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
-----------------------
(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
----
Date of reporting period: 2/28/09
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ITEM 1. REPORTS TO STOCKHOLDERS.
FEBRUARY 28, 2009
ANNUAL REPORT AND SHAREHOLDER LETTER
Franklin Insured Tax-Free Income Fund
Franklin Massachusetts Tax-Free Income Fund
(formerly, Franklin Massachusetts Insured Tax-Free Income Fund)
Franklin Michigan Tax-Free Income Fund
(formerly, Franklin Michigan Insured Tax-Free Income Fund)
Franklin Minnesota Tax-Free Income Fund
(formerly, Franklin Minnesota Insured Tax-Free Income Fund)
Franklin Ohio Tax-Free Income Fund
(formerly, Franklin Ohio Insured Tax-Free Income Fund)
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TAX-FREE INCOME
FRANKLIN TAX-FREE TRUST
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - 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)
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................ 1
ANNUAL REPORT
Municipal Bond Market Overview ............................ 4
Investment Strategy and Manager's Discussion .............. 6
Franklin Insured Tax-Free Income Fund ..................... 7
Franklin Massachusetts Tax-Free Income Fund ............... 17
Franklin Michigan Tax-Free Income Fund .................... 26
Franklin Minnesota Tax-Free Income Fund ................... 38
Franklin Ohio Tax-Free Income Fund ........................ 47
Financial Highlights and Statements of Investments ........ 58
Financial Statements ...................................... 119
Notes to Financial Statements ............................. 128
Report of Independent Registered Public Accounting Firm ... 142
Tax Designation ........................................... 143
Board Members and Officers ................................ 144
Shareholder Information ................................... 149
Shareholder Letter
Dear Shareholder:
The 12-month period ended February 28, 2009, was an extraordinary and stressful
time for investors and those of us who have worked in financial markets for many
years. During this turbulent period, the U.S. recession deepened, credit markets
froze and housing prices plummeted. Most stocks and bonds suffered major losses
as investors worried about an uncertain future. With a new president, Barack
Obama, the country and the financial markets were eager to see how effectively
the government could address these problems. Although this environment is bound
to provoke great concern, we think it is important to put short-term market
developments in perspective. Keep in mind that as daunting as current conditions
may be, we have navigated through other periods of high market volatility and
remain committed to our long-term perspective and disciplined investment
philosophy.
With the economy officially in recession since December 2007, economic growth
contracted during the 12-month reporting period. The national housing market
continued its severe correction with drops in housing starts and prices. The
Conference Board's Consumer Confidence Index dropped to the lowest level since
it began in 1967. The unemployment rate rose from 4.8% to 8.1% over the 12-month
period.(1)
In response to these economic conditions, the Federal Open Market Committee
lowered the federal funds target rate from 3.00% at the beginning of the period
to a range of 0% to 0.25% by period-end. The Federal Reserve Board's (Fed's)
current challenge is to soften the effects of the economic recession, reduce
deflation risks and maintain a healthy financial system to restart lending
throughout the economy. At period-end, the Fed did not seem to regard inflation
as an immediate threat. The Fed and the U.S. Treasury also continued to take
steps they thought were necessary to preserve the integrity of U.S. and global
financial markets.
(1.) Source: Bureau of Labor Statistics.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
It was the freezing of credit and financial markets in the U.S. and the rest of
the world that was the dominant -- and still developing -- story. Despite
various attempts by the Fed and the Treasury Department to inject liquidity into
the system and "rescue" such companies as Bear Stearns, Fannie Mae, Freddie Mac,
Merrill Lynch and American International Group, fears and concerns about the
health of our major financial institutions created a crisis on Wall Street that
we believe has not been seen since the 1930s. These fears intensified when
Lehman Brothers filed for bankruptcy in September 2008. In early October the
Senate and House approved a modified troubled asset relief plan, or TARP,
providing aid for financial institutions. As the crisis of confidence and credit
freeze spread around the world, many other countries and central banks took
measures to promote liquidity and help financial institutions within their own
borders. The U.S. government took additional steps to prevent a worsening of the
economic situation, including the provision of loans to General Motors and
Chrysler, which allowed them to develop restructuring plans and avoid bankruptcy
in the near term. Largely in reaction to financial market upheaval, the 10-year
Treasury yield experienced considerable volatility and declined from 3.53% to
3.02% over the period, reflecting a "flight to quality" by investors the world
over.
On February 17, 2009, President Obama signed into law a $787 billion stimulus
plan known as the American Recovery and Reinvestment Act of 2009, which, at the
least, is expected by many to cushion the effects of the ongoing recession for
taxpayers, consumers, businesses, and state and local governments. At most,
others expect the Act will end the recession and promote renewed growth.
Almost every major market experienced unusually volatile performance during the
reporting period. The municipal bond market, as measured by the Barclays Capital
(BC; formerly, Lehman Brothers) Municipal Bond Index, lost value in the second
half of 2008 but rebounded in 2009. The index returned +5.18% for the 12-month
review period.(2) Long-term municipal bonds, which generally make up the
majority of our portfolios, had a -0.61% return for the same period.(3)
We believe it is especially important during difficult times to keep a clear
head and long-term outlook and to consult with your financial advisor. Your
financial advisor can review your portfolio and help you reassess your needs,
goals and
(2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. The
BC 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 Baa3/BBB-. 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.
(3.) Source: (C) 2009 Morningstar. The BC Municipal Long Bond Index is the long
(22+ years) component of the BC Municipal Bond Index.
2 | Not part of the annual report
risk tolerance. Investors with discipline and a sound investment plan may find
favorable long-term opportunities when markets decline.
In the enclosed annual report for Franklin Tax-Free Trust, the portfolio
managers discuss municipal bond market conditions, investment decisions and Fund
performance during the period. You can also find other performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices. Municipal bonds provide tax-free income and
diversification from equities. Despite periods of volatility, municipal bonds
have a solid long-term record of performance, driven mostly by their income
component.
Please check our website at franklintempleton.com for special portfolio manager
commentary during this period of uncertainty. Although market conditions are
constantly changing, we remain committed to our disciplined strategy as we
manage the Funds, keeping in mind the trust you have placed in us. We appreciate
your confidence and encourage you to contact us when you have questions about
your Franklin Templeton tax-free investment.
Sincerely,
/s/ Charles B. Johnson
- ------------------------------------
Charles B. Johnson
Chairman
Franklin Tax-Free Trust
/s/ Sheila Amoroso
- ------------------------------------
Sheila Amoroso
/s/ Rafael R. Costas Jr.
- ------------------------------------
Rafael R. Costas Jr.
Senior Vice Presidents and Co-Directors
Franklin Municipal Bond Department
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28, 2009. 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.
Not part of the annual report | 3
Annual Report
Municipal Bond Market Overview
The year ended February 28, 2009, was highly unusual for the municipal bond
market. Municipal bonds provide investors with tax-free income and historically
have been a relatively stable, low-volatility investment. Municipal bond funds
have also provided portfolio diversification, helping offset the volatility of
higher risk asset classes, such as equities and many other fixed income
securities. For the 12-month period ended February 28, 2009, the Barclays
Capital (BC; formerly, Lehman Brothers) Municipal Bond Index had a +5.18% total
return compared with the +5.91% return of the BC U.S. Treasury Index.(1)
However, the year under review certainly could not be described as stable or low
volatility for the municipal bond market.
The municipal bond market's problems started with the collapse of a few
leveraged hedge funds, whose strategy was mainly focused on leveraging exposure
to subprime mortgage-related collateralized debt obligations (CDOs). The
damaging effects from such subprime-related exposure rapidly spread to other
markets. The falling prices of the CDOs, due to illiquidity and increased
expectations for mortgage defaults, led credit rating agencies to downgrade
financial guaranty companies early in 2008. In 2008, the four major municipal
insurers, AMBAC, MBIA, FGIC and FSA had been insuring nearly half of new-issue
municipal bonds and had maintained AAA ratings for many years. Although
historically they had been very good risk managers, during 2008 these insurers
were downgraded below AAA.
The downgrades initially did not concern us because many of the issuers that
used insurance were of high quality, and investment-grade municipal bonds had a
historical default rate of less than 1%.(2) However, the downgrades shocked the
market and caused problems for hedge funds and other leveraged market
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. The
BC 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 Baa3/BBB-. 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 BC 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.
(2.) Source: Standard & Poor's, "U.S. Municipal Ratings Transitions and
Defaults, 1986-2009," RATINGSDIRECT, 3/11/09.
4 | Annual Report
participants. As insured bonds declined in value during 2008, many hedge funds
that had built up large municipal bond positions were forced to sell their
insured bonds. This resulted in a significant supply/demand imbalance, and the
value of insured bonds continued to plummet. Historically, insured bonds traded
at higher prices than uninsured bonds; however, the value of insurance eroded
considerably. At the same time, the auction rate securities market collapsed.
Although traditional, non-leveraged mutual funds, retail buyers and
property-and-casualty companies continued to support the market, the selling was
overwhelming and caused some of the municipal bond market's worst performance in
its history.
The municipal bond market stabilized through the spring and summer of 2008.
Unfortunately, during this time the credit crisis started to spread across the
globe and no market was spared, except for Treasuries. Market psychology turned
bearish as the credit crunch took hold. Access to credit was effectively shut
down for close to a month, which spurred the Treasury and Federal Reserve Board
to devise plans to ease the credit crisis.
September and October brought trends similar to those early in the period. The
municipal bond market had even fewer buyers, mostly plain vanilla mutual funds
and individual investors. Once again, selling by hedge funds and leveraged
investors meeting redemptions was overwhelming and caused steep price declines.
The leveraged participants had used a strategy focused on long-maturity bonds,
and as they sold these positions, the long end of the yield curve was most
adversely affected. Interest rates continued to climb higher toward the end of
2008 as demand waned.
So far, early 2009 appeared more positive. The forced selling by hedge funds and
leveraged funds subsided, and positive cash flows once again characterized the
market. Helping the municipal bond market were bond coupon payments at the
beginning of 2009, a small new-issue calendar, and news that municipal issuers
will benefit from the federal government's stimulus package, although we still
expect volatility in the near term. During the reporting period, we had the
opportunity to purchase bonds at higher yields than were available in many
years, which supported our Funds' dividend distributions. At period-end, we
continued to be active in the market and felt that municipal bonds at current
yields represented an attractive long-term opportunity. On February 28, 2009,
yields for 10- and 30-year high-grade municipal bonds continued to exceed
comparable Treasury yields, which is highly unusual.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2009. 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.
Annual Report | 5
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 do not use leverage or exotic
derivatives, nor do we use hedging techniques that could add volatility and
contribute to underperformance in adverse markets. We generally stay fully
invested to maximize income distribution.
The mixture of our value-oriented philosophy of investing primarily for income
and a positive sloping municipal yield curve 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, 2009, 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.
6 | 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)
CREDIT QUALITY BREAKDOWN*
Franklin Insured Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 27.6%
AA 38.5%
A 13.8%
BBB 2.2%
Below Investment Grade 0.3%
Not Rated by S&P 17.6%
* 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 -- 0.3%
AA or Aa 6.2% --
A 6.5% 0.2%
BBB or Baa 3.4% 1.0%
---- ---
Total 16.1% 1.5%
This annual report for Franklin Insured Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
(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.
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 62.
Annual Report | 7
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
DIVIDEND DISTRIBUTIONS*
Franklin Insured Tax-Free Income Fund
DIVIDEND PER SHARE
------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS**
- ----- ---------- ---------- ---------- ---------------
March 2008 4.28 cents 3.70 cents 3.70 cents --
April 2008 4.28 cents 3.70 cents 3.70 cents --
May 2008 4.28 cents 3.70 cents 3.70 cents --
June 2008 4.28 cents 3.73 cents 3.73 cents --
July 2008 4.28 cents 3.73 cents 3.73 cents 2.82 cents
August 2008 4.28 cents 3.73 cents 3.73 cents 4.38 cents
September 2008 4.28 cents 3.75 cents 3.74 cents 4.37 cents
October 2008 4.28 cents 3.75 cents 3.74 cents 4.37 cents
November 2008 4.28 cents 3.75 cents 3.74 cents 4.37 cents
December 2008 4.35 cents 3.88 cents 3.86 cents 4.44 cents
January 2009 4.35 cents 3.88 cents 3.86 cents 4.44 cents
February 2009 4.35 cents 3.88 cents 3.86 cents 4.44 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.
** Effective 7/1/08, the Fund began offering Advisor Class shares. See the
prospectus for details.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.48 on February 29, 2008, to $11.20 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 51.38 cents per share for the same period.(3) The
Performance Summary beginning on page 10 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.51% based on an
annualization of the current 4.40 cent per share dividend and the maximum
offering price of $11.70 on February 28, 2009. An investor in the 2009 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
6.94% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class B, C and Advisor shares' performance,
please see the Performance Summary.
(3.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
8 | Annual Report
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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, 2009, 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 Insured Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Utilities 18.5%
Hospital & Health Care 17.7%
Prerefunded 16.8%
Subject to Government Appropriations 12.2%
General Obligation 9.3%
Transportation 8.9%
Higher Education 6.6%
Other Revenue 4.8%
Tax-Supported 4.6%
Housing 0.6%
* Does not include short-term investments and other net assets.
Annual Report | 9
Performance Summary as of 2/28/09
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
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.28 $11.20 $11.48
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5138
CLASS B (SYMBOL: FBITX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.27 $11.26 $11.53
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4504
CLASS C (SYMBOL: FRITX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.28 $11.31 $11.59
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4495
ADVISOR CLASS (SYMBOL: N/A) CHANGE 2/28/09 7/1/08
- --------------------------- ------ ------- ------
Net Asset Value (NAV) -$0.66 $11.20 $11.86
DISTRIBUTIONS (7/1/08-2/28/09)
Dividend Income $0.3479
10 | 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +2.04% +10.71% +45.89%
Average Annual Total Return(2) -2.30% +1.17% +3.40%
Avg. Ann. Total Return (3/31/09)(3) -5.16% +1.32% +3.41%
Distribution Rate(4) 4.51%
Taxable Equivalent Distribution Rate(5) 6.94%
30-Day Standardized Yield(6) 4.00%
Taxable Equivalent Yield(5) 6.15%
Total Annual Operating expenses(7) 0.64%
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ------- ------ ------ ---------
Cumulative Total Return(1) +1.56% +7.75% +46.71%
Average Annual Total Return(2) -2.34% +1.17% +4.31%
Avg. Ann. Total Return (3/31/09)(3) -5.24% +1.30% +4.32%
Distribution Rate(4) 4.15%
Taxable Equivalent Distribution Rate(5) 6.38%
30-Day Standardized Yield(6) 3.62%
Taxable Equivalent Yield(5) 5.57%
Total Annual Operating expenses(7) 1.19%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +1.46% +7.70% +38.11%
Average Annual Total Return(2) +0.48% +1.49% +3.28%
Avg. Ann. Total Return (3/31/09)(3) -2.40% +1.65% +3.29%
Distribution Rate(4) 4.13%
Taxable Equivalent Distribution Rate(5) 6.35%
30-Day Standardized Yield(6) 3.64%
Taxable Equivalent Yield(5) 5.60%
Total Annual Operating expenses(7) 1.19%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------ -------
Cumulative Total Return(1) +2.11% +10.78% +45.98%
Average Annual Total Return(2) +2.11% +2.07% +3.86%
Avg. Ann. Total Return (3/31/09)(3) -0.92% +2.21% +3.86%
Distribution Rate(4) 4.81%
Taxable Equivalent Distribution Rate(5) 7.40%
30-Day Standardized Yield(6) 4.29%
Taxable Equivalent Yield(5) 6.60%
Total Annual Operating expenses(7) 0.54%
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 (800) 342-5236.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -2.30%
5-Year +1.17%
10-Year +3.40%
(PERFORMANCE GRAPH)
FRANKLIN
INSURED BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS A BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $ 9,578 $10,000 $10,000
3/31/1999 $ 9,602 $10,014 $10,030
4/30/1999 $ 9,619 $10,039 $10,103
5/31/1999 $ 9,572 $ 9,981 $10,103
6/30/1999 $ 9,447 $ 9,837 $10,103
7/31/1999 $ 9,463 $ 9,873 $10,134
8/31/1999 $ 9,343 $ 9,794 $10,158
9/30/1999 $ 9,327 $ 9,798 $10,207
10/31/1999 $ 9,199 $ 9,692 $10,225
11/30/1999 $ 9,288 $ 9,795 $10,231
12/31/1999 $ 9,199 $ 9,722 $10,231
1/31/2000 $ 9,142 $ 9,679 $10,261
2/29/2000 $ 9,266 $ 9,792 $10,322
3/31/2000 $ 9,489 $10,006 $10,407
4/30/2000 $ 9,431 $ 9,947 $10,413
5/31/2000 $ 9,366 $ 9,895 $10,426
6/30/2000 $ 9,609 $10,157 $10,480
7/31/2000 $ 9,760 $10,299 $10,505
8/31/2000 $ 9,905 $10,457 $10,505
9/30/2000 $ 9,837 $10,403 $10,559
10/31/2000 $ 9,949 $10,516 $10,578
11/30/2000 $10,035 $10,596 $10,584
12/31/2000 $10,310 $10,858 $10,578
1/31/2001 $10,371 $10,965 $10,644
2/28/2001 $10,406 $11,000 $10,687
3/31/2001 $10,484 $11,099 $10,711
4/30/2001 $10,361 $10,978 $10,754
5/31/2001 $10,467 $11,097 $10,802
6/30/2001 $10,554 $11,171 $10,821
7/31/2001 $10,705 $11,336 $10,790
8/31/2001 $10,865 $11,523 $10,790
9/30/2001 $10,820 $11,484 $10,839
10/31/2001 $10,945 $11,621 $10,802
11/30/2001 $10,882 $11,523 $10,784
12/31/2001 $10,782 $11,414 $10,742
1/31/2002 $10,943 $11,612 $10,766
2/28/2002 $11,070 $11,752 $10,809
3/31/2002 $10,876 $11,522 $10,869
4/30/2002 $11,049 $11,747 $10,930
5/31/2002 $11,102 $11,818 $10,930
6/30/2002 $11,202 $11,943 $10,936
7/31/2002 $11,330 $12,097 $10,948
8/31/2002 $11,440 $12,242 $10,985
9/30/2002 $11,691 $12,510 $11,003
10/31/2002 $11,511 $12,303 $11,021
11/30/2002 $11,490 $12,252 $11,021
12/31/2002 $11,715 $12,510 $10,997
1/31/2003 $11,694 $12,479 $11,046
2/28/2003 $11,835 $12,653 $11,131
3/31/2003 $11,871 $12,661 $11,198
4/30/2003 $11,974 $12,744 $11,173
5/31/2003 $12,261 $13,043 $11,155
6/30/2003 $12,228 $12,987 $11,167
7/31/2003 $11,766 $12,533 $11,179
8/31/2003 $11,859 $12,626 $11,222
9/30/2003 $12,169 $12,997 $11,258
10/31/2003 $12,126 $12,932 $11,246
11/30/2003 $12,260 $13,067 $11,216
12/31/2003 $12,354 $13,175 $11,204
1/31/2004 $12,439 $13,250 $11,258
2/29/2004 $12,624 $13,450 $11,319
3/31/2004 $12,580 $13,403 $11,392
4/30/2004 $12,274 $13,086 $11,429
5/31/2004 $12,220 $13,038 $11,495
6/30/2004 $12,246 $13,086 $11,532
7/31/2004 $12,394 $13,258 $11,514
8/31/2004 $12,614 $13,524 $11,520
9/30/2004 $12,681 $13,595 $11,544
10/31/2004 $12,800 $13,712 $11,605
11/30/2004 $12,693 $13,599 $11,611
12/31/2004 $12,864 $13,765 $11,568
1/31/2005 $13,016 $13,894 $11,593
2/28/2005 $12,991 $13,848 $11,660
3/31/2005 $12,923 $13,760 $11,751
4/30/2005 $13,107 $13,977 $11,830
5/31/2005 $13,197 $14,076 $11,818
6/30/2005 $13,266 $14,163 $11,824
7/31/2005 $13,229 $14,099 $11,878
8/31/2005 $13,331 $14,242 $11,939
9/30/2005 $13,250 $14,146 $12,085
10/31/2005 $13,191 $14,060 $12,109
11/30/2005 $13,250 $14,127 $12,012
12/31/2005 $13,352 $14,249 $11,964
1/31/2006 $13,367 $14,287 $12,055
2/28/2006 $13,470 $14,383 $12,079
3/31/2006 $13,398 $14,284 $12,146
4/30/2006 $13,402 $14,279 $12,249
5/31/2006 $13,440 $14,343 $12,310
6/30/2006 $13,390 $14,289 $12,334
7/31/2006 $13,528 $14,459 $12,371
8/31/2006 $13,689 $14,673 $12,395
9/30/2006 $13,783 $14,775 $12,334
10/31/2006 $13,867 $14,868 $12,267
11/30/2006 $13,984 $14,992 $12,249
12/31/2006 $13,943 $14,939 $12,267
1/31/2007 $13,913 $14,901 $12,305
2/28/2007 $14,076 $15,097 $12,371
3/31/2007 $14,034 $15,060 $12,483
4/30/2007 $14,073 $15,104 $12,564
5/31/2007 $14,031 $15,038 $12,641
6/30/2007 $13,979 $14,960 $12,666
7/31/2007 $14,076 $15,076 $12,663
8/31/2007 $14,011 $15,011 $12,639
9/30/2007 $14,202 $15,233 $12,674
10/31/2007 $14,265 $15,301 $12,701
11/30/2007 $14,340 $15,398 $12,777
12/31/2007 $14,391 $15,441 $12,768
1/31/2008 $14,418 $15,636 $12,832
2/29/2008 $13,695 $14,920 $12,869
3/31/2008 $14,163 $15,346 $12,980
4/30/2008 $14,418 $15,526 $13,059
5/31/2008 $14,517 $15,620 $13,169
6/30/2008 $14,303 $15,443 $13,302
7/31/2008 $14,282 $15,502 $13,372
8/31/2008 $14,383 $15,683 $13,318
9/30/2008 $13,568 $14,948 $13,300
10/31/2008 $13,501 $14,795 $13,166
11/30/2008 $13,270 $14,842 $12,913
12/31/2008 $13,521 $15,059 $12,780
1/31/2009 $13,798 $15,610 $12,835
2/28/2009 $13,973 $15,692 $12,899
Total Returns 39.73% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------------------------ -------
1-Year -2.34%
5-Year +1.17%
Since Inception (2/1/00) +4.31%
(PERFORMANCE GRAPH)
FRANKLIN
INSURED BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS B BOND INDEX CPI
---- ------------- ---------- -------
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 $10,748 $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 $13,360 $10,960
11/30/2003 $13,152 $13,500 $10,930
12/31/2003 $13,248 $13,611 $10,918
1/31/2004 $13,333 $13,689 $10,972
2/29/2004 $13,525 $13,895 $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 $13,971 $11,226
9/30/2004 $13,542 $14,046 $11,250
10/31/2004 $13,662 $14,166 $11,309
11/30/2004 $13,541 $14,049 $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 $14,306 $11,363
3/31/2005 $13,772 $14,216 $11,451
4/30/2005 $13,949 $14,440 $11,528
5/31/2005 $14,049 $14,542 $11,517
6/30/2005 $14,116 $14,632 $11,523
7/31/2005 $14,060 $14,566 $11,576
8/31/2005 $14,161 $14,713 $11,635
9/30/2005 $14,069 $14,614 $11,777
10/31/2005 $14,000 $14,526 $11,801
11/30/2005 $14,067 $14,595 $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 $14,757 $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 $15,159 $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 $15,394 $11,991
2/28/2007 $14,827 $15,597 $12,056
3/31/2007 $14,789 $15,559 $12,165
4/30/2007 $14,822 $15,605 $12,244
5/31/2007 $14,771 $15,536 $12,319
6/30/2007 $14,711 $15,455 $12,343
7/31/2007 $14,806 $15,575 $12,340
8/31/2007 $14,718 $15,508 $12,317
9/30/2007 $14,924 $15,737 $12,351
10/31/2007 $14,983 $15,807 $12,378
11/30/2007 $15,054 $15,908 $12,451
12/31/2007 $15,088 $15,952 $12,443
1/31/2008 $15,122 $16,153 $12,505
2/29/2008 $14,364 $15,414 $12,541
3/31/2008 $14,857 $15,854 $12,650
4/30/2008 $15,123 $16,040 $12,726
5/31/2008 $15,227 $16,137 $12,834
6/30/2008 $15,004 $15,955 $12,963
7/31/2008 $14,983 $16,015 $13,031
8/31/2008 $15,086 $16,203 $12,979
9/30/2008 $14,235 $15,443 $12,961
10/31/2008 $14,164 $15,285 $12,830
11/30/2008 $13,917 $15,334 $12,584
12/31/2008 $14,187 $15,558 $12,454
1/31/2009 $14,474 $16,127 $12,508
2/28/2009 $14,671 $16,212 $12,571
Total Returns 46.71% 62.12% 25.71%
12 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +0.48%
5-Year +1.49%
10-Year +3.28%
(PERFORMANCE GRAPH)
FRANKLIN
INSURED BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS C BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,020 $10,014 $10,030
4/30/1999 $10,032 $10,039 $10,103
5/31/1999 $ 9,978 $ 9,981 $10,103
6/30/1999 $ 9,844 $ 9,837 $10,103
7/31/1999 $ 9,856 $ 9,873 $10,134
8/31/1999 $ 9,736 $ 9,794 $10,158
9/30/1999 $ 9,707 $ 9,798 $10,207
10/31/1999 $ 9,561 $ 9,692 $10,225
11/30/1999 $ 9,658 $ 9,795 $10,231
12/31/1999 $ 9,561 $ 9,722 $10,231
1/31/2000 $ 9,498 $ 9,679 $10,261
2/29/2000 $ 9,622 $ 9,792 $10,322
3/31/2000 $ 9,847 $10,006 $10,407
4/30/2000 $ 9,783 $ 9,947 $10,413
5/31/2000 $ 9,711 $ 9,895 $10,426
6/30/2000 $ 9,957 $10,157 $10,480
7/31/2000 $10,109 $10,299 $10,505
8/31/2000 $10,252 $10,457 $10,505
9/30/2000 $10,187 $10,403 $10,559
10/31/2000 $10,288 $10,516 $10,578
11/30/2000 $10,372 $10,596 $10,584
12/31/2000 $10,659 $10,858 $10,578
1/31/2001 $10,707 $10,965 $10,644
2/28/2001 $10,738 $11,000 $10,687
3/31/2001 $10,822 $11,099 $10,711
4/30/2001 $10,691 $10,978 $10,754
5/31/2001 $10,785 $11,097 $10,802
6/30/2001 $10,870 $11,171 $10,821
7/31/2001 $11,028 $11,336 $10,790
8/31/2001 $11,187 $11,523 $10,790
9/30/2001 $11,136 $11,484 $10,839
10/31/2001 $11,258 $11,621 $10,802
11/30/2001 $11,189 $11,523 $10,784
12/31/2001 $11,081 $11,414 $10,742
1/31/2002 $11,250 $11,612 $10,766
2/28/2002 $11,364 $11,752 $10,809
3/31/2002 $11,162 $11,522 $10,869
4/30/2002 $11,332 $11,747 $10,930
5/31/2002 $11,391 $11,818 $10,930
6/30/2002 $11,487 $11,943 $10,936
7/31/2002 $11,603 $12,097 $10,948
8/31/2002 $11,719 $12,242 $10,985
9/30/2002 $11,969 $12,510 $11,003
10/31/2002 $11,780 $12,303 $11,021
11/30/2002 $11,754 $12,252 $11,021
12/31/2002 $11,977 $12,510 $10,997
1/31/2003 $11,951 $12,479 $11,046
2/28/2003 $12,098 $12,653 $11,131
3/31/2003 $12,120 $12,661 $11,198
4/30/2003 $12,219 $12,744 $11,173
5/31/2003 $12,504 $13,043 $11,155
6/30/2003 $12,474 $12,987 $11,167
7/31/2003 $11,991 $12,533 $11,179
8/31/2003 $12,079 $12,626 $11,222
9/30/2003 $12,395 $12,997 $11,258
10/31/2003 $12,346 $12,932 $11,246
11/30/2003 $12,474 $13,067 $11,216
12/31/2003 $12,564 $13,175 $11,204
1/31/2004 $12,645 $13,250 $11,258
2/29/2004 $12,826 $13,450 $11,319
3/31/2004 $12,775 $13,403 $11,392
4/30/2004 $12,451 $13,086 $11,429
5/31/2004 $12,401 $13,038 $11,495
6/30/2004 $12,411 $13,086 $11,532
7/31/2004 $12,564 $13,258 $11,514
8/31/2004 $12,780 $13,524 $11,520
9/30/2004 $12,842 $13,595 $11,544
10/31/2004 $12,956 $13,712 $11,605
11/30/2004 $12,842 $13,599 $11,611
12/31/2004 $13,008 $13,765 $11,568
1/31/2005 $13,154 $13,894 $11,593
2/28/2005 $13,122 $13,848 $11,660
3/31/2005 $13,059 $13,760 $11,751
4/30/2005 $13,227 $13,977 $11,830
5/31/2005 $13,321 $14,076 $11,818
6/30/2005 $13,385 $14,163 $11,824
7/31/2005 $13,331 $14,099 $11,878
8/31/2005 $13,427 $14,242 $11,939
9/30/2005 $13,340 $14,146 $12,085
10/31/2005 $13,275 $14,060 $12,109
11/30/2005 $13,327 $14,127 $12,012
12/31/2005 $13,423 $14,249 $11,964
1/31/2006 $13,442 $14,287 $12,055
2/28/2006 $13,528 $14,383 $12,079
3/31/2006 $13,450 $14,284 $12,146
4/30/2006 $13,448 $14,279 $12,249
5/31/2006 $13,479 $14,343 $12,310
6/30/2006 $13,434 $14,289 $12,334
7/31/2006 $13,566 $14,459 $12,371
8/31/2006 $13,719 $14,673 $12,395
9/30/2006 $13,807 $14,775 $12,334
10/31/2006 $13,884 $14,868 $12,267
11/30/2006 $13,995 $14,992 $12,249
12/31/2006 $13,947 $14,939 $12,267
1/31/2007 $13,911 $14,901 $12,305
2/28/2007 $14,066 $15,097 $12,371
3/31/2007 $14,030 $15,060 $12,483
4/30/2007 $14,050 $15,104 $12,564
5/31/2007 $14,002 $15,038 $12,641
6/30/2007 $13,945 $14,960 $12,666
7/31/2007 $14,034 $15,076 $12,663
8/31/2007 $13,963 $15,011 $12,639
9/30/2007 $14,146 $15,233 $12,674
10/31/2007 $14,213 $15,301 $12,701
11/30/2007 $14,280 $15,398 $12,777
12/31/2007 $14,312 $15,441 $12,768
1/31/2008 $14,344 $15,636 $12,832
2/29/2008 $13,614 $14,920 $12,869
3/31/2008 $14,068 $15,346 $12,980
4/30/2008 $14,324 $15,526 $13,059
5/31/2008 $14,415 $15,620 $13,169
6/30/2008 $14,198 $15,443 $13,302
7/31/2008 $14,159 $15,502 $13,372
8/31/2008 $14,263 $15,683 $13,318
9/30/2008 $13,445 $14,948 $13,300
10/31/2008 $13,373 $14,795 $13,166
11/30/2008 $13,139 $14,842 $12,913
12/31/2008 $13,380 $15,059 $12,780
1/31/2009 $13,645 $15,610 $12,835
2/28/2009 $13,811 $15,692 $12,899
Total Returns 38.11% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 2/28/09
- ---------------- -------
1-Year +2.11%
5-Year +2.07%
10-Year +3.86%
(PERFORMANCE GRAPH)
FRANKLIN
INSURED BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE ADVISOR CLASS BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,025 $10,014 $10,030
4/30/1999 $10,042 $10,039 $10,103
5/31/1999 $ 9,994 $ 9,981 $10,103
6/30/1999 $ 9,863 $ 9,837 $10,103
7/31/1999 $ 9,879 $ 9,873 $10,134
8/31/1999 $ 9,755 $ 9,794 $10,158
9/30/1999 $ 9,738 $ 9,798 $10,207
10/31/1999 $ 9,604 $ 9,692 $10,225
11/30/1999 $ 9,697 $ 9,795 $10,231
12/31/1999 $ 9,604 $ 9,722 $10,231
1/31/2000 $ 9,545 $ 9,679 $10,261
2/29/2000 $ 9,674 $ 9,792 $10,322
3/31/2000 $ 9,907 $10,006 $10,407
4/30/2000 $ 9,847 $ 9,947 $10,413
5/31/2000 $ 9,778 $ 9,895 $10,426
6/30/2000 $10,032 $10,157 $10,480
7/31/2000 $10,190 $10,299 $10,505
8/31/2000 $10,341 $10,457 $10,505
9/30/2000 $10,271 $10,403 $10,559
10/31/2000 $10,387 $10,516 $10,578
11/30/2000 $10,477 $10,596 $10,584
12/31/2000 $10,764 $10,858 $10,578
1/31/2001 $10,827 $10,965 $10,644
2/28/2001 $10,864 $11,000 $10,687
3/31/2001 $10,945 $11,099 $10,711
4/30/2001 $10,818 $10,978 $10,754
5/31/2001 $10,928 $11,097 $10,802
6/30/2001 $11,019 $11,171 $10,821
7/31/2001 $11,176 $11,336 $10,790
8/31/2001 $11,343 $11,523 $10,790
9/30/2001 $11,296 $11,484 $10,839
10/31/2001 $11,427 $11,621 $10,802
11/30/2001 $11,361 $11,523 $10,784
12/31/2001 $11,256 $11,414 $10,742
1/31/2002 $11,425 $11,612 $10,766
2/28/2002 $11,557 $11,752 $10,809
3/31/2002 $11,355 $11,522 $10,869
4/30/2002 $11,535 $11,747 $10,930
5/31/2002 $11,591 $11,818 $10,930
6/30/2002 $11,695 $11,943 $10,936
7/31/2002 $11,829 $12,097 $10,948
8/31/2002 $11,944 $12,242 $10,985
9/30/2002 $12,206 $12,510 $11,003
10/31/2002 $12,018 $12,303 $11,021
11/30/2002 $11,996 $12,252 $11,021
12/31/2002 $12,231 $12,510 $10,997
1/31/2003 $12,209 $12,479 $11,046
2/28/2003 $12,356 $12,653 $11,131
3/31/2003 $12,394 $12,661 $11,198
4/30/2003 $12,501 $12,744 $11,173
5/31/2003 $12,801 $13,043 $11,155
6/30/2003 $12,766 $12,987 $11,167
7/31/2003 $12,284 $12,533 $11,179
8/31/2003 $12,382 $12,626 $11,222
9/30/2003 $12,705 $12,997 $11,258
10/31/2003 $12,660 $12,932 $11,246
11/30/2003 $12,800 $13,067 $11,216
12/31/2003 $12,899 $13,175 $11,204
1/31/2004 $12,987 $13,250 $11,258
2/29/2004 $13,181 $13,450 $11,319
3/31/2004 $13,134 $13,403 $11,392
4/30/2004 $12,815 $13,086 $11,429
5/31/2004 $12,758 $13,038 $11,495
6/30/2004 $12,785 $13,086 $11,532
7/31/2004 $12,940 $13,258 $11,514
8/31/2004 $13,169 $13,524 $11,520
9/30/2004 $13,240 $13,595 $11,544
10/31/2004 $13,364 $13,712 $11,605
11/30/2004 $13,252 $13,599 $11,611
12/31/2004 $13,431 $13,765 $11,568
1/31/2005 $13,589 $13,894 $11,593
2/28/2005 $13,563 $13,848 $11,660
3/31/2005 $13,492 $13,760 $11,751
4/30/2005 $13,684 $13,977 $11,830
5/31/2005 $13,778 $14,076 $11,818
6/30/2005 $13,851 $14,163 $11,824
7/31/2005 $13,812 $14,099 $11,878
8/31/2005 $13,918 $14,242 $11,939
9/30/2005 $13,834 $14,146 $12,085
10/31/2005 $13,772 $14,060 $12,109
11/30/2005 $13,833 $14,127 $12,012
12/31/2005 $13,940 $14,249 $11,964
1/31/2006 $13,956 $14,287 $12,055
2/28/2006 $14,063 $14,383 $12,079
3/31/2006 $13,988 $14,284 $12,146
4/30/2006 $13,993 $14,279 $12,249
5/31/2006 $14,032 $14,343 $12,310
6/30/2006 $13,980 $14,289 $12,334
7/31/2006 $14,124 $14,459 $12,371
8/31/2006 $14,292 $14,673 $12,395
9/30/2006 $14,390 $14,775 $12,334
10/31/2006 $14,477 $14,868 $12,267
11/30/2006 $14,600 $14,992 $12,249
12/31/2006 $14,557 $14,939 $12,267
1/31/2007 $14,525 $14,901 $12,305
2/28/2007 $14,696 $15,097 $12,371
3/31/2007 $14,653 $15,060 $12,483
4/30/2007 $14,693 $15,104 $12,564
5/31/2007 $14,649 $15,038 $12,641
6/30/2007 $14,595 $14,960 $12,666
7/31/2007 $14,696 $15,076 $12,663
8/31/2007 $14,628 $15,011 $12,639
9/30/2007 $14,828 $15,233 $12,674
10/31/2007 $14,893 $15,301 $12,701
11/30/2007 $14,971 $15,398 $12,777
12/31/2007 $15,025 $15,441 $12,768
1/31/2008 $15,053 $15,636 $12,832
2/29/2008 $14,298 $14,920 $12,869
3/31/2008 $14,787 $15,346 $12,980
4/30/2008 $15,053 $15,526 $13,059
5/31/2008 $15,156 $15,620 $13,169
6/30/2008 $14,933 $15,443 $13,302
7/31/2008 $14,900 $15,502 $13,372
8/31/2008 $15,018 $15,683 $13,318
9/30/2008 $14,159 $14,948 $13,300
10/31/2008 $14,089 $14,795 $13,166
11/30/2008 $13,846 $14,842 $12,913
12/31/2008 $14,116 $15,059 $12,780
1/31/2009 $14,402 $15,610 $12,835
2/28/2009 $14,598 $15,692 $12,899
Total Returns 45.98% 56.92% 28.99%
Annual Report | 13
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 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the 2009 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 7/1/08, 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 7/1/08, 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 6/30/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 7/1/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -2.58%.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 INSURED TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 971.60 $3.13
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
CLASS B
Actual $1,000 $ 969.10 $5.81
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
CLASS C
Actual $1,000 $ 968.40 $5.81
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
ADVISOR CLASS
Actual $1,000 $ 972.10 $2.64
Hypothetical (5% return before expenses) $1,000 $1,022.12 $2.71
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.64%; B: 1.19%; C: 1.19%; and Advisor:
0.54%), multiplied by the average account value over the period, multiplied
by 181/365 to reflect the one-half year period.
16 | Annual Report
Franklin Massachusetts Tax-Free Income Fund
(formerly, Franklin Massachusetts Insured Tax-Free Income Fund)
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Massachusetts 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)
CREDIT QUALITY BREAKDOWN*
Franklin Massachusetts Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA ............... 25.0%
AA ................ 47.3%
A ................. 15.1%
Not Rated by S&P .. 12.6%
* 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 -- 0.1%
AA or Aa 2.6% --
A 2.7% --
BBB or Baa 5.7% 1.5%
--- ---
Total 11.0% 1.6%
This annual report for Franklin Massachusetts Tax-Free Income Fund covers the
fiscal year ended February 28, 2009.
(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 80.
Annual Report | 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
DIVIDEND DISTRIBUTIONS*
Franklin Massachusetts Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.01 cents 3.45 cents
April 2008 4.01 cents 3.45 cents
May 2008 4.01 cents 3.45 cents
June 2008 4.06 cents 3.52 cents
July 2008 4.06 cents 3.52 cents
August 2008 4.06 cents 3.52 cents
September 2008 4.06 cents 3.54 cents
October 2008 4.06 cents 3.54 cents
November 2008 4.06 cents 3.54 cents
December 2008 4.06 cents 3.59 cents
January 2009 4.06 cents 3.59 cents
February 2009 4.06 cents 3.59 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.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.20 on February 29, 2008, to $10.94 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 48.38 cents per share for the same period.(2) The
Performance Summary beginning on page 21 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.26% based on an
annualization of the current 4.06 cent per share dividend and the maximum
offering price of $11.43 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and Massachusetts personal income tax bracket of
38.45% would need to earn a distribution rate of 6.92% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class C
shares' performance, please see the Performance Summary.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
18 | Annual Report
COMMONWEALTH UPDATE
After years of steady growth, Massachusetts' economy began to decelerate in line
with national trends due to the deepening recession and its attending
conditions, including tighter credit conditions, a depressed housing market and
severe volatility in financial markets. Despite rising unemployment, which
increased sharply from 4.4% to 7.8% during the year under review but remained
below national levels, the commonwealth retained its deep and diverse economy
and comparatively high wealth and personal income levels of 127% above the
national average.(3, 4) The higher education and health care services sectors
posted job gains, which partially offset heavier combined employment losses in
the manufacturing, construction and financial services sectors. However,
financial services sector employment reflected greater losses than at any time
since the 1940s, and Massachusetts' crucial positioning within this typically
high-paying sector has led to disproportionately large job losses when compared
with most other states.
After years of healthy revenue growth, Massachusetts grappled with a sizable
fiscal year 2009 budget shortfall of $1.1 billion as the recession dampened
sales and personal income tax performance.(5) Rising health care costs related
to Medicaid, pensions and health care reform also added to budget pressures at a
time when waning forecasted revenues were unable to support current service
expenses. The governor's fiscal year 2010 budget assessment assumed an even
bigger estimated budget gap of $3.6 billion.(4) In addition to modest use of
budget reserve funds and several one-time solutions, various revenue
enhancements were proposed to further close the gap, including the elimination
of certain sales tax exemptions, spending cuts, and reliance on federal
government stimulus funding.
Massachusetts' tax-supported debt levels ranked among the highest in the nation
on a per-capita basis and as a percentage of personal income, at $4,526 and
9.8%.(5) The debt burden increased in recent years partly due to costs
associated with the Massachusetts Turnpike and Massachusetts School Building
Authorities, which are supported by softening sales tax revenues. The
commonwealth is bolstered by a strong financial position and good reserves,
though some of these reserves will be drawn down in the near term. Given the
commonwealth's dependence on cyclical personal income (and related capital
gains) taxes, a strong reserve position is important. Maintenance of healthy
reserve levels and other prudent budget management practices prompted credit
rating agency Standard & Poor's to recently affirm its AA long-term credit
rating with
PORTFOLIO BREAKDOWN
Franklin Massachusetts
Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 28.0%
Higher Education 25.1%**
Transportation 11.9%
Other Revenue 10.5%
General Obligation 8.7%
Utilities 6.5%
Tax-Supported 6.0%
Hospital & Health Care 2.6%
Subject to Government Appropriations 0.4%
Housing 0.3%
* Does not include short-term investments and other net assets.
** The Fund may invest more than 25% in municipal securities that finance
similar types of projects such as higher education. A change that affects
one project may affect all similar projects, thereby increasing market
risk.
(3.) Source: U.S. Bureau of Labor Statistics.
(4.) Source: Standard & Poor's, "Summary: Massachusetts; General Obligation,"
RATINGSDIRECT, 2/13/09.
(5.) Source: Moody's Investors Service, "New Issue: Massachusetts (Commonwealth
of)," 2/17/09.
Annual Report | 19
a stable outlook for Massachusetts general obligation bonds.(6) Despite the
drawbacks created by its high debt burden and a significant unfunded pension
liability, the commonwealth historically has taken swift and flexible actions to
restore balance after identifying revenue shortfalls -- management practices
critical to navigating periods of fiscal strain.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
As mentioned in the Municipal Bond Market Overview beginning on page 4, over the
past year the municipal bond insurance industry changed dramatically. In light
of recent credit market conditions and recent and possible future downgrades of
municipal bond insurers, the supply of insured Massachusetts municipal
securities that met the Fund's previous investment guidelines was limited. We
were no longer confident we would be able to meet the Fund's non-fundamental
investment policy of investing at least 80% of net assets in insured municipal
securities. Therefore, the board of trustees eliminated the Fund's
non-fundamental investment policy and changed its name, effective February 17,
2009. Going forward, the Fund will buy only municipal securities rated in the
top four ratings by U.S. nationally recognized rating services (or comparable
unrated securities). Because of its historical investment policy of investing in
insured municipal securities, the Fund's portfolio consisted predominantly of
insured municipal securities at fiscal year-end, and the recent changes had
little effect on performance.
Thank you for your continued participation in Franklin Massachusetts 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, 2009, 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.
(6.) This does not indicate Standard & Poor's rating of the Fund.
20 | Annual Report
Performance Summary as of 2/28/09
FRANKLIN MASSACHUSETTS 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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.26 $10.94 $11.20
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4838
CLASS C (SYMBOL: FMAIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.26 $11.03 $11.29
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4215
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +2.00% +11.67% +46.86%
Average Annual Total Return(2) -2.36% +1.34% +3.47%
Avg. Ann. Total Return (3/31/09)(3) -5.00% +1.37% +3.45%
Distribution Rate(4) 4.26%
Taxable Equivalent Distribution Rate(5) 6.92%
30-Day Standardized Yield(6) 3.45%
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) +1.42% +8.64% +39.13%
Average Annual Total Return(2) +0.45% +1.67% +3.36%
Avg. Ann. Total Return (3/31/09)(3) -2.28% +1.70% +3.33%
Distribution Rate(4) 3.87%
Taxable Equivalent Distribution Rate(5) 6.29%
30-Day Standardized Yield(6) 3.07%
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 (800) 342-5236.
Annual Report | 21
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -2.36%
5-Year +1.34%
10-Year +3.47%
(PERFORMANCE GRAPH)
FRANKLIN MASSACHUSETTS BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL BOND
DATE FUND - CLASS A INDEX CPI
- -----------------------------------------------------------------
3/1/1999 $ 9,575 $10,000 $10,000
3/31/1999 $ 9,597 $10,014 $10,030
4/30/1999 $ 9,620 $10,039 $10,103
5/31/1999 $ 9,576 $ 9,981 $10,103
6/30/1999 $ 9,442 $ 9,837 $10,103
7/31/1999 $ 9,456 $ 9,873 $10,134
8/31/1999 $ 9,320 $ 9,794 $10,158
9/30/1999 $ 9,276 $ 9,798 $10,207
10/31/1999 $ 9,139 $ 9,692 $10,225
11/30/1999 $ 9,239 $ 9,795 $10,231
12/31/1999 $ 9,151 $ 9,722 $10,231
1/31/2000 $ 9,098 $ 9,679 $10,261
2/29/2000 $ 9,250 $ 9,792 $10,322
3/31/2000 $ 9,472 $10,006 $10,407
4/30/2000 $ 9,401 $ 9,947 $10,413
5/31/2000 $ 9,312 $ 9,895 $10,426
6/30/2000 $ 9,589 $10,157 $10,480
7/31/2000 $ 9,762 $10,299 $10,505
8/31/2000 $ 9,892 $10,457 $10,505
9/30/2000 $ 9,820 $10,403 $10,559
10/31/2000 $ 9,951 $10,516 $10,578
11/30/2000 $10,047 $10,596 $10,584
12/31/2000 $10,367 $10,858 $10,578
1/31/2001 $10,410 $10,965 $10,644
2/28/2001 $10,453 $11,000 $10,687
3/31/2001 $10,522 $11,099 $10,711
4/30/2001 $10,374 $10,978 $10,754
5/31/2001 $10,472 $11,097 $10,802
6/30/2001 $10,579 $11,171 $10,821
7/31/2001 $10,733 $11,336 $10,790
8/31/2001 $10,915 $11,523 $10,790
9/30/2001 $10,865 $11,484 $10,839
10/31/2001 $10,992 $11,621 $10,802
11/30/2001 $10,914 $11,523 $10,784
12/31/2001 $10,798 $11,414 $10,742
1/31/2002 $10,945 $11,612 $10,766
2/28/2002 $11,065 $11,752 $10,809
3/31/2002 $10,871 $11,522 $10,869
4/30/2002 $11,021 $11,747 $10,930
5/31/2002 $11,123 $11,818 $10,930
6/30/2002 $11,206 $11,943 $10,936
7/31/2002 $11,338 $12,097 $10,948
8/31/2002 $11,480 $12,242 $10,985
9/30/2002 $11,738 $12,510 $11,003
10/31/2002 $11,528 $12,303 $11,021
11/30/2002 $11,484 $12,252 $11,021
12/31/2002 $11,725 $12,510 $10,997
1/31/2003 $11,710 $12,479 $11,046
2/28/2003 $11,863 $12,653 $11,131
3/31/2003 $11,896 $12,661 $11,198
4/30/2003 $12,000 $12,744 $11,173
5/31/2003 $12,284 $13,043 $11,155
6/30/2003 $12,237 $12,987 $11,167
7/31/2003 $11,765 $12,533 $11,179
8/31/2003 $11,859 $12,626 $11,222
9/30/2003 $12,157 $12,997 $11,258
10/31/2003 $12,110 $12,932 $11,246
11/30/2003 $12,246 $13,067 $11,216
12/31/2003 $12,342 $13,175 $11,204
1/31/2004 $12,427 $13,250 $11,258
2/29/2004 $12,596 $13,450 $11,319
3/31/2004 $12,589 $13,403 $11,392
4/30/2004 $12,289 $13,086 $11,429
5/31/2004 $12,229 $13,038 $11,495
6/30/2004 $12,254 $13,086 $11,532
7/31/2004 $12,415 $13,258 $11,514
8/31/2004 $12,630 $13,524 $11,520
9/30/2004 $12,719 $13,595 $11,544
10/31/2004 $12,829 $13,712 $11,605
11/30/2004 $12,724 $13,599 $11,611
12/31/2004 $12,889 $13,765 $11,568
1/31/2005 $13,033 $13,894 $11,593
2/28/2005 $13,014 $13,848 $11,660
3/31/2005 $12,974 $13,760 $11,751
4/30/2005 $13,183 $13,977 $11,830
5/31/2005 $13,273 $14,076 $11,818
6/30/2005 $13,341 $14,163 $11,824
7/31/2005 $13,266 $14,099 $11,878
8/31/2005 $13,401 $14,242 $11,939
9/30/2005 $13,292 $14,146 $12,085
10/31/2005 $13,215 $14,060 $12,109
11/30/2005 $13,273 $14,127 $12,012
12/31/2005 $13,387 $14,249 $11,964
1/31/2006 $13,400 $14,287 $12,055
2/28/2006 $13,503 $14,383 $12,079
3/31/2006 $13,402 $14,284 $12,146
4/30/2006 $13,425 $14,279 $12,249
5/31/2006 $13,460 $14,343 $12,310
6/30/2006 $13,415 $14,289 $12,334
7/31/2006 $13,566 $14,459 $12,371
8/31/2006 $13,752 $14,673 $12,395
9/30/2006 $13,846 $14,775 $12,334
10/31/2006 $13,917 $14,868 $12,267
11/30/2006 $14,035 $14,992 $12,249
12/31/2006 $13,989 $14,939 $12,267
1/31/2007 $13,944 $14,901 $12,305
2/28/2007 $14,122 $15,097 $12,371
3/31/2007 $14,075 $15,060 $12,483
4/30/2007 $14,112 $15,104 $12,564
5/31/2007 $14,054 $15,038 $12,641
6/30/2007 $13,984 $14,960 $12,666
7/31/2007 $14,081 $15,076 $12,663
8/31/2007 $13,987 $15,011 $12,639
9/30/2007 $14,181 $15,233 $12,674
10/31/2007 $14,243 $15,301 $12,701
11/30/2007 $14,341 $15,398 $12,777
12/31/2007 $14,392 $15,441 $12,768
1/31/2008 $14,466 $15,636 $12,832
2/29/2008 $13,789 $14,920 $12,869
3/31/2008 $14,196 $15,346 $12,980
4/30/2008 $14,430 $15,526 $13,059
5/31/2008 $14,517 $15,620 $13,169
6/30/2008 $14,344 $15,443 $13,302
7/31/2008 $14,382 $15,502 $13,372
8/31/2008 $14,470 $15,683 $13,318
9/30/2008 $13,778 $14,948 $13,300
10/31/2008 $13,630 $14,795 $13,166
11/30/2008 $13,529 $14,842 $12,913
12/31/2008 $13,555 $15,059 $12,780
1/31/2009 $13,900 $15,610 $12,835
2/28/2009 $14,062 $15,692 $12,899
Total Returns 40.62% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +0.45%
5-Year +1.67%
10-Year +3.36%
(PERFORMANCE GRAPH)
FRANKLIN MASSACHUSETTS BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL BOND
DATE FUND - CLASS C INDEX CPI
- ----------------------------------------------------------------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,027 $10,014 $10,030
4/30/1999 $10,045 $10,039 $10,103
5/31/1999 $ 9,996 $ 9,981 $10,103
6/30/1999 $ 9,851 $ 9,837 $10,103
7/31/1999 $ 9,862 $ 9,873 $10,134
8/31/1999 $ 9,717 $ 9,794 $10,158
9/30/1999 $ 9,658 $ 9,798 $10,207
10/31/1999 $ 9,511 $ 9,692 $10,225
11/30/1999 $ 9,618 $ 9,795 $10,231
12/31/1999 $ 9,524 $ 9,722 $10,231
1/31/2000 $ 9,456 $ 9,679 $10,261
2/29/2000 $ 9,618 $ 9,792 $10,322
3/31/2000 $ 9,842 $10,006 $10,407
4/30/2000 $ 9,764 $ 9,947 $10,413
5/31/2000 $ 9,668 $ 9,895 $10,426
6/30/2000 $ 9,949 $10,157 $10,480
7/31/2000 $10,123 $10,299 $10,505
8/31/2000 $10,253 $10,457 $10,505
9/30/2000 $10,173 $10,403 $10,559
10/31/2000 $10,303 $10,516 $10,578
11/30/2000 $10,398 $10,596 $10,584
12/31/2000 $10,732 $10,858 $10,578
1/31/2001 $10,762 $10,965 $10,644
2/28/2001 $10,810 $11,000 $10,687
3/31/2001 $10,877 $11,099 $10,711
4/30/2001 $10,719 $10,978 $10,754
5/31/2001 $10,815 $11,097 $10,802
6/30/2001 $10,910 $11,171 $10,821
7/31/2001 $11,072 $11,336 $10,790
8/31/2001 $11,245 $11,523 $10,790
9/30/2001 $11,198 $11,484 $10,839
10/31/2001 $11,314 $11,621 $10,802
11/30/2001 $11,238 $11,523 $10,784
12/31/2001 $11,104 $11,414 $10,742
1/31/2002 $11,259 $11,612 $10,766
2/28/2002 $11,367 $11,752 $10,809
3/31/2002 $11,163 $11,522 $10,869
4/30/2002 $11,321 $11,747 $10,930
5/31/2002 $11,420 $11,818 $10,930
6/30/2002 $11,499 $11,943 $10,936
7/31/2002 $11,639 $12,097 $10,948
8/31/2002 $11,769 $12,242 $10,985
9/30/2002 $12,036 $12,510 $11,003
10/31/2002 $11,807 $12,303 $11,021
11/30/2002 $11,757 $12,252 $11,021
12/31/2002 $11,997 $12,510 $10,997
1/31/2003 $11,976 $12,479 $11,046
2/28/2003 $12,126 $12,653 $11,131
3/31/2003 $12,154 $12,661 $11,198
4/30/2003 $12,254 $12,744 $11,173
5/31/2003 $12,538 $13,043 $11,155
6/30/2003 $12,494 $12,987 $11,167
7/31/2003 $12,009 $12,533 $11,179
8/31/2003 $12,098 $12,626 $11,222
9/30/2003 $12,395 $12,997 $11,258
10/31/2003 $12,340 $12,932 $11,246
11/30/2003 $12,462 $13,067 $11,216
12/31/2003 $12,564 $13,175 $11,204
1/31/2004 $12,634 $13,250 $11,258
2/29/2004 $12,810 $13,450 $11,319
3/31/2004 $12,796 $13,403 $11,392
4/30/2004 $12,488 $13,086 $11,429
5/31/2004 $12,422 $13,038 $11,495
6/30/2004 $12,441 $13,086 $11,532
7/31/2004 $12,597 $13,258 $11,514
8/31/2004 $12,808 $13,524 $11,520
9/30/2004 $12,902 $13,595 $11,544
10/31/2004 $12,996 $13,712 $11,605
11/30/2004 $12,897 $13,599 $11,611
12/31/2004 $13,045 $13,765 $11,568
1/31/2005 $13,194 $13,894 $11,593
2/28/2005 $13,158 $13,848 $11,660
3/31/2005 $13,123 $13,760 $11,751
4/30/2005 $13,327 $13,977 $11,830
5/31/2005 $13,411 $14,076 $11,818
6/30/2005 $13,462 $14,163 $11,824
7/31/2005 $13,392 $14,099 $11,878
8/31/2005 $13,510 $14,242 $11,939
9/30/2005 $13,406 $14,146 $12,085
10/31/2005 $13,312 $14,060 $12,109
11/30/2005 $13,375 $14,127 $12,012
12/31/2005 $13,483 $14,249 $11,964
1/31/2006 $13,489 $14,287 $12,055
2/28/2006 $13,575 $14,383 $12,079
3/31/2006 $13,479 $14,284 $12,146
4/30/2006 $13,496 $14,279 $12,249
5/31/2006 $13,525 $14,343 $12,310
6/30/2006 $13,474 $14,289 $12,334
7/31/2006 $13,606 $14,459 $12,371
8/31/2006 $13,797 $14,673 $12,395
9/30/2006 $13,884 $14,775 $12,334
10/31/2006 $13,948 $14,868 $12,267
11/30/2006 $14,059 $14,992 $12,249
12/31/2006 $14,008 $14,939 $12,267
1/31/2007 $13,967 $14,901 $12,305
2/28/2007 $14,126 $15,097 $12,371
3/31/2007 $14,074 $15,060 $12,483
4/30/2007 $14,104 $15,104 $12,564
5/31/2007 $14,040 $15,038 $12,641
6/30/2007 $13,964 $14,960 $12,666
7/31/2007 $14,054 $15,076 $12,663
8/31/2007 $13,954 $15,011 $12,639
9/30/2007 $14,140 $15,233 $12,674
10/31/2007 $14,194 $15,301 $12,701
11/30/2007 $14,286 $15,398 $12,777
12/31/2007 $14,329 $15,441 $12,768
1/31/2008 $14,395 $15,636 $12,832
2/29/2008 $13,721 $14,920 $12,869
3/31/2008 $14,115 $15,346 $12,980
4/30/2008 $14,352 $15,526 $13,059
5/31/2008 $14,419 $15,620 $13,169
6/30/2008 $14,241 $15,443 $13,302
7/31/2008 $14,272 $15,502 $13,372
8/31/2008 $14,365 $15,683 $13,318
9/30/2008 $13,665 $14,948 $13,300
10/31/2008 $13,513 $14,795 $13,166
11/30/2008 $13,394 $14,842 $12,913
12/31/2008 $13,414 $15,059 $12,780
1/31/2009 $13,759 $15,610 $12,835
2/28/2009 $13,913 $15,692 $12,899
Total Returns 39.13% 56.92% 28.99%
22 | 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 23
Your Fund's Expenses
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
24 | 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 972.00 $3.23
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
CLASS C
Actual $1,000 $ 968.80 $5.91
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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 | 25
Franklin Michigan Tax-Free Income Fund
(formerly, Franklin Michigan Insured Tax-Free Income Fund)
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Michigan 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)
CREDIT QUALITY BREAKDOWN*
Franklin Michigan Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 43.2%
AA 37.4%
A 17.7%
BBB 0.7%
Not Rated by S&P 1.0%
* 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
- ------- -------
AA or Aa 0.3%
A 0.4%
Below Investment Grade 0.3%
Total 1.0%
This annual report for Franklin Michigan Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
(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 88.
26 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Michigan Tax-Free Income Fund
DIVIDEND PER SHARE
------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS**
- ----- ---------- ---------- ---------- ---------------
March 2008 4.26 cents 3.68 cents 3.68 cents --
April 2008 4.26 cents 3.68 cents 3.68 cents --
May 2008 4.26 cents 3.68 cents 3.68 cents --
June 2008 4.26 cents 3.71 cents 3.71 cents --
July 2008 4.26 cents 3.71 cents 3.71 cents 2.81 cents
August 2008 4.26 cents 3.71 cents 3.71 cents 4.36 cents
September 2008 4.26 cents 3.72 cents 3.70 cents 4.35 cents
October 2008 4.26 cents 3.72 cents 3.70 cents 4.35 cents
November 2008 4.26 cents 3.72 cents 3.70 cents 4.35 cents
December 2008 4.26 cents 3.77 cents 3.77 cents 4.35 cents
January 2009 4.26 cents 3.77 cents 3.77 cents 4.35 cents
February 2009 4.26 cents 3.77 cents 3.77 cents 4.35 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.
** Effective 7/1/08, the Fund began offering Advisor Class shares. See the
prospectus for details.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.71 on February 29, 2008, to $11.48 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 50.90 cents per share for the same period.(2) The
Performance Summary beginning on page 31 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.26% based on an
annualization of the current 4.26 cent per share dividend and the maximum
offering price of $11.99 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and Michigan personal income tax bracket of 39.45%
would need to earn a distribution rate of 7.04% from a taxable investment to
match the Fund's Class A tax-free distribution rate. For the Fund's Class B, C
and Advisor shares' performance, please see the Performance Summary.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 27
PORTFOLIO BREAKDOWN
Franklin Michigan Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 32.4%
General Obligation 22.1%
Utilities 12.6%
Higher Education 10.5%
Hospital & Health Care 9.1%
Subject to Government Appropriations 6.3%
Transportation 4.7%
Tax-Supported 1.3%
Other Revenue 1.0%
* Does not include short-term investments and other net assets.
STATE UPDATE
The deepening national recession has extended Michigan's years-long economic
doldrums, with overall business and employment conditions deteriorating
severely. During the year under review, the Big Three (GM, Ford and Chrysler),
cornerstones of the state's crucial motor-vehicle industry, reported record
losses amid 27-year sales lows and sought federal assistance. State employment
in motor vehicle manufacturing was estimated to have fallen by more than 50%
from 2000 peak levels.(3) Other types of manufacturing jobs, as well as those
related to construction, also suffered significant declines. Michigan's real
estate market also shrank, due to disproportionately large declines in home
prices and high foreclosure rates compared with most other states. These trends
took a toll on the state economy and pushed its unemployment rate from 7.2% to
12.0% during the year under review, with February 2009 jobless levels far
exceeding the 8.1% national rate.(4) Michigan wage and salary employment has
fallen in all years since 2001, and the state has endured roughly four years of
recession compared to the nation's one. Underscoring this disparity is
Michigan's gross domestic product (GDP), which has increased by only 2% over the
past 10 years while U.S. GDP has grown by 20%.(3) Partially as a result,
out-migration by Michiganders has resulted in steady population declines in
recent years.
Michigan's liquidity position has been adversely impacted due to declining
revenues and potentially higher budgetary needs in recent years, and the state
has realized general fund deficits during six of the past seven years. The
breadth and depth of the current recession significantly strained available
resources just as state legislators faced escalating budgetary pressures in the
areas of social services and infrastructure. Recession-induced spending
pressures are more pronounced in states with industry or sector concentration,
even more so among durable-goods producers such as Michigan. As the prospect of
economic growth alone driving structural budget balance grew less likely, the
enacted fiscal year 2009 budget decreased spending by 2% from fiscal year 2008
levels, which along with various revenue adjustments helped eliminate a $365
million budget gap.(3) The state also implemented a new business tax system and
affiliated surcharge as well as an increase in the personal income tax rate to
help restore structural budgetary balance. These tax changes allowed Michigan to
reduce its
(3.) Source: Standard & Poor's, "Michigan; General Obligation," RATINGSDIRECT,
10/15/08.
(4.) Source: U.S. Bureau of Labor Statistics.
28 | Annual Report
reliance on nonrecurring measures. However, growing health care and corrections
costs and state revenue sharing demands could put further strain on state
finances.
Michigan's ability to handle such a drastic and protracted economic downturn
highlighted the importance of its governance and financial management strengths.
Two of those relative strengths are the state's debt and pension positions,
which have required less funding in recent years, and per capita debt ratios
have fallen after years of increases. Michigan retained a modest debt burden,
ranking 31st in the nation for debt per capita and 29th for debt to income.(5)
With Michigan's low debt and pension burden, good budget management that has
allowed the state to operate effectively on thin margins, and a diversifying
economic base as it partially relinquishes its dependence on auto manufacturing,
independent credit rating agency Standard & Poor's affirmed its AA- long-term
rating and stable outlook for Michigan's general obligation bonds.(6)
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
As mentioned in the Municipal Bond Market Overview beginning on page 4, over the
past year the municipal bond insurance industry changed dramatically. In light
of recent credit market conditions and recent and possible future downgrades of
municipal bond insurers, the supply of insured Michigan municipal securities
that met the Fund's previous investment guidelines was limited. We were no
longer confident we would be able to meet the Fund's non-fundamental investment
policy of investing at least 80% of net assets in insured municipal securities.
Therefore, the board of trustees eliminated the Fund's non-fundamental
investment policy and changed its name, effective February 17, 2009. Going
forward, the Fund will buy only municipal securities rated in the top four
ratings by U.S. nationally recognized rating services (or comparable unrated
securities). Because of its historical investment policy of investing in insured
municipal securities, the Fund's portfolio consisted predominantly of insured
municipal securities at fiscal year-end, and the recent changes had little
effect on performance.
(5.) Source: Moody's Investors Service, "New Issue: Michigan (State of),"
10/21/08.
(6.) This does not indicate Standard & Poor's rating of the Fund.
Annual Report | 29
Thank you for your continued participation in Franklin Michigan 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, 2009, 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 2/28/09
FRANKLIN MICHIGAN 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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.23 $11.48 $11.71
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5090
CLASS B (SYMBOL: FBMIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.23 $11.54 $11.77
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4447
CLASS C (SYMBOL: FRMTX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.22 $11.61 $11.83
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4441
ADVISOR CLASS (SYMBOL: N/A) CHANGE 2/28/09 7/1/08
- --------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.46 $11.49 $11.95
DISTRIBUTIONS (7/1/08-2/28/09)
Dividend Income $0.3440
Annual Report | 31
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +2.41% +13.77% +49.86%
Average Annual Total Return(2) -1.94% +1.72% +3.67%
Avg. Ann. Total Return (3/31/09)(3) -4.02% +1.86% +3.67%
Distribution Rate(4) 4.26%
Taxable Equivalent Distribution Rate(5) 7.04%
30-Day Standardized Yield(6) 3.54%
Taxable Equivalent Yield(5) 5.69%
Total Annual Operating expenses(7) 0.64%
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ------- ------ ------ ------------------
Cumulative Total Return(1) +1.84% +10.72% +49.12%
Average Annual Total Return(2) -2.08% +1.72% +4.50%
Avg. Ann. Total Return (3/31/09)(3) -4.15% +1.83% +4.48%
Distribution Rate(4) 3.89%
Taxable Equivalent Distribution Rate(5) 6.42%
30-Day Standardized Yield(6) 3.10%
Taxable Equivalent Yield(5) 4.99%
Total Annual Operating expenses(7) 1.19%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +1.91% +10.73% +41.91%
Average Annual Total Return(2) +0.93% +2.06% +3.56%
Avg. Ann. Total Return (3/31/09)(3) -1.28% +2.19% +3.56%
Distribution Rate(4) 3.87%
Taxable Equivalent Distribution Rate(5) 6.39%
30-Day Standardized Yield(6) 3.14%
Taxable Equivalent Yield(5) 5.05%
Total Annual Operating Expenses(7) 1.19%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------ -------
Cumulative Total Return(1) +2.57% +13.94% +50.08%
Average Annual Total Return(2) +2.57% +2.64% +4.14%
Avg. Ann. Total Return (3/31/09)(3) +0.39% +2.78% +4.14%
Distribution Rate(4) 4.54%
Taxable Equivalent Distribution Rate(5) 7.50%
30-Day Standardized Yield(6) 3.79%
Taxable Equivalent Yield(5) 6.10%
Total Annual Operating Expenses(7) 0.54%
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 (800) 342-5236.
32 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -1.94%
5-Year +1.72%
10-Year +3.67%
(PERFORMANCE GRAPH)
FRANKLIN MICHIGAN TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS A MUNICIPAL BOND INDEX CPI
- ---------- -------------------------- -------------------- -------
3/1/1999 $ 9,571 $10,000 $10,000
3/31/1999 $ 9,594 $10,014 $10,030
4/30/1999 $ 9,609 $10,039 $10,103
5/31/1999 $ 9,562 $ 9,981 $10,103
6/30/1999 $ 9,443 $ 9,837 $10,103
7/31/1999 $ 9,466 $ 9,873 $10,134
8/31/1999 $ 9,363 $ 9,794 $10,158
9/30/1999 $ 9,346 $ 9,798 $10,207
10/31/1999 $ 9,257 $ 9,692 $10,225
11/30/1999 $ 9,337 $ 9,795 $10,231
12/31/1999 $ 9,272 $ 9,722 $10,231
1/31/2000 $ 9,231 $ 9,679 $10,261
2/29/2000 $ 9,321 $ 9,792 $10,322
3/31/2000 $ 9,518 $10,006 $10,407
4/30/2000 $ 9,468 $ 9,947 $10,413
5/31/2000 $ 9,418 $ 9,895 $10,426
6/30/2000 $ 9,659 $10,157 $10,480
7/31/2000 $ 9,792 $10,299 $10,505
8/31/2000 $ 9,935 $10,457 $10,505
9/30/2000 $ 9,884 $10,403 $10,559
10/31/2000 $ 9,977 $10,516 $10,578
11/30/2000 $10,045 $10,596 $10,584
12/31/2000 $10,300 $10,858 $10,578
1/31/2001 $10,368 $10,965 $10,644
2/28/2001 $10,420 $11,000 $10,687
3/31/2001 $10,514 $11,099 $10,711
4/30/2001 $10,419 $10,978 $10,754
5/31/2001 $10,514 $11,097 $10,802
6/30/2001 $10,583 $11,171 $10,821
7/31/2001 $10,731 $11,336 $10,790
8/31/2001 $10,880 $11,523 $10,790
9/30/2001 $10,852 $11,484 $10,839
10/31/2001 $10,976 $11,621 $10,802
11/30/2001 $10,894 $11,523 $10,784
12/31/2001 $10,795 $11,414 $10,742
1/31/2002 $10,982 $11,612 $10,766
2/28/2002 $11,089 $11,752 $10,809
3/31/2002 $10,880 $11,522 $10,869
4/30/2002 $11,070 $11,747 $10,930
5/31/2002 $11,124 $11,818 $10,930
6/30/2002 $11,223 $11,943 $10,936
7/31/2002 $11,360 $12,097 $10,948
8/31/2002 $11,478 $12,242 $10,985
9/30/2002 $11,717 $12,510 $11,003
10/31/2002 $11,566 $12,303 $11,021
11/30/2002 $11,536 $12,252 $11,021
12/31/2002 $11,768 $12,510 $10,997
1/31/2003 $11,747 $12,479 $11,046
2/28/2003 $11,887 $12,653 $11,131
3/31/2003 $11,912 $12,661 $11,198
4/30/2003 $12,005 $12,744 $11,173
5/31/2003 $12,291 $13,043 $11,155
6/30/2003 $12,248 $12,987 $11,167
7/31/2003 $11,817 $12,533 $11,179
8/31/2003 $11,890 $12,626 $11,222
9/30/2003 $12,169 $12,997 $11,258
10/31/2003 $12,135 $12,932 $11,246
11/30/2003 $12,268 $13,067 $11,216
12/31/2003 $12,351 $13,175 $11,204
1/31/2004 $12,435 $13,250 $11,258
2/29/2004 $12,610 $13,450 $11,319
3/31/2004 $12,555 $13,403 $11,392
4/30/2004 $12,267 $13,086 $11,429
5/31/2004 $12,233 $13,038 $11,495
6/30/2004 $12,238 $13,086 $11,532
7/31/2004 $12,375 $13,258 $11,514
8/31/2004 $12,574 $13,524 $11,520
9/30/2004 $12,641 $13,595 $11,544
10/31/2004 $12,761 $13,712 $11,605
11/30/2004 $12,653 $13,599 $11,611
12/31/2004 $12,824 $13,765 $11,568
1/31/2005 $12,955 $13,894 $11,593
2/28/2005 $12,940 $13,848 $11,660
3/31/2005 $12,873 $13,760 $11,751
4/30/2005 $13,036 $13,977 $11,830
5/31/2005 $13,147 $14,076 $11,818
6/30/2005 $13,206 $14,163 $11,824
7/31/2005 $13,179 $14,099 $11,878
8/31/2005 $13,281 $14,242 $11,939
9/30/2005 $13,211 $14,146 $12,085
10/31/2005 $13,162 $14,060 $12,109
11/30/2005 $13,221 $14,127 $12,012
12/31/2005 $13,313 $14,249 $11,964
1/31/2006 $13,340 $14,287 $12,055
2/28/2006 $13,432 $14,383 $12,079
3/31/2006 $13,361 $14,284 $12,146
4/30/2006 $13,377 $14,279 $12,249
5/31/2006 $13,415 $14,343 $12,310
6/30/2006 $13,353 $14,289 $12,334
7/31/2006 $13,502 $14,459 $12,371
8/31/2006 $13,662 $14,673 $12,395
9/30/2006 $13,745 $14,775 $12,334
10/31/2006 $13,817 $14,868 $12,267
11/30/2006 $13,923 $14,992 $12,249
12/31/2006 $13,882 $14,939 $12,267
1/31/2007 $13,863 $14,901 $12,305
2/28/2007 $14,016 $15,097 $12,371
3/31/2007 $13,997 $15,060 $12,483
4/30/2007 $14,024 $15,104 $12,564
5/31/2007 $13,982 $15,038 $12,641
6/30/2007 $13,950 $14,960 $12,666
7/31/2007 $14,046 $15,076 $12,663
8/31/2007 $14,026 $15,011 $12,639
9/30/2007 $14,194 $15,233 $12,674
10/31/2007 $14,244 $15,301 $12,701
11/30/2007 $14,342 $15,398 $12,777
12/31/2007 $14,394 $15,441 $12,768
1/31/2008 $14,528 $15,636 $12,832
2/29/2008 $14,006 $14,920 $12,869
3/31/2008 $14,343 $15,346 $12,980
4/30/2008 $14,515 $15,526 $13,059
5/31/2008 $14,590 $15,620 $13,169
6/30/2008 $14,460 $15,443 $13,302
7/31/2008 $14,499 $15,502 $13,372
8/31/2008 $14,624 $15,683 $13,318
9/30/2008 $13,782 $14,948 $13,300
10/31/2008 $13,801 $14,795 $13,166
11/30/2008 $13,791 $14,842 $12,913
12/31/2008 $13,968 $15,059 $12,780
1/31/2009 $14,231 $15,610 $12,835
2/28/2009 $14,343 $15,692 $12,899
Total Returns 43.43% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------- -------
1-Year -2.08%
5-Year +1.72%
Since Inception (2/1/00) +4.50%
(PERFORMANCE GRAPH)
FRANKLIN MICHIGAN TAX-FREE BARCLAYS CAPITAL MUNICIPAL
DATE INCOME FUND - CLASS B BOND INDEX CPI
- ---------- -------------------------- -------------------------- -------
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 $10,748 $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 $13,360 $10,960
11/30/2003 $13,033 $13,500 $10,930
12/31/2003 $13,116 $13,611 $10,918
1/31/2004 $13,210 $13,689 $10,972
2/29/2004 $13,378 $13,895 $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 $13,971 $11,226
9/30/2004 $13,379 $14,046 $11,250
10/31/2004 $13,488 $14,166 $11,309
11/30/2004 $13,379 $14,049 $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 $14,306 $11,363
3/31/2005 $13,575 $14,216 $11,451
4/30/2005 $13,751 $14,440 $11,528
5/31/2005 $13,861 $14,542 $11,517
6/30/2005 $13,916 $14,632 $11,523
7/31/2005 $13,882 $14,566 $11,576
8/31/2005 $13,982 $14,713 $11,635
9/30/2005 $13,903 $14,614 $11,777
10/31/2005 $13,846 $14,526 $11,801
11/30/2005 $13,901 $14,595 $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 $14,757 $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 $15,159 $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 $15,394 $11,991
2/28/2007 $14,632 $15,597 $12,056
3/31/2007 $14,606 $15,559 $12,165
4/30/2007 $14,628 $15,605 $12,244
5/31/2007 $14,577 $15,536 $12,319
6/30/2007 $14,538 $15,455 $12,343
7/31/2007 $14,631 $15,575 $12,340
8/31/2007 $14,603 $15,508 $12,317
9/30/2007 $14,770 $15,737 $12,351
10/31/2007 $14,816 $15,807 $12,378
11/30/2007 $14,911 $15,908 $12,451
12/31/2007 $14,957 $15,952 $12,443
1/31/2008 $15,089 $16,153 $12,505
2/29/2008 $14,547 $15,414 $12,541
3/31/2008 $14,901 $15,854 $12,650
4/30/2008 $15,077 $16,040 $12,726
5/31/2008 $15,155 $16,137 $12,834
6/30/2008 $15,020 $15,955 $12,963
7/31/2008 $15,062 $16,015 $13,031
8/31/2008 $15,190 $16,203 $12,979
9/30/2008 $14,320 $15,443 $12,961
10/31/2008 $14,338 $15,285 $12,830
11/30/2008 $14,324 $15,334 $12,584
12/31/2008 $14,513 $15,558 $12,454
1/31/2009 $14,785 $16,127 $12,508
2/28/2009 $14,912 $16,212 $12,571
Total Returns 49.12% 62.12% 25.71%
Annual Report | 33
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +0.93%
5-Year +2.06%
10-Year +3.56%
(PERFORMANCE GRAPH)
FRANKLIN MICHIGAN TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---------- -------------------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,019 $10,014 $10,030
4/30/1999 $10,029 $10,039 $10,103
5/31/1999 $ 9,975 $ 9,981 $10,103
6/30/1999 $ 9,847 $ 9,837 $10,103
7/31/1999 $ 9,866 $ 9,873 $10,134
8/31/1999 $ 9,754 $ 9,794 $10,158
9/30/1999 $ 9,732 $ 9,798 $10,207
10/31/1999 $ 9,628 $ 9,692 $10,225
11/30/1999 $ 9,715 $ 9,795 $10,231
12/31/1999 $ 9,635 $ 9,722 $10,231
1/31/2000 $ 9,588 $ 9,679 $10,261
2/29/2000 $ 9,684 $ 9,792 $10,322
3/31/2000 $ 9,883 $10,006 $10,407
4/30/2000 $ 9,819 $ 9,947 $10,413
5/31/2000 $ 9,772 $ 9,895 $10,426
6/30/2000 $10,015 $10,157 $10,480
7/31/2000 $10,148 $10,299 $10,505
8/31/2000 $10,290 $10,457 $10,505
9/30/2000 $10,233 $10,403 $10,559
10/31/2000 $10,323 $10,516 $10,578
11/30/2000 $10,397 $10,596 $10,584
12/31/2000 $10,646 $10,858 $10,578
1/31/2001 $10,720 $10,965 $10,644
2/28/2001 $10,768 $11,000 $10,687
3/31/2001 $10,851 $11,099 $10,711
4/30/2001 $10,757 $10,978 $10,754
5/31/2001 $10,840 $11,097 $10,802
6/30/2001 $10,915 $11,171 $10,821
7/31/2001 $11,061 $11,336 $10,790
8/31/2001 $11,208 $11,523 $10,790
9/30/2001 $11,184 $11,484 $10,839
10/31/2001 $11,296 $11,621 $10,802
11/30/2001 $11,208 $11,523 $10,784
12/31/2001 $11,101 $11,414 $10,742
1/31/2002 $11,287 $11,612 $10,766
2/28/2002 $11,391 $11,752 $10,809
3/31/2002 $11,172 $11,522 $10,869
4/30/2002 $11,360 $11,747 $10,930
5/31/2002 $11,410 $11,818 $10,930
6/30/2002 $11,505 $11,943 $10,936
7/31/2002 $11,649 $12,097 $10,948
8/31/2002 $11,764 $12,242 $10,985
9/30/2002 $12,002 $12,510 $11,003
10/31/2002 $11,844 $12,303 $11,021
11/30/2002 $11,808 $12,252 $11,021
12/31/2002 $12,038 $12,510 $10,997
1/31/2003 $12,011 $12,479 $11,046
2/28/2003 $12,148 $12,653 $11,131
3/31/2003 $12,168 $12,661 $11,198
4/30/2003 $12,257 $12,744 $11,173
5/31/2003 $12,551 $13,043 $11,155
6/30/2003 $12,501 $12,987 $11,167
7/31/2003 $12,049 $12,533 $11,179
8/31/2003 $12,116 $12,626 $11,222
9/30/2003 $12,402 $12,997 $11,258
10/31/2003 $12,351 $12,932 $11,246
11/30/2003 $12,489 $13,067 $11,216
12/31/2003 $12,568 $13,175 $11,204
1/31/2004 $12,647 $13,250 $11,258
2/29/2004 $12,818 $13,450 $11,319
3/31/2004 $12,756 $13,403 $11,392
4/30/2004 $12,461 $13,086 $11,429
5/31/2004 $12,410 $13,038 $11,495
6/30/2004 $12,420 $13,086 $11,532
7/31/2004 $12,552 $13,258 $11,514
8/31/2004 $12,746 $13,524 $11,520
9/30/2004 $12,808 $13,595 $11,544
10/31/2004 $12,922 $13,712 $11,605
11/30/2004 $12,808 $13,599 $11,611
12/31/2004 $12,975 $13,765 $11,568
1/31/2005 $13,100 $13,894 $11,593
2/28/2005 $13,079 $13,848 $11,660
3/31/2005 $13,005 $13,760 $11,751
4/30/2005 $13,163 $13,977 $11,830
5/31/2005 $13,278 $14,076 $11,818
6/30/2005 $13,331 $14,163 $11,824
7/31/2005 $13,298 $14,099 $11,878
8/31/2005 $13,393 $14,242 $11,939
9/30/2005 $13,318 $14,146 $12,085
10/31/2005 $13,252 $14,060 $12,109
11/30/2005 $13,305 $14,127 $12,012
12/31/2005 $13,391 $14,249 $11,964
1/31/2006 $13,411 $14,287 $12,055
2/28/2006 $13,508 $14,383 $12,079
3/31/2006 $13,430 $14,284 $12,146
4/30/2006 $13,429 $14,279 $12,249
5/31/2006 $13,472 $14,343 $12,310
6/30/2006 $13,404 $14,289 $12,334
7/31/2006 $13,535 $14,459 $12,371
8/31/2006 $13,700 $14,673 $12,395
9/30/2006 $13,775 $14,775 $12,334
10/31/2006 $13,840 $14,868 $12,267
11/30/2006 $13,939 $14,992 $12,249
12/31/2006 $13,903 $14,939 $12,267
1/31/2007 $13,867 $14,901 $12,305
2/28/2007 $14,012 $15,097 $12,371
3/31/2007 $13,986 $15,060 $12,483
4/30/2007 $14,007 $15,104 $12,564
5/31/2007 $13,970 $15,038 $12,641
6/30/2007 $13,921 $14,960 $12,666
7/31/2007 $14,010 $15,076 $12,663
8/31/2007 $13,983 $15,011 $12,639
9/30/2007 $14,142 $15,233 $12,674
10/31/2007 $14,186 $15,301 $12,701
11/30/2007 $14,276 $15,398 $12,777
12/31/2007 $14,320 $15,441 $12,768
1/31/2008 $14,457 $15,636 $12,832
2/29/2008 $13,925 $14,920 $12,869
3/31/2008 $14,262 $15,346 $12,980
4/30/2008 $14,424 $15,526 $13,059
5/31/2008 $14,491 $15,620 $13,169
6/30/2008 $14,345 $15,443 $13,302
7/31/2008 $14,389 $15,502 $13,372
8/31/2008 $14,505 $15,683 $13,318
9/30/2008 $13,673 $14,948 $13,300
10/31/2008 $13,672 $14,795 $13,166
11/30/2008 $13,655 $14,842 $12,913
12/31/2008 $13,834 $15,059 $12,780
1/31/2009 $14,074 $15,610 $12,835
2/28/2009 $14,191 $15,692 $12,899
Total Returns 41.91% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 2/28/09
- ---------------- -------
1-Year +2.57%
5-Year +2.64%
10-Year +4.14%
(PERFORMANCE GRAPH)
FRANKLIN MICHIGAN TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - ADVISOR CLASS MUNICIPAL BOND INDEX CPI
- ---------- --------------------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,024 $10,014 $10,030
4/30/1999 $10,040 $10,039 $10,103
5/31/1999 $ 9,990 $ 9,981 $10,103
6/30/1999 $ 9,866 $ 9,837 $10,103
7/31/1999 $ 9,890 $ 9,873 $10,134
8/31/1999 $ 9,782 $ 9,794 $10,158
9/30/1999 $ 9,765 $ 9,798 $10,207
10/31/1999 $ 9,672 $ 9,692 $10,225
11/30/1999 $ 9,756 $ 9,795 $10,231
12/31/1999 $ 9,688 $ 9,722 $10,231
1/31/2000 $ 9,645 $ 9,679 $10,261
2/29/2000 $ 9,738 $ 9,792 $10,322
3/31/2000 $ 9,944 $10,006 $10,407
4/30/2000 $ 9,892 $ 9,947 $10,413
5/31/2000 $ 9,840 $ 9,895 $10,426
6/30/2000 $10,092 $10,157 $10,480
7/31/2000 $10,231 $10,299 $10,505
8/31/2000 $10,380 $10,457 $10,505
9/30/2000 $10,327 $10,403 $10,559
10/31/2000 $10,424 $10,516 $10,578
11/30/2000 $10,495 $10,596 $10,584
12/31/2000 $10,762 $10,858 $10,578
1/31/2001 $10,833 $10,965 $10,644
2/28/2001 $10,886 $11,000 $10,687
3/31/2001 $10,985 $11,099 $10,711
4/30/2001 $10,886 $10,978 $10,754
5/31/2001 $10,985 $11,097 $10,802
6/30/2001 $11,057 $11,171 $10,821
7/31/2001 $11,212 $11,336 $10,790
8/31/2001 $11,367 $11,523 $10,790
9/30/2001 $11,338 $11,484 $10,839
10/31/2001 $11,467 $11,621 $10,802
11/30/2001 $11,382 $11,523 $10,784
12/31/2001 $11,278 $11,414 $10,742
1/31/2002 $11,474 $11,612 $10,766
2/28/2002 $11,586 $11,752 $10,809
3/31/2002 $11,367 $11,522 $10,869
4/30/2002 $11,566 $11,747 $10,930
5/31/2002 $11,622 $11,818 $10,930
6/30/2002 $11,725 $11,943 $10,936
7/31/2002 $11,868 $12,097 $10,948
8/31/2002 $11,992 $12,242 $10,985
9/30/2002 $12,242 $12,510 $11,003
10/31/2002 $12,085 $12,303 $11,021
11/30/2002 $12,053 $12,252 $11,021
12/31/2002 $12,296 $12,510 $10,997
1/31/2003 $12,273 $12,479 $11,046
2/28/2003 $12,419 $12,653 $11,131
3/31/2003 $12,446 $12,661 $11,198
4/30/2003 $12,543 $12,744 $11,173
5/31/2003 $12,842 $13,043 $11,155
6/30/2003 $12,796 $12,987 $11,167
7/31/2003 $12,346 $12,533 $11,179
8/31/2003 $12,422 $12,626 $11,222
9/30/2003 $12,714 $12,997 $11,258
10/31/2003 $12,678 $12,932 $11,246
11/30/2003 $12,817 $13,067 $11,216
12/31/2003 $12,904 $13,175 $11,204
1/31/2004 $12,992 $13,250 $11,258
2/29/2004 $13,175 $13,450 $11,319
3/31/2004 $13,117 $13,403 $11,392
4/30/2004 $12,817 $13,086 $11,429
5/31/2004 $12,781 $13,038 $11,495
6/30/2004 $12,786 $13,086 $11,532
7/31/2004 $12,929 $13,258 $11,514
8/31/2004 $13,137 $13,524 $11,520
9/30/2004 $13,208 $13,595 $11,544
10/31/2004 $13,332 $13,712 $11,605
11/30/2004 $13,219 $13,599 $11,611
12/31/2004 $13,399 $13,765 $11,568
1/31/2005 $13,535 $13,894 $11,593
2/28/2005 $13,520 $13,848 $11,660
3/31/2005 $13,449 $13,760 $11,751
4/30/2005 $13,620 $13,977 $11,830
5/31/2005 $13,736 $14,076 $11,818
6/30/2005 $13,797 $14,163 $11,824
7/31/2005 $13,769 $14,099 $11,878
8/31/2005 $13,875 $14,242 $11,939
9/30/2005 $13,803 $14,146 $12,085
10/31/2005 $13,752 $14,060 $12,109
11/30/2005 $13,814 $14,127 $12,012
12/31/2005 $13,910 $14,249 $11,964
1/31/2006 $13,937 $14,287 $12,055
2/28/2006 $14,034 $14,383 $12,079
3/31/2006 $13,959 $14,284 $12,146
4/30/2006 $13,976 $14,279 $12,249
5/31/2006 $14,016 $14,343 $12,310
6/30/2006 $13,951 $14,289 $12,334
7/31/2006 $14,106 $14,459 $12,371
8/31/2006 $14,274 $14,673 $12,395
9/30/2006 $14,361 $14,775 $12,334
10/31/2006 $14,436 $14,868 $12,267
11/30/2006 $14,547 $14,992 $12,249
12/31/2006 $14,503 $14,939 $12,267
1/31/2007 $14,484 $14,901 $12,305
2/28/2007 $14,643 $15,097 $12,371
3/31/2007 $14,624 $15,060 $12,483
4/30/2007 $14,652 $15,104 $12,564
5/31/2007 $14,608 $15,038 $12,641
6/30/2007 $14,575 $14,960 $12,666
7/31/2007 $14,675 $15,076 $12,663
8/31/2007 $14,654 $15,011 $12,639
9/30/2007 $14,829 $15,233 $12,674
10/31/2007 $14,882 $15,301 $12,701
11/30/2007 $14,985 $15,398 $12,777
12/31/2007 $15,039 $15,441 $12,768
1/31/2008 $15,179 $15,636 $12,832
2/29/2008 $14,633 $14,920 $12,869
3/31/2008 $14,986 $15,346 $12,980
4/30/2008 $15,165 $15,526 $13,059
5/31/2008 $15,243 $15,620 $13,169
6/30/2008 $15,108 $15,443 $13,302
7/31/2008 $15,164 $15,502 $13,372
8/31/2008 $15,306 $15,683 $13,318
9/30/2008 $14,432 $14,948 $13,300
10/31/2008 $14,440 $14,795 $13,166
11/30/2008 $14,427 $14,842 $12,913
12/31/2008 $14,632 $15,059 $12,780
1/31/2009 $14,892 $15,610 $12,835
2/28/2009 $15,008 $15,692 $12,899
Total Returns 50.08% 56.92% 28.99%
34 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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.
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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 for the maximum combined effective federal and Michigan
personal income tax rate of 39.45%, 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 7/1/08, 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 7/1/08, 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 6/30/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 7/1/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -0.92%.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 35
Your Fund's Expenses
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
36 | 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 980.80 $3.09
Hypothetical (5% return before expenses) $1,000 $1,021.67 $3.16
CLASS B
Actual $1,000 $ 977.50 $5.79
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
CLASS C
Actual $1,000 $ 978.40 $5.79
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
ADVISOR CLASS
Actual $1,000 $ 980.50 $2.60
Hypothetical (5% return before expenses) $1,000 $1,022.17 $2.66
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.63%; B: 1.18%; C: 1.18%; and Advisor:
0.53%), multiplied by the average account value over the period, multiplied
by 181/365 to reflect the one-half year period.
Annual Report | 37
Franklin Minnesota Tax-Free Income Fund
(formerly, Franklin Minnesota Insured Tax-Free Income Fund)
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Minnesota 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)
CREDIT QUALITY BREAKDOWN*
Franklin Minnesota Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 42.0%
AA 13.1%
A 8.1%
BBB 0.3%
Not Rated by S&P 36.5%
* 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 2.4% 0.2%
AA or Aa 29.8% --
A 3.9% --
BBB or Baa 0.2% --
---- ---
Total 36.3% 0.2%
We are pleased to bring you Franklin Minnesota Tax-Free Income Fund's annual
report for the fiscal year ended February 28, 2009.
(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 97.
38 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Minnesota Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
----- ---------- ----------
March 2008 4.08 cents 3.51 cents
April 2008 4.08 cents 3.51 cents
May 2008 4.08 cents 3.51 cents
June 2008 4.08 cents 3.53 cents
July 2008 4.08 cents 3.53 cents
August 2008 4.08 cents 3.53 cents
September 2008 4.08 cents 3.54 cents
October 2008 4.08 cents 3.54 cents
November 2008 4.08 cents 3.54 cents
December 2008 4.08 cents 3.57 cents
January 2009 4.08 cents 3.57 cents
February 2009 4.08 cents 3.57 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.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.51 on February 29, 2008, to $11.80 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 48.75 cents per share for the same period.(2) The
Performance Summary beginning on page 42 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 3.97% based on an
annualization of the current 4.08 cent per share dividend and the maximum
offering price of $12.32 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and Minnesota personal income tax bracket of 40.10%
would need to earn a distribution rate of 6.63% 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
Minnesota's deep and diverse economy, a mix of manufacturing, services and trade
supported by several regional economic hubs and anchored by the
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 39
PORTFOLIO BREAKDOWN
Franklin Minnesota Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
General Obligation 44.7%
Hospital & Health Care 14.2%
Utilities 12.4%
Prerefunded 9.2%
Tax-Supported 5.6%
Transportation 4.4%
Housing 3.2%
Subject to Government Appropriations 2.8%
Higher Education 2.2%
Other Revenue 1.3%
* Does not include short-term investments and other net assets.
Minneapolis-St. Paul metropolitan area, contracted in tandem with the national
recession. While the state has historically lagged the nation in unemployment,
this rate has grown rapidly during the current 2008-2009 biennium. Minnesota's
unemployment rate for February 2009 was 8.1%, identical to the national
average.(3) Personal incomes per capita remained consistently above the U.S.
average, and for the past five years the state has been between 105% and 109% of
the national average.(4) On the other hand, employment growth over the same time
has lagged that of the nation, partly due to the fact that the state lost
manufacturing jobs and has not recovered them.
Minnesota's revenues -- including sales taxes, personal income taxes and
corporate business taxes -- declined significantly, and state legislators
adjusted revenue projections down sharply, unfortunately at a time of
substantial expenditure growth for the state. In line with its long history of
institutionalized best practices, the state government responded swiftly to this
difficult budget environment, and special legislative sessions were called to
consider fiscal remedies. During the first year of the current biennium (2008),
the state identified and solved a budget gap of $935 million using a mix of both
nonrecurring and recurring measures.(4) By November 2008, however, a worsening
revenue picture opened up an additional budget gap of $426 million and revealed
a projected budget gap of $4.8 billion for the 2010-2011 biennium, which
represents an unusually large 15% of estimated revenues.(4) Like most states,
Minnesota was making significant yet unpopular expenditure cuts, primarily to
health and human services, but unlike most states it also expected to use some
or all of its rainy day fund to close the current (2009) fiscal year gap with no
reserves left for the next biennium.
Thanks to long-standing internal debt control policies, the state's debt levels
remained relatively low, and in line with national averages. In 2008, Minnesota
ranked 26th in the nation in debt per capita and 28th in debt as a percentage of
personal income.(4) However, with no easy solutions left and with massive
revenue shortfalls to address for the remainder of 2009 and the upcoming
biennium, the state will need to make significant adjustments to achieve a
balanced budget. Based largely on Minnesota's strong financial management
policies and practices that remain committed to structural balance and eventual
rebuilding of reserves, independent credit rating agency Standard & Poor's
maintained its rating of AAA with a stable outlook for Minnesota's general
obligation bonds throughout the year under review.(5)
(3.) Source: U.S. Bureau of Labor Statistics.
(4.) Source: Moody's Investors Service, "New Issue: Minnesota (State of),"
1/12/09.
(5.) This does not indicate Standard & Poor's rating of the Fund.
40 | Annual Report
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
As mentioned in the Municipal Bond Market Overview beginning on page 4, over the
past year the municipal bond insurance industry changed dramatically. In light
of recent credit market conditions and recent and possible future downgrades of
municipal bond insurers, the supply of insured Minnesota municipal securities
that met the Fund's previous investment guidelines was limited. We were no
longer confident we would be able to meet the Fund's non-fundamental investment
policy of investing at least 80% of net assets in insured municipal securities.
Therefore, the board of trustees eliminated the Fund's non-fundamental
investment policy and changed its name, effective February 17, 2009. Going
forward, the Fund will buy only municipal securities rated in the top four
ratings by U.S. nationally recognized rating services (or comparable unrated
securities). Because of its historical investment policy of investing in insured
municipal securities, the Fund's portfolio consisted predominantly of insured
municipal securities at fiscal year-end, and the recent changes had little
effect on performance.
Thank you for your continued participation in Franklin Minnesota 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, 2009, 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 | 41
Performance Summary as of 2/28/09
FRANKLIN MINNESOTA 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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.29 $11.80 $11.51
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4875
CLASS C (SYMBOL: FMNIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.29 $11.89 $11.60
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4228
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +6.90% +17.45% +52.68%
Average Annual Total Return(2) +2.37% +2.38% +3.87%
Avg. Ann. Total Return (3/31/09)(3) +0.23% +2.52% +3.88%
Distribution Rate(4) 3.97%
Taxable Equivalent Distribution Rate(5) 6.63%
30-Day Standardized Yield(6) 3.43%
Taxable Equivalent Yield(5) 5.73%
Total Annual Operating expenses(7) 0.67%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +6.26% +14.24% +44.61%
Average Annual Total Return(2) +5.26% +2.70% +3.76%
Avg. Ann. Total Return (3/31/09)(3) +3.13% +2.88% +3.77%
Distribution Rate(4) 3.56%
Taxable Equivalent Distribution Rate(5) 5.94%
30-Day Standardized Yield(6) 3.07%
Taxable Equivalent Yield(5) 5.13%
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 (800) 342-5236.
