial, AMBAC Insured, Daily VRDN and Put, 3.65%,
7/01/36 ................................................................................. 100,000 100,000
U.S. Pharmacopeial Project, Refunding, Series A, AMBAC Insured, Daily VRDN and Put,
3.64%, 7/01/34 .......................................................................... 445,000 445,000
U.S. Pharmacopeial Project, Refunding, Series B, AMBAC Insured, Daily VRDN and Put,
3.67%, 7/01/34 .......................................................................... 1,210,000 1,210,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,755,000) ............................................... 1,755,000
------------
TOTAL INVESTMENTS (COST $455,000,074) 98.8% .................................................. 477,204,658
OTHER ASSETS, LESS LIABILITIES 1.2% .......................................................... 5,622,304
------------
NET ASSETS 100.0% ............................................................................ $482,826,962
============
See Selected Portfolio Abbreviations on page 154.
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.
130 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MISSOURI TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 12.31 $ 12.32 $ 12.44 $ 12.23 $ 12.00
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.52 0.53 0.54 0.55 0.58
Net realized and unrealized gains (losses) ....... 0.06 (0.01) (0.12) 0.21 0.23
--------------------------------------------------------------------
Total from investment operations .................. 0.58 0.52 0.42 0.76 0.81
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.52) (0.53) (0.54) (0.55) (0.58)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 12.37 $ 12.31 $ 12.32 $ 12.44 $ 12.23
====================================================================
Total return c .................................... 4.85% 4.33% 3.49% 6.38% 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $613,125 $562,235 $516,312 $499,238 $468,008
Ratios to average net assets:
Expenses ......................................... 0.66% 0.66% 0.67% 0.67% 0.67%
Net investment income ............................ 4.25% 4.31% 4.44% 4.50% 4.72%
Portfolio turnover rate ........................... 19.77% 15.32% 17.93% 25.04% 18.73%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 131
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MISSOURI TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 12.39 $ 12.39 $ 12.50 $ 12.29 $ 12.06
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.45 0.47 0.48 0.48 0.51
Net realized and unrealized gains (losses) ....... 0.06 -- d (0.12) 0.21 0.23
--------------------------------------------------------------------
Total from investment operations .................. 0.51 0.47 0.36 0.69 0.74
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.45) (0.47) (0.47) (0.48) (0.51)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 12.45 $ 12.39 $ 12.39 $ 12.50 $ 12.29
====================================================================
Total return c .................................... 4.25% 3.82% 2.98% 5.75% 6.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 70,148 $ 68,807 $ 60,418 $ 60,208 $ 55,608
Ratios to average net assets:
Expenses ......................................... 1.21% 1.21% 1.22% 1.25% 1.19%
Net investment income ............................ 3.70% 3.76% 3.89% 3.92% 4.20%
Portfolio turnover rate ........................... 19.77% 15.32% 17.93% 25.04% 18.73%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
132 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.3%
MUNICIPAL BONDS 98.3%
MISSOURI 85.6%
Bi-State Development Agency Missouri Illinois Metropolitan District Revenue, Metrolink Cross
County Project, Series B, FSA Insured, 5.00%, 10/01/32 ...................................... $ 4,500,000 $ 4,763,025
Boone County IDA Health Care Revenue, Retirement Center Project, GNMA Secured, 5.70%,
10/20/22 .................................................................................... 1,515,000 1,639,230
Branson Reorganized School District No. R-4 GO, FSA Insured, 5.00%, 3/01/24 ................... 4,500,000 4,846,545
Cape Girardeau County IDA Health Care Facilities Revenue, St. Francis Medical Center,
Series A, 5.50%,
6/01/27 .................................................................................... 6,350,000 6,805,676
6/01/32 .................................................................................... 5,000,000 5,364,500
Cape Girardeau County IDA Solid Waste Disposal Revenue, Procter and Gamble Paper Products,
5.30%, 5/15/28 .............................................................................. 6,875,000 7,045,844
Curators of the University of Missouri System Facilities Revenue,
Series A, 5.00%, 11/01/31 .................................................................. 17,845,000 18,888,397
System Facilities, Refunding, Series A, 5.00%, 11/01/25 .................................... 15,970,000 17,176,214
System Facilities, Series A, 5.00%, 11/01/26 ............................................... 4,500,000 4,833,090
Dunklin County COP, FGIC Insured, 5.00%, 12/01/24 ............................................. 1,000,000 1,060,470
Florissant COP, FGIC Insured, 5.00%, 8/01/22 .................................................. 1,285,000 1,360,956
Grandview COP, FGIC Insured, 5.00%, 1/01/23 ................................................... 2,410,000 2,550,624
Hannibal IDA Health Facilities Revenue, Refunding, 5.00%, 3/01/22 ............................. 1,000,000 1,049,450
Hazelwood School District GO, Missouri Direct Deposit Page, Series A, FGIC Insured, 5.00%,
3/01/24 ..................................................................................... 3,000,000 3,220,380
Hickory County School District R-1 Skyline GO, Direct Deposit Program,
6.05%, 3/01/20 ............................................................................. 800,000 852,264
Refunding, 6.05%, 3/01/20 .................................................................. 300,000 319,773
High Ridge Fire Protection District GO, FSA Insured, Pre-Refunded, 5.375%, 11/01/20 ........... 1,000,000 1,011,670
Howard Bend Levee District Special Tax, Pre-Refunded,
5.65%, 3/01/13 ............................................................................. 1,000,000 1,046,940
5.85%, 3/01/19 ............................................................................. 4,000,000 4,202,960
Jackson County Consolidated School District No. 2 GO, Direct Deposit Program, 5.20%,
3/01/20 ..................................................................................... 2,000,000 2,108,780
Jackson County Reorganized School District No. 7 Lee's Summit GO, Direct Deposit, Refunding
and Improvement, FSA Insured, 5.00%, 3/01/21 ................................................ 5,700,000 6,050,721
Jackson County Special Obligation Revenue,
Harry S. Truman Sports Complex, AMBAC Insured, 5.00%, 12/01/23 ............................. 6,800,000 7,383,644
Harry S. Truman Sports Complex, AMBAC Insured, 5.00%, 12/01/28 ............................. 26,595,000 28,721,270
MBIA Insured, 5.00%, 12/01/27 .............................................................. 3,105,000 3,272,391
Jasper County Reorganized School District No. R-7 GO, Direct Deposit Program, 6.00%,
3/01/20 ..................................................................................... 1,025,000 1,090,528
Jefferson County Conservation Public Water Supply District No. C-1 Waterworks Revenue,
AMBAC Insured, 5.00%, 12/01/26 .............................................................. 4,500,000 4,657,725
Jefferson County Consolidated School District No. 006 Lease Participation COP, FSA Insured,
5.00%, 3/01/25 .............................................................................. 1,050,000 1,130,861
Joplin IDA Health Facilities Revenue, Freeman Health Systems Project,
5.50%, 2/15/29 ............................................................................. 2,000,000 2,143,960
5.75%, 2/15/35 ............................................................................. 2,500,000 2,747,125
Kansas City Sanitary Sewer System Revenue, Series B, MBIA Insured, 5.00%, 1/01/25 ............. 620,000 665,998
Kansas City Tax Increment Financing Commerce Tax Increment Revenue, Blue Parkway Town
Center Project, MBIA Insured, 5.00%, 7/01/27 ................................................ 1,730,000 1,848,972
Annual Report | 133
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
Lake of the Ozarks Community Board Corp. Bridge System Revenue, Refunding, 5.25%,
12/01/14 ................................................................................... $ 750,000 $ 772,485
12/01/26 ................................................................................... 800,000 818,720
Lee's Summit IDAR, John Knox Village Project,
6.55%, 8/15/10 ............................................................................. 1,000,000 1,008,950
6.625%, 8/15/13 ............................................................................ 2,000,000 2,018,020
5.70%, 8/15/22 ............................................................................. 1,500,000 1,587,360
Lee's Summit Water and Sewer Revenue, Series A, AMBAC Insured, 5.00%, 7/01/22 ................. 1,995,000 2,111,249
Metropolitan St. Louis Sewer District Wastewater Systems Revenue, Series A, MBIA Insured,
5.00%, 5/01/34 .............................................................................. 24,730,000 26,349,568
Missouri Development Finance Board Cultural Facilities Revenue, Nelson Gallery Foundation,
Series A, MBIA Insured, 5.00%, 12/01/30 ..................................................... 9,500,000 9,960,180
Missouri Joint Municipal Electric Utility Commission Power Project Revenue,
Iatan 2 Project, Series A, AMBAC Insured, 5.00%, 1/01/34 ................................... 25,465,000 27,243,221
Plum Point Project, MBIA Insured, 5.00%, 1/01/28 ........................................... 5,235,000 5,632,755
Plum Point Project, MBIA Insured, 5.00%, 1/01/34 ........................................... 24,945,000 26,706,117
Missouri School Board Assn. Lease COP, Republic R-3 School District Project, Refunding,
FSA Insured, 6.00%, 3/01/16 ................................................................. 2,220,000 2,224,351
Missouri Southern State College Revenue, Auxiliary Enterprise System, MBIA Insured, 5.50%,
4/01/23 ..................................................................................... 1,200,000 1,276,260
Missouri State Board of Public Buildings State Office Building, Special Obligation, Series A,
5.125%, 5/01/26 ............................................................................. 3,960,000 4,186,274
Missouri State Development Finance Board Infrastructure Facilities Revenue, Midtown
Redevelopment Project, Series A, MBIA Insured, 5.75%, 4/01/22 ............................... 10,000,000 10,577,900
Missouri State Development Finance Board Recreation Facilities Revenue, YMCA Greater
St. Louis Project, Series A, 5.40%, 9/01/18 ................................................. 7,420,000 7,657,663
Missouri State Development Finance Board Solid Waste Disposal Revenue, Procter and Gamble
Paper Product, 5.20%, 3/15/29 ............................................................... 3,000,000 3,395,730
Missouri State Environmental Improvement and Energy Resources Authority PCR, National Rural
Assn., Electric Project, Series G-6, AMBAC Insured, 5.85%, 2/01/13 .......................... 2,100,000 2,114,280
Missouri State Environmental Improvement and Energy Resources Authority Water PCR, State
Revolving Fund,
Series A, 7.00%, 10/01/10 .................................................................. 475,000 476,330
Series A, 6.55%, 7/01/14 ................................................................... 890,000 890,792
Series A, 5.75%, 1/01/16 ................................................................... 150,000 150,899
Series B, 7.125%, 12/01/10 ................................................................. 195,000 195,527
Series B, 5.80%, 1/01/15 ................................................................... 125,000 125,131
Series B, 6.05%, 7/01/16 ................................................................... 485,000 485,359
Series B, 7.20%, 7/01/16 ................................................................... 825,000 825,883
Series B, 5.50%, 7/01/21 ................................................................... 710,000 751,159
Series B, Pre-Refunded, 5.50%, 7/01/21 ..................................................... 730,000 775,581
Missouri State GO,
State Water Pollution Control, Series A, 5.00%, 6/01/26 .................................... 3,785,000 3,956,536
Stormwater Control, Series A, 5.00%, 6/01/26 ............................................... 1,895,000 1,980,881
Missouri State HDC,
MFHR, FHA Insured, 8.50%, 12/01/29 ......................................................... 65,000 66,845
SFMR, Homeowner Loan, Series D, GNMA Secured, 6.125%, 3/01/28 .............................. 115,000 117,156
SFMR, Series B, GNMA Secured, 6.45%, 9/01/27 ............................................... 240,000 244,385
134 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
Missouri State Health and Educational Facilities Authority Educational Facilities Revenue,
Maryville University of St. Louis Project, Pre-Refunded, 6.50%, 6/15/22 .................. $ 1,750,000 $ 1,866,393
Maryville University of St. Louis Project, Pre-Refunded, 6.75%, 6/15/30 .................. 4,500,000 4,843,305
Washington University, Refunding, Series B, 5.00%, 3/01/30 ............................... 14,000,000 14,574,280
Washington University, Series A, 5.00%, 11/15/37 ......................................... 9,150,000 9,392,566
Washington University, Series B, Pre-Refunded, 6.00%, 3/01/30 ............................ 13,550,000 14,569,502
Webster University, MBIA Insured, 5.30%, 4/01/27 ......................................... 8,000,000 8,498,160
Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
Children's Mercy Hospital, 5.30%, 5/15/28 ................................................ 12,420,000 12,693,488
Freeman Health Systems Project, 5.25%, 2/15/28 ........................................... 2,750,000 2,802,415
Improvement, Jefferson Memorial Hospital, Refunding, Radian Insured, 5.00%, 8/15/21 ...... 4,585,000 4,811,316
Improvement, Jefferson Memorial Hospital, Refunding, Radian Insured, 5.25%, 8/15/28 ...... 4,900,000 5,209,778
Lake of the Ozarks General Hospital, 6.25%, 2/15/11 ...................................... 335,000 339,392
Lake of the Ozarks General Hospital, Refunding, 6.50%, 2/15/21 ........................... 330,000 335,168
Lake Regional Health Systems Project, 5.60%, 2/15/25 ..................................... 1,250,000 1,328,125
Lake Regional Health Systems Project, 5.70%, 2/15/34 ..................................... 2,750,000 2,943,188
Lutheran Senior Services, Refunding, 5.875%, 2/01/23 ..................................... 1,000,000 1,020,000
St. Luke's Episcopal, 5.00%, 12/01/34 .................................................... 7,500,000 7,834,725
St. Luke's Episcopal, Presbyterian Hospital, FSA Insured, 5.25%, 12/01/26 ................ 8,500,000 9,040,005
Missouri State Health and Educational Facilities Authority Revenue,
Educational Facilities, Washington University, Series A, 5.00%, 2/15/33 .................. 15,125,000 15,909,685
Senior Living Facilities, Lutheran Senior Services, Refunding, Series B, 5.125%,
2/01/22 ................................................................................. 2,900,000 3,066,547
Senior Living Facilities, Lutheran Senior Services, Refunding, Series B, 5.125%,
2/01/27 ................................................................................. 2,700,000 2,836,728
Senior Living Facilities, Lutheran Senior Services, Series A, 5.00%, 2/01/25 ............. 1,500,000 1,558,470
Senior Living Facilities, Lutheran Senior Services, Series A, 5.375%, 2/01/35 ............ 4,655,000 4,935,929
SSM Healthcare System, Series A, AMBAC Insured, Pre-Refunded, 5.25%, 6/01/28 ............. 16,385,000 17,558,985
Missouri State Highways and Transportation Commission State Road Revenue, Series A,
Pre-Refunded, 5.00%,
2/01/21 .................................................................................. 10,000,000 10,605,600
2/01/22 .................................................................................. 1,500,000 1,590,840
Missouri State Housing Development Commission Revenue, SF, Homeowner Loan, Series C-1,
GNMA Secured,
5.90%, 9/01/25 ........................................................................... 1,325,000 1,368,725
5.95%, 3/01/28 ........................................................................... 945,000 976,459
a Missouri State Housing Development Commission SFMR, Homeownership Loan Program,
Series A-1, GNMA Secured, 4.75%, 9/01/32 .................................................. 2,500,000 2,520,900
Monarch-Chesterfield Levee District Revenue, MBIA Insured, 5.75%, 3/01/19 .................... 1,920,000 2,047,603
North Kansas City Hospital Revenue, North Kansas City Hospital, Series A, FSA Insured,
5.00%, 11/15/20 .......................................................................... 1,000,000 1,061,180
5.00%, 11/15/21 .......................................................................... 1,000,000 1,063,000
5.00%, 11/15/22 .......................................................................... 1,000,000 1,059,370
5.00%, 11/15/28 .......................................................................... 1,965,000 2,074,568
5.125%, 11/15/33 ......................................................................... 2,755,000 2,945,315
Pulaski County IDA, MFHR, St. Robert Project, Series A, GNMA Secured, 6.00%, 8/20/39 ......... 1,600,000 1,673,216
Annual Report | 135
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
Riverside-Quindaro Bend Levee District Levee District Improvement Revenue, L-385 Project,
Refunding, Radian Insured, 5.00%, 3/01/27 ................................................... $ 5,000,000 $ 5,365,800
Springfield Missouri IDAR, Bethesda Living Centers, Refunding, Series A,
5.625%, 8/15/18 ............................................................................ 3,000,000 3,007,770
5.70%, 8/15/28 ............................................................................. 5,250,000 5,160,540
Springfield Public Building Corp. Leasehold Revenue,
Capital Improvement Program, AMBAC Insured, 5.00%, 3/01/24 ................................. 2,600,000 2,776,748
Springfield Recreational, Series B, AMBAC Insured, Pre-Refunded, 6.125%, 6/01/21 ........... 3,230,000 3,465,790
Springfield Recreational, Series B, AMBAC Insured, Pre-Refunded, 6.15%, 6/01/25 ............ 3,645,000 3,913,819
Springfield Public Utility Revenue, FGIC Insured, 4.75%, 8/01/34 .............................. 5,000,000 5,211,700
Springfield School District No. R-12 GO, Missouri Direct Deposit Program, 5.85%, 3/01/20 ...... 1,500,000 1,589,580
St. Charles County Public Water Supply District No. 2, COP, Missouri Project, Series A,
MBIA Insured, 5.25%, 12/01/28 ............................................................... 1,000,000 1,062,280
St. Louis Airport Revenue,
Airport Development Program, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/26 .......... 5,000,000 5,271,500
Airport Development Program, Series A, MBIA Insured, Pre-Refunded, 5.25%, 7/01/31 .......... 18,835,000 20,044,395
Capital Improvement Program, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/32 .......... 2,540,000 2,705,633
Lambert, St. Louis International Airport, Refunding, MBIA Insured, 5.50%, 7/01/29 .......... 8,320,000 10,081,094
St. Louis Board of Education GO, Missouri Direct Deposit Program, Series A, MBIA Insured,
5.00%, 4/01/25 .............................................................................. 5,630,000 6,076,909
St. Louis County IDA, MFHR,
Lucas Hunt Village Project, GNMA Secured, 5.20%, 9/20/31 ................................... 1,095,000 1,126,273
South Summit Apartments, Refunding, Series A, GNMA Secured, 6.10%, 4/20/32 ................. 1,250,000 1,277,338
St. Louis County IDA Health Facilities Revenue, Mary Queen Healthcare, GNMA Secured,
5.375%, 9/20/31 ............................................................................. 3,310,000 3,516,412
St. Louis County IDAR, Bethesda Living Centers, Series B, 5.85%, 8/15/28 ...................... 1,500,000 1,500,405
St. Louis IDA Sewer and Solid Waste Disposal Facilities Revenue, Anheuser-Busch Project,
5.875%, 11/01/26 ............................................................................ 1,100,000 1,114,531
St. Louis Municipal Finance Corp. Leasehold Revenue,
Carnahan Courthouse, Series A, FGIC Insured, Pre-Refunded, 5.125%, 2/15/27 ................. 4,750,000 5,066,445
City Justice Center, Series A, AMBAC Insured, 6.00%, 2/15/20 ............................... 1,000,000 1,074,880
Taney County IDA Hospital Revenue, The Skaggs Community Hospital Assn.,
5.30%, 5/15/18 ............................................................................. 3,000,000 3,052,350
5.40%, 5/15/28 ............................................................................. 1,500,000 1,525,260
Taney County Reorganized School District GO, No. R-V Hollister, Refunding, FSA Insured,
5.00%, 3/01/20 .............................................................................. 1,300,000 1,379,274
University of Missouri Revenues, System Facilities,
Pre-Refunded, 5.80%, 11/01/27 .............................................................. 1,000,000 1,024,040
Refunding, Series B, 5.00%, 11/01/27 ....................................................... 7,865,000 8,246,767
West Plains IDA Hospital Revenue, Ozarks Medical Center, Refunding,
5.50%, 11/15/12 ............................................................................ 1,000,000 1,010,750
5.60%, 11/15/17 ............................................................................ 1,700,000 1,721,862
5.65%, 11/15/22 ............................................................................ 1,500,000 1,506,165
West Plains Waterworks System Revenue, AMBAC Insured, Pre-Refunded, 5.625%, 3/01/21 ........... 1,250,000 1,320,388
------------
584,695,154
------------
136 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 12.7%
PUERTO RICO 11.9%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Pre-Refunded, 6.00%, 7/01/26 ... $2,785,000 $ 2,993,262
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.375%, 7/01/28 .......................................................................... 1,975,000 2,082,499
5.125%, 7/01/31 .......................................................................... 5,000,000 5,186,800
Pre-Refunded, 5.375%, 7/01/28 ............................................................ 1,025,000 1,098,021
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
Pre-Refunded, 5.50%, 7/01/36 .............................................................. 11,750,000 13,364,333
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................................. 2,500,000 2,714,325
Series G, 5.00%, 7/01/42 ................................................................. 2,500,000 2,656,225
Puerto Rico Electric Power Authority Power Revenue,
Series II, 5.25%, 7/01/31 ................................................................ 10,000,000 10,664,400
Series NN, 5.125%, 7/01/29 ............................................................... 3,250,000 3,452,280
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 2,546,150
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ..................................................... 2,150,000 2,282,913
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................. 5,885,000 6,368,747
Series I, 5.375%, 7/01/34 ................................................................ 10,000,000 10,812,000
Series I, 5.00%, 7/01/36 ................................................................. 14,450,000 15,143,455
------------
81,365,410
------------
VIRGIN ISLANDS 0.8%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.40%, 10/01/12 .......................................................................... 2,500,000 2,583,200
5.50%, 10/01/22 .......................................................................... 2,500,000 2,582,700
------------
5,165,900
------------
TOTAL U.S. TERRITORIES ....................................................................... 86,531,310
------------
TOTAL LONG TERM INVESTMENTS (COST $635,144,783) .............................................. 671,226,464
------------
SHORT TERM INVESTMENTS 0.9%
MUNICIPAL BONDS 0.9%
MISSOURI 0.9%
b Missouri State Health and Educational Facilities Authority Educational Facilities Revenue,
St. Louis University, Series A, MBIA Insured, Daily VRDN and Put, 3.64%, 10/01/35 ........ 2,150,000 2,150,000
Washington University, Series B, Daily VRDN and Put, 3.64%, 2/15/33 ...................... 500,000 500,000
b Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
SSM Health Care Corp., Refunding, Series C-1, FSA Insured, Daily VRDN and Put, 3.66%,
6/01/19 .................................................................................. 3,825,000 3,825,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $6,475,000) ............................................... 6,475,000
------------
Annual Report | 137
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------
FRANKLIN MISSOURI TAX-FREE INCOME FUND VALUE
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $641,619,783) 99.2% ........... $677,701,464
OTHER ASSETS, LESS LIABILITIES 0.8% ................... 5,571,582
------------
NET ASSETS 100.0% ..................................... $683,273,046
============
See Selected Portfolio Abbreviations on page 154.
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.
138 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 12.31 $ 12.37 $ 12.42 $ 12.24 $ 11.96
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.51 0.53 0.54 0.55 0.56
Net realized and unrealized gains (losses) ....... 0.08 (0.06) (0.05) 0.18 0.28
--------------------------------------------------------------------
Total from investment operations .................. 0.59 0.47 0.49 0.73 0.84
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.52) (0.53) (0.54) (0.55) (0.56)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 12.38 $ 12.31 $ 12.37 $ 12.42 $ 12.24
====================================================================
Total return c .................................... 4.89% 3.86% 4.11% 6.10% 7.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $626,783 $509,309 $428,204 $413,438 $418,196
Ratios to average net assets:
Expenses ......................................... 0.66% 0.66% 0.67% 0.67% 0.66%
Net investment income ............................ 4.15% 4.27% 4.42% 4.49% 4.65%
Portfolio turnover rate ........................... 9.79% 5.01% 8.15% 7.67% 7.69%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 139
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 12.44 $ 12.48 $ 12.54 $ 12.35 $ 12.05
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.45 0.46 0.47 0.48 0.50
Net realized and unrealized gains (losses) ....... 0.07 (0.04) (0.06) 0.19 0.30
--------------------------------------------------------------------
Total from investment operations .................. 0.52 0.42 0.41 0.67 0.80
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.45) (0.46) (0.47) (0.48) (0.50)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 12.51 $ 12.44 $ 12.48 $ 12.54 $ 12.35
====================================================================
Total return c .................................... 4.26% 3.42% 3.41% 5.52% 6.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $117,566 $ 99,649 $ 83,343 $ 82,420 $ 76,400
Ratios to average net assets:
Expenses ......................................... 1.21% 1.21% 1.22% 1.25% 1.19%
Net investment income ............................ 3.60% 3.72% 3.87% 3.91% 4.12%
Portfolio turnover rate ........................... 9.79% 5.01% 8.15% 7.67% 7.69%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
140 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.5%
MUNICIPAL BONDS 97.5%
NORTH CAROLINA 80.9%
Appalachian State University Revenue,
Refunding, MBIA Insured, 5.00%, 7/15/30 .................................................... $ 2,000,000 $ 2,148,200
Teachers College Utility System, Refunding, MBIA Insured, 5.00%, 5/15/24 ................... 3,000,000 3,097,770
Asheville Water System Revenue, FSA Insured, Pre-Refunded, 5.00%, 8/01/25 ..................... 1,000,000 1,055,280
Broad River Water Authority Water System Revenue, MBIA Insured, Pre-Refunded, 5.375%,
6/01/26 ..................................................................................... 1,000,000 1,062,030
Brunswick County Enterprise System Revenue, Series A, FSA Insured, 5.00%,
4/01/27 .................................................................................... 1,500,000 1,602,990
4/01/28 .................................................................................... 1,750,000 1,863,470
Buncombe County COP, MBIA Insured, 5.00%, 4/01/22 ............................................. 1,000,000 1,080,170
Buncombe County Metropolitan Sewer District Sewer System Revenue, FSA Insured,
Pre-Refunded, 5.00%, 7/01/29 ................................................................ 5,000,000 5,200,400
Centennial Authority Hotel Tax Revenue, Arena Project, FSA Insured, 5.125%, 9/01/19 ........... 5,115,000 5,251,929
Charlotte Airport Revenue,
Series A, MBIA Insured, 5.00%, 7/01/29 ..................................................... 5,000,000 5,317,650
Series A, MBIA Insured, 5.00%, 7/01/34 ..................................................... 15,130,000 16,051,720
Series B, MBIA Insured, 6.00%, 7/01/24 ..................................................... 4,000,000 4,230,240
Series B, MBIA Insured, 6.00%, 7/01/28 ..................................................... 6,300,000 6,659,730
Charlotte COP,
Convention Facility Project, Pre-Refunded, 5.625%, 12/01/25 ................................ 7,230,000 7,790,180
Governmental Facilities Projects, Series G, 5.00%, 6/01/28 ................................. 3,000,000 3,153,870
Transit Projects, Phase II, Series E, 5.00%, 6/01/35 ....................................... 10,000,000 10,608,900
Charlotte GO, Series C, 5.00%, 7/01/27 ........................................................ 2,010,000 2,132,087
Charlotte Storm Water Fee Revenue,
5.00%, 6/01/35 ............................................................................. 5,000,000 5,374,750
Refunding, 5.00%, 6/01/25 .................................................................. 1,000,000 1,059,290
Charlotte Water and Sewer GO, Pre-Refunded, 5.00%, 2/01/21 .................................... 4,000,000 4,127,520
Charlotte Water and Sewer System Revenue,
5.125%, 6/01/26 ............................................................................ 6,000,000 6,364,200
Pre-Refunded, 5.25%, 6/01/24 ............................................................... 3,000,000 3,133,080
Pre-Refunded, 5.25%, 6/01/25 ............................................................... 3,950,000 4,180,048
Charlotte-Mecklenburg Hospital Authority Health Care System Revenue, Carolinas Healthcare
System, Refunding, Series A,
5.125%, 1/15/22 ............................................................................ 8,000,000 8,203,360
5.00%, 1/15/31 ............................................................................. 5,000,000 5,205,200
Chatham County COP, AMBAC Insured, 5.00%, 6/01/34 ............................................. 5,000,000 5,362,750
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 1,493,645
Cumberland County COP, Civic Center Project, Refunding, AMBAC Insured, 5.00%,
12/01/18 .................................................................................... 3,000,000 3,099,240
Cumberland County Finance Corp. Installment Payment Revenue, Detention Center and Mental
Health, FSA Insured, Pre-Refunded, 5.625%, 6/01/24 .......................................... 5,000,000 5,388,350
Cumberland County Hospital Facilities Revenue, Cumberland County Hospital Systems Inc.,
Pre-Refunded, 5.25%, 10/01/29 ............................................................... 5,250,000 5,506,095
Annual Report | 141
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
Dare County COP,
AMBAC Insured, 5.125%, 6/01/21 ............................................................. $ 650,000 $ 699,517
AMBAC Insured, 5.00%, 6/01/23 .............................................................. 3,000,000 3,180,720
AMBAC Insured, 5.00%, 6/01/29 .............................................................. 5,295,000 5,638,328
FGIC Insured, 5.00%, 6/01/23 ............................................................... 2,655,000 2,857,019
Durham County Enterprise System Revenue, MBIA Insured, 5.00%, 6/01/23 ......................... 1,670,000 1,778,383
Durham County GO, Public Improvement, 5.00%, 6/01/22 .......................................... 2,000,000 2,125,620
Franklin County COP, AMBAC Insured, 5.00%, 6/01/25 ............................................ 1,250,000 1,291,688
Gastonia Combined Utilities System Revenue,
FSA Insured, 5.00%, 5/01/25 ................................................................ 1,000,000 1,046,070
MBIA Insured, Pre-Refunded, 5.625%, 5/01/19 ................................................ 1,000,000 1,068,160
Greensboro Enterprise System Revenue, Series A, Pre-Refunded, 5.125%,
6/01/21 .................................................................................... 390,000 416,044
6/01/22 .................................................................................... 350,000 373,373
Greensboro HDC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 6.70%, 1/01/24 ........... 1,320,000 1,324,422
Halifax County Industrial Facilities and PCFA Revenue, Champion International Corp. Project,
5.45%, 11/01/33 ............................................................................ 4,000,000 4,079,520
Refunding, 6.45%, 11/01/29 ................................................................. 3,900,000 4,124,718
Harnett County COP, FSA Insured, 5.125%, 12/01/23 ............................................. 1,000,000 1,079,500
Henderson County COP, Henderson County School Project, AMBAC Insured, 5.00%, 3/01/21 .......... 1,000,000 1,057,200
High Point Combined Enterprise System Revenue, FGIC Insured, 5.00%, 11/01/31 .................. 11,000,000 11,778,580
Mecklenburg County GO, Public Improvement, Series B, 4.70%, 2/01/20 ........................... 3,000,000 3,121,080
New Hanover County COP, New Hanover County Projects, AMBAC Insured, 5.00%, 12/01/22 ........... 5,000,000 5,315,200
North Carolina Capital Facilities Finance Agency Educational Facilities Revenue,
Johnson and Wales University Project, Series A, XLCA Insured, 5.00%, 4/01/33 ............... 3,000,000 3,153,630
Meredith College, AMBAC Insured, 4.875%, 6/01/24 ........................................... 1,000,000 1,036,420
North Carolina Capital Facilities Finance Agency Revenue, Duke University Project,
Refunding, Series A, 5.00%, 10/01/41 ....................................................... 17,000,000 18,083,410
Refunding, Series B, 4.75%, 7/01/42 ........................................................ 10,000,000 10,381,600
Series A, 5.00%, 10/01/39 .................................................................. 5,815,000 6,225,713
Series A, Pre-Refunded, 5.25%, 7/01/42 ..................................................... 10,000,000 10,805,100
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 6.50%, 1/01/18 ........................................................ 3,000,000 3,603,600
Refunding, Series A, 5.75%, 1/01/26 ........................................................ 10,000,000 10,493,700
Refunding, Series A, AMBAC Insured, 5.00%, 1/01/21 ......................................... 11,555,000 12,477,551
Series D, 6.75%, 1/01/26 ................................................................... 5,000,000 5,438,650
North Carolina HFA, SFR, Series AA, 6.25%, 3/01/17 ............................................ 245,000 246,742
North Carolina HFAR,
MF, Mortgage Loan Resolution, Refunding, Series H, 6.05%, 7/01/28 .......................... 1,295,000 1,309,918
MF, Refunding, Series A, AMBAC Insured, 5.90%, 7/01/20 ..................................... 1,890,000 1,898,127
MF, Refunding, Series J, 5.45%, 7/01/17 .................................................... 1,840,000 1,884,436
Refunding, Series F, 6.70%, 1/01/27 ........................................................ 1,240,000 1,247,130
SF, Refunding, Series DD, 6.20%, 9/01/27 ................................................... 825,000 829,818
SF, Series JJ, 6.45%, 9/01/27 .............................................................. 1,380,000 1,404,122
SFR, Series RR, 5.85%, 9/01/28 ............................................................. 1,660,000 1,694,329
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 1,030,180
Novant Health Project, Refunding, Series A, MBIA Insured, 5.00%, 10/01/24 .................. 5,500,000 5,644,705
142 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
North Carolina Medical Care Commission Health Care Facilities Revenue, (continued)
Refunding, FGIC Insured, 5.00%, 1/01/33 .................................................... $12,805,000 $13,621,703
Scotland Memorial Hospital Project, Radian Insured, 5.50%, 10/01/19 ........................ 630,000 658,545
Scotland Memorial Hospital Project, Radian Insured, 5.50%, 10/01/29 ........................ 1,220,000 1,274,131
Wakemed Project, AMBAC Insured, 5.00%, 10/01/32 ............................................ 4,205,000 4,406,630
North Carolina Medical Care Commission Health System Revenue, Catholic Health East Project,
Series C, AMBAC Insured, 5.00%, 11/15/18 .................................................... 2,500,000 2,583,375
North Carolina Medical Care Commission Hospital Revenue,
Annie Penn Memorial Hospital Project, ETM, 5.25%, 1/01/12 .................................. 1,655,000 1,706,851
Annie Penn Memorial Hospital Project, Pre-Refunded, 5.375%, 1/01/22 ........................ 1,920,000 2,096,410
Halifax Regional Medical Center Project, 5.00%, 8/15/24 .................................... 1,800,000 1,740,960
Mission-St. Joseph's Health System Project, MBIA Insured, Pre-Refunded, 5.125%,
10/01/28 .................................................................................. 3,230,000 3,336,105
Mission-St. Joseph's Health System Project, Refunding, MBIA Insured, 5.125%,
10/01/28 .................................................................................. 1,770,000 1,819,631
Northeast Medical Center, AMBAC Insured, 5.50%, 11/01/30 ................................... 1,580,000 1,666,821
Rex Healthcare Project, AMBAC Insured, 5.00%, 6/01/17 ...................................... 2,780,000 2,853,531
Southeastern Regional Medical Center, 6.25%, 6/01/29 ....................................... 4,000,000 4,225,760
Southeastern Regional Medical Center, 5.375%, 6/01/32 ...................................... 3,500,000 3,699,185
Transylvania Community Hospital Inc. Project, Refunding, 5.75%, 10/01/19 ................... 1,090,000 1,112,803
Wake County Hospital System Project, MBIA Insured, 5.375%, 10/01/26 ........................ 10,825,000 11,118,466
Wilson Memorial Hospital Project, Refunding, AMBAC Insured, 5.625%, 11/01/18 ............... 5,000,000 5,059,200
North Carolina Medical Care Commission Revenue,
Betsy Johnson Project, FSA Insured, 5.125%, 10/01/32 ....................................... 4,500,000 4,755,285
Chatham Hospital Project, MBIA Insured, 5.25%, 2/01/31 ..................................... 6,450,000 7,081,713
Chatham Hospital Project, MBIA Insured, 5.00%, 8/01/35 ..................................... 5,000,000 5,337,950
Morehead Memorial Hospital, FSA Insured, 5.00%, 11/01/26 ................................... 7,110,000 7,574,781
Rowan Regional Medical Center, FSA Insured, 5.00%, 9/01/33 ................................. 25,970,000 27,567,155
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Series A, MBIA Insured,
5.25%, 1/01/19 ............................................................................. 5,000,000 5,391,450
5.00%, 1/01/20 ............................................................................. 2,000,000 2,058,580
North Carolina State COP, Western Carolina University Housing Project, AMBAC Insured, 5.00%,
6/01/33 ..................................................................................... 1,500,000 1,587,105
Onslow County Hospital Authority FHA Insured Mortgage Revenue, Onslow Memorial Hospital
Project, MBIA Insured, 5.00%,
4/01/31 .................................................................................... 6,120,000 6,592,464
10/01/34 ................................................................................... 6,000,000 6,448,380
Pasquotank County COP, MBIA Insured, 5.00%, 6/01/25 ........................................... 1,400,000 1,479,940
Piedmont Triad Airport Authority Airport Revenue, Series A, FSA Insured, Pre-Refunded, 6.00%,
7/01/24 ..................................................................................... 5,745,000 6,102,052
Pitt County COP,
MBIA Insured, Pre-Refunded, 5.85%, 4/01/17 ................................................. 5,055,000 5,163,885
School Facilities Project, Series A, FSA Insured, 5.25%, 4/01/25 ........................... 1,670,000 1,756,406
School Facilities Project, Series B, AMBAC Insured, 5.00%, 4/01/29 ......................... 2,500,000 2,662,100
School Facilities Project, Series B, FSA Insured, 5.50%, 4/01/25 ........................... 1,000,000 1,059,530
Raleigh Combined Enterprise System Revenue,
5.00%, 3/01/31 ............................................................................. 10,360,000 10,992,685
Series A, 5.00%, 3/01/36 ................................................................... 6,000,000 6,435,240
Annual Report | 143
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
Raleigh COP, Downtown Improvement Projects, Series A, 5.00%, 2/01/29 .......................... $ 6,070,000 $ 6,469,224
Raleigh Durham Airport Authority Airport Revenue, Series A,
AMBAC Insured, 5.00%, 5/01/30 .............................................................. 14,060,000 15,039,560
FGIC Insured, 5.00%, 11/01/25 .............................................................. 6,480,000 6,790,586
FGIC Insured, 5.00%, 11/01/31 .............................................................. 8,000,000 8,368,960
Randolph County COP, FSA Insured, Pre-Refunded, 5.75%, 6/01/22 ................................ 5,500,000 5,802,610
Union County COP, AMBAC Insured, 5.00%, 6/01/30 ............................................... 5,000,000 5,358,800
University of North Carolina Ashville Revenue, Refunding, Series A, AMBAC Insured, 5.00%,
6/01/27 ..................................................................................... 1,200,000 1,264,260
University of North Carolina at Wilmington COP, Student Housing Project, FGIC Insured, 5.00%,
6/01/26 .................................................................................... 1,655,000 1,781,690
6/01/27 .................................................................................... 1,740,000 1,871,805
6/01/29 .................................................................................... 1,915,000 2,056,997
6/01/37 .................................................................................... 11,350,000 12,164,476
University of North Carolina Greensboro Revenue,
Housing and Dining System, Series G, MBIA Insured, Pre-Refunded, 6.00%, 4/01/26 ............ 2,040,000 2,198,182
Series A, FSA Insured, 5.00%, 4/01/26 ...................................................... 4,940,000 5,205,871
University of North Carolina System Pool Revenue,
AMBAC Insured, 5.00%, 4/01/29 .............................................................. 2,500,000 2,660,525
Series A, AMBAC Insured, 5.00%, 4/01/27 .................................................... 1,430,000 1,506,591
Series A, AMBAC Insured, Pre-Refunded, 5.00%, 4/01/27 ...................................... 670,000 715,567
Series A, MBIA Insured, 5.00%, 10/01/33 .................................................... 3,500,000 3,778,880
University of North Carolina University Revenues,
5.00%, 12/01/28 ............................................................................ 1,000,000 1,060,930
General, Refunding, Series A, 5.00%, 12/01/34 .............................................. 12,460,000 13,351,513
Series A, 5.00%, 12/01/25 .................................................................. 4,000,000 4,200,440
Wake County Industrial Facilities and PCFA Revenue, Carolina Power and Light Co. Project,
Refunding, 5.375%, 2/01/17 .................................................................. 8,000,000 8,507,040
Wilkes County COP,
MBIA Insured, 5.00%, 6/01/31 ............................................................... 4,295,000 4,606,602
MBIA Insured, 5.00%, 6/01/36 ............................................................... 6,085,000 6,487,827
Public Improvements Project, FSA Insured, 5.375%, 12/01/20 ................................. 1,000,000 1,074,270
Wilmington COP,
AMBAC Insured, 5.00%, 9/01/29 .............................................................. 1,000,000 1,064,160
Refunding, Series A, AMBAC Insured, 5.00%, 6/01/32 ......................................... 5,310,000 5,667,735
Wilmington Water and Sewer System Revenue, Refunding, FSA Insured, 5.00%, 6/01/34 ............. 8,565,000 9,154,443
Winston-Salem Water and Sewer System Revenue, Pre-Refunded, 5.125%, 6/01/20 ................... 2,500,000 2,666,950
------------
601,951,469
------------
U.S. TERRITORIES 16.6%
PUERTO RICO 16.1%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds, Refunding,
5.50%, 5/15/39 .............................................................................. 7,000,000 7,340,340
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ................................................. 4,805,000 5,099,595
Refunding, FSA Insured, 5.125%, 7/01/30 .................................................... 3,445,000 3,627,998
Series A, 5.375%, 7/01/28 .................................................................. 4,925,000 5,193,068
144 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Commonwealth GO, Public Improvement, (continued)
Series A, 5.125%, 7/01/31 ................................................................ $ 3,265,000 $ 3,386,980
Series A, Pre-Refunded, 5.00%, 7/01/27 ................................................... 5,000,000 5,338,550
Series A, Pre-Refunded, 5.375%, 7/01/28 .................................................. 2,405,000 2,576,332
Series A, Pre-Refunded, 5.125%, 7/01/31 .................................................. 1,000,000 1,061,310
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series D, FSA Insured, 5.00%, 7/01/32 ......................................... 5,000,000 5,290,350
Refunding, Series H, 5.00%, 7/01/35 ...................................................... 4,280,000 4,560,811
Series A, MBIA Insured, 5.00%, 7/01/38 ................................................... 2,000,000 2,045,940
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................................. 5,000,000 5,428,650
Series D, Pre-Refunded, 5.25%, 7/01/38 ................................................... 3,000,000 3,239,160
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
AMBAC Insured, Pre-Refunded, 5.00%, 7/01/28 ............................................... 9,000,000 9,193,320
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ............................................................. 23,000,000 24,885,540
Puerto Rico Electric Power Authority Power Revenue,
Series II, 5.25%, 7/01/31 ................................................................ 6,000,000 6,398,640
Series NN, MBIA Insured, 5.00%, 7/01/32 .................................................. 5,000,000 5,288,050
Series RR, FGIC Insured, 5.00%, 7/01/35 .................................................. 3,000,000 3,212,610
Series RR, XLCA Insured, 5.00%, 7/01/30 .................................................. 1,000,000 1,070,870
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ..................................................... 1,790,000 1,900,658
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................. 5,210,000 5,638,262
Series I, 5.00%, 7/01/36 ................................................................. 2,405,000 2,520,416
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.70%, 8/01/25 .............................................................. 5,000,000 5,288,450
------------
119,585,900
------------
VIRGIN ISLANDS 0.5%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 .......................................................................... 2,000,000 2,065,560
5.625%, 10/01/25 ......................................................................... 1,575,000 1,629,841
------------
3,695,401
------------
TOTAL U.S. TERRITORIES ....................................................................... 123,281,301
------------
TOTAL LONG TERM INVESTMENTS (COST $690,750,520) .............................................. 725,232,770
------------
SHORT TERM INVESTMENTS 1.2%
MUNICIPAL BONDS 1.2%
NORTH CAROLINA 1.2%
a Charlotte-Mecklenburg Hospital Authority Health Care System Revenue,
Carolinas Health Care, Refunding, Series C, Daily VRDN and Put, 3.64%, 1/15/26 ........... 200,000 200,000
Series B, Weekly VRDN and Put, 3.64%, 1/15/26 ............................................ 500,000 500,000
a North Carolina Medical Care Commission Hospital Revenue,
Angel Medical Center Inc. Project, Weekly VRDN and Put, 3.67%, 10/01/16 .................. 2,045,000 2,045,000
Lexington Memorial Hospital Project, Refunding, Daily VRDN and Put, 3.60%, 4/01/10 ....... 2,150,000 2,150,000
Annual Report | 145
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
a North Carolina State GO,
Refunding, Series B, Weekly VRDN and Put, 3.47%, 6/01/19 ................................. $1,925,000 $ 1,925,000
Series G, Weekly VRDN and Put, 3.47%, 5/01/21 ............................................ 100,000 100,000
a Wake County GO, Public Improvement, Series C, Weekly VRDN and Put, 3.64%, 4/01/19 ............ 2,200,000 2,200,000
------------
9,120,000
------------
U.S. TERRITORIES 0.0% b
PUERTO RICO 0.0% b
a Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured,
Weekly VRDN and Put, 3.34%, 12/01/15 ...................................................... 100,000 100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $9,220,000) ............................................... 9,220,000
------------
TOTAL INVESTMENTS (COST $699,970,520) 98.7% .................................................. 734,452,770
OTHER ASSETS, LESS LIABILITIES 1.3% .......................................................... 9,895,801
------------
NET ASSETS 100.0% ............................................................................ $744,348,571
============
See Selected Portfolio Abbreviations on page 154.
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.
b Rounds to less than 0.1% of net assets.
146 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 11.85 $ 11.91 $ 11.94 $ 11.64 $ 11.52
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.50 0.51 0.52 0.52 0.54
Net realized and unrealized gains (losses) ....... -- d (0.06) (0.04) 0.30 0.12
--------------------------------------------------------------------
Total from investment operations .................. 0.50 0.45 0.48 0.82 0.66
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.50) (0.51) (0.51) (0.52) (0.54)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 11.85 $ 11.85 $ 11.91 $ 11.94 $ 11.64
====================================================================
Total return c .................................... 4.37% 3.88% 4.18% 7.20% 5.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $493,441 $473,956 $438,871 $441,916 $426,371
Ratios to average net assets:
Expenses ......................................... 0.66% 0.67% 0.67% 0.68% 0.68%
Net investment income ............................ 4.25% 4.27% 4.42% 4.44% 4.67%
Portfolio turnover rate ........................... 8.51% 5.80% 5.85% 7.01% 12.94%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 147
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 11.96 $ 12.02 $ 12.04 $ 11.74 $ 11.62
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.44 0.45 0.46 0.45 0.48
Net realized and unrealized gains (losses) ....... 0.01 (0.06) (0.03) 0.30 0.12
--------------------------------------------------------------------
Total from investment operations .................. 0.45 0.39 0.43 0.75 0.60
--------------------------------------------------------------------
Less distributions from net investment income ..... (0.44) (0.45) (0.45) (0.45) (0.48)
--------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 11.97 $ 11.96 $ 12.02 $ 12.04 $ 11.74
====================================================================
Total return c .................................... 3.84% 3.27% 3.66% 6.54% 5.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 56,793 $ 51,461 $ 43,661 $ 43,009 $ 41,802
Ratios to average net assets:
Expenses ......................................... 1.20% 1.22% 1.22% 1.25% 1.21%
Net investment income ............................ 3.71% 3.72% 3.87% 3.87% 4.14%
Portfolio turnover rate ........................... 8.51% 5.80% 5.85% 7.01% 12.94%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
148 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.0%
MUNICIPAL BONDS 99.0%
VIRGINIA 78.4%
Abingdon IDA Hospital Facilities Revenue, Johnston Memorial Hospital, Refunding, 5.375%,
7/01/28 ................................................................................... $5,000,000 $5,168,500
Alexandria IDA Educational Facilities Revenue, Episcopal High School, Pre-Refunded, 5.875%,
1/01/29 ................................................................................... 2,500,000 2,621,825
Arlington County GO, Public Improvement, Pre-Refunded, 5.00%, 2/01/22 ....................... 2,060,000 2,184,754
a Bedford County IDA, IDR, Nekoosa Packaging Corp. Project, Refunding,
6.30%, 12/01/25 .......................................................................... 2,000,000 2,073,700
Series A, 6.55%, 12/01/25 ................................................................ 5,000,000 5,215,800
Bristol Utility System Revenue, ETM, 5.00%, 7/15/21 ......................................... 1,245,000 1,344,824
Caroline County IDA Lease Revenue, AMBAC Insured, 5.125%, 6/15/34 ........................... 1,000,000 1,071,200
Chesapeake Toll Road Revenue, Expressway, Series A, 5.625%,
7/15/19 .................................................................................. 3,250,000 3,418,350
7/15/32 .................................................................................. 8,000,000 8,360,720
Dinwiddie County IDA Lease Revenue, Refunding, Series B, MBIA Insured, 5.00%,
2/15/30 .................................................................................. 1,410,000 1,497,364
2/15/34 .................................................................................. 3,155,000 3,342,628
Fairfax County EDA Revenue, National Wildlife Federation, MBIA Insured, 5.375%, 9/01/29 ..... 8,000,000 8,379,040
Fairfax County EDA Transportation Contract Revenue, Route 28 Project, MBIA Insured, 5.00%,
4/01/33 ................................................................................... 2,000,000 2,128,420
Fairfax County IDAR, Health Care, Inova Health System Project, Refunding, Series A, 5.00%,
8/15/18 .................................................................................. 2,100,000 2,143,974
8/15/25 .................................................................................. 5,000,000 5,087,850
Fairfax County Redevelopment and Housing Authority MFHR,
Cedar Ridge Apartments, GNMA Secured, 6.30%, 12/20/27 .................................... 4,700,000 4,728,670
Paul Spring Center, Refunding, Series A, FHA Insured, 5.90%, 6/15/17 ..................... 1,000,000 1,033,740
Paul Spring Center, Refunding, Series A, FHA Insured, 6.00%, 12/15/28 .................... 1,000,000 1,033,480
Fairfax County Water Authority Water Revenue,
Pre-Refunded, 5.00%, 4/01/27 ............................................................. 2,830,000 3,006,705
Refunding, 5.00%, 4/01/27 ................................................................ 11,420,000 12,019,550
Fredericksburg IDA Hospital Facilities Revenue, Medicorp Health System Obligation, Refunding,
AMBAC Insured, 5.25%, 6/15/23 ............................................................. 10,000,000 10,231,700
Front Royal and Warren County IDA Lease Revenue, School and Capital Improvement, Series B,
FSA Insured, 5.00%,
4/01/29 .................................................................................. 7,115,000 7,558,336
4/01/35 .................................................................................. 6,000,000 6,377,640
Gloucester County IDA Lease Revenue, Courthouse Project, MBIA Insured, Pre-Refunded,
5.50%, 11/01/30 ........................................................................... 1,715,000 1,839,423
Greater Richmond Convention Center Authority Hotel Tax Revenue,
Convention Center Expansion Project, Pre-Refunded, 6.125%, 6/15/29 ....................... 8,000,000 8,684,720
Convention Center Expansion Project, Pre-Refunded, 6.25%, 6/15/32 ........................ 8,175,000 8,906,009
Refunding, MBIA Insured, 5.00%, 6/15/30 .................................................. 8,000,000 8,552,720
Hampton Convention Center Revenue, Refunding, AMBAC Insured,
5.25%, 1/15/23 ........................................................................... 3,000,000 3,219,990
5.125%, 1/15/28 .......................................................................... 2,605,000 2,773,439
5.00%, 1/15/35 ........................................................................... 8,600,000 9,063,368
Hampton Redevelopment and Housing Authority Senior Living Assn. Revenue, Refunding,
Series A, GNMA Secured, 6.00%, 1/20/26 .................................................... 1,060,000 1,095,881
Annual Report | 149
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
VIRGINIA (CONTINUED)
Hampton Roads Regional Jail Authority Jail Facilities Revenue, Series A, MBIA Insured,
5.00%, 7/01/28 .............................................................................. $10,000,000 $10,139,900
Harrisonburg GO, FSA Insured, 5.75%, 12/01/29 ................................................. 1,000,000 1,087,610
Harrisonburg IDAR, Facilities, Rockingham Memorial Hospital, AMBAC Insured, 5.00%,
8/15/42 ..................................................................................... 9,595,000 10,211,191
Isle Wight County IDA Environmental Improvement Revenue, International Paper Co. Project,
Series A, 6.60%, 5/01/24 .................................................................... 2,000,000 2,149,900
Isle Wight County IDAR, International Paper Co. Project, Series A, 5.85%, 1/01/18 ............. 4,155,000 4,368,442
King George County IDA Lease Revenue, FSA Insured, 5.00%, 3/01/32 ............................. 3,595,000 3,825,799
Leesburg Utilities System Revenue, MBIA Insured, Pre-Refunded, 5.125%, 7/01/22 ................ 3,000,000 3,074,070
Loudoun County IDA Hospital Revenue, Loudoun Hospital Center, Series A, Pre-Refunded,
6.10%, 6/01/32 .............................................................................. 1,500,000 1,681,545
Lynchburg IDA Healthcare Facilities Revenue, Centra Health, Pre-Refunded, 5.20%,
1/01/28 ..................................................................................... 8,000,000 8,180,080
Middle River Regional Jail Authority Jail Facility Revenue, MBIA Insured, 5.00%, 5/15/28 ...... 1,000,000 1,072,690
Middlesex County IDA Lease Revenue, School Facilities Project, MBIA Insured, Pre-Refunded,
5.875%, 8/01/21 ............................................................................ 1,420,000 1,519,812
6.10%, 8/01/26 ............................................................................. 1,725,000 1,855,117
Montgomery County IDA Lease Revenue, Series B, AMBAC Insured, Pre-Refunded, 5.50%,
1/15/22 ..................................................................................... 1,000,000 1,075,460
Newport News EDA, EDR, Series A, 5.00%, 1/15/31 ............................................... 6,000,000 6,448,320
Newport News IDA Mortgage Revenue, Mennowood Communities Inc., Series A, GNMA Secured,
6.25%, 8/01/36 .............................................................................. 2,950,000 3,063,575
Newport News Redevelopment and Housing Authority Revenue, Refunding, Series A, GNMA
Secured, 5.85%, 12/20/30 .................................................................... 4,060,000 4,180,541
Norfolk Airport Authority Revenue, Series B, FGIC Insured, 5.125%, 7/01/31 .................... 1,440,000 1,494,950
Norfolk GO, Capital Improvements, Series B, FSA Insured, Pre-Refunded, 5.00%, 7/01/22 ......... 1,720,000 1,832,161
Norfolk IDAR, Health Care, Bon Secours Health, Series B, MBIA Insured, Pre-Refunded,
5.25%, 8/15/26 .............................................................................. 3,000,000 3,081,240
Norfolk Water Revenue, MBIA Insured, 5.90%, 11/01/25 .......................................... 5,000,000 5,053,700
Northwestern Regional Jail Authority Jail Facilities Revenue, MBIA Insured, 5.00%,
7/01/33 ..................................................................................... 4,350,000 4,671,030
Orange County IDAR, Public Facility, Orange County Project, AMBAC Insured, 5.00%,
2/01/34 ..................................................................................... 1,000,000 1,054,630
Peninsula Ports Authority Hospital Facilities Revenue, Whittaker Memorial Hospital Project,
Refunding, FHA Insured, 8.70%, 8/01/23 ...................................................... 50,000 57,406
Port Authority Commonwealth Port Fidelity Revenue, MBIA Insured, 4.75%, 7/01/28 ............... 1,500,000 1,557,690
Powhatan Co. EDA Lease Revenue, Virginia Capital Projects, AMBAC Insured, 5.25%,
7/15/33 ..................................................................................... 1,000,000 1,073,830
Prince William County IDA, MFHR, Remington Place Apartments Project, Series A-1, AMBAC
Insured, 6.00%, 12/01/33 .................................................................... 2,080,000 2,173,725
Prince William County Service Authority Water and Sewer System Revenue,
FGIC Insured, 5.50%, 7/01/29 ............................................................... 5,000,000 5,255,600
Refunding, 5.00%, 7/01/32 .................................................................. 7,045,000 7,539,136
Richmond GO, FGIC Insured, 5.00%, 7/15/19 ..................................................... 3,690,000 3,912,839
Richmond IDA Student Housing Revenue, University Real Estate Foundation, 5.55%,
1/01/31 ..................................................................................... 4,400,000 4,757,324
150 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
VIRGINIA (CONTINUED)
Richmond Public Facilities COP, 800 Megahertz Project, Series A, AMBAC Insured, 5.00%,
8/01/22 ..................................................................................... $ 2,000,000 $ 2,094,800
Richmond Public Utility Revenue,
FSA Insured, 5.00%, 1/15/35 ................................................................ 3,500,000 3,741,220
Refunding, FSA Insured, 5.00%, 1/15/33 ..................................................... 8,500,000 8,894,655
Spotsylvania County Water and Sewer System Revenue, MBIA Insured, Pre-Refunded,
5.25%, 6/01/22 ............................................................................. 2,500,000 2,559,350
5.40%, 6/01/27 ............................................................................. 6,800,000 6,963,880
Stafford County and Staunton IDAR, Virginia Municipal League Assn. Counties Program,
Series A, MBIA Insured, 5.25%, 8/01/31 ..................................................... 5,000,000 5,539,500
Series C, MBIA Insured, 5.00%, 8/01/35 ..................................................... 8,925,000 9,517,084
Stafford County EDA Hospital Facilities Revenue, Medicorp Health System Obligation,
5.25%, 6/15/37 .............................................................................. 5,000,000 5,328,400
University of Virginia Revenue,
General, 5.00%, 6/01/37 .................................................................... 15,000,000 16,054,050
Series A, 5.00%, 6/01/33 ................................................................... 14,000,000 14,797,020
Virginia Beach Water and Sewer Revenue,
Pre-Refunded, 5.25%, 8/01/21 ............................................................... 1,865,000 1,961,514
System, Refunding, 5.00%, 10/01/30 ......................................................... 3,300,000 3,529,977
Virginia College Building Authority Educational Facilities Revenue,
21st Century College Program, Pre-Refunded, 5.00%, 2/01/21 ................................. 1,000,000 1,046,710
Hampton University Project, Pre-Refunded, 6.00%, 4/01/20 ................................... 1,500,000 1,615,395
Regent University Project, MBIA Insured, Pre-Refunded, 5.125%, 10/01/21 .................... 5,000,000 5,312,200
Regent University Project, MBIA Insured, Pre-Refunded, 5.125%, 10/01/31 .................... 4,050,000 4,302,882
Virginia Commonwealth Transportation Board Transportation Revenue,
Northern Virginia Transportation Program, Refunding, Series A, 5.00%, 5/15/27 .............. 8,920,000 9,376,882
U.S. Route 58 Corridor Development Program, Series B, Pre-Refunded, 5.00%, 5/15/24 ......... 2,000,000 2,105,620
U.S. Route 58 Corridor Development Program, Series B, Pre-Refunded, 5.00%, 5/15/26 ......... 10,000,000 10,528,100
Virginia State HDA, MFHR,
Series C, 5.30%, 11/01/16 .................................................................. 1,000,000 1,037,990
Series H, 5.55%, 5/01/15 ................................................................... 1,000,000 1,033,160
Virginia State HDA Rental Housing Revenue,
Series J, 5.80%, 2/01/19 ................................................................... 2,000,000 2,071,080
Series L, 5.75%, 2/01/15 ................................................................... 1,000,000 1,042,770
Virginia State Public School Authority GO, School Financing,
Series A, 5.00%, 8/01/20 ................................................................... 3,000,000 3,182,640
Series A, 5.00%, 8/01/21 ................................................................... 4,000,000 4,238,480
Series C, 5.00%, 8/01/22 ................................................................... 2,000,000 2,117,560
Series C, 5.00%, 8/01/26 ................................................................... 10,925,000 11,553,515
Virginia State Resources Authority Airports Revenue, Revolving Fund, Series A, 5.00%,
8/01/27 ..................................................................................... 3,000,000 3,109,560
Virginia State Resources Authority Infrastructure Revenue,
Senior Series A, 5.00%, 11/01/31 ........................................................... 5,000,000 5,422,000
Senior Series A, 5.00%, 11/01/36 ........................................................... 4,915,000 5,313,410
Virginia Pooled Financing Program, Refunding, Senior Series C, 5.00%, 11/01/36 ............. 7,315,000 7,907,954
Virginia Pooled Financing Program, Senior Series, 5.00%, 11/01/33 .......................... 5,000,000 5,301,350
Annual Report | 151
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
VIRGINIA (CONTINUED)
Virginia State Resources Authority Water and Sewer System Revenue,
Pooled Loan Program, Mandatory Put 11/01/07, Series A, ETM, 7.45%, 11/01/16 ................ $ 10,000 $ 10,058
Rapidan Service Authority, Refunding, 5.30%, 10/01/18 ...................................... 1,610,000 1,652,311
Tuckahoe Service District Project, 5.00%, 11/01/35 ......................................... 2,000,000 2,114,140
Winchester IDA Hospital Revenue, Valley Health System Obligated, 5.25%, 1/01/37 ............... 5,000,000 5,427,050
York County Sewer Revenue, Pre-Refunded, 5.875%,
6/01/24 .................................................................................... 500,000 528,840
6/01/29 .................................................................................... 1,500,000 1,586,520
------------
431,533,260
------------
U.S. TERRITORIES 20.6%
DISTRICT OF COLUMBIA 6.0%
Metropolitan Washington D.C. Airports Authority Airport System Revenue,
Refunding, Series A, FGIC Insured, 5.00%, 10/01/25 ......................................... 1,000,000 1,050,190
Refunding, Series A, FSA Insured, 5.00%, 10/01/32 .......................................... 10,000,000 10,608,700
Series B, FGIC Insured, Pre-Refunded, 5.25%, 10/01/32 ...................................... 6,655,000 7,190,794
Metropolitan Washington D.C. Airports Authority General Airport Revenue,
Refunding, Series A, FGIC Insured, 5.00%, 10/01/27 ......................................... 5,000,000 5,156,150
Series A, Pre-Refunded, 5.375%, 10/01/23 ................................................... 3,000,000 3,060,060
Series B, 5.75%, 10/01/20 .................................................................. 6,000,000 6,127,560
------------
33,193,454
------------
PUERTO RICO 14.0%
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.00%, 7/01/29 ............................................................................. 8,000,000 8,404,480
5.125%, 7/01/31 ............................................................................ 3,315,000 3,438,849
5.00%, 7/01/33 ............................................................................. 2,000,000 2,086,780
FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 ................................................. 15,000,000 16,015,650
Pre-Refunded, 5.125%, 7/01/31 .............................................................. 1,685,000 1,788,307
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
Pre-Refunded, 5.50%, 7/01/36 ................................................................ 4,500,000 5,118,255
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................................... 5,000,000 5,428,650
Series D, Pre-Refunded, 5.25%, 7/01/38 ..................................................... 3,000,000 3,239,160
Series G, 5.00%, 7/01/33 ................................................................... 5,000,000 5,330,950
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
AMBAC Insured, Pre-Refunded, 5.00%, 7/01/28 ................................................. 4,000,000 4,085,920
Puerto Rico Electric Power Authority Power Revenue,
Series HH, FSA Insured, 5.25%, 7/01/29 ..................................................... 5,910,000 6,270,687
Series RR, FGIC Insured, 5.00%, 7/01/35 .................................................... 5,000,000 5,354,350
Series RR, XLCA Insured, 5.00%, 7/01/30 .................................................... 1,000,000 1,070,870
Puerto Rico HFC Revenue, Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%,
12/01/26 .................................................................................... 20,000 20,195
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/27 ........... 2,580,000 2,717,024
152 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ..................................................... $ 1,315,000 $ 1,396,293
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................. 3,685,000 3,987,907
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.70%, 8/01/25 .............................................................. 1,000,000 1,057,690
------------
76,812,017
------------
VIRGIN ISLANDS 0.6%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/15 ................................................................................. 1,500,000 1,550,325
10/01/18 ................................................................................. 1,500,000 1,549,170
------------
3,099,495
------------
TOTAL U.S. TERRITORIES ....................................................................... 113,104,966
------------
TOTAL LONG TERM INVESTMENTS (COST $518,039,780) .............................................. 544,638,226
------------
SHORT TERM INVESTMENTS 0.2%
MUNICIPAL BONDS 0.2%
VIRGINIA 0.1%
b Lexington IDA Educational Facilities Revenue, VMI Development Board Inc. Project, Refunding,
Daily VRDN and Put, 3.60%, 12/01/36 ....................................................... 100,000 100,000
b Roanoke IDA Hospital Revenue, Carilion Health System, Refunding, Series C-2, FSA Insured,
Daily VRDN and Put, 3.60%, 7/01/27 ........................................................ 600,000 600,000
------------
700,000
------------
U.S. TERRITORIES 0.1%
PUERTO RICO 0.1%
b Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured,
Weekly VRDN and Put, 3.34%, 12/01/15 ...................................................... 200,000 200,000
b Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 3.42%, 7/01/28 .............................. 200,000 200,000
------------
TOTAL U.S. TERRITORIES ....................................................................... 400,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,100,000) ............................................... 1,100,000
------------
TOTAL INVESTMENTS (COST $519,139,780) 99.2% .................................................. 545,738,226
OTHER ASSETS, LESS LIABILITIES 0.8% .......................................................... 4,496,424
------------
NET ASSETS 100.0% ............................................................................ $550,234,650
============
See Selected Portfolio Abbreviations on page 154.
a See Note 7 regarding other considerations.
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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 153
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
SELECTED PORTFOLIO ABBREVIATIONS
ACES - Adjustable Convertible Exempt Security
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Authority/Agency
CDD - Community Development District
CDR - Community Development Revenue
CIFG - CDC IXIS Financial Guaranty
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance Inc.
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HDC - Housing Development Corp.
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority Revenue
HFC - Housing Finance Corp.
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority Revenue
IDB - Industrial Development Bond/Board
IDR - Industrial Development Revenue
ISD - Independent School District
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
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
VHA - Volunteer Hospital of America
XLCA - XL Capital Assurance
154 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2007
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------
Assets:
Investments in securities:
Cost ................................................ $ 273,280,184 $ 1,540,255,422 $ 253,712,678
=====================================================
Value ............................................... $ 286,825,264 $ 1,653,414,763 $ 269,059,401
Cash ................................................. 77,394 147,341 74,327
Receivables:
Capital shares sold ................................. 201,548 1,356,180 1,108,186
Interest ............................................ 3,828,177 23,588,681 3,182,457
-----------------------------------------------------
Total assets .................................. 290,932,383 1,678,506,965 273,424,371
-----------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..................... 7,485,099 -- --
Capital shares redeemed ............................. 625,132 3,202,309 1,257,398
Affiliates .......................................... 169,401 879,549 169,305
Distributions to shareholders ....................... 241,608 1,595,021 263,424
Accrued expenses and other liabilities ............... 45,341 160,416 44,665
-----------------------------------------------------
Total liabilities ............................. 8,566,581 5,837,295 1,734,792
-----------------------------------------------------
Net assets, at value ........................ $ 282,365,802 $ 1,672,669,670 $ 271,689,579
=====================================================
Net assets consist of:
Paid-in capital ...................................... $ 277,560,333 $ 1,559,436,990 $ 260,218,574
Distributions in excess of net investment income ..... (124,722) (971,324) (41,320)
Net unrealized appreciation (depreciation) ........... 13,545,080 113,159,341 15,346,723
Accumulated net realized gain (loss) ................. (8,614,889) 1,044,663 (3,834,398)
-----------------------------------------------------
Net assets, at value ........................ $ 282,365,802 $ 1,672,669,670 $ 271,689,579
=====================================================
CLASS A:
Net assets, at value ................................. $ 244,271,505 $ 1,476,476,877 $ 220,989,081
=====================================================
Shares outstanding ................................... 21,227,666 123,708,817 18,120,495
=====================================================
Net asset value per share a .......................... $ 11.51 $ 11.94 $ 12.20
=====================================================
Maximum offering price per share (net asset value
per share / 95.75%) ................................. $ 12.02 $ 12.47 $ 12.74
=====================================================
CLASS B:
Net assets, at value ................................. -- $ 59,481,048 --
=====================================================
Shares outstanding ................................... -- 4,947,828 --
=====================================================
Net asset value and maximum offering price per share a -- $ 12.02 --
=====================================================
CLASS C:
Net assets, at value ................................. $ 38,094,297 $ 136,711,745 $ 50,700,498
=====================================================
Shares outstanding ................................... 3,283,062 11,307,398 4,118,716
=====================================================
Net asset value and maximum offering price per share a $ 11.60 $ 12.09 $ 12.31
=====================================================
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 |
The accompanying notes are an integral part of these financial statements. | 155
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY TAX-FREE LOUISIANA TAX-FREE MARYLAND TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------
Assets:
Investments in securities:
Cost ................................................ $ 140,702,385 $ 235,531,691 $ 455,000,074
=======================================================
Value ............................................... $ 147,424,742 $ 246,635,997 $ 477,204,658
Cash ................................................. 29,100 41,096 89,363
Receivables:
Capital shares sold ................................. 525,552 630,915 1,348,160
Interest ............................................ 1,751,079 3,313,373 5,580,583
-------------------------------------------------------
Total assets .................................. 149,730,473 250,621,381 484,222,764
-------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..................... 1,037,680 -- --
Capital shares redeemed ............................. 235,751 258,028 633,180
Affiliates .......................................... 74,437 149,106 281,107
Distributions to shareholders ....................... 125,375 218,200 418,429
Accrued expenses and other liabilities ............... 32,820 41,590 63,086
-------------------------------------------------------
Total liabilities ............................. 1,506,063 666,924 1,395,802
-------------------------------------------------------
Net assets, at value ........................ $ 148,224,410 $ 249,954,457 $ 482,826,962
=======================================================
Net assets consist of:
Paid-in capital ...................................... $ 143,815,722 $ 240,931,391 $ 461,811,240
Distributions in excess of net investment income ..... (63,594) (105,720) (218,350)
Net unrealized appreciation (depreciation) ........... 6,722,357 11,104,306 22,204,584
Accumulated net realized gain (loss) ................. (2,250,075) (1,975,520) (970,512)
-------------------------------------------------------
Net assets, at value ........................ $ 148,224,410 $ 249,954,457 $ 482,826,962
=======================================================
CLASS A:
Net assets, at value ................................. $ 148,224,410 $ 220,926,527 $ 410,890,041
=======================================================
Shares outstanding ................................... 12,962,167 19,021,559 34,707,039
=======================================================
Net asset value per share a .......................... $ 11.44 $ 11.61 $ 11.84
=======================================================
Maximum offering price per share (net asset value
per share / 95.75%) ................................. $ 11.95 $ 12.13 $ 12.37
=======================================================
CLASS C:
Net assets, at value ................................. -- $ 29,027,930 $ 71,936,921
=======================================================
Shares outstanding ................................... -- 2,474,460 6,001,967
=======================================================
Net asset value and maximum offering price per share a -- $ 11.73 $ 11.99
=======================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
156 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
-----------------------------------------------------------
FRANKLIN
FRANKLIN NORTH CAROLINA FRANKLIN
MISSOURI TAX-FREE TAX-FREE VIRGINIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------------
Assets:
Investments in securities:
Cost ................................................ $ 641,619,783 $ 699,970,520 $ 519,139,780
=========================================================
Value ............................................... $ 677,701,464 $ 734,452,770 $ 545,738,226
Cash ................................................. 53,157 31,420 80,655
Receivables:
Capital shares sold ................................. 1,570,641 2,203,933 702,022
Interest ............................................ 8,933,824 9,479,515 6,031,956
---------------------------------------------------------
Total assets .................................. 688,259,086 746,167,638 552,552,859
---------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..................... 2,500,990 -- --
Capital shares redeemed ............................. 1,430,700 681,717 1,452,395
Affiliates .......................................... 370,151 421,411 303,169
Distributions to shareholders ....................... 603,035 632,971 494,414
Accrued expenses and other liabilities ............... 81,164 82,968 68,231
---------------------------------------------------------
Total liabilities ............................. 4,986,040 1,819,067 2,318,209
---------------------------------------------------------
Net assets, at value ........................ $ 683,273,046 $ 744,348,571 $ 550,234,650
=========================================================
Net assets consist of:
Paid-in capital ...................................... $ 651,846,555 $ 712,855,151 $ 528,116,071
Distributions in excess of net investment income ..... (340,416) (488,419) (313,492)
Net unrealized appreciation (depreciation) ........... 36,081,681 34,482,250 26,598,446
Accumulated net realized gain (loss) ................. (4,314,774) (2,500,411) (4,166,375)
---------------------------------------------------------
Net assets, at value ........................ $ 683,273,046 $ 744,348,571 $ 550,234,650
=========================================================
CLASS A:
Net assets, at value ................................. $ 613,124,676 $ 626,782,930 $ 493,441,495
=========================================================
Shares outstanding ................................... 49,565,689 50,619,859 41,641,458
=========================================================
Net asset value per share a .......................... $ 12.37 $ 12.38 $ 11.85
=========================================================
Maximum offering price per share (net asset value
per share / 95.75%) ................................. $ 12.92 $ 12.93 $ 12.38
=========================================================
CLASS C:
Net assets, at value ................................. $ 70,148,370 $ 117,565,641 $ 56,793,155
=========================================================
Shares outstanding ................................... 5,636,203 9,397,768 4,743,854
=========================================================
Net asset value and maximum offering price per share a $ 12.45 $ 12.51 $ 11.97
=========================================================
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 |
The accompanying notes are an integral part of these financial statements. | 157
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2007
---------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA TAX-FREE FLORIDA TAX-FREE GEORGIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------
Investment income:
Interest .......................................................... $ 13,586,633 $ 87,800,634 $ 12,628,387
-------------------------------------------------------
Expenses:
Management fees (Note 3a) ......................................... 1,491,234 7,949,255 1,425,197
Distribution fees: (Note 3c)
Class A .......................................................... 238,142 1,506,139 212,850
Class B .......................................................... -- 411,045 --
Class C .......................................................... 238,876 918,050 303,350
Transfer agent fees (Note 3e) ..................................... 106,344 521,579 113,635
Custodian fees .................................................... 4,087 25,611 4,009
Reports to shareholders ........................................... 17,828 106,694 20,699
Registration and filing fees ...................................... 9,021 26,364 11,306
Professional fees ................................................. 21,596 62,159 22,207
Trustees' fees and expenses ....................................... 1,671 11,979 2,144
Other ............................................................. 31,942 99,562 30,884
-------------------------------------------------------
Total expenses ............................................. 2,160,741 11,638,437 2,146,281
-------------------------------------------------------
Net investment income .................................... 11,425,892 76,162,197 10,482,106
-------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ......................... 593,990 3,755,199 (102,207)
Net change in unrealized appreciation (depreciation) on investments (166,203) (2,441,202) 1,679,433
-------------------------------------------------------
Net realized and unrealized gain (loss) ............................ 427,787 1,313,997 1,577,226
-------------------------------------------------------
Net increase (decrease) in net assets resulting from operations .... $ 11,853,679 $ 77,476,194 $ 12,059,332
=======================================================
158 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2007
----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY TAX-FREE LOUISIANA TAX-FREE MARYLAND TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------
Investment income:
Interest .......................................................... $ 6,518,452 $ 11,168,532 $ 22,250,765
------------------------------------------------------
Expenses:
Management fees (Note 3a) ......................................... 813,571 1,264,369 2,307,009
Distribution fees: (Note 3c)
Class A .......................................................... 136,669 201,323 388,846
Class C .......................................................... -- 159,959 426,252
Transfer agent fees (Note 3e) ..................................... 46,007 85,232 206,514
Custodian fees .................................................... 2,093 3,312 6,914
Reports to shareholders ........................................... 11,419 10,199 44,725
Registration and filing fees ...................................... 3,135 2,490 11,794
Professional fees ................................................. 23,014 23,252 28,693
Trustees' fees and expenses ....................................... 1,135 994 3,540
Other ............................................................. 20,611 27,293 35,967
------------------------------------------------------
Total expenses ............................................. 1,057,654 1,778,423 3,460,254
Expenses waived/paid by affiliates (Note 3f) ............... (33,024) -- --
------------------------------------------------------
Net expenses ............................................. 1,024,630 1,778,423 3,460,254
------------------------------------------------------
Net investment income ................................... 5,493,822 9,390,109 18,790,511
------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ......................... 52,844 283,687 477,762
Net change in unrealized appreciation (depreciation) on investments 681,029 1,793,047 2,716,640
------------------------------------------------------
Net realized and unrealized gain (loss) ............................ 733,873 2,076,734 3,194,402
------------------------------------------------------
Net increase (decrease) in net assets resulting from operations .... $ 6,227,695 $ 11,466,843 $ 21,984,913
======================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 159
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2007
--------------------------------------------------------
FRANKLIN
FRANKLIN NORTH CAROLINA FRANKLIN
MISSOURI TAX-FREE TAX-FREE VIRGINIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
Investment income:
Interest .......................................................... $ 31,831,721 $ 32,313,061 $ 26,283,757
------------------------------------------------------
Expenses:
Management fees (Note 3a) ......................................... 3,185,733 3,301,870 2,665,367
Distribution fees: (Note 3c)
Class A .......................................................... 581,293 563,242 481,487
Class C .......................................................... 439,651 701,135 347,087
Transfer agent fees (Note 3e) ..................................... 274,753 290,418 222,347
Custodian fees .................................................... 9,680 10,156 8,009
Reports to shareholders ........................................... 45,789 58,079 38,892
Registration and filing fees ...................................... 11,790 17,122 11,933
Professional fees ................................................. 31,658 33,068 27,602
Trustees' fees and expenses ....................................... 5,581 5,303 3,511
Other ............................................................. 51,136 52,878 44,580
------------------------------------------------------
Total expenses ............................................. 4,637,064 5,033,271 3,850,815
------------------------------------------------------
Net investment income .................................... 27,194,657 27,279,790 22,432,942
------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ......................... 87,961 (137,092) 1,539,558
Net change in unrealized appreciation (depreciation) on investments 3,292,249 5,275,946 (937,465)
------------------------------------------------------
Net realized and unrealized gain (loss) ............................ 3,380,210 5,138,854 602,093
------------------------------------------------------
Net increase (decrease) in net assets resulting from operations .... $ 30,574,867 $ 32,418,644 $ 23,035,035
======================================================
160 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------
FRANKLIN ALABAMA FRANKLIN FLORIDA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 11,425,892 $ 11,241,771 $ 76,162,197 $ 76,159,210
Net realized gain (loss) from investments .. 593,990 831,456 3,755,199 3,143,993
Net change in unrealized appreciation
(depreciation) on investments ............ (166,203) (3,486,537) (2,441,202) (13,295,729)
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ....... 11,853,679 8,586,690 77,476,194 66,007,474
-----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................. (10,084,627) (10,018,613) (68,431,902) (68,636,133)
Class B .................................. -- -- (2,517,336) (2,856,295)
Class C .................................. (1,347,737) (1,257,447) (5,623,163) (5,244,494)
-----------------------------------------------------------------------
Total distributions to shareholders ......... (11,432,364) (11,276,060) (76,572,401) (76,736,922)
-----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................. 6,082,311 14,953,321 (58,115,718) 54,424,967
Class B .................................. -- -- (8,617,307) (5,750,500)
Class C .................................. 2,376,152 4,261,604 (4,005,040) 16,316,566
-----------------------------------------------------------------------
Total capital share transactions ............ 8,458,463 19,214,925 (70,738,065) 64,991,033
-----------------------------------------------------------------------
Redemption fees ............................. 21 125 2,221 509
-----------------------------------------------------------------------
Net increase (decrease) in net assets 8,879,799 16,525,680 (69,832,051) 54,262,094
Net assets:
Beginning of year ........................... 273,486,003 256,960,323 1,742,501,721 1,688,239,627
-----------------------------------------------------------------------
End of year ................................. $ 282,365,802 $ 273,486,003 $ 1,672,669,670 $ 1,742,501,721
=======================================================================
Distributions in excess of net investment
income included in net assets:
End of year ................................ $ (124,722) $ (111,491) $ (971,324) $ (544,144)
=======================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 161
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------------
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 10,482,106 $ 9,331,831 $ 5,493,822 $ 4,877,173
Net realized gain (loss) from investments .. (102,207) (120,456) 52,844 (83,562)
Net change in unrealized appreciation
(depreciation) on investments ............ 1,679,433 (569,286) 681,029 (120,031)
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........ 12,059,332 8,642,089 6,227,695 4,673,580
-----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................. (8,735,103) (7,842,974) (5,512,105) (4,888,713)
Class C .................................. (1,646,821) (1,443,513) -- --
-----------------------------------------------------------------------
Total distributions to shareholders ......... (10,381,924) (9,286,487) (5,512,105) (4,888,713)
-----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................. 13,776,324 36,009,317 19,255,076 15,527,992
Class C .................................. 6,377,834 7,067,599 -- --
-----------------------------------------------------------------------
Total capital share transactions ............ 20,154,158 43,076,916 19,255,076 15,527,992
-----------------------------------------------------------------------
Redemption fees ............................. 3 1,504 57 7
-----------------------------------------------------------------------
Net increase (decrease) in net assets 21,831,569 42,434,022 19,970,723 15,312,866
Net assets:
Beginning of year ........................... 249,858,010 207,423,988 128,253,687 112,940,821
-----------------------------------------------------------------------
End of year ................................. $ 271,689,579 $ 249,858,010 $ 148,224,410 $ 128,253,687
=======================================================================
Distributions in excess of net investment
income included in net assets:
End of year ................................ $ (41,320) $ (141,506) $ (63,594) $ (44,879)
=======================================================================
162 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------------
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 9,390,109 $ 9,065,753 $ 18,790,511 $ 17,008,519
Net realized gain (loss) from investments .. 283,687 (57,294) 477,762 234,851
Net change in unrealized appreciation
(depreciation) on investments ............ 1,793,047 (2,909,233) 2,716,640 (1,101,671)
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ....... 11,466,843 6,099,226 21,984,913 16,141,699
-----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................. (8,522,083) (8,322,538) (16,526,786) (14,965,428)
Class C .................................. (896,730) (806,001) (2,390,301) (1,986,797)
-----------------------------------------------------------------------
Total distributions to shareholders ......... (9,418,813) (9,128,539) (18,917,087) (16,952,225)
-----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................. 30,768,390 2,393,874 39,127,869 36,990,865
Class C .................................. 5,485,909 4,432,819 11,509,723 10,998,107
-----------------------------------------------------------------------
Total capital share transactions ............ 36,254,299 6,826,693 50,637,592 47,988,972
-----------------------------------------------------------------------
Redemption fees ............................. 96 -- 1,164 1,700
-----------------------------------------------------------------------
Net increase (decrease) in net assets 38,302,425 3,797,380 53,706,582 47,180,146
Net assets:
Beginning of year ........................... 211,652,032 207,854,652 429,120,380 381,940,234
-----------------------------------------------------------------------
End of year ................................. $ 249,954,457 $ 211,652,032 $ 482,826,962 $ 429,120,380
=======================================================================
Distributions in excess of net investment
income included in net assets:
End of year ................................ $ (105,720) $ (75,628) $ (218,350) $ (78,585)
=======================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 163
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------------
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................ $ 27,194,657 $ 25,567,295 $ 27,279,790 $ 23,076,805
Net realized gain (loss) from investments .... 87,961 661,439 (137,092) 671,095
Net change in unrealized appreciation
(depreciation) on investments .............. 3,292,249 (1,067,906) 5,275,946 (2,946,033)
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........ 30,574,867 25,160,828 32,418,644 20,801,867
-----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................... (24,717,093) (23,235,905) (23,673,523) (19,756,701)
Class C .................................... (2,504,144) (2,443,723) (3,903,405) (3,324,155)
-----------------------------------------------------------------------
Total distributions to shareholders ........... (27,221,237) (25,679,628) (27,576,928) (23,080,856)
-----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................... 47,844,236 46,392,264 113,407,890 83,045,904
Class C .................................... 1,032,830 8,431,786 17,138,999 16,643,428
-----------------------------------------------------------------------
Total capital share transactions .............. 48,877,066 54,824,050 130,546,889 99,689,332
-----------------------------------------------------------------------
Redemption fees ............................... 50 7,430 1,823 1,047
-----------------------------------------------------------------------
Net increase (decrease) in net assets .. 52,230,746 54,312,680 135,390,428 97,411,390
Net assets:
Beginning of year ............................. 631,042,300 576,729,620 608,958,143 511,546,753
-----------------------------------------------------------------------
End of year ................................... $ 683,273,046 $ 631,042,300 $ 744,348,571 $ 608,958,143
=======================================================================
Distributions in excess of net investment income
included in net assets:
End of year .................................. $ (340,416) $ (215,778) $ (488,419) $ (188,607)
=======================================================================
164 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
--------------------------------
YEAR ENDED FEBRUARY 28,
2007 2006
--------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................ $ 22,432,942 $ 21,187,292
Net realized gain (loss) from investments ............................ 1,539,558 342,816
Net change in unrealized appreciation (depreciation) on investments .. (937,465) (2,977,886)
--------------------------------
Net increase (decrease) in net assets resulting from operations 23,035,035 18,552,222
--------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................................ (20,621,434) (19,640,717)
Class C ............................................................ (1,983,150) (1,773,323)
--------------------------------
Total distributions to shareholders ................................... (22,604,584) (21,414,040)
--------------------------------
Capital share transactions: (Note 2)
Class A ............................................................ 19,152,705 37,693,235
Class C ............................................................ 5,234,023 8,052,762
--------------------------------
Total capital share transactions ...................................... 24,386,728 45,745,997
--------------------------------
Redemption fees ....................................................... 651 213
--------------------------------
Net increase (decrease) in net assets .......................... 24,817,830 42,884,392
Net assets:
Beginning of year ..................................................... 525,416,820 482,532,428
--------------------------------
End of year ........................................................... $ 550,234,650 $ 525,416,820
================================
Distributions in excess of net investment income included in net assets:
End of year ........................................................... $ (313,492) $ (141,541)
================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 165
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 amended, (the 1940 Act) as an open-end investment company,
consisting of twenty-five separate funds. All funds included in this report
(the Funds) are diversified, except the Franklin Maryland Tax-Free Income
Fund, which is non-diversified. The financial statements of the remaining
funds in the Trust are presented separately. The classes of shares offered
within each of the Funds are indicated below. 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
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 may utilize independent pricing
services, quotations from bond dealers, and information with respect to bond
and note transactions, to assist in determining a current market value for
each security. The 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. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of
restrictions on the disposition of the securities. Due to the inherent
uncertainty of valuations of such securities, the fair values may differ
significantly from the values that would have been used had a ready market for
such investments existed. Occasionally, events occur between the time at which
trading in a security is completed and the close of the NYSE that might call
into question the availability (including the reliability) of the value of a
portfolio security held by the fund. If such an event occurs, the securities
may be valued using fair value procedures, which may include the use of
independent pricing services. All security valuation procedures are approved
by the Trust's Board of Trustees.