42 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year +2.37%
5-Year +2.38%
10-Year +3.87%
(PERFORMANCE GRAPH)
FRANKLIN
MINNESOTA BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS A BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $ 9,574 $10,000 $10,000
3/31/1999 $ 9,613 $10,014 $10,030
4/30/1999 $ 9,621 $10,039 $10,103
5/31/1999 $ 9,589 $ 9,981 $10,103
6/30/1999 $ 9,456 $ 9,837 $10,103
7/31/1999 $ 9,471 $ 9,873 $10,134
8/31/1999 $ 9,341 $ 9,794 $10,158
9/30/1999 $ 9,315 $ 9,798 $10,207
10/31/1999 $ 9,168 $ 9,692 $10,225
11/30/1999 $ 9,264 $ 9,795 $10,231
12/31/1999 $ 9,173 $ 9,722 $10,231
1/31/2000 $ 9,122 $ 9,679 $10,261
2/29/2000 $ 9,253 $ 9,792 $10,322
3/31/2000 $ 9,477 $10,006 $10,407
4/30/2000 $ 9,408 $ 9,947 $10,413
5/31/2000 $ 9,324 $ 9,895 $10,426
6/30/2000 $ 9,575 $10,157 $10,480
7/31/2000 $ 9,718 $10,299 $10,505
8/31/2000 $ 9,878 $10,457 $10,505
9/30/2000 $ 9,817 $10,403 $10,559
10/31/2000 $ 9,927 $10,516 $10,578
11/30/2000 $10,012 $10,596 $10,584
12/31/2000 $10,270 $10,858 $10,578
1/31/2001 $10,346 $10,965 $10,644
2/28/2001 $10,397 $11,000 $10,687
3/31/2001 $10,492 $11,099 $10,711
4/30/2001 $10,385 $10,978 $10,754
5/31/2001 $10,481 $11,097 $10,802
6/30/2001 $10,559 $11,171 $10,821
7/31/2001 $10,691 $11,336 $10,790
8/31/2001 $10,833 $11,523 $10,790
9/30/2001 $10,795 $11,484 $10,839
10/31/2001 $10,910 $11,621 $10,802
11/30/2001 $10,854 $11,523 $10,784
12/31/2001 $10,752 $11,414 $10,742
1/31/2002 $10,905 $11,612 $10,766
2/28/2002 $11,003 $11,752 $10,809
3/31/2002 $10,845 $11,522 $10,869
4/30/2002 $11,000 $11,747 $10,930
5/31/2002 $11,063 $11,818 $10,930
6/30/2002 $11,144 $11,943 $10,936
7/31/2002 $11,264 $12,097 $10,948
8/31/2002 $11,365 $12,242 $10,985
9/30/2002 $11,588 $12,510 $11,003
10/31/2002 $11,424 $12,303 $11,021
11/30/2002 $11,402 $12,252 $11,021
12/31/2002 $11,608 $12,510 $10,997
1/31/2003 $11,614 $12,479 $11,046
2/28/2003 $11,764 $12,653 $11,131
3/31/2003 $11,778 $12,661 $11,198
4/30/2003 $11,870 $12,744 $11,173
5/31/2003 $12,146 $13,043 $11,155
6/30/2003 $12,102 $12,987 $11,167
7/31/2003 $11,715 $12,533 $11,179
8/31/2003 $11,778 $12,626 $11,222
9/30/2003 $12,058 $12,997 $11,258
10/31/2003 $11,984 $12,932 $11,246
11/30/2003 $12,107 $13,067 $11,216
12/31/2003 $12,211 $13,175 $11,204
1/31/2004 $12,285 $13,250 $11,258
2/29/2004 $12,449 $13,450 $11,319
3/31/2004 $12,422 $13,403 $11,392
4/30/2004 $12,143 $13,086 $11,429
5/31/2004 $12,097 $13,038 $11,495
6/30/2004 $12,131 $13,086 $11,532
7/31/2004 $12,267 $13,258 $11,514
8/31/2004 $12,465 $13,524 $11,520
9/30/2004 $12,540 $13,595 $11,544
10/31/2004 $12,657 $13,712 $11,605
11/30/2004 $12,557 $13,599 $11,611
12/31/2004 $12,727 $13,765 $11,568
1/31/2005 $12,856 $13,894 $11,593
2/28/2005 $12,817 $13,848 $11,660
3/31/2005 $12,747 $13,760 $11,751
4/30/2005 $12,930 $13,977 $11,830
5/31/2005 $13,007 $14,076 $11,818
6/30/2005 $13,063 $14,163 $11,824
7/31/2005 $13,012 $14,099 $11,878
8/31/2005 $13,133 $14,242 $11,939
9/30/2005 $13,038 $14,146 $12,085
10/31/2005 $12,955 $14,060 $12,109
11/30/2005 $13,032 $14,127 $12,012
12/31/2005 $13,143 $14,249 $11,964
1/31/2006 $13,167 $14,287 $12,055
2/28/2006 $13,267 $14,383 $12,079
3/31/2006 $13,170 $14,284 $12,146
4/30/2006 $13,161 $14,279 $12,249
5/31/2006 $13,196 $14,343 $12,310
6/30/2006 $13,164 $14,289 $12,334
7/31/2006 $13,299 $14,459 $12,371
8/31/2006 $13,490 $14,673 $12,395
9/30/2006 $13,582 $14,775 $12,334
10/31/2006 $13,651 $14,868 $12,267
11/30/2006 $13,777 $14,992 $12,249
12/31/2006 $13,722 $14,939 $12,267
1/31/2007 $13,701 $14,901 $12,305
2/28/2007 $13,862 $15,097 $12,371
3/31/2007 $13,818 $15,060 $12,483
4/30/2007 $13,854 $15,104 $12,564
5/31/2007 $13,798 $15,038 $12,641
6/30/2007 $13,731 $14,960 $12,666
7/31/2007 $13,826 $15,076 $12,663
8/31/2007 $13,770 $15,011 $12,639
9/30/2007 $13,969 $15,233 $12,674
10/31/2007 $14,029 $15,301 $12,701
11/30/2007 $14,101 $15,398 $12,777
12/31/2007 $14,161 $15,441 $12,768
1/31/2008 $14,256 $15,636 $12,832
2/29/2008 $13,675 $14,920 $12,869
3/31/2008 $14,044 $15,346 $12,980
4/30/2008 $14,236 $15,526 $13,059
5/31/2008 $14,308 $15,620 $13,169
6/30/2008 $14,201 $15,443 $13,302
7/31/2008 $14,238 $15,502 $13,372
8/31/2008 $14,384 $15,683 $13,318
9/30/2008 $13,705 $14,948 $13,300
10/31/2008 $13,660 $14,795 $13,166
11/30/2008 $13,708 $14,842 $12,913
12/31/2008 $14,016 $15,059 $12,780
1/31/2009 $14,473 $15,610 $12,835
2/28/2009 $14,618 $15,692 $12,899
Total Returns 46.18% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +5.26%
5-Year +2.70%
10-Year +3.76%
(PERFORMANCE GRAPH)
FRANKLIN
MINNESOTA BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS C BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,036 $10,014 $10,030
4/30/1999 $10,048 $10,039 $10,103
5/31/1999 $10,002 $ 9,981 $10,103
6/30/1999 $ 9,858 $ 9,837 $10,103
7/31/1999 $ 9,878 $ 9,873 $10,134
8/31/1999 $ 9,730 $ 9,794 $10,158
9/30/1999 $ 9,699 $ 9,798 $10,207
10/31/1999 $ 9,541 $ 9,692 $10,225
11/30/1999 $ 9,636 $ 9,795 $10,231
12/31/1999 $ 9,537 $ 9,722 $10,231
1/31/2000 $ 9,480 $ 9,679 $10,261
2/29/2000 $ 9,612 $ 9,792 $10,322
3/31/2000 $ 9,847 $10,006 $10,407
4/30/2000 $ 9,772 $ 9,947 $10,413
5/31/2000 $ 9,680 $ 9,895 $10,426
6/30/2000 $ 9,927 $10,157 $10,480
7/31/2000 $10,078 $10,299 $10,505
8/31/2000 $10,239 $10,457 $10,505
9/30/2000 $10,171 $10,403 $10,559
10/31/2000 $10,280 $10,516 $10,578
11/30/2000 $10,353 $10,596 $10,584
12/31/2000 $10,623 $10,858 $10,578
1/31/2001 $10,697 $10,965 $10,644
2/28/2001 $10,745 $11,000 $10,687
3/31/2001 $10,837 $11,099 $10,711
4/30/2001 $10,722 $10,978 $10,754
5/31/2001 $10,815 $11,097 $10,802
6/30/2001 $10,891 $11,171 $10,821
7/31/2001 $11,030 $11,336 $10,790
8/31/2001 $11,162 $11,523 $10,790
9/30/2001 $11,118 $11,484 $10,839
10/31/2001 $11,230 $11,621 $10,802
11/30/2001 $11,168 $11,523 $10,784
12/31/2001 $11,058 $11,414 $10,742
1/31/2002 $11,218 $11,612 $10,766
2/28/2002 $11,305 $11,752 $10,809
3/31/2002 $11,147 $11,522 $10,869
4/30/2002 $11,300 $11,747 $10,930
5/31/2002 $11,349 $11,818 $10,930
6/30/2002 $11,437 $11,943 $10,936
7/31/2002 $11,553 $12,097 $10,948
8/31/2002 $11,651 $12,242 $10,985
9/30/2002 $11,874 $12,510 $11,003
10/31/2002 $11,703 $12,303 $11,021
11/30/2002 $11,676 $12,252 $11,021
12/31/2002 $11,891 $12,510 $10,997
1/31/2003 $11,882 $12,479 $11,046
2/28/2003 $12,029 $12,653 $11,131
3/31/2003 $12,038 $12,661 $11,198
4/30/2003 $12,127 $12,744 $11,173
5/31/2003 $12,402 $13,043 $11,155
6/30/2003 $12,350 $12,987 $11,167
7/31/2003 $11,951 $12,533 $11,179
8/31/2003 $12,008 $12,626 $11,222
9/30/2003 $12,285 $12,997 $11,258
10/31/2003 $12,213 $12,932 $11,246
11/30/2003 $12,332 $13,067 $11,216
12/31/2003 $12,421 $13,175 $11,204
1/31/2004 $12,491 $13,250 $11,258
2/29/2004 $12,662 $13,450 $11,319
3/31/2004 $12,620 $13,403 $11,392
4/30/2004 $12,343 $13,086 $11,429
5/31/2004 $12,290 $13,038 $11,495
6/30/2004 $12,308 $13,086 $11,532
7/31/2004 $12,450 $13,258 $11,514
8/31/2004 $12,643 $13,524 $11,520
9/30/2004 $12,713 $13,595 $11,544
10/31/2004 $12,815 $13,712 $11,605
11/30/2004 $12,719 $13,599 $11,611
12/31/2004 $12,873 $13,765 $11,568
1/31/2005 $13,007 $13,894 $11,593
2/28/2005 $12,962 $13,848 $11,660
3/31/2005 $12,886 $13,760 $11,751
4/30/2005 $13,064 $13,977 $11,830
5/31/2005 $13,135 $14,076 $11,818
6/30/2005 $13,185 $14,163 $11,824
7/31/2005 $13,139 $14,099 $11,878
8/31/2005 $13,254 $14,242 $11,939
9/30/2005 $13,143 $14,146 $12,085
10/31/2005 $13,053 $14,060 $12,109
11/30/2005 $13,125 $14,127 $12,012
12/31/2005 $13,229 $14,249 $11,964
1/31/2006 $13,247 $14,287 $12,055
2/28/2006 $13,352 $14,383 $12,079
3/31/2006 $13,238 $14,284 $12,146
4/30/2006 $13,223 $14,279 $12,249
5/31/2006 $13,252 $14,343 $12,310
6/30/2006 $13,214 $14,289 $12,334
7/31/2006 $13,343 $14,459 $12,371
8/31/2006 $13,527 $14,673 $12,395
9/30/2006 $13,623 $14,775 $12,334
10/31/2006 $13,686 $14,868 $12,267
11/30/2006 $13,794 $14,992 $12,249
12/31/2006 $13,744 $14,939 $12,267
1/31/2007 $13,706 $14,901 $12,305
2/28/2007 $13,859 $15,097 $12,371
3/31/2007 $13,821 $15,060 $12,483
4/30/2007 $13,839 $15,104 $12,564
5/31/2007 $13,777 $15,038 $12,641
6/30/2007 $13,705 $14,960 $12,666
7/31/2007 $13,804 $15,076 $12,663
8/31/2007 $13,731 $15,011 $12,639
9/30/2007 $13,922 $15,233 $12,674
10/31/2007 $13,986 $15,301 $12,701
11/30/2007 $14,050 $15,398 $12,777
12/31/2007 $14,103 $15,441 $12,768
1/31/2008 $14,191 $15,636 $12,832
2/29/2008 $13,611 $14,920 $12,869
3/31/2008 $13,969 $15,346 $12,980
4/30/2008 $14,152 $15,526 $13,059
5/31/2008 $14,216 $15,620 $13,169
6/30/2008 $14,104 $15,443 $13,302
7/31/2008 $14,134 $15,502 $13,372
8/31/2008 $14,271 $15,683 $13,318
9/30/2008 $13,596 $14,948 $13,300
10/31/2008 $13,533 $14,795 $13,166
11/30/2008 $13,586 $14,842 $12,913
12/31/2008 $13,883 $15,059 $12,780
1/31/2009 $14,325 $15,610 $12,835
2/28/2009 $14,461 $15,692 $12,899
Total Returns 44.61% 56.92% 28.99%
Annual Report | 43
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
44 | Annual Report
Your Fund's Expenses
FRANKLIN MINNESOTA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 45
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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $1,016.30 $3.30
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
CLASS C
Actual $1,000 $1,013.50 $6.04
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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.
46 | Annual Report
Franklin Ohio Tax-Free Income Fund
(formerly, Franklin Ohio Insured Tax-Free Income Fund)
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Ohio 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)
CREDIT QUALITY BREAKDOWN*
Franklin Ohio Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA ................... 36.7%
AA .................... 25.1%
A ..................... 5.9%
Not Rated by S&P ...... 32.3%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
- ------- ------- --------
AAA or Aaa 0.3% 3.5%
AA or Aa 12.4% --
A 11.6% --
BBB or Baa 3.7% 0.8%
---- ---
Total 28.0% 4.3%
We are pleased to bring you Franklin Ohio Tax-Free Income Fund's annual report
for the fiscal year ended February 28, 2009.
(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 107.
Annual Report | 47
DIVIDEND DISTRIBUTIONS*
Franklin Ohio Tax-Free Income Fund
DIVIDEND PER SHARE
------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS**
- -------------- ---------- ---------- ---------- ---------------
March 2008 4.20 cents 3.61 cents 3.59 cents --
April 2008 4.20 cents 3.61 cents 3.59 cents --
May 2008 4.20 cents 3.61 cents 3.59 cents --
June 2008 4.30 cents 3.74 cents 3.74 cents --
July 2008 4.30 cents 3.74 cents 3.74 cents 2.84 cents
August 2008 4.30 cents 3.74 cents 3.74 cents 4.40 cents
September 2008 4.30 cents 3.75 cents 3.74 cents 4.40 cents
October 2008 4.30 cents 3.75 cents 3.74 cents 4.40 cents
November 2008 4.30 cents 3.75 cents 3.74 cents 4.40 cents
December 2008 4.30 cents 3.78 cents 3.78 cents 4.39 cents
January 2009 4.30 cents 3.78 cents 3.78 cents 4.39 cents
February 2009 4.30 cents 3.78 cents 3.78 cents 4.39 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.
** Effective 7/1/08, the Fund began offering Advisor Class shares. See the
prospectus for details.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.91 on February 29, 2008, to $12.08 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 51.11 cents per share for the same period.(2) The
Performance Summary beginning on page 51 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 4.30 cent per share dividend and the maximum
offering price of $12.62 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and Ohio personal income tax bracket of 38.85% would
need to earn a distribution rate of 6.69% from a taxable investment to match the
Fund's Class A tax-free distribution rate. For the Fund's Class B, C and Advisor
shares' performance, please see the Performance Summary.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
48 | Annual Report
STATE UPDATE
In line with other U.S. states, Ohio's economic performance has weakened
substantially in the face of severe recession. Although job losses have occurred
across most sectors of the state economy, they have largely reflected a
significant contraction within its prominent manufacturing sector and in
housing-related industries. The state's pronounced exposure to the turbulent
domestic auto industry hurt employment in the manufacturing sector as
beleaguered auto makers such as General Motors sought federal assistance and
downsized their in-state workforces. As of February 2009, the state unemployment
rate was 9.4%, which was higher than the 8.1% national rate.(3) Other risks to
the Ohio economy included elevated mortgage foreclosure and delinquency rates,
and a housing market contracting in tandem with the national housing downturn.
The breadth of the economy's deterioration strained Ohio's available resources,
tax revenue performance weakened, and the state lowered revenue forecasts
repeatedly over the past year. The major area of weakness was in non-auto sales
and use tax and personal income tax revenue. The state proactively responded to
the shortfalls with several budget-balancing actions, including across-the-board
spending reductions, expansion of the state-run lottery, planned use of cash
reserves, and a heavy reliance on federal stimulus funding. The state maintained
a still sizable budget stabilization reserve despite reductions authorized for
use in fiscal year 2009.
Extreme use of nonrecurring measures to balance Ohio's budget will make
structural budget balance difficult, particularly if economic performance
remains below average. The state's pension plans are reasonably well funded, but
lower revenues resulting from tax-reform initiatives and higher-than-expected
Medicaid costs will continue to stress Ohio's budget. Seeking to jumpstart its
economy, the state approved a broad, $1.5 billion economic stimulus program,
which includes issuing bonds for land conservation and economic revitalization
projects.(4)
Ohio's tax-supported debt, including highway debt, totaled about $9.5
billion.(4) Debt ratios were moderate relative to other states, at $827 per
capita and 2.4% of personal income.(4) Ohio proactively managed its budget,
retained high levels of internal liquidity, and made prompt revenue adjustments
as necessary to restore balance. Independent credit rating agency Standard &
Poor's assigned Ohio's general obligation debt a rating of AA+ with a stable
outlook.(5) Despite recent challenges, rapid recovery in Ohio's fund balance and
reserve levels over the past several years underscored the conservative
financial and debt management practices that have long been central to
maintaining the state's high credit rating.
PORTFOLIO BREAKDOWN
Franklin Ohio Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 34.2%
General Obligation 22.9%
Utilities 11.2%
Higher Education 9.7%
Hospital & Health Care 8.2%
Tax-Supported 5.5%
Subject to Government Appropriations 3.4%
Transportation 3.0%
Housing 0.9%
Other Revenue 0.5%
Corporate-Backed 0.5%
* Does not include short-term investments and other net assets.
(3.) Source: U.S. Bureau of Labor Statistics.
(4.) Source: Standard & Poor's, "Summary: Ohio; General Obligation,"
RATINGSDIRECT, 2/20/09.
(5.) This does not indicate Standard & Poor's rating of the Fund.
Annual Report | 49
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
As mentioned in the Municipal Bond Market Overview beginning on page 4, over the
past year the municipal bond insurance industry changed dramatically. In light
of recent credit market conditions and recent and possible future downgrades of
municipal bond insurers, the supply of insured Ohio municipal securities that
met the Fund's previous investment guidelines was limited. We were no longer
confident we would be able to meet the Fund's non-fundamental investment policy
of investing at least 80% of net assets in insured municipal securities.
Therefore, the board of trustees eliminated the Fund's non-fundamental
investment policy and changed its name, effective February 17, 2009. Going
forward, the Fund will buy only municipal securities rated in the top four
ratings by U.S. nationally recognized rating services (or comparable unrated
securities). Because of its historical investment policy of investing in insured
municipal securities, the Fund's portfolio consisted predominantly of insured
municipal securities at fiscal year-end, and the recent changes had little
effect on performance.
Thank you for your continued participation in Franklin Ohio 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, 2009, 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.
50 | Annual Report
Performance Summary as of 2/28/09
FRANKLIN OHIO 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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.17 $12.08 $11.91
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5111
CLASS B (SYMBOL: FBOIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.17 $12.13 $11.96
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4449
CLASS C (SYMBOL: FOITX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.17 $12.19 $12.02
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4441
ADVISOR CLASS (SYMBOL: N/A) CHANGE 2/28/09 7/1/08
- --------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.19 $12.08 $12.27
DISTRIBUTIONS (7/1/08-2/28/09)
Dividend Income $0.3475
Annual Report | 51
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +5.83% +16.57% +52.36%
Average Annual Total Return(2) +1.32% +2.22% +3.85%
Avg. Ann. Total Return (3/31/09)(3) -1.09% +2.42% +3.87%
Distribution Rate(4) 4.09%
Taxable Equivalent Distribution Rate(5) 6.69%
30-Day Standardized Yield(6) 3.04%
Taxable Equivalent Yield(5) 4.97%
Total Annual Operating expenses(7) 0.65%
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ------- ------ ------- ---------
Cumulative Total Return(1) +5.22% +13.45% +52.29%
Average Annual Total Return(2) +1.22% +2.21% +4.74%
Avg. Ann. Total Return (3/31/09)(3) -1.34% +2.39% +4.76%
Distribution Rate(4) 3.71%
Taxable Equivalent Distribution Rate(5) 6.07%
30-Day Standardized Yield(6) 2.60%
Taxable Equivalent Yield(5) 4.25%
Total Annual Operating expenses(7) 1.20%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +5.19% +13.45% +44.23%
Average Annual Total Return(2) +4.19% +2.56% +3.73%
Avg. Ann. Total Return (3/31/09)(3) +1.69% +2.75% +3.75%
Distribution Rate(4) 3.69%
Taxable Equivalent Distribution Rate(5) 6.03%
30-Day Standardized Yield(6) 2.64%
Taxable Equivalent Yield(5) 4.32%
Total Annual Operating expenses(7) 1.20%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------- -------
Cumulative Total Return(1) +5.89% +16.65% +52.46%
Average Annual Total Return(2) +5.89% +3.13% +4.31%
Avg. Ann. Total Return (3/31/09)(3) +3.27% +3.31% +4.32%
Distribution Rate(4) 4.37%
Taxable Equivalent Distribution Rate(5) 7.17%
30-Day Standardized Yield(6) 3.27%
Taxable Equivalent Yield(5) 5.37%
Total Annual Operating expenses(7) 0.55%
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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236.
52 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year +1.32%
5-Year +2.22%
10-Year +3.85%
(PERFORMANCE GRAPH)
FRANKLIN OHIO BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS A BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $ 9,578 $10,000 $10,000
3/31/1999 $ 9,610 $10,014 $10,030
4/30/1999 $ 9,626 $10,039 $10,103
5/31/1999 $ 9,572 $ 9,981 $10,103
6/30/1999 $ 9,453 $ 9,837 $10,103
7/31/1999 $ 9,469 $ 9,873 $10,134
8/31/1999 $ 9,351 $ 9,794 $10,158
9/30/1999 $ 9,351 $ 9,798 $10,207
10/31/1999 $ 9,233 $ 9,692 $10,225
11/30/1999 $ 9,312 $ 9,795 $10,231
12/31/1999 $ 9,232 $ 9,722 $10,231
1/31/2000 $ 9,192 $ 9,679 $10,261
2/29/2000 $ 9,305 $ 9,792 $10,322
3/31/2000 $ 9,508 $10,006 $10,407
4/30/2000 $ 9,451 $ 9,947 $10,413
5/31/2000 $ 9,411 $ 9,895 $10,426
6/30/2000 $ 9,633 $10,157 $10,480
7/31/2000 $ 9,773 $10,299 $10,505
8/31/2000 $ 9,914 $10,457 $10,505
9/30/2000 $ 9,864 $10,403 $10,559
10/31/2000 $ 9,948 $10,516 $10,578
11/30/2000 $10,032 $10,596 $10,584
12/31/2000 $10,285 $10,858 $10,578
1/31/2001 $10,344 $10,965 $10,644
2/28/2001 $10,378 $11,000 $10,687
3/31/2001 $10,464 $11,099 $10,711
4/30/2001 $10,362 $10,978 $10,754
5/31/2001 $10,448 $11,097 $10,802
6/30/2001 $10,517 $11,171 $10,821
7/31/2001 $10,656 $11,336 $10,790
8/31/2001 $10,813 $11,523 $10,790
9/30/2001 $10,804 $11,484 $10,839
10/31/2001 $10,910 $11,621 $10,802
11/30/2001 $10,857 $11,523 $10,784
12/31/2001 $10,769 $11,414 $10,742
1/31/2002 $10,936 $11,612 $10,766
2/28/2002 $11,043 $11,752 $10,809
3/31/2002 $10,872 $11,522 $10,869
4/30/2002 $11,034 $11,747 $10,930
5/31/2002 $11,087 $11,818 $10,930
6/30/2002 $11,186 $11,943 $10,936
7/31/2002 $11,294 $12,097 $10,948
8/31/2002 $11,402 $12,242 $10,985
9/30/2002 $11,621 $12,510 $11,003
10/31/2002 $11,463 $12,303 $11,021
11/30/2002 $11,443 $12,252 $11,021
12/31/2002 $11,664 $12,510 $10,997
1/31/2003 $11,644 $12,479 $11,046
2/28/2003 $11,791 $12,653 $11,131
3/31/2003 $11,808 $12,661 $11,198
4/30/2003 $11,909 $12,744 $11,173
5/31/2003 $12,180 $13,043 $11,155
6/30/2003 $12,138 $12,987 $11,167
7/31/2003 $11,706 $12,533 $11,179
8/31/2003 $11,777 $12,626 $11,222
9/30/2003 $12,031 $12,997 $11,258
10/31/2003 $11,997 $12,932 $11,246
11/30/2003 $12,147 $13,067 $11,216
12/31/2003 $12,240 $13,175 $11,204
1/31/2004 $12,332 $13,250 $11,258
2/29/2004 $12,522 $13,450 $11,319
3/31/2004 $12,468 $13,403 $11,392
4/30/2004 $12,158 $13,086 $11,429
5/31/2004 $12,104 $13,038 $11,495
6/30/2004 $12,121 $13,086 $11,532
7/31/2004 $12,275 $13,258 $11,514
8/31/2004 $12,509 $13,524 $11,520
9/30/2004 $12,584 $13,595 $11,544
10/31/2004 $12,720 $13,712 $11,605
11/30/2004 $12,593 $13,599 $11,611
12/31/2004 $12,780 $13,765 $11,568
1/31/2005 $12,948 $13,894 $11,593
2/28/2005 $12,912 $13,848 $11,660
3/31/2005 $12,835 $13,760 $11,751
4/30/2005 $13,036 $13,977 $11,830
5/31/2005 $13,133 $14,076 $11,818
6/30/2005 $13,210 $14,163 $11,824
7/31/2005 $13,142 $14,099 $11,878
8/31/2005 $13,262 $14,242 $11,939
9/30/2005 $13,162 $14,146 $12,085
10/31/2005 $13,083 $14,060 $12,109
11/30/2005 $13,161 $14,127 $12,012
12/31/2005 $13,271 $14,249 $11,964
1/31/2006 $13,297 $14,287 $12,055
2/28/2006 $13,429 $14,383 $12,079
3/31/2006 $13,327 $14,284 $12,146
4/30/2006 $13,331 $14,279 $12,249
5/31/2006 $13,367 $14,343 $12,310
6/30/2006 $13,296 $14,289 $12,334
7/31/2006 $13,451 $14,459 $12,371
8/31/2006 $13,639 $14,673 $12,395
9/30/2006 $13,719 $14,775 $12,334
10/31/2006 $13,822 $14,868 $12,267
11/30/2006 $13,947 $14,992 $12,249
12/31/2006 $13,907 $14,939 $12,267
1/31/2007 $13,855 $14,901 $12,305
2/28/2007 $14,047 $15,097 $12,371
3/31/2007 $13,995 $15,060 $12,483
4/30/2007 $14,032 $15,104 $12,564
5/31/2007 $13,980 $15,038 $12,641
6/30/2007 $13,909 $14,960 $12,666
7/31/2007 $14,012 $15,076 $12,663
8/31/2007 $13,959 $15,011 $12,639
9/30/2007 $14,165 $15,233 $12,674
10/31/2007 $14,236 $15,301 $12,701
11/30/2007 $14,341 $15,398 $12,777
12/31/2007 $14,378 $15,441 $12,768
1/31/2008 $14,483 $15,636 $12,832
2/29/2008 $13,791 $14,920 $12,869
3/31/2008 $14,210 $15,346 $12,980
4/30/2008 $14,421 $15,526 $13,059
5/31/2008 $14,528 $15,620 $13,169
6/30/2008 $14,356 $15,443 $13,302
7/31/2008 $14,430 $15,502 $13,372
8/31/2008 $14,551 $15,683 $13,318
9/30/2008 $13,702 $14,948 $13,300
10/31/2008 $13,744 $14,795 $13,166
11/30/2008 $13,783 $14,842 $12,913
12/31/2008 $14,146 $15,059 $12,780
1/31/2009 $14,461 $15,610 $12,835
2/28/2009 $14,593 $15,692 $12,899
Total Returns 45.93% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------- -------
1-Year +1.22%
5-Year +2.21%
Since Inception (2/1/00) +4.74%
(PERFORMANCE GRAPH)
FRANKLIN OHIO BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS B BOND INDEX CPI
---- ------------- ---------- -------
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 $10,748 $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 $13,360 $10,960
11/30/2003 $12,952 $13,500 $10,930
12/31/2003 $13,045 $13,611 $10,918
1/31/2004 $13,137 $13,689 $10,972
2/29/2004 $13,333 $13,895 $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 $13,971 $11,226
9/30/2004 $13,356 $14,046 $11,250
10/31/2004 $13,493 $14,166 $11,309
11/30/2004 $13,364 $14,049 $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 $14,306 $11,363
3/31/2005 $13,583 $14,216 $11,451
4/30/2005 $13,799 $14,440 $11,528
5/31/2005 $13,896 $14,542 $11,517
6/30/2005 $13,960 $14,632 $11,523
7/31/2005 $13,893 $14,566 $11,576
8/31/2005 $14,013 $14,713 $11,635
9/30/2005 $13,901 $14,614 $11,777
10/31/2005 $13,812 $14,526 $11,801
11/30/2005 $13,877 $14,595 $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 $14,757 $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 $15,159 $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 $15,394 $11,991
2/28/2007 $14,719 $15,597 $12,056
3/31/2007 $14,658 $15,559 $12,165
4/30/2007 $14,690 $15,605 $12,244
5/31/2007 $14,616 $15,536 $12,319
6/30/2007 $14,547 $15,455 $12,343
7/31/2007 $14,649 $15,575 $12,340
8/31/2007 $14,574 $15,508 $12,317
9/30/2007 $14,794 $15,737 $12,351
10/31/2007 $14,861 $15,807 $12,378
11/30/2007 $14,951 $15,908 $12,451
12/31/2007 $14,983 $15,952 $12,443
1/31/2008 $15,097 $16,153 $12,505
2/29/2008 $14,377 $15,414 $12,541
3/31/2008 $14,815 $15,854 $12,650
4/30/2008 $15,035 $16,040 $12,726
5/31/2008 $15,147 $16,137 $12,834
6/30/2008 $14,969 $15,955 $12,963
7/31/2008 $15,046 $16,015 $13,031
8/31/2008 $15,171 $16,203 $12,979
9/30/2008 $14,290 $15,443 $12,961
10/31/2008 $14,333 $15,285 $12,830
11/30/2008 $14,369 $15,334 $12,584
12/31/2008 $14,752 $15,558 $12,454
1/31/2009 $15,078 $16,127 $12,508
2/28/2009 $15,229 $16,212 $12,571
Total Returns 52.29% 62.12% 25.71%
Annual Report | 53
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +4.19%
5-Year +2.56%
10-Year +3.73%
(PERFORMANCE GRAPH)
FRANKLIN OHIO BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE CLASS C BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,028 $10,014 $10,030
4/30/1999 $10,040 $10,039 $10,103
5/31/1999 $ 9,980 $ 9,981 $10,103
6/30/1999 $ 9,852 $ 9,837 $10,103
7/31/1999 $ 9,863 $ 9,873 $10,134
8/31/1999 $ 9,737 $ 9,794 $10,158
9/30/1999 $ 9,724 $ 9,798 $10,207
10/31/1999 $ 9,605 $ 9,692 $10,225
11/30/1999 $ 9,682 $ 9,795 $10,231
12/31/1999 $ 9,596 $ 9,722 $10,231
1/31/2000 $ 9,542 $ 9,679 $10,261
2/29/2000 $ 9,654 $ 9,792 $10,322
3/31/2000 $ 9,859 $10,006 $10,407
4/30/2000 $ 9,796 $ 9,947 $10,413
5/31/2000 $ 9,751 $ 9,895 $10,426
6/30/2000 $ 9,983 $10,157 $10,480
7/31/2000 $10,123 $10,299 $10,505
8/31/2000 $10,263 $10,457 $10,505
9/30/2000 $10,207 $10,403 $10,559
10/31/2000 $10,289 $10,516 $10,578
11/30/2000 $10,371 $10,596 $10,584
12/31/2000 $10,625 $10,858 $10,578
1/31/2001 $10,681 $10,965 $10,644
2/28/2001 $10,712 $11,000 $10,687
3/31/2001 $10,794 $11,099 $10,711
4/30/2001 $10,684 $10,978 $10,754
5/31/2001 $10,776 $11,097 $10,802
6/30/2001 $10,842 $11,171 $10,821
7/31/2001 $10,980 $11,336 $10,790
8/31/2001 $11,135 $11,523 $10,790
9/30/2001 $11,122 $11,484 $10,839
10/31/2001 $11,225 $11,621 $10,802
11/30/2001 $11,166 $11,523 $10,784
12/31/2001 $11,070 $11,414 $10,742
1/31/2002 $11,236 $11,612 $10,766
2/28/2002 $11,339 $11,752 $10,809
3/31/2002 $11,160 $11,522 $10,869
4/30/2002 $11,319 $11,747 $10,930
5/31/2002 $11,369 $11,818 $10,930
6/30/2002 $11,464 $11,943 $10,936
7/31/2002 $11,578 $12,097 $10,948
8/31/2002 $11,674 $12,242 $10,985
9/30/2002 $11,900 $12,510 $11,003
10/31/2002 $11,735 $12,303 $11,021
11/30/2002 $11,709 $12,252 $11,021
12/31/2002 $11,928 $12,510 $10,997
1/31/2003 $11,903 $12,479 $11,046
2/28/2003 $12,047 $12,653 $11,131
3/31/2003 $12,049 $12,661 $11,198
4/30/2003 $12,156 $12,744 $11,173
5/31/2003 $12,426 $13,043 $11,155
6/30/2003 $12,377 $12,987 $11,167
7/31/2003 $11,923 $12,533 $11,179
8/31/2003 $11,999 $12,626 $11,222
9/30/2003 $12,249 $12,997 $11,258
10/31/2003 $12,209 $12,932 $11,246
11/30/2003 $12,354 $13,067 $11,216
12/31/2003 $12,443 $13,175 $11,204
1/31/2004 $12,530 $13,250 $11,258
2/29/2004 $12,716 $13,450 $11,319
3/31/2004 $12,656 $13,403 $11,392
4/30/2004 $12,339 $13,086 $11,429
5/31/2004 $12,279 $13,038 $11,495
6/30/2004 $12,290 $13,086 $11,532
7/31/2004 $12,439 $13,258 $11,514
8/31/2004 $12,669 $13,524 $11,520
9/30/2004 $12,748 $13,595 $11,544
10/31/2004 $12,879 $13,712 $11,605
11/30/2004 $12,746 $13,599 $11,611
12/31/2004 $12,928 $13,765 $11,568
1/31/2005 $13,090 $13,894 $11,593
2/28/2005 $13,048 $13,848 $11,660
3/31/2005 $12,955 $13,760 $11,751
4/30/2005 $13,161 $13,977 $11,830
5/31/2005 $13,262 $14,076 $11,818
6/30/2005 $13,323 $14,163 $11,824
7/31/2005 $13,249 $14,099 $11,878
8/31/2005 $13,373 $14,242 $11,939
9/30/2005 $13,257 $14,146 $12,085
10/31/2005 $13,171 $14,060 $12,109
11/30/2005 $13,243 $14,127 $12,012
12/31/2005 $13,347 $14,249 $11,964
1/31/2006 $13,367 $14,287 $12,055
2/28/2006 $13,493 $14,383 $12,079
3/31/2006 $13,395 $14,284 $12,146
4/30/2006 $13,382 $14,279 $12,249
5/31/2006 $13,412 $14,343 $12,310
6/30/2006 $13,335 $14,289 $12,334
7/31/2006 $13,483 $14,459 $12,371
8/31/2006 $13,663 $14,673 $12,395
9/30/2006 $13,748 $14,775 $12,334
10/31/2006 $13,834 $14,868 $12,267
11/30/2006 $13,963 $14,992 $12,249
12/31/2006 $13,905 $14,939 $12,267
1/31/2007 $13,858 $14,901 $12,305
2/28/2007 $14,042 $15,097 $12,371
3/31/2007 $13,984 $15,060 $12,483
4/30/2007 $14,014 $15,104 $12,564
5/31/2007 $13,945 $15,038 $12,641
6/30/2007 $13,879 $14,960 $12,666
7/31/2007 $13,975 $15,076 $12,663
8/31/2007 $13,904 $15,011 $12,639
9/30/2007 $14,113 $15,233 $12,674
10/31/2007 $14,176 $15,301 $12,701
11/30/2007 $14,274 $15,398 $12,777
12/31/2007 $14,304 $15,441 $12,768
1/31/2008 $14,401 $15,636 $12,832
2/29/2008 $13,713 $14,920 $12,869
3/31/2008 $14,118 $15,346 $12,980
4/30/2008 $14,320 $15,526 $13,059
5/31/2008 $14,418 $15,620 $13,169
6/30/2008 $14,254 $15,443 $13,302
7/31/2008 $14,308 $15,502 $13,372
8/31/2008 $14,421 $15,683 $13,318
9/30/2008 $13,580 $14,948 $13,300
10/31/2008 $13,615 $14,795 $13,166
11/30/2008 $13,634 $14,842 $12,913
12/31/2008 $14,008 $15,059 $12,780
1/31/2009 $14,311 $15,610 $12,835
2/28/2009 $14,423 $15,692 $12,899
Total Returns 44.23% 56.92% 28.99%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 2/28/09
- ---------------- -------
1-Year +5.89%
5-Year +3.13%
10-Year +4.31%
(PERFORMANCE GRAPH)
FRANKLIN OHIO BARCLAYS
TAX-FREE CAPITAL
INCOME FUND - MUNICIPAL
DATE ADVISOR CLASS BOND INDEX CPI
---- ------------- ---------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,033 $10,014 $10,030
4/30/1999 $10,050 $10,039 $10,103
5/31/1999 $ 9,994 $ 9,981 $10,103
6/30/1999 $ 9,870 $ 9,837 $10,103
7/31/1999 $ 9,886 $ 9,873 $10,134
8/31/1999 $ 9,763 $ 9,794 $10,158
9/30/1999 $ 9,763 $ 9,798 $10,207
10/31/1999 $ 9,639 $ 9,692 $10,225
11/30/1999 $ 9,722 $ 9,795 $10,231
12/31/1999 $ 9,639 $ 9,722 $10,231
1/31/2000 $ 9,597 $ 9,679 $10,261
2/29/2000 $ 9,715 $ 9,792 $10,322
3/31/2000 $ 9,927 $10,006 $10,407
4/30/2000 $ 9,868 $ 9,947 $10,413
5/31/2000 $ 9,826 $ 9,895 $10,426
6/30/2000 $10,057 $10,157 $10,480
7/31/2000 $10,203 $10,299 $10,505
8/31/2000 $10,351 $10,457 $10,505
9/30/2000 $10,299 $10,403 $10,559
10/31/2000 $10,386 $10,516 $10,578
11/30/2000 $10,474 $10,596 $10,584
12/31/2000 $10,738 $10,858 $10,578
1/31/2001 $10,800 $10,965 $10,644
2/28/2001 $10,835 $11,000 $10,687
3/31/2001 $10,924 $11,099 $10,711
4/30/2001 $10,818 $10,978 $10,754
5/31/2001 $10,908 $11,097 $10,802
6/30/2001 $10,980 $11,171 $10,821
7/31/2001 $11,125 $11,336 $10,790
8/31/2001 $11,289 $11,523 $10,790
9/30/2001 $11,280 $11,484 $10,839
10/31/2001 $11,390 $11,621 $10,802
11/30/2001 $11,335 $11,523 $10,784
12/31/2001 $11,243 $11,414 $10,742
1/31/2002 $11,418 $11,612 $10,766
2/28/2002 $11,529 $11,752 $10,809
3/31/2002 $11,351 $11,522 $10,869
4/30/2002 $11,519 $11,747 $10,930
5/31/2002 $11,576 $11,818 $10,930
6/30/2002 $11,678 $11,943 $10,936
7/31/2002 $11,791 $12,097 $10,948
8/31/2002 $11,905 $12,242 $10,985
9/30/2002 $12,132 $12,510 $11,003
10/31/2002 $11,968 $12,303 $11,021
11/30/2002 $11,947 $12,252 $11,021
12/31/2002 $12,178 $12,510 $10,997
1/31/2003 $12,157 $12,479 $11,046
2/28/2003 $12,311 $12,653 $11,131
3/31/2003 $12,328 $12,661 $11,198
4/30/2003 $12,433 $12,744 $11,173
5/31/2003 $12,716 $13,043 $11,155
6/30/2003 $12,672 $12,987 $11,167
7/31/2003 $12,221 $12,533 $11,179
8/31/2003 $12,296 $12,626 $11,222
9/30/2003 $12,560 $12,997 $11,258
10/31/2003 $12,526 $12,932 $11,246
11/30/2003 $12,681 $13,067 $11,216
12/31/2003 $12,779 $13,175 $11,204
1/31/2004 $12,875 $13,250 $11,258
2/29/2004 $13,073 $13,450 $11,319
3/31/2004 $13,017 $13,403 $11,392
4/30/2004 $12,693 $13,086 $11,429
5/31/2004 $12,637 $13,038 $11,495
6/30/2004 $12,655 $13,086 $11,532
7/31/2004 $12,816 $13,258 $11,514
8/31/2004 $13,060 $13,524 $11,520
9/30/2004 $13,138 $13,595 $11,544
10/31/2004 $13,280 $13,712 $11,605
11/30/2004 $13,148 $13,599 $11,611
12/31/2004 $13,343 $13,765 $11,568
1/31/2005 $13,518 $13,894 $11,593
2/28/2005 $13,480 $13,848 $11,660
3/31/2005 $13,401 $13,760 $11,751
4/30/2005 $13,610 $13,977 $11,830
5/31/2005 $13,712 $14,076 $11,818
6/30/2005 $13,792 $14,163 $11,824
7/31/2005 $13,721 $14,099 $11,878
8/31/2005 $13,846 $14,242 $11,939
9/30/2005 $13,741 $14,146 $12,085
10/31/2005 $13,659 $14,060 $12,109
11/30/2005 $13,740 $14,127 $12,012
12/31/2005 $13,856 $14,249 $11,964
1/31/2006 $13,883 $14,287 $12,055
2/28/2006 $14,021 $14,383 $12,079
3/31/2006 $13,913 $14,284 $12,146
4/30/2006 $13,918 $14,279 $12,249
5/31/2006 $13,956 $14,343 $12,310
6/30/2006 $13,881 $14,289 $12,334
7/31/2006 $14,043 $14,459 $12,371
8/31/2006 $14,239 $14,673 $12,395
9/30/2006 $14,323 $14,775 $12,334
10/31/2006 $14,431 $14,868 $12,267
11/30/2006 $14,562 $14,992 $12,249
12/31/2006 $14,519 $14,939 $12,267
1/31/2007 $14,465 $14,901 $12,305
2/28/2007 $14,666 $15,097 $12,371
3/31/2007 $14,612 $15,060 $12,483
4/30/2007 $14,650 $15,104 $12,564
5/31/2007 $14,596 $15,038 $12,641
6/30/2007 $14,521 $14,960 $12,666
7/31/2007 $14,629 $15,076 $12,663
8/31/2007 $14,573 $15,011 $12,639
9/30/2007 $14,789 $15,233 $12,674
10/31/2007 $14,863 $15,301 $12,701
11/30/2007 $14,973 $15,398 $12,777
12/31/2007 $15,011 $15,441 $12,768
1/31/2008 $15,121 $15,636 $12,832
2/29/2008 $14,398 $14,920 $12,869
3/31/2008 $14,836 $15,346 $12,980
4/30/2008 $15,056 $15,526 $13,059
5/31/2008 $15,168 $15,620 $13,169
6/30/2008 $14,989 $15,443 $13,302
7/31/2008 $15,068 $15,502 $13,372
8/31/2008 $15,195 $15,683 $13,318
9/30/2008 $14,312 $14,948 $13,300
10/31/2008 $14,344 $14,795 $13,166
11/30/2008 $14,381 $14,842 $12,913
12/31/2008 $14,779 $15,059 $12,780
1/31/2009 $15,107 $15,610 $12,835
2/28/2009 $15,246 $15,692 $12,899
Total Returns 52.46% 56.92% 28.99%
54 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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.
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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 for the maximum combined effective federal and Ohio personal
income tax rate of 38.85%, 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 7/1/08, 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 7/1/08, 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 6/30/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 7/1/08
(commencement of sales), the cumulative total return of Advisor Class
shares was +1.37%.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 55
Your Fund's Expenses
FRANKLIN OHIO TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
56 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $1,002.90 $3.18
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
CLASS B
Actual $1,000 $1,000.20 $5.90
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
CLASS C
Actual $1,000 $1,000.20 $5.90
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
ADVISOR CLASS
Actual $1,000 $1,003.40 $2.68
Hypothetical (5% return before expenses) $1,000 $1,022.12 $2.71
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.64%; B: 1.19%; C: 1.19%; and Advisor:
0.54%), multiplied by the average account value over the period, multiplied
by 181/365 to reflect the one-half year period.
Annual Report | 57
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN INSURED TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.48 $ 12.32 $ 12.32 $ 12.41 $ 12.62
---------- ---------- ---------- ---------- ----------
Income from investment operations(b):
Net investment income(c) ...................... 0.52 0.52 0.53 0.54 0.55
Net realized and unrealized gains (losses) .... (0.29) (0.84) 0.01 (0.10) (0.20)
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. 0.23 (0.32) 0.54 0.44 0.35
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ......................... (0.51) (0.52) (0.53) (0.53) (0.55)
Net realized gains ............................ -- --(d) (0.01) -- (0.01)
---------- ---------- ---------- ---------- ----------
Total distributions .............................. (0.51) (0.52) (0.54) (0.53) (0.56)
---------- ---------- ---------- ---------- ----------
Redemption fees(d, e) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 11.20 $ 11.48 $ 12.32 $ 12.32 $ 12.41
========== ========== ========== ========== ==========
Total return(f) .................................. 2.04% (2.70)% 4.51% 3.65% 2.93%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.63% 0.64% 0.63% 0.63% 0.63%
Net investment income ............................ 4.57% 4.28% 4.33% 4.37% 4.47%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $1,807,929 $1,909,094 $1,821,006 $1,697,516 $1,602,174
Portfolio turnover rate .......................... 15.12% 15.60% 6.75% 4.94% 9.07%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
58 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INSURED TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------
CLASS B 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.53 $ 12.37 $ 12.37 $ 12.47 $ 12.67
------- ------- ------- ------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.46 0.45 0.46 0.47 0.48
Net realized and unrealized gains (losses) .... (0.28) (0.83) 0.01 (0.10) (0.19)
------- ------- ------- ------- --------
Total from investment operations ................. 0.18 (0.38) 0.47 0.37 0.29
------- ------- ------- ------- --------
Less distributions from:
Net investment income ......................... (0.45) (0.46) (0.46) (0.47) (0.48)
Net realized gains ............................ -- --(d) (0.01) -- (0.01)
------- ------- ------- ------- --------
Total distributions .............................. (0.45) (0.46) (0.47) (0.47) (0.49)
------- ------- ------- ------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
------- ------- ------- ------- --------
Net asset value, end of year ..................... $ 11.26 $ 11.53 $ 12.37 $ 12.37 $ 12.47
======= ======= ======= ======= ========
Total return(f) .................................. 1.56% (3.22)% 3.93% 3.07% 2.35%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.18% 1.19% 1.18% 1.18% 1.18%
Net investment income ............................ 4.02% 3.73% 3.78% 3.82% 3.92%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $56,475 $69,500 $83,644 $94,569 $103,378
Portfolio turnover rate .......................... 15.12% 15.60% 6.75% 4.94% 9.07%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 59
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INSURED TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.59 $ 12.43 $ 12.42 $ 12.51 $ 12.72
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.47 0.46 0.47 0.48 0.49
Net realized and unrealized gains (losses) .... (0.30) (0.84) 0.01 (0.10) (0.21)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.17 (0.38) 0.48 0.38 0.28
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.45) (0.46) (0.46) (0.47) (0.48)
Net realized gains ............................ -- --(d) (0.01) -- (0.01)
-------- -------- -------- -------- --------
Total distributions .............................. (0.45) (0.46) (0.47) (0.47) (0.49)
-------- -------- -------- -------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 11.31 $ 11.59 $ 12.43 $ 12.42 $ 12.51
======== ======== ======== ======== ========
Total return(f) .................................. 1.46% (3.21)% 3.99% 3.06% 2.34%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.18% 1.19% 1.17% 1.18% 1.18%
Net investment income ............................ 4.02% 3.73% 3.79% 3.82% 3.92%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $196,085 $148,054 $141,913 $147,979 $138,027
Portfolio turnover rate .......................... 15.12% 15.60% 6.75% 4.94% 9.07%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
60 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INSURED TAX-FREE INCOME FUND
PERIOD ENDED
FEBRUARY 28,
ADVISOR CLASS 2009(a)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $11.86
------
Income from investment operations(b):
Net investment income(c) ...................... 0.36
Net realized and unrealized gains (losses) .... (0.67)
------
Total from investment operations ................. (0.31)
------
Less distributions from net investment income .... (0.35)
------
Net asset value, end of period ................... $11.20
======
Total return(d) .................................. (2.58)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses ......................................... 0.53%
Net investment income ............................ 4.67%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $1,417
Portfolio turnover rate .......................... 15.12%
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return is not annualized for periods less than one year.
(e) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
Annual Report | 61
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS 95.2%
ALABAMA 4.4%
Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan, Series A,
AMBAC Insured, 5.25%, 8/15/21 ............................................................... $ 2,490,000 $ 2,583,375
Anniston Regional Medical Center Board Revenue, Series A, AMBAC Insured, 5.25%,
6/01/18 ..................................................................................... 5,000,000 5,067,050
Bessemer GO, wts., XLCA Insured, 5.00%, 2/01/35 ................................................ 2,000,000 1,824,700
Daphne Utilities Board Water Gas and Sewer Revenue, Series B, AMBAC Insured,
Pre-Refunded, 5.50%, 6/01/30 ................................................................ 1,670,000 1,781,773
East Alabama Health Care Authority Health Care Facilities Revenue, Tax Anticipation Bond,
Series A, MBIA Insured, 5.25%, 9/01/28 ...................................................... 7,000,000 6,213,690
Helena Utilities Board Water and Sewer Revenue, MBIA Insured, Pre-Refunded, 5.25%,
4/01/27 .................................................................................. 3,260,000 3,663,458
4/01/33 .................................................................................. 4,890,000 5,495,186
Houston County Health Care Authority Revenue, Series A, AMBAC Insured, 5.125%,
10/01/24 ................................................................................. 5,855,000 5,062,409
10/01/25 ................................................................................. 6,065,000 5,147,002
Leeds Public Educational Building Authority Educational Facilities Revenue, Assured
Guaranty, 5.125%, 4/01/38 ................................................................... 10,865,000 10,475,055
Limestone County Water and Sewer Authority Water Revenue, AMBAC Insured, 5.00%,
12/01/35 .................................................................................... 9,100,000 8,736,455
Madison GO, wts., Refunding, XLCA Insured, 4.75%, 12/01/36 ..................................... 10,000,000 9,061,000
Muscle Shoals GO, wts., MBIA Insured, Pre-Refunded, 5.50%, 8/01/30 ............................. 2,000,000 2,167,340
Orange Beach Water Sewer and Fire Protection Authority Revenue, MBIA Insured, 5.00%,
5/15/35 ..................................................................................... 3,665,000 3,519,976
Pell City GO, wts.,
Refunding, XLCA Insured, 5.00%, 2/01/24 .................................................. 1,020,000 1,024,682
XLCA Insured, 5.00%, 2/01/34 ............................................................. 5,195,000 4,412,062
Tuscaloosa Public Educational Building Authority Student Housing Revenue, Ridgecrest
Student Housing LLC, Assured Guaranty, 6.75%, 7/01/38 ....................................... 5,000,000 5,409,000
University of Alabama at Birmingham Hospital Revenue, Refunding, Series A, AMBAC Insured,
5.00%, 9/01/41 .............................................................................. 5,000,000 4,080,150
University of Alabama University Revenues, FGIC Insured, 5.25%, 10/01/27 ....................... 5,975,000 6,062,295
--------------
91,786,658
--------------
ALASKA 0.7%
Alaska Energy Authority Power Revenue, Bradley Lake Project, Refunding, BIG Insured,
6.25%, 7/01/21 .............................................................................. 5,000 4,999
Alaska Energy Authority Utilities Revenue, Refunding, FSA Insured, 5.20%, 7/01/17 .............. 3,000,000 3,000,150
Matanuska-Susitna Borough Lease Revenue, Goose Greek Correctional Center,
Assured Guaranty, 6.00%, 9/01/32 ............................................................ 10,000,000 10,557,800
--------------
13,562,949
--------------
ARIZONA 3.2%
Arizona State Municipal Financing Program COP, Series 1986-20, BIG Insured, ETM, 7.70%,
8/01/10 ..................................................................................... 4,040,000 4,297,267
Cochise County USD No. 68 GO, Sierra Vista, Refunding, FGIC Insured, 7.50%, 7/01/10 ............ 500,000 534,600
Downtown Phoenix Hotel Corp. Revenue,
Senior Series A, FGIC Insured, 5.00%, 7/01/36 ............................................ 15,000,000 10,727,850
sub. bond, Series B, FGIC Insured, 5.00%, 7/01/36 ........................................ 6,450,000 5,564,673
62 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Maricopa County IDA Hospital Facility Revenue, Samaritan Health Services, Series A,
MBIA Insured, ETM, 7.00%, 12/01/16 .......................................................... $ 300,000 $ 373,191
Mesa IDAR, Discovery Health System, Series A, MBIA Insured, Pre-Refunded,
5.75%, 1/01/25 ........................................................................... 18,000,000 18,883,620
5.625%, 1/01/29 .......................................................................... 12,655,000 13,263,199
Tucson Water Revenue, Series B, FSA Insured, 5.00%, 7/01/32 .................................... 12,000,000 12,047,880
--------------
65,692,280
--------------
ARKANSAS 1.6%
Arkansas State Development Finance Authority Water Revenue, Refunding, Series A,
MBIA Insured, 6.50%, 7/01/10 ................................................................ 920,000 951,869
Arkansas State University Revenue, Arkansas State University-Beebe, Series B,
AMBAC Insured, 5.00%,
12/01/30 ................................................................................. 3,250,000 3,007,452
12/01/35 ................................................................................. 3,045,000 2,668,790
Benton Regional Public Water Authority Water Revenue, Refunding and Improvement,
XLCA Insured, 5.00%, 10/01/35 ............................................................... 5,230,000 4,775,199
Little Rock School District GO,
Refunding, Series B, FSA Insured, 5.50%, 2/01/33 ......................................... 3,970,000 3,984,054
Series C, FSA Insured, 5.25%, 2/01/33 .................................................... 7,790,000 7,820,459
Paragould Water and Electric Revenue, AMBAC Insured, Pre-Refunded, 5.65%, 12/01/25 ............. 1,000,000 1,082,430
Pulaski Technical College Revenue, Student Tuition and Fee, FGIC Insured, 5.00%,
9/01/34 ..................................................................................... 2,190,000 2,066,594
University of Arkansas University Revenues,
AMBAC Insured, 5.00%, 11/01/36 ........................................................... 3,205,000 3,061,576
Various Facility, Fayetteville Campus, FGIC Insured, 5.00%, 12/01/32 ..................... 4,000,000 3,864,840
--------------
33,283,263
--------------
CALIFORNIA 3.2%
California State GO,
Refunding, AMBAC Insured, 5.00%, 2/01/33 ................................................. 7,000,000 6,421,450
Refunding, MBIA Insured, 5.00%, 2/01/31 .................................................. 20,000,000 18,637,200
Refunding, MBIA Insured, 5.00%, 10/01/32 ................................................. 1,910,000 1,760,676
Various Purpose, Refunding, MBIA Insured, 4.75%, 3/01/35 ................................. 20,855,000 18,077,531
Corona COP, Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 ................... 13,840,000 15,182,065
Oakland RDA Tax Allocation, Central District Redevelopment, Refunding, AMBAC Insured,
5.50%, 2/01/14 .............................................................................. 200,000 214,426
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Refunding, Series A,
MBIA Insured, 5.25%, 1/15/30 ................................................................ 4,000,000 2,986,080
Val Verde USD, COP, School Construction Project,
Refunding, Series B, FGIC Insured, 5.00%, 1/01/35 ........................................ 1,680,000 1,409,772
Series B, FGIC Insured, Pre-Refunded, 5.00%, 1/01/35 ..................................... 820,000 935,710
--------------
65,624,910
--------------
COLORADO 5.0%
Arkansas River Power Authority Power Revenue, Improvement, XLCA Insured, 5.25%,
10/01/32 .................................................................................... 12,490,000 9,032,144
Aurora Water Improvement Revenue, first lien, Series A, AMBAC Insured, 5.00%, 8/01/39 .......... 25,000,000 23,981,250
Broomfield COP, Refunding, AMBAC Insured, 6.00%, 12/01/29 ...................................... 3,000,000 3,034,860
Annual Report | 63
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Colorado Board of Governors University Enterprise System Revenue, Series A, FGIC Insured,
5.00%, 3/01/37 .............................................................................. $10,000,000 $ 9,303,400
Colorado Health Facilities Authority Revenue,
Catholic Health, Series C-7, FSA Insured, 5.00%, 9/01/36 ................................. 20,000,000 17,616,200
Hospital, Refunding, Series B, FSA Insured, 5.25%, 3/01/36 ............................... 10,000,000 8,851,900
Denver City and County Airport Revenue,
Series C, MBIA Insured, ETM, 6.125%, 11/15/25 ............................................ 3,590,000 4,160,164
Series C, MBIA Insured, ETM, 6.125%, 11/15/25 ............................................ 4,410,000 4,409,735
Denver Convention Center Hotel Authority Revenue, Refunding, senior bond, XLCA Insured,
5.00%, 12/01/35 ............................................................................. 15,000,000 9,854,100
University of Colorado Hospital Authority Revenue, Refunding, Series A, AMBAC Insured,
5.20%, 11/15/17 .......................................................................... 5,425,000 5,406,555
5.25%, 11/15/22 .......................................................................... 7,800,000 7,002,918
--------------
102,653,226
--------------
CONNECTICUT 0.3%
Connecticut State Health and Educational Facilities Authority Revenue, Child Care Facilities
Program, Series G, Assured Guaranty, 6.00%, 7/01/38 ......................................... 5,000,000 5,299,750
--------------
DISTRICT OF COLUMBIA 0.9%
District of Columbia HFA, RMR, Series 1986-1, FGIC Insured, 7.75%, 9/01/16 ..................... 135,000 134,591
District of Columbia Hospital Revenue, Children's Hospital Obligation, Sub Series 1,
FSA Insured, 5.45%, 7/15/35 ................................................................. 20,000,000 18,981,400
--------------
19,115,991
--------------
FLORIDA 16.6%
Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/20 ................................. 1,000,000 1,022,970
Brevard County Local Option Fuel Tax Revenue, FGIC Insured, 5.00%,
8/01/32 .................................................................................. 12,440,000 11,402,753
8/01/37 .................................................................................. 13,000,000 11,755,120
Broward County HFAR, FSA Insured,
5.65%, 11/01/22 .......................................................................... 405,000 405,178
5.70%, 11/01/29 .......................................................................... 225,000 220,435
Broward County School Board COP,
MBIA Insured, 5.00%, 7/01/28 ............................................................. 2,000,000 1,920,820
Series A, FSA Insured, 5.00%, 7/01/22 .................................................... 2,000,000 2,014,460
Series A, FSA Insured, 5.00%, 7/01/26 .................................................... 2,850,000 2,759,911
Series A, FSA Insured, 5.00%, 7/01/30 .................................................... 2,000,000 1,909,000
Cape Coral Water and Sewer Revenue, AMBAC Insured, 5.00%, 10/01/36 ............................. 2,000,000 1,807,380
Celebration CDD, Special Assessment, Series B, MBIA Insured, 5.50%, 5/01/19 .................... 205,000 205,613
Clearwater Water and Sewer Revenue, FGIC Insured, 5.00%,
12/01/28 ................................................................................. 11,050,000 10,698,831
12/01/32 ................................................................................. 13,665,000 12,919,848
Coral Gables Health Facilities Authority Hospital Revenue, Baptist Health South Florida
Obligated Group, FSA Insured, Pre-Refunded, 5.00%, 8/15/29 .................................. 1,000,000 1,136,930
Dade County HFA, MFMR, Siesta Pointe Apartments, Series A, FSA Insured, 5.75%,
9/01/29 ..................................................................................... 1,890,000 1,863,162
Daytona Beach Utility System Revenue, Refunding, Series B, FGIC Insured, 5.00%,
11/15/32 .................................................................................... 1,000,000 898,240
64 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Destin Capital Improvement Revenue, MBIA Insured, 5.00%, 8/01/27 ............................... $ 1,315,000 $ 1,348,375
Escambia County HFA, SFMR, Multi-County Program, Refunding, Series A, MBIA Insured,
6.40%, 10/01/30 ............................................................................. 45,000 45,215
Escambia County Utilities Authority Utility System Revenue,
FGIC Insured, 5.00%, 1/01/31 ............................................................. 1,775,000 1,717,614
Refunding, Series B, FGIC Insured, 5.00%, 1/01/22 ........................................ 2,000,000 2,025,060
Florida Gulf Coast University Financing Corp. Capital Improvement Revenue, Housing Project,
Series A, MBIA Insured, 5.00%, 2/01/37 ...................................................... 10,000,000 9,173,900
Florida HFAR, Spinnaker Cove Apartments, Series G, AMBAC Insured, 6.50%, 7/01/36 ............... 1,600,000 1,593,728
Florida HFC Revenue,
Housing Logans Pointe Apartments, Series F-1, FSA Insured, 5.90%, 12/01/19 ............... 1,195,000 1,219,378
Marina Bay Apartments, Series S, FSA Insured, 5.85%, 2/01/41 ............................. 1,070,000 1,039,837
Florida Intergovernmental Finance Commission Capital Revenue, Series A, AMBAC Insured,
5.00%, 8/01/32 .............................................................................. 3,570,000 3,084,301
Florida State Board of Education Capital Outlay GO, Public Education,
Refunding, Series E, FGIC Insured, 5.00%, 6/01/24 ........................................ 5,000,000 5,057,750
Series B, FGIC Insured, 5.00%, 6/01/23 ................................................... 5,395,000 5,510,291
Florida State Board of Education GO,
Series C, MBIA Insured, 5.00%, 6/01/27 ................................................... 4,245,000 4,285,030
Series F, MBIA Insured, 5.00%, 6/01/28 ................................................... 2,000,000 2,012,760
Florida State Board Regent Housing Revenue, University of Florida, FGIC Insured,
Pre-Refunded, 5.25%, 7/01/30 ................................................................ 2,000,000 2,132,140
Florida State Correctional Privatization Commission COP, Series B, AMBAC Insured, 5.00%,
8/01/25 ..................................................................................... 2,000,000 1,953,960
Florida State Department of Environmental Protection Preservation Revenue, Florida Forever,
Series A, MBIA Insured, 5.00%, 7/01/21 ...................................................... 3,000,000 3,048,750
Florida State Department of General Services Division Facilities Management Revenue,
Florida Facilities Pool, Series B, FSA Insured, Pre-Refunded, 5.50%, 9/01/28 ................ 550,000 568,920
Greater Orlando Aviation Authority Orlando Airport Facilities Revenue, Series B, FGIC Insured,
5.25%, 10/01/28 ............................................................................. 2,500,000 2,504,375
Gulf Breeze Revenue,
AMBAC Insured, 5.00%, 12/01/32 ........................................................... 1,205,000 1,039,132
FGIC Insured, 5.80%, 12/01/20 ............................................................ 1,250,000 1,290,313
Local Government Loan Program, Series C, FGIC Insured, 6.05%, 12/01/15 ................... 1,915,000 1,915,881
Hernando County School Board COP, MBIA Insured, 5.00%, 7/01/30 ................................. 1,150,000 1,035,276
Hillsborough County School Board COP, Master Lease Program,
MBIA Insured, Pre-Refunded, 5.375%, 7/01/26 .............................................. 1,000,000 1,015,240
Refunding, Series A, MBIA Insured, 5.00%, 7/01/26 ........................................ 1,670,000 1,673,474
Indian Trail Water Control District Improvement Revenue, MBIA Insured, 5.75%, 8/01/16 .......... 1,090,000 1,086,174
Jacksonville Capital Improvement Revenue, Refunding, Series C, AMBAC Insured, 5.00%,
10/01/25 .................................................................................... 4,000,000 3,937,880
Jacksonville Guaranteed Entitlement Revenue, Refunding and Improvement, FGIC Insured,
5.00%, 10/01/32 ............................................................................. 1,000,000 918,280
Jacksonville Sales Tax Revenue,
AMBAC Insured, 5.00%, 10/01/30 ........................................................... 5,000,000 4,896,400
Better Jacksonville, MBIA Insured, 5.00%, 10/01/30 ....................................... 1,500,000 1,455,630
Annual Report | 65
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Jacksonville Transportation Revenue, MBIA Insured,
5.00%, 10/01/26 .......................................................................... $ 2,000,000 $ 2,009,980
5.25%, 10/01/29 .......................................................................... 11,000,000 11,002,090
Jacksonville Water and Sewer Revenue, United Water Project, AMBAC Insured, 6.35%,
8/01/25 ..................................................................................... 1,000,000 972,170
Lake County School Board COP, Series A, AMBAC Insured, 5.00%, 6/01/30 .......................... 2,080,000 1,891,198
Lee County Airport Revenue,
Refunding, FSA Insured, 5.00%, 10/01/33 .................................................. 3,530,000 3,343,545
Series B, FSA Insured, Pre-Refunded, 5.75%, 10/01/33 ..................................... 4,000,000 4,340,800
Lee Memorial Health System Hospital Revenue, Series A, AMBAC Insured, 5.00%,
4/01/32 .................................................................................. 1,460,000 1,137,121
4/01/37 .................................................................................. 11,000,000 8,301,810
Leon County COP, AMBAC Insured, 5.00%, 7/01/25 ................................................. 8,935,000 8,606,103
Maitland CDA Revenue, AMBAC Insured, 5.00%, 7/01/34 ............................................ 2,595,000 2,525,765
Marion County Utility System Revenue, FGIC Insured, 5.00%, 12/01/31 ............................ 1,500,000 1,431,285
Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ............................. 3,000,000 2,826,660
Miami-Dade County Aviation Revenue, Miami International Airport, Hub of the Americas,
Refunding, Series A, CIFG Insured, 5.00%, 10/01/38 ....................................... 1,625,000 1,256,288
Series B, FGIC Insured, 5.75%, 10/01/29 .................................................. 2,500,000 2,507,075
Series B, FGIC Insured, 5.00%, 10/01/30 .................................................. 3,500,000 3,167,185
Miami-Dade County GO, Building Better Communities Program, FGIC Insured, 5.00%,
7/01/33 ..................................................................................... 2,000,000 1,897,420
Miami-Dade County Public Facilities Revenue, Jackson Health System, Series A,
MBIA Insured, 5.00%, 6/01/31 ................................................................ 1,650,000 1,383,475
Miami-Dade County School Board COP, Series A, FGIC Insured, 5.00%,
5/01/25 .................................................................................. 5,000,000 4,595,800
5/01/26 .................................................................................. 17,080,000 15,481,654
5/01/27 .................................................................................. 10,775,000 9,703,534
Ocala Utility System Revenue, Refunding, Series A, FGIC Insured, 5.00%, 10/01/31 ............... 2,000,000 1,896,260
Ocoee Water and Sewer System Revenue, AMBAC Insured, 5.625%, 10/01/26 .......................... 4,220,000 4,219,873
Opa-Locka Capital Improvement Revenue, FGIC Insured, 6.125%, 1/01/24 ........................... 1,000,000 1,002,080
Orange County Health Facilities Authority Revenue, Hospital, Orlando Regional Healthcare,
Series B, FSA Insured, 5.00%, 12/01/32 ...................................................... 7,000,000 6,191,150
Orange County School Board COP,
AMBAC Insured, 5.50%, 8/01/25 ............................................................ 1,000,000 1,044,920
Series A, MBIA Insured, 5.00%, 8/01/27 ................................................... 10,000,000 9,559,000
Orange County Tourist Development Tax Revenue, AMBAC Insured, Pre-Refunded, 5.50%,
10/01/31 .................................................................................... 1,000,000 1,027,370
Orlando-Orange County Expressway Authority Revenue,
junior lien, FGIC Insured, 6.50%, 7/01/10 ................................................ 100,000 105,892
junior lien, FGIC Insured, 6.50%, 7/01/12 ................................................ 225,000 247,559
Series B, AMBAC Insured, 5.00%, 7/01/35 .................................................. 20,000,000 18,376,800
Osceola County HFA, MFHR, Tierra Vista Apartment Project, Series A, FSA Insured, 5.70%,
12/01/17 .................................................................................... 480,000 480,883
Osceola County School Board COP, Series A, AMBAC Insured, Pre-Refunded, 5.25%,
6/01/27 ..................................................................................... 13,000,000 14,620,710
Osceola County Tourist Development Tax Revenue, FGIC Insured, 5.00%, 10/01/32 .................. 3,000,000 2,829,480
66 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Palm Beach County IDR, South Florida Fair Project, MBIA Insured, 5.50%, 6/01/31 ................ $ 2,000,000 $ 1,835,900
Palm Beach County School Board COP, Series A,
AMBAC Insured, Pre-Refunded, 5.125%, 8/01/24 ............................................. 2,000,000 2,200,160
FGIC Insured, Pre-Refunded, 6.00%, 8/01/22 ............................................... 3,000,000 3,240,120
Panama City Beach Utility Revenue, Refunding, AMBAC Insured, 5.00%, 6/01/32 .................... 2,000,000 1,756,860
Pasco County Guaranteed Entitlement Revenue, Refunding, FSA Insured, 5.00%,
12/01/33 .................................................................................... 2,185,000 2,169,486
Pembroke Pines Public Improvement Revenue,
Series A, AMBAC Insured, 5.00%, 10/01/29 ................................................. 2,000,000 1,906,040
Series B, AMBAC Insured, 5.00%, 10/01/34 ................................................. 2,000,000 1,845,460
Pinellas County Health Facilities Authority Revenue, Baycare Health System, FSA Insured,
5.00%, 11/15/30 ............................................................................. 4,000,000 3,523,880
Pinellas County Sewer Revenue, FSA Insured, 5.00%, 10/01/32 .................................... 3,000,000 2,967,120
Polk County Public Facilities Revenue, MBIA Insured, 5.00%, 12/01/33 ........................... 2,000,000 1,816,420
Polk County School Board COP, Series A, FSA Insured, 5.00%,
1/01/24 .................................................................................. 5,000,000 4,922,550
1/01/26 .................................................................................. 1,000,000 978,780
Polk County Utility System Revenue, Series A, FGIC Insured, 5.00%,
10/01/30 ................................................................................. 1,000,000 929,600
10/01/34 ................................................................................. 2,000,000 1,825,440
Port Orange GO, MBIA Insured, 5.00%, 4/01/33 ................................................... 1,755,000 1,707,036
Port St. Lucie Utility Revenue, MBIA Insured, 5.00%, 9/01/34 ................................... 8,420,000 7,842,725
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 3,948,050
St. Lucie West Services District Utility Revenue, senior lien, MBIA Insured, 6.125%,
10/01/32 .................................................................................... 2,240,000 2,257,338
Sumter County School District Revenue, Multi-District Loan Program, FSA Insured, 7.15%,
11/01/15 .................................................................................... 245,000 300,627
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 .................... 2,000,000 2,062,300
Tampa Bay Water Utility System Revenue, FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 ............ 2,000,000 2,216,580
Tavares Water and Sewer Revenue, AMBAC Insured, 5.50%, 10/01/30 ................................ 1,000,000 1,012,420
University of Central Florida Athletics Assn. Inc. COP, Series A, FGIC Insured, 5.00%,
10/01/27 ................................................................................. 1,000,000 805,210
10/01/30 ................................................................................. 1,485,000 1,162,116
University of Central Florida COP, University of Central Florida Convocation Corp., Series A,
FGIC Insured, 5.00%, 10/01/35 ............................................................... 1,500,000 1,121,745
Volusia County Educational Facility Authority Revenue, Embry-Riddle Aeronautical University,
Refunding, Series B, AMBAC Insured, 5.25%, 10/15/19 ......................................... 3,500,000 3,533,740
--------------
341,396,353
--------------
GEORGIA 5.2%
Athens Housing Authority Student Housing Lease Revenue, University of Georgia,
East Campus, Refunding, AMBAC Insured, 5.00%, 12/01/33 ...................................... 6,000,000 5,915,700
Atlanta Airport Revenue, General, Series A, FGIC Insured, Pre-Refunded, 5.50%, 1/01/26 ......... 13,750,000 14,426,225
Atlanta GO, Refunding, FGIC Insured, 5.00%, 12/01/20 ........................................... 3,775,000 3,784,400
Atlanta Water and Wastewater Revenue,
FSA Insured, 5.00%, 11/01/37 ............................................................. 15,000,000 14,489,550
Series A, FGIC Insured, 5.00%, 11/01/29 .................................................. 4,750,000 3,903,265
Annual Report | 67
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Brunswick Water and Sewer Revenue, Refunding and Improvement, MBIA Insured, 6.10%,
10/01/14 .................................................................................... $ 1,535,000 $ 1,765,680
Bulloch County Development Authority Revenue, Assured Guaranty, 5.25%, 7/01/33 ................. 14,825,000 14,723,152
Cherokee County Water and Sewer Authority Revenue,
FGIC Insured, 5.00%, 8/01/27 ............................................................. 1,500,000 1,510,680
MBIA Insured, 6.90%, 8/01/18 ............................................................. 15,000 14,995
Columbus Building Authority Lease Revenue, Series A, FGIC Insured, 5.00%, 1/01/31 .............. 3,500,000 3,501,505
Dahlonega Water and Wastewater Revenue, Series A, Assured Guaranty, 5.50%, 9/01/37 ............. 6,450,000 5,658,327
East Point Building Authority Revenue, Water and Sewer Project, Series A, XLCA Insured,
5.00%, 2/01/30 .............................................................................. 11,360,000 10,193,101
Fulton County Development Authority Revenue, Georgia Institute of Technology Athletic Assn.,
Refunding, AMBAC Insured, 5.125%, 10/01/32 .................................................. 9,000,000 8,884,440
Georgia Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus
Regional Healthcare Systems, MBIA Insured, 5.50%, 8/01/19 ................................... 15,000,000 14,977,950
Henry County Water and Sewer Authority Revenue, FGIC Insured, Pre-Refunded, 5.625%,
2/01/30 ..................................................................................... 3,500,000 3,694,880
--------------
107,443,850
--------------
HAWAII 0.5%
Hawaii County GO, Refunding and Improvement, Series A, FGIC Insured, 5.60%,
5/01/12 .................................................................................. 1,000,000 1,108,330
5/01/13 .................................................................................. 1,000,000 1,125,890
Honolulu City and County GO, Refunding, Series C, FGIC Insured, 5.00%, 7/01/20 ................. 6,250,000 6,342,937
Kauai County GO, Series A, FGIC Insured, Pre-Refunded, 6.125%, 8/01/23 ......................... 1,755,000 1,881,220
--------------
10,458,377
--------------
ILLINOIS 1.2%
Illinois Health Facilities Authority Revenue,
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%,
11/15/28 .............................................................................. 5,000,000 4,634,000
Series B, FSA Insured, ETM, 7.75%, 8/15/10 ............................................... 50,000 54,898
Illinois State Finance Authority Revenue, Edward Hospital, Series A, AMBAC Insured, 5.50%,
2/01/40 ..................................................................................... 4,000,000 3,079,200
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 4,225,845
Regional Transportation Authority Revenue, Series A, AMBAC Insured, 7.20%, 11/01/20 ............ 300,000 366,126
Saline Valley Conservancy District Waterworks Revenue, Saline Valley Conservancy District,
Refunding, Series A, AMBAC Insured, 5.00%, 1/01/41 .......................................... 7,000,000 6,282,080
St. Clair County School District No. 189 East St. Louis GO, Alternate Revenue Source,
Refunding, AMBAC Insured, 5.125%, 1/01/28 ................................................... 7,135,000 7,104,605
--------------
25,746,754
--------------
INDIANA 0.2%
Indiana Health and Educational Facilities Finance Authority Revenue, St. Francis, Series E,
FSA Insured, 5.25%, 5/15/41 ................................................................. 3,750,000 3,411,600
--------------
KANSAS 0.8%
Overland Park Development Corp. Revenue, second tier, Convention, Refunding, Series B,
AMBAC Insured, 5.125%, 1/01/32 .............................................................. 20,000,000 15,722,400
--------------
68 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
KENTUCKY 2.0%
Kentucky Economic Development Finance Authority Health System Revenue,
Norton Healthcare Inc.,
Refunding, Series C, MBIA Insured, 6.05%, 10/01/20 ....................................... $ 8,505,000 $ 8,001,249
Series C, MBIA Insured, Pre-Refunded, 6.05%, 10/01/20 .................................... 4,255,000 4,992,519
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/26 .................................... 12,195,000 14,361,442
Kentucky State Municipal Power Agency Power System Revenue, Prairie State Project,
Series A, MBIA Insured, 5.00%, 9/01/37 ...................................................... 10,000,000 8,751,600
Louisville and Jefferson County Metropolitan Sewer District Sewer and Drain System Revenue,
Series A, MBIA Insured, 5.50%, 5/15/34 ...................................................... 5,000,000 5,086,350
--------------
41,193,160
--------------
LOUISIANA 0.7%
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 5,246,512
Louisiana State Gas and Fuels Tax Revenue, Series A, AMBAC Insured, 5.00%, 6/01/27 ............. 10,000,000 9,651,100
--------------
14,897,612
--------------
MAINE 0.0%a
Maine State Health and Higher Educational Facilities Authority Revenue, Series C,
FSA Insured, 6.20%, 7/01/25 ................................................................. 100,000 99,994
--------------
MARYLAND 1.7%
Baltimore Convention Center Hotel Revenue, Senior Series A, XLCA Insured, 5.00%,
9/01/32 ..................................................................................... 10,000,000 6,050,400
Baltimore Project Revenue, Water Projects, Refunding, Series A, FGIC Insured, 5.125%,
7/01/42 ..................................................................................... 11,000,000 10,733,140
Baltimore Revenue, Water Projects, Series A, FSA Insured, Pre-Refunded, 5.75%,
7/01/30 ..................................................................................... 5,880,000 6,257,143
Maryland State Health and Higher Educational Facilities Authority Revenue,
LifeBridge Health, Refunding, Assured Guaranty, 5.00%, 7/01/34 ........................... 9,000,000 8,155,440
University of Maryland Medical System, Series B, FGIC Insured, 7.00%, 7/01/22 ............ 200,000 231,730
Western Maryland Health, Series A, MBIA Insured, 5.00%, 7/01/34 .......................... 5,000,000 4,044,100
--------------
35,471,953
--------------
MASSACHUSETTS 4.2%
Massachusetts State Development Finance Agency Revenue, Worcester Polytechnic Institute,
MBIA Insured, 5.00%, 9/01/47 ................................................................ 25,050,000 22,686,282
Massachusetts State GO, Consolidated Loan, Series D, MBIA Insured,
ETM, 5.00%, 8/01/27 ...................................................................... 3,535,000 3,877,754
Pre-Refunded, 5.00%, 8/01/27 ............................................................. 855,000 937,901
Massachusetts State Health and Educational Facilities Authority Revenue,
CareGroup Issue, Refunding, Series A, MBIA Insured, 5.00%, 7/01/25 ....................... 3,880,000 3,118,860
CareGroup Issue, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/25 .................... 750,000 852,135
Central New England Health, Series B, AMBAC Insured, 5.20%, 8/01/28 ...................... 4,415,000 3,631,735
Emmanuel College, MBIA Insured, 5.00%, 7/01/37 ........................................... 21,685,000 18,457,404
Harvard Pilgrim Health, Series A, FSA Insured, 5.00%, 7/01/18 ............................ 3,000,000 3,012,990
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ...................... 9,485,000 9,295,205
Simmons College, Series C, MBIA Insured, 5.125%, 10/01/28 ................................ 4,260,000 3,874,896
Annual Report | 69
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, Refunding,
Series B, MBIA Insured, 5.125%, 1/01/37 ..................................................... $ 2,100,000 $ 1,627,521
Massachusetts State Water Resources Authority Revenue, Refunding, Series J, FSA Insured,
5.00%, 8/01/32 .............................................................................. 16,250,000 16,254,225
--------------
87,626,908
--------------
MICHIGAN 11.3%
Birmingham City School District GO, School Building and Site, FSA Insured, 5.00%,
11/01/33 .................................................................................... 8,135,000 8,066,097
Central Michigan University Revenue, Series A, AMBAC Insured, 5.05%, 10/01/32 .................. 8,650,000 8,474,491
Detroit City School District GO, School Building and Site Improvements, Series A, FSA Insured,
Pre-Refunded, 5.125%, 5/01/31 ............................................................... 6,500,000 7,194,330
Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/21 ....................... 12,390,000 9,892,672
Detroit Sewer Disposal System Revenue,
second lien, Series B, MBIA Insured, 5.00%, 7/01/36 ...................................... 15,000,000 11,821,200
senior lien, Refunding, Series A, FSA Insured, 5.00%, 7/01/32 ............................ 2,905,000 2,482,991
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.125%, 7/01/31 ....................... 6,000,000 6,502,200
Detroit Water Supply System Revenue, senior lien, Series A,
FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ............................................... 10,185,000 10,932,986
FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ............................................... 9,815,000 10,676,266
FSA Insured, 5.00%, 7/01/34 .............................................................. 7,040,000 5,947,885
MBIA Insured, 5.00%, 7/01/34 ............................................................. 10,150,000 8,490,069
Grand Rapids Sanitation Sewer System Revenue, FGIC Insured, 5.00%, 1/01/34 ..................... 18,285,000 17,901,746
Jackson County Hospital Finance Authority Revenue, W.A. Foote Memorial Hospital, Series A,
AMBAC Insured, 5.25%, 6/01/17 ............................................................... 500,000 499,940
Michigan Municipal Bond Authority Revenue, Clean Water State Revolving Fund, MBIA Insured,
5.00%, 10/01/23 ............................................................................. 5,095,000 5,189,614
Michigan State Building Authority Revenue, Refunding, Series IA,
FGIC Insured, 5.00%, 10/15/36 ............................................................ 10,000,000 8,534,600
FSA Insured, 5.00%, 10/15/36 ............................................................. 28,895,000 28,341,950
Michigan State Hospital Finance Authority Revenue,
Hospital, Botsford Obligated Group, Refunding, Series A, MBIA Insured, 5.25%,
2/15/22 ............................................................................... 2,000,000 1,792,780
Oakwood Obligated Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 ................ 10,000,000 9,384,000
Sparrow Obligated Group, Refunding, MBIA Insured, 5.00%, 11/15/36 ........................ 13,000,000 9,901,710
St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ............. 2,500,000 2,628,075
Trinity Health Credit Group, Series A, 6.50%, 12/01/33 ................................... 25,000,000 25,834,500
Michigan State Strategic Fund Limited Obligation Revenue, The Detroit Edison Co. Pollution
Control Bonds Project, Refunding, Collateralized Series BB, AMBAC Insured, 7.00%,
5/01/21 .................................................................................. 250,000 264,027
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 8,304,300
Michigan State Trunk Line Revenue, Series A, FSA Insured, Pre-Refunded, 5.25%,
11/01/30 .................................................................................... 15,000,000 16,439,550
Royal Oak Hospital Finance Authority Hospital Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%, 11/15/31 ............................................................... 4,000,000 3,107,080
Saginaw Valley State University Revenue, General, Refunding, AMBAC Insured, 5.30%,
7/01/28 ..................................................................................... 3,400,000 3,400,952
--------------
232,006,011
--------------
70 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MINNESOTA 1.6%
Medford ISD No. 763 GO, Series A, FSA Insured, 5.125%, 2/01/26 ................................. $ 2,475,000 $ 2,624,812
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue, Refunding,
sub. bond, Series A, AMBAC Insured, 5.00%, 1/01/35 .......................................... 15,000,000 14,148,450
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 .......................................... 180,000 168,237
Minnesota State HFAR, Rental Housing, Refunding, Series D, MBIA Insured, 6.00%,
2/01/22 ..................................................................................... 180,000 180,378
Sauk Rapids ISD No. 047 GO, Series A, MBIA Insured, 5.75%, 2/01/26 ............................. 11,850,000 12,705,452
Woodbury COP, Series A, AMBAC Insured, 5.35%, 2/01/21 .......................................... 2,915,000 2,965,575
--------------
32,792,904
--------------
MISSISSIPPI 0.4%
Harrison County Wastewater Management District Revenue, Wastewater Treatment Facilities,
Refunding, Series A, FGIC Insured, 8.50%, 2/01/13 ........................................... 200,000 240,968
Mississippi Development Bank Special Obligation Revenue, Municipal Energy Agency, Series A,
XLCA Insured, 5.00%, 3/01/36 ................................................................ 10,915,000 8,880,226
--------------
9,121,194
--------------
MISSOURI 0.7%
Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
St. Luke's Health System, Series B, 5.50%, 11/15/35 ......................................... 15,000,000 14,936,250
--------------
NEBRASKA 1.3%
Lancaster County Hospital Authority Revenue, Bryan Memorial Hospital Project No. 1,
MBIA Insured, ETM, 6.70%, 6/01/22 ........................................................... 2,500,000 3,112,900
Lincoln Electric System Revenue, FSA Insured, 4.75%, 9/01/35 ................................... 25,000,000 23,805,750
--------------
26,918,650
--------------
NEVADA 0.3%
Clark County GO, Series A, AMBAC Insured, 6.50%, 6/01/17 ....................................... 250,000 296,778
Clark County School District GO, Series A, MBIA Insured, 7.00%, 6/01/10 ........................ 4,000,000 4,264,880
Director of the State of Nevada Department of Business and Industry Revenue, Las Vegas
Monorail Project, first tier, AMBAC Insured, 5.625%, 1/01/34 ................................ 5,000,000 1,750,400
--------------
6,312,058
--------------
NEW JERSEY 2.5%
Essex County Improvement Authority Revenue, Garden State Cancer Center Project,
AMBAC Insured, 6.00%, 12/01/20 .............................................................. 2,390,000 2,389,761
Middlesex County COP, MBIA Insured, 5.30%, 6/15/29 ............................................. 3,575,000 3,565,884
New Brunswick Parking Authority Revenue, Guaranteed Parking, Series A, MBIA Insured,
5.00%, 9/01/34 .............................................................................. 1,500,000 1,445,580
New Jersey EDA Revenue,
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 .................. 3,450,000 3,203,670
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 .................. 21,250,000 20,222,987
Municipal Rehabilitation, Series A, AMBAC Insured, 5.00%, 4/01/28 ........................ 4,000,000 3,951,400
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System,
Series A, 6.00%, 12/15/38 ................................................................... 15,000,000 15,571,500
Annual Report | 71
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey State Turnpike Authority Turnpike Revenue,
2005, Refunding, Series C, AMBAC Insured, 6.50%, 1/01/16 ................................. $ 50,000 $ 58,414
2005, Series C, AMBAC Insured, ETM, 6.50%, 1/01/16 ....................................... 20,000 23,428
Series C, AMBAC Insured, Pre-Refunded, 6.50%, 1/01/16 .................................... 230,000 269,420
--------------
50,702,044
--------------
NEW YORK 3.6%
Central Square GO, Central School District, FGIC Insured, ETM, 6.50%, 6/15/10 .................. 900,000 963,171
MTA Revenue, Series B, MBIA Insured, 5.00%, 11/15/28 ........................................... 20,000,000 19,365,400
MTA Service Contract Revenue, Series B, MBIA Insured, 5.00%, 1/01/31 ........................... 7,000,000 6,651,610
Nassau Health Care Corp. Health System Revenue, Nassau County Guaranteed, FSA Insured,
Pre-Refunded, 5.75%, 8/01/29 ................................................................ 5,000,000 5,200,950
New York City Transitional Finance Authority Revenue, Future Tax Secured,
Refunding, Series B, MBIA Insured, 5.00%, 8/01/32 ........................................ 2,230,000 2,229,889
Series A, FGIC Insured, 5.125%, 8/01/33 .................................................. 14,590,000 14,649,236
New York State Dormitory Authority Revenues,
Mental Health Services Facilities Improvement, Series B, MBIA Insured, Pre-Refunded,
5.25%, 8/15/31 ........................................................................ 5,935,000 6,512,950
State Supported Debt, Mental Health Services Facilities Improvement, Series B,
MBIA Insured, 5.25%, 8/15/31 .......................................................... 5,530,000 5,216,891
State Supported Debt, Mental Health Services Facilities Improvement, Series B,
MBIA Insured, Pre-Refunded, 5.25%, 8/15/31 ............................................ 3,535,000 3,879,238
Vassar Brothers Hospital, FSA Insured, 5.375%, 7/01/25 ................................... 4,000,000 3,988,920
Triborough Bridge and Tunnel Authority Revenues, Refunding, MBIA Insured, 5.00%,
11/15/32 .................................................................................... 5,000,000 4,965,300
--------------
73,623,555
--------------
NORTH CAROLINA 0.7%
North Carolina Medical Care Commission Hospital Revenue, Rex Healthcare Project,
AMBAC Insured, 5.00%, 6/01/17 ............................................................... 5,000,000 5,032,850
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, MBIA Insured, ETM,
6.50%, 1/01/10 .............................................................................. 20,000 20,975
Raleigh-Durham Airport Authority Airport Revenue, Series A, FGIC Insured, 5.00%,
11/01/25 ................................................................................. 5,000,000 5,019,950
11/01/31 ................................................................................. 4,000,000 3,802,040
--------------
13,875,815
--------------
NORTH DAKOTA 1.3%
Cass County Health Facilities Revenue, Health Care, Essential Obligation, Series D,
Assured Guaranty, 5.00%, 2/15/40 ............................................................ 31,970,000 27,419,710
--------------
OHIO 3.2%
Akron Income Tax Revenue, Community Learning Centers, Series A, FGIC Insured, 5.00%,
12/01/33 .................................................................................... 5,000,000 4,814,150
Cleveland Airport System Revenue, Series A, FSA Insured, 5.00%, 1/01/31 ........................ 13,780,000 13,527,688
Fairview Park City School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/29 ................................................................................. 1,460,000 1,446,860
12/01/33 ................................................................................. 2,000,000 1,915,000
72 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Jefferson Area Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.00%, 12/01/31 ............................................................... $ 4,085,000 $ 3,843,617
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 3,745,977
Lucas County Hospital Revenue, ProMedica Healthcare Obligated Group, Refunding,
AMBAC Insured, 5.375%, 11/15/29 ............................................................. 5,000,000 3,931,250
Medina City School District GO, FGIC Insured, Pre-Refunded, 5.25%, 12/01/28 .................... 7,500,000 7,762,200
Olentangy Local School District GO, School Facilities Construction and Improvement, Series A,
FGIC Insured, Pre-Refunded, 5.25%, 12/01/32 ................................................. 11,450,000 13,163,493
Reynoldsburg City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/31 ................................................................ 4,000,000 4,027,480
Springfield City School District GO, FGIC Insured, Pre-Refunded, 5.20%, 12/01/23 ............... 3,860,000 4,327,407
Toledo City School District GO, School Facilities Improvement, Series B, FGIC Insured, 5.00%,
12/01/32 .................................................................................... 4,000,000 3,724,640
--------------
66,229,762
--------------
OKLAHOMA 0.0%(a)
McGee Creek Authority Water Revenue, MBIA Insured, 6.00%, 1/01/23 .............................. 300,000 330,081
--------------
OREGON 0.4%
Ontario Catholic Health Revenue, Holy Rosary Medical Center, MBIA Insured, 5.50%,
11/15/12 .................................................................................... 570,000 569,988
Oregon Health and Science University Revenue,
Refunding, Series B, MBIA Insured, 5.25%, 7/01/15 ........................................ 460,000 459,453
Series A, MBIA Insured, 5.00%, 7/01/32 ................................................... 8,000,000 6,249,120
--------------
7,278,561
--------------
PENNSYLVANIA 2.4%
Allegheny County Hospital Development Authority Revenue, Health System, Series A,
MBIA Insured, Pre-Refunded, 6.50%, 11/15/30 ................................................. 10,000,000 11,070,900
Pennsylvania Convention Center Authority Revenue, Series A, FGIC Insured, ETM, 6.00%,
9/01/19 ..................................................................................... 500,000 595,325
Pennsylvania State Public School Building Authority Lease Revenue, School District of
Philadelphia Project, Refunding, Series B, FSA Insured, 4.75%, 6/01/30 ...................... 6,000,000 5,721,600
Pennsylvania State Turnpike Commission Turnpike Revenue,
Refunding, Series C, Sub Series C-1, Assured Guaranty, 6.25%, 6/01/38 .................... 10,000,000 10,807,500
sub. bond, Series A, Assured Guaranty, 5.00%, 6/01/39 .................................... 10,000,000 9,952,800
Philadelphia Gas Works Revenue, 1998 General Ordinance, Fourth Series, FSA Insured,
5.00%, 8/01/32 .............................................................................. 4,000,000 3,845,120
Philadelphia Water and Wastewater Revenue, Series A, FGIC Insured, Pre-Refunded, 5.25%,
11/01/24 .................................................................................... 2,000,000 2,259,100
Pittsburgh and Allegheny County Public Auditorium Revenue, Regional Asset District Sales Tax,
AMBAC Insured, 5.25%, 2/01/31 ............................................................... 6,000,000 6,023,940
Pittsburgh Water and Sewer Authority Revenue, FGIC Insured, ETM, 7.25%, 9/01/14 ................ 70,000 79,131
--------------
50,355,416
--------------
Annual Report | 73
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
RHODE ISLAND 0.6%
Rhode Island Clean Water Finance Agency Revenue, Cranston Wastewater Treatment System,
MBIA Insured, 5.80%, 9/01/22 ................................................................ $ 7,785,000 $ 7,021,214
Rhode Island State EDC Special Facility Revenue, first lien, Rhode Island Airport Corp. Project,
CIFG Insured, 5.00%, 7/01/31 ................................................................ 5,730,000 4,978,109
Rhode Island State Health and Educational Building Corp. Revenue, Hospital Financing,
Lifespan Obligated Group, Refunding, MBIA Insured, 5.75%, 5/15/23 ........................... 100,000 98,467
--------------
12,097,790
--------------
SOUTH CAROLINA 1.9%
Piedmont Municipal Power Agency Electric Revenue, Refunding, FGIC Insured, 6.25%,
1/01/21 ..................................................................................... 200,000 207,952
Richland County Hospital Facilities Revenue, Community Provider, Pooled Loan Program,
Series A, FSA Insured, ETM, 7.125%, 7/01/17 ................................................. 2,280,000 2,688,918
Scago Educational Facilities Corp. for Pickens School District Revenue, Pickens County
Project, FSA Insured, 5.00%, 12/01/31 ....................................................... 17,800,000 15,689,810
South Carolina Jobs EDA Hospital Facilities Revenue, Palmetto Health, Refunding, Series A,
FSA Insured, 5.00%, 8/01/35 ................................................................. 20,000,000 16,338,400
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 5,077,750
--------------
40,002,830
--------------
SOUTH DAKOTA 0.4%
Brookings COP, Refunding, AMBAC Insured, 5.10%, 12/01/18 ....................................... 5,000,000 5,123,400
South Dakota Lease Revenue, Series A, FSA Insured, 6.75%, 12/15/16 ............................. 2,720,000 3,120,085
--------------
8,243,485
--------------
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 8,693,290
Series A, MBIA Insured, Pre-Refunded, 5.125%, 7/01/25 .................................... 2,780,000 2,841,911
--------------
11,535,201
--------------
TEXAS 5.2%
Austin Hotel Occupancy Tax Revenue, sub. lien, AMBAC Insured, Pre-Refunded,
5.625%, 11/15/21 ......................................................................... 2,355,000 2,435,164
5.80%, 11/15/29 .......................................................................... 6,000,000 6,211,500
Austin Water and Wastewater System Revenue, Refunding, Series B, FSA Insured,
5.125%, 5/15/27 .......................................................................... 11,125,000 11,198,759
5.25%, 5/15/31 ........................................................................... 5,000,000 5,014,000
Bell County Health Facilities Development Corp. Revenue, Hospital, Cook Children's Medical
Center, Refunding, FSA Insured, 5.30%, 12/01/23 ............................................. 5,000,000 5,003,700
Coastal Bend Health Facilities Development Corp. Revenue, Series B, AMBAC Insured, ETM,
6.30%, 1/01/17 .............................................................................. 9,355,000 10,722,514
Dallas-Fort Worth International Airport Revenue,
Joint, Series A, FGIC Insured, 6.00%, 11/01/21 ........................................... 2,210,000 2,217,006
Refunding and Improvement, Joint Series A, FGIC Insured, 5.625%, 11/01/21 ................ 12,000,000 12,038,520
Harris County Hospital District Mortgage Revenue,
AMBAC Insured, ETM, 7.40%, 2/15/10 ....................................................... 50,000 53,147
Refunding, AMBAC Insured, 7.40%, 2/15/10 ................................................. 265,000 279,726
74 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Harris County Hospital District Revenue, senior lien, Refunding, Series A, MBIA Insured,
5.25%, 2/15/37 .............................................................................. $10,250,000 $ 8,712,910
Harris County Houston Sports Authority Revenue, senior lien, Series G, MBIA Insured, 5.25%,
11/15/30 .................................................................................... 21,325,000 17,098,598
Laredo ISD Public Facility Corp. Lease Revenue, Series C, AMBAC Insured, 5.00%,
8/01/29 ..................................................................................... 1,000,000 1,002,200
Matagorda County Navigation District No. 1 Revenue, Houston Industries Inc. Project,
Refunding,
Series A, MBIA Insured, 5.25%, 11/01/29 .................................................. 3,185,000 2,090,188
Series B, MBIA Insured, 5.15%, 11/01/29 .................................................. 2,750,000 1,975,737
North Harris County Regional Water Authority Revenue, senior lien, FGIC Insured, 5.00%,
12/15/33 .................................................................................... 10,000,000 8,854,700
Pflugerville GO, FGIC Insured,
5.25%, 8/01/27 ........................................................................... 3,320,000 3,356,952
5.20%, 8/01/32 ........................................................................... 3,000,000 2,999,850
Tarrant County Health Facilities Development Corp. Health Systems Revenue, Harris Methodist
Health System, MBIA Insured, ETM, 6.00%, 9/01/24 ............................................ 3,250,000 3,856,385
United ISD, GO, 5.125%, 8/15/26 ................................................................ 3,000,000 3,068,790
--------------
108,190,346
--------------
UTAH 0.5%
Provo Electric System Revenue, Series A, AMBAC Insured, ETM, 10.375%, 9/15/15 .................. 35,000 44,587
Utah County Hospital Revenue, IHC Health Services Inc., MBIA Insured, ETM, 5.25%,
8/15/21 .................................................................................. 5,000,000 5,089,550
8/15/26 .................................................................................. 5,000,000 5,324,800
--------------
10,458,937
--------------
VIRGINIA 0.5%
Front Royal and Warren County IDA Lease Revenue, School and Capital Improvement,
Series B, FSA Insured, 5.00%, 4/01/35 ....................................................... 5,000,000 4,871,850
Middle River Regional Jail Authority Jail Facility Revenue, MBIA Insured, 5.00%, 5/15/28 ....... 3,510,000 3,519,021
Winchester IDA Educational Facilities Revenue, first mortgage, Shenandoah University Project,
MBIA Insured,
5.00%, 10/01/18 .......................................................................... 1,000,000 1,010,580
5.25%, 10/01/28 .......................................................................... 1,420,000 1,299,541
--------------
10,700,992
--------------
WASHINGTON 2.6%
King County Sewer Revenue, Refunding, Series A, FGIC Insured, 5.00%, 1/01/35 ................... 6,420,000 6,337,054
Snohomish County PUD No. 1 Electric Revenue, Generation System, FGIC Insured, ETM,
6.65%, 1/01/16 .............................................................................. 4,250,000 5,070,038
Washington State GO, Various Purpose, Series C, FSA Insured, 5.25%, 1/01/26 .................... 6,000,000 6,075,480
Washington State Health Care Facilities Authority Revenue,
MultiCare Health System, Series B, Assured Guaranty, 6.00%, 8/15/39 ...................... 1,500,000 1,493,700
Providence Health, Refunding, Series D, FSA Insured, 5.25%, 10/01/33 ..................... 18,000,000 17,730,540
Series B, MBIA Insured, 5.00%, 2/15/27 ................................................... 6,320,000 6,173,502
Swedish Health Services, Refunding, AMBAC Insured, 5.50%, 11/15/28 ....................... 13,000,000 10,536,240
--------------
53,416,554
--------------
Annual Report | 75
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
WEST VIRGINIA 0.6%
Shepherd University Board of Governors Revenue, Residence Facilities Projects, MBIA Insured,
5.00%, 6/01/35 .............................................................................. $ 7,445,000 $ 6,748,520
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 4,727,800
--------------
11,476,320
--------------
WISCONSIN 0.2%
Superior Limited Obligation Revenue, Midwest Energy Resources, Refunding, Series E,
FGIC Insured, 6.90%, 8/01/21 ................................................................ 3,000,000 3,643,530
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS
(COST $2,063,258,540) 1,962,155,984
--------------
SHORT TERM INVESTMENTS 3.6%
MUNICIPAL BONDS 3.6%
CALIFORNIA 1.3%
(b) California Infrastructure and Economic Development Bank Revenue, Contemporary Jewish
Museum, Daily VRDN and Put, 0.45%, 12/01/36 ................................................. 6,600,000 6,600,000
(b) Sacramento County Sanitation District Financing Authority Revenue, sub. lien, Sanitation
District, Refunding, Series C, Daily VRDN and Put, 0.45%, 12/01/38 .......................... 10,700,000 10,700,000
(b) Southern California Public Power Authority Power Project Revenue,
Mead-Adelanto, Refunding, Series A, Daily VRDN and Put, 0.35%, 7/01/20 ...................... 4,400,000 4,400,000
Mead-Phoenix, Refunding, Series A, Daily VRDN and Put, 0.35%, 7/01/20 ....................... 5,500,000 5,500,000
--------------
27,200,000
--------------
COLORADO 0.4%
(b) Colorado Educational and Cultural Facilities Authority Revenue, National Jewish Federation
Bond Program,
Daily VRDN and Put, 0.65%, 2/01/35 ....................................................... 1,400,000 1,400,000
Refunding, Series A-8, Daily VRDN and Put, 0.65%, 9/01/35 ................................ 5,270,000 5,270,000
Series A-4, Daily VRDN and Put, 0.65%, 2/01/34 ........................................... 800,000 800,000
--------------
7,470,000
--------------
FLORIDA 0.0(a)
(b) Florida State Municipal Power Agency Revenue, All Requirements Power Supply, Refunding,
Series C, Daily VRDN and Put, 0.60%, 10/01/35 ............................................... 400,000 400,000
--------------
MASSACHUSETTS 0.4%
(b) Massachusetts State Health and Educational Facilities Authority Revenue,
Stonehill College, Series K, Daily VRDN and Put, 0.45%, 7/01/37 .......................... 2,300,000 2,300,000
Tufts University, Refunding, Series N-1, Daily VRDN and Put, 0.40%, 8/15/40 .............. 5,900,000 5,900,000
Tufts University, Refunding, Series N-2, Daily VRDN and Put, 0.35%, 8/15/34 .............. 400,000 400,000
--------------
8,600,000
--------------
NEW HAMPSHIRE 0.4%
(b) New Hampshire Health and Education Facilities Authority Revenue,
University of New Hampshire, Series A, Daily VRDN and Put, 0.70%, 7/01/35 ................ 5,195,000 5,195,000
University of North New Hampshire, Daily VRDN and Put, 0.70%, 7/01/33 .................... 4,000,000 4,000,000
--------------
9,195,000
--------------
76 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA 0.0%(a)
(b) North Carolina Medical Care Commission Health Care Facilities Revenue, Wake Forest
University, Refunding, Series D, Daily VRDN and Put, 0.60%, 7/01/34 ......................... $ 400,000 $ 400,000
--------------
OHIO 0.5%
(b) Allen County Hospital Facilities Revenue, Catholic Healthcare, Series A, Daily VRDN and Put,
0.55%, 10/01/31 ............................................................................. 6,200,000 6,200,000
(b) Cuyahoga County Revenue, Cleveland Clinic Health System Obligated Group, Series B,
Sub Series B-3, Daily VRDN and Put, 0.50%, 1/01/39 .......................................... 3,400,000 3,400,000
--------------
9,600,000
--------------
TENNESSEE 0.5%
(b) Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN and
Put, 0.60%,
1/01/33 .................................................................................. 1,600,000 1,600,000
7/01/34 .................................................................................. 4,595,000 4,595,000
11/01/35 ................................................................................. 1,300,000 1,300,000
(b) Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan Pool, Daily VRDN
and Put, 0.60%, 4/01/32 ..................................................................... 1,800,000 1,800,000
--------------
9,295,000
--------------
TEXAS 0.1%
(b) Harris County Cultural Education Facilities Finance Corp. Special Facilities Revenue, Texas
Medical Center, Refunding, Series B, Sub Series B-1, Daily VRDN and Put, 0.60%,
9/01/31 .................................................................................. 2,600,000 2,600,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $74,760,000) ................................................ 74,760,000
--------------
TOTAL INVESTMENTS (COST $2,138,018,540) 98.8% .................................................. 2,036,915,984
OTHER ASSETS, LESS LIABILITIES 1.2% ............................................................ 24,990,638
--------------
NET ASSETS 100.0% .............................................................................. $2,061,906,622
==============
See Abbreviations on page 141.
(a) Rounds to less than 0.1% of net assets.
(b) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal balance
plus accrued interest at specified dates. The coupon rate shown represents
the rate at period end.
The accompanying notes are an integral part of these financial statements.
Annual Report | 77
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.20 $ 11.96 $ 11.92 $ 11.98 $ 12.11
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.49 0.49 0.49 0.50 0.52
Net realized and unrealized gains (losses) .... (0.27) (0.76) 0.04 (0.06) (0.13)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.22 (0.27) 0.53 0.44 0.39
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.48) (0.49) (0.49) (0.50) (0.52)
-------- -------- -------- -------- --------
Net realized gains ............................ -- --(d) -- -- --
-------- -------- -------- -------- --------
Total distributions .............................. (0.48) (0.49) (0.49) (0.50) (0.52)
-------- -------- -------- -------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 10.94 $ 11.20 $ 11.96 $ 11.92 $ 11.98
======== ======== ======== ======== ========
Total return(f) .................................. 2.00% (2.34)% 4.59% 3.71% 3.35%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.66% 0.66% 0.66% 0.67% 0.67%
Net investment income ............................ 4.38% 4.16% 4.16% 4.21% 4.35%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $445,680 $450,957 $467,299 $450,425 $442,842
Portfolio turnover rate .......................... 7.45% 22.03% 14.41% 17.65% 9.54%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
78 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.29 $ 12.05 $ 12.00 $ 12.06 $ 12.19
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ...................... 0.43 0.43 0.43 0.44 0.45
Net realized and unrealized gains (losses) .... (0.27) (0.76) 0.05 (0.07) (0.13)
------- ------- ------- ------- -------
Total from investment operations ................. 0.16 (0.33) 0.48 0.37 0.32
------- ------- ------- ------- -------
Less distributions from:
Net investment income ......................... (0.42) (0.43) (0.43) (0.43) (0.45)
Net realized gains ............................ -- --(d) -- -- --
------- ------- ------- ------- -------
Total distributions .............................. (0.42) (0.43) (0.43) (0.43) (0.45)
------- ------- ------- ------- -------
Redemption fees(d, e) ............................ -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 11.03 $ 11.29 $ 12.05 $ 12.00 $ 12.06
======= ======= ======= ======= =======
Total return(f) .................................. 1.42% (2.86)% 4.07% 3.13% 2.75%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.20% 1.22% 1.20% 1.22% 1.22%
Net investment income ............................ 3.84% 3.60% 3.62% 3.66% 3.80%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $68,027 $61,157 $59,247 $57,063 $50,272
Portfolio turnover rate .......................... 7.45% 22.03% 14.41% 17.65% 9.54%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 79
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------------- ----------- ------------
MUNICIPAL BONDS 98.9%
MASSACHUSETTS 98.1%
Auburn GO, AMBAC Insured, 5.125%, 6/01/24 ...................................................... $ 1,465,000 $ 1,525,973
Boston Convention Center Act of 1997 Revenue, Special Obligation, Series A, AMBAC Insured,
5.00%, 5/01/27 .............................................................................. 3,970,000 3,858,959
Boston GO, Series A, MBIA Insured, Pre-Refunded, 5.00%,
2/01/21 .................................................................................. 3,000,000 3,298,590
2/01/22 .................................................................................. 2,940,000 3,232,618
Chelsea GO, State Qualified, Refunding, AMBAC Insured, 5.125%, 6/15/16 ......................... 1,750,000 1,757,175
Dudley-Charlton Regional School District GO, Series B, FGIC Insured, 5.25%, 5/01/19 ............ 3,140,000 3,509,358
Foxborough Stadium Infrastructure Improvement Revenue, Pre-Refunded, 5.75%, 6/01/25 ............ 4,000,000 4,274,880
Greater Lawrence Sanitary District GO, MBIA Insured, Pre-Refunded, 5.625%, 6/15/20 ............. 1,000,000 1,069,630
Holyoke Gas and Electric Department Revenue, Series A, MBIA Insured, 5.00%, 12/01/26 ........... 9,805,000 8,473,873
Kingston GO, FGIC Insured, Pre-Refunded, 5.50%, 11/15/19 ....................................... 2,055,000 2,147,331
Lawrence GO, AMBAC Insured, Pre-Refunded, 5.00%, 2/01/21 ....................................... 1,000,000 1,068,520
Lowell GO, State Qualified,
AMBAC Insured, 5.00%, 2/01/21 ............................................................ 1,330,000 1,371,802
AMBAC Insured, 5.00%, 2/01/22 ............................................................ 1,405,000 1,438,973
FGIC Insured, Pre-Refunded, 5.85%, 2/15/20 ............................................... 1,595,000 1,690,301
Ludlow GO, School Project, Limited Tax, MBIA Insured, 7.40%, 11/01/09 .......................... 210,000 218,308
Martha's Vineyard Land Bank Revenue, AMBAC Insured,
4.875%, 5/01/22 .......................................................................... 2,000,000 2,057,060
5.00%, 5/01/32 ........................................................................... 2,000,000 1,994,420
5.00%, 5/01/34 ........................................................................... 7,000,000 6,288,310
Massachusetts Bay Transportation Authority Revenue, General Transportation System, Series C,
FGIC Insured, 5.25%, 3/01/15 ................................................................ 2,000,000 2,294,700
Massachusetts Bay Transportation Authority Sales Tax Revenue, Senior Series A, FGIC Insured,
Pre-Refunded, 5.00%, 7/01/27 ................................................................ 5,000,000 5,567,150
Massachusetts State College Building Authority Project Revenue,
Refunding, Series A, XLCA Insured, 5.00%, 5/01/43 ........................................ 2,000,000 1,843,640
Refunding, Series B, XLCA Insured, 5.50%, 5/01/39 ........................................ 5,000,000 5,134,050
Series 1, MBIA Insured, ETM, 5.375%, 5/01/23 ............................................. 5,000,000 5,055,550
Series A, Assured Guaranty, 5.00%, 5/01/33 ............................................... 10,000,000 9,861,300
Massachusetts State Development Finance Agency Revenue,
Boston University, Series T-1, AMBAC Insured, 5.00%, 10/01/35 ............................ 3,600,000 3,291,948
Boston University, Series T-1, AMBAC Insured, 5.00%, 10/01/39 ............................ 25,305,000 22,832,195
Brandeis University, Series K, FGIC Insured, 4.75%, 10/01/28 ............................. 2,000,000 1,890,200
Massachusetts College of Pharmacy and Allied Health Sciences, Series E, Assured Guaranty,
5.00%, 7/01/31 ........................................................................ 5,000,000 4,946,600
Massachusetts College of Pharmacy and Allied Health Sciences, Series E, Assured Guaranty,
5.00%, 7/01/37 ........................................................................ 5,060,000 4,932,437
Massachusetts/Saltonstall Redevelopment Building Corp., Series A, MBIA Insured, 5.125%,
2/01/34 ............................................................................... 22,400,000 18,137,728
MBIA Insured, 5.20%, 7/01/32 ............................................................. 2,250,000 1,664,483
Series A, AMBAC Insured, Pre-Refunded, 5.375%, 1/01/42 ................................... 4,000,000 4,466,600
Series A, GNMA Secured, Pre-Refunded, 6.90%, 10/20/41 .................................... 2,090,000 2,489,294
Series P, MBIA Insured, 4.75%, 7/01/42 ................................................... 11,000,000 9,915,070
Western New England College, AMBAC Insured, Pre-Refunded, 5.25%, 7/01/20 ................. 1,500,000 1,614,960
Western New England College, Refunding, Series A, Assured Guaranty, 5.00%, 9/01/33 ....... 12,200,000 10,183,218
WGBH Educational Foundation, Refunding, Series A, Assured Guaranty, 5.00%, 1/01/36 ....... 15,945,000 15,373,691
Worcester Polytechnic Institute, Refunding, MBIA Insured, 5.00%, 9/01/37 ................. 12,850,000 11,764,303
80 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State GO,
Consolidated Loan, Refunding, Series D, Assured Guaranty, 5.50%, 11/01/19 ................ $ 8,620,000 $ 10,201,253
Consolidated Loan, Series A, FSA Insured, Pre-Refunded, 5.00%, 3/01/24 ................... 5,000,000 5,739,500
Consolidated Loan, Series C, AMBAC Insured, 5.00%, 8/01/37 ............................... 10,000,000 9,879,900
Consolidated Loan, Series C, FGIC Insured, Pre-Refunded, 5.25%, 11/01/30 ................. 6,205,000 6,891,956
Consolidated Loan, Series D, MBIA Insured, ETM, 5.00%, 8/01/27 ........................... 3,430,000 3,762,573
Consolidated Loan, Series D, MBIA Insured, Pre-Refunded, 5.00%, 8/01/27 .................. 965,000 1,058,566
MBIA Insured, Pre-Refunded, 5.00%, 8/01/22 ............................................... 4,100,000 4,497,536
Series C, FGIC Insured, Pre-Refunded, 5.25%, 11/01/30 .................................... 3,440,000 3,820,842
Massachusetts State Health and Educational Facilities Authority Revenue,
Boston College, Series N, MBIA Insured, 5.125%, 6/01/33 .................................. 5,000,000 5,017,550
Brandeis University, Refunding, Series I, MBIA Insured, 4.75%, 10/01/20 .................. 3,000,000 2,991,960
Cable Housing and Health Services, Series A, MBIA Insured, 5.25%, 7/01/23 ................ 1,000,000 888,320
Emmanuel College, MBIA Insured, 5.00%, 7/01/37 ........................................... 10,000,000 8,511,600
Harvard University, Series FF, 5.125%, 7/15/37 ........................................... 1,650,000 1,669,949
(a) Lesley University, Series A, Assured Guaranty, 5.25%, 7/01/39 ............................ 9,350,000 9,086,797
New England Medical Center Hospital, Series H, FGIC Insured, 5.00%, 5/15/22 .............. 9,610,000 7,382,882
New England Medical Center Hospital, Series H, FGIC Insured, Pre-Refunded, 5.00%,
5/15/22 ............................................................................... 390,000 426,812
Northeastern University, Series I, MBIA Insured, 5.00%, 10/01/29 ......................... 1,250,000 1,197,275
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ...................... 4,885,000 4,787,251
Springfield College, AMBAC Insured, 5.00%, 10/15/27 ...................................... 2,500,000 2,228,750
Tufts University, Series I, 5.25%, 2/15/30 ............................................... 2,950,000 2,969,411
University of Massachusetts, Series C, FGIC Insured, 5.125%, 10/01/34 .................... 3,000,000 2,914,530
University of Massachusetts, Worcester Campus, Series B, FGIC Insured, Pre-Refunded,
5.25%, 10/01/31 ....................................................................... 3,500,000 3,825,605
University of Massachusetts Project, Series A, FGIC Insured, Pre-Refunded, 5.875%,
10/01/29 .............................................................................. 4,000,000 4,332,080
University of Massachusetts Project, Series C, MBIA Insured, Pre-Refunded, 5.25%,
10/01/31 .............................................................................. 1,500,000 1,667,910
Wellesley College, Series F, Pre-Refunded, 5.125%, 7/01/39 ............................... 7,250,000 7,430,597
Wheelock College, Series B, MBIA Insured, Pre-Refunded, 5.625%, 10/01/30 ................. 1,770,000 1,941,938
Worcester City Campus Corp., Series F, FGIC Insured, 4.75%, 10/01/36 ..................... 3,030,000 2,665,249
Massachusetts State HFA, MFHR, Section 8 Assisted, Series A, GNMA Secured, ETM, 7.00%,
4/01/21 ..................................................................................... 430,000 552,941
Massachusetts State HFA Housing Revenue, Rental, Mortgage, Series A, AMBAC Insured,
5.95%, 7/01/30 .............................................................................. 2,000,000 1,776,880
Massachusetts State Industrial Finance Agency Revenue,
St. Mark's School Issue, MBIA Insured, 5.375%, 1/01/21 ................................... 2,665,000 2,669,930
Trustees Deerfield Academy, 5.25%, 10/01/27 .............................................. 2,800,000 2,801,764
Massachusetts State Port Authority Revenue,
Series A, AMBAC Insured, 5.00%, 7/01/35 .................................................. 14,915,000 14,551,372
Series A, FSA Insured, 4.50%, 7/01/32 .................................................... 5,590,000 5,004,895
Series A, FSA Insured, 4.50%, 7/01/37 .................................................... 7,935,000 6,966,613
Series A, FSA Insured, Pre-Refunded, 5.125%, 7/01/17 ..................................... 2,000,000 2,049,480
US Airways Project, MBIA Insured, 6.00%, 9/01/21 ......................................... 4,700,000 3,726,583
US Airways Project, Series A, MBIA Insured, 5.875%, 9/01/23 .............................. 4,500,000 3,403,485
Annual Report | 81
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State School Building Authority Dedicated Sales Tax Revenue, Series A,
AMBAC Insured,
4.75%, 8/15/32 ........................................................................... $15,000,000 $ 14,227,200
4.50%, 8/15/35 ........................................................................... 8,700,000 7,772,580
Massachusetts State Special Obligation Dedicated Tax Revenue,
FGIC Insured, Pre-Refunded, 5.25%, 1/01/29 ............................................... 5,000,000 5,558,650
Refunding, FGIC Insured, 5.50%, 1/01/34 .................................................. 8,400,000 8,254,176
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, Refunding,
Series A, MBIA Insured, 5.00%, 1/01/37 ................................................... 9,000,000 7,099,380
Series B, MBIA Insured, 5.25%, 1/01/29 ................................................... 4,600,000 3,865,104
Series B, MBIA Insured, 5.125%, 1/01/37 .................................................. 17,560,000 13,609,176
Massachusetts State Water Pollution Abatement Trust Revenue, Pool Program Bonds,
Series 6, 5.50%, 8/01/30 ................................................................. 2,620,000 2,680,863
Series 6, Pre-Refunded, 5.50%, 8/01/30 ................................................... 1,075,000 1,155,131
Series 7, 5.125%, 2/01/31 ................................................................ 4,300,000 4,323,478
Series 7, Pre-Refunded, 5.125%, 2/01/31 .................................................. 1,700,000 1,836,799
Massachusetts State Water Pollution Abatement Trust Water Pollution Abatement Revenue,
MWRA Program, Refunding, Sub Series A, 5.75%, 8/01/29 ....................................... 3,995,000 4,057,162
Massachusetts State Water Resources Authority Revenue,
Refunding, Series J, FSA Insured, 5.00%, 8/01/32 ......................................... 9,000,000 9,002,340
Series A, FGIC Insured, Pre-Refunded, 5.75%, 8/01/39 ..................................... 9,275,000 9,964,596
Series A, FSA Insured, 4.50%, 8/01/46 .................................................... 1,000,000 861,690
Monson GO, AMBAC Insured, 5.25%, 11/01/23 ...................................................... 1,675,000 1,777,024
New Bedford GO, Municipal Purpose Loan, FGIC Insured, 5.00%, 5/01/21 ........................... 3,685,000 3,792,565
Plymouth County COP, Correctional Facility Project, Refunding, AMBAC Insured, 5.125%,
10/01/18 .................................................................................... 2,000,000 2,042,600
Route 3 North Transportation Improvement Assn. Lease Revenue, MBIA Insured, Pre-Refunded,
5.375%, 6/15/33 ............................................................................. 15,475,000 16,350,421
Salisbury GO, MBIA Insured, Pre-Refunded, 5.30%, 3/15/27 ....................................... 2,795,000 3,136,102
Shrewsbury GO, Municipal Purpose Loan, 5.00%, 8/15/20 .......................................... 2,075,000 2,176,384
Springfield GO,
Municipal Purpose Loan, FGIC Insured, Pre-Refunded, 5.00%, 8/01/21 ....................... 5,000,000 5,491,950
State Qualified Municipal Purpose Loan, FSA Insured, 4.50%, 8/01/26 ...................... 2,000,000 1,877,380
Springfield Water and Sewer Commission Revenue, Series A, AMBAC Insured, Pre-Refunded,
5.00%, 11/01/21 ............................................................................. 2,775,000 3,073,063
University Building Authority Project Revenue, Senior Series 1, AMBAC Insured, Pre-Refunded,
5.25%,
11/01/23 ................................................................................. 2,155,000 2,475,341
11/01/28 ................................................................................. 5,035,000 5,783,453
University of Massachusetts Building Authority Project Revenue, Senior Series 2004-1,
AMBAC Insured, Pre-Refunded, 5.25%, 11/01/29 ................................................ 3,000,000 3,473,850
Whitman Hanson Regional School District GO, Refunding, FGIC Insured, 5.00%, 6/15/21 ............ 1,960,000 2,009,882
Winthrop GO, AMBAC Insured, 5.00%, 11/01/20 .................................................... 1,230,000 1,283,776
Worcester GO, Refunding, Series E, MBIA Insured, 6.00%, 10/01/15 ............................... 1,335,000 1,338,605
------------
504,178,454
------------
82 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 0.8%
PUERTO RICO 0.8%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior lien, Series A,
Assured Guaranty, 5.00%, 7/01/28 ............................................................ $ 4,000,000 $ 3,874,480
------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $526,712,692) ........................ 508,052,934
------------
SHORT TERM INVESTMENTS 1.1%
MUNICIPAL BONDS 1.1%
MASSACHUSETTS 1.1%
(b) Massachusetts State Health and Educational Facilities Authority Revenue,
Museum of Fine Arts, Series A1, Daily VRDN and Put, 0.45%, 12/01/37 ...................... 1,000,000 1,000,000
Museum of Fine Arts, Series A2, Daily VRDN and Put, 0.40%, 12/01/37 ...................... 1,100,000 1,100,000
Stonehill College, Series K, Daily VRDN and Put, 0.45%, 7/01/37 .......................... 1,500,000 1,500,000
Tufts University, Refunding, Series N-1, Daily VRDN and Put, 0.40%, 8/15/40 .............. 1,200,000 1,200,000
Tufts University, Refunding, Series N-2, Daily VRDN and Put, 0.35%, 8/15/34 .............. 600,000 600,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $5,400,000) ................................................. 5,400,000
------------
TOTAL INVESTMENTS (COST $532,112,692) 100.0% ................................................... 513,452,934
OTHER ASSETS, LESS LIABILITIES 0.0%(c) ......................................................... 253,801
------------
NET ASSETS 100.0% .............................................................................. $513,706,735
============
See Abbreviations on page 141.
(a) A portion or all of the security purchased on a when-issued basis. See Note
1(b).
(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.
(c) Rounds to less than 0.1% of net assets.
The accompanying notes are an integral part of these financial statements.
Annual Report | 83
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.71 $ 12.24 $ 12.27 $ 12.35 $ 12.58
---------- ---------- ---------- ---------- ----------
Income from investment operations(b):
Net investment income(c) ...................... 0.51 0.51 0.53 0.54 0.55
Net realized and unrealized gains (losses) .... (0.23) (0.51) (0.01) (0.08) (0.23)
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. 0.28 -- 0.52 0.46 0.32
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ......................... (0.51) (0.52) (0.53) (0.54) (0.55)
Net realized gains ............................ -- (0.01) (0.02) -- --
---------- ---------- ---------- ---------- ----------
Total distributions .............................. (0.51) (0.53) (0.55) (0.54) (0.55)
---------- ---------- ---------- ---------- ----------
Redemption fees(d,e) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 11.48 $ 11.71 $ 12.24 $ 12.27 $ 12.35
========== ========== ========== ========== ==========
Total return(f) .................................. 2.41% (0.06)% 4.35% 3.77% 2.65%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.63% 0.64% 0.64% 0.64% 0.64%
Net investment income ............................ 4.40% 4.25% 4.34% 4.38% 4.45%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $1,318,955 $1,294,052 $1,260,755 $1,230,439 $1,199,126
Portfolio turnover rate .......................... 16.08% 13.00% 7.97% 6.55% 9.40%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
84 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
CLASS B 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.77 $ 12.30 $ 12.33 $ 12.40 $ 12.63
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ...................... 0.45 0.45 0.46 0.47 0.48
Net realized and unrealized gains (losses) .... (0.24) (0.52) (0.01) (0.07) (0.23)
------- ------- ------- ------- -------
Total from investment operations ................. 0.21 (0.07) 0.45 0.40 0.25
------- ------- ------- ------- -------
Less distributions from:
Net investment income ......................... (0.44) (0.45) (0.46) (0.47) (0.48)
Net realized gains ............................ -- (0.01) (0.02) -- --
------- ------- ------- ------- -------
Total distributions .............................. (0.44) (0.46) (0.48) (0.47) (0.48)
------- ------- ------- ------- -------
Redemption fees(d,e) ............................. -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 11.54 $ 11.77 $ 12.30 $ 12.33 $ 12.40
======= ======= ======= ======= =======
Total return(f) .................................. 1.84% (0.61)% 3.77% 3.27% 2.08%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.18% 1.19% 1.19% 1.19% 1.19%
Net investment income ............................ 3.85% 3.70% 3.79% 3.83% 3.90%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $30,625 $39,466 $45,664 $51,285 $54,867
Portfolio turnover rate .......................... 16.08% 13.00% 7.97% 6.55% 9.40%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 85
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.83 $ 12.36 $ 12.39 $ 12.46 $ 12.69
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.45 0.45 0.47 0.48 0.48
Net realized and unrealized gains (losses) .... (0.23) (0.52) (0.02) (0.08) (0.23)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.22 (0.07) 0.45 0.40 0.25
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.44) (0.45) (0.46) (0.47) (0.48)
Net realized gains ............................ -- (0.01) (0.02) -- --
-------- -------- -------- -------- --------
Total distributions .............................. (0.44) (0.46) (0.48) (0.47) (0.48)
-------- -------- -------- -------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 11.61 $ 11.83 $ 12.36 $ 12.39 $ 12.46
======== ======== ======== ======== ========
Total return(f) .................................. 1.91% (0.61)% 3.74% 3.25% 2.06%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.18% 1.19% 1.19% 1.19% 1.19%
Net investment income ............................ 3.85% 3.70% 3.79% 3.83% 3.90%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $173,295 $131,079 $126,535 $123,024 $108,308
Portfolio turnover rate .......................... 16.08% 13.00% 7.97% 6.55% 9.40%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
86 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
PERIOD ENDED
FEBRUARY 28,
ADVISOR CLASS 2009(a)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $11.95
------
Income from investment operations(b):
Net investment income(c) ...................... 0.35
Net realized and unrealized gains (losses) .... (0.47)
------
Total from investment operations ................. (0.12)
------
Less distributions from net investment income .... (0.34)
------
Net asset value, end of period ................... $11.49
======
Total return(d) .................................. (0.92)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses ......................................... 0.53%
Net investment income ............................ 4.50%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $ 769
Portfolio turnover rate .......................... 16.08%
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return is not annualized for periods less than one year.
(e) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
Annual Report | 87
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- --------------
MUNICIPAL BONDS 98.5%
MICHIGAN 93.9%
Adrian City School District GO, FSA Insured, Pre-Refunded, 5.00%,
5/01/26 ...................................................................................... $ 1,960,000 $ 2,220,033
5/01/29 ...................................................................................... 2,125,000 2,406,924
5/01/34 ...................................................................................... 6,690,000 7,577,562
Allen Park Brownfield RDA, GO, Limited Redevelopment, Tax Increment, AMBAC Insured,
5.00%, 5/01/32 .................................................................................. 7,300,000 7,066,035
Allendale Public School District GO, School Building and Site,
FGIC Insured, Pre-Refunded, 5.125%, 5/01/27 .................................................. 6,450,000 7,160,016
FGIC Insured, Pre-Refunded, 5.125%, 5/01/32 .................................................. 5,490,000 6,094,339
Series A, FSA Insured, 5.00%, 5/01/37 ........................................................ 11,810,000 11,394,288
Anchor Bay School District GO, School Building and Site,
Series I, FGIC Insured, Pre-Refunded, 6.00%, 5/01/29 ......................................... 2,000,000 2,017,300
Series II, FGIC Insured, Pre-Refunded, 5.70%, 5/01/25 ........................................ 5,000,000 5,289,650
Series II, FGIC Insured, Pre-Refunded, 5.75%, 5/01/30 ........................................ 3,750,000 3,969,413
Avondale School District GO, School Building and Site, FSA Insured, Pre-Refunded, 5.00%,
5/01/29 ......................................................................................... 9,000,000 10,129,410
Battle Creek School District GO, School Building and Site, FSA Insured, 5.00%,
5/01/31 ...................................................................................... 6,000,000 5,819,760
5/01/34 ...................................................................................... 10,165,000 9,729,633
Battle Creek School District Paying Agent and Registrar, School Building and Site,
FSA Insured, 5.00%, 5/01/37 ..................................................................... 8,760,000 8,340,308
Bay City School District GO, School Building and Site, FSA Insured, 5.00%, 5/01/31 ................. 6,000,000 6,006,780
Brown City Community School District GO, Building and Site, FGIC Insured, Pre-Refunded,
5.00%, 5/01/31 .................................................................................. 3,200,000 3,503,936
Caledonia Community Schools GO, MBIA Insured, 5.00%, 5/01/26 ....................................... 3,665,000 3,696,519
Carman-Ainsworth Community School District GO, FGIC Insured,
5.00%, 5/01/27 ............................................................................... 1,400,000 1,359,246
Pre-Refunded, 5.00%, 5/01/27 ................................................................. 1,550,000 1,707,108
Central Michigan University Revenue,
FGIC Insured, 5.00%, 10/01/27 ................................................................ 500,000 493,435
General, AMBAC Insured, 5.00%, 10/01/34 ...................................................... 8,905,000 8,629,835
Series A, AMBAC Insured, 5.05%, 10/01/32 ..................................................... 10,000,000 9,797,100
Central Montcalm Public School GO, MBIA Insured, Pre-Refunded, 6.00%, 5/01/29 ...................... 1,400,000 1,412,222
Charles Stewart Mott Community College GO, FGIC Insured, Pre-Refunded, 5.50%,
5/01/21 ......................................................................................... 3,550,000 3,747,487
Charlotte Public School District GO, FGIC Insured, Pre-Refunded, 5.375%, 5/01/29 ................... 5,000,000 5,038,350
Chippewa Valley Schools GO, School Building and Site, FSA Insured, 5.00%, 5/01/34 .................. 6,500,000 6,161,155
Detroit City School District GO, School Building and Site Improvements,
Series A, FGIC Insured, Pre-Refunded, 5.00%, 5/01/23 ......................................... 2,650,000 2,965,642
Series A, FSA Insured, 6.00%, 5/01/29 ........................................................ 10,000,000 10,385,300
Series A, FSA Insured, Pre-Refunded, 5.125%, 5/01/31 ......................................... 38,330,000 42,424,411
Series B, FGIC Insured, 5.00%, 5/01/25 ....................................................... 2,000,000 1,852,160
Detroit GO, Series A, Assured Guaranty, 5.00%, 4/01/28 ............................................. 5,000,000 3,675,600
Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/20 ........................... 10,610,000 8,575,957
Detroit Sewer Disposal System Revenue,
second lien, Series A, MBIA Insured, 5.125%, 7/01/33 ......................................... 18,790,000 15,318,547
senior lien, Refunding, Series A, FSA Insured, 5.00%, 7/01/32 ................................ 5,960,000 5,094,191
88 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Detroit Water Supply System Revenue,
FGIC Insured, ETM, 6.25%, 7/01/12 ............................................................ $ 1,175,000 $ 1,254,266
second lien, Refunding, Series C, FSA Insured, 5.00%, 7/01/33 ................................ 20,000,000 17,228,000
second lien, Series B, FGIC Insured, Pre-Refunded, 5.50%, 7/01/33 ............................ 20,000,000 22,014,000
second lien, Series B, MBIA Insured, 5.00%, 7/01/34 .......................................... 8,875,000 7,317,526
senior lien, Refunding, Series A, FGIC Insured, 5.25%, 7/01/33 ............................... 4,745,000 5,161,374
senior lien, Refunding, Series B, BHAC Insured, 5.25%, 7/01/35 ............................... 17,500,000 17,627,050
senior lien, Series A, FGIC Insured, 5.00%, 7/01/30 .......................................... 11,400,000 9,775,956
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/01/29 ........................... 1,500,000 1,578,390
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ............................ 4,880,000 5,238,387
senior lien, Series A, FSA Insured, 5.00%, 7/01/34 ........................................... 38,740,000 32,730,264
senior lien, Series A, MBIA Insured, 5.00%, 7/01/27 .......................................... 4,930,000 4,780,079
Series B, MBIA Insured, Pre-Refunded, 5.00%, 7/01/34 ......................................... 5,270,000 5,933,440
Detroit/Wayne County Stadium Authority Revenue, FGIC Insured, 5.25%, 2/01/27 ....................... 5,500,000 5,241,995
East Grand Rapids Public School District GO, FSA Insured, Pre-Refunded, 6.00%,
5/01/29 ......................................................................................... 4,775,000 4,815,540
Eastern Michigan University Revenues, Series A, FGIC Insured, Pre-Refunded, 5.00%,
6/01/28 ...................................................................................... 6,730,000 7,561,559
6/01/33 ...................................................................................... 14,700,000 16,516,332
Eaton Rapids Public Schools GO, School Building and Site, FSA Insured,
5.00%, 5/01/26 ............................................................................... 2,700,000 2,746,440
5.00%, 5/01/29 ............................................................................... 820,000 824,756
Pre-Refunded, 5.00%, 5/01/29 ................................................................. 1,930,000 2,191,090
Farmington Hills EDC Revenue, Botsford Continuing Care, Series A, MBIA Insured, 5.75%,
2/15/25 ......................................................................................... 100,000 85,782
Fennville Public Schools GO, School Building and Site, FGIC Insured,
5.00%, 5/01/30 ............................................................................... 2,085,000 2,090,504
Pre-Refunded, 5.00%, 5/01/30 ................................................................. 1,115,000 1,262,927
Pre-Refunded, 5.00%, 5/01/34 ................................................................. 3,250,000 3,681,178
Ferris State University Revenue, FGIC Insured, 5.25%,
10/01/26 ..................................................................................... 1,500,000 1,515,180
10/01/31 ..................................................................................... 3,255,000 3,257,376
Fowlerville Community School District GO, FGIC Insured, 5.00%,
5/01/30 ...................................................................................... 1,990,000 1,941,643
5/01/34 ...................................................................................... 8,145,000 7,741,904
Genesee County GO, Water Supply System, AMBAC Insured, 5.00%, 11/01/30 ............................. 4,000,000 3,649,760
Grand Blanc Community Schools GO, School Building and Site, FSA Insured, 5.00%,
5/01/28 ......................................................................................... 4,250,000 4,309,500
Grand Rapids Building Authority GO, AMBAC Insured, 5.50%, 8/01/20 .................................. 2,000,000 2,126,400
Grand Rapids Building Authority Revenue, AMBAC Insured, Series A,
5.00%, 10/01/28 .............................................................................. 3,590,000 3,612,007
Pre-Refunded, 5.00%, 10/01/28 ................................................................ 2,410,000 2,694,476
Grand Rapids Downtown Development Authority Tax Increment Revenue, MBIA Insured,
6.875%, 6/01/24 ................................................................................. 7,500,000 7,499,625
Grand Rapids Sanitation Sewer System Revenue, MBIA Insured, 5.00%,
1/01/30 ...................................................................................... 6,100,000 6,135,685
1/01/34 ...................................................................................... 3,670,000 3,633,704
Annual Report | 89
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Grand Rapids Water Supply Revenue, FGIC Insured, 5.00%, 1/01/35 .................................... $ 3,500,000 $ 3,410,575
Grand Valley State University Revenue, General, Refunding, Series A, FSA Insured, 5.00%,
12/01/28 ..................................................................................... 17,165,000 17,366,345
12/01/33 ..................................................................................... 8,570,000 8,378,889
Grand Valley State University Revenue GO, General, 5.75%, 12/01/34 ................................. 1,500,000 1,462,500
Hartland Consolidated School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/29 ............... 30,000,000 31,841,700
Hazel Park Building Authority Revenue, Ice Arena, AMBAC Insured, 4.70%, 4/01/24 .................... 700,000 677,201
Hazel Park School District GO, FSA Insured, 5.00%,
5/01/27 ...................................................................................... 9,000,000 9,122,670
5/01/32 ...................................................................................... 12,475,000 12,513,922
HealthSource Saginaw Inc. Saginaw County GO, MBIA Insured, 5.00%, 5/01/29 .......................... 4,145,000 4,031,842
Howell Public Schools GO, MBIA Insured, Pre-Refunded, 5.875%, 5/01/22 .............................. 2,000,000 2,016,740
Huron School District GO, FSA Insured, Pre-Refunded,
5.25%, 5/01/21 ............................................................................... 1,500,000 1,627,350
5.375%, 5/01/26 .............................................................................. 2,500,000 2,718,875
Jackson Brownfield RDAR, FGIC Insured,
5.125%, 6/01/22 .............................................................................. 2,290,000 2,334,632
5.125%, 6/01/24 .............................................................................. 1,215,000 1,228,086
Pre-Refunded, 5.25%, 6/01/26 ................................................................. 2,820,000 3,140,042
Pre-Refunded, 5.375%, 6/01/30 ................................................................ 5,830,000 6,514,559
Jackson Public Schools GO, School Building and Site, Refunding, FSA Insured, 5.00%,
5/01/34 ......................................................................................... 6,620,000 6,610,136
Kalamazoo City School District GO, School Building and Site, FSA Insured, Pre-Refunded,
5.00%, 5/01/21 .................................................................................. 4,000,000 4,318,360
Kalamazoo Hospital Finance Authority Hospital Facility Revenue,
Borgess Medical Center, Series A, AMBAC Insured, ETM, 5.625%, 6/01/14 ........................ 3,805,000 4,156,506
Bronson Methodist Hospital, Refunding, MBIA Insured, 5.25%, 5/15/18 .......................... 135,000 135,487
Bronson Methodist Hospital, Refunding, Series B, FSA Insured, 5.00%, 5/15/26 ................. 7,000,000 6,620,180
L'Anse Creuse Public Schools GO, School Building and Site, FSA Insured, 5.00%, 5/01/35 ............. 10,000,000 9,743,000
Lake St. Clair Shores Drain District GO, Series A, MBIA Insured, 5.125%, 10/01/29 .................. 1,000,000 1,004,680
Lake Superior State University Revenue, Refunding, AMBAC Insured, 5.25%, 11/15/31 .................. 3,320,000 2,793,946
Lapeer Community Schools GO, School Building and Site, FSA Insured, 5.00%,
5/01/33 ...................................................................................... 4,400,000 4,332,988
5/01/37 ...................................................................................... 4,325,000 4,235,126
Lenawee County Hospital Finance Authority Hospital Revenue, Lenawee Health Alliance,
Refunding, Series A, AMBAC Insured, 5.20%, 7/01/19 .............................................. 2,115,000 2,145,646
Livonia Municipal Building Authority GO, FGIC Insured, Pre-Refunded, 5.25%, 5/01/30 ................ 3,950,000 4,158,362
Lowell Area Schools GO, FGIC Insured, Pre-Refunded, 5.625%,
5/01/25 ...................................................................................... 3,125,000 3,303,344
5/01/30 ...................................................................................... 3,250,000 3,435,478
Marysville Public School District GO, School Building and Site, Refunding, FSA Insured,
5.00%, 5/01/35 .................................................................................. 5,000,000 4,942,100
Michigan Higher Education Student Loan Authority Revenue, Series XVII-E, AMBAC Insured,
5.40%, 6/01/19 ............................................................................... 5,000,000 4,137,400
5.50%, 6/01/25 ............................................................................... 5,000,000 3,941,850
Michigan Municipal Bond Authority Revenue,
Clean Water State Revolving Fund, 5.00%, 10/01/24 ............................................ 11,355,000 11,592,774
Local Government Loan Program, Series C, MBIA Insured, 6.00%, 11/01/10 ....................... 2,185,000 2,187,272
90 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Michigan State Building Authority Revenue,
Facilities Program, Refunding, Series I, 6.25%, 10/15/38 ..................................... $15,000,000 $ 15,670,800
Facilities Program, Refunding, Series I, AMBAC Insured, 5.00%, 10/15/33 ...................... 4,450,000 3,847,025
Facilities Program, Refunding, Series I, FSA Insured, 4.75%, 10/15/18 ........................ 3,000,000 3,025,020
Facilities Program, Refunding, Series I, FSA Insured, 5.00%, 10/15/24 ........................ 5,000,000 5,078,000
Refunding, AMBAC Insured, 5.00%, 10/15/33 .................................................... 21,000,000 18,154,500
Refunding, Series IA, FGIC Insured, 5.00%, 10/15/32 .......................................... 17,160,000 14,929,028
Refunding, Series IA, FGIC Insured, 5.00%, 10/15/36 .......................................... 5,000,000 4,267,300
Refunding, Series IA, FSA Insured, 5.00%, 10/15/31 ........................................... 15,530,000 15,466,638
Refunding, Series IA, FSA Insured, 5.00%, 10/15/32 ........................................... 10,000,000 9,876,600
Refunding, Series IA, FSA Insured, 5.00%, 10/15/36 ........................................... 1,000,000 980,860
Michigan State Comprehensive Transportation Revenue, Refunding, FSA Insured, 5.00%,
5/15/26 ...................................................................................... 4,740,000 4,805,412
5/15/31 ...................................................................................... 8,000,000 7,810,720
Michigan State COP, AMBAC Insured, Pre-Refunded, 5.50%, 6/01/27 .................................... 12,000,000 12,638,400
Michigan State HDA Rental Housing Revenue, Refunding, Series A, AMBAC Insured, 6.00%,
4/01/16 ......................................................................................... 65,000 65,034
Michigan State Hospital Finance Authority Revenue,
Ascension Health Credit, Series A, MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 .............. 15,175,000 15,906,283
Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured, 5.50%,
8/15/24 ................................................................................... 15,000,000 10,038,450
Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured, 5.25%,
8/15/27 ................................................................................... 10,000,000 6,025,500
Edward W. Sparrow Hospital, Refunding, MBIA Insured, 5.00%, 11/15/31 ......................... 8,500,000 7,855,445
Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.375%, 8/15/26 ......................... 6,000,000 6,000,240
Mercy Health Services, Series R, AMBAC Insured, ETM, 5.375%, 8/15/26 ......................... 1,750,000 1,750,070
Mercy Health Services, Series U, ETM, 5.75%, 8/15/26 ......................................... 300,000 300,000
Mercy Health Services, Series W, FSA Insured, ETM, 5.25%, 8/15/27 ............................ 8,605,000 8,605,172
Mercy Health Services, Series X, MBIA Insured, Pre-Refunded, 6.00%, 8/15/34 .................. 11,000,000 11,353,210
Mercy Mount Clemens Corp., Series A, MBIA Insured, Pre-Refunded, 5.75%, 5/15/29 .............. 4,890,000 4,984,670
Mid-Michigan Health, AMBAC Insured, 5.00%, 4/15/24 ........................................... 7,065,000 6,204,130
Mid-Michigan Health, AMBAC Insured, 5.00%, 4/15/32 ........................................... 1,000,000 797,140
Mid-Michigan Obligation Group, Refunding, Series A, FSA Insured, 5.375%, 6/01/27 ............. 7,500,000 7,460,550
Oakwood Obligated Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ................... 7,500,000 7,519,950
Sparrow Obligated Group, Refunding, MBIA Insured, 5.00%, 11/15/36 ............................ 12,465,000 9,494,217
Sparrow Obligated Group, Refunding, MBIA Insured, 5.00%, 11/15/36 ............................ 6,165,000 5,578,770
St. John's Health System, Refunding, Series A, AMBAC Insured, ETM, 5.125%,
5/15/17 ................................................................................... 14,500,000 14,679,945
St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ................. 3,445,000 3,621,487
St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.25%, 5/15/14 ................. 9,545,000 10,562,020
Trinity Health Credit Group, Series A, 6.50%, 12/01/33 ....................................... 25,000,000 25,834,500
Michigan State Revenue, Grant Antic Bonds, FSA Insured, 5.25%, 9/15/27 ............................. 10,000,000 9,577,200
Michigan State Strategic Fund Limited Obligation Revenue, The Detroit Edison Co. Pollution
Control Bonds Project, Refunding,
Collateralized Series AA, FGIC Insured, 6.95%, 5/01/11 ....................................... 5,000,000 5,237,350
Collateralized Series BB, AMBAC Insured, 7.00%, 5/01/21 ...................................... 3,000,000 3,168,330
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 10,255,810
Annual Report | 91
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Michigan State Trunk Line Revenue,
Refunding, Series A, MBIA Insured, 4.75%, 11/01/20 ........................................... $ 3,300,000 $ 3,337,323
Refunding, Series A, MBIA Insured, 5.00%, 11/01/26 ........................................... 3,050,000 3,071,503
Series A, FSA Insured, Pre-Refunded, 5.25%, 11/01/30 ......................................... 19,680,000 21,568,690
Michigan Technological University Revenue, General, Series A, MBIA Insured, 5.00%,
10/01/34 ........................................................................................ 3,675,000 3,536,342
Milan Area Schools GO, Series A, FGIC Insured, Pre-Refunded, 5.75%, 5/01/24 ........................ 3,500,000 3,704,785
North Kent Sewer Authority Revenue, Sanitary Sewer, MBIA Insured, 5.00%, 11/01/31 .................. 5,960,000 5,702,647
Otsego Public Schools District GO, School Building and Site, FSA Insured, Pre-Refunded,
5.00%, 5/01/34 .................................................................................. 9,835,000 11,165,479
Oxford Area Community School District GO, FSA Insured, Pre-Refunded, 5.00%,
5/01/26 ...................................................................................... 5,425,000 5,947,699
5/01/31 ...................................................................................... 4,865,000 5,333,743
Pennfield School District GO, School Building and Site, FGIC Insured, Pre-Refunded, 5.00%,
5/01/29 ...................................................................................... 1,150,000 1,302,571
5/01/34 ...................................................................................... 2,500,000 2,831,675
Pinckney Community Schools GO, Refunding, FSA Insured, 5.00%, 5/01/26 .............................. 2,955,000 3,016,700
Pontiac General Building Authority GO, FGIC Insured, Pre-Refunded, 5.375%,
6/01/23 ...................................................................................... 1,620,000 1,810,220
6/01/27 ...................................................................................... 2,635,000 2,944,402
Port Huron GO, Limited Tax, AMBAC Insured, 5.00%, 10/01/22 ......................................... 1,600,000 1,628,144
River Rouge School District GO, Refunding, FGIC Insured, 5.00%, 5/01/22 ............................ 6,575,000 6,708,801
Rockford Public Schools GO, School Building and Site, FSA Insured, 5.00%, 5/01/33 .................. 8,220,000 8,094,809
Royal Oak Hospital Finance Authority Hospital Revenue, William Beaumont Hospital,
Refunding, 8.25%, 9/01/39 .................................................................... 10,000,000 10,628,200
Series M, MBIA Insured, 5.25%, 11/15/31 ...................................................... 12,750,000 9,903,817
Series M, MBIA Insured, 5.25%, 11/15/35 ...................................................... 17,600,000 13,433,024
Saginaw City School District GO, School Building and Site, FSA Insured, 5.00%,
5/01/36 ...................................................................................... 6,275,000 6,155,712
5/01/38 ...................................................................................... 10,555,000 10,301,047
Saginaw Hospital Finance Authority Revenue, Covenant Medical Center, Refunding, Series E,
MBIA Insured,
5.375%, 7/01/19 .............................................................................. 4,850,000 4,851,164
5.50%, 7/01/24 ............................................................................... 1,750,000 1,690,133
Saginaw Valley State University Revenue,
General, FSA Insured, 5.00%, 7/01/37 ......................................................... 5,000,000 4,823,550
General, Refunding, AMBAC Insured, 5.25%, 7/01/19 ............................................ 345,000 350,610
General, Refunding, FSA Insured, 5.00%, 7/01/28 .............................................. 7,050,000 7,107,034
Series A, MBIA Insured, 5.125%, 7/01/30 ...................................................... 4,315,000 4,319,876
South Macomb Disposal Authority Revenue, AMBAC Insured, Pre-Refunded, 5.25%,
9/01/20 ......................................................................................... 2,000,000 2,124,920
South Redford School District GO, School Building and Site, MBIA Insured, 5.00%,
5/01/30 ......................................................................................... 3,500,000 3,432,590
Southfield Library Building Authority GO, Refunding, MBIA Insured, 5.00%, 5/01/30 .................. 6,535,000 6,558,591
Southfield Public Schools GO, Refunding, MBIA Insured, 4.75%, 5/01/29 .............................. 9,040,000 8,788,055
Sparta Area Schools GO, School Building and Site, FGIC Insured, Pre-Refunded, 5.00%,
5/01/30 ......................................................................................... 2,730,000 3,092,189
92 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
St. Clair County EDC, PCR, The Detroit Edison Co., Refunding, Series AA, AMBAC Insured,
6.40%, 8/01/24 .................................................................................. $10,000,000 $ 9,994,400
Sturgis Public School District GO, Refunding, FGIC Insured, 5.00%, 5/01/30 ......................... 4,715,000 4,571,004
Taylor Brownfield RDA, GO, Tax Increment, Series A, MBIA Insured, 5.00%,
5/01/29 ...................................................................................... 2,900,000 2,842,087
5/01/34 ...................................................................................... 3,945,000 3,723,804
Taylor Tax Increment Finance Authority Revenue, FSA Insured, 5.00%, 5/01/21 ........................ 2,595,000 2,656,112
Tecumseh Public Schools GO, FGIC Insured, Pre-Refunded, 5.50%,
5/01/25 ...................................................................................... 5,925,000 6,254,608
5/01/30 ...................................................................................... 4,500,000 4,750,335
Thornapple Kellogg School GO, School Building and Site,
FSA Insured, Pre-Refunded, 5.00%, 5/01/23 .................................................... 965,000 1,083,309
FSA Insured, Pre-Refunded, 5.00%, 5/01/28 .................................................... 6,250,000 7,016,250
Refunding, FSA Insured, 5.00%, 5/01/23 ....................................................... 3,035,000 3,120,526
Trenton Public Schools School District GO, School Building and Site, FSA Insured, 5.00%,
5/01/31 ...................................................................................... 4,575,000 4,526,368
5/01/38 ...................................................................................... 8,150,000 7,894,253
Van Dyke Public Schools GO, School Building and Site, FSA Insured, 5.00%, 5/01/34 .................. 5,000,000 4,873,900
Warren Consolidated School District GO, FSA Insured, 4.875%, 5/01/22 ............................... 8,910,000 9,066,014
Warren Water and Sewer Revenue, FSA Insured, Pre-Refunded, 5.125%, 11/01/23 ........................ 2,450,000 2,694,045
Wayne Charter County Airport Revenue, Detroit Metropolitan Wayne County Airport, Series A,
MBIA Insured, 5.25%, 12/01/18 ................................................................... 5,500,000 5,298,865
Wayne Charter County GO,
Airport Hotel, Detroit Metropolitan Wayne County Airport, Series A, MBIA Insured, 5.25%,
12/01/25 .................................................................................. 17,000,000 16,775,090
Airport Hotel, Detroit Metropolitan Wayne County Airport, Series A, MBIA Insured, 5.00%,
12/01/30 .................................................................................. 10,750,000 9,659,412
Capital Improvement, Series A, FSA Insured, 5.00%, 2/01/34 ................................... 7,640,000 7,253,874
Capital Improvement, Series A, FSA Insured, 5.00%, 2/01/38 ................................... 12,135,000 11,411,269
Wayne County Airport Authority Revenue, Detroit Metropolitan Airport, Refunding,
FGIC Insured, 5.00%,
12/01/27 ..................................................................................... 9,910,000 9,030,190
12/01/28 ..................................................................................... 10,170,000 9,160,322
Wayne State University Revenues, General,
AMBAC Insured, 5.00%, 11/15/30 ............................................................... 2,925,000 2,947,084
AMBAC Insured, 5.00%, 11/15/36 ............................................................... 5,000,000 4,947,850
Refunding, FGIC Insured, 5.125%, 11/15/29 .................................................... 17,900,000 17,975,001
Refunding, FSA Insured, 5.00%, 11/15/28 ...................................................... 23,550,000 23,746,407
Refunding, FSA Insured, 5.00%, 11/15/35 ...................................................... 22,435,000 21,663,909
West Bloomfield School District GO, FGIC Insured, Pre-Refunded, 6.00%,
5/01/19 ...................................................................................... 2,100,000 2,228,919
5/01/20 ...................................................................................... 2,000,000 2,122,780
West Branch Rose City Area School District GO, FGIC Insured, Pre-Refunded, 5.50%,
5/01/24 ......................................................................................... 1,400,000 1,410,668
West Ottawa Public School District GO, School Building Site, Refunding, MBIA Insured,
5.00%, 5/01/32 .................................................................................. 6,025,000 5,871,362
Western Michigan University Revenues, General, FSA Insured, 5.00%,
11/15/28 ..................................................................................... 5,500,000 5,572,490
11/15/32 ..................................................................................... 6,410,000 6,313,273
Annual Report | 93
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Western Townships Utilities Authority GO, Sewer Disposal System, FGIC Insured, 4.75%,
1/01/23 ......................................................................................... $ 8,500,000 $ 8,505,355
Whitmore Lake Public School District GO, FGIC Insured, 5.00%, 5/01/32 .............................. 9,375,000 8,953,594
Willow Run Community Schools GO, FSA Insured, 5.00%, 5/01/31 ....................................... 12,550,000 12,577,108
Wyoming Sewer Disposal System Revenue, Refunding, MBIA Insured, 5.00%, 6/01/27 ..................... 5,700,000 5,699,544
Ypsilanti Community Utilities GO, Sanitation Sewer System No. 3, FGIC Insured, 5.00%,
5/01/32 ......................................................................................... 6,065,000 5,831,316
Zeeland Public Schools GO, Refunding, FGIC Insured, 5.00%, 5/01/25 ................................. 3,350,000 3,302,330
--------------
1,431,031,158
--------------
U.S. TERRITORIES 4.6%
PUERTO RICO 4.6%
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series D, FSA Insured, 5.00%, 7/01/32 ............................................. 11,945,000 11,421,331
Series B, MBIA Insured, Pre-Refunded, 5.875%, 7/01/35 ........................................ 8,570,000 9,165,101
Series B, MBIA Insured, Pre-Refunded, 5.875%, 7/01/35 ........................................ 16,430,000 17,684,595
Series D, FSA Insured, Pre-Refunded, 5.00%, 7/01/32 .......................................... 8,055,000 8,996,468
Puerto Rico Electric Power Authority Power Revenue, Series RR, FGIC Insured, Pre-Refunded,
5.00%, 7/01/35 .................................................................................. 14,000,000 16,177,140
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ......................... 6,380,000 6,334,574
--------------
TOTAL U.S. TERRITORIES ............................................................................. 69,779,209
--------------
TOTAL INVESTMENTS (COST $1,524,697,178) 98.5% ...................................................... 1,500,810,367
OTHER ASSETS, LESS LIABILITIES 1.5% ................................................................ 22,834,169
--------------
NET ASSETS 100.0% .................................................................................. $1,523,644,536
==============
See Abbreviations on page 141.
The accompanying notes are an integral part of these financial statements.
94 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MINNESOTA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.51 $ 12.16 $ 12.13 $ 12.23 $ 12.39
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.48 0.50 0.50 0.51 0.53
Net realized and unrealized gains (losses) .... 0.30 (0.65) 0.03 (0.10) (0.16)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.78 (0.15) 0.53 0.41 0.37
-------- -------- -------- -------- --------
Less distributions from net investment income .... (0.49) (0.50) (0.50) (0.51) (0.53)
-------- -------- -------- -------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 11.80 $ 11.51 $ 12.16 $ 12.13 $ 12.23
======== ======== ======== ======== ========
Total return(f) .................................. 6.90% (1.34)% 4.50% 3.48% 2.99%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.66% 0.67% 0.66% 0.67% 0.67%
Net investment income ............................ 4.17% 4.14% 4.15% 4.17% 4.35%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $653,812 $545,977 $539,643 $528,660 $515,780
Portfolio turnover rate .......................... 21.67% 9.99% 14.24% 13.03% 12.06%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 95
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MINNESOTA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.60 $ 12.24 $ 12.22 $ 12.31 $ 12.47
-------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ...................... 0.42 0.43 0.44 0.44 0.46
Net realized and unrealized gains (losses) .... 0.29 (0.64) 0.01 (0.09) (0.16)
-------- ------- ------- ------- -------
Total from investment operations ................. 0.71 (0.21) 0.45 0.35 0.30
-------- ------- ------- ------- -------
Less distributions from net investment income .... (0.42) (0.43) (0.43) (0.44) (0.46)
-------- ------- ------- ------- -------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 11.89 $ 11.60 $ 12.24 $ 12.22 $ 12.31
======== ======= ======= ======= =======
Total return(f) .................................. 6.26% (1.78)% 3.81% 2.98% 2.40%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.21% 1.22% 1.21% 1.22% 1.22%
Net investment income ............................ 3.62% 3.59% 3.60% 3.62% 3.80%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $102,212 $70,318 $64,873 $64,900 $59,682
Portfolio turnover rate .......................... 21.67% 9.99% 14.24% 13.03% 12.06%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
96 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN MINNESOTA TAX-FREE INCOME FUND AMOUNT VALUE
--------------------------------------- ----------- ------------
MUNICIPAL BONDS 98.4%
MINNESOTA 95.1%
Anoka County Housing and RDA, GO, Housing Development, Refunding, AMBAC Insured,
4.875%, 2/01/24 ............................................................................. $ 2,195,000 $ 2,263,813
Anoka-Hennepin ISD No. 11 GO,
School Building, Refunding, Series A, Assured Guaranty, 5.00%, 2/01/20 ................... 5,870,000 6,719,859
School District Credit Enhancement Program, Series A, FSA Insured, 5.00%, 2/01/20 ........ 6,130,000 6,481,985
Bloomington ISD No. 271 GO, School Building, Refunding, Series C, FSA Insured, 4.50%,
2/01/23 ..................................................................................... 2,500,000 2,593,075
Blue Earth County EDA Public Project Lease Revenue, Series A, MBIA Insured, 4.50%,
12/01/24 .................................................................................... 1,055,000 1,070,181
Brooklyn Center ISD No. 286 GO, FGIC Insured, 5.00%, 2/01/22 ................................... 1,000,000 1,079,330
Burnsville MFR, Coventry Court, Refunding, Series A, GNMA Secured,
5.90%, 9/20/19 ........................................................................... 400,000 402,580
5.95%, 9/20/29 ........................................................................... 1,275,000 1,285,710
6.00%, 9/20/34 ........................................................................... 1,000,000 1,010,750
Byron ISD No. 531 GO, School Building, Series A, FGIC Insured, 5.00%, 2/01/24 .................. 2,015,000 2,108,073
Cambridge ISD No. 911 GO, Series A, MBIA Insured, 4.25%, 2/01/24 ............................... 1,235,000 1,229,554
Cass Lake ISD No. 115 GO, Refunding, FGIC Insured, 5.00%, 2/01/22 .............................. 3,805,000 3,951,036
Centennial ISD No. 012 GO, Series A, FSA Insured, 5.00%, 2/01/21 ............................... 1,000,000 1,079,330
Chaska ISD No. 112 GO, School Building, Series A, MBIA Insured, 4.50%, 2/01/28 ................. 15,000,000 14,736,900
Chisago County GO, Capital Improvement, Series A, MBIA Insured, 4.75%, 2/01/26 ................. 2,415,000 2,467,671
Dakota County CDA Governmental Housing Development GO, Senior Housing Facilities, Series A,
5.125%, 1/01/35 ............................................................................. 2,625,000 2,625,682
Dakota County Housing and RDA, SFMR, GNMA Secured,
5.75%, 4/01/18 ........................................................................... 104,000 104,157
5.85%, 10/01/30 .......................................................................... 174,000 174,059
Deer River ISD No. 317 GO, FSA Insured, 6.00%, 2/01/25 ......................................... 1,325,000 1,381,034
Duluth ISD No. 709 COP, Full Term Certificate, Series B, FSA Insured, 5.00%, 2/01/28 ........... 18,890,000 19,545,861
Eagan GO, Recreational Facilities, Series A, MBIA Insured, 5.00%, 2/01/21 ...................... 3,075,000 3,197,077
Eagan MFHR, Forest Ridge Apartments, Refunding, Series A, GNMA Secured,
5.95%, 9/20/29 ........................................................................... 1,700,000 1,714,042
6.00%, 9/20/34 ........................................................................... 1,480,000 1,495,910
Elk River ISD Number 728 GO, School Building, Refunding, Series A, FSA Insured, 4.25%,
2/01/24 ..................................................................................... 6,265,000 6,237,371
Farmington ISD No. 192 GO,
MBIA Insured, 5.25%, 2/01/24 ............................................................. 5,915,000 6,285,693
School Building, Refunding, Series A, FSA Insured, 4.50%, 2/01/24 ........................ 5,015,000 5,107,226
School Building, Series B, FSA Insured, 5.00%, 2/01/23 ................................... 3,000,000 3,156,360
School Building, Series B, FSA Insured, 4.75%, 2/01/27 ................................... 16,075,000 16,310,659
Fergus Falls ISD No. 544 GO, School Building, Series A, FSA Insured, 5.00%, 1/01/25 ............ 1,655,000 1,737,998
Fridley ISD No. 014 GO, Alternative Facilities, Series A, FSA Insured, 4.375%, 2/01/27 ......... 2,040,000 1,972,252
Hastings ISD No. 200 GO, Refunding, Series A, FSA Insured, 4.50%, 2/01/22 ...................... 2,700,000 2,766,042
Hennepin County Sales Tax Revenue,
Hennepin County Sales Tax, 4.75%, 12/15/37 ............................................... 25,000,000 24,272,750
Second Lien, Ballpark Project, Series B, 5.00%, 12/15/21 ................................. 5,000,000 5,440,200
Hibbing Health Care Facilities Revenue, The Duluth Clinic Ltd., FSA Insured, Pre-Refunded,
5.00%, 11/01/25 ............................................................................. 8,000,000 9,119,600
Annual Report | 97
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MINNESOTA TAX-FREE INCOME FUND AMOUNT VALUE
--------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Hopkins Elderly Housing Revenue, St. Therese Project, Refunding, Series A, GNMA Secured,
5.60%, 11/20/17 .......................................................................... $ 700,000 $ 704,641
5.70%, 11/20/32 .......................................................................... 3,000,000 3,042,780
Hopkins ISD No. 270 GO, FGIC Insured, 5.125%, 2/01/22 .......................................... 3,880,000 4,201,380
Hubbard County Housing and RDA, GO, Heritage Center Project, MBIA Insured, 5.50%,
8/01/27 ..................................................................................... 1,085,000 1,142,896
Lake Superior ISD No. 381 GO, Series A, FSA Insured, 5.00%, 4/01/23 ............................ 4,195,000 4,590,337
Lakeview ISD No. 2167 GO, MBIA Insured, 5.25%, 2/01/26 ......................................... 3,705,000 3,937,896
Lakeville ISD No. 194 GO,
School Building, Refunding, Series B, Assured Guaranty, 5.00%, 2/01/16 ................... 5,405,000 6,212,939
School Building, Refunding, Series B, Assured Guaranty, 5.00%, 2/01/17 ................... 5,750,000 6,646,080
Series A, FGIC Insured, 5.00%, 2/01/23 ................................................... 10,180,000 11,082,152
Medford ISD No. 763 GO, Series A, FSA Insured, 5.125%, 2/01/29 ................................. 2,700,000 2,863,431
Metropolitan Council Minneapolis-St. Paul Metropolitan Area GO, Wastewater, Series B, 4.50%,
12/01/26 .................................................................................... 5,000,000 5,031,500
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue,
Refunding, Senior Series A, AMBAC Insured, 5.00%, 1/01/20 ................................ 5,400,000 5,718,492
Refunding, Series A, BHAC Insured, 5.00%, 1/01/23 ........................................ 14,800,000 15,887,948
Senior, Refunding, Series A, BHAC Insured, 5.00%, 1/01/26 ................................ 10,000,000 10,467,100
Series A, FGIC Insured, Pre-Refunded, 5.25%, 1/01/32 ..................................... 7,000,000 7,496,930
Series C, FGIC Insured, Pre-Refunded, 5.25%, 1/01/26 ..................................... 2,000,000 2,140,100
Series C, FGIC Insured, Pre-Refunded, 5.25%, 1/01/32 ..................................... 9,000,000 9,630,450
Minneapolis CDA and St. Paul Housing and RDAR, Health Care Facilities, Carondelet, Series B,
BIG Insured, Pre-Refunded, 8.875%, 11/01/15 ................................................. 545,000 620,390
Minneapolis GO,
Sports Arena Project, Refunding, 5.125%, 10/01/20 ........................................ 8,340,000 8,339,750
Sports Arena Project, Refunding, 5.20%, 10/01/24 ......................................... 3,750,000 3,750,187
Various Purpose, Pre-Refunded, 5.125%, 12/01/28 .......................................... 3,000,000 3,312,300
Minneapolis Health Care Revenue, Fairview Health Services, AMBAC Insured, 5.00%,
11/15/34 .................................................................................... 12,645,000 10,690,083
Minneapolis MFR, Riverside Plaza, Refunding, GNMA Secured, 5.20%, 12/20/30 ..................... 5,000,000 4,589,800
Minneapolis Health Care System Revenue, Fairview Health Services, Series B, Assured Guaranty,
6.50%, 11/15/38, 6.50%, 11/15/38 ............................................................ 35,000,000 37,464,000
Minneapolis Special School District No. 001 COP,
Refunding, Series A, MBIA Insured, 4.50%, 2/01/21 ........................................ 2,715,000 2,798,052
Series A, FSA Insured, 5.00%, 2/01/21 .................................................... 1,950,000 2,021,409
Minnesota Agriculture and Economic Development Board Revenue,
Benedictine Health, Series A, MBIA Insured, Pre-Refunded, 5.125%, 2/15/29 ................ 14,625,000 15,341,479
Evangelical Lutheran Good Samaritan, Society Project, AMBAC Insured, 5.15%,
12/01/22 .............................................................................. 4,870,000 4,465,157
Health Care System, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ................... 365,000 341,147
Series E, Assured Guaranty, 5.00%, 2/15/37 ............................................... 20,600,000 17,969,380
Minnesota Public Facilities Authority Water PCR, Series B, Refunding, 5.00%, 3/01/18 ........... 6,215,000 7,230,842
Minnesota State 911 Revenue, Public Safety Radio Communication System, Assured Guaranty,
5.00%, 6/01/24 .............................................................................. 5,000,000 5,287,750
98 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MINNESOTA TAX-FREE INCOME FUND AMOUNT VALUE
--------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Minnesota State Colleges and University Revenue, Fund, Series A, MBIA Insured, 5.00%,
10/01/22 ................................................................................. $ 1,745,000 $ 1,850,136
10/01/23 ................................................................................. 1,825,000 1,921,999
10/01/24 ................................................................................. 1,900,000 1,985,367
10/01/25 ................................................................................. 1,155,000 1,198,162
10/01/26 ................................................................................. 1,715,000 1,769,194
10/01/32 ................................................................................. 5,540,000 5,576,786
Minnesota State GO,
Highway and Various Purpose, 5.00%, 8/01/23 .............................................. 3,000,000 3,245,700
Highway and Various Purpose, FSA Insured, 5.00%, 8/01/22 ................................. 1,000,000 1,087,150
Highway and Various Purpose, FSA Insured, 5.00%, 8/01/25 ................................. 10,000,000 10,590,500
MBIA Insured, 5.00%, 6/01/26 ............................................................. 10,000,000 10,424,700
Various Purposes, Series A, 4.25%, 12/01/27 .............................................. 5,000,000 4,879,700
Various Purposes, Series A, 4.50%, 12/01/28 .............................................. 15,540,000 15,565,330
Minnesota State HFAR,
Rental Housing, Refunding, Series D, MBIA Insured, 5.90%, 8/01/15 ........................ 730,000 729,971
Rental Housing, Refunding, Series D, MBIA Insured, 5.95%, 2/01/18 ........................ 225,000 225,369
Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 ........................ 230,000 230,483
SFM, Series B, 5.00%, 7/01/13 ............................................................ 50,000 50,067
SFM, Series D, 5.45%, 1/01/26 ............................................................ 1,620,000 1,595,344
SFM, Series E, AMBAC Insured, 5.40%, 1/01/25 ............................................. 1,980,000 1,965,289
SFM, Series G, AMBAC Insured, 6.25%, 7/01/26 ............................................. 170,000 170,325
Minnesota State Higher Education Facilities Authority Revenue, St. John's University,
Series 5-I, MBIA Insured, Pre-Refunded, 5.25%,
10/01/21 ................................................................................. 1,750,000 1,915,130
10/01/26 ................................................................................. 1,500,000 1,641,540
Minnesota State Public Facilities Authority Clean Water Revenue, Series B, 4.75%, 3/01/27 ...... 5,000,000 5,106,700
Minnetonka MFHR, Cedar Hills Project, Refunding, Series A, GNMA Secured,
5.90%, 10/20/19 .......................................................................... 1,750,000 1,759,783
5.95%, 10/20/29 .......................................................................... 5,955,000 6,001,925
Moorhead ISD No. 152 GO, School Building, Refunding, 4.25%, 4/01/22 ............................ 4,690,000 4,751,861
New Brighton GO, Tax Increment, Series A, MBIA Insured, 5.00%, 2/01/32 ......................... 5,110,000 5,169,685
Nobles County Housing and RDA Public Project Revenue, Annual Appropriation Lease Obligation,
AMBAC Insured, Pre-Refunded, 5.625%, 2/01/22 ................................................ 1,230,000 1,285,092
North Branch Water System Revenue,
FSA Insured, 4.75%, 8/01/27 .............................................................. 1,500,000 1,519,665
Series A, FSA Insured, 5.00%, 8/01/33 .................................................... 1,325,000 1,313,870
Northern Municipal Power Agency Electric System Revenue,
Refunding, FSA Insured, 5.00%, 1/01/12 ................................................... 790,000 797,173
Refunding, Series A, Assured Guaranty, 5.00%, 1/01/13 .................................... 4,000,000 4,295,880
Refunding, Series A, Assured Guaranty, 5.00%, 1/01/21 .................................... 1,000,000 1,032,350
Series A, AMBAC Insured, 5.00%, 1/01/26 .................................................. 2,000,000 1,981,900
Osseo ISD No. 279 GO, Series A, FSA Insured, 5.00%, 2/01/20 .................................... 3,000,000 3,134,310
Pine City Health Care and Housing Revenue, North Branch, Series A, GNMA Secured, 5.00%,
10/20/38 .................................................................................... 4,280,000 3,871,260
Pipestone-Jasper ISD No. 2689 GO, Refunding, Series A, FSA Insured, 5.00%, 3/01/20 ............. 1,595,000 1,697,686
Annual Report | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MINNESOTA TAX-FREE INCOME FUND AMOUNT VALUE
--------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Plymouth Health Facilities Revenue, Westhealth Project, Series A, FSA Insured,
6.25%, 6/01/16 ........................................................................... $ 1,600,000 $ 1,607,856
6.125%, 6/01/24 .......................................................................... 1,815,000 1,814,891
Prior Lake ISD No. 719 GO,
FSA Insured, 5.50%, 2/01/20 .............................................................. 2,255,000 2,340,216
FSA Insured, 5.50%, 2/01/21 .............................................................. 2,590,000 2,687,876
Series C, MBIA Insured, 5.00%, 2/01/21 ................................................... 2,000,000 2,082,480
Series C, MBIA Insured, 5.00%, 2/01/23 ................................................... 6,025,000 6,216,896
Robbinsdale GO, Housing Development, Senior Housing Project, Series B, FGIC Insured,
Pre-Refunded, 5.875%, 1/01/31 ............................................................... 2,160,000 2,254,154
Robbinsdale ISD No. 281 GO, Refunding, Series A, MBIA Insured, 4.50%, 2/01/22 .................. 3,000,000 3,050,430
Rochester Electric Utility Revenue, AMBAC Insured, Pre-Refunding, 5.25%, 12/01/24 .............. 3,000,000 3,223,890
Rush City ISD No. 139 GO, School Building, MBIA Insured,
5.00%, 2/01/21 ........................................................................... 1,680,000 1,835,350
5.125%, 2/01/26 .......................................................................... 4,245,000 4,657,826
Sauk Rapids ISD No. 047 GO,
School Building, Refunding, Series A, FSA Insured, 5.00%, 2/01/22 ........................ 2,200,000 2,341,130
School Building, Refunding, Series A, FSA Insured, 4.50%, 2/01/25 ........................ 2,175,000 2,183,896
Series A, MBIA Insured, 5.75%, 2/01/23 ................................................... 2,740,000 2,936,732
Series A, MBIA Insured, 5.75%, 2/01/26 ................................................... 5,000,000 5,360,950
Scott County GO, Capital Improvement, Series A, AMBAC Insured, 5.00%, 12/01/27 ................. 5,590,000 5,810,246
Scott County Housing and Redevelopment Authority Facilities Lease Revenue, AMBAC Insured,
Pre-Refunded, 5.70%, 2/01/29 ................................................................ 1,380,000 1,409,394
Scott County Housing and Redevelopment Authority GO, Savage City, Hamilton Apartments
Project, AMBAC Insured, Pre-Refunded, 5.70%, 2/01/33 ........................................ 2,285,000 2,333,670
South Washington County ISD No. 833 GO, Series B, FSA Insured, 5.00%, 2/01/23 .................. 4,000,000 4,116,400
Southeastern Multi-County Housing and RDAR, Housing Development, Goodhue County
Apartments, Series B, MBIA Insured, Pre-Refunded, 5.75%, 1/01/31 ............................ 2,415,000 2,517,782
Southern Minnesota Municipal Power Agency Power Supply System Revenue,
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/19 .............. 5,875,000 4,008,160
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/20 .............. 14,035,000 8,968,646
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/23 .............. 4,000,000 2,095,920
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/26 .............. 5,000,000 2,139,300
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn., 1/01/27 .............. 6,600,000 2,643,234
Capital Appreciation, Refunding, Series C, AMBAC Insured, zero cpn., 1/01/18 ............. 15,935,000 11,530,247
Series A, MBIA Insured, Pre-Refunded, 5.75%, 1/01/18 ..................................... 1,000,000 1,102,670
Spring Lake Park ISD No. 16 GO, School Building, Series A, FSA Insured, 5.00%, 2/01/29 ......... 4,025,000 4,138,384
St. Clair ISD No. 75 GO, MBIA Insured, 5.70%, 4/01/22 .......................................... 2,250,000 2,257,425
St. Cloud Health Care Revenue, St. Cloud Hospital Obligation, Group A, FSA Insured, 5.875%,
5/01/30 ..................................................................................... 17,785,000 17,821,459
St. Cloud Hospital Facilities Revenue, St. Cloud Hospital, Refunding, Series A, AMBAC Insured,
5.00%, 7/01/15 .............................................................................. 1,165,000 1,164,884
St. Michael ISD No. 885 GO,
FSA Insured, 5.00%, 2/01/23 .............................................................. 3,300,000 3,561,789
School Building, Refunding, FSA Insured, 5.00%, 2/01/24 .................................. 2,735,000 2,867,675
School Building, Series A, FSA Insured, 4.75%, 2/01/29 ................................... 5,000,000 5,023,200
St. Paul Housing and RDA Health Care Revenue, Allina Health System, Series A, MBIA Insured,
5.00%, 11/15/22 ............................................................................. 5,000,000 4,611,350
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MINNESOTA TAX-FREE INCOME FUND AMOUNT VALUE
--------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
St. Paul ISD No. 625 GO, School Building, Series A, FSA Insured, 5.00%,
2/01/24 .................................................................................. $ 1,615,000 $ 1,710,027
2/01/25 .................................................................................. 1,675,000 1,760,860
2/01/26 .................................................................................. 1,745,000 1,822,513
St. Paul Sales Tax Revenue, Sub Series A, XLCA Insured, 5.00%, 11/01/30 ........................ 7,360,000 7,123,082
St. Peter GO, Hospital, Series A, MBIA Insured, 5.00%, 9/01/32 ................................. 6,805,000 6,427,799
University of Minnesota Revenue, Series A,
5.25%, 4/01/29 ........................................................................... 1,000,000 1,049,430
5.125%, 4/01/34 .......................................................................... 1,000,000 1,019,280
Upsala ISD No. 487 GO, School Building, FGIC Insured, 5.00%,
2/01/22 .................................................................................. 1,140,000 1,243,250
2/01/28 .................................................................................. 2,400,000 2,619,216
Waconia ISD No. 110 GO, School Building, Refunding, Series B, 4.125%, 2/01/22 .................. 5,340,000 5,416,896
Walker-Hakensack-Akeley ISD No. 113 GO, Series A, FSA Insured, 6.00%,
2/01/23 .................................................................................. 1,160,000 1,209,056
2/01/25 .................................................................................. 1,300,000 1,354,977
Washington County Housing and RDAR, Government Housing, Landfall Terrace Project,
Refunding,
5.35%, 2/01/22 ........................................................................... 1,000,000 999,760
5.40%, 8/01/27 ........................................................................... 2,015,000 2,014,859
Watertown ISD No. 111 GO, Series A, FSA Insured, 5.00%, 2/01/24 ................................ 2,725,000 2,857,190
West St. Paul ISD No. 197 GO, School Building, Series B, 5.00%,
2/01/21 .................................................................................. 3,340,000 3,539,298
2/01/22 .................................................................................. 3,500,000 3,679,935
Western Minnesota Municipal Power Agency Revenue,
MBIA Insured, 5.00%, 1/01/26 ............................................................. 8,565,000 8,588,040
Refunding, Series A, AMBAC Insured, 5.50%, 1/01/12 ....................................... 2,745,000 2,745,110
Refunding, Series A, AMBAC Insured, 5.50%, 1/01/13 ....................................... 4,500,000 4,495,320
Series A, FSA Insured, 5.00%, 1/01/36 .................................................... 6,000,000 5,903,760
Series A, MBIA Insured, 5.00%, 1/01/30 ................................................... 7,200,000 7,017,624
Willmar GO, Rice Memorial Hospital Project, FSA Insured, 5.00%,
2/01/22 .................................................................................. 2,550,000 2,623,644
2/01/25 .................................................................................. 3,000,000 3,048,780
2/01/32 .................................................................................. 5,415,000 5,418,574
------------
718,884,668
------------
U.S. TERRITORIES 3.3%
PUERTO RICO 3.0%
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.00%, 7/01/23 ................................................ 1,545,000 1,681,053
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ............................................... 580,000 632,733
Refunding, FSA Insured, 5.00%, 7/01/23 ................................................... 955,000 943,397
Refunding, FSA Insured, 5.125%, 7/01/30 .................................................. 420,000 402,877
Puerto Rico Electric Power Authority Power Revenue, Refunding,
Series SS, MBIA Insured, 5.00%, 7/01/25 .................................................. 5,000,000 4,464,250
Series V, FGIC Insured, 5.25%, 7/01/30 ................................................... 5,000,000 4,388,900
Puerto Rico Municipal Finance Agency GO, Series A, FSA Insured, 5.75%, 8/01/12 ................. 5,000,000 5,114,900
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/30 ............ 1,000,000 949,550
Annual Report | 101
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MINNESOTA TAX-FREE INCOME FUND AMOUNT VALUE
--------------------------------------- ----------- ------------
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 $ 2,177,575
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ..................... 940,000 933,307
Puerto Rico Public Finance Corp. Commonwealth Revenue, Series E, AMBAC Insured, ETM,
5.50%, 8/01/27 .............................................................................. 1,000,000 1,092,600
------------
22,781,142
------------
VIRGIN ISLANDS 0.3%
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, FSA Insured, 5.25%,
10/01/20 ................................................................................. 1,160,000 1,167,180
10/01/21 ................................................................................. 1,000,000 1,005,710
------------
2,172,890
------------
TOTAL U.S. TERRITORIES ......................................................................... 24,954,032
------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $731,776,345) ........................ 743,838,700
------------
SHORT TERM INVESTMENTS (COST $1,400,000) 0.2%
MUNICIPAL BONDS 0.2%
MINNESOTA 0.2%
(a) Minneapolis Health Care System Revenue, Fairview Health Services, Series E, Weekly VRDN
and Put, 0.37%, 11/15/47 .................................................................... 1,400,000 1,400,000
------------
TOTAL INVESTMENTS (COST $733,176,345) 98.6% .................................................... 745,238,700
OTHER ASSETS, LESS LIABILITIES 1.4% ............................................................ 10,785,386
------------
NET ASSETS 100.0% .............................................................................. $756,024,086
============
See Abbreviations on page 141.
(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.
The accompanying notes are an integral part of these financial statements.
102 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN OHIO TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- ---------- ---------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.91 $ 12.64 $ 12.60 $ 12.64 $ 12.81
---------- ---------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.51 0.51 0.52 0.53 0.54
Net realized and unrealized gains (losses) .... 0.17 (0.73) 0.04 (0.04) (0.16)
---------- ---------- -------- -------- --------
Total from investment operations ................. 0.68 (0.22) 0.56 0.49 0.38
---------- ---------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.51) (0.51) (0.52) (0.53) (0.54)
Net realized gains ............................ -- --(d) --(d) -- (0.01)
---------- ---------- -------- -------- --------
Total distributions .............................. (0.51) (0.51) (0.52) (0.53) (0.55)
---------- ---------- -------- -------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
---------- ---------- -------- -------- --------
Net asset value, end of year ..................... $ 12.08 $ 11.91 $ 12.64 $ 12.60 $ 12.64
========== ========== ======== ======== ========
Total return(f) .................................. 5.83% (1.82)% 4.61% 3.98% 3.15%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.64% 0.65% 0.65% 0.65% 0.65%
Net investment income ............................ 4.26% 4.11% 4.17% 4.20% 4.36%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $1,144,463 $1,010,704 $980,493 $901,614 $849,970
Portfolio turnover rate .......................... 11.12% 16.47% 10.55% 16.44% 19.87%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 103
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OHIO TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-------------------------------------------------
CLASS B 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.96 $ 12.69 $ 12.64 $ 12.68 $ 12.85
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ...................... 0.45 0.44 0.45 0.46 0.48
Net realized and unrealized gains (losses) .... 0.16 (0.73) 0.06 (0.04) (0.17)
------- ------- ------- ------- -------
Total from investment operations ................. 0.61 (0.29) 0.51 0.42 0.31
------- ------- ------- ------- -------
Less distributions from:
Net investment income ......................... (0.44) (0.44) (0.46) (0.46) (0.47)
Net realized gains ............................ -- --(d) --(d) -- (0.01)
------- ------- ------- ------- -------
Total distributions .............................. (0.44) (0.44) (0.46) (0.46) (0.48)
------- ------- ------- ------- -------
Redemption fees(d, e) ............................ -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 12.13 $ 11.96 $ 12.69 $ 12.64 $ 12.68
======= ======= ======= ======= =======
Total return(f) .................................. 5.22% (2.35)% 4.11% 3.41% 2.56%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.19% 1.20% 1.20% 1.20% 1.20%
Net investment income ............................ 3.71% 3.56% 3.62% 3.65% 3.81%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $36,629 $42,638 $51,897 $56,478 $60,264
Portfolio turnover rate .......................... 11.12% 16.47% 10.55% 16.44% 19.87%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
104 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OHIO TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- --------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.02 $ 12.75 $ 12.70 $ 12.74 $ 12.90
-------- -------- --------- -------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.45 0.45 0.46 0.46 0.48
Net realized and unrealized gains (losses) .... 0.16 (0.74) 0.04 (0.04) (0.16)
-------- -------- --------- -------- --------
Total from investment operations ................. 0.61 (0.29) 0.50 0.42 0.32
-------- -------- --------- -------- --------
Less distributions from:
Net investment income ......................... (0.44) (0.44) (0.45) (0.46) (0.47)
Net realized gains ............................ -- --(d) --(d) -- (0.01)
-------- -------- --------- -------- --------
Total distributions .............................. (0.44) (0.44) (0.45) (0.46) (0.48)
-------- -------- --------- -------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- -------- --------- -------- --------
Net asset value, end of year ..................... $ 12.19 $ 12.02 $ 12.75 $ 12.70 $ 12.74
======== ======== ========= ======== ========
Total return(f) .................................. 5.19% (2.34)% 4.08% 3.38% 2.64%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.19% 1.20% 1.20% 1.20% 1.20%
Net investment income ............................ 3.71% 3.56% 3.62% 3.65% 3.81%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $201,779 $158,124 $143,804 $130,540 $108,617
Portfolio turnover rate .......................... 11.12% 16.47% 10.55% 16.44% 19.87%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 105
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OHIO TAX-FREE INCOME FUND
PERIOD ENDED
FEBRUARY 28,
ADVISOR CLASS 2009(a)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................ $12.27
------
Income from investment operations(b):
Net investment income(c) ..................................... 0.35
Net realized and unrealized gains (losses) ................... (0.19)
------
Total from investment operations ................................ 0.16
------
Less distributions from net investment income ................... (0.35)
------
Net asset value, end of period .................................. $12.08
------
Total return(d) ................................................. 1.37%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses ........................................................ 0.54%
Net investment income ........................................... 4.36%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................... $ 352
Portfolio turnover rate ......................................... 11.12%
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return is not annualized for periods less than one year.