166 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its income and net
realized gains.
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and
losses on security transactions are determined on a specific identification
basis. Interest income and estimated expenses are accrued daily. Amortization
of premium and accretion of discount on debt securities are included in
interest income. Dividends from net investment income are normally declared
daily and distributed monthly to shareholders. Distributions to shareholders
are determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
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 of the Trust.
Fund specific expenses are charged directly to the fund that incurred the
expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based
upon the relative proportion of net assets of each class. Differences in per
share distributions, by class, are generally due to differences in class
specific expenses.
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.
Annual Report | 167
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount
redeemed. Such fees are retained by the funds and accounted for as an addition
to paid-in capital.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities 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. Currently, the Trust
expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2007, 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, 2007
Shares sold ....................... 2,519,115 $ 28,789,935 11,574,824 $ 136,974,591
Shares issued in reinvestment of
distributions .................... 479,619 5,475,921 2,560,339 30,327,849
Shares redeemed ................... (2,469,108) (28,183,545) (19,035,566) (225,418,158)
-----------------------------------------------------------------
Net increase (decrease) ........... 529,626 $ 6,082,311 (4,900,403) $ (58,115,718)
=================================================================
Year ended February 28, 2006
Shares sold ....................... 2,667,852 $ 30,764,669 17,384,814 $ 207,558,940
Shares issued in reinvestment of
distributions .................... 444,918 5,132,741 2,466,126 29,505,832
Shares redeemed ................... (1,818,578) (20,944,089) (15,289,335) (182,639,805)
-----------------------------------------------------------------
Net increase (decrease) ........... 1,294,192 $ 14,953,321 4,561,605 $ 54,424,967
=================================================================
CLASS B SHARES:
Year ended February 28, 2007
Shares sold ....................... 63,363 $ 755,690
Shares issued in reinvestment of
distributions .................... 113,079 1,348,912
Shares redeemed ................... (899,821) (10,721,909)
-------------------------------
Net increase (decrease) ........... (723,379) $ (8,617,307)
===============================
168 | 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 B SHARES: (CONTINUED)
Year ended February 28, 2006
Shares sold ....................... 65,279 $ 785,355
Shares issued in reinvestment of
distributions .................... 124,962 1,505,441
Shares redeemed ................... (668,512) (8,041,296)
-------------------------------
Net increase (decrease) ........... (478,271) $ (5,750,500)
===============================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold ....................... 580,065 $ 6,678,985 1,908,430 $ 22,875,111
Shares issued in reinvestment of
distributions .................... 56,340 648,521 249,556 2,993,714
Shares redeemed ................... (430,268) (4,951,354) (2,487,753) (29,873,865)
----------------------------------------------------------------
Net increase (decrease) ........... 206,137 $ 2,376,152 (329,767) $ (4,005,040)
================================================================
Year ended February 28, 2006
Shares sold ....................... 693,697 $ 8,060,291 2,766,626 $ 33,473,426
Shares issued in reinvestment of
distributions .................... 51,113 594,167 232,372 2,813,675
Shares redeemed ................... (378,228) (4,392,854) (1,650,487) (19,970,535)
----------------------------------------------------------------
Net increase (decrease) ........... 366,582 $ 4,261,604 1,348,511 $ 16,316,566
================================================================
----------------------------------------------------------------
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2007
Shares sold ....................... 3,364,207 $ 40,533,072 2,491,343 $ 28,210,789
Shares issued in reinvestment of
distributions .................... 470,243 5,665,748 299,040 3,384,752
Shares redeemed ................... (2,687,328) (32,422,496) (1,089,754) (12,340,465)
----------------------------------------------------------------
Net increase (decrease) ........... 1,147,122 $ 13,776,324 1,700,629 $ 19,255,076
================================================================
Year ended February 28, 2006
Shares sold ....................... 4,192,789 $ 50,855,277 2,333,857 $ 26,554,238
Shares issued in reinvestment of
distributions .................... 405,266 4,918,550 242,063 2,757,028
Shares redeemed ................... (1,631,050) (19,764,510) (1,211,728) (13,783,274)
----------------------------------------------------------------
Net increase (decrease) ........... 2,967,005 $ 36,009,317 1,364,192 $ 15,527,992
================================================================
Annual Report | 169
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------
FRANKLIN GEORGIA
TAX-FREE INCOME FUND
---------------------------
SHARES AMOUNT
---------------------------
CLASS C SHARES:
Year ended February 28, 2007
Shares sold ....................... 1,056,465 $ 12,855,131
Shares issued in reinvestment of
distributions .................... 81,248 988,372
Shares redeemed ................... (613,251) (7,465,669)
---------------------------
Net increase (decrease) ........... 524,462 $ 6,377,834
===========================
Year ended February 28, 2006
Shares sold ....................... 1,015,401 $ 12,422,685
Shares issued in reinvestment of
distributions .................... 69,774 854,251
Shares redeemed ................... (507,865) (6,209,337)
---------------------------
Net increase (decrease) ........... 577,310 $ 7,067,599
===========================
----------------------------------------------------------------
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2007
Shares sold ....................... 4,048,612 $ 46,521,915 7,003,809 $ 81,862,889
Shares issued in reinvestment of
distributions .................... 490,398 5,635,163 890,920 10,422,243
Shares redeemed ................... (1,864,792) (21,388,688) (4,546,144) (53,157,263)
----------------------------------------------------------------
Net increase (decrease) ........... 2,674,218 $ 30,768,390 3,348,585 $ 39,127,869
================================================================
Year ended February 28, 2006
Shares sold ....................... 3,013,388 $ 34,984,276 5,677,853 $ 66,876,033
Shares issued in reinvestment of
distributions .................... 408,949 4,739,329 773,603 9,117,121
Shares redeemed ................... (3,226,243) (37,329,731) (3,312,936) (39,002,289)
----------------------------------------------------------------
Net increase (decrease) ........... 196,094 $ 2,393,874 3,138,520 $ 36,990,865
================================================================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold ....................... 842,243 $ 9,798,274 1,666,293 $ 19,706,435
Shares issued in reinvestment of
distributions .................... 48,730 565,464 128,266 1,519,318
Shares redeemed ................... (421,220) (4,877,829) (821,596) (9,716,030)
----------------------------------------------------------------
Net increase (decrease) ........... 469,753 $ 5,485,909 972,963 $ 11,509,723
================================================================
Year ended February 28, 2006
Shares sold ....................... 724,210 $ 8,486,486 1,470,548 $ 17,526,394
Shares issued in reinvestment of
distributions .................... 37,798 442,071 101,017 1,204,156
Shares redeemed ................... (385,666) (4,495,738) (648,937) (7,732,443)
----------------------------------------------------------------
Net increase (decrease) ........... 376,342 $ 4,432,819 922,628 $ 10,998,107
================================================================
170 | 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 A SHARES:
Year ended February 28, 2007
Shares sold ....................... 7,990,480 $ 97,636,332 13,373,011 $ 163,736,949
Shares issued in reinvestment of
distributions .................... 1,224,271 14,960,169 1,215,040 14,878,520
Shares redeemed ................... (5,305,879) (64,752,265) (5,330,579) (65,207,579)
-----------------------------------------------------------------
Net increase (decrease) ........... 3,908,872 $ 47,844,236 9,257,472 $ 113,407,890
=================================================================
Year ended February 28, 2006
Shares sold ....................... 7,083,235 $ 87,219,423 9,992,315 $ 123,133,371
Shares issued in reinvestment of
distributions .................... 1,055,017 12,988,801 960,208 11,833,691
Shares redeemed ................... (4,373,599) (53,815,960) (4,219,113) (51,921,158)
-----------------------------------------------------------------
Net increase (decrease) ........... 3,764,653 $ 46,392,264 6,733,410 $ 83,045,904
=================================================================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold ....................... 907,134 $ 11,152,508 2,523,560 $ 31,212,679
Shares issued in reinvestment of
distributions .................... 128,587 1,580,545 192,200 2,377,116
Shares redeemed ................... (954,063) (11,700,223) (1,331,485) (16,450,796)
-----------------------------------------------------------------
Net increase (decrease) ........... 81,658 $ 1,032,830 1,384,275 $ 17,138,999
=================================================================
Year ended February 28, 2006
Shares sold ....................... 1,113,723 $ 13,796,171 2,261,283 $ 28,146,681
Shares issued in reinvestment of
distributions .................... 123,225 1,525,828 157,244 1,957,013
Shares redeemed ................... (556,905) (6,890,213) (1,081,626) (13,460,266)
-----------------------------------------------------------------
Net increase (decrease) ........... 680,043 $ 8,431,786 1,336,901 $ 16,643,428
=================================================================
-----------------------------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
-----------------------------
SHARES AMOUNT
-----------------------------
CLASS A SHARES:
Year ended February 28, 2007
Shares sold ....................... 6,489,824 $ 76,246,042
Shares issued in reinvestment of
distributions .................... 1,066,713 12,543,244
Shares redeemed ................... (5,927,927) (69,636,581)
-----------------------------
Net increase (decrease) ........... 1,628,610 $ 19,152,705
=============================
Year ended February 28, 2006
Shares sold ....................... 6,013,498 $ 71,413,227
Shares issued in reinvestment of
distributions .................... 967,950 11,496,122
Shares redeemed ................... (3,809,732) (45,216,114)
-----------------------------
Net increase (decrease) ........... 3,171,716 $ 37,693,235
=============================
Annual Report | 171
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
SHARES AMOUNT
----------------------------
CLASS C SHARES:
Year ended February 28, 2007
Shares sold ............................. 994,357 $ 11,800,411
Shares issued in reinvestment of
distributions .......................... 112,170 1,332,477
Shares redeemed ......................... (665,136) (7,898,865)
----------------------------
Net increase (decrease) ................. 441,391 $ 5,234,023
============================
Year ended February 28, 2006
Shares sold ............................. 1,182,646 $ 14,184,278
Shares issued in reinvestment of
distributions .......................... 96,582 1,157,963
Shares redeemed ......................... (608,289) (7,289,479)
----------------------------
Net increase (decrease) ................. 670,939 $ 8,052,762
============================
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 each of the Funds as follows:
- ------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% In excess of $20 billion
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets,
and is not an additional expense of the Funds.
172 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A
reimbursement distribution plans, the Funds reimburse Distributors for costs
incurred in connection with the servicing, sale and distribution of the Funds'
shares up to the maximum annual plan rate. Under the Class A reimbursement
distribution plans, costs exceeding the maximum for the current plan year
cannot be reimbursed in subsequent periods.
In addition, under the Funds' compensation distribution plans, the Funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
---------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA KENTUCKY
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------------------
Reimbursement Plans:
Class A ............... 0.10% 0.10% 0.10% 0.10%
Compensation Plans:
Class B ............... -- 0.65% -- --
Class C ............... 0.65% 0.65% 0.65% --
-----------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
LOUISIANA MARYLAND MISSOURI NORTH CAROLINA
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------------
Reimbursement Plans:
Class A ............... 0.10% 0.10% 0.10% 0.10%
Compensation Plans:
Class C ............... 0.65% 0.65% 0.65% 0.65%
------------
FRANKLIN
VIRGINIA
TAX-FREE
INCOME FUND
------------
Reimbursement Plans:
Class A ............... 0.10%
Compensation Plans:
Class C ............... 0.65%
Annual Report | 173
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
-----------------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ..................... $ 86,978 $ 270,499 $ 93,909
Contingent deferred sales charges retained ....... $ 447 $ 149,597 $ 6,974
-----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ..................... $ 61,559 $ 127,513 $ 199,979
Contingent deferred sales charges retained ....... $ -- $ 5,346 $ 18,365
-----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ..................... $ 306,262 $ 364,583 $ 184,391
Contingent deferred sales charges retained ....... $ 9,517 $ 18,659 $ 14,866
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were retained by Investor Services:
-----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------
Transfer agent fees ............................. $ 60,900 $ 321,019 $ 70,404
-----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------
Transfer agent fees ............................. $ 28,867 $ 49,753 $ 135,782
-----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------
Transfer agent fees ............................. $ 178,110 $ 150,996 $ 141,445
174 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
Advisers agreed in advance to voluntarily waive a portion of management fees
for the Franklin Kentucky Tax-Free Income Fund. Total expenses waived by
Advisers are not subject to reimbursement by the fund subsequent to the fund's
fiscal year end. Advisers may discontinue this waiver at any time.
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At February 28, 2007, the capital loss carryforwards were as
follows:
-------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA GEORGIA KENTUCKY
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------
Capital loss carryforwards expiring in:
2008 ................................ $ 298,563 $1,370,476 $ 252,252
2009 ................................ 135,955 833,999 --
2010 ................................ 7,179,861 -- 413,791
2011 ................................ 804,634 -- --
2012 ................................ 195,876 972,862 1,264,854
2013 ................................ -- 416,353 253,770
2014 ................................ -- 68,078 65,408
2015 ................................ -- 125,659 --
-------------------------------------------
$8,614,889 $3,787,427 $2,250,075
===========================================
-------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
LOUISIANA MARYLAND MISSOURI
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------
Capital loss carryforwards expiring in:
2008 ................................ $ 282,869 $ -- $ --
2009 ................................ 171,149 123,307 838,251
2010 ................................ -- 119,821 --
2011 ................................ -- -- 316,094
2012 ................................ 1,281,282 -- 1,619,914
2013 ................................ 240,220 727,384 1,384,535
-------------------------------------------
$1,975,520 $ 970,512 $4,158,794
===========================================
Annual Report | 175
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
----------------------------------
FRANKLIN FRANKLIN
NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------------
Capital loss carryforwards expiring in:
2008 ................................ $ -- $ 333,586
2009 ................................ 2,029,214 1,407,973
2010 ................................ -- 1,188,255
2012 ................................ 335,790 1,236,561
----------------------------------
$ 2,365,004 $ 4,166,375
==================================
During the year ended February 28, 2007, the Funds utilized capital loss
carryforwards as follows:
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------
Capital loss carryforwards utilized ... $600,749 $2,410,369 $ --
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------
Capital loss carryforwards utilized ... $53,277 $219,562 $490,952
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------
Capital loss carryforwards utilized ... $117,585 $989 $1,539,866
For tax purposes, realized capital losses, occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At February 28, 2007, the Franklin Georgia Tax-Free Income Fund
deferred realized capital losses of $1,516.
The tax character of distributions paid during the years ended February 28,
2007 and 2006, was as follows:
--------------------------------------------------------------
FRANKLIN ALABAMA FRANKLIN FLORIDA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
Distributions paid from -
tax exempt income ..... $11,432,364 $11,276,060 $76,572,401 $76,736,922
176 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
--------------------------------------------------------------
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
Distributions paid from -
tax exempt income .... $10,381,924 $9,286,487 $5,512,105 $4,888,713
--------------------------------------------------------------
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
Distributions paid from -
tax exempt income .... $9,418,813 $9,128,539 $18,917,087 $16,952,225
--------------------------------------------------------------
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
Distributions paid from -
tax exempt income .... $27,221,237 $25,679,628 $27,576,928 $23,080,856
----------------------------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
----------------------------
2007 2006
----------------------------
Distributions paid from -
tax exempt income $22,604,584 $21,414,040
----------------------------
At February 28, 2007, the cost of investments, net unrealized appreciation
(depreciation), undistributed tax exempt income and undistributed long term
capital gains 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 ...................... $ 273,239,892 $ 1,540,234,703 $ 253,750,147
=======================================================
Unrealized appreciation .................. $ 13,588,869 $ 113,200,192 $ 15,309,254
Unrealized depreciation .................. (3,497) (20,132) --
-------------------------------------------------------
Net unrealized appreciation (depreciation) $ 13,585,372 $ 113,180,060 $ 15,309,254
=======================================================
Undistributed tax exempt income .......... $ 76,594 $ 305,393 $ 214,118
Undistributed long term capital gains .... -- 1,342,248 --
-------------------------------------------------------
Distributable earnings ................... $ 76,594 $ 1,647,641 $ 214,118
=======================================================
Annual Report | 177
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------
Cost of investments ...................... $ 140,683,842 $ 235,515,755 $ 454,976,876
=====================================================
Unrealized appreciation .................. 6,740,900 $ 11,136,993 $ 22,227,782
Unrealized depreciation .................. -- (16,751) --
-----------------------------------------------------
Net unrealized appreciation (depreciation) 6,740,900 $ 11,120,242 $ 22,227,782
=====================================================
Distributable earnings - undistributed tax
exempt income .......................... $ 43,238 $ 96,546 $ 176,881
=====================================================
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------
Cost of investments ...................... $ 641,726,405 $ 700,060,387 $ 519,099,732
=====================================================
Unrealized appreciation .................. $ 35,985,587 $ 34,392,383 $ 26,665,872
Unrealized depreciation .................. (10,528) -- (27,378)
-----------------------------------------------------
Net unrealized appreciation (depreciation) $ 35,975,059 $ 34,392,383 $ 26,638,494
=====================================================
Distributable earnings - undistributed tax
exempt income .......................... $ 213,261 $ 99,012 $ 140,874
=====================================================
Net investment income differs for financial statement and tax purposes
primarily due to differing treatment of bond discounts.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and bond discounts.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended February 28, 2007, were as follows:
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------
Purchases ................................ $ 57,233,394 $ 116,745,949 $ 36,388,172
Sales .................................... $ 43,771,083 $ 195,628,537 $ 11,483,023
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------
Purchases ................................ $ 23,268,701 $ 46,739,968 $ 83,010,795
Sales .................................... $ 3,023,335 $ 12,582,770 $ 35,109,322
178 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT TRANSACTIONS (CONTINUED)
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-----------------------------------------------------
Purchases ................................ $ 172,638,277 $ 190,555,398 $ 72,306,713
Sales .................................... $ 126,796,922 $ 64,828,620 $ 45,164,154
6. CONCENTRATION OF RISK
Each of the Funds invests a large percentage of its total assets in
obligations of issuers within its respective state and U.S. territories. Such
concentration may subject the Funds to risks associated with industrial or
regional matters, and economic, political or legal developments occurring
within those states and U.S. territories.
7. OTHER CONSIDERATIONS
The Industrial Development Authority of the County of Bedford, Virginia
Industrial Development Revenue Bonds (Nekoosa Packaging Corporation Project),
Series 1998, maturing on December 1, 2025 (the "Bonds") held by Franklin
Virginia Tax-Free Income Fund (the "Virginia Fund"), has been informed of a
proposed adverse determination letter from the Internal Revenue Service
("IRS") in which the IRS indicated that the interest paid to bondholders of
the Bonds is not excludable from gross income. The Virginia Fund has been
holding the Bonds since February 1998 and has passed through the interest
earned on the Bonds to the shareholders of the Virginia Fund in the form of
non-taxable dividends during the holding period. Georgia-Pacific Corporation
(GP), the issuer of the Bonds, is contesting the IRS determination; however,
the ultimate outcome of this matter is unknown at this time. If GP were to
fail to obtain a favorable determination, the Virginia Fund could be subject
to tax expense plus interest, which is estimated to be approximately $722,000
at February 28, 2007. In various SEC filings, GP has stated that it will take
steps to ensure the bondholders will be made whole with respect to any
liability caused by the IRS determination. Based on GP's representations and
the uncertainty regarding the ultimate outcome of this matter, no liability
has been recorded on the Statement of Assets and Liabilities of the Virginia
Fund. The Trust's management believes that the final outcome of this matter
will not have a material adverse impact to the Virginia Fund and/or its
shareholders.
8. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), 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 ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements
Annual Report | 179
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. REGULATORY AND LITIGATION MATTERS (CONTINUED)
with certain of those regulators and governmental entities. Specifically, the
Company entered into settlements with the SEC, among others, concerning market
timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that
settlement and plan, was completed in September 2006. The Trust did not
participate in that settlement.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company
directors, fund directors, and employees, have been named in private lawsuits
(styled as shareholder class actions, or as derivative actions on behalf of
either the named funds or Franklin Resources, Inc.). The lawsuits relate to
the industry practices referenced above, as well as to allegedly excessive
commissions and advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the
eventual outcome of these lawsuits, nor whether they will have a material
negative impact on the Company. If it is determined that the Company bears
responsibility for any unlawful or inappropriate conduct that caused losses to
the Trust, it is committed to making the Trust or its shareholders whole, as
appropriate.
9. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net
asset value calculation in the first semi-annual reporting period in 2007. The
Funds are currently evaluating the impact, if any, of applying the various
provisions of FIN 48.
180 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. The Trust believes
the adoption of SFAS 157 will have no material impact on its financial
statements.
Annual Report | 181
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 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, Franklin Virginia Tax-Free Income Fund (separate portfolios of
Franklin Tax-Free Trust, hereafter referred to as the "Funds") at February 28,
2007, 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 five years in the
period then ended, 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, 2007 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 13, 2007
182 | Annual Report
Franklin Tax-Free Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code (Code), the Funds
designate 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended February 28, 2007. A
portion of the Funds' exempt-interest dividends may be subject to the federal
alternative minimum tax. In January 2008, shareholders will be notified of
amounts for use in preparing their 2007 income tax returns.
Under Section 852(b)(3)(C) of the Code, the Franklin Florida Tax-Free Income
Fund designates the maximum amount allowable but no less than $1,342,248 as a
long term capital gain dividend for the fiscal year ended February 28, 2007.
Annual Report | 183
Franklin Tax-Free Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth 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. Generally, each board
member serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1984 142 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)
- -----------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation) (exploration
San Mateo, CA 94403-1906 and refining of oil 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 (1929) Trustee Since 1984 116 Director, Center for Creative Land
One Franklin Parkway 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).
- --------------------------------------------------------------------------------------------------------------------------------
184 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2005 103 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation) (exploration
San Mateo, CA 94403-1906 and refining of oil and gas) and
Sentient Jet (private jet service); and
FORMERLY, Director, Becton Dickinson
and Company (medical technology),
Cooper Industries, Inc. (electrical
products and tools and hardware),
Health Net, Inc. (formerly, Foundation
Health) (integrated managed care),
The Hertz Corporation (car rental),
Pacific Southwest Airlines, The RCA
Corporation, Unicom (formerly,
Commonwealth Edison), UAL
Corporation (airlines) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation.
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Since 1984 142 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.; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41
of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 126 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.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 185
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (1959) 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.
- -----------------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (1965) 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 (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice
Vice President President -
- AML AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 30 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).
- -----------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
186 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton
Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 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).
- -----------------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company;
and officer of 30 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 187
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 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:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (1961) 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 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Prior to February 28, 2007 S. Joseph Fortunato and Gordon S. Macklin
ceased to be director of the Fund.
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.
188 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, the Board of Trustees ("Board"), including
a majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate tax-exempt funds within
the Trust (the "Fund(s)"). In reaching this decision, the Board took into
account information furnished throughout the year at regular Board meetings, as
well as information prepared specifically in connection with the annual renewal
review process. Information furnished and discussed throughout the year included
investment performance reports and related financial information for each Fund,
as well as periodic reports on shareholder services, legal, compliance, pricing
and other services provided by the Investment Manager ("Manager") and its
affiliates. Information furnished specifically in connection with the renewal
process included a report for each Fund prepared by Lipper, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper reports compared each Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager and its affiliates including management's
explanation of differences where relevant and a three-year expense analysis with
an explanation for any increase in expense ratios. Additional material
accompanying such report was a memorandum prepared by management describing
project initiatives and capital investments relating to the services provided to
the Funds by the Franklin Templeton Investments organization, as well as a
memorandum relating to economies of scale and a comparative analysis concerning
transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset
Annual Report | 189
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
value calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted that such systems and
procedures had functioned smoothly during the Florida hurricanes and blackouts
experienced in recent years. Consideration was also given to the experience of
each Fund's portfolio management team, the number of accounts managed and
general method of compensation. In this latter respect, the Board noted that a
primary factor in management's determination of a portfolio manager's bonus
compensation was the relative investment performance of the funds he or she
managed and that a portion of such bonus was required to be invested in a
pre-designated list of funds within such person's fund management area so as to
be aligned with the interests of Fund shareholders. The Board also took into
account the quality of transfer agent and shareholder services provided Fund
shareholders by an affiliate of the Manager, noting continuing expenditures by
management to increase and improve the scope of such services, periodic
favorable reports on such service conducted by third parties, the high industry
ranking given to the Franklin Templeton website and the firsthand experience of
individual members of the Board who deal with the shareholder services
department in their capacities as shareholders in one or more of the various
Franklin Templeton Funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of each Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each Fund showed its
investment performance or that of its Class A shares for Funds having multiple
share classes, in comparison to a performance universe selected by Lipper.
Comparative performance for each Fund was shown for the one-year period ended
December 31, 2006, and for additional periods ended that date up to ten years
depending on when a particular Fund commenced operations. Investment performance
was shown on an income return basis, as well as a total return basis for each
Fund. The Lipper reports showed that the income return for each Fund was either
in the highest quintile or second-highest quintile of its performance universe
during the one-year period, as well as during each of the previous year periods
shown on an annualized basis. The Lipper reports showed the total return for
each Fund to be in the upper half with most being in either the highest quintile
or second-highest quintile of their performance universe for the one-year period
with varying results for prior periods, depending on the particular Fund. The
Board expressed satisfaction with such performance, noting that the investment
objective of each of the Funds is to obtain a high level of tax-exempt income.
COMPARATIVE EXPENSES. Consideration was given to the management fee and total
expense ratios of each Fund in comparison with those of a group of funds
selected by Lipper as its appropriate Lipper expense group. Prior to making such
comparisons, the Board relied upon a survey
190 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
showing that the scope of services covered under a Fund's investment management
agreement was similar to those provided by fund managers to other mutual fund
groups. In reviewing comparative costs, emphasis was given to the contractual
investment management fee charged each Fund in comparison with the contractual
investment management fee that would have been charged by other funds within its
Lipper expense group assuming they were the same size as the Fund, as well as
the actual total expenses of the Fund in comparison with those of its Lipper
expense group. The Lipper contractual investment management fee analysis
includes an administrative charge as being part of the investment management
fee, and total expenses, for comparative consistency, are shown by Lipper for
fund Class A shares for funds having multiple share classes. The Lipper report
showed that the contractual investment management fee rate for each Fund, with
the exception of the Funds discussed below, was in the lower half of its Lipper
expense group and that the actual total expense rate for all Funds was in the
least expensive quintile of their respective Lipper expense groups. The
contractual investment management fee rates for Franklin Georgia Tax-Free Income
Fund, Franklin Louisiana Tax-Free Income Fund and Franklin Kentucky Tax-Free
Income Fund were all within six basis points of the median for their respective
Lipper expense groups. These Funds are among the smallest funds within Franklin
Tax-Free Trust and in the case of the smallest, being Franklin Kentucky Tax-Free
Income Fund, the Manager absorbed expenses so that the actual management fee
paid was below the contractual rate. Based on the above, the Board was satisfied
with the investment management fee and total expenses of each Fund in comparison
to its Lipper expense group as shown in the Lipper reports.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. Specific attention was given to the methodology
followed in allocating costs to each Fund, it being recognized that allocation
methodologies are inherently subjective and various allocation methodologies may
each be reasonable while producing different results. In this respect, the Board
noted that while being continuously refined and reflecting changes in the
Manager's own cost accounting, such allocation methodology was consistent with
that followed in profitability report presentations for the Funds made in prior
years and that the Funds' independent registered public accounting firm had been
engaged by the Manager to perform certain procedures on a biennial basis,
specified and approved by the Manager and the Funds' Board solely for their
purposes and use in reference to the profitability analysis. In reviewing and
discussing such analysis, management discussed with the Board its belief that
costs incurred in establishing the infrastructure necessary to the type of
mutual fund operations conducted by the Manager and its affiliates may not be
fully reflected in the expenses allocated to each Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Funds, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board
considered a third-party study comparing the profitability of the Manager's
Annual Report | 191
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
parent on an overall basis as compared to other publicly held managers broken
down to show profitability from management operations exclusive of distribution
expenses, as well as profitability including distribution expenses. The Board
also considered the extent to which the Manager and its affiliates might derive
ancillary benefits from fund operations, including interest in a joint venture
entity which financed up-front commissions paid to brokers/dealers who sold fund
Class B shares prior to February 2005, when the offering of such shares was
discontinued. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to each Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing any precise
determination is inherently subjective, the Board noted that based upon the Fund
profitability analysis, it appears that as some funds get larger, at some point
economies of scale do result in the Manager realizing a larger profit margin on
management services provided such fund. The Board also noted that any economies
of scale are shared with each of these Funds and their shareholders through
management fee breakpoints existing in each of the Funds' investment management
agreements, so that as a Fund grows in size, its effective management fee rate
declines. The fee structure under the investment management agreement with each
Fund provides an initial fee of 0.65% on the first $100 million of assets; 0.50%
on the next $150 million of assets; 0.45% on assets in excess of $250 million;
with additional breakpoints beginning at the $10 billion asset level thereafter.
In reviewing such structure, management stated its belief that this fee
structure reaches a relatively low rate quickly as a Fund grows and that such
low rate, in effect, reflects anticipated economies of scale as a Fund's assets
increase. In support of such position, management pointed out the favorable
effective management fee and total expense comparisons for each Fund within its
Lipper expense group as previously discussed under "Comparative Expenses." The
Board believed that to the extent economies of scale may be realized by the
Manager and its affiliates, the schedule of fees under the investment management
agreement for each Fund provided a sharing of benefits with the Fund and its
shareholders.
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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the 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.
192 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
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 | 193
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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 BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON 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 A2007 04/07
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007
- --------------------------------------------------------------------------------
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
Franklin Pennsylvania
Tax-Free Income Fund
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER TAX - FREE INCOME
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FRANKLIN TAX-FREE TRUST FASTER VIA EMAIL?
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment
disciplines that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among
what it believes are undervalued stocks, as well
as arbitrage situations and distressed
securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why
our funds can be used to build truly diversified
allocation plans covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as
well as the reliable, accurate and personal
service that has helped us become one of the
most trusted names in financial services.
- -------------------------------------------------------------------------------
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 ................................ 28
Franklin Double Tax-Free Income Fund ..................................... 36
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 ................................. 59
Franklin New Jersey Tax-Free Income Fund ................................. 69
Franklin Oregon Tax-Free Income Fund ..................................... 78
Franklin Pennsylvania Tax-Free Income Fund ............................... 86
Financial Highlights and Statements of Investments ....................... 95
Financial Statements ..................................................... 199
Notes to Financial Statements ............................................ 212
Report of Independent Registered Public Accounting Firm .................. 230
Tax Designation .......................................................... 231
Board Members and Officers ............................................... 232
Shareholder Information .................................................. 237
- --------------------------------------------------------------------------------
Annual Report
Municipal Bond Market Overview
For the 12 months ended February 28, 2007, the municipal bond market performed
well compared with the U.S. Treasury market despite Federal Reserve Board (Fed)
interest rate hikes, inflation concerns, volatile oil prices, mixed market
expectations and uncertainty regarding future economic growth. Over the year,
Treasury yields generally increased while municipal yields varied --shorter
maturities increased, intermediate maturities were fairly flat to slightly lower
and longer-term yields decreased. Municipal yields historically have trended
with Treasury yields; however, strong demand for municipal bonds from
traditional and non-traditional investors contributed to an unusual situation
for the year under review. Longer-term municipal yields declined as Treasury
yields rose, allowing municipal bonds to outperform Treasuries. The Lehman
Brothers Municipal Bond Index returned +4.96% for the period, while the Lehman
Brothers U.S. Treasury Index returned +4.78%. 1
During the reporting period, short-term interest rates increased as the Fed
raised the federal funds target rate from 4.50% to 5.25% in three successive
hikes from March through June 2006. Since then, the Fed maintained the
short-term rate at 5.25% with an inflation risk bias, stating it is more
concerned with a potential for increased inflation than a slowing economy.
Largely as a result, Treasury yields generally rose. Many market participants
appeared to expect that the Fed was more likely to lower the federal funds
target rate than raise it. This sentiment was reflected by a flat to slightly
inverted Treasury yield curve (spread between short-term and long-term yields)
during the reporting period. On February 28, 2007, the 2-year Treasury yielded
4.65%, the 10-year 4.56% and the 30-year 4.68%. Yield for the 2-year Treasury
dropped 3 basis points (100 basis points equal one percentage point), while
yields for the 10-year increased 1 basis point and the 30-year 17 basis points,
for the one-year period.
During the year, the yield curve was generally flat or inverted, nominal yields
were low and credit spreads (the difference in yield between higher-grade and
lower-grade securities) narrowed. In this environment, the interest rate premium
1. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Lehman Brothers U.S. Treasury Index includes public
obligations of the U.S. Treasury with a remaining maturity of one year or
more. All issues must have at least one year to final maturity regardless
of call features, have at least $250 million par amount outstanding and be
rated investment grade (Baa3 or better). They must also be dollar
denominated, nonconvertible and publicly issued.
Annual Report | 7
decreased for assuming additional risk in the fixed income market, and
non-traditional municipal buyers seemed to focus on the municipal bond market.
Non-traditional or cross-over buyers typically invest in taxable securities;
however, they will enter the municipal bond market when municipal valuations are
attractive. With historically favorable intermediate- and longer-term municipal
yields versus Treasury yields, and a positive sloping yield curve (though
flatter than usual), municipal bonds offered favorable relative value for
traditional and cross-over fixed income investors. As a result, demand was
consistently strong for intermediate- to longer-term municipal bonds over the
year, which drove performance and contributed to further flattening of the
municipal yield curve. Due to Fed tightening, short-term municipal yields
increased; however, strong demand for longer-term bonds resulted in declining
longer-term yields. According to Municipal Market Data, the 2-year municipal
yield rose 16 basis points during the period, while 10-year and 30-year yields
decreased 8 and 33 basis points. 2
Generally low interest rates continued to motivate municipal issuers to access
the debt market to finance their capital needs. In 2006, new issuance was
approximately $388 billion, which was the second-highest volume after the $408
billion issued in 2005. 3 Refunding deals, in which issuers take advantage of
lower rates to refinance higher yielding outstanding debt, declined in 2006 to
approximately $79 billion compared with $130 billion in 2005. 3 However,
issuance for new capital projects increased to approximately $260 billion in
2006 versus $222 billion in 2005. 3 As a result of narrowing credit spreads,
issuers also found it more advantageous to issue their debt without paying a
premium for bond insurance. In 2006, 49% of new bond issuance was insured
compared with 57% in 2005. 3 When credit spreads are narrow, the economic
benefit for issuers using insurance generally diminishes and bond insurers have
less flexibility in pricing. Strong demand from traditional buyers such as
mutual funds, individuals and insurance companies combined with large
participation of cross-over buyers enabled the municipal bond market to absorb
the comparatively large amount of new issuance through the year.
2. Source: Thomson Financial.
3. Source: THE BOND BUYER.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2007. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, 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 securities. 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 positive sloping municipal yield curve compared to Treasuries
favored the use of longer-term bonds. Consequently, we sought to purchase bonds
from 15 to 30 years in maturity with good call features for the long-term funds,
10 to 15 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
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 as high a level of income exempt from federal and Arizona
personal income taxes as is consistent with prudent investment management and
preservation of capital by investing at least 80% of its net assets in
securities that pay interest free from such taxes. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Arizona Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ............................................ 57.2%
AA ............................................. 10.1%
A .............................................. 8.0%
BBB ............................................ 22.4%
Not Rated by S&P ............................... 2.3%
* 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. below
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
AAA or Aaa 1.3% 0.2%
A 0.4% --
BBB or Baa 0.2% 0.2%
- ---------------------------------------------------------
Total 1.9% 0.4%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Arizona Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE SUMMARY
The Fund's Class A share price, as measured by net asset value, increased from
$11.09 on February 28, 2006, to $11.16 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 98.
10 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Arizona Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 2006 3.94 cents 3.43 cents 3.42 cents
- --------------------------------------------------------------------------------
April 2006 3.94 cents 3.43 cents 3.42 cents
- --------------------------------------------------------------------------------
May 2006 3.94 cents 3.43 cents 3.42 cents
- --------------------------------------------------------------------------------
June 2006 3.94 cents 3.44 cents 3.43 cents
- --------------------------------------------------------------------------------
July 2006 3.94 cents 3.44 cents 3.43 cents
- --------------------------------------------------------------------------------
August 2006 3.94 cents 3.44 cents 3.43 cents
- --------------------------------------------------------------------------------
September 2006 3.94 cents 3.45 cents 3.45 cents
- --------------------------------------------------------------------------------
October 2006 3.94 cents 3.45 cents 3.45 cents
- --------------------------------------------------------------------------------
November 2006 3.94 cents 3.45 cents 3.45 cents
- --------------------------------------------------------------------------------
December 2006 3.94 cents 3.43 cents 3.42 cents
- --------------------------------------------------------------------------------
January 2007 3.94 cents 3.43 cents 3.42 cents
- --------------------------------------------------------------------------------
February 2007 3.94 cents 3.43 cents 3.42 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 47.43 cents per share for the same
period. 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 4.05%
based on an annualization of the current 3.94 cent per share dividend and the
maximum offering price of $11.66 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Arizona personal income tax bracket of
37.95% would need to earn a distribution rate of 6.53% 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
In mid-2006, Arizona surpassed Nevada as the country's fastest-growing state in
terms of population. Employment growth improved, and the unemployment rate
dropped from 4.2% in February 2006 to 3.9% in February 2007 as manufacturing job
losses were offset by increases in construction and mining employment. 3 The
state's economy includes a mix of industries, including trade, government
services, professional and business services, education and health services, and
manufacturing. Construction activity was robust in recent years
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 27.1%
- --------------------------------------------------------------------------------
Hospital & Health Care 16.2%
- --------------------------------------------------------------------------------
Utilities 13.0%
- --------------------------------------------------------------------------------
Other Revenue 10.2%
- --------------------------------------------------------------------------------
General Obligation 9.1%
- --------------------------------------------------------------------------------
Higher Education 7.8%
- --------------------------------------------------------------------------------
Tax-Supported 5.9%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 4.8%
- --------------------------------------------------------------------------------
Transportation 4.7%
- --------------------------------------------------------------------------------
Housing 1.2%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
as single-family housing starts grew, and, despite a slowdown in housing starts
in 2006, construction employment continued to increase.
The state's revenue in fiscal year 2006 grew 20% over the prior year. The fiscal
year 2007 budget projected a $174 million ending general fund balance, or 1.7%
of budgeted general fund revenue, and included a $448 million reduction in
ongoing tax revenue due primarily to a 5% income tax cut and a three-year
elimination of the state's property tax. 4 The income tax cut is the first phase
of a total 10% income tax reduction to be implemented over two years. Total
general fund revenue for the first five months of fiscal year 2007 through
November 2006 increased 9% compared to the same period in fiscal year 2006, and
revenues came in 2.2% stronger than original forecasts. 4 However, the income
tax cut effects will not be realized until spring 2007.
Arizona, in accordance with its state constitution, cannot issue general
obligation bonds, and, therefore, has a low debt level. The state's overall debt
burden, including all tax-supported debt, was low at $563 per capita. 4
Per-capita income increased over the past several years; however, it remained
below the national average. According to Standard & Poor's, an independent
credit rating agency, Arizona's issuer credit rating is AA with a stable
outlook. 5 The rating and outlook reflected the state's diverse and expanding
economy with rapid population growth, an improved financial position in recent
years with anticipated stable reserve levels, and a low debt burden.
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 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, "State Review: Arizona," RATINGSDIRECT, 1/3/07.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
12| Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------
CLASS A (SYMBOL: FTAZX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $11.16 $11.09
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------
Dividend Income $0.4743
- ---------------------------------------------------------------------------------------
CLASS B (SYMBOL: FBAZX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $11.22 $11.15
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------
Dividend Income $0.4138
- ---------------------------------------------------------------------------------------
CLASS C (SYMBOL: FAZIX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $11.27 $11.20
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------
Dividend Income $0.4129
- ---------------------------------------------------------------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE
FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +5.05% +30.24% +64.59%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.60% +4.51% +4.65%
- -------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.91% +4.82% +4.74%
- -------------------------------------------------------------------------------------------------
Distribution Rate 4 4.05%
- -------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.53%
- -------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.43%
- -------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.53%
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.63%
- -------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.45% +26.67% +47.46%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.45% +4.51% +5.64%
- -------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.82% +4.84% +5.51%
- -------------------------------------------------------------------------------------------------
Distribution Rate 4 3.67%
- -------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.91%
- -------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.04%
- -------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.90%
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.18%
- -------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.42% +26.65% +55.99%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.42% +4.84% +4.55%
- -------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.88% +5.17% +4.62%
- -------------------------------------------------------------------------------------------------
Distribution Rate 4 3.64%
- -------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.87%
- -------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.05%
- -------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.92%
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.18%
- -------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Arizona Tax-Free Lehman Brothers
Date Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $ 9,574 $10,000 $10,000
3/31/1997 $ 9,465 $ 9,867 $10,025
4/30/1997 $ 9,544 $ 9,949 $10,038
5/31/1997 $ 9,658 $10,099 $10,031
6/30/1997 $ 9,747 $10,207 $10,044
7/31/1997 $ 9,974 $10,489 $10,056
8/31/1997 $ 9,906 $10,391 $10,075
9/30/1997 $10,013 $10,514 $10,100
10/31/1997 $10,068 $10,582 $10,125
11/30/1997 $10,131 $10,644 $10,119
12/31/1997 $10,262 $10,799 $10,107
1/31/1998 $10,344 $10,911 $10,125
2/28/1998 $10,355 $10,914 $10,144
3/31/1998 $10,354 $10,924 $10,163
4/30/1998 $10,336 $10,875 $10,182
5/31/1998 $10,464 $11,047 $10,201
6/30/1998 $10,496 $11,090 $10,213
7/31/1998 $10,524 $11,118 $10,226
8/31/1998 $10,654 $11,290 $10,238
9/30/1998 $10,783 $11,430 $10,251
10/31/1998 $10,771 $11,430 $10,276
11/30/1998 $10,807 $11,470 $10,276
12/31/1998 $10,820 $11,499 $10,269
1/31/1999 $10,932 $11,636 $10,294
2/28/1999 $10,892 $11,585 $10,307
3/31/1999 $10,928 $11,601 $10,338
4/30/1999 $10,944 $11,630 $10,414
5/31/1999 $10,903 $11,563 $10,414
6/30/1999 $10,740 $11,396 $10,414
7/31/1999 $10,767 $11,438 $10,445
8/31/1999 $10,627 $11,346 $10,470
9/30/1999 $10,615 $11,351 $10,520
10/31/1999 $10,424 $11,228 $10,539
11/30/1999 $10,501 $11,347 $10,545
12/31/1999 $10,398 $11,263 $10,545
1/31/2000 $10,315 $11,214 $10,576
2/29/2000 $10,434 $11,344 $10,639
3/31/2000 $10,685 $11,592 $10,727
4/30/2000 $10,621 $11,523 $10,733
5/31/2000 $10,558 $11,463 $10,746
6/30/2000 $10,812 $11,767 $10,802
7/31/2000 $10,965 $11,931 $10,827
8/31/2000 $11,139 $12,115 $10,827
9/30/2000 $11,084 $12,052 $10,883
10/31/2000 $11,197 $12,183 $10,902
11/30/2000 $11,268 $12,275 $10,909
12/31/2000 $11,476 $12,579 $10,902
1/31/2001 $11,527 $12,703 $10,971
2/28/2001 $11,567 $12,744 $11,015
3/31/2001 $11,649 $12,858 $11,040
4/30/2001 $11,539 $12,719 $11,084
5/31/2001 $11,633 $12,855 $11,134
6/30/2001 $11,749 $12,941 $11,153
7/31/2001 $11,953 $13,133 $11,122
8/31/2001 $12,103 $13,350 $11,122
9/30/2001 $12,043 $13,305 $11,172
10/31/2001 $12,094 $13,463 $11,134
11/30/2001 $11,923 $13,350 $11,115
12/31/2001 $11,819 $13,223 $11,071
1/31/2002 $11,948 $13,453 $11,096
2/28/2002 $12,101 $13,615 $11,140
3/31/2002 $11,882 $13,348 $11,203
4/30/2002 $12,058 $13,609 $11,266
5/31/2002 $12,098 $13,692 $11,266
6/30/2002 $12,207 $13,836 $11,272
7/31/2002 $12,362 $14,014 $11,284
8/31/2002 $12,506 $14,183 $11,322
9/30/2002 $12,800 $14,494 $11,341
10/31/2002 $12,551 $14,253 $11,360
11/30/2002 $12,486 $14,194 $11,360
12/31/2002 $12,725 $14,494 $11,335
1/31/2003 $12,682 $14,457 $11,385
2/28/2003 $12,863 $14,659 $11,472
3/31/2003 $12,879 $14,668 $11,541
4/30/2003 $12,967 $14,765 $11,516
5/31/2003 $13,281 $15,110 $11,497
6/30/2003 $13,273 $15,046 $11,510
7/31/2003 $12,807 $14,520 $11,523
8/31/2003 $12,908 $14,628 $11,566
9/30/2003 $13,288 $15,058 $11,604
10/31/2003 $13,244 $14,982 $11,591
11/30/2003 $13,407 $15,138 $11,560
12/31/2003 $13,532 $15,264 $11,548
1/31/2004 $13,683 $15,351 $11,604
2/29/2004 $13,896 $15,582 $11,667
3/31/2004 $13,873 $15,528 $11,742
4/30/2004 $13,502 $15,160 $11,779
5/31/2004 $13,418 $15,105 $11,848
6/30/2004 $13,483 $15,160 $11,886
7/31/2004 $13,736 $15,360 $11,867
8/31/2004 $14,016 $15,667 $11,873
9/30/2004 $14,119 $15,751 $11,898
10/31/2004 $14,261 $15,886 $11,961
11/30/2004 $14,147 $15,755 $11,967
12/31/2004 $14,352 $15,947 $11,924
1/31/2005 $14,546 $16,096 $11,949
2/28/2005 $14,533 $16,043 $12,018
3/31/2005 $14,468 $15,942 $12,112
4/30/2005 $14,716 $16,193 $12,193
5/31/2005 $14,833 $16,308 $12,180
6/30/2005 $14,912 $16,409 $12,187
7/31/2005 $14,833 $16,335 $12,243
8/31/2005 $14,847 $16,500 $12,306
9/30/2005 $14,741 $16,388 $12,456
10/31/2005 $14,634 $16,289 $12,481
11/30/2005 $14,688 $16,367 $12,381
12/31/2005 $14,835 $16,508 $12,331
1/31/2006 $14,849 $16,552 $12,425
2/28/2006 $15,011 $16,664 $12,450
3/31/2006 $14,901 $16,549 $12,519
4/30/2006 $14,887 $16,543 $12,625
5/31/2006 $14,927 $16,617 $12,688
6/30/2006 $14,899 $16,554 $12,713
7/31/2006 $15,049 $16,751 $12,751
8/31/2006 $15,269 $17,000 $12,776
9/30/2006 $15,379 $17,118 $12,713
10/31/2006 $15,489 $17,225 $12,644
11/30/2006 $15,642 $17,369 $12,625
12/31/2006 $15,599 $17,307 $12,644
1/31/2007 $15,556 $17,263 $12,683
2/28/2007 $15,758 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS A 2/28/07
- -----------------------------------------
1-Year +0.60%
- -----------------------------------------
5-Year +4.51%
- -----------------------------------------
10-Year +4.65%
- -----------------------------------------
CLASS B (2/1/00-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Arizona Tax-free Lehman Brothers
Date Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,105 $10,116 $10,059
3/31/2000 $10,343 $10,337 $10,142
4/30/2000 $10,286 $10,276 $10,148
5/31/2000 $10,221 $10,223 $10,160
6/30/2000 $10,461 $10,494 $10,213
7/31/2000 $10,613 $10,640 $10,237
8/31/2000 $10,775 $10,804 $10,237
9/30/2000 $10,718 $10,747 $10,290
10/31/2000 $10,821 $10,865 $10,308
11/30/2000 $10,895 $10,947 $10,314
12/31/2000 $11,081 $11,217 $10,308
1/31/2001 $11,124 $11,328 $10,373
2/28/2001 $11,158 $11,364 $10,415
3/31/2001 $11,242 $11,466 $10,438
4/30/2001 $11,120 $11,342 $10,480
5/31/2001 $11,215 $11,464 $10,527
6/30/2001 $11,322 $11,541 $10,545
7/31/2001 $11,512 $11,712 $10,515
8/31/2001 $11,651 $11,905 $10,515
9/30/2001 $11,588 $11,865 $10,563
10/31/2001 $11,632 $12,006 $10,527
11/30/2001 $11,474 $11,905 $10,509
12/31/2001 $11,358 $11,792 $10,468
1/31/2002 $11,476 $11,997 $10,492
2/28/2002 $11,627 $12,141 $10,533
3/31/2002 $11,402 $11,903 $10,592
4/30/2002 $11,575 $12,136 $10,652
5/31/2002 $11,598 $12,210 $10,652
6/30/2002 $11,707 $12,339 $10,658
7/31/2002 $11,850 $12,498 $10,669
8/31/2002 $11,971 $12,648 $10,705
9/30/2002 $12,257 $12,925 $10,723
10/31/2002 $12,014 $12,711 $10,741
11/30/2002 $11,946 $12,658 $10,741
12/31/2002 $12,168 $12,925 $10,717
1/31/2003 $12,122 $12,892 $10,764
2/28/2003 $12,299 $13,072 $10,847
3/31/2003 $12,298 $13,080 $10,912
4/30/2003 $12,375 $13,167 $10,889
5/31/2003 $12,668 $13,475 $10,871
6/30/2003 $12,655 $13,418 $10,883
7/31/2003 $12,207 $12,948 $10,895
8/31/2003 $12,297 $13,045 $10,936
9/30/2003 $12,652 $13,428 $10,972
10/31/2003 $12,604 $13,361 $10,960
11/30/2003 $12,753 $13,500 $10,930
12/31/2003 $12,866 $13,612 $10,918
1/31/2004 $13,003 $13,690 $10,972
2/29/2004 $13,198 $13,896 $11,031
3/31/2004 $13,171 $13,847 $11,102
4/30/2004 $12,814 $13,519 $11,137
5/31/2004 $12,740 $13,470 $11,203
6/30/2004 $12,795 $13,519 $11,238
7/31/2004 $13,028 $13,697 $11,220
8/31/2004 $13,286 $13,972 $11,226
9/30/2004 $13,377 $14,046 $11,250
10/31/2004 $13,505 $14,167 $11,309
11/30/2004 $13,391 $14,050 $11,315
12/31/2004 $13,578 $14,221 $11,274
1/31/2005 $13,754 $14,354 $11,297
2/28/2005 $13,736 $14,307 $11,363
3/31/2005 $13,681 $14,216 $11,451
4/30/2005 $13,895 $14,441 $11,528
5/31/2005 $13,999 $14,543 $11,517
6/30/2005 $14,067 $14,633 $11,523
7/31/2005 $13,986 $14,567 $11,576
8/31/2005 $13,993 $14,714 $11,635
9/30/2005 $13,887 $14,615 $11,777
10/31/2005 $13,781 $14,526 $11,801
11/30/2005 $13,825 $14,596 $11,706
12/31/2005 $13,957 $14,721 $11,659
1/31/2006 $13,963 $14,761 $11,748
2/28/2006 $14,108 $14,860 $11,771
3/31/2006 $13,999 $14,758 $11,836
4/30/2006 $13,980 $14,752 $11,937
5/31/2006 $14,010 $14,818 $11,996
6/30/2006 $13,978 $14,762 $12,020
7/31/2006 $14,112 $14,938 $12,056
8/31/2006 $14,310 $15,160 $12,079
9/30/2006 $14,419 $15,265 $12,020
10/31/2006 $14,503 $15,361 $11,955
11/30/2006 $14,652 $15,489 $11,937
12/31/2006 $14,592 $15,434 $11,955
1/31/2007 $14,545 $15,395 $11,991
2/28/2007 $14,746 $15,597 $12,056
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B 2/28/07
- -----------------------------------------
1-Year +0.45%
- -----------------------------------------
5-Year +4.51%
- -----------------------------------------
Since Inception (2/1/00) +5.64%
- -----------------------------------------
Annual Report | 15
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS C 2/28/07
- -----------------------------------------
1-Year +3.42%
- -----------------------------------------
5-Year +4.84%
- -----------------------------------------
10-Year +4.55%
- -----------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Arizona Tax-free Lehman Brothers
Date Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,894 $ 9,867 $10,025
4/30/1997 $ 9,971 $ 9,949 $10,038
5/31/1997 $10,084 $10,099 $10,031
6/30/1997 $10,162 $10,207 $10,044
7/31/1997 $10,394 $10,489 $10,056
8/31/1997 $10,328 $10,391 $10,075
9/30/1997 $10,434 $10,514 $10,100
10/31/1997 $10,485 $10,582 $10,125
11/30/1997 $10,546 $10,644 $10,119
12/31/1997 $10,676 $10,799 $10,107
1/31/1998 $10,765 $10,911 $10,125
2/28/1998 $10,771 $10,914 $10,144
3/31/1998 $10,766 $10,924 $10,163
4/30/1998 $10,732 $10,875 $10,182
5/31/1998 $10,860 $11,047 $10,201
6/30/1998 $10,897 $11,090 $10,213
7/31/1998 $10,911 $11,118 $10,226
8/31/1998 $11,049 $11,290 $10,238
9/30/1998 $11,186 $11,430 $10,251
10/31/1998 $11,160 $11,430 $10,276
11/30/1998 $11,191 $11,470 $10,276
12/31/1998 $11,198 $11,499 $10,269
1/31/1999 $11,308 $11,636 $10,294
2/28/1999 $11,261 $11,585 $10,307
3/31/1999 $11,303 $11,601 $10,338
4/30/1999 $11,315 $11,630 $10,414
5/31/1999 $11,258 $11,563 $10,414
6/30/1999 $11,086 $11,396 $10,414
7/31/1999 $11,108 $11,438 $10,445
8/31/1999 $10,960 $11,346 $10,470
9/30/1999 $10,942 $11,351 $10,520
10/31/1999 $10,742 $11,228 $10,539
11/30/1999 $10,815 $11,347 $10,545
12/31/1999 $10,705 $11,263 $10,545
1/31/2000 $10,616 $11,214 $10,576
2/29/2000 $10,732 $11,344 $10,639
3/31/2000 $10,984 $11,592 $10,727
4/30/2000 $10,914 $11,523 $10,733
5/31/2000 $10,844 $11,463 $10,746
6/30/2000 $11,099 $11,767 $10,802
7/31/2000 $11,249 $11,931 $10,827
8/31/2000 $11,421 $12,115 $10,827
9/30/2000 $11,371 $12,052 $10,883
10/31/2000 $11,470 $12,183 $10,902
11/30/2000 $11,548 $12,275 $10,909
12/31/2000 $11,754 $12,579 $10,902
1/31/2001 $11,789 $12,703 $10,971
2/28/2001 $11,824 $12,744 $11,015
3/31/2001 $11,913 $12,858 $11,040
4/30/2001 $11,785 $12,719 $11,084
5/31/2001 $11,885 $12,855 $11,134
6/30/2001 $11,998 $12,941 $11,153
7/31/2001 $12,199 $13,133 $11,122
8/31/2001 $12,346 $13,350 $11,122
9/30/2001 $12,280 $13,305 $11,172
10/31/2001 $12,326 $13,463 $11,134
11/30/2001 $12,147 $13,350 $11,115
12/31/2001 $12,036 $13,223 $11,071
1/31/2002 $12,161 $13,453 $11,096
2/28/2002 $12,321 $13,615 $11,140
3/31/2002 $12,083 $13,348 $11,203
4/30/2002 $12,266 $13,609 $11,266
5/31/2002 $12,290 $13,692 $11,266
6/30/2002 $12,405 $13,836 $11,272
7/31/2002 $12,556 $14,014 $11,284
8/31/2002 $12,696 $14,183 $11,322
9/30/2002 $12,986 $14,494 $11,341
10/31/2002 $12,729 $14,253 $11,360
11/30/2002 $12,658 $14,194 $11,360
12/31/2002 $12,892 $14,494 $11,335
1/31/2003 $12,843 $14,457 $11,385
2/28/2003 $13,020 $14,659 $11,472
3/31/2003 $13,030 $14,668 $11,541
4/30/2003 $13,113 $14,765 $11,516
5/31/2003 $13,422 $15,110 $11,497
6/30/2003 $13,407 $15,046 $11,510
7/31/2003 $12,934 $14,520 $11,523
8/31/2003 $13,028 $14,628 $11,566
9/30/2003 $13,402 $15,058 $11,604
10/31/2003 $13,351 $14,982 $11,591
11/30/2003 $13,507 $15,138 $11,560
12/31/2003 $13,626 $15,264 $11,548
1/31/2004 $13,783 $15,351 $11,604
2/29/2004 $13,990 $15,582 $11,667
3/31/2004 $13,961 $15,528 $11,742
4/30/2004 $13,572 $15,160 $11,779
5/31/2004 $13,495 $15,105 $11,848
6/30/2004 $13,553 $15,160 $11,886
7/31/2004 $13,799 $15,360 $11,867
8/31/2004 $14,071 $15,667 $11,873
9/30/2004 $14,168 $15,751 $11,898
10/31/2004 $14,302 $15,886 $11,961
11/30/2004 $14,182 $15,755 $11,967
12/31/2004 $14,380 $15,947 $11,924
1/31/2005 $14,565 $16,096 $11,949
2/28/2005 $14,559 $16,043 $12,018
3/31/2005 $14,488 $15,942 $12,112
4/30/2005 $14,714 $16,193 $12,193
5/31/2005 $14,837 $16,308 $12,180
6/30/2005 $14,908 $16,409 $12,187
7/31/2005 $14,810 $16,335 $12,243
8/31/2005 $14,830 $16,500 $12,306
9/30/2005 $14,705 $16,388 $12,456
10/31/2005 $14,606 $16,289 $12,481
11/30/2005 $14,639 $16,367 $12,381
12/31/2005 $14,791 $16,508 $12,331
1/31/2006 $14,798 $16,552 $12,425
2/28/2006 $14,951 $16,664 $12,450
3/31/2006 $14,823 $16,549 $12,519
4/30/2006 $14,802 $16,543 $12,625
5/31/2006 $14,834 $16,617 $12,688
6/30/2006 $14,799 $16,554 $12,713
7/31/2006 $14,954 $16,751 $12,751
8/31/2006 $15,163 $17,000 $12,776
9/30/2006 $15,278 $17,118 $12,713
10/31/2006 $15,367 $17,225 $12,644
11/30/2006 $15,510 $17,369 $12,625
12/31/2006 $15,461 $17,307 $12,644
1/31/2007 $15,411 $17,263 $12,683
2/28/2007 $15,599 $17,490 $12,751
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Arizona
personal income tax rate of 37.95%, 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million. The
bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds with
floating rates and derivatives are excluded from the index. The index has
four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
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 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.20 $3.17
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.67 $3.16
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.30 $5.89
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.20 $5.94
- ----------------------------------------------------------------------------------------------------------------------------------
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: 1.17%; and C: 1.18%), 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 as high a level of income exempt from federal and Colorado
personal income taxes as is consistent with prudent investment management and
preservation of capital by investing at least 80% of its net assets in
securities that pay interest free from such taxes. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Colorado Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ......................................... 64.4%
AA .......................................... 8.1%
A ........................................... 6.6%
BBB ......................................... 6.2%
Not Rated by S&P ............................ 14.7%
* 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 8.9% -- --
AA or Aa 0.3% -- 0.1%
A 2.5% 0.1% --
BBB or Baa 1.9% 0.9% --
- --------------------------------------------------------------
Total 13.6% 1.0% 0.1%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Colorado Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE SUMMARY
The Fund's Class A share price, as measured by net asset value, increased from
$12.03 on February 28, 2006, to $12.10 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 106.
Annual Report | 19
DIVIDEND DISTRIBUTIONS 2
Franklin Colorado Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.40 cents 3.84 cents
- --------------------------------------------------------------------------------
April 2006 4.40 cents 3.84 cents
- --------------------------------------------------------------------------------
May 2006 4.40 cents 3.84 cents
- --------------------------------------------------------------------------------
June 2006 4.36 cents 3.82 cents
- --------------------------------------------------------------------------------
July 2006 4.36 cents 3.82 cents
- --------------------------------------------------------------------------------
August 2006 4.36 cents 3.82 cents
- --------------------------------------------------------------------------------
September 2006 4.36 cents 3.82 cents
- --------------------------------------------------------------------------------
October 2006 4.36 cents 3.82 cents
- --------------------------------------------------------------------------------
November 2006 4.28 cents 3.74 cents
- --------------------------------------------------------------------------------
December 2006 4.19 cents 3.63 cents
- --------------------------------------------------------------------------------
January 2007 4.19 cents 3.63 cents
- --------------------------------------------------------------------------------
February 2007 4.19 cents 3.63 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 51.95 cents per share for the same
period. 2 The Performance Summary beginning on page 23 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.98%
based on an annualization of the current 4.19 cent per share dividend and the
maximum offering price of $12.64 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Colorado personal income tax bracket of
38.01% would need to earn a distribution rate of 6.42% 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.
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.
STATE UPDATE
Colorado's growing population and workforce are well supported by a healthy and
diverse economy, the resulting employment and personal income growth, and
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
20 | Annual Report
relatively low costs of living and doing business. Although the high tech sector
continued to be weak, the state gained jobs in the financial services, health,
education, leisure, hospitality and construction industries. Colorado is a
wealthy state with per-capita income levels above the U.S. average.
Unemployment, at 3.8% in February 2007, was below the 4.5% national jobless
rate. 3
State general fund revenues increased 13.1% in fiscal year 2006 partly due to
strong economic growth. 4 The state's fiscal condition over the next several
years will also continue to benefit from voters' approval of Referendum C, which
suspended the state constitution's spending limit through 2010. Without this
greater budget flexibility to retain and spend additional revenues, Colorado
would have faced substantial tax refund requirements and associated budget cuts
because prior spending limit calculations were based on the amount of state
revenues collected at a recessionary low point in fiscal year 2003.
Constitutional prohibitions on general obligation debt have resulted in very low
debt levels. State tax-supported debt, consisting entirely of general fund lease
obligations, was about $346 million or $75 per capita. 4 Although state debt
issuance is expected to remain low, large transportation needs and deferred
capital maintenance funding left over from Colorado's recent economic
difficulties could increase the state's interest in issuing additional lease
obligation financing.
According to independent credit rating agency Standard & Poor's, Colorado's
general credit outlook is stable with a rating of AA, which reflects a favorable
trend of economic recovery, low debt burden and the state's history of mid-year
budget corrections. 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.
PORTFOLIO BREAKDOWN
Franklin Colorado Tax-Free Income Fund 2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 17.9%
- --------------------------------------------------------------------------------
Utilities 15.9%
- --------------------------------------------------------------------------------
Transportation 13.5%
- --------------------------------------------------------------------------------
General Obligation 13.1%
- --------------------------------------------------------------------------------
Hospital & Health Care 11.3%
- --------------------------------------------------------------------------------
Tax-Supported 9.8%
- --------------------------------------------------------------------------------
Higher Education 7.0%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 5.9%
- --------------------------------------------------------------------------------
Housing 3.7%
- --------------------------------------------------------------------------------
Corporate-Backed 1.9%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
3. Source: Bureau of Labor Statistics.
4. Source: Standard & Poor's, "Research: State Review: Colorado,"
RATINGSDIRECT, 10/25/06.
5. This does not indicate Standard & Poor's rating of the Fund.
Annual Report | 21
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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
22 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRCOX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.10 $12.03
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.5195
- ---------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FCOIX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.19 $12.12
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4533
- ---------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +5.04% +28.62% +68.44%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.61% +4.26% +4.90%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.79% +4.47% +4.97%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.98%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.42%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.38%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.45%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.69%
- ----------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.43% +25.14% +59.60%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.43% +4.59% +4.79%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.75% +4.82% +4.87%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.56%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.74%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.98%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.81%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.24%
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 23
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +0.61%
- ----------------------------------------------
5-Year +4.26%
- ----------------------------------------------
10-Year +4.90%
- ----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Colorado Tax-Free Lehman Brothers
Date Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------
3/1/1997 $ 9,578 $10,000 $10,000
3/31/1997 $ 9,468 $ 9,867 $10,025
4/30/1997 $ 9,546 $ 9,949 $10,038
5/31/1997 $ 9,656 $10,099 $10,031
6/30/1997 $ 9,759 $10,207 $10,044
7/31/1997 $10,003 $10,489 $10,056
8/31/1997 $ 9,916 $10,391 $10,075
9/30/1997 $10,051 $10,514 $10,100
10/31/1997 $10,112 $10,582 $10,125
11/30/1997 $10,181 $10,644 $10,119
12/31/1997 $10,331 $10,799 $10,107
1/31/1998 $10,435 $10,911 $10,125
2/28/1998 $10,428 $10,914 $10,144
3/31/1998 $10,447 $10,924 $10,163
4/30/1998 $10,414 $10,875 $10,182
5/31/1998 $10,572 $11,047 $10,201
6/30/1998 $10,615 $11,090 $10,213
7/31/1998 $10,632 $11,118 $10,226
8/31/1998 $10,765 $11,290 $10,238
9/30/1998 $10,889 $11,430 $10,251
10/31/1998 $10,863 $11,430 $10,276
11/30/1998 $10,907 $11,470 $10,276
12/31/1998 $10,922 $11,499 $10,269
1/31/1999 $11,022 $11,636 $10,294
2/28/1999 $10,977 $11,585 $10,307
3/31/1999 $11,013 $11,601 $10,338
4/30/1999 $11,021 $11,630 $10,414
5/31/1999 $10,956 $11,563 $10,414
6/30/1999 $10,800 $11,396 $10,414
7/31/1999 $10,809 $11,438 $10,445
8/31/1999 $10,659 $11,346 $10,470
9/30/1999 $10,640 $11,351 $10,520
10/31/1999 $10,452 $11,228 $10,539
11/30/1999 $10,555 $11,347 $10,545
12/31/1999 $10,431 $11,263 $10,545
1/31/2000 $10,326 $11,214 $10,576
2/29/2000 $10,469 $11,344 $10,639
3/31/2000 $10,747 $11,592 $10,727
4/30/2000 $10,679 $11,523 $10,733
5/31/2000 $10,602 $11,463 $10,746
6/30/2000 $10,883 $11,767 $10,802
7/31/2000 $11,020 $11,931 $10,827
8/31/2000 $11,196 $12,115 $10,827
9/30/2000 $11,117 $12,052 $10,883
10/31/2000 $11,245 $12,183 $10,902
11/30/2000 $11,335 $12,275 $10,909
12/31/2000 $11,644 $12,579 $10,902
1/31/2001 $11,734 $12,703 $10,971
2/28/2001 $11,784 $12,744 $11,015
3/31/2001 $11,874 $12,858 $11,040
4/30/2001 $11,792 $12,719 $11,084
5/31/2001 $11,893 $12,855 $11,134
6/30/2001 $12,036 $12,941 $11,153
7/31/2001 $12,231 $13,133 $11,122
8/31/2001 $12,438 $13,350 $11,122
9/30/2001 $12,342 $13,305 $11,172
10/31/2001 $12,476 $13,463 $11,134
11/30/2001 $12,380 $13,350 $11,115
12/31/2001 $12,232 $13,223 $11,071
1/31/2002 $12,430 $13,453 $11,096
2/28/2002 $12,546 $13,615 $11,140
3/31/2002 $12,373 $13,348 $11,203
4/30/2002 $12,532 $13,609 $11,266
5/31/2002 $12,606 $13,692 $11,266
6/30/2002 $12,723 $13,836 $11,272
7/31/2002 $12,873 $14,014 $11,284
8/31/2002 $12,991 $14,183 $11,322
9/30/2002 $13,294 $14,494 $11,341
10/31/2002 $13,007 $14,253 $11,360
11/30/2002 $12,949 $14,194 $11,360
12/31/2002 $13,222 $14,494 $11,335
1/31/2003 $13,185 $14,457 $11,385
2/28/2003 $13,379 $14,659 $11,472
3/31/2003 $13,351 $14,668 $11,541
4/30/2003 $13,446 $14,765 $11,516
5/31/2003 $13,755 $15,110 $11,497
6/30/2003 $13,703 $15,046 $11,510
7/31/2003 $13,219 $14,520 $11,523
8/31/2003 $13,338 $14,628 $11,566
9/30/2003 $13,709 $15,058 $11,604
10/31/2003 $13,623 $14,982 $11,591
11/30/2003 $13,778 $15,138 $11,560
12/31/2003 $13,911 $15,264 $11,548
1/31/2004 $14,021 $15,351 $11,604
2/29/2004 $14,236 $15,582 $11,667
3/31/2004 $14,195 $15,528 $11,742
4/30/2004 $13,837 $15,160 $11,779
5/31/2004 $13,785 $15,105 $11,848
6/30/2004 $13,815 $15,160 $11,886
7/31/2004 $14,023 $15,360 $11,867
8/31/2004 $14,267 $15,667 $11,873
9/30/2004 $14,357 $15,751 $11,898
10/31/2004 $14,495 $15,886 $11,961
11/30/2004 $14,369 $15,755 $11,967
12/31/2004 $14,581 $15,947 $11,924
1/31/2005 $14,769 $16,096 $11,949
2/28/2005 $14,714 $16,043 $12,018
3/31/2005 $14,671 $15,942 $12,112
4/30/2005 $14,898 $16,193 $12,193
5/31/2005 $15,002 $16,308 $12,180
6/30/2005 $15,070 $16,409 $12,187
7/31/2005 $15,026 $16,335 $12,243
8/31/2005 $15,181 $16,500 $12,306
9/30/2005 $15,087 $16,388 $12,456
10/31/2005 $14,992 $16,289 $12,481
11/30/2005 $15,073 $16,367 $12,381
12/31/2005 $15,218 $16,508 $12,331
1/31/2006 $15,236 $16,552 $12,425
2/28/2006 $15,369 $16,664 $12,450
3/31/2006 $15,271 $16,549 $12,519
4/30/2006 $15,263 $16,543 $12,625
5/31/2006 $15,307 $16,617 $12,688
6/30/2006 $15,260 $16,554 $12,713
7/31/2006 $15,420 $16,751 $12,751
8/31/2006 $15,646 $17,000 $12,776
9/30/2006 $15,756 $17,118 $12,713
10/31/2006 $15,866 $17,225 $12,644
11/30/2006 $16,027 $17,369 $12,625
12/31/2006 $15,964 $17,307 $12,644
1/31/2007 $15,940 $17,263 $12,683
2/28/2007 $16,133 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +3.43%
- ----------------------------------------------
5-Year +4.59%
- ----------------------------------------------
10-Year +4.79%
- ----------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Colorado Tax-Free Lehman Brothers
Date Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,881 $ 9,867 $10,025
4/30/1997 $ 9,957 $ 9,949 $10,038
5/31/1997 $10,067 $10,099 $10,031
6/30/1997 $10,177 $10,207 $10,044
7/31/1997 $10,417 $10,489 $10,056
8/31/1997 $10,331 $10,391 $10,075
9/30/1997 $10,458 $10,514 $10,100
10/31/1997 $10,515 $10,582 $10,125
11/30/1997 $10,591 $10,644 $10,119
12/31/1997 $10,741 $10,799 $10,107
1/31/1998 $10,844 $10,911 $10,125
2/28/1998 $10,840 $10,914 $10,144
3/31/1998 $10,845 $10,924 $10,163
4/30/1998 $10,806 $10,875 $10,182
5/31/1998 $10,965 $11,047 $10,201
6/30/1998 $11,004 $11,090 $10,213
7/31/1998 $11,026 $11,118 $10,226
8/31/1998 $11,158 $11,290 $10,238
9/30/1998 $11,280 $11,430 $10,251
10/31/1998 $11,248 $11,430 $10,276
11/30/1998 $11,288 $11,470 $10,276
12/31/1998 $11,299 $11,499 $10,269
1/31/1999 $11,396 $11,636 $10,294
2/28/1999 $11,344 $11,585 $10,307
3/31/1999 $11,375 $11,601 $10,338
4/30/1999 $11,379 $11,630 $10,414
5/31/1999 $11,316 $11,563 $10,414
6/30/1999 $11,142 $11,396 $10,414
7/31/1999 $11,145 $11,438 $10,445
8/31/1999 $10,987 $11,346 $10,470
9/30/1999 $10,953 $11,351 $10,520
10/31/1999 $10,755 $11,228 $10,539
11/30/1999 $10,855 $11,347 $10,545
12/31/1999 $10,733 $11,263 $10,545
1/31/2000 $10,621 $11,214 $10,576
2/29/2000 $10,762 $11,344 $10,639
3/31/2000 $11,032 $11,592 $10,727
4/30/2000 $10,958 $11,523 $10,733
5/31/2000 $10,884 $11,463 $10,746
6/30/2000 $11,167 $11,767 $10,802
7/31/2000 $11,301 $11,931 $10,827
8/31/2000 $11,476 $12,115 $10,827
9/30/2000 $11,389 $12,052 $10,883
10/31/2000 $11,515 $12,183 $10,902
11/30/2000 $11,611 $12,275 $10,909
12/31/2000 $11,921 $12,579 $10,902
1/31/2001 $12,006 $12,703 $10,971
2/28/2001 $12,041 $12,744 $11,015
3/31/2001 $12,138 $12,858 $11,040
4/30/2001 $12,038 $12,719 $11,084
5/31/2001 $12,136 $12,855 $11,134
6/30/2001 $12,286 $12,941 $11,153
7/31/2001 $12,478 $13,133 $11,122
8/31/2001 $12,682 $13,350 $11,122
9/30/2001 $12,569 $13,305 $11,172
10/31/2001 $12,710 $13,463 $11,134
11/30/2001 $12,596 $13,350 $11,115
12/31/2001 $12,451 $13,223 $11,071
1/31/2002 $12,646 $13,453 $11,096
2/28/2002 $12,756 $13,615 $11,140
3/31/2002 $12,566 $13,348 $11,203
4/30/2002 $12,731 $13,609 $11,266
5/31/2002 $12,800 $13,692 $11,266
6/30/2002 $12,912 $13,836 $11,272
7/31/2002 $13,058 $14,014 $11,284
8/31/2002 $13,171 $14,183 $11,322
9/30/2002 $13,470 $14,494 $11,341
10/31/2002 $13,175 $14,253 $11,360
11/30/2002 $13,110 $14,194 $11,360
12/31/2002 $13,391 $14,494 $11,335
1/31/2003 $13,336 $14,457 $11,385
2/28/2003 $13,537 $14,659 $11,472
3/31/2003 $13,491 $14,668 $11,541
4/30/2003 $13,581 $14,765 $11,516
5/31/2003 $13,886 $15,110 $11,497
6/30/2003 $13,838 $15,046 $11,510
7/31/2003 $13,346 $14,520 $11,523
8/31/2003 $13,458 $14,628 $11,566
9/30/2003 $13,823 $15,058 $11,604
10/31/2003 $13,730 $14,982 $11,591
11/30/2003 $13,878 $15,138 $11,560
12/31/2003 $13,993 $15,264 $11,548
1/31/2004 $14,097 $15,351 $11,604
2/29/2004 $14,318 $15,582 $11,667
3/31/2004 $14,270 $15,528 $11,742
4/30/2004 $13,907 $15,160 $11,779
5/31/2004 $13,848 $15,105 $11,848
6/30/2004 $13,871 $15,160 $11,886
7/31/2004 $14,060 $15,360 $11,867
8/31/2004 $14,309 $15,667 $11,873
9/30/2004 $14,392 $15,751 $11,898
10/31/2004 $14,524 $15,886 $11,961
11/30/2004 $14,391 $15,755 $11,967
12/31/2004 $14,607 $15,947 $11,924
1/31/2005 $14,776 $16,096 $11,949
2/28/2005 $14,727 $16,043 $12,018
3/31/2005 $14,665 $15,942 $12,112
4/30/2005 $14,883 $16,193 $12,193
5/31/2005 $14,980 $16,308 $12,180
6/30/2005 $15,052 $16,409 $12,187
7/31/2005 $14,990 $16,335 $12,243
8/31/2005 $15,137 $16,500 $12,306
9/30/2005 $15,036 $16,388 $12,456
10/31/2005 $14,948 $16,289 $12,481
11/30/2005 $15,009 $16,367 $12,381
12/31/2005 $15,145 $16,508 $12,331
1/31/2006 $15,156 $16,552 $12,425
2/28/2006 $15,293 $16,664 $12,450
3/31/2006 $15,177 $16,549 $12,519
4/30/2006 $15,162 $16,543 $12,625
5/31/2006 $15,198 $16,617 $12,688
6/30/2006 $15,157 $16,554 $12,713
7/31/2006 $15,296 $16,751 $12,751
8/31/2006 $15,512 $17,000 $12,776
9/30/2006 $15,625 $17,118 $12,713
10/31/2006 $15,713 $17,225 $12,644
11/30/2006 $15,879 $17,369 $12,625
12/31/2006 $15,809 $17,307 $12,644
1/31/2007 $15,765 $17,263 $12,683
2/28/2007 $15,960 $17,490 $12,751
24 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Colorado
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
Annual Report | 25
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 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.30 $3.42
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.41
- ------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.10 $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 | 27
Franklin Connecticut Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Connecticut Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and Connecticut
personal income taxes as is consistent with prudent investment management and
preservation of capital by investing at least 80% of its net assets in
securities that pay interest free from such taxes. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Connecticut Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ......................................... 56.3%
AA .......................................... 16.9%
A ........................................... 3.2%
BBB ......................................... 15.6%
Below Investment Grade ...................... 1.4%
Not Rated by S&P ............................ 6.6%
* 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 5.0% --
BBB or Baa -- 0.3%
Below Investment Grade 1.3% --
- ------------------------------------------------
Total 6.3% 0.3%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Connecticut Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.10 on February 28, 2006, to $11.13 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 113.
28 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Connecticut Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 3.92 cents 3.40 cents
- --------------------------------------------------------------------------------
April 2006 3.92 cents 3.40 cents
- --------------------------------------------------------------------------------
May 2006 3.92 cents 3.40 cents
- --------------------------------------------------------------------------------
June 2006 3.92 cents 3.41 cents
- --------------------------------------------------------------------------------
July 2006 3.92 cents 3.41 cents
- --------------------------------------------------------------------------------
August 2006 3.92 cents 3.41 cents
- --------------------------------------------------------------------------------
September 2006 3.87 cents 3.37 cents
- --------------------------------------------------------------------------------
October 2006 3.87 cents 3.37 cents
- --------------------------------------------------------------------------------
November 2006 3.87 cents 3.37 cents
- --------------------------------------------------------------------------------
December 2006 3.86 cents 3.34 cents
- --------------------------------------------------------------------------------
January 2007 3.86 cents 3.34 cents
- --------------------------------------------------------------------------------
February 2007 3.86 cents 3.34 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 46.83 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 3.93%
based on an annualization of the current 3.81 cent per share dividend and the
maximum offering price of $11.62 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Connecticut personal income tax bracket
of 38.25% would need to earn a distribution rate of 6.36% 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.
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.
STATE UPDATE
Connecticut's economy is highly developed and urbanized, and the population
exhibits high wealth and income levels. Although the economy showed signs
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 Connecticut Tax-Free Income Fund 2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Utilities 21.0%
- --------------------------------------------------------------------------------
Higher Education 20.6%
- --------------------------------------------------------------------------------
Hospital & Health Care 18.9%
- --------------------------------------------------------------------------------
Prerefunded 14.0%
- --------------------------------------------------------------------------------
Other Revenue 9.0%
- --------------------------------------------------------------------------------
General Obligation 8.7%
- --------------------------------------------------------------------------------
Housing 3.3%
- --------------------------------------------------------------------------------
Transportation 1.9%
- --------------------------------------------------------------------------------
Tax-Supported 1.5%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 1.1%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
of recovery, job creation lagged the nation's and remained well below its peak
in 2000. The education and health services sectors led job growth, while the
trade, transportation and utilities sectors were weak. Manufacturing job losses
slowed, and the financial services industry showed steady job growth. In
February 2007, state unemployment was 4.2%, compared with the 4.5% national
rate. 3
Recent economic recovery contributed to Connecticut's improving financial
operations. Fiscal year 2007 exhibited strong tax revenue growth, as personal
and corporate taxes exceeded expectations. As of November 1, 2006, the state
projected that the general fund could end the current fiscal year with a $266
million surplus. 4 However, Connecticut could face additional spending pressures
from large, accrued, unfunded pension liabilities.
Connecticut's debt is significantly higher than historical levels. Net debt
equaled 6.0% of personal income and debt per capita was $2,973. 4 However, these
high debt levels are mitigated by the state's very high wealth levels and
above-average debt retirement.
Independent credit rating agency Standard & Poor's assigned the state's general
obligation bonds a rating of AA with a stable outlook, reflecting the state's
improving revenue trends, progress toward replenishing reserves and continuing
signs of economic recovery. 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.
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: State Review: Connecticut,"
RATINGSDIRECT, 12/1/06.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
30 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FXCTX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $ 11.13 $11.10
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4683
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCTIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $ 11.19 $ 11.15
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4066
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 1 +4.61% +27.54% +64.98%
- --------------------------------------------------------------------------------
Average Annual Total Return 2 +0.19% +4.08% +4.68%
- --------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.39% +4.41% +4.72%
- --------------------------------------------------------------------------------
Distribution Rate 4 3.93%
- --------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.36%
- --------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.38%
- --------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.47%
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.71%
- --------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 1 +4.10% +24.16% +56.39%
- --------------------------------------------------------------------------------
Average Annual Total Return 2 +3.10% +4.42% +4.57%
- --------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.27% +4.75% +4.62%
- --------------------------------------------------------------------------------
Distribution Rate 4 3.54%
- --------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.73%
- --------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.04%
- --------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.92%
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.26%
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +0.19%
- ----------------------------------------------
5-Year +4.08%
- ----------------------------------------------
10-Year +4.68%
- ----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Connecticut Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $ 9,579 $10,000 $10,000
3/31/1997 $ 9,502 $ 9,867 $10,025
4/30/1997 $ 9,565 $ 9,949 $10,038
5/31/1997 $ 9,691 $10,099 $10,031
6/30/1997 $ 9,780 $10,207 $10,044
7/31/1997 $10,004 $10,489 $10,056
8/31/1997 $ 9,941 $10,391 $10,075
9/30/1997 $10,049 $10,514 $10,100
10/31/1997 $10,094 $10,582 $10,125
11/30/1997 $10,167 $10,644 $10,119
12/31/1997 $10,295 $10,799 $10,107
1/31/1998 $10,378 $10,911 $10,125
2/28/1998 $10,406 $10,914 $10,144
3/31/1998 $10,414 $10,924 $10,163
4/30/1998 $10,422 $10,875 $10,182
5/31/1998 $10,552 $11,047 $10,201
6/30/1998 $10,597 $11,090 $10,213
7/31/1998 $10,633 $11,118 $10,226
8/31/1998 $10,745 $11,290 $10,238
9/30/1998 $10,848 $11,430 $10,251
10/31/1998 $10,836 $11,430 $10,276
11/30/1998 $10,873 $11,470 $10,276
12/31/1998 $10,910 $11,499 $10,269
1/31/1999 $11,024 $11,636 $10,294
2/28/1999 $10,993 $11,585 $10,307
3/31/1999 $11,019 $11,601 $10,338
4/30/1999 $11,015 $11,630 $10,414
5/31/1999 $10,972 $11,563 $10,414
6/30/1999 $10,791 $11,396 $10,414
7/31/1999 $10,817 $11,438 $10,445
8/31/1999 $10,654 $11,346 $10,470
9/30/1999 $10,630 $11,351 $10,520
10/31/1999 $10,435 $11,228 $10,539
11/30/1999 $10,512 $11,347 $10,545
12/31/1999 $10,376 $11,263 $10,545
1/31/2000 $10,250 $11,214 $10,576
2/29/2000 $10,339 $11,344 $10,639
3/31/2000 $10,612 $11,592 $10,727
4/30/2000 $10,536 $11,523 $10,733
5/31/2000 $10,460 $11,463 $10,746
6/30/2000 $10,727 $11,767 $10,802
7/31/2000 $10,870 $11,931 $10,827
8/31/2000 $11,046 $12,115 $10,827
9/30/2000 $10,989 $12,052 $10,883
10/31/2000 $11,102 $12,183 $10,902
11/30/2000 $11,184 $12,275 $10,909
12/31/2000 $11,405 $12,579 $10,902
1/31/2001 $11,465 $12,703 $10,971
2/28/2001 $11,526 $12,744 $11,015
3/31/2001 $11,641 $12,858 $11,040
4/30/2001 $11,516 $12,719 $11,084
5/31/2001 $11,654 $12,855 $11,134
6/30/2001 $11,746 $12,941 $11,153
7/31/2001 $11,972 $13,133 $11,122
8/31/2001 $12,188 $13,350 $11,122
9/30/2001 $12,103 $13,305 $11,172
10/31/2001 $12,287 $13,463 $11,134
11/30/2001 $12,168 $13,350 $11,115
12/31/2001 $12,047 $13,223 $11,071
1/31/2002 $12,243 $13,453 $11,096
2/28/2002 $12,394 $13,615 $11,140
3/31/2002 $12,158 $13,348 $11,203
4/30/2002 $12,367 $13,609 $11,266
5/31/2002 $12,429 $13,692 $11,266
6/30/2002 $12,547 $13,836 $11,272
7/31/2002 $12,724 $14,014 $11,284
8/31/2002 $12,868 $14,183 $11,322
9/30/2002 $13,175 $14,494 $11,341
10/31/2002 $12,886 $14,253 $11,360
11/30/2002 $12,830 $14,194 $11,360
12/31/2002 $13,105 $14,494 $11,335
1/31/2003 $13,072 $14,457 $11,385
2/28/2003 $13,252 $14,659 $11,472
3/31/2003 $13,254 $14,668 $11,541
4/30/2003 $13,340 $14,765 $11,516
5/31/2003 $13,667 $15,110 $11,497
6/30/2003 $13,608 $15,046 $11,510
7/31/2003 $12,990 $14,520 $11,523
8/31/2003 $13,052 $14,628 $11,566
9/30/2003 $13,371 $15,058 $11,604
10/31/2003 $13,311 $14,982 $11,591
11/30/2003 $13,472 $15,138 $11,560
12/31/2003 $13,583 $15,264 $11,548
1/31/2004 $13,657 $15,351 $11,604
2/29/2004 $13,881 $15,582 $11,667
3/31/2004 $13,880 $15,528 $11,742
4/30/2004 $13,504 $15,160 $11,779
5/31/2004 $13,454 $15,105 $11,848
6/30/2004 $13,543 $15,160 $11,886
7/31/2004 $13,758 $15,360 $11,867
8/31/2004 $14,000 $15,667 $11,873
9/30/2004 $14,102 $15,751 $11,898
10/31/2004 $14,243 $15,886 $11,961
11/30/2004 $14,153 $15,755 $11,967
12/31/2004 $14,334 $15,947 $11,924
1/31/2005 $14,515 $16,096 $11,949
2/28/2005 $14,490 $16,043 $12,018
3/31/2005 $14,438 $15,942 $12,112
4/30/2005 $14,661 $16,193 $12,193
5/31/2005 $14,766 $16,308 $12,180
6/30/2005 $14,832 $16,409 $12,187
7/31/2005 $14,806 $16,335 $12,243
8/31/2005 $14,953 $16,500 $12,306
9/30/2005 $14,848 $16,388 $12,456
10/31/2005 $14,781 $16,289 $12,481
11/30/2005 $14,848 $16,367 $12,381
12/31/2005 $14,983 $16,508 $12,331
1/31/2006 $15,010 $16,552 $12,425
2/28/2006 $15,119 $16,664 $12,450
3/31/2006 $15,023 $16,549 $12,519
4/30/2006 $15,049 $16,543 $12,625
5/31/2006 $15,075 $16,617 $12,688
6/30/2006 $15,033 $16,554 $12,713
7/31/2006 $15,184 $16,751 $12,751
8/31/2006 $15,391 $17,000 $12,776
9/30/2006 $15,486 $17,118 $12,713
10/31/2006 $15,568 $17,225 $12,644
11/30/2006 $15,707 $17,369 $12,625
12/31/2006 $15,663 $17,307 $12,644
1/31/2007 $15,632 $17,263 $12,683
2/28/2007 $15,803 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +3.10%
- ----------------------------------------------
5-Year +4.42%
- ----------------------------------------------
10-Year +4.57%
- ----------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Connecticut Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,914 $ 9,867 $10,025
4/30/1997 $ 9,976 $ 9,949 $10,038
5/31/1997 $10,102 $10,099 $10,031
6/30/1997 $10,199 $10,207 $10,044
7/31/1997 $10,418 $10,489 $10,056
8/31/1997 $10,348 $10,391 $10,075
9/30/1997 $10,465 $10,514 $10,100
10/31/1997 $10,497 $10,582 $10,125
11/30/1997 $10,578 $10,644 $10,119
12/31/1997 $10,705 $10,799 $10,107
1/31/1998 $10,786 $10,911 $10,125
2/28/1998 $10,810 $10,914 $10,144
3/31/1998 $10,813 $10,924 $10,163
4/30/1998 $10,817 $10,875 $10,182
5/31/1998 $10,946 $11,047 $10,201
6/30/1998 $10,988 $11,090 $10,213
7/31/1998 $11,020 $11,118 $10,226
8/31/1998 $11,131 $11,290 $10,238
9/30/1998 $11,232 $11,430 $10,251
10/31/1998 $11,215 $11,430 $10,276
11/30/1998 $11,247 $11,470 $10,276
12/31/1998 $11,280 $11,499 $10,269
1/31/1999 $11,392 $11,636 $10,294
2/28/1999 $11,355 $11,585 $10,307
3/31/1999 $11,376 $11,601 $10,338
4/30/1999 $11,377 $11,630 $10,414
5/31/1999 $11,317 $11,563 $10,414
6/30/1999 $11,126 $11,396 $10,414
7/31/1999 $11,157 $11,438 $10,445
8/31/1999 $10,975 $11,346 $10,470
9/30/1999 $10,945 $11,351 $10,520
10/31/1999 $10,740 $11,228 $10,539
11/30/1999 $10,814 $11,347 $10,545
12/31/1999 $10,670 $11,263 $10,545
1/31/2000 $10,535 $11,214 $10,576
2/29/2000 $10,632 $11,344 $10,639
3/31/2000 $10,907 $11,592 $10,727
4/30/2000 $10,824 $11,523 $10,733
5/31/2000 $10,731 $11,463 $10,746
6/30/2000 $11,000 $11,767 $10,802
7/31/2000 $11,141 $11,931 $10,827
8/31/2000 $11,315 $12,115 $10,827
9/30/2000 $11,252 $12,052 $10,883
10/31/2000 $11,362 $12,183 $10,902
11/30/2000 $11,441 $12,275 $10,909
12/31/2000 $11,661 $12,579 $10,902
1/31/2001 $11,717 $12,703 $10,971
2/28/2001 $11,774 $12,744 $11,015
3/31/2001 $11,885 $12,858 $11,040
4/30/2001 $11,753 $12,719 $11,084
5/31/2001 $11,898 $12,855 $11,134
6/30/2001 $11,987 $12,941 $11,153
7/31/2001 $12,211 $13,133 $11,122
8/31/2001 $12,425 $13,350 $11,122
9/30/2001 $12,333 $13,305 $11,172
10/31/2001 $12,514 $13,463 $11,134
11/30/2001 $12,387 $13,350 $11,115
12/31/2001 $12,260 $13,223 $11,071
1/31/2002 $12,452 $13,453 $11,096
2/28/2002 $12,599 $13,615 $11,140
3/31/2002 $12,354 $13,348 $11,203
4/30/2002 $12,560 $13,609 $11,266
5/31/2002 $12,616 $13,692 $11,266
6/30/2002 $12,731 $13,836 $11,272
7/31/2002 $12,904 $14,014 $11,284
8/31/2002 $13,043 $14,183 $11,322
9/30/2002 $13,347 $14,494 $11,341
10/31/2002 $13,062 $14,253 $11,360
11/30/2002 $13,000 $14,194 $11,360
12/31/2002 $13,260 $14,494 $11,335
1/31/2003 $13,220 $14,457 $11,385
2/28/2003 $13,408 $14,659 $11,472
3/31/2003 $13,392 $14,668 $11,541
4/30/2003 $13,472 $14,765 $11,516
5/31/2003 $13,795 $15,110 $11,497
6/30/2003 $13,740 $15,046 $11,510
7/31/2003 $13,100 $14,520 $11,523
8/31/2003 $13,156 $14,628 $11,566
9/30/2003 $13,470 $15,058 $11,604
10/31/2003 $13,403 $14,982 $11,591
11/30/2003 $13,570 $15,138 $11,560
12/31/2003 $13,676 $15,264 $11,548
1/31/2004 $13,744 $15,351 $11,604
2/29/2004 $13,963 $15,582 $11,667
3/31/2004 $13,943 $15,528 $11,742
4/30/2004 $13,573 $15,160 $11,779
5/31/2004 $13,517 $15,105 $11,848
6/30/2004 $13,598 $15,160 $11,886
7/31/2004 $13,794 $15,360 $11,867
8/31/2004 $14,041 $15,667 $11,873
9/30/2004 $14,124 $15,751 $11,898
10/31/2004 $14,271 $15,886 $11,961
11/30/2004 $14,175 $15,755 $11,967
12/31/2004 $14,349 $15,947 $11,924
1/31/2005 $14,523 $16,096 $11,949
2/28/2005 $14,490 $16,043 $12,018
3/31/2005 $14,432 $15,942 $12,112
4/30/2005 $14,647 $16,193 $12,193
5/31/2005 $14,745 $16,308 $12,180
6/30/2005 $14,817 $16,409 $12,187
7/31/2005 $14,785 $16,335 $12,243
8/31/2005 $14,910 $16,500 $12,306
9/30/2005 $14,813 $16,388 $12,456
10/31/2005 $14,727 $16,289 $12,481
11/30/2005 $14,787 $16,367 $12,381
12/31/2005 $14,914 $16,508 $12,331
1/31/2006 $14,934 $16,552 $12,425
2/28/2006 $15,035 $16,664 $12,450
3/31/2006 $14,946 $16,549 $12,519
4/30/2006 $14,951 $16,543 $12,625
5/31/2006 $14,984 $16,617 $12,688
6/30/2006 $14,935 $16,554 $12,713
7/31/2006 $15,063 $16,751 $12,751
8/31/2006 $15,261 $17,000 $12,776
9/30/2006 $15,348 $17,118 $12,713
10/31/2006 $15,436 $17,225 $12,644
11/30/2006 $15,566 $17,369 $12,625
12/31/2006 $15,515 $17,307 $12,644
1/31/2007 $15,464 $17,263 $12,683
2/28/2007 $15,639 $17,490 $12,751
32 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT
MAY INVEST A GREATER PORTION OF ITS ASSETS IN ONE ISSUER THAN A DIVERSIFIED
FUND. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Connecticut
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
Annual Report | 33
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 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.30 $3.52
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.32 $3.51
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.30 $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 | 35
Franklin Double Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Double Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and personal
income taxes of all 50 U.S. states as is consistent with prudent investment
management and preservation of capital by investing at least 80% of its net
assets in securities that pay interest free from such taxes. The Fund invests
primarily in debt securities issued by U.S territories such as Puerto Rico. 1
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Double Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- --------------------------------------------------------------------------------
AAA 43.6%
- --------------------------------------------------------------------------------
AA 5.3%
- --------------------------------------------------------------------------------
A 4.1%
- --------------------------------------------------------------------------------
BBB 41.7%
- --------------------------------------------------------------------------------
Below Investment Grade 0.5%
- --------------------------------------------------------------------------------
Not Rated by S&P 4.8%
- --------------------------------------------------------------------------------
* 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 2.2% 1.1% 0.9%
- ----------------------------------------------
Total 2.2% 1.1% 1.5%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Double Tax-Free Income Fund's annual report
for the fiscal year ended February 28, 2007.
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 119.
36 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Double Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.14 cents 3.58 cents
- --------------------------------------------------------------------------------
April 2006 4.14 cents 3.58 cents
- --------------------------------------------------------------------------------
May 2006 4.14 cents 3.58 cents
- --------------------------------------------------------------------------------
June 2006 4.14 cents 3.60 cents
- --------------------------------------------------------------------------------
July 2006 4.14 cents 3.60 cents
- --------------------------------------------------------------------------------
August 2006 4.14 cents 3.60 cents
- --------------------------------------------------------------------------------
September 2006 4.14 cents 3.61 cents
- --------------------------------------------------------------------------------
October 2006 4.14 cents 3.61 cents
- --------------------------------------------------------------------------------
November 2006 4.14 cents 3.61 cents
- --------------------------------------------------------------------------------
December 2006 4.14 cents 3.59 cents
- --------------------------------------------------------------------------------
January 2007 4.14 cents 3.59 cents
- --------------------------------------------------------------------------------
February 2007 4.14 cents 3.59 cents
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The Fund's Class A share price, as measured by net asset value, increased from
$11.98 on February 28, 2006, to $12.06 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 49.83 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 3.94% based on an
annualization of the current 4.14 cent per share dividend and the maximum
offering price of $12.60 on February 28, 2007. An investor in the 2007 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
6.06% 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.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 | 37
PORTFOLIO BREAKDOWN
Franklin Double Tax-Free Income Fund 2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 23.6%
- --------------------------------------------------------------------------------
Utilities 15.0%
- --------------------------------------------------------------------------------
Transportation 10.1%
- --------------------------------------------------------------------------------
General Obligation 9.6%
- --------------------------------------------------------------------------------
Higher Education 9.0%
- --------------------------------------------------------------------------------
Other Revenue 9.0%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 9.0%
- --------------------------------------------------------------------------------
Tax-Supported 7.0%
- --------------------------------------------------------------------------------
Housing 4.6%
- --------------------------------------------------------------------------------
Hospital & Health Care 2.9%
- --------------------------------------------------------------------------------
Corporate-Backed 0.2%
- --------------------------------------------------------------------------------
* 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.
Franklin Double Tax-Free Income Fund is the only mutual fund of its kind to
offer both state and federal income tax exemptions 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 95 different positions across 11 different
sectors as of February 28, 2007. Issuers represented in the portfolio included
Puerto Rico (80.1% of the Fund's total long-term investments), Virgin Islands
(14.2%) and Guam (5.7%).
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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
38 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FPRTX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $12.06 $11.98
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4983
- ---------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FPRIX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.10 $12.11 $12.01
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4328
- ---------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.97% +28.77% +69.64%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.52% +4.27% +4.97%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.97% +4.60% +5.05%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.94%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.06%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.43%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.28%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.71%
- ----------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.55% +25.52% +60.77%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.55% +4.65% +4.86%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.90% +4.94% +4.95%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.57%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.49%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.03%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.66%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.26%
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +0.52%
- ----------------------------------------------
5-Year +4.27%
- ----------------------------------------------
10-Year +4.97%
- ----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Double Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------
3/1/1997 $ 9,576 $10,000 $10,000
3/31/1997 $ 9,479 $ 9,867 $10,025
4/30/1997 $ 9,558 $ 9,949 $10,038
5/31/1997 $ 9,696 $10,099 $10,031
6/30/1997 $ 9,775 $10,207 $10,044
7/31/1997 $10,014 $10,489 $10,056
8/31/1997 $ 9,955 $10,391 $10,075
9/30/1997 $10,067 $10,514 $10,100
10/31/1997 $10,120 $10,582 $10,125
11/30/1997 $10,199 $10,644 $10,119
12/31/1997 $10,329 $10,799 $10,107
1/31/1998 $10,400 $10,911 $10,125
2/28/1998 $10,418 $10,914 $10,144
3/31/1998 $10,454 $10,924 $10,163
4/30/1998 $10,437 $10,875 $10,182
5/31/1998 $10,580 $11,047 $10,201
6/30/1998 $10,616 $11,090 $10,213
7/31/1998 $10,634 $11,118 $10,226
8/31/1998 $10,761 $11,290 $10,238
9/30/1998 $10,888 $11,430 $10,251
10/31/1998 $10,869 $11,430 $10,276
11/30/1998 $10,906 $11,470 $10,276
12/31/1998 $10,922 $11,499 $10,269
1/31/1999 $11,032 $11,636 $10,294
2/28/1999 $11,012 $11,585 $10,307
3/31/1999 $11,066 $11,601 $10,338
4/30/1999 $11,091 $11,630 $10,414
5/31/1999 $11,061 $11,563 $10,414
6/30/1999 $10,913 $11,396 $10,414
7/31/1999 $10,948 $11,438 $10,445
8/31/1999 $10,813 $11,346 $10,470
9/30/1999 $10,820 $11,351 $10,520
10/31/1999 $10,694 $11,228 $10,539
11/30/1999 $10,768 $11,347 $10,545
12/31/1999 $10,660 $11,263 $10,545
1/31/2000 $10,561 $11,214 $10,576
2/29/2000 $10,686 $11,344 $10,639
3/31/2000 $10,909 $11,592 $10,727
4/30/2000 $10,858 $11,523 $10,733
5/31/2000 $10,798 $11,463 $10,746
6/30/2000 $11,064 $11,767 $10,802
7/31/2000 $11,222 $11,931 $10,827
8/31/2000 $11,400 $12,115 $10,827
9/30/2000 $11,349 $12,052 $10,883
10/31/2000 $11,419 $12,183 $10,902
11/30/2000 $11,509 $12,275 $10,909
12/31/2000 $11,752 $12,579 $10,902
1/31/2001 $11,822 $12,703 $10,971
2/28/2001 $11,873 $12,744 $11,015
3/31/2001 $11,953 $12,858 $11,040
4/30/2001 $11,859 $12,719 $11,084
5/31/2001 $11,992 $12,855 $11,134
6/30/2001 $12,094 $12,941 $11,153
7/31/2001 $12,302 $13,133 $11,122
8/31/2001 $12,490 $13,350 $11,122
9/30/2001 $12,339 $13,305 $11,172
10/31/2001 $12,495 $13,463 $11,134
11/30/2001 $12,386 $13,350 $11,115
12/31/2001 $12,247 $13,223 $11,071
1/31/2002 $12,437 $13,453 $11,096
2/28/2002 $12,618 $13,615 $11,140
3/31/2002 $12,388 $13,348 $11,203
4/30/2002 $12,632 $13,609 $11,266
5/31/2002 $12,682 $13,692 $11,266
6/30/2002 $12,785 $13,836 $11,272
7/31/2002 $12,934 $14,014 $11,284
8/31/2002 $13,071 $14,183 $11,322
9/30/2002 $13,375 $14,494 $11,341
10/31/2002 $13,148 $14,253 $11,360
11/30/2002 $13,119 $14,194 $11,360
12/31/2002 $13,382 $14,494 $11,335
1/31/2003 $13,298 $14,457 $11,385
2/28/2003 $13,461 $14,659 $11,472
3/31/2003 $13,455 $14,668 $11,541
4/30/2003 $13,484 $14,765 $11,516
5/31/2003 $13,831 $15,110 $11,497
6/30/2003 $13,766 $15,046 $11,510
7/31/2003 $13,243 $14,520 $11,523
8/31/2003 $13,362 $14,628 $11,566
9/30/2003 $13,726 $15,058 $11,604
10/31/2003 $13,648 $14,982 $11,591
11/30/2003 $13,839 $15,138 $11,560
12/31/2003 $13,959 $15,264 $11,548
1/31/2004 $14,021 $15,351 $11,604
2/29/2004 $14,296 $15,582 $11,667
3/31/2004 $14,287 $15,528 $11,742
4/30/2004 $13,885 $15,160 $11,779
5/31/2004 $13,758 $15,105 $11,848
6/30/2004 $13,858 $15,160 $11,886
7/31/2004 $14,090 $15,360 $11,867
8/31/2004 $14,384 $15,667 $11,873
9/30/2004 $14,460 $15,751 $11,898
10/31/2004 $14,609 $15,886 $11,961
11/30/2004 $14,502 $15,755 $11,967
12/31/2004 $14,676 $15,947 $11,924
1/31/2005 $14,876 $16,096 $11,949
2/28/2005 $14,866 $16,043 $12,018
3/31/2005 $14,806 $15,942 $12,112
4/30/2005 $15,032 $16,193 $12,193
5/31/2005 $15,147 $16,308 $12,180
6/30/2005 $15,237 $16,409 $12,187
7/31/2005 $15,177 $16,335 $12,243
8/31/2005 $15,318 $16,500 $12,306
9/30/2005 $15,206 $16,388 $12,456
10/31/2005 $15,106 $16,289 $12,481
11/30/2005 $15,107 $16,367 $12,381
12/31/2005 $15,250 $16,508 $12,331
1/31/2006 $15,316 $16,552 $12,425
2/28/2006 $15,485 $16,664 $12,450
3/31/2006 $15,357 $16,549 $12,519
4/30/2006 $15,346 $16,543 $12,625
5/31/2006 $15,361 $16,617 $12,688
6/30/2006 $15,324 $16,554 $12,713
7/31/2006 $15,496 $16,751 $12,751
8/31/2006 $15,722 $17,000 $12,776
9/30/2006 $15,856 $17,118 $12,713
10/31/2006 $15,964 $17,225 $12,644
11/30/2006 $16,112 $17,369 $12,625
12/31/2006 $16,047 $17,307 $12,644
1/31/2007 $16,022 $17,263 $12,683
2/28/2007 $16,245 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +3.55%
- ----------------------------------------------
5-Year +4.65%
- ----------------------------------------------
10-Year +4.86%
- ----------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Double Lehman Brothers
Date Tax-free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,877 $ 9,867 $10,025
4/30/1997 $ 9,963 $ 9,949 $10,038
5/31/1997 $10,101 $10,099 $10,031
6/30/1997 $10,180 $10,207 $10,044
7/31/1997 $10,423 $10,489 $10,056
8/31/1997 $10,358 $10,391 $10,075
9/30/1997 $10,469 $10,514 $10,100
10/31/1997 $10,519 $10,582 $10,125
11/30/1997 $10,587 $10,644 $10,119
12/31/1997 $10,727 $10,799 $10,107
1/31/1998 $10,795 $10,911 $10,125
2/28/1998 $10,808 $10,914 $10,144
3/31/1998 $10,850 $10,924 $10,163
4/30/1998 $10,827 $10,875 $10,182
5/31/1998 $10,961 $11,047 $10,201
6/30/1998 $10,993 $11,090 $10,213
7/31/1998 $11,007 $11,118 $10,226
8/31/1998 $11,142 $11,290 $10,238
9/30/1998 $11,258 $11,430 $10,251
10/31/1998 $11,234 $11,430 $10,276
11/30/1998 $11,276 $11,470 $10,276
12/31/1998 $11,288 $11,499 $10,269
1/31/1999 $11,386 $11,636 $10,294
2/28/1999 $11,361 $11,585 $10,307
3/31/1999 $11,420 $11,601 $10,338
4/30/1999 $11,431 $11,630 $10,414
5/31/1999 $11,394 $11,563 $10,414
6/30/1999 $11,247 $11,396 $10,414
7/31/1999 $11,278 $11,438 $10,445
8/31/1999 $11,134 $11,346 $10,470
9/30/1999 $11,136 $11,351 $10,520
10/31/1999 $10,991 $11,228 $10,539
11/30/1999 $11,062 $11,347 $10,545
12/31/1999 $10,956 $11,263 $10,545
1/31/2000 $10,849 $11,214 $10,576
2/29/2000 $10,972 $11,344 $10,639
3/31/2000 $11,196 $11,592 $10,727
4/30/2000 $11,129 $11,523 $10,733
5/31/2000 $11,073 $11,463 $10,746
6/30/2000 $11,340 $11,767 $10,802
7/31/2000 $11,496 $11,931 $10,827
8/31/2000 $11,674 $12,115 $10,827
9/30/2000 $11,616 $12,052 $10,883
10/31/2000 $11,682 $12,183 $10,902
11/30/2000 $11,768 $12,275 $10,909
12/31/2000 $12,011 $12,579 $10,902
1/31/2001 $12,077 $12,703 $10,971
2/28/2001 $12,133 $12,744 $11,015
3/31/2001 $12,210 $12,858 $11,040
4/30/2001 $12,108 $12,719 $11,084
5/31/2001 $12,227 $12,855 $11,134
6/30/2001 $12,326 $12,941 $11,153
7/31/2001 $12,532 $13,133 $11,122
8/31/2001 $12,728 $13,350 $11,122
9/30/2001 $12,558 $13,305 $11,172
10/31/2001 $12,722 $13,463 $11,134
11/30/2001 $12,594 $13,350 $11,115
12/31/2001 $12,458 $13,223 $11,071
1/31/2002 $12,645 $13,453 $11,096
2/28/2002 $12,811 $13,615 $11,140
3/31/2002 $12,583 $13,348 $11,203
4/30/2002 $12,824 $13,609 $11,266
5/31/2002 $12,869 $13,692 $11,266
6/30/2002 $12,957 $13,836 $11,272
7/31/2002 $13,112 $14,014 $11,284
8/31/2002 $13,246 $14,183 $11,322
9/30/2002 $13,547 $14,494 $11,341
10/31/2002 $13,311 $14,253 $11,360
11/30/2002 $13,277 $14,194 $11,360
12/31/2002 $13,547 $14,494 $11,335
1/31/2003 $13,456 $14,457 $11,385
2/28/2003 $13,603 $14,659 $11,472
3/31/2003 $13,592 $14,668 $11,541
4/30/2003 $13,614 $14,765 $11,516
5/31/2003 $13,958 $15,110 $11,497
6/30/2003 $13,886 $15,046 $11,510
7/31/2003 $13,353 $14,520 $11,523
8/31/2003 $13,478 $14,628 $11,566
9/30/2003 $13,836 $15,058 $11,604
10/31/2003 $13,739 $14,982 $11,591
11/30/2003 $13,935 $15,138 $11,560
12/31/2003 $14,039 $15,264 $11,548
1/31/2004 $14,095 $15,351 $11,604
2/29/2004 $14,377 $15,582 $11,667
3/31/2004 $14,361 $15,528 $11,742
4/30/2004 $13,940 $15,160 $11,779
5/31/2004 $13,806 $15,105 $11,848
6/30/2004 $13,900 $15,160 $11,886
7/31/2004 $14,137 $15,360 $11,867
8/31/2004 $14,424 $15,667 $11,873
9/30/2004 $14,494 $15,751 $11,898
10/31/2004 $14,636 $15,886 $11,961
11/30/2004 $14,511 $15,755 $11,967
12/31/2004 $14,690 $15,947 $11,924
1/31/2005 $14,883 $16,096 $11,949
2/28/2005 $14,866 $16,043 $12,018
3/31/2005 $14,799 $15,942 $12,112
4/30/2005 $15,018 $16,193 $12,193
5/31/2005 $15,125 $16,308 $12,180
6/30/2005 $15,195 $16,409 $12,187
7/31/2005 $15,128 $16,335 $12,243
8/31/2005 $15,275 $16,500 $12,306
9/30/2005 $15,156 $16,388 $12,456
10/31/2005 $15,050 $16,289 $12,481
11/30/2005 $15,045 $16,367 $12,381
12/31/2005 $15,179 $16,508 $12,331
1/31/2006 $15,238 $16,552 $12,425
2/28/2006 $15,386 $16,664 $12,450
3/31/2006 $15,265 $16,549 $12,519
4/30/2006 $15,246 $16,543 $12,625
5/31/2006 $15,254 $16,617 $12,688
6/30/2006 $15,210 $16,554 $12,713
7/31/2006 $15,373 $16,751 $12,751
8/31/2006 $15,590 $17,000 $12,776
9/30/2006 $15,715 $17,118 $12,713
10/31/2006 $15,815 $17,225 $12,644
11/30/2006 $15,954 $17,369 $12,625
12/31/2006 $15,883 $17,307 $12,644
1/31/2007 $15,851 $17,263 $12,683
2/28/2007 $16,077 $17,490 $12,751
40 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the 2007 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
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 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.40 $3.53
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.32 $3.51
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.40 $6.30
- ----------------------------------------------------------------------------------------------------------------------------------
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 | 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 as high a level of income exempt from
federal income tax as is 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.1 The Fund maintains a
dollar-weighted average maturity (the time in which the debt must be repaid) of
3 to 10 years.
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Federal Intermediate-Term Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ......................................... 66.7%
AA .......................................... 8.0%
A ........................................... 4.2%
BBB ......................................... 7.7%
Below Investment Grade ...................... 1.3%
Not Rated by S&P ............................ 12.1%
* 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 8.7% -- 0.2%
AA or Aa 1.5% -- --
BBB or Baa 1.4% 0.3% --
- ---------------------------------------------------------------
Total 11.6% 0.3% 0.2%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Federal Intermediate-Term Tax-Free Income
Fund's annual report for the fiscal year ended February 28, 2007.
1. Dividends are generally subject to state and local taxes, if any. For
investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 125.
44 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Federal Intermediate-Term Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 3.45 cents 2.91 cents
- --------------------------------------------------------------------------------
April 2006 3.45 cents 2.91 cents
- --------------------------------------------------------------------------------
May 2006 3.45 cents 2.91 cents
- --------------------------------------------------------------------------------
June 2006 3.51 cents 2.99 cents
- --------------------------------------------------------------------------------
July 2006 3.51 cents 2.99 cents
- --------------------------------------------------------------------------------
August 2006 3.51 cents 2.99 cents
- --------------------------------------------------------------------------------
September 2006 3.51 cents 3.02 cents
- --------------------------------------------------------------------------------
October 2006 3.51 cents 3.02 cents
- --------------------------------------------------------------------------------
November 2006 3.51 cents 3.02 cents
- --------------------------------------------------------------------------------
December 2006 3.51 cents 2.98 cents
- --------------------------------------------------------------------------------
January 2007 3.51 cents 2.98 cents
- --------------------------------------------------------------------------------
February 2007 3.51 cents 2.98 cents
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The Fund's Class A share price, as measured by net asset value, increased from
$11.42 on February 28, 2006, to $11.47 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 42.09 cents per share for the same period. 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 3.59% based on an
annualization of the current 3.51 cent per share dividend and the maximum
offering price of $11.73 on February 28, 2007. An investor in the 2007 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
5.52% 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.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 30.1%
- --------------------------------------------------------------------------------
Utilities 23.2%
- --------------------------------------------------------------------------------
Prerefunded 9.6%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 8.2%
- --------------------------------------------------------------------------------
Hospital & Health Care 7.8%
- --------------------------------------------------------------------------------
Other Revenue 7.0%
- --------------------------------------------------------------------------------
Transportation 4.3%
- --------------------------------------------------------------------------------
Higher Education 4.1%
- --------------------------------------------------------------------------------
Tax-Supported 3.4%
- --------------------------------------------------------------------------------
Corporate-Backed 2.3%
- --------------------------------------------------------------------------------
* 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
46 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKITX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.05 $11.47 $11.42
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4209
- ---------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FCITX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.05 $11.49 $11.44
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.3583
- ---------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.22% +24.34% +60.36%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.90% +3.97% +4.60%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +2.59% +4.30% +4.67%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.59%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.52%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.28%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.05%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.69%
- ----------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 3-YEAR INCEPTION (7/1/03)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.65% +7.12% +10.28%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.65% +2.32% +2.71%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.29% +2.46% +2.55%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.10%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 4.77%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.80%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.31%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.24%
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +1.90%
- ----------------------------------------------
5-Year +3.97%
- ----------------------------------------------
10-Year +4.60%
- ----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Federal Lehman Brothers Municipal
Intermediate-Term Bond Index: 10-Year
Date Tax-Free Income Fund Component 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $ 9,777 $10,000 $10,000
3/31/1997 $ 9,683 $ 9,866 $10,025
4/30/1997 $ 9,761 $ 9,939 $10,038
5/31/1997 $ 9,820 $10,079 $10,031
6/30/1997 $ 9,934 $10,191 $10,044
7/31/1997 $10,158 $10,477 $10,056
8/31/1997 $10,108 $10,375 $10,075
9/30/1997 $10,187 $10,507 $10,100
10/31/1997 $10,239 $10,563 $10,125
11/30/1997 $10,300 $10,612 $10,119
12/31/1997 $10,434 $10,779 $10,107
1/31/1998 $10,559 $10,899 $10,125
2/28/1998 $10,562 $10,898 $10,144
3/31/1998 $10,566 $10,890 $10,163
4/30/1998 $10,551 $10,830 $10,182
5/31/1998 $10,687 $11,015 $10,201
6/30/1998 $10,719 $11,055 $10,213
7/31/1998 $10,752 $11,073 $10,226
8/31/1998 $10,871 $11,265 $10,238
9/30/1998 $10,980 $11,433 $10,251
10/31/1998 $10,975 $11,438 $10,276
11/30/1998 $11,008 $11,472 $10,276
12/31/1998 $11,039 $11,508 $10,269
1/31/1999 $11,168 $11,684 $10,294
2/28/1999 $11,111 $11,579 $10,307
3/31/1999 $11,112 $11,573 $10,338
4/30/1999 $11,153 $11,604 $10,414
5/31/1999 $11,095 $11,523 $10,414
6/30/1999 $10,967 $11,308 $10,414
7/31/1999 $10,998 $11,384 $10,445
8/31/1999 $10,930 $11,342 $10,470
9/30/1999 $10,952 $11,381 $10,520
10/31/1999 $10,834 $11,300 $10,539
11/30/1999 $10,897 $11,424 $10,545
12/31/1999 $10,829 $11,364 $10,545
1/31/2000 $10,760 $11,318 $10,576
2/29/2000 $10,835 $11,407 $10,639
3/31/2000 $11,003 $11,629 $10,727
4/30/2000 $10,954 $11,570 $10,733
5/31/2000 $10,885 $11,502 $10,746
6/30/2000 $11,086 $11,814 $10,802
7/31/2000 $11,205 $11,978 $10,827
8/31/2000 $11,376 $12,164 $10,827
9/30/2000 $11,359 $12,107 $10,883
10/31/2000 $11,447 $12,231 $10,902
11/30/2000 $11,483 $12,298 $10,909
12/31/2000 $11,636 $12,587 $10,902
1/31/2001 $11,768 $12,749 $10,971
2/28/2001 $11,826 $12,771 $11,015
3/31/2001 $11,916 $12,879 $11,040
4/30/2001 $11,865 $12,720 $11,084
5/31/2001 $11,988 $12,859 $11,134
6/30/2001 $12,067 $12,936 $11,153
7/31/2001 $12,225 $13,113 $11,122
8/31/2001 $12,416 $13,337 $11,122
9/30/2001 $12,408 $13,318 $11,172
10/31/2001 $12,522 $13,483 $11,134
11/30/2001 $12,414 $13,309 $11,115
12/31/2001 $12,281 $13,168 $11,071
1/31/2002 $12,451 $13,417 $11,096
2/28/2002 $12,611 $13,608 $11,140
3/31/2002 $12,396 $13,328 $11,203
4/30/2002 $12,646 $13,637 $11,266
5/31/2002 $12,715 $13,702 $11,266
6/30/2002 $12,886 $13,872 $11,272
7/31/2002 $13,024 $14,057 $11,284
8/31/2002 $13,151 $14,240 $11,322
9/30/2002 $13,417 $14,579 $11,341
10/31/2002 $13,184 $14,315 $11,360
11/30/2002 $13,102 $14,197 $11,360
12/31/2002 $13,382 $14,508 $11,335
1/31/2003 $13,321 $14,430 $11,385
2/28/2003 $13,554 $14,679 $11,472
3/31/2003 $13,563 $14,687 $11,541
4/30/2003 $13,667 $14,796 $11,516
5/31/2003 $14,045 $15,220 $11,497
6/30/2003 $13,957 $15,147 $11,510
7/31/2003 $13,365 $14,511 $11,523
8/31/2003 $13,493 $14,636 $11,566
9/30/2003 $13,933 $15,128 $11,604
10/31/2003 $13,820 $15,013 $11,591
11/30/2003 $13,959 $15,174 $11,560
12/31/2003 $14,099 $15,334 $11,548
1/31/2004 $14,165 $15,399 $11,604
2/29/2004 $14,416 $15,670 $11,667
3/31/2004 $14,311 $15,581 $11,742
4/30/2004 $13,923 $15,151 $11,779
5/31/2004 $13,917 $15,160 $11,848
6/30/2004 $13,961 $15,210 $11,886
7/31/2004 $14,153 $15,418 $11,867
8/31/2004 $14,445 $15,756 $11,873
9/30/2004 $14,514 $15,840 $11,898
10/31/2004 $14,634 $15,966 $11,961
11/30/2004 $14,452 $15,785 $11,967
12/31/2004 $14,622 $15,971 $11,924
1/31/2005 $14,729 $16,106 $11,949
2/28/2005 $14,634 $16,004 $12,018
3/31/2005 $14,500 $15,864 $12,112
4/30/2005 $14,774 $16,172 $12,193
5/31/2005 $14,869 $16,280 $12,180
6/30/2005 $14,939 $16,374 $12,187
7/31/2005 $14,816 $16,235 $12,243
8/31/2005 $14,977 $16,432 $12,306
9/30/2005 $14,854 $16,284 $12,456
10/31/2005 $14,742 $16,160 $12,481
11/30/2005 $14,813 $16,260 $12,381
12/31/2005 $14,937 $16,408 $12,331
1/31/2006 $14,969 $16,462 $12,425
2/28/2006 $15,054 $16,560 $12,450
3/31/2006 $14,914 $16,390 $12,519
4/30/2006 $14,894 $16,361 $12,625
5/31/2006 $14,966 $16,473 $12,688
6/30/2006 $14,906 $16,399 $12,713
7/31/2006 $15,087 $16,617 $12,751
8/31/2006 $15,321 $16,901 $12,776
9/30/2006 $15,436 $17,025 $12,713
10/31/2006 $15,510 $17,127 $12,644
11/30/2006 $15,625 $17,262 $12,625
12/31/2006 $15,551 $17,182 $12,644
1/31/2007 $15,490 $17,105 $12,683
2/28/2007 $15,678 $17,345 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +2.65%
- ----------------------------------------------
3-Year +2.32%
- ----------------------------------------------
Since Inception (7/1/03) +2.71%
- ----------------------------------------------
CLASS C (7/1/03-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Federal Lehman Brothers Municipal
Intermediate-Term Bond Index: 10-Year
Date Tax-Free Income Fund Component 8 CPI 8
- --------------------------------------------------------------------------------
7/1/2003 $10,000 $10,000 $10,000
7/31/2003 $ 9,570 $ 9,580 $10,011
8/31/2003 $ 9,665 $ 9,662 $10,049
9/30/2003 $ 9,967 $ 9,988 $10,082
10/31/2003 $ 9,890 $ 9,911 $10,071
11/30/2003 $ 9,977 $10,018 $10,044
12/31/2003 $10,072 $10,124 $10,033
1/31/2004 $10,115 $10,167 $10,082
2/29/2004 $10,289 $10,345 $10,136
3/31/2004 $10,209 $10,286 $10,201
4/30/2004 $ 9,928 $10,002 $10,234
5/31/2004 $ 9,919 $10,008 $10,294
6/30/2004 $ 9,945 $10,042 $10,327
7/31/2004 $10,086 $10,179 $10,310
8/31/2004 $10,290 $10,402 $10,316
9/30/2004 $10,334 $10,457 $10,338
10/31/2004 $10,414 $10,541 $10,392
11/30/2004 $10,271 $10,421 $10,397
12/31/2004 $10,396 $10,544 $10,359
1/31/2005 $10,467 $10,633 $10,381
2/28/2005 $10,395 $10,566 $10,441
3/31/2005 $10,295 $10,474 $10,523
4/30/2005 $10,484 $10,676 $10,593
5/31/2005 $10,538 $10,748 $10,582
6/30/2005 $10,592 $10,810 $10,588
7/31/2005 $10,500 $10,718 $10,637
8/31/2005 $10,609 $10,848 $10,691
9/30/2005 $10,516 $10,750 $10,822
10/31/2005 $10,433 $10,669 $10,844
11/30/2005 $10,478 $10,735 $10,757
12/31/2005 $10,561 $10,833 $10,713
1/31/2006 $10,579 $10,868 $10,795
2/28/2006 $10,634 $10,933 $10,817
3/31/2006 $10,530 $10,820 $10,876
4/30/2006 $10,511 $10,801 $10,969
5/31/2006 $10,557 $10,875 $11,023
6/30/2006 $10,510 $10,826 $11,045
7/31/2006 $10,632 $10,971 $11,078
8/31/2006 $10,792 $11,158 $11,100
9/30/2006 $10,858 $11,240 $11,045
10/31/2006 $10,916 $11,307 $10,985
11/30/2006 $10,992 $11,397 $10,969
12/31/2006 $10,934 $11,343 $10,985
1/31/2007 $10,877 $11,292 $11,019
2/28/2007 $11,028 $11,451 $11,078
48 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT
MAY INVEST A GREATER PORTION OF ITS ASSETS IN ONE ISSUER THAN A 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the 2007 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index: 10-Year Component 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
$7 million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds with
floating rates and derivatives are excluded from the index. The index has
four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
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 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.60 $3.46
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.37 $3.46
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,020.90 $6.21
- ----------------------------------------------------------------------------------------------------------
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 INVESTMENTS: Franklin Federal Limited-Term Tax-Free
Income Fund seeks to provide as high a level of income exempt from federal
income tax as is 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.1 The Fund maintains a dollar-weighted average
maturity (the time in which the debt must be repaid) of five years or less.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Federal Limited-Term Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ......................................... 51.1%
AA .......................................... 13.5%
A ........................................... 5.6%
BBB ......................................... 9.9%
Not Rated by S&P ............................ 19.9%
* 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 4.8% 6.5%
AA or Aa 8.6% --
- ------------------------------------------------------
Total 13.4% 6.5%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Federal Limited-Term Tax-Free Income Fund's
annual report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$9.91 on February 28, 2006, to $9.93 on February 28, 2007. The Fund's
1. Dividends are generally subject to state and local taxes, if any. For
investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 136.
52 | Annual Report
Class A shares paid dividends totaling 29.20 cents per share for the same
period. 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 3.07%. An
investor in the 2007 maximum federal income tax bracket of 35.00% would need to
earn a distribution rate of 4.72% 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.
Consistent with our investment strategy, 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 in the one- to five-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.
DIVIDEND DISTRIBUTIONS 2
Franklin Federal Limited-Term
Tax-Free Income Fund - Class A
- --------------------------------------------------------------------------------
MONTH DIVIDEND PER SHARE
- --------------------------------------------------------------------------------
March 2006 2.00 cents
- --------------------------------------------------------------------------------
April 2006 2.00 cents
- --------------------------------------------------------------------------------
May 2006 2.45 cents
- --------------------------------------------------------------------------------
June 2006 2.45 cents
- --------------------------------------------------------------------------------
July 2006 2.45 cents
- --------------------------------------------------------------------------------
August 2006 2.45 cents
- --------------------------------------------------------------------------------
September 2006 2.45 cents
- --------------------------------------------------------------------------------
October 2006 2.45 cents
- --------------------------------------------------------------------------------
November 2006 2.45 cents
- --------------------------------------------------------------------------------
December 2006 2.60 cents
- --------------------------------------------------------------------------------
January 2007 2.60 cents
- --------------------------------------------------------------------------------
February 2007 2.60 cents
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Federal Limited-Term
Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
General Obligation 27.2%
- --------------------------------------------------------------------------------
Other Revenue 22.4%
- --------------------------------------------------------------------------------
Hospital & Health Care 21.3%
- --------------------------------------------------------------------------------
Higher Education 9.2%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 8.1%
- --------------------------------------------------------------------------------
Tax-Supported 5.7%
- --------------------------------------------------------------------------------
Housing 3.0%
- --------------------------------------------------------------------------------
Utilities 1.6%
- --------------------------------------------------------------------------------
Transportation 1.5%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 53
Performance Summary as of 2/28/07
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FFTFX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.02 $9.93 $9.91
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $ 0.2920
- --------------------------------------------------------------------------------
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE.
THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------
CLASS A 1-YEAR 3-YEAR INCEPTION (9/2/03)
- ----------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.20% +4.62% +6.43%
- ----------------------------------------------------------------------------------------
Average Annual Total Return 3 +0.85% +0.76% +1.14%
- ----------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +1.21% +0.91% +1.19%
- ----------------------------------------------------------------------------------------
Distribution Rate 5 3.07%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 6 4.72%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield 7 3.03%
- ----------------------------------------------------------------------------------------
Taxable Equivalent Yield 6 4.66%
- ----------------------------------------------------------------------------------------
Total Annual Operating Expenses 8
- ----------------------------------------------------------------------------------------
Without Waiver 1.09%
- ----------------------------------------------------------------------------------------
With Waiver 0.50%
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
THE FUND'S MANAGER HAS AGREED IN ADVANCE TO VOLUNTARILY WAIVE OR LIMIT ITS FEES
AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND.
THE FUND'S MANAGER MAY END THIS ARRANGEMENT AT ANY TIME.
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.
CLASS A (9/2/03-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Federal Limited-Term Lehman Brothers Municipal Bond
Date Tax-Tree Income Fund Index: 5-Year Component 9 CPI 9
- --------------------------------------------------------------------------------------
9/2/2003 $ 9,775 $10,000 $10,000
9/30/2003 $ 9,853 $10,253 $10,033
10/31/2003 $ 9,834 $10,186 $10,022
11/30/2003 $ 9,853 $10,227 $ 9,995
12/31/2003 $ 9,863 $10,267 $ 9,984
1/31/2004 $ 9,883 $10,316 $10,033
2/29/2004 $ 9,942 $10,442 $10,087
3/31/2004 $ 9,924 $10,398 $10,152
4/30/2004 $ 9,837 $10,190 $10,184
5/31/2004 $ 9,799 $10,137 $10,244
6/30/2004 $ 9,810 $10,175 $10,276
7/31/2004 $ 9,871 $10,269 $10,260
8/31/2004 $ 9,962 $10,449 $10,265
9/30/2004 $ 9,973 $10,463 $10,287
10/31/2004 $ 9,994 $10,521 $10,341
11/30/2004 $ 9,956 $10,452 $10,347
12/31/2004 $ 9,989 $10,547 $10,309
1/31/2005 $ 9,981 $10,544 $10,330
2/28/2005 $ 9,954 $10,492 $10,390
3/31/2005 $ 9,929 $10,425 $10,471
4/30/2005 $ 9,973 $10,546 $10,542
5/31/2005 $ 9,989 $10,576 $10,531
6/30/2005 $10,024 $10,625 $10,536
7/31/2005 $10,001 $10,567 $10,585
8/31/2005 $10,028 $10,634 $10,639
9/30/2005 $10,025 $10,615 $10,769
10/31/2005 $10,012 $10,570 $10,791
11/30/2005 $10,020 $10,595 $10,704
12/31/2005 $10,049 $10,647 $10,661
1/31/2006 $10,068 $10,671 $10,742
2/28/2006 $10,077 $10,691 $10,764
3/31/2006 $10,066 $10,649 $10,823
4/30/2006 $10,087 $10,672 $10,915
5/31/2006 $10,112 $10,709 $10,970
6/30/2006 $10,116 $10,659 $10,991
7/31/2006 $10,162 $10,759 $11,024
8/31/2006 $10,228 $10,875 $11,046
9/30/2006 $10,274 $10,934 $10,991
10/31/2006 $10,300 $10,980 $10,932
11/30/2006 $10,335 $11,025 $10,915
12/31/2006 $10,342 $11,002 $10,932
1/31/2007 $10,337 $10,979 $10,965
2/28/2007 $10,404 $11,079 $11,024
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +0.85%
- ----------------------------------------------
3-Year +0.76%
- ----------------------------------------------
Since Inception (9/2/03) +1.14%
- ----------------------------------------------
Annual Report | 55
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. IN GENERAL, BONDS WITH LONGER MATURITIES ARE MORE SENSITIVE
TO INTEREST RATE CHANGES. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF
THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 2/1/06, these shares were offered without an initial sales
charge; thus actual total returns would have differed.
1. The Fund's manager and administrator have agreed in advance to waive a
portion of their management fees. If the manager and administrator 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 2.29%. The
manager and administrator may end this arrangement at any time upon notice
to the Fund's board.
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 2.60 cent per share
current monthly dividend and the maximum offering price of $10.16 on
2/28/07.
6. Taxable equivalent distribution rate and yield assume the 2007 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 2/28/07.
8. Figures are as stated in the Fund's prospectus current as of the date of
this report.
9. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index: 5-Year Component 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 $7 million and be issued as part of a transaction of at least $75
million. The bonds must be dated after 12/31/90, and must be at least one
year from their maturity date. Remarketed issues, taxable municipal bonds,
bonds with floating rates and derivatives are excluded from the index. The
index has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
56 | Annual Report
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 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 | 57
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.00 $2.52
- ------------------------------------------------------------------------------------------------------
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.
58 | Annual Report
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 securities that pay interest free from
such tax.1 The Fund currently invests primarily in securities rated BBB/Baa or
below (or comparable unrated securities). Its secondary goal is capital
appreciation to the extent possible and consistent with the Fund's principal
investment goal.
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin High Yield Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ................................... 29.1%
AA .................................... 7.1%
A ..................................... 5.5%
BBB ................................... 14.5%
Below Investment Grade ................ 14.0%
Not Rated by S&P ...................... 29.8%
* 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 3.3% -- 2.4%
AA or Aa 0.3% -- 0.5%
A 0.5% 0.3% 1.6%
BBB or Baa 1.3% 0.8% 3.5%
Below Investment Grade 2.9% -- 12.4%
- -----------------------------------------------------------
Total 8.3% 1.1% 20.4%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin High Yield Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
1. Dividends are generally subject to state and local taxes, if any. For
investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 143.
Annual Report | 59
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
DIVIDEND DISTRIBUTIONS 2
Franklin High Yield Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS
- --------------------------------------------------------------------------------
March 2006 4.38 cents 3.88 cents 3.87 cents 4.46 cents
- --------------------------------------------------------------------------------
April 2006 4.38 cents 3.88 cents 3.87 cents 4.46 cents
- --------------------------------------------------------------------------------
May 2006 4.38 cents 3.88 cents 3.87 cents 4.46 cents
- --------------------------------------------------------------------------------
June 2006 4.38 cents 3.88 cents 3.88 cents 4.46 cents
- --------------------------------------------------------------------------------
July 2006 4.38 cents 3.88 cents 3.88 cents 4.46 cents
- --------------------------------------------------------------------------------
August 2006 4.38 cents 3.88 cents 3.88 cents 4.46 cents
- --------------------------------------------------------------------------------
September 2006 4.38 cents 3.90 cents 3.90 cents 4.47 cents
- --------------------------------------------------------------------------------
October 2006 4.38 cents 3.90 cents 3.90 cents 4.47 cents
- --------------------------------------------------------------------------------
November 2006 4.38 cents 3.90 cents 3.90 cents 4.47 cents
- --------------------------------------------------------------------------------
December 2006 4.38 cents 3.87 cents 3.88 cents 4.47 cents
- --------------------------------------------------------------------------------
January 2007 4.38 cents 3.87 cents 3.88 cents 4.47 cents
- --------------------------------------------------------------------------------
February 2007 4.38 cents 3.87 cents 3.88 cents 4.47 cents
- --------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$10.83 on February 28, 2006, to $11.04 on February 28, 2007. The Fund's Class A
shares paid dividends totaling 52.72 cents per share for the same period.2 The
Performance Summary beginning on page 62 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.56% based on an
annualization of the current 4.38 cent per share dividend and the maximum
offering price of $11.53 on February 28, 2007. An investor in the 2007 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
7.02% 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.
2. Assumes shares were purchased and held for the entire accrual period, which
differs from the calendar month. 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.
60 | 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.
During the 12-month review period, spreads between short- and long-term bond
yields continued to tighten, and it was a challenging environment for us to find
value in credit-driven securities. We believed that investors were not
adequately compensated for the added credit risk with such tight spreads. As a
result, most of our purchases were in AAA-rated, insured bonds, and at fiscal
year-end, the Fund's average credit quality was A, the third-highest credit
tier.
During the period, the Fund continued to generate high, current, tax-free income
for its shareholders. Consistent with our strategy, the Fund did not use
leverage or credit derivatives to boost short-term returns and we were careful
to not overexpose the portfolio to any one credit sector. At period-end, we
believed the Fund was well-positioned for a change in yield spreads or interest
rates.
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.
PORTFOLIO BREAKDOWN
Franklin High Yield Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Utilities 19.7%
- --------------------------------------------------------------------------------
Prerefunded 17.1%
- --------------------------------------------------------------------------------
Hospital & Health Care 14.8%
- --------------------------------------------------------------------------------
Transportation 14.3%
- --------------------------------------------------------------------------------
Tax-Supported 13.3%
- --------------------------------------------------------------------------------
Corporate-Backed 5.2%
- --------------------------------------------------------------------------------
Other Revenue 4.7%
- --------------------------------------------------------------------------------
General Obligation 4.2%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 3.5%
- --------------------------------------------------------------------------------
Housing 2.1%
- --------------------------------------------------------------------------------
Higher Education 1.1%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 61
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRHIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.21 $11.04 $10.83
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5272
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FYIBX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.21 $11.11 $10.90
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4673
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FHYIX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.21 $11.16 $10.95
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4673
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FHYVX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.21 $11.06 $10.85
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.5375
- --------------------------------------------------------------------------------
62 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY;
ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.99% +36.39% +72.57%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.45% +5.48% +5.15%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +2.32% +5.61% +5.20%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 4.56%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 7.02%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.85%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.92%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.63%
- -----------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.36% +32.56% +44.74%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.36% +5.48% +4.64%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +2.36% +5.62% +4.55%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 4.17%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.42%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.47%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.34%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.18%
- -----------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.34% +32.66% +63.39%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.34% +5.81% +5.03%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +5.33% +5.93% +5.08%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 4.14%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.37%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.48%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.35%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.18%
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS 8 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.08% +36.47% +72.66%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +7.08% +6.42% +5.61%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +6.97% +6.54% +5.67%
- -----------------------------------------------------------------------------------------------
Distribution Rate 4 4.85%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 7.46%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.15%
- -----------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 6.38%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.53%
- -----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 63
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +2.45%
- ----------------------------------------------
5-Year +5.48%
- ----------------------------------------------
10-Year +5.15%
- ----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin High Yield Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 9 CPI 9
- --------------------------------------------------------------------
3/1/1997 $ 9,573 $10,000 $10,000
3/31/1997 $ 9,496 $ 9,867 $10,025
4/30/1997 $ 9,571 $ 9,949 $10,038
5/31/1997 $ 9,690 $10,099 $10,031
6/30/1997 $ 9,809 $10,207 $10,044
7/31/1997 $10,059 $10,489 $10,056
8/31/1997 $10,004 $10,391 $10,075
9/30/1997 $10,169 $10,514 $10,100
10/31/1997 $10,238 $10,582 $10,125
11/30/1997 $10,306 $10,644 $10,119
12/31/1997 $10,465 $10,799 $10,107
1/31/1998 $10,579 $10,911 $10,125
2/28/1998 $10,603 $10,914 $10,144
3/31/1998 $10,608 $10,924 $10,163
4/30/1998 $10,605 $10,875 $10,182
5/31/1998 $10,739 $11,047 $10,201
6/30/1998 $10,789 $11,090 $10,213
7/31/1998 $10,803 $11,118 $10,226
8/31/1998 $10,929 $11,290 $10,238
9/30/1998 $10,998 $11,430 $10,251
10/31/1998 $10,983 $11,430 $10,276
11/30/1998 $10,949 $11,470 $10,276
12/31/1998 $10,968 $11,499 $10,269
1/31/1999 $11,057 $11,636 $10,294
2/28/1999 $11,051 $11,585 $10,307
3/31/1999 $11,084 $11,601 $10,338
4/30/1999 $11,127 $11,630 $10,414
5/31/1999 $11,082 $11,563 $10,414
6/30/1999 $10,959 $11,396 $10,414
7/31/1999 $11,011 $11,438 $10,445
8/31/1999 $10,887 $11,346 $10,470
9/30/1999 $10,881 $11,351 $10,520
10/31/1999 $10,686 $11,228 $10,539
11/30/1999 $10,770 $11,347 $10,545
12/31/1999 $10,613 $11,263 $10,545
1/31/2000 $10,515 $11,214 $10,576
2/29/2000 $10,621 $11,344 $10,639
3/31/2000 $10,840 $11,592 $10,727
4/30/2000 $10,792 $11,523 $10,733
5/31/2000 $10,725 $11,463 $10,746
6/30/2000 $10,822 $11,767 $10,802
7/31/2000 $10,951 $11,931 $10,827
8/31/2000 $11,102 $12,115 $10,827
9/30/2000 $11,062 $12,052 $10,883
10/31/2000 $11,138 $12,183 $10,902
11/30/2000 $11,140 $12,275 $10,909
12/31/2000 $11,235 $12,579 $10,902
1/31/2001 $11,308 $12,703 $10,971
2/28/2001 $11,371 $12,744 $11,015
3/31/2001 $11,478 $12,858 $11,040
4/30/2001 $11,422 $12,719 $11,084
5/31/2001 $11,540 $12,855 $11,134
6/30/2001 $11,638 $12,941 $11,153
7/31/2001 $11,824 $13,133 $11,122
8/31/2001 $12,011 $13,350 $11,122
9/30/2001 $11,910 $13,305 $11,172
10/31/2001 $11,999 $13,463 $11,134
11/30/2001 $11,976 $13,350 $11,115
12/31/2001 $11,896 $13,223 $11,071
1/31/2002 $12,054 $13,453 $11,096
2/28/2002 $12,111 $13,615 $11,140
3/31/2002 $12,008 $13,348 $11,203
4/30/2002 $12,146 $13,609 $11,266
5/31/2002 $12,192 $13,692 $11,266
6/30/2002 $12,285 $13,836 $11,272
7/31/2002 $12,343 $14,014 $11,284
8/31/2002 $12,414 $14,183 $11,322
9/30/2002 $12,495 $14,494 $11,341
10/31/2002 $12,199 $14,253 $11,360
11/30/2002 $12,293 $14,194 $11,360
12/31/2002 $12,508 $14,494 $11,335
1/31/2003 $12,519 $14,457 $11,385
2/28/2003 $12,591 $14,659 $11,472
3/31/2003 $12,506 $14,668 $11,541
4/30/2003 $12,652 $14,765 $11,516
5/31/2003 $12,945 $15,110 $11,497
6/30/2003 $12,981 $15,046 $11,510
7/31/2003 $12,745 $14,520 $11,523
8/31/2003 $12,781 $14,628 $11,566
9/30/2003 $13,130 $15,058 $11,604
10/31/2003 $13,193 $14,982 $11,591
11/30/2003 $13,356 $15,138 $11,560
12/31/2003 $13,507 $15,264 $11,548
1/31/2004 $13,659 $15,351 $11,604
2/29/2004 $13,824 $15,582 $11,667
3/31/2004 $13,797 $15,528 $11,742
4/30/2004 $13,590 $15,160 $11,779
5/31/2004 $13,538 $15,105 $11,848
6/30/2004 $13,602 $15,160 $11,886
7/31/2004 $13,757 $15,360 $11,867
8/31/2004 $13,979 $15,667 $11,873
9/30/2004 $14,069 $15,751 $11,898
10/31/2004 $14,213 $15,886 $11,961
11/30/2004 $14,252 $15,755 $11,967
12/31/2004 $14,436 $15,947 $11,924
1/31/2005 $14,608 $16,096 $11,949
2/28/2005 $14,646 $16,043 $12,018
3/31/2005 $14,616 $15,942 $12,112
4/30/2005 $14,858 $16,193 $12,193
5/31/2005 $14,992 $16,308 $12,180
6/30/2005 $15,114 $16,409 $12,187
7/31/2005 $15,166 $16,335 $12,243
8/31/2005 $15,274 $16,500 $12,306
9/30/2005 $15,075 $16,388 $12,456
10/31/2005 $14,986 $16,289 $12,481
11/30/2005 $15,033 $16,367 $12,381
12/31/2005 $15,222 $16,508 $12,331
1/31/2006 $15,270 $16,552 $12,425
2/28/2006 $15,446 $16,664 $12,450
3/31/2006 $15,408 $16,549 $12,519
4/30/2006 $15,428 $16,543 $12,625
5/31/2006 $15,476 $16,617 $12,688
6/30/2006 $15,511 $16,554 $12,713
7/31/2006 $15,676 $16,751 $12,751
8/31/2006 $15,900 $17,000 $12,776
9/30/2006 $16,037 $17,118 $12,713
10/31/2006 $16,175 $17,225 $12,644
11/30/2006 $16,358 $17,369 $12,625
12/31/2006 $16,363 $17,307 $12,644
1/31/2007 $16,354 $17,263 $12,683
2/28/2007 $16,519 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 2/28/07
- ----------------------------------------------
1-Year +2.36%
- ----------------------------------------------
5-Year +5.48%
- ----------------------------------------------
Since Inception (1/1/99) +4.64%
- ----------------------------------------------
CLASS B (1/1/99-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin High Yield Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 9 CPI 9
- --------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,095 $10,119 $10,024
2/28/1999 $10,085 $10,075 $10,037
3/31/1999 $10,110 $10,089 $10,067
4/30/1999 $10,143 $10,114 $10,140
5/31/1999 $10,098 $10,055 $10,140
6/30/1999 $ 9,981 $ 9,911 $10,140
7/31/1999 $10,033 $ 9,947 $10,171
8/31/1999 $ 9,915 $ 9,867 $10,195
9/30/1999 $ 9,905 $ 9,871 $10,244
10/31/1999 $ 9,723 $ 9,764 $10,262
11/30/1999 $ 9,794 $ 9,868 $10,268
12/31/1999 $ 9,647 $ 9,794 $10,268
1/31/2000 $ 9,555 $ 9,752 $10,299
2/29/2000 $ 9,646 $ 9,865 $10,360
3/31/2000 $ 9,839 $10,081 $10,445
4/30/2000 $ 9,801 $10,021 $10,451
5/31/2000 $ 9,726 $ 9,969 $10,464
6/30/2000 $ 9,810 $10,233 $10,519
7/31/2000 $ 9,931 $10,375 $10,543
8/31/2000 $10,054 $10,535 $10,543
9/30/2000 $10,013 $10,481 $10,598
10/31/2000 $10,077 $10,595 $10,616
11/30/2000 $10,084 $10,675 $10,622
12/31/2000 $10,164 $10,939 $10,616
1/31/2001 $10,225 $11,047 $10,683
2/28/2001 $10,268 $11,082 $10,726
3/31/2001 $10,368 $11,182 $10,750
4/30/2001 $10,313 $11,060 $10,793
5/31/2001 $10,414 $11,179 $10,842
6/30/2001 $10,497 $11,254 $10,860
7/31/2001 $10,659 $11,421 $10,830
8/31/2001 $10,822 $11,609 $10,830
9/30/2001 $10,727 $11,570 $10,879
10/31/2001 $10,802 $11,708 $10,842
11/30/2001 $10,776 $11,609 $10,824
12/31/2001 $10,700 $11,499 $10,781
1/31/2002 $10,836 $11,699 $10,805
2/28/2002 $10,892 $11,840 $10,848
3/31/2002 $10,784 $11,608 $10,909
4/30/2002 $10,902 $11,835 $10,970
5/31/2002 $10,949 $11,907 $10,970
6/30/2002 $11,017 $12,033 $10,976
7/31/2002 $11,063 $12,187 $10,988
8/31/2002 $11,132 $12,334 $11,025
9/30/2002 $11,200 $12,604 $11,043
10/31/2002 $10,920 $12,395 $11,062
11/30/2002 $10,999 $12,343 $11,062
12/31/2002 $11,196 $12,604 $11,037
1/31/2003 $11,190 $12,572 $11,086
2/28/2003 $11,259 $12,748 $11,171
3/31/2003 $11,167 $12,755 $11,239
4/30/2003 $11,291 $12,840 $11,214
5/31/2003 $11,557 $13,140 $11,196
6/30/2003 $11,584 $13,084 $11,208
7/31/2003 $11,369 $12,627 $11,220
8/31/2003 $11,397 $12,721 $11,263
9/30/2003 $11,700 $13,095 $11,300
10/31/2003 $11,750 $13,029 $11,287
11/30/2003 $11,889 $13,165 $11,257
12/31/2003 $12,017 $13,274 $11,245
1/31/2004 $12,146 $13,350 $11,300
2/29/2004 $12,287 $13,551 $11,361
3/31/2004 $12,257 $13,503 $11,434
4/30/2004 $12,069 $13,184 $11,470
5/31/2004 $12,017 $13,136 $11,538
6/30/2004 $12,079 $13,184 $11,574
7/31/2004 $12,210 $13,357 $11,556
8/31/2004 $12,388 $13,625 $11,562
9/30/2004 $12,474 $13,697 $11,586
10/31/2004 $12,584 $13,815 $11,647
11/30/2004 $12,612 $13,701 $11,653
12/31/2004 $12,780 $13,868 $11,611
1/31/2005 $12,914 $13,998 $11,635
2/28/2005 $12,941 $13,951 $11,702
3/31/2005 $12,920 $13,863 $11,794
4/30/2005 $13,127 $14,082 $11,873
5/31/2005 $13,238 $14,182 $11,861
6/30/2005 $13,339 $14,270 $11,867
7/31/2005 $13,378 $14,205 $11,922
8/31/2005 $13,467 $14,348 $11,983
9/30/2005 $13,286 $14,252 $12,129
10/31/2005 $13,203 $14,165 $12,154
11/30/2005 $13,239 $14,233 $12,056
12/31/2005 $13,398 $14,356 $12,007
1/31/2006 $13,433 $14,394 $12,099
2/28/2006 $13,581 $14,491 $12,123
3/31/2006 $13,529 $14,391 $12,190
4/30/2006 $13,553 $14,386 $12,294
5/31/2006 $13,589 $14,450 $12,355
6/30/2006 $13,612 $14,396 $12,379
7/31/2006 $13,750 $14,567 $12,416
8/31/2006 $13,939 $14,783 $12,441
9/30/2006 $14,052 $14,886 $12,379
10/31/2006 $14,166 $14,979 $12,312
11/30/2006 $14,319 $15,104 $12,294
12/31/2006 $14,317 $15,051 $12,312
1/31/2007 $14,302 $15,012 $12,350
2/28/2007 $14,474 $15,210 $12,416
64 | Annual Report
Performance Summary (CONTINUED)
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin High Yield Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 9 CPI 9
- --------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,915 $ 9,867 $10,025
4/30/1997 $ 9,988 $ 9,949 $10,038
5/31/1997 $10,107 $10,099 $10,031
6/30/1997 $10,225 $10,207 $10,044
7/31/1997 $10,480 $10,489 $10,056
8/31/1997 $10,418 $10,391 $10,075
9/30/1997 $10,593 $10,514 $10,100
10/31/1997 $10,650 $10,582 $10,125
11/30/1997 $10,716 $10,644 $10,119
12/31/1997 $10,884 $10,799 $10,107
1/31/1998 $10,997 $10,911 $10,125
2/28/1998 $11,016 $10,914 $10,144
3/31/1998 $11,017 $10,924 $10,163
4/30/1998 $11,007 $10,875 $10,182
5/31/1998 $11,140 $11,047 $10,201
6/30/1998 $11,187 $11,090 $10,213
7/31/1998 $11,206 $11,118 $10,226
8/31/1998 $11,321 $11,290 $10,238
9/30/1998 $11,387 $11,430 $10,251
10/31/1998 $11,375 $11,430 $10,276
11/30/1998 $11,335 $11,470 $10,276
12/31/1998 $11,340 $11,499 $10,269
1/31/1999 $11,436 $11,636 $10,294
2/28/1999 $11,425 $11,585 $10,307
3/31/1999 $11,453 $11,601 $10,338
4/30/1999 $11,490 $11,630 $10,414
5/31/1999 $11,428 $11,563 $10,414
6/30/1999 $11,297 $11,396 $10,414
7/31/1999 $11,356 $11,438 $10,445
8/31/1999 $11,214 $11,346 $10,470
9/30/1999 $11,213 $11,351 $10,520
10/31/1999 $11,009 $11,228 $10,539
11/30/1999 $11,079 $11,347 $10,545
12/31/1999 $10,914 $11,263 $10,545
1/31/2000 $10,809 $11,214 $10,576
2/29/2000 $10,912 $11,344 $10,639
3/31/2000 $11,130 $11,592 $10,727
4/30/2000 $11,087 $11,523 $10,733
5/31/2000 $11,002 $11,463 $10,746
6/30/2000 $11,107 $11,767 $10,802
7/31/2000 $11,234 $11,931 $10,827
8/31/2000 $11,382 $12,115 $10,827
9/30/2000 $11,336 $12,052 $10,883
10/31/2000 $11,408 $12,183 $10,902
11/30/2000 $11,405 $12,275 $10,909
12/31/2000 $11,496 $12,579 $10,902
1/31/2001 $11,565 $12,703 $10,971
2/28/2001 $11,623 $12,744 $11,015
3/31/2001 $11,726 $12,858 $11,040
4/30/2001 $11,664 $12,719 $11,084
5/31/2001 $11,778 $12,855 $11,134
6/30/2001 $11,883 $12,941 $11,153
7/31/2001 $12,065 $13,133 $11,122
8/31/2001 $12,249 $13,350 $11,122
9/30/2001 $12,130 $13,305 $11,172
10/31/2001 $12,226 $13,463 $11,134
11/30/2001 $12,186 $13,350 $11,115
12/31/2001 $12,100 $13,223 $11,071
1/31/2002 $12,265 $13,453 $11,096
2/28/2002 $12,316 $13,615 $11,140
3/31/2002 $12,206 $13,348 $11,203
4/30/2002 $12,340 $13,609 $11,266
5/31/2002 $12,381 $13,692 $11,266
6/30/2002 $12,469 $13,836 $11,272
7/31/2002 $12,522 $14,014 $11,284
8/31/2002 $12,587 $14,183 $11,322
9/30/2002 $12,664 $14,494 $11,341
10/31/2002 $12,348 $14,253 $11,360
11/30/2002 $12,449 $14,194 $11,360
12/31/2002 $12,659 $14,494 $11,335
1/31/2003 $12,664 $14,457 $11,385
2/28/2003 $12,731 $14,659 $11,472
3/31/2003 $12,639 $14,668 $11,541
4/30/2003 $12,779 $14,765 $11,516
5/31/2003 $13,079 $15,110 $11,497
6/30/2003 $13,097 $15,046 $11,510
7/31/2003 $12,855 $14,520 $11,523
8/31/2003 $12,885 $14,628 $11,566
9/30/2003 $13,240 $15,058 $11,604
10/31/2003 $13,296 $14,982 $11,591
11/30/2003 $13,452 $15,138 $11,560
12/31/2003 $13,584 $15,264 $11,548
1/31/2004 $13,729 $15,351 $11,604
2/29/2004 $13,901 $15,582 $11,667
3/31/2004 $13,868 $15,528 $11,742
4/30/2004 $13,655 $15,160 $11,779
5/31/2004 $13,596 $15,105 $11,848
6/30/2004 $13,653 $15,160 $11,886
7/31/2004 $13,801 $15,360 $11,867
8/31/2004 $14,015 $15,667 $11,873
9/30/2004 $14,099 $15,751 $11,898
10/31/2004 $14,235 $15,886 $11,961
11/30/2004 $14,267 $15,755 $11,967
12/31/2004 $14,456 $15,947 $11,924
1/31/2005 $14,607 $16,096 $11,949
2/28/2005 $14,637 $16,043 $12,018
3/31/2005 $14,614 $15,942 $12,112
4/30/2005 $14,847 $16,193 $12,193
5/31/2005 $14,972 $16,308 $12,180
6/30/2005 $15,085 $16,409 $12,187
7/31/2005 $15,130 $16,335 $12,243
8/31/2005 $15,230 $16,500 $12,306
9/30/2005 $15,026 $16,388 $12,456
10/31/2005 $14,932 $16,289 $12,481
11/30/2005 $14,972 $16,367 $12,381
12/31/2005 $15,151 $16,508 $12,331
1/31/2006 $15,191 $16,552 $12,425
2/28/2006 $15,371 $16,664 $12,450
3/31/2006 $15,313 $16,549 $12,519
4/30/2006 $15,339 $16,543 $12,625
5/31/2006 $15,365 $16,617 $12,688
6/30/2006 $15,392 $16,554 $12,713
7/31/2006 $15,561 $16,751 $12,751
8/31/2006 $15,760 $17,000 $12,776
9/30/2006 $15,902 $17,118 $12,713
10/31/2006 $16,030 $17,225 $12,644
11/30/2006 $16,202 $17,369 $12,625
12/31/2006 $16,201 $17,307 $12,644
1/31/2007 $16,184 $17,263 $12,683
2/28/2007 $16,339 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +5.34%
- ----------------------------------------------
5-Year +5.81%
- ----------------------------------------------
10-Year +5.03%
- ----------------------------------------------
ADVISOR CLASS (3/1/97-2/28/07) 8
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin High Yield Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 9 CPI 9
- --------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,920 $ 9,867 $10,025
4/30/1997 $ 9,999 $ 9,949 $10,038
5/31/1997 $10,122 $10,099 $10,031
6/30/1997 $10,246 $10,207 $10,044
7/31/1997 $10,508 $10,489 $10,056
8/31/1997 $10,450 $10,391 $10,075
9/30/1997 $10,623 $10,514 $10,100
10/31/1997 $10,695 $10,582 $10,125
11/30/1997 $10,766 $10,644 $10,119
12/31/1997 $10,932 $10,799 $10,107
1/31/1998 $11,051 $10,911 $10,125
2/28/1998 $11,076 $10,914 $10,144
3/31/1998 $11,082 $10,924 $10,163
4/30/1998 $11,078 $10,875 $10,182
5/31/1998 $11,218 $11,047 $10,201
6/30/1998 $11,271 $11,090 $10,213
7/31/1998 $11,285 $11,118 $10,226
8/31/1998 $11,417 $11,290 $10,238
9/30/1998 $11,489 $11,430 $10,251
10/31/1998 $11,473 $11,430 $10,276
11/30/1998 $11,438 $11,470 $10,276
12/31/1998 $11,457 $11,499 $10,269
1/31/1999 $11,551 $11,636 $10,294
2/28/1999 $11,545 $11,585 $10,307
3/31/1999 $11,579 $11,601 $10,338
4/30/1999 $11,623 $11,630 $10,414
5/31/1999 $11,576 $11,563 $10,414
6/30/1999 $11,451 $11,396 $10,414
7/31/1999 $11,506 $11,438 $10,445
8/31/1999 $11,376 $11,346 $10,470
9/30/1999 $11,370 $11,351 $10,520
10/31/1999 $11,166 $11,228 $10,539
11/30/1999 $11,253 $11,347 $10,545
12/31/1999 $11,089 $11,263 $10,545
1/31/2000 $10,988 $11,214 $10,576
2/29/2000 $11,098 $11,344 $10,639
3/31/2000 $11,326 $11,592 $10,727
4/30/2000 $11,277 $11,523 $10,733
5/31/2000 $11,206 $11,463 $10,746
6/30/2000 $11,308 $11,767 $10,802
7/31/2000 $11,443 $11,931 $10,827
8/31/2000 $11,601 $12,115 $10,827
9/30/2000 $11,559 $12,052 $10,883
10/31/2000 $11,638 $12,183 $10,902
11/30/2000 $11,640 $12,275 $10,909
12/31/2000 $11,739 $12,579 $10,902
1/31/2001 $11,816 $12,703 $10,971
2/28/2001 $11,882 $12,744 $11,015
3/31/2001 $11,993 $12,858 $11,040
4/30/2001 $11,935 $12,719 $11,084
5/31/2001 $12,059 $12,855 $11,134
6/30/2001 $12,160 $12,941 $11,153
7/31/2001 $12,355 $13,133 $11,122
8/31/2001 $12,550 $13,350 $11,122
9/30/2001 $12,445 $13,305 $11,172
10/31/2001 $12,538 $13,463 $11,134
11/30/2001 $12,513 $13,350 $11,115
12/31/2001 $12,430 $13,223 $11,071
1/31/2002 $12,596 $13,453 $11,096
2/28/2002 $12,655 $13,615 $11,140
3/31/2002 $12,547 $13,348 $11,203
4/30/2002 $12,691 $13,609 $11,266
5/31/2002 $12,740 $13,692 $11,266
6/30/2002 $12,837 $13,836 $11,272
7/31/2002 $12,897 $14,014 $11,284
8/31/2002 $12,971 $14,183 $11,322
9/30/2002 $13,056 $14,494 $11,341
10/31/2002 $12,747 $14,253 $11,360
11/30/2002 $12,845 $14,194 $11,360
12/31/2002 $13,070 $14,494 $11,335
1/31/2003 $13,081 $14,457 $11,385
2/28/2003 $13,157 $14,659 $11,472
3/31/2003 $13,067 $14,668 $11,541
4/30/2003 $13,220 $14,765 $11,516
5/31/2003 $13,526 $15,110 $11,497
6/30/2003 $13,564 $15,046 $11,510
7/31/2003 $13,317 $14,520 $11,523
8/31/2003 $13,355 $14,628 $11,566
9/30/2003 $13,720 $15,058 $11,604
10/31/2003 $13,785 $14,982 $11,591
11/30/2003 $13,955 $15,138 $11,560
12/31/2003 $14,113 $15,264 $11,548
1/31/2004 $14,272 $15,351 $11,604
2/29/2004 $14,445 $15,582 $11,667
3/31/2004 $14,417 $15,528 $11,742
4/30/2004 $14,200 $15,160 $11,779
5/31/2004 $14,146 $15,105 $11,848
6/30/2004 $14,212 $15,160 $11,886
7/31/2004 $14,375 $15,360 $11,867
8/31/2004 $14,606 $15,667 $11,873
9/30/2004 $14,701 $15,751 $11,898
10/31/2004 $14,852 $15,886 $11,961
11/30/2004 $14,892 $15,755 $11,967
12/31/2004 $15,084 $15,947 $11,924
1/31/2005 $15,264 $16,096 $11,949
2/28/2005 $15,303 $16,043 $12,018
3/31/2005 $15,272 $15,942 $12,112
4/30/2005 $15,526 $16,193 $12,193
5/31/2005 $15,666 $16,308 $12,180
6/30/2005 $15,792 $16,409 $12,187
7/31/2005 $15,847 $16,335 $12,243
8/31/2005 $15,960 $16,500 $12,306
9/30/2005 $15,752 $16,388 $12,456
10/31/2005 $15,659 $16,289 $12,481
11/30/2005 $15,709 $16,367 $12,381
12/31/2005 $15,906 $16,508 $12,331
1/31/2006 $15,921 $16,552 $12,425
2/28/2006 $16,105 $16,664 $12,450
3/31/2006 $16,067 $16,549 $12,519
4/30/2006 $16,104 $16,543 $12,625
5/31/2006 $16,140 $16,617 $12,688
6/30/2006 $16,147 $16,554 $12,713
7/31/2006 $16,351 $16,751 $12,751
8/31/2006 $16,570 $17,000 $12,776
9/30/2006 $16,729 $17,118 $12,713
10/31/2006 $16,874 $17,225 $12,644
11/30/2006 $17,066 $17,369 $12,625
12/31/2006 $17,073 $17,307 $12,644
1/31/2007 $17,065 $17,263 $12,683
2/28/2007 $17,266 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
ADVISOR CLASS 8 2/28/07
- ----------------------------------------------
1-Year +7.08%
- ----------------------------------------------
5-Year +6.42%
- ----------------------------------------------
10-Year +5.61%
- ----------------------------------------------
Annual Report | 65
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. IN GENERAL, AN INVESTOR IS PAID A HIGHER YIELD TO ASSUME A
GREATER DEGREE OF CREDIT 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.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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, C and Advisor) per share on 2/28/07.
5. Taxable equivalent distribution rate and yield assume the 2007 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Effective 1/3/06, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 1/3/06, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/2/06, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 1/3/06
(commencement of sales), the cumulative and average annual total returns
of Advisor Class shares were +8.52% and +7.35%.
9. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must at 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 Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
66 | 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 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 | 67
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,039.00 $3.13
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.72 $3.11
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,035.90 $5.91
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,036.80 $5.91
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
- ----------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,040.30 $2.68
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.17 $2.66
- ----------------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.62%; B: 1.17%; C: 1.17%; and Advisor: 0.53%), multiplied by the average
account value over the period, multiplied by 181/365 to reflect the
one-half year period.
68 | 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 as high a level of income exempt from federal and New Jersey
personal income taxes as is consistent with prudent investment management and
preservation of capital by investing at least 80% of its net assets in
securities that pay interest free from such taxes. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin New Jersey Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- --------------------------------------------------------------------------------
AAA 69.0%
- --------------------------------------------------------------------------------
AA 2.6%
- --------------------------------------------------------------------------------
A 1.7%
- --------------------------------------------------------------------------------
BBB 9.6%
- --------------------------------------------------------------------------------
Below Investment Grade 0.5%
- --------------------------------------------------------------------------------
Not Rated by S&P 16.6%
- --------------------------------------------------------------------------------
* 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 9.0% 0.2%
AA or Aa 0.4% --
A 1.5% --
BBB or Baa 4.6% --
Below Investment Grade 0.9% --
- ------------------------------------------------
Total 16.4% 0.2%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin New Jersey Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$12.15 on February 28, 2006, to $12.22 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 173.
Annual Report | 69
DIVIDEND DISTRIBUTIONS 2
Franklin New Jersey Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 2006 4.30 cents 3.74 cents 3.74 cents
- --------------------------------------------------------------------------------
April 2006 4.30 cents 3.74 cents 3.74 cents
- --------------------------------------------------------------------------------
May 2006 4.30 cents 3.74 cents 3.74 cents
- --------------------------------------------------------------------------------
June 2006 4.30 cents 3.74 cents 3.74 cents
- --------------------------------------------------------------------------------
July 2006 4.30 cents 3.74 cents 3.74 cents
- --------------------------------------------------------------------------------
August 2006 4.30 cents 3.74 cents 3.74 cents
- --------------------------------------------------------------------------------
September 2006 4.30 cents 3.75 cents 3.74 cents
- --------------------------------------------------------------------------------
October 2006 4.30 cents 3.75 cents 3.74 cents
- --------------------------------------------------------------------------------
November 2006 4.30 cents 3.75 cents 3.74 cents
- --------------------------------------------------------------------------------
December 2006 4.28 cents 3.74 cents 3.72 cents
- --------------------------------------------------------------------------------
January 2007 4.28 cents 3.72 cents 3.72 cents
- --------------------------------------------------------------------------------
February 2007 4.28 cents 3.72 cents 3.72 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 51.67 cents per share for the same
period. 2 The Performance Summary beginning on page 72 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.95%
based on an annualization of the current 4.20 cent per share dividend and the
maximum offering price of $12.76 on February 28, 2007. An investor in the 2007
maximum combined effective federal and New Jersey personal income tax bracket of
40.83% would need to earn a distribution rate of 6.68% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class B
and C shares' performance, please see the Performance Summary.
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.
STATE UPDATE
New Jersey's economy continued to grow, albeit at a slower pace than the
nation's as its 4.1% unemployment rate in February 2007 was less than the
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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.
70 | Annual Report
4.5% national average. 3 Although employment growth slowed, the state's strong
economy continued to be supported by its large and diverse base and highly
skilled workforce. The state benefits from its regional proximity to
metropolitan areas such as Philadelphia and New York City. Personal incomes
remained above the national average and are expected to continue to increase.