(e) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
106 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS 98.0%
OHIO 95.9%
Akron Bath Copley Joint Township Hospital District Revenue, Hospital Improvement Children's
Hospital Center, FSA Insured, 5.00%, 11/15/22 ............................................... $ 5,000,000 $ 5,006,300
Akron GO, Improvement, FGIC Insured, 5.00%,
12/01/20 ................................................................................. 2,150,000 2,240,945
12/01/21 ................................................................................. 2,255,000 2,336,586
12/01/22 ................................................................................. 1,185,000 1,217,090
Akron Income Tax Revenue, Community Learning Centers, Series A, FGIC Insured, 5.00%,
12/01/22 ................................................................................. 2,460,000 2,457,392
12/01/24 ................................................................................. 3,200,000 3,189,408
12/01/33 ................................................................................. 8,005,000 7,707,454
American Municipal Power-Ohio Inc. Revenue, Prairie State Energy Campus Project,
Refunding, Series A,
Assured Guaranty, 5.25%, 2/15/33 ......................................................... 30,000,000 28,737,900
BHAC Insured, 5.00%, 2/15/38 ............................................................. 22,000,000 21,440,980
Anthony Wayne Local School District GO,
Refunding, FSA Insured, 5.00%, 12/01/24 .................................................. 3,200,000 3,265,344
School Facilities Construction and Improvement, FSA Insured, Pre-Refunded, 5.65%,
12/01/21 .............................................................................. 1,845,000 2,013,559
School Facilities Construction and Improvement, FSA Insured, Pre-Refunded, 5.70%,
12/01/25 .............................................................................. 2,335,000 2,550,357
School Facilities Construction and Improvement, Refunding, FSA Insured, 5.65%,
12/01/21 .............................................................................. 645,000 673,038
Athens City School District GO, School Facilities Construction and Improvement, FSA Insured,
Pre-Refunded, 6.00%, 12/01/24 ............................................................... 2,345,000 2,573,403
Aurora City School District COP, MBIA Insured, Pre-Refunded,
6.10%, 12/01/19 .......................................................................... 1,825,000 1,918,440
6.15%, 12/01/24 .......................................................................... 1,670,000 1,756,122
Austintown Local School District GO, School Improvement, FSA Insured, 5.125%,
12/01/30 .................................................................................... 7,715,000 7,866,060
Avon Lake City School District GO, FGIC Insured, Pre-Refunded, 5.50%, 12/01/26 ................. 4,000,000 4,226,920
Avon Lake Water System Revenue, Series A, AMBAC Insured, Pre-Refunded, 5.75%,
10/01/26 .................................................................................... 2,020,000 2,173,843
Avon Local School District GO, School Improvement, MBIA Insured, Pre-Refunded, 5.25%,
12/01/23 ................................................................................. 1,000,000 1,151,180
12/01/29 ................................................................................. 2,295,000 2,641,958
Bluffton Exempted Village School District GO, Library Construction Improvement,
AMBAC Insured, 5.50%, 12/01/28 .............................................................. 1,190,000 1,394,347
Bowling Green MFHR, Village Apartments, Refunding, Series A, GNMA Secured, 5.40%,
9/20/36 .................................................................................. 2,940,000 2,882,111
Brookfield Local School District GO, School Facilities Improvement, FSA Insured, 5.25%,
1/15/36 .................................................................................. 1,300,000 1,329,497
Brookville Local School District GO, FSA Insured, Pre-Refunded,
5.25%, 12/01/22 .......................................................................... 1,075,000 1,237,519
5.00%, 12/01/31 .......................................................................... 3,000,000 3,419,700
Buckeye Local School District GO, Construction and Improvement Bonds, FGIC Insured,
Pre-Refunded, 5.50%, 12/01/25 ............................................................... 750,000 809,205
Annual Report | 107
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Butler County GO,
Judgement Bonds, FSA Insured, Pre-Refunded, 4.75%, 12/01/26 .............................. $ 4,000,000 $ 4,510,600
Limited Tax, Various Purpose, Refunding, FGIC Insured, 5.00%, 12/01/26 ................... 2,130,000 2,179,246
Butler County Transportation ID Revenue, Highway, XLCA Insured, 5.00%, 12/01/31 ................ 40,000 40,053
Canal Winchester Local School District GO, Capital Appreciation, MBIA Insured, zero cpn.,
12/01/32 ................................................................................. 1,455,000 341,270
12/01/33 ................................................................................. 2,000,000 438,640
Central Local School District GO, Classroom Facilities, FSA Insured, 5.75%, 12/01/22 1,555,000 1,621,974
Chillicothe City School District GO, Capital Appreciation, Refunding, FGIC Insured, zero cpn.,
12/01/22 ................................................................................. 1,905,000 908,723
12/01/23 ................................................................................. 1,905,000 844,086
12/01/24 ................................................................................. 1,905,000 779,450
Cincinnati City School District COP, School Improvement Project, Refunding, FSA Insured,
5.00%,
12/15/26 ................................................................................. 7,310,000 7,328,129
12/15/27 ................................................................................. 7,000,000 6,957,300
Cincinnati City School District GO,
Classroom Facilities Construction and Improvement, FSA Insured, Pre-Refunded, 5.00%,
12/01/27 ................................................................................. 2,500,000 2,837,600
School Improvement, FSA Insured, 5.00%, 12/01/22 ............................................ 9,510,000 9,890,495
Cincinnati Technical College Revenue, AMBAC Insured,
5.25%, 10/01/23 .......................................................................... 2,510,000 2,504,829
5.00%, 10/01/28 .......................................................................... 2,715,000 2,440,378
Circleville GO, Capital Facilities Improvement, AMBAC Insured, 5.625%, 12/01/20 ................ 2,035,000 2,143,872
Cleveland Airport System Revenue, Series C, FSA Insured, 5.00%, 1/01/26 ........................ 9,500,000 9,615,900
Cleveland Municipal School District GO, FSA Insured, 5.00%, 12/01/27 ........................... 4,000,000 4,045,640
Cleveland Public Power System Revenue,
Capital Appreciation, Series B, MBIA Insured, zero cpn., 11/15/38 ........................ 10,000,000 1,617,200
Series B, MBIA Insured, 5.00%, 11/15/28 .................................................. 2,000,000 1,866,700
Series B, MBIA Insured, 5.00%, 11/15/38 .................................................. 10,000,000 8,781,600
Cleveland State University General Receipt Revenue, FGIC Insured, 5.25%, 6/01/24 ............... 1,000,000 1,025,220
Cleveland Waterworks Revenue, Series K, FGIC Insured, Pre-Refunded, 5.00%,
1/01/22 .................................................................................. 2,075,000 2,272,685
1/01/23 .................................................................................. 4,285,000 4,693,232
1/01/25 .................................................................................. 8,150,000 8,926,450
Cleveland-Cuyahoga County Port Authority Revenue, Student Housing, Euclid Avenue Housing
Corp., Fenn Project, AMBAC Insured, 5.00%,
8/01/25 .................................................................................. 2,440,000 2,449,174
8/01/28 .................................................................................. 2,145,000 2,095,429
Clyde-Green Springs Exempted Village School District GO, School Facilities Construction,
Refunding and Improvement, MBIA Insured, 5.125%, 12/01/32 ................................... 1,000,000 999,240
Columbus City School District GO, Linden Elementary Construction, FSA Insured,
Pre-Refunded, 5.00%, 12/01/28 ............................................................... 900,000 989,388
Columbus Tax Increment Financing Revenue, Easton Project, AMBAC Insured, Pre-Refunded,
5.30%, 12/01/19 ............................................................................. 1,500,000 1,530,570
Crawford County GO, AMBAC Insured, Pre-Refunded, 5.25%, 12/01/31 ............................... 1,330,000 1,523,887
108 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Cuyahoga Community College District General Receipts Revenue, Series A, AMBAC Insured,
5.00%,
12/01/22 ................................................................................. $ 1,000,000 $ 1,010,850
12/01/32 ................................................................................. 3,000,000 2,728,440
Cuyahoga County Hospital Revenue, University Hospitals Health System Inc., AMBAC Insured,
Pre-Refunded,
5.40%, 1/15/19 ........................................................................... 1,500,000 1,540,410
5.50%, 1/15/30 ........................................................................... 1,760,000 1,808,048
Cuyahoga County MFHR, Rockefeller Park Project, Series A, GNMA Secured, Pre-Refunded,
5.75%, 1/20/29 .............................................................................. 1,000,000 1,077,030
Cuyahoga County Utility System Revenue,
Improvement, Medical Center Co. Project, AMBAC Insured, 5.125%, 2/15/28 .................. 1,000,000 879,020
Medical Center Co. Project, Series B, MBIA Insured, 6.10%, 8/15/15 ....................... 2,945,000 2,935,429
Darke County GO, Real Estate Acquisition and Improvement, FGIC Insured, 5.125%,
12/01/27 .................................................................................... 1,020,000 1,043,419
Dayton City School District GO, School Facilities Construction and Improvement, Series A,
FGIC Insured,
4.75%, 12/01/25 .......................................................................... 9,400,000 9,207,958
5.00%, 12/01/29 .......................................................................... 8,275,000 8,190,098
Deerfield Township Tax Increment Revenue, Refunding, Series B, MBIA Insured, 5.00%,
12/01/25 .................................................................................... 1,000,000 1,008,060
Dublin City School District GO, Capital Appreciation Bonds, FGIC Insured, zero cpn.,
12/01/16 .................................................................................... 4,635,000 3,341,928
Eastlake GO, Capital Facilities, MBIA Insured, 5.00%, 12/01/27 ................................. 1,950,000 1,957,098
Eaton City School District GO, FGIC Insured, Pre-Refunded, 5.00%, 12/01/25 ..................... 1,250,000 1,420,888
Edgewood City School District GO, School Improvement, Refunding, FSA Insured, 5.00%,
12/01/24 .................................................................................... 2,220,000 2,290,285
Fairborn City School District GO, School Improvement, Refunding, FSA Insured, 5.00%,
12/01/23 ................................................................................. 1,205,000 1,249,344
12/01/24 ................................................................................. 1,265,000 1,303,633
12/01/25 ................................................................................. 1,330,000 1,361,534
Fairfield County GO, FGIC Insured, 5.00%, 12/01/20 ............................................. 1,600,000 1,673,840
Fairless Local School District GO, Capital Appreciation, Various Purpose School Facilities,
FSA Insured, 5.00%, 12/01/28 ................................................................ 2,085,000 2,105,558
Field Local School District GO, School Facilities Construction and Improvement,
AMBAC Insured, 5.00%, 12/01/27 .............................................................. 1,290,000 1,186,516
Finneytown Local School District GO, FGIC Insured, 5.80%, 12/01/24 ............................. 1,980,000 2,001,166
Franklin County Convention Facilities Authority Revenue, Tax and Lease Revenue Anticipation
Bonds, Refunding, AMBAC Insured, 5.00%, 12/01/24 ............................................ 7,255,000 7,480,485
Franklin County Hospital Revenue,
OhioHealth Corp., Refunding, Series C, MBIA Insured, 5.00%, 5/15/33 ...................... 5,250,000 4,995,007
The Children's Hospital Project, AMBAC Insured, Pre-Refunded, 5.50%, 5/01/21 ............. 3,365,000 3,697,496
The Children's Hospital Project, AMBAC Insured, Pre-Refunded, 5.50%, 5/01/28 ............. 4,265,000 4,686,425
The Children's Hospital Project, Series C, FGIC Insured, 5.00%, 5/01/35 .................. 10,000,000 9,204,000
Franklin GO, MBIA Insured, 5.25%, 12/01/27 ..................................................... 1,500,000 1,525,320
Garfield Heights GO, Various Purpose, Refunding and Improvement, FGIC Insured, 5.00%,
12/01/27 .................................................................................... 2,655,000 2,681,178
Annual Report | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Georgetown Exempted Village School District GO, Classroom Facilities, FSA Insured, 5.125%,
12/01/31 .................................................................................... $ 1,000,000 $ 1,019,580
Graham Local School District GO, School Improvement, Refunding, MBIA Insured, 5.00%,
12/01/33 .................................................................................... 6,055,000 5,797,662
Grand Valley Local School District GO, Classroom Facilities Improvement, FGIC Insured,
5.00%, 12/01/24 ............................................................................. 1,300,000 1,302,093
Greater Cleveland Regional Transit Authority GO, Capital Improvement, Series A,
MBIA Insured, Pre-Refunded, 5.125%, 12/01/21 ................................................ 1,750,000 1,929,672
Green Community Learning Centers Income Tax Revenue, MBIA Insured, 5.00%,
12/01/27 ................................................................................. 1,205,000 1,222,099
12/01/28 ................................................................................. 1,265,000 1,276,512
12/01/32 ................................................................................. 2,675,000 2,641,830
Greene County GO, AMBAC Insured, Pre-Refunded, 5.00%,
12/01/22 ................................................................................. 1,475,000 1,659,832
12/01/28 ................................................................................. 2,620,000 2,948,312
Greene County Sewer System Revenue, Governmental Enterprise, AMBAC Insured,
Pre-Refunded, 5.625%, 12/01/25 .............................................................. 1,890,000 2,061,858
Greene County Water System Revenue, Governmental Enterprise, MBIA Insured, Pre-Refunded,
5.25%, 12/01/21 ............................................................................. 5,400,000 6,024,672
Guernsey County GO, Refunding, FGIC Insured, 5.00%, 12/01/23 ................................... 2,690,000 2,729,462
Hamilton County Convention Facilities Authority Revenue,
FGIC Insured, 5.00%, 12/01/28 ............................................................ 5,400,000 5,306,472
second lien, FGIC Insured, Pre-Refunded, 5.00%, 12/01/33 ................................. 7,235,000 8,228,655
Hamilton County Hospital Facilities Revenue, Cincinnati Children's Hospital, Series J,
FGIC Insured, 5.25%, 5/15/34 ................................................................ 5,000,000 4,476,550
Hamilton County Sales Tax Revenue,
Refunding, Series A, Assured Guaranty, 5.00%, 12/01/32 ................................... 10,000,000 9,544,700
Refunding, Series B, AMBAC Insured, 5.25%, 12/01/32 ...................................... 3,965,000 3,753,745
Refunding, Series B, AMBAC Insured, 5.60%, 12/01/32 ...................................... 245,000 243,069
Refunding, Sub Series A, FSA Insured, 5.00%, 12/01/32 .................................... 35,080,000 33,482,808
Series B, AMBAC Insured, Pre-Refunded, 5.25%, 12/01/32 ................................... 15,755,000 16,888,100
Series B, AMBAC Insured, Pre-Refunded, 5.60%, 12/01/32 ................................... 955,000 1,029,433
Hamilton County Sewer System Revenue,
Improvement, Series A, MBIA Insured, Pre-Refunded, 5.25%, 12/01/21 ....................... 1,000,000 1,106,030
Metropolitan Sewer District Improvement, Series B, MBIA Insured, 5.00%, 12/01/30 ......... 4,000,000 4,024,720
Hamilton GO, One Renaissance Center, Series A, AMBAC Insured, 5.25%,
11/01/18 ................................................................................. 1,010,000 1,064,187
11/01/19 ................................................................................. 1,015,000 1,064,431
11/01/20 ................................................................................. 1,120,000 1,169,616
11/01/21 ................................................................................. 1,180,000 1,227,707
Heath City School District GO, School Improvement, Series A, FGIC Insured, Pre-Refunded,
5.60%, 12/01/21 .......................................................................... 1,000,000 1,079,750
5.50%, 12/01/27 .......................................................................... 1,170,000 1,261,295
Highland Local School District GO, School Improvement, FSA Insured, Pre-Refunded, 5.00%,
12/01/23 ................................................................................. 3,680,000 4,045,498
12/01/26 ................................................................................. 3,675,000 4,040,001
110 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Hilliard School District GO,
Capital Appreciation, School Construction, Refunding, MBIA Insured, zero cpn.,
12/01/19 ................................................................................. $ 2,190,000 $ 1,392,512
Capital Appreciation, School Construction, Refunding, MBIA Insured, zero cpn.,
12/01/20 ................................................................................. 4,525,000 2,683,461
School Improvement, FGIC Insured, Pre-Refunded, 5.75%, 12/01/28 ............................. 4,000,000 4,372,360
School Improvement, Series A, FGIC Insured, 5.25%, 12/01/28 ................................. 3,010,000 3,063,909
Huber Heights Water System Revenue, Refunding and Improvement, MBIA Insured, 5.00%,
12/01/27 .................................................................................... 3,205,000 3,243,139
12/01/30 .................................................................................... 2,250,000 2,208,870
Hudson City School District COP, MBIA Insured, 5.00%, 6/01/34 .................................. 6,720,000 6,413,702
Independence Local School District GO, FGIC Insured, 5.25%, 12/01/21 ........................... 1,390,000 1,463,184
Ironton City School District GO, Refunding, MBIA Insured, 5.00%, 12/01/34 ...................... 5,130,000 5,006,264
Jackson Center Local School District Shelby County GO, Facilities Construction and
Improvement, MBIA Insured, 5.00%, 12/01/28 .................................................. 1,175,000 1,185,281
Jackson City School District GO, School Improvement, MBIA Insured, Pre-Refunded, 5.25%,
12/01/27 .................................................................................... 3,000,000 3,264,390
Jackson Local School District GO, Stark and Summit Counties Local School District,
FSA Insured, Pre-Refunded,
5.50%, 12/01/20 .......................................................................... 4,000,000 4,315,760
5.625%, 12/01/25 ......................................................................... 3,500,000 3,783,815
Jonathan Alder Local School District GO, School Facilities Construction and Improvement,
MBIA Insured, Pre-Refunded,
4.75%, 12/01/22 .......................................................................... 1,105,000 1,235,600
5.00%, 12/01/27 .......................................................................... 6,195,000 6,983,376
5.00%, 12/01/30 .......................................................................... 3,320,000 3,742,503
Kenston Local School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/24 ................................................................................. 2,380,000 2,434,550
12/01/25 ................................................................................. 2,500,000 2,546,650
Kettering City School District GO, School Improvement, FSA Insured, Pre-Refunded, 5.00%,
12/01/28 ................................................................................. 2,970,000 3,377,900
12/01/31 ................................................................................. 2,595,000 2,951,397
Keystone Local School District Lorain County GO, School Improvement, FSA Insured, 5.00%,
12/01/30 .................................................................................... 6,170,000 6,200,603
Kings Local School District GO, School Improvement, MBIA Insured, 5.00%, 12/01/33 .............. 10,000,000 9,614,900
Lake Local School District Wood County GO, MBIA Insured, Pre-Refunded,
5.30%, 12/01/21 .......................................................................... 1,575,000 1,761,590
5.375%, 12/01/25 ......................................................................... 1,900,000 2,128,912
Lakewood City School District GO,
FGIC Insured, 5.00%, 12/01/30 ............................................................ 9,170,000 9,121,216
FGIC Insured, 4.50%, 12/01/34 ............................................................ 6,000,000 5,304,420
School Improvement, FSA Insured, Pre-Refunded, 5.125%, 12/01/31 .......................... 21,900,000 25,260,117
School Improvement, Refunding, FSA Insured, 4.50%, 12/01/31 .............................. 2,220,000 2,057,163
Lakota Local School District GO,
FSA Insured, 5.00%, 12/01/29 ............................................................. 5,000,000 5,059,500
Refunding, Series A, FGIC Insured, 5.25%, 12/01/26 ....................................... 2,000,000 2,179,260
Lancaster Wastewater System Improvement Revenue, Assured Guaranty, 4.75%, 12/01/33 ............. 4,000,000 3,693,200
Annual Report | 111
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Lebanon City School District GO, FSA Insured, Pre-Refunded, 5.00%, 12/01/29 .................... $ 6,250,000 $ 6,870,750
Licking County Joint Vocational School District GO, School Facilities Construction and
Improvement, MBIA Insured,
5.00%, 12/01/21 .......................................................................... 2,200,000 2,283,358
4.75%, 12/01/23 .......................................................................... 2,230,000 2,257,273
Licking Heights Local School District GO, School Facilities Construction and Improvement,
Refunding, Series A, MBIA Insured, 5.00%, 12/01/24 ....................................... 2,085,000 2,122,864
Refunding, Series A, MBIA Insured, 5.00%, 12/01/25 ....................................... 2,215,000 2,240,871
Refunding, Series A, MBIA Insured, 5.00%, 12/01/26 ....................................... 2,345,000 2,361,063
Series A, FGIC Insured, Pre-Refunded, 5.625%, 12/01/28 ................................... 4,000,000 4,324,360
Little Miami Local School District GO,
Refunding, FSA Insured, 4.50%, 12/01/34 .................................................. 20,255,000 17,848,909
School Improvement, FSA Insured, Pre-Refunded, 5.00%, 12/01/34 ........................... 4,000,000 4,663,000
Logan Hocking Local School District GO, Construction and Improvement, MBIA Insured,
Pre-Refunded, 5.00%,
12/01/22 ................................................................................. 1,200,000 1,320,888
12/01/29 ................................................................................. 1,000,000 1,100,740
London City School District GO, School Facilities Construction and Improvement,
FGIC Insured, Pre-Refunded, 5.00%,
12/01/22 ................................................................................. 700,000 767,536
12/01/29 ................................................................................. 1,500,000 1,644,720
Lorain County GO, Sewer System Improvement, MBIA Insured, 5.00%, 12/01/19 ...................... 1,640,000 1,714,210
Lorain County Health Facilities Revenue, Catholic Healthcare Partners, Series A,
AMBAC Insured, 5.50%, 9/01/29 ............................................................... 6,250,000 6,085,250
Lorain County Hospital Revenue, Catholic Healthcare Partners, Refunding,
Series B, MBIA Insured, 5.50%, 9/01/27 ................................................... 5,000,000 4,798,350
Series C-1, FSA Insured, 5.00%, 4/01/33 .................................................. 19,410,000 18,220,943
Lorain GO, Urban Renewal, MBIA Insured, Pre-Refunded, 5.70%, 12/01/28 .......................... 1,050,000 1,135,554
Louisville City School District GO, FGIC Insured, 5.00%, 12/01/24 .............................. 3,500,000 3,504,165
Loveland City School District GO, Series A, MBIA Insured, Pre-Refunded, 5.00%,
12/01/24 4,000,000 4,172,280
Lucas County GO, 8.00%,
12/01/09 ................................................................................. 120,000 126,179
12/01/10 ................................................................................. 220,000 244,242
Lucas County Hospital Revenue, ProMedica Healthcare Obligated Group,
MBIA Insured, ETM, 5.75%, 11/15/14 ....................................................... 4,460,000 4,459,242
Refunding, AMBAC Insured, 5.375%, 11/15/29 ............................................... 750,000 589,688
Refunding, MBIA Insured, 5.75%, 11/15/14 ................................................. 300,000 299,949
Mad River Local School District GO, Classroom Facilities, FGIC Insured, Pre-Refunded,
5.125%, 12/01/24 ............................................................................ 4,180,000 4,650,125
Madison Local School District Butler County GO,
MBIA Insured, Pre-Refunded, 5.75%, 12/01/26 .............................................. 1,000,000 1,047,460
School Improvement, FGIC Insured, Pre-Refunded, 5.60%, 12/01/26 .......................... 1,120,000 1,212,176
Mahoning County Hospital Facilities Revenue, Western Reserve Care, MBIA Insured, ETM,
5.50%, 10/15/25 ............................................................................. 4,750,000 5,282,712
Mahoning County Sewer System Revenue, AMBAC Insured, 5.375%, 12/01/18 .......................... 1,905,000 1,983,334
112 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Marion County City School District GO, School Facilities Construction and Improvement
Project, FSA Insured, Pre-Refunded,
5.55%, 12/01/20 .......................................................................... $ 1,000,000 $ 1,089,640
5.625%, 12/01/22 ......................................................................... 1,100,000 1,200,023
Marion County GO, AMBAC Insured, Pre-Refunded, 5.05%, 12/01/31 ................................. 1,500,000 1,663,320
Martins Ferry City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/32 ................................................................ 3,610,000 3,621,227
Marysville Exempted Village School District COP, School Facilities Project, MBIA Insured,
Pre-Refunded, 5.25%,
12/01/28 ................................................................................. 2,120,000 2,469,546
12/01/30 ................................................................................. 2,650,000 3,086,932
Marysville Exempted Village School District GO,
Capital Appreciation, Refunding, MBIA Insured, zero cpn., 12/01/20 ....................... 1,000,000 574,270
Capital Appreciation, Refunding, MBIA Insured, zero cpn., 12/01/21 ....................... 1,000,000 534,320
FSA Insured, Pre-Refunded, 5.30%, 12/01/21 ............................................... 2,000,000 2,170,660
FSA Insured, Pre-Refunded, 5.35%, 12/01/25 ............................................... 2,010,000 2,183,242
FSA Insured, Pre-Refunded, 5.375%, 12/01/29 .............................................. 2,465,000 2,678,518
Refunding, MBIA Insured, 5.00%, 12/01/29 ................................................. 1,000,000 991,000
School Improvement, AMBAC Insured, Pre-Refunded, 6.00%, 12/01/29 ......................... 2,890,000 3,168,827
School Improvement, Refunding, FSA Insured, 5.00%, 12/01/29 .............................. 5,500,000 5,508,910
Marysville Wastewater Treatment System Revenue,
Assured Guaranty, 4.25%, 12/01/27 ........................................................ 1,170,000 1,053,176
Assured Guaranty, 4.75%, 12/01/47 ........................................................ 4,000,000 3,418,000
first mortgage, MBIA Insured, Pre-Refunded, 5.00%, 12/01/35 .............................. 4,780,000 5,549,150
Refunding, Assured Guaranty, 4.75%, 12/01/46 ............................................. 14,205,000 12,237,039
Marysville Water System Mortgage Revenue, AMBAC Insured,
5.00%, 12/01/32 .......................................................................... 1,250,000 1,193,088
4.50%, 12/01/38 .......................................................................... 2,500,000 2,129,100
Mason City School District GO, School Improvement, FSA Insured, Pre-Refunded, 5.00%,
12/01/31 .................................................................................... 5,000,000 5,686,700
Maumee City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/27 ................................................................ 3,610,000 3,664,475
Medina GO, 5.00%, 12/01/22 ..................................................................... 1,100,000 1,162,480
Medina School District COP, School Facilities Project, Assured Guaranty, 5.25%,
12/01/31 .................................................................................... 5,725,000 5,829,424
Miami University General Receipts Revenue, Refunding, AMBAC Insured, 5.00%,
12/01/22 .................................................................................... 1,675,000 1,721,079
Middletown City School District GO, FGIC Insured, Pre-Refunded, 5.00%, 12/01/31 ................ 14,975,000 16,745,195
Milford Exempted Village School District GO, School Improvement, FSA Insured, Pre-Refunded,
5.00%, 12/01/22 .......................................................................... 2,000,000 2,198,640
5.125%, 12/01/30 ......................................................................... 7,325,000 8,077,058
Minerva Local School District GO, Classroom Facilities, MBIA Insured, Pre-Refunded, 5.30%,
12/01/29 .................................................................................... 1,300,000 1,474,486
Minster School District School Facilities and Construction GO, FSA Insured, Pre-Refunded,
5.70%, 12/01/23 .......................................................................... 3,190,000 3,484,214
5.75%, 12/01/27 .......................................................................... 3,260,000 3,563,473
Annual Report | 113
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Monroe Local School District GO,
AMBAC Insured, Pre-Refunded, 5.00%, 12/01/23 ............................................. $ 1,000,000 $ 1,125,310
School Improvement, Refunding, AMBAC Insured, 4.50%, 12/01/29 ............................ 5,115,000 4,621,812
Montgomery County Revenue, Catholic Health, Series C-1, FSA Insured, 5.00%, 10/01/41 ........... 10,000,000 8,500,500
Morley Library District GO, Lake County District Library, Library Improvement, AMBAC Insured,
4.75%, 12/01/21 ............................................................................. 1,000,000 1,019,150
Mount Healthy City School District GO, School Improvement, FSA Insured, 5.00%,
12/01/31 ................................................................................. 1,880,000 1,859,715
12/01/35 ................................................................................. 2,500,000 2,435,050
New Albany Community Authority Community Facilities Revenue, Refunding, Series B,
AMBAC Insured,
5.125%, 10/01/21 ......................................................................... 3,000,000 3,004,530
5.20%, 10/01/24 .......................................................................... 5,000,000 4,813,850
New Lexington HDC Mortgage Revenue, Lincoln Park, Refunding, Series A, MBIA Insured,
5.85%, 1/01/21 .............................................................................. 745,000 725,123
Newark City School District GO, School Improvement, Series A, FGIC Insured, 5.00%,
12/01/33 .................................................................................... 5,000,000 4,673,600
Nordonia Hills Local School District GO, School Improvement, AMBAC Insured, Pre-Refunded,
5.45%, 12/01/25 ............................................................................. 3,035,000 3,301,837
Ohio Capital Corp. HMR, Refunding, Series G, MBIA Insured, 6.35%, 7/01/22 ...................... 485,000 485,849
Ohio Center Local Government Capital Asset Financing Program Fractionalized Interests GO,
FSA Insured,
4.875%, 12/01/18 ......................................................................... 1,255,000 1,342,185
5.25%, 12/01/23 .......................................................................... 1,410,000 1,482,869
Ohio HFA, MFHR, Wind River Apartment Project, Series A, GNMA Secured, 5.65%,
5/01/32 ..................................................................................... 2,035,000 2,014,101
Ohio HFA Capital Fund Revenue, Series A, FSA Insured, 5.00%, 4/01/27 ........................... 5,545,000 5,681,740
Ohio State Air Quality Development Authority Revenue,
JMG Funding LP Project, AMBAC Insured, 5.625%, 10/01/22 .................................. 6,875,000 6,285,262
Ohio Power Co., Refunding, Series C, AMBAC Insured, 5.15%, 5/01/26 ....................... 9,075,000 8,592,482
Pollution Control, Dayton Power and Light Company, Refunding, Series B, BHAC Insured,
4.80%, 1/01/34 ........................................................................ 28,270,000 27,586,997
Ohio State Building Authority Revenue, State Facilities,
Administration Building Fund Project, Refunding, Series A, FSA Insured, 5.00%,
4/01/22 ............................................................................... 3,100,000 3,192,380
Adult Correction, Series A, FSA Insured, 5.00%, 4/01/24 .................................. 5,390,000 5,543,238
Ohio State Department of Transportation COP, Panhandle Rail Line Project, FSA Insured,
6.50%, 4/15/12 .............................................................................. 600,000 600,672
Ohio State GO, Common Schools, Series B, 4.625%, 9/15/22 ....................................... 5,000,000 5,072,600
Ohio State Higher Educational Facility Commission Revenue,
FGIC Insured, Pre-Refunded, 5.00%, 5/01/23 ............................................... 8,460,000 9,360,652
Higher Educational Facility, Oberlin College, AMBAC Insured, Pre-Refunded, 5.00%,
10/01/26 .............................................................................. 8,000,000 8,287,600
Higher Educational Facility, Xavier University Project, CIFG Insured, Pre-Refunded,
5.00%, 5/01/23 ........................................................................ 3,385,000 3,813,439
Higher Educational Facility, Xavier University Project, CIFG Insured, Pre-Refunded,
5.00%, 5/01/24 ........................................................................ 2,000,000 2,253,140
114 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Ohio State Higher Educational Facility Commission Revenue, (continued)
University Hospital, BHAC Insured, 4.75%, 1/15/36 ........................................ $10,000,000 $ 8,890,600
University Hospital, BHAC Insured, 4.75%, 1/15/46 ........................................ 15,000,000 12,743,400
University Hospital, BHAC Insured, 5.25%, 1/15/46 ........................................ 13,500,000 12,989,025
University of Dayton Project, XLCA Insured, 5.00%, 12/01/34 .............................. 8,500,000 7,226,615
Ohio State Higher Educational Facility Revenue,
Case Western Reserve University Project, Refunding, MBIA Insured, 5.00%, 12/01/44 ........ 10,000,000 9,459,300
Case Western Reserve University Project, Series A, AMBAC Insured, 5.00%, 12/01/34 ........ 4,935,000 4,781,818
Otterbein College Project, CIFG Insured, 5.00%, 12/01/25 ................................. 2,205,000 2,070,782
Otterbein College Project, CIFG Insured, 5.00%, 12/01/35 ................................. 3,225,000 2,780,917
Ohio State Turnpike Commission Turnpike Revenue, AMBAC Insured, 5.25%, 2/15/31 ................. 16,425,000 16,545,231
Ohio State University General Receipts Athens Revenue,
FSA Insured, Pre-Refunded, 5.00%, 12/01/24 ............................................... 3,025,000 3,125,158
MBIA Insured, 5.00%, 12/01/24 ............................................................ 2,155,000 2,155,819
Ohio State University General Receipts Revenue,
Series A, 5.125%, 12/01/31 ............................................................... 2,500,000 2,516,275
State University Ohio, Series B, MBIA Insured, 5.00%, 6/01/33 ............................ 5,255,000 5,225,362
Ohio State Water Development Authority Revenue,
Drinking Water Fund, Leverage, Pre-Refunded, 5.00%, 6/01/23 .............................. 2,255,000 2,541,971
Pure Water, Series I, AMBAC Insured, ETM, 7.00%, 12/01/09 ................................ 440,000 445,980
Olentangy Local School District GO,
BIG Insured, 7.75%, 12/01/09 ............................................................. 375,000 394,286
BIG Insured, 7.75%, 12/01/10 ............................................................. 375,000 415,958
FSA Insured, 5.00%, 12/01/25 ............................................................. 45,000 45,900
FSA Insured, Pre-Refunded, 5.00%, 12/01/25 ............................................... 1,790,000 1,991,071
FSA Insured, Pre-Refunded, 5.00%, 12/01/30 ............................................... 3,910,000 4,349,210
FSA Insured, Pre-Refunded, 5.00%, 12/01/30 ............................................... 1,745,000 2,029,749
Refunding, FSA Insured, 5.00%, 12/01/30 .................................................. 90,000 90,662
Refunding, Series A, FSA Insured, 4.50%, 12/01/32 ........................................ 11,300,000 10,293,509
School Facilities Construction and Improvement, FSA Insured, Pre-Refunded, 5.625%,
12/01/27 .............................................................................. 4,500,000 4,869,000
School Facilities Construction and Improvement, Refunding, Assured Guaranty, 5.00%,
12/01/36 .............................................................................. 7,505,000 7,382,668
School Facilities Construction and Improvement, Series A, FGIC Insured, Pre-Refunded,
5.25%, 12/01/32 ....................................................................... 11,200,000 12,876,080
Ottawa and Glandorf Local School District GO, School Facilities Construction and Improvement,
MBIA Insured, Pre-Refunded, 5.25%, 12/01/23 ................................................. 2,175,000 2,467,255
Perrysburg Exempted Village School District GO,
Refunding, Series B, FSA Insured, 5.00%, 12/01/25 ........................................ 2,235,000 2,331,261
Series B, FSA Insured, Pre-Refunded, 5.00%, 12/01/25 ..................................... 2,765,000 2,884,089
Pickerington Local School District GO,
AMBAC Insured, Pre-Refunded, 5.00%, 12/01/25 ............................................. 7,000,000 7,301,490
School Facilities Construction and Improvement, FGIC Insured, Pre-Refunded, 5.00%,
12/01/28 .............................................................................. 3,000,000 3,297,960
Plain Local School District GO, FGIC Insured,
6.00%, 12/01/25 .......................................................................... 800,000 831,656
Pre-Refunded, 6.00%, 12/01/25 ............................................................ 3,700,000 4,087,242
Annual Report | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Plainesville City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/28 ........ $ 2,515,000 $ 2,499,206
Princeton City School District GO, MBIA Insured, Pre-Refunded, 5.00%,
12/01/25 ................................................................................. 1,700,000 1,941,978
12/01/26 ................................................................................. 2,725,000 3,112,876
12/01/30 ................................................................................. 2,260,000 2,581,688
Ravenna City School District GO, School Improvement, FSA Insured, 5.00%, 1/15/31 ............... 1,710,000 1,713,027
Reynoldsburg City School District GO, School Facilities Construction, FSA Insured, 5.00%,
12/01/32 .................................................................................... 3,000,000 2,983,260
Ridgewood Local School District GO, School Facilities Improvement, FSA Insured,
Pre-Refunded, 6.00%, 12/01/24 ............................................................... 1,730,000 1,898,502
Rittman Exempted Village School District GO, School Improvement, FSA Insured,
Pre-Refunded, 5.125%, 12/01/31 .............................................................. 1,000,000 1,114,590
Riverside Local School District GO, School Facilities Construction and Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 12/01/22 ................................................. 1,000,000 1,093,090
Ross County Hospital Revenue, Facilities, Adena Health System, Refunding, Assured Guaranty,
5.25%, 12/01/38 ............................................................................. 15,000,000 14,516,550
Rural Lorain County Water Authority Water Resource Revenue, AMBAC Insured, Pre-Refunded,
5.875%, 10/01/24 ............................................................................ 3,100,000 3,225,147
Shaker Heights GO, Urban Renewal, Refunding, AMBAC Insured,
5.00%, 12/01/21 .......................................................................... 1,225,000 1,282,747
5.25%, 12/01/26 .......................................................................... 725,000 746,685
Shawnee State University Revenue, MBIA Insured, 5.00%, 6/01/28 ................................. 5,780,000 4,812,428
Sidney City School District GO, School Improvement,
FGIC Insured, Pre-Refunded, 5.125%, 12/01/28 ............................................. 1,425,000 1,610,022
Series B, FGIC Insured, Pre-Refunded, 5.25%, 12/01/23 .................................... 1,780,000 1,988,474
Series B, FGIC Insured, Pre-Refunded, 5.25%, 12/01/28 .................................... 1,000,000 1,117,120
Springboro Sewer System Revenue, Mortgage, MBIA Insured, 5.00%, 6/01/27 ........................ 1,095,000 1,088,441
St. Henry Local Consolidated School District GO, MBIA Insured, Pre-Refunded, 5.75%,
12/01/22 .................................................................................... 1,515,000 1,657,425
St. Mary's City School District GO, School Facilities Construction and Improvement,
FSA Insured, 5.00%, 12/01/35 ................................................................ 3,500,000 3,409,070
Steubenville City School District GO, School Facilities and Implementation, MBIA Insured,
5.60%, 12/01/22 ............................................................................. 1,500,000 1,568,625
Streetsboro City School District GO, School Improvement, MBIA Insured, Pre-Refunded,
5.00%, 12/01/25 ............................................................................. 2,500,000 2,744,750
Strongsville City School District COP, CIFG Insured, 5.00%, 12/01/34 ........................... 2,355,000 2,356,060
Struthers City School District GO, Refunding, AMBAC Insured, 5.50%, 12/01/22 ................... 1,950,000 2,035,956
Summit County GO, Sanitary Sewer System Improvement, FGIC Insured, Pre-Refunded,
5.25%, 12/01/21 ............................................................................. 4,505,000 5,026,138
Swanton Local School District GO, School Improvement, FGIC Insured, Pre-Refunded, 5.25%,
12/01/25 .................................................................................... 1,895,000 2,108,756
Sycamore Community City School District COP, Blue Ash Elementary School Project,
AMBAC Insured, 5.125%, 12/01/25 ............................................................. 1,000,000 1,022,870
Sylvania City School District GO,
Refunding, FGIC Insured, 5.00%, 12/01/22 ................................................. 1,550,000 1,594,594
Various Purpose, FGIC Insured, Pre-Refunded, 5.30%, 12/01/20 ............................. 2,225,000 2,485,369
116 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Toledo City School District GO, School Facilities Improvement,
FSA Insured, 5.00%, 12/01/23 ............................................................. $ 1,500,000 $ 1,536,105
Series B, FGIC Insured, 5.00%, 12/01/27 .................................................. 1,925,000 1,904,075
Toledo Sewer System Revenue, AMBAC Insured, 5.00%,
11/15/22 ................................................................................. 1,000,000 1,028,570
11/15/23 ................................................................................. 1,000,000 1,020,890
Toledo Special Obligation, Industrial Development, Vehicle Storage Project, AMBAC Insured,
5.25%, 12/01/26 ............................................................................. 1,500,000 1,538,220
Toledo Waterworks Revenue, MBIA Insured, 5.00%, 11/15/30 ....................................... 6,425,000 6,266,688
Trenton Water System Revenue, Improvement, FSA Insured, 5.125%, 12/01/34 ....................... 2,750,000 2,791,415
Tri-Valley Local School District GO, FGIC Insured, Pre-Refunded, 5.25%, 12/01/29 ............... 8,530,000 9,512,400
Trotwood-Madison City School District GO, School Improvement, FGIC Insured, Pre-Refunded,
5.375%, 12/01/22 ............................................................................ 1,685,000 1,919,030
Trumbull County GO, Refunding, MBIA Insured, 5.20%, 12/01/20 ................................... 1,475,000 1,553,219
Twinsburg GO,
Golf Course, Refunding, FGIC Insured, 5.00%, 12/01/21 .................................... 1,000,000 1,021,750
Park Land and Conservation, FGIC Insured, 5.00%, 12/01/21 ................................ 1,000,000 1,021,750
Union County GO, MBIA Insured, Pre-Refunded, 5.00%, 12/01/33 ................................... 2,895,000 3,307,074
University of Akron General Receipts Revenue,
FGIC Insured, 4.75%, 1/01/25 ............................................................. 1,080,000 1,027,577
FGIC Insured, 5.00%, 1/01/28 ............................................................. 1,475,000 1,415,794
FGIC Insured, 5.00%, 1/01/35 ............................................................. 5,250,000 4,725,840
FGIC Insured, Pre-Refunded, 5.70%, 1/01/24 ............................................... 7,050,000 7,414,344
FGIC Insured, Pre-Refunded, 5.75%, 1/01/29 ............................................... 1,500,000 1,578,135
Series A, FSA Insured, 5.00%, 1/01/33 .................................................... 6,030,000 5,817,985
Series B, FSA Insured, 5.00%, 1/01/38 .................................................... 21,760,000 21,239,066
University of Cincinnati COP, Jefferson Avenue Residence Hall, MBIA Insured, 5.125%,
6/01/28 ..................................................................................... 7,400,000 7,055,530
University of Cincinnati General Receipts Revenue,
AMBAC Insured, 5.00%, 6/01/31 ............................................................ 1,350,000 1,309,352
Refunding, Series G, MBIA Insured, 5.00%, 6/01/28 ........................................ 8,575,000 8,459,666
Series A, AMBAC Insured, 5.00%, 6/01/23 .................................................. 1,845,000 1,861,789
Series A, AMBAC Insured, 5.00%, 6/01/24 .................................................. 1,940,000 1,957,654
Series A, AMBAC Insured, 5.00%, 6/01/25 .................................................. 2,005,000 2,013,100
Series C, FSA Insured, 5.00%, 6/01/31 .................................................... 10,000,000 9,698,900
Series G, MBIA Insured, 5.00%, 6/01/29 ................................................... 3,410,000 3,329,149
University of Toledo General Receipts Bonds Revenue, Series A, AMBAC Insured, 4.50%,
6/01/30 ..................................................................................... 10,000,000 8,933,300
Upper Scioto Valley Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.25%, 12/01/25 ............................................................... 1,160,000 1,190,114
Van Wert City School District GO, School Improvement, FGIC Insured, Pre-Refunded, 5.00%,
12/01/27 ................................................................................. 4,805,000 5,388,471
12/01/30 ................................................................................. 2,500,000 2,803,575
Wadsworth City School District GO, FGIC Insured, Pre-Refunded, 5.75%, 12/01/22 ................. 1,200,000 1,284,012
Warren City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/28 .............. 3,000,000 3,020,370
Warrensville Heights City School District GO, School Improvement, FGIC Insured, Pre-Refunded,
5.625%, 12/01/20 ......................................................................... 3,500,000 3,789,555
5.75%, 12/01/24 .......................................................................... 2,750,000 2,983,392
Annual Report | 117
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN OHIO TAX-FREE INCOME FUND AMOUNT VALUE
---------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Waterville GO, Refunding, MBIA Insured, 5.05%, 12/01/26 ........................................ $ 1,085,000 $ 1,110,139
West Chester Township GO, AMBAC Insured, 5.00%, 12/01/25 ....................................... 1,500,000 1,520,580
West Muskingum Local School District School Facilities GO, FGIC Insured, 5.00%,
12/01/24 .................................................................................... 2,750,000 2,778,682
Westerville City School District GO, Refunding, XLCA Insured, 5.00%, 12/01/27 .................. 3,820,000 3,889,753
Westfall Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, Pre-Refunded, 6.00%, 12/01/22 ................................................. 2,850,000 3,011,823
Wheelersburg Local School District GO, School Improvement, FSA Insured, 5.00%,
12/01/32 .................................................................................... 1,400,000 1,404,354
Zanesville City School District GO, School Improvement, MBIA Insured,
4.75%, 12/01/22 .......................................................................... 5,500,000 5,604,775
4.75%, 12/01/26 .......................................................................... 3,250,000 3,222,830
5.05%, 12/01/29 .......................................................................... 3,500,000 3,513,580
--------------
1,326,388,137
--------------
U.S. TERRITORIES 2.1%
PUERTO RICO 2.1%
Puerto Rico Commonwealth GO, Public Improvement, Series A, FGIC Insured, Pre-Refunded,
5.00%, 7/01/32 .............................................................................. 10,000,000 11,168,800
Puerto Rico Electric Power Authority Power Revenue, Refunding, Series V, FGIC Insured,
5.25%, 7/01/30 .............................................................................. 5,000,000 4,388,900
Puerto Rico Municipal Finance Agency GO, Series A, FSA Insured, 5.75%, 8/01/12 ................. 3,500,000 3,580,430
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 ..................... 11,000,000 9,923,760
--------------
29,061,890
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS
(COST $1,342,712,468) ....................................................................... 1,355,450,027
--------------
SHORT TERM INVESTMENTS 0.9%
MUNICIPAL BONDS 0.9%
OHIO 0.9%
(a) Allen County Hospital Facilities Revenue, Catholic Healthcare, Series A, Daily VRDN and Put,
0.55%, 10/01/31 ............................................................................. 5,100,000 5,100,000
(a) Cuyahoga County Revenue, Cleveland Clinic Health System Obligated Group, Series B,
Sub Series B-1, Daily VRDN and Put, 0.50%, 1/01/39 .......................................... 2,400,000 2,400,000
(a) Ohio State Higher Educational Facility Revenue, Case Western Reserve University, Series A,
Daily VRDN and Put, 0.35%, 10/01/31 ......................................................... 5,100,000 5,100,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $12,600,000) ................................................ 12,600,000
--------------
TOTAL INVESTMENTS (COST $1,355,312,468) 98.9% .................................................. 1,368,050,027
OTHER ASSETS, LESS LIABILITIES 1.1% ............................................................ 15,173,657
--------------
NET ASSETS 100.0% .............................................................................. $1,383,223,684
==============
See Abbreviations on page 141.
(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.
The accompanying notes are an integral part of these financial statements.
118 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2009
FRANKLIN FRANKLIN
FRANKLIN MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- --------------
Assets:
Investments in securities:
Cost ........................................................... $2,138,018,540 $532,112,692 $1,524,697,178
============== ============ ==============
Value .......................................................... $2,036,915,984 $513,452,934 $1,500,810,367
Cash .............................................................. 52,883 92,852 4,875,923
Receivables:
Investment securities sold ..................................... -- 4,198,243 --
Capital shares sold ............................................ 6,228,832 645,527 1,327,067
Interest ....................................................... 27,275,952 6,221,355 21,646,749
Other assets ...................................................... 4,437 1,109 3,344
-------------- ------------ --------------
Total assets ................................................ 2,070,478,088 524,612,020 1,528,663,450
-------------- ------------ --------------
Liabilities:
Payables:
Investment securities purchased ................................ -- 9,145,668 --
Capital shares redeemed ........................................ 5,069,679 911,695 2,572,910
Affiliates ..................................................... 1,103,745 293,411 841,527
Distributions to shareholders .................................. 2,063,165 486,300 1,439,926
Accrued expenses and other liabilities ............................ 334,877 68,211 164,551
-------------- ------------ --------------
Total liabilities ........................................... 8,571,466 10,905,285 5,018,914
-------------- ------------ --------------
Net assets, at value ..................................... $2,061,906,622 $513,706,735 $1,523,644,536
============== ============ ==============
Net assets consist of:
Paid-in capital ................................................... $2,167,653,510 $533,537,138 $1,548,795,150
Undistributed net investment income (distributions in excess of
net investment income) ......................................... 164,711 93,230 (312,504)
Net unrealized appreciation (depreciation) ........................ (101,102,556) (18,659,758) (23,886,811)
Accumulated net realized gain (loss) .............................. (4,809,043) (1,263,875) (951,299)
-------------- ------------ --------------
Net assets, at value ..................................... $2,061,906,622 $513,706,735 $1,523,644,536
============== ============ ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 119
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
FRANKLIN FRANKLIN
FRANKLIN MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- --------------
CLASS A:
Net assets, at value .............................................. $1,807,929,028 $445,679,997 $1,318,955,497
-------------- ------------ --------------
Shares outstanding ................................................ 161,411,158 40,747,494 114,893,331
-------------- ------------ --------------
Net asset value per share(a) ...................................... $ 11.20 $ 10.94 $ 11.48
-------------- ------------ --------------
Maximum offering price per share (net asset value
per share / 95.75%) ............................................ $ 11.70 $ 11.43 $ 11.99
-------------- ------------ --------------
CLASS B:
Net assets, at value .............................................. $ 56,474,672 $ 30,624,788
-------------- ------------ --------------
Shares outstanding ................................................ 5,016,901 2,654,054
-------------- ------------ --------------
Net asset value and maximum offering price per share(a) ........... $ 11.26 $ 11.54
-------------- ------------ --------------
CLASS C:
Net assets, at value .............................................. $ 196,085,487 $ 68,026,738 $ 173,295,342
-------------- ------------ --------------
Shares outstanding ................................................ 17,330,111 6,167,689 14,930,613
-------------- ------------ --------------
Net asset value and maximum offering price per share(a) ........... $ 11.31 $ 11.03 $ 11.61
-------------- ------------ --------------
ADVISOR CLASS:
Net assets, at value .............................................. $ 1,417,435 $ 768,909
-------------- ------------ --------------
Shares outstanding ................................................ 126,599 66,901
-------------- ------------ --------------
Net asset value and maximum offering price per share .............. $ 11.20 $ 11.49
-------------- ------------ --------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
120 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------ --------------
Assets:
Investments in securities:
Cost ........................................................ $733,176,345 $1,355,312,468
============ ==============
Value ....................................................... $745,238,700 $1,368,050,027
Cash ........................................................... 3,246,995 19,242
Receivables:
Investment securities sold .................................. 1,027,718 --
Capital shares sold ......................................... 1,819,451 3,089,844
Interest .................................................... 6,580,216 16,302,686
Other assets ................................................... 1,566 2,994
------------ --------------
Total assets ............................................. 757,914,646 1,387,464,793
------------ --------------
Liabilities:
Payables:
Capital shares redeemed ..................................... 723,840 2,046,647
Affiliates .................................................. 419,969 784,183
Distributions to shareholders ............................... 661,815 1,245,390
Accrued expenses and other liabilities ......................... 84,936 164,889
------------ --------------
Total liabilities ........................................ 1,890,560 4,241,109
------------ --------------
Net assets, at value .................................. $756,024,086 $1,383,223,684
============ ==============
Net assets consist of:
Paid-in capital ................................................ $749,483,359 $1,381,859,916
Undistributed net investment income (distributions in excess
of net investment income) ................................... (476,567) 112,707
Net unrealized appreciation (depreciation) ..................... 12,062,355 12,737,559
Accumulated net realized gain (loss) ........................... (5,045,061) (11,486,498)
------------ --------------
Net assets, at value .................................. $756,024,086 $1,383,223,684
============ ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 121
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------ --------------
CLASS A:
Net assets, at value .................................................... $653,811,846 $1,144,463,418
------------ --------------
Shares outstanding ...................................................... 55,422,885 94,729,704
------------ --------------
Net asset value per share(a) ............................................ $ 11.80 $ 12.08
------------ --------------
Maximum offering price per share (net asset value per share / 95.75%) ... $ 12.32 $ 12.62
------------ --------------
CLASS B:
Net assets, at value .................................................... $ 36,628,871
--------------
Shares outstanding ...................................................... 3,019,881
--------------
Net asset value and maximum offering price per share(a) ................. $ 12.13
--------------
CLASS C:
Net assets, at value .................................................... $102,212,240 $ 201,779,356
------------ --------------
Shares outstanding ...................................................... 8,596,852 16,546,684
------------ --------------
Net asset value and maximum offering price per share(a) ................. $ 11.89 $ 12.19
------------ --------------
ADVISOR CLASS:
Net assets, at value .................................................... $ 352,039
--------------
Shares outstanding ...................................................... 29,154
--------------
Net asset value and maximum offering price per share .................... $ 12.08
--------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
122 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2009
FRANKLIN FRANKLIN
FRANKLIN MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- -------------
Investment income:
Interest .................................... $112,619,517 $ 26,790,618 $ 77,834,804
------------ ------------ ------------
Expenses:
Management fees (Note 3a) ................... 9,937,201 2,636,165 7,210,338
Distribution fees: (Note 3c)
Class A .................................. 1,910,836 456,535 1,344,435
Class B .................................. 419,183 -- 234,608
Class C .................................. 1,141,517 434,385 1,066,007
Transfer agent fees (Note 3e) ............... 1,034,644 199,629 662,699
Custodian fees .............................. 31,989 7,943 23,148
Reports to shareholders ..................... 134,838 30,951 90,907
Registration and filing fees ................ 176,597 25,740 63,914
Professional fees ........................... 96,282 32,930 58,111
Trustees' fees and expenses ................. 18,828 4,481 13,024
Other ....................................... 153,537 39,843 86,911
------------ ------------ ------------
Total expenses ........................ 15,055,452 3,868,602 10,854,102
------------ ------------ ------------
Net investment income .............. 97,564,065 22,922,016 66,980,702
------------ ------------ ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ... (4,393,757) (1,245,152) (816,329)
Net change in unrealized appreciation
(depreciation) on investments ............ (60,332,613) (14,037,757) (37,100,944)
------------ ------------ ------------
Net realized and unrealized gain (loss) ........ (64,726,370) (15,282,909) (37,917,273)
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 32,837,695 $ 7,639,107 $ 29,063,429
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 123
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2009
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------- ------------
Investment income:
Interest .................................... $32,813,799 $ 65,520,115
----------- ------------
Expenses:
Management fees (Note 3a) ................... 3,332,564 6,291,067
Distribution fees: (Note 3c)
Class A .................................. 593,263 1,108,263
Class B .................................. -- 258,858
Class C .................................. 559,052 1,217,917
Transfer agent fees (Note 3e) ............... 283,271 574,287
Custodian fees .............................. 10,079 20,009
Reports to shareholders ..................... 41,214 84,480
Registration and filing fees ................ 25,397 54,028
Professional fees ........................... 35,268 55,725
Trustees' fees and expenses ................. 5,609 10,891
Other ....................................... 58,837 112,581
----------- ------------
Total expenses ........................ 4,944,554 9,788,106
----------- ------------
Net investment income .............. 27,869,245 55,732,009
----------- ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ... (2,737,401) (10,025,945)
Net change in unrealized appreciation
(depreciation) on investments ............ 19,252,804 22,764,647
----------- ------------
Net realized and unrealized gain (loss) ........ 16,515,403 12,738,702
----------- ------------
Net increase (decrease) in net assets resulting
from operations ............................. $44,384,648 $ 68,470,711
=========== ============
The accompanying notes are an integral part of these financial statements.
124 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN INSURED FRANKLIN MASSACHUSETTS
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------- ---------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
-------------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
--------------- -------------- ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................... $ 97,564,065 $ 91,016,962 $ 22,922,016 $ 21,651,999
Net realized gain (loss) from investments ..... (4,393,757) (448,120) (1,245,152) 218,139
Net change in unrealized appreciation
(depreciation) on investments .............. (60,332,613) (151,034,247) (14,037,757) (34,578,857)
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ............ 32,837,695 (60,465,405) 7,639,107 (12,708,719)
-------------- -------------- ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A .................................... (86,060,828) (83,230,413) (20,022,854) (19,594,778)
Class B .................................... (2,521,430) (2,926,855) -- --
Class C .................................... (6,824,256) (5,414,621) (2,517,773) (2,160,545)
Advisor Class .............................. (39,345) -- -- --
Net realized gains:
Class A .................................... -- (254,713) -- (55,882)
Class B .................................... -- (10,516) -- --
Class C .................................... -- (18,578) -- (7,157)
-------------- -------------- ------------ ------------
Total distributions to shareholders .............. (95,445,859) (91,855,696) (22,540,627) (21,818,362)
-------------- -------------- ------------ ------------
Capital share transactions: (Note 2)
Class A .................................... (45,201,620) 224,663,802 7,636,448 14,147,192
Class B .................................... (11,489,518) (8,907,609) -- --
Class C .................................... 53,067,028 16,644,514 8,857,913 5,946,264
Advisor Class .............................. 1,490,283 -- -- --
-------------- -------------- ------------ ------------
Total capital share transactions ................. (2,133,827) 232,400,707 16,494,361 20,093,456
-------------- -------------- ------------ ------------
Redemption fees .................................. 81 5,969 334 924
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets ... (64,741,910) 80,085,575 1,593,175 (14,432,701)
Net assets:
Beginning of year ................................ 2,126,648,532 2,046,562,957 512,113,560 526,546,261
-------------- -------------- ------------ ------------
End of year ...................................... $2,061,906,622 $2,126,648,532 $513,706,735 $512,113,560
============== ============== ============ ============
Undistributed net investment income (distributions in
excess of net investment income):
End of year ...................................... $ 164,711 $ (1,942,163) $ 93,230 $ (285,574)
============== ============== ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
Annual Report | 125
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN MICHIGAN FRANKLIN MINNESOTA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------- ---------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
------------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
-------------- -------------- ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................... $ 66,980,702 $ 60,969,190 $ 27,869,245 $ 25,007,932
Net realized gain (loss) from investments ..... (816,329) 1,102,166 (2,737,401) 419,172
Net change in unrealized appreciation
(depreciation) on investments .............. (37,100,944) (64,527,342) 19,252,804 (34,331,260)
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ............ 29,063,429 (2,455,986) 44,384,648 (8,904,156)
-------------- -------------- ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A .................................... (58,712,814) (55,027,672) (24,869,215) (22,626,575)
Class B .................................... (1,373,574) (1,599,733) -- --
Class C .................................... (6,169,869) (4,666,968) (3,099,312) (2,389,710)
Advisor Class .............................. (17,725) -- -- --
Net realized gains:
Class A .................................... -- (1,154,802) -- --
Class B .................................... -- (36,411) -- --
Class C .................................... -- (111,395) -- --
-------------- -------------- ------------ ------------
Total distributions to shareholders .............. (66,273,982) (62,596,981) (27,968,527) (25,016,285)
-------------- -------------- ------------ ------------
Capital share transactions: (Note 2)
Class A .................................... 56,375,532 90,726,897 93,405,889 36,474,466
Class B .................................... (8,124,493) (4,371,379) -- --
Class C .................................... 47,214,803 10,337,823 29,905,202 9,222,990
Advisor Class .............................. 792,485 -- -- --
-------------- -------------- ------------ ------------
Total capital share transactions ................. 96,258,327 96,693,341 123,311,091 45,697,456
-------------- -------------- ------------ ------------
Redemption fees .................................. 37 1,724 1,981 1,733
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets ... 59,047,811 31,642,098 139,729,193 11,778,748
Net assets:
Beginning of year ................................ 1,464,596,725 1,432,954,627 616,294,893 604,516,145
-------------- -------------- ------------ ------------
End of year ...................................... $1,523,644,536 $1,464,596,725 $756,024,086 $616,294,893
============== ============== ============ ============
Distributions in excess of net investment income
included in net assets:
End of year ...................................... $ (312,504) $ (1,004,310) $ (476,567) $ (368,274)
============== ============== ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
126 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN OHIO
TAX-FREE INCOME FUND
-------------------------------
YEAR ENDED FEBRUARY 28,
-------------------------------
2009 2008(a)
-------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................... $ 55,732,009 $ 48,447,612
Net realized gain (loss) from investments ..... (10,025,945) (1,486,121)
Net change in unrealized appreciation
(depreciation) on investments .............. 22,764,647 (71,748,664)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations ............ 68,470,711 (24,787,173)
-------------- --------------
Distributions to shareholders from:
Net investment income:
Class A .................................... (47,067,244) (41,008,313)
Class B .................................... (1,469,022) (1,697,322)
Class C .................................... (6,852,940) (5,268,781)
Advisor Class .............................. (7,023) --
Net realized gains:
Class A .................................... -- (343,160)
Class B .................................... -- (17,065)
Class C .................................... -- (50,745)
-------------- --------------
Total distributions to shareholders .............. (55,396,229) (48,385,386)
-------------- --------------
Capital share transactions: (Note 2)
Class A .................................... 122,742,776 91,296,759
Class B .................................... (6,589,061) (6,540,259)
Class C .................................... 42,179,875 23,683,316
Advisor Class .............................. 349,077 --
-------------- --------------
Total capital share transactions ................. 158,682,667 108,439,816
-------------- --------------
Redemption fees .................................. 1,147 3,732
-------------- --------------
Net increase (decrease) in net assets ... 171,758,296 35,270,989
Net assets:
Beginning of year ................................ 1,211,465,388 1,176,194,399
-------------- --------------
End of year ...................................... $1,383,223,684 $1,211,465,388
============== ==============
Undistributed net investment income (distributions in
excess of net investment income):
End of year ...................................... $ 112,707 $ (212,652)
============== ==============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
Annual Report | 127
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Free Trust (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
twenty-four separate funds, five of which are included in this report (Funds).
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. Effective July 1, 2008, the Franklin Insured Tax-Free Income Fund,
Franklin Michigan Tax-Free Income Fund and Franklin Ohio Tax-Free Income Fund
began offering a new class of shares, Advisor Class. Each class of shares
differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
CLASS A & CLASS C CLASS A, CLASS B, CLASS C & ADVISOR CLASS
- ----------------- -----------------------------------------
Franklin Massachusetts Tax-Free Income Fund Franklin Insured Tax-Free Income Fund
Franklin Minnesota Tax-Free Income Fund Franklin Michigan Tax-Free Income Fund
Franklin Ohio Tax-Free Income Fund
Effective February 17, 2009, the following name changes occurred:
FORMER NAME NEW NAME
- ----------- -------------------------------------------
Franklin Massachusetts Insured Tax-Free Income Fund Franklin Massachusetts Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund Franklin Michigan Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund Franklin Minnesota Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund Franklin Ohio 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
128 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
B. SECURITIES PURCHASED ON A WHEN-ISSUED AND DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued and 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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of February 28, 2009, and have
determined that no provision for income tax is required in the Funds' financial
statements.
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 of America. 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.
Annual Report | 129
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Realized and unrealized gains and losses and net investment income, not
including 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. Insurance
companies typically insure municipal bonds that tend to be of very high quality,
with the majority of underlying municipal bonds rated A or better. However,
there is a risk that in the event of an issuer default, the insurer may not be
able to fulfill its obligations under the terms of the policy.
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 was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Funds and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
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, on behalf of the Funds, 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.
130 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2009, there were an unlimited number of shares authorized
(without par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN MASSACHUSETTS
INSURED TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ......................... 36,202,614 $ 412,603,041 7,219,049 $ 81,575,484
Shares issued on merger (Note 7) .... 11,431,481 138,549,550 -- --
Shares issued in reinvestment of
distributions .................... 4,714,948 54,017,557 1,000,143 11,166,730
Shares redeemed ..................... (57,261,732) (650,371,768) (7,730,726) (85,105,766)
----------- ------------- ---------- ------------
Net increase (decrease) ............. (4,912,689) $ (45,201,620) 488,466 $ 7,636,448
=========== ============= ========== ============
Year ended February 29, 2008
Shares sold ......................... 41,123,249 $ 499,160,173 5,711,345 $ 67,182,705
Shares issued in reinvestment of
distributions .................... 4,387,210 53,175,294 931,758 10,944,800
Shares redeemed ..................... (27,046,194) (327,671,665) (5,451,860) (63,980,313)
----------- ------------- ---------- ------------
Net increase (decrease) ............. 18,464,265 $ 224,663,802 1,191,243 $ 14,147,192
=========== ============= ========== ============
CLASS B SHARES:
Year ended February 28, 2009
Shares sold ......................... 261,627 $ 2,969,937
Shares issued in reinvestment of
distributions .................... 137,752 1,585,936
Shares redeemed ..................... (1,408,274) (16,045,391)
----------- -------------
Net increase (decrease) ............. (1,008,895) $ (11,489,518)
=========== =============
Year ended February 29, 2008
Shares sold ......................... 108,603 $ 1,325,617
Shares issued in reinvestment of
distributions .................... 149,296 1,818,711
Shares redeemed ..................... (992,006) (12,051,937)
----------- -------------
Net increase (decrease) ............. (734,107) $ (8,907,609)
=========== =============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ......................... 8,171,227 $ 94,165,836 1,797,453 $ 20,433,521
Shares issued in reinvestment of
distributions .................... 379,771 4,373,837 154,469 1,736,426
Shares redeemed ..................... (3,998,878) (45,472,645) (1,201,028) (13,312,034)
----------- ------------- ---------- ------------
Net increase (decrease) ............. 4,552,120 $ 53,067,028 750,894 $ 8,857,913
=========== ============= ========== ============
Year ended February 29, 2008
Shares sold ......................... 3,544,247 $ 43,372,926 1,257,097 $ 14,883,947
Shares issued in reinvestment of
distributions .................... 288,479 3,529,575 123,189 1,458,293
Shares redeemed ..................... (2,474,610) (30,257,987) (879,082) (10,395,976)
----------- ------------- ---------- ------------
Net increase (decrease) ............. 1,358,116 $ 16,644,514 501,204 $ 5,946,264
=========== ============= ========== ============
Annual Report | 131
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN
INSURED TAX-FREE
INCOME FUND
--------------------
SHARES AMOUNT
------- ----------
ADVISOR CLASS SHARES:
Period ended February 28, 2009(a)
Shares sold ......................... 124,946 $1,471,522
Shares issued in reinvestment of
distributions .................... 2,076 23,126
Shares redeemed ..................... (423) (4,365)
------- ----------
Net increase (decrease) ............. 126,599 $1,490,283
======= ==========
FRANKLIN MICHIGAN FRANKLIN MINNESOTA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ......................... 18,559,197 $ 218,215,013 13,826,368 $160,107,842
Shares issued in reinvestment of
distributions .................... 3,146,032 36,592,804 1,368,844 15,911,356
Shares redeemed ..................... (17,312,598) (198,432,285) (7,203,039) (82,613,309)
----------- ------------- ---------- ------------
Net increase (decrease) ............. 4,392,631 $ 56,375,532 7,992,173 $ 93,405,889
=========== ============= ========== ============
Year ended February 29, 2008
Shares sold ......................... 16,960,358 $ 205,298,531 8,038,778 $ 96,295,366
Shares issued in reinvestment of
distributions .................... 2,859,318 34,592,056 1,219,023 14,595,327
Shares redeemed ..................... (12,332,626) (149,163,690) (6,220,117) (74,416,227)
----------- ------------- ---------- ------------
Net increase (decrease) ............. 7,487,050 $ 90,726,897 3,037,684 $ 36,474,466
=========== ============= ========== ============
CLASS B SHARES:
Year ended February 28, 2009
Shares sold ......................... 21,401 $ 255,650
Shares issued in reinvestment of
distributions .................... 82,415 965,252
Shares redeemed ..................... (803,088) (9,345,395)
----------- -------------
Net increase (decrease) ............. (699,272) $ (8,124,493)
=========== =============
Year ended February 29, 2008
Shares sold ......................... 21,785 $ 264,343
Shares issued in reinvestment of
distributions .................... 95,046 1,155,502
Shares redeemed ..................... (476,525) (5,791,224)
----------- -------------
Net increase (decrease) ............. (359,694) $ (4,371,379)
=========== =============
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
132 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN MICHIGAN FRANKLIN MINNESOTA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ......................... 6,578,089 $ 78,665,502 3,511,015 $ 41,174,133
Shares issued in reinvestment of
distributions .................... 372,014 4,367,130 171,220 2,003,340
Shares redeemed ..................... (3,096,660) (35,817,829) (1,149,121) (13,272,271)
---------- ------------ ---------- ------------
Net increase (decrease) ............. 3,853,443 $ 47,214,803 2,533,114 $ 29,905,202
========== ============ ========== ============
Year ended February 29, 2008
Shares sold ......................... 2,534,340 $ 31,020,796 1,349,179 $ 16,272,187
Shares issued in reinvestment of
distributions .................... 276,888 3,385,163 117,894 1,421,575
Shares redeemed ..................... (1,970,436) (24,068,136) (702,199) (8,470,772)
---------- ------------ ---------- ------------
Net increase (decrease) ............. 840,792 $ 10,337,823 764,874 $ 9,222,990
========== ============ ========== ============
ADVISOR CLASS SHARES:
Period ended February 28, 2009(a)
Shares sold ......................... 69,375 $ 820,540
Shares issued in reinvestment of
distributions .................... 122 1,390
Shares redeemed ..................... (2,596) (29,445)
---------- ------------
Net increase (decrease) ............. 66,901 $ 792,485
========== ============
FRANKLIN OHIO
TAX-FREE
INCOME FUND
---------------------------
SHARES AMOUNT
----------- -------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ......................... 21,090,258 $ 255,535,352
Shares issued in reinvestment of
distributions .................... 2,565,398 30,822,919
Shares redeemed ..................... (13,777,887) (163,615,495)
----------- -------------
Net increase (decrease) ............. 9,877,769 $ 122,742,776
=========== =============
Year ended February 29, 2008
Shares sold ......................... 15,743,152 $ 196,372,470
Shares issued in reinvestment of
distributions .................... 2,090,527 26,027,391
Shares redeemed ..................... (10,525,907) (131,103,102)
----------- -------------
Net increase (decrease) ............. 7,307,772 $ 91,296,759
=========== =============
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
Annual Report | 133
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN OHIO
TAX-FREE
INCOME FUND
-------------------------
SHARES AMOUNT
---------- ------------
CLASS B SHARES:
Year ended February 28, 2009
Shares sold ......................... 43,489 $ 524,360
Shares issued in reinvestment of
distributions .................... 84,398 1,019,519
Shares redeemed ..................... (673,655) (8,132,940)
---------- ------------
Net increase (decrease) ............. (545,768) $ (6,589,061)
========== ============
Year ended February 29, 2008
Shares sold ......................... 26,357 $ 331,695
Shares issued in reinvestment of
distributions .................... 94,581 1,182,095
Shares redeemed ..................... (643,960) (8,054,049)
---------- ------------
Net increase (decrease) ............. (523,022) $ (6,540,259)
========== ============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ......................... 5,749,303 $ 70,510,862
Shares issued in reinvestment of
distributions .................... 391,834 4,747,155
Shares redeemed ..................... (2,752,071) (33,078,142)
---------- ------------
Net increase (decrease) ............. 3,389,066 $ 42,179,875
========== ============
Year ended February 29, 2008
Shares sold ......................... 3,353,584 $ 42,183,260
Shares issued in reinvestment of
distributions .................... 288,112 3,618,530
Shares redeemed ..................... (1,760,678) (22,118,474)
---------- ------------
Net increase (decrease) ............. 1,881,018 $ 23,683,316
========== ============
ADVISOR CLASS SHARES:
Period ended February 28, 2009(a)
Shares sold ......................... 29,058 $ 347,943
Shares issued in reinvestment of
distributions .................... 559 6,553
Shares redeemed ..................... (463) (5,419)
---------- ------------
Net increase (decrease) ............. 29,154 $ 349,077
========== ============
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
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 Funds 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
134 | 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Class A reimbursement distribution plans, 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 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
FRANKLIN MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE 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%
Annual Report | 135
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
FRANKLIN FRANKLIN
MINNESOTA OHIO
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 MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- -----------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ......... $571,889 $152,459 $510,590
Contingent deferred sales charges retained ..... $333,753 $ 27,622 $122,161
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------- -----------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ......... $268,950 $534,773
Contingent deferred sales charges retained ..... $ 21,196 $126,625
E. TRANSFER AGENT FEES
For the year ended February 28, 2009, 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 MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- -----------
Transfer agent fees ..... $576,805 $124,302 $431,824
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------- -----------
Transfer agent fees ..... $183,938 $354,731
136 | 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, 2009, the capital loss carryforwards were as
follows:
FRANKLIN FRANKLIN
FRANKLIN MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- -----------
Capital loss carryforwards expiring in:
2016 ............................... $ 22,960 $ -- $ --
2017 ............................... 798,241 33,682 472,758
-------- ------- --------
$821,201 $33,682 $472,758
======== ======= ========
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------- -----------
Capital loss carryforwards expiring in:
2010 ............................... $ 788,761 $ --
2015 ............................... 1,475,000 --
2016 ............................... -- 73,849
2017 ............................... 1,004,796 3,842,081
---------- ----------
$3,268,557 $3,915,930
========== ==========
On February 28, 2009, the Franklin Minnesota Tax-Free Income Fund had expired
capital loss carryforwards of $89,650, which were reclassified to paid-in
capital.
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, 2009, deferred losses were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
INSURED MASSACHUSETTS MICHIGAN MINNESOTA
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
- ----------- ------------- ----------- -----------
$3,987,842 $1,230,193 $393,374 $695,951
The tax character of distributions paid during the years ended February 28, 2009
and February 29, 2008, was as follows:
FRANKLIN INSURED FRANKLIN MASSACHUSETTS
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from:
Tax exempt income ......... $95,445,859 $91,571,889 $22,540,627 $21,755,323
Long term capital gain .... -- 283,807 -- 63,039
----------- ----------- ----------- -----------
$95,445,859 $91,855,696 $22,540,627 $21,818,362
=========== =========== =========== ===========
Annual Report | 137
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
FRANKLIN MICHIGAN FRANKLIN MINNESOTA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from:
Tax exempt income ......... $66,273,982 $61,294,373 $27,968,527 $25,016,285
Long term capital gain .... -- 1,302,608 -- --
----------- ----------- ----------- -----------
$66,273,982 $62,596,981 $27,968,527 $25,016,285
=========== =========== =========== ===========
FRANKLIN OHIO
TAX-FREE INCOME FUND
-------------------------
2009 2008
----------- -----------
Distributions paid from:
Tax exempt income ......... $55,396,229 $47,974,416
Long term capital gain .... -- 410,970
----------- -----------
$55,396,229 $48,385,386
=========== ===========
At February 28, 2009, the cost of investments, net unrealized appreciation
(depreciation), undistributed tax exempt and ordinary income and undistributed
capital gains for income tax purposes were as follows:
FRANKLIN FRANKLIN
FRANKLIN MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- --------------
Cost of investments .......................... $2,137,871,936 $532,015,511 $1,524,583,804
============== ============ ==============
Unrealized appreciation ...................... $ 43,503,583 $ 15,605,755 $ 50,812,123
Unrealized depreciation ...................... (144,459,535) (34,168,332) (74,585,560)
-------------- ------------ --------------
Net unrealized appreciation (depreciation) ... $ (100,955,952) $(18,562,577) $ (23,773,437)
============== ============ ==============
Distributable earnings -
undistributed tax exempt income ........... $ 2,081,273 $ 482,349 $ 928,879
============== ============ ==============
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------ --------------
Cost of investments .......................... $734,150,393 $1,362,711,914
============ ==============
Unrealized appreciation ...................... $ 23,414,597 $ 50,271,803
Unrealized depreciation ...................... (12,326,290) (44,933,690)
------------ --------------
Net unrealized appreciation (depreciation) ... $ 11,088,307 $ 5,338,113
============ ==============
Distributable earnings -
undistributed tax exempt income ........... $ 78,742 $ 1,186,974
============ ==============
138 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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 bond discounts and wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended February 28, 2009, were as follows:
FRANKLIN FRANKLIN
FRANKLIN MASSACHUSETTS MICHIGAN
INSURED TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------- ------------- ------------
Purchases ........................... $319,137,457 $53,964,340 $355,735,239
Sales ............................... $530,831,025 $38,511,303 $241,700,401
FRANKLIN FRANKLIN
MINNESOTA OHIO
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------ ------------
Purchases ........................... $275,240,127 $304,784,128
Sales ............................... $144,369,150 $144,968,936
6. CONCENTRATION OF RISK
Each of the funds invest 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. In
addition, investments in these securities are sensitive to interest rate changes
and credit risk of the issuer and may subject the funds to increased market
volatility. The market for these investments may be limited, which may make them
difficult to buy or sell.
7. MERGER
On May 21, 2008, the Franklin Insured Tax-Free Income Fund acquired the net
assets of Franklin Florida Insured Tax-Free Income Fund pursuant to a plan of
reorganization approved by Franklin Florida Insured Tax-Free Income Fund's
shareholders. The merger was accomplished by a tax-free exchange of 11,431,481
shares of the Franklin Insured Tax-Free Income Fund (valued at $12.12) for the
net assets of the Franklin Florida Insured Tax-Free Income Fund which aggregated
$138,549,550, including $4,016,955 of unrealized appreciation (depreciation).
The combined net assets of the Franklin Insured Tax-Free Income Fund immediately
after the merger was $2,438,796,882.
Annual Report | 139
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT FACILITY
Effective January 23, 2009, the Funds, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to
interest charged on any borrowings made by the Funds and other costs incurred by
the Funds, pay their share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee based upon the unused portion of the Global Credit
Facility. During the period, the Funds incurred commitment fees of $1,511 of
their pro rata portion of the Global Credit Facility, which is reflected in
Other expenses on the Statements of Operations. During the year ended February
28, 2009, the Funds did not utilize the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on March 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Funds have determined that the implementation
of SFAS 157 did not have a material impact on the Funds' financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Trust's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Funds' investments and are summarized in the following fair
value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
At February 28, 2009, all of the Funds' investments in securities carried at
fair value were in Level 2 inputs.
140 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ABBREVIATIONS
SELECTED PORTFOLIO
AMBAC - American Municipal Bond Assurance Corp.
BHAC - Berkshire Hathaway Assurance Corp.
BIG - Bond Investors Guaranty Insurance Co. (acquired by
MBIA in 1989 and no longer does business under
this name)
CDA - Community Development Authority/Agency
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
ID - Improvement District
IDA - Industrial Development Authority/Agency
IDAR - Industrial 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 | 141
Franklin Tax-Free Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN TAX-FREE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Franklin Insured Tax-Free
Income Fund, Franklin Massachusetts Tax-Free Income Fund (formerly Franklin
Massachusetts Insured Tax-Free Income Fund), Franklin Michigan Tax-Free Income
Fund (formerly Franklin Michigan Insured Tax-Free Income Fund), Franklin
Minnesota Tax-Free Income Fund (formerly Franklin Minnesota Insured Tax-Free
Income Fund) and Franklin Ohio Tax-Free Income Fund (formerly Franklin Ohio
Insured Tax-Free Income Fund) (separate portfolios of Franklin Tax-Free Trust,
hereafter referred to as the "Funds") at February 28, 2009, 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, 2009 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 17, 2009
142 | 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, 2009. A portion of the Fund's
exempt-interest dividends may be subject to the federal alternative minimum tax.
In January 2010, shareholders will be notified of amounts for use in preparing
their 2009 income tax returns.
Annual Report | 143
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 136 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 113 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement
Systems (CALPERS) (1971 - 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield
of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 113 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC
(wireless company); Chairman of the Board and Chief Executive Officer, AirTouch
Communications (cellular communications) (1993-1998) and Pacific Telesis Groups
(telephone holding company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 136 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J.
San Mateo, CA 94403-1906 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).
144 | 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 W.T. LAHAYE (1929) Trustee Since 1984 113 Center for Creative Land Recycling
One Franklin Parkway (brownfield 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).
FRANK A. OLSON (1932) Trustee Since 2005 136 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and
San Mateo, CA 94403-1906 Sentient Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (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 (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 113 None
One Franklin Parkway Independent 2007 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate
Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm)
(1986-1990).
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 136 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 42
of the investment companies in Franklin Templeton Investments.
Annual Report | 145
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------- --------------- ------------------ ----------------------- -----------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 90 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
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.
JENNIFER J. BOLT (1964) Chief Since December Not Applicable Not Applicable
One Franklin Parkway Executive 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; and
officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the
investment companies in Franklin Templeton Investments.
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).
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
- ----------------------------- --------------- ------------------ ----------------------- -----------------------------------
LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable
One Franklin Parkway Chief Financial 2004, Chief
San Mateo, CA 94403-1906 Officer and Financial Officer
Chief and Chief
Accounting Accounting Officer
Officer since 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 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).
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/or director, as the case maybe, of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
RUPERT H. JOHNSON, JR. (1940) President and President since Not Applicable Not Applicable
One Franklin Parkway Chief 1993 and Chief
San Mateo, CA 94403-1906 Executive 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.
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; and officer of 30 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
- ----------------------------- --------------- ------------------ ----------------------- -----------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
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).
THOMAS WALSH (1961) 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.
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson is considered to be an interested person of the Trust
under the federal securities laws due to his position as officer and
director and major shareholder of Franklin Resources, Inc. (Resources),
which is the parent company of the Trust's investment manager and
distributor. Gregory E. Johnson is considered to be an interested person of
the Trust under the federal securities laws due to his position as an
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON 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. WILSON IS AN INDEPENDENT BOARD MEMBER 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 (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
148 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 24, 2009, 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 additional material, including 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. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
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 it 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
Annual Report | 149
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
complex, the adherence to fair value pricing procedures established by the
Board, and the accuracy of net asset value calculations. The Board also noted
the extent of benefits provided Fund shareholders from being part of the
Franklin Templeton family of funds, including the right to exchange investments
between the same class of funds without a sales charge, the ability to reinvest
Fund 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 predesignated 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,
and the continuous enhancements to and high industry ranking given the Franklin
Templeton website. Particular attention was given to the overall performance and
actions taken by the Manager and its affiliates in response to problems arising
out of the market turmoil and financial crisis experienced during the past year.
In this respect, the Board noted that management's independent credit analysis
and diligent risk management procedures had minimized exposure of funds within
the Franklin Templeton complex to subprime mortgages and that its continuous
monitoring of counterparty credit risk had limited fund exposure to firms
experiencing financial difficulties like Bear Stearns and AIG. The same type of
conservative approach and attention to risk had also prevented any structured
investment products or other volatile instruments from being held in the
portfolios of any of the money market funds within the Franklin Templeton
complex, including the sweep money fund utilized by many of the Funds as part of
their cash management. The Board also took into account, among other things,
management's efforts in establishing a $725 million global credit facility for
the benefit of the Funds and other accounts managed by Franklin Templeton
Investments to provide a source of cash for temporary and emergency purposes or
to meet unusual redemption requests as well as the strong financial position of
the Manager's parent company and its commitment to the mutual fund business. The
Board also noted that during the past year Franklin Templeton Investments, like
many other fund managers, had announced a hiring freeze and implemented employee
reductions, and the Board discussed with management the nature of such
reductions and steps being taken to minimize any negative impact on the nature
and quality of services being provided the 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
150 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
year, particular attention in assessing performance was given to the Lipper
reports furnished for the agreement renewals. The Lipper report prepared for
each individual Fund showed its investment performance or those of its Class A
shares for a Fund 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, 2008, and for additional periods ended
that date up to 10 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 above the median of its Lipper universe for the
one-year period with most being in the highest or second-highest quintile of
their Lipper universe for the previous three-, five- and 10-year periods as
well. The Lipper reports showed the total return for most such Funds to be above
the median of their performance universe during 2008 with the majority being in
the first or second-highest quintile of their performance universe during the
previous three-, five- and 10-year periods on an annualized basis. 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. Lipper expense data
is based upon historical information taken from each Fund's most recent annual
report and, as a result of the severe decline in mutual fund industry assets
during the last quarter of 2008, is based on asset levels that are higher than
the levels currently existing for most Funds. While recognizing the limitations
inherent in Lipper's methodology and recognizing that current expense ratios may
increase as assets decline, the Board believed that the independent analysis
conducted by Lipper remained an appropriate measure of comparative expenses. In
reviewing comparative costs, Lipper provides information on each Fund's
contractual investment management fee in comparison with the contractual
investment management fee that would have been charged by other funds within its
Lipper expense group assuming they were similar in size to 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 reports
showed that the contractual investment management fee rates for each Fund were
at or below the median of their respective Lipper expense groups. The Lipper
reports further showed that the actual total expense rates for all Funds were
below the medians of their respective Lipper expense groups. 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
Annual Report | 151
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
to each of the individual Funds during the 12-month period ended September 30,
2008, being the most recent fiscal year-end for Franklin Resources, Inc., the
Manager's parent. During such period, the assets of the Franklin Templeton U.S.
fund business were significantly higher than currently existing, and to such
extent the profitability analysis does not reflect current fund operations.
While taking this into account in assessing the significance of the Fund
profitability analysis, the Board recognized such analysis was made at a given
point in time and that the decline in assets and effect on profitability would
be reflected in the profitability analysis covering Franklin Resources' 2009
fiscal year period. In reviewing the analysis, 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 for 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 and other regulatory 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 its
interest in a joint venture entity that 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
152 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 0.625% on the first $100 million of assets; 0.5% on the next
$150 million of assets; 0.45% on assets in excess of $250 million; with
additional breakpoints beginning at 0.44% on assets in excess of $7.5 billion
and continuing 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's investment manager 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 (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 (800)
SEC-0330.
Annual Report | 153
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(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 FUNDS
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
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 Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(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.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08
Not part of the annual report
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN TAX-FREE TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
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SHAREHOLDER SERVICES
(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 A2009 04/09
(GRAPHIC)
FEBRUARY 28, 2009
ANNUAL REPORT
AND SHAREHOLDER LETTER
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
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TAX-FREE INCOME
FRANKLIN TAX-FREE TRUST
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - 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
Not part of the annual report
Contents
SHAREHOLDER LETTER ....................................... 1
ANNUAL REPORT
Municipal Bond Market Overview ........................... 4
Investment Strategy and Manager's Discussion ............. 6
Franklin Alabama Tax-Free Income Fund .................... 7
Franklin Florida Tax-Free Income Fund .................... 15
Franklin Georgia Tax-Free Income Fund .................... 24
Franklin Kentucky Tax-Free Income Fund ................... 33
Franklin Louisiana Tax-Free Income Fund .................. 41
Franklin Maryland Tax-Free Income Fund ................... 49
Franklin Missouri Tax-Free Income Fund ................... 58
Franklin North Carolina Tax-Free Income Fund ............. 66
Franklin Virginia Tax-Free Income Fund ................... 75
Financial Highlights and Statements of Investments ....... 83
Financial Statements ..................................... 144
Notes to Financial Statements ............................ 155
Report of Independent Registered Public Accounting Firm .. 171
Tax Designation .......................................... 172
Board Members and Officers ............................... 173
Shareholder Information .................................. 178
SHAREHOLDER LETTER
Dear Shareholder:
The 12-month period ended February 28, 2009, was an extraordinary and stressful
time for investors and those of us who have worked in financial markets for many
years. During this turbulent period, the U.S. recession deepened, credit markets
froze and housing prices plummeted. Most stocks and bonds suffered major losses
as investors worried about an uncertain future. With a new president, Barack
Obama, the country and the financial markets were eager to see how effectively
the government could address these problems. Although this environment is bound
to provoke great concern, we think it is important to put short-term market
developments in perspective. Keep in mind that as daunting as current conditions
may be, we have navigated through other periods of high market volatility and
remain committed to our long-term perspective and disciplined investment
philosophy.
With the economy officially in recession since December 2007, economic growth
contracted during the 12-month reporting period. The national housing market
continued its severe correction with drops in housing starts and prices. The
Conference Board's Consumer Confidence Index dropped to the lowest level since
it began in 1967. The unemployment rate rose from 4.8% to 8.1% over the 12-month
period.(1)
In response to these economic conditions, the Federal Open Market Committee
lowered the federal funds target rate from 3.00% at the beginning of the period
to a range of 0% to 0.25% by period-end. The Federal Reserve Board's (Fed's)
current challenge is to soften the effects of the economic recession, reduce
deflation risks and maintain a healthy financial system to restart lending
throughout the economy. At period-end, the Fed did not seem to regard inflation
as an immediate threat. The Fed and the U.S. Treasury also continued to take
steps they thought were necessary to preserve the integrity of U.S. and global
financial markets.
(1.) Source: Bureau of Labor Statistics.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
It was the freezing of credit and financial markets in the U.S. and the rest of
the world that was the dominant -- and still developing -- story. Despite
various attempts by the Fed and the Treasury Department to inject liquidity into
the system and "rescue" such companies as Bear Stearns, Fannie Mae, Freddie Mac,
Merrill Lynch and American International Group, fears and concerns about the
health of our major financial institutions created a crisis on Wall Street that
we believe has not been seen since the 1930s. These fears intensified when
Lehman Brothers filed for bankruptcy in September 2008. In early October the
Senate and House approved a modified troubled asset relief plan, or TARP,
providing aid for financial institutions. As the crisis of confidence and credit
freeze spread around the world, many other countries and central banks took
measures to promote liquidity and help financial institutions within their own
borders. The U.S. government took additional steps to prevent a worsening of the
economic situation, including the provision of loans to General Motors and
Chrysler, which allowed them to develop restructuring plans and avoid bankruptcy
in the near term. Largely in reaction to financial market upheaval, the 10-year
Treasury yield experienced considerable volatility and declined from 3.53% to
3.02% over the period, reflecting a "flight to quality" by investors the world
over.
On February 17, 2009, President Obama signed into law a $787 billion stimulus
plan known as the American Recovery and Reinvestment Act of 2009, which, at the
least, is expected by many to cushion the effects of the ongoing recession for
taxpayers, consumers, businesses, and state and local governments. At most,
others expect the Act will end the recession and promote renewed growth.
Almost every major market experienced unusually volatile performance during the
reporting period. The municipal bond market, as measured by the Barclays Capital
(BC; formerly, Lehman Brothers) Municipal Bond Index, lost value in the second
half of 2008 but rebounded in 2009. The index returned +5.18% for the 12-month
review period.(2) Long-term municipal bonds, which generally make up the
majority of our portfolios, had a -0.61% return for the same period.(3)
We believe it is especially important during difficult times to keep a clear
head and long-term outlook and to consult with your financial advisor. Your
financial advisor can review your portfolio and help you reassess your needs,
goals and
(2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. The
BC 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 Baa3/BBB-. 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.
(3.) Source: (C) 2009 Morningstar. The BC Municipal Long Bond Index is the long
(22+ years) component of the BC Municipal Bond Index.
2 | Not part of the annual report
risk tolerance. Investors with discipline and a sound investment plan may find
favorable long-term opportunities when markets decline.
In the enclosed annual report for Franklin Tax-Free Trust, the portfolio
managers discuss municipal bond market conditions, investment decisions and Fund
performance during the period. You can also find other performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices. Municipal bonds provide tax-free income and
diversification from equities. Despite periods of volatility, municipal bonds
have a solid long-term record of performance, driven mostly by their income
component.
Please check our website at FRANKLINTEMPLETON.COM for special portfolio manager
commentary during this period of uncertainty. Although market conditions are
constantly changing, we remain committed to our disciplined strategy as we
manage the Funds, keeping in mind the trust you have placed in us. We appreciate
your confidence and encourage you to contact us when you have questions about
your Franklin Templeton tax-free investment.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
Chairman
Franklin Tax-Free Trust
/s/ Sheila Amoroso
Sheila Amoroso
/s/ Rafael R. Costas Jr.
Rafael R. Costas Jr.
Senior Vice Presidents and Co-Directors
Franklin Municipal Bond Department
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28, 2009. 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.
Not part of the annual report | 3
Annual Report
Municipal Bond Market Overview
The year ended February 28, 2009, was highly unusual for the municipal bond
market. Municipal bonds provide investors with tax-free income and historically
have been a relatively stable, low-volatility investment. Municipal bond funds
have also provided portfolio diversification, helping offset the volatility of
higher risk asset classes, such as equities and many other fixed income
securities. For the 12-month period ended February 28, 2009, the Barclays
Capital (BC; formerly, Lehman Brothers) Municipal Bond Index had a +5.18% total
return compared with the +5.91% return of the BC U.S. Treasury Index.(1)
However, the year under review certainly could not be described as stable or low
volatility for the municipal bond market.
The municipal bond market's problems started with the collapse of a few
leveraged hedge funds, whose strategy was mainly focused on leveraging exposure
to subprime mortgage-related collateralized debt obligations (CDOs). The
damaging effects from such subprime-related exposure rapidly spread to other
markets. The falling prices of the CDOs, due to illiquidity and increased
expectations for mortgage defaults, led credit rating agencies to downgrade
financial guaranty companies early in 2008. In 2008, the four major municipal
insurers, AMBAC, MBIA, FGIC and FSA had been insuring nearly half of new-issue
municipal bonds and had maintained AAA ratings for many years. Although
historically they had been very good risk managers, during 2008 these insurers
were downgraded below AAA.
The downgrades initially did not concern us because many of the issuers that
used insurance were of high quality, and investment-grade municipal bonds had a
historical default rate of less than 1%.(2) However, the downgrades shocked the
market and caused problems for hedge funds and other leveraged market
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. The
BC 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 Baa3/BBB-. 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 BC 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.
(2.) Source: Standard & Poor's, "U.S. Municipal Ratings Transitions and
Defaults, 1986-2009," RATINGSDIRECT, 3/11/09.
4 | Annual Report
participants. As insured bonds declined in value during 2008, many hedge funds
that had built up large municipal bond positions were forced to sell their
insured bonds. This resulted in a significant supply/demand imbalance, and the
value of insured bonds continued to plummet. Historically, insured bonds traded
at higher prices than uninsured bonds; however, the value of insurance eroded
considerably. At the same time, the auction rate securities market collapsed.
Although traditional, non-leveraged mutual funds, retail buyers and
property-and-casualty companies continued to support the market, the selling was
overwhelming and caused some of the municipal bond market's worst performance in
its history.
The municipal bond market stabilized through the spring and summer of 2008.
Unfortunately, during this time the credit crisis started to spread across the
globe and no market was spared, except for Treasuries. Market psychology turned
bearish as the credit crunch took hold. Access to credit was effectively shut
down for close to a month, which spurred the Treasury and Federal Reserve Board
to devise plans to ease the credit crisis.
September and October brought trends similar to those early in the period. The
municipal bond market had even fewer buyers, mostly plain vanilla mutual funds
and individual investors. Once again, selling by hedge funds and leveraged
investors meeting redemptions was overwhelming and caused steep price declines.
The leveraged participants had used a strategy focused on long-maturity bonds,
and as they sold these positions, the long end of the yield curve was most
adversely affected. Interest rates continued to climb higher toward the end of
2008 as demand waned.
So far, early 2009 appeared more positive. The forced selling by hedge funds and
leveraged funds subsided, and positive cash flows once again characterized the
market. Helping the municipal bond market were bond coupon payments at the
beginning of 2009, a small new-issue calendar, and news that municipal issuers
will benefit from the federal government's stimulus package, although we still
expect volatility in the near term. During the reporting period, we had the
opportunity to purchase bonds at higher yields than were available in many
years, which supported our Funds' dividend distributions. At period-end, we
continued to be active in the market and felt that municipal bonds at current
yields represented an attractive long-term opportunity. On February 28, 2009,
yields for 10- and 30-year high-grade municipal bonds continued to exceed
comparable Treasury yields, which is highly unusual.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2009. 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.
Annual Report | 5
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 do not use leverage or exotic
derivatives, nor do we use hedging techniques that could add volatility and
contribute to under-performance in adverse markets. We generally stay fully
invested to maximize income distribution.
The mixture of our value-oriented philosophy of investing primarily for income
and a positive sloping municipal yield curve 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, 2009, 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.
6 | Annual Report
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)
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
CREDIT QUALITY BREAKDOWN*
Franklin Alabama Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA ............... 22.2%
AA ................ 23.0%
A ................. 23.6%
BBB ............... 8.4%
Not Rated by S&P .. 22.8%
* 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 -- 0.1%
AA 3.2% --
A 8.0% --
BBB or Baa 7.6% 3.6%
Below Investment Grade 0.3% --
---- ---
Total 19.1% 3.7%
This annual report for Franklin Alabama Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$10.84 on February 29, 2008, to $10.59 on February 28, 2009. 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 85.
Annual Report | 7
DIVIDEND DISTRIBUTIONS*
Franklin Alabama Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 3.95 cents 3.39 cents
April 2008 3.95 cents 3.39 cents
May 2008 3.95 cents 3.39 cents
June 2008 3.95 cents 3.43 cents
July 2008 3.95 cents 3.43 cents
August 2008 3.95 cents 3.43 cents
September 2008 4.00 cents 3.49 cents
October 2008 4.00 cents 3.49 cents
November 2008 4.00 cents 3.49 cents
December 2008 4.00 cents 3.54 cents
January 2009 4.00 cents 3.54 cents
February 2009 4.00 cents 3.54 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.
Class A shares paid dividends totaling 47.35 cents per share for the same
period.(2) The Performance Summary beginning on page 10 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.34%
based on an annualization of the current 4.00 cent per share dividend and the
maximum offering price of $11.06 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Alabama personal income tax bracket of
38.25% would need to earn a distribution rate of 7.03% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class C
shares' performance, please see the Performance Summary.
STATE UPDATE
During the reporting period, Alabama's economy fared better than many other
state economies amid the national recession and subprime mortgage and credit
crises. Although the state's home sales growth continued to soften, its
foreclosure rate was one of the lowest in the country. Despite the national
downturn, manufacturing remained a bright spot in Alabama's economy. Honda
Manufacturing of Alabama began producing the Ridgeline pickup truck at its plant
in Lincoln,
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
8 | Annual Report
and announced that it will also begin producing the Accord V-6 sedan at this
facility later in the year. Manufacturing activity related to the aerospace
industry also helped to prop up the local economy. Many other sectors of
Alabama's economy did not fare as well, however, and the state lost jobs in the
construction, information, and professional and business services sectors. At
period-end, Alabama's unemployment rate was 8.4%, compared with the 8.1%
national rate.(3)
State officials historically have practiced conservative financial management,
and constitutional provisions mandate expenditure cutbacks in the event of
revenue shortfalls. Recent income and sales tax revenues have continued to
decline, and officials plan to address the shortfall through several measures.
However, Alabama's restrictive tax structure provides officials with little
revenue raising flexibility. To finance capital needs, the state has made
extensive use of revenue bonds issued through state agencies and departments.
Therefore, Alabama's total debt ratio was low at $500 per capita and 1.6% of
personal income.(4)
Standard & Poor's assigned Alabama's general obligation debt a rating of AA with
a stable outlook.(5) The rating and outlook reflected the state's constitutional
restrictions on expenditures, dedicated revenue streams for capital projects and
debt service, and low general obligation debt burden.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Standard & Poor's, "State Review: Alabama," RATINGSDIRECT, 7/15/08.
(5.) This does not indicate Standard & Poor's rating of the Fund.
PORTFOLIO BREAKDOWN
Franklin Alabama Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM
INVESTMENTS*
------------
Prerefunded 22.2%
Utilities 15.7%
Hospital & Health Care 15.4%
General Obligation 12.5%
Higher Education 11.9%
Subject to Government Appropriations 9.7%
Tax-Supported 5.4%
Transportation 3.9%
Housing 2.2%
Corporate-Backed 1.1%
* Does not include short-term investments and other net assets.
Annual Report | 9
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) -$0.25 $10.59 $10.84
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4735
CLASS C (SYMBOL: FALEX) CHANGE 2/28/09 2/29/08
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) -$0.24 $10.69 $10.93
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4127
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------ ------ ------ -------
Cumulative Total Return(1) +2.18% +11.56% +44.50%
Average Annual Total Return(2) -2.16% +1.33% +3.30%
Avg. Ann. Total Return (3/31/09)(3) -5.04% +1.35% +3.25%
Distribution Rate(4) 4.34%
Taxable Equivalent Distribution Rate(5) 7.03%
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) +1.59% +8.65% +36.88%
Average Annual Total Return(2) +0.62% +1.67% +3.19%
Avg. Ann. Total Return (3/31/09)(3) -2.35% +1.69% +3.15%
Distribution Rate(4) 3.95%
Taxable Equivalent Distribution Rate(5) 6.40%
30-Day Standardized Yield(6) 2.99%
Taxable Equivalent Yield(5) 4.84%
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 (800) 342-5236.
10 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN
ALABAMA BARCLAYS
TAX-FREE CAPITAL
INCOME MUNICIPAL
DATE FUND - CLASS A BOND INDEX CPI
- ---------- -------------- ---------- -------
3/1/1999 $ 9,574 $10,000 $10,000
3/31/1999 $ 9,606 $10,014 $10,030
4/30/1999 $ 9,623 $10,039 $10,103
5/31/1999 $ 9,590 $ 9,981 $10,103
6/30/1999 $ 9,471 $ 9,837 $10,103
7/31/1999 $ 9,487 $ 9,873 $10,134
8/31/1999 $ 9,353 $ 9,794 $10,158
9/30/1999 $ 9,353 $ 9,798 $10,207
10/31/1999 $ 9,226 $ 9,692 $10,225
11/30/1999 $ 9,269 $ 9,795 $10,231
12/31/1999 $ 9,166 $ 9,722 $10,231
1/31/2000 $ 9,080 $ 9,679 $10,261
2/29/2000 $ 9,192 $ 9,792 $10,322
3/31/2000 $ 9,409 $10,006 $10,407
4/30/2000 $ 9,357 $ 9,947 $10,413
5/31/2000 $ 9,315 $ 9,895 $10,426
6/30/2000 $ 9,535 $10,157 $10,480
7/31/2000 $ 9,642 $10,299 $10,505
8/31/2000 $ 9,784 $10,457 $10,505
9/30/2000 $ 9,714 $10,403 $10,559
10/31/2000 $ 9,810 $10,516 $10,578
11/30/2000 $ 9,889 $10,596 $10,584
12/31/2000 $10,068 $10,858 $10,578
1/31/2001 $10,084 $10,965 $10,644
2/28/2001 $10,127 $11,000 $10,687
3/31/2001 $10,189 $11,099 $10,711
4/30/2001 $10,085 $10,978 $10,754
5/31/2001 $10,185 $11,097 $10,802
6/30/2001 $10,284 $11,171 $10,821
7/31/2001 $10,440 $11,336 $10,790
8/31/2001 $10,624 $11,523 $10,790
9/30/2001 $10,584 $11,484 $10,839
10/31/2001 $10,714 $11,621 $10,802
11/30/2001 $10,654 $11,523 $10,784
12/31/2001 $10,545 $11,414 $10,742
1/31/2002 $10,664 $11,612 $10,766
2/28/2002 $10,783 $11,752 $10,809
3/31/2002 $10,616 $11,522 $10,869
4/30/2002 $10,747 $11,747 $10,930
5/31/2002 $10,831 $11,818 $10,930
6/30/2002 $10,924 $11,943 $10,936
7/31/2002 $11,056 $12,097 $10,948
8/31/2002 $11,160 $12,242 $10,985
9/30/2002 $11,412 $12,510 $11,003
10/31/2002 $11,270 $12,303 $11,021
11/30/2002 $11,245 $12,252 $11,021
12/31/2002 $11,460 $12,510 $10,997
1/31/2003 $11,464 $12,479 $11,046
2/28/2003 $11,599 $12,653 $11,131
3/31/2003 $11,634 $12,661 $11,198
4/30/2003 $11,740 $12,744 $11,173
5/31/2003 $11,988 $13,043 $11,155
6/30/2003 $11,961 $12,987 $11,167
7/31/2003 $11,523 $12,533 $11,179
8/31/2003 $11,650 $12,626 $11,222
9/30/2003 $11,984 $12,997 $11,258
10/31/2003 $11,905 $12,932 $11,246
11/30/2003 $12,034 $13,067 $11,216
12/31/2003 $12,140 $13,175 $11,204
1/31/2004 $12,225 $13,250 $11,258
2/29/2004 $12,406 $13,450 $11,319
3/31/2004 $12,386 $13,403 $11,392
4/30/2004 $12,080 $13,086 $11,429
5/31/2004 $12,051 $13,038 $11,495
6/30/2004 $12,106 $13,086 $11,532
7/31/2004 $12,257 $13,258 $11,514
8/31/2004 $12,464 $13,524 $11,520
9/30/2004 $12,541 $13,595 $11,544
10/31/2004 $12,652 $13,712 $11,605
11/30/2004 $12,545 $13,599 $11,611
12/31/2004 $12,700 $13,765 $11,568
1/31/2005 $12,834 $13,894 $11,593
2/28/2005 $12,792 $13,848 $11,660
3/31/2005 $12,728 $13,760 $11,751
4/30/2005 $12,896 $13,977 $11,830
5/31/2005 $12,976 $14,076 $11,818
6/30/2005 $13,035 $14,163 $11,824
7/31/2005 $12,992 $14,099 $11,878
8/31/2005 $13,096 $14,242 $11,939
9/30/2005 $13,018 $14,146 $12,085
10/31/2005 $12,941 $14,060 $12,109
11/30/2005 $12,999 $14,127 $12,012
12/31/2005 $13,103 $14,249 $11,964
1/31/2006 $13,127 $14,287 $12,055
2/28/2006 $13,220 $14,383 $12,079
3/31/2006 $13,162 $14,284 $12,146
4/30/2006 $13,163 $14,279 $12,249
5/31/2006 $13,198 $14,343 $12,310
6/30/2006 $13,152 $14,289 $12,334
7/31/2006 $13,281 $14,459 $12,371
8/31/2006 $13,445 $14,673 $12,395
9/30/2006 $13,528 $14,775 $12,334
10/31/2006 $13,599 $14,868 $12,267
11/30/2006 $13,718 $14,992 $12,249
12/31/2006 $13,670 $14,939 $12,267
1/31/2007 $13,646 $14,901 $12,305
2/28/2007 $13,813 $15,097 $12,371
3/31/2007 $13,764 $15,060 $12,483
4/30/2007 $13,810 $15,104 $12,564
5/31/2007 $13,760 $15,038 $12,641
6/30/2007 $13,698 $14,960 $12,666
7/31/2007 $13,794 $15,076 $12,663
8/31/2007 $13,719 $15,011 $12,639
9/30/2007 $13,926 $15,233 $12,674
10/31/2007 $13,986 $15,301 $12,701
11/30/2007 $14,071 $15,398 $12,777
12/31/2007 $14,107 $15,441 $12,768
1/31/2008 $14,206 $15,636 $12,832
2/29/2008 $13,543 $14,920 $12,869
3/31/2008 $13,955 $15,346 $12,980
4/30/2008 $14,143 $15,526 $13,059
5/31/2008 $14,255 $15,620 $13,169
6/30/2008 $14,103 $15,443 $13,302
7/31/2008 $14,128 $15,502 $13,372
8/31/2008 $14,178 $15,683 $13,318
9/30/2008 $13,423 $14,948 $13,300
10/31/2008 $13,258 $14,795 $13,166
11/30/2008 $13,232 $14,842 $12,913
12/31/2008 $13,374 $15,059 $12,780
1/31/2009 $13,647 $15,610 $12,835
2/28/2009 $13,834 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS A 2/28/09
- ------- -------
1-Year -2.16%
5-Year +1.33%
10-Year +3.30%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN
ALABAMA BARCLAYS
TAX-FREE CAPITAL
INCOME MUNICIPAL
DATE FUND - CLASS C BOND INDEX CPI
- ---------- -------------- ---------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,029 $10,014 $10,030
4/30/1999 $10,050 $10,039 $10,103
5/31/1999 $10,002 $ 9,981 $10,103
6/30/1999 $ 9,882 $ 9,837 $10,103
7/31/1999 $ 9,886 $ 9,873 $10,134
8/31/1999 $ 9,743 $ 9,794 $10,158
9/30/1999 $ 9,747 $ 9,798 $10,207
10/31/1999 $ 9,593 $ 9,692 $10,225
11/30/1999 $ 9,641 $ 9,795 $10,231
12/31/1999 $ 9,531 $ 9,722 $10,231
1/31/2000 $ 9,437 $ 9,679 $10,261
2/29/2000 $ 9,549 $ 9,792 $10,322
3/31/2000 $ 9,768 $10,006 $10,407
4/30/2000 $ 9,710 $ 9,947 $10,413
5/31/2000 $ 9,662 $ 9,895 $10,426
6/30/2000 $ 9,885 $10,157 $10,480
7/31/2000 $ 9,999 $10,299 $10,505
8/31/2000 $10,133 $10,457 $10,505
9/30/2000 $10,055 $10,403 $10,559
10/31/2000 $10,150 $10,516 $10,578
11/30/2000 $10,227 $10,596 $10,584
12/31/2000 $10,415 $10,858 $10,578
1/31/2001 $10,417 $10,965 $10,644
2/28/2001 $10,457 $11,000 $10,687
3/31/2001 $10,515 $11,099 $10,711
4/30/2001 $10,404 $10,978 $10,754
5/31/2001 $10,511 $11,097 $10,802
6/30/2001 $10,598 $11,171 $10,821
7/31/2001 $10,763 $11,336 $10,790
8/31/2001 $10,947 $11,523 $10,790
9/30/2001 $10,901 $11,484 $10,839
10/31/2001 $11,029 $11,621 $10,802
11/30/2001 $10,963 $11,523 $10,784
12/31/2001 $10,836 $11,414 $10,742
1/31/2002 $10,962 $11,612 $10,766
2/28/2002 $11,079 $11,752 $10,809
3/31/2002 $10,903 $11,522 $10,869
4/30/2002 $11,032 $11,747 $10,930
5/31/2002 $11,112 $11,818 $10,930
6/30/2002 $11,202 $11,943 $10,936
7/31/2002 $11,342 $12,097 $10,948
8/31/2002 $11,432 $12,242 $10,985
9/30/2002 $11,694 $12,510 $11,003
10/31/2002 $11,534 $12,303 $11,021
11/30/2002 $11,503 $12,252 $11,021
12/31/2002 $11,727 $12,510 $10,997
1/31/2003 $11,716 $12,479 $11,046
2/28/2003 $11,858 $12,653 $11,131
3/31/2003 $11,878 $12,661 $11,198
4/30/2003 $11,980 $12,744 $11,173
5/31/2003 $12,236 $13,043 $11,155
6/30/2003 $12,203 $12,987 $11,167
7/31/2003 $11,753 $12,533 $11,179
8/31/2003 $11,875 $12,626 $11,222
9/30/2003 $12,218 $12,997 $11,258
10/31/2003 $12,122 $12,932 $11,246
11/30/2003 $12,245 $13,067 $11,216
12/31/2003 $12,347 $13,175 $11,204
1/31/2004 $12,427 $13,250 $11,258
2/29/2004 $12,603 $13,450 $11,319
3/31/2004 $12,578 $13,403 $11,392
4/30/2004 $12,265 $13,086 $11,429
5/31/2004 $12,230 $13,038 $11,495
6/30/2004 $12,280 $13,086 $11,532
7/31/2004 $12,428 $13,258 $11,514
8/31/2004 $12,640 $13,524 $11,520
9/30/2004 $12,713 $13,595 $11,544
10/31/2004 $12,807 $13,712 $11,605
11/30/2004 $12,705 $13,599 $11,611
12/31/2004 $12,855 $13,765 $11,568
1/31/2005 $12,983 $13,894 $11,593
2/28/2005 $12,935 $13,848 $11,660
3/31/2005 $12,864 $13,760 $11,751
4/30/2005 $13,027 $13,977 $11,830
5/31/2005 $13,101 $14,076 $11,818
6/30/2005 $13,153 $14,163 $11,824
7/31/2005 $13,105 $14,099 $11,878
8/31/2005 $13,203 $14,242 $11,939
9/30/2005 $13,120 $14,146 $12,085
10/31/2005 $13,036 $14,060 $12,109
11/30/2005 $13,088 $14,127 $12,012
12/31/2005 $13,186 $14,249 $11,964
1/31/2006 $13,204 $14,287 $12,055
2/28/2006 $13,291 $14,383 $12,079
3/31/2006 $13,227 $14,284 $12,146
4/30/2006 $13,222 $14,279 $12,249
5/31/2006 $13,251 $14,343 $12,310
6/30/2006 $13,199 $14,289 $12,334
7/31/2006 $13,321 $14,459 $12,371
8/31/2006 $13,478 $14,673 $12,395
9/30/2006 $13,566 $14,775 $12,334
10/31/2006 $13,631 $14,868 $12,267
11/30/2006 $13,743 $14,992 $12,249
12/31/2006 $13,689 $14,939 $12,267
1/31/2007 $13,647 $14,901 $12,305
2/28/2007 $13,807 $15,097 $12,371
3/31/2007 $13,763 $15,060 $12,483
4/30/2007 $13,791 $15,104 $12,564
5/31/2007 $13,735 $15,038 $12,641
6/30/2007 $13,680 $14,960 $12,666
7/31/2007 $13,756 $15,076 $12,663
8/31/2007 $13,676 $15,011 $12,639
9/30/2007 $13,874 $15,233 $12,674
10/31/2007 $13,939 $15,301 $12,701
11/30/2007 $14,017 $15,398 $12,777
12/31/2007 $14,047 $15,441 $12,768
1/31/2008 $14,137 $15,636 $12,832
2/29/2008 $13,477 $14,920 $12,869
3/31/2008 $13,877 $15,346 $12,980
4/30/2008 $14,054 $15,526 $13,059
5/31/2008 $14,158 $15,620 $13,169
6/30/2008 $14,002 $15,443 $13,302
7/31/2008 $14,020 $15,502 $13,372
8/31/2008 $14,063 $15,683 $13,318
9/30/2008 $13,314 $14,948 $13,300
10/31/2008 $13,146 $14,795 $13,166
11/30/2008 $13,101 $14,842 $12,913
12/31/2008 $13,235 $15,059 $12,780
1/31/2009 $13,496 $15,610 $12,835
2/28/2009 $13,688 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +0.62%
5-Year +1.67%
10-Year +3.19%
Annual Report | 11
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
12 | Annual Report
Your Fund's Expenses
FRANKLIN ALABAMA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 13
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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 976.00 $3.58
Hypothetical (5% return before expenses) $1,000 $1,021.17 $3.66
CLASS C
Actual $1,000 $ 973.60 $6.26
Hypothetical (5% return before expenses) $1,000 $1,018.45 $6.41
* Expenses are calculated using the most recent six-month expense ratio
annualized 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.
14 | Annual Report
Franklin Florida Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Florida Tax-Free Income Fund
seeks to provide 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)
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
CREDIT QUALITY BREAKDOWN*
Franklin Florida Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA................ 24.2%
AA................. 29.2%
A.................. 18.2%
BBB................ 7.1%
Not Rated by S&P... 21.3%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
- ------- ------- --------
AAA or Aaa 0.4% 5.0%
AA or Aa 4.3% --
A 6.3% 0.6%
BBB or Baa 2.8% 1.9%
---- ---
Total 13.8% 7.5%
This annual report for Franklin Florida Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.17 on February 29, 2008, to $10.90 on February 28, 2009. 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 91.
Annual Report | 15
DIVIDEND DISTRIBUTIONS*
Franklin Florida Tax-Free Income Fund
DIVIDEND PER SHARE
------------------------------------
MONTH CLASS A CLASS B CLASS C
- -------------- ---------- ---------- ----------
March 2008 4.36 cents 3.81 cents 3.80 cents
April 2008 4.36 cents 3.81 cents 3.80 cents
May 2008 4.36 cents 3.81 cents 3.80 cents
June 2008 4.36 cents 3.85 cents 3.83 cents
July 2008 4.36 cents 3.85 cents 3.83 cents
August 2008 4.36 cents 3.85 cents 3.83 cents
September 2008 4.36 cents 3.85 cents 3.83 cents
October 2008 4.36 cents 3.85 cents 3.83 cents
November 2008 4.36 cents 3.85 cents 3.83 cents
December 2008 4.36 cents 3.89 cents 3.89 cents
January 2009 4.36 cents 3.89 cents 3.89 cents
February 2009 4.36 cents 3.89 cents 3.89 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.
Class A shares paid dividends totaling 51.93 cents per share for the same
period.(2) The Performance Summary beginning on page 18 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.61%
based on an annualization of the current 4.37 cent per share dividend and the
maximum offering price of $11.38 on February 28, 2008. An investor in the 2009
maximum federal income tax bracket of 35.00% would need to earn a distribution
rate of 7.09% 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
During the reporting period, Florida's housing-reliant economy was hit hard by
the national subprime mortgage crisis and economic slowdown. In 2008, the
Sunshine State posted one of the highest foreclosure rates in the country. In
this challenging economic environment, home prices plummeted and credit
tightened. These conditions contributed to job losses in the manufacturing,
information,
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
16 | Annual Report
and professional and business services sectors. As of February 2009, the state's
9.4% unemployment rate was higher than the country's 8.1% rate.(3)
In November 2008, the state forecast a $2.1 billion revenue shortfall and an
increased deficit for fiscal year 2009 largely resulting from underperformance
of tax receipts and an increase in Medicaid spending.(4) To address the
imbalance, the state passed a plan that relied on spending reductions and trust
fund sweeps, reserves and other one-time revenue sources. The state's
demonstrated record of active budget management, including multiple revenue
estimating conferences, allowed Florida to effectively weather a difficult
revenue downturn.