Because New Jersey faced structural imbalances for several years, the New Jersey
Supreme Court ruled in 2004 that new revenue or cost reductions, not borrowed
funds, are required to balance the state budget. The fiscal year 2007 budget
complied with the ruling, as the state government restructured the budget to
avoid bond issuances and rely less on one-time measures. Spending for education,
pension funding, health care and debt service exerted pressure, but positive
reserves and stronger-than-anticipated tax revenue collections in fiscal year
2006 helped the state move in the right direction. Although further budget
adjustments might be necessary, New Jersey made significant improvement toward
structural budget balance with its adopted fiscal year 2007 budget. Overall
tax-supported debt rose to $27.1 billion in fiscal year 2006, and debt ratios
increased to more than $3,100 per capita and 7.0% of personal income from $1,860
and 4.7% five fiscal years ago. 4
Backed by a record of strong fiscal management, New Jersey's long-term financial
position remained favorable. Independent credit rating agency Standard & Poor's
assigned the state's general obligation bonds a rating of AA with a stable
outlook. 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.
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.
PORTFOLIO BREAKDOWN
Franklin New Jersey Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 30.5%
- --------------------------------------------------------------------------------
Hospital & Health Care 22.8%
- --------------------------------------------------------------------------------
Transportation 14.3%
- --------------------------------------------------------------------------------
Utilities 8.5%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 7.4%
- --------------------------------------------------------------------------------
Higher Education 5.5%
- --------------------------------------------------------------------------------
General Obligation 4.5%
- --------------------------------------------------------------------------------
Other Revenue 3.8%
- --------------------------------------------------------------------------------
Housing 1.4%
- --------------------------------------------------------------------------------
Tax-Supported 1.1%
- --------------------------------------------------------------------------------
Corporate-Backed 0.2%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
3. Source: Bureau of Labor Statistics.
4. Source: Standard & Poor's, "New Jersey; General Obligation,"
RATINGSDIRECT, 8/1/06.
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, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 71
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRNJX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.22 $12.15
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.5167
- ---------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FNJBX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $12.28 $12.22
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4498
- ---------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FNIIX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $12.31 $12.24
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4493
- ---------------------------------------------------------------------------------------------
72 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE
FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.96% +28.76% +70.39%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.50% +4.27% +5.01%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.85% +4.60% +5.07%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.95%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.68%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.36%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.68%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.65%
- ----------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.28% +25.24% +50.29%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.28% +4.27% +5.93%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.69% +4.61% +5.80%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.55%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.00%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.96%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.00%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.20%
- ----------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.35% +25.15% +61.29%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.35% +4.59% +4.90%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.67% +4.93% +4.96%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.55%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.00%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.97%
- ----------------------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.02%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.20%
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 73
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +0.50%
- ----------------------------------------------
5-Year +4.27%
- ----------------------------------------------
10-Year +5.01%
- ----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin New Jersey Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ---------------------------------------------------------------------------
3/1/1997 $ 9,571 $10,000 $10,000
3/31/1997 $ 9,484 $ 9,867 $10,025
4/30/1997 $ 9,562 $ 9,949 $10,038
5/31/1997 $ 9,665 $10,099 $10,031
6/30/1997 $ 9,752 $10,207 $10,044
7/31/1997 $ 9,990 $10,489 $10,056
8/31/1997 $ 9,909 $10,391 $10,075
9/30/1997 $10,021 $10,514 $10,100
10/31/1997 $10,083 $10,582 $10,125
11/30/1997 $10,153 $10,644 $10,119
12/31/1997 $10,284 $10,799 $10,107
1/31/1998 $10,372 $10,911 $10,125
2/28/1998 $10,373 $10,914 $10,144
3/31/1998 $10,392 $10,924 $10,163
4/30/1998 $10,368 $10,875 $10,182
5/31/1998 $10,510 $11,047 $10,201
6/30/1998 $10,565 $11,090 $10,213
7/31/1998 $10,584 $11,118 $10,226
8/31/1998 $10,720 $11,290 $10,238
9/30/1998 $10,828 $11,430 $10,251
10/31/1998 $10,855 $11,430 $10,276
11/30/1998 $10,875 $11,470 $10,276
12/31/1998 $10,912 $11,499 $10,269
1/31/1999 $11,004 $11,636 $10,294
2/28/1999 $10,959 $11,585 $10,307
3/31/1999 $10,995 $11,601 $10,338
4/30/1999 $11,023 $11,630 $10,414
5/31/1999 $10,967 $11,563 $10,414
6/30/1999 $10,837 $11,396 $10,414
7/31/1999 $10,874 $11,438 $10,445
8/31/1999 $10,725 $11,346 $10,470
9/30/1999 $10,687 $11,351 $10,520
10/31/1999 $10,555 $11,228 $10,539
11/30/1999 $10,640 $11,347 $10,545
12/31/1999 $10,535 $11,263 $10,545
1/31/2000 $10,468 $11,214 $10,576
2/29/2000 $10,612 $11,344 $10,639
3/31/2000 $10,854 $11,592 $10,727
4/30/2000 $10,786 $11,523 $10,733
5/31/2000 $10,708 $11,463 $10,746
6/30/2000 $10,992 $11,767 $10,802
7/31/2000 $11,140 $11,931 $10,827
8/31/2000 $11,318 $12,115 $10,827
9/30/2000 $11,248 $12,052 $10,883
10/31/2000 $11,388 $12,183 $10,902
11/30/2000 $11,478 $12,275 $10,909
12/31/2000 $11,759 $12,579 $10,902
1/31/2001 $11,819 $12,703 $10,971
2/28/2001 $11,910 $12,744 $11,015
3/31/2001 $12,000 $12,858 $11,040
4/30/2001 $11,876 $12,719 $11,084
5/31/2001 $12,009 $12,855 $11,134
6/30/2001 $12,109 $12,941 $11,153
7/31/2001 $12,294 $13,133 $11,122
8/31/2001 $12,458 $13,350 $11,122
9/30/2001 $12,382 $13,305 $11,172
10/31/2001 $12,526 $13,463 $11,134
11/30/2001 $12,428 $13,350 $11,115
12/31/2001 $12,309 $13,223 $11,071
1/31/2002 $12,508 $13,453 $11,096
2/28/2002 $12,664 $13,615 $11,140
3/31/2002 $12,426 $13,348 $11,203
4/30/2002 $12,649 $13,609 $11,266
5/31/2002 $12,722 $13,692 $11,266
6/30/2002 $12,838 $13,836 $11,272
7/31/2002 $12,976 $14,014 $11,284
8/31/2002 $13,125 $14,183 $11,322
9/30/2002 $13,417 $14,494 $11,341
10/31/2002 $13,139 $14,253 $11,360
11/30/2002 $13,090 $14,194 $11,360
12/31/2002 $13,374 $14,494 $11,335
1/31/2003 $13,314 $14,457 $11,385
2/28/2003 $13,477 $14,659 $11,472
3/31/2003 $13,496 $14,668 $11,541
4/30/2003 $13,593 $14,765 $11,516
5/31/2003 $13,905 $15,110 $11,497
6/30/2003 $13,853 $15,046 $11,510
7/31/2003 $13,323 $14,520 $11,523
8/31/2003 $13,431 $14,628 $11,566
9/30/2003 $13,768 $15,058 $11,604
10/31/2003 $13,716 $14,982 $11,591
11/30/2003 $13,882 $15,138 $11,560
12/31/2003 $14,014 $15,264 $11,548
1/31/2004 $14,112 $15,351 $11,604
2/29/2004 $14,327 $15,582 $11,667
3/31/2004 $14,308 $15,528 $11,742
4/30/2004 $13,949 $15,160 $11,779
5/31/2004 $13,907 $15,105 $11,848
6/30/2004 $13,972 $15,160 $11,886
7/31/2004 $14,168 $15,360 $11,867
8/31/2004 $14,424 $15,667 $11,873
9/30/2004 $14,538 $15,751 $11,898
10/31/2004 $14,664 $15,886 $11,961
11/30/2004 $14,549 $15,755 $11,967
12/31/2004 $14,737 $15,947 $11,924
1/31/2005 $14,950 $16,096 $11,949
2/28/2005 $14,919 $16,043 $12,018
3/31/2005 $14,851 $15,942 $12,112
4/30/2005 $15,078 $16,193 $12,193
5/31/2005 $15,207 $16,308 $12,180
6/30/2005 $15,287 $16,409 $12,187
7/31/2005 $15,242 $16,335 $12,243
8/31/2005 $15,385 $16,500 $12,306
9/30/2005 $15,277 $16,388 $12,456
10/31/2005 $15,193 $16,289 $12,481
11/30/2005 $15,261 $16,367 $12,381
12/31/2005 $15,392 $16,508 $12,331
1/31/2006 $15,409 $16,552 $12,425
2/28/2006 $15,541 $16,664 $12,450
3/31/2006 $15,429 $16,549 $12,519
4/30/2006 $15,446 $16,543 $12,625
5/31/2006 $15,475 $16,617 $12,688
6/30/2006 $15,427 $16,554 $12,713
7/31/2006 $15,600 $16,751 $12,751
8/31/2006 $15,799 $17,000 $12,776
9/30/2006 $15,921 $17,118 $12,713
10/31/2006 $16,017 $17,225 $12,644
11/30/2006 $16,179 $17,369 $12,625
12/31/2006 $16,130 $17,307 $12,644
1/31/2007 $16,094 $17,263 $12,683
2/28/2007 $16,309 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 2/28/07
- ----------------------------------------------
1-Year +0.28%
- ----------------------------------------------
5-Year +4.27%
- ----------------------------------------------
Since Inception (2/1/00) +5.93%
- ----------------------------------------------
CLASS B (2/1/00-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin New Jersey Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ---------------------------------------------------------------------------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,129 $10,116 $10,059
3/31/2000 $10,355 $10,337 $10,142
4/30/2000 $10,285 $10,276 $10,148
5/31/2000 $10,206 $10,223 $10,160
6/30/2000 $10,481 $10,494 $10,213
7/31/2000 $10,626 $10,640 $10,237
8/31/2000 $10,790 $10,804 $10,237
9/30/2000 $10,718 $10,747 $10,290
10/31/2000 $10,846 $10,865 $10,308
11/30/2000 $10,927 $10,947 $10,314
12/31/2000 $11,188 $11,217 $10,308
1/31/2001 $11,240 $11,328 $10,373
2/28/2001 $11,331 $11,364 $10,415
3/31/2001 $11,411 $11,466 $10,438
4/30/2001 $11,288 $11,342 $10,480
5/31/2001 $11,408 $11,464 $10,527
6/30/2001 $11,498 $11,541 $10,545
7/31/2001 $11,667 $11,712 $10,515
8/31/2001 $11,817 $11,905 $10,515
9/30/2001 $11,750 $11,865 $10,563
10/31/2001 $11,880 $12,006 $10,527
11/30/2001 $11,773 $11,905 $10,509
12/31/2001 $11,665 $11,792 $10,468
1/31/2002 $11,846 $11,997 $10,492
2/28/2002 $11,989 $12,141 $10,533
3/31/2002 $11,758 $11,903 $10,592
4/30/2002 $11,962 $12,136 $10,652
5/31/2002 $12,035 $12,210 $10,652
6/30/2002 $12,129 $12,339 $10,658
7/31/2002 $12,263 $12,498 $10,669
8/31/2002 $12,389 $12,648 $10,705
9/30/2002 $12,657 $12,925 $10,723
10/31/2002 $12,400 $12,711 $10,741
11/30/2002 $12,349 $12,658 $10,741
12/31/2002 $12,609 $12,925 $10,717
1/31/2003 $12,547 $12,892 $10,764
2/28/2003 $12,695 $13,072 $10,847
3/31/2003 $12,706 $13,080 $10,912
4/30/2003 $12,792 $13,167 $10,889
5/31/2003 $13,078 $13,475 $10,871
6/30/2003 $13,024 $13,418 $10,883
7/31/2003 $12,522 $12,948 $10,895
8/31/2003 $12,617 $13,045 $10,936
9/30/2003 $12,926 $13,428 $10,972
10/31/2003 $12,871 $13,361 $10,960
11/30/2003 $13,031 $13,500 $10,930
12/31/2003 $13,138 $13,612 $10,918
1/31/2004 $13,223 $13,690 $10,972
2/29/2004 $13,418 $13,896 $11,031
3/31/2004 $13,405 $13,847 $11,102
4/30/2004 $13,053 $13,519 $11,137
5/31/2004 $13,009 $13,470 $11,203
6/30/2004 $13,074 $13,519 $11,238
7/31/2004 $13,239 $13,697 $11,220
8/31/2004 $13,471 $13,972 $11,226
9/30/2004 $13,570 $14,046 $11,250
10/31/2004 $13,682 $14,167 $11,309
11/30/2004 $13,569 $14,050 $11,315
12/31/2004 $13,748 $14,221 $11,274
1/31/2005 $13,928 $14,354 $11,297
2/28/2005 $13,894 $14,307 $11,363
3/31/2005 $13,836 $14,216 $11,451
4/30/2005 $14,028 $14,441 $11,528
5/31/2005 $14,141 $14,543 $11,517
6/30/2005 $14,220 $14,633 $11,523
7/31/2005 $14,161 $14,567 $11,576
8/31/2005 $14,286 $14,714 $11,635
9/30/2005 $14,192 $14,615 $11,777
10/31/2005 $14,108 $14,526 $11,801
11/30/2005 $14,164 $14,596 $11,706
12/31/2005 $14,267 $14,721 $11,659
1/31/2006 $14,276 $14,761 $11,748
2/28/2006 $14,403 $14,860 $11,771
3/31/2006 $14,294 $14,758 $11,836
4/30/2006 $14,291 $14,752 $11,937
5/31/2006 $14,323 $14,818 $11,996
6/30/2006 $14,272 $14,762 $12,020
7/31/2006 $14,424 $14,938 $12,056
8/31/2006 $14,601 $15,160 $12,079
9/30/2006 $14,694 $15,265 $12,020
10/31/2006 $14,788 $15,361 $11,955
11/30/2006 $14,930 $15,489 $11,937
12/31/2006 $14,878 $15,434 $11,955
1/31/2007 $14,838 $15,395 $11,991
2/28/2007 $15,029 $15,597 $12,056
74 | Annual Report
Performance Summary (CONTINUED)
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin New Jersey Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- ---------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,905 $ 9,867 $10,025
4/30/1997 $ 9,982 $ 9,949 $10,038
5/31/1997 $10,084 $10,099 $10,031
6/30/1997 $10,170 $10,207 $10,044
7/31/1997 $10,413 $10,489 $10,056
8/31/1997 $10,334 $10,391 $10,075
9/30/1997 $10,437 $10,514 $10,100
10/31/1997 $10,496 $10,582 $10,125
11/30/1997 $10,564 $10,644 $10,119
12/31/1997 $10,703 $10,799 $10,107
1/31/1998 $10,780 $10,911 $10,125
2/28/1998 $10,786 $10,914 $10,144
3/31/1998 $10,800 $10,924 $10,163
4/30/1998 $10,761 $10,875 $10,182
5/31/1998 $10,912 $11,047 $10,201
6/30/1998 $10,954 $11,090 $10,213
7/31/1998 $10,969 $11,118 $10,226
8/31/1998 $11,113 $11,290 $10,238
9/30/1998 $11,219 $11,430 $10,251
10/31/1998 $11,243 $11,430 $10,276
11/30/1998 $11,257 $11,470 $10,276
12/31/1998 $11,290 $11,499 $10,269
1/31/1999 $11,379 $11,636 $10,294
2/28/1999 $11,337 $11,585 $10,307
3/31/1999 $11,360 $11,601 $10,338
4/30/1999 $11,382 $11,630 $10,414
5/31/1999 $11,329 $11,563 $10,414
6/30/1999 $11,181 $11,396 $10,414
7/31/1999 $11,214 $11,438 $10,445
8/31/1999 $11,055 $11,346 $10,470
9/30/1999 $11,011 $11,351 $10,520
10/31/1999 $10,871 $11,228 $10,539
11/30/1999 $10,953 $11,347 $10,545
12/31/1999 $10,841 $11,263 $10,545
1/31/2000 $10,757 $11,214 $10,576
2/29/2000 $10,910 $11,344 $10,639
3/31/2000 $11,162 $11,592 $10,727
4/30/2000 $11,078 $11,523 $10,733
5/31/2000 $10,994 $11,463 $10,746
6/30/2000 $11,278 $11,767 $10,802
7/31/2000 $11,434 $11,931 $10,827
8/31/2000 $11,600 $12,115 $10,827
9/30/2000 $11,534 $12,052 $10,883
10/31/2000 $11,660 $12,183 $10,902
11/30/2000 $11,747 $12,275 $10,909
12/31/2000 $12,028 $12,579 $10,902
1/31/2001 $12,083 $12,703 $10,971
2/28/2001 $12,180 $12,744 $11,015
3/31/2001 $12,256 $12,858 $11,040
4/30/2001 $12,135 $12,719 $11,084
5/31/2001 $12,264 $12,855 $11,134
6/30/2001 $12,361 $12,941 $11,153
7/31/2001 $12,542 $13,133 $11,122
8/31/2001 $12,704 $13,350 $11,122
9/30/2001 $12,632 $13,305 $11,172
10/31/2001 $12,761 $13,463 $11,134
11/30/2001 $12,656 $13,350 $11,115
12/31/2001 $12,530 $13,223 $11,071
1/31/2002 $12,735 $13,453 $11,096
2/28/2002 $12,887 $13,615 $11,140
3/31/2002 $12,641 $13,348 $11,203
4/30/2002 $12,849 $13,609 $11,266
5/31/2002 $12,927 $13,692 $11,266
6/30/2002 $13,038 $13,836 $11,272
7/31/2002 $13,172 $14,014 $11,284
8/31/2002 $13,317 $14,183 $11,322
9/30/2002 $13,605 $14,494 $11,341
10/31/2002 $13,319 $14,253 $11,360
11/30/2002 $13,264 $14,194 $11,360
12/31/2002 $13,544 $14,494 $11,335
1/31/2003 $13,478 $14,457 $11,385
2/28/2003 $13,636 $14,659 $11,472
3/31/2003 $13,648 $14,668 $11,541
4/30/2003 $13,739 $14,765 $11,516
5/31/2003 $14,057 $15,110 $11,497
6/30/2003 $13,988 $15,046 $11,510
7/31/2003 $13,449 $14,520 $11,523
8/31/2003 $13,550 $14,628 $11,566
9/30/2003 $13,882 $15,058 $11,604
10/31/2003 $13,834 $14,982 $11,591
11/30/2003 $13,994 $15,138 $11,560
12/31/2003 $14,108 $15,264 $11,548
1/31/2004 $14,211 $15,351 $11,604
2/29/2004 $14,420 $15,582 $11,667
3/31/2004 $14,395 $15,528 $11,742
4/30/2004 $14,029 $15,160 $11,779
5/31/2004 $13,970 $15,105 $11,848
6/30/2004 $14,040 $15,160 $11,886
7/31/2004 $14,228 $15,360 $11,867
8/31/2004 $14,477 $15,667 $11,873
9/30/2004 $14,572 $15,751 $11,898
10/31/2004 $14,703 $15,886 $11,961
11/30/2004 $14,582 $15,755 $11,967
12/31/2004 $14,762 $15,947 $11,924
1/31/2005 $14,967 $16,096 $11,949
2/28/2005 $14,929 $16,043 $12,018
3/31/2005 $14,855 $15,942 $12,112
4/30/2005 $15,073 $16,193 $12,193
5/31/2005 $15,194 $16,308 $12,180
6/30/2005 $15,278 $16,409 $12,187
7/31/2005 $15,215 $16,335 $12,243
8/31/2005 $15,349 $16,500 $12,306
9/30/2005 $15,236 $16,388 $12,456
10/31/2005 $15,159 $16,289 $12,481
11/30/2005 $15,206 $16,367 $12,381
12/31/2005 $15,329 $16,508 $12,331
1/31/2006 $15,339 $16,552 $12,425
2/28/2006 $15,462 $16,664 $12,450
3/31/2006 $15,357 $16,549 $12,519
4/30/2006 $15,354 $16,543 $12,625
5/31/2006 $15,389 $16,617 $12,688
6/30/2006 $15,334 $16,554 $12,713
7/31/2006 $15,485 $16,751 $12,751
8/31/2006 $15,687 $17,000 $12,776
9/30/2006 $15,786 $17,118 $12,713
10/31/2006 $15,887 $17,225 $12,644
11/30/2006 $16,039 $17,369 $12,625
12/31/2006 $15,983 $17,307 $12,644
1/31/2007 $15,940 $17,263 $12,683
2/28/2007 $16,129 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +3.35%
- ----------------------------------------------
5-Year +4.59%
- ----------------------------------------------
10-Year +4.90%
- ----------------------------------------------
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and New Jersey
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
Annual Report | 75
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 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.
76 | 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.10 $3.22
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
- ----------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.30 $5.98
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.20 $5.98
- ----------------------------------------------------------------------------------------------------------
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.
Annual Report | 77
Franklin Oregon Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Oregon Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal and Oregon
personal income taxes as is consistent with prudent investment management and
preservation of capital by investing at least 80% of its net assets in
securities that pay interest free from such taxes. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Oregon Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ............................................ 42.2%
AA ............................................. 14.7%
A .............................................. 7.6%
BBB ............................................ 8.6%
Below Investment Grade ......................... 1.2%
Not Rated by S&P ............................... 25.7%
* 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 15.8% -- 2.0%
AA or Aa 6.4% -- --
A 0.1% -- --
BBB or Baa 0.6% 0.5% --
Below Investment Grade -- -- 0.3%
- ------------------------------------------------------------
Total 22.9% 0.5% 2.3%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Oregon Tax-Free Income Fund's annual report
for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.89 on February 28, 2006, to $11.93 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 182.
78 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Oregon Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
-------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
March 2006 4.02 cents 3.47 cents
- --------------------------------------------------------------------------------
April 2006 4.02 cents 3.47 cents
- --------------------------------------------------------------------------------
May 2006 4.02 cents 3.47 cents
- --------------------------------------------------------------------------------
June 2006 4.02 cents 3.47 cents
- --------------------------------------------------------------------------------
July 2006 4.02 cents 3.47 cents
- --------------------------------------------------------------------------------
August 2006 4.02 cents 3.47 cents
- --------------------------------------------------------------------------------
September 2006 4.02 cents 3.46 cents
- --------------------------------------------------------------------------------
October 2006 4.02 cents 3.46 cents
- --------------------------------------------------------------------------------
November 2006 4.02 cents 3.46 cents
- --------------------------------------------------------------------------------
December 2006 4.02 cents 3.46 cents
- --------------------------------------------------------------------------------
January 2007 4.02 cents 3.46 cents
- --------------------------------------------------------------------------------
February 2007 4.02 cents 3.46 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 48.39 cents per share for the same
period. 2 The Performance Summary beginning on page 81 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 3.87%
based on an annualization of the current 4.02 cent per share dividend and the
maximum offering price of $12.46 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Oregon personal income tax bracket of
40.85% would need to earn a distribution rate of 6.54% 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 continued to improve during the reporting period. Unemployment
declined, as non-farm employment increased at more than two times the national
rate in 2006. All major sectors added jobs, including trade, education, health
services, and professional and business services. Oregon's unemployment rate
fell from 5.4% at the beginning of the period to 5.3% at period-end. 3
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 | 79
PORTFOLIO BREAKDOWN
Franklin Oregon Tax-Free Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 25.7%
- --------------------------------------------------------------------------------
General Obligation 19.3%
- --------------------------------------------------------------------------------
Utilities 10.2%
- --------------------------------------------------------------------------------
Transportation 9.7%
- --------------------------------------------------------------------------------
Hospital & Health Care 9.4%
- --------------------------------------------------------------------------------
Higher Education 7.3%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 7.0%
- --------------------------------------------------------------------------------
Other Revenue 5.4%
- --------------------------------------------------------------------------------
Housing 3.8%
- --------------------------------------------------------------------------------
Corporate-Backed 1.2%
- --------------------------------------------------------------------------------
Tax-Supported 1.0%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
The state's most recent revenue forecast, in December 2006, anticipated
additional revenues for the 2005-2007 biennium due to stronger personal and
corporate income tax receipts than originally expected. Corporate income tax
receipts came in above budget despite an approximately $100 million corporate
tax credit in the previous biennium, which is part of the current budget. 4
Pension reform in recent years contributed to favorable funding ratios in the
state's retirement systems. Offsetting these positive developments are
above-average debt ratios. Oregon's 2006 net tax-supported debt as a percentage
of personal income was 4.5%, and debt per capita was $1,350, well above the
50-state medians of 2.5% and $754. 4
Moody's Investors Service, an independent credit rating agency, assigned a
rating of Aa3 with a stable outlook to Oregon's general obligation debt. 5 The
rating and outlook reflected the state's financial controls that compensate for
uncertainty associated with voter initiative activity and budget reserves that
were relatively low until fiscal year 2006, as well as an improving economy,
strengthening revenues and above-average debt levels.
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 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.
4. Source: Moody's Investors Service, "New Issue: Oregon (State of),"
2/14/07.
5. This does not indicate Moody's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
80 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRORX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $11.93 $11.89
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4839
- ---------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FORIX) CHANGE 2/28/07 2/28/06
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.05 $12.05 $12.00
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4171
- ---------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.53% +28.99% +66.43%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.07% +4.32% +4.77%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.51% +4.59% +4.80%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.87%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.54%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.34%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.65%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.66%
- ---------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.99% +25.52% +57.69%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.99% +4.65% +4.66%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.42% +4.93% +4.70%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.46%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.85%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.95%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.99%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.21%
- ---------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 81
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.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +0.07%
- ----------------------------------------------
5-Year +4.32%
- ----------------------------------------------
10-Year +4.77%
- ----------------------------------------------
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Oregon Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $ 9,577 $10,000 $10,000
3/31/1997 $ 9,504 $ 9,867 $10,025
4/30/1997 $ 9,572 $ 9,949 $10,038
5/31/1997 $ 9,675 $10,099 $10,031
6/30/1997 $ 9,752 $10,207 $10,044
7/31/1997 $ 9,965 $10,489 $10,056
8/31/1997 $ 9,932 $10,391 $10,075
9/30/1997 $10,028 $10,514 $10,100
10/31/1997 $10,081 $10,582 $10,125
11/30/1997 $10,152 $10,644 $10,119
12/31/1997 $10,274 $10,799 $10,107
1/31/1998 $10,354 $10,911 $10,125
2/28/1998 $10,364 $10,914 $10,144
3/31/1998 $10,366 $10,924 $10,163
4/30/1998 $10,359 $10,875 $10,182
5/31/1998 $10,484 $11,047 $10,201
6/30/1998 $10,521 $11,090 $10,213
7/31/1998 $10,541 $11,118 $10,226
8/31/1998 $10,677 $11,290 $10,238
9/30/1998 $10,786 $11,430 $10,251
10/31/1998 $10,759 $11,430 $10,276
11/30/1998 $10,806 $11,470 $10,276
12/31/1998 $10,833 $11,499 $10,269
1/31/1999 $10,934 $11,636 $10,294
2/28/1999 $10,897 $11,585 $10,307
3/31/1999 $10,923 $11,601 $10,338
4/30/1999 $10,940 $11,630 $10,414
5/31/1999 $10,883 $11,563 $10,414
6/30/1999 $10,713 $11,396 $10,414
7/31/1999 $10,748 $11,438 $10,445
8/31/1999 $10,605 $11,346 $10,470
9/30/1999 $10,584 $11,351 $10,520
10/31/1999 $10,412 $11,228 $10,539
11/30/1999 $10,515 $11,347 $10,545
12/31/1999 $10,407 $11,263 $10,545
1/31/2000 $10,348 $11,214 $10,576
2/29/2000 $10,481 $11,344 $10,639
3/31/2000 $10,722 $11,592 $10,727
4/30/2000 $10,652 $11,523 $10,733
5/31/2000 $10,583 $11,463 $10,746
6/30/2000 $10,866 $11,767 $10,802
7/31/2000 $11,013 $11,931 $10,827
8/31/2000 $11,190 $12,115 $10,827
9/30/2000 $11,119 $12,052 $10,883
10/31/2000 $11,227 $12,183 $10,902
11/30/2000 $11,296 $12,275 $10,909
12/31/2000 $11,557 $12,579 $10,902
1/31/2001 $11,617 $12,703 $10,971
2/28/2001 $11,666 $12,744 $11,015
3/31/2001 $11,756 $12,858 $11,040
4/30/2001 $11,631 $12,719 $11,084
5/31/2001 $11,742 $12,855 $11,134
6/30/2001 $11,833 $12,941 $11,153
7/31/2001 $12,018 $13,133 $11,122
8/31/2001 $12,204 $13,350 $11,122
9/30/2001 $12,127 $13,305 $11,172
10/31/2001 $12,271 $13,463 $11,134
11/30/2001 $12,172 $13,350 $11,115
12/31/2001 $12,039 $13,223 $11,071
1/31/2002 $12,215 $13,453 $11,096
2/28/2002 $12,359 $13,615 $11,140
3/31/2002 $12,150 $13,348 $11,203
4/30/2002 $12,360 $13,609 $11,266
5/31/2002 $12,420 $13,692 $11,266
6/30/2002 $12,534 $13,836 $11,272
7/31/2002 $12,670 $14,014 $11,284
8/31/2002 $12,796 $14,183 $11,322
9/30/2002 $13,065 $14,494 $11,341
10/31/2002 $12,796 $14,253 $11,360
11/30/2002 $12,756 $14,194 $11,360
12/31/2002 $13,018 $14,494 $11,335
1/31/2003 $12,968 $14,457 $11,385
2/28/2003 $13,141 $14,659 $11,472
3/31/2003 $13,135 $14,668 $11,541
4/30/2003 $13,231 $14,765 $11,516
5/31/2003 $13,576 $15,110 $11,497
6/30/2003 $13,546 $15,046 $11,510
7/31/2003 $13,069 $14,520 $11,523
8/31/2003 $13,165 $14,628 $11,566
9/30/2003 $13,503 $15,058 $11,604
10/31/2003 $13,449 $14,982 $11,591
11/30/2003 $13,615 $15,138 $11,560
12/31/2003 $13,735 $15,264 $11,548
1/31/2004 $13,821 $15,351 $11,604
2/29/2004 $14,047 $15,582 $11,667
3/31/2004 $14,040 $15,528 $11,742
4/30/2004 $13,714 $15,160 $11,779
5/31/2004 $13,684 $15,105 $11,848
6/30/2004 $13,725 $15,160 $11,886
7/31/2004 $13,909 $15,360 $11,867
8/31/2004 $14,153 $15,667 $11,873
9/30/2004 $14,231 $15,751 $11,898
10/31/2004 $14,380 $15,886 $11,961
11/30/2004 $14,264 $15,755 $11,967
12/31/2004 $14,463 $15,947 $11,924
1/31/2005 $14,651 $16,096 $11,949
2/28/2005 $14,630 $16,043 $12,018
3/31/2005 $14,548 $15,942 $12,112
4/30/2005 $14,799 $16,193 $12,193
5/31/2005 $14,914 $16,308 $12,180
6/30/2005 $14,993 $16,409 $12,187
7/31/2005 $14,934 $16,335 $12,243
8/31/2005 $15,101 $16,500 $12,306
9/30/2005 $14,991 $16,388 $12,456
10/31/2005 $14,892 $16,289 $12,481
11/30/2005 $14,957 $16,367 $12,381
12/31/2005 $15,087 $16,508 $12,331
1/31/2006 $15,114 $16,552 $12,425
2/28/2006 $15,257 $16,664 $12,450
3/31/2006 $15,129 $16,549 $12,519
4/30/2006 $15,142 $16,543 $12,625
5/31/2006 $15,181 $16,617 $12,688
6/30/2006 $15,103 $16,554 $12,713
7/31/2006 $15,286 $16,751 $12,751
8/31/2006 $15,495 $17,000 $12,776
9/30/2006 $15,600 $17,118 $12,713
10/31/2006 $15,693 $17,225 $12,644
11/30/2006 $15,838 $17,369 $12,625
12/31/2006 $15,772 $17,307 $12,644
1/31/2007 $15,732 $17,263 $12,683
2/28/2007 $15,939 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +2.99%
- ----------------------------------------------
5-Year +4.65%
- ----------------------------------------------
10-Year +4.66%
- ----------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Oregon Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,918 $ 9,867 $10,025
4/30/1997 $ 9,984 $ 9,949 $10,038
5/31/1997 $10,086 $10,099 $10,031
6/30/1997 $10,162 $10,207 $10,044
7/31/1997 $10,378 $10,489 $10,056
8/31/1997 $10,348 $10,391 $10,075
9/30/1997 $10,442 $10,514 $10,100
10/31/1997 $10,492 $10,582 $10,125
11/30/1997 $10,552 $10,644 $10,119
12/31/1997 $10,682 $10,799 $10,107
1/31/1998 $10,760 $10,911 $10,125
2/28/1998 $10,765 $10,914 $10,144
3/31/1998 $10,762 $10,924 $10,163
4/30/1998 $10,740 $10,875 $10,182
5/31/1998 $10,874 $11,047 $10,201
6/30/1998 $10,907 $11,090 $10,213
7/31/1998 $10,922 $11,118 $10,226
8/31/1998 $11,057 $11,290 $10,238
9/30/1998 $11,164 $11,430 $10,251
10/31/1998 $11,132 $11,430 $10,276
11/30/1998 $11,174 $11,470 $10,276
12/31/1998 $11,197 $11,499 $10,269
1/31/1999 $11,295 $11,636 $10,294
2/28/1999 $11,261 $11,585 $10,307
3/31/1999 $11,273 $11,601 $10,338
4/30/1999 $11,295 $11,630 $10,414
5/31/1999 $11,221 $11,563 $10,414
6/30/1999 $11,052 $11,396 $10,414
7/31/1999 $11,073 $11,438 $10,445
8/31/1999 $10,931 $11,346 $10,470
9/30/1999 $10,895 $11,351 $10,520
10/31/1999 $10,723 $11,228 $10,539
11/30/1999 $10,813 $11,347 $10,545
12/31/1999 $10,709 $11,263 $10,545
1/31/2000 $10,633 $11,214 $10,576
2/29/2000 $10,764 $11,344 $10,639
3/31/2000 $11,016 $11,592 $10,727
4/30/2000 $10,939 $11,523 $10,733
5/31/2000 $10,864 $11,463 $10,746
6/30/2000 $11,138 $11,767 $10,802
7/31/2000 $11,292 $11,931 $10,827
8/31/2000 $11,467 $12,115 $10,827
9/30/2000 $11,389 $12,052 $10,883
10/31/2000 $11,494 $12,183 $10,902
11/30/2000 $11,559 $12,275 $10,909
12/31/2000 $11,819 $12,579 $10,902
1/31/2001 $11,874 $12,703 $10,971
2/28/2001 $11,908 $12,744 $11,015
3/31/2001 $12,014 $12,858 $11,040
4/30/2001 $11,882 $12,719 $11,084
5/31/2001 $11,989 $12,855 $11,134
6/30/2001 $12,065 $12,941 $11,153
7/31/2001 $12,257 $13,133 $11,122
8/31/2001 $12,440 $13,350 $11,122
9/30/2001 $12,346 $13,305 $11,172
10/31/2001 $12,485 $13,463 $11,134
11/30/2001 $12,380 $13,350 $11,115
12/31/2001 $12,240 $13,223 $11,071
1/31/2002 $12,412 $13,453 $11,096
2/28/2002 $12,563 $13,615 $11,140
3/31/2002 $12,346 $13,348 $11,203
4/30/2002 $12,552 $13,609 $11,266
5/31/2002 $12,606 $13,692 $11,266
6/30/2002 $12,715 $13,836 $11,272
7/31/2002 $12,858 $14,014 $11,284
8/31/2002 $12,968 $14,183 $11,322
9/30/2002 $13,233 $14,494 $11,341
10/31/2002 $12,956 $14,253 $11,360
11/30/2002 $12,911 $14,194 $11,360
12/31/2002 $13,178 $14,494 $11,335
1/31/2003 $13,122 $14,457 $11,385
2/28/2003 $13,290 $14,659 $11,472
3/31/2003 $13,267 $14,668 $11,541
4/30/2003 $13,368 $14,765 $11,516
5/31/2003 $13,708 $15,110 $11,497
6/30/2003 $13,671 $15,046 $11,510
7/31/2003 $13,188 $14,520 $11,523
8/31/2003 $13,265 $14,628 $11,566
9/30/2003 $13,596 $15,058 $11,604
10/31/2003 $13,547 $14,982 $11,591
11/30/2003 $13,706 $15,138 $11,560
12/31/2003 $13,832 $15,264 $11,548
1/31/2004 $13,899 $15,351 $11,604
2/29/2004 $14,131 $15,582 $11,667
3/31/2004 $14,118 $15,528 $11,742
4/30/2004 $13,775 $15,160 $11,779
5/31/2004 $13,738 $15,105 $11,848
6/30/2004 $13,784 $15,160 $11,886
7/31/2004 $13,949 $15,360 $11,867
8/31/2004 $14,186 $15,667 $11,873
9/30/2004 $14,268 $15,751 $11,898
10/31/2004 $14,411 $15,886 $11,961
11/30/2004 $14,277 $15,755 $11,967
12/31/2004 $14,480 $15,947 $11,924
1/31/2005 $14,659 $16,096 $11,949
2/28/2005 $14,633 $16,043 $12,018
3/31/2005 $14,544 $15,942 $12,112
4/30/2005 $14,773 $16,193 $12,193
5/31/2005 $14,892 $16,308 $12,180
6/30/2005 $14,963 $16,409 $12,187
7/31/2005 $14,899 $16,335 $12,243
8/31/2005 $15,057 $16,500 $12,306
9/30/2005 $14,941 $16,388 $12,456
10/31/2005 $14,837 $16,289 $12,481
11/30/2005 $14,895 $16,367 $12,381
12/31/2005 $15,015 $16,508 $12,331
1/31/2006 $15,035 $16,552 $12,425
2/28/2006 $15,169 $16,664 $12,450
3/31/2006 $15,036 $16,549 $12,519
4/30/2006 $15,042 $16,543 $12,625
5/31/2006 $15,073 $16,617 $12,688
6/30/2006 $14,990 $16,554 $12,713
7/31/2006 $15,162 $16,751 $12,751
8/31/2006 $15,361 $17,000 $12,776
9/30/2006 $15,457 $17,118 $12,713
10/31/2006 $15,553 $17,225 $12,644
11/30/2006 $15,676 $17,369 $12,625
12/31/2006 $15,617 $17,307 $12,644
1/31/2007 $15,571 $17,263 $12,683
2/28/2007 $15,769 $17,490 $12,751
82 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Oregon
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
Annual Report | 83
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 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.
84 | 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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.90 $3.27
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.60 $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% 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 | 85
Franklin Pennsylvania Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Pennsylvania Tax-Free Income
Fund seeks to provide as high a level of income exempt from federal and
Pennsylvania personal income taxes as is consistent with prudent investment
management and preservation of capital by investing at least 80% of its net
assets in securities that pay interest free from such taxes. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Pennsylvania Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ........................................... 68.4%
AA ............................................ 4.6%
A ............................................. 1.1%
BBB ........................................... 12.7%
Not Rated by S&P .............................. 13.2%
* 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 12.6% 0.1%
A 0.1% --
BBB or Baa 0.4% --
- ---------------------------------------------------------
Total 13.1% 0.1%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Pennsylvania Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$10.44 on February 28, 2006, to $10.47 on February 28, 2007. The Fund's
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally
taxable. To avoid imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 192.
86 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin Pennsylvania Tax-Free Income Fund
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------
MONTH CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
March 2006 3.83 cents 3.35 cents 3.32 cents
- --------------------------------------------------------------------------------
April 2006 3.83 cents 3.35 cents 3.32 cents
- --------------------------------------------------------------------------------
May 2006 3.83 cents 3.35 cents 3.32 cents
- --------------------------------------------------------------------------------
June 2006 3.69 cents 3.23 cents 3.21 cents
- --------------------------------------------------------------------------------
July 2006 3.69 cents 3.23 cents 3.21 cents
- --------------------------------------------------------------------------------
August 2006 3.69 cents 3.23 cents 3.21 cents
- --------------------------------------------------------------------------------
September 2006 3.69 cents 3.22 cents 3.22 cents
- --------------------------------------------------------------------------------
October 2006 3.69 cents 3.22 cents 3.22 cents
- --------------------------------------------------------------------------------
November 2006 3.69 cents 3.22 cents 3.22 cents
- --------------------------------------------------------------------------------
December 2006 3.69 cents 3.20 cents 3.20 cents
- --------------------------------------------------------------------------------
January 2007 3.69 cents 3.20 cents 3.20 cents
- --------------------------------------------------------------------------------
February 2007 3.69 cents 3.20 cents 3.20 cents
- --------------------------------------------------------------------------------
Class A shares paid dividends totaling 44.80 cents per share for the same
period. 2 The Performance Summary beginning on page 89 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.05%
based on an annualization of the current 3.69 cent per share dividend and the
maximum offering price of $10.93 on February 28, 2007. An investor in the 2007
maximum combined effective federal and Pennsylvania personal income tax bracket
of 37.00% would need to earn a distribution rate of 6.43% 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.
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.
2. Assumes shares were purchased and held for the entire accrual period,
which differs from the calendar month. 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 | 87
PORTFOLIO BREAKDOWN
Franklin Pennsylvania Tax-Free
Income Fund
2/28/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 26.8%
- --------------------------------------------------------------------------------
General Obligation 19.7%
- --------------------------------------------------------------------------------
Higher Education 11.9%
- --------------------------------------------------------------------------------
Hospital & Health Care 11.5%
- --------------------------------------------------------------------------------
Transportation 9.6%
- --------------------------------------------------------------------------------
Utilities 5.8%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 5.0%
- --------------------------------------------------------------------------------
Other Revenue 4.4%
- --------------------------------------------------------------------------------
Corporate-Backed 2.6%
- --------------------------------------------------------------------------------
Housing 2.6%
- --------------------------------------------------------------------------------
Tax-Supported 0.1%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
COMMONWEALTH UPDATE
Pennsylvania's economy continued to rebound, bolstered by encouraging signs from
the employment sector. Although the manufacturing sector continued its decline,
the state's diverse economic base gained jobs in education, health care, leisure
and hospitality, and retail trade. As of February 2007, Pennsylvania's 4.0%
unemployment rate was less than the 4.5% national average and personal incomes
continued to grow modestly. 3
Despite increased funding for education, public welfare and debt service,
Pennsylvania's fiscal year 2007 budget was balanced using its surplus from
fiscal years 2005 and 2006. The large elderly population, bundled with shrinking
federal aid and escalating general medical costs, presented challenges for the
state, but it managed to protect core Medicaid services without compromising its
fiscal responsibilities. The state's limited use of nonrecurring measures also
was an indication of a sound fiscal structure. The commonwealth's debt burden is
expected to grow but remain below that of neighboring states.
Even with low budget reserves and increasing debt levels, independent credit
rating agency Standard & Poor's (S&P) considers Pennsylvania's debt profile
favorable. Strong actions to preserve budget balance and overall sound financial
management led S&P to assign the state's general obligation bonds a rating of AA
with a stable outlook. 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.
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 S&P's rating of the Fund.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
88 | Annual Report
Performance Summary as of 2/28/07
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRPAX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $10.47 $10.44
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4480
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBPTX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $10.51 $10.47
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.3909
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRPTX) CHANGE 2/28/07 2/28/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $10.55 $10.51
- --------------------------------------------------------------------------------
DISTRIBUTIONS (3/1/06-2/28/07)
- --------------------------------------------------------------------------------
Dividend Income $0.3894
- --------------------------------------------------------------------------------
Annual Report | 89
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE
FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.71% +27.41% +66.97%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.29% +4.05% +4.80%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.51% +4.39% +4.88%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 4.05%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 6.43%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.34%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 5.30%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.66%
- ---------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.22% +24.13% +48.91%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.22% +4.08% +5.79%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +0.50% +4.43% +5.66%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.68%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.84%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.94%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.67%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.21%
- ---------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +4.19% +23.99% +58.13%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.19% +4.39% +4.69%
- ---------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.56% +4.76% +4.77%
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 3.64%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 5 5.78%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.95%
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield 5 4.68%
- ---------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.21%
- ---------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
90 | 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.
CLASS A (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Pennsylvania Lehman Brothers
Date Tax-free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $ 9,576 $10,000 $10,000
3/31/1997 $ 9,484 $ 9,867 $10,025
4/30/1997 $ 9,567 $ 9,949 $10,038
5/31/1997 $ 9,679 $10,099 $10,031
6/30/1997 $ 9,774 $10,207 $10,044
7/31/1997 $10,001 $10,489 $10,056
8/31/1997 $ 9,935 $10,391 $10,075
9/30/1997 $10,037 $10,514 $10,100
10/31/1997 $10,103 $10,582 $10,125
11/30/1997 $10,178 $10,644 $10,119
12/31/1997 $10,326 $10,799 $10,107
1/31/1998 $10,432 $10,911 $10,125
2/28/1998 $10,430 $10,914 $10,144
3/31/1998 $10,437 $10,924 $10,163
4/30/1998 $10,424 $10,875 $10,182
5/31/1998 $10,540 $11,047 $10,201
6/30/1998 $10,597 $11,090 $10,213
7/31/1998 $10,615 $11,118 $10,226
8/31/1998 $10,733 $11,290 $10,238
9/30/1998 $10,851 $11,430 $10,251
10/31/1998 $10,826 $11,430 $10,276
11/30/1998 $10,873 $11,470 $10,276
12/31/1998 $10,893 $11,499 $10,269
1/31/1999 $10,991 $11,636 $10,294
2/28/1999 $10,965 $11,585 $10,307
3/31/1999 $10,980 $11,601 $10,338
4/30/1999 $11,015 $11,630 $10,414
5/31/1999 $10,946 $11,563 $10,414
6/30/1999 $10,813 $11,396 $10,414
7/31/1999 $10,838 $11,438 $10,445
8/31/1999 $10,672 $11,346 $10,470
9/30/1999 $10,644 $11,351 $10,520
10/31/1999 $10,444 $11,228 $10,539
11/30/1999 $10,556 $11,347 $10,545
12/31/1999 $10,441 $11,263 $10,545
1/31/2000 $10,358 $11,214 $10,576
2/29/2000 $10,494 $11,344 $10,639
3/31/2000 $10,751 $11,592 $10,727
4/30/2000 $10,689 $11,523 $10,733
5/31/2000 $10,638 $11,463 $10,746
6/30/2000 $10,910 $11,767 $10,802
7/31/2000 $11,060 $11,931 $10,827
8/31/2000 $11,245 $12,115 $10,827
9/30/2000 $11,204 $12,052 $10,883
10/31/2000 $11,300 $12,183 $10,902
11/30/2000 $11,350 $12,275 $10,909
12/31/2000 $11,584 $12,579 $10,902
1/31/2001 $11,680 $12,703 $10,971
2/28/2001 $11,730 $12,744 $11,015
3/31/2001 $11,851 $12,858 $11,040
4/30/2001 $11,716 $12,719 $11,084
5/31/2001 $11,837 $12,855 $11,134
6/30/2001 $11,924 $12,941 $11,153
7/31/2001 $12,118 $13,133 $11,122
8/31/2001 $12,312 $13,350 $11,122
9/30/2001 $12,280 $13,305 $11,172
10/31/2001 $12,416 $13,463 $11,134
11/30/2001 $12,347 $13,350 $11,115
12/31/2001 $12,206 $13,223 $11,071
1/31/2002 $12,414 $13,453 $11,096
2/28/2002 $12,551 $13,615 $11,140
3/31/2002 $12,310 $13,348 $11,203
4/30/2002 $12,509 $13,609 $11,266
5/31/2002 $12,587 $13,692 $11,266
6/30/2002 $12,726 $13,836 $11,272
7/31/2002 $12,878 $14,014 $11,284
8/31/2002 $13,018 $14,183 $11,322
9/30/2002 $13,283 $14,494 $11,341
10/31/2002 $13,085 $14,253 $11,360
11/30/2002 $13,050 $14,194 $11,360
12/31/2002 $13,305 $14,494 $11,335
1/31/2003 $13,294 $14,457 $11,385
2/28/2003 $13,461 $14,659 $11,472
3/31/2003 $13,463 $14,668 $11,541
4/30/2003 $13,580 $14,765 $11,516
5/31/2003 $13,878 $15,110 $11,497
6/30/2003 $13,838 $15,046 $11,510
7/31/2003 $13,341 $14,520 $11,523
8/31/2003 $13,444 $14,628 $11,566
9/30/2003 $13,757 $15,058 $11,604
10/31/2003 $13,703 $14,982 $11,591
11/30/2003 $13,846 $15,138 $11,560
12/31/2003 $13,937 $15,264 $11,548
1/31/2004 $14,029 $15,351 $11,604
2/29/2004 $14,219 $15,582 $11,667
3/31/2004 $14,162 $15,528 $11,742
4/30/2004 $13,850 $15,160 $11,779
5/31/2004 $13,808 $15,105 $11,848
6/30/2004 $13,819 $15,160 $11,886
7/31/2004 $14,007 $15,360 $11,867
8/31/2004 $14,236 $15,667 $11,873
9/30/2004 $14,317 $15,751 $11,898
10/31/2004 $14,452 $15,886 $11,961
11/30/2004 $14,340 $15,755 $11,967
12/31/2004 $14,518 $15,947 $11,924
1/31/2005 $14,697 $16,096 $11,949
2/28/2005 $14,667 $16,043 $12,018
3/31/2005 $14,609 $15,942 $12,112
4/30/2005 $14,818 $16,193 $12,193
5/31/2005 $14,915 $16,308 $12,180
6/30/2005 $14,999 $16,409 $12,187
7/31/2005 $14,940 $16,335 $12,243
8/31/2005 $15,095 $16,500 $12,306
9/30/2005 $14,993 $16,388 $12,456
10/31/2005 $14,919 $16,289 $12,481
11/30/2005 $14,974 $16,367 $12,381
12/31/2005 $15,102 $16,508 $12,331
1/31/2006 $15,128 $16,552 $12,425
2/28/2006 $15,272 $16,664 $12,450
3/31/2006 $15,181 $16,549 $12,519
4/30/2006 $15,178 $16,543 $12,625
5/31/2006 $15,220 $16,617 $12,688
6/30/2006 $15,156 $16,554 $12,713
7/31/2006 $15,315 $16,751 $12,751
8/31/2006 $15,519 $17,000 $12,776
9/30/2006 $15,619 $17,118 $12,713
10/31/2006 $15,720 $17,225 $12,644
11/30/2006 $15,866 $17,369 $12,625
12/31/2006 $15,831 $17,307 $12,644
1/31/2007 $15,796 $17,263 $12,683
2/28/2007 $15,989 $17,490 $12,751
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 2/28/07
- ----------------------------------------------
1-Year +0.29%
- ----------------------------------------------
5-Year +4.05%
- ----------------------------------------------
10-Year +4.80%
- ----------------------------------------------
CLASS B (2/1/00-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Pennsylvania Lehman Brothers
Date Tax-free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
2/1/2000 $10,000 $10,000 $10,000
2/29/2000 $10,111 $10,116 $10,059
3/31/2000 $10,354 $10,337 $10,142
4/30/2000 $10,301 $10,276 $10,148
5/31/2000 $10,237 $10,223 $10,160
6/30/2000 $10,493 $10,494 $10,213
7/31/2000 $10,644 $10,640 $10,237
8/31/2000 $10,816 $10,804 $10,237
9/30/2000 $10,772 $10,747 $10,290
10/31/2000 $10,858 $10,865 $10,308
11/30/2000 $10,901 $10,947 $10,314
12/31/2000 $11,121 $11,217 $10,308
1/31/2001 $11,208 $11,328 $10,373
2/28/2001 $11,251 $11,364 $10,415
3/31/2001 $11,361 $11,466 $10,438
4/30/2001 $11,227 $11,342 $10,480
5/31/2001 $11,338 $11,464 $10,527
6/30/2001 $11,427 $11,541 $10,545
7/31/2001 $11,607 $11,712 $10,515
8/31/2001 $11,788 $11,905 $10,515
9/30/2001 $11,752 $11,865 $10,563
10/31/2001 $11,875 $12,006 $10,527
11/30/2001 $11,805 $11,905 $10,509
12/31/2001 $11,664 $11,792 $10,468
1/31/2002 $11,857 $11,997 $10,492
2/28/2002 $11,982 $12,141 $10,533
3/31/2002 $11,747 $11,903 $10,592
4/30/2002 $11,931 $12,136 $10,652
5/31/2002 $11,999 $12,210 $10,652
6/30/2002 $12,126 $12,339 $10,658
7/31/2002 $12,265 $12,498 $10,669
8/31/2002 $12,393 $12,648 $10,705
9/30/2002 $12,639 $12,925 $10,723
10/31/2002 $12,457 $12,711 $10,741
11/30/2002 $12,418 $12,658 $10,741
12/31/2002 $12,655 $12,925 $10,717
1/31/2003 $12,627 $12,892 $10,764
2/28/2003 $12,792 $13,072 $10,847
3/31/2003 $12,787 $13,080 $10,912
4/30/2003 $12,880 $13,167 $10,889
5/31/2003 $13,168 $13,475 $10,871
6/30/2003 $13,124 $13,418 $10,883
7/31/2003 $12,648 $12,948 $10,895
8/31/2003 $12,739 $13,045 $10,936
9/30/2003 $13,029 $13,428 $10,972
10/31/2003 $12,972 $13,361 $10,960
11/30/2003 $13,101 $13,500 $10,930
12/31/2003 $13,181 $13,612 $10,918
1/31/2004 $13,261 $13,690 $10,972
2/29/2004 $13,442 $13,896 $11,031
3/31/2004 $13,396 $13,847 $11,102
4/30/2004 $13,083 $13,519 $11,137
5/31/2004 $13,037 $13,470 $11,203
6/30/2004 $13,041 $13,519 $11,238
7/31/2004 $13,225 $13,697 $11,220
8/31/2004 $13,421 $13,972 $11,226
9/30/2004 $13,491 $14,046 $11,250
10/31/2004 $13,612 $14,167 $11,309
11/30/2004 $13,501 $14,050 $11,315
12/31/2004 $13,662 $14,221 $11,274
1/31/2005 $13,823 $14,354 $11,297
2/28/2005 $13,789 $14,307 $11,363
3/31/2005 $13,728 $14,216 $11,451
4/30/2005 $13,918 $14,441 $11,528
5/31/2005 $14,015 $14,543 $11,517
6/30/2005 $14,087 $14,633 $11,523
7/31/2005 $14,026 $14,567 $11,576
8/31/2005 $14,151 $14,714 $11,635
9/30/2005 $14,063 $14,615 $11,777
10/31/2005 $13,987 $14,526 $11,801
11/30/2005 $14,019 $14,596 $11,706
12/31/2005 $14,132 $14,721 $11,659
1/31/2006 $14,150 $14,761 $11,748
2/28/2006 $14,277 $14,860 $11,771
3/31/2006 $14,186 $14,758 $11,836
4/30/2006 $14,177 $14,752 $11,937
5/31/2006 $14,210 $14,818 $11,996
6/30/2006 $14,144 $14,762 $12,020
7/31/2006 $14,299 $14,938 $12,056
8/31/2006 $14,482 $15,160 $12,079
9/30/2006 $14,569 $15,265 $12,020
10/31/2006 $14,656 $15,361 $11,955
11/30/2006 $14,785 $15,489 $11,937
12/31/2006 $14,746 $15,434 $11,955
1/31/2007 $14,706 $15,395 $11,991
2/28/2007 $14,891 $15,597 $12,056
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 2/28/07
- ----------------------------------------------
1-Year +0.22%
- ----------------------------------------------
5-Year +4.08%
- ----------------------------------------------
Since Inception (2/1/00) +5.79%
- ----------------------------------------------
Annual Report | 91
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 2/28/07
- ----------------------------------------------
1-Year +3.19%
- ----------------------------------------------
5-Year +4.39%
- ----------------------------------------------
10-Year +4.69%
- ----------------------------------------------
CLASS C (3/1/97-2/28/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Pennsylvania Lehman Brothers
Date Tax-Free Income Fund Municipal Bond Index 8 CPI 8
- --------------------------------------------------------------------------------
3/1/1997 $10,000 $10,000 $10,000
3/31/1997 $ 9,900 $ 9,867 $10,025
4/30/1997 $ 9,982 $ 9,949 $10,038
5/31/1997 $10,093 $10,099 $10,031
6/30/1997 $10,187 $10,207 $10,044
7/31/1997 $10,418 $10,489 $10,056
8/31/1997 $10,344 $10,391 $10,075
9/30/1997 $10,446 $10,514 $10,100
10/31/1997 $10,509 $10,582 $10,125
11/30/1997 $10,591 $10,644 $10,119
12/31/1997 $10,740 $10,799 $10,107
1/31/1998 $10,834 $10,911 $10,125
2/28/1998 $10,837 $10,914 $10,144
3/31/1998 $10,839 $10,924 $10,163
4/30/1998 $10,810 $10,875 $10,182
5/31/1998 $10,936 $11,047 $10,201
6/30/1998 $10,990 $11,090 $10,213
7/31/1998 $10,992 $11,118 $10,226
8/31/1998 $11,119 $11,290 $10,238
9/30/1998 $11,225 $11,430 $10,251
10/31/1998 $11,205 $11,430 $10,276
11/30/1998 $11,248 $11,470 $10,276
12/31/1998 $11,263 $11,499 $10,269
1/31/1999 $11,359 $11,636 $10,294
2/28/1999 $11,327 $11,585 $10,307
3/31/1999 $11,347 $11,601 $10,338
4/30/1999 $11,367 $11,630 $10,414
5/31/1999 $11,290 $11,563 $10,414
6/30/1999 $11,149 $11,396 $10,414
7/31/1999 $11,170 $11,438 $10,445
8/31/1999 $10,994 $11,346 $10,470
9/30/1999 $10,960 $11,351 $10,520
10/31/1999 $10,751 $11,228 $10,539
11/30/1999 $10,860 $11,347 $10,545
12/31/1999 $10,738 $11,263 $10,545
1/31/2000 $10,648 $11,214 $10,576
2/29/2000 $10,782 $11,344 $10,639
3/31/2000 $11,040 $11,592 $10,727
4/30/2000 $10,972 $11,523 $10,733
5/31/2000 $10,916 $11,463 $10,746
6/30/2000 $11,188 $11,767 $10,802
7/31/2000 $11,336 $11,931 $10,827
8/31/2000 $11,519 $12,115 $10,827
9/30/2000 $11,472 $12,052 $10,883
10/31/2000 $11,564 $12,183 $10,902
11/30/2000 $11,610 $12,275 $10,909
12/31/2000 $11,842 $12,579 $10,902
1/31/2001 $11,935 $12,703 $10,971
2/28/2001 $11,993 $12,744 $11,015
3/31/2001 $12,098 $12,858 $11,040
4/30/2001 $11,955 $12,719 $11,084
5/31/2001 $12,084 $12,855 $11,134
6/30/2001 $12,167 $12,941 $11,153
7/31/2001 $12,358 $13,133 $11,122
8/31/2001 $12,550 $13,350 $11,122
9/30/2001 $12,512 $13,305 $11,172
10/31/2001 $12,643 $13,463 $11,134
11/30/2001 $12,568 $13,350 $11,115
12/31/2001 $12,419 $13,223 $11,071
1/31/2002 $12,624 $13,453 $11,096
2/28/2002 $12,756 $13,615 $11,140
3/31/2002 $12,507 $13,348 $11,203
4/30/2002 $12,702 $13,609 $11,266
5/31/2002 $12,774 $13,692 $11,266
6/30/2002 $12,909 $13,836 $11,272
7/31/2002 $13,056 $14,014 $11,284
8/31/2002 $13,192 $14,183 $11,322
9/30/2002 $13,453 $14,494 $11,341
10/31/2002 $13,260 $14,253 $11,360
11/30/2002 $13,218 $14,194 $11,360
12/31/2002 $13,470 $14,494 $11,335
1/31/2003 $13,452 $14,457 $11,385
2/28/2003 $13,614 $14,659 $11,472
3/31/2003 $13,610 $14,668 $11,541
4/30/2003 $13,709 $14,765 $11,516
5/31/2003 $14,016 $15,110 $11,497
6/30/2003 $13,968 $15,046 $11,510
7/31/2003 $13,463 $14,520 $11,523
8/31/2003 $13,546 $14,628 $11,566
9/30/2003 $13,853 $15,058 $11,604
10/31/2003 $13,805 $14,982 $11,591
11/30/2003 $13,941 $15,138 $11,560
12/31/2003 $14,026 $15,264 $11,548
1/31/2004 $14,111 $15,351 $11,604
2/29/2004 $14,303 $15,582 $11,667
3/31/2004 $14,241 $15,528 $11,742
4/30/2004 $13,923 $15,160 $11,779
5/31/2004 $13,874 $15,105 $11,848
6/30/2004 $13,879 $15,160 $11,886
7/31/2004 $14,059 $15,360 $11,867
8/31/2004 $14,282 $15,667 $11,873
9/30/2004 $14,355 $15,751 $11,898
10/31/2004 $14,484 $15,886 $11,961
11/30/2004 $14,365 $15,755 $11,967
12/31/2004 $14,536 $15,947 $11,924
1/31/2005 $14,707 $16,096 $11,949
2/28/2005 $14,684 $16,043 $12,018
3/31/2005 $14,606 $15,942 $12,112
4/30/2005 $14,807 $16,193 $12,193
5/31/2005 $14,910 $16,308 $12,180
6/30/2005 $14,986 $16,409 $12,187
7/31/2005 $14,922 $16,335 $12,243
8/31/2005 $15,069 $16,500 $12,306
9/30/2005 $14,961 $16,388 $12,456
10/31/2005 $14,881 $16,289 $12,481
11/30/2005 $14,929 $16,367 $12,381
12/31/2005 $15,049 $16,508 $12,331
1/31/2006 $15,068 $16,552 $12,425
2/28/2006 $15,188 $16,664 $12,450
3/31/2006 $15,091 $16,549 $12,519
4/30/2006 $15,096 $16,543 $12,625
5/31/2006 $15,115 $16,617 $12,688
6/30/2006 $15,060 $16,554 $12,713
7/31/2006 $15,209 $16,751 $12,751
8/31/2006 $15,403 $17,000 $12,776
9/30/2006 $15,495 $17,118 $12,713
10/31/2006 $15,587 $17,225 $12,644
11/30/2006 $15,724 $17,369 $12,625
12/31/2006 $15,697 $17,307 $12,644
1/31/2007 $15,655 $17,263 $12,683
2/28/2007 $15,813 $17,490 $12,751
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS,
THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET CONDITIONS. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 2/28/07.
5. Taxable equivalent distribution rate and yield assume the published rates
as of 12/28/06 for the maximum combined effective federal and Pennsylvania
personal income tax rate 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 2/28/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond
Index is a market value-weighted index engineered for the long-term
tax-exempt bond market. All bonds included have a minimum credit rating of
at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds
with floating rates and derivatives are excluded from the index. The index
has four main bond sectors: general obligation, revenue, insured and
prerefunded. The Consumer Price Index (CPI), calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate.
92 | 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 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 | 93
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 9/1/06 VALUE 2/28/07 PERIOD* 9/1/06-2/28/07
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.90 $3.32
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.00 $6.08
- ----------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.90 $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.
94 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN ARIZONA TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.09 $ 11.21 $ 11.21 $ 10.88 $ 10.76
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.48 0.48 0.50 0.52 0.54
Net realized and unrealized gains (losses) .. 0.06 (0.12) (0.01) 0.33 0.12
-------------------------------------------------------------
Total from investment operations ............... 0.54 0.36 0.49 0.85 0.66
-------------------------------------------------------------
Less distributions from net investment income .. (0.47) (0.48) (0.49) (0.52) (0.54)
-------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................... $ 11.16 $ 11.09 $ 11.21 $ 11.21 $ 10.88
=============================================================
Total return c ................................. 5.05% 3.25% 4.61% 8.00% 6.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $928,840 $885,864 $852,608 $900,646 $880,409
Ratios to average net assets:
Expenses .................................... 0.63% 0.63% 0.63% 0.63% 0.63%
Net investment income ....................... 4.32% 4.34% 4.52% 4.75% 5.00%
Portfolio turnover rate ........................ 6.56% 33.22% 27.99% 16.22% 24.94%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 95
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.15 $ 11.27 $ 11.26 $ 10.93 $ 10.81
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.42 0.43 0.44 0.46 0.48
Net realized and unrealized gains (losses) .. 0.06 (0.13) -- d 0.33 0.12
-------------------------------------------------------------
Total from investment operations ............... 0.48 0.30 0.44 0.79 0.60
-------------------------------------------------------------
Less distributions from net investment income .. (0.41) (0.42) (0.43) (0.46) (0.48)
-------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................... $ 11.22 $ 11.15 $ 11.27 $ 11.26 $ 10.93
=============================================================
Total return c ................................. 4.45% 2.68% 4.09% 7.28% 5.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 21,061 $ 22,315 $ 23,753 $ 25,617 $ 20,648
Ratios to average net assets:
Expenses .................................... 1.17% 1.18% 1.18% 1.18% 1.18%
Net investment income ....................... 3.78% 3.79% 3.97% 4.20% 4.45%
Portfolio turnover rate ........................ 6.56% 33.22% 27.99% 16.22% 24.94%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
96 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.20 $ 11.32 $ 11.31 $ 10.97 $ 10.85
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.42 0.43 0.44 0.46 0.48
Net realized and unrealized gains (losses) .. 0.06 (0.13) -- d 0.33 0.12
-------------------------------------------------------------
Total from investment operations ............... 0.48 0.30 0.44 0.79 0.60
-------------------------------------------------------------
Less distributions from net investment income .. (0.41) (0.42) (0.43) (0.45) (0.48)
-------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................... $ 11.27 $ 11.20 $ 11.32 $ 11.31 $ 10.97
=============================================================
Total return c ................................. 4.42% 2.66% 4.09% 7.42% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 58,386 $ 51,071 $ 44,055 $ 43,027 $ 37,315
Ratios to average net assets:
Expenses .................................... 1.18% 1.18% 1.18% 1.20% 1.16%
Net investment income ....................... 3.77% 3.79% 3.97% 4.18% 4.47%
Portfolio turnover rate ........................ 6.56% 33.22% 27.99% 16.22% 24.94%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 97
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.2%
MUNICIPAL BONDS 98.2%
ARIZONA 80.0%
Arizona Health Facilities Authority Hospital System Revenue,
John C. Lincoln Health Network, 5.75%, 12/01/32 ............................................. $ 3,280,000 $ 3,507,074
Phoenix Baptist Hospital, MBIA Insured, ETM, 6.25%, 9/01/11 ................................. 1,340,000 1,378,713
Arizona Health Facilities Authority Revenue, Catholic Healthcare West, Series A, 6.625%,
7/01/20 ...................................................................................... 6,390,000 7,029,639
Arizona School Facilities Board Revenue, State School Improvement, Pre-Refunded, 5.00%,
7/01/19 ...................................................................................... 2,000,000 2,108,600
Arizona State Board of Regents COP, University of Arizona Main Campus, Series A-1,
AMBAC Insured, 5.125%, 6/01/25 ............................................................... 2,000,000 2,105,940
Arizona State Municipal Financing Program COP, Refunding, Series 14, AMBAC Insured,
5.00%, 8/01/33 ............................................................................... 1,000,000 1,047,650
Arizona State University COP,
Arizona State University Project, Series 2002, MBIA Insured, Pre-Refunded, 5.00%,
7/01/20 .................................................................................... 5,475,000 5,832,025
Arizona State University Project, Series 2002, MBIA Insured, Pre-Refunded, 5.00%,
7/01/21 .................................................................................... 5,965,000 6,353,978
Arizona State University Project, Series 2002, MBIA Insured, Pre-Refunded, 5.10%,
7/01/23 .................................................................................... 3,545,000 3,793,185
Arizona State University Project, Series 2002, MBIA Insured, Pre-Refunded, 5.10%,
7/01/24 .................................................................................... 1,875,000 2,006,269
Arizona State University Project, Series 2002, MBIA Insured, Pre-Refunded, 5.10%,
7/01/25 .................................................................................... 2,640,000 2,824,826
Downtown Campus/Mercado Project, Series A, MBIA Insured, 5.80%, 7/01/24 ..................... 1,350,000 1,358,775
Research Infrastructure Projects, AMBAC Insured, 5.00%, 9/01/30 ............................. 17,250,000 18,322,260
Research Infrastructure Projects, Series A, AMBAC Insured, 5.00%, 9/01/27 ................... 4,415,000 4,698,840
Arizona State University Revenues,
FGIC Insured, 5.00%, 7/01/23 ................................................................ 2,890,000 3,045,569
FGIC Insured, 5.00%, 7/01/25 ................................................................ 2,250,000 2,366,685
System, FGIC Insured, Pre-Refunded, 5.875%, 7/01/25 ......................................... 1,000,000 1,059,400
System, Refunding, AMBAC Insured, 5.00%, 7/01/27 ............................................ 1,895,000 2,039,039
Arizona Student Loan Acquisition Authority Student Loan Revenue,
junior sub., Refunding, Series B-1, 6.15%, 5/01/29 .......................................... 1,000,000 1,060,380
Refunding, Senior Series A-1, 5.90%, 5/01/24 ................................................ 1,500,000 1,590,990
Arizona Tourism and Sports Authority Tax Revenue, Multipurpose Stadium Facility, Series A,
MBIA Insured, 5.00%, 7/01/28 ................................................................ 7,000,000 7,383,250
Douglas Community Housing Corp. MFR, Rancho La Perilla, Series A, GNMA Secured,
6.125%, 7/20/41 .............................................................................. 2,235,000 2,358,059
Downtown Phoenix Hotel Corp. Revenue,
Senior Series A, FGIC Insured, 5.00%, 7/01/40 ............................................... 26,485,000 28,092,110
Sub Series B, FGIC Insured, 5.00%, 7/01/36 .................................................. 25,095,000 26,674,981
Sub Series B, FGIC Insured, 5.00%, 7/01/40 .................................................. 12,845,000 13,624,435
Glendale IDA Hospital Revenue, John C Lincoln Health, Refunding, Series B, 5.00%,
12/01/37 ..................................................................................... 3,000,000 3,094,050
Glendale IDAR, Midwestern University, Series A,
5.375%, 5/15/28 ............................................................................. 8,000,000 8,239,840
Connie Lee Insured, 6.00%, 5/15/16 .......................................................... 455,000 461,529
Connie Lee Insured, 6.00%, 5/15/26 .......................................................... 340,000 344,794
MBIA Insured, 5.375%, 5/15/28 ............................................................... 1,050,000 1,079,610
98 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Glendale Municipal Property Corp. Excise Tax Revenue, Series A, AMBAC Insured, 5.00%,
7/01/33 ...................................................................................... $ 1,000,000 $ 1,054,750
Glendale Water and Sewer Revenue, sub. lien, AMBAC Insured, 5.00%, 7/01/23 .................... 2,000,000 2,125,560
Goodyear Community Facilities General District No. 1 GO, MBIA Insured, 5.20%, 7/15/25 ......... 1,500,000 1,589,160
Goodyear Community Facilities Utilities District No. 1 GO, MBIA Insured, 5.20%, 7/15/25 ....... 1,000,000 1,059,440
Greater Arizona Development Authority Infrastructure Revenue, Series A, MBIA Insured,
5.00%, 8/01/26 ............................................................................... 4,425,000 4,744,618
Marana Municipal Property Corp. Municipal Facilities Revenue, Refunding, MBIA Insured,
5.25%, 7/01/22 ............................................................................... 1,100,000 1,131,647
Maricopa County GO, USD No. 41, Gilbert,
6.25%, 7/01/15 .............................................................................. 160,000 165,480
Pre-Refunded, 6.25%, 7/01/15 ................................................................ 1,840,000 1,902,302
Maricopa County Hospital Revenue, Sun Health Corp.,
5.30%, 4/01/29 .............................................................................. 7,095,000 7,260,030
Pre-Refunded, 6.125%, 4/01/18 ............................................................... 11,270,000 11,514,334
Refunding, 5.80%, 4/01/08 ................................................................... 3,870,000 3,945,542
Refunding, 5.90%, 4/01/09 ................................................................... 2,120,000 2,164,986
Refunding, 6.125%, 4/01/18 .................................................................. 4,380,000 4,474,477
Refunding, 5.00%, 4/01/35 ................................................................... 12,090,000 12,486,673
Maricopa County IDA,
MFHR, Senior National Health Facilities II, Project A, FSA Insured, ETM, 5.50%,
1/01/18 .................................................................................... 2,000,000 2,241,440
MFHR, Villas de Merced Apartment Project, Series A, GNMA Secured, 5.50%,
12/20/37 ................................................................................... 570,000 574,982
MFHR, Western Groves Apartments, Series A-1, AMBAC Insured, 5.30%, 12/01/22 ................. 1,650,000 1,699,269
SFMR, GNMA Secured, 6.25%, 12/01/30 ......................................................... 35,000 35,236
Maricopa County IDA Health Facilities Revenue,
Catholic Healthcare West, Refunding, Series A, 5.375%, 7/01/23 .............................. 7,000,000 7,531,720
Catholic Healthcare West, Refunding, Series A, 5.50%, 7/01/26 ............................... 12,250,000 13,196,067
Catholic Healthcare West, Refunding, Series A, ACA Insured, 5.00%, 7/01/16 .................. 1,785,000 1,819,736
Catholic Healthcare West, Refunding, Series A, ACA Insured, 5.00%, 7/01/21 .................. 9,600,000 9,779,328
Catholic Healthcare West Project, Refunding, Series A, 5.00%, 7/01/16 ....................... 9,535,000 9,754,019
Catholic Healthcare West Project, Series A, Pre-Refunded, 5.00%, 7/01/16 .................... 780,000 783,526
Mayo Clinic, 5.00%, 11/15/36 ................................................................ 25,750,000 27,105,480
Maricopa County IDA Hospital Facility Revenue,
Mayo Clinic Hospital, 5.25%, 11/15/37 ....................................................... 16,000,000 16,454,560
Mayo Clinic Hospital, AMBAC Insured, 5.25%, 11/15/37 ........................................ 3,000,000 3,060,810
Samaritan Health Services, Series A, MBIA Insured, ETM, 7.00%, 12/01/16 ..................... 1,890,000 2,304,685
Maricopa County IDA Senior Living Healthcare Revenue, Immanuel Care, Refunding, Series A,
GNMA Secured, 5.00%, 8/20/35 ................................................................. 1,725,000 1,813,958
Maricopa County Pollution Control Corp. PCR, Public Service Co. Palo Verde Project,
Series A, AMBAC Insured, 5.05%, 5/01/29 ..................................................... 11,500,000 12,123,070
Mesa Utility System Revenue,
FGIC Insured, 5.00%, 7/01/21 ................................................................ 5,000,000 5,271,500
MBIA Insured, Pre-Refunded, 5.00%, 7/01/26 .................................................. 10,000,000 10,846,700
MBIA Insured, Pre-Refunded, 5.00%, 7/01/27 .................................................. 10,500,000 11,389,035
MBIA Insured, Pre-Refunded, 5.00%, 7/01/28 .................................................. 11,000,000 11,931,370
Refunding, Second Series, FGIC Insured, 4.50%, 7/01/28 ...................................... 10,000,000 10,240,200
Annual Report | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Mojave County IDA Health Care Revenue, Chris Ridge and Silver, Refunding, GNMA Secured,
6.375%, 11/01/31 ............................................................................. $ 585,000 $ 585,000
Nogales Municipal Development Authority Inc. GO, MBIA Insured, 5.00%, 6/01/36 ................. 6,075,000 6,496,423
Northern Arizona University COP,
AMBAC Insured, 5.00%, 9/01/30 ............................................................... 6,360,000 6,776,516
Northern Arizona University Research Projects, AMBAC Insured, 5.00%, 9/01/25 ................ 2,130,000 2,296,332
Northern Arizona University Research Projects, AMBAC Insured, 5.00%, 9/01/27 ................ 2,355,000 2,531,861
Northern Arizona University Revenues, FGIC Insured, Pre-Refunded, 5.00%, 6/01/30 .............. 1,000,000 1,064,280
Peoria Water and Sewer Revenue, FGIC Insured, 5.00%, 7/01/19 .................................. 1,300,000 1,333,423
Phoenix Airport Revenue,
Refunding, Series B, MBIA Insured, 6.20%, 7/01/10 ........................................... 700,000 700,560
Refunding, Series C, MBIA Insured, 6.30%, 7/01/10 ........................................... 1,680,000 1,681,394
Refunding, Series C, MBIA Insured, 6.40%, 7/01/11 ........................................... 1,785,000 1,786,464
Refunding, Series C, MBIA Insured, 6.40%, 7/01/12 ........................................... 570,000 570,467
Series D, MBIA Insured, 6.30%, 7/01/10 ...................................................... 1,800,000 1,801,494
Series D, MBIA Insured, 6.40%, 7/01/11 ...................................................... 3,825,000 3,828,136
Series D, MBIA Insured, 6.40%, 7/01/12 ...................................................... 820,000 820,672
Phoenix Civic Improvement Corp. Airport Revenue, senior lien, Series B, FGIC Insured, 5.25%,
7/01/22 ..................................................................................... 3,000,000 3,173,580
7/01/23 ..................................................................................... 5,000,000 5,286,850
7/01/27 ..................................................................................... 15,250,000 16,065,112
Phoenix Civic Improvement Corp. Distribution Revenue, Capital Appreciation, Civic Plaza,
Series B, FGIC Insured, zero cpn. to 7/01/13, 5.50% thereafter,
7/01/27 ..................................................................................... 3,945,000 3,453,137
7/01/28 ..................................................................................... 2,000,000 1,758,640
7/01/29 ..................................................................................... 2,000,000 1,765,980
7/01/36 ..................................................................................... 5,000,000 4,504,300
7/01/37 ..................................................................................... 7,000,000 6,317,010
Phoenix Civic Improvement Corp. Excise Tax Revenue,
Adams Street Garage Project, senior lien, Series B, 5.35%, 7/01/24 .......................... 2,985,000 3,121,564
Municipal Courthouse Project, senior lien, Series A, 5.375%, 7/01/29 ........................ 18,310,000 19,207,922
Subordinated, Civic Plaza Expansion Project, Series A, FGIC Insured, 5.00%, 7/01/30 ......... 5,525,000 5,900,424
Subordinated, Civic Plaza Expansion Project, Series A, FGIC Insured, 5.00%, 7/01/35 ......... 12,000,000 12,771,720
Phoenix Civic Improvement Corp. Wastewater System Revenue, junior lien,
FGIC Insured, Pre-Refunded, 6.00%, 7/01/19 .................................................. 3,000,000 3,248,070
FGIC Insured, Pre-Refunded, 6.00%, 7/01/20 .................................................. 3,670,000 3,973,472
FGIC Insured, Pre-Refunded, 6.00%, 7/01/24 .................................................. 24,715,000 26,758,683
MBIA Insured, 5.00%, 7/01/28 ................................................................ 2,000,000 2,128,360
MBIA Insured, 5.00%, 7/01/29 ................................................................ 3,405,000 3,625,780
Refunding, FGIC Insured, 5.00%, 7/01/20 ..................................................... 9,710,000 10,205,501
Refunding, FGIC Insured, 5.125%, 7/01/21 .................................................... 10,000,000 10,547,500
Refunding, FGIC Insured, 5.00%, 7/01/24 ..................................................... 7,050,000 7,386,778
Phoenix Civic Improvement Corp. Water System Revenue, junior lien, Refunding,
FGIC Insured, 5.00%, 7/01/26 ................................................................ 3,250,000 3,423,355
MBIA Insured, 5.00%, 7/01/29 ................................................................ 5,000,000 5,361,700
Phoenix GO,
5.25%, 7/01/22 .............................................................................. 5,420,000 5,690,458
Various Purposes, Series B, 5.00%, 7/01/27 .................................................. 8,360,000 8,822,392
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Phoenix HFC Mortgage Revenue, Section 8 Project, Refunding, Series A, MBIA Insured,
6.90%, 1/01/23 ............................................................................... $ 1,125,000 $ 1,133,708
Phoenix IDA, SFMR, Series 1B, GNMA Secured, 6.20%, 6/01/22 .................................... 15,000 15,073
Phoenix IDA Government Office Lease Revenue,
Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/21 .................................. 4,300,000 4,528,072
Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/28 .................................. 4,000,000 4,187,920
Capitol Mall LLC II Project, Refunding, AMBAC Insured, 5.00%, 9/15/26 ....................... 3,445,000 3,696,967
Capitol Mall Project, AMBAC Insured, Pre-Refunded, 5.375%, 9/15/22 .......................... 2,000,000 2,113,880
Capitol Mall Project, AMBAC Insured, Pre-Refunded, 5.50%, 9/15/27 ........................... 22,300,000 23,661,415
Capitol Mall Project, Refunding, AMBAC Insured, 5.00%, 9/15/27 .............................. 4,615,000 4,945,619
Phoenix IDA Hospital Revenue, Refunding, Series B, Connie Lee Insured, 5.75%,
12/01/16 ..................................................................................... 3,500,000 3,617,880
Phoenix Municipal Housing Revenue, Fillmore Gardens Project, Refunding, 6.30%,
6/01/09 ...................................................................................... 915,000 917,654
Phoenix Street and Highway Revenue, Refunding, 6.60%, 7/01/07 ................................. 610,000 610,555
Pima County IDA, SFMR,
Refunding, Series A, 7.625%, 2/01/12 ........................................................ 155,000 155,550
Series B-1, GNMA Secured, 6.10%, 5/01/31 .................................................... 30,000 30,199
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 6,345,180
Refunding, Series A, 5.00%, 1/01/31 ......................................................... 1,375,000 1,446,445
Series A, 5.00%, 1/01/37 .................................................................... 26,500,000 28,391,040
San Luis Civic Improvement Corp. Municipal Facilities Excise Tax Revenue, XLCA Insured,
5.00%, 7/01/38 ............................................................................... 8,650,000 9,156,198
Scottsdale GO, Refunding, 5.00%, 7/01/22 ...................................................... 3,000,000 3,181,140
Scottsdale IDA Hospital Revenue, Scottsdale Healthcare, Pre-Refunded,
5.70%, 12/01/21 ............................................................................. 2,000,000 2,193,660
5.80%, 12/01/31 ............................................................................. 14,865,000 16,368,595
Scottsdale Municipal Property Corp. Excise Tax Revenue,
Pre-Refunded, 5.00%, 7/01/24 ................................................................ 5,000,000 5,423,350
Pre-Refunded, 5.00%, 7/01/30 ................................................................ 7,580,000 8,338,000
Series A, Pre-Refunded, 5.00%, 7/01/34 ...................................................... 2,000,000 2,169,340
Show Low IDA Hospital Revenue, Navapache Regional Medical Center, Radian Insured, 5.00%,
12/01/25 .................................................................................... 1,420,000 1,511,917
12/01/30 .................................................................................... 1,815,000 1,921,541
12/01/35 .................................................................................... 2,000,000 2,103,940
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 3,216,120
Tempe Arizona IDA Lease Revenue, State University Foundation, AMBAC Insured, 5.00%,
7/01/28 ..................................................................................... 4,275,000 4,521,283
7/01/34 ..................................................................................... 11,510,000 12,133,612
Tolleson IDA, MFR, Copper Cove Project, Series A, GNMA Secured,
5.40%, 11/20/22 ............................................................................. 1,090,000 1,138,821
5.45%, 11/20/32 ............................................................................. 1,285,000 1,346,616
Tucson Airport Authority Inc. Revenue, sub. lien, AMBAC Insured, 5.35%, 6/01/31 ............... 10,000,000 10,441,600
Annual Report | 101
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Tucson IDA Lease Revenue, University of Arizona/Marshall Foundation, Series A,
AMBAC Insured, 5.00%, 7/15/32 ................................................................ $ 1,000,000 $ 1,045,320
Tucson Water Revenue,
Series A, FGIC Insured, Pre-Refunded, 5.00%, 7/01/23 ........................................ 3,600,000 3,795,480
Series D, FGIC Insured, Pre-Refunded, 5.25%, 7/01/23 ........................................ 3,000,000 3,109,170
University Medical Center Corp. Revenue, 5.00%, 7/01/35 ....................................... 7,000,000 7,255,010
University of Arizona COP,
Parking and Student Housing, AMBAC Insured, Pre-Refunded, 5.75%, 6/01/24 .................... 1,115,000 1,166,056
University of Arizona Projects, Series B, AMBAC Insured, 5.125%, 6/01/22 .................... 2,250,000 2,401,290
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/26 ..................... 7,070,000 7,464,506
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/28 ..................... 7,000,000 7,378,770
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/31 ..................... 5,565,000 5,856,662
University of Arizona University Revenues, Arizona Board of Regents System, Series A,
FGIC Insured, 5.80%, 6/01/24 ................................................................. 2,000,000 2,113,660
Yavapai County IDA Hospital Facility Revenue, Regional Medical Center, Series A, 6.00%,
8/01/33 ...................................................................................... 2,000,000 2,166,400
Yavapai County USD No. 28 Camp Verde GO, Refunding, FGIC Insured, 6.00%, 7/01/09 .............. 75,000 75,569
Yuma IDA Hospital Revenue, Yuma Regional Medical Center, FSA Insured, Pre-Refunded,
5.50%, 8/01/21 ............................................................................... 2,015,000 2,184,260
Yuma Municipal Property Corp. Revenue, Municipal Facilities, AMBAC Insured, 5.00%,
7/01/25 ...................................................................................... 3,100,000 3,200,254
-------------
807,404,792
-------------
U.S. TERRITORIES 18.2%
PUERTO RICO 17.8%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds,
Refunding, 5.50%, 5/15/39 .................................................................... 5,000,000 5,243,100
Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.375%, 7/01/28 .................... 3,355,000 3,537,613
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
Pre-Refunded,
5.00%, 7/01/36 .............................................................................. 10,000,000 10,983,500
5.50%, 7/01/36 .............................................................................. 8,550,000 9,724,684
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series B, Pre-Refunded, 6.00%, 7/01/39 ...................................................... 19,600,000 21,252,672
Series D, Pre-Refunded, 5.375%, 7/01/36 ..................................................... 5,000,000 5,428,650
Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 ................. 15,000,000 15,996,600
Puerto Rico HFC Revenue, Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%,
12/01/26 ..................................................................................... 40,000 40,389
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 .......................... 4,665,000 4,683,007
Hospital Auxilio Mutuo Obligation, Series A, MBIA Insured, 6.25%, 7/01/24 ................... 2,790,000 2,793,543
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ........................................................ 8,190,000 8,696,306
Series D, Pre-Refunded, 5.375%, 7/01/33 ..................................................... 21,810,000 23,602,782
Series I, 5.375%, 7/01/34 ................................................................... 40,000,000 43,248,000
Series I, 5.00%, 7/01/36 .................................................................... 7,000,000 7,335,930
102 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
5.50%, 8/01/29 .............................................................................. $ 3,660,000 $ 3,877,111
Pre-Refunded, 5.50%, 8/01/29 ................................................................ 11,340,000 12,295,282
--------------
178,739,169
--------------
VIRGIN ISLANDS 0.4%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/13 ....... 2,500,000 2,586,200
Virgin Islands Water and Power Authority Water System Revenue, Refunding, 5.50%,
7/01/17 ...................................................................................... 1,500,000 1,537,800
--------------
4,124,000
--------------
TOTAL U.S. TERRITORIES ........................................................................ 182,863,169
--------------
TOTAL LONG TERM INVESTMENTS (COST $932,204,114) ............................................... 990,267,961
--------------
SHORT TERM INVESTMENTS 0.8%
MUNICIPAL BONDS 0.8%
ARIZONA 0.1%
a Arizona Health Facilities Authority Hospital System Revenue, Series B, MBIA Insured,
Weekly VRDN and Put, 3.65%, 10/01/26 ......................................................... 200,000 200,000
a Arizona Health Facilities Authority Revenue, Arizona Voluntary Hospital Federation,
Series B, Weekly VRDN and Put, 3.65%, 10/01/15 ............................................... 1,020,000 1,020,000
--------------
1,220,000
--------------
U.S. TERRITORIES 0.7%
PUERTO RICO 0.7%
a Puerto Rico Commonwealth Government Development Bank Revenue, Refunding,
MBIA Insured, Weekly VRDN and Put, 3.34%, 12/01/15 ........................................... 5,950,000 5,950,000
a Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 3.42%, 7/01/28 ................................. 870,000 870,000
--------------
TOTAL U.S. TERRITORIES ........................................................................ 6,820,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $8,040,000) ................................................ 8,040,000
--------------
TOTAL INVESTMENTS (COST $940,244,114) 99.0% ................................................... 998,307,961
OTHER ASSETS, LESS LIABILITIES 1.0% ........................................................... 9,979,199
--------------
NET ASSETS 100.0% ............................................................................. $1,008,287,160
==============
See Selected Portfolio Abbreviations on page 198.