Following legal guidelines on tax-supported debt affordability, Florida's debt
burden, at $1,005 per capita and 2.8% of personal income, remained moderate.(5)
Independent credit rating agency Standard & Poor's assigned Florida's general
obligation bonds its highest rating of AAA with a negative outlook, which
reflected the state's strong and conservative financial and budget management
practices, swift responses to increased budget pressures and lack of economic
growth.(6)
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Standard & Poor's, "Summary: Florida; General Obligation,"
RATINGSDIRECT, 2/4/09.
(5.) Source: Moody's Investors Service, "New Issue: Florida (State of),"
2/20/09.
(6.) This does not indicate Standard & Poor's rating of the Fund.
PORTFOLIO BREAKDOWN
Franklin Florida Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM
INVESTMENTS*
------------
Prerefunded 25.8%
Utilities 15.0%
Transportation 12.7%
Hospital & Health Care 10.4%
Subject to Government Appropriations 10.4%
Tax-Supported 7.5%
General Obligation 7.5%
Other Revenue 5.0%
Housing 4.1%
Higher Education 1.3%
Corporate-Backed 0.3%
* Does not include short-term investments and other net assets.
Annual Report | 17
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.27 $10.90 $11.17
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5193
Long-Term Capital Gain $0.0123
TOTAL: $0.5316
CLASS B (SYMBOL: FRFBX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.26 $10.99 $11.25
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4587
Long-Term Capital Gain $0.0123
TOTAL: $0.4710
CLASS C (SYMBOL: FRFIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.26 $11.06 $11.32
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4572
Long-Term Capital Gain $0.0123
TOTAL: $0.4695
18 | 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) +2.37% +13.01% +48.71%
Average Annual Total Return(2) -2.02% +1.59% +3.60%
Avg. Ann. Total Return (3/31/09)(3) -4.48% +1.68% +3.60%
Distribution Rate(4) 4.61%
Taxable Equivalent Distribution Rate(5) 7.09%
30-Day Standardized Yield(6) 3.89%
Taxable Equivalent Yield(5) 5.98%
Total Annual Operating Expenses(7) 0.61%
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ------- ------ ------- ---------
Cumulative Total Return(1) +1.89% +9.95% 49.85%
Average Annual Total Return(2) -2.02% +1.58% +4.56%
Avg. Ann. Total Return (3/31/09)(3) -4.66% +1.65% +4.54%
Distribution Rate(4) 4.21%
Taxable Equivalent Distribution Rate(5) 6.48%
30-Day Standardized Yield(6) 3.52%
Taxable Equivalent Yield(5) 5.42%
Total Annual Operating Expenses(7) 1.16%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) +1.86% +10.06% +40.89%
Average Annual Total Return(2) +0.89% +1.94% +3.49%
Avg. Ann. Total Return (3/31/09)(3) -1.72% +2.02% +3.49%
Distribution Rate(4) 4.20%
Taxable Equivalent Distribution Rate(5) 6.46%
30-Day Standardized Yield(6) 3.52%
Taxable Equivalent Yield(5) 5.42%
Total Annual Operating Expenses(7) 1.16%
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 (800) 342-5236.
Annual Report | 19
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -2.02%
5-Year +1.59%
10-Year +3.60%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN FLORIDA
TAX-FREE
INCOME FUND BARCLAYS CAPITAL
DATE - CLASS A MUNICIPAL BOND INDEX CPI
- ---- ---------------- -------------------- -------
3/1/1999 $ 9,574 $10,000 $10,000
3/31/1999 $ 9,582 $10,014 $10,030
4/30/1999 $ 9,606 $10,039 $10,103
5/31/1999 $ 9,557 $ 9,981 $10,103
6/30/1999 $ 9,436 $ 9,837 $10,103
7/31/1999 $ 9,444 $ 9,873 $10,134
8/31/1999 $ 9,362 $ 9,794 $10,158
9/30/1999 $ 9,328 $ 9,798 $10,207
10/31/1999 $ 9,196 $ 9,692 $10,225
11/30/1999 $ 9,271 $ 9,795 $10,231
12/31/1999 $ 9,195 $ 9,722 $10,231
1/31/2000 $ 9,136 $ 9,679 $10,261
2/29/2000 $ 9,229 $ 9,792 $10,322
3/31/2000 $ 9,433 $10,006 $10,407
4/30/2000 $ 9,382 $ 9,947 $10,413
5/31/2000 $ 9,323 $ 9,895 $10,426
6/30/2000 $ 9,555 $10,157 $10,480
7/31/2000 $ 9,694 $10,299 $10,505
8/31/2000 $ 9,824 $10,457 $10,505
9/30/2000 $ 9,781 $10,403 $10,559
10/31/2000 $ 9,877 $10,516 $10,578
11/30/2000 $ 9,957 $10,596 $10,584
12/31/2000 $10,205 $10,858 $10,578
1/31/2001 $10,267 $10,965 $10,644
2/28/2001 $10,321 $11,000 $10,687
3/31/2001 $10,411 $11,099 $10,711
4/30/2001 $10,312 $10,978 $10,754
5/31/2001 $10,412 $11,097 $10,802
6/30/2001 $10,485 $11,171 $10,821
7/31/2001 $10,658 $11,336 $10,790
8/31/2001 $10,832 $11,523 $10,790
9/30/2001 $10,804 $11,484 $10,839
10/31/2001 $10,942 $11,621 $10,802
11/30/2001 $10,849 $11,523 $10,784
12/31/2001 $10,746 $11,414 $10,742
1/31/2002 $10,913 $11,612 $10,766
2/28/2002 $11,024 $11,752 $10,809
3/31/2002 $10,834 $11,522 $10,869
4/30/2002 $11,003 $11,747 $10,930
5/31/2002 $11,068 $11,818 $10,930
6/30/2002 $11,172 $11,943 $10,936
7/31/2002 $11,304 $12,097 $10,948
8/31/2002 $11,447 $12,242 $10,985
9/30/2002 $11,725 $12,510 $11,003
10/31/2002 $11,491 $12,303 $11,021
11/30/2002 $11,440 $12,252 $11,021
12/31/2002 $11,682 $12,510 $10,997
1/31/2003 $11,679 $12,479 $11,046
2/28/2003 $11,833 $12,653 $11,131
3/31/2003 $11,860 $12,661 $11,198
4/30/2003 $11,956 $12,744 $11,173
5/31/2003 $12,241 $13,043 $11,155
6/30/2003 $12,207 $12,987 $11,167
7/31/2003 $11,751 $12,533 $11,179
8/31/2003 $11,828 $12,626 $11,222
9/30/2003 $12,138 $12,997 $11,258
10/31/2003 $12,074 $12,932 $11,246
11/30/2003 $12,223 $13,067 $11,216
12/31/2003 $12,321 $13,175 $11,204
1/31/2004 $12,420 $13,250 $11,258
2/29/2004 $12,602 $13,450 $11,319
3/31/2004 $12,566 $13,403 $11,392
4/30/2004 $12,261 $13,086 $11,429
5/31/2004 $12,205 $13,038 $11,495
6/30/2004 $12,232 $13,086 $11,532
7/31/2004 $12,407 $13,258 $11,514
8/31/2004 $12,635 $13,524 $11,520
9/30/2004 $12,726 $13,595 $11,544
10/31/2004 $12,839 $13,712 $11,605
11/30/2004 $12,749 $13,599 $11,611
12/31/2004 $12,905 $13,765 $11,568
1/31/2005 $13,052 $13,894 $11,593
2/28/2005 $13,015 $13,848 $11,660
3/31/2005 $12,967 $13,760 $11,751
4/30/2005 $13,148 $13,977 $11,830
5/31/2005 $13,253 $14,076 $11,818
6/30/2005 $13,314 $14,163 $11,824
7/31/2005 $13,255 $14,099 $11,878
8/31/2005 $13,383 $14,242 $11,939
9/30/2005 $13,301 $14,146 $12,085
10/31/2005 $13,251 $14,060 $12,109
11/30/2005 $13,301 $14,127 $12,012
12/31/2005 $13,408 $14,249 $11,964
1/31/2006 $13,436 $14,287 $12,055
2/28/2006 $13,544 $14,383 $12,079
3/31/2006 $13,459 $14,284 $12,146
4/30/2006 $13,476 $14,279 $12,249
5/31/2006 $13,516 $14,343 $12,310
6/30/2006 $13,487 $14,289 $12,334
7/31/2006 $13,619 $14,459 $12,371
8/31/2006 $13,786 $14,673 $12,395
9/30/2006 $13,885 $14,775 $12,334
10/31/2006 $13,960 $14,868 $12,267
11/30/2006 $14,083 $14,992 $12,249
12/31/2006 $14,041 $14,939 $12,267
1/31/2007 $14,011 $14,901 $12,305
2/28/2007 $14,170 $15,097 $12,371
3/31/2007 $14,140 $15,060 $12,483
4/30/2007 $14,169 $15,104 $12,564
5/31/2007 $14,127 $15,038 $12,641
6/30/2007 $14,071 $14,960 $12,666
7/31/2007 $14,173 $15,076 $12,663
8/31/2007 $14,105 $15,011 $12,639
9/30/2007 $14,281 $15,233 $12,674
10/31/2007 $14,334 $15,301 $12,701
11/30/2007 $14,388 $15,398 $12,777
12/31/2007 $14,414 $15,441 $12,768
1/31/2008 $14,542 $15,636 $12,832
2/29/2008 $13,911 $14,920 $12,869
3/31/2008 $14,302 $15,346 $12,980
4/30/2008 $14,506 $15,526 $13,059
5/31/2008 $14,611 $15,620 $13,169
6/30/2008 $14,468 $15,443 $13,302
7/31/2008 $14,485 $15,502 $13,372
8/31/2008 $14,604 $15,683 $13,318
9/30/2008 $13,880 $14,948 $13,300
10/31/2008 $13,617 $14,795 $13,166
11/30/2008 $13,621 $14,842 $12,913
12/31/2008 $13,704 $15,059 $12,780
1/31/2009 $14,136 $15,610 $12,835
2/28/2009 $14,238 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------- -------
1-Year -2.02%
5-Year +1.58%
Since Inception (2/1/00) +4.56%
CLASS B (2/1/00-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN FLORIDA
TAX-FREE
INCOME FUND BARCLAYS CAPITAL
DATE - CLASS B MUNICIPAL BOND INDEX CPI
- ---- ---------------- -------------------- -------
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 $10,748 $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 $13,360 $10,960
11/30/2003 $13,161 $13,500 $10,930
12/31/2003 $13,261 $13,611 $10,918
1/31/2004 $13,361 $13,689 $10,972
2/29/2004 $13,561 $13,895 $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 $13,971 $11,226
9/30/2004 $13,646 $14,046 $11,250
10/31/2004 $13,760 $14,166 $11,309
11/30/2004 $13,647 $14,049 $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 $14,306 $11,363
3/31/2005 $13,865 $14,216 $11,451
4/30/2005 $14,062 $14,440 $11,528
5/31/2005 $14,155 $14,542 $11,517
6/30/2005 $14,226 $14,632 $11,523
7/31/2005 $14,145 $14,566 $11,576
8/31/2005 $14,274 $14,713 $11,635
9/30/2005 $14,181 $14,614 $11,777
10/31/2005 $14,121 $14,526 $11,801
11/30/2005 $14,169 $14,595 $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 $14,757 $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 $15,159 $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 $15,394 $11,991
2/28/2007 $14,998 $15,597 $12,056
3/31/2007 $14,959 $15,559 $12,165
4/30/2007 $14,983 $15,605 $12,244
5/31/2007 $14,919 $15,536 $12,319
6/30/2007 $14,867 $15,455 $12,343
7/31/2007 $14,954 $15,575 $12,340
8/31/2007 $14,876 $15,508 $12,317
9/30/2007 $15,066 $15,737 $12,351
10/31/2007 $15,115 $15,807 $12,378
11/30/2007 $15,164 $15,908 $12,451
12/31/2007 $15,185 $15,952 $12,443
1/31/2008 $15,311 $16,153 $12,505
2/29/2008 $14,647 $15,414 $12,541
3/31/2008 $15,058 $15,854 $12,650
4/30/2008 $15,275 $16,040 $12,726
5/31/2008 $15,385 $16,137 $12,834
6/30/2008 $15,233 $15,955 $12,963
7/31/2008 $15,254 $16,015 $13,031
8/31/2008 $15,376 $16,203 $12,979
9/30/2008 $14,616 $15,443 $12,961
10/31/2008 $14,342 $15,285 $12,830
11/30/2008 $14,340 $15,334 $12,584
12/31/2008 $14,432 $15,558 $12,454
1/31/2009 $14,887 $16,127 $12,508
2/28/2009 $14,985 $16,212 $12,571
20 | Annual Report
Performance Summary (CONTINUED)
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN FLORIDA
TAX-FREE
INCOME FUND BARCLAYS CAPITAL
DATE - CLASS C MUNICIPAL BOND INDEX CPI
- ---- ---------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,004 $10,014 $10,030
4/30/1999 $10,024 $10,039 $10,103
5/31/1999 $ 9,969 $ 9,981 $10,103
6/30/1999 $ 9,838 $ 9,837 $10,103
7/31/1999 $ 9,842 $ 9,873 $10,134
8/31/1999 $ 9,744 $ 9,794 $10,158
9/30/1999 $ 9,705 $ 9,798 $10,207
10/31/1999 $ 9,564 $ 9,692 $10,225
11/30/1999 $ 9,645 $ 9,795 $10,231
12/31/1999 $ 9,563 $ 9,722 $10,231
1/31/2000 $ 9,490 $ 9,679 $10,261
2/29/2000 $ 9,581 $ 9,792 $10,322
3/31/2000 $ 9,795 $10,006 $10,407
4/30/2000 $ 9,730 $ 9,947 $10,413
5/31/2000 $ 9,664 $ 9,895 $10,426
6/30/2000 $ 9,908 $10,157 $10,480
7/31/2000 $10,046 $10,299 $10,505
8/31/2000 $10,175 $10,457 $10,505
9/30/2000 $10,126 $10,403 $10,559
10/31/2000 $10,221 $10,516 $10,578
11/30/2000 $10,307 $10,596 $10,584
12/31/2000 $10,547 $10,858 $10,578
1/31/2001 $10,615 $10,965 $10,644
2/28/2001 $10,665 $11,000 $10,687
3/31/2001 $10,752 $11,099 $10,711
4/30/2001 $10,646 $10,978 $10,754
5/31/2001 $10,734 $11,097 $10,802
6/30/2001 $10,812 $11,171 $10,821
7/31/2001 $10,984 $11,336 $10,790
8/31/2001 $11,157 $11,523 $10,790
9/30/2001 $11,123 $11,484 $10,839
10/31/2001 $11,259 $11,621 $10,802
11/30/2001 $11,169 $11,523 $10,784
12/31/2001 $11,049 $11,414 $10,742
1/31/2002 $11,224 $11,612 $10,766
2/28/2002 $11,332 $11,752 $10,809
3/31/2002 $11,124 $11,522 $10,869
4/30/2002 $11,290 $11,747 $10,930
5/31/2002 $11,352 $11,818 $10,930
6/30/2002 $11,451 $11,943 $10,936
7/31/2002 $11,590 $12,097 $10,948
8/31/2002 $11,730 $12,242 $10,985
9/30/2002 $12,016 $12,510 $11,003
10/31/2002 $11,764 $12,303 $11,021
11/30/2002 $11,707 $12,252 $11,021
12/31/2002 $11,957 $12,510 $10,997
1/31/2003 $11,938 $12,479 $11,046
2/28/2003 $12,089 $12,653 $11,131
3/31/2003 $12,111 $12,661 $11,198
4/30/2003 $12,213 $12,744 $11,173
5/31/2003 $12,486 $13,043 $11,155
6/30/2003 $12,456 $12,987 $11,167
7/31/2003 $11,978 $12,533 $11,179
8/31/2003 $12,049 $12,626 $11,222
9/30/2003 $12,366 $12,997 $11,258
10/31/2003 $12,295 $12,932 $11,246
11/30/2003 $12,439 $13,067 $11,216
12/31/2003 $12,533 $13,175 $11,204
1/31/2004 $12,627 $13,250 $11,258
2/29/2004 $12,805 $13,450 $11,319
3/31/2004 $12,765 $13,403 $11,392
4/30/2004 $12,452 $13,086 $11,429
5/31/2004 $12,391 $13,038 $11,495
6/30/2004 $12,412 $13,086 $11,532
7/31/2004 $12,580 $13,258 $11,514
8/31/2004 $12,802 $13,524 $11,520
9/30/2004 $12,887 $13,595 $11,544
10/31/2004 $13,004 $13,712 $11,605
11/30/2004 $12,897 $13,599 $11,611
12/31/2004 $13,058 $13,765 $11,568
1/31/2005 $13,199 $13,894 $11,593
2/28/2005 $13,156 $13,848 $11,660
3/31/2005 $13,102 $13,760 $11,751
4/30/2005 $13,287 $13,977 $11,830
5/31/2005 $13,386 $14,076 $11,818
6/30/2005 $13,441 $14,163 $11,824
7/31/2005 $13,376 $14,099 $11,878
8/31/2005 $13,498 $14,242 $11,939
9/30/2005 $13,410 $14,146 $12,085
10/31/2005 $13,343 $14,060 $12,109
11/30/2005 $13,398 $14,127 $12,012
12/31/2005 $13,498 $14,249 $11,964
1/31/2006 $13,520 $14,287 $12,055
2/28/2006 $13,610 $14,383 $12,079
3/31/2006 $13,519 $14,284 $12,146
4/30/2006 $13,541 $14,279 $12,249
5/31/2006 $13,574 $14,343 $12,310
6/30/2006 $13,528 $14,289 $12,334
7/31/2006 $13,664 $14,459 $12,371
8/31/2006 $13,824 $14,673 $12,395
9/30/2006 $13,915 $14,775 $12,334
10/31/2006 $13,983 $14,868 $12,267
11/30/2006 $14,098 $14,992 $12,249
12/31/2006 $14,062 $14,939 $12,267
1/31/2007 $14,014 $14,901 $12,305
2/28/2007 $14,177 $15,097 $12,371
3/31/2007 $14,141 $15,060 $12,483
4/30/2007 $14,163 $15,104 $12,564
5/31/2007 $14,103 $15,038 $12,641
6/30/2007 $14,054 $14,960 $12,666
7/31/2007 $14,136 $15,076 $12,663
8/31/2007 $14,063 $15,011 $12,639
9/30/2007 $14,229 $15,233 $12,674
10/31/2007 $14,288 $15,301 $12,701
11/30/2007 $14,335 $15,398 $12,777
12/31/2007 $14,354 $15,441 $12,768
1/31/2008 $14,472 $15,636 $12,832
2/29/2008 $13,835 $14,920 $12,869
3/31/2008 $14,223 $15,346 $12,980
4/30/2008 $14,417 $15,526 $13,059
5/31/2008 $14,513 $15,620 $13,169
6/30/2008 $14,366 $15,443 $13,302
7/31/2008 $14,376 $15,502 $13,372
8/31/2008 $14,486 $15,683 $13,318
9/30/2008 $13,759 $14,948 $13,300
10/31/2008 $13,495 $14,795 $13,166
11/30/2008 $13,492 $14,842 $12,913
12/31/2008 $13,567 $15,059 $12,780
1/31/2009 $13,996 $15,610 $12,835
2/28/2009 $14,089 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +0.89%
5-Year +1.94%
10-Year +3.49%
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the 2009 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 21
Your Fund's Expenses
FRANKLIN FLORIDA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
22 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 975.10 $3.04
Hypothetical (5% return before expenses) $1,000 $1,021.72 $3.11
CLASS B
Actual $1,000 $ 972.70 $5.72
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
CLASS C
Actual $1,000 $ 972.80 $5.72
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.62%; B: 1.17%; and C: 1.17%), multiplied by
the average account value over the period, multiplied by 181/365 to reflect
the one-half year period.
Annual Report | 23
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)
CREDIT QUALITY BREAKDOWN*
Franklin Georgia Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA ..................... 27.3%
AA ...................... 34.4%
A ....................... 19.6%
BBB ..................... 1.2%
Below Investment Grade .. 1.0%
Not Rated by S&P ........ 16.5%
* 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 -- 1.8%
AA or Aa 3.5% --
A 5.9% --
BBB or Baa 4.0% 1.3%
---- ---
Total 13.4% 3.1%
This annual report for Franklin Georgia Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
(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.
24 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Georgia Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.10 cents 3.53 cents
April 2008 4.10 cents 3.53 cents
May 2008 4.10 cents 3.53 cents
June 2008 4.20 cents 3.66 cents
July 2008 4.20 cents 3.66 cents
August 2008 4.20 cents 3.66 cents
September 2008 4.20 cents 3.65 cents
October 2008 4.20 cents 3.65 cents
November 2008 4.20 cents 3.65 cents
December 2008 4.20 cents 3.71 cents
January 2009 4.20 cents 3.71 cents
February 2009 4.20 cents 3.71 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.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.36 on February 29, 2008, to $11.24 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 49.92 cents per share for the same period.(2) 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 4.29% based on an
annualization of the current 4.20 cent per share dividend and the maximum
offering price of $11.74 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and Georgia personal income tax bracket of 38.90%
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 C
shares' performance, please see the Performance Summary.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
Annual Report | 25
PORTFOLIO BREAKDOWN
Franklin Georgia Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM
INVESTMENTS*
------------
Utilities 32.4%**
Prerefunded 16.6%
Subject to Government Appropriations 16.5%
General Obligation 11.3%
Hospital & Health Care 9.4%
Transportation 5.2%
Higher Education 4.4%
Housing 1.5%
Other Revenue 1.3%
Tax-Supported 1.1%
Corporate-Backed 0.3%
* Does not include short-term investments and other net assets.
** The Fund may invest more than 25% in municipal securities that finance
similar types of projects such as utilities. A change that affects one
project may affect all similar projects, thereby increasing market risk.
STATE UPDATE
During the reporting period, Georgia's economy slid into a severe economic
downturn after years of outpacing the national economy. In 2008, amid the
national mortgage crisis, local home prices and sales levels waned, and the
state posted one of the highest foreclosure rates in the country. Georgia's once
robust job market also declined in 2008, as the state suffered the
fourth-largest number of job losses in the nation.(3) At period-end, Georgia's
unemployment rate was 9.3%, the highest level in 27 years, compared with the
8.1% national rate.(4)
Georgia faced a $2.1 billion gap in its fiscal year 2009 budget, largely as a
result of a downturn in revenue collections.(5) The governor planned to address
this imbalance by reducing budgetary reserves and expenditures and adjusting
onetime revenues. The largest measures included reductions in agency operating
budgets, a drawdown of reserves of employer contributions to the state health
benefit plan, and deferral of homestead tax relief grants. Georgia maintains
conservative financial practices and has a history of responsiveness to
budgetary pressures. Its constitution limits growth in appropriations to net
projected revenues from existing sources and any unappropriated prior-year
surplus.
Although growing, the state's debt burden was moderate in relation to national
median levels. Georgia's debt per capita was $954 and its debt-to-income ratio
was 3.0% compared with the 50-state medians of $889 and 2.6%.(6) Independent
credit rating agencies Moody's Investors Service and Standard & Poor's assigned
Georgia's general obligation debt Aaa and AAA ratings with stable outlooks.(7)
The ratings and outlooks reflected expectations that management will continue to
monitor revenue and expenditure trends and take appropriate action to address
revenue shortfalls and ensure long-term structural balance.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
(3.) Source: Federal Reserve Bank of Atlanta, "The Southeast in 2009: Region
Hopes for Turnaround," ECONSOUTH, Vol. 10, No. 4, fourth quarter 2008.
(4.) Source: Bureau of Labor Statistics.
(5.) Source: Standard & Poor's, "Summary: Georgia; General Obligation,"
RATINGSDIRECT, 1/29/09.
(6.) Source: Moody's Investors Service, "New Issue: Georgia (State of),"
1/29/09.
(7.) These do not indicate ratings of the Fund.
26 | Annual Report
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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.12 $11.24 $11.36
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4992
CLASS C (SYMBOL: FGAIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.12 $11.35 $11.47
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4351
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +3.38% +13.21% +46.93%
Average Annual Total Return(2) -0.98% +1.63% +3.47%
Avg. Ann. Total Return (3/31/09)(3) -4.09% +1.71% +3.47%
Distribution Rate(4) 4.29%
Taxable Equivalent Distribution Rate(5) 7.02%
30-Day Standardized Yield(6) 3.82%
Taxable Equivalent Yield(5) 6.25%
Total Annual Operating Expenses(7) 0.72%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +2.78% +10.09% +38.98%
Average Annual Total Return(2) +1.79% +1.94% +3.35%
Avg. Ann. Total Return (3/31/09)(3) -1.34% +2.04% +3.35%
Distribution Rate(4) 3.90%
Taxable Equivalent Distribution Rate(5) 6.38%
30-Day Standardized Yield(6) 3.45%
Taxable Equivalent Yield(5) 5.65%
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 (800) 342-5236.
28 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN GEORGIA BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS A BOND INDEX CPI
- ---------- ---------------- ---------------- -------
3/1/1999 $ 9,572 $10,000 $10,000
3/31/1999 $ 9,587 $10,014 $10,030
4/30/1999 $ 9,618 $10,039 $10,103
5/31/1999 $ 9,570 $ 9,981 $10,103
6/30/1999 $ 9,442 $ 9,837 $10,103
7/31/1999 $ 9,450 $ 9,873 $10,134
8/31/1999 $ 9,336 $ 9,794 $10,158
9/30/1999 $ 9,311 $ 9,798 $10,207
10/31/1999 $ 9,180 $ 9,692 $10,225
11/30/1999 $ 9,245 $ 9,795 $10,231
12/31/1999 $ 9,162 $ 9,722 $10,231
1/31/2000 $ 9,079 $ 9,679 $10,261
2/29/2000 $ 9,212 $ 9,792 $10,322
3/31/2000 $ 9,429 $10,006 $10,407
4/30/2000 $ 9,386 $ 9,947 $10,413
5/31/2000 $ 9,327 $ 9,895 $10,426
6/30/2000 $ 9,572 $10,157 $10,480
7/31/2000 $ 9,682 $10,299 $10,505
8/31/2000 $ 9,836 $10,457 $10,505
9/30/2000 $ 9,766 $10,403 $10,559
10/31/2000 $ 9,886 $10,516 $10,578
11/30/2000 $ 9,971 $10,596 $10,584
12/31/2000 $10,214 $10,858 $10,578
1/31/2001 $10,273 $10,965 $10,644
2/28/2001 $10,316 $11,000 $10,687
3/31/2001 $10,411 $11,099 $10,711
4/30/2001 $10,304 $10,978 $10,754
5/31/2001 $10,391 $11,097 $10,802
6/30/2001 $10,478 $11,171 $10,821
7/31/2001 $10,629 $11,336 $10,790
8/31/2001 $10,798 $11,523 $10,790
9/30/2001 $10,724 $11,484 $10,839
10/31/2001 $10,876 $11,621 $10,802
11/30/2001 $10,792 $11,523 $10,784
12/31/2001 $10,689 $11,414 $10,742
1/31/2002 $10,824 $11,612 $10,766
2/28/2002 $10,950 $11,752 $10,809
3/31/2002 $10,762 $11,522 $10,869
4/30/2002 $10,898 $11,747 $10,930
5/31/2002 $10,952 $11,818 $10,930
6/30/2002 $11,042 $11,943 $10,936
7/31/2002 $11,171 $12,097 $10,948
8/31/2002 $11,272 $12,242 $10,985
9/30/2002 $11,515 $12,510 $11,003
10/31/2002 $11,275 $12,303 $11,021
11/30/2002 $11,253 $12,252 $11,021
12/31/2002 $11,480 $12,510 $10,997
1/31/2003 $11,458 $12,479 $11,046
2/28/2003 $11,609 $12,653 $11,131
3/31/2003 $11,616 $12,661 $11,198
4/30/2003 $11,739 $12,744 $11,173
5/31/2003 $12,019 $13,043 $11,155
6/30/2003 $12,043 $12,987 $11,167
7/31/2003 $11,545 $12,533 $11,179
8/31/2003 $11,649 $12,626 $11,222
9/30/2003 $11,991 $12,997 $11,258
10/31/2003 $11,897 $12,932 $11,246
11/30/2003 $12,032 $13,067 $11,216
12/31/2003 $12,146 $13,175 $11,204
1/31/2004 $12,240 $13,250 $11,258
2/29/2004 $12,425 $13,450 $11,319
3/31/2004 $12,388 $13,403 $11,392
4/30/2004 $12,077 $13,086 $11,429
5/31/2004 $12,030 $13,038 $11,495
6/30/2004 $12,075 $13,086 $11,532
7/31/2004 $12,233 $13,258 $11,514
8/31/2004 $12,465 $13,524 $11,520
9/30/2004 $12,551 $13,595 $11,544
10/31/2004 $12,680 $13,712 $11,605
11/30/2004 $12,548 $13,599 $11,611
12/31/2004 $12,741 $13,765 $11,568
1/31/2005 $12,924 $13,894 $11,593
2/28/2005 $12,875 $13,848 $11,660
3/31/2005 $12,804 $13,760 $11,751
4/30/2005 $13,010 $13,977 $11,830
5/31/2005 $13,109 $14,076 $11,818
6/30/2005 $13,156 $14,163 $11,824
7/31/2005 $13,106 $14,099 $11,878
8/31/2005 $13,250 $14,242 $11,939
9/30/2005 $13,144 $14,146 $12,085
10/31/2005 $13,060 $14,060 $12,109
11/30/2005 $13,116 $14,127 $12,012
12/31/2005 $13,249 $14,249 $11,964
1/31/2006 $13,272 $14,287 $12,055
2/28/2006 $13,384 $14,383 $12,079
3/31/2006 $13,286 $14,284 $12,146
4/30/2006 $13,288 $14,279 $12,249
5/31/2006 $13,323 $14,343 $12,310
6/30/2006 $13,268 $14,289 $12,334
7/31/2006 $13,392 $14,459 $12,371
8/31/2006 $13,595 $14,673 $12,395
9/30/2006 $13,698 $14,775 $12,334
10/31/2006 $13,779 $14,868 $12,267
11/30/2006 $13,927 $14,992 $12,249
12/31/2006 $13,872 $14,939 $12,267
1/31/2007 $13,838 $14,901 $12,305
2/28/2007 $14,023 $15,097 $12,371
3/31/2007 $13,955 $15,060 $12,483
4/30/2007 $13,991 $15,104 $12,564
5/31/2007 $13,922 $15,038 $12,641
6/30/2007 $13,854 $14,960 $12,666
7/31/2007 $13,960 $15,076 $12,663
8/31/2007 $13,868 $15,011 $12,639
9/30/2007 $14,069 $15,233 $12,674
10/31/2007 $14,128 $15,301 $12,701
11/30/2007 $14,189 $15,398 $12,777
12/31/2007 $14,238 $15,441 $12,768
1/31/2008 $14,333 $15,636 $12,832
2/29/2008 $13,604 $14,920 $12,869
3/31/2008 $14,061 $15,346 $12,980
4/30/2008 $14,290 $15,526 $13,059
5/31/2008 $14,400 $15,620 $13,169
6/30/2008 $14,269 $15,443 $13,302
7/31/2008 $14,271 $15,502 $13,372
8/31/2008 $14,383 $15,683 $13,318
9/30/2008 $13,540 $14,948 $13,300
10/31/2008 $13,423 $14,795 $13,166
11/30/2008 $13,251 $14,842 $12,913
12/31/2008 $13,477 $15,059 $12,780
1/31/2009 $13,877 $15,610 $12,835
2/28/2009 $14,064 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS A 2/28/09
- ------- -------
1-Year -0.98%
5-Year +1.63%
10-Year +3.47%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN GEORGIA BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS C BOND INDEX CPI
- ---------- ---------------- ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,012 $10,014 $10,030
4/30/1999 $10,032 $10,039 $10,103
5/31/1999 $ 9,977 $ 9,981 $10,103
6/30/1999 $ 9,840 $ 9,837 $10,103
7/31/1999 $ 9,844 $ 9,873 $10,134
8/31/1999 $ 9,721 $ 9,794 $10,158
9/30/1999 $ 9,690 $ 9,798 $10,207
10/31/1999 $ 9,549 $ 9,692 $10,225
11/30/1999 $ 9,620 $ 9,795 $10,231
12/31/1999 $ 9,521 $ 9,722 $10,231
1/31/2000 $ 9,431 $ 9,679 $10,261
2/29/2000 $ 9,563 $ 9,792 $10,322
3/31/2000 $ 9,783 $10,006 $10,407
4/30/2000 $ 9,735 $ 9,947 $10,413
5/31/2000 $ 9,670 $ 9,895 $10,426
6/30/2000 $ 9,918 $10,157 $10,480
7/31/2000 $10,036 $10,299 $10,505
8/31/2000 $10,181 $10,457 $10,505
9/30/2000 $10,105 $10,403 $10,559
10/31/2000 $10,223 $10,516 $10,578
11/30/2000 $10,307 $10,596 $10,584
12/31/2000 $10,560 $10,858 $10,578
1/31/2001 $10,616 $10,965 $10,644
2/28/2001 $10,655 $11,000 $10,687
3/31/2001 $10,748 $11,099 $10,711
4/30/2001 $10,623 $10,978 $10,754
5/31/2001 $10,716 $11,097 $10,802
6/30/2001 $10,801 $11,171 $10,821
7/31/2001 $10,950 $11,336 $10,790
8/31/2001 $11,119 $11,523 $10,790
9/30/2001 $11,038 $11,484 $10,839
10/31/2001 $11,188 $11,621 $10,802
11/30/2001 $11,097 $11,523 $10,784
12/31/2001 $10,987 $11,414 $10,742
1/31/2002 $11,119 $11,612 $10,766
2/28/2002 $11,242 $11,752 $10,809
3/31/2002 $11,046 $11,522 $10,869
4/30/2002 $11,189 $11,747 $10,930
5/31/2002 $11,229 $11,818 $10,930
6/30/2002 $11,326 $11,943 $10,936
7/31/2002 $11,452 $12,097 $10,948
8/31/2002 $11,549 $12,242 $10,985
9/30/2002 $11,801 $12,510 $11,003
10/31/2002 $11,542 $12,303 $11,021
11/30/2002 $11,505 $12,252 $11,021
12/31/2002 $11,740 $12,510 $10,997
1/31/2003 $11,712 $12,479 $11,046
2/28/2003 $11,861 $12,653 $11,131
3/31/2003 $11,862 $12,661 $11,198
4/30/2003 $11,982 $12,744 $11,173
5/31/2003 $12,269 $13,043 $11,155
6/30/2003 $12,278 $12,987 $11,167
7/31/2003 $11,769 $12,533 $11,179
8/31/2003 $11,867 $12,626 $11,222
9/30/2003 $12,217 $12,997 $11,258
10/31/2003 $12,106 $12,932 $11,246
11/30/2003 $12,246 $13,067 $11,216
12/31/2003 $12,356 $13,175 $11,204
1/31/2004 $12,435 $13,250 $11,258
2/29/2004 $12,627 $13,450 $11,319
3/31/2004 $12,584 $13,403 $11,392
4/30/2004 $12,265 $13,086 $11,429
5/31/2004 $12,212 $13,038 $11,495
6/30/2004 $12,242 $13,086 $11,532
7/31/2004 $12,405 $13,258 $11,514
8/31/2004 $12,632 $13,524 $11,520
9/30/2004 $12,714 $13,595 $11,544
10/31/2004 $12,837 $13,712 $11,605
11/30/2004 $12,699 $13,599 $11,611
12/31/2004 $12,887 $13,765 $11,568
1/31/2005 $13,075 $13,894 $11,593
2/28/2005 $13,009 $13,848 $11,660
3/31/2005 $12,933 $13,760 $11,751
4/30/2005 $13,143 $13,977 $11,830
5/31/2005 $13,237 $14,076 $11,818
6/30/2005 $13,278 $14,163 $11,824
7/31/2005 $13,222 $14,099 $11,878
8/31/2005 $13,359 $14,242 $11,939
9/30/2005 $13,248 $14,146 $12,085
10/31/2005 $13,147 $14,060 $12,109
11/30/2005 $13,207 $14,127 $12,012
12/31/2005 $13,333 $14,249 $11,964
1/31/2006 $13,339 $14,287 $12,055
2/28/2006 $13,455 $14,383 $12,079
3/31/2006 $13,340 $14,284 $12,146
4/30/2006 $13,336 $14,279 $12,249
5/31/2006 $13,375 $14,343 $12,310
6/30/2006 $13,304 $14,289 $12,334
7/31/2006 $13,432 $14,459 $12,371
8/31/2006 $13,628 $14,673 $12,395
9/30/2006 $13,724 $14,775 $12,334
10/31/2006 $13,798 $14,868 $12,267
11/30/2006 $13,950 $14,992 $12,249
12/31/2006 $13,889 $14,939 $12,267
1/31/2007 $13,849 $14,901 $12,305
2/28/2007 $14,014 $15,097 $12,371
3/31/2007 $13,952 $15,060 $12,483
4/30/2007 $13,970 $15,104 $12,564
5/31/2007 $13,896 $15,038 $12,641
6/30/2007 $13,822 $14,960 $12,666
7/31/2007 $13,920 $15,076 $12,663
8/31/2007 $13,823 $15,011 $12,639
9/30/2007 $14,026 $15,233 $12,674
10/31/2007 $14,067 $15,301 $12,701
11/30/2007 $14,132 $15,398 $12,777
12/31/2007 $14,161 $15,441 $12,768
1/31/2008 $14,261 $15,636 $12,832
2/29/2008 $13,525 $14,920 $12,869
3/31/2008 $13,979 $15,346 $12,980
4/30/2008 $14,198 $15,526 $13,059
5/31/2008 $14,299 $15,620 $13,169
6/30/2008 $14,164 $15,443 $13,302
7/31/2008 $14,160 $15,502 $13,372
8/31/2008 $14,252 $15,683 $13,318
9/30/2008 $13,430 $14,948 $13,300
10/31/2008 $13,296 $14,795 $13,166
11/30/2008 $13,109 $14,842 $12,913
12/31/2008 $13,336 $15,059 $12,780
1/31/2009 $13,734 $15,610 $12,835
2/28/2009 $13,898 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +1.79%
5-Year +1.94%
10-Year +3.35%
Annual Report | 29
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 GEORGIA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 977.80 $3.43
Hypothetical (5% return before expenses) $1,000 $1,021.32 $3.51
CLASS C
Actual $1,000 $ 975.30 $6.12
Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.26
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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.
32 | 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
CREDIT QUALITY BREAKDOWN*
Franklin Kentucky Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 18.3%
AA 29.7%
A 15.2%
BBB 9.8%
Below Investment Grade 0.9%
Not Rated by S&P 26.1%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
- ------- ------- --------
AA or Aa 15.0% --
A 5.3% 0.7%
BBB or Baa 4.4% 0.7%
---- ---
Total 24.7% 1.4%
This annual report for Franklin Kentucky Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$10.57 on February 29, 2008, to $10.50 on February 28, 2009. 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 105.
Annual Report | 33
DIVIDEND DISTRIBUTIONS*
Franklin Kentucky Tax-Free Income Fund Class A
MONTH DIVIDEND PER SHARE
- ----- ------------------
March 2008 3.75 cents
April 2008 3.75 cents
May 2008 3.75 cents
June 2008 3.85 cents
July 2008 3.85 cents
August 2008 3.85 cents
September 2008 3.95 cents
October 2008 3.95 cents
November 2008 3.95 cents
December 2008 3.95 cents
January 2009 3.95 cents
February 2009 3.95 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.
Class A shares paid dividends totaling 46.19 cents per share for the same
period.(2) 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 4.32%. An
investor in the 2009 maximum combined effective federal and Kentucky personal
income tax bracket of 38.90% would need to earn a distribution rate of 7.07%
from a taxable investment to match the Fund's Class A tax-free distribution
rate.
COMMONWEALTH UPDATE
Kentucky seemed little affected by the national recession until the third
quarter of 2008. The commonwealth's economy usually lags the nation in total
employment, population and personal income growth and was not hit by the auto
job losses and the effects of the housing downturn as soon as other parts of the
country. In September 2008, Kentucky began reporting negative year-over-year
employment growth, mainly in the manufacturing sector. By period-end, the
commonwealth's 9.2% unemployment rate was higher than the national rate of 8.1%,
reflecting job losses in the construction, manufacturing, trade, transportation
and utilities sectors.(3)
The slowing economy contributed to weaker-than-expected collections of sales and
income tax revenue. This underperformance forced Kentucky to issue a downwardly
revised general fund revenue projection indicating a $456 million shortfall.(4)
In response, the commonwealth reduced expenditures, increased tobacco and liquor
taxes and transferred funds. Kentucky relies on lease-supported debt for the
majority of its net tax-supported debt and strives to limit debt service to 6%
of total state revenues, a goal it has consistently achieved over the past 10
years. However, relative to national medians, the commonwealth's 2008 debt
levels were high at 4.7% as a percentage of personal income, compared with the
2.6% national median, and $1,381 per capita, compared with the $889 national
median.(4)
Independent credit rating agency Moody's Investors Service assigned Kentucky an
issuer credit rating of Aa3 with a negative outlook.(5) The rating and outlook
reflected the commonwealth's weakened economic and financial condition, which
led to projected budget shortfalls in the current fiscal year and upcoming
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Moody's Investors Service, "New Issue: Kentucky (Commonwealth of),"
2/19/09.
(5.) This does not indicate Moody's rating of the Fund.
34 | Annual Report
biennium. Kentucky addressed these shortfalls largely by using one-time
resources including a drawdown of reserve balances. However, based on Kentucky's
history of active financial management, Moody's expected the commonwealth to
work toward stabilizing its fiscal condition and restoring structural budget
balance.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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, 2009, 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 Kentucky Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Utilities 30.4%**
Subject to Government Appropriations 24.6%
Prerefunded 14.1%
General Obligation 9.2%
Higher Education 7.1%
Hospital & Health Care 6.4%
Transportation 3.3%
Other Revenue 2.7%
Housing 1.2%
Tax-Supported 1.0%
* Does not include short-term investments and other net assets.
** The Fund may invest more than 25% in municipal securities that finance
similar types of projects such as utilities. A change that affects one
project may affect all similar projects, thereby increasing market risk.
Annual Report | 35
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.07 $10.50 $10.57
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4619
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(2) +3.76% +12.33% +44.41%
Average Annual Total Return(3) -0.65% +1.47% +3.29%
Avg. Ann. Total Return (3/31/09)(4) -3.17% +1.60% +3.33%
Distribution Rate(5) 4.32%
Taxable Equivalent Distribution Rate(6) 7.07%
30-Day Standardized Yield(7) 4.00%
Taxable Equivalent Yield(6) 6.55%
Total Annual Operating Expenses(8) 0.76%
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 (800) 342-5236.
36 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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.
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN KENTUCKY
TAX-FREE INCOME FUND BARCLAYS CAPITAL
DATE - CLASS A MUNICIPAL BOND INDEX CPI
- ---------- -------------------- -------------------- -------
3/1/1999 $ 9,574 $10,000 $10,000
3/31/1999 $ 9,598 $10,014 $10,030
4/30/1999 $ 9,613 $10,039 $10,103
5/31/1999 $ 9,562 $ 9,981 $10,103
6/30/1999 $ 9,425 $ 9,837 $10,103
7/31/1999 $ 9,432 $ 9,873 $10,134
8/31/1999 $ 9,311 $ 9,794 $10,158
9/30/1999 $ 9,292 $ 9,798 $10,207
10/31/1999 $ 9,145 $ 9,692 $10,225
11/30/1999 $ 9,212 $ 9,795 $10,231
12/31/1999 $ 9,123 $ 9,722 $10,231
1/31/2000 $ 9,043 $ 9,679 $10,261
2/29/2000 $ 9,174 $ 9,792 $10,322
3/31/2000 $ 9,401 $10,006 $10,407
4/30/2000 $ 9,302 $ 9,947 $10,413
5/31/2000 $ 9,194 $ 9,895 $10,426
6/30/2000 $ 9,451 $10,157 $10,480
7/31/2000 $ 9,611 $10,299 $10,505
8/31/2000 $ 9,772 $10,457 $10,505
9/30/2000 $ 9,698 $10,403 $10,559
10/31/2000 $ 9,814 $10,516 $10,578
11/30/2000 $ 9,904 $10,596 $10,584
12/31/2000 $10,178 $10,858 $10,578
1/31/2001 $10,222 $10,965 $10,644
2/28/2001 $10,248 $11,000 $10,687
3/31/2001 $10,348 $11,099 $10,711
4/30/2001 $10,215 $10,978 $10,754
5/31/2001 $10,325 $11,097 $10,802
6/30/2001 $10,426 $11,171 $10,821
7/31/2001 $10,584 $11,336 $10,790
8/31/2001 $10,743 $11,523 $10,790
9/30/2001 $10,625 $11,484 $10,839
10/31/2001 $10,776 $11,621 $10,802
11/30/2001 $10,696 $11,523 $10,784
12/31/2001 $10,583 $11,414 $10,742
1/31/2002 $10,741 $11,612 $10,766
2/28/2002 $10,871 $11,752 $10,809
3/31/2002 $10,699 $11,522 $10,869
4/30/2002 $10,869 $11,747 $10,930
5/31/2002 $10,933 $11,818 $10,930
6/30/2002 $11,055 $11,943 $10,936
7/31/2002 $11,178 $12,097 $10,948
8/31/2002 $11,282 $12,242 $10,985
9/30/2002 $11,486 $12,510 $11,003
10/31/2002 $11,250 $12,303 $11,021
11/30/2002 $11,213 $12,252 $11,021
12/31/2002 $11,461 $12,510 $10,997
1/31/2003 $11,412 $12,479 $11,046
2/28/2003 $11,567 $12,653 $11,131
3/31/2003 $11,559 $12,661 $11,198
4/30/2003 $11,623 $12,744 $11,173
5/31/2003 $11,903 $13,043 $11,155
6/30/2003 $11,863 $12,987 $11,167
7/31/2003 $11,386 $12,533 $11,179
8/31/2003 $11,492 $12,626 $11,222
9/30/2003 $11,881 $12,997 $11,258
10/31/2003 $11,810 $12,932 $11,246
11/30/2003 $11,938 $13,067 $11,216
12/31/2003 $12,056 $13,175 $11,204
1/31/2004 $12,121 $13,250 $11,258
2/29/2004 $12,314 $13,450 $11,319
3/31/2004 $12,305 $13,403 $11,392
4/30/2004 $11,995 $13,086 $11,429
5/31/2004 $11,910 $13,038 $11,495
6/30/2004 $11,965 $13,086 $11,532
7/31/2004 $12,138 $13,258 $11,514
8/31/2004 $12,345 $13,524 $11,520
9/30/2004 $12,477 $13,595 $11,544
10/31/2004 $12,543 $13,712 $11,605
11/30/2004 $12,454 $13,599 $11,611
12/31/2004 $12,620 $13,765 $11,568
1/31/2005 $12,775 $13,894 $11,593
2/28/2005 $12,742 $13,848 $11,660
3/31/2005 $12,674 $13,760 $11,751
4/30/2005 $12,887 $13,977 $11,830
5/31/2005 $12,965 $14,076 $11,818
6/30/2005 $13,021 $14,163 $11,824
7/31/2005 $12,975 $14,099 $11,878
8/31/2005 $13,100 $14,242 $11,939
9/30/2005 $13,019 $14,146 $12,085
10/31/2005 $12,937 $14,060 $12,109
11/30/2005 $12,993 $14,127 $12,012
12/31/2005 $13,118 $14,249 $11,964
1/31/2006 $13,139 $14,287 $12,055
2/28/2006 $13,253 $14,383 $12,079
3/31/2006 $13,158 $14,284 $12,146
4/30/2006 $13,145 $14,279 $12,249
5/31/2006 $13,190 $14,343 $12,310
6/30/2006 $13,164 $14,289 $12,334
7/31/2006 $13,291 $14,459 $12,371
8/31/2006 $13,467 $14,673 $12,395
9/30/2006 $13,559 $14,775 $12,334
10/31/2006 $13,641 $14,868 $12,267
11/30/2006 $13,770 $14,992 $12,249
12/31/2006 $13,719 $14,939 $12,267
1/31/2007 $13,692 $14,901 $12,305
2/28/2007 $13,858 $15,097 $12,371
3/31/2007 $13,806 $15,060 $12,483
4/30/2007 $13,840 $15,104 $12,564
5/31/2007 $13,775 $15,038 $12,641
6/30/2007 $13,699 $14,960 $12,666
7/31/2007 $13,782 $15,076 $12,663
8/31/2007 $13,668 $15,011 $12,639
9/30/2007 $13,875 $15,233 $12,674
10/31/2007 $13,947 $15,301 $12,701
11/30/2007 $13,981 $15,398 $12,777
12/31/2007 $13,991 $15,441 $12,768
1/31/2008 $14,063 $15,636 $12,832
2/29/2008 $13,330 $14,920 $12,869
3/31/2008 $13,768 $15,346 $12,980
4/30/2008 $14,005 $15,526 $13,059
5/31/2008 $14,116 $15,620 $13,169
6/30/2008 $14,012 $15,443 $13,302
7/31/2008 $13,985 $15,502 $13,372
8/31/2008 $14,098 $15,683 $13,318
9/30/2008 $13,375 $14,948 $13,300
10/31/2008 $13,170 $14,795 $13,166
11/30/2008 $13,116 $14,842 $12,913
12/31/2008 $13,221 $15,059 $12,780
1/31/2009 $13,612 $15,610 $12,835
2/28/2009 $13,826 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS A 2/28/09
- ------- -------
1-Year -0.65%
5-Year +1.47%
10-Year +3.29%
Annual Report | 37
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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.) Past expense reductions by the Fund's manger increased the Fund's total
returns. Without these reductions, the Fund's total returns would have been
lower.
(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 3.95 cent per share
current monthly dividend and the maximum offering price of $10.97 per share
on 2/28/09.
(6.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(8.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
38 | Annual Report
Your Fund's Expenses
FRANKLIN KENTUCKY TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 39
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
- ------- ----------------- -------------- ----------------------
Actual $1,000 $ 981.00 $3.78
Hypothetical (5% return before expenses) $1,000 $1,020.98 $3.86
* Expenses are calculated using the most recent six-month annualized expense
ratio of 0.77%, multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
40 | Annual Report
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
CREDIT QUALITY BREAKDOWN*
Franklin Louisiana Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM
RATINGS INVESTMENTS**
- ------- -------------
AAA 17.3%
AA 22.0%
A 35.9%
BBB 10.3%
Below Investment Grade 0.6%
Not Rated by S&P 13.9%
* 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 3.9% 0.7%
A 2.0% --
BBB or Baa 5.1% 2.2%
---- ---
Total 11.0% 2.9%
This annual report for Franklin Louisiana Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$10.74 on February 29, 2008, to $10.43 on February 28, 2009. 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.
Annual Report | 41
DIVIDEND DISTRIBUTIONS*
Franklin Louisiana Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 3.94 cents 3.40 cents
April 2008 3.94 cents 3.40 cents
May 2008 3.94 cents 3.40 cents
June 2008 3.99 cents 3.47 cents
July 2008 3.99 cents 3.47 cents
August 2008 3.99 cents 3.47 cents
September 2008 3.99 cents 3.44 cents
October 2008 3.99 cents 3.44 cents
November 2008 3.99 cents 3.44 cents
December 2008 3.99 cents 3.61 cents
January 2009 3.99 cents 3.61 cents
February 2009 3.99 cents 3.61 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.
Class A shares paid dividends totaling 47.38 cents per share for the same
period.(2) The Performance Summary beginning on page 44 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.40%
based on an annualization of the current 3.99 cent per share dividend and the
maximum offering price of $10.89 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Louisiana personal income tax bracket of
38.90% would need to earn a distribution rate of 7.20% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class C
shares' performance, please see the Performance Summary.
STATE UPDATE
Louisiana's economic and fiscal recovery suffered setbacks during the period
under review. After a period of growth largely fueled by an unprecedented rise
in energy prices, the state's energy-reliant revenues were hit hard by the
combined effects of the sudden downturn in oil prices and the damage caused by
2. All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
42 | Annual Report
Hurricanes Ike and Gustav. At the beginning of the reporting period, global
economic growth slowed, triggering a rapid sell-off of oil futures contracts and
a sharp decline in prices. The two consecutive hurricanes devastated the state's
energy production and refining infrastructure and disrupted refining operations.
These events contributed to higher unemployment. At period-end, Louisiana's
unemployment rate was 5.7%, compared with the 8.1% national rate.(3)
Louisiana's economic growth during the reporting period was modest compared to
recent past years in which the state's coffers swelled with revenue derived from
the oil industry and the Hurricane Katrina recovery effort. In fiscal year 2008,
Louisiana experienced 3.1% fiscal growth, mainly resulting from the nation's
high oil prices.(4) Collections of sales and personal and corporate income taxes
either declined or were flat. The state announced that it will face a $2 billion
shortfall in fiscal year 2010 caused by plummeting energy prices and the
national economic slowdown.(5)
Independent credit rating agency Standard & Poor's issued Louisiana an A+
general obligation bond rating with a stable outlook.(6) The rating and outlook
reflected the state's revenue performance and budget discipline.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Moody's Investors Service, "Rating Update: Louisiana (State of),"
11/3/08.
(5.) Source: Moller, Jan, "Louisiana Faces $2 Billion Shortfall Next Year; $345
Million Deficit in Current Budget," THE TIMES-PICAYUNE, 12/15/08.
(6.) This does not indicate Standard & Poor's rating of the Fund.
PORTFOLIO BREAKDOWN
Franklin Louisiana Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM
INVESTMENTS*
------------
Tax-Supported 16.3%
Utilities 15.4%
Subject to Government Appropriations 11.3%
Transportation 10.1%
General Obligation 9.4%
Prerefunded 8.2%
Other Revenue 7.6%
Hospital & Health Care 7.2%
Higher Education 6.4%
Housing 6.0%
Corporate-Backed 2.1%
* Does not include short-term investments and other net assets.
Annual Report | 43
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.31 $10.43 $10.74
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4738
CLASS C (SYMBOL: FLAIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.31 $10.54 $10.85
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4148
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +1.53% +9.57% +43.47%
Average Annual Total Return(2) -2.82% +0.97% +3.23%
Avg. Ann. Total Return (3/31/09)(3) -5.76% +1.04% +3.22%
Distribution Rate(4) 4.40%
Taxable Equivalent Distribution Rate(5) 7.20%
30-Day Standardized Yield(6) 4.27%
Taxable Equivalent Yield(5) 6.99%
Total Annual Operating Expenses(7) 0.71%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +0.96% +6.59% +35.83%
Average Annual Total Return(2) -0.01% +1.28% +3.11%
Avg. Ann. Total Return (3/31/09)(3) -3.05% +1.38% +3.11%
Distribution Rate(4) 4.04%
Taxable Equivalent Distribution Rate(5) 6.61%
30-Day Standardized Yield(6) 3.92%
Taxable Equivalent Yield(5) 6.42%
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 (800) 342-5236.
44 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN LOUISIANA BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS A BOND INDEX CPI
- ---- ------------------ ---------------- -------
3/1/1999 $ 9,579 $10,000 $10,000
3/31/1999 $ 9,602 $10,014 $10,030
4/30/1999 $ 9,626 $10,039 $10,103
5/31/1999 $ 9,575 $ 9,981 $10,103
6/30/1999 $ 9,449 $ 9,837 $10,103
7/31/1999 $ 9,448 $ 9,873 $10,134
8/31/1999 $ 9,320 $ 9,794 $10,158
9/30/1999 $ 9,311 $ 9,798 $10,207
10/31/1999 $ 9,165 $ 9,692 $10,225
11/30/1999 $ 9,241 $ 9,795 $10,231
12/31/1999 $ 9,154 $ 9,722 $10,231
1/31/2000 $ 9,076 $ 9,679 $10,261
2/29/2000 $ 9,196 $ 9,792 $10,322
3/31/2000 $ 9,422 $10,006 $10,407
4/30/2000 $ 9,360 $ 9,947 $10,413
5/31/2000 $ 9,298 $ 9,895 $10,426
6/30/2000 $ 9,536 $10,157 $10,480
7/31/2000 $ 9,659 $10,299 $10,505
8/31/2000 $ 9,810 $10,457 $10,505
9/30/2000 $ 9,764 $10,403 $10,559
10/31/2000 $ 9,879 $10,516 $10,578
11/30/2000 $ 9,987 $10,596 $10,584
12/31/2000 $10,230 $10,858 $10,578
1/31/2001 $10,274 $10,965 $10,644
2/28/2001 $10,310 $11,000 $10,687
3/31/2001 $10,390 $11,099 $10,711
4/30/2001 $10,287 $10,978 $10,754
5/31/2001 $10,396 $11,097 $10,802
6/30/2001 $10,459 $11,171 $10,821
7/31/2001 $10,634 $11,336 $10,790
8/31/2001 $10,791 $11,523 $10,790
9/30/2001 $10,750 $11,484 $10,839
10/31/2001 $10,918 $11,621 $10,802
11/30/2001 $10,849 $11,523 $10,784
12/31/2001 $10,731 $11,414 $10,742
1/31/2002 $10,881 $11,612 $10,766
2/28/2002 $11,003 $11,752 $10,809
3/31/2002 $10,825 $11,522 $10,869
4/30/2002 $11,005 $11,747 $10,930
5/31/2002 $11,051 $11,818 $10,930
6/30/2002 $11,164 $11,943 $10,936
7/31/2002 $11,288 $12,097 $10,948
8/31/2002 $11,383 $12,242 $10,985
9/30/2002 $11,617 $12,510 $11,003
10/31/2002 $11,434 $12,303 $11,021
11/30/2002 $11,400 $12,252 $11,021
12/31/2002 $11,617 $12,510 $10,997
1/31/2003 $11,592 $12,479 $11,046
2/28/2003 $11,720 $12,653 $11,131
3/31/2003 $11,736 $12,661 $11,198
4/30/2003 $11,823 $12,744 $11,173
5/31/2003 $12,094 $13,043 $11,155
6/30/2003 $12,047 $12,987 $11,167
7/31/2003 $11,608 $12,533 $11,179
8/31/2003 $11,736 $12,626 $11,222
9/30/2003 $12,083 $12,997 $11,258
10/31/2003 $11,993 $12,932 $11,246
11/30/2003 $12,112 $13,067 $11,216
12/31/2003 $12,221 $13,175 $11,204
1/31/2004 $12,383 $13,250 $11,258
2/29/2004 $12,545 $13,450 $11,319
3/31/2004 $12,527 $13,403 $11,392
4/30/2004 $12,231 $13,086 $11,429
5/31/2004 $12,213 $13,038 $11,495
6/30/2004 $12,248 $13,086 $11,532
7/31/2004 $12,402 $13,258 $11,514
8/31/2004 $12,622 $13,524 $11,520
9/30/2004 $12,690 $13,595 $11,544
10/31/2004 $12,823 $13,712 $11,605
11/30/2004 $12,705 $13,599 $11,611
12/31/2004 $12,873 $13,765 $11,568
1/31/2005 $13,019 $13,894 $11,593
2/28/2005 $12,967 $13,848 $11,660
3/31/2005 $12,903 $13,760 $11,751
4/30/2005 $13,095 $13,977 $11,830
5/31/2005 $13,176 $14,076 $11,818
6/30/2005 $13,236 $14,163 $11,824
7/31/2005 $13,182 $14,099 $11,878
8/31/2005 $13,287 $14,242 $11,939
9/30/2005 $13,130 $14,146 $12,085
10/31/2005 $13,040 $14,060 $12,109
11/30/2005 $13,110 $14,127 $12,012
12/31/2005 $13,226 $14,249 $11,964
1/31/2006 $13,250 $14,287 $12,055
2/28/2006 $13,355 $14,383 $12,079
3/31/2006 $13,274 $14,284 $12,146
4/30/2006 $13,276 $14,279 $12,249
5/31/2006 $13,323 $14,343 $12,310
6/30/2006 $13,336 $14,289 $12,334
7/31/2006 $13,454 $14,459 $12,371
8/31/2006 $13,644 $14,673 $12,395
9/30/2006 $13,739 $14,775 $12,334
10/31/2006 $13,824 $14,868 $12,267
11/30/2006 $13,944 $14,992 $12,249
12/31/2006 $13,908 $14,939 $12,267
1/31/2007 $13,883 $14,901 $12,305
2/28/2007 $14,040 $15,097 $12,371
3/31/2007 $13,991 $15,060 $12,483
4/30/2007 $14,040 $15,104 $12,564
5/31/2007 $13,991 $15,038 $12,641
6/30/2007 $13,941 $14,960 $12,666
7/31/2007 $14,026 $15,076 $12,663
8/31/2007 $13,964 $15,011 $12,639
9/30/2007 $14,137 $15,233 $12,674
10/31/2007 $14,198 $15,301 $12,701
11/30/2007 $14,259 $15,398 $12,777
12/31/2007 $14,284 $15,441 $12,768
1/31/2008 $14,320 $15,636 $12,832
2/29/2008 $13,538 $14,920 $12,869
3/31/2008 $14,004 $15,346 $12,980
4/30/2008 $14,244 $15,526 $13,059
5/31/2008 $14,331 $15,620 $13,169
6/30/2008 $14,204 $15,443 $13,302
7/31/2008 $14,191 $15,502 $13,372
8/31/2008 $14,294 $15,683 $13,318
9/30/2008 $13,416 $14,948 $13,300
10/31/2008 $13,211 $14,795 $13,166
11/30/2008 $12,963 $14,842 $12,913
12/31/2008 $13,133 $15,059 $12,780
1/31/2009 $13,499 $15,610 $12,835
2/28/2009 $13,743 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS A 2/28/09
- ------- -------
1-Year -2.82%
5-Year +0.97%
10-Year +3.23%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN LOUISIANA BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS C BOND INDEX CPI
- ---- ------------------ ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,029 $10,014 $10,030
4/30/1999 $10,040 $10,039 $10,103
5/31/1999 $ 9,982 $ 9,981 $10,103
6/30/1999 $ 9,846 $ 9,837 $10,103
7/31/1999 $ 9,840 $ 9,873 $10,134
8/31/1999 $ 9,704 $ 9,794 $10,158
9/30/1999 $ 9,690 $ 9,798 $10,207
10/31/1999 $ 9,535 $ 9,692 $10,225
11/30/1999 $ 9,609 $ 9,795 $10,231
12/31/1999 $ 9,515 $ 9,722 $10,231
1/31/2000 $ 9,430 $ 9,679 $10,261
2/29/2000 $ 9,550 $ 9,792 $10,322
3/31/2000 $ 9,779 $10,006 $10,407
4/30/2000 $ 9,710 $ 9,947 $10,413
5/31/2000 $ 9,642 $ 9,895 $10,426
6/30/2000 $ 9,882 $10,157 $10,480
7/31/2000 $10,005 $10,299 $10,505
8/31/2000 $10,165 $10,457 $10,505
9/30/2000 $10,103 $10,403 $10,559
10/31/2000 $10,217 $10,516 $10,578
11/30/2000 $10,323 $10,596 $10,584
12/31/2000 $10,578 $10,858 $10,578
1/31/2001 $10,618 $10,965 $10,644
2/28/2001 $10,650 $11,000 $10,687
3/31/2001 $10,727 $11,099 $10,711
4/30/2001 $10,616 $10,978 $10,754
5/31/2001 $10,723 $11,097 $10,802
6/30/2001 $10,792 $11,171 $10,821
7/31/2001 $10,957 $11,336 $10,790
8/31/2001 $11,122 $11,523 $10,790
9/30/2001 $11,066 $11,484 $10,839
10/31/2001 $11,232 $11,621 $10,802
11/30/2001 $11,166 $11,523 $10,784
12/31/2001 $11,030 $11,414 $10,742
1/31/2002 $11,178 $11,612 $10,766
2/28/2002 $11,307 $11,752 $10,809
3/31/2002 $11,120 $11,522 $10,869
4/30/2002 $11,299 $11,747 $10,930
5/31/2002 $11,340 $11,818 $10,930
6/30/2002 $11,450 $11,943 $10,936
7/31/2002 $11,571 $12,097 $10,948
8/31/2002 $11,662 $12,242 $10,985
9/30/2002 $11,895 $12,510 $11,003
10/31/2002 $11,704 $12,303 $11,021
11/30/2002 $11,674 $12,252 $11,021
12/31/2002 $11,879 $12,510 $10,997
1/31/2003 $11,859 $12,479 $11,046
2/28/2003 $11,983 $12,653 $11,131
3/31/2003 $11,994 $12,661 $11,198
4/30/2003 $12,077 $12,744 $11,173
5/31/2003 $12,347 $13,043 $11,155
6/30/2003 $12,294 $12,987 $11,167
7/31/2003 $11,843 $12,533 $11,179
8/31/2003 $11,956 $12,626 $11,222
9/30/2003 $12,310 $12,997 $11,258
10/31/2003 $12,203 $12,932 $11,246
11/30/2003 $12,327 $13,067 $11,216
12/31/2003 $12,431 $13,175 $11,204
1/31/2004 $12,588 $13,250 $11,258
2/29/2004 $12,746 $13,450 $11,319
3/31/2004 $12,722 $13,403 $11,392
4/30/2004 $12,429 $13,086 $11,429
5/31/2004 $12,394 $13,038 $11,495
6/30/2004 $12,434 $13,086 $11,532
7/31/2004 $12,572 $13,258 $11,514
8/31/2004 $12,787 $13,524 $11,520
9/30/2004 $12,860 $13,595 $11,544
10/31/2004 $12,978 $13,712 $11,605
11/30/2004 $12,854 $13,599 $11,611
12/31/2004 $13,027 $13,765 $11,568
1/31/2005 $13,167 $13,894 $11,593
2/28/2005 $13,109 $13,848 $11,660
3/31/2005 $13,038 $13,760 $11,751
4/30/2005 $13,225 $13,977 $11,830
5/31/2005 $13,300 $14,076 $11,818
6/30/2005 $13,353 $14,163 $11,824
7/31/2005 $13,294 $14,099 $11,878
8/31/2005 $13,404 $14,242 $11,939
9/30/2005 $13,229 $14,146 $12,085
10/31/2005 $13,134 $14,060 $12,109
11/30/2005 $13,197 $14,127 $12,012
12/31/2005 $13,307 $14,249 $11,964
1/31/2006 $13,325 $14,287 $12,055
2/28/2006 $13,423 $14,383 $12,079
3/31/2006 $13,337 $14,284 $12,146
4/30/2006 $13,332 $14,279 $12,249
5/31/2006 $13,374 $14,343 $12,310
6/30/2006 $13,380 $14,289 $12,334
7/31/2006 $13,491 $14,459 $12,371
8/31/2006 $13,685 $14,673 $12,395
9/30/2006 $13,774 $14,775 $12,334
10/31/2006 $13,839 $14,868 $12,267
11/30/2006 $13,964 $14,992 $12,249
12/31/2006 $13,922 $14,939 $12,267
1/31/2007 $13,892 $14,901 $12,305
2/28/2007 $14,041 $15,097 $12,371
3/31/2007 $13,986 $15,060 $12,483
4/30/2007 $14,027 $15,104 $12,564
5/31/2007 $13,960 $15,038 $12,641
6/30/2007 $13,917 $14,960 $12,666
7/31/2007 $13,994 $15,076 $12,663
8/31/2007 $13,914 $15,011 $12,639
9/30/2007 $14,090 $15,233 $12,674
10/31/2007 $14,144 $15,301 $12,701
11/30/2007 $14,198 $15,398 $12,777
12/31/2007 $14,215 $15,441 $12,768
1/31/2008 $14,245 $15,636 $12,832
2/29/2008 $13,457 $14,920 $12,869
3/31/2008 $13,921 $15,346 $12,980
4/30/2008 $14,150 $15,526 $13,059
5/31/2008 $14,229 $15,620 $13,169
6/30/2008 $14,098 $15,443 $13,302
7/31/2008 $14,079 $15,502 $13,372
8/31/2008 $14,173 $15,683 $13,318
9/30/2008 $13,305 $14,948 $13,300
10/31/2008 $13,084 $14,795 $13,166
11/30/2008 $12,834 $14,842 $12,913
12/31/2008 $12,996 $15,059 $12,780
1/31/2009 $13,350 $15,610 $12,835
2/28/2009 $13,583 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year -0.01%
5-Year +1.28%
10-Year +3.11%
Annual Report | 45
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
46 | Annual Report
Your Fund's Expenses
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 47
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 961.60 $3.50
Hypothetical (5% return before expenses) $1,000 $1,021.22 $3.61
CLASS C
Actual $1,000 $ 958.50 $6.17
Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.36
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.72% and C: 1.27%), multiplied by the
average account value over the period, multiplied by 181/365 to reflect the
one-half year period.
48 | 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)
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
CREDIT QUALITY BREAKDOWN*
Franklin Maryland Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA ..................... 27.4%
AA ...................... 21.6%
A ....................... 15.9%
BBB ..................... 14.1%
Below Investment Grade .. 3.0%
Not Rated by S&P ........ 18.0%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
- ------- ------- --------
AAA or Aaa -- 2.3%
AA or Aa 5.7% --
A 3.8% --
BBB or Baa 4.4% 1.8%
---- ---
Total 13.9% 4.1%
This annual report for Franklin Maryland Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$10.81 on February 29, 2008, to $10.35 on February 28, 2009. 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 116.
Annual Report | 49
DIVIDEND DISTRIBUTIONS*
Franklin Maryland Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.04 cents 3.50 cents
April 2008 4.04 cents 3.50 cents
May 2008 4.04 cents 3.50 cents
June 2008 4.04 cents 3.52 cents
July 2008 4.04 cents 3.52 cents
August 2008 4.04 cents 3.52 cents
September 2008 4.07 cents 3.55 cents
October 2008 4.07 cents 3.55 cents
November 2008 4.07 cents 3.55 cents
December 2008 4.12 cents 3.67 cents
January 2009 4.12 cents 3.67 cents
February 2009 4.12 cents 3.67 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.
Class A shares paid dividends totaling 48.46 cents per share for the same
period.(2) 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 4.57%
based on an annualization of the current 4.12 cent per share dividend and the
maximum offering price of $10.81 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Maryland state and local personal income
tax bracket of 41.14% would need to earn a distribution rate of 7.76% from a
taxable investment to match the Fund's Class A tax-free distribution rate. For
the Fund's Class C shares' performance, please see the Performance Summary.
STATE UPDATE
Maryland's broad-based, diverse economy historically has outpaced the nation's.
During the reporting period, the state's economy, like the national economy, was
affected by the national recession as well as the mortgage and credit crises. In
2008, the state's employment declined 0.2%, compared with the 0.8% annual
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
50 | Annual Report
growth rate recorded in 2007.(3) At period-end, Maryland's 6.7% unemployment
rate was lower than the national rate, as the mining, logging and construction,
financial activities, and manufacturing sectors lost jobs.(4) Although the
state's economy has diversified in recent years, it continued to be more
affected by federal government activities than most states.
During the reporting period, the slumping housing market and economic
uncertainty contributed to weakened sales and personal income tax collections.
In October 2008, the state implemented $297 million in expenditure cuts to
address the budget gap resulting from this underperformance.(5) The governor
proposed additional budget cuts to resolve the remainder of fiscal year 2009's
budget gap. Maryland faced a projected $2.2 billion budget gap for fiscal year
2010.5 The state planned to address this budget gap with a combination of fund
transfers, spending reductions, and assumed federal stimulus receipts.
Maryland's debt levels eased considerably in recent years. Relative to 2008
national median levels, the state ranked 16th in debt per capita and 21st in
debt as a percentage of personal income.(5)
Independent credit rating agencies Standard & Poor's and Moody's Investors
Service assigned Maryland's general obligation bonds their highest ratings of
AAA and Aaa with stable outlooks.(6) The ratings and outlooks reflected the
state's economic strength and historically strong financial and debt management
practices. Maryland has a solid history of managing its finances through periods
of fiscal stress and addressed a recent structural budget gap, which improved
the state's long-term financial outlook.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
(3.) Source: Standard & Poor's, "Maryland; General Obligation," RATINGSDIRECT,
2/18/09.
(4.) Source: Bureau of Labor Statistics.
(5.) Source: Moody's Investors Service, "New Issue: Maryland (State of),"
2/19/09.
(6.) These do not indicate ratings of the Fund.
PORTFOLIO BREAKDOWN
Franklin Maryland Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Hospital & Health Care 20.2%
Prerefunded 20.1%
Higher Education 15.4%
Utilities 11.2%
Transportation 10.9%
General Obligation 8.2%
Housing 5.7%
Other Revenue 5.0%
Subject to Government Appropriations 2.0%
Tax-Supported 0.9%
Corporate-Backed 0.4%
* Does not include short-term investments and other net assets.
Annual Report | 51
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, 2009, 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 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.46 $10.35 $10.81
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4846
CLASS C (SYMBOL: FMDIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.45 $10.50 $10.95
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4243
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +0.20% +7.71% +40.63%
Average Annual Total Return(2) -4.06% +0.62% +3.02%
Avg. Ann. Total Return (3/31/09)(3) -6.93% +0.73% +3.04%
Distribution Rate(4) 4.57%
Taxable Equivalent Distribution Rate(5) 7.76%
30-Day Standardized Yield(6) 4.09%
Taxable Equivalent Yield(5) 6.95%
Total Annual Operating Expenses(7) 0.67%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -0.26% +4.87% +33.33%
Average Annual Total Return(2) -1.22% +0.96% +2.92%
Avg. Ann. Total Return (3/31/09)(3) -4.36% +1.05% +2.92%
Distribution Rate(4) 4.18%
Taxable Equivalent Distribution Rate(5) 7.10%
30-Day Standardized Yield(6) 3.73%
Taxable Equivalent Yield(5) 6.34%
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 (800) 342-5236.
Annual Report | 53
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -4.06%
5-Year +0.62%
10-Year +3.02%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN MARYLAND
TAX-FREE
INCOME FUND BARCLAYS CAPITAL
DATE - CLASS A MUNICIPAL BOND INDEX CPI
- ---------- -------------------- -------------------- -------
3/1/1999 $ 9,573 $10,000 $10,000
3/31/1999 $ 9,586 $10,014 $10,030
4/30/1999 $ 9,624 $10,039 $10,103
5/31/1999 $ 9,579 $ 9,981 $10,103
6/30/1999 $ 9,443 $ 9,837 $10,103
7/31/1999 $ 9,464 $ 9,873 $10,134
8/31/1999 $ 9,318 $ 9,794 $10,158
9/30/1999 $ 9,298 $ 9,798 $10,207
10/31/1999 $ 9,151 $ 9,692 $10,225
11/30/1999 $ 9,241 $ 9,795 $10,231
12/31/1999 $ 9,152 $ 9,722 $10,231
1/31/2000 $ 9,089 $ 9,679 $10,261
2/29/2000 $ 9,198 $ 9,792 $10,322
3/31/2000 $ 9,412 $10,006 $10,407
4/30/2000 $ 9,383 $ 9,947 $10,413
5/31/2000 $ 9,302 $ 9,895 $10,426
6/30/2000 $ 9,536 $10,157 $10,480
7/31/2000 $ 9,683 $10,299 $10,505
8/31/2000 $ 9,849 $10,457 $10,505
9/30/2000 $ 9,820 $10,403 $10,559
10/31/2000 $ 9,916 $10,516 $10,578
11/30/2000 $10,003 $10,596 $10,584
12/31/2000 $10,226 $10,858 $10,578
1/31/2001 $10,286 $10,965 $10,644
2/28/2001 $10,347 $11,000 $10,687
3/31/2001 $10,417 $11,099 $10,711
4/30/2001 $10,332 $10,978 $10,754
5/31/2001 $10,421 $11,097 $10,802
6/30/2001 $10,510 $11,171 $10,821
7/31/2001 $10,655 $11,336 $10,790
8/31/2001 $10,819 $11,523 $10,790
9/30/2001 $10,787 $11,484 $10,839
10/31/2001 $10,915 $11,621 $10,802
11/30/2001 $10,846 $11,523 $10,784
12/31/2001 $10,747 $11,414 $10,742
1/31/2002 $10,894 $11,612 $10,766
2/28/2002 $11,013 $11,752 $10,809
3/31/2002 $10,827 $11,522 $10,869
4/30/2002 $10,995 $11,747 $10,930
5/31/2002 $11,106 $11,818 $10,930
6/30/2002 $11,199 $11,943 $10,936
7/31/2002 $11,331 $12,097 $10,948
8/31/2002 $11,444 $12,242 $10,985
9/30/2002 $11,665 $12,510 $11,003
10/31/2002 $11,474 $12,303 $11,021
11/30/2002 $11,450 $12,252 $11,021
12/31/2002 $11,664 $12,510 $10,997
1/31/2003 $11,668 $12,479 $11,046
2/28/2003 $11,803 $12,653 $11,131
3/31/2003 $11,818 $12,661 $11,198
4/30/2003 $11,914 $12,744 $11,173
5/31/2003 $12,161 $13,043 $11,155
6/30/2003 $12,124 $12,987 $11,167
7/31/2003 $11,700 $12,533 $11,179
8/31/2003 $11,806 $12,626 $11,222
9/30/2003 $12,077 $12,997 $11,258
10/31/2003 $12,020 $12,932 $11,246
11/30/2003 $12,148 $13,067 $11,216
12/31/2003 $12,255 $13,175 $11,204
1/31/2004 $12,321 $13,250 $11,258
2/29/2004 $12,502 $13,450 $11,319
3/31/2004 $12,474 $13,403 $11,392
4/30/2004 $12,203 $13,086 $11,429
5/31/2004 $12,164 $13,038 $11,495
6/30/2004 $12,199 $13,086 $11,532
7/31/2004 $12,340 $13,258 $11,514
8/31/2004 $12,546 $13,524 $11,520
9/30/2004 $12,624 $13,595 $11,544
10/31/2004 $12,724 $13,712 $11,605
11/30/2004 $12,629 $13,599 $11,611
12/31/2004 $12,783 $13,765 $11,568
1/31/2005 $12,938 $13,894 $11,593
2/28/2005 $12,919 $13,848 $11,660
3/31/2005 $12,867 $13,760 $11,751
4/30/2005 $13,057 $13,977 $11,830
5/31/2005 $13,147 $14,076 $11,818
6/30/2005 $13,216 $14,163 $11,824
7/31/2005 $13,174 $14,099 $11,878
8/31/2005 $13,299 $14,242 $11,939
9/30/2005 $13,213 $14,146 $12,085
10/31/2005 $13,159 $14,060 $12,109
11/30/2005 $13,207 $14,127 $12,012
12/31/2005 $13,322 $14,249 $11,964
1/31/2006 $13,347 $14,287 $12,055
2/28/2006 $13,452 $14,383 $12,079
3/31/2006 $13,362 $14,284 $12,146
4/30/2006 $13,363 $14,279 $12,249
5/31/2006 $13,399 $14,343 $12,310
6/30/2006 $13,344 $14,289 $12,334
7/31/2006 $13,497 $14,459 $12,371
8/31/2006 $13,685 $14,673 $12,395
9/30/2006 $13,781 $14,775 $12,334
10/31/2006 $13,877 $14,868 $12,267
11/30/2006 $14,008 $14,992 $12,249
12/31/2006 $13,962 $14,939 $12,267
1/31/2007 $13,927 $14,901 $12,305
2/28/2007 $14,118 $15,097 $12,371
3/31/2007 $14,047 $15,060 $12,483
4/30/2007 $14,083 $15,104 $12,564
5/31/2007 $14,036 $15,038 $12,641
6/30/2007 $13,952 $14,960 $12,666
7/31/2007 $14,036 $15,076 $12,663
8/31/2007 $13,891 $15,011 $12,639
9/30/2007 $14,123 $15,233 $12,674
10/31/2007 $14,184 $15,301 $12,701
11/30/2007 $14,196 $15,398 $12,777
12/31/2007 $14,136 $15,441 $12,768
1/31/2008 $14,209 $15,636 $12,832
2/29/2008 $13,440 $14,920 $12,869
3/31/2008 $13,912 $15,346 $12,980
4/30/2008 $14,175 $15,526 $13,059
5/31/2008 $14,275 $15,620 $13,169
6/30/2008 $14,062 $15,443 $13,302
7/31/2008 $14,050 $15,502 $13,372
8/31/2008 $14,165 $15,683 $13,318
9/30/2008 $13,363 $14,948 $13,300
10/31/2008 $12,984 $14,795 $13,166
11/30/2008 $12,753 $14,842 $12,913
12/31/2008 $12,640 $15,059 $12,780
1/31/2009 $13,274 $15,610 $12,835
2/28/2009 $13,463 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year -1.22%
5-Year +0.96%
10-Year +2.92%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN MARYLAND
TAX-FREE
INCOME FUND BARCLAYS CAPITAL
DATE - CLASS C MUNICIPAL BOND INDEX CPI
- ---------- -------------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,017 $10,014 $10,030
4/30/1999 $10,043 $10,039 $10,103
5/31/1999 $ 9,992 $ 9,981 $10,103
6/30/1999 $ 9,846 $ 9,837 $10,103
7/31/1999 $ 9,864 $ 9,873 $10,134
8/31/1999 $ 9,709 $ 9,794 $10,158
9/30/1999 $ 9,683 $ 9,798 $10,207
10/31/1999 $ 9,526 $ 9,692 $10,225
11/30/1999 $ 9,615 $ 9,795 $10,231
12/31/1999 $ 9,519 $ 9,722 $10,231
1/31/2000 $ 9,450 $ 9,679 $10,261
2/29/2000 $ 9,558 $ 9,792 $10,322
3/31/2000 $ 9,783 $10,006 $10,407
4/30/2000 $ 9,740 $ 9,947 $10,413
5/31/2000 $ 9,661 $ 9,895 $10,426
6/30/2000 $ 9,898 $10,157 $10,480
7/31/2000 $10,036 $10,299 $10,505
8/31/2000 $10,202 $10,457 $10,505
9/30/2000 $10,168 $10,403 $10,559
10/31/2000 $10,271 $10,516 $10,578
11/30/2000 $10,356 $10,596 $10,584
12/31/2000 $10,579 $10,858 $10,578
1/31/2001 $10,636 $10,965 $10,644
2/28/2001 $10,694 $11,000 $10,687
3/31/2001 $10,769 $11,099 $10,711
4/30/2001 $10,668 $10,978 $10,754
5/31/2001 $10,763 $11,097 $10,802
6/30/2001 $10,849 $11,171 $10,821
7/31/2001 $10,992 $11,336 $10,790
8/31/2001 $11,155 $11,523 $10,790
9/30/2001 $11,117 $11,484 $10,839
10/31/2001 $11,243 $11,621 $10,802
11/30/2001 $11,167 $11,523 $10,784
12/31/2001 $11,061 $11,414 $10,742
1/31/2002 $11,205 $11,612 $10,766
2/28/2002 $11,322 $11,752 $10,809
3/31/2002 $11,127 $11,522 $10,869
4/30/2002 $11,293 $11,747 $10,930
5/31/2002 $11,401 $11,818 $10,930
6/30/2002 $11,499 $11,943 $10,936
7/31/2002 $11,618 $12,097 $10,948
8/31/2002 $11,737 $12,242 $10,985
9/30/2002 $11,956 $12,510 $11,003
10/31/2002 $11,757 $12,303 $11,021
11/30/2002 $11,728 $12,252 $11,021
12/31/2002 $11,939 $12,510 $10,997
1/31/2003 $11,939 $12,479 $11,046
2/28/2003 $12,070 $12,653 $11,131
3/31/2003 $12,079 $12,661 $11,198
4/30/2003 $12,171 $12,744 $11,173
5/31/2003 $12,425 $13,043 $11,155
6/30/2003 $12,373 $12,987 $11,167
7/31/2003 $11,940 $12,533 $11,179
8/31/2003 $12,041 $12,626 $11,222
9/30/2003 $12,309 $12,997 $11,258
10/31/2003 $12,245 $12,932 $11,246
11/30/2003 $12,369 $13,067 $11,216
12/31/2003 $12,470 $13,175 $11,204
1/31/2004 $12,541 $13,250 $11,258
2/29/2004 $12,717 $13,450 $11,319
3/31/2004 $12,682 $13,403 $11,392
4/30/2004 $12,393 $13,086 $11,429
5/31/2004 $12,347 $13,038 $11,495
6/30/2004 $12,387 $13,086 $11,532
7/31/2004 $12,513 $13,258 $11,514
8/31/2004 $12,724 $13,524 $11,520
9/30/2004 $12,797 $13,595 $11,544
10/31/2004 $12,891 $13,712 $11,605
11/30/2004 $12,791 $13,599 $11,611
12/31/2004 $12,950 $13,765 $11,568
1/31/2005 $13,100 $13,894 $11,593
2/28/2005 $13,064 $13,848 $11,660
3/31/2005 $13,017 $13,760 $11,751
4/30/2005 $13,189 $13,977 $11,830
5/31/2005 $13,284 $14,076 $11,818
6/30/2005 $13,336 $14,163 $11,824
7/31/2005 $13,288 $14,099 $11,878
8/31/2005 $13,417 $14,242 $11,939
9/30/2005 $13,326 $14,146 $12,085
10/31/2005 $13,255 $14,060 $12,109
11/30/2005 $13,307 $14,127 $12,012
12/31/2005 $13,416 $14,249 $11,964
1/31/2006 $13,435 $14,287 $12,055
2/28/2006 $13,533 $14,383 $12,079
3/31/2006 $13,437 $14,284 $12,146
4/30/2006 $13,432 $14,279 $12,249
5/31/2006 $13,462 $14,343 $12,310
6/30/2006 $13,400 $14,289 $12,334
7/31/2006 $13,546 $14,459 $12,371
8/31/2006 $13,727 $14,673 $12,395
9/30/2006 $13,815 $14,775 $12,334
10/31/2006 $13,904 $14,868 $12,267
11/30/2006 $14,040 $14,992 $12,249
12/31/2006 $13,987 $14,939 $12,267
1/31/2007 $13,935 $14,901 $12,305
2/28/2007 $14,129 $15,097 $12,371
3/31/2007 $14,052 $15,060 $12,483
4/30/2007 $14,081 $15,104 $12,564
5/31/2007 $14,016 $15,038 $12,641
6/30/2007 $13,938 $14,960 $12,666
7/31/2007 $14,016 $15,076 $12,663
8/31/2007 $13,854 $15,011 $12,639
9/30/2007 $14,088 $15,233 $12,674
10/31/2007 $14,142 $15,301 $12,701
11/30/2007 $14,148 $15,398 $12,777
12/31/2007 $14,081 $15,441 $12,768
1/31/2008 $14,147 $15,636 $12,832
2/29/2008 $13,372 $14,920 $12,869
3/31/2008 $13,842 $15,346 $12,980
4/30/2008 $14,093 $15,526 $13,059
5/31/2008 $14,185 $15,620 $13,169
6/30/2008 $13,970 $15,443 $13,302
7/31/2008 $13,952 $15,502 $13,372
8/31/2008 $14,070 $15,683 $13,318
9/30/2008 $13,254 $14,948 $13,300
10/31/2008 $12,876 $14,795 $13,166
11/30/2008 $12,644 $14,842 $12,913
12/31/2008 $12,527 $15,059 $12,780
1/31/2009 $13,142 $15,610 $12,835
2/28/2009 $13,333 $15,692 $12,899
54 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 for the maximum combined effective federal and Maryland
state and local personal income tax rate of 41.14%, 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 55
Your Fund's Expenses
FRANKLIN MARYLAND TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
56 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 950.70 $3.29
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.41
CLASS C
Actual $1,000 $ 947.90 $5.94
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.16
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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 | 57
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
CREDIT QUALITY BREAKDOWN*
Franklin Missouri Tax-Free Income Fund 2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 28.3%
AA 37.7%
A 5.7%
BBB 13.0%
Below Investment Grade 0.5%
Not Rated by S&P 14.8%
* 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 2.8% 1.3%
AA or Aa 1.4% --
A 3.2% 0.4%
BBB or Baa 2.7% 2.8%
Below Investment Grade -- 0.2%
---- ---
Total 10.1% 4.7%
This annual report for Franklin Missouri Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.52 on February 29, 2008, to $11.28 on February 28, 2009. 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 122.
58 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Missouri Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.28 cents 3.72 cents
April 2008 4.28 cents 3.72 cents
May 2008 4.28 cents 3.72 cents
June 2008 4.28 cents 3.72 cents
July 2008 4.28 cents 3.72 cents
August 2008 4.28 cents 3.72 cents
September 2008 4.31 cents 3.77 cents
October 2008 4.31 cents 3.77 cents
November 2008 4.31 cents 3.77 cents
December 2008 4.31 cents 3.83 cents
January 2009 4.31 cents 3.83 cents
February 2009 4.31 cents 3.83 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.
Class A shares paid dividends totaling 51.16 cents per share for the same
period.(2) The Performance Summary beginning on page 61 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.39%
based on an annualization of the current 4.31 cent per share dividend and the
maximum offering price of $11.78 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Missouri personal income tax bracket of
38.90% would need to earn a distribution rate of 7.18% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class C
shares' performance, please see the Performance Summary.
STATE UPDATE
During the reporting period, Missouri's economy was affected by the national
recession as well as the mortgage and credit crises. Missouri's once-dominant
and still-integral manufacturing sector continued its steady decline, but over
recent years the state's economic base has diversified. At period-end, the
state's unemployment rate reached 8.3%, its highest level since April 1983, and
was
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 59
PORTFOLIO BREAKDOWN
Franklin Missouri Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 18.3%
Utilities 16.5%
Hospital & Health Care 14.4%
Higher Education 14.1%
Subject to Government Appropriations 8.4%
Other Revenue 7.9%
Tax-Supported 6.4%
Transportation 5.6%
General Obligation 5.1%
Corporate-Backed 2.3%
Housing 1.0%
* Does not include short-term investments and other net assets.
higher than the national rate of 8.1%.(3) The biggest job losses were in the
construction and manufacturing sectors. Missouri's foreclosure rate, while not
high compared to other states' rates, increased during the year.
Missouri's initial fiscal year 2009 budget called for an increase in general
revenue spending, including increased spending on education and Medicaid. The
state's initial revenue estimate anticipated increased collections of sales and
individual and corporate income taxes. However, as a result of lower wages, lost
income and job security fears associated with rising unemployment, sales tax
collections fell in January 2009 from a year earlier. Per state law, the budget
is mandated to stay in financial balance, and state officials are required to
make midyear budget cuts to maintain a balanced budget. Missouri's debt burden
was low at $613 per capita and 1.8% of personal income.(4)
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 reflected the state's healthy and diverse economic base, strong
financial management, high reserve levels, and low debt burden.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Standard & Poor's, "State Review: Missouri," RATINGSDIRECT,
8/29/08.
(5.) This does not indicate Standard & Poor's rating of the Fund.
60 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.24 $ 11.28 $ 11.52
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5116
CLASS C (SYMBOL: FMOIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.25 $ 11.35 $ 11.60
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4480
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +2.39% +12.60% +47.21%
Average Annual Total Return(2) -1.95% +1.52% +3.49%
Avg. Ann. Total Return (3/31/09)(3) -4.50% +1.62% +3.48%
Distribution Rate(4) 4.39%
Taxable Equivalent Distribution Rate(5) 7.18%
30-Day Standardized Yield(6) 3.80%
Taxable Equivalent Yield(5) 6.22%
Total Annual Operating Expenses(7) 0.66%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +1.81% +9.56% +39.30%
Average Annual Total Return(2) +0.83% +1.84% +3.37%
Avg. Ann. Total Return (3/31/09)(3) -1.89% +1.93% +3.36%
Distribution Rate(4) 4.01%
Taxable Equivalent Distribution Rate(5) 6.56%
30-Day Standardized Yield(6) 3.43%
Taxable Equivalent Yield(5) 5.61%
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 (800) 342-5236.
Annual Report | 61
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -1.95%
5-Year +1.52%
10-Year +3.49%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN MISSOURI TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS A MUNICIPAL BOND INDEX CPI
- ---- -------------------------- -------------------- --------
3/1/1999 $ 9,576 $10,000 $10,000
3/31/1999 $ 9,599 $10,014 $10,030
4/30/1999 $ 9,615 $10,039 $10,103
5/31/1999 $ 9,559 $ 9,981 $10,103
6/30/1999 $ 9,411 $ 9,837 $10,103
7/31/1999 $ 9,427 $ 9,873 $10,134
8/31/1999 $ 9,290 $ 9,794 $10,158
9/30/1999 $ 9,274 $ 9,798 $10,207
10/31/1999 $ 9,120 $ 9,692 $10,225
11/30/1999 $ 9,209 $ 9,795 $10,231
12/31/1999 $ 9,103 $ 9,722 $10,231
1/31/2000 $ 9,013 $ 9,679 $10,261
2/29/2000 $ 9,128 $ 9,792 $10,322
3/31/2000 $ 9,360 $10,006 $10,407
4/30/2000 $ 9,302 $ 9,947 $10,413
5/31/2000 $ 9,235 $ 9,895 $10,426
6/30/2000 $ 9,487 $10,157 $10,480
7/31/2000 $ 9,622 $10,299 $10,505
8/31/2000 $ 9,792 $10,457 $10,505
9/30/2000 $ 9,732 $10,403 $10,559
10/31/2000 $ 9,835 $10,516 $10,578
11/30/2000 $ 9,921 $10,596 $10,584
12/31/2000 $10,171 $10,858 $10,578
1/31/2001 $10,231 $10,965 $10,644
2/28/2001 $10,275 $11,000 $10,687
3/31/2001 $10,353 $11,099 $10,711
4/30/2001 $10,256 $10,978 $10,754
5/31/2001 $10,352 $11,097 $10,802
6/30/2001 $10,431 $11,171 $10,821
7/31/2001 $10,600 $11,336 $10,790
8/31/2001 $10,822 $11,523 $10,790
9/30/2001 $10,767 $11,484 $10,839
10/31/2001 $10,910 $11,621 $10,802
11/30/2001 $10,818 $11,523 $10,784
12/31/2001 $10,681 $11,414 $10,742
1/31/2002 $10,889 $11,612 $10,766
2/28/2002 $11,006 $11,752 $10,809
3/31/2002 $10,785 $11,522 $10,869
4/30/2002 $10,968 $11,747 $10,930
5/31/2002 $11,031 $11,818 $10,930
6/30/2002 $11,141 $11,943 $10,936
7/31/2002 $11,289 $12,097 $10,948
8/31/2002 $11,410 $12,242 $10,985
9/30/2002 $11,661 $12,510 $11,003
10/31/2002 $11,452 $12,303 $11,021
11/30/2002 $11,421 $12,252 $11,021
12/31/2002 $11,628 $12,510 $10,997
1/31/2003 $11,616 $12,479 $11,046
2/28/2003 $11,767 $12,653 $11,131
3/31/2003 $11,774 $12,661 $11,198
4/30/2003 $11,867 $12,744 $11,173
5/31/2003 $12,145 $13,043 $11,155
6/30/2003 $12,093 $12,987 $11,167
7/31/2003 $11,629 $12,533 $11,179
8/31/2003 $11,743 $12,626 $11,222
9/30/2003 $12,045 $12,997 $11,258
10/31/2003 $11,982 $12,932 $11,246
11/30/2003 $12,126 $13,067 $11,216
12/31/2003 $12,241 $13,175 $11,204
1/31/2004 $12,316 $13,250 $11,258
2/29/2004 $12,521 $13,450 $11,319
3/31/2004 $12,475 $13,403 $11,392
4/30/2004 $12,156 $13,086 $11,429
5/31/2004 $12,111 $13,038 $11,495
6/30/2004 $12,136 $13,086 $11,532
7/31/2004 $12,315 $13,258 $11,514
8/31/2004 $12,535 $13,524 $11,520
9/30/2004 $12,612 $13,595 $11,544
10/31/2004 $12,740 $13,712 $11,605
11/30/2004 $12,631 $13,599 $11,611
12/31/2004 $12,813 $13,765 $11,568
1/31/2005 $12,985 $13,894 $11,593
2/28/2005 $12,958 $13,848 $11,660
3/31/2005 $12,900 $13,760 $11,751
4/30/2005 $13,106 $13,977 $11,830
5/31/2005 $13,206 $14,076 $11,818
6/30/2005 $13,275 $14,163 $11,824
7/31/2005 $13,269 $14,099 $11,878
8/31/2005 $13,403 $14,242 $11,939
9/30/2005 $13,279 $14,146 $12,085
10/31/2005 $13,175 $14,060 $12,109
11/30/2005 $13,223 $14,127 $12,012
12/31/2005 $13,369 $14,249 $11,964
1/31/2006 $13,384 $14,287 $12,055
2/28/2006 $13,520 $14,383 $12,079
3/31/2006 $13,414 $14,284 $12,146
4/30/2006 $13,407 $14,279 $12,249
5/31/2006 $13,433 $14,343 $12,310
6/30/2006 $13,381 $14,289 $12,334
7/31/2006 $13,541 $14,459 $12,371
8/31/2006 $13,746 $14,673 $12,395
9/30/2006 $13,839 $14,775 $12,334
10/31/2006 $13,933 $14,868 $12,267
11/30/2006 $14,072 $14,992 $12,249
12/31/2006 $14,019 $14,939 $12,267
1/31/2007 $13,976 $14,901 $12,305
2/28/2007 $14,174 $15,097 $12,371
3/31/2007 $14,108 $15,060 $12,483
4/30/2007 $14,157 $15,104 $12,564
5/31/2007 $14,091 $15,038 $12,641
6/30/2007 $14,013 $14,960 $12,666
7/31/2007 $14,121 $15,076 $12,663
8/31/2007 $13,984 $15,011 $12,639
9/30/2007 $14,209 $15,233 $12,674
10/31/2007 $14,271 $15,301 $12,701
11/30/2007 $14,333 $15,398 $12,777
12/31/2007 $14,336 $15,441 $12,768
1/31/2008 $14,422 $15,636 $12,832
2/29/2008 $13,769 $14,920 $12,869
3/31/2008 $14,167 $15,346 $12,980
4/30/2008 $14,398 $15,526 $13,059
5/31/2008 $14,497 $15,620 $13,169
6/30/2008 $14,319 $15,443 $13,302
7/31/2008 $14,311 $15,502 $13,372
8/31/2008 $14,436 $15,683 $13,318
9/30/2008 $13,595 $14,948 $13,300
10/31/2008 $13,479 $14,795 $13,166
11/30/2008 $13,395 $14,842 $12,913
12/31/2008 $13,622 $15,059 $12,780
1/31/2009 $13,961 $15,610 $12,835
2/28/2009 $14,096 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +0.83%
5-Year +1.84%
10-Year +3.37%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN MISSOURI TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---- -------------------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,020 $10,014 $10,030
4/30/1999 $10,023 $10,039 $10,103
5/31/1999 $ 9,969 $ 9,981 $10,103
6/30/1999 $ 9,802 $ 9,837 $10,103
7/31/1999 $ 9,814 $ 9,873 $10,134
8/31/1999 $ 9,676 $ 9,794 $10,158
9/30/1999 $ 9,647 $ 9,798 $10,207
10/31/1999 $ 9,491 $ 9,692 $10,225
11/30/1999 $ 9,571 $ 9,795 $10,231
12/31/1999 $ 9,456 $ 9,722 $10,231
1/31/2000 $ 9,359 $ 9,679 $10,261
2/29/2000 $ 9,474 $ 9,792 $10,322
3/31/2000 $ 9,710 $10,006 $10,407
4/30/2000 $ 9,645 $ 9,947 $10,413
5/31/2000 $ 9,581 $ 9,895 $10,426
6/30/2000 $ 9,828 $10,157 $10,480
7/31/2000 $ 9,971 $10,299 $10,505
8/31/2000 $10,133 $10,457 $10,505
9/30/2000 $10,075 $10,403 $10,559
10/31/2000 $10,177 $10,516 $10,578
11/30/2000 $10,261 $10,596 $10,584
12/31/2000 $10,513 $10,858 $10,578
1/31/2001 $10,571 $10,965 $10,644
2/28/2001 $10,611 $11,000 $10,687
3/31/2001 $10,695 $11,099 $10,711
4/30/2001 $10,581 $10,978 $10,754
5/31/2001 $10,675 $11,097 $10,802
6/30/2001 $10,751 $11,171 $10,821
7/31/2001 $10,920 $11,336 $10,790
8/31/2001 $11,143 $11,523 $10,790
9/30/2001 $11,091 $11,484 $10,839
10/31/2001 $11,232 $11,621 $10,802
11/30/2001 $11,133 $11,523 $10,784
12/31/2001 $10,988 $11,414 $10,742
1/31/2002 $11,186 $11,612 $10,766
2/28/2002 $11,310 $11,752 $10,809
3/31/2002 $11,078 $11,522 $10,869
4/30/2002 $11,260 $11,747 $10,930
5/31/2002 $11,320 $11,818 $10,930
6/30/2002 $11,427 $11,943 $10,936
7/31/2002 $11,573 $12,097 $10,948
8/31/2002 $11,691 $12,242 $10,985
9/30/2002 $11,942 $12,510 $11,003
10/31/2002 $11,723 $12,303 $11,021
11/30/2002 $11,686 $12,252 $11,021
12/31/2002 $11,892 $12,510 $10,997
1/31/2003 $11,874 $12,479 $11,046
2/28/2003 $12,023 $12,653 $11,131
3/31/2003 $12,025 $12,661 $11,198
4/30/2003 $12,114 $12,744 $11,173
5/31/2003 $12,392 $13,043 $11,155
6/30/2003 $12,343 $12,987 $11,167
7/31/2003 $11,858 $12,533 $11,179
8/31/2003 $11,966 $12,626 $11,222
9/30/2003 $12,266 $12,997 $11,258
10/31/2003 $12,205 $12,932 $11,246
11/30/2003 $12,345 $13,067 $11,216
12/31/2003 $12,446 $13,175 $11,204
1/31/2004 $12,526 $13,250 $11,258
2/29/2004 $12,718 $13,450 $11,319
3/31/2004 $12,676 $13,403 $11,392
4/30/2004 $12,348 $13,086 $11,429
5/31/2004 $12,296 $13,038 $11,495
6/30/2004 $12,316 $13,086 $11,532
7/31/2004 $12,480 $13,258 $11,514
8/31/2004 $12,707 $13,524 $11,520
9/30/2004 $12,778 $13,595 $11,544
10/31/2004 $12,902 $13,712 $11,605
11/30/2004 $12,786 $13,599 $11,611
12/31/2004 $12,963 $13,765 $11,568
1/31/2005 $13,130 $13,894 $11,593
2/28/2005 $13,097 $13,848 $11,660
3/31/2005 $13,033 $13,760 $11,751
4/30/2005 $13,233 $13,977 $11,830
5/31/2005 $13,338 $14,076 $11,818
6/30/2005 $13,391 $14,163 $11,824
7/31/2005 $13,379 $14,099 $11,878
8/31/2005 $13,507 $14,242 $11,939
9/30/2005 $13,376 $14,146 $12,085
10/31/2005 $13,277 $14,060 $12,109
11/30/2005 $13,308 $14,127 $12,012
12/31/2005 $13,448 $14,249 $11,964
1/31/2006 $13,457 $14,287 $12,055
2/28/2006 $13,598 $14,383 $12,079
3/31/2006 $13,475 $14,284 $12,146
4/30/2006 $13,462 $14,279 $12,249
5/31/2006 $13,481 $14,343 $12,310
6/30/2006 $13,423 $14,289 $12,334
7/31/2006 $13,577 $14,459 $12,371
8/31/2006 $13,775 $14,673 $12,395
9/30/2006 $13,873 $14,775 $12,334
10/31/2006 $13,960 $14,868 $12,267
11/30/2006 $14,093 $14,992 $12,249
12/31/2006 $14,022 $14,939 $12,267
1/31/2007 $13,984 $14,901 $12,305
2/28/2007 $14,174 $15,097 $12,371
3/31/2007 $14,102 $15,060 $12,483
4/30/2007 $14,133 $15,104 $12,564
5/31/2007 $14,061 $15,038 $12,641
6/30/2007 $13,988 $14,960 $12,666
7/31/2007 $14,088 $15,076 $12,663
8/31/2007 $13,946 $15,011 $12,639
9/30/2007 $14,151 $15,233 $12,674
10/31/2007 $14,217 $15,301 $12,701
11/30/2007 $14,273 $15,398 $12,777
12/31/2007 $14,270 $15,441 $12,768
1/31/2008 $14,336 $15,636 $12,832
2/29/2008 $13,684 $14,920 $12,869
3/31/2008 $14,083 $15,346 $12,980
4/30/2008 $14,292 $15,526 $13,059
5/31/2008 $14,396 $15,620 $13,169
6/30/2008 $14,214 $15,443 $13,302
7/31/2008 $14,199 $15,502 $13,372
8/31/2008 $14,315 $15,683 $13,318
9/30/2008 $13,469 $14,948 $13,300
10/31/2008 $13,347 $14,795 $13,166
11/30/2008 $13,271 $14,842 $12,913
12/31/2008 $13,476 $15,059 $12,780
1/31/2009 $13,803 $15,610 $12,835
2/28/2009 $13,930 $15,692 $12,899
62 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 63
Your Fund's Expenses
FRANKLIN MISSOURI TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
64 | 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.