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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 103
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN COLORADO TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
------------------------- -----------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 12.03 $ 12.04 $ 12.19 $ 11.98 $ 11.79
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.51 0.53 0.54 0.55 0.57
Net realized and unrealized gains (losses) ............. 0.08 (0.01) (0.15) 0.19 0.19
-------------------------------------------------------------
Total from investment operations .......................... 0.59 0.52 0.39 0.74 0.76
-------------------------------------------------------------
Less distributions from net investment income ............. (0.52) (0.53) (0.54) (0.53) (0.57)
-------------------------------------------------------------
Redemption fees ........................................... -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year .............................. $ 12.10 $ 12.03 $ 12.04 $ 12.19 $ 11.98
=============================================================
Total return c ............................................ 5.04% 4.41% 3.39% 6.39% 6.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 426,482 $ 382,608 $ 346,589 $ 339,134 $ 345,825
Ratios to average net assets:
Expenses ............................................... 0.68% 0.69% 0.69% 0.69% 0.69%
Net investment income .................................. 4.31% 4.40% 4.52% 4.56% 4.79%
Portfolio turnover rate ................................... 15.20% 23.19% 30.06% 17.79% 26.30%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
104 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN COLORADO TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 12.12 $ 12.13 $ 12.27 $ 12.06 $ 11.86
Income from investment operations a:
Net investment income b ................................ 0.45 0.47 0.48 0.48 0.51
Net realized and unrealized gains (losses) ............. 0.07 (0.01) (0.14) 0.20 0.20
-------------------------------------------------------------
Total from investment operations .......................... 0.52 0.46 0.34 0.68 0.71
-------------------------------------------------------------
Less distributions from net investment income ............. (0.45) (0.47) (0.48) (0.47) (0.51)
-------------------------------------------------------------
Redemption fees ........................................... -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year .............................. $ 12.19 $ 12.12 $ 12.13 $ 12.27 $ 12.06
=============================================================
Total return c ............................................ 4.43% 3.81% 2.88% 5.75% 6.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 50,938 $ 43,676 $ 40,875 $ 43,075 $ 43,821
Ratios to average net assets:
Expenses ............................................... 1.23% 1.24% 1.24% 1.26% 1.22%
Net investment income .................................. 3.76% 3.85% 3.97% 3.99% 4.26%
Portfolio turnover rate ................................... 15.20% 23.19% 30.06% 17.79% 26.30%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 105
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.7%
MUNICIPAL BONDS 97.7%
COLORADO 94.7%
Adams County School District No. 14 GO, FSA Insured, 5.00%, 12/01/26 .......................... $ 5,000,000 $ 5,450,300
Arapahoe County MFR, Housing Development Reserve South Creek, Series A, FSA Insured,
6.45%, 6/01/32 ............................................................................... 3,105,000 3,271,925
Arapahoe County Water and Wastewater GO, Refunding, Series A, MBIA Insured, 5.125%,
12/01/32 ..................................................................................... 15,000,000 15,888,300
Arkansas River Power Authority Power Revenue, Improvement, XLCA Insured, 5.25%,
10/01/32 .................................................................................... 1,690,000 1,852,358
10/01/40 .................................................................................... 8,200,000 8,919,796
Arvada IDR, Wanco Inc. Project,
5.25%, 12/01/07 ............................................................................. 25,000 25,079
5.80%, 12/01/17 ............................................................................. 480,000 487,565
Aspen Valley Hospital District Revenue, Refunding, 5.00%, 10/15/26 ............................ 1,670,000 1,727,248
Aurora COP, AMBAC Insured, Pre-Refunded, 5.50%, 12/01/30 ...................................... 4,935,000 5,256,417
Aurora Sewer Improvement Revenue, first lien, MBIA Insured, 5.00%, 8/01/29 .................... 7,285,000 7,892,715
Boulder County Development Revenue, University Corp. for Atmospheric Research, MBIA Insured,
5.00%, 9/01/33 ............................................................................... 1,500,000 1,575,525
Boulder County Hospital Revenue, Longmont United Hospital Project, Pre-Refunded,
5.50%, 12/01/12 ............................................................................. 1,000,000 1,021,790
5.60%, 12/01/17 ............................................................................. 3,385,000 3,460,926
Bowles Metropolitan District GO, Refunding, FSA Insured, 5.00%, 12/01/33 ...................... 2,500,000 2,643,225
Broadlands Metropolitan District No. 2 GO, Refunding, MBIA Insured, 5.25%, 12/01/34 ........... 8,655,000 9,380,375
Broomfield COP,
Master Facilities Lease Purchase, AMBAC Insured, 5.625%, 12/01/22 ........................... 1,535,000 1,606,715
Refunding, AMBAC Insured, 6.00%, 12/01/29 ................................................... 2,000,000 2,112,760
Broomfield Sales and Use Tax Revenue, Refunding and Improvement, Series A, AMBAC Insured,
5.00%, 12/01/27 .............................................................................. 10,000,000 10,533,900
Broomfield Sewer Activity Enterprise Sewer and Wastewater Revenue, AMBAC Insured, 5.00%,
12/01/31 ..................................................................................... 7,500,000 7,880,775
Centennial Downs Metropolitan District GO, Refunding, AMBAC Insured, 5.00%, 12/01/28 .......... 1,560,000 1,660,714
Colorado Department of Transportation COP, MBIA Insured, 5.00%, 6/15/34 ....................... 6,915,000 7,334,049
Colorado Educational and Cultural Facilities Authority Revenue,
Student Housing, University of Colorado Foundation Project, AMBAC Insured, 5.00%,
7/01/27 .................................................................................... 6,545,000 6,871,595
Student Housing, University of Colorado Foundation Project, AMBAC Insured, 5.00%,
7/01/32 .................................................................................... 10,005,000 10,474,935
University of Denver Project, AMBAC Insured, Pre-Refunded, 5.375%, 3/01/23 .................. 1,050,000 1,117,473
University of Denver Project, Refunding, Series B, FGIC Insured, Pre-Refunded, 5.25%,
3/01/35 .................................................................................... 3,250,000 3,626,967
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series A, Pre-Refunded, 5.00%, 12/01/28 ........................ 1,800,000 1,847,394
Community Provider Pooled Loan Program, Series A, FSA Insured, 7.25%, 7/15/17 ............... 88,000 88,185
Evangelical Lutheran, Series A, 5.25%, 6/01/34 .............................................. 3,500,000 3,702,475
Evangelical Lutheran Project, 5.25%, 6/01/31 ................................................ 4,000,000 4,255,560
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian Insured, 5.00%,
12/01/25 ................................................................................... 3,050,000 3,243,187
106 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Colorado Health Facilities Authority Revenue, (continued)
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian Insured, 5.00%,
12/01/26 ................................................................................... $ 3,205,000 $ 3,400,120
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian Insured, 5.00%,
12/01/27 ................................................................................... 3,365,000 3,564,343
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian Insured, 5.00%,
12/01/30 ................................................................................... 3,000,000 3,170,370
Hospital, Parkview Medical Center Inc., Refunding, 5.00%, 9/01/20 ........................... 890,000 935,203
Hospital, Parkview Medical Center Inc., Refunding, 5.00%, 9/01/25 ........................... 1,000,000 1,045,000
Hospital Improvement, North Colorado Medical Center Inc. Project, FSA Insured,
Pre-Refunded, 5.75%, 5/15/24 ............................................................... 5,000,000 5,268,650
Kaiser Permanente, Series A, ETM, 5.35%, 11/01/16 ........................................... 8,000,000 8,175,280
Parkview Medical Center Inc. Project, 5.25%, 9/01/18 ........................................ 1,660,000 1,682,261
Parkview Medical Center Inc. Project, 5.30%, 9/01/25 ........................................ 1,615,000 1,635,478
Portercare Adventist Health, Pre-Refunded, 6.625%, 11/15/26 ................................. 2,500,000 2,839,150
Portercare Adventist Health, Pre-Refunded, 6.50%, 11/15/31 .................................. 5,500,000 6,216,705
Colorado HFAR,
MF, Project II, Series A-2, 5.30%, 10/01/23 ................................................. 1,645,000 1,715,686
MF, Project II, Series A-2, 5.375%, 10/01/32 ................................................ 3,605,000 3,723,388
MFH, Castle High, Series A, AMBAC Insured, 5.90%, 12/01/20 .................................. 2,630,000 2,749,691
MFH Insured Mortgage, Series A-2, FHA Insured, 6.00%, 10/01/28 .............................. 1,000,000 1,020,860
MFH Insured Mortgage, Series C-3, 6.05%, 10/01/32 ........................................... 1,535,000 1,589,032
Colorado Springs Hospital Revenue,
6.375%, 12/15/30 ............................................................................ 3,785,000 4,146,354
Pre-Refunded, 6.375%, 12/15/30 .............................................................. 3,715,000 4,095,825
Colorado Springs Utilities Revenue,
Refunding and Improvement, Series A, 5.375%, 11/15/26 ....................................... 10,000,000 10,098,800
sub. lien, System Improvement, Series B, 5.00%, 11/15/33 .................................... 4,000,000 4,211,040
Colorado State COP, University of Colorado Denver Health Sciences Center Fitzsimons Academic
Facility Project, Series B, MBIA Insured, 5.00%, 11/01/30 .................................... 5,000,000 5,328,600
Colorado Water Resources and Power Development Authority Clean Water Revenue, Series A,
6.15%, 9/01/11 .............................................................................. 125,000 125,261
6.30%, 9/01/14 .............................................................................. 25,000 25,055
Colorado Water Resources and Power Development Authority Small Water Resource Revenue,
Series A, FGIC Insured,
5.80%, 11/01/20 ............................................................................. 800,000 855,496
Pre-Refunded, 5.80%, 11/01/20 ............................................................... 1,200,000 1,288,752
Colorado Water Resources and Power Development Authority Water Resources Revenue,
Arapahoe County Water Improvement, Series E, MBIA Insured, 5.00%, 12/01/35 .................. 10,475,000 11,208,564
East Cherry Creek Valley Water Sanitary District, MBIA Insured, 5.00%, 11/15/30 ............. 2,590,000 2,790,311
Parker Water and Sanitary District, MBIA Insured, 5.00%, 9/01/30 ............................ 5,000,000 5,337,450
Commerce City COP, AMBAC Insured, 5.00%, 12/15/37 ............................................. 13,975,000 14,909,368
Denver City and County Airport Revenue,
Refunding, Series A, AMBAC Insured, 5.625%, 11/15/23 ........................................ 4,500,000 4,758,030
Refunding, Series B, 5.50%, 11/15/33 ........................................................ 5,000,000 5,339,500
Series D, 7.75%, 11/15/13 ................................................................... 1,000,000 1,116,690
Annual Report | 107
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Denver City and County COP, Series B, AMBAC Insured, Pre-Refunded, 5.50%, 12/01/25 ............ $ 7,000,000 $ 7,512,050
Denver Convention Center Hotel Authority Revenue, Refunding, Senior, XLCA Insured, 5.00%,
12/01/30 ..................................................................................... 15,000,000 16,054,350
Denver Health and Hospital Authority Healthcare Revenue,
Refunding, Series A, 6.25%, 12/01/33 ........................................................ 3,250,000 3,617,965
Series A, 6.00%, 12/01/23 ................................................................... 1,000,000 1,069,900
Series A, 6.00%, 12/01/31 ................................................................... 5,400,000 5,711,094
Douglas County School District No. RE-1 Douglas and Elbert Counties GO, Improvement,
Series B, FSA Insured, 5.00%, 12/15/30 ....................................................... 1,835,000 1,957,780
Dove Valley Metropolitan District Arapahoe County GO, Refunding, FSA Insured, 5.00%,
11/01/35 ..................................................................................... 11,275,000 12,058,387
E-470 Public Highway Authority Revenue,
Capital Appreciation, Series A, MBIA Insured, zero cpn., 9/01/33 ............................ 3,000,000 788,640
Capital Appreciation, Series B, MBIA Insured, zero cpn., 9/01/32 ............................ 7,800,000 2,172,300
Capital Appreciation, Series B, MBIA Insured, zero cpn., 9/01/34 ............................ 14,075,000 3,492,430
Refunding, Senior Series A, MBIA Insured, 5.00%, 9/01/26 .................................... 5,000,000 5,073,700
Senior Series A, MBIA Insured, 5.75%, 9/01/29 ............................................... 4,575,000 4,972,430
Senior Series A, MBIA Insured, 5.75%, 9/01/35 ............................................... 10,825,000 11,765,368
El Paso County Mortgage Revenue, Stetson Meadows, Series A, GNMA Secured, 5.25%,
12/20/32 ..................................................................................... 1,890,000 1,964,371
El Paso County School District No. 2 GO, FGIC Insured, 5.25%, 12/01/26 ........................ 4,000,000 4,243,800
El Paso County School District No. 38 GO, Pre-Refunded, 6.00%, 12/01/24 ....................... 1,500,000 1,622,610
Fort Collins PCR, Anheuser-Busch Co. Project, Refunding, 6.00%, 9/01/31 ....................... 5,325,000 5,386,717
Garfield County Building Corp. COP, AMBAC Insured, Pre-Refunded, 5.75%,
12/01/19 .................................................................................... 1,500,000 1,596,915
12/01/24 .................................................................................... 1,000,000 1,064,610
Greeley MFR, Housing Mortgage, Creek Stone Project, FHA Insured, 5.95%, 7/01/28 ............... 1,000,000 1,023,840
La Junta Hospital Revenue, Ark Valley Regional Medical Center Project,
5.75%, 4/01/14 .............................................................................. 2,090,000 2,170,214
6.00%, 4/01/19 .............................................................................. 1,000,000 1,042,680
6.10%, 4/01/24 .............................................................................. 1,000,000 1,044,440
Logan County School District No. RE-1 Valley Sterling GO, MBIA Insured, Pre-Refunded, 5.00%,
12/15/30 ..................................................................................... 6,470,000 7,105,354
Northwest Parkway Public Highway Authority Revenue, Series A,
AMBAC Insured, 5.125%, 6/15/26 .............................................................. 7,550,000 8,029,500
AMBAC Insured, 5.125%, 6/15/31 .............................................................. 4,465,000 4,735,802
FSA Insured, 5.25%, 6/15/41 ................................................................. 3,460,000 3,696,595
Pitkin County Open Space Acquisition GO, AMBAC Insured, Pre-Refunded, 5.375%,
12/01/30 ..................................................................................... 2,940,000 3,118,752
Pueblo Board Waterworks Water Revenue, Series A, FSA Insured, Pre-Refunded, 6.00%,
11/01/21 ..................................................................................... 4,300,000 4,647,225
Pueblo County COP, Public Parking, 6.90%, 7/01/15 ............................................. 360,000 362,081
108 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Pueblo County School District No. 070 Pueblo Rural GO, FGIC Insured, Pre-Refunded, 6.00%,
12/01/19 ..................................................................................... $ 3,995,000 $ 4,242,690
Regional Transportation District Sales Tax Revenue, Fastracks Project, Series A, AMBAC Insured,
5.00%, 11/01/31 .............................................................................. 7,000,000 7,584,920
Summit County Sports Facilities Revenue, Keystone Resorts Project, Ralston Purina Co.,
Refunding, 7.875%, 9/01/08 ................................................................... 2,750,000 2,919,757
Thornton Development Authority Tax Increment Revenue, North Washington Street Urban
Renewal, MBIA Insured, 5.00%, 12/01/29 ....................................................... 6,100,000 6,510,591
Thornton Water Enterprise Revenue, MBIA Insured, 5.00%, 12/01/29 .............................. 7,010,000 7,481,843
University of Colorado COP, Series A, AMBAC Insured, Pre-Refunded, 5.00%, 6/01/33 ............. 6,070,000 6,523,186
University of Colorado Enterprise System Revenue, AMBAC Insured, 5.00%, 6/01/28 ............... 5,240,000 5,653,698
University of Colorado Hospital Authority Revenue, Series A,
5.00%, 11/15/37 ............................................................................. 2,000,000 2,085,200
5.25%, 11/15/39 ............................................................................. 3,000,000 3,183,930
Pre-Refunded, 5.60%, 11/15/25 ............................................................... 1,900,000 2,054,147
University of Northern Colorado Revenue,
Auxiliary Facilities Systems, Refunding and Improvement, AMBAC Insured, 5.00%,
6/01/31 .................................................................................... 3,000,000 3,115,710
FSA Insured, 5.00%, 6/01/30 ................................................................. 4,580,000 4,901,837
Ute Water Conservancy District Water Revenue, MBIA Insured, 5.75%, 6/15/20 .................... 5,000,000 5,349,700
Westminster Building Authority COP, MBIA Insured, 5.25%, 12/01/22 ............................. 1,555,000 1,657,397
------------
451,943,047
------------
U.S. TERRITORIES 3.0%
PUERTO RICO 1.9%
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 1,359,644
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ........................................................ 2,120,000 2,251,059
Series I, 5.375%, 7/01/34 ................................................................... 5,000,000 5,406,000
------------
9,016,703
------------
VIRGIN ISLANDS 1.1%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.40%, 10/01/12 ............................................................................. 2,500,000 2,583,200
5.50%, 10/01/22 ............................................................................. 2,500,000 2,582,700
------------
5,165,900
------------
TOTAL U.S. TERRITORIES ........................................................................ 14,182,603
------------
TOTAL LONG TERM INVESTMENTS (COST $438,719,523) ............................................... 466,125,650
------------
Annual Report | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 0.9%
MUNICIPAL BONDS 0.9%
COLORADO 0.9%
a Colorado Educational and Cultural Facilities Authority Revenue, National Jewish Federal
Bond Program,
Daily VRDN and Put, 3.64%, 2/01/35 .......................................................... $ 1,040,000 $ 1,040,000
Series A-4, Daily VRDN and Put, 3.64%, 2/01/34 .............................................. 2,110,000 2,110,000
Series A-7, Weekly VRDN and Put, 3.64%, 7/01/29 ............................................. 1,300,000 1,300,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $4,450,000) ................................................ 4,450,000
------------
TOTAL INVESTMENTS (COST $443,169,523) 98.6% ................................................... 470,575,650
OTHER ASSETS, LESS LIABILITIES 1.4%. .......................................................... 6,844,708
------------
NET ASSETS 100.0% ............................................................................. $477,420,358
============
See Selected Portfolio Abbreviations on page 198.
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.
110 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
-----------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 11.10 $ 11.11 $ 11.12 $ 11.10 $ 10.88
-----------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.46 0.48 0.49 0.49 0.51
Net realized and unrealized gains (losses) ... 0.04 (0.01) (0.02) 0.02 0.22
-----------------------------------------------------------
Total from investment operations ................ 0.50 0.47 0.47 0.51 0.73
-----------------------------------------------------------
Less distributions from net investment income ... (0.47) (0.48) (0.48) (0.49) (0.51)
-----------------------------------------------------------
Redemption fees ................................. -- d -- -- d -- --
-----------------------------------------------------------
Net asset value, end of year .................... $ 11.13 $ 11.10 $ 11.11 $ 11.12 $ 11.10
===========================================================
Total return c .................................. 4.61% 4.33% 4.38% 4.72% 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 305,258 $ 274,407 $ 249,286 $ 265,854 $ 279,268
Ratios to average net assets:
Expenses ..................................... 0.70% 0.71% 0.71% 0.70% 0.70%
Net investment income ........................ 4.21% 4.30% 4.46% 4.43% 4.66%
Portfolio turnover rate ......................... 11.18% 7.73% 2.77% 6.79% 10.20%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 111
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 11.15 $ 11.16 $ 11.17 $ 11.15 $ 10.92
------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.41 0.42 0.43 0.43 0.45
Net realized and unrealized gains (losses) ... 0.04 (0.01) (0.02) 0.02 0.23
------------------------------------------------------------
Total from investment operations ................ 0.45 0.41 0.41 0.45 0.68
------------------------------------------------------------
Less distributions from net investment income ... (0.41) (0.42) (0.42) (0.43) (0.45)
------------------------------------------------------------
Redemption fees ................................. -- d -- -- d -- --
------------------------------------------------------------
Net asset value, end of year .................... $ 11.19 $ 11.15 $ 11.16 $ 11.17 $ 11.15
============================================================
Total return c .................................. 4.10% 3.75% 3.78% 4.12% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 52,623 $ 45,564 $ 40,942 $ 42,817 $ 46,267
Ratios to average net assets:
Expenses ..................................... 1.25% 1.26% 1.26% 1.27% 1.24%
Net investment income ........................ 3.66% 3.75% 3.91% 3.86% 4.12%
Portfolio turnover rate ......................... 11.18% 7.73% 2.77% 6.79% 10.20%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
112 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.9%
MUNICIPAL BONDS 97.9%
CONNECTICUT 78.8%
Bridgeport GO, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/15/19 ........................... $ 1,000,000 $ 1,079,570
Connecticut State Airport Revenue, Bradley International Airport, Series A, FGIC Insured,
5.125%, 10/01/26 .............................................................................. 3,000,000 3,138,030
Connecticut State Development Authority First Mortgage Gross Revenue, Health Care Project,
5.75%, 12/01/23 .............................................................................. 750,000 794,085
Baptist Homes Inc. Project, Refunding, Radian Insured, 5.625%, 9/01/22 ....................... 2,000,000 2,133,680
Church Homes Inc., Refunding, 5.80%, 4/01/21 ................................................. 4,000,000 4,072,320
Elim Park Baptist Home, Refunding, Series A, 5.375%, 12/01/18 ................................ 1,100,000 1,117,094
Connecticut State Development Authority PCR, Connecticut Light and Water, Refunding,
Series A, 5.85%, 9/01/28 ...................................................................... 5,500,000 5,769,665
Connecticut State Development Authority Revenue, Life Care Facilities, Seabury Project,
Refunding, Radian Insured, 5.00%, 9/01/21 ..................................................... 2,000,000 2,057,960
Connecticut State Development Authority Water Facility Revenue, Bridgeport Hydraulic Co.
Project,
6.15%, 4/01/35 ............................................................................... 1,000,000 1,021,380
6.00%, 9/01/36 ............................................................................... 10,000,000 10,189,900
Connecticut State GO,
Series A, FSA Insured, 4.75%, 12/15/22 ....................................................... 1,000,000 1,070,180
Series B, 5.00%, 6/15/22 ..................................................................... 2,000,000 2,110,740
Series B, FSA Insured, 5.00%, 5/01/26 ........................................................ 3,040,000 3,297,670
Series B, Pre-Refunded, 5.00%, 6/15/20 ....................................................... 10,000,000 10,537,800
Series D, 5.00%, 11/01/26 .................................................................... 2,000,000 2,162,120
Connecticut State Health and Educational Facilities Authority Revenue,
Brunswick School, Series A, MBIA Insured, 5.00%, 7/01/29 ..................................... 5,000,000 5,174,300
Canterbury School, Series B, Radian Insured, 5.00%, 7/01/36 .................................. 1,000,000 1,046,200
Catholic Health East, Series F, MBIA Insured, 5.75%, 11/15/29 ................................ 3,250,000 3,436,583
Child Care Facilities Program, Series C, AMBAC Insured, 5.625%, 7/01/29 ...................... 1,250,000 1,321,075
Child Care Facilities Program, Series E, AMBAC Insured, 5.00%, 7/01/31 ....................... 1,000,000 1,051,770
Child Care Facilities Program, Series F, Assured Guaranty, 5.00%, 7/01/31 .................... 2,525,000 2,671,349
Connecticut College Project, Series D-1, MBIA Insured, 5.75%, 7/01/30 ........................ 1,000,000 1,070,710
Danbury Hospital Issue, Refunding, Series G, AMBAC Insured, 5.75%, 7/01/29 ................... 3,500,000 3,678,990
Eastern Connecticut Health Network, Refunding, Series A, Radian Insured, 6.00%,
7/01/25 ..................................................................................... 2,965,000 3,178,361
Eastern Connecticut Health Network, Refunding, Series C, Radian Insured, 5.125%,
7/01/30 ..................................................................................... 2,500,000 2,642,850
Eastern Connecticut Health Network, Series A, Radian Insured, Pre-Refunded, 6.00%,
7/01/25 ..................................................................................... 5,980,000 6,470,539
Eastern Connecticut Health Network, Series A, Radian Insured, Pre-Refunded, 6.00%,
7/01/25 ..................................................................................... 250,000 270,673
Fairfield University, Series I, MBIA Insured, Pre-Refunded, 5.25%, 7/01/25 ................... 1,500,000 1,568,400
Fairfield University, Series I, MBIA Insured, Pre-Refunded, 5.50%, 7/01/29 ................... 8,000,000 8,408,960
Fairfield University, Series J, MBIA Insured, 5.00%, 7/01/29 ................................. 3,000,000 3,162,900
Greenwich Academy, Series B, FSA Insured, 5.00%, 3/01/32 ..................................... 4,210,000 4,421,973
Hartford University, Series G, Radian Insured, 5.25%, 7/01/26 ................................ 5,000,000 5,465,800
Hebrew Home and Hospital, Series B, FHA Insured, 5.15%, 8/01/28 .............................. 3,505,000 3,636,017
Horace Bushnell Memorial Hall, Series A, MBIA Insured, 5.625%, 7/01/29 ....................... 1,000,000 1,049,070
Hospital for Special Care, Refunding, Series B, 5.375%, 7/01/17 .............................. 3,000,000 3,071,790
Hospital for Special Care, Refunding, Series B, 5.50%, 7/01/27 ............................... 3,200,000 3,276,704
Annual Report | 113
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CONNECTICUT (CONTINUED)
Connecticut State Health and Educational Facilities Authority Revenue, (continued)
Lutheran General Health Care System, ETM, 7.375%, 7/01/19 .................................... $ 450,000 $ 540,900
Middlesex Hospital, Series L, FSA Insured, 5.00%, 7/01/32 .................................... 3,500,000 3,761,485
Miss Porter's School Issue, Series B, AMBAC Insured, 5.00%, 7/01/26 .......................... 2,730,000 2,967,128
Miss Porter's School Issue, Series B, AMBAC Insured, 5.00%, 7/01/36 .......................... 3,415,000 3,678,365
New Horizons Village Project, 7.30%, 11/01/16 ................................................ 2,905,000 2,909,677
Norwich Free Academy, Series A, AMBAC Insured, 5.00%, 7/01/34 ................................ 1,675,000 1,781,413
Sacred Heart University, Refunding, Series E, Radian Insured, 5.00%, 7/01/28 ................. 4,000,000 4,081,480
Sacred Heart University, Series C, 6.50%, 7/01/16 ............................................ 235,000 238,885
Sacred Heart University, Series C, 6.625%, 7/01/26 ........................................... 785,000 797,646
Series B, MBIA Insured, 5.00%, 7/01/33 ....................................................... 2,000,000 2,120,960
St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ..................................... 4,615,000 4,498,194
Trinity College, Series G, AMBAC Insured, 5.00%, 7/01/31 ..................................... 5,425,000 5,712,525
Trinity College, Series H, MBIA Insured, 5.00%, 7/01/26 ...................................... 1,855,000 1,981,344
University of Connecticut Foundation, Series A, Pre-Refunded, 5.375%, 7/01/29 ................ 1,250,000 1,297,238
Village Families and Children, Series A, AMBAC Insured, 5.00%, 7/01/32 ....................... 1,000,000 1,059,010
Westover School, Series A, Radian Insured, 5.70%, 7/01/30 .................................... 2,000,000 2,147,400
William W. Backus Hospital, Series G, FSA Insured, 5.00%, 7/01/35 ............................ 4,720,000 5,037,278
Windham Community Memorial Hospital, Series C, 6.00%, 7/01/20 ................................ 5,000,000 5,062,050
Yale New Haven Hospital, Series J-1, AMBAC Insured, 5.00%, 7/01/31 ........................... 10,000,000 10,771,200
Yale University, Series Y-1, 5.00%, 7/01/35 .................................................. 15,000,000 16,096,050
Connecticut State HFAR,
Housing Mortgage Finance Program, Refunding, Sub Series E-2, 5.20%, 11/15/21 ................. 1,840,000 1,878,769
Housing Mortgage Finance Program, Series B, 6.10%, 11/15/31 .................................. 2,715,000 2,807,066
Housing Mortgage Finance Program, Sub Series E-4, 5.05%, 5/15/28 ............................. 4,650,000 4,756,159
Special Obligation, Special Needs Housing, Series 1, AMBAC Insured, 5.00%, 6/15/22 ........... 1,000,000 1,073,140
Special Obligation, Special Needs Housing, Series 1, AMBAC Insured, 5.00%, 6/15/32 ........... 1,000,000 1,065,640
Connecticut State Higher Education Supplemental Loan Authority Revenue, Family Education
Loan Program, Series A,
AMBAC Insured, 6.00%, 11/15/18 ............................................................... 690,000 702,041
MBIA Insured, 5.50%, 11/15/17 ................................................................ 915,000 941,462
Connecticut State Revenue, Revolving Fund, Series A, 5.00%,
7/01/26 ...................................................................................... 6,025,000 6,528,690
7/01/27 ...................................................................................... 4,060,000 4,396,127
Connecticut State Special Tax Obligation Revenue, Transportation Infrastructure,
Series A, FSA Insured, Pre-Refunded, 5.375%, 10/01/18 ........................................ 1,000,000 1,072,880
Series B, AMBAC Insured, 5.00%, 12/01/20 ..................................................... 5,000,000 5,322,400
Series B, AMBAC Insured, 5.00%, 12/01/22 ..................................................... 1,000,000 1,060,240
Greater New Haven Water Pollution Control Authority Regional Water Revenue, Refunding,
Series A, MBIA Insured, 5.00%,
11/15/24 ..................................................................................... 3,315,000 3,584,045
8/15/35 ...................................................................................... 6,750,000 7,236,067
Hartford GO, AMBAC Insured, 5.00%,
7/15/23 ...................................................................................... 1,000,000 1,088,810
7/15/25 ...................................................................................... 1,000,000 1,083,080
New Haven GO, Series C, MBIA Insured,
5.00%, 11/01/22 .............................................................................. 2,975,000 3,179,055
ETM, 5.00%, 11/01/22 ......................................................................... 25,000 28,419
114 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CONNECTICUT (CONTINUED)
South Central Regional Water Authority Water System Revenue,
Eighteenth Series B-1, MBIA Insured, 5.00%, 8/01/26 .......................................... $ 3,500,000 $ 3,740,800
Refunding, Twentieth Series A, MBIA Insured, 5.00%, 8/01/26 .................................. 7,345,000 7,945,748
Series A, MBIA Insured, 5.00%, 8/01/33 ....................................................... 6,000,000 6,374,220
University of Connecticut Revenue, Student Fee,
Refunding, Series A, FGIC Insured, 5.00%, 11/15/26 ........................................... 10,000,000 10,673,500
Series A, 5.00%, 5/15/23 ..................................................................... 10,000,000 10,584,500
Series A, FGIC Insured, Pre-Refunded, 6.00%, 11/15/25 ........................................ 1,500,000 1,635,465
------------
281,925,759
------------
U.S. TERRITORIES 19.1%
PUERTO RICO 17.4%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds, Refunding,
5.50%, 5/15/39 ................................................................................ 4,000,000 4,194,480
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ................................................... 1,165,000 1,236,426
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ................................................... 1,000,000 1,065,410
Refunding, FSA Insured, 5.125%, 7/01/30 ...................................................... 835,000 879,355
Series A, 5.00%, 7/01/29 ..................................................................... 1,000,000 1,050,560
Series A, 5.125%, 7/01/31 .................................................................... 3,195,000 3,314,366
Series A, 5.00%, 7/01/33 ..................................................................... 1,000,000 1,043,390
Series A, 5.00%, 7/01/34 ..................................................................... 750,000 786,960
Series A, FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 ......................................... 1,000,000 1,067,710
Series A, Pre-Refunded, 5.125%, 7/01/31 ...................................................... 1,000,000 1,061,310
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series A, 5.00%, 7/01/38 .......................................................... 2,500,000 2,565,975
Series G, 5.00%, 7/01/33 ..................................................................... 1,000,000 1,066,190
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ................................................................. 5,000,000 5,409,900
Puerto Rico Electric Power Authority Power Revenue,
Series HH, FSA Insured, 5.25%, 7/01/29 ....................................................... 13,000,000 13,793,390
Series II, 5.25%, 7/01/31 .................................................................... 1,000,000 1,066,440
Series RR, XLCA Insured, 5.00%, 7/01/30 ...................................................... 1,000,000 1,070,870
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 3,669,668
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 1,033,600
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ......................................................... 1,995,000 2,118,331
Series D, Pre-Refunded, 5.375%, 7/01/33 ...................................................... 6,005,000 6,498,611
Series I, 5.00%, 7/01/36 ..................................................................... 1,000,000 1,047,990
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.70%, 8/01/25 .................................................................. 5,000,000 5,288,450
University of Puerto Rico Revenues, University System, Refunding, Series Q, 5.00%,
6/01/36 ....................................................................................... 2,000,000 2,118,200
------------
62,447,582
------------
Annual Report | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS 1.7%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/13 ..................................................................................... $ 2,500,000 $ 2,586,200
10/01/22 ..................................................................................... 2,500,000 2,582,700
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/21 ....................................................................................... 1,000,000 1,011,750
------------
6,180,650
------------
TOTAL U.S. TERRITORIES ......................................................................... 68,628,232
------------
TOTAL LONG TERM INVESTMENTS (COST $334,630,270) ................................................ 350,553,991
------------
SHORT TERM INVESTMENTS 1.0%
MUNICIPAL BONDS 1.0%
CONNECTICUT 1.0%
a Connecticut State Health and Educational Facilities Authority Revenue, Yale University,
Series T-1, Daily VRDN and Put, 3.62%, 7/01/29 ............................................... 300,000 300,000
Series V-1, Daily VRDN and Put, 3.62%, 7/01/36 ............................................... 2,300,000 2,300,000
Series V-2, Daily VRDN and Put, 3.62%, 7/01/36 ............................................... 800,000 800,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $3,400,000) ................................................. 3,400,000
------------
TOTAL INVESTMENTS (COST $338,030,270) 98.9% .................................................... 353,953,991
OTHER ASSETS, LESS LIABILITIES 1.1% ............................................................ 3,927,018
------------
NET ASSETS 100.0% .............................................................................. $357,881,009
============
See Selected Portfolio Abbreviations on page 198.
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.
116 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN DOUBLE TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.98 $ 11.99 $ 12.06 $ 11.90 $ 11.68
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.50 0.50 0.51 0.52 0.54
Net realized and unrealized gains (losses) .. 0.08 (0.01) (0.05) 0.19 0.22
-------------------------------------------------------------
Total from investment operations ............... 0.58 0.49 0.46 0.71 0.76
-------------------------------------------------------------
Less distributions from:
Net investment income ....................... (0.50) (0.50) (0.51) (0.52) (0.54)
Net realized gains .......................... -- -- (0.02) (0.03) --
-------------------------------------------------------------
Total distributions ............................ (0.50) (0.50) (0.53) (0.55) (0.54)
-------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................... $ 12.06 $ 11.98 $ 11.99 $ 12.06 $ 11.90
=============================================================
Total return c ................................. 4.97% 4.13% 4.01% 6.18% 6.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 428,458 $ 370,481 $ 309,495 $ 298,732 $ 273,119
Ratios to average net assets:
Expenses .................................... 0.70% 0.71% 0.72% 0.72% 0.74%
Net investment income ....................... 4.16% 4.17% 4.31% 4.35% 4.61%
Portfolio turnover rate ........................ 10.88% 14.19% 10.46% 25.31% 31.54%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 117
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DOUBLE TAX-FREE INCOME FUND
--------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
--------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 12.01 $ 12.03 $ 12.10 $ 11.93 $ 11.70
--------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.43 0.43 0.45 0.45 0.48
Net realized and unrealized gains (losses) .. 0.10 (0.02) (0.05) 0.20 0.23
--------------------------------------------------------
Total from investment operations ............... 0.53 0.41 0.40 0.65 0.71
--------------------------------------------------------
Less distributions from:
Net investment income ....................... (0.43) (0.43) (0.45) (0.45) (0.48)
Net realized gains .......................... -- -- (0.02) (0.03) --
--------------------------------------------------------
Total distributions ............................ (0.43) (0.43) (0.47) (0.48) (0.48)
--------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
--------------------------------------------------------
Net asset value, end of year ................... $ 12.11 $ 12.01 $ 12.03 $ 12.10 $ 11.93
========================================================
Total return c ................................. 4.55% 3.47% 3.42% 5.67% 6.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 58,803 $ 55,931 $ 45,621 $ 45,572 $ 30,856
Ratios to average net assets:
Expenses .................................... 1.24% 1.26% 1.27% 1.30% 1.24%
Net investment income ....................... 3.62% 3.62% 3.76% 3.77% 4.11%
Portfolio turnover rate ........................ 10.88% 14.19% 10.46% 25.31% 31.54%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
118 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN DOUBLE TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.5%
MUNICIPAL BONDS 97.5%
U.S. TERRITORIES 97.5%
GUAM 5.6%
Guam Education Financing Foundation COP, 5.00%, 10/01/23 ...................................... $ 2,500,000 $ 2,664,350
Guam International Airport Authority Revenue,
Series A, MBIA Insured, 5.25%, 10/01/20 ..................................................... 1,725,000 1,873,385
Series A, MBIA Insured, 5.25%, 10/01/22 ..................................................... 700,000 759,367
Series B, MBIA Insured, 5.25%, 10/01/22 ..................................................... 1,000,000 1,084,810
Series B, MBIA Insured, 5.25%, 10/01/23 ..................................................... 1,000,000 1,084,210
Series C, MBIA Insured, 5.25%, 10/01/21 ..................................................... 5,000,000 5,217,800
Series C, MBIA Insured, 5.00%, 10/01/23 ..................................................... 5,000,000 5,242,150
Guam Power Authority Revenue, Refunding, Series A, MBIA Insured,
5.125%, 10/01/29 ............................................................................ 1,975,000 2,063,855
5.25%, 10/01/34 ............................................................................. 7,000,000 7,345,030
------------
27,334,957
------------
PUERTO RICO 78.1%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds, Refunding,
5.50%, 5/15/39 ............................................................................... 5,000,000 5,243,100
Puerto Rico Commonwealth GO, Public Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 .................................................. 3,000,000 3,196,230
Series A, 5.375%, 7/01/28 ................................................................... 1,300,000 1,370,759
Series A, 5.00%, 7/01/29 .................................................................... 4,500,000 4,727,520
Series A, 5.00%, 7/01/34 .................................................................... 5,000,000 5,246,400
Series A, FGIC Insured, 5.125%, 7/01/31 ..................................................... 3,315,000 3,496,496
Series A, FGIC Insured, Pre-Refunded, 5.125%, 7/01/31 ....................................... 1,685,000 1,788,307
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
Pre-Refunded, 5.50%, 7/01/36 ................................................................. 11,850,000 13,478,071
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series H, 5.00%, 7/01/35 ......................................................... 100,000 106,561
Refunding, Series I, FGIC Insured, 5.00%, 7/01/26 ........................................... 4,000,000 4,280,320
Refunding, Series K, 5.00%, 7/01/30 ......................................................... 1,000,000 1,054,920
Refunding, Series L, MBIA Insured, 5.25%, 7/01/23 ........................................... 6,000,000 7,002,660
a Refunding, Series M, 5.00%, 7/01/25 ......................................................... 4,345,000 4,659,839
Series B, Pre-Refunded, 6.00%, 7/01/39 ...................................................... 10,000,000 10,843,200
Series D, Pre-Refunded, 5.375%, 7/01/36 ..................................................... 11,990,000 13,017,903
Series J, Pre-Refunded, 5.00%, 7/01/34 ...................................................... 1,000,000 1,083,330
Series K, Pre-Refunded, 5.00%, 7/01/35 ...................................................... 5,815,000 6,351,957
Series K, Pre-Refunded, 5.00%, 7/01/40 ...................................................... 9,500,000 10,377,230
Puerto Rico Commonwealth Infrastructure Financing Authority Special Obligation, Series A,
ETM, 5.50%, 10/01/32 ......................................................................... 10,000,000 10,722,800
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue,
5.00%, 7/01/37 .............................................................................. 12,000,000 12,676,680
Series A, AMBAC Insured, Pre-Refunded, 5.00%, 7/01/21 ....................................... 9,000,000 9,193,320
Series B, 5.00%, 7/01/37 .................................................................... 9,000,000 9,474,930
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ............................................................... 20,000,000 21,639,600
CIFG Insured, 5.00%, 7/01/27 ................................................................ 900,000 973,053
Annual Report | 119
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN DOUBLE TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Electric Power Authority Power Revenue,
Refunding, Series SS, MBIA Insured, 5.00%, 7/01/23 .......................................... $ 4,900,000 $ 5,294,107
Series HH, FSA Insured, 5.25%, 7/01/29 ...................................................... 1,605,000 1,702,953
Series II, 5.25%, 7/01/31 ................................................................... 15,500,000 16,529,820
Series II, FSA Insured, 5.125%, 7/01/26 ..................................................... 1,000,000 1,069,440
Series NN, 5.125%, 7/01/29 .................................................................. 5,125,000 5,443,980
Series NN, MBIA Insured, 5.00%, 7/01/32 ..................................................... 4,000,000 4,230,440
Series RR, FGIC Insured, 5.00%, 7/01/35 ..................................................... 5,670,000 6,071,833
Series RR, XLCA Insured, 5.00%, 7/01/30 ..................................................... 1,725,000 1,847,251
Puerto Rico HFAR, Capital Fund Program, 4.60%, 12/01/24 ....................................... 10,000,000 10,220,300
Puerto Rico HFC, HMR, MBS, Series A, GNMA Secured, 5.20%, 12/01/33 ............................ 10,790,000 11,076,043
Puerto Rico HFC Revenue, Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%,
12/01/26 ..................................................................................... 2,060,000 2,080,044
Puerto Rico Housing Bank and Financing Authority SFMR, Affordable Housing Mortgage,
First Portfolio, Pre-Refunded, 6.25%, 4/01/29 ................................................ 1,915,000 1,918,447
Puerto Rico Industrial Medical and Environmental Pollution Control Facilities Financing
Authority Revenue, PepsiCo Inc. Project, 6.25%, 11/15/13 ..................................... 900,000 945,414
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 2,510,200
Dr. Pila Hospital Project, Refunding, FHA Insured, 6.25%, 8/01/32 ........................... 500,000 502,075
Hospital Auxilio Mutuo Obligation, Series A, MBIA Insured, 6.25%, 7/01/24 ................... 8,445,000 8,455,725
Mennonite General Hospital Project, 5.625%, 7/01/17 ......................................... 665,000 641,492
Mennonite General Hospital Project, 5.625%, 7/01/27 ......................................... 1,950,000 1,808,527
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 6,679,428
Guaynabo Municipal Government, 5.625%, 7/01/22 .............................................. 3,160,000 3,218,334
Guaynabo Warehouse, Series A, 5.15%, 7/01/19 ................................................ 1,250,000 1,275,963
Guaynabo Warehouse, Series A, 5.20%, 7/01/24 ................................................ 4,120,000 4,211,258
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 2,129,100
Ana G. Mendez University System Project, Refunding, 5.375%, 2/01/29 ......................... 7,850,000 8,060,380
Cogeneration Facility, AES Puerto Rico Project, 6.625%, 6/01/26 ............................. 5,970,000 6,510,822
International American University of Puerto Rico Project, MBIA Insured, 4.25%,
10/01/24 ................................................................................... 1,000,000 1,017,480
International American University of Puerto Rico Project, MBIA Insured, 4.375%,
10/01/25 ................................................................................... 1,000,000 1,027,560
International American University of Puerto Rico Project, MBIA Insured, 4.50%,
10/01/29 ................................................................................... 3,750,000 3,829,537
University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 ............................ 6,000,000 6,201,600
Puerto Rico Municipal Finance Agency GO, Series A, FSA Insured,
5.00%, 8/01/22 .............................................................................. 3,000,000 3,247,890
Pre-Refunded, 5.50%, 8/01/23 ................................................................ 7,400,000 7,797,602
120 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN DOUBLE TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%,
8/01/27 ..................................................................................... $ 5,500,000 $ 5,792,105
8/01/30 ..................................................................................... 12,000,000 12,911,160
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ........................................................ 3,430,000 3,642,043
Series D, Pre-Refunded, 5.375%, 7/01/33 ..................................................... 9,070,000 9,815,554
Series I, 5.25%, 7/01/33 .................................................................... 4,500,000 4,818,330
Series I, 5.375%, 7/01/34 ................................................................... 5,000,000 5,406,000
Series I, 5.00%, 7/01/36 .................................................................... 4,000,000 4,191,960
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 .................... 1,250,000 1,250,900
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation,
Series A, Pre-Refunded, 5.00%, 6/01/26 ...................................................... 2,865,000 2,940,435
Series E, 5.50%, 8/01/29 .................................................................... 2,155,000 2,282,835
Series E, Pre-Refunded, 5.50%, 8/01/29 ...................................................... 6,845,000 7,421,623
University of Puerto Rico Revenues, University System, Refunding,
Series P, 5.00%, 6/01/30 .................................................................... 4,475,000 4,767,710
Series Q, 5.00%, 6/01/26 .................................................................... 2,500,000 2,673,425
Series Q, 5.00%, 6/01/30 .................................................................... 5,000,000 5,327,050
Series Q, 5.00%, 6/01/36 .................................................................... 7,500,000 7,943,250
------------
380,744,611
------------
VIRGIN ISLANDS 13.8%
Virgin Islands HFA, SFR, Refunding, Series A, GNMA Secured,
6.45%, 3/01/16 .............................................................................. 160,000 161,582
6.50%, 3/01/25 .............................................................................. 390,000 393,783
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, FGIC Insured, 5.00%, 10/01/27 ............................... 4,500,000 4,892,130
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/26 ............................. 5,000,000 5,327,100
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 ............................. 9,220,000 9,779,838
Gross Receipts Taxes Loan Note, Refunding, ACA Insured, 5.00%, 10/01/31 ..................... 2,500,000 2,607,075
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 .......................... 3,000,000 3,098,340
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/22 .......................... 6,750,000 6,973,290
senior lien, Fund Loan Notes, Refunding, Series A, 5.625%, 10/01/25 ......................... 3,950,000 4,087,539
senior lien, Matching Fund Loan Notes, Series A, 5.25%, 10/01/24 ............................ 2,000,000 2,132,280
Virgin Islands Port Authority Marine Revenue, Series A, FSA Insured,
5.25%, 9/01/18 .............................................................................. 3,930,000 4,134,517
5.00%, 9/01/23 .............................................................................. 10,000,000 10,423,000
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/18 ..................................................................................... 4,175,000 4,211,323
7/01/21 ..................................................................................... 1,000,000 1,011,750
Virgin Islands Water and Power Authority Water System Revenue, Refunding,
5.25%, 7/01/12 .............................................................................. 4,000,000 4,071,600
5.50%, 7/01/17 .............................................................................. 4,000,000 4,100,800
------------
67,405,947
------------
TOTAL LONG TERM INVESTMENTS (COST $452,060,651) ............................................... 475,485,515
------------
Annual Report | 121
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN DOUBLE TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 2.1%
MUNICIPAL BONDS 2.1%
U.S. TERRITORIES 2.1%
PUERTO RICO 2.1%
b Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured,
Weekly VRDN and Put, 3.34%, 12/01/15 ......................................................... $ 7,959,000 $ 7,959,000
b Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 3.42%, 7/01/28 ................................. 2,100,000 2,100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $10,059,000) ............................................... 10,059,000
------------
TOTAL INVESTMENTS (COST $462,119,651) 99.6% ................................................... 485,544,515
OTHER ASSETS, LESS LIABILITIES 0.4% ........................................................... 1,717,047
------------
NET ASSETS 100.0% ............................................................................. $487,261,562
============
See Selected Portfolio Abbreviations on page 198.
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.
122 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
----------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.42 $ 11.51 $ 11.76 $ 11.48 $ 11.14
----------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.42 0.42 0.42 0.43 0.46
Net realized and unrealized gains (losses) .. 0.05 (0.10) (0.25) 0.28 0.35
----------------------------------------------------------
Total from investment operations ............... 0.47 0.32 0.17 0.71 0.81
----------------------------------------------------------
Less distributions from net investment income .. (0.42) (0.41) (0.42) (0.43) (0.47)
----------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
----------------------------------------------------------
Net asset value, end of year ................... $ 11.47 $ 11.42 $ 11.51 $ 11.76 $ 11.48
==========================================================
Total return c ................................. 4.22% 2.83% 1.54% 6.33% 7.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 611,291 $ 540,348 $ 493,994 $ 454,942 $ 365,043
Ratios to average net assets:
Expenses .................................... 0.69% 0.69% 0.69% 0.70% 0.72%
Net investment income ....................... 3.68% 3.64% 3.67% 3.69% 4.07%
Portfolio turnover rate ........................ 8.94% 12.62% 9.14% 8.62% 4.86%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 123
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e
------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.44 $ 11.53 $ 11.77 $ 11.67
------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.36 0.35 0.36 0.24
Net realized and unrealized gains (losses) .. 0.05 (0.09) (0.24) 0.10
------------------------------------------------
Total from investment operations ............... 0.41 0.26 0.12 0.34
------------------------------------------------
Less distributions from net investment income .. (0.36) (0.35) (0.36) (0.24)
------------------------------------------------
Redemption fees ................................ -- d -- d -- d --
------------------------------------------------
Net asset value, end of year ................... $ 11.49 $ 11.44 $ 11.53 $ 11.77
================================================
Total return c ................................. 3.65% 2.27% 1.05% 2.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 28,510 $ 30,178 $ 23,384 $ 11,182
Ratios to average net assets:
Expenses .................................... 1.24% 1.24% 1.24% 1.25% f
Net investment income ....................... 3.13% 3.09% 3.12% 3.14% f
Portfolio turnover rate ........................ 8.94% 12.62% 9.14% 8.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e For the period July 1, 2003 (effective date) to February 29, 2004.
f Annualized.
124 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.1%
MUNICIPAL BONDS 98.1%
ALABAMA 4.8%
Alabama Water Pollution Control Authority Revenue, Revolving Fund Loan, Refunding, Series B,
AMBAC Insured,
4.625%, 8/15/13 ............................................................................. $ 5,900,000 $ 6,144,437
4.125%, 2/15/14 ............................................................................. 3,000,000 3,064,200
East Alabama Health Care Authority Health Care Facilities Revenue, Tax Anticipation Bond,
Series A, MBIA Insured,
4.50%, 9/01/13 .............................................................................. 1,925,000 1,983,751
4.625%, 9/01/14 ............................................................................. 2,010,000 2,081,235
4.50%, 9/01/15 .............................................................................. 2,100,000 2,164,092
Huntsville Health Care Authority Revenue, Series A, MBIA Insured,
4.80%, 6/01/13 .............................................................................. 2,400,000 2,504,952
5.00%, 6/01/17 .............................................................................. 2,900,000 3,120,661
Jefferson County GO, Capital Improvement wts., Series A, MBIA Insured, 5.00%, 4/01/17 ......... 2,195,000 2,355,542
Jefferson County Limited Obligation School wts. Revenue, Series A, 5.25%, 1/01/16 ............. 2,000,000 2,165,240
Sylacauga GO, wts., AMBAC Insured, Pre-Refunded, 5.50%, 6/01/12 ............................... 600,000 643,302
University of Alabama General Revenue, Series A, MBIA Insured, 5.00%, 7/01/15 ................. 4,070,000 4,392,914
------------
30,620,326
------------
ARIZONA 4.4%
Arizona School Facilities Board Revenue, Series B, FGIC Insured, 4.00%, 9/01/13 ............... 5,000,000 5,068,500
Arizona State University COP, Research Infrastructure Projects, AMBAC Insured, 5.25%,
9/01/16 ...................................................................................... 2,505,000 2,767,273
Glendale IDAR, John C Lincoln Health, Refunding, Series B, 5.00%, 12/01/18 .................... 5,605,000 5,854,703
Maricopa County GO, School District No. 97, Deer Valley School Improvement, Series A,
FGIC Insured, 4.75%, 7/01/12 ................................................................. 4,000,000 4,203,000
Maricopa County Hospital Revenue, Sun Health Corp., Refunding, 5.00%, 4/01/18 ................. 2,000,000 2,091,800
Maricopa County USD No. 48 Scottsdale GO, Refunding, Series A, FSA Insured, 4.00%,
7/01/15 ...................................................................................... 3,000,000 3,063,840
Maricopa County USD No. 80 Chandler GO, Project of 2002, Series A, FSA Insured, 4.00%,
7/01/14 ...................................................................................... 1,000,000 1,017,860
Mesa GO, Refunding, Series A, FGIC Insured, 4.20%, 7/01/16 .................................... 715,000 729,321
Tempe Arizona IDA Lease Revenue, State University Foundation, AMBAC Insured, 4.00%,
7/01/14 ..................................................................................... 1,110,000 1,129,825
7/01/15 ..................................................................................... 1,000,000 1,013,910
7/01/16 ..................................................................................... 1,000,000 1,012,230
------------
27,952,262
------------
ARKANSAS 1.8%
Arkansas State Development Finance Authority Revenue, State Agencies Facilities, Corrections,
Series B, FSA Insured, 5.00%,
11/01/17 .................................................................................... 1,955,000 2,132,592
11/01/19 .................................................................................... 2,065,000 2,244,635
Conway Hospital Revenue, Conway Regional Medical Improvement, Refunding, Series A, 6.20%,
8/01/17 ...................................................................................... 1,105,000 1,160,438
Little Rock GO, Capital Improvements, FSA Insured, 4.00%, 4/01/15 ............................. 2,500,000 2,536,900
Annual Report | 125
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ARKANSAS (CONTINUED)
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 $ 1,083,160
Student Fee University of Arkansas at Fort Smith, FSA Insured, 4.75%, 12/01/15 .............. 2,295,000 2,402,819
------------
11,560,544
------------
CALIFORNIA 6.3%
California State Department of Water Resources Power Supply Revenue, Series A, Pre-Refunded,
5.125%, 5/01/18 .............................................................................. 3,000,000 3,247,170
California State GO,
Refunding, 5.00%, 2/01/17 ................................................................... 3,000,000 3,190,590
Various Purpose, 5.25%, 11/01/17 ........................................................... 10,000,000 10,863,500
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue, Asset-Backed, ETM,
5.00%, 6/01/12 ............................................................................... 1,500,000 1,594,950
Los Angeles Department of Water and Power Waterworks Revenue, Series B, MBIA Insured,
4.25%, 7/01/17 ............................................................................... 6,530,000 6,711,991
Los Angeles USD, GO, Series A, MBIA Insured,
4.125%, 7/01/15 ............................................................................. 2,500,000 2,566,400
4.25%, 7/01/16 .............................................................................. 2,500,000 2,571,075
North Orange County Community College District GO, Election of 2002, Series B, FGIC Insured,
Pre-Refunded, 4.00%, 8/01/15 ................................................................. 2,000,000 2,055,480
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Capital Appreciation,
Refunding, Series A, 5.65%, 1/15/17 .......................................................... 3,000,000 3,213,420
Tulare Joint UHSD, GO, Election of 2004, Series A, MBIA Insured, 5.00%, 8/01/16 ............... 2,870,000 3,159,325
Val Verde USD, COP, FGIC Insured, ETM, 5.00%, 1/01/15 ......................................... 1,000,000 1,096,080
------------
40,269,981
------------
COLORADO 4.2%
Adams County PCR, Public Service Co. of Colorado Project, Refunding, Series A, MBIA Insured,
4.375%, 9/01/17 .............................................................................. 17,000,000 17,703,460
Denver City and County COP, Series B, AMBAC Insured, Pre-Refunded, 5.75%, 12/01/16 ............ 3,000,000 3,245,430
Denver City and County Medical Facilities GO, 4.00%, 8/01/16 .................................. 6,000,000 6,060,660
------------
27,009,550
------------
FLORIDA 9.4%
Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/16 ........................ 5,915,000 6,390,743
Collier County Capital Improvement Revenue, FGIC Insured, 4.60%, 10/01/13 ..................... 1,000,000 1,038,790
Collier County School Board COP, Refunding, FSA Insured, 5.00%, 2/15/16 ....................... 5,000,000 5,396,150
Florida State Department of Management Services Division Facilities Management Revenue,
Florida Facilities Pool, Refunding, Series A, AMBAC Insured, 5.00%, 9/01/17 .................. 5,660,000 6,194,304
Hillsborough County Capacity Assessment Special Assessment Revenue, Series 2006,
FGIC Insured, 5.00%, 3/01/19 ................................................................. 5,000,000 5,374,400
Jacksonville Water and Sewer System Revenue, Series B, FSA Insured, 4.10%, 10/01/13 ........... 3,000,000 3,004,650
Marion County Public Improvement Revenue, Refunding, MBIA Insured,
4.20%, 12/01/12 ............................................................................. 1,400,000 1,431,458
4.30%, 12/01/13 ............................................................................. 1,800,000 1,844,064
Marion County School Board COP, FSA Insured, 4.00%, 6/01/15 ................................... 1,115,000 1,129,707
126 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Orange County School Board COP, Series B, FGIC Insured, 5.00%,
8/01/18 ..................................................................................... $ 5,150,000 $ 5,600,728
8/01/19 ..................................................................................... 5,985,000 6,498,992
Orlando Waste Water Services Revenue, Refunding, Series A, AMBAC Insured, 4.00%,
10/01/14 ..................................................................................... 7,000,000 7,076,580
Tampa Bay Water Utility System Revenue,
FGIC Insured, Pre-Refunded, 5.75%, 10/01/15 ................................................. 1,000,000 1,088,550
Series B, FGIC Insured, Pre-Refunded, 4.75%, 10/01/15 ....................................... 4,140,000 4,333,628
Series B, FGIC Insured, Pre-Refunded, 4.75%, 10/01/16 ....................................... 3,400,000 3,559,018
-----------
59,961,762
-----------
GEORGIA 1.9%
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.30%,
12/01/13 ..................................................................................... 1,020,000 1,038,931
Main Street Natural Gas Inc. Gas Revenue, Series B, 5.00%, 3/15/18 ............................ 5,000,000 5,442,300
South Georgia Governmental Services Authority Revenue, FGIC Insured, 5.00%, 1/01/16 ........... 2,650,000 2,898,862
Wayne County Development Authority PCR, ITT Rayonier Inc. Project, Refunding, 6.10%,
11/01/07 ..................................................................................... 3,105,000 3,107,670
-----------
12,487,763
-----------
HAWAII 0.4%
Hawaii State Department of Budget and Finance Special Purpose Revenue, Kaiser Permanente,
Series A, ETM, 5.10%, 3/01/14 ................................................................ 2,500,000 2,584,875
-----------
ILLINOIS 0.7%
Chicago Park District GO, Parking Revenues, Series A, FGIC Insured, Pre-Refunded, 4.125%,
1/01/14 ...................................................................................... 3,125,000 3,202,094
Illinois Health Facilities Authority Revenue, Victory Health Services, Series A, Pre-Refunded,
5.25%, 8/15/09 ............................................................................... 1,170,000 1,189,808
-----------
4,391,902
-----------
KENTUCKY 0.4%
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement,
5.70%, 10/01/10 ............................................................................. 1,000,000 1,019,660
5.75%, 10/01/11 ............................................................................. 1,500,000 1,530,750
-----------
2,550,410
-----------
LOUISIANA 2.5%
Louisiana State Citizens Property Insurance Corp. Assessment Revenue, Series B,
AMBAC Insured, 5.00%, 6/01/19 ................................................................ 11,000,000 11,966,130
St. John's Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 .................. 4,000,000 4,148,160
-----------
16,114,290
-----------
MARYLAND 2.8%
Maryland State EDC Student Housing Revenue, University of Maryland College Park Projects,
Refunding, CIFG Insured, 5.00%,
6/01/19 ..................................................................................... 1,445,000 1,571,914
6/01/20 ..................................................................................... 1,000,000 1,085,400
Annual Report | 127
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MARYLAND (CONTINUED)
Maryland State Health and Higher Educational Facilities Authority Revenue,
Doctors Community Hospital, Refunding, Series A, 5.00%, 7/01/20 ............................. $ 6,000,000 $ 6,341,640
Parking, Johns Hopkins Medical Institutions, Refunding, Series B, AMBAC Insured, 5.00%,
7/01/15 .................................................................................... 1,000,000 1,088,960
Peninsula Regional Medical Center, 5.00%, 7/01/18 ........................................... 1,600,000 1,728,576
Peninsula Regional Medical Center, 5.00%, 7/01/19 ........................................... 1,430,000 1,543,757
Peninsula Regional Medical Center, 5.00%, 7/01/20 ........................................... 1,000,000 1,078,740
Western Maryland Health, Refunding, Series A, MBIA Insured, 5.00%, 1/01/19 .................. 3,020,000 3,284,763
--------------
17,723,750
--------------
MASSACHUSETTS 1.6%
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 3,208,860
Massachusetts State Development Finance Agency Revenue, Loomis Community Project,
first mortgage, Refunding, Series A, 5.50%, 7/01/08 .......................................... 1,045,000 1,049,493
Massachusetts State Industrial Finance Agency Resource Recovery Revenue, Ogden Haverhill
Project, Refunding, Series A,
5.15%, 12/01/07 ............................................................................. 2,000,000 2,012,680
5.20%, 12/01/08 ............................................................................. 2,000,000 2,037,440
Massachusetts State Industrial Finance Agency Revenue, D'Youville Senior Care, 5.50%,
10/01/12 ..................................................................................... 1,745,000 1,793,930
--------------
10,102,403
--------------
MICHIGAN 8.6%
Battle Creek Downtown Development Authority Tax Allocation, MBIA Insured, Pre-Refunded,
5.00%, 5/01/17 ............................................................................... 3,295,000 3,347,358
Chippewa County Hospital Financing Authority Revenue, Chippewa County War Memorial
Hospital, Refunding, Series B, 5.30%, 11/01/07 ............................................... 815,000 819,377
Detroit GO, Series B, FSA Insured, 5.00%,
4/01/18 ..................................................................................... 2,635,000 2,854,601
4/01/19 ..................................................................................... 2,515,000 2,720,626
Ferris State University Revenue, General,
AMBAC Insured, Pre-Refunded, 5.00%, 10/01/18 ................................................ 520,000 527,686
Refunding, AMBAC Insured, 5.00%, 10/01/18 ................................................... 2,120,000 2,147,539
Garden City School District GO, Refunding, FSA Insured, 5.00%,
5/01/15 ..................................................................................... 1,250,000 1,363,437
5/01/18 ..................................................................................... 1,455,000 1,564,765
Jackson Public Schools GO, School Building and Site, Refunding, FSA Insured, 5.00%,
5/01/16 ..................................................................................... 1,925,000 2,067,200
5/01/17 ..................................................................................... 2,025,000 2,171,954
Michigan Municipal Bond Authority Revenue, School District City of Detroit, FSA Insured,
5.00%, 6/01/17 ............................................................................... 10,000,000 10,782,800
Michigan State Hospital Finance Authority Revenue, Ascension Health Credit, Series A,
MBIA Insured, Pre-Refunded, 6.00%, 11/15/13 .................................................. 1,200,000 1,283,508
Otsego Public Schools District GO, School Building and Site, FSA Insured, 5.00%, 5/01/16 ...... 1,630,000 1,750,408
Roseville School District GO, School Building and Site, Refunding, FSA Insured, 5.00%,
5/01/19 ...................................................................................... 2,275,000 2,471,492
128 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Saginaw-Midland Municipal Water Supply Corp. Revenue GO, Water Supply System, Refunding,
MBIA Insured, 4.25%, 9/01/13 ................................................................. $ 1,245,000 $ 1,284,180
South Lyon Community Schools GO, Refunding,
FGIC Insured, 5.00%, 5/01/16 ................................................................ 3,040,000 3,334,515
FSA Insured, 5.00%, 5/01/17 ................................................................. 4,385,000 4,760,444
Wayne-Westland Community Schools GO, Refunding,
4.50%, 5/01/12 .............................................................................. 1,035,000 1,073,005
4.625%, 5/01/13 ............................................................................. 1,095,000 1,149,027
FSA Insured, 5.00%, 5/01/16 ................................................................. 2,825,000 3,059,927
Western Townships Utilities Authority GO, Refunding, MBIA Insured, 4.75%, 1/01/17 ............. 4,290,000 4,407,117
--------------
54,940,966
--------------
MINNESOTA 3.9%
Chaska ISD No. 112 GO, Refunding, Series A,
5.00%, 2/01/16 .............................................................................. 4,000,000 4,141,880
FSA Insured, 4.00%, 2/01/14 ................................................................. 2,060,000 2,089,293
Minneapolis GO, Various Purpose, 5.00%, 12/01/17 .............................................. 3,000,000 3,174,630
Minneapolis Special School District No. 001 COP, Refunding, Series B, FGIC Insured, 4.625%,
2/01/17 ...................................................................................... 1,000,000 1,034,050
Mounds View ISD No. 621 GO, MBIA Insured, 5.00%,
2/01/14 ..................................................................................... 2,340,000 2,481,710
2/01/15 ..................................................................................... 2,425,000 2,569,627
2/01/16 ..................................................................................... 2,460,000 2,603,320
Ramsey County GO, Capital Improvement Plan, Series A, 4.75%, 2/01/15 .......................... 2,215,000 2,317,377
Robbinsdale ISD No. 281 GO, Refunding, FSA Insured,
4.00%, 2/01/13 .............................................................................. 2,070,000 2,101,278
4.125%, 2/01/14 ............................................................................. 2,175,000 2,219,000
--------------
24,732,165
--------------
MISSOURI 4.4%
Hannibal IDA Health Facilities Revenue, Refunding, 5.00%, 3/01/19 ............................. 1,675,000 1,761,648
Jackson County Reorganized School District No. 7 Lees Summit GO, School Building,
MBIA Insured, 5.00%, 3/01/16 ................................................................. 2,000,000 2,153,720
Lake of the Ozarks Community Bridge Corp. Bridge System Revenue,
Pre-Refunded, 5.00%, 12/01/08 ............................................................... 1,000,000 1,009,920
Refunding, 5.00%, 12/01/08 .................................................................. 1,060,000 1,071,522
Missouri Joint Municipal Electric Utility Commission Power Project Revenue, Plum Point
Project,
MBIA Insured, 5.00%,
1/01/17 ..................................................................................... 1,500,000 1,637,295
1/01/19 ..................................................................................... 1,000,000 1,087,620
Southeast Missouri State University System Facilities Revenue, Refunding and Improvement,
MBIA Insured,
4.375%, 4/01/12 ............................................................................. 335,000 345,130
4.50%, 4/01/14 .............................................................................. 545,000 562,783
4.60%, 4/01/15 .............................................................................. 1,360,000 1,407,410
4.70%, 4/01/16 .............................................................................. 1,165,000 1,208,187
Springfield Public Utility Revenue, FGIC Insured, 4.50%, 8/01/21 .............................. 15,245,000 15,825,072
--------------
28,070,307
--------------
Annual Report | 129
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEVADA 0.8%
a Clark County School District GO, Refunding, Series A, MBIA Insured, 4.50%, 6/15/19 ............ $ 5,000,000 $ 5,305,300
------------
NEW JERSEY 4.7%
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 2,810,692
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding, Series 1,
5.90%, 1/01/15 ............................................................................... 805,000 809,693
New Jersey State COP, Equipment Lease Purchase, Series A, AMBAC Insured, 5.00%,
6/15/17 ...................................................................................... 5,000,000 5,348,550
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System,
Refunding, Series C, FSA Insured, 4.50%, 12/15/10 ........................................... 10,000,000 10,293,400
Series D, FSA Insured, 5.00%, 6/15/19 ....................................................... 5,630,000 6,072,462
Series D, FSA Insured, Pre-Refunded, 5.00%, 6/15/19 ......................................... 4,370,000 4,778,158
------------
30,112,955
------------
NEW YORK 13.2%
Liverpool Central School District GO, Refunding, FSA Insured, 5.00%, 7/15/14 .................. 1,560,000 1,660,074
Long Island Power Authority Electric System Revenue, General,
Refunding, Series A, FGIC Insured, 5.00%, 12/01/19 .......................................... 7,000,000 7,620,480
Series E, FGIC Insured, 5.00%, 12/01/18 ..................................................... 8,500,000 9,316,085
Middletown City School District GO, Refunding, Series A, FSA Insured, 4.00%, 11/01/15 ......... 2,050,000 2,078,946
MTA Commuter Facilities Revenue, Services Contract, Series R, ETM, 5.50%, 7/01/11 ............. 2,215,000 2,293,367
MTA Revenue, Transportation,
Series C, 5.00%, 11/15/16 ................................................................... 1,150,000 1,255,122
Series F, 5.00%, 11/15/15 ................................................................... 1,250,000 1,358,187
MTA Transit Facilities Revenue, Series A, Pre-Refunded, 6.00%, 7/01/15 ........................ 1,500,000 1,581,135
New York City GO,
Refunding, Series C, MBIA Insured, 5.875%, 8/01/16 .......................................... 5,000 5,384
Refunding, Series H, 5.00%, 8/01/17 ......................................................... 4,330,000 4,630,762
Series C, MBIA Insured, Pre-Refunded, 5.875%, 8/01/16 ....................................... 1,245,000 1,347,252
Series F, 4.75%, 1/15/16 .................................................................... 3,000,000 3,135,510
Series H, 5.90%, 8/01/09 .................................................................... 495,000 504,266
Series H, 5.00%, 8/01/16 .................................................................... 3,000,000 3,214,380
Series H, Pre-Refunded, 5.90%, 8/01/09 ...................................................... 5,000 5,097
Series I, 5.00%, 8/01/18 .................................................................... 10,000,000 10,674,800
Series J, 6.00%, 8/01/08 .................................................................... 985,000 1,003,873
Series J, Pre-Refunded, 6.00%, 8/01/08 ...................................................... 2,015,000 2,054,695
Series O, 5.00%, 6/01/19 .................................................................... 5,000,000 5,362,200
New York City Transitional Finance Authority Revenue, Series C, 4.50%, 2/15/13 ................ 4,500,000 4,669,470
New York State Dormitory Authority Revenue, Mortgage, St. Barnabas, Series B, FHA Insured,
4.25%, 8/01/14 ............................................................................... 2,355,000 2,415,547
New York State Dormitory Authority Revenues, Mental Health Services Facilities Improvement,
Series D, MBIA Insured, 5.00%, 8/15/17 ....................................................... 2,000,000 2,051,760
130 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York State Energy Research and Development Authority PCR, New York State Electric and
Gas, MBIA Insured, 4.10%, 3/15/15 ............................................................ $ 7,000,000 $ 7,098,560
Yonkers GO,
Refunding, Series A, MBIA Insured, 5.00%, 8/01/17 ........................................... 6,435,000 6,976,312
Series B, FSA Insured, 4.00%, 10/15/16 ...................................................... 1,890,000 1,914,475
--------------
84,227,739
--------------
NORTH CAROLINA 3.4%
Asheville Water System Revenue, FSA Insured, Pre-Refunded, 5.25%,
8/01/15 ..................................................................................... 915,000 974,814
8/01/17 ..................................................................................... 1,020,000 1,086,677
8/01/19 ..................................................................................... 1,030,000 1,097,331
Charlotte Water and Sewer System Revenue, 5.00%, 6/01/16 ...................................... 4,000,000 4,241,160
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series D, 6.00%, 1/01/09 ......................................................... 400,000 407,008
Series D, 6.45%, 1/01/14 .................................................................... 1,000,000 1,078,930
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Refunding, Series B,
6.50%, 1/01/09 ............................................................................... 5,000,000 5,235,150
Rutherford County COP, Refunding, AMBAC Insured, 5.00%, 9/01/17 ............................... 1,275,000 1,358,564
Wake County GO, Public Improvement, 4.50%, 3/01/14 ............................................ 6,400,000 6,672,768
--------------
22,152,402
--------------
OHIO 4.7%
Akron GO, Various Purpose, Refunding and Improvement, MBIA Insured, 4.125%, 12/01/14 .......... 1,000,000 1,022,790
Allen County GO, Refunding, AMBAC Insured, 4.75%, 12/01/17 .................................... 2,180,000 2,290,351
Cleveland Municipal School District GO, FSA Insured, 5.00%,
12/01/14 .................................................................................... 1,915,000 2,074,251
12/01/15 .................................................................................... 1,510,000 1,632,582
12/01/16 .................................................................................... 1,400,000 1,510,880
Franklin County Health Care Facilities Revenue, Presbyterian Retirement Services, Refunding,
5.25%, 7/01/08 .............................................................................. 575,000 581,101
5.40%, 7/01/10 .............................................................................. 775,000 791,011
5.50%, 7/01/11 .............................................................................. 500,000 510,835
Kenston Local School District GO, School Improvement, MBIA Insured, 4.00%, 12/01/15 ........... 1,000,000 1,015,970
Lake Local School District Wood County GO, MBIA Insured,
5.20%, 12/01/17 ............................................................................. 375,000 402,544
Pre-Refunded, 5.20%, 12/01/17 ............................................................... 2,190,000 2,356,812
Mahoning County Sewer System Revenue, AMBAC Insured, 5.20%, 12/01/14 .......................... 1,360,000 1,443,382
Mason City School District GO, School Improvement, Refunding, FGIC Insured, 5.00%,
12/01/15 .................................................................................... 2,670,000 2,927,014
Nordonia Hills City School District GO, School Improvement, Refunding, FGIC Insured, 4.50%,
12/01/21 .................................................................................... 2,360,000 2,452,347
Ohio State Building Authority Revenue, State Facilities, Administration Building Fund Project,
Refunding, Series B, FSA Insured, 4.00%, 10/01/12 ........................................... 1,000,000 1,019,000
University of Akron General Receipts Revenue, FGIC Insured, Pre-Refunded, 5.75%,
1/01/14 ..................................................................................... 2,000,000 2,131,280
Annual Report | 131
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
University of Cincinnati General Receipts Revenue, Series A, AMBAC Insured, 5.00%,
6/01/17 ...................................................................................... $ 3,000,000 $ 3,259,080
Westerville City School District GO, Refunding, MBIA Insured, 5.00%, 12/01/18 ................. 1,000,000 1,079,750
Youngstown GO, AMBAC Insured, 6.125%, 12/01/15 ................................................ 1,275,000 1,442,446
--------------
29,943,426
--------------
OKLAHOMA 0.2%
Okmulgee County Governmental Building Authority Sales Tax Revenue, first mortgage,
MBIA Insured, Pre-Refunded,
5.60%, 3/01/10 .............................................................................. 775,000 793,058
6.00%, 3/01/15 .............................................................................. 700,000 729,827
--------------
1,522,885
--------------
OREGON 3.3%
Emerald Peoples Utility District Revenue, Refunding, Series A, FSA Insured, 4.00%,
11/01/15 ..................................................................................... 2,475,000 2,515,417
Oregon State Department of Administrative Services COP, Series A, FGIC Insured, 5.00%,
11/01/19 ..................................................................................... 2,340,000 2,551,232
Portland GO, Arena, Refunding, Series B, 5.00%, 6/01/16 ....................................... 3,075,000 3,342,832
Portland Sewer System Revenue, second lien, Series B, MBIA Insured, 5.00%,
6/15/18 ..................................................................................... 3,135,000 3,426,649
6/15/19 ..................................................................................... 3,290,000 3,590,706
Salem Water and Sewer Revenue,
MBIA Insured, 4.10%, 6/01/16 ................................................................ 1,035,000 1,057,253
Refunding, FSA Insured, 4.375%, 6/01/11 ..................................................... 2,160,000 2,225,167
Refunding, FSA Insured, 4.50%, 6/01/12 ...................................................... 2,250,000 2,343,600
--------------
21,052,856
--------------
PENNSYLVANIA 1.8%
Allegheny County IDAR, Pollution Control, Refunding, Series A, AMBAC Insured, 4.35%,
12/01/13 ..................................................................................... 5,000,000 5,210,200
Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding, 5.40%,
7/01/07 ...................................................................................... 555,000 557,009
Pittsburgh Water and Sewer Authority Revenue, Refunding, FSA Insured, 4.00%,
9/01/14 ..................................................................................... 4,000,000 4,064,040
9/01/15 ..................................................................................... 2,000,000 2,028,560
--------------
11,859,809
--------------
SOUTH CAROLINA 1.3%
Charleston County Resource Recovery Revenue, Foster Wheeler Charleston, Refunding,
AMBAC Insured, 5.25%, 1/01/10 ................................................................ 1,000,000 1,036,230
Rock Hill Utility System Revenue, Refunding and Improvement, Series A, FSA Insured, 4.00%,
1/01/14 ...................................................................................... 2,000,000 2,033,180
Scago Educational Facilities Corp. for Pickens School District Revenue, Pickens County
Project, FSA Insured, 5.00%, 12/01/18 ........................................................ 5,000,000 5,441,850
--------------
8,511,260
--------------
132 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TENNESSEE 1.4%
Tennessee Energy Acquisition Corp. Gas Revenue, Series C, 5.00%, 2/01/18 ...................... $ 5,000,000 $ 5,429,000
Tennessee State School Board Authority Revenue, Higher Educational Facilities, Second
Program, Series A, FSA Insured, Pre-Refunded, 5.00%, 5/01/13 ................................. 3,425,000 3,642,008
--------------
9,071,008
--------------
TEXAS 2.4%
Edgewood ISD Bexar County GO, Series A, 5.00%,
2/15/16 ..................................................................................... 1,225,000 1,313,960
2/15/17 ..................................................................................... 1,285,000 1,375,888
Houston Hotel Occupancy Tax and Special Revenue, Convention and Entertainment, Series B,
AMBAC Insured, 5.00%, 9/01/11 ................................................................ 6,000,000 6,332,580
Laredo ISD Public Facility Corp. Lease Revenue,
Series A, AMBAC Insured, 5.00%, 8/01/15 ..................................................... 1,000,000 1,048,220
Series C, AMBAC Insured, 5.00%, 8/01/19 ..................................................... 1,000,000 1,052,370
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.35%,
11/01/10 ..................................................................................... 2,500,000 2,508,675
Travis County Health Facilities Development Corp. Revenue, Ascension Health Credit, Series A,
MBIA Insured, Pre-Refunded, 6.25%, 11/15/17 .................................................. 1,500,000 1,613,925
--------------
15,245,618
--------------
UTAH 0.5%
Salt Lake County College Revenue,
Refunding, 5.00%, 10/01/19 .................................................................. 2,585,000 2,675,992
Westminster College Project, 5.50%, 10/01/12 ................................................ 340,000 346,460
--------------
3,022,452
--------------
WASHINGTON 1.2%
King County School District No. 406 South Central GO, Refunding, FSA Insured, 5.00%,
12/01/16 ..................................................................................... 3,000,000 3,241,320
Washington State GO, Series A, FSA Insured, 5.00%, 7/01/16 .................................... 4,000,000 4,345,480
--------------
7,586,800
--------------
WEST VIRGINIA 0.1%
West Virginia Public Energy Authority Energy Revenue, Morgantown Assn. Project, Series A,
5.05%, 7/01/08 ............................................................................... 365,000 366,241
--------------
U.S. TERRITORIES 1.0%
VIRGIN ISLANDS 1.0%
Virgin Islands PFAR, senior lien, Refunding, Series A, 5.30%, 10/01/11 ........................ 4,000,000 4,113,480
Virgin Islands Water and Power Authority Water System Revenue, Refunding, 5.00%,
7/01/09 ...................................................................................... 2,400,000 2,423,928
--------------
TOTAL U.S. TERRITORIES ........................................................................ 6,537,408
--------------
TOTAL LONG TERM INVESTMENTS (COST $610,538,985) ............................................... 627,591,415
--------------
Annual Report | 133
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 1.3%
MUNICIPAL BONDS 1.3%
CONNECTICUT 0.6%
b Connecticut State Health and Educational Facilities Authority Revenue, Yale University,
Series V-1, Daily VRDN and Put, 3.62%, 7/01/36 ................................................. $ 4,000,000 $ 4,000,000
--------------
MASSACHUSETTS 0.1%
b Massachusetts State Health and Educational Facilities Authority Revenue, Capital Assets Program,
Series E, Daily VRDN and Put, 3.53%, 1/01/35 ................................................... 500,000 500,000
--------------
MICHIGAN 0.1%
b Detroit Sewage Disposal Revenue, senior lien, Series B, FSA Insured, Daily VRDN and Put,
3.66%, 7/01/33 ................................................................................. 400,000 400,000
--------------
NEW JERSEY 0.1%
b New Jersey EDA Revenue, School Facilities Construction, Sub Series R-3, Daily VRDN and Put,
3.58%, 9/01/31 ................................................................................. 600,000 600,000
--------------
NORTH CAROLINA 0.2%
b North Carolina State GO, Series G, Weekly VRDN and Put, 3.47%, 5/01/21 .......................... 225,000 225,000
b Wake County GO, Public Improvement, Series C, Weekly VRDN and Put, 3.64%, 4/01/19 ............... 1,100,000 1,100,000
--------------
1,325,000
--------------
TENNESSEE 0.2%
b Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN and
Put, 3.65%,
7/01/31 ....................................................................................... 500,000 500,000
1/01/33 ....................................................................................... 1,100,000 1,100,000
--------------
1,600,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $8,425,000) .................................................. 8,425,000
--------------
TOTAL INVESTMENTS (COST $618,963,985) 99.4% ..................................................... 636,016,415
OTHER ASSETS, LESS LIABILITIES 0.6% ............................................................. 3,784,699
--------------
NET ASSETS 100.0% ............................................................................... $ 639,801,114
==============
See Selected Portfolio Abbreviations on page 198.