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.
EXPENSES PAID
BEGINNING ACCOUNT ENDING ACCOUNT DURING PERIOD*
VALUE 9/1/08 VALUE 2/28/09 9/1/08-2/28/09
----------------- -------------- --------------
CLASS A
Actual $1,000 $ 976.60 $3.23
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
CLASS C
Actual $1,000 $ 973.20 $5.92
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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 | 65
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)
CREDIT QUALITY BREAKDOWN*
Franklin North Carolina Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA................ 32.9%
AA................. 34.7%
A.................. 12.4%
BBB................ 11.6%
Not Rated by S&P... 8.4%
* 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 0.6% --
AA or Aa 5.0% --
A 0.9% 0.3%
BBB or Baa 0.7% 0.7%
Below Investment Grade 0.2% --
--- ---
Total 7.4% 1.0%
This annual report for Franklin North Carolina Tax-Free Income Fund covers the
fiscal year ended February 28, 2009.
(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 130.
66 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin North Carolina Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.15 cents 3.58 cents
April 2008 4.15 cents 3.58 cents
May 2008 4.15 cents 3.58 cents
June 2008 4.15 cents 3.61 cents
July 2008 4.15 cents 3.61 cents
August 2008 4.15 cents 3.61 cents
September 2008 4.15 cents 3.61 cents
October 2008 4.15 cents 3.61 cents
November 2008 4.15 cents 3.61 cents
December 2008 4.15 cents 3.66 cents
January 2009 4.15 cents 3.66 cents
February 2009 4.15 cents 3.66 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.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.46 on February 29, 2008, to $11.37 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 49.43 cents per share for the same period.(2) The
Performance Summary beginning on page 70 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.24% based on an
annualization of the current 4.19 cent per share dividend and the maximum
offering price of $11.87 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and North Carolina personal income tax bracket of
40.04% would need to earn a distribution rate of 7.07% 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 67
PORTFOLIO BREAKDOWN
Franklin North Carolina Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM
INVESTMENTS*
------------
Utilities 22.0%
Hospital & Health Care 18.8%
Subject to Government Appropriations 13.7%
Prerefunded 12.7%
Higher Education 12.0%
Transportation 10.5%
General Obligation 5.3%
Housing 2.1%
Other Revenue 1.3%
Tax-Supported 0.9%
Corporate-Backed 0.7%
* Does not include short-term investments and other net assets.
STATE UPDATE
During the year under review, North Carolina's economy decelerated amid a
national slowdown. However, the state was more resilient, relative to other
states, in weathering the housing market downturn as its home prices held up
better than the U.S. average. Job gains in the professional and business
services and health and education services sectors offset some of the weakness
from ongoing contraction in manufacturing and construction. Overall, employment
growth slowed similar to the national pattern. As of February 2009, the state's
10.7% unemployment rate was higher than the country's 8.1% average.(3)
Despite recent economic deceleration, North Carolina delivered modest revenue
growth for fiscal year 2008, largely driven by an increase in personal income
taxes and better-than-expected growth in corporate income taxes. For fiscal year
2009, the state projected 5% total revenue growth compared with fiscal year
2008.(4) However, North Carolina did not expect a budgetary surplus in the
current fiscal year as it had in previous years. 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 $774 per capita and 2.3% 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) The rating and outlook reflected
North Carolina's strong financial management, replenished reserve fund and
healthy financial outlook.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Moody's Investors Service, "New Issue: North Carolina (State of),"
8/1/08.
(5.) Source: Standard & Poor's, "State Review: North Carolina," RATINGSDIRECT,
8/5/08.
(6.) This does not indicate Standard & Poor's rating of the Fund.
68 | Annual Report
Thank you for your continued participation in Franklin North Carolina Tax-Free
Income Fund. We intend to maintain our conservative, buy-and-hold investment
strategy as we attempt to provide shareholders with high, current, tax-free
income.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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 | 69
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.09 $11.37 $11.46
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4943
CLASS C (SYMBOL: FNCIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.09 $11.49 $11.58
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4307
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +3.60% +13.32% +47.90%
Average Annual Total Return(2) -0.81% +1.65% +3.54%
Avg. Ann. Total Return (3/31/09)(3) -3.56% +1.70% +3.54%
Distribution Rate(4) 4.24%
Taxable Equivalent Distribution Rate(5) 7.07%
30-Day Standardized Yield(6) 4.07%
Taxable Equivalent Yield(5) 6.79%
Total Annual Operating Expenses(7) 0.65%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +2.99% +10.11% +39.92%
Average Annual Total Return(2) +2.00% +1.94% +3.42%
Avg. Ann. Total Return (3/31/09)(3) -0.74% +2.03% +3.43%
Distribution Rate(4) 3.84%
Taxable Equivalent Distribution Rate(5) 6.40%
30-Day Standardized Yield(6) 3.71%
Taxable Equivalent Yield(5) 6.19%
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 (800) 342-5236.
70 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN NORTH CAROLINA
TAX-FREE INCOME BARCLAYS CAPITAL
DATE FUND - CLASS A MUNICIPAL BOND INDEX CPI
- ---------- ----------------------- -------------------- ------------------
3/1/1999 $ 9,575 $10,000 $10,000
3/31/1999 $ 9,590 $10,014 $10,030
4/30/1999 $ 9,605 $10,039 $10,103
5/31/1999 $ 9,557 $ 9,981 $10,103
6/30/1999 $ 9,405 $ 9,837 $10,103
7/31/1999 $ 9,413 $ 9,873 $10,134
8/31/1999 $ 9,308 $ 9,794 $10,158
9/30/1999 $ 9,291 $ 9,798 $10,207
10/31/1999 $ 9,153 $ 9,692 $10,225
11/30/1999 $ 9,226 $ 9,795 $10,231
12/31/1999 $ 9,119 $ 9,722 $10,231
1/31/2000 $ 9,044 $ 9,679 $10,261
2/29/2000 $ 9,152 $ 9,792 $10,322
3/31/2000 $ 9,375 $10,006 $10,407
4/30/2000 $ 9,316 $ 9,947 $10,413
5/31/2000 $ 9,266 $ 9,895 $10,426
6/30/2000 $ 9,501 $10,157 $10,480
7/31/2000 $ 9,645 $10,299 $10,505
8/31/2000 $ 9,789 $10,457 $10,505
9/30/2000 $ 9,738 $10,403 $10,559
10/31/2000 $ 9,849 $10,516 $10,578
11/30/2000 $ 9,935 $10,596 $10,584
12/31/2000 $10,177 $10,858 $10,578
1/31/2001 $10,246 $10,965 $10,644
2/28/2001 $10,290 $11,000 $10,687
3/31/2001 $10,369 $11,099 $10,711
4/30/2001 $10,246 $10,978 $10,754
5/31/2001 $10,343 $11,097 $10,802
6/30/2001 $10,432 $11,171 $10,821
7/31/2001 $10,628 $11,336 $10,790
8/31/2001 $10,789 $11,523 $10,790
9/30/2001 $10,734 $11,484 $10,839
10/31/2001 $10,868 $11,621 $10,802
11/30/2001 $10,795 $11,523 $10,784
12/31/2001 $10,676 $11,414 $10,742
1/31/2002 $10,847 $11,612 $10,766
2/28/2002 $10,982 $11,752 $10,809
3/31/2002 $10,778 $11,522 $10,869
4/30/2002 $10,969 $11,747 $10,930
5/31/2002 $11,022 $11,818 $10,930
6/30/2002 $11,122 $11,943 $10,936
7/31/2002 $11,258 $12,097 $10,948
8/31/2002 $11,396 $12,242 $10,985
9/30/2002 $11,656 $12,510 $11,003
10/31/2002 $11,465 $12,303 $11,021
11/30/2002 $11,433 $12,252 $11,021
12/31/2002 $11,668 $12,510 $10,997
1/31/2003 $11,636 $12,479 $11,046
2/28/2003 $11,777 $12,653 $11,131
3/31/2003 $11,773 $12,661 $11,198
4/30/2003 $11,838 $12,744 $11,173
5/31/2003 $12,116 $13,043 $11,155
6/30/2003 $12,083 $12,987 $11,167
7/31/2003 $11,658 $12,533 $11,179
8/31/2003 $11,752 $12,626 $11,222
9/30/2003 $12,052 $12,997 $11,258
10/31/2003 $11,999 $12,932 $11,246
11/30/2003 $12,143 $13,067 $11,216
12/31/2003 $12,247 $13,175 $11,204
1/31/2004 $12,322 $13,250 $11,258
2/29/2004 $12,498 $13,450 $11,319
3/31/2004 $12,493 $13,403 $11,392
4/30/2004 $12,205 $13,086 $11,429
5/31/2004 $12,160 $13,038 $11,495
6/30/2004 $12,217 $13,086 $11,532
7/31/2004 $12,386 $13,258 $11,514
8/31/2004 $12,596 $13,524 $11,520
9/30/2004 $12,674 $13,595 $11,544
10/31/2004 $12,793 $13,712 $11,605
11/30/2004 $12,694 $13,599 $11,611
12/31/2004 $12,855 $13,765 $11,568
1/31/2005 $13,028 $13,894 $11,593
2/28/2005 $13,012 $13,848 $11,660
3/31/2005 $12,943 $13,760 $11,751
4/30/2005 $13,127 $13,977 $11,830
5/31/2005 $13,217 $14,076 $11,818
6/30/2005 $13,286 $14,163 $11,824
7/31/2005 $13,248 $14,099 $11,878
8/31/2005 $13,360 $14,242 $11,939
9/30/2005 $13,278 $14,146 $12,085
10/31/2005 $13,217 $14,060 $12,109
11/30/2005 $13,264 $14,127 $12,012
12/31/2005 $13,376 $14,249 $11,964
1/31/2006 $13,402 $14,287 $12,055
2/28/2006 $13,515 $14,383 $12,079
3/31/2006 $13,430 $14,284 $12,146
4/30/2006 $13,434 $14,279 $12,249
5/31/2006 $13,471 $14,343 $12,310
6/30/2006 $13,418 $14,289 $12,334
7/31/2006 $13,566 $14,459 $12,371
8/31/2006 $13,760 $14,673 $12,395
9/30/2006 $13,853 $14,775 $12,334
10/31/2006 $13,946 $14,868 $12,267
11/30/2006 $14,085 $14,992 $12,249
12/31/2006 $14,031 $14,939 $12,267
1/31/2007 $13,989 $14,901 $12,305
2/28/2007 $14,174 $15,097 $12,371
3/31/2007 $14,107 $15,060 $12,483
4/30/2007 $14,156 $15,104 $12,564
5/31/2007 $14,100 $15,038 $12,641
6/30/2007 $14,021 $14,960 $12,666
7/31/2007 $14,103 $15,076 $12,663
8/31/2007 $13,977 $15,011 $12,639
9/30/2007 $14,189 $15,233 $12,674
10/31/2007 $14,261 $15,301 $12,701
11/30/2007 $14,310 $15,398 $12,777
12/31/2007 $14,323 $15,441 $12,768
1/31/2008 $14,407 $15,636 $12,832
2/29/2008 $13,670 $14,920 $12,869
3/31/2008 $14,102 $15,346 $12,980
4/30/2008 $14,367 $15,526 $13,059
5/31/2008 $14,476 $15,620 $13,169
6/30/2008 $14,310 $15,443 $13,302
7/31/2008 $14,312 $15,502 $13,372
8/31/2008 $14,447 $15,683 $13,318
9/30/2008 $13,545 $14,948 $13,300
10/31/2008 $13,379 $14,795 $13,166
11/30/2008 $13,158 $14,842 $12,913
12/31/2008 $13,370 $15,059 $12,780
1/31/2009 $13,793 $15,610 $12,835
2/28/2009 $14,161 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS A 2/28/09
- ------- -------
1-Year -0.81%
5-Year +1.65%
10-Year +3.54%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN NORTH CAROLINA
TAX-FREE INCOME BARCLAYS CAPITAL
DATE FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---------- ----------------------- -------------------- ------------------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,011 $10,014 $10,030
4/30/1999 $10,022 $10,039 $10,103
5/31/1999 $ 9,967 $ 9,981 $10,103
6/30/1999 $ 9,797 $ 9,837 $10,103
7/31/1999 $ 9,808 $ 9,873 $10,134
8/31/1999 $ 9,687 $ 9,794 $10,158
9/30/1999 $ 9,673 $ 9,798 $10,207
10/31/1999 $ 9,518 $ 9,692 $10,225
11/30/1999 $ 9,588 $ 9,795 $10,231
12/31/1999 $ 9,474 $ 9,722 $10,231
1/31/2000 $ 9,393 $ 9,679 $10,261
2/29/2000 $ 9,507 $ 9,792 $10,322
3/31/2000 $ 9,734 $10,006 $10,407
4/30/2000 $ 9,669 $ 9,947 $10,413
5/31/2000 $ 9,604 $ 9,895 $10,426
6/30/2000 $ 9,850 $10,157 $10,480
7/31/2000 $ 9,993 $10,299 $10,505
8/31/2000 $10,137 $10,457 $10,505
9/30/2000 $10,080 $10,403 $10,559
10/31/2000 $10,190 $10,516 $10,578
11/30/2000 $10,274 $10,596 $10,584
12/31/2000 $10,517 $10,858 $10,578
1/31/2001 $10,593 $10,965 $10,644
2/28/2001 $10,633 $11,000 $10,687
3/31/2001 $10,708 $11,099 $10,711
4/30/2001 $10,568 $10,978 $10,754
5/31/2001 $10,671 $11,097 $10,802
6/30/2001 $10,757 $11,171 $10,821
7/31/2001 $10,953 $11,336 $10,790
8/31/2001 $11,112 $11,523 $10,790
9/30/2001 $11,052 $11,484 $10,839
10/31/2001 $11,184 $11,621 $10,802
11/30/2001 $11,104 $11,523 $10,784
12/31/2001 $10,977 $11,414 $10,742
1/31/2002 $11,155 $11,612 $10,766
2/28/2002 $11,279 $11,752 $10,809
3/31/2002 $11,065 $11,522 $10,869
4/30/2002 $11,255 $11,747 $10,930
5/31/2002 $11,314 $11,818 $10,930
6/30/2002 $11,409 $11,943 $10,936
7/31/2002 $11,543 $12,097 $10,948
8/31/2002 $11,677 $12,242 $10,985
9/30/2002 $11,946 $12,510 $11,003
10/31/2002 $11,737 $12,303 $11,021
11/30/2002 $11,699 $12,252 $11,021
12/31/2002 $11,932 $12,510 $10,997
1/31/2003 $11,895 $12,479 $11,046
2/28/2003 $12,042 $12,653 $11,131
3/31/2003 $12,023 $12,661 $11,198
4/30/2003 $12,093 $12,744 $11,173
5/31/2003 $12,369 $13,043 $11,155
6/30/2003 $12,330 $12,987 $11,167
7/31/2003 $11,886 $12,533 $11,179
8/31/2003 $11,984 $12,626 $11,222
9/30/2003 $12,271 $12,997 $11,258
10/31/2003 $12,211 $12,932 $11,246
11/30/2003 $12,359 $13,067 $11,216
12/31/2003 $12,459 $13,175 $11,204
1/31/2004 $12,529 $13,250 $11,258
2/29/2004 $12,710 $13,450 $11,319
3/31/2004 $12,689 $13,403 $11,392
4/30/2004 $12,393 $13,086 $11,429
5/31/2004 $12,342 $13,038 $11,495
6/30/2004 $12,393 $13,086 $11,532
7/31/2004 $12,557 $13,258 $11,514
8/31/2004 $12,773 $13,524 $11,520
9/30/2004 $12,835 $13,595 $11,544
10/31/2004 $12,949 $13,712 $11,605
11/30/2004 $12,855 $13,599 $11,611
12/31/2004 $13,010 $13,765 $11,568
1/31/2005 $13,166 $13,894 $11,593
2/28/2005 $13,144 $13,848 $11,660
3/31/2005 $13,079 $13,760 $11,751
4/30/2005 $13,258 $13,977 $11,830
5/31/2005 $13,341 $14,076 $11,818
6/30/2005 $13,404 $14,163 $11,824
7/31/2005 $13,360 $14,099 $11,878
8/31/2005 $13,466 $14,242 $11,939
9/30/2005 $13,378 $14,146 $12,085
10/31/2005 $13,311 $14,060 $12,109
11/30/2005 $13,352 $14,127 $12,012
12/31/2005 $13,458 $14,249 $11,964
1/31/2006 $13,477 $14,287 $12,055
2/28/2006 $13,594 $14,383 $12,079
3/31/2006 $13,493 $14,284 $12,146
4/30/2006 $13,490 $14,279 $12,249
5/31/2006 $13,521 $14,343 $12,310
6/30/2006 $13,462 $14,289 $12,334
7/31/2006 $13,614 $14,459 $12,371
8/31/2006 $13,800 $14,673 $12,395
9/30/2006 $13,875 $14,775 $12,334
10/31/2006 $13,973 $14,868 $12,267
11/30/2006 $14,093 $14,992 $12,249
12/31/2006 $14,033 $14,939 $12,267
1/31/2007 $13,996 $14,901 $12,305
2/28/2007 $14,173 $15,097 $12,371
3/31/2007 $14,100 $15,060 $12,483
4/30/2007 $14,142 $15,104 $12,564
5/31/2007 $14,069 $15,038 $12,641
6/30/2007 $13,995 $14,960 $12,666
7/31/2007 $14,070 $15,076 $12,663
8/31/2007 $13,928 $15,011 $12,639
9/30/2007 $14,142 $15,233 $12,674
10/31/2007 $14,194 $15,301 $12,701
11/30/2007 $14,248 $15,398 $12,777
12/31/2007 $14,254 $15,441 $12,768
1/31/2008 $14,331 $15,636 $12,832
2/29/2008 $13,587 $14,920 $12,869
3/31/2008 $14,005 $15,346 $12,980
4/30/2008 $14,270 $15,526 $13,059
5/31/2008 $14,371 $15,620 $13,169
6/30/2008 $14,201 $15,443 $13,302
7/31/2008 $14,197 $15,502 $13,372
8/31/2008 $14,323 $15,683 $13,318
9/30/2008 $13,421 $14,948 $13,300
10/31/2008 $13,250 $14,795 $13,166
11/30/2008 $13,028 $14,842 $12,913
12/31/2008 $13,230 $15,059 $12,780
1/31/2009 $13,649 $15,610 $12,835
2/28/2009 $13,992 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +2.00%
5-Year +1.94%
10-Year +3.42%
Annual Report | 71
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 for the maximum combined effective federal and North
Carolina personal income tax rate of 40.04%, 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
72 | Annual Report
Your Fund's Expenses
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 73
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.
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 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
- ------- ----------------- -------------- ----------------------
Actual $1,000 $ 980.30 $3.19
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
CLASS C
- -------
Actual $1,000 $ 977.00 $5.88
Hypothetical (5% return before expenses) $1,000 $1,018.84 $6.01
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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.
74 | Annual Report
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)
CREDIT QUALITY BREAKDOWN*
Franklin Virginia Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA 31.4%
AA 41.0%
A 8.9%
BBB 10.2%
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 0.2% 0.3%
AA or Aa 1.7% --
A 3.4% --
BBB or Baa 2.2% --
Below Investment Grade 0.7% --
--- ---
Total 8.2% 0.3%
This annual report for Franklin Virginia Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
(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 139.
Annual Report | 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
DIVIDEND DISTRIBUTIONS*
Franklin Virginia Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.00 cents 3.44 cents
April 2008 4.00 cents 3.44 cents
May 2008 4.00 cents 3.44 cents
June 2008 4.00 cents 3.47 cents
July 2008 4.00 cents 3.47 cents
August 2008 4.00 cents 3.47 cents
September 2008 4.00 cents 3.48 cents
October 2008 4.00 cents 3.48 cents
November 2008 4.00 cents 3.48 cents
December 2008 4.00 cents 3.52 cents
January 2009 4.00 cents 3.52 cents
February 2009 4.00 cents 3.52 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.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, decreased from
$11.12 on February 29, 2008, to $10.95 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 47.65 cents per share for the same period.(2) The
Performance Summary beginning on page 78 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.25% based on an
annualization of the current 4.05 cent per share dividend and the maximum
offering price of $11.44 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and Virginia personal income tax bracket of 38.74%
would need to earn a distribution rate of 6.94% from a taxable investment to
match the Fund's Class A tax-free distribution rate. For the Fund's Class C
shares' performance, please see the Performance Summary.
COMMONWEALTH UPDATE
Virginia's economy slowed during the year under review but still outperformed
the nation, and employment growth was weak yet positive. As of February 2009,
the commonwealth's 6.6% unemployment rate was lower than the 8.1%
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
76 | Annual Report
national average.(3) A large military presence and proximity to the nation's
capital remained stabilizing factors for Virginia's economy. Median household
effective buying power and per-capita income continued to grow and were well
above national levels. However, consistent with national trends, the
commonwealth's real estate market slowed, particularly in northern Virginia, an
area that had grown significantly in recent years.
For the first quarter of fiscal year 2009 through September 2008, Virginia's
revenue collections declined 4% compared with the same period in fiscal year
2008.(4) Sales and mortgage recordation taxes weakened, and personal income
taxes grew but below the projected rate. To close the budget gap, the governor
ordered state agencies to reduce spending and delay pay increases, issued
additional pay-as-you-go bonds, enacted one-time transfers, and proposed a
withdrawal from the revenue stabilization fund.
Virginia's debt burden remained manageable and debt ratios were low, with
overall net debt per capita at $764 and about 1.9% of personal income.(4)
Independent credit rating agency Standard & Poor's assigned Virginia its highest
rating of AAA with a stable outlook.(5) This rating and outlook reflected the
commonwealth's strong and diverse economy, strong financial operations,
pro-active and conservative budgeting, and manageable debt burden.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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, 2009, 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
2/28/09
% OF TOTAL
LONG-TERM
INVESTMENTS*
------------
Utilities 20.5%
Prerefunded 19.9%
Other Revenue 16.0%
General Obligation 11.4%
Transportation 7.8%
Hospital & Health Care 5.9%
Subject to Government Appropriations 4.7%
Housing 4.2%
Higher Education 3.9%
Tax-Supported 3.3%
Corporate-Backed 2.4%
* Does not include short-term investments and other net assets.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Moody's Investors Service, "New Issue: Virginia (Commonwealth of),"
11/7/08.
(5.) This does not indicate Standard & Poor's rating of the Fund.
Annual Report | 77
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.17 $10.95 $11.12
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4765
CLASS C (SYMBOL: FVAIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.16 $11.08 $11.24
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4144
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +2.80% +13.64% +45.92%
Average Annual Total Return(2) -1.54% +1.70% +3.40%
Avg. Ann. Total Return (3/31/09)(3) -4.18% +1.78% +3.40%
Distribution Rate(4) 4.25%
Taxable Equivalent Distribution Rate(5) 6.94%
30-Day Standardized Yield(6) 3.77%
Taxable Equivalent Yield(5) 6.15%
Total Annual Operating Expenses(7) 0.66%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +2.30% +10.70% +38.38%
Average Annual Total Return(2) +1.31% +2.05% +3.30%
Avg. Ann. Total Return (3/31/09)(3) -1.42% +2.11% +3.29%
Distribution Rate(4) 3.84%
Taxable Equivalent Distribution Rate(5) 6.27%
30-Day Standardized Yield(6) 3.38%
Taxable Equivalent Yield(5) 5.52%
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 (800) 342-5236.
78 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN VIRGINIA
TAX-FREE INCOME BARCLAYS CAPITAL
DATE FUND - CLASS A MUNICIPAL BOND INDEX CPI
- ---- ----------------- -------------------- -------
3/1/1999 $ 9,573 $10,000 $10,000
3/31/1999 $ 9,588 $10,014 $10,030
4/30/1999 $ 9,603 $10,039 $10,103
5/31/1999 $ 9,561 $ 9,981 $10,103
6/30/1999 $ 9,413 $ 9,837 $10,103
7/31/1999 $ 9,427 $ 9,873 $10,134
8/31/1999 $ 9,295 $ 9,794 $10,158
9/30/1999 $ 9,285 $ 9,798 $10,207
10/31/1999 $ 9,135 $ 9,692 $10,225
11/30/1999 $ 9,216 $ 9,795 $10,231
12/31/1999 $ 9,123 $ 9,722 $10,231
1/31/2000 $ 9,037 $ 9,679 $10,261
2/29/2000 $ 9,155 $ 9,792 $10,322
3/31/2000 $ 9,417 $10,006 $10,407
4/30/2000 $ 9,355 $ 9,947 $10,413
5/31/2000 $ 9,286 $ 9,895 $10,426
6/30/2000 $ 9,534 $10,157 $10,480
7/31/2000 $ 9,654 $10,299 $10,505
8/31/2000 $ 9,810 $10,457 $10,505
9/30/2000 $ 9,748 $10,403 $10,559
10/31/2000 $ 9,853 $10,516 $10,578
11/30/2000 $ 9,896 $10,596 $10,584
12/31/2000 $10,108 $10,858 $10,578
1/31/2001 $10,169 $10,965 $10,644
2/28/2001 $10,240 $11,000 $10,687
3/31/2001 $10,328 $11,099 $10,711
4/30/2001 $10,219 $10,978 $10,754
5/31/2001 $10,317 $11,097 $10,802
6/30/2001 $10,388 $11,171 $10,821
7/31/2001 $10,542 $11,336 $10,790
8/31/2001 $10,687 $11,523 $10,790
9/30/2001 $10,620 $11,484 $10,839
10/31/2001 $10,756 $11,621 $10,802
11/30/2001 $10,697 $11,523 $10,784
12/31/2001 $10,554 $11,414 $10,742
1/31/2002 $10,718 $11,612 $10,766
2/28/2002 $10,826 $11,752 $10,809
3/31/2002 $10,643 $11,522 $10,869
4/30/2002 $10,800 $11,747 $10,930
5/31/2002 $10,862 $11,818 $10,930
6/30/2002 $10,953 $11,943 $10,936
7/31/2002 $11,082 $12,097 $10,948
8/31/2002 $11,184 $12,242 $10,985
9/30/2002 $11,401 $12,510 $11,003
10/31/2002 $11,165 $12,303 $11,021
11/30/2002 $11,131 $12,252 $11,021
12/31/2002 $11,371 $12,510 $10,997
1/31/2003 $11,326 $12,479 $11,046
2/28/2003 $11,467 $12,653 $11,131
3/31/2003 $11,491 $12,661 $11,198
4/30/2003 $11,604 $12,744 $11,173
5/31/2003 $11,895 $13,043 $11,155
6/30/2003 $11,859 $12,987 $11,167
7/31/2003 $11,431 $12,533 $11,179
8/31/2003 $11,535 $12,626 $11,222
9/30/2003 $11,801 $12,997 $11,258
10/31/2003 $11,785 $12,932 $11,246
11/30/2003 $11,920 $13,067 $11,216
12/31/2003 $12,024 $13,175 $11,204
1/31/2004 $12,109 $13,250 $11,258
2/29/2004 $12,296 $13,450 $11,319
3/31/2004 $12,278 $13,403 $11,392
4/30/2004 $11,980 $13,086 $11,429
5/31/2004 $11,973 $13,038 $11,495
6/30/2004 $12,007 $13,086 $11,532
7/31/2004 $12,166 $13,258 $11,514
8/31/2004 $12,378 $13,524 $11,520
9/30/2004 $12,455 $13,595 $11,544
10/31/2004 $12,584 $13,712 $11,605
11/30/2004 $12,481 $13,599 $11,611
12/31/2004 $12,676 $13,765 $11,568
1/31/2005 $12,829 $13,894 $11,593
2/28/2005 $12,810 $13,848 $11,660
3/31/2005 $12,771 $13,760 $11,751
4/30/2005 $12,947 $13,977 $11,830
5/31/2005 $13,026 $14,076 $11,818
6/30/2005 $13,106 $14,163 $11,824
7/31/2005 $13,055 $14,099 $11,878
8/31/2005 $13,157 $14,242 $11,939
9/30/2005 $13,094 $14,146 $12,085
10/31/2005 $13,031 $14,060 $12,109
11/30/2005 $13,066 $14,127 $12,012
12/31/2005 $13,169 $14,249 $11,964
1/31/2006 $13,194 $14,287 $12,055
2/28/2006 $13,308 $14,383 $12,079
3/31/2006 $13,231 $14,284 $12,146
4/30/2006 $13,233 $14,279 $12,249
5/31/2006 $13,269 $14,343 $12,310
6/30/2006 $13,226 $14,289 $12,334
7/31/2006 $13,354 $14,459 $12,371
8/31/2006 $13,516 $14,673 $12,395
9/30/2006 $13,598 $14,775 $12,334
10/31/2006 $13,682 $14,868 $12,267
11/30/2006 $13,788 $14,992 $12,249
12/31/2006 $13,755 $14,939 $12,267
1/31/2007 $13,722 $14,901 $12,305
2/28/2007 $13,888 $15,097 $12,371
3/31/2007 $13,854 $15,060 $12,483
4/30/2007 $13,891 $15,104 $12,564
5/31/2007 $13,834 $15,038 $12,641
6/30/2007 $13,788 $14,960 $12,666
7/31/2007 $13,884 $15,076 $12,663
8/31/2007 $13,801 $15,011 $12,639
9/30/2007 $13,970 $15,233 $12,674
10/31/2007 $14,030 $15,301 $12,701
11/30/2007 $14,115 $15,398 $12,777
12/31/2007 $14,116 $15,441 $12,768
1/31/2008 $14,226 $15,636 $12,832
2/29/2008 $13,591 $14,920 $12,869
3/31/2008 $13,995 $15,346 $12,980
4/30/2008 $14,203 $15,526 $13,059
5/31/2008 $14,301 $15,620 $13,169
6/30/2008 $14,153 $15,443 $13,302
7/31/2008 $14,178 $15,502 $13,372
8/31/2008 $14,278 $15,683 $13,318
9/30/2008 $13,452 $14,948 $13,300
10/31/2008 $13,304 $14,795 $13,166
11/30/2008 $13,203 $14,842 $12,913
12/31/2008 $13,380 $15,059 $12,780
1/31/2009 $13,747 $15,610 $12,835
2/28/2009 $13,968 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS A 2/28/09
- ------- -------
1-Year -1.54%
5-Year +1.70%
10-Year +3.40%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN VIRGINIA
TAX-FREE INCOME BARCLAYS CAPITAL
DATE FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---- ----------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,019 $10,014 $10,030
4/30/1999 $10,038 $10,039 $10,103
5/31/1999 $ 9,982 $ 9,981 $10,103
6/30/1999 $ 9,824 $ 9,837 $10,103
7/31/1999 $ 9,834 $ 9,873 $10,134
8/31/1999 $ 9,692 $ 9,794 $10,158
9/30/1999 $ 9,669 $ 9,798 $10,207
10/31/1999 $ 9,518 $ 9,692 $10,225
11/30/1999 $ 9,598 $ 9,795 $10,231
12/31/1999 $ 9,488 $ 9,722 $10,231
1/31/2000 $ 9,405 $ 9,679 $10,261
2/29/2000 $ 9,513 $ 9,792 $10,322
3/31/2000 $ 9,788 $10,006 $10,407
4/30/2000 $ 9,720 $ 9,947 $10,413
5/31/2000 $ 9,645 $ 9,895 $10,426
6/30/2000 $ 9,896 $10,157 $10,480
7/31/2000 $10,016 $10,299 $10,505
8/31/2000 $10,171 $10,457 $10,505
9/30/2000 $10,103 $10,403 $10,559
10/31/2000 $10,206 $10,516 $10,578
11/30/2000 $10,246 $10,596 $10,584
12/31/2000 $10,459 $10,858 $10,578
1/31/2001 $10,517 $10,965 $10,644
2/28/2001 $10,585 $11,000 $10,687
3/31/2001 $10,680 $11,099 $10,711
4/30/2001 $10,563 $10,978 $10,754
5/31/2001 $10,650 $11,097 $10,802
6/30/2001 $10,727 $11,171 $10,821
7/31/2001 $10,879 $11,336 $10,790
8/31/2001 $11,013 $11,523 $10,790
9/30/2001 $10,949 $11,484 $10,839
10/31/2001 $11,083 $11,621 $10,802
11/30/2001 $11,018 $11,523 $10,784
12/31/2001 $10,867 $11,414 $10,742
1/31/2002 $11,029 $11,612 $10,766
2/28/2002 $11,144 $11,752 $10,809
3/31/2002 $10,943 $11,522 $10,869
4/30/2002 $11,107 $11,747 $10,930
5/31/2002 $11,156 $11,818 $10,930
6/30/2002 $11,243 $11,943 $10,936
7/31/2002 $11,370 $12,097 $10,948
8/31/2002 $11,468 $12,242 $10,985
9/30/2002 $11,693 $12,510 $11,003
10/31/2002 $11,448 $12,303 $11,021
11/30/2002 $11,409 $12,252 $11,021
12/31/2002 $11,637 $12,510 $10,997
1/31/2003 $11,596 $12,479 $11,046
2/28/2003 $11,735 $12,653 $11,131
3/31/2003 $11,753 $12,661 $11,198
4/30/2003 $11,862 $12,744 $11,173
5/31/2003 $12,153 $13,043 $11,155
6/30/2003 $12,110 $12,987 $11,167
7/31/2003 $11,672 $12,533 $11,179
8/31/2003 $11,772 $12,626 $11,222
9/30/2003 $12,035 $12,997 $11,258
10/31/2003 $12,013 $12,932 $11,246
11/30/2003 $12,144 $13,067 $11,216
12/31/2003 $12,243 $13,175 $11,204
1/31/2004 $12,322 $13,250 $11,258
2/29/2004 $12,505 $13,450 $11,319
3/31/2004 $12,481 $13,403 $11,392
4/30/2004 $12,175 $13,086 $11,429
5/31/2004 $12,172 $13,038 $11,495
6/30/2004 $12,190 $13,086 $11,532
7/31/2004 $12,345 $13,258 $11,514
8/31/2004 $12,563 $13,524 $11,520
9/30/2004 $12,635 $13,595 $11,544
10/31/2004 $12,759 $13,712 $11,605
11/30/2004 $12,650 $13,599 $11,611
12/31/2004 $12,839 $13,765 $11,568
1/31/2005 $12,987 $13,894 $11,593
2/28/2005 $12,962 $13,848 $11,660
3/31/2005 $12,916 $13,760 $11,751
4/30/2005 $13,087 $13,977 $11,830
5/31/2005 $13,171 $14,076 $11,818
6/30/2005 $13,234 $14,163 $11,824
7/31/2005 $13,187 $14,099 $11,878
8/31/2005 $13,283 $14,242 $11,939
9/30/2005 $13,204 $14,146 $12,085
10/31/2005 $13,145 $14,060 $12,109
11/30/2005 $13,175 $14,127 $12,012
12/31/2005 $13,271 $14,249 $11,964
1/31/2006 $13,290 $14,287 $12,055
2/28/2006 $13,387 $14,383 $12,079
3/31/2006 $13,304 $14,284 $12,146
4/30/2006 $13,311 $14,279 $12,249
5/31/2006 $13,341 $14,343 $12,310
6/30/2006 $13,292 $14,289 $12,334
7/31/2006 $13,412 $14,459 $12,371
8/31/2006 $13,568 $14,673 $12,395
9/30/2006 $13,643 $14,775 $12,334
10/31/2006 $13,720 $14,868 $12,267
11/30/2006 $13,831 $14,992 $12,249
12/31/2006 $13,780 $14,939 $12,267
1/31/2007 $13,741 $14,901 $12,305
2/28/2007 $13,899 $15,097 $12,371
3/31/2007 $13,860 $15,060 $12,483
4/30/2007 $13,890 $15,104 $12,564
5/31/2007 $13,839 $15,038 $12,641
6/30/2007 $13,775 $14,960 $12,666
7/31/2007 $13,863 $15,076 $12,663
8/31/2007 $13,775 $15,011 $12,639
9/30/2007 $13,947 $15,233 $12,674
10/31/2007 $14,000 $15,301 $12,701
11/30/2007 $14,066 $15,398 $12,777
12/31/2007 $14,073 $15,441 $12,768
1/31/2008 $14,174 $15,636 $12,832
2/29/2008 $13,531 $14,920 $12,869
3/31/2008 $13,921 $15,346 $12,980
4/30/2008 $14,132 $15,526 $13,059
5/31/2008 $14,222 $15,620 $13,169
6/30/2008 $14,058 $15,443 $13,302
7/31/2008 $14,076 $15,502 $13,372
8/31/2008 $14,179 $15,683 $13,318
9/30/2008 $13,350 $14,948 $13,300
10/31/2008 $13,198 $14,795 $13,166
11/30/2008 $13,092 $14,842 $12,913
12/31/2008 $13,260 $15,059 $12,780
1/31/2009 $13,614 $15,610 $12,835
2/28/2009 $13,838 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +1.31%
5-Year +2.05%
10-Year +3.30%
Annual Report | 79
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 for the maximum combined 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
80 | Annual Report
Your Fund's Expenses
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 81
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.
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 EXPENSES PAID
ACCOUNT ENDING ACCOUNT DURING PERIOD*
VALUE 9/1/08 VALUE 2/28/09 9/1/08-2/28/09
------------ -------------- ---------------
CLASS A
Actual $1,000 $ 978.60 $3.29
Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.36
CLASS C
Actual $1,000 $ 976.20 $5.93
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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.
82 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN ALABAMA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------------------
2009 2008(a) 2007 2006 2005
-------- -------- -------- -------- --------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.84 $ 11.51 $ 11.49 $ 11.61 $ 11.76
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.48 0.47 0.48 0.50 0.51
Net realized and unrealized gains (losses) .. (0.26) (0.67) 0.02 (0.12) (0.16)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.22 (0.20) 0.50 0.38 0.35
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.47) (0.47) (0.48) (0.50) (0.50)
-------- -------- -------- -------- --------
Redemption fees(d) ............................. --(e) --(e) --(e) --(e) --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.59 $ 10.84 $ 11.51 $ 11.49 $ 11.61
======== ======== ======== ======== ========
Total return(f) ................................ 2.18% (1.96)% 4.50% 3.34% 3.12%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.71% 0.71% 0.71% 0.72% 0.72%
Net investment income .......................... 4.40% 4.14% 4.23% 4.31% 4.39%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $218,937 $230,439 $244,272 $237,848 $225,258
Portfolio turnover rate ........................ 20.42% 16.92% 16.04% 12.86% 8.53%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 83
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ALABAMA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-------------------------------------------------------
2009 2008(a) 2007 2006 2005
------- ------- ------- ------- -------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.93 $ 11.60 $ 11.58 $ 11.70 $ 11.84
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.42 0.41 0.42 0.44 0.45
Net realized and unrealized gains (losses) .. (0.25) (0.68) 0.02 (0.12) (0.15)
------- ------- ------- ------- -------
Total from investment operations ............... 0.17 (0.27) 0.44 0.32 0.30
------- ------- ------- ------- -------
Less distributions from net investment income .. (0.41) (0.40) (0.42) (0.44) (0.44)
------- ------- ------- ------- -------
Redemption fees(d) ............................. --(e) --(e) --(e) --(e) --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 10.69 $ 10.93 $ 11.60 $ 11.58 $ 11.70
======= ======= ======= ======= =======
Total return(f) ................................ 1.59% (2.39)% 3.89% 2.75% 2.63%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.26% 1.26% 1.26% 1.27% 1.27%
Net investment income .......................... 3.85% 3.59% 3.68% 3.76% 3.84%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $41,651 $38,341 $38,094 $35,638 $31,702
Portfolio turnover rate ........................ 20.42% 16.92% 16.04% 12.86% 8.53%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
84 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ------------ ------------
MUNICIPAL BONDS 95.9%
ALABAMA 83.8%
Alabama Building Renovation Finance Authority Revenue, Refunding, AMBAC
Insured, 5.625%, 9/01/24 ................................................ $ 2,500,000 $ 2,564,900
Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan,
Series A, AMBAC Insured, 5.25%, 8/15/24 ................................. 1,755,000 1,800,648
Alabama Water Pollution Control Authority Revenue, Revolving Fund Loan,
Series A, AMBAC Insured, 5.00%, 8/15/23 ................................. 4,435,000 4,475,935
Alabaster GO, wts., AMBAC Insured, Pre-Refunded, 5.00%, 9/01/24 ............ 3,470,000 3,747,704
Alabaster Sewer Revenue, AMBAC Insured, 5.00%, 4/01/29 ..................... 2,055,000 2,001,591
Athens GO, wts., XLCA Insured, 5.00%, 2/01/36 .............................. 2,560,000 2,365,363
Auburn GO, Refunding, FSA Insured, 5.00%, 1/01/24 .......................... 1,500,000 1,516,050
Auburn University General Fee Revenue, Auburn University, Series A, FSA
Insured, 5.00%, 6/01/38 ................................................. 7,000,000 6,872,810
Bessemer GO, wts., XLCA Insured, 5.00%, 2/01/35 ............................ 1,990,000 1,815,576
Bessemer Governmental Utility Services Corp. Water Supply Revenue,
Refunding, Series A, Assured Guaranty, 5.00%, 6/01/39 ................... 3,825,000 3,576,337
Birmingham Southern College Private Educational Building Authority Tuition
Revenue, Refunding, 5.35%, 12/01/19 ..................................... 1,000,000 834,100
Butler County IDA Environmental Improvement Revenue, International Paper,
Series A, 7.00%, 9/01/32 ................................................ 1,000,000 715,220
Butler County Public Education Cooperative District, Series A, XLCA
Insured, 5.00%, 7/01/37 ................................................. 9,025,000 7,196,354
Central Elmore Water and Sewer Authority Revenue, Water, MBIA Insured,
5.00%, 1/01/29 .......................................................... 4,290,000 4,127,838
Clarke and Mobile Counties Gas District Revenue, AMBAC Insured,
Pre-Refunded, 5.875%, 12/01/23 .......................................... 4,000,000 4,236,440
Coffee County PBA, Building Revenue, MBIA Insured, 5.00%, 9/01/27 .......... 2,145,000 2,189,916
Cullman and Jefferson Counties Gas District Gas Revenue, MBIA Insured,
5.85%, 7/01/24 .......................................................... 2,000,000 2,085,120
DCH Health Care Authority Health Care Facilities Revenue, 5.125%, 6/01/36 .. 7,000,000 5,811,400
East Alabama Health Care Authority Health Care Facilities Revenue,
Mandatory Put 9/01/18,
Series A, 5.25%, 9/01/36 ................................................ 5,000,000 4,676,050
Series B, 5.50%, 9/01/33 ................................................ 4,500,000 4,244,805
Etowah County Board of Education Special Tax, School wts., FSA Insured,
5.00%,
9/01/24 ................................................................. 4,235,000 4,316,778
9/01/28 ................................................................. 2,000,000 2,005,560
9/01/33 ................................................................. 2,500,000 2,411,050
Fairfield GO, wts., Refunding, AMBAC Insured, 5.00%, 2/01/29 ............... 1,500,000 1,503,165
Fairfield IDB Environmental Improvement Revenue, USX Corp. Project,
Refunding, 5.45%, 9/01/14 ............................................... 2,000,000 1,978,540
Florence Electric Revenue, wts., FSA Insured, 5.25%, 6/01/19 ............... 1,415,000 1,436,126
Franklin County GO, wts., Series B, AMBAC Insured, 5.125%, 10/01/33 ........ 2,000,000 2,017,360
Houston County Health Care Authority Revenue,
AMBAC Insured, Pre-Refunded, 6.125%, 10/01/25 ........................... 1,000,000 1,038,830
AMBAC Insured, Pre-Refunded, 6.25%, 10/01/30 ............................ 3,150,000 3,274,551
Series A, AMBAC Insured, 5.25%, 10/01/30 ................................... 5,000,000 3,920,150
Huntsville Health Care Authority Revenue, Series A, MBIA Insured,
Pre-Refunded,
5.40%, 6/01/22 .......................................................... 4,000,000 4,501,760
5.50%, 6/01/27 .......................................................... 3,820,000 4,310,985
Huntsville PBA Lease Revenue, Municipal Justice and Public Safety Center,
Refunding and Improvement, MBIA Insured, 5.00%, 10/01/33 ................... 8,000,000 7,661,440
Jacksonville State University Revenue, Tuition and Fee, MBIA Insured,
5.00%, 12/01/22 ......................................................... 3,000,000 3,032,850
Annual Report | 85
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ------------ ------------
MUNICIPAL BONDS (CONTINUED)
ALABAMA (CONTINUED)
Jefferson County Limited Obligation School wts. Revenue, Series A, 5.00%,
1/01/24 ................................................................. $ 2,000,000 $ 1,122,160
Jefferson County Sewer Revenue, wts., ETM, 7.50%, 9/01/13 .................. 200,000 224,636
Lauderdale County and Florence Health Care Authority Revenue, Coffee Health
Group, Series A, MBIA Insured,
5.625%, 7/01/21 ......................................................... 3,000,000 2,760,180
5.375%, 7/01/29 ......................................................... 3,095,000 2,439,355
Pre-Refunded, 5.375%, 7/01/29 .............................................. 1,905,000 1,953,997
Leeds Public Educational Building Authority Educational Facilities Revenue,
Assured Guaranty, 5.125%, 4/01/33 ....................................... 7,410,000 7,224,602
Limestone County Water and Sewer Authority Water Revenue, AMBAC Insured,
5.00%,
12/01/29 ................................................................ 1,540,000 1,535,934
12/01/31 ................................................................ 3,910,000 3,795,945
Madison County Board of Education Capital Outlay GO, Tax Anticipation wts.,
Series A, AMBAC Insured, 5.00%, 9/01/34 ................................. 1,000,000 919,750
Madison GO, wts.,
AMBAC Insured, Pre-Refunded, 5.35%, 2/01/26 ............................. 2,410,000 2,621,670
Refunding, XLCA Insured, 4.75%, 12/01/36 ................................ 2,455,000 2,224,475
Madison Water and Wastewater Board Water and Sewer Revenue, Refunding,
Series A, XLCA Insured, 4.75%, 12/01/31 ................................. 7,500,000 6,771,450
Marshall County Health Care Authority GO, Refunding, AMBAC Insured, 4.75%,
2/01/33 ................................................................. 3,000,000 2,647,320
Marshall County Health Care Authority Hospital Revenue, Series A, 5.75%,
1/01/32 ................................................................. 2,170,000 1,868,305
Mobile County Board School Commissioners GO, Capital Outlay wts., Series B,
AMBAC Insured, Pre-Refunded,
5.10%, 3/01/22 .......................................................... 2,265,000 2,433,675
5.125%, 3/01/31 ......................................................... 8,230,000 8,846,921
Mobile GO, wts., 5.50%, 2/15/30 ............................................ 2,000,000 1,953,760
Moulton Water Works Board Water Revenue, MBIA Insured, 5.375%, 1/01/32 ..... 1,935,000 1,775,517
Muscle Shoals GO, wts., MBIA Insured, Pre-Refunded, 5.50%, 8/01/30 ......... 1,550,000 1,679,689
Orange Beach Water Sewer and Fire Protection Authority Revenue, MBIA
Insured, 5.00%, 5/15/35 ................................................. 2,000,000 1,920,860
Oxford GO, School wts., AMBAC Insured, Pre-Refunded, 6.00%, 5/01/30 ........ 4,275,000 4,398,120
Sheffield GO, wts., AMBAC Insured, 5.125%, 5/01/33 ......................... 2,610,000 2,630,697
Sylacauga GO, wts., AMBAC Insured, Pre-Refunded, 5.50%, 6/01/25 ............ 1,700,000 1,828,384
Tallassee GO, Water Gas and Sewer wts., AMBAC Insured,
5.25%, 5/01/31 .......................................................... 705,000 711,888
Pre-Refunded, 5.25%, 5/01/31 ............................................ 430,000 470,209
Troy Public Educational Building Authority Dormitory Revenue, Troy
University Housing LLC Project, Series A, CIFG Insured, 5.00%, 9/01/32 .. 5,000,000 4,516,600
Troy State University Student Fee Revenue, MBIA Insured, 5.00%, 11/01/21 ... 2,215,000 2,275,912
Trussville GO, wts., Series A, FGIC Insured, 5.00%, 10/01/36 ............... 4,740,000 4,508,593
Tuscaloosa Public Educational Building Authority Student Housing Revenue,
Ridgecrest Student Housing LLC, Assured Guaranty, 6.75%, 7/01/38 ........ 5,000,000 5,409,000
University of Alabama at Birmingham Hospital Revenue, Refunding, Series A,
AMBAC Insured, 5.00%, 9/01/41 ........................................... 9,000,000 7,344,270
University of Montevallo Revenue, FSA Insured, Pre-Refunded,
5.30%, 5/01/22 .......................................................... 1,940,000 2,127,850
University of North Alabama Revenue,
General Fee, Series A, FSA Insured, 5.375%, 11/01/17 .................... 4,395,000 4,456,882
Student Housing, FGIC Insured, 5.00%, 11/01/29 .......................... 2,995,000 2,846,718
86 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ------------ ------------
MUNICIPAL BONDS (CONTINUED)
ALABAMA (CONTINUED)
University of South Alabama University Revenues, Facilities, Capital
Improvement, BHAC Insured, 5.00%, 8/01/38 ............................... $ 5,000,000 $ 4,954,100
Valley Special Care Facilities Financing Authority Revenue, Lanier Memorial
Hospital, Series A, 5.65%, 11/01/22 ..................................... 3,465,000 2,865,694
------------
218,328,420
------------
U.S. TERRITORIES 12.1%
PUERTO RICO 10.7%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior lien,
Series A, 6.00%, 7/01/38 ................................................ 1,000,000 910,940
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.25%, 7/01/27 ............................... 1,495,000 1,635,201
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 .............................. 1,885,000 2,056,384
Refunding, FSA Insured, 5.25%, 7/01/27 .................................. 1,005,000 1,002,578
Refunding, FSA Insured, 5.125%, 7/01/30 ................................. 1,115,000 1,069,542
Series A, 5.125%, 7/01/31 ............................................... 3,550,000 2,886,186
Series A, Pre-Refunded, 5.125%, 7/01/31 ................................. 1,450,000 1,581,834
Puerto Rico Commonwealth Highway and Transportation Authority Transportation
Revenue, Refunding, Series N, Assured Guaranty, 5.25%, 7/01/36 .......... 10,000,000 9,744,400
Puerto Rico Electric Power Authority Power Revenue, Series WW, 5.50%,
7/01/38 ................................................................. 3,350,000 2,959,055
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.25%, 7/01/27 ..................................... 760,000 658,076
Refunding, Series G, 5.00%, 7/01/26 ..................................... 1,000,000 833,200
Series D, Pre-Refunded, 5.25%, 7/01/27 .................................. 2,305,000 2,533,817
------------
27,871,213
------------
VIRGIN ISLANDS 1.4%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien,
Refunding, Series A, 5.50%,
10/01/13 ................................................................ 1,700,000 1,687,063
10/01/22 ................................................................ 2,300,000 1,905,389
------------
3,592,452
------------
TOTAL U.S. TERRITORIES ..................................................... 31,463,665
------------
TOTAL INVESTMENTS (COST $260,870,273) 95.9% ................................ 249,792,085
OTHER ASSETS, LESS LIABILITIES 4.1% ........................................ 10,795,587
------------
NET ASSETS 100.0% .......................................................... $260,587,672
============
See Abbreviations on page 170.
The accompanying notes are an integral part of these financial statements.
Annual Report | 87
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FLORIDA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------
2009 2008(a) 2007 2006 2005
---------- ---------- ---------- ---------- ----------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 11.17 $ 11.94 $ 11.93 $ 12.00 $ 12.17
---------- ---------- ---------- ---------- ----------
Income from investment operations(b):
Net investment income(c) ....................... 0.53 0.53 0.53 0.54 0.55
Net realized and unrealized gains (losses) ..... (0.27) (0.74) 0.02 (0.06) (0.17)
---------- ---------- ---------- ---------- ----------
Total from investment operations .................. 0.26 (0.21) 0.55 0.48 0.38
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income .......................... (0.52) (0.53) (0.54) (0.55) (0.55)
Net realized gains ............................. (0.01) (0.03) -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions ............................... (0.53) (0.56) (0.54) (0.55) (0.55)
---------- ---------- ---------- ---------- ----------
Redemption fees(d, e) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ...................... $ 10.90 $ 11.17 $ 11.94 $ 11.93 $ 12.00
========== ========== ========== ========== ==========
Total return(f) ................................... 2.37% (1.83)% 4.64% 4.07% 3.28%
RATIOS TO AVERAGE NET ASSETS
Expenses .......................................... 0.62% 0.61% 0.61% 0.62% 0.62%
Net investment income ............................. 4.77% 4.51% 4.51% 4.54% 4.67%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $1,155,202 $1,279,340 $1,476,477 $1,533,884 $1,488,979
Portfolio turnover rate ........................... 10.74% 6.85% 6.90% 9.37% 4.15%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
88 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLORIDA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------
2009 2008(a) 2007 2006 2005
------- ------- ------- ------- -------
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.25 $ 12.02 $ 12.01 $ 12.08 $ 12.25
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.47 0.47 0.47 0.48 0.49
Net realized and unrealized gains (losses) .. (0.26) (0.75) 0.01 (0.07) (0.18)
------- ------- ------- ------- -------
Total from investment operations ............ 0.21 (0.28) 0.48 0.41 0.31
------- ------- ------- ------- -------
Less distributions from:
Net investment income ....................... (0.46) (0.46) (0.47) (0.48) (0.48)
Net realized gains .......................... (0.01) (0.03) -- -- --
------- ------- ------- ------- -------
Total distributions ......................... (0.47) (0.49) (0.47) (0.48) (0.48)
------- ------- ------- ------- -------
Redemption fees(d, e) ....................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................ $ 10.99 $ 11.25 $ 12.02 $ 12.01 $ 12.08
======= ======= ======= ======= =======
Total return(f) ............................. 1.89% (2.43)% 4.12% 3.48% 2.66%
RATIOS TO AVERAGE NET ASSETS
Expenses .................................... 1.17% 1.16% 1.16% 1.17% 1.17%
Net investment income ....................... 4.22% 3.96% 3.96% 3.99% 4.12%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $36,536 $47,654 $59,481 $68,109 $74,311
Portfolio turnover rate ..................... 10.74% 6.85% 6.90% 9.37% 4.15%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 89
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLORIDA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------
2009 2008(a) 2007 2006 2005
-------- -------- -------- -------- --------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.32 $ 12.09 $ 12.07 $ 12.14 $ 12.30
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.48 0.47 0.48 0.48 0.49
Net realized and unrealized gains (losses) .. (0.27) (0.75) 0.01 (0.07) (0.17)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.21 (0.28) 0.49 0.41 0.32
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ....................... (0.46) (0.46) (0.47) (0.48) (0.48)
Net realized gains .......................... (0.01) (0.03) -- -- --
-------- -------- -------- -------- --------
Total distributions ............................ (0.47) (0.49) (0.47) (0.48) (0.48)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 11.06 $ 11.32 $ 12.09 $ 12.07 $ 12.14
======== ======== ======== ======== ========
Total return(f) ................................ 1.86% (2.41)% 4.18% 3.45% 2.74%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.17% 1.16% 1.15% 1.17% 1.17%
Net investment income .......................... 4.22% 3.96% 3.97% 3.99% 4.12%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $109,884 $115,863 $136,712 $140,508 $124,949
Portfolio turnover rate ........................ 10.74% 6.85% 6.90% 9.37% 4.15%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
90 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------- ----------- --------------
MUNICIPAL BONDS 99.0%
FLORIDA 94.5%
Alachua County Health Facilities Authority Health Facilities Revenue,
Shands Healthcare Project,
Refunding, Series D-1, 6.50%, 12/01/19 .................................. $ 1,215,000 $ 1,262,810
Refunding, Series D-1, 6.75%, 12/01/22 .................................. 1,000,000 1,020,590
Series D-2, 6.75%, 12/01/30 ............................................. 5,000,000 5,013,450
Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/21 ............. 2,000,000 2,035,380
Brevard County Health Facilities Authority Health Care Facilities Revenue,
Health First Inc. .......................................................
Project, MBIA Insured, 5.00%, 4/01/26 ................................... 5,000,000 3,784,150
Brevard County School Board COP,
Refunding, Series A, AMBAC Insured, 5.40%, 7/01/11 ...................... 4,415,000 4,654,116
Series A, AMBAC Insured, 5.00%, 7/01/26 ................................. 10,675,000 10,232,308
Broward County Educational Facilities Authority Revenue, Educational
Facilities, Nova Southeastern, Refunding, Series B, 5.60%, 4/01/29 ...... 3,180,000 2,626,426
Broward County Health Facilities Authority Revenue, Catholic Health
Services, Refunding, 5.50%, 8/15/20 ..................................... 9,360,000 9,240,941
Broward County HFA,
MFHR, Bridgewater Place Apartments Project, Series A, 5.45%, 10/01/34 ... 3,000,000 2,556,600
MFHR, Cross Keys Apartments Project, Series A, 5.80%, 10/01/33 .......... 1,980,000 1,679,614
MFHR, Cross Keys Apartments Project, Series A, 5.85%, 4/01/39 ........... 5,730,000 4,785,868
MFHR, Stirling Apartments Phase II, Series A, 5.35%, 10/01/29 ........... 990,000 833,481
MFHR, Stirling Apartments Phase II, Series A, 5.40%, 4/01/39 ............ 1,980,000 1,627,322
SFMR, Refunding, Series B, FHA Insured, zero cpn., 4/01/29 .............. 265,000 66,595
Broward County HFAR, Series D,
6.90%, 6/01/09 .......................................................... 5,000 5,012
7.375%, 6/01/21 ......................................................... 65,000 65,114
Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/26 ..... 21,500,000 20,820,385
Broward County Water and Sewer Utility Revenue, Series A, 5.25%, 10/01/34.. 2,200,000 2,193,752
Cape Canaveral Hospital District Revenue COP, Refunding, 5.25%, 1/01/28 .... 3,500,000 2,869,580
Celebration CDD, Special Assessment, Series A, MBIA Insured,
5.50%, 5/01/18 .......................................................... 1,345,000 1,349,129
Citrus County Hospital Board Revenue, Citrus Memorial Hospital,
Refunding, 6.25%, 8/15/23 ............................................... 8,900,000 7,751,188
Clearwater MFR, Rental Housing, Drew Gardens Projects, Refunding, Series A,
FHA Insured, 6.50%, 10/01/25 ............................................ 2,295,000 2,297,731
Clermont Water and Sewer Revenue, Refunding, FSA Insured,
5.375%, 12/01/30 ........................................................ 5,000,000 5,015,250
Crossing at Fleming Island CDD, Florida Special Assessment Revenue,
Refunding, Series B, MBIA Insured, 5.80%, 5/01/16 ....................... 5,980,000 5,958,651
Dade County Aviation Revenue, Miami International Airport, Series C,
FSA Insured, 5.125%, 10/01/27 ........................................... 9,550,000 9,570,246
Daytona Beach Utility System Revenue, Refunding, Series B, FGIC Insured,
5.00%, 11/15/32 ......................................................... 3,250,000 2,919,280
Duval County HFA, MFHR, Mortgage, Eagles Point North, Series A,
MBIA Insured,
5.60%, 7/01/17 .......................................................... 1,000,000 1,000,370
5.70%, 7/01/27 .......................................................... 2,000,000 1,783,100
Enterprise CDD, Water and Sewer Revenue, MBIA Insured, 5.50%, 5/01/26 ...... 3,000,000 3,020,970
Escambia County Health Facilities Authority Health Facility Revenue,
Baptist Hospital and Baptist Manor, 5.125%, 10/01/19 .................... 8,750,000 7,150,500
Florida Health Care Facility Loan VHA Project, AMBAC Insured,
5.95%, 7/01/20 ....................................................... 1,145,000 1,120,921
Escambia County Health Facilities Authority Revenue, Ascension Health
Credit, Series A-2,
AMBAC Insured, Pre-Refunded, 5.75%, 11/15/29 ............................ 25,000,000 26,067,250
Annual Report | 91
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Escambia County HFA, SFMR, Multi-County Program, Refunding, Series A,
MBIA Insured, 6.40%, 10/01/30 ........................................... $ 225,000 $ 226,076
Escambia County HFA Dormitory Revenue, University of West Florida
Foundation Inc. Project, Refunding, MBIA Insured, 5.00%, 6/01/31 ........ 6,580,000 6,475,378
Florida HFAR,
Homeowner Mortgage, Series 1, MBIA Insured, 5.625%, 7/01/17 ............. 1,390,000 1,391,307
Reserve at Kanapaha, Series G, AMBAC Insured, 5.70%, 7/01/37 ............ 5,000,000 4,291,450
Reserve at Northshore, Series H, AMBAC Insured, 5.70%, 5/01/37 .......... 2,000,000 1,766,940
Florida HFC Revenue,
Brenwood Trace Apartments, Series E-1, FSA Insured, 5.65%, 6/01/19 ...... 1,245,000 1,263,476
Brenwood Trace Apartments, Series E-1, FSA Insured, 5.80%, 12/01/38 ..... 4,965,000 4,809,447
Capital Appreciation, Homeowner Mortgage, Series 4, FSA Insured,
zero cpn., 7/01/30 ................................................... 1,985,000 465,145
Deer Meadows Apartments, Series R, FNMA Insured, 6.00%, 5/01/32 ......... 3,435,000 3,417,653
Deferred Interest, Homeowner Mortgage, Series 1, MBIA Insured,
zero cpn., 7/01/17 ................................................... 1,040,000 653,276
Deferred Interest, Homeowner Mortgage, Series 2, MBIA Insured,
zero cpn., 1/01/29 ................................................... 11,675,000 3,873,298
Homeowner Mortgage, Series 4, FSA Insured, 6.25%, 7/01/22 ............... 1,170,000 1,179,032
Homeowner Mortgage, Series 4, GNMA Secured, 6.375%, 7/01/38 ............. 5,000,000 5,186,100
Housing-Waverly Apartments, Series C-1, FSA Insured, 6.50%, 7/01/40 ..... 3,000,000 3,035,730
Florida Intergovernmental Finance Commission Capital Revenue, Series C-1,
AMBAC Insured, 5.00%, 2/01/21 ........................................... 1,355,000 1,371,897
Florida Municipal Loan Council Revenue, Series B, MBIA Insured,
Pre-Refunded, 5.75%, 11/01/29 ........................................... 1,500,000 1,566,435
Florida Ports Financing Commission Revenue, State Transportation Trust Fund,
Intermodal Program, FGIC Insured, 5.50%, 10/01/23 ....................... 7,000,000 6,958,070
Florida State Board of Education Capital Outlay GO, Public Education,
Refunding, Series D, 5.75%, 6/01/22 ..................................... 25,900,000 26,870,991
Refunding, Series D, 6.00%, 6/01/23 ..................................... 15,000,000 17,536,050
Refunding, Series G, FGIC Insured, 5.00%, 6/01/31 ....................... 5,000,000 4,992,950
Series C, FGIC Insured, Pre-Refunded, 5.75%, 6/01/29 .................... 5,000,000 5,346,850
Florida State Board of Education GO,
Series A, 5.50%, 6/01/38 ................................................ 10,000,000 10,283,000
Series F, MBIA Insured, 5.00%, 6/01/28 .................................. 14,405,000 14,496,904
Florida State Board of Education Lottery Revenue, Series A, FGIC Insured,
5.00%, 7/01/20 .......................................................... 6,000,000 6,081,060
Florida State Board Regent Housing Revenue,
University of Central Florida, AMBAC Insured, Pre-Refunded,
5.75%, 10/01/29 ...................................................... 8,650,000 8,995,567
University of Florida, FGIC Insured, Pre-Refunded, 5.75%, 7/01/25 ....... 3,400,000 3,646,976
Florida State Department of Environmental Protection Preservation Revenue,
Florida Forever, Series A, MBIA Insured, 5.00%, 7/01/21 ................. 4,000,000 4,065,000
Florida State Mid-Bay Bridge Authority Revenue,
Exchangeable, Refunding, Series D, 6.10%, 10/01/22 ...................... 13,695,000 11,602,952
Exchangeable, Series A, 5.95%, 10/01/13 ................................. 4,455,000 4,423,191
Exchangeable, Series D, ETM, 6.10%, 10/01/22 ............................ 3,545,000 4,159,419
Series A, AMBAC Insured, Pre-Refunded, zero cpn., 10/01/25 .............. 9,845,000 4,917,873
Series A, AMBAC Insured, Pre-Refunded, zero cpn., 10/01/26 .............. 2,500,000 1,182,875
Series A, ETM, 6.875%, 10/01/22 ......................................... 6,000,000 7,721,160
Florida State Municipal Power Agency Revenue,
All Requirements Power Supply Project, Series A, 5.00%, 10/01/31 ........ 6,000,000 5,696,280
Stanton II Project, Refunding, AMBAC Insured, 5.00%, 10/01/26 ........... 5,000,000 4,879,900
Stanton Project, Refunding, 5.50%, 10/01/19 ............................. 1,000,000 1,074,660
92 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Florida State Turnpike Authority Turnpike Revenue,
Department of Transportation,
Refunding, Series A, 5.00%, 7/01/35 ..................................... $ 5,000,000 $ 4,934,800
Series B, 5.00%, 7/01/30 ................................................ 3,455,000 3,460,010
Fort Lauderdale Water and Sewer Revenue,
5.00%, 9/01/35 .......................................................... 24,090,000 23,707,451
MBIA Insured, 5.00%, 9/01/31 ............................................... 8,315,000 8,259,456
Fort Pierce Capital Improvement Revenue, Refunding, Series A,
Assured Guaranty, 6.00%, 9/01/32 ........................................ 1,500,000 1,577,520
Fort Pierce Utilities Authority Revenue,
AMBAC Insured, 5.00%, 10/01/27 .......................................... 7,000,000 6,842,360
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/20 ...... 3,090,000 1,732,841
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/21 ...... 2,585,000 1,358,831
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/22 ...... 3,090,000 1,511,010
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/23 ...... 3,060,000 1,395,544
Capital Appreciation, Series B, AMBAC Insured, zero cpn., 10/01/24 ...... 2,560,000 1,083,059
Halifax Hospital Medical Center Hospital Revenue,
Refunding and Improvement, Series A, 5.00%, 6/01/38 ..................... 11,395,000 7,995,871
Series B-1, FSA Insured, 5.50%, 6/01/38 ................................. 10,000,000 9,009,700
Hernando County School Board COP, MBIA Insured, 5.00%, 7/01/35 ............. 22,050,000 19,168,065
Hialeah Housing Authority Revenue, Affordable Housing Program, Refunding,
GNMA Secured, 5.30%, 12/20/18 ........................................... 1,240,000 1,247,502
Highlands County Health Facilities Authority Revenue,
Adventist Health Systems, Series A, Pre-Refunded, 6.00%, 11/15/31 ....... 16,000,000 17,800,960
Hillsborough County Assessment Revenue, Capacity Assessment Special,
FSA Insured, 5.125%, 3/01/20 ............................................ 1,000,000 962,980
Hillsborough County Aviation Authority Revenue, Series B,
Assured Guaranty, 5.00%,
10/01/33 ................................................................ 5,465,000 5,069,279
10/01/38 ................................................................ 6,725,000 6,208,587
Hillsborough County HFA Mortgage Revenue, SF, Series A,
GNMA Secured, 5.875%, 4/01/30 ........................................... 505,000 505,465
zero cpn., 4/01/32 ...................................................... 295,000 68,095
Hillsborough County IDA, PCR, Tampa Electric Co. Project,
Refunding, 5.50%, 10/01/23 .............................................. 16,000,000 14,833,280
Series A, 5.65%, 5/15/18 ................................................ 6,500,000 6,403,345
Hillsborough County IDAR, Tampa General Hospital Project, Refunding,
Series B, 5.40%,
10/01/28 ................................................................ 7,000,000 5,595,100
Hillsborough County School Board COP, Master Lease Program, Series B,
MBIA Insured,
5.00%, 7/01/29 .......................................................... 10,000,000 9,677,000
Indian River County Hospital District Revenue, Refunding, FSA Insured,
5.70%, 10/01/15 ......................................................... 1,000,000 999,930
Jacksonville Capital Improvement Revenue,
Refunding, Series C, AMBAC Insured, 5.00%, 10/01/25 ..................... 3,460,000 3,406,266
Series A, AMBAC Insured, 5.00%, 10/01/30 ................................ 10,000,000 9,493,500
Jacksonville Guaranteed Entitlement Revenue, Refunding and Improvement,
FGIC Insured,
5.00%, 10/01/32 ......................................................... 17,250,000 15,840,330
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/23 ............. 5,000,000 5,043,050
Jacksonville Transportation Revenue, MBIA Insured,
5.25%, 10/01/29 ......................................................... 17,955,000 17,958,411
5.00%, 10/01/31 ......................................................... 25,000,000 24,534,500
Annual Report | 93
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Kissimmee Water and Sewer Revenue, AMBAC Insured, ETM, 6.00%, 10/01/15 ..... $ 5,000,000 $ 4,979,100
Lake County School Board COP, Series A, AMBAC Insured, 5.00%, 6/01/30 ...... 5,000,000 4,546,150
Lakeland Electric and Water Revenue, Capital Appreciation, ETM, zero cpn.,
10/01/14 ................................................................ 5,770,000 4,938,716
Lakeland Hospital System Revenue, Lakeland Regional Health System,
Pre-Refunded, 5.75%, 11/15/27 ........................................... 6,925,000 7,899,486
Pre-Refunded, 5.50%, 11/15/32 ........................................... 12,070,000 13,661,550
Series A, MBIA Insured, Pre-Refunded, 5.50%, 11/15/26 ................... 10,000,000 10,431,200
Lee County Airport Revenue,
Refunding, FSA Insured, 5.00%, 10/01/33 ................................. 18,000,000 17,049,240
Series A, FSA Insured, 6.00%, 10/01/32 .................................. 11,405,000 10,906,259
Lee County IDA Health Care Facilities Revenue, Shell Point Village Project,
Series A,
Pre-Refunded, 5.50%, 11/15/21 ........................................... 7,500,000 7,826,100
Lessburg Hospital Revenue, Leesburg Regional Medical Center Project, 5.50%,
7/01/32 ................................................................. 4,150,000 3,249,118
Marion County Utility System Revenue,
FGIC Insured, 5.00%, 12/01/31 ........................................... 5,000,000 4,770,950
Series A, MBIA Insured, 5.00%, 12/01/28 ................................. 5,000,000 4,829,200
Melbourne Water and Sewer Revenue,
Capital Appreciation, FGIC Insured, ETM, zero cpn., 10/01/26 ............ 1,500,000 620,085
Capital Appreciation, Refunding, Series B, FGIC Insured,
zero cpn., 10/01/22 .................................................. 1,785,000 907,012
Capital Appreciation, Refunding, Series B, FGIC Insured,
zero cpn., 10/01/26 .................................................. 4,500,000 1,719,360
FGIC Insured, Pre-Refunded, 5.25%, 10/01/30 ............................. 6,000,000 6,439,800
Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ......... 7,000,000 6,595,540
Miami-Dade County Aviation Revenue, Miami International Airport,
Hub of the Americas,
Refunding, FGIC Insured, 5.375%, 10/01/27 ............................... 5,000,000 4,355,650
Refunding, FGIC Insured, 5.375%, 10/01/32 ............................... 5,000,000 4,160,300
Refunding, Series A, XLCA Insured, 5.00%, 10/01/37 ...................... 10,000,000 7,759,500
Series B, FGIC Insured, 5.00%, 10/01/30 ................................. 4,440,000 4,017,800
Miami-Dade County Educational Facilities Authority Revenue, Series A,
AMBAC Insured,
Pre-Refunded, 5.75%, 4/01/29 ............................................ 10,000,000 10,620,000
Miami-Dade County HFA, MFMR, Villa Esperanza Apartments Project,
5.25%, 10/01/19 ......................................................... 430,000 409,261
5.40%, 10/01/33 ......................................................... 1,500,000 1,274,895
Miami-Dade County IDAR, Airis Miami II LLC Project, AMBAC Insured,
6.00%, 10/15/25 ......................................................... 4,500,000 4,261,590
Miami-Dade County Public Facilities Revenue, Jackson Health System,
Series A, MBIA Insured,
5.00%, 6/01/35 .......................................................... 20,970,000 17,185,125
Miami-Dade County School Board COP, Assured Guaranty, 5.375%, 2/01/34 ...... 5,000,000 4,948,950
Miami-Dade County Special Obligation Revenue,
Juvenile Courthouse Project, Series A, AMBAC Insured, 5.00%, 4/01/35 .... 5,000,000 4,595,600
Sub Series B, MBIA Insured, zero cpn., 10/01/36 ......................... 5,635,000 815,272
Sub Series C, MBIA Insured, zero cpn., 10/01/28 ......................... 8,305,000 2,148,337
sub. lien, Refunding, Series A, MBIA Insured, zero cpn., 10/01/25 ....... 22,365,000 7,182,743
North Broward Hospital District Revenue, Improvement, Pre-Refunded,
6.00%, 1/15/31 .......................................................... 25,530,000 27,906,588
Okaloosa County Water and Sewer Revenue, Refunding, FSA Insured,
5.00%, 7/01/36 .......................................................... 10,000,000 9,404,100
Orange County Health Facilities Authority Revenue,
Adventist Health System Inc., Pre-Refunded, 6.375%, 11/15/20 ............ 3,000,000 3,288,300
Adventist Health System Inc., Pre-Refunded, 6.25%, 11/15/24 ............. 5,500,000 6,320,380
Adventist Health System Inc., Pre-Refunded, 6.50%, 11/15/30 ............. 10,750,000 11,805,650
Hospital, Adventist Health System Inc., Pre-Refunded, 5.625%, 11/15/32 .. 15,000,000 17,044,350
94 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Orange County Health Facilities Authority Revenue, (continued)
Hospital, Orlando Regional Healthcare, Series B, 5.125%, 11/15/39 ....... $ 5,000,000 $ 3,684,450
Hospital, Orlando Regional Healthcare, Series B, FSA Insured,
5.00%, 12/01/32 ...................................................... 5,000,000 4,422,250
Hospital, Orlando Regional Healthcare, Series C, 5.25%, 10/01/35 ........ 4,000,000 3,090,800
Orlando Regional Healthcare System, Pre-Refunded, 6.00%, 12/01/29 ....... 6,000,000 6,910,080
Orlando Regional Healthcare System, Refunding, Series E,
6.00%, 10/01/26 ...................................................... 11,750,000 10,813,055
Orlando Regional Healthcare System, Series E, Pre-Refunded,
6.00%, 10/01/26 ...................................................... 250,000 259,975
Orange County HFA Homeowner Revenue, Series C-1, GNMA Secured,
5.70%, 9/01/26 .......................................................... 360,000 357,883
Orange County School Board COP, Series A,
(a) Assured Guaranty, 5.50%, 8/01/34 ........................................ 10,000,000 9,798,400
MBIA Insured, 5.00%, 8/01/27 ............................................ 12,000,000 11,470,800
Orange County Tourist Development Tax Revenue,
AMBAC Insured, Pre-Refunded, 5.50%, 10/01/31 ............................ 10,500,000 10,787,385
AMBAC Insured, Pre-Refunded, 5.50%, 10/01/32 ............................ 5,000,000 5,568,400
Refunding, XLCA Insured, 5.00%, 10/01/31 ................................ 12,970,000 11,971,569
Orlando Tourist Development Tax Revenue, Senior 6th Cent Contract Payments,
Series A, Assured Guaranty, 5.25%, 11/01/38 ............................. 16,740,000 15,689,398
Orlando-Orange County Expressway Authority Revenue,
junior lien, FGIC Insured, 5.00%, 7/01/28 ............................... 8,000,000 7,872,880
senior lien, AMBAC Insured, ETM, 7.625%, 7/01/18 ........................ 265,000 350,269
Series B, AMBAC Insured, 5.00%, 7/01/35 ................................. 7,135,000 6,555,923
Osceola County IDAR, Community Provider Pooled Loan Program,
Series A, FSA Insured, 7.75%, 7/01/10 ................................... 76,000 76,052
Series C, FSA Insured, 7.60%, 7/01/10 ................................... 204,000 204,135
Osceola County Sales Tax Revenue, FSA Insured, 5.00%, 4/01/24 .............. 10,000,000 10,052,600
Osceola County Tourist Development Tax Revenue, FGIC Insured,
5.00%, 10/01/32 ......................................................... 10,000,000 9,431,600
Palm Beach County Financing Authority MFR, Housing Windsor Park Apartment
Project, Series A, 5.90%, 6/01/38 ....................................... 980,000 847,769
Palm Beach County HFAR, Acts Retirement-Life Communities,
5.125%, 11/15/29 ........................................................ 3,650,000 2,480,285
Palm Beach County IDR, South Florida Fair Project, MBIA Insured,
5.50%, 6/01/31 .......................................................... 5,000,000 4,589,750
Palm Beach County Public Improvement Revenue, 5.00%, 5/01/33 ............... 1,000,000 961,960
Palm Beach County School Board COP,
Series A, FGIC Insured, Pre-Refunded, 6.00%, 8/01/22 .................... 5,000,000 5,400,200
Series E, MBIA Insured, 5.00%, 8/01/32 .................................. 15,000,000 13,749,300
Palm Beach County Solid Waste Authority Revenue, Improvement,
Series B, 5.50%, 10/01/25 ............................................... 5,000,000 5,157,450
Panama City Beach Utility Revenue, Refunding, AMBAC Insured, 5.00%,
6/01/27 ................................................................. 4,450,000 4,058,089
6/01/32 ................................................................. 2,795,000 2,455,212
Pinellas County Health Facilities Authority Revenue, Baycare Health System,
FSA Insured, 5.00%, 11/15/30 ............................................ 11,500,000 10,131,155
Pinellas County HFA, SFHR, Multi-County, Series B-1, GNMA Insured,
zero cpn., 9/01/31 ...................................................... 205,000 45,664
Polk County Capital Improvement Revenue, FSA Insured, Pre-Refunded,
5.75%, 12/01/21 ......................................................... 2,350,000 2,568,762
Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/26 ........ 4,000,000 3,915,120
Port Everglades Authority Port Improvement Revenue, Capital Appreciation,
ETM, zero cpn., 9/01/10 ................................................. 17,835,000 16,800,570
Port St. Lucie Utility Revenue, System,
Capital Appreciation, MBIA Insured, Pre-Refunded, zero cpn., 9/01/29 ....... 20,000,000 6,680,400
Annual Report | 95
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Port St. Lucie Utility Revenue, System, (continued)
Capital Appreciation, Refunding, Series A, MBIA Insured,
zero cpn., 9/01/32 ................................................... $ 5,000,000 $ 1,166,650
Capital Appreciation, Refunding, Series A, MBIA Insured,
zero cpn., 9/01/33 ................................................... 5,000,000 1,047,350
Refunding, Series A, MBIA Insured, 5.00%, 9/01/30 ....................... 11,580,000 10,751,219
Refunding, Series A, MBIA Insured, 5.00%, 9/01/31 ....................... 8,805,000 8,105,091
Sarasota Special Obligation Revenue, Capital Appreciation, Refunding,
AMBAC Insured, zero cpn.,
11/01/09 ................................................................ 1,365,000 1,344,429
11/01/12 ................................................................ 1,780,000 1,608,426
11/01/15 ................................................................ 2,180,000 1,693,380
South Broward Hospital District Revenue,
Pre-Refunded, 5.60%, 5/01/27 ............................................ 5,000,000 5,654,350
Pre-Refunded, 5.625%, 5/01/32 ........................................... 16,250,000 18,389,150
South Broward Hospital District Obligated Group, Refunding,
5.00%, 5/01/36 .......................................................... 7,000,000 5,824,350
South Florida Water Management District COP, AMBAC Insured,
5.00%, 10/01/31 ......................................................... 12,050,000 11,455,091
St. Johns County Water and Sewer Revenue, Capital Appreciation,
AMBAC Insured, zero cpn.,
6/01/22 ................................................................. 4,000,000 2,025,080
6/01/23 ................................................................. 4,255,000 2,031,507
6/01/24 ................................................................. 1,500,000 671,670
6/01/25 ................................................................. 2,130,000 893,642
St. Lucie West Services District Utility Revenue, senior lien,
MBIA Insured, 6.125%, 10/01/32 .......................................... 10,000,000 10,077,400
Sumter County Capital Improvement Revenue, AMBAC Insured,
5.00%, 6/01/30 .......................................................... 3,520,000 3,347,309
Sunrise Utilities System Revenue, Refunding, AMBAC Insured,
5.20%, 10/01/22 ......................................................... 2,550,000 2,629,433
Tallahassee Energy System Revenue, MBIA Insured, 5.00%, 10/01/35 ........... 5,000,000 4,657,600
Tamarac Sales Tax Revenue, FGIC Insured, 5.00%, 4/01/22 .................... 2,490,000 2,540,348
Tampa Bay Water Utility System Revenue,
FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 ............................. 15,000,000 16,624,350
Series B, FGIC Insured, 5.00%, 10/01/31 ................................. 10,000,000 9,544,000
Tampa Sports Authority Revenue, Guaranteed Package, Tampa Bay Arena
Project, MBIA Insured,
6.00%, 10/01/15 ......................................................... 1,000,000 1,124,160
6.05%, 10/01/20 ......................................................... 1,715,000 1,841,138
6.10%, 10/01/26 ......................................................... 2,695,000 2,838,940
Tampa Water and Sewer Revenue, sub. lien, Series A, AMBAC Insured, ETM,
7.25%, 10/01/16 ......................................................... 1,330,000 1,584,695
Viera East CDD, Water and Sewer Revenue, 6.75%, 5/01/09 .................... 545,000 542,597
Viera East CDD Special Assessment,
Refunding, 7.00%, 5/01/26 ............................................... 6,445,000 5,205,626
Series B, ETM, 6.75%, 5/01/14 ........................................... 4,270,000 4,793,886
Village Center CDD Recreational Revenue, Series A, MBIA Insured,
5.20%, 11/01/25 ......................................................... 10,000,000 8,893,300
Volusia County Educational Facility Authority Revenue,
Educational Facilities,
Embry Riddle University, Refunding, Series B, AMBAC Insured,
5.25%, 10/15/22 ......................................................... 2,000,000 1,984,520
Stetson University Inc. Project, AMBAC Insured, 5.25%, 6/01/29 ............. 5,000,000 4,974,900
Volusia County School Board COP, Master Lease Program, FSA Insured,
5.50%, 8/01/24 .......................................................... 5,000,000 5,126,100
West Lake CDD, Special Assessment Revenue, MBIA Insured, 5.75%, 5/01/17 .... 1,740,000 1,579,172
West Orange Healthcare District Revenue, Series A, 5.65%, 2/01/22 .......... 10,850,000 10,645,043
West Palm Beach CRDA Revenue, Northwood Pleasant Community Redevelopment,
5.00%, 3/01/35 .......................................................... 1,000,000 763,400
--------------
1,230,028,695
--------------
96 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------- ----------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 4.5%
PUERTO RICO 3.9%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue,
senior lien, Series A, 6.00%, 7/01/44 ................................... $ 2,100,000 $ 1,881,096
Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.00%,
7/01/25 ................................................................. 5,000,000 4,211,350
7/01/29 ................................................................. 10,000,000 8,271,200
7/01/33 ................................................................. 6,360,000 4,960,800
Puerto Rico Commonwealth Highway and Transportation Authority
Transportation Revenue,
Refunding, Series A, MBIA Insured, 5.00%, 7/01/38 ....................... 560,000 447,003
Refunding, Series K, 5.00%, 7/01/30 ..................................... 5,000,000 4,155,700
Series B, Pre-Refunded, 6.00%, 7/01/39 .................................. 5,000,000 5,355,400
Series D, Pre-Refunded, 5.375%, 7/01/36 ................................. 5,000,000 5,541,800
Series G, 5.00%, 7/01/33 ................................................ 1,680,000 1,329,569
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 5,288,937
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 .................................... 1,210,000 1,022,753
Series D, Pre-Refunded, 5.375%, 7/01/33 ................................. 3,790,000 4,181,355
Series I, 5.00%, 7/01/36 ................................................ 5,000,000 3,932,150
--------------
50,579,113
--------------
VIRGIN ISLANDS 0.6%
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, Radian Insured,
5.00%, 10/01/33 ......................................................... 10,000,000 8,071,700
--------------
TOTAL U.S. TERRITORIES ..................................................... 58,650,813
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS
(COST $1,310,117,173) ................................................... 1,288,679,508
--------------
SHORT TERM INVESTMENTS 0.2%
MUNICIPAL BONDS 0.2%
FLORIDA 0.2%
(b) Broward County Educational Facilities Authority Revenue, Nova Southeastern
University, Series A, Daily VRDN and Put, 0.60%, 4/01/38 ................ 1,500,000 1,500,000
(b) Florida State Municipal Power Agency Revenue, All Requirements Power
Supply, Refunding, Series C, Daily VRDN and Put, 0.60%, 10/01/35 ........ 1,100,000 1,100,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $2,600,000) ............................. 2,600,000
--------------
TOTAL INVESTMENTS (COST $1,312,717,173) 99.2% .............................. 1,291,279,508
OTHER ASSETS, LESS LIABILITIES 0.8% ........................................ 10,342,401
--------------
NET ASSETS 100.0% .......................................................... $1,301,621,909
==============
See Abbreviations on page 170.
(a) Security purchased on a when-issued basis. See Note 1(b).
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 97
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN GEORGIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.36 $ 12.20 $ 12.13 $ 12.17 $ 12.27
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ........................ 0.49 0.49 0.50 0.51 0.53
Net realized and unrealized gains (losses) ...... (0.11) (0.84) 0.06 (0.04) (0.10)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.38 (0.35) 0.56 0.47 0.43
-------- -------- -------- -------- --------
Less distributions from net investment income ...... (0.50) (0.49) (0.49) (0.51) (0.53)
-------- -------- -------- -------- --------
Redemption fees(d) ................................. -- --(e) --(e) --(e) --(e)
-------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 11.24 $ 11.36 $ 12.20 $ 12.13 $ 12.17
======== ======== ======== ======== ========
Total return(f) .................................... 3.38% (2.97)% 4.79% 3.91% 3.65%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 0.69% 0.72% 0.73% 0.74% 0.75%
Net investment income .............................. 4.33% 4.10% 4.13% 4.18% 4.40%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $308,087 $253,104 $220,989 $205,875 $170,407
Portfolio turnover rate ............................ 9.61% 8.00% 4.50% 8.54% 22.50%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
98 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GEORGIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.47 $ 12.31 $ 12.24 $ 12.27 $ 12.37
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ........................ 0.43 0.43 0.44 0.44 0.47
Net realized and unrealized gains (losses) ...... (0.11) (0.84) 0.06 (0.03) (0.11)
------- ------- ------- ------- -------
Total from investment operations ................... 0.32 (0.41) 0.50 0.41 0.36
------- ------- ------- ------- -------
Less distributions from net investment income ...... (0.44) (0.43) (0.43) (0.44) (0.46)
------- ------- ------- ------- -------
Redemption fees(d) ................................. -- --(e) --(e) --(e) --(e)
------- ------- ------- ------- -------
Net asset value, end of year ....................... $ 11.35 $ 11.47 $ 12.31 $ 12.24 $ 12.27
======= ======= ======= ======= =======
Total return(f) .................................... 2.78% (3.48)% 4.16% 3.39% 3.05%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.24% 1.27% 1.28% 1.29% 1.30%
Net investment income .............................. 3.78% 3.55% 3.58% 3.63% 3.85%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $68,721 $52,087 $50,700 $43,983 $37,017
Portfolio turnover rate ............................ 9.61% 8.00% 4.50% 8.54% 22.50%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- -----------
MUNICIPAL BONDS 94.8%
GEORGIA 91.7%
Athens-Clarke County Unified Government Water and Sewer Revenue,
5.625%, 1/01/33 ................................................................................ $10,000,000 $10,346,299
5.50%, 1/01/38 ................................................................................. 5,000,000 5,098,449
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien,
Refunding, Series C, FSA Insured, 5.00%, 1/01/33 ............................................... 5,000,000 5,013,550
Series J, FSA Insured, 5.00%, 1/01/34 .......................................................... 5,000,000 5,009,650
Atlanta Airport Revenue, General, Series A, FGIC Insured, Pre-Refunded,
5.50%, 1/01/26 ................................................................................. 5,000,000 5,245,900
5.60%, 1/01/30 ................................................................................. 5,000,000 5,250,000
Atlanta Development Authority Educational Facilities Revenue, Science Park
LLC Project, 5.00%, 7/01/32 .................................................................... 3,000,000 2,659,350
Atlanta Development Authority Revenue,
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/26 .................. 2,555,000 2,664,482
Yamacraw Design Center Project, Series A, MBIA Insured, Pre-Refunded,
5.125%, 1/01/23 ............................................................................. 4,150,000 4,541,553
Atlanta Public Safety and Judicial Facilities Authority Revenue, Public
Safety Facility Project,
FSA Insured, 5.00%, 12/01/26 ................................................................... 1,140,000 1,167,850
Atlanta Tax Allocation, Atlantic State Project, Refunding, Assured Guaranty,
5.00%, 12/01/23 ................................................................................ 1,000,000 967,510
Atlanta Urban Residential Finance Authority MFHR, Fulton Cotton Mill, GNMA
Secured,
6.00%, 5/20/17 ................................................................................. 890,000 890,863
6.125%, 5/20/27 ................................................................................ 1,560,000 1,561,014
Atlanta Water and Wastewater Revenue,
FSA Insured, 5.00%, 11/01/24 ................................................................... 4,000,000 4,086,680
Refunding, Series A, MBIA Insured, 5.00%, 11/01/33 ............................................. 8,000,000 6,708,880
Series A, FSA Insured, 5.50%, 11/01/27 ......................................................... 5,000,000 5,025,150
Augusta Water and Sewer Revenue, Refunding, FSA Insured, 5.00%, 10/01/32 .......................... 5,000,000 4,851,600
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center,
5.25%, 12/01/22 ................................................................................ 2,500,000 1,982,275
5.375%, 12/01/28 ............................................................................... 2,000,000 1,478,220
Bartow County Development Authority PCR, Georgia Power Co., First Series,
5.10%, 6/01/23 ................................................................................. 5,000,000 4,999,600
Bleckley-Dodge County Joint Development Authority Student Housing Facilities
Revenue, MGC
Real Estate Foundation II LLC Project, 5.00%, 7/01/33 .......................................... 3,500,000 3,060,260
Bulloch County Development Authority Lease Revenue, Georgia Southern
University, XLCA
Insured, 5.00%, 8/01/27 ........................................................................ 5,000,000 4,841,900
Burke County Development Authority PCR, Oglethorpe Power Corp., Vogtle
Project,
Series B, 5.50%, 1/01/33 ....................................................................... 5,000,000 4,631,150
Series E, 7.00%, 1/01/23 ....................................................................... 5,000,000 5,338,150
Carroll City-County Hospital Authority Revenue Anticipation Certificates,
Tanner Medical Center Inc. Project, Assured Guaranty, 5.00%, 7/01/38 ........................... 5,000,000 4,073,550
Cherokee County GO, 5.00%, 4/01/26 ................................................................ 1,000,000 1,044,230
Cherokee County Water and Sewer Authority Revenue,
MBIA Insured, 6.90%, 8/01/18 ................................................................... 10,000 9,997
Series 2006, FSA Insured, 5.00%, 8/01/35 ....................................................... 3,000,000 2,943,780
Clayton County Development Authority Revenue,
Gateway Village Project, Series A, Pre-Refunded, 6.00%, 8/01/23 ................................ 3,500,000 3,648,715
Refunding, Series A, MBIA Insured, 5.00%, 8/01/23 .............................................. 2,310,000 2,397,018
Clayton County MFHR, Pointe Clear Apartments Project, FSA Insured, 5.70%,
7/01/23 ........................................................................................ 930,000 930,614
Cobb County Development Authority Parking Revenue, Kennesaw State University
Foundation Inc.
Project, MBIA Insured, 5.00%, 7/15/29 .......................................................... 2,000,000 1,977,220
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- -------------
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Cobb County Development Authority University Facilities Revenue, Kennesaw
State University, Sub Series D, MBIA Insured, 5.00%, 7/15/29 .................................. $ 5,000,000 $ 4,108,000
College Park Business and IDAR, Civic Center Project, AMBAC Insured,
Pre-Refunded, 5.75%, 9/01/26 .................................................................. 2,000,000 2,175,940
Columbia County Water and Sewer Revenue, FSA Insured, 5.00%, 6/01/24 ............................. 1,130,000 1,177,460
Columbus Water and Sewer Revenue,
FSA Insured, 5.00%, 5/01/29 ................................................................... 2,500,000 2,496,675
Refunding, MBIA Insured, 5.00%, 5/01/25 ....................................................... 1,000,000 1,016,740
Dahlonega Water and Wastewater Revenue, Series A, Assured Guaranty, 5.50%,
9/01/37 ....................................................................................... 5,000,000 4,386,300
Decatur County School Building Authority Revenue, High School Project, FSA
Insured, 5.00%, 10/01/32 ...................................................................... 1,500,000 1,455,480
DeKalb County Public Safety and Judicial Facilities Authority Revenue,
Public Safety and Judicial Facility Project, 5.00%, 12/01/29 .................................. 2,000,000 2,035,780
DeKalb County School District COP, Georgia School Boards Assn. Inc., AMBAC
Insured, 5.00%, 12/01/27 ...................................................................... 4,285,000 4,334,020
DeKalb County Water and Sewer Revenue, Refunding, Series B, FSA Insured,
5.00%, 10/01/35 ............................................................................... 7,000,000 7,040,460
Douglasville-Douglas County Water and Sewer Authority Revenue, MBIA
Insured, 5.00%,
6/01/29 ....................................................................................... 3,410,000 3,450,579
6/01/32 ....................................................................................... 2,000,000 1,980,860
East Point Building Authority Revenue, Water and Sewer Project, Series A,
XLCA Insured, 5.00%, 2/01/34 .................................................................. 5,480,000 4,727,925
Fayette County PFAR, Criminal Justice Center Project, Refunding, 5.00%,
6/01/26 ....................................................................................... 3,000,000 3,050,010
Fayette County School District GO, zero cpn. to 9/01/10,
4.75% thereafter, 3/01/21 ..................................................................... 1,355,000 1,274,472
4.95% thereafter, 3/01/25 ..................................................................... 1,000,000 902,900
Forsyth County GO, Pre-Refunded, 5.75%, 2/01/19 .................................................. 1,500,000 1,598,700
Forsyth County Water and Sewerage Authority Revenue, FSA Insured,
5.00%, 4/01/32 ................................................................................ 5,000,000 4,952,500
Fulton County Development Authority Revenue,
Georgia Tech Foundation Funding, Series A, 5.00%, 11/01/31 .................................... 3,000,000 3,014,580
Georgia Tech Foundation Funding SAC II Project, Series A, 5.25%, 11/01/30 ..................... 5,000,000 5,062,650
Molecular Science Building Project, MBIA Insured, 5.00%, 5/01/25 .............................. 2,240,000 2,287,802
Morehouse College Project, Refunding, AMBAC Insured, 5.00%, 12/01/27 .......................... 5,000,000 4,927,850
Fulton County Water and Sewer Revenue, FGIC Insured, 5.00%, 1/01/30 .............................. 2,500,000 2,471,125
Gainesville and Hall County Hospital Authority Revenue Anticipation
Certificates, Northeast Health System Inc. Project, Pre-Refunded,
5.50%, 5/15/31 ................................................................................ 2,500,000 2,720,975
Georgia Municipal Assn. Inc. COP, City Court Atlanta Project, AMBAC
Insured, 5.25%, 12/01/26 ...................................................................... 2,000,000 1,851,560
Georgia Municipal Electric Authority Power Revenue, Series W,
6.60%, 1/01/18 ................................................................................ 955,000 1,080,401
ETM, 6.60%, 1/01/18 ........................................................................... 45,000 52,761
Georgia Municipal Gas Authority Gas Revenue, City of Toccoa Project, AMBAC
Insured, 5.00%, 6/01/24 ....................................................................... 1,000,000 1,002,910
Georgia Private Colleges and Universities Authority Student Housing
Revenue, Mercer Housing Corp. Project, Series A, 6.00%, 6/01/24 ............................... 2,550,000 2,045,687
Georgia School Board Assn. Inc. COP, DeKalb County Public School Project,
MBIA Insured, 5.00%, 12/01/25 ................................................................. 2,600,000 2,576,522
Georgia State GO, Series B, 5.00%, 7/01/28 ....................................................... 3,225,000 3,363,965
Annual Report | 101
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- -------------
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Georgia State HFAR,
MF, Lake Vista Apartments Project, Series A, FSA Insured, 5.95%, 1/01/27 ...................... $ 1,000,000 $ 1,002,400
SFM, Series C, 5.00%, 12/01/27 ................................................................ 1,000,000 906,390
Georgia State Higher Education Facilities Authority Revenue, USG Real Estate
Foundation I LLC Project,
6.00%, 6/15/34 ................................................................................ 5,000,000 5,038,350
Assured Guaranty, 5.625%, 6/15/38 ............................................................. 3,000,000 2,997,570
Glynn-Brunswick Memorial Hospital Authority Revenue, Anticipation Certificates,
Southeast Georgia Health, Series A, 5.625%, 8/01/34 ........................................... 3,500,000 3,067,610
Gwinnett County Development Authority COP, Gwinnett County Public Schools
Project,
MBIA Insured, 5.25%, 1/01/24 .................................................................. 2,000,000 2,114,160
MBIA Insured, Pre-Refunded, 5.00%, 1/01/24 .................................................... 8,500,000 9,579,415
Refunding, MBIA Insured, 5.25%, 1/01/22 ....................................................... 3,000,000 3,250,770
Gwinnett County Hospital Authority Revenue, Anticipation Certificates,
Gwinnett Hospital Systems Inc. Project, Series B, MBIA Insured,
Pre-Refunded, 5.30%, 9/01/27 .................................................................. 3,750,000 4,226,025
Gwinnett County School District GO, 5.00%,
2/01/32 ....................................................................................... 5,000,000 5,097,000
2/01/36 ....................................................................................... 5,815,000 5,894,026
Gwinnett County Water and Sewer Authority Revenue, Pre-Refunded, 5.25%,
8/01/25 ....................................................................................... 2,795,000 3,147,925
Habersham County Hospital Authority Revenue, Anticipation Certificates, XLCA
Insured, 5.00%, 12/01/27 ...................................................................... 2,015,000 1,733,343
Habersham County School District GO, MBIA Insured, 5.00%, 4/01/28 ................................ 2,750,000 2,558,820
Henry County Hospital Authority Revenue, Henry Medical Center Inc. Project,
Refunding, AMBAC Insured, 6.00%, 7/01/29 ...................................................... 5,000,000 5,029,350
Hogansville Combined Public Utility System Revenue, Refunding, FSA Insured,
6.00%, 10/01/23 ............................................................................... 3,300,000 3,965,412
Jackson County School District GO, MBIA Insured, 5.00%, 3/01/25 .................................. 3,000,000 3,073,260
Lagrange-Troup County Hospital Authority Revenue, Series A, 5.50%, 7/01/38 ....................... 4,000,000 3,612,080
Main Street Natural Gas Inc. Gas Project Revenue, Series A, 5.50%, 9/15/27 ....................... 5,000,000 3,623,450
Medical Center Hospital Authority Revenue, Anticipation Certificates,
Columbus Regional Healthcare System,
Assured Guaranty, 6.375%, 8/01/29 ............................................................. 4,000,000 4,209,120
MBIA Insured, 5.50%, 8/01/25 .................................................................. 6,000,000 5,400,000
Meriwether County PFAR, Meriwether County Schools Project, MBIA Insured,
5.85%, 10/01/26 ............................................................................... 1,000,000 1,019,000
Monroe County Development Authority PCR, Oglethorpe Power Co., Scherer
Project, Refunding, Series A, 6.80%, 1/01/12 .................................................. 1,500,000 1,578,645
Municipal Electric Authority Revenue,
General Resolution Projects, sub. note, Refunding, Series D, 5.50%, 1/01/26 ................... 5,000,000 5,043,150
Project 1, Sub Series E, MBIA Insured, 5.00%, 1/01/25 ......................................... 2,315,000 2,245,874
Newton County Hospital Authority Revenue, Newton Health System Project 1999,
AMBAC Insured, Pre-Refunded, 6.10%, 2/01/24 ................................................... 4,500,000 4,769,865
Newton County IDAR, Georgia Perimeter College Foundation Real Estate Newton,
CIFG Insured, 5.00%, 6/01/24 .................................................................. 3,150,000 3,133,148
Paulding County GO, Courthouse, FGIC Insured, 5.00%, 2/01/32 ..................................... 4,000,000 4,020,560
Paulding County School District GO, 5.00%, 2/01/33 ............................................... 4,000,000 3,950,360
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 2,863,260
102 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE
------------------------------------- ----------- -------------
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Private Colleges and Universities Authority Revenue, Mercer University Project, Refunding,
Series A, 5.375%, 10/01/29 .................................................................... $ 2,000,000 $ 1,479,100
Richmond County Development Authority, Solid Waste Disposal Revenue, International Paper Co.