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.
134 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND
-----------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e
-----------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 9.91 $ 9.99 $ 10.12 $ 10.00
-----------------------------------------------
Income from investment operations a:
Net investment income b ............................. 0.29 0.21 0.15 0.06
Net realized and unrealized gains (losses) .......... 0.02 (0.09) (0.14) 0.11
-----------------------------------------------
Total from investment operations ....................... 0.31 0.12 0.01 0.17
-----------------------------------------------
Less distributions from net investment income .......... (0.29) (0.20) (0.14) (0.05)
-----------------------------------------------
Redemption fees ........................................ -- d -- d -- d --
-----------------------------------------------
Net asset value, end of year ........................... $ 9.93 $ 9.91 $ 9.99 $ 10.12
===============================================
Total return c ......................................... 3.20% 1.23% 0.14% 1.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $ 18,683 $ 26,005 $ 33,254 $ 24,282
Ratios to average net assets:
Expenses before waiver and payments by affiliates ... 1.16% 1.09% 1.13% 1.27% f
Expenses net of waiver and payments by affiliates ... 0.50% 0.50% 0.50% 0.50% f
Net investment income ............................... 2.88% 2.07% 1.49% 1.22% f
Portfolio turnover rate ................................ 57.74% 32.42% 15.79% 8.08%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e For the period September 2, 2003 (commencement of operations) to February
29, 2004.
f Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 135
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 74.6%
MUNICIPAL BONDS 74.6%
ALABAMA 1.3%
Etowah County Board of Education Special Tax School Warrants, Refunding, FSA Insured, 2.60%,
9/01/08 ...................................................................................... $ 250,000 $ 244,598
------------
COLORADO 2.0%
Strasburg School District No. 31J GO, MBIA Insured, zero cpn.,
12/01/07 .................................................................................... 220,000 214,168
12/01/08 .................................................................................... 170,000 159,501
------------
373,669
------------
KANSAS 2.8%
Junction City COP, Radian Insured, 4.00%,
9/01/09 ..................................................................................... 215,000 215,353
9/01/10 ..................................................................................... 310,000 310,700
------------
526,053
------------
LOUISIANA 5.5%
Louisiana State Citizens Property Insurance Corp. Assessment Revenue, Series B, AMBAC Insured,
5.00%, 6/01/09 ............................................................................... 1,000,000 1,028,060
------------
MISSOURI 1.3%
Platte County COP, Public Improvements, 2.40%, 10/01/08 ....................................... 200,000 194,510
Springfield COP, Enterprise System Project, 3.85%, 2/01/08 .................................... 50,000 50,096
------------
244,606
------------
NEVADA 2.5%
Henderson Local ID Special Assessment, No. T-6, Limited Obligation, Refunding, Senior Series A,
FSA Insured, 2.85%, 11/01/09 ................................................................. 275,000 267,363
Washoe County Improvement Bonds, Refunding, FSA Insured, 2.50%, 11/01/08 ...................... 205,000 199,494
------------
466,857
------------
NEW YORK 15.0%
New York State Dormitory Authority Revenues,
Non State Supported Debt, Aids Long Term Health Care Facility, Refunding, 5.00%,
11/01/11 ................................................................................... 750,000 782,490
The New York and Presbyterian Hospital, Mortgage, Refunding, Series A, FHA Insured, 5.00%,
8/15/09 .................................................................................... 750,000 772,928
New York State Urban Development Corp. Revenue, State Personal Income Tax, Series C-1
Empire State, 2.80%, 12/15/09 ................................................................ 245,000 237,559
Tobacco Settlement Financing Corp. Revenue, Series B-1, 4.00%, 6/01/07 ........................ 1,000,000 1,000,520
------------
2,793,497
------------
OHIO 4.6%
Franklin County Hospital Revenue, Hospital Corp., Refunding, Series C, MBIA Insured, 2.50%,
5/15/08 ...................................................................................... 500,000 490,095
Stark County GO, Sewage System, Refunding, AMBAC Insured, 2.50%, 12/01/08 ..................... 370,000 359,718
------------
849,813
------------
136 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OREGON 0.6%
Lake County School District No. 014 GO, Refunding, FSA Insured, 2.50%, 1/15/08 ................ $ 105,000 $ 103,488
------------
PENNSYLVANIA 1.3%
Pittsburgh Water and Sewer Authority Revenue, Refunding, FSA Insured, 2.65%, 9/01/08 .......... 250,000 244,685
------------
RHODE ISLAND 0.5%
Rhode Island Housing and Mortgage Finance Corp. Revenue, Homeownership Opportunity,
Series 44-A, 2.40%, 10/01/07 ................................................................. 100,000 98,897
------------
SOUTH DAKOTA 1.9%
South Dakota HDA Revenue, Series D, 2.90%, 5/01/09 ............................................ 365,000 356,025
------------
UTAH 0.9%
Davis County Sales Tax Revenue, Series B, AMBAC Insured, 2.55%, 10/01/08 ...................... 180,000 175,721
------------
VIRGINIA 2.5%
Virginia State Public School Authority Revenue, School Financing 1997, Refunding, Series C,
5.00%, 8/01/08 ............................................................................... 455,000 463,263
------------
WASHINGTON 15.0%
Washington State GO, Motor Vehicle Tax, Series F, AMBAC Insured, zero cpn., 12/01/09 .......... 1,000,000 894,700
Washington State Health Care Facilities Authority Revenue, Kadlec Medical Center, Series A,
Assured Guaranty Insured, 5.00%, 12/01/10 .................................................... 1,000,000 1,040,340
Washington State Higher Education Facilities Authority Revenue, University of Puget Sound
Project,
Mandatory Put 4/01/08, Refunding, 5.00%, 10/01/30 ........................................... 750,000 759,187
Refunding, 3.80%, 10/01/07 .................................................................. 100,000 100,043
------------
2,794,270
------------
WEST VIRGINIA 1.1%
West Virginia State Hospital Finance Authority Hospital Revenue, West Virginia University
Hospital, Refunding, FSA Insured, 2.50%, 6/01/07 ............................................. 205,000 204,114
------------
WYOMING 2.8%
Sweetwater County Improvement Project Powers Board Lease Revenue, MBIA Insured, 5.00%,
12/15/10 ..................................................................................... 500,000 523,050
------------
U.S. TERRITORIES 13.0%
GUAM 1.2%
Guam International Airport Authority Revenue, Series A, MBIA Insured, 2.375%, 10/01/08 ........ 240,000 233,004
------------
PUERTO RICO 11.8%
Puerto Rico Commonwealth GO, Public Improvement, Mandatory Put 7/01/08, Refunding,
Series C, MBIA Insured, 5.00%, 7/01/28 ....................................................... 660,000 672,652
Puerto Rico Commonwealth Government Development Bank Revenue, senior notes, Series B,
5.00%, 12/01/08 .............................................................................. 950,000 968,155
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Revenue, Ana G. Mendez University System Project, 5.00%, 3/01/11 ......... 545,000 562,069
------------
2,202,876
------------
TOTAL U.S. TERRITORIES ........................................................................ 2,435,880
------------
TOTAL LONG TERM INVESTMENTS (COST $13,979,341) ................................................ 13,926,546
------------
Annual Report | 137
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 22.7%
MUNICIPAL BONDS 22.7%
ALABAMA 2.1%
a Homewood Educational Building Authority Revenue, Educational Facilities, Samford University,
AMBAC Insured, Daily VRDN and Put, 3.60%, 12/01/21 ........................................... $ 400,000 $ 400,000
------------
FLORIDA 2.7%
Gulf County GO, Cape San Blas Beach, Assured Guaranty, 4.00%, 8/01/07 ......................... 500,000 500,750
------------
NEW YORK 13.1%
New York State Dormitory Authority Revenue,
State Supported Debt, Lease, State University Dormitory Facilities, Series A, 4.50%,
7/01/07 ..................................................................................... 700,000 701,785
Rockland County GO, RAN, 4.50%, 3/22/07 ....................................................... 1,000,000 1,000,390
Syracuse GO, BAN, Series A, 4.50%, 6/20/07 .................................................... 750,000 751,650
------------
2,453,825
------------
PENNSYLVANIA 4.8%
a Delaware Valley Regional Finance Authority Local Government Revenue, Mandatory Put 7/01/07,
Series A, AMBAC Insured, Semi-Annual VRDN and Put, 0.892%, 7/01/27 ........................... 900,000 888,498
------------
TOTAL SHORT TERM INVESTMENTS (COST $4,249,326) ................................................ 4,243,073
------------
TOTAL INVESTMENTS (COST $18,228,667) 97.3% .................................................... 18,169,619
OTHER ASSETS, LESS LIABILITIES 2.7% ........................................................... 512,956
------------
NET ASSETS 100.0% ............................................................................. $ 18,682,575
============
See Selected Portfolio Abbreviations on page 198.
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.
138 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
---------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.83 $ 10.81 $ 10.78 $ 10.39 $ 10.58
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.54 0.55 0.58 0.59 0.59
Net realized and unrealized gains (losses) .... 0.20 0.03 0.03 0.39 (0.18)
---------------------------------------------------------------------
Total from investment operations ................. 0.74 0.58 0.61 0.98 0.41
---------------------------------------------------------------------
Less distributions from net investment income .... (0.53) (0.56) (0.58) (0.59) (0.60)
---------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- --
---------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.04 $ 10.83 $ 10.81 $ 10.78 $ 10.39
=====================================================================
Total return c ................................... 6.99% 5.45% 5.94% 9.75% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 5,329,032 $ 5,070,599 $ 4,714,804 $ 4,570,744 $ 4,410,233
Ratios to average net assets:
Expenses ...................................... 0.62% 0.63% 0.62% 0.62% 0.62%
Net investment income ......................... 4.97% 5.11% 5.44% 5.62% 5.69%
Portfolio turnover rate .......................... 10.90% 11.63% 8.60% 8.67% 11.81%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 139
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 e 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.90 $ 10.87 $ 10.84 $ 10.45 $ 10.64
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.48 0.50 0.52 0.53 0.54
Net realized and unrealized gains (losses) .... 0.20 0.03 0.04 0.39 (0.19)
--------------------------------------------------------------------
Total from investment operations ................. 0.68 0.53 0.56 0.92 0.35
--------------------------------------------------------------------
Less distributions from net investment income .... (0.47) (0.50) (0.53) (0.53) (0.54)
--------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.11 $ 10.90 $ 10.87 $ 10.84 $ 10.45
====================================================================
Total return c ................................... 6.36% 4.93% 5.32% 9.09% 3.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 215,121 $ 240,628 $ 258,063 $ 250,878 $ 212,027
Ratios to average net assets:
Expenses ...................................... 1.17% 1.18% 1.18% 1.18% 1.18%
Net investment income ......................... 4.42% 4.56% 4.88% 5.06% 5.13%
Portfolio turnover rate .......................... 10.90% 11.63% 8.60% 8.67% 11.81%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
140 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.95 $ 10.91 $ 10.88 $ 10.48 $ 10.67
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.49 0.50 0.52 0.54 0.54
Net realized and unrealized gains (losses) .... 0.19 0.03 0.03 0.39 (0.19)
-----------------------------------------------------------------------
Total from investment operations ................. 0.68 0.53 0.55 0.93 0.35
-----------------------------------------------------------------------
Less distributions from net investment income .... (0.47) (0.49) (0.52) (0.53) (0.54)
-----------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- --
-----------------------------------------------------------------------
Net asset value, end of year ..................... $ 11.16 $ 10.95 $ 10.91 $ 10.88 $ 10.48
=======================================================================
Total return c ................................... 6.34% 5.00% 5.29% 9.16% 3.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 761,994 $ 695,270 $ 588,921 $ 565,210 $ 508,653
Ratios to average net assets:
Expenses ...................................... 1.17% 1.18% 1.18% 1.18% 1.18%
Net investment income ......................... 4.42% 4.56% 4.88% 5.06% 5.13%
Portfolio turnover rate .......................... 10.90% 11.63% 8.60% 8.67% 11.81%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 141
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
-----------------------
YEAR ENDED FEBRUARY 28,
ADVISOR CLASS 2007 2006 e
-----------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.85 $ 10.76
-----------------------
Income from investment operations a:
Net investment income b ....................... 0.55 0.10
Net realized and unrealized gains (losses) .... 0.20 0.04
-----------------------
Total from investment operations ................. 0.75 0.14
-----------------------
Less distributions from net investment income .... (0.54) (0.05)
-----------------------
Redemption fees .................................. -- d -- d
-----------------------
Net asset value, end of year ..................... $ 11.06 $ 10.85
=======================
Total return c ................................... 7.08% 1.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 53,127 $ 471
Ratios to average net assets:
Expenses ...................................... 0.52% 0.53% f
Net investment income ......................... 5.07% 5.21% f
Portfolio turnover rate .......................... 10.90% 11.63%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e For the period January 3, 2006 (effective date) to February 28, 2006.
f Annualized.
142 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.3%
MUNICIPAL BONDS 97.3%
ALABAMA 0.3%
Camden IDB Exempt Facilities Revenue, Weyerhaeuser, Refunding,
Series A, 6.125%, 12/01/24 ................................................................. $ 3,000,000 $ 3,313,440
Series B, 6.375%, 12/01/24 ................................................................. 1,750,000 1,931,283
Oneonta Eastern Health Systems Special Care Facilities Financing Authority GO, 7.75%,
7/01/21 ...................................................................................... 10,220,000 11,045,367
--------------
16,290,090
--------------
ALASKA 0.2%
Alaska Industrial Development and Export Authority Power Revenue, Upper Lynn Canal
Regional Power,
5.70%, 1/01/12 ............................................................................. 1,700,000 1,711,271
5.80%, 1/01/18 ............................................................................. 1,495,000 1,500,636
5.875%, 1/01/32 ............................................................................ 6,900,000 6,779,940
--------------
9,991,847
--------------
ARIZONA 4.0%
Apache County IDA,
IDR, Tucson Electric Power Co. Project, Refunding, Series C, 5.85%, 3/01/26 ................ 16,500,000 16,631,835
PCR, Tucson Electric Power Co. Project, Refunding, Series A, 5.85%, 3/01/28 ................ 53,150,000 53,559,255
PCR, Tucson Electric Power Co. Project, Refunding, Series B, 5.875%, 3/01/33 ............... 33,800,000 34,056,204
Arizona Health Facilities Authority Hospital System Revenue, John C. Lincoln Health Network,
Pre-Refunded, 6.375%, 12/01/37 ............................................................... 2,500,000 2,861,625
Arizona Health Facilities Authority Revenue,
Bethesda Foundation Project, Series A, 6.375%, 8/15/15 ..................................... 400,000 408,896
Bethesda Foundation Project, Series A, 6.40%, 8/15/27 ...................................... 4,000,000 4,077,480
Catholic Healthcare West, Series A, 6.625%, 7/01/20 ........................................ 3,940,000 4,334,394
Casa Grande IDA Hospital Revenue, Casa Grande Regional Medical Center, Series A, 7.25%,
12/01/32 ..................................................................................... 14,500,000 15,855,025
Coconino County Pollution Control Corp. Revenue, Tucson Electric Power Navajo, Refunding,
Series A, 7.125%, 10/01/32 ................................................................. 21,125,000 21,852,968
Series B, 7.00%, 10/01/32 .................................................................. 9,500,000 9,828,985
Downtown Phoenix Hotel Corp. Revenue, Sub Series B, FGIC Insured, 5.00%, 7/01/36 .............. 10,000,000 10,629,600
Maricopa County IDA Health Facilities Revenue, Catholic Healthcare West, Refunding,
Series A,
5.50%, 7/01/26 ............................................................................. 7,500,000 8,079,225
ACA Insured, 5.00%, 7/01/16 ................................................................ 6,500,000 6,626,490
Maricopa County Pollution Control Corp. PCR, Public Service Co. of Colorado, Refunding,
Series A, 5.75%, 11/01/22 .................................................................... 9,800,000 9,870,462
Phoenix Civic Improvement Corp. Water System Revenue, junior lien, Refunding,
MBIA Insured, 5.00%, 7/01/29 ................................................................. 36,500,000 39,140,410
Pima County IDAR, Tucson Electric Power Co. Project, Series A, 6.10%, 9/01/25 ................. 3,990,000 4,023,755
University Medical Center Corp. Revenue, 5.00%, 7/01/35 ....................................... 10,175,000 10,545,675
--------------
252,382,284
--------------
ARKANSAS 0.3%
Arkansas State Development Finance Authority Industrial Facilities Revenue, Potlatch Corp.
Projects, Series A, 7.75%, 8/01/25 ........................................................... 3,800,000 4,319,460
Baxter County IDR, Aeroquip Corp. Project, Refunding, 5.80%, 10/01/13 ......................... 2,400,000 2,662,056
Annual Report | 143
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ARKANSAS (CONTINUED)
Calhoun County Solid Waste Disposal Revenue, Georgia-Pacific Corp. Project, 6.375%,
11/01/26 ..................................................................................... $ 10,000,000 $ 10,545,500
Warren Solid Waste Disposal Revenue, Potlach Corp. Project, 7.00%, 4/01/12 .................... 3,150,000 3,410,001
---------------
20,937,017
---------------
CALIFORNIA 17.8%
ABAG 1915 Act Special Assessment, Windemere Ranch AD,
1999-1, 6.375%, 9/02/32 .................................................................... 9,735,000 10,460,160
Series 1, 7.45%, 9/02/30 ................................................................... 37,525,000 39,544,595
Adelanto Water Authority Revenue, Subordinated, Water System Acquisition Project, Series A,
Pre-Refunded, 7.50%, 9/01/28 ................................................................. 21,325,000 22,924,588
Alameda County MFHR, Claremont House Project, Refunding, Series A, 8.00%, 12/01/23 ............ 11,050,000 11,544,266
Avenal PFAR, Pre-Refunded,
7.00%, 9/02/10 ............................................................................. 685,000 706,947
7.25%, 9/02/27 ............................................................................. 3,665,000 3,803,097
Beaumont Financing Authority Local Agency Revenue, Improvement Area No. 19C, Series A,
5.35%, 9/01/36 ............................................................................... 3,680,000 3,759,598
Beaumont PFAR, Sewer Enterprise Project, Series A, Pre-Refunded, 6.90%, 9/01/23 ............... 4,270,000 5,065,672
Calabasas Special Tax, CFD No. 01-1, Refunding, 6.25%, 9/01/31 ................................ 5,780,000 6,508,107
California County Tobacco Securitization Agency Revenue, Asset-Backed, Alameda County,
5.875%, 6/01/35 .............................................................................. 3,700,000 3,934,802
California Educational Facilities Authority Revenue, Pooled College and University Financing,
Refunding, Series B, 6.125%, 6/01/09 ......................................................... 30,000 30,024
California Health Facilities Financing Authority Revenue, Marshall Medical Center, Series A,
California Mortgage Insured, 5.00%,
11/01/24 ................................................................................... 2,295,000 2,423,245
11/01/29 ................................................................................... 2,220,000 2,336,617
11/01/33 ................................................................................... 3,130,000 3,286,031
California HFAR, Home Mortgage, Series K, 4.70%, 8/01/31 ...................................... 20,000,000 20,129,400
California Infrastructure and Economic Development Bank Revenue, Department of Social
Services Administration Building, AMBAC Insured, 5.00%,
12/01/30 ................................................................................... 10,300,000 11,552,892
12/01/35 ................................................................................... 14,110,000 15,759,036
California State GO,
5.00%, 2/01/33 ............................................................................. 40,640,000 42,743,933
Refunding, 5.25%, 4/01/30 .................................................................. 2,500,000 2,647,975
Refunding, 5.25%, 4/01/32 .................................................................. 2,500,000 2,645,625
Various Purpose, 5.125%, 11/01/24 .......................................................... 18,935,000 20,236,403
Various Purpose, 5.00%, 8/01/33 ............................................................ 25,000,000 26,525,000
California Statewide CDA Revenue,
Elder Care Alliance, Series A, Pre-Refunded, 8.25%, 11/15/32 ............................... 13,090,000 16,364,987
Eskaton Village Grass Valley, Pre-Refunded, 8.25%, 11/15/31 ................................ 3,045,000 3,511,798
John F. Kennedy University, 6.75%, 10/01/33 ................................................ 8,000,000 8,631,680
Monterey Institute International, 5.50%, 7/01/31 ........................................... 13,240,000 13,294,946
Prospect Sierra School, Pre-Refunded, 6.75%, 9/01/32 ....................................... 6,545,000 7,302,256
Sutter Health, Refunding, Series A, 5.00%, 11/15/43 ........................................ 25,000,000 26,164,500
144 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Chabot-Las Positas Community College District GO, Capital Appreciation Bonds, Series C,
AMBAC Insured, zero cpn.,
8/01/33 .................................................................................... $ 21,015,000 $ 5,928,331
8/01/34 .................................................................................... 10,000,000 2,676,600
8/01/43 .................................................................................... 31,515,000 5,298,617
8/01/45 .................................................................................... 34,035,000 5,160,387
Chino CFD Special Tax, No. 03-3, Improvement Area 2, 5.00%, 9/01/36 ........................... 2,215,000 2,256,753
Chula Vista CFD Special Tax,
No. 07-I, Otay Ranch Village Eleven, 5.875%, 9/01/34 ....................................... 3,205,000 3,400,954
No. 13-I, Otay Ranch Village Seven, 5.35%, 9/01/36 ......................................... 2,675,000 2,758,835
No. 99-1, Otay Ranch Spa One, Pre-Refunded, 6.10%, 9/01/31 ................................. 4,890,000 5,375,479
Corona COP, Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 .................. 8,820,000 10,314,814
El Dorado County CFD Special Tax, Promontory Specific, Series No. 2001-1, 6.30%,
9/01/31 ...................................................................................... 3,500,000 3,757,495
Elk Grove Special Tax, East Franklin Community No. 1-A, Pre-Refunded,
5.80%, 8/01/25 ............................................................................. 3,745,000 3,926,558
6.00%, 8/01/33 ............................................................................. 5,435,000 5,702,782
Emeryville RDA, MFHR, Emery Bay Apartments II,
Refunding, Series A, 5.85%, 10/01/28 ....................................................... 13,250,000 13,616,362
sub. lien, Refunding, Series B, 6.35%, 10/01/28 ............................................ 3,140,000 3,225,565
sub. lien, Refunding, Series C, 7.875%, 10/01/28 ........................................... 1,860,000 1,910,648
Foothill/Eastern Corridor Agency Toll Road Revenue, Capital Appreciation, Refunding,
zero cpn., 1/15/22 ......................................................................... 49,115,000 20,978,490
zero cpn., 1/15/31 ......................................................................... 4,000,000 1,004,360
zero cpn., 1/15/34 ......................................................................... 4,500,000 940,140
zero cpn., 1/15/36 ......................................................................... 4,000,000 738,920
zero cpn. to 7/15/09, 5.85% thereafter, 1/15/23 ............................................ 35,000,000 32,778,200
Fullerton CFD No. 1 Special Tax, Amerige Heights, 6.20%, 9/01/32 .............................. 3,500,000 3,709,755
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue,
Asset-Backed, Series A-3, 7.875%, 6/01/42 .................................................. 10,000,000 12,200,200
Enhanced, Asset-Backed, Refunding, Series A, 5.00%, 6/01/45 ................................ 30,750,000 32,011,365
Enhanced, Asset-Backed, Series A-3, Pre-Refunded, 5.50%, 6/01/33 ........................... 20,000,000 22,023,200
Enhanced, Asset-Backed, Series A-3, Pre-Refunded, 5.50%, 6/01/43 ........................... 20,000,000 22,023,200
Enhanced, Asset-Backed, Series B, Pre-Refunded, 5.625%, 6/01/38 ............................ 21,000,000 23,269,470
Series 2003 A-1, 6.75%, 6/01/39 ............................................................ 4,735,000 5,447,286
Lake Elsinore 1915 Act Special Assessment, AD No. 93-1, Limited Obligation, Refunding,
7.00%, 9/02/30 ............................................................................... 8,065,000 8,746,815
Lee Lake Water District CFD No. 3 Special Tax, Retreat, 5.95%, 9/01/34 ........................ 5,000,000 5,335,950
Livermore CFD Special Tax, No. 06-1, Shea Properties, 5.40%, 9/01/36 .......................... 6,595,000 6,777,286
Los Angeles MFR, Refunding,
Series J-1B, 7.125%, 1/01/24 ............................................................... 200,000 200,762
Series J-1C, 7.125%, 1/01/24 ............................................................... 540,000 542,057
Series J-2B, 8.50%, 1/01/24 ................................................................ 970,000 965,519
a Series J-2C, 8.50%, 1/01/24 ................................................................ 2,560,000 2,548,173
Annual Report | 145
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Los Angeles Regional Airports Improvement Corp. Lease Revenue,
b Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 .................... $ 12,000,000 $ 11,949,360
Facilities Sub-Lease, Los Angeles International, Series A-1, 7.125%, 12/01/24 .............. 2,000,000 2,279,540
Facilities Sub-Lease, Los Angeles International, Series A-2, 7.50%, 12/01/24 ............... 10,000,000 11,584,700
Refunding, Series C, 7.00%, 12/01/12 ....................................................... 6,000,000 6,509,460
Refunding, Series C, 7.50%, 12/01/24 ....................................................... 30,000,000 34,754,100
b United Airlines, Los Angeles International, Refunding, 6.875%, 11/15/12 .................... 9,500,000 9,210,440
Los Angeles Wastewater System Revenue, Refunding, Series A, MBIA Insured, 5.00%,
6/01/30 ...................................................................................... 7,530,000 8,076,076
Murrieta 1915 Act Special Tax, CFD No. 2000-1, 6.375%, 9/01/30 ................................ 4,000,000 4,311,600
Poway USD Special Tax,
CFD No. 10, Area A, 6.10%, 9/01/31 ......................................................... 1,995,000 2,062,291
CFD No. 11, Area A, 5.375%, 9/01/28 ........................................................ 2,965,000 3,062,400
CFD No. 11, Area A, 5.375%, 9/01/34 ........................................................ 2,235,000 2,297,133
CFD No. 14, Del Sur, 5.25%, 9/01/36 ........................................................ 7,500,000 7,692,075
Rocklin Special Tax, CFD No. 10, Whitney, 5.00%, 9/01/35 ...................................... 7,335,000 7,394,193
Romoland School District Special Tax, CFD 1,
Improvement Area 1, 5.35%, 9/01/28 ......................................................... 7,015,000 7,222,223
Improvement Area 1, 5.40%, 9/01/36 ......................................................... 6,175,000 6,352,716
Improvement Area 2, 5.35%, 9/01/38 ......................................................... 7,900,000 8,067,401
San Bernardino County Finance Authority Revenue, Public Improvement, AD, Refunding,
Series A, 7.00%, 9/02/17 ..................................................................... 595,000 603,366
San Francisco City and County RDA Lease Revenue, George R. Moscone Center, zero cpn.,
7/01/09 .................................................................................... 3,750,000 3,428,287
7/01/10 .................................................................................... 4,500,000 3,964,545
7/01/12 .................................................................................... 4,500,000 3,659,985
7/01/13 .................................................................................... 4,250,000 3,314,745
7/01/14 .................................................................................... 2,250,000 1,675,148
San Francisco Uptown Parking Corp. Parking Revenue, Union Square, MBIA Insured, 6.00%,
7/01/31 ...................................................................................... 8,920,000 9,797,639
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, Series A, 5.60%, 1/15/16 .................................. 22,500,000 24,087,150
Capital Appreciation, Refunding, Series A, 5.65%, 1/15/17 .................................. 20,000,000 21,422,800
Capital Appreciation, Refunding, Series A, 5.75%, 1/15/23 .................................. 20,000,000 21,371,800
Capital Appreciation, Refunding, Series A, 5.75%, 1/15/24 .................................. 20,000,000 21,297,600
junior lien, ETM, zero cpn., 1/01/08 ....................................................... 10,400,000 10,101,000
junior lien, ETM, zero cpn., 1/01/09 ....................................................... 21,800,000 20,427,690
junior lien, ETM, zero cpn., 1/01/10 ....................................................... 15,000,000 13,536,750
junior lien, ETM, zero cpn., 1/01/12 ....................................................... 30,100,000 25,174,737
junior lien, ETM, zero cpn., 1/01/24 ....................................................... 52,700,000 26,018,517
junior lien, ETM, zero cpn., 1/01/25 ....................................................... 45,200,000 21,324,004
junior lien, ETM, zero cpn., 1/01/26 ....................................................... 131,900,000 59,548,893
junior lien, ETM, zero cpn., 1/01/27 ....................................................... 139,100,000 59,851,948
senior lien, 5.00%, 1/01/33 ................................................................ 11,930,000 11,938,232
Saugus USD Special Tax, 6.00%, 9/01/33 ........................................................ 3,150,000 3,345,363
Seal Beach CFD No. 05 01 Special Tax, Pacific Gateway Business Center, 5.30%,
9/01/36 ...................................................................................... 2,000,000 2,057,060
146 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Stockton 1915 Act Special Assessment, Limited Obligation, Mosher AD 02, 6.30%,
9/02/33 ...................................................................................... $ 6,000,000 $ 6,256,260
Stockton CFD Special Tax, No. 2001-1, Spanos Park West, Pre-Refunded, 6.375%,
9/01/32 ...................................................................................... 4,100,000 4,727,259
Upland CFD Special Tax, 2003-2 San Antonio Improvement, Series 1-A, 6.00%, 9/01/34 ............ 6,520,000 6,848,021
West Sacramento Special Tax, CFD No. 16, Pre-Refunded, 6.00%, 9/01/33 ......................... 3,000,000 3,347,100
--------------
1,133,341,115
--------------
COLORADO 3.8%
Colorado Health Facilities Authority Revenue,
Adventist Health-Sunbelt, Refunding, Series D, 5.25%, 11/15/35 ............................. 20,000,000 21,344,800
Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.45%,
7/01/08 ................................................................................... 520,000 525,637
Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.75%,
7/01/20 ................................................................................... 3,000,000 3,095,610
Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.875%,
7/01/28 ................................................................................... 2,990,000 3,086,637
Denver City and County Airport Revenue,
Refunding, Series B, 5.50%, 11/15/33 ....................................................... 20,000,000 21,358,000
Series D, 7.75%, 11/15/13 .................................................................. 500,000 558,345
Denver City and County Special Facilities Airport Revenue, United Airlines Inc. Project,
Series A, 6.875%, 10/01/32 ................................................................... 11,760,000 12,168,777
Denver Convention Center Hotel Authority Revenue, Refunding, Senior, XLCA Insured, 5.00%,
12/01/35 ..................................................................................... 15,000,000 15,955,950
Denver Health and Hospital Authority Healthcare Revenue, Refunding, Series A, 6.25%,
12/01/33 ..................................................................................... 4,000,000 4,452,880
E-470 Public Highway Authority Revenue, Capital Appreciation,
Refunding, Series B, MBIA Insured, zero cpn., 9/01/37 ...................................... 15,720,000 3,692,942
Refunding, Series B, MBIA Insured, zero cpn., 9/01/38 ...................................... 20,000,000 4,455,200
Refunding, Series B, MBIA Insured, zero cpn., 9/01/39 ...................................... 30,000,000 6,343,800
Series A, MBIA Insured, zero cpn., 9/01/28 ................................................. 15,000,000 5,999,700
Series B, MBIA Insured, zero cpn., 9/01/29 ................................................. 10,000,000 3,321,600
Series B, MBIA Insured, zero cpn., 9/01/30 ................................................. 17,300,000 5,419,917
Series B, MBIA Insured, zero cpn., 9/01/31 ................................................. 10,000,000 2,950,400
Eagle County Airport Terminal Corp. Revenue, Series A,
7.00%, 5/01/21 ............................................................................. 745,000 812,728
7.125%, 5/01/31 ............................................................................ 1,410,000 1,540,298
Eagle County Sports and Housing Facilities Revenue, Vail Associate Project, Refunding,
6.95%, 8/01/19 ............................................................................... 41,200,000 45,757,132
Littleton MFHR, Riverpoint, Refunding, Series C, 8.00%, 12/01/29 .............................. 2,755,000 2,918,068
McKay Landing Metropolitan District No. 002 GO,
Limited Tax, Pre-Refunded, 7.50%, 12/01/19 ................................................. 2,990,000 3,360,252
Subordinated, Series A, Pre-Refunded, 7.50%, 12/01/34 ...................................... 2,000,000 2,263,680
Regional Transportation District Sales Tax Revenue, Fastracks Project, Series A,
AMBAC Insured, 5.00%, 11/01/36 ............................................................... 40,000,000 43,009,600
Saddle Rock South Metropolitan District No. 2 GO, Limited Mill Levy Obligation, 7.20%,
12/01/19 ..................................................................................... 275,000 293,109
Annual Report | 147
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Saddle Rock South Metropolitan District No. 3 GO, Limited Mill Levy Obligation, 7.35%,
12/01/19 ..................................................................................... $ 3,050,000 $ 3,253,923
Superior Metropolitan District No. 1 Special Revenue, Refunding, AMBAC Insured, 5.00%,
12/01/28 ..................................................................................... 7,640,000 8,204,138
University of Colorado Hospital Authority Revenue, Series A, Pre-Refunded, 5.60%,
11/15/31 ..................................................................................... 9,000,000 9,730,170
a,c Villages Castle Rock Metropolitan District No. 4 Revenue, Refunding, 8.50%, 6/01/31 ........... 3,000,000 3,102,180
--------------
238,975,473
--------------
CONNECTICUT 1.6%
Connecticut State Development Authority PCR,
Connecticut Light and Water, Refunding, Series A, 5.85%, 9/01/28 ........................... 53,825,000 56,464,040
Western Massachusetts Electric Co., Refunding, Series A, 5.85%, 9/01/28 .................... 12,500,000 13,112,875
Connecticut State Development Authority Water Facility Revenue, Bridgeport Hydraulic Co.
Project, 6.15%, 4/01/35 ...................................................................... 3,000,000 3,064,140
Connecticut State Health and Educational Facilities Authority Revenue,
Sacred Heart University, Series C, 6.50%, 7/01/16 .......................................... 420,000 426,943
St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ................................... 5,650,000 5,506,998
Windham Community Memorial Hospital, Series C, 6.00%, 7/01/11 .............................. 1,000,000 1,018,510
Connecticut State HFAR, Housing Mortgage Finance Program, Refunding, Series C-1, 6.30%,
11/15/17 ..................................................................................... 16,060,000 16,425,044
Greater New Haven Water Pollution Control Authority Regional Water Revenue, Refunding,
Series A, MBIA Insured, 5.00%, 8/15/35 ....................................................... 6,735,000 7,219,987
--------------
103,238,537
--------------
FLORIDA 7.3%
Bartram Springs CDD Special Assessment, Refunding, 4.75%, 5/01/34 ............................. 5,000,000 5,000,050
Beacon Tradeport CDD Special Assessment, Commercial Project, Series A, Pre-Refunded,
6.00%, 5/01/16 ............................................................................. 24,400,000 25,844,724
6.20%, 5/01/22 ............................................................................. 23,590,000 25,907,717
Brighton Lakes CDD Special Assessment, Series B, 7.625%, 5/01/31 .............................. 3,175,000 3,398,711
Brooks of Bonita Springs CDD Capital Improvement Revenue, 6.85%, 5/01/31 ...................... 1,400,000 1,486,828
Brooks of Bonita Springs II CDD Capital Improvement Revenue, Series A, Pre-Refunded,
7.00%, 5/01/31 ............................................................................... 11,935,000 12,598,944
Capital Region CDD Capital Improvement Revenue, Series A-2, 6.85%, 5/01/31 .................... 2,390,000 2,556,607
Championsgate CDD Capital Improvement Revenue, Series A, 6.25%, 5/01/20 ....................... 2,565,000 2,627,253
Citrus County Hospital Board Revenue, Citrus Memorial Hospital, Refunding, 6.375%,
8/15/32 ...................................................................................... 10,550,000 11,479,666
Creekside CDD Special Assessment, 5.20%, 5/01/38 .............................................. 1,400,000 1,414,980
East Homestead CDD Special Assessment Revenue, 5.45%, 5/01/36 ................................. 1,425,000 1,450,579
Falcon Trace CDD Special Assessment, 6.00%, 5/01/20 ........................................... 3,690,000 3,800,146
Fleming Plantation CDD Special Assessment, Series B, 7.375%, 5/01/31 .......................... 9,900,000 10,572,705
Florida State Board of Education Capital Outlay GO, Public Education, Refunding, Series D,
6.00%, 6/01/23 ............................................................................... 5,000,000 6,240,250
Gateway Services District Water Management Benefit Tax Revenue, Second Assessment Area,
Phase One, 8.00%, 5/01/20 .................................................................... 3,675,000 3,691,648
148 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Groves CDD Special Assessment Revenue,
Series A, 7.75%, 5/01/32 ................................................................... $ 1,750,000 $ 1,780,223
Series B, 7.625%, 5/01/08 .................................................................. 900,000 905,616
Halifax Hospital Medical Center Hospital Revenue,
Refunding and Improvement, Series A, 5.375%, 6/01/46 ....................................... 18,000,000 19,053,000
Series A, Pre-Refunded, 7.25%, 10/01/24 .................................................... 4,700,000 5,337,508
Series A, Pre-Refunded, 7.25%, 10/01/29 .................................................... 1,400,000 1,589,896
Heritage Harbor CDD Special Assessment Revenue, Series A, 6.70%, 5/01/19 ...................... 1,500,000 1,517,400
Hillsborough County IDAR, Refunding, Series B, 5.25%,
10/01/28 ................................................................................... 1,500,000 1,594,020
10/01/34 ................................................................................... 7,250,000 7,683,042
Indian Trace CDD, GO, Water Management Special Benefit, Refunding, Sub Series B, 8.25%,
5/01/11 ...................................................................................... 11,010,000 11,637,460
Indian Trace CDD Special Assessment, Isles at Weston Project, 5.50%, 5/01/33 .................. 3,000,000 3,043,950
Indian Trail ID, GO, Water Control and Improvement, Unit Development 18,
ETM, 6.875%, 8/01/10 ....................................................................... 590,000 619,718
Pre-Refunded, 7.00%, 8/01/20 ............................................................... 2,445,000 2,687,911
Pre-Refunded, 7.25%, 8/01/31 ............................................................... 5,725,000 6,332,880
Indigo CDD Capital Improvement Revenue, Refunding,
Series A, 7.00%, 5/01/31 ................................................................... 925,000 937,691
Series C, 7.00%, 5/01/30 ................................................................... 4,840,000 4,906,405
Islands at Doral CDD Special Assessment, 6.125%, 5/01/24 ...................................... 1,880,000 2,007,107
Lake Ashton CDD Revenue, Series A, 7.40%, 5/01/32 ............................................. 1,620,000 1,753,828
Lakeland Retirement Community Revenue, first mortgage, Carpenters Home, Refunding,
Series A, 6.75%, 1/01/19 ..................................................................... 13,720,000 14,287,459
Lakewood Ranch CDD No. 3 Special Assessment Revenue, 7.625%, 5/01/18 .......................... 440,000 445,689
Lee County Transportation Facilities Revenue, Sanibel Bridges and Causeway, Series B,
CIFG Insured, 5.00%, 10/01/30 ................................................................ 11,505,000 12,255,241
Mediterra North CDD Capital Improvement Revenue, Series A, 6.80%, 5/01/31 ..................... 8,315,000 8,934,135
Mediterra South CDD Capital Improvement Revenue,
6.85%, 5/01/31 ............................................................................. 2,565,000 2,728,980
Series B, 6.95%, 5/01/31 ................................................................... 7,295,000 7,583,225
Mediterranea CDD Special Assessment, Series A, 5.60%, 5/01/37 ................................. 1,550,000 1,601,662
Miami-Dade County Public Facilities Revenue, Jackson Health System, Series A,
MBIA Insured, 5.00%, 6/01/32 ................................................................. 14,000,000 14,882,560
Midtown Miami Community Development Special Assessment Revenue,
Series A, 6.25%, 5/01/37 ................................................................... 7,500,000 8,182,725
Series B, 6.50%, 5/01/37 ................................................................... 4,000,000 4,457,080
Mount Dora Country Club CDD Special Assessment Revenue, 7.75%, 5/01/13 ........................ 475,000 476,834
North Springs ID Special Assessment Revenue, Parkland Isles Project, Series A, 7.00%,
5/01/19 ...................................................................................... 770,000 780,765
Northern Palm Beach County ID Revenue, Water Control and Improvement,
Unit Development No. 43, 6.10%, 8/01/21 ...................................................... 2,585,000 2,712,673
Northwood CDD Special Assessment Revenue, Series B, 7.60%, 5/01/17 ............................ 1,155,000 1,161,006
Oakstead CDD Revenue, Capital Improvement, Series A, Pre-Refunded, 7.20%, 5/01/32 ............. 3,230,000 3,533,588
Annual Report | 149
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Orange County Health Facilities Authority Revenue, Hospital,
Adventist Health System Inc., Pre-Refunded, 5.625%, 11/15/32 ............................... $ 10,000,000 $ 11,055,400
Orlando Regional Healthcare, Pre-Refunded, 5.75%, 12/01/32 ................................. 15,000,000 16,608,600
Orange County Tourist Development Tax Revenue, Refunding, AMBAC Insured, 5.00%,
10/01/29 ..................................................................................... 13,925,000 14,895,433
Palm Glades CDD Revenue, Special Assessment, Series A, 5.30%, 5/01/36 ......................... 1,300,000 1,325,415
Parklands West CDD Revenue, Special Assessment, Series A, 6.90%, 5/01/32 ...................... 2,850,000 3,047,334
Parkway Center CDD Special Assessment, Refunding, Series A, 8.25%, 5/01/31 .................... 1,367,430 1,460,388
Pelican Marsh CDD Special Assessment Revenue,
Series A, 7.10%, 5/01/20 ................................................................... 3,310,000 3,560,898
Series A, 7.20%, 5/01/31 ................................................................... 6,275,000 6,749,641
Series B, 6.90%, 5/01/11 ................................................................... 1,980,000 2,044,469
Series C, 7.00%, 5/01/19 ................................................................... 10,325,000 10,554,215
Series D, 6.95%, 5/01/19 ................................................................... 3,575,000 3,656,867
Piney-Z CDD Capital Improvement Revenue, Series A, 7.25%, 5/01/19 ............................. 660,000 674,645
Poinciana CDD Special Assessment, Series A, 7.125%, 5/01/31 ................................... 10,140,000 10,830,635
Portico CDD Capital Improvement Revenue, 5.45%, 5/01/37 ....................................... 3,000,000 3,073,620
Reserve CDD Capital Improvement Revenue, Stormwater Management, 8.25%, 5/01/14 ................ 1,795,000 1,811,424
Reserve CDD No. 2 Capital Improvement Revenue, 7.125%, 5/01/30 ................................ 3,570,000 3,655,966
Reserve CDD Utility Revenue, Stormwater Management, Refunding, Series A, 6.625%,
12/01/22 ..................................................................................... 3,735,000 3,896,688
River Place St. Lucie CDD Special Assessment Revenue,
Series A, 7.625%, 5/01/21 .................................................................. 1,135,000 1,204,712
Series A, 7.625%, 5/01/30 .................................................................. 1,590,000 1,690,361
Series B, 7.25%, 5/01/10 ................................................................... 970,000 983,047
Riverwood CDD Special Assessment Revenue, Series A, 7.75%, 5/01/14 ............................ 635,000 670,522
Sampson Creek CDD Capital Improvement Revenue, Series A, Pre-Refunded, 6.95%,
5/01/31 ...................................................................................... 2,770,000 3,012,237
Somerset County Revenue, Somerset CDD, 5.30%, 5/01/37 ......................................... 8,170,000 8,299,740
South-Dade Venture CDD Special Assessment Revenue, 6.00%, 5/01/24 ............................. 2,735,000 2,908,590
St. Lucie West Services District Capital Improvement Revenue, Cascades Project, 6.10%,
5/01/18 ...................................................................................... 1,985,000 2,037,960
St. Lucie West Services District Special Assessment Revenue, Port St. Lucie,
Water Management Benefit, Refunding, Series B,
6.00%, 5/01/09 ............................................................................. 520,000 522,574
6.25%, 5/01/25 ............................................................................. 5,080,000 5,298,084
Stonegate CDD Special Assessment Revenue, 6.00%, 5/01/24 ...................................... 2,165,000 2,278,749
Stoneybrook West CDD Special Assessment Revenue, Series A, 7.00%, 5/01/32 ..................... 2,990,000 3,155,646
Tara CDD No. 1 Capital Improvement Revenue, Series A, 7.15%, 5/01/31 .......................... 1,330,000 1,411,077
University of Central Florida Assn. Inc. COP, Series A, FGIC Insured, 5.00%, 10/01/35 ......... 9,190,000 9,755,185
Venetian CDD Capital Improvement Revenue, Series A, 6.75%, 5/01/34 ............................ 8,495,000 9,197,367
Verandah East CDD Revenue, Capital Improvement, Series A, 5.40%, 5/01/37 ...................... 2,000,000 2,050,660
Verandah West CDD Revenue, Series A, 6.625%, 5/01/33 .......................................... 8,560,000 9,237,010
Village CDD No. 4 Special Assessment Revenue, 7.20%, 5/01/31 .................................. 6,475,000 6,992,158
150 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Village Center CDD Recreational Revenue,
Sub Series B, 6.25%, 1/01/13 ............................................................... $ 5,045,000 $ 5,248,919
Sub Series B, 8.25%, 1/01/17 ............................................................... 1,830,000 1,874,359
Sub Series C, 7.375%, 1/01/19 .............................................................. 2,185,000 2,275,262
Vista Lake CDD Capital Improvement Revenue, Series A, 7.20%, 5/01/32 .......................... 2,680,000 2,833,457
Waterchase CDD Capital Improvement Revenue, Series A, 6.70%, 5/01/32 .......................... 2,870,000 3,077,501
Waterlefe CDD Capital Improvement Revenue, Series A, 6.95%, 5/01/31 ........................... 1,170,000 1,251,818
Waters Edge CDD Capital Improvement Revenue, 5.30%, 5/01/36 ................................... 2,000,000 2,031,760
Westchase East CDD Capital Improvement Revenue, 7.10%, 5/01/21 ................................ 1,400,000 1,492,904
Winter Garden Village at Fowler Groves CDD Special Tax, 5.65%, 5/01/37 ........................ 2,000,000 2,110,960
--------------
467,286,342
--------------
GEORGIA 2.5%
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien,
Refunding, Series C, FSA Insured, 5.00%, 1/01/33 ........................................... 36,000,000 37,982,880
Series J, FSA Insured, 5.00%, 1/01/29 ...................................................... 16,445,000 17,437,291
Atlanta Tax Allocation, Princeton Lakes Project, 5.50%, 1/01/31 ............................... 1,235,000 1,274,075
Atlanta Water and Wastewater Revenue, FSA Insured, 5.00%, 11/01/34 ............................ 33,890,000 36,104,034
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.375%,
12/01/28 ..................................................................................... 1,470,000 1,478,511
Floyd County Development Authority Environmental Improvement Revenue,
Temple-Inland Inc., Refunding, 5.70%, 12/01/15 ............................................... 1,575,000 1,668,020
Forsyth County Hospital Authority Revenue, Anticipation Certificate, Georgia Baptist Health
Care System Project, ETM,
6.25%, 10/01/18 ............................................................................ 6,000,000 6,823,380
6.375%, 10/01/28 ........................................................................... 8,000,000 10,060,880
Fulton County Residential Care Revenue, Lenbrook Project, Series A, 5.00%, 7/01/27 ............ 5,000,000 4,918,200
Gainesville RDA Educational Facilities Revenue, Riverside Military Academy, Refunding,
5.125%, 3/01/37 .............................................................................. 3,500,000 3,608,185
Henry County Hospital Authority Revenue, Henry Medical Center Inc. Project, Refunding,
MBIA Insured, 5.00%, 7/01/34 ................................................................. 26,145,000 27,813,051
Main Street Natural Gas Inc. Gas Revenue, Series B, 5.00%, 3/15/22 ............................ 6,000,000 6,622,620
McDuffie County Development Authority Waste Disposal Revenue, Temple-Inland Forest
Products, 6.95%, 12/01/23 .................................................................... 5,120,000 5,701,479
--------------
161,492,606
--------------
HAWAII 1.1%
Honolulu City and County GO, Series A, MBIA Insured, 5.00%,
7/01/26 .................................................................................... 12,020,000 12,880,632
7/01/27 .................................................................................... 12,640,000 13,517,342
Honolulu City and County Wastewater System Revenue,
First Bond Resolution, Senior Series A, MBIA Insured, 5.00%, 7/01/31 ....................... 20,000,000 21,462,000
Senior Series A, FGIC Insured, 5.00%, 7/01/30 .............................................. 20,425,000 21,797,969
--------------
69,657,943
--------------
Annual Report | 151
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
IDAHO 0.3%
Nez Perce County PCR,
Potlatch 84, 7.00%, 12/01/14 ............................................................... $ 2,500,000 $ 2,792,175
Potlatch Corp. Project, Refunding, 6.00%, 10/01/24 ......................................... 17,500,000 17,840,200
--------------
20,632,375
--------------
ILLINOIS 2.7%
Antioch Village Special Service Area No. 1 Special Tax, Deercrest Project, 6.625%,
3/01/33 ...................................................................................... 3,350,000 3,566,510
Antioch Village Special Service Area No. 2 Special Tax, Clublands Project, 6.625%,
3/01/33 ...................................................................................... 5,544,000 5,902,309
Bolingbrook Special Service Area No. 1 Special Tax, Augusta Village Project, Pre-Refunded,
6.25%, 3/01/32 ............................................................................. 3,655,000 4,135,121
6.75%, 3/01/32 ............................................................................. 5,415,000 6,147,920
Bolingbrook Special Service Area No. 2 Special Tax, Bloomfield West Project, Series A,
Pre-Refunded,
6.625%, 3/01/31 ............................................................................ 4,361,000 4,843,196
7.00%, 3/01/31 ............................................................................. 4,807,000 5,404,943
Bolingbrook Special Service Area No. 3 Special Tax, Lakewood Ridge Project, Pre-Refunded,
7.05%, 3/01/31 ............................................................................... 5,853,000 6,675,054
Bryant PCR, Central Illinois Light Co. Project, Refunding, MBIA Insured, 5.90%, 8/01/23 ....... 11,000,000 11,020,460
Cary Special Tax,
Refunding, Radian Insured, 5.00%, 3/01/30 .................................................. 3,160,000 3,311,459
Special Service Area No. 1, Cambria Project, Series A, Pre-Refunded, 7.625%,
3/01/30 ................................................................................... 2,869,000 3,237,150
Special Service Area No. 2, Foxford Hills Project, Pre-Refunded, 7.50%, 3/01/30 ............ 5,319,000 5,913,398
Gilberts Special Service Area No. 9 Special Tax, Big Timber Project, Pre-Refunded, 7.75%,
3/01/27 ...................................................................................... 6,000,000 7,014,240
Hampshire Special Service Area No. 14 Special Tax, Lakewood Crossing Subdivision, 5.95%,
3/01/36 ...................................................................................... 7,785,000 7,993,404
Illinois Finance Authority Revenue,
Lutheran Hillside Village, Refunding, 5.25%, 2/01/37 ....................................... 5,000,000 5,288,650
Northwestern University, 5.00%, 12/01/42 ................................................... 10,500,000 11,132,100
Illinois Health Facilities Authority Revenue,
Sarah Bush Lincoln Health Center, Refunding, Series B, 6.00%, 2/15/11 ...................... 2,725,000 2,804,407
Thorek Hospital and Medical Center, Refunding, 5.375%, 8/15/28 ............................. 8,595,000 8,747,217
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue, McCormick Place
Convention Center, ETM, 7.00%, 7/01/26 ....................................................... 7,500,000 10,080,450
Minooka Special Assessment, Improvement Prairie Ridge Project, 6.875%, 3/01/33 ................ 3,000,000 3,233,850
Montgomery Special Assessment, Improvement, Lakewood Creek Project, Pre-Refunded,
7.75%, 3/01/30 ............................................................................... 4,767,000 5,460,551
Otter Creek Water Reclamation District Kane Country Revenue, Separate Waterworks and
Sewage System, Refunding, XLCA Insured, 5.00%, 1/01/39 ....................................... 5,000,000 5,314,800
Plano Special Service Area No. 2 Special Tax, Lakewood Springs Project, Series B, 6.375%,
3/01/34 ...................................................................................... 8,000,000 8,656,640
Southwestern Development Authority Revenue, Anderson Hospital, 5.625%, 8/15/29 ................ 2,425,000 2,505,753
152 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ILLINOIS (CONTINUED)
Wauconda Special Service Area No. 1 Special Tax, Liberty Lakes Project,
6.00%, 3/01/33 ............................................................................. $ 4,500,000 $ 4,719,645
6.625%, 3/01/33 ............................................................................ 5,280,000 5,723,520
Wonder Lake Special Services Area No. 2 Special Tax, Neumann Homes Project, 6.125%,
3/01/35 ...................................................................................... 9,500,000 9,778,730
Yorkville United City Special Services Area Special Tax,
No. 04, MPI Grande Reserve Project, Series 104, 6.375%, 3/01/34 ............................ 4,400,000 4,638,260
No. 2003, Windett Ridge Project, Series 101, 6.875%, 3/01/33 ............................... 3,837,000 4,136,094
No. 2005-108, Autumn Creek Project, 6.00%, 3/01/36 ......................................... 4,980,000 5,158,334
--------------
172,544,165
--------------
INDIANA 1.6%
Delaware County Hospital Authority Hospital Revenue, Cardinal Health System, 5.25%,
8/01/36 ...................................................................................... 5,000,000 5,265,200
Goshen Industrial Revenue, Greencroft Hospital Assn. Inc., Refunding, 5.75%,
8/15/19 .................................................................................... 3,000,000 3,074,400
8/15/28 .................................................................................... 5,000,000 5,096,600
Indiana Health and Educational Facility Financing Authority Revenue, Baptist Homes of
Indiana, Refunding, 5.25%, 11/15/35 .......................................................... 12,000,000 12,711,720
Indiana Health Facility Financing Authority Hospital Revenue,
6.25%, 3/01/25 ............................................................................. 3,200,000 3,523,712
6.00%, 3/01/34 ............................................................................. 12,000,000 12,954,000
Community Foundation Northwest Indiana, Series A, 6.375%, 8/01/31 .......................... 48,500,000 52,011,400
Jackson County Scheck Memorial Hospital, Refunding, 5.125%, 2/15/17 ........................ 1,500,000 1,544,070
Indiana State Development Finance Authority Environmental Revenue, USX Corp. Project,
Refunding, 5.60%, 12/01/32 ................................................................... 8,200,000 8,533,658
--------------
104,714,760
--------------
KANSAS 0.2%
Wyandotte County City Unified Government Utility System Revenue, Improvement, Series B,
FSA Insured, 5.00%, 9/01/32 .................................................................. 10,000,000 10,628,300
--------------
KENTUCKY 1.4%
b,d Kenton County Airport Board Airport Revenue, Special Facilities, Delta Airlines Inc. Project,
Series A, 7.50%, 2/01/12 ................................................................... 7,050,000 4,231,269
Series A, 7.50%, 2/01/20 ................................................................... 35,275,000 21,153,712
Series A, 7.125%, 2/01/21 .................................................................. 28,830,000 17,288,198
Series A, 6.125%, 2/01/22 .................................................................. 12,940,000 7,758,694
Series B, 7.25%, 2/01/22 ................................................................... 5,315,000 3,187,033
Kentucky Economic Development Finance Authority Health System Revenue,
Norton Healthcare Inc.,
Refunding, Series C, MBIA Insured, 6.10%, 10/01/22 ......................................... 10,650,000 12,239,406
Refunding, Series C, MBIA Insured, 6.15%, 10/01/27 ......................................... 3,995,000 4,580,068
Series C, MBIA Insured, Pre-Refunded, 6.10%, 10/01/22 ...................................... 5,325,000 6,123,058
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/27 ...................................... 6,005,000 6,922,384
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 ................. 6,835,000 6,933,151
--------------
90,416,973
--------------
Annual Report | 153
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
LOUISIANA 1.6%
Beauregard Parish Revenue, Boise Cascade Corp. Project, Refunding, 6.80%, 2/01/27 ............. $ 13,990,000 $ 15,671,038
Louisiana Public Facilities Authority Revenue, FHA Insured Mortgage, Baton Rouge General,
MBIA Insured, 5.25%, 7/01/33 ................................................................. 32,240,000 34,710,874
Louisiana State Citizens Property Insurance Corp. Assessment Revenue, Series B,
AMBAC Insured, 5.00%, 6/01/22 ................................................................ 10,000,000 10,829,800
Louisiana State Gas and Fuels Tax Revenue, Series A, FSA Insured, 5.00%, 5/01/36 .............. 15,000,000 16,068,450
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 ........ 4,850,000 4,862,998
West Feliciana Parish PCR, Entergy Gulf States Project, Refunding, Series B, 6.60%,
9/01/28 ...................................................................................... 20,750,000 20,868,690
--------------
103,011,850
--------------
MAINE 0.5%
Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 .......................... 4,800,000 4,832,688
Skowhegan PCR, S.D. Warren Co.,
Series A, 6.65%, 10/15/15 .................................................................. 24,570,000 24,943,955
Series B, 6.65%, 10/15/15 .................................................................. 4,940,000 5,015,187
--------------
34,791,830
--------------
MARYLAND 0.8%
Gaithersburg Hospital Facilities Revenue, Shady Grove Adventist Hospital, Refunding and
Improvement, Series B, ETM, 8.50%, 9/01/07 ................................................... 535,000 547,583
Maryland State CDA Department of Housing and CDR, Housing, Series A, 5.875%,
7/01/16 ...................................................................................... 2,270,000 2,324,525
Maryland State EDC Revenue,
Chesapeake Bay, senior lien, Series B, Pre-Refunded, 7.50%, 12/01/14 ....................... 1,915,000 2,124,022
Chesapeake Bay, senior lien, Series B, Pre-Refunded, 7.625%, 12/01/22 ...................... 6,740,000 7,502,159
Chesapeake Bay, senior lien, Series B, Pre-Refunded, 7.75%, 12/01/31 ....................... 16,160,000 18,039,570
senior lien Project, Chesapeake Bay Hyatt Hotel, Refunding, Series A, 4.75%,
12/01/11 .................................................................................. 1,250,000 1,264,713
senior lien Project, Chesapeake Bay Hyatt Hotel, Refunding, Series A, 5.00%,
12/01/16 .................................................................................. 3,000,000 3,088,860
senior lien Project, Chesapeake Bay Hyatt Hotel, Refunding, Series A, 5.00%,
12/01/31 .................................................................................. 10,000,000 10,137,900
senior lien Project, Chesapeake Bay Hyatt Hotel, Refunding, Series B, 5.00%,
12/01/16 .................................................................................. 1,000,000 1,029,620
senior lien Project, Chesapeake Bay Hyatt Hotel, Refunding, Series B, 5.25%,
12/01/31 .................................................................................. 2,000,000 2,067,640
Maryland State Health and Higher Educational Facilities Authority Revenue, Edenwald,
Series A, 5.40%, 1/01/37 ..................................................................... 1,200,000 1,257,192
Takoma Park Hospital Facilities Revenue, Washington Adventist Hospital Project, Series B,
ETM, 8.50%, 9/01/07 .......................................................................... 2,000,000 2,025,140
--------------
51,408,924
--------------
MASSACHUSETTS 1.1%
Massachusetts Bay Transportation Authority Revenue, General Transportation System, Series A,
7.00%, 3/01/21 ............................................................................... 2,000,000 2,471,580
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 3,208,860
154 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State Development Finance Agency Revenue,
Berkshire Retirement Project, first mortgage, 5.60%, 7/01/19 ............................... $ 1,030,000 $ 1,057,655
Berkshire Retirement Project, first mortgage, 5.625%, 7/01/29 .............................. 1,620,000 1,664,615
Curry College, Series A, ACA Insured, 5.00%, 3/01/36 ....................................... 2,000,000 2,076,240
Loomis Community Project, first mortgage, Refunding, Series A, 5.625%, 7/01/15 ............. 1,850,000 1,905,722
Loomis Community Project, first mortgage, Refunding, Series A, 5.75%, 7/01/23 .............. 3,500,000 3,608,955
Massachusetts State Health and Educational Facilities Authority Revenue,
St. Memorial Medical Center, Refunding, Series A, 6.00%, 10/01/23 .......................... 6,235,000 6,241,796
Sterling and Francine Clark Art Institute, Series A, 5.00%, 7/01/36 ........................ 8,000,000 8,552,720
a,b Massachusetts State Industrial Finance Agency Solid Waste Disposal Revenue,
Massachusetts Paper Co. Project, senior lien, 8.50%, 11/01/12 ................................ 39,820,661 99,552
Massachusetts State School Building Authority Dedicated Sales Tax Revenue, Series A,
FSA Insured, 5.00%, 8/15/30 .................................................................. 30,950,000 33,102,882
Massachusetts State Water Resources Authority Revenue, General, Refunding, Series A,
AMBAC Insured, 5.00%, 8/01/31 ................................................................ 8,000,000 8,634,720
--------------
72,625,297
--------------
MICHIGAN 3.7%
Delta County EDC Environmental Improvement Revenue, Mead Escanaba Paper, Series A,
Pre-Refunded, 6.25%, 4/15/27 ................................................................. 10,500,000 11,730,810
Detroit Sewer Disposal System Revenue, second lien, Series A, MBIA Insured, 5.00%,
7/01/35 ...................................................................................... 26,750,000 28,412,245
Detroit Water Supply System Revenue, second lien, Refunding, Series C, FSA Insured, 5.00%,
7/01/33 ...................................................................................... 11,000,000 11,768,790
Garden City Hospital Financing Authority Hospital Revenue, Refunding,
5.625%, 9/01/10 ............................................................................ 2,710,000 2,763,848
5.75%, 9/01/17 ............................................................................. 1,000,000 1,019,200
Gaylord Hospital Finance Authority Limited Obligation Revenue, Otsego Memorial Hospital,
Refunding, 6.50%,
1/01/31 .................................................................................... 1,000,000 1,056,020
1/01/37 .................................................................................... 1,000,000 1,053,690
Michigan State Building Authority Revenue,
Facilities Program, Refunding, Series I, AMBAC Insured, 5.00%, 10/15/33 .................... 13,495,000 14,428,719
Facilities Program, Refunding, Series II, MBIA Insured, 5.00%, 10/15/29 .................... 16,585,000 17,559,203
Refunding, Series IA, FGIC Insured, 5.00%, 10/15/31 ........................................ 9,500,000 10,251,450
Michigan State Hospital Finance Authority Revenue,
Ascension Health Credit, Series A, MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 ............ 18,000,000 19,309,860
Detroit Medical Center Obligation Group, Refunding, Series A, 6.25%, 8/15/13 ............... 7,500,000 7,536,600
Detroit Medical Center Obligation Group, Refunding, Series A, 6.50%, 8/15/18 ............... 30,205,000 30,361,160
Detroit Medical Center Obligation Group, Refunding, Series B, 5.50%, 8/15/23 ............... 500,000 500,205
Detroit Medical Center Obligation Group, Series A, 5.25%, 8/15/23 .......................... 500,000 492,410
Marquette, 5.00%, 5/15/34 .................................................................. 6,000,000 6,174,300
Memorial Healthcare Center, Refunding, 5.75%, 11/15/15 ..................................... 1,000,000 1,045,630
Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.75%, 8/15/16 ........................ 7,310,000 7,394,869
Sinai Hospital, Refunding, 6.625%, 1/01/16 ................................................. 2,990,000 3,023,099
Sinai Hospital, Refunding, 6.70%, 1/01/26 .................................................. 7,250,000 7,322,935
Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co. Pollution
Control Project, Refunding, Series C, 5.45%, 9/01/29 ......................................... 11,000,000 11,672,650
Annual Report | 155
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Midland County EDR, Refunding, Series A, 6.875%, 7/23/09 ...................................... $ 35,000,000 $ 35,986,300
Tawas City Hospital Finance Authority Revenue, Tawas St. Joseph's Hospital Project, Series A,
ETM, 5.60%, 2/15/13 .......................................................................... 1,275,000 1,333,357
--------------
232,197,350
--------------
MINNESOTA 1.6%
Hubbard County Solid Waste Disposal Revenue, Potlatch Corp. Project, 7.25%, 8/01/14 ........... 9,000,000 10,090,890
Mahtomedi Senior Housing Revenue, St. Andrews Village Project, Refunding, 5.75%,
12/01/40 .................................................................................... 5,000,000 5,092,250
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue, Refunding,
Sub Series C, FGIC Insured, 5.00%, 1/01/31 ................................................... 21,185,000 22,448,685
Minneapolis Health Care Facility Revenue,
Augustana Chapel View Homes, Series D, 5.875%, 6/01/35 ..................................... 5,075,000 5,222,226
Fairview Health Services, Series A, Pre-Refunded, 5.625%, 5/15/32 .......................... 18,380,000 20,243,916
Jones-Harrison Residence Project, 5.70%, 10/01/35 .......................................... 1,000,000 1,014,600
Minneapolis Health Care Revenue, Fairview Health Services, AMBAC Insured, 5.00%,
11/15/30 ..................................................................................... 8,200,000 8,765,636
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Refunding, Series A, 6.375%, 11/15/29 ...................................................... 175,000 193,501
Series A, Pre-Refunded, 6.375%, 11/15/29 ................................................... 6,325,000 6,972,870
Minnesota State HFAR, Rental Housing, Refunding, Series D, MBIA Insured, 5.95%,
2/01/18 ...................................................................................... 320,000 322,227
Minnesota State Municipal Power Agency Electric Revenue, 5.00%, 10/01/35 ...................... 5,000,000 5,252,250
a Roseville MFHR, Rosepointe I Project, Refunding, Series C, 8.00%, 12/01/29 .................... 3,145,000 3,309,515
St. Paul Housing and RDA Hospital Revenue, Healtheast Project, 6.00%, 11/15/35 ................ 10,000,000 11,114,300
a St. Paul Housing and RDA Tax Increment Revenue, Energy Park Project, Series A, 8.625%,
9/01/07 ...................................................................................... 205,000 196,185
--------------
100,239,051
--------------
MISSISSIPPI 0.6%
Claiborne County PCR, Systems Energy Resources Inc., Refunding, 6.20%, 2/01/26 ................ 33,295,000 33,573,679
e Mississippi Hospital Equipment and Facilities Authority Revenue, Mississippi Baptist Health
System Inc., Refunding, Series A, 5.00%, 8/15/26 ............................................. 5,000,000 5,223,350
--------------
38,797,029
--------------
MISSOURI 0.2%
Lake of the Ozarks Community Board Corp. Bridge System Revenue, Refunding, 5.25%,
12/01/20 ..................................................................................... 8,350,000 8,574,281
West Plains IDA Hospital Revenue, Ozarks Medical Center,
6.30%, 11/15/11 ............................................................................ 695,000 724,364
6.75%, 11/15/24 ............................................................................ 1,870,000 1,939,003
Refunding, 5.50%, 11/15/12 ................................................................. 500,000 505,375
--------------
11,743,023
--------------
MONTANA 0.2%
Forsyth PCR, Puget Sound Energy, Refunding, Series A, AMBAC Insured, 5.00%, 3/01/31 ........... 10,220,000 10,862,531
--------------
156 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEBRASKA 0.3%
Public Power Generation Agency Revenue, Whelan Energy Center Unit 2, Series A,
AMBAC Insured, 5.00%, 1/01/32 ................................................................ $ 16,485,000 $ 17,728,958
Scotts Bluff County Hospital Authority No. 1 Hospital Revenue, Regional West Medical Center,
6.375%, 12/15/08 ............................................................................. 625,000 626,363
--------------
18,355,321
--------------
NEVADA 1.8%
Clark County ID Special Assessment,
Local ID No. 132, Summerlin South, 6.875%, 2/01/21 ......................................... 3,840,000 3,983,270
Local ID No. 142, Mountains Edge, 6.375%, 8/01/23 .......................................... 4,190,000 4,336,482
Local ID No. 151, Summerlin, 5.00%, 8/01/20 ................................................ 765,000 783,016
Local ID No. 151, Summerlin, 5.00%, 8/01/25 ................................................ 2,405,000 2,456,227
Clark County IDR, Nevada Power Co. Project, Refunding, Series B, 5.90%, 10/01/30 .............. 5,125,000 5,128,331
Henderson Health Care Facility Revenue, Catholic Healthcare West, Series A, 5.625%,
7/01/24 ...................................................................................... 7,000,000 7,618,100
Henderson Local ID Special Assessment,
No. T-2, 9.50%, 8/01/11 .................................................................... 365,000 365,657
No. T-4C, Green Valley, Refunding, Series A, 5.90%, 11/01/18 ............................... 3,080,000 3,177,544
No. T-12, Series A, 7.375%, 8/01/18 ........................................................ 38,175,000 40,624,308
No. T-16, 4.90%, 3/01/16 ................................................................... 1,390,000 1,416,313
No. T-16, 5.00%, 3/01/18 ................................................................... 1,000,000 1,020,460
No. T-16, 5.00%, 3/01/19 ................................................................... 1,000,000 1,017,150
No. T-16, 5.10%, 3/01/22 ................................................................... 1,500,000 1,526,835
No. T-16, 5.125%, 3/01/25 .................................................................. 1,580,000 1,603,700
No. T-17, 5.00%, 9/01/15 ................................................................... 720,000 740,556
No. T-17, 5.00%, 9/01/16 ................................................................... 740,000 763,192
No. T-17, 5.00%, 9/01/25 ................................................................... 1,400,000 1,434,272
Las Vegas Local Improvement Bonds Special Assessment,
Special ID No. 404, Refunding, FSA Insured, 5.85%, 11/01/09 ................................ 2,605,000 2,613,596
Special ID No. 607, 6.25%, 6/01/24 ......................................................... 5,000,000 5,155,850
Special ID No. 808, Summerlin Area, 6.75%, 6/01/21 ......................................... 8,230,000 8,515,499
Las Vegas Special Assessment, ID No. 505, Elkhorn Springs, 8.00%, 9/15/13 ..................... 3,100,000 3,163,240
Washoe County Revenue, Reno-Sparks Convention Center Project, FSA Insured, Pre-Refunded,
6.40%, 7/01/29 ............................................................................... 15,415,000 16,553,860
--------------
113,997,458
--------------
NEW HAMPSHIRE 0.3%
New Hampshire Higher Education and Health Facilities Authority Revenue,
Hillcrest Terrace, 7.50%, 7/01/24 .......................................................... 16,050,000 16,534,871
Littleton Hospital Assn., Series B, 5.90%, 5/01/28 ......................................... 2,000,000 2,060,020
New Hampshire Catholic Charities, Refunding, Series A, 5.75%, 8/01/11 ...................... 980,000 984,586
--------------
19,579,477
--------------
Annual Report | 157
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY 5.8%
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding,
Series 1, 6.00%, 1/01/19 ................................................................... $ 2,180,000 $ 2,196,045
Series 1, 6.00%, 1/01/29 ................................................................... 5,000,000 5,026,500
Series 2, 6.125%, 1/01/19 .................................................................. 2,125,000 2,147,482
Series 2, 6.125%, 1/01/29 .................................................................. 5,105,000 5,148,444
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 10,623,388
New Jersey EDA Revenue,
Cigarette Tax, 5.50%, 6/15/24 .............................................................. 23,000,000 24,123,090
Cigarette Tax, 5.50%, 6/15/31 .............................................................. 6,500,000 6,974,175
Cigarette Tax, 5.75%, 6/15/34 .............................................................. 10,000,000 10,851,600
first mortgage, Keswick Pines, Refunding, 5.75%, 1/01/24 ................................... 1,500,000 1,521,300
first mortgage, Presbyterian, Series A, 6.25%, 11/01/20 .................................... 7,635,000 8,084,091
School Facilities Construction, Series S, 5.00%, 9/01/36 ................................... 10,000,000 10,717,800
New Jersey EDA Special Facility Revenue, Continental Airlines Inc. Project,
6.625%, 9/15/12 ............................................................................ 25,525,000 27,736,996
6.25%, 9/15/19 ............................................................................. 42,000,000 43,734,180
6.40%, 9/15/23 ............................................................................. 79,890,000 83,469,871
New Jersey Health Care Facilities Financing Authority Revenue,
Capital Appreciation St Barnabas Health, Series B, zero cpn., 7/01/33 ...................... 57,680,000 15,563,794
Capital Appreciation St Barnabas Health, Series B, zero cpn., 7/01/34 ...................... 52,330,000 13,393,863
Capital Appreciation St Barnabas Health, Series B, zero cpn., 7/01/35 ...................... 20,000,000 4,859,200
South Jersey Hospital, 5.00%, 7/01/46 ...................................................... 6,000,000 6,267,840
South Jersey Hospital, Pre-Refunded, 5.875%, 7/01/21 ....................................... 7,500,000 8,277,225
South Jersey Hospital, Pre-Refunded, 6.00%, 7/01/32 ........................................ 18,000,000 19,973,160
Trinitas Hospital Obligation Group, Refunding, 7.50%, 7/01/30 .............................. 5,000,000 5,500,750
New Jersey State Turnpike Authority Turnpike Revenue,
Refunding, Series A, FSA Insured, 5.00%, 1/01/25 ........................................... 13,700,000 14,697,223
Series C, FSA Insured, 5.00%, 1/01/35 ...................................................... 10,195,000 10,894,581
Tobacco Settlement Financing Corp. Revenue,
Asset-Backed, Pre-Refunded, 6.00%, 6/01/37 ................................................. 10,000,000 11,105,700
Asset-Backed, Pre-Refunded, 6.125%, 6/01/42 ................................................ 9,050,000 10,104,144
Capital Appreciation Bonds, Series 1B, zero cpn., 6/01/41 .................................. 40,000,000 5,948,800
--------------
368,941,242
--------------
NEW MEXICO 2.3%
Farmington PCR,
Public Service Co. of New Mexico, San Juan Project, Refunding, Series A, 6.30%,
12/01/16 ................................................................................... 24,045,000 24,581,204
Public Service Co. of New Mexico, San Juan Project, Refunding, Series D, 6.375%,
4/01/22 .................................................................................... 66,125,000 67,559,912
Public Service Co. Project, Series A, 6.60%, 10/01/29 ....................................... 6,000,000 6,499,740
Tucson Electric Power Co., Series A, 6.95%, 10/01/20 ........................................ 37,000,000 38,303,140
New Mexico State Hospital Equipment Loan Council Hospital Revenue, St. Vincent Hospital,
Series A, Radian Insured,
5.25%, 7/01/30 ............................................................................. 4,360,000 4,637,514
5.00%, 7/01/35 ............................................................................. 3,470,000 3,586,661
--------------
145,168,171
--------------
158 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW YORK 9.6%
Corinth IDA Environmental Improvement Revenue, International Paper Co. Project, Refunding,
Series A, 5.75%, 2/01/22 ..................................................................... $ 2,000,000 $ 2,113,180
Hudson Yards Infrastructure Corp. Revenue, Series A, 5.00%, 2/15/47 ........................... 10,500,000 11,168,115
Liberty Development Corp. Revenue, Goldman Sachs Headquarters, 5.25%, 10/01/35 ................ 25,000,000 29,389,750
MAC for City of Troy Revenue, Capital Appreciation, Series C, MBIA Insured, zero cpn.,
7/15/21 .................................................................................... 428,010 238,624
1/15/22 .................................................................................... 649,658 353,869
MTA Revenue,
Series A, MBIA Insured, 4.75%, 11/15/28 .................................................... 15,000,000 15,807,150
Series B, AMBAC Insured, 5.00%, 11/15/30 ................................................... 10,000,000 10,742,900
Transportation, Series F, 5.00%, 11/15/30 .................................................. 7,000,000 7,435,400
MTA Transit Facilities Revenue, Series A, MBIA Insured, Pre-Refunded, 5.875%, 7/01/27 ......... 22,700,000 23,205,756
New York City GO,
Fiscal 2003, Series I, 5.00%, 3/01/24 ...................................................... 5,000,000 5,250,350
Fiscal 2003, Series I, 5.00%, 3/01/25 ...................................................... 9,000,000 9,440,820
Refunding, Series G, 5.00%, 8/01/21 ........................................................ 10,000,000 10,742,700
Refunding, Series H, 6.25%, 8/01/15 ........................................................ 1,535,000 1,565,823
Refunding, Series H, 6.125%, 8/01/25 ....................................................... 380,000 387,440
Refunding, Series J, 6.00%, 8/01/21 ........................................................ 5,000 5,095
Series B, 7.00%, 2/01/18 ................................................................... 115,000 115,317
Series D, 7.625%, 2/01/14 .................................................................. 5,000 5,016
Series F, 7.50%, 2/01/21 ................................................................... 85,000 85,260
Series G, 7.50%, 2/01/22 ................................................................... 10,000 10,031
Series G, Pre-Refunded, 6.125%, 10/15/11 ................................................... 20,480,000 20,999,373
Series G, Pre-Refunded, 6.20%, 10/15/14 .................................................... 10,000,000 10,258,100
Series H, Pre-Refunded, 6.25%, 8/01/15 ..................................................... 23,465,000 23,950,491
Series H, Pre-Refunded, 6.125%, 8/01/25 .................................................... 5,220,000 5,325,392
Series I, 6.25%, 4/15/17 ................................................................... 35,000 35,445
Series I, Pre-Refunded, 6.25%, 4/15/17 ..................................................... 25,335,000 25,662,075
Series I, Pre-Refunded, 6.25%, 4/15/27 ..................................................... 22,920,000 23,215,897
Series J, Pre-Refunded, 6.00%, 8/01/21 ..................................................... 9,995,000 10,192,701
New York City IDA, Civic Facility Revenue,
Amboy Properties Corp. Project, Refunding, 6.75%, 6/01/20 .................................. 6,515,000 6,605,624
Series C, 6.80%, 6/01/28 ................................................................... 5,000,000 5,393,150
Staten Island University Hospital Project, Series C, 6.45%, 7/01/32 ........................ 1,490,000 1,577,493
New York City IDA Revenue, Liberty, Seven World Trade Center, Series A, 6.50%, 3/01/35 ........ 50,000,000 53,384,000
New York City IDA Special Facility Revenue,
American Airlines Inc., JFK International Airport Project, 7.50%, 8/01/16 .................. 15,000,000 17,804,550
American Airlines Inc., JFK International Airport Project, 7.625%, 8/01/25 ................. 20,000,000 24,235,800
American Airlines Inc., JFK International Airport Project, 7.75%, 8/01/31 .................. 15,000,000 18,438,450
American Airlines Inc., JFK International Airport Project, Series A, 8.00%, 8/01/12 ........ 74,000,000 86,069,400
British Airways PLC Project, 7.625%, 12/01/32 .............................................. 15,000,000 16,950,600
New York City IDAR,
Liberty, Seven World Trade Center, Series A, 6.25%, 3/01/15 ................................ 10,000,000 10,649,500
Queens Baseball Stadium-Pilot, AMBAC Insured, 5.00%, 1/01/31 ............................... 9,500,000 10,232,830
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Series C, 5.00%, 6/15/30 ................................................................... 15,000,000 16,003,650
Series E, 5.00%, 6/15/34 ................................................................... 10,000,000 10,504,400
Annual Report | 159
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York State Dormitory Authority Revenues, Supported Debt, Mental Health Services,
Refunding, Series A, 6.00%, 8/15/17 .......................................................... $ 115,000 $ 117,505
New York State Dormitory Authority State Personal Income Tax Revenue, Education, Series D,
5.00%, 3/15/31 ............................................................................... 10,000,000 10,785,700
New York State HFA Service Contract Obligation Revenue, Series A, 6.00%, 3/15/26 .............. 220,000 224,818
Oneida County IDAR, Civic Facility, St. Elizabeth Medical, Series B, 6.00%, 12/01/19 .......... 1,000,000 1,031,350
Onondaga County IDA Solid Waste Disposal Facility Revenue, Solvay Paperboard LLC Project,
Refunding,
6.80%, 11/01/14 ............................................................................ 4,600,000 4,805,390
7.00%, 11/01/30 ............................................................................ 7,000,000 7,304,850
Port Authority of New York and New Jersey Revenue, Consolidated, 140th, XLCA Insured,
5.00%, 12/01/27 .............................................................................. 17,020,000 18,426,192
Port Authority of New York and New Jersey Special Obligation Revenue, Continental
Airlines Inc., Eastern Project, La Guardia,
9.00%, 12/01/10 ............................................................................ 8,325,000 8,422,486
9.125%, 12/01/15 ........................................................................... 27,650,000 27,981,247
Utica IDA Civic Facility Revenue, Utica College Civic Facility,
6.75%, 12/01/21 ............................................................................ 1,250,000 1,387,262
6.85%, 12/01/31 ............................................................................ 2,000,000 2,220,800
--------------
608,259,117
--------------
NORTH CAROLINA 1.9%
Charlotte Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 ............................. 15,310,000 16,282,644
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 5.75%, 1/01/26 ........................................................ 37,500,000 39,351,375
Refunding, Series B, 5.75%, 1/01/24 ........................................................ 35,750,000 37,540,718
Series D, 6.70%, 1/01/19 ................................................................... 2,000,000 2,172,240
Series D, 6.75%, 1/01/26 ................................................................... 5,000,000 5,438,650
North Carolina HFAR, SF, Series II, FHA Insured, 6.20%,
3/01/16 .................................................................................... 960,000 1,012,359
9/01/17 .................................................................................... 655,000 664,910
North Carolina Medical Care Commission Health Care Facilities Revenue, Pennybyrn at
Maryfield, Series A,
5.75%, 10/01/23 ............................................................................ 3,625,000 3,774,060
6.00%, 10/01/23 ............................................................................ 2,500,000 2,645,675
North Carolina Medical Care Commission Retirement Facilities Revenue, first mortgage,
United Methodist, Refunding, Series C,
5.25%, 10/01/24 ............................................................................ 920,000 951,390
5.50%, 10/01/32 ............................................................................ 1,600,000 1,669,328
North Carolina Medical Care Commission Revenue, Series A, 6.125%, 10/01/35 .................... 7,000,000 7,405,230
--------------
118,908,579
--------------
NORTH DAKOTA 0.1%
Ward County Health Care Facilities Revenue, Trinity Obligated Group, 5.125%,
7/01/25 .................................................................................... 2,250,000 2,366,460
7/01/29 .................................................................................... 2,500,000 2,621,625
--------------
4,988,085
--------------
160 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO 1.5%
Centerville City School District GO, School Improvement, FSA Insured, 5.00%, 12/01/30 ......... $ 9,260,000 $ 9,930,794
Cuyahoga County Hospital Revenue, Refunding, 5.50%, 1/01/29 ................................... 11,500,000 12,407,925
Dayton Special Facilities Revenue, Emery Air Freight Corp., Emery Worldwide Air Inc.,
Refunding,
Series C, 6.05%, 10/01/09 .................................................................. 14,250,000 15,071,227
Series E, 6.05%, 10/01/09 .................................................................. 5,250,000 5,552,558
Series F, 6.05%, 10/01/09 .................................................................. 1,000,000 1,057,630
Franklin County Health Care Facilities Revenue,
Ohio Presbyterian, Series A, Pre-Refunded, 7.125%, 7/01/29 ................................. 1,000,000 1,144,110
Presbyterian Retirement Services, Refunding, 5.50%, 7/01/17 ................................ 3,100,000 3,166,774
Presbyterian Retirement Services, Refunding, 5.50%, 7/01/21 ................................ 950,000 970,463
Presbyterian Retirement Services, Series A, Pre-Refunded, 6.625%, 7/01/13 .................. 1,000,000 1,026,320
Franklin County Ohio Hospital Revenue, The Children's Hospital, FGIC Insured, 5.00%,
5/01/35 ...................................................................................... 10,000,000 10,589,600
Hamilton County Sales Tax Revenue, Refunding, Sub Series A, AMBAC Insured, 5.00%,
12/01/32 ..................................................................................... 10,000,000 10,774,400
Lucas County Health Facilities Revenue, Presbyterian Retirement Services, Series A,
Pre-Refunded,
6.625%, 7/01/14 ............................................................................ 1,000,000 1,026,920
6.75%, 7/01/20 ............................................................................. 2,000,000 2,059,200
Miami County Hospital Facilities Revenue, Refunding and Improvement, Upper Valley Medical
Center, 5.25%, 5/15/26 ....................................................................... 2,750,000 2,946,515
Montgomery County Health System Revenue,
Series B-1, 8.10%, 7/01/18 ................................................................. 245,000 250,383
Series B-2, 8.10%, 7/01/18 ................................................................. 295,000 301,481
St. Leonard, Series B, 8.10%, 7/01/18 ...................................................... 400,000 408,788
Ohio State Air Quality Development Authority Revenue, PCR, Cleveland Electric, Refunding,
Series B, 6.00%, 8/01/20 ..................................................................... 6,250,000 6,427,250
Oregon City School District GO, AMBAC Insured, 5.00%, 12/01/27 ................................ 5,000,000 5,376,800
Toledo Lucas County Port Authority Airport Revenue, Bax Global Project, Refunding, Series 1,
6.25%, 11/01/13 .............................................................................. 3,900,000 4,028,661
Willoughby IDR, Presbyterian Retirement Services, Refunding, Series A, Pre-Refunded,
6.875%, 7/01/16 .............................................................................. 1,500,000 1,542,330
--------------
96,060,129
--------------
OKLAHOMA 0.2%
Oklahoma Development Finance Authority Revenue, Comanche County Hospital Project,
Series B, 6.60%, 7/01/31 ..................................................................... 5,000,000 5,512,700
Tulsa Industrial Authority Revenue, Refunding, MBIA Insured, 5.00%, 10/01/31 .................. 5,325,000 5,714,204
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding,
6.00%, 8/15/14 ............................................................................... 4,000,000 4,122,920
--------------
15,349,824
--------------
OREGON 0.4%
Oregon State Department of Administrative Services COP, Series A,
AMBAC Insured, Pre-Refunded, 6.00%, 5/01/26 ................................................ 9,400,000 10,139,028
FSA Insured, 5.00%, 5/01/30 ................................................................ 8,195,000 8,765,946
Annual Report | 161
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Oregon State Health Housing Educational and Cultural Facilities Authority Revenue,
Linfield College Project, Series A,
6.75%, 10/01/25 ............................................................................. $ 5,000 $ 5,474
Pre-Refunded, 6.75%, 10/01/25 ............................................................... 5,215,000 5,790,110
--------------
24,700,558
--------------
PENNSYLVANIA 4.6%
Allegheny County Hospital Development Authority Revenue, Health System,
Refunding, Series A, MBIA Insured, 6.50%, 11/15/30 ......................................... 10,000,000 11,059,200
Series B, 9.25%, 11/15/15 .................................................................. 23,110,000 27,463,693
Series B, 9.25%, 11/15/22 .................................................................. 24,000,000 28,521,360
Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding, 6.10%,
7/15/20 ...................................................................................... 5,500,000 5,620,285
Allegheny County Sanitation Authority Sewer Revenue, Refunding, Series A, MBIA Insured,
5.00%, 12/01/30 .............................................................................. 12,775,000 13,698,888
Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 .................. 2,725,000 2,822,746
Delaware County IDAR, Resource Recovery Facility, Refunding, Series A,
6.50%, 1/01/08 ............................................................................. 425,000 433,929
6.10%, 7/01/13 ............................................................................. 20,500,000 21,216,475
6.20%, 7/01/19 ............................................................................. 9,500,000 9,836,490
Harrisburg Authority University Revenue, Harrisburg University of Science,
Series A, 5.40%, 9/01/16 ................................................................... 1,500,000 1,534,635
Series B, 6.00%, 9/01/36 ................................................................... 3,000,000 3,082,710
Lancaster IDAR, Garden Spot Village Project, Series A, Pre-Refunded, 7.625%, 5/01/31 .......... 1,650,000 1,856,316
Lehigh County IDA, PCR, Pennsylvania Power and Light Electrical Utilities Corp. Project,
Refunding, Series A, FGIC Insured, 4.70%, 9/01/29 ............................................ 16,000,000 16,648,320
Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue,
Reliant Energy Seward, Series A, 6.75%, 12/01/36 ............................................. 65,000,000 71,955,650
Pennsylvania State Higher Educational Facilities Authority Health Services Revenue,
Allegheny Delaware Valley Obligation Group, Refunding, Series A, MBIA Insured, 5.875%,
11/15/16 ..................................................................................... 13,000,000 13,278,460
Pennsylvania State Public School Building Authority Lease Revenue, School District
Philadelphia Project, Refunding, Series B, FSA Insured, 4.75%, 6/01/30 ....................... 24,000,000 25,025,280
Philadelphia IDA Health Care Facility Revenue, Pauls Run, Refunding, Series A, 5.85%,
5/15/13 ...................................................................................... 2,200,000 2,246,574
Philadelphia Water and Wastewater Revenue, Series A, FSA Insured, 5.00%, 7/01/27 .............. 10,020,000 10,744,847
Sayre Health Care Facilities Authority Revenue, Guthrie Health, Series A, 5.75%,
12/01/21 ..................................................................................... 3,000,000 3,247,890
State Public School Building Authority School Revenue, Philadelphia School District Project,
FSA Insured, Pre-Refunded, 5.00%, 6/01/33 .................................................... 13,750,000 14,776,575
Washington County IDA, PCR, West Pennsylvania Power Co., Series G, AMBAC Insured,
6.05%, 4/01/14 ............................................................................... 5,025,000 5,035,050
--------------
290,105,373
--------------
162 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
RHODE ISLAND 0.2%
Rhode Island State Health and Educational Building Corp. Revenue, Hospital Financing,
Lifespan Obligation Group,
MBIA Insured, Pre-Refunded, 5.75%, 5/15/23 ................................................. $ 3,095,000 $ 3,169,249
Pre-Refunded, 6.50%, 8/15/32 ............................................................... 8,000,000 9,112,160
Refunding, MBIA Insured, 5.75%, 5/15/23 .................................................... 405,000 414,497
--------------
12,695,906
--------------
SOUTH CAROLINA 1.0%
Dorchester County School District No. 002 Installment Purchase Revenue, Growth Remedy
Opportunities Tax Hike, 5.25%, 12/01/29 ...................................................... 16,500,000 17,577,450
Greenville County School District Installment Purchase Revenue, Building Equity
Sooner Tomorrow,
5.00%, 12/01/28 ............................................................................ 10,000,000 10,536,800
Refunding, 5.50%, 12/01/28 ................................................................. 7,500,000 7,987,425
Lancaster Educational Assistance Program Inc. Revenue, School District of Lancaster County
Project, 5.00%, 12/01/26 ..................................................................... 15,015,000 15,450,585
Scago Educational Facilities Corp. for Calhoun School District Revenue, School Project,
Radian Insured, 5.00%, 12/01/26 .............................................................. 7,540,000 7,943,616
Scago Educational Facilities Corp. for Williamsburg School District Revenue, Williamsburg
County Project, 5.00%, 12/01/31 .............................................................. 2,000,000 2,098,940
Tobacco Settlement Revenue Management Authority Tobacco Settlement Revenue, Series B,
6.375%, 5/15/30 .............................................................................. 3,750,000 4,356,150
--------------
65,950,966
--------------
TENNESSEE 1.2%
Clarksville Natural Gas Acquisition Corp. Gas Revenue, 5.00%, 12/15/20 ........................ 5,990,000 6,579,356
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 5,267,050
Johnson City Health and Educational Facilities Board Hospital Revenue, first mortgage,
Mountain States Health, Refunding, Series A, MBIA Insured, zero cpn.,
7/01/27 .................................................................................... 19,365,000 8,028,148
7/01/28 .................................................................................... 19,400,000 7,685,698
7/01/29 .................................................................................... 19,365,000 7,329,652
7/01/30 .................................................................................... 19,370,000 7,003,417
Knox County Health Educational and Housing Facilities Board Hospital Facilities Revenue,
Capital Appreciation, Refunding and Improvement, Series A, FSA Insured, zero cpn.,
1/01/25 ................................................................................... 5,000,000 1,907,350
Capital Appreciation, Refunding and Improvement, Series A, FSA Insured, zero cpn.,
1/01/26 ................................................................................... 2,610,000 935,868
Covenant Health System, Refunding and Improvement, Series A, zero cpn., 1/01/37 ............ 12,760,000 2,928,165
Covenant Health System, Refunding and Improvement, Series A, zero cpn., 1/01/39 ............ 13,755,000 2,840,270
Tennessee Energy Acquisition Corp. Gas Revenue, Series A, 5.25%, 9/01/26 ...................... 20,000,000 22,891,400
--------------
73,396,374
--------------
Annual Report | 163
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TEXAS 2.9%
Angelina and Neches River Authority Waste Disposal Revenue, Temple-Inland Forest Products,
6.95%, 5/01/23 ............................................................................... $ 1,750,000 $ 1,941,765
Austin Convention Enterprises Inc. Convention Center Revenue, first tier,
Refunding, Series A, XLCA Insured, 5.00%, 1/01/34 .......................................... 16,000,000 17,020,640
Refunding, Series B, 5.75%, 1/01/34 ........................................................ 3,500,000 3,766,525
Series A, Pre-Refunded, 6.70%, 1/01/32 ..................................................... 10,000,000 11,059,500
Bexar County Health Facilities Development Corp. Revenue,
Army Retirement Residence, Refunding, 5.00%, 7/01/27 ....................................... 1,000,000 1,040,860
Army Retirement Residence, Refunding, 5.00%, 7/01/33 ....................................... 760,000 788,508
Army Retirement Residence, Refunding, 5.00%, 7/01/37 ....................................... 580,000 601,274
Incarnate Word Health Services, FSA Insured, ETM, 6.00%, 11/15/15 .......................... 8,750,000 8,877,225
Brazos River Authority PCR, TXU Energy Co. Project, Refunding, Series B, 6.30%,
7/01/32 ...................................................................................... 9,000,000 9,647,100
Brownsville Utility System Revenue, Refunding and Improvement, Series A, AMBAC Insured,
5.00%, 9/01/31 ............................................................................... 12,500,000 13,373,625
Coppell Special Assessment, Gateway Project, 8.70%, 3/01/12 ................................... 2,245,000 2,284,692
Decatur Hospital Authority Hospital Revenue, Series A, ETM, 5.75%, 9/01/29 .................... 4,750,000 5,468,485
El Paso Health Facilities Development Corp. Revenue, Senior Care Facilities,
Bienvivir Senior Health,
7.00%, 8/15/12 ............................................................................. 765,000 816,959
7.50%, 8/15/18 ............................................................................. 2,300,000 2,499,479
7.75%, 8/15/31 ............................................................................. 3,000,000 3,315,210
Georgetown Health Facilities Development Corp. Revenue, Georgetown Healthcare System,
Pre-Refunded, 6.25%, 8/15/29 ................................................................. 10,975,000 11,831,818
Matagorda County Navigation District No. 1 Revenue, Centerpoint Energy Project, Refunding,
5.60%, 3/01/27 ............................................................................... 11,000,000 11,720,830
Sabine River Authority PCR,
TXU Electric, Refunding, Series C, 5.20%, 5/01/28 .......................................... 15,000,000 15,144,750
TXU Energy Co. LLC Project, Refunding, Series A, 5.80%, 7/01/22 ............................ 1,000,000 1,046,600
TXU Energy Co. LLC Project, Refunding, Series B, 6.15%, 8/01/22 ............................ 3,000,000 3,207,120
Texas Municipal Gas Acquisition and Supply Corp. I Gas Supply Revenue, Senior Lien,
Series A, 5.25%,
12/15/22 ................................................................................... 5,000,000 5,656,650
12/15/23 ................................................................................... 6,000,000 6,815,040
12/15/25 ................................................................................... 7,000,000 8,006,880
Texas State Revenue, Transportation Commission-Mobility Fund, Series A, 5.00%,
4/01/33 ...................................................................................... 10,000,000 10,744,800
Texas State Turnpike Authority Revenue, Capital Appreciation, AMBAC Insured, zero cpn.,
8/15/32 ...................................................................................... 51,000,000 12,636,270
Waco Health Facilities Development Corp. FHA Insured Mortgage Revenue, Hillcrest Health
System Project, Series A, MBIA Insured, 5.00%, 8/01/31 ....................................... 15,000,000 15,900,000
--------------
185,212,605
--------------
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 16,198,500
--------------
164 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
VIRGINIA 1.3%
Fairfax County EDA Transportation Contract Revenue, Route 28 Project, MBIA Insured,
5.00%, 4/01/33 ............................................................................... $ 5,000,000 $ 5,321,050
Greater Richmond Convention Center Authority Hotel Tax Revenue, Refunding, MBIA Insured,
5.00%, 6/15/30 ............................................................................... 12,255,000 13,101,698
James City County EDA Residential Care Facility Revenue, first mortgage, Williamsburg
Landing, Series A,
5.35%, 9/01/26 ............................................................................. 750,000 782,198
5.50%, 9/01/34 ............................................................................. 750,000 783,592
Peninsula Ports Authority Coal Terminal Revenue, Dominion Terminal Associates, Refunding,
6.00%, 4/01/33 ............................................................................... 9,000,000 9,940,140
Tobacco Settlement Financing Corp. Revenue, Asset-Backed,
5.50%, 6/01/26 ............................................................................. 2,500,000 2,654,425
5.625%, 6/01/37 ............................................................................ 3,000,000 3,193,830
Virginia Beach Development Authority Residential Care Facility Mortgage Revenue,
Westminster Canterbury Project,
Refunding, 5.00%, 11/01/22 ................................................................. 1,000,000 1,017,510
Refunding, 5.25%, 11/01/26 ................................................................. 1,000,000 1,035,800
Refunding, 5.375%, 11/01/32 ................................................................ 1,000,000 1,037,330
Series A, Pre-Refunded, 7.125%, 11/01/23 ................................................... 5,000,000 5,533,200
Series A, Pre-Refunded, 7.25%, 11/01/32 .................................................... 9,000,000 9,988,020
Virginia State HDA Commonwealth Mortgage Revenue, 4.80%, 7/01/29 .............................. 31,000,000 31,508,400
--------------
85,897,193
--------------
WASHINGTON 1.5%
Douglas County PUD No. 1 Wells Hydroelectric Revenue, Refunding, Series B, FGIC Insured,
5.00%, 9/01/35 ............................................................................... 7,685,000 8,170,922
Energy Northwest Electric Revenue, Columbia Generating Station,
Refunding, Series A, 5.00%, 7/01/24 ........................................................ 15,260,000 16,412,283
Series C, 5.00%, 7/01/24 ................................................................... 5,000,000 5,377,550
Port Seattle Revenue, intermediate lien, Refunding, Series A, MBIA Insured, 5.00%,
3/01/30 ...................................................................................... 15,000,000 15,964,350
Spokane GO, Refunding, Series A, FGIC Insured, 5.00%, 12/01/30 ................................ 5,720,000 6,146,769
Washington State GO,
AMBAC Insured, 5.00%, 1/01/31 .............................................................. 17,020,000 18,221,612
Motor Vehicle Fuel Tax, Series C, 5.00%, 6/01/29 ........................................... 5,180,000 5,514,006
Motor Vehicle Fuel Tax, Series C, 5.00%, 6/01/30 ........................................... 5,370,000 5,716,258
Washington State Health Care Facilities Authority Revenue,
Kadlec Medical Center, Series A, Assured Guaranty Insured, 5.00%, 12/01/30 ................. 4,000,000 4,233,680
Providence Health Care Services, Refunding, Series A, FGIC Insured, 5.00%, 10/01/36 ........ 10,000,000 10,657,400
--------------
96,414,830
--------------
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 10,647,500
--------------
Annual Report | 165
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
WISCONSIN 1.1%
Central Brown County Water Authority Water System Revenue, Refunding, AMBAC Insured,
5.00%, 12/01/30 .............................................................................. $ 16,705,000 $ 17,913,106
Green Bay Water System Revenue,
FSA Insured, Pre-Refunded, 5.00%, 11/01/29 ................................................. 3,750,000 4,080,075
Refunding, FSA Insured, 5.00%, 11/01/29 .................................................... 1,250,000 1,331,662
Kaukauna Environmental Improvement Revenue, International Paper Co. Project, Series A,
6.70%, 5/01/24 ............................................................................... 4,100,000 4,379,169
Wisconsin Housing and EDA Home Ownership Revenue, Series E, 4.90%, 9/01/37 .................... 26,210,000 26,667,626
Wisconsin State Health and Educational Facilities Authority Revenue,
Fort Healthcare Inc. Project, 5.75%, 5/01/24 ............................................... 5,000,000 5,397,450
New Castle Place Project, Series A, 7.00%, 12/01/31 ........................................ 2,500,000 2,665,025
Thedacare Inc., AMBAC Insured, 5.00%, 12/15/30 ............................................. 9,530,000 10,091,508
--------------
72,525,621
--------------
U.S. TERRITORIES 3.4%
DISTRICT OF COLUMBIA 1.3%
District of Columbia Ballpark Revenue, Series B-1, FGIC Insured, 5.00%, 2/01/35 ............... 18,000,000 19,128,780
District of Columbia GO,
Refunding, Series A, 6.00%, 6/01/07 ........................................................ 1,535,000 1,542,921
Series A, ETM, 6.00%, 6/01/07 .............................................................. 280,000 281,588
District of Columbia Hospital Revenue, Medlantic Healthcare Group, Series A, MBIA Insured,
ETM, 5.875%, 8/15/19 ......................................................................... 8,850,000 9,027,088
District of Columbia Revenue, Methodist Home Issue, 6.00%, 1/01/29 ............................ 4,750,000 4,830,417
District of Columbia Tobacco Settlement Financing Corp. Revenue,
Capital Appreciation, Asset-Backed Bonds, Series A, zero cpn., 6/15/46 ..................... 175,000,000 16,544,500
Capital Appreciation, Asset-Backed Bonds, Series B, zero cpn., 6/15/46 ..................... 66,000,000 5,962,440
Refunding, Asset-Backed Bonds, 6.50%, 5/15/33 .............................................. 22,000,000 26,242,480
--------------
83,560,214
--------------
GUAM 0.2%
Guam Government Waterworks Authority Water and Wastewater System Revenue, Water,
6.00%, 7/01/25 ............................................................................. 4,000,000 4,402,160
5.875%, 7/01/35 ............................................................................ 8,000,000 8,626,400
--------------
13,028,560
--------------
NORTHERN MARIANA ISLANDS 0.2%
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.60%,
3/15/28 ...................................................................................... 8,010,000 8,913,208
--------------
PUERTO RICO 1.1%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds,
Refunding,
5.50%, 5/15/39 ............................................................................. 11,500,000 12,059,130
5.625%, 5/15/43 ............................................................................ 3,500,000 3,690,260
Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.00%, 7/01/34 ..................... 20,000,000 20,985,600
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series J, Pre-Refunded, 5.00%, 7/01/34 ....................................................... 11,500,000 12,458,295
166 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Electric Power Authority Power Revenue, Series NN, 5.125%, 7/01/29 ................ $ 11,500,000 $ 12,215,760
University of Puerto Rico Revenues, University System, Refunding, Series P, 5.00%,
6/01/30 ...................................................................................... 7,645,000 8,145,059
--------------
69,554,104
--------------
VIRGIN ISLANDS 0.6%
Virgin Islands PFAR, sub. lien, Fund Loan Notes, Refunding, Series E,
5.75%, 10/01/13 ............................................................................ 15,000,000 15,604,200
5.875%, 10/01/18 ........................................................................... 7,000,000 7,297,430
6.00%, 10/01/22 ............................................................................ 14,500,000 15,136,695
--------------
38,038,325
--------------
TOTAL U.S. TERRITORIES ........................................................................ 213,094,411
--------------
TOTAL LONG TERM INVESTMENTS (COST $5,765,840,878) ............................................. 6,184,653,952
--------------
SHORT TERM INVESTMENTS 1.5%
MUNICIPAL BONDS 1.5%
FLORIDA 0.1%
f Jacksonville Health Facilities Authority Hospital Revenue, Genesis Rehabilitation Hospital,
Refunding, Daily VRDN and Put, 3.65%, 5/01/21 ................................................ 285,000 285,000
f Martin County PCR, Florida Power and Light Co. Project, Refunding, Daily VRDN and Put,
3.65%, 7/15/22 ............................................................................... 3,800,000 3,800,000
f Orange County School Board COP, Series B, MBIA Insured, Daily VRDN and Put, 3.66%,
8/01/27 ...................................................................................... 2,540,000 2,540,000
f Pinellas County Health Facilities Authority Revenue, Pooled Hospital Loan Program,
Refunding, AMBAC Insured, Daily VRDN and Put, 3.67%, 12/01/15 ................................ 2,500,000 2,500,000
--------------
9,125,000
--------------
GEORGIA 0.0% g
f Athens-Clarke County Unified Government Development Authority Revenue, University of
Georgia Athletic Assn. Project, Daily VRDN and Put, 3.64%, 8/01/33 ........................... 400,000 400,000
--------------
LOUISIANA 0.1%
f Louisiana Public Facilities Authority Revenue, Kenner Hotel Ltd., Daily VRDN and Put,
3.63%, 12/01/15 .............................................................................. 3,600,000 3,600,000
--------------
MARYLAND 0.0% g
f Maryland State EDC Revenue, Multi-Modal, U.S. Pharmacopeial, AMBAC Insured,
Daily VRDN and Put, 3.65%, 7/01/36 ........................................................... 100,000 100,000
--------------
MASSACHUSETTS 0.1%
f Massachusetts State Health and Educational Facilities Authority Revenue, Capital
Assets Program,
Series D, MBIA Insured, Daily VRDN and Put, 3.63%, 1/01/35 ................................. 100,000 100,000
Series E, Daily VRDN and Put, 3.53%, 1/01/35 ............................................... 5,550,000 5,550,000
--------------
5,650,000
--------------
Annual Report | 167
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN 0.0% g
f Detroit Sewage Disposal Revenue, senior lien, Series B, FSA Insured, Daily VRDN and Put,
3.66%, 7/01/33 ............................................................................... $ 100,000 $ 100,000
f Michigan State University Revenues, Series A, Daily VRDN and Put, 3.66%, 8/15/32 ............. 300,000 300,000
--------------
400,000
--------------
MISSOURI 0.1%
f Missouri State Health and Educational Facilities Authority Educational Facilities Revenue,
St. Louis University, Series A, MBIA Insured, Daily VRDN and Put, 3.64%, 10/01/35 ............ 1,880,000 1,880,000
f Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
SSM Health Care Corp., Refunding, Series C-1, FSA Insured, Daily VRDN and Put, 3.66%,
6/01/19 .................................................................................... 1,600,000 1,600,000
--------------
3,480,000
--------------
NEVADA 0.1%
f Las Vegas Valley Water District GO, Water Improvement, Series C, Daily VRDN and Put, 3.66%,
6/01/36 ...................................................................................... 8,900,000 8,900,000
--------------
NEW YORK 0.7%
f Long Island Power Authority Electric System Revenue,
Sub Series 2, Daily VRDN and Put, 3.62%, 5/01/33 ........................................... 550,000 550,000
Sub Series 3B, Daily VRDN and Put, 3.63%, 5/01/33 .......................................... 10,000,000 10,000,000
f New York City GO,
Sub Series A-7, Daily VRDN and Put, 3.62%, 8/01/20 ......................................... 3,000,000 3,000,000
Sub Series H-4, Daily VRDN and Put, 3.62%, 3/01/34 ......................................... 5,585,000 5,585,000
f New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Fiscal 2003, Refunding, Sub Series C-3, Daily VRDN and Put, 3.62%, 6/15/18 ................. 10,800,000 10,800,000
Series C, FGIC Insured, Daily VRDN and Put, 3.63%, 6/15/23 ................................. 6,300,000 6,300,000
f New York City Transitional Finance Authority Revenue, Future Tax Secured, Series B,
Daily VRDN and Put, 3.60%, 2/01/31 ........................................................... 2,200,000 2,200,000
f Port Authority of New York and New Jersey Special Obligation Revenue, Versatile Structure,
Series 2, Daily VRDN and Put, 3.63%, 5/01/19 ................................................. 6,800,000 6,800,000
--------------
45,235,000
--------------
NORTH CAROLINA 0.1%
f North Carolina State GO, Series G, Weekly VRDN and Put, 3.47%, 5/01/21 ........................ 4,125,000 4,125,000
--------------
OHIO 0.0% g
f Ohio State Air Quality Development Authority Revenue, Pollution Control, Ohio Edison Co.,
Series C, Daily VRDN and Put, 3.63%, 6/01/23 ................................................. 1,700,000 1,700,000
--------------
PENNSYLVANIA 0.0% g
f Emmaus General Authority Revenue, FSA Insured, Weekly VRDN and Put, 3.52%,
12/01/28 .............................................,,...................................... 1,800,000 1,800,000
--------------
TENNESSEE 0.1%
f Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan Pool, Daily VRDN
and Put, 3.65%, 2/01/36 ...................................................................... 5,700,000 5,700,000
--------------
168 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TEXAS 0.1%
f Texas Municipal Gas Acquisition and Supply Corp. I Gas Supply Revenue, Senior Lien,
Series B, Quarterly VRDN and Put, 3.928%, 12/15/09 ........................................... $ 6,000,000 $ 6,009,060
--------------
TOTAL SHORT TERM INVESTMENTS (COST $96,215,000) ............................................... 96,224,060
--------------
TOTAL INVESTMENTS (COST $5,862,055,878) 98.8% ................................................. 6,280,878,012
OTHER ASSETS, LESS LIABILITIES 1.2% ........................................................... 78,396,540
--------------
NET ASSETS 100.0% ............................................................................. $6,359,274,552
==============
See Selected Portfolio Abbreviations on page 198.
a Security has been deemed illiquid because it may not be able to be sold
within seven days. At February 28, 2007, the aggregate value of these
securities was $9,255,605, representing 0.15% of net assets.
b See Note 6 regarding defaulted securities.
c The bond pays interest based upon the issuer's ability to pay, which may
be less than the stated interest rate.
d See Note 8 regarding other considerations - credit committee
participation.
e See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
f 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.
g Rounds to less than 0.1% of net assets.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 169
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 12.15 $ 12.18 $ 12.23 $ 12.03 $ 11.85
----------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.51 0.52 0.54 0.54 0.56
Net realized and unrealized gains (losses) ........ 0.08 (0.02) (0.05) 0.19 0.18
----------------------------------------------------------------
Total from investment operations ..................... 0.59 0.50 0.49 0.73 0.74
----------------------------------------------------------------
Less distributions from net investment income ........ (0.52) (0.53) (0.54) (0.53) (0.56)
----------------------------------------------------------------
Redemption fees ...................................... -- d -- d -- d -- --
----------------------------------------------------------------
Net asset value, end of year ......................... $ 12.22 $ 12.15 $ 12.18 $ 12.23 $ 12.03
================================================================
Total return c ....................................... 4.96% 4.17% 4.13% 6.27% 6.41%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $1,006,797 $ 892,122 $ 792,518 $ 786,938 $ 778,716
Ratios to average net assets:
Expenses .......................................... 0.64% 0.65% 0.65% 0.65% 0.65%
Net investment income ............................. 4.23% 4.28% 4.47% 4.31% 4.68%
Portfolio turnover rate .............................. 3.65% 8.11% 11.50% 8.95% 17.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
170 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 e 2003
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 12.22 $ 12.24 $ 12.29 $ 12.09 $ 11.90
----------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.45 0.46 0.47 0.48 0.49
Net realized and unrealized gains (losses) ........ 0.06 (0.02) (0.05) 0.19 0.19
----------------------------------------------------------------
Total from investment operations ..................... 0.51 0.44 0.42 0.67 0.68
----------------------------------------------------------------
Less distributions from net investment income ........ (0.45) (0.46) (0.47) (0.47) (0.49)
----------------------------------------------------------------
Redemption fees ...................................... -- d -- d -- d -- --
----------------------------------------------------------------
Net asset value, end of year ......................... $ 12.28 $ 12.22 $ 12.24 $ 12.29 $ 12.09
================================================================
Total return c ....................................... 4.28% 3.66% 3.55% 5.67% 5.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 72,203 $ 78,327 $ 83,208 $ 80,303 $ 67,994
Ratios to average net assets:
Expenses .......................................... 1.19% 1.20% 1.20% 1.20% 1.20%
Net investment income ............................. 3.68% 3.73% 3.92% 4.86% 4.13%
Portfolio turnover rate .............................. 3.65% 8.11% 11.50% 8.95% 17.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 171
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 12.24 $ 12.27 $ 12.32 $ 12.11 $ 11.93
----------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.45 0.46 0.48 0.48 0.50
Net realized and unrealized gains (losses) ........ 0.07 (0.03) (0.06) 0.20 0.18
----------------------------------------------------------------
Total from investment operations ..................... 0.52 0.43 0.42 0.68 0.68
----------------------------------------------------------------
Less distributions from net investment income ........ (0.45) (0.46) (0.47) (0.47) (0.50)
----------------------------------------------------------------
Redemption fees ...................................... -- d -- d -- d -- --
----------------------------------------------------------------
Net asset value, end of year ......................... $ 12.31 $ 12.24 $ 12.27 $ 12.32 $ 12.11
================================================================
Total return c ....................................... 4.35% 3.57% 3.53% 5.72% 5.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 158,706 $ 139,401 $ 117,356 $ 111,847 $ 100,410
Ratios to average net assets:
Expenses .......................................... 1.19% 1.20% 1.20% 1.22% 1.18%
Net investment income ............................. 3.68% 3.73% 3.92% 4.88% 4.15%
Portfolio turnover rate .............................. 3.65% 8.11% 11.50% 8.95% 17.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
172 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.9%
MUNICIPAL BONDS 98.9%
DELAWARE 1.2%
Delaware River and Bay Authority Revenue,
MBIA Insured, 5.00%, 1/01/27 ............................................................... $ 10,000,000 $ 10,535,500
Series A, AMBAC Insured, Pre-Refunded, 5.75%, 1/01/29 ...................................... 4,000,000 4,262,560
--------------
14,798,060
--------------
NEW JERSEY 73.3%
Atlantic County Improvement Authority Luxury Tax Revenue, Convention Center Project,
MBIA Insured, ETM, 7.40%, 7/01/16 ............................................................ 9,500,000 11,491,770
Bergen County Improvement Authority School District Revenue GO, Wyckoff Township Board of
Education Project, 5.00%, 4/01/32 ............................................................ 3,400,000 3,647,044
Bergen County Utilities Authority Water PCR, System, AMBAC Insured, 5.00%, 12/15/31 ........... 3,000,000 3,236,190
Berhards Township School District GO, MBIA Insured, 5.00%, 7/15/30 ............................ 10,038,000 10,804,100
Berkeley Township Board of Education GO, FSA Insured, 4.75%, 8/01/22 .......................... 1,975,000 2,044,718
Branchburg Township Board of Education GO, FGIC Insured, Pre-Refunded, 5.00%,
7/15/27 .................................................................................... 1,300,000 1,371,188
7/15/28 .................................................................................... 1,365,000 1,439,747
7/15/29 .................................................................................... 1,440,000 1,518,854
Camden County Improvement Authority Health System Revenue, Catholic Health East,
Refunding, Series B, AMBAC Insured, 5.00%, 11/15/28 .......................................... 11,600,000 11,975,260
Cape May County IPC Financing Authority Revenue, Atlantic City Electric Co., Refunding,
Series A, MBIA Insured, 6.80%, 3/01/21 ....................................................... 5,400,000 7,041,870
Carteret Board of Education COP, MBIA Insured, Pre-Refunded, 5.75%, 1/15/30 ................... 1,155,000 1,224,531
East Orange GO, Water Utility, AMBAC Insured, Pre-Refunded, 5.70%,
6/15/23 .................................................................................... 1,200,000 1,242,888
6/15/24 .................................................................................... 1,385,000 1,434,500
6/15/25 .................................................................................... 1,465,000 1,517,359
Egg Harbor Township School District GO,
FGIC Insured, Pre-Refunded, 5.125%, 7/15/24 ................................................ 4,870,000 5,202,621
MBIA Insured, Pre-Refunded, 5.00%, 4/01/29 ................................................. 3,195,000 3,487,151
MBIA Insured, Pre-Refunded, 5.00%, 4/01/30 ................................................. 3,027,000 3,303,789
Freehold Township Board of Education GO, MBIA Insured, Pre-Refunded, 5.00%, 2/15/30 ........... 1,500,000 1,574,865
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 1,472,268
Series B, 7.00%, 12/01/29 .................................................................. 1,250,000 1,340,225
Hammonton School District GO, FGIC Insured, Pre-Refunded, 5.00%,
8/01/26 .................................................................................... 1,155,000 1,228,712
8/01/27 .................................................................................... 1,215,000 1,292,541
Higher Education Student Assistance Authority Student Loan Revenue, Series A,
MBIA Insured, 6.15%, 6/01/19 ................................................................. 1,335,000 1,375,410
Hoboken GO, Parking Utility, Series A, FGIC Insured, 5.00%, 1/01/23 ........................... 4,315,000 4,585,248
Hoboken Parking Authority Parking Revenue, AMBAC Insured, Pre-Refunded, 5.30%,
5/01/27 ...................................................................................... 3,600,000 3,891,780
Hudson County Improvement Authority Solid Waste Systems Revenue, Koppers Site Project,
Series A, 6.125%, 1/01/29 .................................................................... 6,510,000 6,540,206
Jackson Township School District GO, FGIC Insured, Pre-Refunded, 5.00%, 4/15/25 ............... 3,000,000 3,188,610
Jersey City GO, Series A, FSA Insured, Pre-Refunded, 5.625%, 3/01/20 .......................... 1,000,000 1,065,300
Annual Report | 173
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
Lafayette Yard Community Development Corp. Revenue, Hotel/Conference Center Project,
Trenton Guaranteed, MBIA Insured, Pre-Refunded,
6.00%, 4/01/29 ............................................................................. $ 1,750,000 $ 1,885,695
5.80%, 4/01/35 ............................................................................. 2,520,000 2,700,860
Middlesex County COP, MBIA Insured,
5.00%, 8/01/31 ............................................................................. 3,250,000 3,390,628
zero cpn., 6/15/24 ......................................................................... 1,000,000 495,140
Middlesex County Improvement Authority Revenue, Administration Building Residential
Project, FNMA Insured,
5.25%, 7/01/21 ............................................................................. 750,000 795,998
5.35%, 7/01/34 ............................................................................. 1,575,000 1,666,870
Middletown Township GO, Board of Education, MBIA Insured, Pre-Refunded, 5.85%,
8/01/24 .................................................................................... 4,295,000 4,334,170
8/01/25 .................................................................................... 5,000 5,046
Monroe Township Municipal Utilities Authority Middlesex County Revenue, FGIC Insured,
Pre-Refunded, 5.00%, 2/01/26 ................................................................. 1,000,000 1,049,440
Mount Olive Township Board of Education GO, MBIA Insured, Pre-Refunded, 5.00%,
7/15/29 ...................................................................................... 7,875,000 8,544,926
New Jersey EDA, PCR, Jersey Central Power and Light, 7.10%, 7/01/15 ........................... 550,000 553,251
New Jersey EDA Heating and Cooling Revenue, Trigen-Trenton Project, Refunding, Series B,
6.20%, 12/01/07 .............................................................................. 445,000 447,087
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 5,330,350
New Jersey EDA Revenue,
Cigarette Tax, 5.50%, 6/15/24 .............................................................. 5,000,000 5,244,150
Hillcrest Health Services System Project, Refunding, AMBAC Insured, 5.375%,
1/01/16 ................................................................................... 2,500,000 2,583,650
Jewish Community Housing Corp. Metropolitan Project, 5.90%, 12/01/31 ....................... 5,110,000 5,431,010
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/23 .................... 3,100,000 3,315,233
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/27 .................... 5,000,000 5,337,300
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 .................... 12,500,000 13,326,875
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 .................... 13,750,000 14,614,600
Municipal Rehabilitation, Series A, AMBAC Insured, 5.00%, 4/01/28 .......................... 21,740,000 22,913,090
School Facilities Construction, Series A, AMBAC Insured, Pre-Refunded, 5.00%,
6/15/21 ................................................................................... 14,000,000 14,752,920
School Facilities Construction, Series C, MBIA Insured, 4.75%, 6/15/25 ..................... 16,500,000 16,987,575
School Facilities Construction, Series L, FSA Insured, 5.00%, 3/01/30 ...................... 15,500,000 16,540,050
School Facilities Construction, Series O, 5.125%, 3/01/28 .................................. 5,000,000 5,381,400
School Facilities Construction, Series P, 5.00%, 9/01/30 ................................... 5,250,000 5,589,728
School Facilities Construction, Series P, MBIA Insured, 5.00%, 9/01/30 ..................... 5,480,000 5,887,438
Transportation Project Sub Lease, Series A, FSA Insured, Pre-Refunded, 5.25%,
5/01/17 ................................................................................... 5,000,000 5,169,400
Transportation Project Sub Lease, Series A, FSA Insured, Pre-Refunded, 5.00%,
5/01/18 ................................................................................... 2,000,000 2,057,480
New Jersey EDA School Revenue, Blair Academy, 1995 Project, Series A, 5.85%, 9/01/16 .......... 1,640,000 1,643,001
New Jersey EDA State Lease Revenue, Liberty State Park Lease Rental, Refunding,
AMBAC Insured, 5.75%, 3/15/20 ................................................................ 4,605,000 4,658,971
174 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey EDA Water Facilities Revenue, Hackensack Water Co. Project, Refunding, Series A,
MBIA Insured, 5.80%, 3/01/24 ................................................................. $ 1,000,000 $ 1,031,180
New Jersey Health Care Facilities Financing Authority Department of Human Services Revenue,
Greystone Park Psychiatric Hospital, AMBAC Insured, 5.00%, 9/15/27 ........................... 5,000,000 5,347,050
New Jersey Health Care Facilities Financing Authority Revenue,
Atlantic City Medical Center, Refunding, 5.75%, 7/01/25 .................................... 5,000,000 5,338,850
Atlantic Health Systems, Series A, AMBAC Insured, 5.00%, 7/01/27 ........................... 7,500,000 7,674,075
Burdette Tomlin Memorial Hospital, 5.50%, 7/01/29 .......................................... 5,725,000 5,939,630
Cathedral Health Services, Refunding, MBIA Insured, 5.25%, 8/01/21 ......................... 5,000,000 5,170,400
Englewood Hospital, MBIA Insured, 5.00%, 8/01/31 ........................................... 9,275,000 9,716,954
Franciscan St. Mary's Hospital, ETM, 5.875%, 7/01/12 ....................................... 2,820,000 2,959,449
Hackensack University Medical Center, 6.00%, 1/01/34 ....................................... 10,000,000 10,612,000
Holy Name Hospital, 5.00%, 7/01/36 ......................................................... 5,000,000 5,184,450
Holy Name Hospital, Refunding, 6.00%, 7/01/25 .............................................. 3,000,000 3,080,280
Holy Name Hospital, Refunding, AMBAC Insured, 5.25%, 7/01/20 ............................... 3,000,000 3,071,610
Hunterdon Medical Center, Series A, 5.125%, 7/01/35 ........................................ 2,000,000 2,116,060
Hunterdon Medical Center, Series B, 5.00%, 7/01/36 ......................................... 7,135,000 7,526,069
Jersey City Medical Center, AMBAC Insured, 5.00%, 8/01/31 .................................. 7,000,000 7,277,060
JFK Medical Center/Hartwyck, Refunding, MBIA Insured, 5.00%, 7/01/25 ....................... 7,855,000 8,046,662
Medical Center at Princeton Obligation Group, AMBAC Insured, 5.00%, 7/01/28 ................ 6,785,000 6,948,790
Meridian Health Systems Obligation Group, FSA Insured, 5.375%, 7/01/24 ..................... 6,500,000 6,835,140
Meridian Health Systems Obligation Group, FSA Insured, 5.25%, 7/01/29 ...................... 20,000,000 20,889,200
Robert Wood Johnson University Hospital, 5.75%, 7/01/25 .................................... 5,000,000 5,336,750
Somerset Medical Center, 5.75%, 7/01/28 .................................................... 11,000,000 11,618,420
South Jersey Hospital, 5.00%, 7/01/36 ...................................................... 8,000,000 8,375,760
South Jersey Hospital, 5.00%, 7/01/46 ...................................................... 15,200,000 15,878,528
South Jersey Hospital, Pre-Refunded, 5.875%, 7/01/21 ....................................... 10,000,000 11,036,300
South Jersey Hospital, Pre-Refunded, 6.00%, 7/01/32 ........................................ 18,600,000 20,638,932
Southern Ocean County Hospital, FSA Insured, 5.00%, 7/01/27 ................................ 2,000,000 2,026,920
St Barnabas Health Care System, Series A, 5.00%, 7/01/29 ................................... 12,000,000 12,481,080
St. Joseph's Hospital and Medical Center, Refunding, Connie Lee Insured, 5.75%,
7/01/16 ................................................................................... 1,000,000 1,016,460
St. Joseph's Hospital and Medical Center, Refunding, Connie Lee Insured, 6.00%,
7/01/26 ................................................................................... 1,000,000 1,017,250
St. Peters University Hospital, Series A, 6.875%, 7/01/30 .................................. 1,500,000 1,643,070
New Jersey State Building Authority State Building Revenue, Refunding, 5.00%, 6/15/15 ......... 5,000,000 5,117,150
New Jersey State Educational Facilities Authority Revenue,
Capital Improvement Funding Project, Series A, FSA Insured, Pre-Refunded, 5.00%,
9/01/20 ................................................................................... 8,000,000 8,358,800
FGIC Insured, Pre-Refunded, 5.50%, 7/01/30 ................................................. 6,615,000 7,000,655
Kean University, Series B, MBIA Insured, 5.00%, 7/01/30 .................................... 5,240,000 5,682,308
Kean University, Series D, FGIC Insured, 5.00%, 7/01/33 .................................... 10,000,000 10,570,400
Montclair State University, Refunding, Series A, AMBAC Insured, 5.00%, 7/01/31 ............. 8,000,000 8,655,840
Montclair State University, Refunding, Series A, AMBAC Insured, 5.00%, 7/01/36 ............. 10,000,000 10,771,200
Montclair State University, Series F, FGIC Insured, Pre-Refunded, 5.00%, 7/01/31 ........... 5,000,000 5,271,500
Princeton University, Refunding, Series A, 5.00%, 7/01/30 .................................. 5,000,000 5,365,350
Princeton University, Refunding, Series D, 5.00%, 7/01/29 .................................. 1,000,000 1,070,080
Annual Report | 175
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey State Educational Facilities Authority Revenue, (continued)
Ramapo College of New Jersey, Series D, AMBAC Insured, Pre-Refunded, 5.00%,
7/01/25 ................................................................................... $ 1,000,000 $ 1,054,300
Ramapo College of New Jersey, Series D, AMBAC Insured, Pre-Refunded, 5.00%,
7/01/31 ................................................................................... 1,500,000 1,581,450
Ramapo College of New Jersey, Series D, MBIA Insured, Pre-Refunded, 5.00%,
7/01/36 ................................................................................... 6,745,000 7,419,500
Ramapo College of New Jersey, Series E, FGIC Insured, Pre-Refunded, 5.00%, 7/01/34 ......... 2,000,000 2,169,340
Richard Stockton College, Refunding, Series F, AMBAC Insured, 5.00%, 7/01/28 ............... 3,370,000 3,611,292
Richard Stockton College, Series F, MBIA Insured, 5.00%, 7/01/31 ........................... 5,395,000 5,802,376
Rowan University, Refunding, Series D, AMBAC Insured, 5.00%, 7/01/24 ....................... 1,755,000 1,884,519
Rowan University, Series C, FGIC Insured, 5.00%, 7/01/31 ................................... 2,000,000 2,101,100
Rowan University, Series G, MBIA Insured, 5.00%, 7/01/25 ................................... 1,470,000 1,590,511
Rowan University, Series G, MBIA Insured, 5.00%, 7/01/26 ................................... 1,000,000 1,081,170
Rowan University, Series K, FGIC Insured, 5.00%, 7/01/27 ................................... 1,000,000 1,054,810
Rowan University, Series K, FGIC Insured, 5.00%, 7/01/33 ................................... 1,000,000 1,051,860
Seton Hall University Project, Series G, AMBAC Insured, 5.00%, 7/01/26 ..................... 1,870,000 1,958,563
Stevens Institute of Technology, Series I, 5.00%, 7/01/18 .................................. 1,100,000 1,126,411
Stevens Institute of Technology, Series I, 5.00%, 7/01/28 .................................. 1,575,000 1,605,240
University of Medical Dentistry, Series C, AMBAC Insured, 5.125%, 12/01/29 ................. 2,700,000 2,791,368
New Jersey State Highway Authority Garden State Parkway General Revenue, ETM, 6.20%,
1/01/10 ...................................................................................... 5,000,000 5,237,650
New Jersey State Housing and Mortgage Finance Agency MFHR,
Series A1, FSA Insured, 6.35%, 11/01/31 .................................................... 2,000,000 2,097,260
Series B, FSA Insured, 6.25%, 11/01/26 ..................................................... 1,480,000 1,551,247
Series D, FSA Insured, 5.50%, 5/01/22 ...................................................... 845,000 875,276
Series E1, FSA Insured, 5.70%, 5/01/20 ..................................................... 2,790,000 2,916,889
Series E1, FSA Insured, 5.75%, 5/01/25 ..................................................... 1,295,000 1,352,589
New Jersey State Housing and Mortgage Finance Agency Revenue, Home Buyer,
Series CC, MBIA Insured, 5.875%, 10/01/31 .................................................. 1,355,000 1,400,013
Series U, MBIA Insured, 5.85%, 4/01/29 ..................................................... 4,275,000 4,365,416
New Jersey State Transportation Corp. COP, Federal Transportation Administration Grants,
Series A, AMBAC Insured, Pre-Refunded, 6.125%, 9/15/15 ....................................... 2,000,000 2,117,480
New Jersey State Transportation Trust Fund Authority Revenue,
Capital Appreciation, Transportation System, Series C, FSA Insured, zero cpn.,
12/15/33 .................................................................................. 10,000,000 3,242,900
Transportation System, Series B, MBIA Insured, Pre-Refunded, 5.00%, 12/15/21 ............... 10,000,000 10,595,400
Transportation System, Series D, FSA Insured, 5.00%, 6/15/20 ............................... 7,000,000 7,565,600
New Jersey State Turnpike Authority Turnpike Revenue,
Growth and Income Securities, Series B, AMBAC Insured, zero cpn. to 1/01/15,
5.15% thereafter, 1/01/35 ................................................................. 7,500,000 5,442,750
Series A, AMBAC Insured, 5.00%, 1/01/30 .................................................... 13,500,000 14,316,480
Series A, FGIC Insured, 5.00%, 1/01/27 ..................................................... 6,500,000 6,904,365
Series A, MBIA Insured, Pre-Refunded, 5.60%, 1/01/22 ....................................... 7,500,000 7,894,575
Series A, MBIA Insured, Pre-Refunded, 5.50%, 1/01/25 ....................................... 16,300,000 17,114,185
Series C, FSA Insured, 5.00%, 1/01/35 ...................................................... 22,675,000 24,230,959
176 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
Newark Housing Authority Port Authority Revenue, Newark Marine Terminal, MBIA Insured,
Pre-Refunded,
5.00%, 1/01/26 ............................................................................. $ 3,245,000 $ 3,503,237
5.50%, 1/01/27 ............................................................................. 3,240,000 3,594,780
5.50%, 1/01/28 ............................................................................. 2,000,000 2,219,000
5.00%, 1/01/34 ............................................................................. 29,155,000 31,475,155
5.00%, 1/01/37 ............................................................................. 3,965,000 4,280,535
North Hudson Sewer Authority New Jersey Sewer Revenue, Series C, MBIA Insured, 5.00%,
8/01/22 .................................................................................... 1,000,000 1,047,400
8/01/31 .................................................................................... 1,000,000 1,045,330
North Plainfield Board of Education GO, FSA Insured, Pre-Refunded, 4.875%, 8/15/25 ............ 1,020,000 1,071,673
Ocean County Board of Education GO, Cape May, FGIC Insured, Pre-Refunded, 5.00%,
4/01/21 .................................................................................... 2,155,000 2,265,767
4/01/22 .................................................................................... 2,142,000 2,252,099
Passaic County Improvement Authority Lease Revenue, Preakness Healthcare Center Project,
AMBAC Insured, 5.00%, 5/01/35 ................................................................ 8,045,000 8,565,190
Passaic County Improvement Authority Parking Facilities Revenue, Paterson Parking Deck
Project, Series A, FSA Insured, 5.00%, 4/15/35 ............................................... 1,375,000 1,464,485
Passaic Valley Sewer Commissioners GO, Sewer System, Refunding, Series E, AMBAC Insured,
5.75%, 12/01/22 .............................................................................. 8,925,000 9,460,768
Rutgers State University COP, AMBAC Insured, 5.00%, 1/01/34 ................................... 1,000,000 1,059,750
South Brunswick Township Board of Education GO, Refunding, Series AA, FGIC Insured,
5.50%, 8/01/24 ............................................................................... 1,720,000 1,731,404
South Jersey Transportation Authority Transportation System Revenue, AMBAC Insured, 5.00%,
11/01/29 ..................................................................................... 12,000,000 12,453,000
Tobacco Settlement Financing Corp. Revenue, Asset-Backed, Pre-Refunded, 6.00%,
6/01/37 ...................................................................................... 13,000,000 14,437,410
Union County Utilities Authority Solid Waste Revenue, Sub Lease, Ogden Martin, Refunding,
Series A, AMBAC Insured, 5.35%, 6/01/23 ...................................................... 2,535,000 2,603,673
University of Medicine and Dentistry COP,
AMBAC Insured, 5.00%, 4/15/32 .............................................................. 4,625,000 4,860,551
MBIA Insured, 5.00%, 6/15/29 ............................................................... 2,090,000 2,227,501
MBIA Insured, 5.00%, 6/15/36 ............................................................... 18,000,000 19,102,500
Series A, MBIA Insured, 5.00%, 9/01/22 ..................................................... 1,700,000 1,769,462
University of Medicine and Dentistry Revenue, Series A, AMBAC Insured, 5.00%,
12/01/24 ................................................................................... 2,500,000 2,651,925
12/01/31 ................................................................................... 29,395,000 31,041,708
Upper Freehold Regional School District GO, MBIA Insured, Pre-Refunded, 5.00%,
2/15/35 ...................................................................................... 8,730,000 9,628,666
Washington Township Board of Education GO, Mercer County, FGIC Insured, Pre-Refunded,
5.00%, 1/01/28 ............................................................................... 4,497,000 4,765,021
West Orange County Board of Education COP, MBIA Insured, Pre-Refunded, 5.625%,
10/01/29 ..................................................................................... 2,000,000 2,115,820
Woodbridge Township GO, FGIC Insured, 5.00%, 7/15/24 .......................................... 1,220,000 1,281,781
--------------
906,950,174
--------------
Annual Report | 177
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW YORK 4.8%
Port Authority of New York and New Jersey Revenue,
120th Series, MBIA Insured, 5.50%, 10/15/35 ................................................ $ 5,000,000 $ 5,094,000
121st Series, MBIA Insured, 5.375%, 10/15/35 ............................................... 3,000,000 3,057,450
Consolidated, 109th Series, FSA Insured, 5.375%, 7/15/27 ................................... 2,500,000 2,528,400
Consolidated, 125th Series, FSA Insured, 5.00%, 4/15/32 .................................... 23,950,000 25,447,354
Consolidated, 144th Series, 5.00%, 10/01/30 ................................................ 10,000,000 10,755,600
Consolidated, Refunding, 135th Series, XLCA Insured, 5.00%, 9/15/29 ........................ 3,900,000 4,173,780
Port Authority of New York and New Jersey Special Obligation Revenue, John F. Kennedy
International Air Terminal, MBIA Insured, 5.75%, 12/01/22 .................................... 8,000,000 8,262,880
--------------
59,319,464
--------------
PENNSYLVANIA 1.6%
Delaware River Port Authority Pennsylvania and New Jersey Revenue, FSA Insured, 5.75%,
1/01/22 .................................................................................... 8,500,000 8,976,425
1/01/26 .................................................................................... 10,000,000 10,552,200
--------------
19,528,625
--------------
U.S. TERRITORIES 18.0%
PUERTO RICO 17.0%
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ................................................. 13,655,000 14,492,188
Refunding, FSA Insured, 5.125%, 7/01/30 .................................................... 8,350,000 8,793,552
Series A, 5.00%, 7/01/29 ................................................................... 10,000,000 10,505,600
Series A, FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 ....................................... 3,000,000 3,203,130
Series A, Pre-Refunded, 5.00%, 7/01/27 ..................................................... 11,555,000 12,337,389
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
a Refunding, Series N, MBIA Insured, 5.25%, 7/01/32 .......................................... 10,000,000 11,924,500
Series B, Pre-Refunded, 6.00%, 7/01/39 ..................................................... 10,000,000 10,843,200
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................................... 5,000,000 5,428,650
Series D, Pre-Refunded, 5.25%, 7/01/38 ..................................................... 5,000,000 5,398,600
Puerto Rico Commonwealth Infrastructure Financing Authority Special Obligation, Series A,
ETM, 5.50%, 10/01/32 ......................................................................... 1,000,000 1,072,280
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue,
5.00%, 7/01/37 ............................................................................. 8,000,000 8,451,120
Series A, AMBAC Insured, Pre-Refunded, 5.00%, 7/01/28 ...................................... 13,000,000 13,279,240
Puerto Rico Electric Power Authority Power Revenue,
Series II, 5.25%, 7/01/31 .................................................................. 18,000,000 19,195,920
Series RR, FGIC Insured, 5.00%, 7/01/35 .................................................... 48,440,000 51,872,943
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 1,033,600
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ....................................................... 6,830,000 7,252,231
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................... 18,170,000 19,663,574
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series A,
MBIA Insured, Pre-Refunded, 5.00%, 8/01/29 ................................................... 5,000,000 5,286,850
--------------
210,034,567
--------------
178 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS 1.0%
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 ............................ $ 5,000,000 $ 5,303,600
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/15 ......................... 2,500,000 2,583,875
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ......................... 3,045,000 3,144,815
senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/22 ......................... 2,000,000 2,066,160
--------------
13,098,450
--------------
TOTAL U.S. TERRITORIES ........................................................................ 223,133,017
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,154,775,362) ............................................. 1,223,729,340
--------------
SHORT TERM INVESTMENTS 1.0%
MUNICIPAL BONDS 1.0%
NEW JERSEY 0.8%
b New Jersey EDA Revenue, School Facilities Construction, Sub Series R-3, Daily VRDN and Put,
3.58%, 9/01/31 ............................................................................... 605,000 605,000
b New Jersey Sports and Exposition Authority State Contract Revenue, Refunding, Series B-2,
MBIA Insured, Weekly VRDN and Put, 3.47%, 3/01/21 ............................................ 1,240,000 1,240,000
b New Jersey State Educational Facilities Authority Revenue, Princeton University, Series B,
Daily VRDN and Put, 3.62%, 7/01/21 ........................................................... 8,500,000 8,500,000
--------------
10,345,000
--------------
NEW YORK 0.1%
b Port Authority of New York and New Jersey Special Obligation Revenue, Versatile Structure,
Series 2, Daily VRDN and Put, 3.63%, 5/01/19 ................................................. 1,600,000 1,600,000
--------------
U.S. TERRITORIES 0.1%
PUERTO RICO 0.1%
b Puerto Rico Commonwealth Government Development Bank Revenue, Refunding,
MBIA Insured, Weekly VRDN and Put, 3.34%, 12/01/15 ........................................... 800,000 800,000
b Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 3.42%, 7/01/28 ................................. 200,000 200,000
--------------
TOTAL U.S. TERRITORIES ........................................................................ 1,000,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $12,945,000) ............................................... 12,945,000
--------------
TOTAL INVESTMENTS (COST $1,167,720,362) 99.9% ................................................. 1,236,674,340
OTHER ASSETS, LESS LIABILITIES 0.1% ........................................................... 1,031,213
--------------
NET ASSETS 100.0% ............................................................................. $1,237,705,553
==============
See Selected Portfolio Abbreviations on page 198.
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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 179
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN OREGON TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 11.89 $ 11.90 $ 11.95 $ 11.69 $ 11.52
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................... 0.48 0.50 0.52 0.54 0.53
Net realized and unrealized gains (losses) ............ 0.04 -- (0.04) 0.24 0.18
-----------------------------------------------------------------------
Total from investment operations ......................... 0.52 0.50 0.48 0.78 0.71
-----------------------------------------------------------------------
Less distributions from net investment income ............ (0.48) (0.51) (0.53) (0.52) (0.54)
-----------------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- --
-----------------------------------------------------------------------
Net asset value, end of year ............................. $ 11.93 $ 11.89 $ 11.90 $ 11.95 $ 11.69
=======================================================================
Total return c ........................................... 4.53% 4.28% 4.15% 6.87% 6.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $ 686,892 $ 625,326 $ 570,324 $ 554,871 $ 559,531
Ratios to average net assets:
Expenses .............................................. 0.65% 0.66% 0.65% 0.65% 0.65%
Net investment income ................................. 4.19% 4.20% 4.40% 4.62% 4.63%
Portfolio turnover rate .................................. 4.86% 4.96% 10.45% 4.82% 8.92%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
180 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND
-----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 12.00 $ 12.01 $ 12.06 $ 11.79 $ 11.61
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................... 0.43 0.44 0.46 0.48 0.48
Net realized and unrealized gains (losses) ............ 0.04 (0.01) (0.05) 0.25 0.18
-----------------------------------------------------------------------
Total from investment operations ......................... 0.47 0.43 0.41 0.73 0.66
-----------------------------------------------------------------------
Less distributions from net investment income ............ (0.42) (0.44) (0.46) (0.46) (0.48)
-----------------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- --
-----------------------------------------------------------------------
Net asset value, end of year ............................. $ 12.05 $ 12.00 $ 12.01 $ 12.06 $ 11.79
=======================================================================
Total return c ........................................... 3.99% 3.66% 3.55% 6.30% 5.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $ 91,743 $ 84,268 $ 75,266 $ 80,108 $ 75,491
Ratios to average net assets:
Expenses .............................................. 1.20% 1.21% 1.20% 1.22% 1.17%
Net investment income ................................. 3.64% 3.65% 3.85% 4.05% 4.11%
Portfolio turnover rate .................................. 4.86% 4.96% 10.45% 4.82% 8.92%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 181
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.3%
MUNICIPAL BONDS 97.3%
OREGON 81.9%
Bend Sewer Revenue, AMBAC Insured, Pre-Refunded, 5.375%, 10/01/20 ............................. $ 1,550,000 $ 1,640,350
Benton and Linn County School District No. 509J GO, Corvallis, FSA Insured, 5.00%,
6/01/22 ...................................................................................... 5,000,000 5,321,650
Benton County Hospital Facilities Authority Revenue, Samaritan Health Services Project,
Refunding,
5.20%, 10/01/17 ............................................................................. 4,000,000 4,109,920
5.125%, 10/01/28 ............................................................................ 4,500,000 4,603,995
Clackamas County Hospital Facility Authority Revenue,
Gross Willamette Falls Project, Refunding, 5.375%, 4/01/22 .................................. 2,125,000 2,221,815
Gross Willamette Falls Project, Refunding, 5.125%, 4/01/26 .................................. 1,000,000 1,016,150
Kaiser Permanente, Series A, ETM, 5.375%, 4/01/14 ........................................... 2,500,000 2,612,525
Willamette Falls Hospital Project, 6.00%, 4/01/19 ........................................... 1,000,000 1,035,630
Willamette View Inc. Project, Refunding, 6.10%, 11/01/12 .................................... 500,000 507,125
Willamette View Inc. Project, Refunding, 6.30%, 11/01/21 .................................... 1,500,000 1,525,845
Clackamas County School District No. 7J Lake Oswego GO,
MBIA Insured, Pre-Refunded, 5.00%, 6/01/26 .................................................. 5,000,000 5,266,600
Refunding, FSA Insured, 5.25%, 6/01/25 ...................................................... 3,075,000 3,590,954
Clackamas County School District No. 86 GO, Canby, 5.25%, 6/15/20 ............................. 3,000,000 3,147,810
Clackamas County School District No. 108 GO, FSA Insured, Pre-Refunded, 5.00%,
6/15/25 ...................................................................................... 5,000,000 5,268,900
Clackamas Education Service District GO, AMBAC Insured, 4.125%, 6/01/36 ....................... 2,315,000 2,326,876
Coos County School District No. 13 GO, FSA Insured,
5.00%, 6/15/22 .............................................................................. 55,000 57,858
Pre-Refunded, 5.00%, 6/15/22 ................................................................ 2,465,000 2,624,535
Curry County School District No. 17-C Brookings Harbor GO, Pre-Refunded, 5.375%,
12/15/20 ..................................................................................... 2,750,000 2,918,823
Deschutes and Jefferson Counties School District No. 2J Redmond GO, Series A, FGIC Insured,
5.00%, 6/15/21 ............................................................................... 1,000,000 1,074,300
Deschutes County Administrative School District No. 1 GO, Series A, FSA Insured, Pre-Refunded,
5.125%, 6/15/21 .............................................................................. 3,500,000 3,705,415
Emerald Peoples Utility District Revenue, Refunding, Series A, FSA Insured, 5.25%,
11/01/21 ..................................................................................... 1,000,000 1,089,420
Gresham Stormwater Revenue, FGIC Insured, Pre-Refunded, 5.30%, 5/01/21 ........................ 1,190,000 1,265,958
High Desert Education Service District GO, AMBAC Insured, 4.50%, 6/01/30 ...................... 1,010,000 1,037,240
Hillsboro GO, AMBAC Insured, 5.00%, 6/01/29 ................................................... 5,360,000 5,724,962
Hillsboro Hospital Facility Authority Revenue, Hospital Tuality Healthcare Project,
Radian Insured, 5.375%,
10/01/26 .................................................................................... 2,000,000 2,121,520
10/01/31 .................................................................................... 2,000,000 2,124,100
Jackson County School District No. 4 GO, FSA Insured,
5.00%, 6/15/20 .............................................................................. 1,450,000 1,515,685
Pre-Refunded, 5.00%, 6/15/20 ................................................................ 550,000 579,579
Jackson County School District No. 6 Central Point GO, Refunding, FSA Insured, 4.75%,
6/15/20 ...................................................................................... 2,155,000 2,274,172
Jackson County School District No. 9 Eagle Point GO, Pre-Refunded, 5.00%,
6/15/20 ..................................................................................... 1,680,000 1,770,350
6/15/21 ..................................................................................... 1,500,000 1,580,670
182 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Klamath Falls Intercommunity Hospital Authority Revenue, Merle West Medical Center Project,
Pre-Refunded, 6.25%, 9/01/31 ................................................................ $ 3,290,000 $ 3,728,425
Refunding, 6.25%, 9/01/31 ................................................................... 1,960,000 2,144,534
Refunding, Assured Guaranty, 5.00%, 9/01/36 ................................................. 5,000,000 5,346,700
Lane County School District No. 4J Eugene GO, FSA Insured, 4.75%, 7/01/22 ..................... 5,150,000 5,358,317
Lane and Douglas Counties School District No. 45J3 GO, South Lane District, Refunding,
FSA Insured, 4.75%, 6/15/25 .................................................................. 3,510,000 3,649,171
Lane County School District No. 19 Springfield GO, FSA Insured, zero cpn.,
6/15/27 ..................................................................................... 5,580,000 2,223,630
6/15/28 ..................................................................................... 2,000,000 759,540
6/15/29 ..................................................................................... 1,925,000 695,734
Lane County School District No. 52 Bethel GO, Refunding, FSA Insured, 5.00%, 6/15/20 .......... 5,700,000 6,037,953
Linn County Community School District No. 9 GO,
Lebanon, FGIC Insured, Pre-Refunded, 5.55%, 6/15/21 ......................................... 1,155,000 1,277,060
Lebanon, FGIC Insured, Pre-Refunded, 5.60%, 6/15/30 ......................................... 9,495,000 10,524,828
MBIA Insured, Pre-Refunded, 5.375%, 6/15/30 ................................................. 5,000,000 5,268,650
Linn County School District No. 55 GO, Sweet Home, FSA Insured, Pre-Refunded, 5.00%,
6/15/29 ...................................................................................... 1,000,000 1,053,780
Marion County Housing Authority Revenue, Elliott Residence Project, GNMA Secured, 7.50%,
10/20/25 ..................................................................................... 1,105,000 1,161,521
Medford Hospital Facilities Authority Revenue, Asante Health System,
Refunding, Series A, MBIA Insured, 5.00%, 8/15/18 ........................................... 2,570,000 2,631,038
Refunding, Series A, MBIA Insured, 5.00%, 8/15/24 ........................................... 1,715,000 1,754,925
Series A, MBIA Insured, Pre-Refunded, 5.00%, 8/15/24 ........................................ 3,585,000 3,690,040
Multnomah County Educational Facilities Revenue, University of Portland Project, 6.00%,
4/01/25 ...................................................................................... 2,000,000 2,118,640
Multnomah County GO, Refunding, AMBAC Insured, 4.50%, 8/01/19 ................................. 1,500,000 1,559,310
Multnomah County School District No. 7 Reynolds GO, Series 2005, MBIA Insured, 5.00%,
6/01/35 ...................................................................................... 3,220,000 3,320,657
Multnomah County School District No. 40 GO, FSA Insured, Pre-Refunded, 5.00%,
12/01/20 ..................................................................................... 3,490,000 3,656,822
Multnomah-Clackamas Counties Centennial School District No. 28-302 GO, FGIC Insured,
Pre-Refunded, 5.00%, 6/15/21 ................................................................. 5,000,000 5,268,900
Multnomah-Clackamas Counties Centennial School District No. 28-JT GO, Capital Appreciation,
AMBAC Insured, zero cpn., 6/01/16 ............................................................ 2,260,000 1,552,597
Northern Wasco County Peoples Utilities District Hydroelectric Revenue, McNary Dam Fishway
Project, 5.20%, 12/01/24 ..................................................................... 5,000,000 5,002,200
Oak Lodge Water District GO, AMBAC Insured,
7.40%, 12/01/08 ............................................................................. 215,000 216,909
7.50%, 12/01/09 ............................................................................. 215,000 216,954
Oregon Coast Community College District GO, MBIA Insured, 5.00%, 6/15/23 ...................... 3,745,000 4,010,970
Oregon Health and Science University Revenue,
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 7/01/21 ................. 11,480,000 6,321,118
Series A, MBIA Insured, 5.00%, 7/01/32 ...................................................... 24,750,000 26,049,127
Oregon State Department of Administrative Services COP,
FSA Insured, 4.625%, 5/01/30 ................................................................ 7,795,000 8,041,322
Refunding, Series A, AMBAC Insured, 5.00%, 5/01/24 .......................................... 10,000,000 10,331,500
Annual Report | 183
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Oregon State Department of Administrative Services COP, (continued)
Refunding, Series B, AMBAC Insured, 5.00%, 5/01/26 .......................................... $ 7,500,000 $ 7,891,950
Refunding, Series B, FSA Insured, 5.00%, 5/01/21 ............................................ 1,930,000 2,066,335
Series A, AMBAC Insured, Pre-Refunded, 6.00%, 5/01/26 ....................................... 2,000,000 2,157,240
Series A, FSA Insured, 5.00%, 5/01/23 ....................................................... 2,695,000 2,886,641
Series B, FGIC Insured, 5.00%, 11/01/30 ..................................................... 19,100,000 20,499,266
Oregon State Department of Administrative Services Lottery Revenue, Oregon Administration,
Lottery, Series A, FSA Insured, 5.00%,
4/01/25 ..................................................................................... 5,000,000 5,432,650
4/01/27 ..................................................................................... 4,000,000 4,335,720
Oregon State Department of Transportation Highway User Tax Revenue,
Refunding, Series A, 5.00%, 11/15/22 ........................................................ 1,200,000 1,289,424
Refunding, Series A, 5.00%, 11/15/23 ........................................................ 1,260,000 1,352,169
Refunding, Series A, 5.00%, 11/15/25 ........................................................ 1,295,000 1,386,168
Refunding, Series A, 5.00%, 11/15/29 ........................................................ 3,330,000 3,550,746
Series A, 5.125%, 11/15/23 .................................................................. 5,000,000 5,351,950
Series A, 5.125%, 11/15/26 .................................................................. 14,200,000 15,192,012
Series A, 5.00%, 11/15/28 ................................................................... 5,000,000 5,334,900
Series A, 5.00%, 11/15/31 ................................................................... 5,540,000 5,976,663
a Oregon State EDR, Georgia-Pacific Corp. Project, Series CLVII, 6.35%, 8/01/25 ................. 7,910,000 7,979,766
Oregon State Facilities Authority Revenue,
Senior College in Student Housing Project, Series A, XLCA Insured, 5.00%, 7/01/35 ........... 3,660,000 3,890,068
Willamette University Projects, Refunding, Series A, FGIC Insured, 5.00%, 10/01/35 .......... 5,210,000 5,588,715
Oregon State GO,
Board of Higher Education, Baccalaureate, Series A, 5.00%, 8/01/27 .......................... 6,000,000 6,156,000
Board of Higher Education, Series A, Pre-Refunded, 5.65%, 8/01/27 ........................... 4,440,000 4,520,719
Board of Higher Education, Series C, Pre-Refunded, 5.65%, 8/01/27 ........................... 1,460,000 1,486,543
Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/15 ............................ 910,000 915,433
Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/21 ............................ 455,000 457,798
Elderly and Disabled Housing Authority, Series A, 5.375%, 8/01/28 ........................... 1,435,000 1,459,567
Elderly and Disabled Housing Authority, Series B, 6.10%, 8/01/17 ............................ 1,410,000 1,420,434
Elderly and Disabled Housing Authority, Series B, 6.25%, 8/01/23 ............................ 2,015,000 2,029,085
Elderly and Disabled Housing Authority, Series C, 6.50%, 8/01/22 ............................ 335,000 335,787
State Board of Higher Education, Refunding, Series A, 5.00%, 8/01/30 ........................ 1,705,000 1,830,676
State Board of Higher Education, Refunding, Series A, 5.00%, 8/01/31 ........................ 2,000,000 2,093,960
State Board of Higher Education, Refunding, Series A, 5.00%, 8/01/35 ........................ 6,000,000 6,428,940
State Board of Higher Education, Refunding, Series E, 5.00%, 8/01/29 ........................ 7,745,000 8,247,108
State Board of Higher Education, Series A, 5.00%, 8/01/31 ................................... 2,695,000 2,906,611
State Board of Higher Education, Series A, 5.00%, 8/01/36 ................................... 2,715,000 2,923,783
State Board of Higher Education, Series A, Pre-Refunded, 5.60%, 8/01/25 ..................... 8,000,000 8,434,880
State Board of Higher Education, Series A, Pre-Refunded, 5.50%, 8/01/29 ..................... 2,000,000 2,104,160
Veteran's Welfare, Series 76-A, 6.05%, 10/01/28 ............................................. 740,000 756,043
Veteran's Welfare, Series 77, 5.30%, 10/01/29 ............................................... 1,835,000 1,871,113
Veteran's Welfare, Series A, 5.70%, 10/01/32 ................................................ 2,480,000 2,509,413
184 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Oregon State Health Housing Educational and Cultural Facilities Authority Revenue,
Peacehealth, AMBAC Insured, 5.00%, 11/15/26 ................................................. $ 5,500,000 $ 5,793,150
Reed College Project, Series A, 5.75%, 7/01/32 .............................................. 10,735,000 11,462,726
Oregon State Housing and Community Services Department MFHR, Series B, 6.00%,
7/01/31 ...................................................................................... 5,000,000 5,154,350
Oregon State Housing and Community Services Department Mortgage Revenue, SFM Program,
Series A, 6.35%, 7/01/14 .................................................................... 520,000 533,385
Series A, 6.40%, 7/01/18 .................................................................... 265,000 265,859
Series A, 6.45%, 7/01/26 .................................................................... 660,000 662,211
Series C, 6.20%, 7/01/15 .................................................................... 550,000 553,460
Series C, 6.40%, 7/01/26 ................................................................. 310,000 311,042
Series D, 6.80%, 7/01/27 .................................................................... 480,000 494,683
Series H, FHA Insured, 5.75%, 7/01/30 ....................................................... 1,710,000 1,752,716
Polk Marion and Benton Counties School District No. 13J GO, FSA Insured, Pre-Refunded,
5.80%, 6/15/20 ............................................................................... 1,985,000 2,117,499
Port Astoria PCR, James River Project, Refunding, 6.55%, 2/01/15 .............................. 945,000 949,848
Port of Portland International Airport Revenue, Portland International Airport,
Refunding, Series D, FGIC Insured, 5.00%, 7/01/23 ........................................... 3,000,000 3,114,690
Series 7B, MBIA Insured, Pre-Refunded, 7.10%, 7/01/21 ....................................... 2,800,000 3,195,500
Series 12C, FGIC Insured, 5.00%, 7/01/18 .................................................... 1,500,000 1,546,125
Series A, AMBAC Insured, 5.50%, 7/01/24 ..................................................... 22,000,000 23,049,180
Port St. Helens PCR, Portland General Electric Co. Project, Series A, 5.25%, 8/01/14 .......... 3,600,000 3,667,752
Portland Community College District GO, Series B, Pre-Refunded, 5.00%,
6/01/20 ..................................................................................... 7,185,000 7,562,356
6/01/21 ..................................................................................... 6,290,000 6,620,351
Portland GO,
Central City Streetcar Project, Series A, 4.75%, 4/01/21 .................................... 3,600,000 3,661,668
Limited Tax, Series A, 5.00%, 4/01/18 ....................................................... 1,000,000 1,014,570
Limited Tax, Series A, 5.00%, 6/01/24 ....................................................... 10,000,000 10,526,300
Limited Tax, Series A, MBIA Insured, 5.125%, 6/01/30 ........................................ 6,315,000 6,690,679
Limited Tax, Series B, zero cpn., 6/01/21 ................................................... 1,000,000 549,460
Portland Housing Authority MFR,
Berry Ridge Project, 6.30%, 5/01/29 ......................................................... 1,500,000 1,505,805
Housing, Lovejoy Station Apartments Project, MBIA Insured, 6.00%, 7/01/33 ................... 2,000,000 2,088,580
Portland MFR,
Civic Stadium Housing Project, Series A, 6.00%, 3/01/17 ..................................... 1,000,000 1,009,440
Housing Garden Park Estates Project, Series A, GNMA Secured, 5.875%, 3/20/37 ................ 3,175,000 3,305,270
Portland River District Urban Renewal and Redevelopment Revenue, Series A, AMBAC Insured,
5.00%, 6/15/21 ............................................................................... 3,000,000 3,195,780
Portland Sewer System Revenue,
first lien, Series A, FSA Insured, 5.00%, 10/01/24 .......................................... 6,235,000 6,668,083
second lien, Refunding, Series A, FSA Insured, 5.00%, 6/01/23 ............................... 2,500,000 2,649,425
second lien, Series B, MBIA Insured, 5.00%, 6/15/28 ......................................... 5,105,000 5,501,250
Annual Report | 185
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Portland Urban Renewal and Redevelopment Revenue, Interstate Corridor, Refunding, Series A,
FGIC Insured, 5.00%,
6/15/23 ..................................................................................... $ 2,030,000 $ 2,183,590
6/15/24 ..................................................................................... 1,295,000 1,392,034
6/15/25 ..................................................................................... 2,385,000 2,561,967
Portland Urban Renewal and Redevelopment Tax Allocation, Convention Center, Series A,
AMBAC Insured, 5.50%, 6/15/20 ................................................................ 3,000,000 3,189,750
Portland Water System Revenue, MBIA Insured, 4.50%,
10/01/27 .................................................................................... 3,725,000 3,835,930
10/01/28 .................................................................................... 3,895,000 3,973,874
Redmond GO, Series C, MBIA Insured, 5.00%, 6/01/33 ............................................ 1,260,000 1,333,168
Salem Hospital Facility Authority Revenue, Salem Hospital Project, Series A, 5.00%,
8/15/27 ..................................................................................... 7,500,000 7,939,650
8/15/36 ..................................................................................... 25,000,000 26,306,250
Salem-Keizer School District No. 24J GO, Pre-Refunded, 5.00%, 6/01/19 ......................... 9,500,000 9,783,100
Southwestern Community College District GO, MBIA Insured, 5.00%, 6/01/28 ...................... 1,100,000 1,176,329
Sunrise Water Authority Water Revenue, sub. lien,
Series B, XLCA Insured, 5.00%, 9/01/25 ...................................................... 1,160,000 1,239,356
XLCA Insured, 5.00%, 3/01/25 ................................................................ 1,660,000 1,762,057
Tillamook and Yamhill Counties School District No. 101, Nestucca Valley, FSA Insured, 5.00%,
6/15/25 ...................................................................................... 1,765,000 1,895,963
Tri-County Metropolitan Transportation District Revenue, Limited Obligation, Airport Light
Rail,
Series 1, Pre-Refunded, 5.65%, 6/01/29 ....................................................... 14,080,000 14,824,691
Washington and Clackamas Counties School District No. 23 J Tigard GO,
MBIA Insured, Pre-Refunded, 5.00%, 6/15/22 .................................................. 7,000,000 7,453,040
Refunding, MBIA Insured, 5.00%, 6/15/20 ..................................................... 6,260,000 7,009,447
Refunding, MBIA Insured, 5.00%, 6/15/22 ..................................................... 6,905,000 7,798,231
Washington Clackamas and Yamhill Counties School District No. 88J GO, Sherwood, Series A,
MBIA Insured, zero cpn.,
6/15/27 ..................................................................................... 3,500,000 1,393,385
6/15/28 ..................................................................................... 2,960,000 1,124,030
12/15/31 .................................................................................... 3,515,000 1,124,308
Washington County Clean Water Services Sewer Revenue, senior lien, FGIC Insured, 5.00%,
10/01/19 ..................................................................................... 3,905,000 4,111,614
Washington County GO,
Obligations, Refunding, 5.00%, 6/01/24 ...................................................... 3,680,000 4,024,227
Obligations, Refunding, 4.375%, 6/01/26 ..................................................... 4,375,000 4,504,500
Pre-Refunded, 5.00%, 6/01/26 ................................................................ 10,000,000 10,525,200
Washington County School District No. 48J Beaverton GO, Pre-Refunded, 5.00%, 6/01/22 .......... 4,155,000 4,422,084
Washington County Unified Sewer Agency Revenue, senior lien, Refunding, Series A, 6.20%,
10/01/10 ..................................................................................... 470,000 471,001
Washington Multnomah and Yamhill Counties School District No. 1J Hillsboro GO, FSA Insured,
5.60%, 4/01/20 ............................................................................... 1,000,000 1,054,070
--------------
637,270,079
--------------
186 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 15.4%
PUERTO RICO 14.4%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds,
Refunding, 5.625%, 5/15/43 ................................................................... $ 10,000,000 $ 10,543,600
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.00%, 7/01/29 .............................................................................. 10,000,000 10,505,600
5.125%, 7/01/31 ............................................................................. 9,885,000 10,254,304
Pre-Refunded, 5.00%, 7/01/27 ................................................................ 10,000,000 10,677,100
Pre-Refunded, 5.125%, 7/01/31 ............................................................... 5,115,000 5,428,601
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
Pre-Refunded, 5.50%, 7/01/36 ................................................................. 13,000,000 14,786,070
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, Pre-Refunded, 5.375%, 7/01/36 ...................................................... 10,000,000 10,857,300
Puerto Rico Electric Power Authority Power Revenue,
Series II, 5.25%, 7/01/31 ................................................................... 12,000,000 12,797,280
Series II, FSA Insured, 5.125%, 7/01/26 ..................................................... 9,150,000 9,785,376
Series RR, FGIC Insured, 5.00%, 7/01/35 ..................................................... 10,000,000 10,708,700
Puerto Rico HFC Revenue, Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%,
12/01/26 ..................................................................................... 395,000 398,843
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
5.50%, 8/01/29 .............................................................................. 1,285,000 1,361,226
Pre-Refunded, 5.50%, 8/01/29 ................................................................ 3,715,000 4,027,952
------------
112,131,952
------------
VIRGIN ISLANDS 1.0%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/15 .................................................................................... 1,635,000 1,689,854
10/01/18 .................................................................................... 2,400,000 2,478,672
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/18 ..................................................................................... 2,500,000 2,521,750
7/01/21 ..................................................................................... 1,400,000 1,416,450
------------
8,106,726
------------
TOTAL U.S. TERRITORIES ........................................................................ 120,238,678
------------
TOTAL LONG TERM INVESTMENTS (COST $717,107,706) ............................................... 757,508,757
------------
SHORT TERM INVESTMENTS 1.7%
MUNICIPAL BONDS 1.7%
OREGON 1.2%
b Multnomah County Hospital Facilities Authority Revenue, Holladay Park Plaza Project, Refunding,
Daily VRDN and Put, 3.65%, 11/15/33 .......................................................... 1,800,000 1,800,000
b Oregon Health and Science University Revenue, Special Oshu Medical Group Project, Series A,
Weekly VRDN and Put, 3.52%, 7/01/33 .......................................................... 1,400,000 1,400,000
b Oregon State GO, Series 73F, Weekly VRDN and Put, 3.50%, 12/01/17 ............................. 4,300,000 4,300,000
b Oregon State Health Housing Educational and Cultural Facilities Authority Revenue, Guide Dogs
for the Blind, Series A, Weekly VRDN and Put, 3.68%, 7/01/25 ................................. 1,600,000 1,600,000
------------
9,100,000
------------
Annual Report | 187
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 0.5%
PUERTO RICO 0.5%
b Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured,
Weekly VRDN and Put, 3.34%, 12/01/15 ......................................................... $ 2,500,000 $ 2,500,000
b Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series A, AMBAC Insured, Weekly VRDN and Put, 3.42%, 7/01/28 ................................. 1,800,000 1,800,000
------------
TOTAL U.S. TERRITORIES ........................................................................ 4,300,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $13,400,000) ............................................... 13,400,000
------------
TOTAL INVESTMENTS (COST $730,507,706) 99.0% ................................................... 770,908,757
OTHER ASSETS, LESS LIABILITIES 1.0% ........................................................... 7,726,343
------------
NET ASSETS 100.0% ............................................................................. $778,635,100
============
See Selected Portfolio Abbreviations on page 198.
a See Note 8 regarding other considerations.
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.