Project, 5.80%, 12/01/20 ...................................................................... 1,500,000 1,112,865
Richmond County Development Authority Educational Facilities Revenue, Augusta State University
Jaguar Student Center, Series A, XLCA Insured, 5.00%, 7/01/29 ................................. 1,000,000 932,500
Rockdale County Water and Sewer Authority Revenue,
FSA Insured, 5.00%, 7/01/29 ................................................................... 4,000,000 4,077,880
Series A, MBIA Insured, Pre-Refunded, 5.375%, 7/01/29 ......................................... 5,000,000 5,240,750
Savannah EDA Revenue, Armstrong Center LLC Project, Series A, XLCA Insured, 5.00%, 12/01/30 ...... 1,500,000 1,345,485
South Fulton Municipal Regional Water and Sewer Authority Water Revenue, MBIA Insured,
Pre-Refunded, 5.00%, 1/01/33 .................................................................. 3,500,000 3,905,230
Suwanee GO, MBIA Insured, Pre-Refunded, 5.25%, 1/01/32 ........................................... 3,000,000 3,315,240
Upper Oconee Basin Water Authority Revenue, Refunding, MBIA Insured, 5.00%, 7/01/26 .............. 1,000,000 964,000
Valdosta and Lowndes County Hospital Authority Revenue, Certificates, South Georgia Medical
Center Project,
5.00%, 10/01/33 ............................................................................... 2,000,000 1,560,500
AMBAC Insured, 5.25%, 10/01/27 ................................................................ 3,000,000 2,368,860
Walton County Water and Sewer Authority Revenue,
Hard Labor Creek Project, FSA Insured, 5.00%, 2/01/33 ......................................... 5,000,000 4,830,650
Oconee, Hard Creek Resources Project, FSA Insured, 5.00%, 2/01/38 ............................. 3,845,000 3,781,288
Refunding and Improvement, MBIA Insured, 6.00%, 2/01/21 ....................................... 750,000 749,445
Ware County Hospital Authority Revenue, Anticipation Certificates, MBIA Insured, 5.25%, 3/01/25... 3,000,000 2,728,740
------------
345,611,919
------------
U.S. TERRITORIES 3.1%
PUERTO RICO 2.3%
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series L, MBIA Insured, 5.25%, 7/01/35 ............................................. 10,000,000 8,370,200
------------
VIRGIN ISLANDS 0.8%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.40%, 10/01/12 ............................................................................... 850,000 849,958
5.50%, 10/01/22 ............................................................................... 1,200,000 994,116
5.625%, 10/01/25 .............................................................................. 1,530,000 1,249,184
------------
3,093,258
------------
TOTAL U.S. TERRITORIES ........................................................................... 11,463,458
------------
TOTAL INVESTMENTS (COST $365,932,281) 94.8% ...................................................... 357,075,377
OTHER ASSETS, LESS LIABILITIES 5.2% .............................................................. 19,732,618
------------
NET ASSETS 100.0% ................................................................................ $376,807,995
============
See Abbreviations on page 170.
The accompanying notes are an integral part of these financial statements.
Annual Report | 103
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN KENTUCKY TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- --------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.57 $ 11.44 $ 11.39 $ 11.41 $ 11.51
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ........................ 0.47 0.45 0.45 0.47 0.48
Net realized and unrealized gains (losses) ...... (0.08) (0.87) 0.06 (0.02) (0.10)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.39 (0.42) 0.51 0.45 0.38
-------- -------- -------- -------- --------
Less distributions from net investment income ...... (0.46) (0.45) (0.46) (0.47) (0.48)
-------- -------- -------- -------- --------
Redemption fees(d).................................. -- --(e) --(e) --(e) --(e)
-------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 10.50 $ 10.57 $ 11.44 $ 11.39 $ 11.41
======== ======== ======== ======== ========
Total return(f) .................................... 3.76% (3.81)% 4.57% 4.01% 3.47%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .. 0.76% 0.76% 0.77% 0.78% 0.79%
Expenses net of waiver and payments by affiliates .. 0.76% 0.75% 0.75% 0.75% 0.71%
Net investment income .............................. 4.40% 4.05% 4.02% 4.10% 4.30%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $162,043 $149,776 $148,224 $128,254 $112,941
Portfolio turnover rate ............................ 10.40% 9.42% 2.28% 9.43% 12.48%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
104 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE
-------------------------------------- ---------- ------------
MUNICIPAL BONDS 98.5%
KENTUCKY 88.2%
Bellevue GO, Public Project, Harbor Greene Project, XLCA Insured, 5.00%, 2/01/34 ................. $1,065,000 $ 1,065,873
Boone County GO, Public Project, 5.00%,
4/01/20 ....................................................................................... 1,310,000 1,372,631
4/01/21 ....................................................................................... 1,000,000 1,040,970
Boone County PCR, Collateralized, Dayton Power and Light Co., Refunding, Series A, FGIC
Insured, 4.70%, 1/01/28 ....................................................................... 3,000,000 2,658,450
Boone Florence Water Commission Water Supply Systems Revenue, Refunding, FGIC Insured, 5.00%,
12/01/22 ...................................................................................... 1,200,000 1,220,664
12/01/27 ...................................................................................... 2,000,000 1,936,020
Bowling Green GO, Project, Series A, 5.00%, 6/01/38 .............................................. 5,000,000 4,894,300
Bowling Green ISD Finance Corp. School Building Revenue, 5.75%, 1/01/20 .......................... 1,140,000 1,172,923
Boyle County Revenue, Refunding and College Improvement, CIFG Insured, 5.00%, 6/01/32 ............ 1,500,000 1,463,640
Campbell and Kenton Counties Sanitation District No. 1 Sanitation District Revenue, Series A,
FSA Insured, 5.00%,
8/01/19 ....................................................................................... 1,500,000 1,562,805
8/01/24 ....................................................................................... 2,000,000 2,040,060
Campbell County School District Finance Corp. School Building Revenue, FSA Insured, 5.00%,
8/01/26 ....................................................................................... 2,845,000 2,910,264
Christian County Hospital Revenue, Jennie Stuart Medical Center, Refunding, Assured Guaranty,
5.50%, 2/01/36 ................................................................................ 3,000,000 2,877,960
Christian County Public Courthouse Corp. Lease Revenue, District Court Facilities Project,
Pre-Refunded, 5.125%, 8/01/20 ................................................................. 1,015,000 1,095,063
Fayette County School District Finance Corp. School Building Revenue,
Pre-Refunded, 5.50%, 9/01/18 .................................................................. 2,500,000 2,590,800
Series A, AMBAC Insured, 5.25%, 4/01/20 ....................................................... 2,160,000 2,246,681
Florence GO, Public Project, Series A, FGIC Insured, 5.00%, 11/01/32 ............................. 1,000,000 1,001,960
Greater Kentucky Housing Assistance Corp. Mortgage Revenue, Section 8 Assisted Projects,
Refunding, Series A, MBIA Insured, 6.10%, 1/01/24 ............................................. 290,000 290,714
Hardin County School District Finance Corp. School Building Revenue, Pre-Refunded, 5.75%,
2/01/20 ....................................................................................... 1,500,000 1,584,495
Henry County Water District No. 2 Water Revenue, Refunding, MBIA Insured, 4.75%, 1/01/28 ......... 2,035,000 2,040,861
Jefferson County Health Facilities Revenue, Jewish Hospital Healthcare Services Inc., Refunding,
AMBAC Insured, 5.75%, 1/01/26 1,000,000 989,290
Jefferson County School District Finance Corp. School Building Revenue, Series A,
FSA Insured, Pre-Refunded, 5.25%, 7/01/18 ..................................................... 1,500,000 1,572,615
MBIA Insured, 4.75%, 6/01/27 .................................................................. 2,440,000 2,358,870
Kentucky Area Development Districts Financing Trust Lease Acquisition Program COP, Series L,
XLCA Insured, 5.00%, 11/01/29 ................................................................. 1,000,000 1,010,650
Kentucky Area Development Districts Financing Trust Lease Program Revenue, City of Ewing,
Series A, Pre-Refunded, 6.00%, 6/01/30 ........................................................ 2,000,000 2,163,360
Series C, 6.00%, 6/01/30 ...................................................................... 1,285,000 1,294,239
Series E, 5.70%, 6/01/22 ...................................................................... 1,000,000 1,065,400
Kentucky Asset/Liability Commission General Receipts Revenue, University of Kentucky, Project
Notes, FGIC Insured, 5.00%, 10/01/25 .......................................................... 3,000,000 3,086,160
Kentucky Economic Development Finance Authority Health System Revenue, Norton Healthcare Inc.,
Refunding, Series C, MBIA Insured, 6.15%, 10/01/24 ............................................ 160,000 144,526
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/24 ......................................... 245,000 288,524
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/25 ......................................... 935,000 1,101,103
Annual Report | 105
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE
-------------------------------------- ---------- ------------
MUNICIPAL BONDS (CONTINUED)
KENTUCKY (CONTINUED)
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 .................. $2,000,000 $ 1,361,480
Kentucky Economic Finance Authority Louisville Arena Project Revenue, Louisville Arena, Sub
Series A-1, Assured Guaranty, 6.00%, 12/01/33 ................................................. 2,000,000 2,009,640
Kentucky Housing Corp. Housing Revenue, Series A, 4.60%, 7/01/32 ................................. 2,000,000 1,639,860
Kentucky Infrastructure Authority Revenue, Series A, 5.00%,
6/01/19 ....................................................................................... 1,140,000 1,164,145
6/01/20 ....................................................................................... 1,250,000 1,271,100
6/01/21 ....................................................................................... 1,190,000 1,206,779
Kentucky Rural Water Finance Corp. Public Project Revenue,
Flexible Term Program, Series A, 5.00%, 2/01/26 ............................................... 1,055,000 1,065,012
Multimodal, Flexible Term Program, Series I, 5.00%, 2/01/34 ................................... 1,500,000 1,450,170
Kentucky State Municipal Power Agency Power System Revenue, Prairie State Project, Series A,
MBIA Insured, 5.00%,
9/01/32 ....................................................................................... 5,000,000 4,453,950
9/01/37 ....................................................................................... 4,250,000 3,719,430
Kentucky State Property and Buildings Commission Revenues,
Project No. 62, Refunding, Second Series, 5.25%, 10/01/18 ..................................... 3,540,000 3,658,555
Project No. 64, MBIA Insured, Pre-Refunded, 5.50%, 5/01/17 .................................... 1,535,000 1,585,164
Project No. 69, Series A, FSA Insured, Pre-Refunded, 5.00%, 8/01/21 ........................... 2,300,000 2,503,964
Project No. 77, MBIA Insured, Pre-Refunded, 5.00%, 8/01/23 .................................... 1,100,000 1,246,025
Project No. 90, Refunding, 5.50%, 11/01/28 .................................................... 5,000,000 5,166,100
Kentucky State Turnpike Authority Economic Development Road Revenue, Revitalization Projects,
Refunding, Series A, 5.00%, 7/01/28 ........................................................... 1,000,000 1,002,890
Series A, AMBAC Insured, 5.00%, 7/01/25 ....................................................... 2,000,000 2,049,960
Lawrenceburg Water and Sewer Revenue, MBIA Insured, 5.00%, 10/01/28 .............................. 1,730,000 1,587,292
Louisville and Jefferson County Metropolitan Government College Revenue, Bellarmine University,
Refunding and Improvement, Series A, 6.00%, 5/01/38 ........................................... 2,500,000 2,138,700
Louisville and Jefferson County Metropolitan Government Health Facilities Revenue, Jewish
Hospital and St. Mary's HealthCare Inc. Project, Refunding, 6.125%, 2/01/37 ................... 2,000,000 1,952,080
Louisville and Jefferson County Metropolitan Government Industrial Building Revenue,
Sisters of Mercy, Cincinnati, 5.00%, 10/01/35 ................................................. 1,500,000 1,128,600
Louisville and Jefferson County Metropolitan Sewer District Sewer and Drainage System
Revenue, Series A,
AMBAC Insured, 5.00%, 5/15/36 ................................................................. 3,000,000 2,762,520
FGIC Insured, 5.00%, 5/15/30 .................................................................. 2,750,000 2,742,658
FGIC Insured, 5.00%, 5/15/38 .................................................................. 3,000,000 2,828,640
Louisville and Jefferson County Student Housing Revenue, University of Louisville, Phase 3-A,
AMBAC Insured, 5.00%, 6/01/34 ................................................................. 3,755,000 3,654,929
Series A, AMBAC Insured, 5.00%, 6/01/25 ....................................................... 1,000,000 1,024,690
Louisville Parking Authority of River City Revenue, MBIA Insured, 5.00%, 6/01/29 ................. 3,290,000 3,304,410
Louisville Regional Airport Authority Airport System Revenue, FSA Insured, 5.50%, 7/01/38 ........ 3,000,000 2,670,540
Louisville Water Works Board Water System Revenue, Louisville Water Co., Refunding, FSA Insured,
5.25%, 11/15/24 ............................................................................... 2,500,000 2,542,825
5.50%, 11/15/25 ............................................................................... 2,000,000 2,042,020
Murray Hospital Facilities Revenue, Murray, Calloway County Public Hospital, 5.125%, 8/01/37 3,000,000 2,042,700
Northern Kentucky University COP, AMBAC Insured, 5.00%, 12/01/27 ................................. 1,500,000 1,485,480
Northern Kentucky Water Service District Revenue, MBIA Insured, 4.875%, 2/01/20 .................. 1,270,000 1,261,986
106 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ---------- ------------
MUNICIPAL BONDS (CONTINUED)
KENTUCKY (CONTINUED)
Oldham County School District Finance Corp. School Building Revenue, MBIA Insured, 5.00%,
5/01/24 ....................................................................................... $5,680,000 $ 5,832,792
Paducah Electric Plant Board Revenue, Series A, Assured Guaranty, 5.25%, 10/01/35 ................ 3,000,000 2,995,590
Pulaski County Public Properties Corp. First Mortgage Revenue, AOC Judicial Facility,
6.00%, 12/01/28 ............................................................................... 1,000,000 1,059,660
Russell Health System Revenue, Our Lady of Bellefonte, Pre-Refunded, 5.50%, 7/01/15 .............. 785,000 814,139
Trimble County Environmental Facilities Revenue, Trimble County Environmental Facility,
AMBAC Insured, 6.00%, 3/01/37 ................................................................. 5,000,000 4,583,800
Refunding, AMBAC Insured, 4.60%, 6/01/33 ...................................................... 3,750,000 3,018,338
Warren County Hospital Facility Revenue, Community Hospital Corp. Project, Refunding, Series A,
5.00%, 8/01/29 ................................................................................ 1,000,000 793,540
------------
142,964,024
------------
U.S. TERRITORIES 10.3%
PUERTO RICO 9.3%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds, Refunding,
5.375%, 5/15/33 ............................................................................... 1,680,000 1,246,190
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.125%, 7/01/31 ............................................................................... 3,125,000 2,540,656
Pre-Refunded, 5.125%, 7/01/31 ................................................................. 1,875,000 2,045,475
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, Pre-Refunded, 5.375%, 7/01/36 ....................................................... 2,500,000 2,770,900
Series K, 5.00%, 7/01/27 ...................................................................... 3,000,000 2,522,910
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.25%, 7/01/36 ........................................................... 455,000 372,650
Refunding, Series N, 5.00%, 7/01/32 ........................................................... 3,000,000 2,403,840
Series D, Pre-Refunded, 5.25%, 7/01/36 ........................................................ 995,000 1,093,774
------------
14,996,395
------------
VIRGIN ISLANDS 1.0%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.625%, 10/01/25 .............................................................................. 2,000,000 1,632,920
------------
TOTAL U.S. TERRITORIES ........................................................................... 16,629,315
------------
TOTAL MUNICIPAL BOND BEFORE SHORT TERM INVESTMENTS (COST $166,026,746) ........................... 159,593,339
------------
SHORT TERM INVESTMENTS (COST $800,000) 0.5%
MUNICIPAL BONDS 0.5%
KENTUCKY 0.5%
(a) Lexington-Fayette Urban County Airport Board General Airport Revenue, Refunding, Series B,
Daily VRDN and Put, 0.65%, 7/01/38 ............................................................ 800,000 800,000
------------
TOTAL INVESTMENTS (COST $166,826,746) 99.0% ...................................................... 160,393,339
OTHER ASSETS, LESS LIABILITIES 1.0% .............................................................. 1,649,918
------------
NET ASSETS 100.0% ................................................................................ $162,043,257
============
See Abbreviations on page 170.
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 107
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.74 $ 11.61 $ 11.52 $ 11.68 $ 11.81
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ........................ 0.48 0.47 0.48 0.50 0.52
Net realized and unrealized gains (losses) ...... (0.32) (0.87) 0.10 (0.16) (0.14)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.16 (0.40) 0.58 0.34 0.38
-------- -------- -------- -------- --------
Less distributions from net investment income ...... (0.47) (0.47) (0.49) (0.50) (0.51)
-------- -------- -------- -------- --------
Redemption fees(d) ................................. -- --(e) --(e) -- --(e)
-------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 10.43 $ 10.74 $ 11.61 $ 11.52 $ 11.68
======== ======== ======== ======== ========
Total return(f) .................................... 1.53% (3.57)% 5.14% 2.99% 3.36%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 0.71% 0.71% 0.73% 0.73% 0.73%
Net investment income .............................. 4.45% 4.14% 4.22% 4.30% 4.49%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $266,905 $234,314 $220,927 $188,333 $188,659
Portfolio turnover rate ............................ 11.73% 11.57% 5.71% 9.78% 8.67%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
108 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LOUISIANA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.85 $ 11.73 $ 11.63 $ 11.79 $ 11.91
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ........................ 0.42 0.41 0.43 0.44 0.46
Net realized and unrealized gains (losses) ...... (0.32) (0.88) 0.09 (0.16) (0.13)
------- ------- ------- ------- -------
Total from investment operations ................... 0.10 (0.47) 0.52 0.28 0.33
------- ------- ------- ------- -------
Less distributions from net investment income ...... (0.41) (0.41) (0.42) (0.44) (0.45)
------- ------- ------- ------- -------
Redemption fees(d) ................................. -- --(e) --(e) -- --(e)
------- ------- ------- ------- -------
Net asset value, end of year ....................... $ 10.54 $ 10.85 $ 11.73 $ 11.63 $ 11.79
======= ======= ======= ======= =======
Total return(f) .................................... 0.96% (4.16)% 4.61% 2.40% 2.84%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.26% 1.26% 1.28% 1.28% 1.28%
Net investment income .............................. 3.90% 3.59% 3.67% 3.75% 3.94%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $41,646 $35,085 $29,028 $23,319 $19,196
Portfolio turnover rate ............................ 11.73% 11.57% 5.71% 9.78% 8.67%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------- ----------- ------------
MUNICIPAL BONDS 96.5%
LOUISIANA 89.5%
Alexandria Sales & Use Tax Revenue, 5.00%,
8/01/26 ....................................................................................... $ 1,710,000 $ 1,735,188
8/01/27 ....................................................................................... 1,790,000 1,802,315
8/01/28 ....................................................................................... 1,875,000 1,872,600
Bossier City Utilities Revenue, BHAC Insured, 5.50%, 10/01/33 .................................... 5,000,000 5,168,950
Bossier Parish Sales and Use Tax Revenue, AMBAC Insured, 5.00%, 7/01/20 .......................... 1,900,000 1,962,434
Calcasieu Parish Public Trust Authority Student Lease Revenue, McNeese Student Housing
Project, MBIA Insured, 5.25%,
5/01/21 ....................................................................................... 1,505,000 1,466,638
5/01/33 ....................................................................................... 2,500,000 2,041,175
De Soto Parish Environmental Improvement Revenue, International Paper Co. Project, Series A,
5.65%, 12/01/21 ............................................................................... 1,000,000 676,080
De Soto Parish PCR, Cleco Utility Group Inc. Project, Refunding, AMBAC Insured, 5.875%,
9/01/29 ....................................................................................... 11,500,000 10,055,025
Denham Spring Livingston Housing and Mortgage Finance Authority SFHR, Series A, FHA
Insured, ETM, 7.20%, 8/01/10 .................................................................. 1,380,000 1,499,950
East Baton Rouge Mortgage Finance Authority Revenue, SFM Purchase, Refunding, Series A,
6.10%, 10/01/29 ............................................................................... 135,000 134,702
East Baton Rouge Parish Park and Recreation District GO, FSA Insured, 5.00%, 5/01/25 ............. 3,325,000 3,393,628
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 1,080,250
East Baton Rouge Parish Sales Tax Revenue,
Public Improvement, Refunding, Series A, AMBAC Insured, 5.00%, 2/01/24 ........................ 2,000,000 2,007,000
Road and Street Improvement, Assured Guaranty, 5.25%, 8/01/28 ................................. 1,000,000 1,011,950
Road and Street Improvement, Assured Guaranty, 5.50%, 8/01/30 ................................. 1,700,000 1,733,660
England District Sub-District No. 1 Revenue, FGIC Insured, 5.00%, 8/15/19 ........................ 5,000,000 5,195,150
Greater New Orleans Expressway Commission Revenue, Refunding, AMBAC Insured, 5.00%,
11/01/27 ...................................................................................... 5,000,000 4,881,150
Jefferson Parish Revenue, Public Improvement, 24th Judicial District Project, MBIA Insured,
5.00%, 4/01/29 ................................................................................ 3,060,000 2,958,286
Jefferson Parish West Jefferson Park and Community Center Revenue, MBIA Insured, 5.00%,
10/01/29 ...................................................................................... 2,925,000 2,970,367
Jefferson Sales Tax District Special Sales Tax Revenue, Special Tax Bond, AMBAC Insured,
Pre-Refunded, 5.00%, 12/01/20 ................................................................. 4,195,000 4,611,647
Lafayette Communications Systems Revenue, XLCA Insured, 5.25%, 11/01/27 .......................... 5,000,000 4,676,450
Lafayette Public Power Authority Electric Revenue, MBIA Insured, 5.00%, 11/01/32 ................. 5,000,000 4,615,200
Lafayette Public Trust Financing Authority Revenue, Ragin' Cajun Facilities Inc. Project, MBIA
Insured, 5.00%, 10/01/22 ...................................................................... 1,500,000 1,552,260
Lafayette Public Trust Financing Authority SFMR, Series A, ETM, 7.20%, 4/01/11 ................... 30,000 33,546
Lafayette Utilities Revenue, MBIA Insured, 5.00%, 11/01/28 ....................................... 5,000,000 4,877,450
Lafourche Parish Home Mortgage Authority SFMR, ETM, 7.40%, 7/01/10 ............................... 30,000 31,102
Livingston Parish Waterworks Revenue, Ward Two Water District, AMBAC Insured, 5.125%,
4/01/29 ....................................................................................... 2,200,000 2,158,002
Louisiana HFA, SFMR, Home Ownership Program,
GO Zone, Series B-1, GNMA Secured, 5.00%, 12/01/32 ............................................ 2,075,000 1,969,818
Series A, GNMA Secured, 5.50%, 6/01/40 ........................................................ 5,000,000 4,940,700
Series B, GNMA Secured, 6.125%, 12/01/33 ...................................................... 1,000,000 1,036,130
110 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
LOUISIANA (CONTINUED)
Louisiana HFA Mortgage Revenue, SF, Series A-1, GNMA Secured, 5.45%, 12/01/20 .................... $ 415,000 $ 409,352
Louisiana Local Government Environmental Facilities and CDA Revenue,
Ascension Parish Library Projects, AMBAC Insured, 5.25%, 4/01/29 ........................... 1,000,000 990,170
Baton Rouge Apartments, Series A, MBIA Insured, 6.375%, 1/01/30 ............................ 4,265,000 3,929,131
Delgado Community College Foundation Project, AMBAC Insured, 6.00%, 10/01/29 ............... 1,000,000 1,022,870
Delta Campus Facilities Corp. Project, Assured Guaranty, 5.50%, 10/01/27 ................... 5,000,000 5,040,500
Denham Springs Sewer Project, AMBAC Insured, 4.75%, 12/01/31 ............................... 3,000,000 2,573,970
East Ascension Consolidated No. 1, Refunding, AMBAC Insured, 5.00%, 12/01/37 ............... 5,370,000 5,042,913
East Ascension Consolidated No. 1, Refunding, AMBAC Insured, 5.00%, 12/01/44 ............... 8,870,000 8,101,681
Independence Stadium Project, Refunding, 5.25%, 3/01/30 .................................... 8,845,000 8,593,094
Jefferson Parking Garage Project, AMBAC Insured, 5.00%, 9/01/21 ............................ 2,215,000 2,257,018
Lake Charles Public Improvements Project, AMBAC Insured, 5.00%, 5/01/27 .................... 5,000,000 4,854,450
Livingston Parish Road, AMBAC Insured, 5.00%, 3/01/21 ...................................... 4,040,000 3,611,679
MBIA Insured, 5.00%, 12/01/26 .............................................................. 3,000,000 2,947,830
Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/26 ......... 2,000,000 2,003,480
Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/31 ......... 2,000,000 1,913,040
Shreveport Airport Cargo Project, Series C, Assured Guaranty, 6.75%, 1/01/24 ............... 2,620,000 2,732,372
Shreveport Airport Cargo Project, Series C, Assured Guaranty, 7.00%, 1/01/33 ............... 2,500,000 2,535,075
Southeastern Louisiana Student Housing, Series A, MBIA Insured, 5.00%, 8/01/27 ............. 3,000,000 2,528,550
Louisiana Public Facilities Authority Hospital Revenue, Touro Infirmary
Project, Series A, 5.625%, 8/15/29 ............................................................ 3,500,000 2,459,135
Louisiana Public Facilities Authority Revenue,
Archdiocese of New Orleans Project, Refunding, CIFG Insured, 5.00%, 7/01/31 ................ 5,000,000 4,219,800
Centenary College Project, Refunding, 5.75%, 2/01/29 ....................................... 7,300,000 5,208,842
Christus Health, Refunding, Series B, Assured Guaranty, 6.50%, 7/01/30 ..................... 5,000,000 5,130,750
Dillard University Project, Series A, AMBAC Insured, 5.30%, 8/01/26 ........................ 1,540,000 1,575,528
FHA Insured Mortgage, Baton Rouge General, MBIA Insured, 5.25%, 7/01/33 .................... 5,000,000 4,460,750
Grambling University Project, Black and Gold Facilities Project, Series A, CIFG Insured,
5.00%, 7/01/30 .......................................................................... 5,000,000 3,558,550
Mortgage Purchase, HFA, Refunding, Series A, FNMA Insured, 6.40%, 7/20/20 .................. 1,715,000 1,734,877
Ochsner Clinic Foundation Project, Refunding, Series B, ETM, 5.75%, 5/15/23 ................ 2,500,000 2,949,350
Ochsner Clinic Foundation Project, Series B, 5.25%, 5/15/27 ................................ 3,990,000 3,216,858
Tulane University of Louisiana, Series A, AMBAC Insured, Pre-Refunded, 5.125%, 7/01/27 ..... 3,000,000 3,347,220
Louisiana State Citizens Property Insurance Corp. Assessment Revenue, Series B, AMBAC
Insured, 5.00%, 6/01/23 ....................................................................... 5,000,000 4,104,500
Louisiana State Gas and Fuels Tax Revenue, Series A,
AMBAC Insured, 5.00%, 6/01/27 .............................................................. 3,500,000 3,377,885
FSA Insured, 5.00%, 5/01/31 ................................................................ 10,000,000 9,959,500
Louisiana State GO, Match, Refunding, Series B, CIFG Insured, 5.00%,
7/15/24 .................................................................................... 3,475,000 3,528,237
7/15/25 .................................................................................... 1,765,000 1,781,132
Louisiana State Office Facilities Corp. Lease Revenue, Capital Complex Program,
AMBAC Insured, 5.00%, 5/01/21 .............................................................. 2,500,000 2,551,775
Series A, MBIA Insured, 5.375%, 3/01/19 .................................................... 3,000,000 3,031,950
Louisiana State Offshore Term Authority Deepwater Port Revenue, Loop LLC Project, Refunding,
5.00%, 10/01/20 ............................................................................... 5,000,000 4,888,150
Annual Report | 111
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
--------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
LOUISIANA (CONTINUED)
Louisiana State University and Agricultural and Mechanical College Board Revenue,
AMBAC Insured, 5.00%, 7/01/22 .............................................................. $ 5,000,000 $ 5,200,200
Auxiliary, FGIC Insured, 5.00%, 7/01/31 .................................................... 3,000,000 2,714,880
Auxiliary, Series B, AMBAC Insured, 5.00%, 7/01/27 ......................................... 1,500,000 1,456,095
Monroe Sales Tax Increment Revenue, Economic Development Project, Garret Road, Refunding,
Assured Guaranty,
5.375%, 3/01/24 ............................................................................ 1,035,000 1,088,582
5.50%, 3/01/25 ............................................................................. 2,145,000 2,256,154
New Orleans Aviation Board Revenue, Restructuring GARBS, Refunding, Series A-1, Assured
Guaranty, 6.00%, 1/01/23 ...................................................................... 2,000,000 2,035,440
New Orleans GO,
Drain Systems, AMBAC Insured, 5.00%, 12/01/18 .............................................. 1,000,000 922,770
Public Improvement, AMBAC Insured, 5.25%, 12/01/29 ......................................... 1,485,000 1,238,119
Public Improvement, FGIC Insured, 5.25%, 12/01/21 .......................................... 1,295,000 1,149,882
Public Improvement, FGIC Insured, 5.125%, 12/01/26 ......................................... 2,000,000 1,690,360
Radian Insured, 5.125%, 12/01/30 ........................................................... 10,055,000 8,116,999
Refunding, MBIA Insured, 5.125%, 9/01/21 ................................................... 2,000,000 1,821,440
Orleans Levee District Revenue, Levee Improvement, Refunding, FSA Insured, 5.95%,
11/01/14 ...................................................................................... 470,000 470,179
Orleans Parish Parishwide School District GO, Refunding, Series B, FGIC Insured, 5.50%,
9/01/20 ....................................................................................... 1,000,000 996,960
Orleans Parish School Board GO, Series 95, FGIC Insured, 5.375%, 9/01/18 ......................... 1,950,000 1,943,974
Ouachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical Center,
FSA Insured, Pre-Refunded, 5.75%, 5/15/21 ..................................................... 2,500,000 2,654,275
Ouachita Parish West Ouachita Parish School District Sales and Use Tax Revenue, FGIC Insured,
Pre-Refunded, 5.75%, 9/01/24 .................................................................. 1,410,000 1,536,251
Port New Orleans Board of Commissioners Port Facility Revenue, Refunding, Assured Guaranty,
5.125%, 4/01/38 ............................................................................... 5,000,000 4,600,450
Rapides Parish Housing and Mortgage Finance Authority Revenue, SFM Purchase, FHA Insured,
ETM, 7.25%, 8/01/10 ........................................................................... 300,000 313,434
Shreveport Certificates of Indebtedness Revenue, Refunding, Series A, AMBAC Insured, 5.00%,
10/01/16 ...................................................................................... 1,000,000 1,031,770
St. Bernard Home Mortgage Authority Revenue, SF, Series A, FGIC Insured, ETM, 7.50%,
9/01/10 ....................................................................................... 435,000 476,621
St. Charles Parish Consolidated Waterworks and Wastewater District No. 1 Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ................................................................. 6,485,000 6,322,745
St. John the Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 ................... 2,500,000 2,491,525
St. John the Baptist Parish Revenue, Marathon Oil Corp. Project, Series A, 5.125%, 6/01/37 ....... 4,000,000 2,931,480
St. Tammany's Public Trust Financing Authority SFMR, Series A, ETM, 7.20%,
7/01/10 .................................................................................... 30,000 30,927
7/01/11 .................................................................................... 50,000 56,857
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 2,063,499
University of Louisiana System Board of Supervisors Lease Revenue,
Lafayette Cajundome Convention Center Project, MBIA Insured, Pre-Refunded, 6.25%,
9/01/29 ................................................................................. 1,200,000 1,257,972
Northwestern State University Wellness, AMBAC Insured, 5.10%, 4/01/24 ...................... 1,000,000 910,140
------------
276,100,747
------------
112 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 7.0%
PUERTO RICO 6.2%
Puerto Rico Commonwealth GO, Public Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ..................................................... $ 4,400,000 $ 4,649,084
Series A, 5.00%, 7/01/33 ....................................................................... 615,000 479,700
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series L, MBIA Insured, 5.25%, 7/01/35 ................................................. 10,000,000 8,370,200
Puerto Rico Electric Power Authority Power Revenue, Series WW, 5.25%, 7/01/33 ........................ 6,450,000 5,571,446
------------
19,070,430
------------
VIRGIN ISLANDS 0.8%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.50%, 10/01/18 ................................................................................... 3,000,000 2,641,080
------------
TOTAL U.S. TERRITORIES ............................................................................... 21,711,510
------------
TOTAL INVESTMENTS (COST $318,219,449) 96.5% .......................................................... 297,812,257
OTHER ASSETS, LESS LIABILITIES 3.5% .................................................................. 10,738,909
------------
NET ASSETS 100.0% .................................................................................... $308,551,166
============
See Abbreviations on page 170.
The accompanying notes are an integral part of these financial statements.
Annual Report | 113
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MARYLAND TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.81 $11.84 $ 11.77 $ 11.80 $ 11.93
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ........................ 0.49 0.48 0.49 0.51 0.51
Net realized and unrealized gains (losses) ...... (0.47) (1.03) 0.08 (0.03) (0.13)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.02 (0.55) 0.57 0.48 0.38
-------- -------- -------- -------- --------
Less distributions from net investment income ...... (0.48) (0.48) (0.50) (0.51) (0.51)
-------- -------- -------- -------- --------
Redemption fees(d, e) .............................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 10.35 $10.81 $ 11.84 $ 11.77 $ 11.80
======== ======== ======== ======== ========
Total return(f) .................................... 0.20% (4.80)% 4.96% 4.11% 3.34%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 0.67% 0.67% 0.68% 0.69% 0.70%
Net investment income .............................. 4.56% 4.18% 4.21% 4.29% 4.40%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $426,218 $417,427 $410,890 $369,205 $332,943
Portfolio turnover rate ............................ 8.94% 10.28% 7.84% 8.00% 12.03%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
114 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MARYLAND TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.95 $ 11.99 $ 11.91 $ 11.93 $ 12.05
-------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ........................ 0.44 0.43 0.43 0.45 0.46
Net realized and unrealized gains (losses) ...... (0.47) (1.05) 0.08 (0.03) (0.13)
-------- ------- ------- ------- -------
Total from investment operations ................... (0.03) (0.62) 0.51 0.42 0.33
-------- ------- ------- ------- -------
Less distributions from net investment income ...... (0.42) (0.42) (0.43) (0.44) (0.45)
-------- ------- ------- ------- -------
Redemption fees(d, e) .............................. -- -- -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year ....................... $ 10.50 $ 10.95 $ 11.99 $ 11.91 $ 11.93
======== ======= ======= ======= =======
Total return(f) .................................... (0.26)% (5.35)% 4.42% 3.57% 2.73%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.22% 1.22% 1.23% 1.24% 1.25%
Net investment income .............................. 4.01% 3.63% 3.66% 3.74% 3.85%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $101,328 $82,927 $71,937 $59,915 $48,997
Portfolio turnover rate ............................ 8.94% 10.28% 7.84% 8.00% 12.03%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- -----------
MUNICIPAL BONDS 96.7%
MARYLAND 77.6%
Anne Arundel County GO, Refunding, 4.625%, 3/01/32 ................................................ $ 2,000,000 $ 1,981,820
Baltimore Convention Center Hotel Revenue, Senior Series A, XLCA Insured, 5.25%, 9/01/39 .......... 25,095,000 15,096,148
Baltimore County Metropolitan 68th District GO, Refunding, 5.00%, 8/01/32 ......................... 1,000,000 1,007,430
Baltimore GO, Consolidated Public Improvement, Series A, FSA Insured, Pre-Refunded, 5.25%,
10/15/17 ....................................................................................... 3,300,000 3,462,360
Baltimore Port Facilities Revenue, Consolidated Coal Sales, Refunding, Series A, 6.50%,
10/01/11 ....................................................................................... 1,850,000 1,916,952
Baltimore Project Revenue,
sub. bond, Water Projects, Series A, FSA Insured, 5.00%, 7/01/38 ............................ 6,150,000 6,163,222
Wastewater Projects, FSA Insured, 5.00%, 7/01/37 ............................................ 6,500,000 6,470,295
Wastewater Projects, Series A, FSA Insured, 5.00%, 7/01/33 .................................. 5,355,000 5,378,401
Wastewater Projects, Series A, FSA Insured, 5.00%, 7/01/38 .................................. 5,000,000 5,010,750
Wastewater Projects, Series B, FGIC Insured, Pre-Refunded, 5.00%, 7/01/28 ................... 4,000,000 4,077,400
Wastewater Projects, Series C, AMBAC Insured, 5.00%, 7/01/31 ................................ 2,855,000 2,798,357
Wastewater Projects, Series D, AMBAC Insured, 5.00%, 7/01/32 ................................ 2,120,000 2,051,800
Water Projects, Refunding, Series A, FGIC Insured, 5.125%, 7/01/42 .......................... 11,740,000 11,455,188
Water Projects, Series C, AMBAC Insured, 5.00%, 7/01/32 ..................................... 5,000,000 4,839,150
Baltimore Revenue,
Wastewater Project, Series A, FGIC Insured, Pre-Refunded, 5.80%, 7/01/15 .................... 5,000,000 5,084,750
Water Projects, Series A, FSA Insured, Pre-Refunded, 5.75%, 7/01/30 ......................... 10,000,000 10,641,400
Carroll County Revenue, Fairhaven and Copper Ridge, Refunding, Series A, Radian Insured,
5.375%, 1/01/16 ............................................................................. 2,000,000 1,886,040
5.50%, 1/01/19 .............................................................................. 1,000,000 904,040
5.625%, 1/01/25 ............................................................................. 2,000,000 1,472,380
Frederick County Educational Facilities Revenue, Mount St. Mary University, Refunding,
5.625%, 9/01/38 ................................................................................ 5,000,000 3,345,800
Harford County GO, Consolidated Public Improvement, 4.45%, 1/15/17 ................................ 1,125,000 1,169,134
Maryland Environmental Services COP, Water and Waste Facilities, Series A, 6.70%, 6/01/11 ......... 1,210,000 1,210,762
Maryland State Community Development Administration Department of Housing and CDR,
Housing, Refunding, Series A, 6.00%, 7/01/32 ................................................ 4,000,000 3,974,760
Residential, Series C, 5.375%, 9/01/39 ...................................................... 10,000,000 9,977,600
Residential, Series C, 5.65%, 9/01/48 ....................................................... 8,000,000 8,064,240
Residential, Series D, 5.25%, 9/01/29 ....................................................... 3,135,000 2,889,185
SF Program, Second Series, 5.00%, 4/01/17 ................................................... 310,000 310,000
Maryland State EDC Student Housing Revenue,
University of Maryland Baltimore County Project, Refunding, XLCA Insured, 5.00%, 7/01/30 .... 3,245,000 1,939,829
University of Maryland Baltimore County Project, Refunding, XLCA Insured, 5.00%, 7/01/35 .... 3,675,000 2,084,974
University of Maryland College Park Projects, Refunding, CIFG Insured, 5.00%, 6/01/25 ....... 2,500,000 1,878,725
University of Maryland College Park Projects, Refunding, CIFG Insured, 5.00%, 6/01/28 ....... 2,000,000 1,439,200
University of Maryland College Park Projects, Refunding, CIFG Insured, 5.00%, 6/01/33 ....... 9,370,000 6,382,750
Maryland State EDC Utility Infrastructure Revenue, University College Park Project, AMBAC
Insured, 5.00%, 7/01/19 ........................................................................ 1,675,000 1,726,389
Maryland State Health and Higher Educational Facilities Authority Revenue,
Anne Arundel Health System, Series A, 6.75%, 7/01/29 ........................................ 2,000,000 2,062,740
Anne Arundel Health System, Series A, 6.75%, 7/01/39 ........................................ 2,000,000 2,032,420
Anne Arundel Health System, Series A, Pre-Refunded, 5.125%, 7/01/34 ......................... 2,500,000 2,817,225
Anne Arundel Medical Center, FSA Insured, 5.125%, 7/01/33 ................................... 8,365,000 7,725,161
Carroll County General Hospital, 6.00%, 7/01/26 ............................................. 2,000,000 1,984,920
116 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MARYLAND (CONTINUED)
Maryland State Health and Higher Educational Facilities Authority Revenue, (continued)
Carroll County General Hospital, 5.80%, 7/01/32 ............................................. $ 5,000,000 $ 4,543,200
Carroll Hospital Center, 5.00%, 7/01/40 ..................................................... 6,790,000 5,094,605
Catholic Health Initiatives, Series A, 6.00%, 12/01/20 ...................................... 715,000 735,571
Catholic Health Initiatives, Series A, ETM, 6.00%, 12/01/20 ................................. 2,205,000 2,335,183
Catholic Health Initiatives, Series A, ETM, 6.00%, 12/01/24 ................................. 2,025,000 2,142,754
Charity Obligation Group, Series A, Pre-Refunded, 5.00%, 11/01/19 ........................... 1,515,000 1,540,982
Charity Obligation Group, Series A, Pre-Refunded, 5.00%, 11/01/29 ........................... 2,250,000 2,288,587
Edenwald, Series A, 5.40%, 1/01/31 .......................................................... 1,000,000 682,600
Helix Health Issue, AMBAC Insured, ETM, 5.00%, 7/01/27 ...................................... 11,000,000 11,722,920
Johns Hopkins Medical Institutions, Series A, 5.00%, 5/15/37 ................................ 9,395,000 8,130,527
LifeBridge Health, Refunding, Assured Guaranty, 5.00%, 7/01/34 .............................. 10,945,000 9,917,921
Loyola College, Series A, 5.00%, 10/01/40 ................................................... 8,525,000 7,059,979
Maryland Institute College of Art, 5.00%, 6/01/35 ........................................... 2,000,000 1,356,800
Maryland Institute College of Art, 5.00%, 6/01/36 ........................................... 5,000,000 3,365,900
Maryland Institute College of Art, 5.00%, 6/01/40 ........................................... 6,000,000 3,953,040
Maryland Institute College of Art, Pre-Refunded, 5.625%, 6/01/36 ............................ 3,600,000 3,901,104
Mercy Medical Center, Refunding, 5.625%, 7/01/31 ............................................ 5,500,000 4,365,130
Mercy Medical Center, Series A, 5.00%, 7/01/37 .............................................. 10,000,000 7,568,600
North Arundel Hospital, Pre-Refunded, 6.50%, 7/01/26 ........................................ 1,000,000 1,079,700
North Arundel Hospital, Pre-Refunded, 6.50%, 7/01/31 ........................................ 1,320,000 1,425,204
Parking, Johns Hopkins Medical Institutions, AMBAC Insured, 5.00%, 7/01/27 .................. 655,000 552,427
Parking, Johns Hopkins Medical Institutions, AMBAC Insured, 5.00%, 7/01/34 .................. 5,000,000 4,069,000
Parking, Johns Hopkins Medical Institutions, Refunding, Series B, AMBAC Insured, 5.00%,
7/01/38 .................................................................................. 6,200,000 6,115,060
Peninsula Regional Medical Center, 5.00%, 7/01/36 ........................................... 6,625,000 5,351,940
Roland Park Place Project, Refunding, 5.625%, 7/01/18 ....................................... 2,500,000 2,195,375
Roland Park Place Project, Refunding, 5.625%, 7/01/24 ....................................... 2,680,000 2,121,166
The Johns Hopkins University Issue, Pre-Refunded, 6.00%, 7/01/39 ............................ 5,000,000 5,138,750
The Johns Hopkins University Issue, Series A, 5.00%, 7/01/32 ................................ 29,000,000 29,103,530
The Johns Hopkins University Issue, Series A, 5.00%, 7/01/38 ................................ 5,805,000 5,823,402
Union Hospital Cecil County Issue, 5.00%, 7/01/35 ........................................... 3,015,000 2,375,187
University of Maryland Medical System, Pre-Refunded, 6.75%, 7/01/30 ......................... 11,000,000 11,912,780
University of Maryland Medical System, Refunding, AMBAC Insured, 5.25%, 7/01/28 ............. 15,000,000 14,349,600
University of Maryland Medical System, Series A, 5.00%, 7/01/41 ............................. 2,500,000 1,976,675
Washington County Hospital, 5.75%, 1/01/38 .................................................. 2,500,000 1,872,075
Western Maryland Health, Refunding, Series A, MBIA Insured, 4.75%, 7/01/36 .................. 17,680,000 13,646,485
Maryland State Transportation Authority Lease Revenue, Metrorail Parking Project, AMBAC
Insured, 5.00%, 7/01/28 ........................................................................ 3,975,000 4,020,991
Maryland State Transportation Authority Parking Revenue, AMBAC Insured, 5.00%, 3/01/27 ............ 8,000,000 8,024,480
Maryland State Transportation Authority Transportation Facility Projects Revenue, FSA Insured,
5.00%,
7/01/27 ..................................................................................... 5,890,000 6,005,326
7/01/31 ..................................................................................... 7,455,000 7,509,869
7/01/32 ..................................................................................... 7,165,000 7,204,407
7/01/34 ..................................................................................... 7,500,000 7,541,250
Morgan State University Maryland and Auxiliary Facilities Fees Revenue, Series A, FGIC Insured,
5.00%, 7/01/32 ................................................................................. 6,450,000 6,250,953
Prince George's County GO, Consolidated Public Improvement, 4.40%, 9/15/22 ........................ 10,000,000 10,236,500
Annual Report | 117
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MARYLAND (CONTINUED)
Prince George's County IDA Lease Revenue, Upper Marlboro Justice, Series B, MBIA Insured,
4.75%, 6/30/30 ................................................................................. $ 4,000,000 $ 3,900,240
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 2,118,240
Westminster Education Facilities Revenue, McDaniel College Inc., Pre-Refunded, 5.50%,
4/01/27 ..................................................................................... 425,000 482,524
4/01/32 ..................................................................................... 1,500,000 1,703,025
------------
409,525,261
------------
U.S. TERRITORIES 19.1%
PUERTO RICO 17.8%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior lien, Series A,
6.00%, 7/01/38 ................................................................................. 2,100,000 1,912,974
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.25%, 7/01/27 ................................................... 1,520,000 1,662,546
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 .................................................. 4,360,000 4,756,411
Refunding, FSA Insured, 5.25%, 7/01/27 ...................................................... 1,015,000 1,012,554
Refunding, FSA Insured, 5.125%, 7/01/30 ..................................................... 2,870,000 2,752,990
Refunding, Series A, FGIC Insured, 5.50%, 7/01/21 ........................................... 10,000,000 9,312,800
Refunding, Series A, FGIC Insured, 5.50%, 7/01/22 ........................................... 5,000,000 4,627,450
Series A, 5.00%, 7/01/27 .................................................................... 6,250,000 5,216,625
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series N, Assured Guaranty, 5.25%, 7/01/36 ....................................... 5,000,000 4,872,200
Refunding, Series N, FGIC Insured, 5.25%, 7/01/39 ........................................... 5,000,000 4,114,950
Series D, Pre-Refunded, 5.25%, 7/01/38 ...................................................... 5,000,000 5,521,800
Series G, 5.00%, 7/01/33 .................................................................... 2,170,000 1,717,360
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ............................................................... 5,000,000 4,058,150
FGIC Insured, 5.00%, 7/01/24 ................................................................ 5,000,000 4,389,750
Puerto Rico Electric Power Authority Power Revenue,
Refunding, Series SS, FSA Insured, 5.00%, 7/01/30 ........................................... 10,000,000 9,743,400
Series HH, FSA Insured, Pre-Refunded, 5.25%, 7/01/29 ........................................ 10,780,000 11,514,549
Series II, Pre-Refunded, 5.25%, 7/01/31 ..................................................... 3,000,000 3,377,400
Puerto Rico HFAR, Subordinated, Capital Fund Modernization, 5.125%, 12/01/27 ...................... 4,250,000 4,296,792
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.25%, 7/01/36 ......................................................... 520,000 425,885
Refunding, Series N, 5.00%, 7/01/32 ......................................................... 5,000,000 4,006,400
Series D, Pre-Refunded, 5.25%, 7/01/36 ...................................................... 1,480,000 1,626,920
University of Puerto Rico Revenues, University System, Refunding, Series P, 5.00%, 6/01/30 ........ 4,000,000 3,048,000
------------
93,967,906
------------
118 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS 1.3%
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, Refunding, Series A, FSA Insured, 5.00%, 10/01/22 ........... $ 2,000,000 $ 1,965,140
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A, 5.50%,
10/01/14 ................................................................................. 3,300,000 3,210,768
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A, 5.50%,
10/01/18 ................................................................................. 1,700,000 1,496,612
------------
6,672,520
------------
TOTAL U.S. TERRITORIES ............................................................................ 100,640,426
------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $559,166,769) ........................... 510,165,687
------------
SHORT TERM INVESTMENTS 1.9%
MUNICIPAL BONDS 1.9%
MARYLAND 1.9%
(a) Maryland State EDC, EDR, U.S. Pharmacopeial, Refunding, Series A, Daily VRDN and Put,
0.60%, 7/01/38 ................................................................................... 5,765,000 5,765,000
(a) Maryland State Health and Higher Educational Facilities Authority Revenue, Upper Chesapeake
Hospital, Refunding, Series A, Daily VRDN and Put, 0.60%, 1/01/43 ................................ 4,025,000 4,025,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $9,790,000) ................................................... 9,790,000
------------
TOTAL INVESTMENTS (COST $568,956,769) 98.6% ...................................................... 519,955,687
OTHER ASSETS, LESS LIABILITIES 1.4% .............................................................. 7,589,471
------------
NET ASSETS 100.0% ................................................................................ $527,545,158
============
See Abbreviations on page 170.
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 119
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MISSOURI TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.52 $ 12.37 $ 12.31 $ 12.32 $ 12.44
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ........................ 0.52 0.51 0.52 0.53 0.54
Net realized and unrealized gains (losses) ...... (0.25) (0.85) 0.06 (0.01) (0.12)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.27 (0.34) 0.58 0.52 0.42
-------- -------- -------- -------- --------
Less distributions from net investment income ...... (0.51) (0.51) (0.52) (0.53) (0.54)
-------- -------- -------- -------- --------
Redemption fees(d,e) ............................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 11.28 $ 11.52 $ 12.37 $ 12.31 $ 12.32
======== ======== ======== ======== ========
Total return(f) .................................... 2.39% (2.86)% 4.85% 4.33% 3.49%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 0.65% 0.66% 0.66% 0.66% 0.67%
Net investment income .............................. 4.50% 4.24% 4.25% 4.31% 4.44%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $691,272 $622,913 $613,125 $562,235 $516,312
Portfolio turnover rate ............................ 12.44% 16.11% 19.77% 15.32% 17.93%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
120 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MISSOURI TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.60 $ 12.45 $ 12.39 $ 12.39 $ 12.50
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ........................ 0.46 0.45 0.45 0.47 0.48
Net realized and unrealized gains (losses) ...... (0.26) (0.86) 0.06 --(d) (0.12)
------- ------- ------- ------- -------
Total from investment operations ................... 0.20 (0.41) 0.51 0.47 0.36
------- ------- ------- ------- -------
Less distributions from net investment income ...... (0.45) (0.44) (0.45) (0.47) (0.47)
------- ------- ------- ------- -------
Redemption fees(d,e) ............................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ....................... $ 11.35 $ 11.60 $ 12.45 $ 12.39 $ 12.39
======= ======= ======= ======= =======
Total return(f) .................................... 1.81% (3.45)% 4.25% 3.82% 2.98%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.20% 1.21% 1.21% 1.21% 1.22%
Net investment income .............................. 3.95% 3.69% 3.70% 3.76% 3.89%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $84,637 $71,563 $70,148 $68,807 $60,418
Portfolio turnover rate ............................ 12.44% 16.11% 19.77% 15.32% 17.93%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 121
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- -----------
MUNICIPAL BONDS 97.3%
MISSOURI 85.9%
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 $ 4,178,834
Boone County IDA Health Care Revenue, Retirement Center Project, GNMA Secured, 5.70%, 10/20/22 .... 1,515,000 1,552,330
Cape Girardeau County IDA Health Care Facilities Revenue,
Southeast Missouri Hospital Assn., 5.00%, 6/01/36 ........................................... 7,500,000 5,192,250
St. Francis Medical Center, Series A, 5.50%, 6/01/27 ........................................ 6,350,000 5,755,195
St. Francis Medical Center, Series A, 5.50%, 6/01/32 ........................................ 5,000,000 4,368,700
Cape Girardeau County IDA Solid Waste Disposal Revenue, Procter and Gamble Paper Products,
5.30%, 5/15/28 ................................................................................. 6,875,000 6,744,581
Columbia Special Obligation Electric Utility Improvement Revenue, Annual Appropriation
Obligation, Series A, 5.75%, 10/01/33 .......................................................... 10,290,000 10,662,704
Curators of the University of Missouri System Facilities Revenue,
Series A, 5.00%, 11/01/33 ................................................................... 5,000,000 4,950,700
Series A, 5.00%, 11/01/35 ................................................................... 20,000,000 19,680,200
System Facilities, Refunding, Series A, 5.00%, 11/01/25 ..................................... 5,750,000 5,920,142
Dunklin County COP, FGIC Insured, 5.00%, 12/01/24 ................................................. 1,000,000 1,045,050
Florissant COP, FGIC Insured, 5.00%, 8/01/22 ...................................................... 1,285,000 1,312,370
Grandview COP, FGIC Insured, 5.00%, 1/01/23 ....................................................... 2,410,000 2,415,639
Gravois Bluffs Transportation Development District Transportation Sales Tax Revenue, Refunding,
4.75%, 5/01/32 ................................................................................. 5,000,000 3,145,050
Hannibal IDA Health Facilities Revenue, Refunding, 5.00%, 3/01/22 ................................. 1,000,000 798,280
Hickory County School District R-1 Skyline GO, Direct Deposit Program,
6.05%, 3/01/20 .............................................................................. 800,000 831,336
Refunding, 6.05%, 3/01/20 ................................................................... 300,000 308,073
Howard Bend Levee District Special Tax, Pre-Refunded, 5.85%, 3/01/19 .............................. 3,000,000 3,030,000
Jackson County Consolidated School District No. 2 GO, Direct Deposit Program, 5.20%,
3/01/20 ........................................................................................ 2,000,000 2,130,820
Jackson County Reorganized School District No. 7 Lee's Summit GO, Direct Deposit Program,
Refunding and Improvement, FSA Insured, 5.00%, 3/01/21 ......................................... 5,700,000 6,192,423
Jackson County Special Obligation Revenue,
Harry S. Truman Sports Complex, AMBAC Insured, 5.00%, 12/01/28 .............................. 2,500,000 2,450,600
Harry S. Truman Sports Complex, AMBAC Insured, 5.00%, 12/01/29 .............................. 26,925,000 26,853,918
MBIA Insured, 5.00%, 12/01/27 ............................................................... 3,105,000 3,136,392
Jasper County Reorganized School District No. R-7 GO, Direct Deposit Program, 6.00%, 3/01/20 ...... 1,025,000 1,064,647
Jefferson County Conservation Public Water Supply District No. C-1 Waterworks Revenue,
AMBAC Insured, 5.00%, 12/01/26 ................................................................. 4,500,000 4,525,740
Jefferson County Consolidated School District No. 006 Lease Participation COP, FSA Insured,
5.00%, 3/01/25 ................................................................................. 1,050,000 1,085,658
Joplin IDA Health Facilities Revenue, Freeman Health Systems Project,
5.50%, 2/15/29 .............................................................................. 2,000,000 1,566,960
5.75%, 2/15/35 .............................................................................. 2,500,000 1,953,600
Kansas City IDAR, Kansas City Missouri IDA, AMBAC Insured,
5.00%, 12/01/24 ............................................................................. 4,470,000 4,513,806
4.50%, 12/01/32 ............................................................................. 10,000,000 8,517,700
5.00%, 12/01/32 ............................................................................. 15,000,000 13,926,150
122 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
-------------------------------------- ----------- -------------
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
Kansas City Special Obligation Revenue, Arena Project, Refunding and Improvement, Series C,
5.125%, 4/01/38 ............................................................................... $10,000,000 $ 9,004,800
Kansas City Special Obligation Tax Allocation, East Village Project, Series B, Assured Guaranty,
5.00%, 4/15/31 ................................................................................ 4,760,000 4,647,712
Kansas City Tax Increment Financing Commerce Tax Increment Revenue, Blue Parkway Town
Center Project, MBIA Insured, 5.00%, 7/01/27 .................................................. 1,730,000 1,739,515
(a) Kansas City Water Revenue, Refunding and Improvement, Series A, 5.25%, 12/01/32 .................. 10,000,000 10,006,700
Lake of the Ozarks Community Board Corp. Bridge System Revenue, Refunding, 5.25%,
12/01/14 ................................................................................... 750,000 690,390
12/01/26 ................................................................................... 800,000 607,544
Lee's Summit IDAR, John Knox Village Project, Pre-Refunded, 5.70%, 8/15/22 ....................... 1,500,000 1,720,200
Lee's Summit Water and Sewer Revenue, Series A, AMBAC Insured, 5.00%, 7/01/22 .................... 1,995,000 2,045,793
Lincoln University Auxiliary System Revenue, Assured Guaranty, 5.125%, 6/01/37 ................... 1,500,000 1,485,510
Metropolitan St. Louis Sewer District Wastewater System Revenue,
Series A, 5.75%, 5/01/38 ................................................................... 2,000,000 2,100,700
Series A, MBIA Insured, 5.00%, 5/01/34 ..................................................... 24,730,000 24,658,036
Series C, MBIA Insured, 5.00%, 5/01/36 ..................................................... 22,740,000 22,638,125
Missouri Development Finance Board Cultural Facilities Revenue,
Nelson Gallery Foundation, Series A, MBIA Insured, 5.00%, 12/01/30 ......................... 9,500,000 9,547,595
Series B, 5.00%, 6/01/37 ................................................................... 22,435,000 22,538,650
Missouri Joint Municipal Electric Utility Commission Power Project Revenue,
Plum Point Project, MBIA Insured, 5.00%, 1/01/28 ........................................... 5,235,000 4,438,809
Plum Point Project, MBIA Insured, 5.00%, 1/01/34 ........................................... 34,945,000 28,537,834
Series A, AMBAC Insured, 5.00%, 1/01/32 .................................................... 10,000,000 8,901,000
Missouri Southern State College Revenue, Auxiliary Enterprise System, MBIA Insured, 5.50%,
4/01/23 ....................................................................................... 1,200,000 1,249,548
Missouri State Board of Public Buildings State Office Building, Special Obligation, Series A,
5.125%, 5/01/26 ............................................................................... 3,960,000 4,009,302
Missouri State Development Finance Board Infrastructure Facilities Revenue, Midtown
Redevelopment Project, Series A, MBIA Insured, Pre-Refunded, 5.75%, 4/01/22 ................... 10,000,000 10,554,300
Missouri State Development Finance Board Recreation Facilities Revenue, YMCA Greater St.
Louis Project, Series A, 5.40%, 9/01/18 ....................................................... 7,420,000 7,473,276
Missouri State Development Finance Board Solid Waste Disposal Revenue, Procter and Gamble
Paper Product, 5.20%, 3/15/29 ................................................................. 3,000,000 2,747,010
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 2,096,472
Missouri State Environmental Improvement and Energy Resources Authority Water PCR, State
Revolving Fund,
Series A, 7.00%, 10/01/10 .................................................................. 270,000 270,122
Series A, 6.55%, 7/01/14 ................................................................... 815,000 814,886
Series A, 5.75%, 1/01/16 ................................................................... 150,000 149,919
Series B, 7.125%, 12/01/10 ................................................................. 120,000 120,097
Series B, 5.80%, 1/01/15 ................................................................... 125,000 124,830
Series B, 6.05%, 7/01/16 ................................................................... 485,000 484,442
Series B, 7.20%, 7/01/16 ................................................................... 805,000 804,920
Series B, 5.50%, 7/01/21 ................................................................... 710,000 731,115
Series B, Pre-Refunded, 5.50%, 7/01/21 ..................................................... 730,000 782,750
Annual Report | 123
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
-------------------------------------- ----------- -------------
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
Missouri State Environmental Improvement and Energy Resources Authority Water Pollution
Control and Drinking Water Revenue, State Revolving Funds Programs, Series A, 5.75%, 1/01/29 ..... $ 2,500,000 $ 2,727,100
Missouri State GO,
State Water Pollution Control, Series A, 5.00%, 6/01/26 .................................... 3,785,000 3,840,791
Stormwater Control, Series A, 5.00%, 6/01/26 ............................................... 1,895,000 1,922,932
Missouri State HDC,
MFHR, FHA Insured, 8.50%, 12/01/29 ......................................................... 40,000 40,342
SFMR, Series B, GNMA Secured, 6.45%, 9/01/27 ............................................... 170,000 170,175
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 1,863,522
Maryville University of St. Louis Project, Pre-Refunded, 6.75%, 6/15/30 .................... 4,500,000 4,806,135
Washington University, Refunding, Series B, 5.00%, 3/01/30 ................................. 14,000,000 14,089,460
Washington University, Series A, 5.00%, 11/15/37 ........................................... 9,150,000 9,167,019
Washington University, Series B, Pre-Refunded, 6.00%, 3/01/30 .............................. 13,550,000 14,404,192
Webster University, MBIA Insured, 5.30%, 4/01/27 ........................................... 8,000,000 7,141,760
Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
Coxhealth, 5.50%, 11/15/39 ................................................................. 10,000,000 8,943,100
Freeman Health Systems Project, 5.25%, 2/15/28 ............................................. 2,750,000 2,083,950
Improvement, Jefferson Memorial Hospital, Refunding, Radian Insured, 5.00%, 8/15/21 ........ 4,585,000 4,237,595
Improvement, Jefferson Memorial Hospital, Refunding, Radian Insured, 5.25%, 8/15/28 ........ 4,900,000 4,149,908
Lake of the Ozarks General Hospital, 6.25%, 2/15/11 ........................................ 180,000 180,749
Lake of the Ozarks General Hospital, Refunding, 6.50%, 2/15/21 ............................. 330,000 316,774
Lake Regional Health Systems Project, 5.60%, 2/15/25 ....................................... 1,250,000 1,053,700
Lake Regional Health Systems Project, 5.70%, 2/15/34 ....................................... 2,750,000 2,151,572
St. Luke's Episcopal, 5.00%, 12/01/34 ...................................................... 7,500,000 5,814,825
St. Luke's Episcopal, Presbyterian Hospital, FSA Insured, 5.25%, 12/01/26 .................. 8,500,000 7,380,465
St. Luke's Health System, Series B, 5.50%, 11/15/35 ........................................ 6,725,000 6,696,419
Missouri State Health and Educational Facilities Authority Revenue,
Educational Facilities, Washington University, Series A, 5.00%, 2/15/33 .................... 15,125,000 15,194,424
Senior Living Facilities, Lutheran Senior Services, Refunding, Series B, 5.125%, 2/01/22 ... 2,900,000 2,309,850
Senior Living Facilities, Lutheran Senior Services, Refunding, Series B, 5.125%, 2/01/27 ... 2,700,000 1,971,729
Senior Living Facilities, Lutheran Senior Services, Series A, 5.00%, 2/01/25 ............... 1,500,000 1,116,405
Senior Living Facilities, Lutheran Senior Services, Series A, 5.375%, 2/01/35 .............. 4,655,000 3,235,877
SSM Healthcare System, Series A, AMBAC Insured, Pre-Refunded, 5.25%, 6/01/28 ............... 16,385,000 17,816,394
St. Luke's Health System, Series A, FSA Insured, 5.50%, 11/15/35 ........................... 10,000,000 9,957,500
The Washington University, Series A, 5.375%, 3/15/39 ....................................... 16,075,000 16,757,544
Missouri State Highways and Transit Commission State Road Revenue, First Lien, Series B,
5.00%, 5/01/24 ................................................................................ 11,005,000 11,571,647
Missouri State Housing Development Commission SFMR, Homeownership Loan Program,
Series A-1, GNMA Secured, 4.75%, 9/01/32 ................................................... 2,390,000 1,955,426
Series C-1, GNMA Secured, 5.90%, 9/01/25 ................................................... 945,000 938,536
Series C-1, GNMA Secured, 5.95%, 3/01/28 ................................................... 675,000 677,187
Monarch-Chesterfield Levee District Revenue, MBIA Insured, 5.75%, 3/01/19 ........................ 1,920,000 1,987,162
North Kansas City Hospital Revenue, North Kansas City Hospital, Series A, FSA Insured,
5.00%, 11/15/20 ............................................................................ 1,000,000 1,018,350
5.00%, 11/15/21 ............................................................................ 1,000,000 1,013,290
5.00%, 11/15/22 ............................................................................ 1,000,000 1,006,580
124 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
-------------------------------------- ----------- -------------
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
North Kansas City Hospital Revenue, North Kansas City Hospital, Series A, FSA Insured, (continued)
5.00%, 11/15/28 ............................................................................ $ 1,965,000 $ 1,836,017
5.125%, 11/15/33 ........................................................................... 2,755,000 2,496,884
Pettis County School District 200 Sedalia Lease COP, Missouri State Assn. of Rural Education,
Assured Guaranty, 5.00%, 3/01/27 .............................................................. 6,690,000 6,800,117
Pulaski County IDA, MFHR, St. Robert Project, Series A, GNMA Secured, 6.00%, 8/20/39 ............. 1,600,000 1,606,096
Riverside IDA, IDR, Riverside Horizons Project, Series A, ACA Insured, 5.00%,
5/01/20 .................................................................................... 1,500,000 1,316,745
5/01/27 .................................................................................... 2,000,000 1,582,320
Riverside-Quindaro Bend Levee District of Platte County Levee Improvement Revenue, L-385
Project, Refunding, Radian Insured, 5.00%, 3/01/27 ............................................... 5,000,000 3,777,650
Springfield Missouri IDAR, Bethesda Living Centers, Refunding, Series A,
5.625%, 8/15/18 ............................................................................ 3,000,000 2,507,400
5.70%, 8/15/28 ............................................................................. 5,250,000 3,650,220
Springfield Public Building Corp. Leasehold Revenue, Capital Improvement Program, AMBAC Insured,
5.00%, 3/01/24 ................................................................................ 2,600,000 2,679,794
Springfield Branson Airport, Series A, AMBAC Insured, 5.00%, 7/01/36 ....................... 5,000,000 4,603,650
Springfield Recreational, Series B, AMBAC Insured, Pre-Refunded, 6.125%, 6/01/21 ........... 3,230,000 3,332,326
Springfield Recreational, Series B, AMBAC Insured, Pre-Refunded, 6.15%, 6/01/25 ............ 3,645,000 3,738,276
Springfield Public Utility Revenue, FGIC Insured, 4.75%, 8/01/34 ................................. 5,000,000 4,842,050
Springfield School District No. R-12 GO, Missouri Direct Deposit Program, 5.85%, 3/01/20 ......... 1,500,000 1,555,815
St. Charles County Public Water Supply District No. 2, COP, Missouri Project, Series A, MBIA
Insured, 5.25%, 12/01/28 ...................................................................... 1,000,000 884,270
St. Joseph IDA Special Obligation Revenue, Sewer System Improvements Project, 5.00%, 4/01/27 ..... 1,330,000 1,280,910
St. Louis Airport Revenue,
Airport Development Program, Series A, MBIA Insured, Pre-Refunded, 5.25%, 7/01/31 .......... 18,835,000 20,533,164
Lambert, Refunding, Series B, FSA Insured, 5.00%, 7/01/25 .................................. 9,420,000 8,328,222
Lambert, St. Louis International Airport, Refunding, MBIA Insured, 5.50%, 7/01/29 .......... 8,320,000 7,527,187
St. Louis County IDA, MFHR,
Lucas Hunt Village Project, GNMA Secured, 5.20%, 9/20/31 ................................... 1,095,000 1,054,189
South Summit Apartments, Refunding, Series A, GNMA Secured, 6.10%, 4/20/32 ................. 1,250,000 1,250,612
St. Louis County IDA Health Facilities Revenue, Mary Queen Healthcare, GNMA Secured,
5.375%, 9/20/31 ............................................................................... 3,310,000 3,076,612
St. Louis County IDAR, Bethesda Living Centers, Series B, 5.85%, 8/15/28 ......................... 1,500,000 1,063,320
St. Louis Municipal Finance Corp. Leasehold Revenue,
Carnahan Courthouse, Series A, FGIC Insured, Pre-Refunded, 5.125%, 2/15/27 ................. 4,750,000 5,231,555
City Justice Center, Series A, AMBAC Insured, Pre-Refunded, 6.00%, 2/15/20 ................. 1,000,000 1,060,180
St. Louis Municipal Finance Corp. Recreation Sales Tax Leasehold Revenue, AMBAC Insured, 5.00%,
2/15/32 .................................................................................... 8,075,000 6,748,439
2/15/37 .................................................................................... 7,800,000 6,359,730
Taney County IDA Hospital Revenue, The Skaggs Community Hospital Assn., Refunding,
5.30%, 5/15/18 ............................................................................. 3,000,000 2,610,090
5.40%, 5/15/28 ............................................................................. 1,500,000 1,156,815
Taney County Reorganized School District GO, No. R-V Hollister, FSA Insured, Pre-Refunded,
5.00%, 3/01/20 ................................................................................ 1,300,000 1,459,536
University of Missouri Revenues, System Facilities, Refunding, Series B, 5.00%, 11/01/27 ......... 7,865,000 7,958,122
Annual Report | 125
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
West Plains IDA Hospital Revenue, Ozarks Medical Center, Refunding,
5.50%, 11/15/12 ............................................................................... $ 810,000 $ 768,155
5.60%, 11/15/17 ............................................................................... 1,700,000 1,465,791
5.65%, 11/15/22 ............................................................................... 1,500,000 1,196,895
------------
666,581,290
------------
U.S. TERRITORIES 11.4%
PUERTO RICO 10.8%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Pre-Refunded, 6.00%,
7/01/26 ....................................................................................... 2,785,000 2,955,581
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.375%, 7/01/28 ............................................................................... 1,975,000 1,726,367
5.125%, 7/01/31 ............................................................................... 5,000,000 4,065,050
Pre-Refunded, 5.375%, 7/01/28 ................................................................. 1,025,000 1,124,056
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
Pre-Refunded, 5.50%, 7/01/36 .................................................................. 9,500,000 11,417,575
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series N, FGIC Insured, 5.25%, 7/01/39 ............................................. 4,970,000 4,090,260
Series D, Pre-Refunded, 5.375%, 7/01/36 ....................................................... 2,500,000 2,770,900
Puerto Rico Electric Power Authority Power Revenue,
Refunding, Series UU, FSA Insured, 5.00%, 7/01/24 ............................................. 11,085,000 11,091,651
Series II, Pre-Refunded, 5.25%, 7/01/31 ....................................................... 10,000,000 11,258,000
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 2,396,900
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 .......................................................... 2,150,000 1,817,288
Series D, Pre-Refunded, 5.375%, 7/01/33 ....................................................... 5,885,000 6,492,685
Series I, 5.00%, 7/01/36 ...................................................................... 14,450,000 11,363,914
Series I, Pre-Refunded, 5.375%, 7/01/34 ....................................................... 10,000,000 11,233,700
------------
83,803,927
------------
VIRGIN ISLANDS 0.6%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien,
Refunding, Series A,
5.40%, 10/01/12 ............................................................................... 2,500,000 2,499,875
5.50%, 10/01/22 ............................................................................... 2,500,000 2,071,075
------------
4,570,950
------------
TOTAL U.S. TERRITORIES ........................................................................... 88,374,877
------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $788,800,899) .......................... 754,956,167
------------
126 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
SHORT TERM INVESTMENTS 2.4%
MUNICIPAL BONDS 2.4%
MISSOURI 2.4%
(b) Missouri Development Finance Board Cultural Facilities Revenue, The Nelson Gallery Foundation,
Refunding, Series A, Daily VRDN and Put, 0.65%, 12/01/37 ...................................... $ 6,600,000 $ 6,600,000
(b) Missouri State Health and Educational Facilities Authority Educational Facilities Revenue,
St. Louis University, Refunding, Series A-1, Daily VRDN and Put, 0.60%, 10/01/35 .............. 400,000 400,000
Washington University, Series B, Daily VRDN and Put, 0.45%, 2/15/33 ........................... 5,100,000 5,100,000
(b) Missouri State Health and Educational Facilities Authority Health Facilities Revenue, Sisters
Mercy Health, Refunding, Series A, Daily VRDN and Put, 0.65%, 6/01/16 ......................... 6,150,000 6,150,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $18,250,000) .................................................. 18,250,000
------------
TOTAL INVESTMENTS (COST $807,050,899) 99.7% ...................................................... 773,206,167
OTHER ASSETS, LESS LIABILITIES 0.3% .............................................................. 2,702,199
------------
NET ASSETS 100.0% ................................................................................ $775,908,366
============
See Abbreviations on page 170.
(a) Security purchased on a when-issued basis. See Note 1(b).
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 127
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 11.46 $ 12.38 $ 12.31 $ 12.37 $ 12.42
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .......................... 0.51 0.50 0.51 0.53 0.54
Net realized and unrealized gains (losses) ........ (0.11) (0.92) 0.08 (0.06) (0.05)
-------- -------- -------- -------- --------
Total from investment operations ..................... 0.40 (0.42) 0.59 0.47 0.49
-------- -------- -------- -------- --------
Less distributions from net investment income ........ (0.49) (0.50) (0.52) (0.53) (0.54)
-------- -------- -------- -------- --------
Redemption fees(d, e) ................................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 11.37 $ 11.46 $ 12.38 $ 12.31 $ 12.37
======== ======== ======== ======== ========
Total return(f) ...................................... 3.60% (3.55)% 4.89% 3.86% 4.11%
RATIOS TO AVERAGE NET ASSETS
Expenses ............................................. 0.64% 0.65% 0.66% 0.66% 0.67%
Net investment income ................................ 4.41% 4.11% 4.15% 4.27% 4.42%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $742,759 $673,785 $626,783 $509,309 $428,204
Portfolio turnover rate .............................. 7.09% 12.03% 9.79% 5.01% 8.15%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
128 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 11.58 $ 12.51 $ 12.44 $ 12.48 $ 12.54
-------- -------- -------- ------- -------
Income from investment operations(b):
Net investment income(c) .......................... 0.45 0.44 0.45 0.46 0.47
Net realized and unrealized gains (losses) ........ (0.11) (0.94) 0.07 (0.04) (0.06)
-------- -------- -------- ------- -------
Total from investment operations ..................... 0.34 (0.50) 0.52 0.42 0.41
-------- -------- -------- ------- -------
Less distributions from net investment income ........ (0.43) (0.43) (0.45) (0.46) (0.47)
-------- -------- -------- ------- -------
Redemption fees(d, e) ................................ -- -- -- -- --
-------- -------- -------- ------- -------
Net asset value, end of year ......................... $ 11.49 $ 11.58 $ 12.51 $ 12.44 $ 12.48
======== ======== ======== ======= =======
Total return(f) ...................................... 2.99% (4.13)% 4.26% 3.42% 3.41%
RATIOS TO AVERAGE NET ASSETS
Expenses ............................................. 1.19% 1.20% 1.21% 1.21% 1.22%
Net investment income ................................ 3.86% 3.56% 3.60% 3.72% 3.87%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $151,193 $123,593 $117,566 $99,649 $83,343
Portfolio turnover rate .............................. 7.09% 12.03% 9.79% 5.01% 8.15%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 129
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------- ----------- ------------
MUNICIPAL BONDS 98.5%
NORTH CAROLINA 85.8%
Albemarle Hospital Authority Health Care Facilities Revenue, Refunding, 5.25%, 10/01/38 .......... $ 7,600,000 $ 5,380,040
Appalachian State University Revenue, Refunding, MBIA Insured, 5.00%, 7/15/30 .................... 2,000,000 1,936,120
Asheville Water System Revenue,
FSA Insured, Pre-Refunded, 5.00%, 8/01/25 ..................................................... 1,000,000 1,089,930
MBIA Insured, 5.00%, 8/01/32 .................................................................. 2,110,000 2,089,786
Broad River Water Authority Water System Revenue, MBIA Insured, Pre-Refunded, 5.375%,
6/01/26 ....................................................................................... 1,000,000 1,064,100
Brunswick County Enterprise System Revenue, Series A, FSA Insured, 5.00%,
4/01/27 ....................................................................................... 1,500,000 1,523,430
4/01/28 ....................................................................................... 1,750,000 1,770,248
Buncombe County COP, MBIA Insured, 5.00%, 4/01/22 ................................................ 1,000,000 1,046,630
Buncombe County Metropolitan Sewer District Sewer System Revenue, FSA Insured,
Pre-Refunded, 5.00%, 7/01/29 .................................................................. 5,000,000 5,123,350
Cape Fear Public Utility Authority Water and Sewer System Revenue, 5.00%, 8/01/35 ................ 15,000,000 14,977,500
Cary Combined Enterprise System Revenue, Refunding, Series 2007, 5.00%, 12/01/33 ................. 5,405,000 5,434,998
Centennial Authority Hotel Tax Revenue, Arena Project, FSA Insured, 5.125%, 9/01/19 .............. 5,115,000 5,107,583
Charlotte Airport Revenue,
Charlotte Douglas International Airport, Refunding, Series A, AMBAC Insured, 5.00%,
7/01/32 .................................................................................... 21,680,000 20,167,386
Charlotte Douglas International Airport, Refunding, Series A, AMBAC Insured, 5.00%,
7/01/36 .................................................................................... 13,085,000 11,873,067
Series A, MBIA Insured, 5.00%, 7/01/29 ........................................................ 5,000,000 4,790,350
Series A, MBIA Insured, 5.00%, 7/01/34 ........................................................ 15,130,000 13,938,210
Series B, MBIA Insured, 6.00%, 7/01/24 ........................................................ 4,000,000 3,995,640
Series B, MBIA Insured, 6.00%, 7/01/28 ........................................................ 6,300,000 6,022,107
Charlotte COP,
Convention Facility Project, Pre-Refunded, 5.625%, 12/01/25 ................................... 7,230,000 7,887,424
Governmental Facilities Projects, Series G, 5.00%, 6/01/28 .................................... 3,000,000 3,027,150
Refunding, 5.00%, 6/01/33 ..................................................................... 2,500,000 2,475,550
Transit Projects, Phase II, Series E, 5.00%, 6/01/35 .......................................... 6,000,000 5,904,720
Charlotte GO, Series C, 5.00%, 7/01/27 ........................................................... 2,010,000 2,047,426
Charlotte Storm Water Fee Revenue,
5.00%, 6/01/35 ................................................................................ 10,000,000 10,023,300
Refunding, 5.00%, 6/01/25 ..................................................................... 1,000,000 1,025,640
Charlotte Water and Sewer System Revenue,
5.125%, 6/01/26 ............................................................................... 6,000,000 6,133,320
5.00%, 7/01/38 ................................................................................ 6,775,000 6,829,810
Pre-Refunded, 5.25%, 6/01/25 .................................................................. 3,950,000 4,202,207
Charlotte-Mecklenburg Hospital Authority Health Care System Revenue,
Carolinas HealthCare System, Refunding, Series A, 5.00%, 1/15/31 .............................. 3,865,000 3,710,864
Carolinas HealthCare System, Series A, FSA Insured, 5.00%, 1/15/23 ............................ 7,780,000 7,829,792
Carolinas HealthCare System, Series A, Pre-Refunded, 5.00%, 1/15/31 ........................... 1,135,000 1,223,144
Refunding, 5.00%, 1/15/39 ..................................................................... 15,000,000 13,923,000
Chatham County COP, AMBAC Insured, 5.00%, 6/01/34 ................................................ 5,000,000 4,745,500
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 1,195,714
130 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
Cumberland County COP, Civic Center Project, Refunding, AMBAC Insured, 5.00%,
12/01/18 ...................................................................................... $ 3,000,000 $ 3,041,970
Cumberland County Finance Corp. Installment Payment Revenue, Detention Center and Mental
Health, FSA Insured, Pre-Refunded, 5.625%, 6/01/24 ............................................ 5,000,000 5,487,800
Cumberland County Hospital Facilities Revenue, Cumberland County Hospital Systems Inc.,
Pre-Refunded, 5.25%, 10/01/29 ................................................................. 5,250,000 5,422,935
Dare County COP,
AMBAC Insured, 5.125%, 6/01/21 ................................................................ 650,000 678,958
AMBAC Insured, 5.00%, 6/01/23 ................................................................. 3,000,000 3,075,840
AMBAC Insured, 5.00%, 6/01/29 ................................................................. 5,295,000 5,274,561
FGIC Insured, 5.00%, 6/01/23 .................................................................. 2,655,000 2,707,542
Durham County Enterprise System Revenue, MBIA Insured, 5.00%, 6/01/23 ............................ 1,670,000 1,717,378
Franklin County COP, AMBAC Insured, 5.00%, 6/01/25 ............................................... 1,250,000 1,262,838
Gastonia Combined Utilities System Revenue,
FSA Insured, 5.00%, 5/01/25 ................................................................... 1,000,000 1,012,990
MBIA Insured, Pre-Refunded, 5.625%, 5/01/19 ................................................... 1,000,000 1,068,200
Greensboro Enterprise System Revenue, Series A, Pre-Refunded, 5.125%,
6/01/21 ....................................................................................... 390,000 427,545
6/01/22 ....................................................................................... 350,000 383,695
Greensboro HDC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 6.70%, 1/01/24 .............. 1,290,000 1,293,148
Greenville Utilities Commission Combined Enterprise System Revenue, Refunding, Series A,
FSA Insured, 5.00%, 11/01/33 .................................................................. 6,000,000 5,833,920
Halifax County Industrial Facilities and PCFA Revenue, Champion International Corp. Project,
5.45%, 11/01/33 ............................................................................... 4,000,000 2,377,080
Refunding, 6.45%, 11/01/29 .................................................................... 3,900,000 2,809,521
Harnett County COP,
Assured Guaranty, 5.00%, 6/01/28 .............................................................. 1,000,000 998,700
Assured Guaranty, 5.00%, 6/01/29 .............................................................. 500,000 496,815
FSA Insured, 5.125%, 12/01/23 ................................................................. 1,000,000 1,040,200
Henderson County COP, Henderson County School Project, AMBAC Insured, 5.00%, 3/01/21 ............. 1,000,000 1,031,890
High Point Combined Enterprise System Revenue, FSA Insured, 5.00%,
11/01/31 ...................................................................................... 11,000,000 10,837,970
11/01/33 ...................................................................................... 5,000,000 4,916,150
Iredell County COP, Iredell County School Project, FSA Insured,
5.125%, 6/01/27 ............................................................................... 4,000,000 4,141,120
5.00%, 6/01/28 ................................................................................ 1,000,000 1,019,200
Johnston Memorial Hospital Authority Mortgage Revenue, FSA Insured, 5.25%, 10/01/36 .............. 7,000,000 6,412,770
Mecklenburg County COP, Series A, 5.00%, 2/01/28 ................................................. 350,000 353,801
Mecklenburg County GO, Public Improvement, Series B, 4.70%, 2/01/20 .............................. 3,000,000 3,106,200
Monroe COP, Assured Guaranty, 5.50%,
3/01/34 ....................................................................................... 2,425,000 2,415,203
3/01/39 ....................................................................................... 1,085,000 1,075,550
Nash Health Care System Health Care Facilities Revenue, FSA Insured, 5.00%, 11/01/30 ............. 2,250,000 2,160,698
New Hanover County COP, New Hanover County Projects, AMBAC Insured, 5.00%, 12/01/22 .............. 5,000,000 5,183,750
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 2,634,150
Meredith College, AMBAC Insured, ETM, 4.875%, 6/01/24 ......................................... 1,000,000 1,009,410
Annual Report | 131
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
North Carolina Capital Facilities Finance Agency Revenue, Duke University Project,
Refunding, Series A, 5.00%, 10/01/41 .......................................................... $10,000,000 $ 10,049,700
Refunding, Series B, 4.75%, 7/01/42 ........................................................... 10,000,000 9,260,600
Series A, 5.00%, 10/01/39 ..................................................................... 5,815,000 5,854,891
Series A, Pre-Refunded, 5.25%, 7/01/42 ........................................................ 10,000,000 11,304,200
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 6.50%, 1/01/18 ........................................................... 3,000,000 3,257,460
Refunding, Series A, 5.00%, 1/01/24 ........................................................... 10,000,000 8,523,000
Refunding, Series A, 5.75%, 1/01/26 ........................................................... 10,000,000 8,987,000
Refunding, Series A, AMBAC Insured, 5.00%, 1/01/21 ............................................ 11,555,000 11,133,936
Series C, 6.75%, 1/01/24 ...................................................................... 3,500,000 3,572,555
Series D, 6.75%, 1/01/26 ...................................................................... 5,000,000 5,005,300
North Carolina HFA, SFR, Series AA, 6.25%, 3/01/17 ............................................... 220,000 220,224
North Carolina HFAR,
Home Ownership, Refunding, Series 12-C, 5.35%, 7/01/33 ........................................ 10,000,000 9,878,600
MF, Mortgage Loan Resolution, Refunding, Series H, 6.05%, 7/01/28 ............................. 1,015,000 1,017,040
MF, Refunding, Series A, AMBAC Insured, 5.90%, 7/01/20 ........................................ 1,125,000 1,115,831
MF, Refunding, Series J, 5.45%, 7/01/17 ....................................................... 260,000 261,732
Refunding, Series F, 6.70%, 1/01/27 ........................................................... 1,240,000 1,242,964
SF, Refunding, Series DD, 6.20%, 9/01/27 ...................................................... 620,000 645,749
SF, Series JJ, 6.45%, 9/01/27 ................................................................. 1,145,000 1,149,088
SFR, Series RR, 5.85%, 9/01/28 ................................................................ 1,215,000 1,222,035
North Carolina Infrastructure Finance Corp. COP, Capital Improvement, Series A, FSA Insured,
5.00%, 5/01/22 ................................................................................ 6,595,000 7,054,606
North Carolina Medical Care Commission Health Care Facilities Revenue,
Refunding, FGIC Insured, 5.00%, 1/01/33 ....................................................... 12,805,000 9,805,429
Scotland Memorial Hospital Project, Radian Insured, 5.50%, 10/01/19 ........................... 630,000 587,336
Scotland Memorial Hospital Project, Radian Insured, 5.50%, 10/01/29 ........................... 1,220,000 1,008,147
University Health System, Refunding, Series D, 6.25%, 12/01/33 ................................ 10,000,000 10,426,200
WakeMed Project, AMBAC Insured, 5.00%, 10/01/32 ............................................... 4,205,000 3,225,529
WakeMed Project, Series A, Assured Guaranty, 5.625%, 10/01/29 ................................. 1,500,000 1,525,365
WakeMed Project, Series A, Assured Guaranty, 5.625%, 10/01/38 ................................. 6,000,000 6,029,580
WakeMed Project, Series A, Assured Guaranty, 5.875%, 10/01/38 ................................. 2,515,000 2,557,227
North Carolina Medical Care Commission Health System Revenue,
Catholic Health East Project, Series C, AMBAC Insured, 5.00%, 11/15/18 ........................ 2,500,000 2,532,375
Mission Health Combination, Refunding, FSA Insured, 5.00%, 10/01/36 ........................... 5,000,000 4,721,450
North Carolina Medical Care Commission Hospital Revenue,
Annie Penn Memorial Hospital Project, ETM, 5.25%, 1/01/12 ..................................... 1,050,000 1,119,573
Annie Penn Memorial Hospital Project, Pre-Refunded, 5.375%, 1/01/22 ........................... 1,920,000 2,162,342
Halifax Regional Medical Center Project, 5.00%, 8/15/24 ....................................... 1,800,000 1,341,414
Mission-St. Joseph's Health System Project, Refunding, MBIA Insured, 5.125%,
10/01/28 ................................................................................... 1,770,000 1,769,982
Northeast Medical Center, AMBAC Insured, Pre-Refunded, 5.50%, 11/01/30 ........................ 1,580,000 1,710,239
Rex Healthcare Project, AMBAC Insured, 5.00%, 6/01/17 ......................................... 2,780,000 2,798,265
Southeastern Regional Medical Center, 6.25%, 6/01/29 .......................................... 4,000,000 3,840,040
Southeastern Regional Medical Center, 5.375%, 6/01/32 ......................................... 3,500,000 2,893,765
Transylvania Community Hospital Inc. Project, Refunding, 5.75%, 10/01/19 ...................... 1,090,000 987,573
Wake County Hospital System Project, MBIA Insured, 5.375%, 10/01/26 ........................... 10,825,000 9,664,235
132 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------- ----------- -----------
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
North Carolina Medical Care Commission Revenue,
Betsy Johnson Project, FSA Insured, 5.125%, 10/01/32 ....................................... $ 4,500,000 $ 4,111,965
Chatham Hospital Project, MBIA Insured, 5.25%, 2/01/31 ..................................... 6,450,000 5,739,210
Morehead Memorial Hospital, FSA Insured, 5.00%, 11/01/26 ................................... 5,000,000 4,829,000
Novant Health Obligation Group, MBIA Insured, 5.00%, 11/01/39 .............................. 9,680,000 9,102,201
Rowan Regional Medical Center, FSA Insured, 5.00%, 9/01/33 ................................. 25,970,000 23,147,580
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Series A, MBIA Insured,
5.25%, 1/01/19 ............................................................................. 5,000,000 5,181,650
5.00%, 1/01/20 ............................................................................. 2,000,000 1,997,540
5.25%, 1/01/20 ............................................................................. 1,500,000 1,544,340
North Carolina State Capital Improvement Limited Obligation Revenue, Series A, 5.00%,
5/01/28 ....................................................................................... 5,000,000 5,125,250
North Carolina State COP, Western Carolina University Housing Project, AMBAC Insured, 5.00%,
6/01/33 ....................................................................................... 1,500,000 1,477,095
North Carolina State GO, Public Improvement, Series A, 4.50%, 3/01/26 ............................ 4,855,000 4,929,913
Northern Hospital District of Surry County Health Care Facilities Revenue,
6.00%, 10/01/28 ............................................................................ 1,000,000 841,860
6.25%, 10/01/38 ............................................................................ 2,000,000 1,655,580
Oak Island Enterprise System Revenue, Series A, MBIA Insured, 5.00%, 6/01/33 ..................... 5,000,000 4,676,300
Onslow County Hospital Authority FHA Insured Mortgage Revenue, Onslow Memorial Hospital
Project, MBIA Insured, 5.00%,
4/01/31 .................................................................................... 6,120,000 5,564,671
10/01/34 ................................................................................... 6,000,000 5,362,980
Onslow Water and Sewer Authority Combined Enterprise System Revenue, Series A, MBIA
Insured, 5.00%, 6/01/33 ....................................................................... 7,500,000 7,233,975
Pasquotank County COP, MBIA Insured, 5.00%, 6/01/25 .............................................. 1,400,000 1,423,772
Piedmont Triad Airport Authority Airport Revenue, Series A, FSA Insured, Pre-Refunded, 6.00%,
7/01/24 ....................................................................................... 5,745,000 5,905,343
Pitt County COP, School Facilities Project,
Series A, FSA Insured, Pre-Refunded, 5.25%, 4/01/25 ........................................ 1,670,000 1,770,233
Series B, AMBAC Insured, 5.00%, 4/01/29 .................................................... 2,500,000 2,462,550
Series B, FSA Insured, Pre-Refunded, 5.50%, 4/01/25 ........................................ 1,000,000 1,062,690
Raleigh Combined Enterprise System Revenue,
5.00%, 3/01/31 ............................................................................. 10,360,000 10,460,078
Series A, 5.00%, 3/01/36 ................................................................... 6,000,000 6,045,720
Raleigh COP, Downtown Improvement Projects, Series A, 5.00%, 2/01/29 ............................. 6,070,000 6,119,106
Raleigh-Durham Airport Authority Airport Revenue, Series A,
AMBAC Insured, 5.00%, 5/01/30 .............................................................. 14,060,000 13,440,235
FGIC Insured, 5.00%, 11/01/25 .............................................................. 6,480,000 6,505,855
FGIC Insured, 5.00%, 11/01/31 .............................................................. 8,000,000 7,604,080
Randolph County COP, FSA Insured, Pre-Refunded, 5.75%, 6/01/22 ................................... 5,500,000 5,624,960
Rockingham County COP, Assured Guaranty, 5.00%, 4/01/32 .......................................... 9,380,000 9,080,215
Union County COP, AMBAC Insured, 5.00%, 6/01/30 .................................................. 5,000,000 5,002,600
University of North Carolina at Ashville Revenue, General, Refunding, Series A, AMBAC Insured,
5.00%, 6/01/27 ................................................................................ 1,200,000 1,211,700
University of North Carolina at Charlotte Revenue, General, Series B, FSA Insured, 5.00%,
4/01/32 ....................................................................................... 5,000,000 5,013,000
Annual Report | 133
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------- ----------- -----------
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
University of North Carolina at Wilmington COP, Student Housing Project,
Assured Guaranty, 5.00%, 6/01/32 ........................................................... $ 5,000,000 $ 4,999,600
FGIC Insured, 5.00%, 6/01/26 ............................................................... 1,655,000 1,626,733
FGIC Insured, 5.00%, 6/01/27 ............................................................... 1,740,000 1,693,177
FGIC Insured, 5.00%, 6/01/29 ............................................................... 1,915,000 1,821,222
FGIC Insured, 5.00%, 6/01/37 ............................................................... 11,350,000 10,201,493
University of North Carolina Greensboro Revenue,
Housing and Dining System, Series G, MBIA Insured, Pre-Refunded, 6.00%, 4/01/26 ............ 2,040,000 2,178,822
Series A, FSA Insured, 5.00%, 4/01/26 ...................................................... 4,940,000 5,024,227
University of North Carolina System Pool Revenue,
AMBAC Insured, 5.00%, 4/01/29 .............................................................. 2,500,000 2,525,550
Series A, AMBAC Insured, 5.00%, 4/01/27 .................................................... 1,430,000 1,445,315
Series A, AMBAC Insured, Pre-Refunded, 5.00%, 4/01/27 ...................................... 670,000 750,326
Series A, Assured Guaranty, 5.00%, 10/01/33 ................................................ 5,000,000 4,923,300
Series A, MBIA Insured, 5.00%, 10/01/33 .................................................... 2,000,000 1,942,080
University of North Carolina at Chapel Hill Revenue, Board of Governors of the University of
North Carolina, General,
5.00%, 12/01/28 ............................................................................ 1,000,000 1,020,640
Refunding, 5.00%, 12/01/31 ................................................................. 9,000,000 9,171,720
Refunding, Series A, 5.00%, 12/01/34 ....................................................... 11,460,000 11,596,374
Series A, 5.00%, 12/01/25 .................................................................. 4,000,000 4,064,960
Wake County Industrial Facilities and PCFA Revenue, Carolina Power and Light Co. Project,
Refunding, 5.375%, 2/01/17 .................................................................... 8,000,000 8,238,880
Western Carolina University Research and Development Corp. COP, Western Carolina University
Student Housing, Assured Guaranty, 5.00%, 6/01/39 ............................................. 5,000,000 4,885,250
Wilkes County COP,
MBIA Insured, 5.00%, 6/01/31 ............................................................... 4,295,000 4,116,672
MBIA Insured, 5.00%, 6/01/36 ............................................................... 6,085,000 5,714,606
Public Improvements Project, FSA Insured, 5.375%, 12/01/20 ................................. 1,000,000 1,044,410
Wilmington COP,
AMBAC Insured, 5.00%, 9/01/29 .............................................................. 1,000,000 1,008,590
Refunding, Series A, AMBAC Insured, 5.00%, 6/01/32 ......................................... 5,310,000 5,244,899
Series A, 5.00%, 6/01/33 ................................................................... 6,000,000 5,859,480
Series A, 5.00%, 6/01/38 ................................................................... 7,625,000 7,352,101
Wilmington Storm Water Fee Revenue, Refunding, AMBAC Insured, 5.00%,
6/01/28 .................................................................................... 700,000 705,117
6/01/33 .................................................................................... 1,000,000 971,200
Wilmington Water and Sewer System Revenue, Refunding, FSA Insured, 5.00%, 6/01/34 ................ 3,565,000 3,524,395
Wilson COP, Public Facilities Project, Assured Guaranty, 5.00%, 5/01/33 .......................... 3,000,000 2,874,030
Winston-Salem Water and Sewer System Revenue,
(a) 5.00%, 6/01/3............................................................................... 5,000,000 5,043,500
Pre-Refunded, 5.125%, 6/01/20 .............................................................. 2,500,000 2,740,675
Refunding, Series A, 5.00%, 6/01/32 ........................................................ 7,590,000 7,671,137
------------
766,920,839
------------
U.S. TERRITORIES 12.7%
PUERTO RICO 12.4%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed Bonds, Refunding,
5.50%, 5/15/39 ................................................................................ 7,000,000 4,753,700
134 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------- ----------- -----------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior lien, Series A,
6.00%, 7/01/38 ................................................................................ $ 2,100,000 $ 1,912,974
Puerto Rico Commonwealth GO,
Public Improvement, FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ............................. 4,805,000 5,241,871
Public Improvement, Refunding, FSA Insured, 5.125%, 7/01/30 ................................ 3,445,000 3,304,547
Public Improvement, Refunding, Series A, 5.50%, 7/01/32 .................................... 5,000,000 4,330,650
Public Improvement, Series A, 5.375%, 7/01/28 .............................................. 4,925,000 4,304,992
Public Improvement, Series A, 5.125%, 7/01/31 .............................................. 3,265,000 2,654,478
Public Improvement, Series A, Pre-Refunded, 5.375%, 7/01/28 ................................ 2,405,000 2,637,419
Public Improvement, Series A, Pre-Refunded, 5.125%, 7/01/31 ................................ 1,000,000 1,090,920
Series A, 5.00%, 7/01/26 ................................................................... 8,050,000 6,773,350
Series A, 5.25%, 7/01/37 ................................................................... 5,000,000 4,077,300
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Refunding, Series A, MBIA Insured, 5.00%, 7/01/38 .......................................... 85,000 67,849
Refunding, Series D, FSA Insured, 5.00%, 7/01/32 ........................................... 3,060,000 2,925,850
Refunding, Series H, 5.00%, 7/01/35 ........................................................ 1,490,000 1,166,074
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................................... 5,000,000 5,541,800
Series D, Pre-Refunded, 5.25%, 7/01/38 ..................................................... 3,000,000 3,313,080
Series H, Pre-Refunded, 5.00%, 7/01/35 ..................................................... 2,790,000 3,166,036
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ................................................................. 8,000,000 6,493,040
Puerto Rico Electric Power Authority Power Revenue,
Series NN, MBIA Insured, Pre-Refunded, 5.00%, 7/01/32 ...................................... 5,000,000 5,673,900
Series RR, FGIC Insured, Pre-Refunded, 5.00%, 7/01/35 ...................................... 3,000,000 3,466,530
Series RR, XLCA Insured, Pre-Refunded, 5.00%, 7/01/30 ...................................... 1,000,000 1,155,510
Series TT, 5.00%, 7/01/32 .................................................................. 10,100,000 8,431,480
Series WW, 5.50%, 7/01/38 .................................................................. 6,700,000 5,918,110
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ....................................................... 1,790,000 1,512,997
Refunding, Series N, 5.00%, 7/01/32 ........................................................ 10,000,000 8,012,800
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................................... 5,210,000 5,747,985
Series I, 5.00%, 7/01/36 ................................................................... 2,405,000 1,891,364
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.70%, 8/01/25 .................................................................. 5,000,000 5,211,000
------------
110,777,606
------------
VIRGIN ISLANDS 0.3%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.50%, 10/01/18 ............................................................................ 2,000,000 1,760,720
5.625%, 10/01/25 ........................................................................... 1,575,000 1,285,924
------------
3,046,644
------------
TOTAL U.S. TERRITORIES ........................................................................... 113,824,250
------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $921,995,201) .......................... 880,745,089
------------
Annual Report | 135
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------- ----------- -----------
SHORT TERM INVESTMENTS 0.2%
MUNICIPAL BONDS 0.2%
NORTH CAROLINA 0.2%
(b) North Carolina Medical Care Commission Health Care Facilities Revenue,
Cleveland County Health, Daily VRDN and Put, 0.60%, 1/01/33 ................................... $ 1,300,000 $ 1,300,000
Wake Forest University, Refunding, Series D, Daily VRDN and Put, 0.60%, 7/01/34 ............... 700,000 700,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $2,000,000) ................................................... 2,000,000
------------
TOTAL INVESTMENTS (COST $923,995,201) 98.7% ...................................................... 882,745,089
OTHER ASSETS, LESS LIABILITIES 1.3% .............................................................. 11,206,078
------------
NET ASSETS 100.0% ................................................................................ $893,951,167
============
See Abbreviations on page 170.