188 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS A 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.44 $ 10.48 $ 10.62 $ 10.51 $ 10.29
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.44 0.46 0.47 0.47 0.50
Net realized and unrealized gains (losses) .. 0.04 (0.04) (0.15) 0.11 0.22
-------------------------------------------------------------
Total from investment operations ............... 0.48 0.42 0.32 0.58 0.72
-------------------------------------------------------------
Less distributions from net investment income .. (0.45) (0.46) (0.46) (0.47) (0.50)
-------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................... $ 10.47 $ 10.44 $ 10.48 $ 10.62 $ 10.51
=============================================================
Total return c ................................. 4.71% 4.08% 3.19% 5.66% 7.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 747,279 $ 718,293 $ 693,804 $ 732,998 $ 722,865
Ratios to average net assets:
Expenses .................................... 0.66% 0.66% 0.66% 0.66% 0.66%
Net investment income ....................... 4.26% 4.37% 4.52% 4.51% 4.82%
Portfolio turnover rate ........................ 6.99% 13.07% 7.48% 17.63% 6.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 189
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS B 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.47 $ 10.51 $ 10.65 $ 10.54 $ 10.31
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.39 0.40 0.41 0.42 0.44
Net realized and unrealized gains (losses) .. 0.04 (0.04) (0.14) 0.10 0.24
-------------------------------------------------------------
Total from investment operations ............... 0.43 0.36 0.27 0.52 0.68
-------------------------------------------------------------
Less distributions from net investment income .. (0.39) (0.40) (0.41) (0.41) (0.45)
-------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................... $ 10.51 $ 10.47 $ 10.51 $ 10.65 $ 10.54
=============================================================
Total return c ................................. 4.22% 3.51% 2.61% 5.06% 6.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 43,897 $ 47,623 $ 51,913 $ 50,112 $ 36,575
Ratios to average net assets:
Expenses .................................... 1.21% 1.21% 1.21% 1.21% 1.21%
Net investment income ....................... 3.71% 3.82% 3.97% 3.96% 4.27%
Portfolio turnover rate ........................ 6.99% 13.07% 7.48% 17.63% 6.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
190 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
CLASS C 2007 2006 2005 2004 e 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.51 $ 10.56 $ 10.69 $ 10.58 $ 10.35
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................... 0.39 0.40 0.42 0.42 0.45
Net realized and unrealized gains (losses) .. 0.04 (0.05) (0.15) 0.10 0.23
-------------------------------------------------------------
Total from investment operations ............... 0.43 0.35 0.27 0.52 0.68
-------------------------------------------------------------
Less distributions from net investment income .. (0.39) (0.40) (0.40) (0.41) (0.45)
-------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ................... $ 10.55 $ 10.51 $ 10.56 $ 10.69 $ 10.58
=============================================================
Total return c ................................. 4.19% 3.40% 2.69% 5.04% 6.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 100,495 $ 88,237 $ 79,551 $ 81,137 $ 74,605
Ratios to average net assets:
Expenses .................................... 1.21% 1.21% 1.21% 1.23% 1.19%
Net investment income ....................... 3.71% 3.82% 3.97% 3.94% 4.29%
Portfolio turnover rate ........................ 6.99% 13.07% 7.48% 17.63% 6.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e For the year ended February 29.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 191
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.0%
MUNICIPAL BONDS 99.0%
PENNSYLVANIA 92.0%
Allegheny County Airport Authority Airport Revenue, Pittsburgh International Airport, Refunding,
FGIC Insured, 5.75%, 1/01/18 .................................................................. $ 1,000,000 $ 1,054,320
Allegheny County Airport Revenue, Pittsburgh International Airport, Refunding, Series B,
MBIA Insured, 5.00%, 1/01/19 .................................................................. 6,000,000 6,122,460
Allegheny County COP, AMBAC Insured, 5.00%, 12/01/28 ........................................... 4,000,000 4,144,760
Allegheny County GO,
MBIA Insured, Pre-Refunded, 5.00%, 11/01/27 ................................................. 1,000,000 1,068,900
a Series C-60, FSA Insured, 5.00%, 11/01/32 ................................................... 4,650,000 5,037,392
Allegheny County Higher Education Building Authority University Revenue, Duquesne University,
Series A, XLCA Insured, 5.00%,
3/01/29 ..................................................................................... 5,000,000 5,374,400
3/01/33 ..................................................................................... 6,630,000 7,105,769
Allegheny County Hospital Development Authority Revenue,
Allegheny General Hospital Project, Series A, MBIA Insured, Pre-Refunded, 6.25%,
9/01/20 .................................................................................... 10,000,000 10,129,600
Health Center, Canterbury Place, Refunding, MBIA Insured, 5.375%, 12/01/21 .................. 4,500,000 4,646,520
Health System, Refunding, Series A, MBIA Insured, 6.50%, 11/15/30 ........................... 10,000,000 11,059,200
University of Pittsburgh Health Center, Refunding, Series A, MBIA Insured, 5.625%,
4/01/27 .................................................................................... 10,450,000 10,671,331
Allegheny County IDAR,
Environmental Improvement, USX Corp., Refunding, 6.10%, 1/15/18 ............................. 2,000,000 2,043,740
Environmental Improvement, USX Corp., Refunding, 5.50%, 12/01/29 ............................ 10,000,000 10,371,300
Environmental Improvement, USX Corp., Refunding, 5.60%, 9/01/30 ............................. 7,530,000 7,811,396
Refunding, Series A, MBIA Insured, 5.00%, 11/01/29 .......................................... 5,000,000 5,263,500
Refunding, Series B, MBIA Insured, 5.00%, 11/01/29 .......................................... 9,000,000 9,474,300
Allegheny County Port Authority Special Revenue, Transportation,
MBIA Insured, Pre-Refunded, 6.125%, 3/01/29 ................................................. 15,000,000 15,860,400
Refunding, FGIC Insured, 5.00%, 3/01/25 ..................................................... 13,250,000 13,882,157
Refunding, FGIC Insured, 5.00%, 3/01/29 ..................................................... 16,500,000 17,274,675
Allegheny County Residential Finance Authority Mortgage Revenue, SFM,
Refunding, Series DD-1, GNMA Secured, 5.35%, 11/01/19 ....................................... 265,000 271,153
Refunding, Series DD-2, GNMA Secured, 5.40%, 11/01/29 ....................................... 1,350,000 1,380,861
Series FF-2, GNMA Secured, 6.00%, 11/01/31 .................................................. 130,000 134,456
Series II-2, GNMA Secured, 5.90%, 11/01/32 .................................................. 910,000 949,321
Allegheny County Sanitation Authority Sewer Revenue, Refunding, Series A, MBIA Insured,
5.00%, 12/01/30 ............................................................................... 7,000,000 7,506,240
Allegheny Valley School District GO, MBIA Insured, 5.00%, 11/01/28 ............................. 1,550,000 1,656,547
Allentown Parking Authority Parking Revenue, FSA Insured, 5.00%, 11/15/35 ...................... 4,430,000 4,749,004
Armstrong County GO, Refunding, MBIA Insured, 5.40%, 6/01/31 ................................... 2,500,000 2,656,100
Beary Valley Joint Authority Water Revenue, FSA Insured, Pre-Refunded, 5.00%, 5/01/29 .......... 1,000,000 1,073,780
Bedford County GO, AMBAC Insured, 5.00%, 9/01/35 ............................................... 6,000,000 6,423,780
Bucks County IDAR, AMBAC Insured, 5.125%, 9/15/31 .............................................. 3,675,000 3,855,479
Butler Area School District GO, FSA Insured, Pre-Refunded, 5.00%, 4/01/31 ...................... 4,000,000 4,328,640
Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 ................... 3,100,000 3,211,197
Chichester School District GO, FSA Insured, 5.00%, 3/15/26 ..................................... 1,830,000 1,941,667
Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding,
5.40%, 7/01/07 .............................................................................. 540,000 541,955
5.55%, 7/01/09 .............................................................................. 2,365,000 2,419,797
192 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding, (continued)
5.60%, 7/01/10 .............................................................................. $ 600,000 $ 613,956
5.75%, 7/01/12 .............................................................................. 1,795,000 1,837,200
5.75%, 7/01/17 .............................................................................. 700,000 716,198
5.625%, 7/01/21 ............................................................................. 1,500,000 1,527,765
Council Rock School District GO, Series A, MBIA Insured, Pre-Refunded, 5.00%, 11/15/22 ......... 5,180,000 5,483,496
Cumberland County Municipal Authority College Revenue, Dickinson College, Series A,
AMBAC Insured, Pre-Refunded, 5.50%, 11/01/30 ................................................. 1,200,000 1,276,536
Dauphin County General Authority Health System Revenue, Pinnacle Health, MBIA Insured,
5.50%, 5/15/17 .............................................................................. 1,015,000 1,028,337
Pre-Refunded, 5.50%, 5/15/17 ................................................................ 985,000 998,376
Dauphin County General Authority Hospital Revenue, Hapsco-Western Hospital Project,
Refunding, Series A, MBIA Insured, 6.50%, 7/01/12 ........................................... 4,500,000 4,503,915
Series B, MBIA Insured, ETM, 6.25%, 7/01/16 ................................................. 5,000,000 5,632,800
Deer Lakes School District GO, Series A, FSA Insured, Pre-Refunded, 5.00%, 1/15/23 ............. 1,000,000 1,011,890
Delaware County Authority College Revenue,
Cabrini College, Radian Insured, Pre-Refunded, 5.875%, 7/01/29 .............................. 5,245,000 5,508,247
Cabrini College, Refunding, Radian Insured, 5.875%, 7/01/29 ................................. 1,140,000 1,186,877
Eastern College, Series C, 5.625%, 10/01/28 ................................................. 2,210,000 2,243,393
Haverford College, 5.75%, 11/15/29 .......................................................... 3,500,000 3,758,405
Haverford College, 6.00%, 11/15/30 .......................................................... 1,750,000 1,894,760
Delaware County Authority Hospital Revenue, Crozer Keystone Obligation, Group A, 5.00%,
12/15/31 ...................................................................................... 5,000,000 5,187,650
Delaware County Authority Revenue,
Dunwoody Village Project, Pre-Refunded, 6.25%, 4/01/30 ...................................... 1,800,000 1,887,786
Health Facilities, Mercy Health Corp. Project, ETM, 6.00%, 12/15/26 ......................... 10,800,000 11,106,504
Delaware County IDAR, Philadelphia Suburban Water Co. Project, FGIC Insured, 6.00%,
6/01/29 ....................................................................................... 2,000,000 2,106,980
Delaware County University Authority Revenue, Villanova University, Series A, MBIA Insured,
5.00%, 12/01/28 ............................................................................... 3,000,000 3,080,790
Delaware Valley Regional Finance Authority Local Government Revenue, Series B,
AMBAC Insured, 5.60%, 7/01/17 ................................................................. 5,000,000 5,661,750
Erie County Hospital Authority Revenue, Hamot Health Foundation, CIFG Insured, 5.00%,
11/01/35 ...................................................................................... 6,000,000 6,403,740
Erie County IDA Environmental Improvement Revenue, International Paper Co. Project,
Refunding, Series B, 6.00%, 9/01/16 ........................................................... 600,000 632,898
Erie GO, Series E, FGIC Insured, 5.25%, 11/15/25 ............................................... 5,000,000 5,304,350
Erie School District GO, AMBAC Insured, Pre-Refunded, 5.80%, 9/01/29 ........................... 3,000,000 3,212,550
Greater Johnstown School District GO, Series C, MBIA Insured, 5.125%, 8/01/25 .................. 3,615,000 3,817,476
Hazleton Area School District GO, Series B, FGIC Insured, 5.00%, 3/01/23 ....................... 4,455,000 4,505,965
Hazleton Health Services Authority Hospital Revenue, Hazleton General Hospital, 5.50%,
7/01/27 ....................................................................................... 1,500,000 1,502,130
Indiana County IDAR, Indiana University of Pennsylvania, Refunding, AMBAC Insured, 5.00%,
11/01/29 ...................................................................................... 1,250,000 1,335,925
Johnstown RDA Sewer Revenue, Series A, FSA Insured, 5.00%, 8/15/34 ............................. 1,825,000 1,981,822
Lancaster County Hospital Authority Revenue, Health Center,
Masonic Homes Project, 5.00%, 11/01/31 ...................................................... 3,000,000 3,161,910
Willow Valley Retirement Project, 5.875%, 6/01/21 ........................................... 1,000,000 1,057,140
Annual Report | 193
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Latrobe IDAR, St. Vincent College Project, 5.70%, 5/01/31 ...................................... $ 1,500,000 $ 1,596,915
Lehigh County General Purpose Authority Revenues,
Good Shepherd Rehabilitation Hospital, Refunding, AMBAC Insured, 5.25%, 11/15/27 ............ 5,000,000 5,138,650
Lehigh Valley Hospital, Health Network, Series A, MBIA Insured, 5.00%, 7/01/28 .............. 4,000,000 4,081,480
Lehigh Valley Hospital, Health Network, Series B, FSA Insured, 5.25%, 7/01/19 ............... 2,750,000 2,939,860
Lower Merion Township School District GO, Refunding, 4.375%, 5/15/18 ........................... 1,000,000 1,023,130
Luzerne County GO, Series D, FGIC Insured, Pre-Refunded, 5.00%, 11/15/26 ....................... 2,000,000 2,094,540
Lycoming County Authority College Revenue, Pennsylvania College of Technology,
AMBAC Insured, 5.25%, 5/01/32 ............................................................... 5,030,000 5,327,223
Refunding, AMBAC Insured, 5.35%, 7/01/26 .................................................... 2,400,000 2,528,424
Mercer County GO, FGIC Insured, 5.00%, 10/01/31 ................................................ 2,000,000 2,085,300
Mercer County IDA Water Facilities Revenue, MBIA Insured, 6.00%, 7/01/30 ....................... 5,000,000 5,314,300
Montgomery County GO, 5.00%, 9/15/22 ........................................................... 3,335,000 3,512,756
Montgomery County Higher Education and Health Authority Revenue, Faulkeways at Gwynedd
Project, Pre-Refunded, 6.75%,
11/15/24 .................................................................................... 400,000 434,932
11/15/30 .................................................................................... 1,000,000 1,087,330
Montgomery County IDA Retirement Community Revenue,
Acts Retirement Communities, Refunding, Series B, 5.00%, 11/15/22 ........................... 2,000,000 2,113,160
Adult Community Total Services Retirement-Life Communities Inc., 5.25%, 11/15/28 ............ 5,000,000 5,100,000
Mount Pleasant Business District Authority Hospital Revenue, Frick Hospital, Pre-Refunded,
5.70%, 12/01/13 ............................................................................. 1,205,000 1,246,500
5.75%, 12/01/17 ............................................................................. 500,000 517,405
5.75%, 12/01/27 ............................................................................. 1,600,000 1,655,696
Muhlenberg School District GO, Series AA, FGIC Insured,
5.00%, 9/01/22 .............................................................................. 1,390,000 1,464,184
Pre-Refunded, 6.00%, 9/01/23 ................................................................ 4,000,000 4,309,400
New Wilmington Municipal Authority College Revenue, Westminster College, 5.35%,
3/01/28 ....................................................................................... 2,250,000 2,270,880
Norristown Area School District GO, FGIC Insured, Pre-Refunded, 5.00%, 9/01/27 ................. 5,000,000 5,360,150
Northampton Boro Municipal Authority Water Revenue, MBIA Insured, 5.00%, 5/15/34 ............... 2,400,000 2,548,632
Norwin School District GO,
FGIC Insured, Pre-Refunded, 6.00%, 4/01/30 .................................................. 5,000,000 5,324,950
FSA Insured, 5.00%, 4/01/35 ................................................................. 3,000,000 3,223,920
Series A, MBIA Insured, 5.00%, 4/01/30 ...................................................... 1,000,000 1,038,730
Series B, MBIA Insured, 5.00%, 4/01/31 ...................................................... 6,390,000 6,578,441
Pennsbury School District GO, FGIC Insured, Pre-Refunded, 5.00%, 1/15/22 ....................... 2,835,000 2,983,015
Pennsylvania Economic Development Financing Authority Revenue, Lincoln University, Series A,
FGIC Insured, 5.00%, 6/01/33 .................................................................. 3,325,000 3,534,143
Pennsylvania HFAR,
Future Income Growth Securities, SFM, Series 64, zero cpn. to 10/01/08, 5.25% thereafter,
4/01/30 .................................................................................... 3,050,000 2,841,685
SFM, Refunding, Series 63A, zero cpn., 4/01/30 .............................................. 10,885,000 3,165,576
SFM, Refunding, Series 72A, 5.25%, 4/01/21 .................................................. 7,000,000 7,231,140
Pennsylvania State Higher Educational Facilities Authority College and University Revenues,
Allegheny College, Series B, 6.125%, 11/01/13 ............................................... 90,000 90,127
Drexel University, MBIA Insured, 5.75%, 5/01/22 ............................................. 3,095,000 3,166,309
Drexel University, MBIA Insured, Pre-Refunded, 5.75%, 5/01/22 ............................... 905,000 925,978
Marywood University Project, MBIA Insured, Pre-Refunded, 5.65%, 6/01/25 ..................... 2,500,000 2,653,625
194 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
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 $ 17,364,140
Pennsylvania State Higher Educational Facilities Authority Revenue,
Bryn Mawr College, AMBAC Insured, 5.125%, 12/01/29 .......................................... 1,500,000 1,562,295
Drexel University, Series A, 5.00%, 5/01/20 ................................................. 1,485,000 1,561,730
Drexel University, Series A, 5.20%, 5/01/29 ................................................. 750,000 795,503
Scranton University, Refunding, Series A, XLCA Insured, 5.00%, 11/01/35 ..................... 5,000,000 5,352,200
State System of Higher Education, Series R, FSA Insured, 5.00%, 6/15/24 ..................... 3,140,000 3,245,567
Temple University, First Series, MBIA Insured, Pre-Refunded, 5.00%, 7/15/31 ................. 2,500,000 2,658,250
Temple University, Refunding, MBIA Insured, 5.00%, 4/01/28 .................................. 5,000,000 5,392,950
Temple University, Refunding, MBIA Insured, 5.00%, 4/01/33 .................................. 10,000,000 10,762,200
Trustees University of Pennsylvania, Refunding, Series C, 5.00%, 7/15/38 .................... 5,000,000 5,315,600
University Sciences Philadelphia, Refunding, Series A, XLCA Insured, 5.00%, 11/01/36 ........ 8,315,000 8,852,648
Widener University, 5.00%, 7/15/31 .......................................................... 500,000 520,415
Pennsylvania State Public School Building Authority Lease Revenue, School District Philadelphia
Project, Series A, FSA Insured, 5.00%, 6/01/31 ................................................ 5,000,000 5,383,000
Pennsylvania State Public School Building Authority Revenue,
Career Institute of Technology, FGIC Insured, 5.00%, 11/15/28 ............................... 1,000,000 1,072,840
Central Montgomery County Area, FGIC Insured, 5.00%, 5/15/24 ................................ 2,500,000 2,667,700
Lehigh Career and Technical Institution, MBIA Insured, Pre-Refunded, 5.00%, 10/01/31 ........ 1,000,000 1,057,210
Pennsylvania State Turnpike Commission Oil Franchise Tax Revenue, Series B, MBIA Insured,
5.00%, 12/01/24 ............................................................................. 1,655,000 1,758,851
Pre-Refunded, 5.00%, 12/01/31 ............................................................... 5,000,000 5,399,750
Pennsylvania State Turnpike Commission Revenue, AMBAC Insured, Pre-Refunded, 5.00%,
7/15/28 ..................................................................................... 10,000,000 10,633,000
7/15/31 ..................................................................................... 10,000,000 10,633,000
Pennsylvania State Turnpike Commission Turnpike Revenue,
Series A, AMBAC Insured, 5.00%, 12/01/34 .................................................... 5,000,000 5,346,850
Series R, AMBAC Insured, 5.00%, 12/01/26 .................................................... 2,000,000 2,115,340
Series R, AMBAC Insured, 5.00%, 12/01/30 .................................................... 11,125,000 11,736,875
Pennsylvania State University Revenue, 5.00%, 9/01/35 .......................................... 1,000,000 1,068,410
Pennsylvania Turnpike Commission Oil Franchise Tax Revenue, Refunding, Series B,
AMBAC Insured, 5.00%, 12/01/27 ................................................................ 3,000,000 3,244,860
Philadelphia Authority for IDR,
Please Touch Museum Project, 5.25%, 9/01/36 ................................................. 4,710,000 4,976,633
Series B, AMBAC Insured, 5.25%, 7/01/31 ..................................................... 2,000,000 2,118,340
Philadelphia Gas Works Revenue, Twelfth Series B, MBIA Insured, ETM, 7.00%, 5/15/20 ............ 980,000 1,167,494
Philadelphia Hospitals and Higher Educational Facilities Authority Revenue, Temple University
Hospital, 5.875%, 11/15/23 .................................................................... 5,000,000 5,086,650
Philadelphia Housing Authority Capital Fund Program Revenue, Series A, FSA Insured, 5.00%,
12/01/21 ...................................................................................... 5,000,000 5,341,450
Philadelphia IDA Lease Revenue, Series B, FSA Insured, 5.125%, 10/01/26 ........................ 12,000,000 12,720,720
Philadelphia Parking Authority Parking Revenue, Airport, FSA Insured, 5.25%,
9/01/22 ..................................................................................... 3,250,000 3,403,140
9/01/29 ..................................................................................... 13,000,000 13,555,620
Philadelphia RDA Revenue, Neighborhood Transformation, Series C, FGIC Insured, 5.00%,
4/15/31 ....................................................................................... 14,565,000 15,492,208
Annual Report | 195
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Philadelphia School District GO,
Series B, AMBAC Insured, Pre-Refunded, 5.375%, 4/01/19 ...................................... $ 1,000,000 $ 1,001,260
Series C, MBIA Insured, Pre-Refunded, 5.75%, 3/01/29 ........................................ 8,000,000 8,473,920
Series D, FGIC Insured, 5.125%, 6/01/34 ..................................................... 5,000,000 5,369,700
Philadelphia Water and Wastewater Revenue, Series A,
FGIC Insured, 5.00%, 11/01/31 ............................................................... 7,515,000 7,903,300
FSA Insured, 5.00%, 7/01/28 ................................................................. 5,000,000 5,350,700
FSA Insured, 5.00%, 7/01/29 ................................................................. 11,645,000 12,453,279
FSA Insured, 5.00%, 7/01/35 ................................................................. 4,500,000 4,795,965
Pine-Richland School District GO, FSA Insured, 5.00%, 7/15/35 .................................. 12,485,000 13,355,080
Pittsburgh Public Parking Authority Parking Revenue, AMBAC Insured, Pre-Refunded, 6.00%,
12/01/24 ...................................................................................... 2,000,000 2,144,120
Pittsburgh Urban RDA Mortgage Revenue, Series C, GNMA Secured, 5.70%, 4/01/30 .................. 1,310,000 1,338,126
Pittsburgh Urban RDA Tax Allocation, 6.10%, 5/01/19 ............................................ 1,000,000 1,051,140
Pittsburgh Water and Sewer Authority Revenue, FGIC Insured, ETM, 7.25%, 9/01/14 ................ 1,015,000 1,143,357
Plum Boro School District GO, FGIC Insured, Pre-Refunded, 5.25%, 9/15/30 ....................... 8,870,000 9,464,911
a Pocono Mountain School District GO, Series C, FSA Insured, 5.00%, 9/01/34 ...................... 4,000,000 4,309,640
Reading School District GO, FSA Insured, 5.00%, 1/15/36 ........................................ 23,790,000 25,512,396
Sayre Health Care Facilities Authority Revenue, Guthrie Health, Series A, 5.875%,
12/01/31 ...................................................................................... 2,500,000 2,722,200
Seneca Valley School District GO, MBIA Insured, Pre-Refunded, 5.375%, 1/01/21 .................. 2,000,000 2,152,100
Southcentral General Authority Revenue, Wellspan Health Obligated, MBIA Insured,
ETM, 5.25%, 5/15/31 ......................................................................... 1,875,000 1,978,219
Pre-Refunded, 5.25%, 5/15/31 ................................................................ 8,125,000 8,702,281
Southeastern Pennsylvania Transportation Authority Special Revenue, FGIC Insured, 5.375%,
3/01/22 ....................................................................................... 3,000,000 3,060,000
Southern Lehigh School District GO, Series A, FGIC Insured, Pre-Refunded, 5.00%, 9/01/25 ....... 6,900,000 7,363,059
Southmoreland School District GO, MBIA Insured, 5.00%, 4/01/27 ................................. 5,025,000 5,386,499
State Public School Building Authority College Revenue, Westmoreland County Community
College, FGIC Insured, 5.25%, 10/15/22 ........................................................ 2,170,000 2,328,692
State Public School Building Authority School Revenue,
Daniel Boone School District Project, MBIA Insured, Pre-Refunded, 5.00%, 4/01/28 ............ 10,000,000 10,561,700
Northwestern School District Project, Series E, FGIC Insured, Pre-Refunded, 5.75%,
1/15/19 .................................................................................... 3,000,000 3,114,960
Philadelphia School District Project, FSA Insured, Pre-Refunded, 5.00%, 6/01/33 ............. 37,170,000 39,945,112
Susquehanna Area Regional Airport Authority Revenue, Series A, AMBAC Insured, 5.00%,
1/01/28 ....................................................................................... 2,000,000 2,081,760
Twin Valley School District GO, FSA Insured, 5.00%, 4/01/23 .................................... 2,915,000 3,133,042
University of Pittsburgh Revenue, Higher Education, Refunding, Series B, MBIA Insured,
5.00%, 6/01/21 ................................................................................ 10,000,000 10,227,400
Upper St. Clair Township School District GO,
FSA Insured, 5.00%, 7/15/28 ................................................................. 1,000,000 1,050,240
Pre-Refunded, 5.20%, 7/15/27 ................................................................ 3,500,000 3,520,265
Washington County Authority Revenue, Capital Projects and Equipment Program, Refunding,
AMBAC Insured, 6.15%, 12/01/29 ................................................................ 2,200,000 2,399,144
Washington County GO, Series A, AMBAC Insured, 5.125%, 9/01/27 ................................. 5,000,000 5,310,150
196 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
West Allegheny School District GO, Refunding, Series D, FGIC Insured, 4.75%,
9/01/19 ..................................................................................... $ 2,000,000 $ 2,079,140
9/01/20 ..................................................................................... 3,805,000 3,952,063
York County GO, MBIA Insured, 5.00%, 6/01/33 ................................................... 6,500,000 6,979,960
--------------
820,252,419
--------------
U.S. TERRITORIES 7.0%
PUERTO RICO 6.4%
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.00%, 7/01/29 .............................................................................. 4,000,000 4,202,240
5.00%, 7/01/33 .............................................................................. 30,000,000 31,301,700
Pre-Refunded, 5.00%, 7/01/27 ................................................................ 7,000,000 7,473,970
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, 5.00%,
7/01/37 ....................................................................................... 7,010,000 7,405,294
Puerto Rico PBA Guaranteed Revenue, Government Facilities, Series I, 5.00%, 7/01/36 ............ 5,950,000 6,235,540
--------------
56,618,744
--------------
VIRGIN ISLANDS 0.6%
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 ........... 5,000,000 5,303,600
--------------
TOTAL U.S. TERRITORIES ......................................................................... 61,922,344
--------------
TOTAL LONG TERM INVESTMENTS (COST $835,861,480) ................................................ 882,174,763
--------------
SHORT TERM INVESTMENTS 0.8%
MUNICIPAL BONDS 0.8%
PENNSYLVANIA 0.8%
b Emmaus General Authority Revenue, FSA Insured, Weekly VRDN and Put, 3.52%, 12/01/28 ............ 1,300,000 1,300,000
b Lehigh County General Purpose Authority Revenues, St. Lukes Hospital Project, Daily VRDN and
Put, 3.60%, 7/01/31 ........................................................................... 300,000 300,000
b Pennsylvania State Higher Educational Facilities Authority College and University Revenues,
Pennsylvania College of Optometry, Refunding, Weekly VRDN and Put, 3.67%, 3/01/26 ............. 900,000 900,000
b Pennsylvania State Turnpike Commission Turnpike Revenue, Series Q, Daily VRDN and Put,
3.64%, 6/01/27 ................................................................................ 1,500,000 1,500,000
b Upper Dauphin IDAR, United Church Christ Homes, Weekly VRDN and Put, 3.67%,
12/01/26 ...................................................................................... 200,000 200,000
b York General Authority Pooled Financing Revenue,
Sub Series 1996-B, AMBAC Insured, Weekly VRDN and Put, 3.67%, 9/01/26 ....................... 2,330,000 2,330,000
Sub Series A, AMBAC Insured, Weekly VRDN and Put, 3.67%, 9/01/26 ............................ 825,000 825,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $7,355,000) ................................................. 7,355,000
--------------
TOTAL INVESTMENTS (COST $843,216,480) 99.8% .................................................... 889,529,763
OTHER ASSETS, LESS LIABILITIES 0.2% ............................................................ 2,141,177
--------------
NET ASSETS 100.0% .............................................................................. $ 891,670,940
==============
See Selected Portfolio Abbreviations on page 198.
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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 197
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2007
SELECTED PORTFOLIO ABBREVIATIONS
1915 ACT - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
ACA - American Capital Access Holdings Inc.
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
BAN - Bond Anticipation Note
CDA - Community Development Authority/Agency
CDD - Community Development District
CDR - Community Development Revenue
CFD - Community Facilities District
CIFG - CDC IXIS Financial Guaranty
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 Inc.
GNMA - Government National Mortgage Association
GO - General Obligation
GP - Graduated Payment
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
ID - Improvement District
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority Revenue
IDB - Industrial Development Bond/Board
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
MAC - Municipal Assistance Corp.
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Security
MF - Multi-Family
MFH - Multi-Family Housing
MFHR - Multi-Family Housing 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
RAN - Revenue Anticipation Note
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
198 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2007
----------------------------------------------------------------------
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 .............................................. $ 940,244,114 $ 443,169,523 $ 338,030,270 $ 462,119,651
======================================================================
Value ............................................. $ 998,307,961 $ 470,575,650 $ 353,953,991 $ 485,544,515
Cash ............................................... -- 23,430 50,728 134,899
Receivables:
Capital shares sold ............................... 3,195,557 1,695,455 1,109,723 2,446,510
Interest .......................................... 10,578,075 6,495,533 3,836,842 5,178,949
----------------------------------------------------------------------
Total assets ................................ 1,012,081,593 478,790,068 358,951,284 493,304,873
----------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................... -- -- -- 4,599,791
Capital shares redeemed ........................... 1,617,887 570,533 499,509 603,202
Affiliates ........................................ 514,819 264,933 210,974 278,303
Distributions to shareholders ..................... 1,040,226 478,921 309,305 484,328
Funds advanced by Custodian ........................ 534,795 -- -- --
Accrued expenses and other liabilities ............. 86,706 55,323 50,487 77,687
----------------------------------------------------------------------
Total liabilities ........................... 3,794,433 1,369,710 1,070,275 6,043,311
----------------------------------------------------------------------
Net assets, at value ...................... $ 1,008,287,160 $ 477,420,358 $ 357,881,009 $ 487,261,562
======================================================================
Net assets consist of:
Paid-in capital .................................... $ 973,811,737 $ 456,313,541 $ 346,580,082 $ 465,046,809
Distribution in excess of net investment income .... (152,250) (326,051) (190,188) (217,232)
Net unrealized appreciation (depreciation) ......... 58,063,847 27,406,127 15,923,721 23,424,864
Accumulated net realized gain (loss) ............... (23,436,174) (5,973,259) (4,432,606) (992,879)
----------------------------------------------------------------------
Net assets, at value ...................... $ 1,008,287,160 $ 477,420,358 $ 357,881,009 $ 487,261,562
======================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 199
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
----------------------------------------------------------------------
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 ............................... $ 928,839,679 $ 426,482,402 $ 305,257,544 $ 428,458,284
======================================================================
Shares outstanding ................................. 83,264,893 35,237,709 27,422,295 35,513,973
======================================================================
Net asset value per share a ........................ $ 11.16 $ 12.10 $ 11.13 $ 12.06
======================================================================
Maximum offering price per share (net asset value
per share / 95.75%) ............................... $ 11.66 $ 12.64 $ 11.62 $ 12.60
======================================================================
CLASS B:
Net assets, at value ............................... $ 21,061,006 -- -- --
======================================================================
Shares outstanding ................................. 1,877,203 -- -- --
======================================================================
Net asset value and maximum offering price per
share a ........................................... $ 11.22 -- -- --
======================================================================
CLASS C:
Net assets, at value ............................... $ 58,386,475 $ 50,937,956 $ 52,623,465 $ 58,803,278
======================================================================
Shares outstanding ................................. 5,181,359 4,178,098 4,703,733 4,857,705
======================================================================
Net asset value and maximum offering price per
share a ........................................... $ 11.27 $ 12.19 $ 11.19 $ 12.11
======================================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
200 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
---------------------------------------------------------------------------
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 .............................................. $ 618,963,985 $ 18,228,667 $ 5,862,055,878 $ 1,167,720,362
===========================================================================
Value ............................................. $ 636,016,415 $ 18,169,619 $ 6,280,878,012 $ 1,236,674,340
Cash ............................................... 23,092 31,844 51,954 97,029
Receivables:
Investment securities sold ........................ -- 299,492 1,061,164 --
Capital shares sold ............................... 3,746,086 19,073 13,117,477 2,596,571
Interest .......................................... 7,130,326 214,037 89,185,809 13,021,555
---------------------------------------------------------------------------
Total assets ................................ 646,915,919 18,734,065 6,384,294,416 1,252,389,495
---------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................... 5,210,900 -- 5,185,400 11,626,600
Capital shares redeemed ........................... 896,396 10,129 9,462,948 1,163,069
Affiliates ........................................ 341,672 5,025 3,409,241 696,322
Distributions to shareholders ..................... 572,265 14,624 6,405,121 1,080,733
Professional fees ................................. 20,943 16,141 57,250 25,250
Accrued expenses and other liabilities ............. 72,629 5,571 499,904 91,968
---------------------------------------------------------------------------
Total liabilities ........................... 7,114,805 51,490 25,019,864 14,683,942
---------------------------------------------------------------------------
Net assets, at value ...................... $ 639,801,114 $ 18,682,575 $ 6,359,274,552 $ 1,237,705,553
===========================================================================
Net assets consist of:
Paid-in capital .................................... $ 628,125,619 $ 19,045,069 $ 6,327,628,569 $ 1,171,326,590
Undistributed net investment income (distribution
in excess of net investment income) ............... (135,271) 50,433 7,123,687 (654,717)
Net unrealized appreciation (depreciation) ......... 17,052,430 (59,048) 418,822,134 68,953,978
Accumulated net realized gain (loss) ............... (5,241,664) (353,879) (394,299,838) (1,920,298)
---------------------------------------------------------------------------
Net assets, at value ...................... $ 639,801,114 $ 18,682,575 $ 6,359,274,552 $ 1,237,705,553
===========================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 201
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
--------------------------------------------------------------------------
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 ............................... $ 611,291,495 $ 18,682,575 $ 5,329,032,496 $ 1,006,796,619
==========================================================================
Shares outstanding ................................. 53,294,778 1,881,295 482,753,658 82,419,120
==========================================================================
Net asset value per share a ........................ $ 11.47 $ 9.93 $ 11.04 $ 12.22
==========================================================================
Maximum offering price per share (net asset value
per share / 97.75%, 97.75%, 95.75% and
95.75%, respectively) ............................. $ 11.73 $ 10.16 $ 11.53 $ 12.76
==========================================================================
CLASS B:
Net assets, at value ............................... -- -- $ 215,121,036 $ 72,202,687
==========================================================================
Shares outstanding ................................. -- -- 19,359,182 5,877,511
==========================================================================
Net asset value and maximum offering price
per share a ....................................... -- -- $ 11.11 $ 12.28
==========================================================================
CLASS C:
Net assets, at value ............................... $ 28,509,619 -- $ 761,994,204 $ 158,706,247
==========================================================================
Shares outstanding ................................. 2,481,507 -- 68,282,259 12,887,477
==========================================================================
Net asset value and maximum offering price
per share a ....................................... $ 11.49 -- $ 11.16 $ 12.31
==========================================================================
ADVISOR CLASS:
Net assets, at value ............................... -- -- $ 53,126,816 --
==========================================================================
Shares outstanding ................................. -- -- 4,804,330 --
==========================================================================
Net asset value and maximum offering price
per share a ....................................... -- -- $ 11.06 --
==========================================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
202 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2007
-------------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
-------------------------------
Assets:
Investments in securities:
Cost .................................................................................... $ 730,507,706 $ 843,216,480
===============================
Value ................................................................................... $ 770,908,757 $ 889,529,763
Cash ..................................................................................... 317,426 84,831
Receivables:
Capital shares sold ..................................................................... 1,013,887 1,334,507
Interest ................................................................................ 8,090,271 13,179,220
-------------------------------
Total assets ...................................................................... 780,330,341 904,128,321
-------------------------------
Liabilities:
Payables:
Investment securities purchased ......................................................... -- 9,215,039
Capital shares redeemed ................................................................. 525,115 1,692,519
Affiliates .............................................................................. 420,746 528,829
Distributions to shareholders ........................................................... 667,142 908,976
Accrued expenses and other liabilities .................................................... 82,238 112,018
-------------------------------
Total liabilities ................................................................. 1,695,241 12,457,381
-------------------------------
Net assets, at value ........................................................... $ 778,635,100 $ 891,670,940
===============================
Net assets consist of:
Paid-in capital .......................................................................... $ 743,871,142 $ 854,218,454
Undistributed net investment income (distribution in excess of net investment income) .... 720,012 (706,019)
Net unrealized appreciation (depreciation) ............................................... 40,401,051 46,313,283
Accumulated net realized gain (loss) ..................................................... (6,357,105) (8,154,778)
-------------------------------
Net assets, at value ........................................................... $ 778,635,100 $ 891,670,940
===============================
CLASS A:
Net assets, at value ..................................................................... $ 686,891,709 $ 747,279,005
===============================
Shares outstanding ....................................................................... 57,579,541 71,355,426
===============================
Net asset value per share a .............................................................. $ 11.93 $ 10.47
===============================
Maximum offering price per share (net asset value per share / 95.75%) .................... $ 12.46 $ 10.93
===============================
CLASS B:
Net assets, at value ..................................................................... -- $ 43,897,001
===============================
Shares outstanding ....................................................................... -- 4,177,572
===============================
Net asset value and maximum offering price per share a ................................... -- $ 10.51
===============================
CLASS C:
Net assets, at value ..................................................................... $ 91,743,391 $ 100,494,934
===============================
Shares outstanding ....................................................................... 7,615,616 9,521,575
===============================
Net asset value and maximum offering price per share a ................................... $ 12.05 $ 10.55
===============================
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 |
The accompanying notes are an integral part of these financial statements. | 203
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2007
----------------------------------------------------------
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 ............................................................. $ 47,992,867 $ 22,288,062 $ 16,436,680 $ 21,743,687
----------------------------------------------------------
Expenses:
Management fees (Note 3a) ............................................ 4,633,140 2,276,356 1,766,709 2,277,227
Distribution fees: (Note 3c)
Class A ............................................................. 895,694 400,590 285,415 390,949
Class B ............................................................. 138,252 -- -- --
Class C ............................................................. 348,969 304,367 319,779 362,930
Transfer agent fees (Note 3e) ........................................ 304,950 175,867 134,783 227,955
Custodian fees ....................................................... 14,413 6,733 5,034 6,594
Reports to shareholders .............................................. 55,738 30,315 21,651 46,880
Registration and filing fees ......................................... 26,217 17,907 11,605 47,424
Professional fees .................................................... 33,116 23,433 25,083 24,610
Trustees' fees and expenses .......................................... 7,611 3,456 3,009 3,449
Other ................................................................ 61,700 39,696 34,156 37,905
----------------------------------------------------------
Total expenses ................................................ 6,519,800 3,278,720 2,607,224 3,425,923
----------------------------------------------------------
Net investment income ..................................... 41,473,067 19,009,342 13,829,456 18,317,764
----------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ............................ 16,102 455,753 597,015 (39,264)
Net change in unrealized appreciation (depreciation) on investments .. 5,981,067 2,701,363 759,714 3,955,304
----------------------------------------------------------
Net realized and unrealized gain (loss) ............................... 5,997,169 3,157,116 1,356,729 3,916,040
----------------------------------------------------------
Net increase (decrease) in net assets resulting from operations ....... $ 47,470,236 $ 22,166,458 $ 15,186,185 $ 22,233,804
==========================================================
204 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2007
--------------------------------------------------------------------
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 .................................................. $ 25,794,117 $ 716,053 $ 342,115,036 $ 56,404,845
--------------------------------------------------------------------
Expenses:
Management fees (Note 3a) ................................. 2,924,060 106,083 27,869,510 5,489,386
Administrative fees (Note 3b) ............................. -- 42,433 -- --
Distribution fees: (Note 3c)
Class A .................................................. 561,932 31,909 4,997,716 935,613
Class B .................................................. -- -- 1,485,078 485,220
Class C .................................................. 186,941 -- 4,657,436 953,798
Transfer agent fees (Note 3e) ............................. 316,516 12,393 2,712,074 490,191
Custodian fees ............................................ 8,867 305 91,336 17,448
Reports to shareholders ................................... 61,001 1,827 522,706 89,821
Registration and filing fees .............................. 74,685 17,960 314,817 29,088
Professional fees ......................................... 27,410 19,037 137,215 36,104
Trustees' fees and expenses ............................... 4,588 194 47,743 8,944
Other ..................................................... 56,310 13,082 322,984 73,987
--------------------------------------------------------------------
Total expenses ..................................... 4,222,310 245,223 43,158,615 8,609,600
Expenses waived/paid by affiliates (Note 3f) ....... -- (139,080) -- --
--------------------------------------------------------------------
Net expenses ..................................... 4,222,310 106,143 43,158,615 8,609,600
--------------------------------------------------------------------
Net investment income .......................... 21,571,807 609,910 298,956,421 47,795,245
--------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ................. (331,035) (289,453) 5,854,079 521,124
Net change in unrealized appreciation (depreciation)
on investments ........................................... 3,318,807 331,178 103,785,915 7,161,104
--------------------------------------------------------------------
Net realized and unrealized gain (loss) .................... 2,987,772 41,725 109,639,994 7,682,228
--------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ........................................... $ 24,559,579 $ 651,635 $ 408,596,415 $ 55,477,473
====================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 205
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2007
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Investment income:
Interest ............................................................... $ 35,549,154 $ 42,557,222
----------------------------
Expenses:
Management fees (Note 3a) .............................................. 3,569,728 4,152,878
Distribution fees: (Note 3c)
Class A ............................................................... 648,170 724,686
Class B ............................................................... -- 292,448
Class C ............................................................... 559,262 615,711
Transfer agent fees (Note 3e) .......................................... 273,551 467,475
Custodian fees ......................................................... 11,113 12,839
Reports to shareholders ................................................ 55,203 76,170
Registration and filing fees ........................................... 14,899 17,397
Professional fees ...................................................... 74,122 32,596
Trustees' fees and expenses ............................................ 5,542 6,792
Other .................................................................. 26,408 63,276
----------------------------
Total expenses .................................................. 5,237,998 6,462,268
----------------------------
Net investment income ....................................... 30,311,156 36,094,954
----------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .............................. 469,938 1,281,423
Net change in unrealized appreciation (depreciation) on investments .... 2,088,783 2,394,879
----------------------------
Net realized and unrealized gain (loss) ................................. 2,558,721 3,676,302
----------------------------
Net increase (decrease) in net assets resulting from operations ......... $ 32,869,877 $ 39,771,256
============================
206 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................ $ 41,473,067 $ 40,211,510 $ 19,009,342 $ 17,280,836
Net realized gain (loss) from investments ............ 16,102 (3,359,696) 455,753 1,061,191
Net change in unrealized appreciation (depreciation)
on investments ...................................... 5,981,067 (7,592,550) 2,701,363 (1,335,131)
----------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ............................... 47,470,236 29,259,264 22,166,458 17,006,896
----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................. (38,507,587) (37,074,120) (17,382,896) (15,701,274)
Class B ............................................. (805,152) (859,297) -- --
Class C ............................................. (1,998,504) (1,707,145) (1,758,014) (1,585,515)
----------------------------------------------------------------------
Total distributions to shareholders ................... (41,311,243) (39,640,562) (19,140,910) (17,286,789)
----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................................. 37,344,539 42,924,550 41,205,476 36,260,208
Class B ............................................. (1,379,950) (1,179,614) -- --
Class C ............................................. 6,912,195 7,468,784 6,905,826 2,836,912
----------------------------------------------------------------------
Total capital share transactions ...................... 42,876,784 49,213,720 48,111,302 39,097,120
----------------------------------------------------------------------
Redemption fees ....................................... 1,518 972 71 2,849
----------------------------------------------------------------------
Net increase (decrease) in net assets .......... 49,037,295 38,833,394 51,136,921 38,820,076
Net assets:
Beginning of year ..................................... 959,249,865 920,416,471 426,283,437 387,463,361
----------------------------------------------------------------------
End of year ........................................... $ 1,008,287,160 $ 959,249,865 $ 477,420,358 $ 426,283,437
======================================================================
Distribution in excess of net investment income included
in net assets:
End of year .......................................... $ (152,250) $ (309,850) $ (326,051) $ (194,064)
======================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 207
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-----------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................................... $ 13,829,456 $ 12,848,174 $ 18,317,764 $ 15,800,313
Net realized gain (loss) from investments ..................... 597,015 943,185 (39,264) (752,664)
Net change in unrealized appreciation (depreciation) on
investments .................................................. 759,714 (1,051,248) 3,955,304 198,149
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations ............................................. 15,186,185 12,740,111 22,233,804 15,245,798
-----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ...................................................... (12,121,949) (11,351,471) (16,359,351) (13,819,200)
Class C ...................................................... (1,801,317) (1,605,812) (2,044,822) (1,820,505)
-----------------------------------------------------------------
Total distributions to shareholders ............................ (13,923,266) (12,957,283) (18,404,173) (15,639,705)
-----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ...................................................... 29,805,787 25,319,081 54,608,839 61,316,933
Class C ...................................................... 6,840,808 4,641,615 2,406,222 10,370,731
-----------------------------------------------------------------
Total capital share transactions ............................... 36,646,595 29,960,696 57,015,061 71,687,664
-----------------------------------------------------------------
Redemption fees ................................................ 200 -- 4,941 2,193
-----------------------------------------------------------------
Net increase (decrease) in net assets ................... 37,909,714 29,743,524 60,849,637 71,295,950
Net assets:
Beginning of year .............................................. 319,971,295 290,227,771 426,411,929 355,115,979
-----------------------------------------------------------------
End of year .................................................... $ 357,881,009 $ 319,971,295 $ 487,261,562 $ 426,411,929
=================================================================
Distribution in excess of net investment income included
in net assets:
End of year ................................................... $ (190,188) $ (96,623) $ (217,232) $ (130,832)
=================================================================
208 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-----------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................................... $ 21,571,807 $ 19,707,756 $ 609,910 $ 632,836
Net realized gain (loss) from investments ..................... (331,035) (164,491) (289,453) (64,397)
Net change in unrealized appreciation (depreciation)
on investments ............................................... 3,318,807 (4,492,616) 331,178 (201,951)
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ........................................ 24,559,579 15,050,649 651,635 366,488
-----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ...................................................... (20,803,274) (18,531,114) (624,236) (618,849)
Class C ...................................................... (906,501) (861,645) -- --
-----------------------------------------------------------------
Total distributions to shareholders ............................ (21,709,775) (19,392,759) (624,236) (618,849)
-----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ...................................................... 68,175,477 50,452,677 (7,353,306) (6,997,425)
Class C ...................................................... (1,768,725) 7,026,076 -- --
-----------------------------------------------------------------
Total capital share transactions ............................... 66,406,752 57,478,753 (7,353,306) (6,997,425)
-----------------------------------------------------------------
Redemption fees ................................................ 17,577 12,346 3,498 547
-----------------------------------------------------------------
Net increase (decrease) in net assets ................... 69,274,133 53,148,989 (7,322,409) (7,249,239)
Net assets:
Beginning of year .............................................. 570,526,981 517,377,992 26,004,984 33,254,223
-----------------------------------------------------------------
End of year .................................................... $ 639,801,114 $ 570,526,981 $ 18,682,575 $ 26,004,984
=================================================================
Undistributed net investment income (distribution in
excess of net investment income) included in net assets:
End of year ................................................... $ (135,271) $ 2,918 $ 50,433 $ 64,767
=================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 209
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------------------------------------------
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................ $ 298,956,421 $ 291,641,870 $ 47,795,245 $ 43,604,327
Net realized gain (loss) from investments ............ 5,854,079 (3,128,037) 521,124 880,535
Net change in unrealized appreciation
(depreciation) on investments ....................... 103,785,915 15,435,817 7,161,104 (2,857,064)
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ..................... 408,596,415 303,949,650 55,477,473 41,627,798
-------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................. (249,836,216) (251,784,959) (40,003,015) (36,272,328)
Class B ............................................. (9,809,693) (11,397,952) (2,775,587) (3,034,077)
Class C ............................................. (30,648,621) (29,094,318) (5,422,963) (4,769,921)
Advisor Class ....................................... (832,882) (1,575) -- --
-------------------------------------------------------------------------
Total distributions to shareholders ................... (291,127,412) (292,278,804) (48,201,565) (44,076,326)
-------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................................. 159,947,392 346,305,348 108,761,479 101,613,738
Class B ............................................. (29,738,908) (18,064,570) (6,495,109) (4,700,710)
Class C ............................................. 52,433,727 104,792,935 18,310,768 22,303,375
Advisor Class ....................................... 52,178,163 467,986 -- --
-------------------------------------------------------------------------
Total capital share transactions ...................... 234,820,374 433,501,699 120,577,138 119,216,403
-------------------------------------------------------------------------
Redemption fees ....................................... 16,656 8,108 2,923 29
-------------------------------------------------------------------------
Net increase (decrease) in net assets .......... 352,306,033 445,180,653 127,855,969 116,767,904
Net assets:
Beginning of year ..................................... 6,006,968,519 5,561,787,866 1,109,849,584 993,081,680
-------------------------------------------------------------------------
End of year ........................................... $ 6,359,274,552 $ 6,006,968,519 $ 1,237,705,553 $ 1,109,849,584
=========================================================================
Undistributed net investment income (distribution
in excess of net investment income) included in
net assets:
End of year .......................................... $ 7,123,687 $ (538,347) $ (654,717) $ (248,175)
=========================================================================
210 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-----------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
2007 2006 2007 2006
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................................... $ 30,311,156 $ 28,016,592 $ 36,094,954 $ 35,959,931
Net realized gain (loss) from investments ..................... 469,938 189,699 1,281,423 1,360,791
Net change in unrealized appreciation (depreciation)
on investments ............................................... 2,088,783 (639,747) 2,394,879 (4,715,262)
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ........................................ 32,869,877 27,566,544 39,771,256 32,605,460
-----------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ...................................................... (26,548,588) (25,553,674) (31,312,084) (30,947,487)
Class B ...................................................... -- -- (1,698,161) (1,924,710)
Class C ...................................................... (3,018,791) (2,936,356) (3,524,304) (3,203,302)
-----------------------------------------------------------------
Total distributions to shareholders ............................ (29,567,379) (28,490,030) (36,534,549) (36,075,499)
-----------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ...................................................... 58,650,149 55,843,742 26,319,729 27,401,855
Class B ...................................................... -- -- (3,838,588) (4,071,957)
Class C ...................................................... 7,088,064 9,082,300 11,798,972 9,025,420
-----------------------------------------------------------------
Total capital share transactions ............................... 65,738,213 64,926,042 34,280,113 32,355,318
-----------------------------------------------------------------
Redemption fees ................................................ 147 1,047 398 322
-----------------------------------------------------------------
Net increase (decrease) in net assets ................... 69,040,858 64,003,603 37,517,218 28,885,601
Net assets:
Beginning of year .............................................. 709,594,242 645,590,639 854,153,722 825,268,121
-----------------------------------------------------------------
End of year .................................................... $ 778,635,100 $ 709,594,292 $ 891,670,940 $ 854,153,722
=================================================================
Undistributed net investment income (distribution in
excess of net investment income) included in net assets:
End of year ................................................... $ 720,012 $ 15,238 $ (706,019) $ (265,914)
=================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 211
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 amended, (the 1940 Act) as an open-end investment company,
consisting of twenty-five separate funds. All funds included in this report (the
Funds) are diversified, except Franklin Connecticut Tax-Free Income Fund and
Franklin Federal Intermediate-Term Tax-Free Income Fund, which are
non-diversified. The financial statements of the remaining funds in the Trust
are presented separately. The classes of shares offered within each of the Funds
are indicated below. 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 B & CLASS C
- ----------------------------------------------------------------------------------------------------
Franklin Federal Limited-Term Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
- ----------------------------------------------------------------------------------------------------
CLASS A & CLASS C CLASS A, CLASS B, CLASS C & ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------
Franklin Colorado Tax-Free Income Fund Franklin High Yield 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 Oregon Tax-Free Income Fund
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 may utilize independent pricing services,
quotations from bond dealers, and information with respect to bond and note
transactions, to assist in determining a current market value for each security.
The 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. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Funds. 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
212 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of Trustees.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its income and net
realized gains.
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividends from net investment income are normally declared daily and
distributed monthly to shareholders. Distributions to shareholders are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
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 of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.
Annual Report | 213
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
F. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities 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. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2007, 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, 2007
Shares sold ...................... 12,333,300 $ 135,919,403 6,334,963 $ 75,761,896
Shares issued in reinvestment
of distributions ................ 1,854,336 20,431,487 808,412 9,666,464
Shares redeemed .................. (10,807,139) (119,006,351) (3,702,408) (44,222,884)
--------------------------------------------------------
Net increase (decrease) .......... 3,380,497 $ 37,344,539 3,440,967 $ 41,205,476
========================================================
Year ended February 28, 2006
Shares sold ..................... 11,975,940 $ 133,352,332 6,109,541 $ 73,409,662
Shares issued in reinvestment
of distributions ............... 1,713,171 19,081,804 692,709 8,336,485
Shares redeemed ................. (9,835,816) (109,509,586) (3,781,100) (45,485,939)
--------------------------------------------------------
Net increase (decrease) ......... 3,853,295 $ 42,924,550 3,021,150 $ 36,260,208
========================================================
214 | Annual Report
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
-----------------------------------------------------------
CLASS B SHARES:
Year ended February 28, 2007
Shares sold .................... 55,977 $ 619,656
Shares issued in reinvestment
of distributions .............. 44,020 487,639
Shares redeemed ................ (224,011) (2,487,245)
---------------------------
Net increase (decrease) ........ (124,014) $ (1,379,950)
===========================
Year ended February 28, 2006
Shares sold .................... 30,284 $ 340,860
Shares issued in reinvestment
of distributions .............. 46,425 520,082
Shares redeemed ................ (182,326) (2,040,556)
---------------------------
Net increase (decrease) ........ (105,617) $ (1,179,614)
===========================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold .................... 1,219,939 $ 13,578,793 1,188,883 $ 14,311,574
Shares issued in reinvestment
of distributions .............. 106,928 1,190,123 93,810 1,129,596
Shares redeemed ................ (706,916) (7,856,721) (709,009) (8,535,344)
-----------------------------------------------------------
Net increase (decrease) ........ 619,951 $ 6,912,195 573,684 $ 6,905,826
===========================================================
Year ended February 28, 2006
Shares sold .................... 1,349,975 $ 15,176,472 765,261 $ 9,270,956
Shares issued in reinvestment
of distributions .............. 89,196 1,002,627 81,584 988,535
Shares redeemed ................ (770,280) (8,710,315) (613,213) (7,422,579)
-----------------------------------------------------------
Net increase (decrease) ........ 668,891 $ 7,468,784 233,632 $ 2,836,912
===========================================================
------------------------------------------------------------
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2007
Shares sold .................... 5,809,929 $ 64,043,710 8,160,497 $ 97,082,744
Shares issued in reinvestment
of distributions .............. 611,177 6,743,520 895,194 10,646,518
Shares redeemed ................ (3,719,851) (40,981,443) (4,476,753) (53,120,423)
------------------------------------------------------------
Net increase (decrease) ........ 2,701,255 $ 29,805,787 4,578,938 $ 54,608,839
============================================================
Year ended February 28, 2006
Shares sold .................... 4,154,513 $ 46,128,395 7,635,503 $ 91,396,425
Shares issued in reinvestment
of distributions .............. 571,197 6,347,565 710,309 8,499,575
Shares redeemed ................ (2,446,141) (27,156,879) (3,226,425) (38,579,067)
------------------------------------------------------------
Net increase (decrease) ........ 2,279,569 $ 25,319,081 5,119,387 $ 61,316,933
============================================================
Annual Report | 215
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
-----------------------------------------------------------
CLASS C SHARES:
Year ended February 28, 2007
Shares sold .................... 1,110,519 $ 12,301,790 1,039,393 $ 12,397,388
Shares issued in reinvestment
of distributions .............. 99,750 1,106,043 108,508 1,294,419
Shares redeemed ................ (592,040) (6,567,025) (945,437) (11,285,585)
-----------------------------------------------------------
Net increase (decrease) ........ 618,229 $ 6,840,808 202,464 $ 2,406,222
===========================================================
Year ended February 28, 2006
Shares sold .................... 939,542 $ 10,484,884 1,426,473 $ 17,137,658
Shares issued in reinvestment
of distributions .............. 95,710 1,068,446 92,680 1,112,794
Shares redeemed ................ (618,737) (6,911,715) (657,469) (7,879,721)
-----------------------------------------------------------
Net increase (decrease) ........ 416,515 $ 4,641,615 861,684 $ 10,370,731
===========================================================
-------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM TAX-FREE LIMITED-TERM TAX-FREE
INCOME FUND INCOME FUND
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2007
Shares sold .................. 16,784,533 $ 190,605,644 759,028 $ 7,518,682
Shares issued in reinvestment
of distributions ............ 1,213,516 13,779,788 51,961 514,763
Shares redeemed .............. (12,012,731) (136,209,955) (1,553,981) (15,386,751)
-------------------------------------------------------------
Net increase (decrease) ...... 5,985,318 $ 68,175,477 (742,992) $ (7,353,306)
=============================================================
Year ended February 28, 2006
Shares sold .................. 13,659,935 $ 156,346,796 1,397,484 $ 13,911,639
Shares issued in reinvestment
of distributions ............ 1,066,740 12,218,991 49,964 497,165
Shares redeemed .............. (10,324,457) (118,113,110) (2,150,605) (21,406,229)
-------------------------------------------------------------
Net increase (decrease) ...... 4,402,218 $ 50,452,677 (703,157) $ (6,997,425)
=============================================================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold .................. 540,019 $ 6,149,457
Shares issued in reinvestment
of distributions ............ 53,346 606,627
Shares redeemed .............. (749,727) (8,524,809)
-----------------------------
Net increase (decrease) ...... (156,362) $ (1,768,725)
=============================
Year ended February 28, 2006
Shares sold .................. 1,170,334 $ 13,451,826
Shares issued in reinvestment
of distributions ............ 53,817 617,525
Shares redeemed .............. (614,309) (7,043,275)
-----------------------------
Net increase (decrease) ...... 609,842 $ 7,026,076
=============================
216 | Annual Report
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, 2007
Shares sold ................. 63,582,718 $ 690,963,191 16,893,523 $ 204,068,722
Shares issued in reinvestment
of distributions ........... 12,516,618 136,066,513 1,965,859 23,742,079
Shares redeemed ............. (61,453,766) (667,082,312) (9,870,787) (119,049,322)
-------------------------------------------------------------
Net increase (decrease) ..... 14,645,570 $ 159,947,392 8,988,595 $ 108,761,479
=============================================================
Year ended February 28, 2006
Shares sold ................. 76,040,423 $ 823,076,161 14,208,081 $ 172,729,035
Shares issued in reinvestment
of distributions ........... 12,217,135 132,235,296 1,791,284 21,795,959
Shares redeemed ............. (56,420,469) (609,006,109) (7,645,953) (92,911,256)
-------------------------------------------------------------
Net increase (decrease) ..... 31,837,089 $ 346,305,348 8,353,412 $ 101,613,738
=============================================================
CLASS B SHARES:
Year ended February 28, 2007
Shares sold ................. 335,266 $ 3,661,866 76,036 $ 920,327
Shares issued in reinvestment
of distributions ........... 504,017 5,512,457 148,092 1,797,779
Shares redeemed ............. (3,552,905) (38,913,231) (758,569) (9,213,215)
-------------------------------------------------------------
Net increase (decrease) ..... (2,713,622) $ (29,738,908) (534,441) $ (6,495,109)
=============================================================
Year ended February 28, 2006
Shares sold ................. 416,566 $ 4,531,659 68,597 $ 838,868
Shares issued in reinvestment
of distributions ........... 578,436 6,300,714 164,156 2,008,818
Shares redeemed ............. (2,655,064) (28,896,943) (617,285) (7,548,396)
-------------------------------------------------------------
Net increase (decrease) ..... (1,660,062) $ (18,064,570) (384,532) $ (4,700,710)
=============================================================
CLASS C SHARES:
Year ended February 28, 2007
Shares sold ................. 13,123,558 $ 144,182,689 2,916,408 $ 35,511,302
Shares issued in reinvestment
of distributions ........... 1,653,754 18,171,718 288,499 3,511,145
Shares redeemed ............. (10,018,868) (109,920,680) (1,703,406) (20,711,679)
-------------------------------------------------------------
Net increase (decrease) ..... 4,758,444 $ 52,433,727 1,501,501 $ 18,310,768
=============================================================
Year ended February 28, 2006
Shares sold ................. 15,987,715 $ 174,932,594 3,135,704 $ 38,437,567
Shares issued in reinvestment
of distributions ........... 1,557,184 17,024,337 257,992 3,163,008
Shares redeemed ............. (7,985,897) (87,163,996) (1,573,597) (19,297,200)
-------------------------------------------------------------
Net increase (decrease) ..... 9,559,002 $ 104,792,935 1,820,099 $ 22,303,375
=============================================================
Annual Report | 217
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------
FRANKLIN HIGH YIELD
TAX-FREE
INCOME FUND
---------------------------
SHARES AMOUNT
---------------------------
ADVISOR CLASS SHARES:
Year ended February 28, 2007
Shares sold ................. 4,984,655 $ 54,644,355
Shares issued in reinvestment
of distributions ........... 10,808 118,284
Shares redeemed ............. (234,572) (2,584,476)
---------------------------
Net increase (decrease) ..... 4,760,891 $ 52,178,163
===========================
Year ended February 28, 2006 a
Shares sold ................. 43,438 $ 467,975
Shares issued in reinvestment
of distributions ........... 1 11
---------------------------
Net increase (decrease) ..... 43,439 $ 467,986
===========================
a For the period January 3, 2006 (effective date) to February 28, 2006.
------------------------------------------------------------
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Year ended February 28, 2007
Shares sold ................. 9,882,585 $ 116,511,413 8,862,926 $ 91,841,699
Shares issued in reinvestment
of distributions ........... 1,496,094 17,655,896 1,774,687 18,392,663
Shares redeemed (6,405,345) (75,517,160) (8,095,507) (83,914,633)
------------------------------------------------------------
Net increase (decrease) ..... 4,973,334 $ 58,650,149 2,542,106 $ 26,319,729
============================================================
Year ended February 28, 2006
Shares sold ................. 8,774,698 $ 104,336,218 8,345,300 $ 87,155,893
Shares issued in reinvestment
of distributions ........... 1,328,280 15,795,327 1,673,252 17,486,178
Shares redeemed ............. (5,411,758) (64,287,803) (7,398,908) (77,240,216)
------------------------------------------------------------
Net increase (decrease) ..... 4,691,220 $ 55,843,742 2,619,644 $ 27,401,855
============================================================
CLASS B SHARES:
Year ended February 28, 2007
Shares sold ................. 33,597 $ 348,631
Shares issued in reinvestment
of distributions ........... 97,957 1,018,383
Shares redeemed ............. (501,542) (5,205,602)
----------------------------
Net increase (decrease) ..... (369,988) $ (3,838,588)
============================
Year ended February 28, 2006
Shares sold ................. 47,342 $ 497,161
Shares issued in reinvestment
of distributions ........... 109,207 1,145,145
Shares redeemed ............. (546,101) (5,714,263)
----------------------------
Net increase (decrease) ..... (389,552) $ (4,071,957)
============================
218 | 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 C SHARES:
Year ended February 28, 2007
Shares sold ................. 1,586,817 $ 18,908,076 2,161,676 $ 22,594,947
Shares issued in reinvestment
of distributions ........... 164,242 1,956,691 213,498 2,229,810
Shares redeemed ............. (1,158,924) (13,776,703) (1,245,375) (13,025,785)
------------------------------------------------------------
Net increase (decrease) ..... 592,135 $ 7,088,064 1,129,799 $ 11,798,972
============================================================
Year ended February 28, 2006
Shares sold ................. 1,387,470 $ 16,643,100 1,653,167 $ 17,408,706
Shares issued in reinvestment
of distributions ........... 154,952 1,859,772 198,765 2,092,400
Shares redeemed ............. (786,351) (9,420,572) (996,318) (10,475,686)
------------------------------------------------------------
Net increase (decrease) ..... 756,071 $ 9,082,300 855,614 $ 9,025,420
============================================================
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 each
of the funds as follows:
- ----------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ----------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% In excess of $20 billion
Annual Report | 219
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
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% Up to and including $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 the Funds. The fee is paid by Advisers, except Franklin Federal Limited-Term
Income Fund based on average daily net assets, and is not an additional expense
of the funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the fund's Class A reimbursement distribution plan, the
funds reimburse Distributors for costs incurred in connection with the
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate. Under the Class A reimbursement distribution plan, costs exceeding
the maximum for the current plan year cannot be reimbursed in subsequent
periods.
In addition, under the Funds' compensation distribution plans, the Funds pays
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are 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
---------------------------------------------------------
Reimbursement Plans:
Class A ............... 0.10% 0.10% 0.10% 0.10%
Compensation Plans:
Class B ............... 0.65% -- -- --
Class C ............... 0.65% 0.65% 0.65% 0.65%
220 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
---------------------------------------------------------
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
---------------------------------------------------------
Reimbursement Plans:
Class A ............... 0.10% -- 0.10% 0.10%
Compensation Plans:
Class A ............... -- 0.15% -- --
Class B ............... -- -- 0.65% 0.65%
Class C ............... 0.65% -- 0.65% 0.65%
-----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
-----------------------------
Reimbursement Plans:
Class A ............... 0.10% 0.10%
Compensation Plans:
Class B ............... -- 0.65%
Class C ............... 0.65% 0.65%
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
--------------------------------------------------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ........ $ 292,553 $ 183,992 $ 113,464 $ 273,869
Contingent deferred sales charges retained .. $ 63,896 $ 21,245 $ 35,350 $ 45,737
--------------------------------------------------------
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
--------------------------------------------------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ........ $ 42,239 $ 3,079 $ 1,549,280 $ 347,073
Contingent deferred sales charges retained .. $ 24,888 $ 18,751 $ 461,296 $ 131,519
Annual Report | 221
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS (CONTINUED)
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ........ $ 362,294 $ 263,305
Contingent deferred sales charges retained .. $ 22,529 $ 70,272
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were retained by 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 ......................... $ 196,147 $ 112,831 $ 88,370 $ 143,750
--------------------------------------------------------
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 ......................... $ 186,437 $ 8,875 $ 1,746,403 $ 322,347
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Transfer agent fees ......................... $ 175,054 $ 313,869
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
For the Franklin Federal Limited-Term Tax-Free Income Fund, FT Services agreed
in advance to voluntarily waive administrative fees. Additionally, Advisers
agreed in advance to voluntarily waive a portion of management fees. Total
expenses waived by FT Services and Advisers are not subject to reimbursement by
the fund subsequent to the fund's fiscal year end. FT Services and Advisers may
discontinue this waiver at any time.
222 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At February 28, 2007, the capital loss carryforwards 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
---------------------------------------------------------
Capital loss carryforwards expiring in:
2008 ....................................... $ -- $ -- $ 917,208 $ --
2009 ....................................... -- 1,107,178 427,481 --
2011 ....................................... -- 81,665 53,698 --
2012 ....................................... 20,108,487 4,695,674 3,034,219 --
2013 ....................................... -- -- -- 200,921
2014 ....................................... 2,638,564 -- -- 152,458
2015 ....................................... 659,023 -- -- 134,018
---------------------------------------------------------
$ 23,406,074 $ 5,884,517 $ 4,432,606 $ 487,397
=========================================================
---------------------------------------------------------
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
---------------------------------------------------------
Capital loss carryforwards expiring in:
2008 ....................................... $ 314,284 $ -- $ 31,182,025 $ --
2009 ....................................... 1,207,419 -- 73,985,675 --
2010 ....................................... 614,893 -- 3,519,381 --
2011 ....................................... -- -- 131,377,453 --
2012 ....................................... 2,156,839 -- 50,621,589 1,818,048
2013 ....................................... 373,568 -- 35,250,377 --
2014 ....................................... 213,358 22,356 7,711,279 --
2015 ....................................... 361,303 319,808 -- --
---------------------------------------------------------
$ 5,241,664 $ 342,164 $393,647,779 $ 1,818,048
=========================================================
----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------------------------
Capital loss carryforwards expiring in:
2008 ....................................... $ 1,075,373 $ --
2009 ....................................... 966,007 2,552,284
2010 ....................................... 1,860,003 4,726,279
2012 ....................................... 2,455,722 --
2013 ....................................... -- 876,215
----------------------------
$ 6,357,105 $ 8,154,778
============================
Annual Report | 223
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
During the year ended February 28, 2007, the funds utilized capital loss
carryforwards as follows:
- ----------------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
COLORADO CONNECTICUT HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA
TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
- ----------------------------------------------------------------------------------
$ 462,522 $ 596,770 $ 5,989,640 $ 521,346 $ 471,157 $ 1,281,933
For tax purposes, realized capital losses, occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At February 28, 2007, Franklin Colorado Tax-Free Income Fund and
Franklin Federal Limited-Term Tax-Free Income Fund deferred realized capital
losses of $6,350 and $11,715, respectively.
The tax character of distributions paid during the years ended February 28, 2007
and 2006, was as follows:
-------------------------------------------------------------
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------
Distributions paid from - tax exempt income ......... $ 41,311,243 $ 39,640,562 $ 19,140,910 $ 17,286,789
-------------------------------------------------------------
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------
Distributions paid from - tax exempt income ......... $ 13,923,266 $ 12,957,283 $ 18,404,173 $ 15,639,705
-------------------------------------------------------------
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------
Distributions paid from - tax exempt income ......... $ 21,709,775 $ 19,392,759 $ 624,236 $ 618,849
-------------------------------------------------------------
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------
Distributions paid from - tax exempt income ......... $ 291,127,412 $ 292,278,804 $ 48,201,565 $ 44,076,326
-------------------------------------------------------------
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------
Distributions paid from - tax exempt income ......... $ 29,567,379 $ 28,490,030 $ 36,534,549 $ 36,075,499
224 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
At February 28, 2007, the cost of investments, net unrealized appreciation
(depreciation), undistributed tax exempt and ordinary income 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 ........................................ $ 940,174,187 $ 443,189,084 $ 338,012,622
======================================================
Unrealized appreciation .................................... $ 58,403,067 $ 27,386,566 $ 16,001,221
Unrealized depreciation .................................... (269,293) -- (59,852)
------------------------------------------------------
Net unrealized appreciation (depreciation) ................. $ 58,133,774 $ 27,386,566 $ 15,941,369
======================================================
Distributable earnings - undistributed tax exempt income ... $ 787,951 $ 90,040 $ 101,470
======================================================
------------------------------------------------------
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 ........................................ $ 462,588,536 $ 618,935,921 $ 18,220,828
======================================================
Unrealized appreciation .................................... $ 23,135,656 $ 17,088,474 $ 36,305
Unrealized depreciation .................................... (179,677) (7,980) (87,514)
------------------------------------------------------
Net unrealized appreciation (depreciation) ................. $ 22,955,979 $ 17,080,494 $ (51,209)
======================================================
Distributable earnings - undistributed tax exempt income ... $ 230,497 $ 408,929 $ 57,218
======================================================
------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
HIGH YIELD NEW JERSEY OREGON
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------
Cost of investments ........................................ $5,859,188,652 $ 1,167,666,325 $ 730,462,781
======================================================
Unrealized appreciation .................................... $ 465,302,351 $ 69,036,779 $ 40,445,976
Unrealized depreciation .................................... (43,612,991) (28,764) --
------------------------------------------------------
Net unrealized appreciation (depreciation) ................. $ 421,689,360 $ 69,008,015 40,445,976
======================================================
Undistributed tax exempt income ............................ $ 13,166,357 $ 269,731 $ 1,342,229
Undistributed ordinary income .............................. 282,976 -- --
------------------------------------------------------
Distributable earnings ..................................... $ 13,449,333 $ 269,731 $ 1,342,229
======================================================
Annual Report | 225
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
---------------
FRANKLIN
PENNSYLVANIA
TAX-FREE
INCOME FUND
---------------
Cost of investments ........................................ $ 843,120,065
===============
Unrealized appreciation .................................... $ 46,427,459
Unrealized depreciation .................................... (17,761)
---------------
Net unrealized appreciation (depreciation) ................. $ 46,409,698
===============
Distributable earnings - undistributed tax exempt income ... $ 106,542
===============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities and bond discounts.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, bond workout expenditures
and bond discounts.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended February 28, 2007, 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 ............. $ 99,044,143 $ 108,928,237 $ 60,400,754 $ 103,539,557
Sales ................. $ 62,911,100 $ 67,170,341 $ 36,918,753 $ 47,744,475
------------------------------------------------------------
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 ............. $ 107,947,095 $ 9,485,736 $ 887,913,350 $ 166,619,509
Sales ................. $ 52,338,626 $ 16,813,857 $ 650,799,812 $ 41,762,793
-----------------------------
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
-----------------------------
Purchases ............. $ 87,205,597 $ 93,864,362
Sales ................. $ 35,038,718 $ 59,673,952
226 | 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 29.30% 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 Franklin High Yield Tax-Free Income Fund held defaulted securities and/or
other securities for which the income has been deemed uncollectible. At February
28, 2007, the aggregate value of these securities was $74,878,258, representing
1.18%, of the fund's net assets. The Funds discontinue accruing income on
securities for which income has been deemed uncollectible and provide an
estimate for losses on interest receivable. The securities have been identified
on the accompanying Statement of Investments.
7. CONCENTRATION OF RISK
Each of the Funds invest a large percentage of its assets in obligations of
issuers within its respective state and U.S. territories, except for Franklin
Federal Intermediate-Term Tax-Free Income Fund, Franklin Federal Limited-Term
Tax-Free Income Fund and 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 and U.S. territories.
8. OTHER CONSIDERATIONS
The Oregon Economic Development Department ("OEDD"), the issuer of Oregon
Economic Development Department Revenue Bonds (Georgia-Pacific Corporation 1995
Project), Series 157, maturing on August 1, 2025 (the "Bonds") held by Franklin
Oregon Tax-Free Income Fund (the "Oregon Fund"), received a proposed adverse
determination letter from the Internal Revenue Service ("IRS") in which the IRS
indicated that the interest paid to bondholders of the Bonds is not excludable
from gross income. The Oregon Fund has been holding the Bonds since April 1996
and has passed through the interest earned on the Bonds to the shareholders of
the Oregon Fund in the form of non-taxable dividends during the holding period.
In addition, the Oregon Fund has been contacted by the IRS informing it of this
determination. OEDD and Georgia-Pacific Corporation (GP) are contesting the IRS
determination; however, the ultimate outcome of this matter is unknown at this
time. If OEDD and/or GP were to fail to obtain a favorable final determination,
the Oregon Fund could be subject to tax expense plus interest which is estimated
to be approximately $673,000 at February 28, 2007. In various SEC filings, GP
has stated that it will take steps to ensure the bondholders will be made whole
with respect to any liability caused by the IRS determination. Based on GP's
representations and the uncertainty regarding the ultimate outcome of this
matter, no liability has been recorded on the
Annual Report | 227
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. OTHER CONSIDERATIONS (CONTINUED)
Statement of Assets and Liabilities of the Oregon Fund. The Trust's management
believes that the final outcome of this matter will not have a material adverse
impact to the Oregon Fund and/or its shareholders.
Directors or employees of Advisers, as the Franklin High Yield Tax-Free Income
Fund Investment Manager, serve as members of various bondholders' steering
committees, on credit committees, and represent the funds in certain corporate
restructuring negotiations. As a result of this involvement, such individuals
may be in possession of certain material non-public information. If the fund's
Investment Manager, while in possession of such information, seeks to buy or
sell any of these securities, it will comply with all applicable federal
securities laws. The securities have been identified on the accompanying
Statement of Investments.
9. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), 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 ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006. The Trust did not participate in that
settlement.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
228 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY AND LITIGATION MATTERS (CONTINUED)
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Funds
are currently evaluating the impact, if any, of applying the various provisions
of FIN 48.
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Trust believes the adoption of
SFAS 157 will have no material impact on its financial statements.
Annual Report | 229
Franklin Tax-Free Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEE 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 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, 2007, 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, 2007 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 13, 2007
230 | Annual Report
Franklin Tax-Free Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds designate
100% of the distributions paid from net investment income as exempt-interest
dividends for the fiscal year ended February 28, 2007. A portion of the Funds'
exempt-interest dividends may be subject to the federal alternative minimum tax.
In January 2008, shareholders will be notified of amounts for use in preparing
their 2007 income tax returns.
Annual Report | 231
Franklin Tax-Free Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth 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. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1984 142 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).
- -----------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation)
San Mateo, CA 94403-1906 (exploration and refining of oil 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 (1929) Trustee Since 1984 116 Director, Center for Creative Land
One Franklin Parkway 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).
- -----------------------------------------------------------------------------------------------------------------------------------
232 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2005 103 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation)
San Mateo, CA 94403-1906 (exploration and refining of oil and
gas) and Sentient Jet (private jet
service); and FORMERLY, Director,
Becton Dickinson and Company (medical
technology), Cooper Industries, Inc.
(electrical products and tools and
hardware), Health Net, Inc.
(formerly, Foundation Health)
(integrated managed care), The Hertz
Corporation (car rental), Pacific
Southwest Airlines, The RCA
Corporation, Unicom (formerly,
Commonwealth Edison), UAL Corporation
(airlines) and White Mountains
Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999));
and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation.
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Since 1984 142 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.; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41
of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 126 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.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 233
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (1959) 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.
- -----------------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (1965) 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 (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice
Vice President President -
- AML AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 30 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).
- -----------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
234 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton
Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 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).
- -----------------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company;
and officer of 30 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 235
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (1961) 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 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Prior to February 28, 2007 S. Joseph Fortunato and Gordon S. Macklin
ceased to be director of the Fund.
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.
236 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, the Board of Trustees ("Board"), including
a majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate tax-exempt funds within
the Trust ("Fund(s)"). In reaching this decision, the Board took into account
information furnished throughout the year at regular Board meetings, as well as
information prepared specifically in connection with the annual renewal review
process. Information furnished and discussed throughout the year included
investment performance reports and related financial information for each Fund,
as well as periodic reports on shareholder services, legal, compliance, pricing
and other services provided by the Investment Manager ("Manager") and its
affiliates. Information furnished specifically in connection with the renewal
process included a report for each Fund prepared by Lipper, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper reports compared each Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager and its affiliates including management's
explanation of differences where relevant and a three-year expense analysis with
an explanation for any increase in expense ratios. Additional material
accompanying such report was a memorandum prepared by management describing
project initiatives and capital investments relating to the services provided to
the Funds by the Franklin Templeton Investments organization, as well as a
memorandum relating to economies of scale and a comparative analysis concerning
transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset
Annual Report | 237
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
value calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted that such systems and
procedures had functioned smoothly during the Florida hurricanes and blackouts
experienced in recent years. Consideration was also given to the experience of
each Fund's portfolio management team, the number of accounts managed and
general method of compensation. In this latter respect, the Board noted that a
primary factor in management's determination of a portfolio manager's bonus
compensation was the relative investment performance of the funds he or she
managed and that a portion of such bonus was required to be invested in a
pre-designated list of funds within such person's fund management area so as to
be aligned with the interests of Fund shareholders. The Board also took into
account the quality of transfer agent and shareholder services provided Fund
shareholders by an affiliate of the Manager, noting continuing expenditures by
management to increase and improve the scope of such services, periodic
favorable reports on such service conducted by third parties, the high industry
ranking given to the Franklin Templeton website and the firsthand experience of
individual members of the Board who deal with the shareholder services
department in their capacities as shareholders in one or more of the various
Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of each Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each Fund showed its
investment performance or that of its Class A shares for Funds having multiple
share classes, in comparison to a performance universe selected by Lipper.
Comparative performance for each Fund was shown for the one-year period ended
December 31, 2006, and for additional periods ended that date up to ten years
depending on when a particular Fund commenced operations. Investment performance
was shown on an income return basis, as well as a total return basis for each
Fund. The Lipper reports showed that the income return for each Fund, with one
exception, was either in the highest quintile or second-highest quintile of its
performance universe during the one-year period, as well as during each of the
previous year periods shown on an annualized basis. The Lipper reports, with the
same exception, showed the total return for each Fund to be in the upper half
with most being in either the highest quintile or second-highest quintile of
their performance universe for the one-year period with varying results for
prior periods, depending on the particular Fund. The Board expressed
satisfaction with such performance, noting that the investment objective of each
of the Funds is to obtain a high level of tax-exempt income. The one exception
was Franklin Federal Limited-Term Tax-Free Income Fund whose income return was
in the second-lowest quintile and total return in the middle quintile of its
Lipper performance universe. The Board was satisfied with management's
explanation for
238 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
performance of Franklin Federal Limited-Term Tax-Free Income Fund, which was
that the Fund had not been in existence for more than three years and was of a
relatively small size and noted that management had limited this Fund's expenses
through fee waivers.
COMPARATIVE EXPENSES. Consideration was given to the management fee and total
expense ratios of each Fund in comparison with those of a group of funds
selected by Lipper as its appropriate Lipper expense group. Prior to making such
comparisons, the Board relied upon a survey showing that the scope of services
covered under a Fund's investment management agreement was similar to those
provided by fund managers to other mutual fund groups. In reviewing comparative
costs, emphasis was given to the contractual investment management fee charged
each Fund in comparison with the contractual investment management fee that
would have been charged by other funds within its Lipper expense group assuming
they were the same size as the Fund, as well as the actual total expenses of the
Fund in comparison with those of its Lipper expense group. The Lipper
contractual investment management fee analysis includes an administrative charge
as being part of the investment management fee, and total expenses, for
comparative consistency, are shown by Lipper for fund Class A shares for funds
having multiple share classes. The Lipper report showed that the contractual
investment management fee rate for each Fund, with the exception of the Fund
discussed below, was in the lower half of its Lipper expense group and that the
actual total expense rate for all Funds was in the least expensive quintile of
their respective Lipper expense groups. The contractual investment management
fee rate for Franklin Federal Limited-Term Tax-Free Income Fund was at the
median of its Lipper expense group. This Fund is among the smallest funds within
Franklin Tax-Free Trust, and the Manager absorbed expenses so that the actual
management fee paid was below the contractual rate. Based on the above, the
Board was satisfied with the investment management fee and total expenses of
each Fund in comparison to its Lipper expense group as shown in the Lipper
reports.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. Specific attention was given to the methodology
followed in allocating costs to each Fund, it being recognized that allocation
methodologies are inherently subjective and various allocation methodologies may
each be reasonable while producing different results. In this respect, the Board
noted that while being continuously refined and reflecting changes in the
Manager's own cost accounting, such allocation methodology was consistent with
that followed in profitability report presentations for the Funds made in prior
years and that the Funds' independent registered public accounting firm had been
engaged by the Manager to perform certain procedures on a biennial basis,
specified and approved by the Manager and the Funds' Board solely for their
purposes and use in reference to the profitability analysis. In reviewing and
discussing such analysis, management discussed with the Board its belief that
costs incurred in establishing the infrastructure necessary to the type of
mutual fund operations conducted by the Manager and its affiliates may not be
fully
Annual Report | 239
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
reflected in the expenses allocated to each Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Funds, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board
considered a third-party study comparing the profitability of the Manager's
parent on an overall basis as compared to other publicly held managers broken
down to show profitability from management operations exclusive of distribution
expenses, as well as profitability including distribution expenses. The Board
also considered the extent to which the Manager and its affiliates might derive
ancillary benefits from fund operations, including interest in a joint venture
entity which financed up-front commissions paid to brokers/dealers who sold fund
Class B shares prior to February 2005, when the offering of such shares was
discontinued. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to each Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing any precise
determination is inherently subjective, the Board noted that based upon the Fund
profitability analysis, it appears that as some funds get larger, at some point
economies of scale do result in the Manager realizing a larger profit margin on
management services provided such fund. The Board also noted that any economies
of scale are shared with each of these Funds and their shareholders through
management fee breakpoints existing in each of the Funds' investment management
agreements, so that as a Fund grows in size, its effective management fee rate
declines. The fee structure under the investment management agreement with each
Fund provides an initial fee of 0.65% on the first $100 million of assets; 0.50%
on the next $150 million of assets; 0.45% on assets in excess of $250 million;
with additional breakpoints beginning at the $10 billion asset level thereafter.
In reviewing such structure, management stated its belief that this fee
structure reaches a relatively low rate quickly as a Fund grows and that such
low rate, in effect, reflects anticipated economies of scale as a Fund's assets
increase. In support of such position, management pointed out the favorable
effective management fee and total expense comparisons for each Fund within its
Lipper expense group as previously discussed under "Comparative Expenses." The
Board believed that to the extent economies of scale may be realized by the
Manager and its affiliates, the schedule of fees under the investment management
agreement for each Fund provided a sharing of benefits with the Fund and its
shareholders.
240 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the 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 | 241
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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 BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
|_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
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 A2007 04/07
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is Frank W. T. LaHaye, and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNT 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 $631,375 for the fiscal year ended February 28, 2007 and $556,957 for the
fiscal year ended February 28, 2006.
(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.
There were no 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.
(c) Tax Fees
The aggregate 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 were $0 for the fiscal year ended February 28, 2007 and
$20,000 for the fiscal year ended February 28, 2006. The services for which
these fees were paid included tax compliance.
There were no 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.
(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 $13,548 for the fiscal year ended February 28,
2007 and $0 for the fiscal year ended February 28, 2006. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with 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 $162,313 for the fiscal year ended February
28, 2007 and $4,500 for the fiscal year ended February 28, 2006. The services
for which these fees were paid included review of materials provided to the fund
Board in connection with investment management contract renewal process and the
review of the ICI transfer agent survey.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the
Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to the
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were 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 $175,861 for the fiscal year ended February 28, 2007 and $24,500
for the fiscal year ended February 28, 2006.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT
COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN TAX-FREE TRUST
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date April 26, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date April 26, 2007
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date April 26, 2007