(a) Security purchased on a when-issued basis. See Note 1(b).
(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.
The accompanying notes are an integral part of these financial statements.
136 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
2009 2008(a) 2007 2006 2005
-------- -------- -------- -------- --------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.12 $ 11.85 $ 11.85 $ 11.91 $ 11.94
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ........................ 0.49 0.49 0.50 0.51 0.52
Net realized and unrealized gains (losses) ...... (0.18) (0.73) --(d) (0.06) (0.04)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.31 (0.24) 0.50 0.45 0.48
-------- -------- -------- -------- --------
Less distributions from net investment income ...... (0.48) (0.49) (0.50) (0.51) (0.51)
-------- -------- -------- -------- --------
Redemption fees (d,e) .............................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 10.95 $ 11.12 $ 11.85 $ 11.85 $ 11.91
======== ======== ======== ======== ========
Total return(f) .................................... 2.80% (2.13)% 4.37% 3.88% 4.18%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 0.66% 0.66% 0.66% 0.67% 0.67%
Net investment income .............................. 4.42% 4.18% 4.25% 4.27% 4.42%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $547,261 $494,276 $493,441 $473,956 $438,871
Portfolio turnover rate ............................ 8.75% 18.28% 8.51% 5.80% 5.85%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 137
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------
2009 2008(a) 2007 2006 2005
------- ------- ------- ------- -------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.24 $ 11.97 $ 11.96 $ 12.02 $ 12.04
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ........................ 0.43 0.43 0.44 0.45 0.46
Net realized and unrealized gains (losses) ...... (0.18) (0.74) 0.01 (0.06) (0.03)
------- ------- ------- ------- -------
Total from investment operations ................... 0.25 (0.31) 0.45 0.39 0.43
------- ------- ------- ------- -------
Less distributions from net investment income ...... (0.41) (0.42) (0.44) (0.45) (0.45)
------- ------- ------- ------- -------
Redemption fees(d,e) ............................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ....................... $ 11.08 $ 11.24 $ 11.97 $ 11.96 $ 12.02
======= ======= ======= ======= =======
Total return(f) .................................... 2.30% (2.65)% 3.84% 3.27% 3.66%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.21% 1.21% 1.20% 1.22% 1.22%
Net investment income .............................. 3.87% 3.63% 3.71% 3.72% 3.87%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $73,493 $60,372 $56,793 $51,461 $43,661
Portfolio turnover rate ............................ 8.75% 18.28% 8.51% 5.80% 5.85%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
138 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS 97.1%
VIRGINIA 79.1%
Abingdon IDA Hospital Facilities Revenue, Johnston Memorial Hospital, Refunding, 5.375%,
7/01/28 ....................................................................................... $ 5,000,000 $ 4,274,750
(a) Bedford County IDA, IDR, Nekoosa Packaging Corp. Project, Refunding,
6.30%, 12/01/25 ............................................................................... 2,000,000 1,230,220
Series A, 6.55%, 12/01/25 ..................................................................... 5,000,000 3,167,250
Bristol Utility System Revenue, ETM, 5.00%, 7/15/21 .............................................. 1,245,000 1,373,148
Capital Region Airport Commission Airport Revenue, FSA Insured, 5.00%,
7/01/31 ....................................................................................... 2,000,000 1,968,140
7/01/38 ....................................................................................... 5,895,000 5,692,389
Caroline County IDA Lease Revenue, AMBAC Insured, 5.125%, 6/15/34 ................................ 1,000,000 999,220
Charlotte County IDA, Hospital Revenue, Halifax Regional Hospital Inc., 5.00%, 9/01/37 ........... 2,500,000 1,890,925
Chesapeake Toll Road Revenue, Expressway, Series A, 5.625%,
7/15/19 ....................................................................................... 2,845,000 2,667,273
7/15/32 ....................................................................................... 8,000,000 6,576,640
Dinwiddie County IDA Lease Revenue, Refunding, Series B, MBIA Insured, 5.00%, 2/15/30 ............ 1,410,000 1,402,710
Fairfax County EDA Revenue, National Wildlife Federation, MBIA Insured, 5.375%, 9/01/29 .......... 8,000,000 8,047,120
Fairfax County IDAR, Health Care, Inova Health System Project, Refunding, Series A, 5.00%,
8/15/18 ....................................................................................... 2,100,000 2,103,948
8/15/25 ....................................................................................... 5,000,000 4,810,000
Fairfax County Redevelopment and Housing Authority MFHR, Paul Spring Center, Refunding,
Series A, FHA Insured,
5.90%, 6/15/17 ................................................................................ 880,000 883,502
6.00%, 12/15/28 ............................................................................... 1,000,000 1,003,100
Fairfax County Water Authority Water Revenue,
Pre-Refunded, 5.00%, 4/01/27 .................................................................. 2,830,000 3,131,961
Refunding, 5.00%, 4/01/27 ..................................................................... 11,420,000 11,608,087
Front Royal and Warren County IDA Lease Revenue, School and Capital Improvement, Series B,
FSA Insured, 5.00%,
4/01/29 ....................................................................................... 5,115,000 5,126,151
4/01/35 ....................................................................................... 6,000,000 5,846,220
Gloucester County IDA Lease Revenue, Courthouse Project, MBIA Insured, Pre-Refunded,
5.50%, 11/01/30 ............................................................................... 1,715,000 1,860,844
Greater Richmond Convention Center Authority Hotel Tax Revenue,
Convention Center Expansion Project, Pre-Refunded, 6.125%, 6/15/29 ............................ 8,000,000 8,607,840
Convention Center Expansion Project, Pre-Refunded, 6.25%, 6/15/32 ............................. 8,175,000 8,809,053
Refunding, MBIA Insured, 5.00%, 6/15/30 ....................................................... 17,555,000 16,799,959
Hampton Convention Center Revenue, Refunding, AMBAC Insured,
5.25%, 1/15/23 ................................................................................ 3,000,000 3,061,740
5.125%, 1/15/28 ............................................................................... 2,605,000 2,584,629
5.00%, 1/15/35 ................................................................................ 8,600,000 7,942,100
Hampton Roads Regional Jail Authority Jail Facilities Revenue, Series A, MBIA Insured, 5.00%,
7/01/28 ....................................................................................... 10,000,000 8,540,900
Hampton Roads Sanitation District Wastewater Revenue, Hampton Roads,
5.00%, 4/01/33 ................................................................................ 10,000,000 10,057,600
Refunding, 5.00%, 4/01/38 ..................................................................... 22,400,000 22,415,232
Harrisonburg GO, FSA Insured, 5.75%, 12/01/29 .................................................... 1,000,000 1,056,810
Harrisonburg IDAR, Hospital Facilities, Rockingham Memorial Hospital, AMBAC
Insured, 5.00%,
8/15/42 ....................................................................................... 8,595,000 6,339,672
8/15/46 ....................................................................................... 15,000,000 10,992,900
Annual Report | 139
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
VIRGINIA (CONTINUED)
Isle Wight County IDA Environmental Improvement Revenue, International Paper Co. Project,
Series A, 6.60%, 5/01/24 ...................................................................... $ 2,000,000 $ 1,542,640
Isle Wight County IDAR, International Paper Co. Project, Series A, 5.85%, 1/01/18 ................ 4,155,000 3,599,019
King George County IDA Lease Revenue, FSA Insured, 5.00%, 3/01/32 ................................ 3,595,000 3,551,429
Loudoun County IDA Hospital Revenue, Loudoun Hospital Center, Series A, Pre-Refunded,
6.10%, 6/01/32 ................................................................................ 1,500,000 1,709,175
Loudoun County Sanitation Authority Water and Sewer Revenue, 5.00%, 1/01/33 ...................... 15,060,000 15,119,336
Louisa IDA, PCR, Virginia Electric and Power Co. Project, Mandatory Put 12/01/11, Series C,
5.00%, 11/01/35 ............................................................................... 5,000,000 5,076,350
Manassas Park GO, Series A, CIFG Insured, 5.00%, 4/01/29 ......................................... 5,545,000 5,461,936
Middle River Regional Jail Authority Jail Facility Revenue, MBIA Insured,
5.00%, 5/15/28 ................................................................................ 1,000,000 1,002,570
Middlesex County IDA Lease Revenue, School Facilities Project, MBIA
Insured, Pre-Refunded,
5.875%, 8/01/21 ............................................................................ 1,420,000 1,479,001
6.10%, 8/01/26 ............................................................................. 1,725,000 1,798,261
Montgomery County IDA Lease Revenue, Series B, AMBAC Insured, Pre-Refunded, 5.50%,
1/15/22 ....................................................................................... 1,000,000 1,085,870
Montgomery County IDA Public Facilities Lease Revenue, Public Projects, 5.00%, 2/01/29 ........... 6,500,000 5,832,450
Newport News EDA, EDR, Series A, 5.00%, 1/15/31 .................................................. 5,870,000 5,893,304
Newport News IDA Mortgage Revenue, Mennowood Communities Inc., Series A,
GNMA Secured,
6.25%, 8/01/36 ................................................................................ 2,950,000 2,956,814
Newport News Water Revenue, FSA Insured, 5.00%, 6/01/37 .......................................... 1,345,000 1,349,398
Norfolk Airport Authority Revenue, Series B, FGIC Insured, 5.125%, 7/01/31 ....................... 1,440,000 1,203,322
Norfolk Water Revenue, MBIA Insured, 5.90%, 11/01/25 ............................................. 5,000,000 5,002,150
Northwestern Regional Jail Authority Jail Facilities Revenue, MBIA Insured,
5.00%, 7/01/33 ................................................................................ 2,600,000 2,311,400
Orange County IDAR, Public Facility, Orange County Project, AMBAC Insured, Pre-Refunded,
5.00%, 2/01/34 ................................................................................ 1,000,000 1,107,590
Patrick County EDA Lease Revenue, School Projects, Assured Guaranty, 5.25%, 3/01/39 .............. 6,435,000 6,073,932
Peninsula Ports Authority Hospital Facilities Revenue, Whittaker Memorial Hospital Project,
Refunding, FHA Insured, 8.70%, 8/01/23 ........................................................ 50,000 52,393
Pittsylvania County GO, Series B, 5.75%, 2/01/30 ................................................. 5,800,000 6,026,026
Powhatan Co. EDA Lease Revenue, Virginia Capital Projects, AMBAC Insured, 5.25%,
7/15/33 ....................................................................................... 1,000,000 1,004,570
Prince William County IDA, MFHR, Remington Place Apartments Project, Series A-1, AMBAC
Insured, 6.00%, 12/01/33 ...................................................................... 2,080,000 1,955,782
Prince William County Service Authority Water and Sewer System Revenue,
FGIC Insured, Pre-Refunded, 5.50%, 7/01/29 .................................................... 5,000,000 5,131,450
Refunding, 5.00%, 7/01/32 ..................................................................... 1,750,000 1,760,238
Richmond GO, FGIC Insured, 5.00%, 7/15/19 ........................................................ 3,690,000 3,839,814
Richmond IDA Student Housing Revenue, University Real Estate Foundation, 5.55%,
1/01/31 ....................................................................................... 4,400,000 4,328,588
Richmond Public Facilities COP, 800 Megahertz Project, Series A, AMBAC Insured, 5.00%,
8/01/22 ....................................................................................... 2,000,000 2,035,760
Richmond Public Utility Revenue, FSA Insured,
5.00%, 1/15/35 ................................................................................ 3,500,000 3,484,670
Pre-Refunded, 5.00%, 1/15/33 .................................................................. 8,500,000 9,345,835
Riverside Regional Jail Authority Jail Facility Revenue, MBIA Insured, 5.00%,
7/01/28 ....................................................................................... 7,000,000 7,004,200
7/01/32 ....................................................................................... 22,000,000 21,149,040
140 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
VIRGINIA (CONTINUED)
Roanoke County EDA Lease Revenue, Public Facility Projects, Assured Guaranty, 5.125%,
10/15/37 ...................................................................................... $10,000,000 $ 9,903,100
Stafford County and Staunton IDAR, Virginia Municipal League Assn. Counties Program,
Series A, MBIA Insured, 5.25%, 8/01/31 ........................................................ 5,000,000 5,051,700
Series C, MBIA Insured, 5.00%, 8/01/35 ........................................................ 7,735,000 7,470,772
XLCA Insured, 5.00%, 8/01/37 .................................................................. 3,985,000 3,732,630
Stafford County EDA Hospital Facilities Revenue, Medicorp Health System Obligation, 5.25%,
6/15/37 ....................................................................................... 5,000,000 4,117,550
University of Virginia Revenue,
General, 5.00%, 6/01/37 ....................................................................... 8,935,000 9,015,326
Series B, 5.00%, 6/01/33 ...................................................................... 14,000,000 14,094,640
Virginia Beach Development Authority Public Facility Revenue, 5.00%, 7/15/27 ..................... 5,635,000 5,781,848
Virginia Beach Water and Sewer Revenue, Pre-Refunded, 5.25%, 8/01/21 ............................. 1,865,000 1,979,082
Virginia College Building Authority Educational Facilities Revenue,
21st Century College Program, Pre-Refunded, 5.00%, 2/01/21 .................................... 1,000,000 1,049,550
Hampton University Project, Pre-Refunded, 6.00%, 4/01/20 ...................................... 1,500,000 1,601,220
Public Higher Education Financing Program, Series A, 5.00%, 9/01/33 ........................... 4,010,000 4,049,218
Regent University Project, MBIA Insured, Pre-Refunded, 5.125%, 10/01/21 ....................... 5,000,000 5,489,400
Regent University Project, MBIA Insured, Pre-Refunded, 5.125%, 10/01/31 ....................... 4,050,000 4,446,414
Virginia Commonwealth Transportation Board Transportation Revenue,
Northern Virginia Transportation Program, Refunding, Series A, 5.00%, 5/15/27 ................. 8,920,000 9,058,795
U.S. Route 58 Corridor Development Program, Series B, Pre-Refunded, 5.00%, 5/15/24 ............ 2,000,000 2,162,020
U.S. Route 58 Corridor Development Program, Series B, Pre-Refunded, 5.00%, 5/15/26 ............ 10,000,000 10,810,100
Virginia Port Authority Port Facility Revenue, MBIA Insured, 4.75%, 7/01/28 ...................... 1,500,000 1,400,100
Virginia State HDA,
Commonwealth Mortgage Revenue, Series E, 6.375%, 1/01/36 ...................................... 10,000,000 10,402,100
MFHR, Series C, 5.30%, 11/01/16 ............................................................... 1,000,000 1,007,340
MFHR, Series H, 5.55%, 5/01/15 ................................................................ 1,000,000 1,012,880
Virginia State HDA Rental Housing Revenue,
Series J, 5.80%, 2/01/19 ...................................................................... 2,000,000 2,012,880
Series L, 5.75%, 2/01/15 ...................................................................... 1,000,000 1,010,420
Virginia State Public School Authority GO, School Financing,
Series A, 5.00%, 8/01/20 ...................................................................... 3,000,000 3,138,360
Series A, 5.00%, 8/01/21 ...................................................................... 4,000,000 4,162,760
Series C, 5.00%, 8/01/22 ...................................................................... 2,000,000 2,071,060
Series C, 5.00%, 8/01/26 ...................................................................... 10,925,000 11,176,166
Virginia State Public School Authority Special Obligation Fluvanna County Revenue, School
Financing, 6.00%, 12/01/32 .................................................................... 5,000,000 5,286,550
Virginia State Resources Authority Airports Revenue, Revolving Fund, Series A, 5.00%,
8/01/27 ....................................................................................... 3,000,000 2,989,140
Virginia State Resources Authority Infrastructure Revenue,
Senior Series A, 5.00%, 11/01/31 .............................................................. 5,000,000 5,085,600
Senior Series A, 5.00%, 11/01/36 .............................................................. 4,915,000 4,955,106
Virginia Pooled Financing Program, Senior Series, 5.00%, 11/01/33 ............................. 5,000,000 5,036,850
Virginia Pooled Financing Program, Senior Series A, 5.00%, 11/01/38 ........................... 1,600,000 1,613,312
Virginia Pooled Financing Program, Senior Series B, 5.00%, 11/01/32 ........................... 2,505,000 2,541,773
Virginia State Resources Authority Water and Sewer System Revenue, Tuckahoe Service District
Project, 5.00%, 11/01/35 ...................................................................... 1,150,000 1,152,174
Annual Report | 141
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
VIRGINIA (CONTINUED)
York County Sewer Revenue, Pre-Refunded, 5.875%,
6/01/24 ....................................................................................... $ 500,000 $ 511,445
6/01/29 ....................................................................................... 1,500,000 1,534,335
------------
491,060,062
------------
DISTRICT OF COLUMBIA 3.5%
Metropolitan Washington D.C. Airports Authority Airport System Revenue,
Refunding, Series A, FGIC Insured, 5.00%, 10/01/25 ............................................ 1,000,000 920,440
Refunding, Series A, FSA Insured, 5.00%, 10/01/32 ............................................. 10,000,000 8,554,600
Series B, FGIC Insured, Pre-Refunded, 5.25%, 10/01/32 ......................................... 6,655,000 7,522,945
Metropolitan Washington D.C. Airports Authority General Airport Revenue,
Refunding, Series A,
FGIC Insured, 5.00%, 10/01/27 ................................................................. 5,000,000 4,491,650
------------
21,489,635
------------
U.S. TERRITORIES 14.5%
PUERTO RICO 14.0%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior lien, Series A,
6.00%, 7/01/38 ................................................................................ 1,100,000 1,002,034
Assured Guaranty, 5.00%, 7/01/28 .............................................................. 7,000,000 6,780,340
Puerto Rico Commonwealth GO, Public Improvement, Series A,
5.125%, 7/01/28 ............................................................................... 5,000,000 4,213,900
5.00%, 7/01/29 ................................................................................ 8,000,000 6,616,960
5.125%, 7/01/31 ............................................................................... 3,315,000 2,695,128
5.00%, 7/01/33 ................................................................................ 900,000 702,000
6.00%, 7/01/38 ................................................................................ 5,000,000 4,572,400
Pre-Refunded, 5.125%, 7/01/31 ................................................................. 1,685,000 1,838,200
Pre-Refunded, 5.00%, 7/01/33 .................................................................. 1,100,000 1,245,805
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
Pre-Refunded, 5.50%, 7/01/36 .................................................................. 4,500,000 5,408,325
Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue,
Series D, Pre-Refunded, 5.375%, 7/01/36 ....................................................... 5,000,000 5,541,800
Series D, Pre-Refunded, 5.25%, 7/01/38 ........................................................ 3,000,000 3,313,080
Series G, 5.00%, 7/01/33 ...................................................................... 1,695,000 1,341,440
Series G, Pre-Refunded, 5.00%, 7/01/33 ........................................................ 3,305,000 3,750,448
Puerto Rico Electric Power Authority Power Revenue,
Series HH, FSA Insured, Pre-Refunded, 5.25%, 7/01/29 .......................................... 5,910,000 6,312,708
Series RR, FGIC Insured, Pre-Refunded, 5.00%, 7/01/35 ......................................... 3,000,000 3,466,530
Series RR, XLCA Insured, Pre-Refunded, 5.00%, 7/01/30 ......................................... 1,000,000 1,155,510
Series TT, 5.00%, 7/01/32 ..................................................................... 10,000,000 8,348,000
Series WW, 5.50%, 7/01/38 ..................................................................... 6,700,000 5,918,110
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/27 .............. 2,580,000 2,513,255
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 .......................................................... 1,315,000 1,111,504
Refunding, Series N, 5.00%, 7/01/32 ........................................................... 5,000,000 4,006,400
Series D, Pre-Refunded, 5.375%, 7/01/33 .......................................................... 3,685,000 4,065,513
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.70%, 8/01/25 .................................................................. 1,000,000 1,042,200
------------
86,961,590
------------
142 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
PRINCIPAL
FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- ------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS 0.5%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien,
Refunding, Series A,
5.50%, 10/01/15 ............................................................................... $ 1,500,000 $ 1,434,870
5.50%, 10/01/18 ............................................................................... 1,500,000 1,320,540
------------
2,755,410
------------
TOTAL U.S. TERRITORIES ........................................................................... 89,717,000
------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $622,089,827) .......................... 602,266,697
------------
SHORT TERM INVESTMENTS 1.8%
MUNICIPAL BONDS 1.8%
VIRGINIA 1.8%
(b) Norfolk Redevelopment and Housing Authority Revenue, Old Dominion University Project,
Refunding, Daily VRDN and Put, 0.60%, 8/01/31 ................................................. 2,200,000 2,200,000
(b) Virginia Small Business Financing Authority Hospital Revenue, Carilion Clinic Obligation,
Series B, Daily VRDN and Put, 0.60%, 7/01/42 .................................................. 9,200,000 9,200,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $11,400,000) .................................................. 11,400,000
------------
TOTAL INVESTMENTS (COST $633,489,827) 98.9% ...................................................... 613,666,697
OTHER ASSETS, LESS LIABILITIES 1.1% .............................................................. 7,087,190
------------
NET ASSETS 100.0% ................................................................................ $620,753,887
============
See Abbreviations on page 170.
(a) The Internal Revenue Service has issued a preliminary adverse
determination, ruling that the income generated by the bonds is taxable.
The issuer of the bonds is contesting this determination and, until such
time as this is finalized, the Fund will continue to recognize interest
income earned on the bonds as tax-exempt. The Trust's management believes
that the final outcome of this matter will not have a material adverse
impact to the Fund and/or its shareholders.
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 143
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2009
FRANKLIN FRANKLIN FRANKLIN
ALABAMA TAX-FREE FLORIDA TAX-FREE GEORGIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------- ---------------- ----------------
Assets:
Investments in securities:
Cost ........................................................... $260,870,273 $1,312,717,173 $365,932,281
------------ -------------- ------------
Value .......................................................... $249,792,085 $1,291,279,508 $357,075,377
Cash .............................................................. 6,907,334 4,011,236 14,375,820
Receivables:
Capital shares sold ............................................ 483,454 717,219 2,275,773
Interest ....................................................... 4,001,095 20,556,651 4,279,543
Other assets ...................................................... 561 2,847 777
------------ -------------- ------------
Total assets ................................................ 261,184,529 1,316,567,461 378,007,290
------------ -------------- ------------
Liabilities:
Payables:
Investment securities purchased ................................ -- 9,824,800 --
Capital shares redeemed ........................................ 230,991 3,465,764 561,000
Affiliates ..................................................... 161,137 694,957 224,572
Distributions to shareholders .................................. 154,237 824,682 353,848
Accrued expenses and other liabilities ............................ 50,492 135,349 59,875
------------ -------------- ------------
Total liabilities ........................................... 596,857 14,945,552 1,199,295
------------ -------------- ------------
Net assets, at value ..................................... $260,587,672 $1,301,621,909 $376,807,995
============ ============== ============
Net assets consist of:
Paid-in capital ................................................... $279,636,790 $1,326,839,782 $390,817,991
Undistributed net investment income (distributions in excess of net
investment income) ............................................. 26,501 419,331 (204,054)
Net unrealized appreciation (depreciation) ........................ (11,078,188) (21,437,665) (8,856,904)
Accumulated net realized gain (loss) .............................. (7,997,431) (4,199,539) (4,949,038)
------------ -------------- ------------
Net assets, at value ..................................... $260,587,672 $1,301,621,909 $376,807,995
============ ============== ============
CLASS A:
Net assets, at value .............................................. $218,936,653 $1,155,202,367 $308,086,934
============ ============== ============
Shares outstanding ................................................ 20,673,547 105,954,263 27,417,991
============ ============== ============
Net asset value per share(a) ...................................... $ 10.59 $ 10.90 $ 11.24
============ ============== ============
Maximum offering price per share (net asset value per
share / 95.75%) ................................................ $ 11.06 $ 11.38 $ 11.74
============ ============== ============
CLASS B:
Net assets, at value .............................................. -- $ 36,535,869 --
============ ============== ============
Shares outstanding ................................................ -- 3,325,251 --
============ ============== ============
Net asset value and maximum offering price per share(a) ........... -- $ 10.99 --
============ ============== ============
CLASS C:
Net assets, at value .............................................. $ 41,651,019 $ 109,883,673 $ 68,721,061
============ ============== ============
Shares outstanding ................................................ 3,897,204 9,936,698 6,053,506
============ ============== ============
Net asset value and maximum offering price per share(a) ........... $ 10.69 $ 11.06 $ 11.35
============ ============== ============
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
144 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY TAX-FREE LOUISIANA TAX-FREE MARYLAND TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------- ------------------ -----------------
Assets:
Investments in securities:
Cost ........................................................... $ 166,826,746 $ 318,219,449 $ 568,956,769
------------- ------------- -------------
Value .......................................................... $ 160,393,339 $ 297,812,257 $ 519,955,687
Cash .............................................................. 168,722 6,611,223 38,361
Receivables:
Capital shares sold ............................................ 171,094 552,002 2,277,269
Interest ....................................................... 2,188,156 4,468,818 6,546,671
Other assets ...................................................... 346 638 1,089
------------- ------------- -------------
Total assets ................................................ 162,921,657 309,444,938 528,819,077
------------- ------------- -------------
Liabilities:
Payables:
Capital shares redeemed ........................................ 647,465 476,505 553,158
Affiliates ..................................................... 93,243 181,313 313,933
Distributions to shareholders .................................. 97,673 184,905 326,810
Accrued expenses and other liabilities ............................ 40,019 51,049 80,018
------------- ------------- -------------
Total liabilities ........................................... 878,400 893,772 1,273,919
------------- ------------- -------------
Net assets, at value ..................................... $ 162,043,257 $ 308,551,166 $ 527,545,158
============= ============= =============
Net assets consist of:
Paid-in capital ................................................... $ 171,017,834 $ 331,207,990 $ 577,995,806
Undistributed net investment income ............................... 51,607 13,691 123,235
Net unrealized appreciation (depreciation) ........................ (6,433,407) (20,407,192) (49,001,082)
Accumulated net realized gain (loss) .............................. (2,592,777) (2,263,323) (1,572,801)
------------- ------------- -------------
Net assets, at value ..................................... $ 162,043,257 $ 308,551,166 $ 527,545,158
============= ============= =============
CLASS A:
Net assets, at value .............................................. $ 162,043,257 $ 266,905,091 $ 426,217,617
============= ============= =============
Shares outstanding ................................................ 15,430,544 25,592,910 41,169,811
============= ============= =============
Net asset value per share(a) ...................................... $ 10.50 $ 10.43 $ 10.35
============= ============= =============
Maximum offering price per share (net asset value per
share / 95.75%) ................................................ $ 10.97 $ 10.89 $ 10.81
============= ============= =============
CLASS C:
Net assets, at value .............................................. -- $ 41,646,075 $ 101,327,541
============= ============= =============
Shares outstanding ................................................ -- 3,949,965 9,653,118
============= ============= =============
Net asset value and maximum offering price per share(a) ........... -- $ 10.54 $ 10.50
============= ============= =============
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 145
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
FRANKLIN
FRANKLIN NORTH CAROLINA FRANKLIN
MISSOURI TAX-FREE TAX-FREE VIRGINIA TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------------- -------------- -----------------
Assets:
Investments in securities:
Cost ........................................................... $807,050,899 $923,995,201 $633,489,827
------------ ------------ ------------
Value .......................................................... $773,206,167 $882,745,089 $613,666,697
Cash .............................................................. 1,982,420 2,241,308 109,875
Receivables:
Capital shares sold ............................................ 1,878,010 4,063,090 1,498,909
Interest ....................................................... 10,504,217 12,360,646 7,340,628
Other assets ...................................................... 1,621 1,884 1,304
------------ ------------ ------------
Total assets ................................................ 787,572,435 901,412,017 622,617,413
------------ ------------ ------------
Liabilities:
Payables:
Investment securities purchased ................................ 10,006,700 5,079,750 --
Capital shares redeemed ........................................ 671,868 1,245,391 1,077,062
Affiliates ..................................................... 419,739 505,814 342,658
Distributions to shareholders .................................. 465,887 513,046 360,781
Accrued expenses and other liabilities ............................ 99,875 116,849 83,025
------------ ------------ ------------
Total liabilities ........................................... 11,664,069 7,460,850 1,863,526
------------ ------------ ------------
Net assets, at value ..................................... $775,908,366 $893,951,167 $620,753,887
============ ============ ============
Net assets consist of:
Paid-in capital ................................................ $813,730,282 $936,140,529 $645,278,962
Undistributed net investment income ............................ 283,444 634,531 362,867
Net unrealized appreciation (depreciation) ..................... (33,844,732) (41,250,112) (19,823,130)
Accumulated net realized gain (loss) ........................... (4,260,628) (1,573,781) (5,064,812)
------------ ------------ ------------
Net assets, at value ..................................... $775,908,366 $893,951,167 $620,753,887
============ ============ ============
CLASS A:
Net assets, at value .............................................. $691,271,859 $742,758,604 $547,260,512
============ ============ ============
Shares outstanding ................................................ 61,305,105 65,350,675 49,968,900
============ ============ ============
Net asset value per share(a) ...................................... $ 11.28 $ 11.37 $ 10.95
============ ============ ============
Maximum offering price per share (net asset value per
share / 95.75%) ................................................ $ 11.78 $ 11.87 $ 11.44
============ ============ ============
CLASS C:
Net assets, at value .............................................. $ 84,636,507 $151,192,563 $ 73,493,375
============ ============ ============
Shares outstanding ................................................ 7,455,160 13,153,176 6,634,982
============ ============ ============
Net asset value and maximum offering price per share(a) ........... $ 11.35 $ 11.49 $ 11.08
============ ============ ============
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
146 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2009
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- ------------ -----------
Investment income:
Interest .............................................................. $13,948,294 $ 75,631,471 $17,467,411
----------- ------------ -----------
Expenses:
Management fees (Note 3a) ............................................. 1,472,307 6,535,076 1,827,480
Distribution fees: (Note 3c)
Class A ............................................................ 230,933 1,244,804 287,252
Class B ............................................................ -- 276,554 --
Class C ............................................................ 267,910 755,888 395,273
Transfer agent fees (Note 3e) ............................................ 102,203 446,835 130,951
Custodian fees ........................................................... 4,087 21,058 5,186
Reports to shareholders .................................................. 19,708 71,042 23,984
Registration and filing fees ............................................. 12,305 25,508 11,418
Professional fees ........................................................ 25,980 34,977 27,305
Trustees' fees and expenses .............................................. 2,318 12,037 2,872
Other .................................................................... 32,555 95,705 37,508
----------- ------------ -----------
Total expenses .................................................. 2,170,306 9,519,484 2,749,229
----------- ------------ -----------
Net investment income ........................................ 11,777,988 66,111,987 14,718,182
----------- ------------ -----------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ............................. 299,533 (4,026,661) (2,921,597)
Net change in unrealized appreciation (depreciation) on investments ... (7,801,350) (32,523,051) (2,999,770)
----------- ------------ -----------
Net realized and unrealized gain (loss) .................................. (7,501,817) (36,549,712) (5,921,367)
----------- ------------ -----------
Net increase (decrease) in net assets resulting from operations .......... $ 4,276,171 $ 29,562,275 $ 8,796,815
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
Annual Report | 147
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2009
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- ------------ ------------
Investment income:
Interest .............................................................. $ 8,204,146 $ 15,227,411 $ 27,568,716
----------- ------------ ------------
Expenses:
Management fees (Note 3a) ............................................. 922,272 1,583,630 2,626,535
Distribution fees: (Note 3c)
Class A ............................................................ 158,594 254,359 429,302
Class C ............................................................ -- 261,654 631,361
Transfer agent fees (Note 3e) ............................................ 51,639 96,327 223,568
Custodian fees ........................................................... 2,432 4,435 8,123
Reports to shareholders .................................................. 12,346 19,504 37,388
Registration and filing fees ............................................. 4,341 22,856 17,371
Professional fees ........................................................ 24,431 27,223 29,853
Trustees' fees and expenses .............................................. 1,335 2,459 4,431
Other .................................................................... 26,107 33,453 43,606
----------- ------------ ------------
Total expenses .................................................. 1,203,497 2,305,900 4,051,538
----------- ------------ ------------
Net investment income ........................................ 7,000,649 12,921,511 23,517,178
----------- ------------ ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ............................. (488,253) (880,447) (1,514,070)
Net change in unrealized appreciation (depreciation) on investments ... (1,155,679) (9,610,506) (23,977,575)
----------- ------------ ------------
Net realized and unrealized gain (loss) .................................. (1,643,932) (10,490,953) (25,491,645)
----------- ------------ ------------
Net increase (decrease) in net assets resulting from operations .......... $ 5,356,717 $ 2,430,558 $ (1,974,467)
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
148 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2009
FRANKLIN
FRANKLIN NORTH FRANKLIN
MISSOURI CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------ ------------ ------------
Investment income:
Interest .............................................................. $ 38,419,803 $ 44,198,606 $ 30,265,991
------------ ------------ ------------
Expenses:
Management fees (Note 3a) ............................................. 3,615,844 4,196,756 2,943,609
Distribution fees: (Note 3c)
Class A ............................................................ 666,224 732,466 527,185
Class C ............................................................ 512,130 916,433 442,304
Transfer agent fees (Note 3e) ............................................ 304,536 322,628 232,987
Custodian fees ........................................................... 11,107 13,469 9,078
Reports to shareholders .................................................. 52,713 57,564 39,957
Registration and filing fees ............................................. 16,073 18,541 14,125
Professional fees ........................................................ 37,889 39,093 31,740
Trustees' fees and expenses .............................................. 6,233 7,299 4,988
Other .................................................................... 57,084 73,863 49,921
------------ ------------ ------------
Total expenses .................................................. 5,279,833 6,378,112 4,295,894
------------ ------------ ------------
Net investment income ........................................ 33,139,970 37,820,494 25,970,097
------------ ------------ ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ............................. 958,192 (448,003) (2,145,207)
Net change in unrealized appreciation (depreciation) on investments ... (20,223,159) (13,672,900) (9,810,949)
------------ ------------ ------------
Net realized and unrealized gain (loss) .................................. (19,264,967) (14,120,903) (11,956,156)
------------ ------------ ------------
Net increase (decrease) in net assets resulting from operations .......... $ 13,875,003 $ 23,699,591 $ 14,013,941
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 149
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,
--------------------------- -------------------------------
2009 2008(a) 2009 2008(a)
------------ ------------ -------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................ $ 11,777,988 $ 11,347,904 $ 66,111,987 $ 70,172,266
Net realized gain (loss) from investments .... 299,533 21,482 (4,026,661) 3,783,922
Net change in unrealized appreciation
(depreciation) on investments ............. (7,801,350) (16,821,918) (32,523,051) (102,073,955)
------------ ------------ -------------- --------------
Net increase (decrease) in net assets
resulting from operations ........... 4,276,171 (5,452,532) 29,562,275 (28,117,767)
------------ ------------ -------------- --------------
Distributions to shareholders from:
Net investment income:
Class A ................................... (10,131,192) (9,880,146) (58,140,734) (63,008,195)
Class B ................................... -- -- (1,747,446) (2,139,667)
Class C ................................... (1,562,914) (1,380,574) (4,715,478) (4,973,672)
Net realized gains:
Class A ................................... -- -- (1,408,071) (3,179,974)
Class B ................................... -- -- (49,356) (121,721)
Class C ................................... -- -- (128,830) (285,792)
------------ ------------ -------------- --------------
Total distributions to shareholders ............. (11,694,106) (11,260,720) (66,189,915) (73,709,021)
------------ ------------ -------------- --------------
Capital share transactions: (Note 2)
Class A ................................... (5,232,581) 523,212 (91,571,048) (106,873,626)
Class B ................................... -- -- (10,140,310) (8,400,713)
Class C ................................... 4,457,591 2,604,144 (2,898,320) (12,710,739)
------------ ------------ -------------- --------------
Total capital share transactions ................... (774,990) 3,127,356 (104,609,678) (127,985,078)
------------ ------------ -------------- --------------
Redemption fees .................................... 19 672 1,176 247
------------ ------------ -------------- --------------
Net increase (decrease) in net assets .. (8,192,906) (13,585,224) (141,236,142) (229,811,619)
Net assets:
Beginning of year ............................... 268,780,578 282,365,802 1,442,858,051 1,672,669,670
------------ ------------ -------------- --------------
End of year ..................................... $260,587,672 $268,780,578 $1,301,621,909 $1,442,858,051
============ ============ ============== ==============
Undistributed net investment income (distributions
in excess of net investment income) included in
net assets:
End of year .................................. $ 26,501 $ (38,019) $ 419,331 $ (964,291)
============ ============ ============== ==============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
150 | Annual Report
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,
--------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
------------ ------------ ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................ $ 14,718,182 $ 11,586,230 $ 7,000,649 $ 6,234,071
Net realized gain (loss) from investments .... (2,921,597) (412,952) (488,253) (121,164)
Net change in unrealized appreciation
(depreciation) on investments ............. (2,999,770) (21,203,857) (1,155,679) (12,000,085)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ........... 8,796,815 (10,030,579) 5,356,717 (5,887,178)
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ................................... (12,579,994) (9,748,797) (6,911,504) (6,193,552)
Class C ................................... (2,295,173) (1,844,814) -- --
------------ ------------ ------------ ------------
Total distributions to shareholders ............. (14,875,167) (11,593,611) (6,911,504) (6,193,552)
------------ ------------ ------------ ------------
Capital share transactions: (Note 2)
Class A ................................... 60,057,104 50,014,362 13,821,854 13,632,500
Class C ................................... 17,638,583 5,110,906 -- --
------------ ------------ ------------ ------------
Total capital share transactions ................ 77,695,687 55,125,268 13,821,854 13,632,500
------------ ------------ ------------ ------------
Redemption fees ................................. -- 3 -- 10
------------ ------------ ------------ ------------
Net increase (decrease) in net assets .. 71,617,335 33,501,081 12,267,067 1,551,780
Net assets:
Beginning of year ............................... 305,190,660 271,689,579 149,776,190 148,224,410
------------ ------------ ------------ ------------
End of year ..................................... $376,807,995 $305,190,660 $162,043,257 $149,776,190
============ ============ ============ ============
Undistributed net investment income (distributions
in excess of net investment income) included in
net assets:
End of year .................................. $ (204,054) $ (48,762) $ 51,607 $ (37,134)
============ ============ ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
Annual Report | 151
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,
--------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
------------ ------------ ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................ $ 12,921,511 $ 11,003,097 $ 23,517,178 $ 20,675,868
Net realized gain (loss) from investments .... (880,447) 590,790 (1,514,070) 901,591
Net change in unrealized appreciation
(depreciation) on investments ............. (9,610,506) (21,900,992) (23,977,575) (47,228,091)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ........... 2,430,558 (10,307,105) (1,974,467) (25,650,632)
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ................................... (11,272,273) (9,805,930) (19,457,945) (17,727,976)
Class C ................................... (1,540,027) (1,185,118) (3,796,929) (2,858,421)
------------ ------------ ------------ ------------
Total distributions to shareholders ............. (12,812,300) (10,991,048) (23,254,874) (20,586,397)
------------ ------------ ------------ ------------
Capital share transactions: (Note 2)
Class A ................................... 41,385,179 31,950,372 28,830,036 45,305,989
Class C ................................... 8,148,253 8,792,302 23,590,277 18,455,975
------------ ------------ ------------ ------------
Total capital share transactions ................ 49,533,432 40,742,674 52,420,313 63,761,964
------------ ------------ ------------ ------------
Redemption fees ................................. -- 498 140 2,149
------------ ------------ ------------ ------------
Net increase (decrease) in net assets .. 39,151,690 19,445,019 27,191,112 17,527,084
Net assets:
Beginning of year ............................... 269,399,476 249,954,457 500,354,046 482,826,962
------------ ------------ ------------ ------------
End of year ..................................... $308,551,166 $269,399,476 $527,545,158 $500,354,046
============ ============ ============ ============
Undistributed net investment income (distributions
in excess of net investment income) included in
net assets:
End of year .................................. $ 13,691 $ (95,470) $ 123,235 $ (131,422)
============ ============ ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
152 | Annual Report
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,
--------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
------------ ------------ ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................ $ 33,139,970 $ 29,454,876 $ 37,820,494 $ 31,817,345
Net realized gain (loss) from investments .... 958,192 (904,141) (448,003) (284,409)
Net change in unrealized appreciation
(depreciation) on investments ............. (20,223,159) (49,703,254) (13,672,900) (62,059,462)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations .............. 13,875,003 (21,152,519) 23,699,591 (30,526,526)
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ...................................... (29,678,906) (26,636,426) (31,640,924) (27,242,374)
Class C ...................................... (3,052,630) (2,602,929) (5,247,665) (4,369,823)
------------ ------------ ------------ ------------
Total distributions to shareholders ................ (32,731,536) (29,239,355) (36,888,589) (31,612,197)
------------ ------------ ------------ ------------
Capital share transactions: (Note 2)
Class A ...................................... 85,168,122 55,048,990 80,134,686 99,458,941
Class C ...................................... 15,120,904 6,542,901 29,627,681 15,706,331
------------ ------------ ------------ ------------
Total capital share transactions ................... 100,289,026 61,591,891 109,762,367 115,165,272
------------ ------------ ------------ ------------
Redemption fees .................................... 439 2,371 644 2,034
------------ ------------ ------------ ------------
Net increase (decrease) in net assets ..... 81,432,932 11,202,388 96,574,013 53,028,583
Net assets:
Beginning of year ............................... 694,475,434 683,273,046 797,377,154 744,348,571
------------ ------------ ------------ ------------
End of year ..................................... $775,908,366 $694,475,434 $893,951,167 $797,377,154
============ ============ ============ ============
Undistributed net investment income (distributions
in excess of net investment income) included in
net assets:
End of year .................................. $ 283,444 $ (125,095) $ 634,531 $ (289,395)
============ ============ ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
Annual Report | 153
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
---------------------------
YEAR ENDED FEBRUARY 28,
---------------------------
2009 2008(a)
------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................ $ 25,970,097 $ 23,037,881
Net realized gain (loss) from investments .... (2,145,207) 767,869
Net change in unrealized appreciation
(depreciation) on investments ............. (9,810,949) (36,610,627)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ........... 14,013,941 (12,804,877)
------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ...................................... (22,666,320) (21,012,887)
Class C ...................................... (2,515,309) (2,117,720)
------------ ------------
Total distributions to shareholders ................ (25,181,629) (23,130,607)
------------ ------------
Capital share transactions: (Note 2)
Class A ...................................... 62,664,423 32,953,142
Class C ...................................... 14,608,564 7,393,073
------------ ------------
Total capital share transactions ................... 77,272,987 40,346,215
------------ ------------
Redemption fees .................................... 483 2,724
------------ ------------
Net increase (decrease) in net assets .. 66,105,782 4,413,455
Net assets:
Beginning of year ............................... 554,648,105 550,234,650
------------ ------------
End of year ..................................... $620,753,887 $554,648,105
============ ============
Undistributed net investment income (distributions
in excess of net investment income) included in
net assets:
End of year .................................. $ 362,867 $ (424,903)
============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
154 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Free Trust (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
twenty-four separate funds, nine of which are included in this report (Funds).
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.
Annual Report | 155
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. SECURITIES PURCHASED ON A WHEN-ISSUED AND DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued and 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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of February 28, 2009, and have
determined that no provision for income tax is required in the Funds' financial
statements.
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 of America. 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, not
including 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.
156 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Insurance
companies typically insure municipal bonds that tend to be of very high quality,
with the majority of underlying municipal bonds rated A or better. However,
there is a risk that in the event of an issuer default, the insurer may not be
able to fulfill its obligations under the terms of the policy.
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 was 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.
Effective September 1, 2008, the redemption fee was eliminated.
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, on behalf of the Funds, 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.
Annual Report | 157
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2009, there were an unlimited number of shares authorized
(without 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, 2009
Shares sold ..................................... 3,049,727 $ 33,250,600 10,600,472 $ 118,757,513
Shares issued in reinvestment of distributions .. 543,176 5,840,149 2,468,269 27,399,969
Shares redeemed ................................. (4,187,180) (44,323,330) (21,678,782) (237,728,530)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... (594,277) $ (5,232,581) (8,610,041) $ (91,571,048)
========== ============ =========== =============
Year ended February 29, 2008
Shares sold ..................................... 2,955,594 $ 33,565,509 10,215,195 $ 119,707,897
Shares issued in reinvestment of distributions .. 494,764 5,608,283 2,572,445 30,127,358
Shares redeemed ................................. (3,410,200) (38,650,580) (21,932,153) (256,708,881)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 40,158 $ 523,212 (9,144,513) $(106,873,626)
========== ============ =========== =============
CLASS B SHARES:
Year ended February 28, 2009
Shares sold ..................................... 60,574 $ 675,962
Shares issued in reinvestment of distributions .. 85,294 956,449
Shares redeemed ................................. (1,055,974) (11,772,721)
----------- -------------
Net increase (decrease) ......................... (910,106) $ (10,140,310)
=========== =============
Year ended February 29, 2008
Shares sold ..................................... 48,660 $ 577,089
Shares issued in reinvestment of distributions .. 107,339 1,266,297
Shares redeemed ................................. (868,470) (10,244,099)
----------- -------------
Net increase (decrease) ......................... (712,471) $ (8,400,713)
=========== =============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ..................................... 960,305 $ 10,609,980 1,817,897 $ 20,644,547
Shares issued in reinvestment of distributions .. 72,730 787,579 242,305 2,725,468
Shares redeemed ................................. (644,006) (6,939,968) (2,360,072) (26,268,335)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 389,029 $ 4,457,591 (299,870) $ (2,898,320)
========== ============ =========== =============
Year ended February 29, 2008
Shares sold ..................................... 762,716 $ 8,726,868 1,485,824 $ 17,639,138
Shares issued in reinvestment of distributions .. 57,424 656,401 239,973 2,847,253
Shares redeemed ................................. (595,027) (6,779,125) (2,796,627) (33,197,130)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 225,113 $ 2,604,144 (1,070,830) $ (12,710,739)
========== ============ =========== =============
158 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ..................................... 8,519,500 $ 97,359,178 2,741,271 $ 29,431,566
Shares issued in reinvestment of distributions .. 681,315 7,733,193 446,025 4,717,263
Shares redeemed ................................. (4,056,075) (45,035,267) (1,932,255) (20,326,975)
---------- ------------ ---------- ------------
Net increase (decrease) ......................... 5,144,740 $ 60,057,104 1,255,041 $ 13,821,854
========== ============ ========== ============
Year ended February 29, 2008
Shares sold ..................................... 6,305,544 $ 75,730,670 2,660,793 $ 29,822,700
Shares issued in reinvestment of distributions .. 513,429 6,143,251 366,935 4,110,361
Shares redeemed ................................. (2,666,217) (31,859,559) (1,814,392) (20,300,561)
---------- ------------ ---------- ------------
Net increase (decrease) ......................... 4,152,756 $ 50,014,362 1,213,336 $ 13,632,500
========== ============ ========== ============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ..................................... 2,259,060 $ 26,073,383
Shares issued in reinvestment of distributions .. 128,847 1,474,913
Shares redeemed ................................. (873,821) (9,909,713)
---------- ------------
Net increase (decrease) ......................... 1,514,086 $ 17,638,583
========== ============
Year ended February 29, 2008
Shares sold ..................................... 1,361,938 $ 16,469,882
Shares issued in reinvestment of distributions .. 97,027 1,172,321
Shares redeemed ................................. (1,038,261) (12,531,297)
---------- ------------
Net increase (decrease) ......................... 420,704 $ 5,110,906
========== ============
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ..................................... 6,811,042 $ 73,406,545 8,971,597 $ 95,689,803
Shares issued in reinvestment of distributions .. 725,918 7,713,876 1,170,434 12,458,451
Shares redeemed ................................. (3,767,887) (39,735,242) (7,579,820) (79,318,218)
---------- ------------ ---------- ------------
Net increase (decrease) ......................... 3,769,073 $ 41,385,179 2,562,211 $ 28,830,036
========== ============ ========== ============
Year ended February 29, 2008
Shares sold ..................................... 4,916,730 $ 56,127,477 8,816,127 $102,010,423
Shares issued in reinvestment of distributions .. 571,302 6,518,549 990,085 11,434,098
Shares redeemed ................................. (2,685,754) (30,695,654) (5,905,651) (68,138,532)
---------- ------------ ---------- ------------
Net increase (decrease) ......................... 2,802,278 $ 31,950,372 3,900,561 $ 45,305,989
========== ============ ========== ============
Annual Report | 159
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ..................................... 1,549,355 $17,015,668 3,577,048 $ 39,451,384
Shares issued in reinvestment of distributions .. 99,172 1,064,751 244,981 2,634,949
Shares redeemed ................................. (931,984) (9,932,166) (1,739,547) (18,496,056)
---------- ----------- ---------- ------------
Net increase (decrease) ......................... 716,543 $ 8,148,253 2,082,482 $ 23,590,277
========== =========== ========== ============
Year ended February 29, 2008
Shares sold ..................................... 1,216,169 $14,058,445 2,439,584 $ 28,638,380
Shares issued in reinvestment of distributions .. 67,871 782,271 163,843 1,915,428
Shares redeemed ................................. (525,078) (6,048,414) (1,034,758) (12,097,833)
---------- ----------- ---------- ------------
Net increase (decrease) ......................... 758,962 $ 8,792,302 1,568,669 $ 18,455,975
========== =========== ========== ============
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ----------- -------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ..................................... 15,357,031 $ 176,182,581 18,537,029 $ 212,922,287
Shares issued in reinvestment of distributions .. 1,640,360 18,747,963 1,820,793 20,749,426
Shares redeemed ................................. (9,760,719) (109,762,422) (13,806,721) (153,537,027)
---------- ------------- ----------- -------------
Net increase (decrease) ......................... 7,236,672 $ 85,168,122 6,551,101 $ 80,134,686
========== ============= =========== =============
Year ended February 29, 2008
Shares sold ..................................... 10,035,056 $ 121,741,219 15,400,186 $ 186,717,651
Shares issued in reinvestment of distributions .. 1,361,564 16,488,739 1,435,869 17,397,862
Shares redeemed ................................. (6,893,876) (83,180,968) (8,656,340) (104,656,572)
---------- ------------- ----------- -------------
Net increase (decrease) ......................... 4,502,744 $ 55,048,990 8,179,715 $ 99,458,941
========== ============= =========== =============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ..................................... 2,380,212 $ 27,514,674 4,243,730 $ 49,653,841
Shares issued in reinvestment of distributions .. 170,334 1,959,354 292,342 3,365,327
Shares redeemed ................................. (1,267,186) (14,353,124) (2,053,384) (23,391,487)
---------- ------------- ----------- -------------
Net increase (decrease) ......................... 1,283,360 $ 15,120,904 2,482,688 $ 29,627,681
========== ============= =========== =============
Year ended February 29, 2008
Shares sold ..................................... 1,305,112 $ 15,931,915 2,677,565 $ 32,877,531
Shares issued in reinvestment of distributions .. 136,584 1,664,654 226,645 2,775,254
Shares redeemed ................................. (906,099) (11,053,668) (1,631,490) (19,946,454)
---------- ------------- ----------- -------------
Net increase (decrease) ......................... 535,597 $ 6,542,901 1,272,720 $ 15,706,331
========== ============= =========== =============
160 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
-------------------------
SHARES AMOUNT
---------- ------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ...................................... 12,174,383 $135,208,637
Shares issued in reinvestment of distributions ... 1,312,036 14,488,670
Shares redeemed .................................. (7,968,618) (87,032,884)
---------- ------------
Net increase (decrease) .......................... 5,517,801 $ 62,664,423
========== ============
Year ended February 29, 2008
Shares sold ...................................... 7,803,075 $ 91,110,918
Shares issued in reinvestment of distributions ... 1,122,045 13,074,013
Shares redeemed .................................. (6,115,479) (71,231,789)
---------- ------------
Net increase (decrease) .......................... 2,809,641 $ 32,953,142
========== ============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ...................................... 2,294,542 $ 25,883,501
Shares issued in reinvestment of distributions ... 162,010 1,806,195
Shares redeemed .................................. (1,192,892) (13,081,132)
---------- ------------
Net increase (decrease) .......................... 1,263,660 $ 14,608,564
========== ============
Year ended February 29, 2008
Shares sold ...................................... 1,173,322 $ 13,824,750
Shares issued in reinvestment of distributions ... 122,432 1,441,770
Shares redeemed .................................. (668,286) (7,873,447)
---------- ------------
Net increase (decrease) .......................... 627,468 $ 7,393,073
========== ============
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
- ---------- ----------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
Annual Report | 161
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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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. 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% --
162 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
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%
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 .................. $75,575 $204,251 $149,447
Contingent deferred sales charges retained ...... $17,920 $ 42,980 $ 16,106
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 .................. $79,888 $176,765 $198,969
Contingent deferred sales charges retained ...... $ 452 $ 20,926 $ 39,435
FRANKLIN
FRANKLIN NORTH FRANKLIN
MISSOURI 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 .................. $418,184 $358,415 $225,833
Contingent deferred sales charges retained ...... $ 85,995 $ 44,921 $ 33,994
Annual Report | 163
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
For the year ended February 28, 2009, 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 ................... $57,769 $266,361 $73,834
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -----------
Transfer agent fees ................... $29,712 $52,272 $135,492
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- -------------- -----------
Transfer agent fees ................... $181,955 $167,349 $137,369
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At February 28, 2009, the capital loss carryforwards were as
follows:
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -----------
Capital loss carryforwards expiring in:
2010 ............................... $6,996,921 $ -- $ --
2011 ............................... 804,634 -- --
2012 ............................... 195,876 -- 972,862
2013 ............................... -- -- 416,353
2014 ............................... -- -- 51,012
2015 ............................... -- -- 125,659
2016 ............................... -- -- 414,407
2017 ............................... -- 365,411 2,923,290
---------- -------- ----------
$7,997,431 $365,411 $4,903,583
========== ======== ==========
164 | Annual Report
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
----------- ----------- -----------
Capital loss carryforwards expiring in:
2010 ............................... $ 413,791 $ -- $ --
2012 ............................... 1,264,854 1,142,711 --
2013 ............................... 253,770 240,220 66,378
2014 ............................... 65,408 -- --
2016 ............................... 107,105 -- --
2017 ............................... 417,325 42,794 1,506,424
---------- ---------- ----------
$2,522,253 $1,425,725 $1,572,802
========== ========== ==========
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- -------------- -----------
Capital loss carryforwards expiring in:
2010 ............................... $ -- $ -- $1,188,255
2011 ............................... 196,258 -- --
2012 ............................... 1,619,914 335,790 1,236,561
2013 ............................... 1,384,535 -- --
2016 ............................... 776,667 -- --
----------- -------- ----------
$ 3,977,374 $335,790 $2,424,816
=========== ======== ==========
During the year end February 28, 2009, the funds utilized capital loss
carryforwards as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ALABAMA MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
- ----------- ----------- -------------- -----------
$318,895 $958,087 $371,360 $495,487
On February 28, 2009, the following funds had expired capital loss
carryforwards, which were reclassified to paid-in capital.
FRANKLIN FRANKLIN FRANKLIN
GEORGIA NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
- ----------- -------------- -----------
$833,999 $1,644,939 $459,518
Annual Report | 165
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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, 2009, deferred losses were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
FLORIDA KENTUCKY LOUISIANA NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
- ----------- ----------- ----------- -------------- -----------
$3,536,543 $70,524 $837,598 $811,384 $2,639,996
The tax character of distributions paid during the years ended February 28, 2009
and February 29, 2008, was as follows:
FRANKLIN ALABAMA FRANKLIN FLORIDA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from:
Tax exempt income ....... $11,694,106 $11,260,720 $64,603,658 $70,121,534
Long term capital gain .. -- -- 1,586,257 3,587,487
----------- ----------- ----------- -----------
$11,694,106 $11,260,720 $66,189,915 $73,709,021
=========== =========== =========== ===========
FRANKLIN GEORGIA FRANKLIN KENTUCKY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- ------------------------
2009 2008 2009 2008
----------- ----------- ---------- ----------
Distributions paid from -
tax exempt income ....... $14,875,167 $11,593,611 $6,911,504 $6,193,552
----------- ----------- ---------- ----------
FRANKLIN LOUISIANA FRANKLIN MARYLAND
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from -
tax exempt income ....... $12,812,300 $10,991,048 $23,254,874 $20,586,397
----------- ----------- ----------- -----------
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from -
tax exempt income ....... $32,731,536 $29,239,355 $36,888,589 $31,612,197
----------- ----------- ----------- -----------
FRANKLIN VIRGINIA
TAX-FREE INCOME FUND
-------------------------
2009 2008
----------- -----------
Distributions paid from -
tax exempt income ....... $25,181,629 $23,130,607
----------- -----------
166 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
At February 28, 2009, the cost of investments, net unrealized appreciation
(depreciation) and undistributed tax exempt income for income tax purposes were
as follows:
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------ -------------- ------------
Cost of investments .......................... $260,833,554 $1,312,758,273 $365,960,394
============ ============== ============
Unrealized appreciation ...................... $ 5,884,784 $ 46,414,225 $ 9,654,339
Unrealized depreciation ...................... (16,926,253) (67,892,990) (18,539,356)
------------ -------------- ------------
Net unrealized appreciation (depreciation) ... $(11,041,469) $ (21,478,765) $ (8,885,017)
============ ============== ============
Distributable earnings - undistributed tax
exempt income ............................. $ 144,020 $ 987,528 $ 132,454
============ ============== ============
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------ ------------ ------------
Cost of investments .......................... $166,819,579 $318,198,980 $568,928,424
============ ============ ============
Unrealized appreciation ...................... $ 3,424,880 $ 4,399,855 $ 9,153,443
Unrealized depreciation ...................... (9,851,120) (24,786,578) (58,126,180)
------------ ------------ ------------
Net unrealized appreciation (depreciation) ... $ (6,426,240) $(20,386,723) $(48,972,737)
============ ============ ============
Distributable earnings - undistributed tax
exempt income ............................. $ 142,113 $ 178,127 $ 421,702
============ ============ ============
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------ -------------- ------------
Cost of investments .......................... $807,253,335 $924,367,380 $633,456,612
============ ============ ============
Unrealized appreciation ...................... $ 18,159,894 $ 15,215,688 $ 14,724,339
Unrealized depreciation ...................... (52,207,062) (56,837,979) (34,514,254)
------------ ------------ ------------
Net unrealized appreciation (depreciation) ... $(34,047,168) $(41,622,291) $(19,789,915)
============ ============ ============
Distributable earnings - undistributed tax
exempt income ............................. $ 668,511 $ 1,093,149 $ 690,436
============ ============ ============
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.
Annual Report | 167
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended February 28, 2009, were as follows:
FRANKLIN FRANKLIN FRANKLIN
ALABAMA FLORIDA GEORGIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- ------------ -----------
Purchases ................................ $54,275,443 $148,155,493 $99,991,036
Sales .................................... $60,778,987 $268,454,483 $32,027,738
FRANKLIN FRANKLIN FRANKLIN
KENTUCKY LOUISIANA MARYLAND
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -----------
Purchases ................................ $33,273,923 $81,643,511 $95,969,294
Sales .................................... $15,852,110 $33,409,939 $45,809,935
FRANKLIN FRANKLIN FRANKLIN
MISSOURI NORTH CAROLINA VIRGINIA
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------ ------------ ------------
Purchases ................................ $191,190,285 $182,629,863 $131,966,279
Sales .................................... $ 90,206,042 $ 60,242,419 $ 50,670,039
6. CONCENTRATION OF RISK
Each of the Funds invests a large percentage of its total assets in obligations
of issuers within its respective state, U.S. territories, or the District of
Columbia. Such concentration may subject the Funds to risks associated with
industrial or regional matters, and economic, political or legal developments
occurring within those states, U.S. territories, or the District of Columbia. In
addition, investments in these securities are sensitive to interest rate changes
and credit risk of the issuer and may subject the funds to increased market
volatility. The market for these investments may be limited, which may make them
difficult to buy or sell.
7. CREDIT FACILITY
Effective January 23, 2009, the Funds, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
168 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CREDIT FACILITY (CONTINUED)
Under the terms of the Global Credit Facility, the Funds shall, in addition to
interest charged on any borrowings made by the Funds and other costs incurred by
the Funds, pay their share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee based upon the unused portion of the Global Credit
Facility. During the period, the Funds incurred commitment fees of $1,245 of
their pro rata portion of the Global Credit Facility, which is reflected in
Other expenses on the Statements of Operations. During the year ended February
28, 2009, the Funds did not utilize the Global Credit Facility.
8. FAIR VALUE MEASUREMENTS
The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on March 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Funds have determined that the implementation
of SFAS 157 did not have a material impact on the Funds' financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Trust's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Funds' investments and are summarized in the following fair
value hierarchy:
- Level 1 -- quoted prices in active markets for identical securities
- Level 2 -- other significant observable inputs (including quoted
prices for similar securities, interest rates, prepayment speed,
credit risk, etc.)
- Level 3 -- significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
At February 28, 2009, all of the Funds' investments in securities carried at
fair value were in Level 2 inputs.
Annual Report | 169
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ABBREVIATIONS
SELECTED PORTFOLIO
ACA - American Capital Access Holdings Inc.
AMBAC - American Municipal Bond Assurance Corp.
BHAC - Berkshire Hathaway 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.
GARBS - General Airport Revenue Bonds
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
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
170 | Annual Report
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 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, 2009, 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, 2009 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 17, 2009
Annual Report | 171
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, 2009. A portion
of the Funds' exempt-interest dividends may be subject to the federal
alternative minimum tax. In January 2010, shareholders will be notified of
amounts for use in preparing their 2009 income tax returns.
172 | Annual Report
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 136 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 113 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement
Systems (CALPERS) (1971 - 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield
of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 113 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 136 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 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).
Annual Report | 173
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 W.T. LAHAYE (1929) Trustee Since 1984 113 Center for Creative Land Recycling
One Franklin Parkway (brownfield 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).
FRANK A. OLSON (1932) Trustee Since 2005 136 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and
San Mateo, CA 94403-1906 Sentient Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (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 (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 113 None
One Franklin Parkway Independent 2007 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate
Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm)
(1986-1990).
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 136 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 42
of the investment companies in Franklin Templeton Investments.
174 | 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
- ------------------- -------------- ------------------ ----------------------- ------------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 90 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
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.
JENNIFER J. BOLT (1964) Chief Since December Not Applicable Not Applicable
One Franklin Parkway Executive 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; and
officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the
investment companies in Franklin Templeton Investments.
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).
Annual Report | 175
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ------------------ ----------------------- ------------------------------------
LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable
One Franklin Parkway Chief Financial 2004, Chief
San Mateo, CA 94403-1906 Officer and Financial Officer
Chief and Chief
Accounting Accounting Officer
Officer since 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 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).
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/or director, as the case maybe, of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
RUPERT H. JOHNSON, JR. (1940) President and President since Not Applicable Not Applicable
One Franklin Parkway Chief 1993 and Chief
San Mateo, CA 94403-1906 Executive 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.
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; and officer of 30 of the investment companies in Franklin
Templeton Investments.
176 | 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
- ------------------- -------------- ------------------ ----------------------- ------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
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).
THOMAS WALSH (1961) 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.
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson is considered to be an interested person of the Trust
under the federal securities laws due to his position as officer and
director and major shareholder of Franklin Resources, Inc. (Resources),
which is the parent company of the Trust's investment manager and
distributor. Gregory E. Johnson is considered to be an interested person of
the Trust under the federal securities laws due to his position as an
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON 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. WILSON IS AN INDEPENDENT BOARD MEMBER 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 (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
Annual Report | 177
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 24, 2009, 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 additional material, including 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. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
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 it 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
178 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
management personnel with the code of ethics adopted throughout the Franklin
Templeton fund complex, the adherence to fair value pricing procedures
established by the Board, and the accuracy of net asset value calculations. The
Board also noted the extent of benefits provided Fund shareholders from being
part of the Franklin Templeton family of funds, including the right to exchange
investments between the same class of funds without a sales charge, the ability
to reinvest Fund 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 predesignated 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,
and the continuous enhancements to and high industry ranking given the Franklin
Templeton website. Particular attention was given to the overall performance and
actions taken by the Manager and its affiliates in response to problems arising
out of the market turmoil and financial crisis experienced during the past year.
In this respect, the Board noted that management's independent credit analysis
and diligent risk management procedures had minimized exposure of funds within
the Franklin Templeton complex to subprime mortgages and that its continuous
monitoring of counterparty credit risk had limited fund exposure to firms
experiencing financial difficulties like Bear Stearns and AIG. The same type of
conservative approach and attention to risk had also prevented any structured
investment products or other volatile instruments from being held in the
portfolios of any of the money market funds within the Franklin Templeton
complex, including the sweep money fund utilized by many of the funds as part of
their cash management. The Board also took into account, among other things,
management's efforts in establishing a $725 million global credit facility for
the benefit of the Funds and other accounts managed by Franklin Templeton
Investments to provide a source of cash for temporary and emergency purposes or
to meet unusual redemption requests as well as the strong financial position of
the Manager's parent company and its commitment to the mutual fund business. The
Board also noted that during the past year Franklin Templeton Investments, like
many other fund managers, had announced a hiring freeze and implemented employee
reductions and the Board discussed with management the nature of such reductions
and steps being taken to minimize any negative impact on the nature and quality
of services being provided the Funds.
Annual Report | 179
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 report prepared for each individual Fund showed
its investment performance or those of its Class A shares for a Fund 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, 2008, and for additional periods ended that date up to 10
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 above the median of its Lipper universe for the one-year period with most
being in the highest or second-highest quintile of their Lipper universe for the
previous three-, five- and 10-year periods as well. The Lipper reports showed
the total return for most such Funds to be above the median of their performance
universe during 2008 with the majority being in the first or second-highest
quintile of their performance universe during the previous three-, five- and
10-year periods on an annualized basis. 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. Lipper expense data
is based upon historical information taken from each Fund's most recent annual
report and, as a result of the severe decline in mutual fund industry assets
during the last quarter of 2008, is based on asset levels that are higher than
the levels currently existing for most funds. While recognizing the limitations
inherent in Lipper's methodology and recognizing that current expense ratios may
increase as assets decline, the Board believed that the independent analysis
conducted by Lipper remained an appropriate measure of comparative expenses. In
reviewing comparative costs, Lipper provides information on each Fund's
contractual investment management fee in comparison with the contractual
investment management fee that would have been charged by other funds within its
Lipper expense group assuming they were similar in size to 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 reports
showed that the contractual investment management fee rates for each Fund were
at or below the median of their respective Lipper expense groups, with the
exception of Franklin Kentucky Tax-Free Income Fund whose fee rate was less than
three basis points above its expense group median. The Lipper reports further
showed that the actual total expense rates for all Funds were below the medians
of their respective Lipper expense groups. 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.
180 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 during the 12-month period ended September 30,
2008, being the most recent fiscal year-end for Franklin Resources, Inc., the
Manager's parent. During such period, the assets of the Franklin Templeton U.S.
fund business were significantly higher than currently existing, and to such
extent the profitability analysis does not reflect current fund operations.
While taking this into account in assessing the significance of the Fund
profitability analysis, the Board recognized such analysis was made at a given
point in time and that the decline in assets and effect on profitability would
be reflected in the profitability analysis covering Franklin Resources' 2009
fiscal year period. In reviewing the analysis, 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 for 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 and other regulatory 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 its
interest in a joint venture entity that 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.
Annual Report | 181
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 0.625% on the first $100 million of assets; 0.5%
on the next $150 million of assets; 0.45% on assets in excess of $250 million;
with additional breakpoints beginning at 0.44% on assets in excess of $7.5
billion and continuing 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's investment manager 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 (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 (800)
SEC-0330.
182 | Annual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(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 FUNDS
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
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 Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California (8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts (7)
Michigan(7)
Minnesota (7)
Missouri
New Jersey
New York (8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust (9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(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.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN TAX-FREE TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2009 04/09
(GRAPHIC)
FEBRUARY 28, 2009
ANNUAL REPORT
AND SHAREHOLDER LETTER
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
SIGN UP FOR EDELIVERY
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TAX-FREE INCOME
FRANKLIN TAX-FREE TRUST
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - 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)
Not part of the annual report
Contents
SHAREHOLDER LETTER ....................................................... 1
ANNUAL REPORT
Municipal Bond Market Overview ........................................... 4
Investment Strategy and Manager's Discussion ............................. 6
Franklin Arizona Tax-Free Income Fund .................................... 7
Franklin Colorado Tax-Free Income Fund ................................... 17
Franklin Connecticut Tax-Free Income Fund ................................ 26
Franklin Double Tax-Free Income Fund ..................................... 34
Franklin Federal Intermediate-Term Tax-Free Income Fund .................. 42
Franklin Federal Limited-Term Tax-Free Income Fund ....................... 51
Franklin High Yield Tax-Free Income Fund ................................. 57
Franklin New Jersey Tax-Free Income Fund ................................. 67
Franklin Oregon Tax-Free Income Fund ..................................... 78
Franklin Pennsylvania Tax-Free Income Fund ............................... 86
Financial Highlights and Statements of Investments ....................... 95
Financial Statements ..................................................... 207
Notes to Financial Statements ............................................ 220
Report of Independent Registered Public Accounting Firm .................. 239
Tax Designation .......................................................... 240
Board Members and Officers ............................................... 241
Shareholder Information .................................................. 246
Shareholder Letter
Dear Shareholder:
The 12-month period ended February 28, 2009, was an extraordinary and stressful
time for investors and those of us who have worked in financial markets for many
years. During this turbulent period, the U.S. recession deepened, credit markets
froze and housing prices plummeted. Most stocks and bonds suffered major losses
as investors worried about an uncertain future. With a new president, Barack
Obama, the country and the financial markets were eager to see how effectively
the government could address these problems. Although this environment is bound
to provoke great concern, we think it is important to put short-term market
developments in perspective. Keep in mind that as daunting as current conditions
may be, we have navigated through other periods of high market volatility and
remain committed to our long-term perspective and disciplined investment
philosophy.
With the economy officially in recession since December 2007, economic growth
contracted during the 12-month reporting period. The national housing market
continued its severe correction with drops in housing starts and prices. The
Conference Board's Consumer Confidence Index dropped to the lowest level since
it began in 1967. The unemployment rate rose from 4.8% to 8.1% over the 12-month
period.(1)
In response to these economic conditions, the Federal Open Market Committee
lowered the federal funds target rate from 3.00% at the beginning of the period
to a range of 0% to 0.25% by period-end. The Federal Reserve Board's (Fed's)
current challenge is to soften the effects of the economic recession, reduce
deflation risks and maintain a healthy financial system to restart lending
throughout the economy. At period-end, the Fed did not seem to regard inflation
as an immediate threat. The Fed and the U.S. Treasury also continued to take
steps they thought were necessary to preserve the integrity of U.S. and global
financial markets.
(1.) Source: Bureau of Labor Statistics.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
It was the freezing of credit and financial markets in the U.S. and the rest of
the world that was the dominant -- and still developing -- story. Despite
various attempts by the Fed and the Treasury Department to inject liquidity into
the system and "rescue" such companies as Bear Stearns, Fannie Mae, Freddie Mac,
Merrill Lynch and American International Group, fears and concerns about the
health of our major financial institutions created a crisis on Wall Street that
we believe has not been seen since the 1930s. These fears intensified when
Lehman Brothers filed for bankruptcy in September 2008. In early October the
Senate and House approved a modified troubled asset relief plan, or TARP,
providing aid for financial institutions. As the crisis of confidence and credit
freeze spread around the world, many other countries and central banks took
measures to promote liquidity and help financial institutions within their own
borders. The U.S. government took additional steps to prevent a worsening of the
economic situation, including the provision of loans to General Motors and
Chrysler, which allowed them to develop restructuring plans and avoid bankruptcy
in the near term. Largely in reaction to financial market upheaval, the 10-year
Treasury yield experienced considerable volatility and declined from 3.53% to
3.02% over the period, reflecting a "flight to quality" by investors the world
over.
On February 17, 2009, President Obama signed into law a $787 billion stimulus
plan known as the American Recovery and Reinvestment Act of 2009, which, at the
least, is expected by many to cushion the effects of the ongoing recession for
taxpayers, consumers, businesses, and state and local governments. At most,
others expect the Act will end the recession and promote renewed growth.
Almost every major market experienced unusually volatile performance during the
reporting period. The municipal bond market, as measured by the Barclays Capital
(BC; formerly, Lehman Brothers) Municipal Bond Index, lost value in the second
half of 2008 but rebounded in 2009. The index returned +5.18% for the 12-month
review period.(2) Long-term municipal bonds, which generally make up the
majority of our portfolios, had a -0.61% return for the same period.(3)
We believe it is especially important during difficult times to keep a clear
head and long-term outlook and to consult with your financial advisor. Your
financial advisor can review your portfolio and help you reassess your needs,
goals and
(2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. The
BC 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 Baa3/BBB-. 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.
(3.) Source: (C) 2009 Morningstar. The BC Municipal Long Bond Index is the long
(22+ years) component of the BC Municipal Bond Index.
2 | Not part of the annual report
risk tolerance. Investors with discipline and a sound investment plan may find
favorable long-term opportunities when markets decline.
In the enclosed annual report for Franklin Tax-Free Trust, the portfolio
managers discuss municipal bond market conditions, investment decisions and Fund
performance during the period. You can also find other performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices. Municipal bonds provide tax-free income and
diversification from equities. Despite periods of volatility, municipal bonds
have a solid long-term record of performance, driven mostly by their income
component.
Please check our website at FRANKLINTEMPLETON.COM for special portfolio manager
commentary during this period of uncertainty. Although market conditions are
constantly changing, we remain committed to our disciplined strategy as we
manage the Funds, keeping in mind the trust you have placed in us. We appreciate
your confidence and encourage you to contact us when you have questions about
your Franklin Templeton tax-free investment.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
Chairman
Franklin Tax-Free Trust
/s/ Sheila Amoroso
Sheila Amoroso
/s/ Rafael R. Costas Jr.
Rafael R. Costas Jr.
Senior Vice Presidents and Co-Directors
Franklin Municipal Bond Department
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28, 2009. 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.
Not part of the annual report | 3
Annual Report
Municipal Bond Market Overview
The year ended February 28, 2009, was highly unusual for the municipal bond
market. Municipal bonds provide investors with tax-free income and historically
have been a relatively stable, low-volatility investment. Municipal bond funds
have also provided portfolio diversification, helping offset the volatility of
higher risk asset classes, such as equities and many other fixed income
securities. For the 12-month period ended February 28, 2009, the Barclays
Capital (BC; formerly, Lehman Brothers) Municipal Bond Index had a +5.18% total
return compared with the +5.91% return of the BC U.S. Treasury Index.(1)
However, the year under review certainly could not be described as stable or low
volatility for the municipal bond market.
The municipal bond market's problems started with the collapse of a few
leveraged hedge funds, whose strategy was mainly focused on leveraging exposure
to subprime mortgage-related collateralized debt obligations (CDOs). The
damaging effects from such subprime-related exposure rapidly spread to other
markets. The falling prices of the CDOs, due to illiquidity and increased
expectations for mortgage defaults, led credit rating agencies to downgrade
financial guaranty companies early in 2008. In 2008, the four major municipal
insurers, AMBAC, MBIA, FGIC and FSA, had been insuring nearly half of new-issue
municipal bonds and had maintained AAA ratings for many years. Although
historically they had been very good risk managers, during 2008 these insurers
were downgraded below AAA.
The downgrades initially did not concern us because many of the issuers that
used insurance were of high quality, and investment-grade municipal bonds had a
historical default rate of less than 1%.(2) However, the downgrades shocked the
market and caused problems for hedge funds and other leveraged market
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. The
BC 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 Baa3/BBB-. 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 BC 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.
(2.) Source: Standard & Poor's, "U.S. Municipal Ratings Transitions and
Defaults, 1986-2009," RATINGSDIRECT, 3/11/09.
4 | Annual Report
participants. As insured bonds declined in value during 2008, many hedge funds
that had built up large municipal bond positions were forced to sell their
insured bonds. This resulted in a significant supply/demand imbalance, and the
value of insured bonds continued to plummet. Historically, insured bonds traded
at higher prices than uninsured bonds; however, the value of insurance eroded
considerably. At the same time, the auction rate securities market collapsed.
Although traditional, non-leveraged mutual funds, retail buyers and
property-and-casualty companies continued to support the market, the selling was
overwhelming and caused some of the municipal bond market's worst performance in
its history.
The municipal bond market stabilized through the spring and summer of 2008.
Unfortunately, during this time the credit crisis started to spread across the
globe and no market was spared, except for Treasuries. Market psychology turned
bearish as the credit crunch took hold. Access to credit was effectively shut
down for close to a month, which spurred the Treasury and Federal Reserve Board
to devise plans to ease the credit crisis.
September and October brought trends similar to those early in the period. The
municipal bond market had even fewer buyers, mostly plain vanilla mutual funds
and individual investors. Once again, selling by hedge funds and leveraged
investors meeting redemptions was overwhelming and caused steep price declines.
The leveraged participants had used a strategy focused on long-maturity bonds,
and as they sold these positions, the long end of the yield curve was most
adversely affected. Interest rates continued to climb higher toward the end of
2008 as demand waned.
So far, early 2009 appeared more positive. The forced selling by hedge funds and
leveraged funds subsided, and positive cash flows once again characterized the
market. Helping the municipal bond market were bond coupon payments at the
beginning of 2009, a small new-issue calendar, and news that municipal issuers
will benefit from the federal government's stimulus package, although we still
expect volatility in the near term. During the reporting period, we had the
opportunity to purchase bonds at higher yields than were available in many
years, which supported our Funds' dividend distributions. At period-end, we
continued to be active in the market and felt that municipal bonds at current
yields represented an attractive long-term opportunity. On February 28, 2009,
yields for 10- and 30-year high-grade municipal bonds continued to exceed
comparable Treasury yields, which is highly unusual.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28,
2009. 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.
Annual Report | 5
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 do not use leverage or exotic
derivatives, nor do we use hedging techniques that could add volatility and
contribute to under-performance in adverse markets. We generally stay fully
invested to maximize income distribution.
The mixture of our value-oriented philosophy of investing primarily for income
and a positive sloping municipal yield curve favored the use of longer-term
bonds. Consequently, we sought to purchase bonds from 20 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, 2009, 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.
6 | Annual Report
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)
CREDIT QUALITY BREAKDOWN*
Franklin Arizona Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA 11.3%
AA 47.3%
A 16.4%
BBB 18.5%
Not Rated by S&P 6.5%
* 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 0.5% 3.2%
A 1.5% --
BBB or Baa 1.3% --
--- ---
Total 3.3% 3.2%
This annual report for Franklin Arizona Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$10.30 on February 29, 2008, to $10.18 on February 28, 2009. 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 99.
Annual Report | 7
DIVIDEND DISTRIBUTIONS*
Franklin Arizona Tax-Free Income Fund
DIVIDEND PER SHARE
---------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS**
- -------------- ---------- ---------- ---------- ---------------
March 2008 3.89 cents 3.38 cents 3.38 cents --
April 2008 3.89 cents 3.38 cents 3.38 cents --
May 2008 3.89 cents 3.38 cents 3.38 cents --
June 2008 3.89 cents 3.40 cents 3.41 cents --
July 2008 3.89 cents 3.40 cents 3.41 cents 2.56 cents
August 2008 3.89 cents 3.40 cents 3.41 cents 3.98 cents
September 2008 3.89 cents 3.42 cents 3.40 cents 3.97 cents
October 2008 3.89 cents 3.42 cents 3.40 cents 3.97 cents
November 2008 3.89 cents 3.42 cents 3.40 cents 3.97 cents
December 2008 3.93 cents 3.50 cents 3.48 cents 4.01 cents
January 2009 3.93 cents 3.50 cents 3.48 cents 4.01 cents
February 2009 3.93 cents 3.50 cents 3.48 cents 4.01 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.
** Effective 7/1/08, the Fund began offering Advisor Class shares. See the
prospectus for details.
Class A shares paid dividends totaling 46.64 cents per share for the same
period.(2) The Performance Summary beginning on page 10 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.58%
based on an annualization of the current 4.06 cent per share dividend and the
maximum offering price of $10.63 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Arizona personal income tax bracket of
37.95% would need to earn a distribution rate of 7.38% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class B,
C and Advisor shares' performance, please see the Performance Summary.
STATE UPDATE
Arizona's economy weakened along with the national economy and was further
hampered by a distressed residential real estate market. Falling home prices and
a high foreclosure rate plagued the state's housing market and in turn had a
significant negative impact on employment growth and revenue trends. As of
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
8 | Annual Report
February 2009, the state's unemployment rate was 7.4%, compared to the country's
8.1% rate.(3) Although slowing, population growth continued to support the
state's diverse economy.
Arizona's revenue environment was volatile in fiscal year 2008 and rapidly
deteriorated in fiscal year 2009, with sales and income tax collections well
below forecasts and Medicaid costs escalating. After making a number of
budget-balancing adjustments throughout the reporting period, in January 2009
the state government passed a revised budget for the 2009 fiscal year to bridge
a $1.6 billion shortfall.(4) In addition to utilizing all of the budget
stabilization fund, Arizona enacted cost-control measures including a hiring
freeze, severe spending restrictions in state government and postponement of
school construction projects.
Arizona, in accordance with its state constitution, cannot issue general
obligation bonds and instead relied on sales tax, gas tax and
appropriation-backed debt designated primarily for highway projects and school
facility needs. The resulting low debt burden along with sound financial
management practices led independent credit rating agency Standard & Poor's to
assign Arizona an issuer credit rating of AA with a stable outlook.(5)
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Arizona Department of Economic Security, "State Budget Cuts Impact
DES Customers, Contracted Providers, and Staff," 1/31/09.
(5.) This does not indicate Standard & Poor's rating of the Fund.
PORTFOLIO BREAKDOWN
Franklin Arizona Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM
INVESTMENTS*
------------
Prerefunded 24.8%
Hospital & Health Care 17.5%
Utilities 16.3%
Higher Education 11.8%
Other Revenue 7.4%
Subject to Government Appropriations 6.2%
Tax-Supported 5.6%
General Obligation 5.5%
Transportation 3.9%
Housing 1.0%
* Does not include short-term investments and other net assets.
Annual Report | 9
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.12 $10.18 $10.30
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4664
CLASS B (SYMBOL: FBAZX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.12 $10.24 $10.36
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4099
CLASS C (SYMBOL: FAZIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.12 $10.29 $10.41
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4090
ADVISOR CLASS (SYMBOL: N/A) CHANGE 2/28/09 7/1/08
- --------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.46 $10.18 $10.64
DISTRIBUTIONS (7/1/08-2/28/09)
Dividend Income $0.3155
10 | 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) +3.42% +13.10% +44.26%
Average Annual Total Return(2) -1.00% +1.60% +3.28%
Avg. Ann. Total Return (3/31/09)(3) -4.53% +1.61% +3.23%
Distribution Rate(4) 4.58%
Taxable Equivalent Distribution Rate(5) 7.38%
30-Day Standardized Yield(6) 3.80%
Taxable Equivalent Yield(5) 6.12%
Total Annual Operating Expenses(7) 0.63%
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ------- ------ ------- ---------
Cumulative Total Return(1) +2.84% +10.07% +46.37%
Average Annual Total Return(2) -1.11% +1.60% +4.29%
Avg. Ann. Total Return (3/31/09)(3) -4.66% +1.59% +4.23%
Distribution Rate(4) 4.22%
Taxable Equivalent Distribution Rate(5) 6.80%
30-Day Standardized Yield(6) 3.43%
Taxable Equivalent Yield(5) 5.53%
Total Annual Operating Expenses(7) 1.18%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) +2.82% +10.01% +36.63%
Average Annual Total Return(2) +1.83% +1.93% +3.17%
Avg. Ann. Total Return (3/31/09)(3) -1.80% +1.94% +3.12%
Distribution Rate(4) 4.20%
Taxable Equivalent Distribution Rate(5) 6.77%
30-Day Standardized Yield(6) 3.44%
Taxable Equivalent Yield(5) 5.54%
Total Annual Operating Expenses(7) 1.18%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------- ---------
Cumulative Total Return(1) +3.49% +13.17% +44.35%
Average Annual Total Return(2) +3.49% +2.51% +3.74%
Avg. Ann. Total Return (3/31/09)(3) -0.23% +2.50% +3.68%
Distribution Rate(4) 4.88%
Taxable Equivalent Distribution Rate(5) 7.86%
30-Day Standardized Yield(6) 4.08%
Taxable Equivalent Yield(5) 6.58%
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 (800) 342-5236.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -1.00%
5-Year +1.60%
10-Year +3.28%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN ARIZONA TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS A MUNICIPAL BOND INDEX CPI
- ---------- ------------------------- -------------------- -------
3/1/1999 $ 9,571 $10,000 $10,000
3/31/1999 $ 9,603 $10,014 $10,030
4/30/1999 $ 9,617 $10,039 $10,103
5/31/1999 $ 9,581 $ 9,981 $10,103
6/30/1999 $ 9,438 $ 9,837 $10,103
7/31/1999 $ 9,461 $ 9,873 $10,134
8/31/1999 $ 9,338 $ 9,794 $10,158
9/30/1999 $ 9,327 $ 9,798 $10,207
10/31/1999 $ 9,160 $ 9,692 $10,225
11/30/1999 $ 9,227 $ 9,795 $10,231
12/31/1999 $ 9,137 $ 9,722 $10,231
1/31/2000 $ 9,065 $ 9,679 $10,261
2/29/2000 $ 9,169 $ 9,792 $10,322
3/31/2000 $ 9,389 $10,006 $10,407
4/30/2000 $ 9,333 $ 9,947 $10,413
5/31/2000 $ 9,278 $ 9,895 $10,426
6/30/2000 $ 9,501 $10,157 $10,480
7/31/2000 $ 9,635 $10,299 $10,505
8/31/2000 $ 9,788 $10,457 $10,505
9/30/2000 $ 9,740 $10,403 $10,559
10/31/2000 $ 9,839 $10,516 $10,578
11/30/2000 $ 9,902 $10,596 $10,584
12/31/2000 $10,085 $10,858 $10,578
1/31/2001 $10,129 $10,965 $10,644
2/28/2001 $10,164 $11,000 $10,687
3/31/2001 $10,236 $11,099 $10,711
4/30/2001 $10,139 $10,978 $10,754
5/31/2001 $10,222 $11,097 $10,802
6/30/2001 $10,324 $11,171 $10,821
7/31/2001 $10,503 $11,336 $10,790
8/31/2001 $10,635 $11,523 $10,790
9/30/2001 $10,583 $11,484 $10,839
10/31/2001 $10,627 $11,621 $10,802
11/30/2001 $10,477 $11,523 $10,784
12/31/2001 $10,386 $11,414 $10,742
1/31/2002 $10,499 $11,612 $10,766
2/28/2002 $10,633 $11,752 $10,809
3/31/2002 $10,441 $11,522 $10,869
4/30/2002 $10,595 $11,747 $10,930
5/31/2002 $10,631 $11,818 $10,930
6/30/2002 $10,727 $11,943 $10,936
7/31/2002 $10,863 $12,097 $10,948
8/31/2002 $10,990 $12,242 $10,985
9/30/2002 $11,248 $12,510 $11,003
10/31/2002 $11,029 $12,303 $11,021
11/30/2002 $10,972 $12,252 $11,021
12/31/2002 $11,182 $12,510 $10,997
1/31/2003 $11,144 $12,479 $11,046
2/28/2003 $11,303 $12,653 $11,131
3/31/2003 $11,317 $12,661 $11,198
4/30/2003 $11,394 $12,744 $11,173
5/31/2003 $11,670 $13,043 $11,155
6/30/2003 $11,663 $12,987 $11,167
7/31/2003 $11,254 $12,533 $11,179
8/31/2003 $11,342 $12,626 $11,222
9/30/2003 $11,676 $12,997 $11,258
10/31/2003 $11,638 $12,932 $11,246
11/30/2003 $11,781 $13,067 $11,216
12/31/2003 $11,891 $13,175 $11,204
1/31/2004 $12,024 $13,250 $11,258
2/29/2004 $12,211 $13,450 $11,319
3/31/2004 $12,191 $13,403 $11,392
4/30/2004 $11,865 $13,086 $11,429
5/31/2004 $11,791 $13,038 $11,495
6/30/2004 $11,848 $13,086 $11,532
7/31/2004 $12,071 $13,258 $11,514
8/31/2004 $12,317 $13,524 $11,520
9/30/2004 $12,407 $13,595 $11,544
10/31/2004 $12,532 $13,712 $11,605
11/30/2004 $12,432 $13,599 $11,611
12/31/2004 $12,612 $13,765 $11,568
1/31/2005 $12,782 $13,894 $11,593
2/28/2005 $12,771 $13,848 $11,660
3/31/2005 $12,714 $13,760 $11,751
4/30/2005 $12,931 $13,977 $11,830
5/31/2005 $13,035 $14,076 $11,818
6/30/2005 $13,104 $14,163 $11,824
7/31/2005 $13,035 $14,099 $11,878
8/31/2005 $13,046 $14,242 $11,939
9/30/2005 $12,953 $14,146 $12,085
10/31/2005 $12,860 $14,060 $12,109
11/30/2005 $12,907 $14,127 $12,012
12/31/2005 $13,036 $14,249 $11,964
1/31/2006 $13,048 $14,287 $12,055
2/28/2006 $13,190 $14,383 $12,079
3/31/2006 $13,094 $14,284 $12,146
4/30/2006 $13,082 $14,279 $12,249
5/31/2006 $13,117 $14,343 $12,310
6/30/2006 $13,092 $14,289 $12,334
7/31/2006 $13,224 $14,459 $12,371
8/31/2006 $13,417 $14,673 $12,395
9/30/2006 $13,514 $14,775 $12,334
10/31/2006 $13,611 $14,868 $12,267
11/30/2006 $13,745 $14,992 $12,249
12/31/2006 $13,708 $14,939 $12,267
1/31/2007 $13,670 $14,901 $12,305
2/28/2007 $13,855 $15,097 $12,371
3/31/2007 $13,804 $15,060 $12,483
4/30/2007 $13,841 $15,104 $12,564
5/31/2007 $13,765 $15,038 $12,641
6/30/2007 $13,701 $14,960 $12,666
7/31/2007 $13,789 $15,076 $12,663
8/31/2007 $13,675 $15,011 $12,639
9/30/2007 $13,877 $15,233 $12,674
10/31/2007 $13,940 $15,301 $12,701
11/30/2007 $13,965 $15,398 $12,777
12/31/2007 $14,028 $15,441 $12,768
1/31/2008 $14,130 $15,636 $12,832
2/29/2008 $13,352 $14,920 $12,869
3/31/2008 $13,830 $15,346 $12,980
4/30/2008 $14,023 $15,526 $13,059
5/31/2008 $14,152 $15,620 $13,169
6/30/2008 $13,955 $15,443 $13,302
7/31/2008 $13,927 $15,502 $13,372
8/31/2008 $14,057 $15,683 $13,318
9/30/2008 $13,285 $14,948 $13,300
10/31/2008 $13,047 $14,795 $13,166
11/30/2008 $13,018 $14,842 $12,913
12/31/2008 $13,112 $15,059 $12,780
1/31/2009 $13,568 $15,610 $12,835
2/28/2009 $13,807 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------- -------
1-Year -1.11%
5-Year +1.60%
Since Inception (2/1/00) +4.29%
CLASS B (2/1/00-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN ARIZONA TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS B MUNICIPAL BOND INDEX CPI
- ---------- ------------------------- -------------------- -------
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 $10,748 $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 $13,360 $10,960
11/30/2003 $12,753 $13,500 $10,930
12/31/2003 $12,866 $13,611 $10,918
1/31/2004 $13,003 $13,689 $10,972
2/29/2004 $13,198 $13,895 $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 $13,971 $11,226
9/30/2004 $13,377 $14,046 $11,250
10/31/2004 $13,505 $14,166 $11,309
11/30/2004 $13,391 $14,049 $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 $14,306 $11,363
3/31/2005 $13,681 $14,216 $11,451
4/30/2005 $13,895 $14,440 $11,528
5/31/2005 $13,999 $14,542 $11,517
6/30/2005 $14,067 $14,632 $11,523
7/31/2005 $13,986 $14,566 $11,576
8/31/2005 $13,993 $14,713 $11,635
9/30/2005 $13,887 $14,614 $11,777
10/31/2005 $13,781 $14,526 $11,801
11/30/2005 $13,825 $14,595 $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 $14,757 $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 $15,159 $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 $15,394 $11,991
2/28/2007 $14,734 $15,597 $12,056
3/31/2007 $14,674 $15,559 $12,165
4/30/2007 $14,706 $15,605 $12,244
5/31/2007 $14,632 $15,536 $12,319
6/30/2007 $14,546 $15,455 $12,343
7/31/2007 $14,632 $15,575 $12,340
8/31/2007 $14,505 $15,508 $12,317
9/30/2007 $14,725 $15,737 $12,351
10/31/2007 $14,771 $15,807 $12,378
11/30/2007 $14,804 $15,908 $12,451
12/31/2007 $14,850 $15,952 $12,443
1/31/2008 $14,964 $16,153 $12,505
2/29/2008 $14,141 $15,414 $12,541
3/31/2008 $14,649 $15,854 $12,650
4/30/2008 $14,852 $16,040 $12,726
5/31/2008 $14,989 $16,137 $12,834
6/30/2008 $14,779 $15,955 $12,963
7/31/2008 $14,749 $16,015 $13,031
8/31/2008 $14,885 $16,203 $12,979
9/30/2008 $14,071 $15,443 $12,961
10/31/2008 $13,818 $15,285 $12,830
11/30/2008 $13,783 $15,334 $12,584
12/31/2008 $13,888 $15,558 $12,454
1/31/2009 $14,368 $16,127 $12,508
2/28/2009 $14,637 $16,212 $12,571
12 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +1.83%
5-Year +1.93%
10-Year +3.17%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN ARIZONA TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---------- ------------------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,037 $10,014 $10,030
4/30/1999 $10,048 $10,039 $10,103
5/31/1999 $ 9,997 $ 9,981 $10,103
6/30/1999 $ 9,844 $ 9,837 $10,103
7/31/1999 $ 9,864 $ 9,873 $10,134
8/31/1999 $ 9,733 $ 9,794 $10,158
9/30/1999 $ 9,717 $ 9,798 $10,207
10/31/1999 $ 9,539 $ 9,692 $10,225
11/30/1999 $ 9,604 $ 9,795 $10,231
12/31/1999 $ 9,506 $ 9,722 $10,231
1/31/2000 $ 9,427 $ 9,679 $10,261
2/29/2000 $ 9,530 $ 9,792 $10,322
3/31/2000 $ 9,753 $10,006 $10,407
4/30/2000 $ 9,691 $ 9,947 $10,413
5/31/2000 $ 9,630 $ 9,895 $10,426
6/30/2000 $ 9,855 $10,157 $10,480
7/31/2000 $ 9,989 $10,299 $10,505
8/31/2000 $10,142 $10,457 $10,505
9/30/2000 $10,097 $10,403 $10,559
10/31/2000 $10,185 $10,516 $10,578
11/30/2000 $10,254 $10,596 $10,584
12/31/2000 $10,438 $10,858 $10,578
1/31/2001 $10,468 $10,965 $10,644
2/28/2001 $10,500 $11,000 $10,687
3/31/2001 $10,579 $11,099 $10,711
4/30/2001 $10,465 $10,978 $10,754
5/31/2001 $10,554 $11,097 $10,802
6/30/2001 $10,654 $11,171 $10,821
7/31/2001 $10,833 $11,336 $10,790
8/31/2001 $10,963 $11,523 $10,790
9/30/2001 $10,904 $11,484 $10,839
10/31/2001 $10,945 $11,621 $10,802
11/30/2001 $10,787 $11,523 $10,784
12/31/2001 $10,688 $11,414 $10,742
1/31/2002 $10,799 $11,612 $10,766
2/28/2002 $10,941 $11,752 $10,809
3/31/2002 $10,729 $11,522 $10,869
4/30/2002 $10,892 $11,747 $10,930
5/31/2002 $10,913 $11,818 $10,930
6/30/2002 $11,016 $11,943 $10,936
7/31/2002 $11,149 $12,097 $10,948
8/31/2002 $11,274 $12,242 $10,985
9/30/2002 $11,531 $12,510 $11,003
10/31/2002 $11,303 $12,303 $11,021
11/30/2002 $11,240 $12,252 $11,021
12/31/2002 $11,448 $12,510 $10,997
1/31/2003 $11,405 $12,479 $11,046
2/28/2003 $11,561 $12,653 $11,131
3/31/2003 $11,571 $12,661 $11,198
4/30/2003 $11,644 $12,744 $11,173
5/31/2003 $11,919 $13,043 $11,155
6/30/2003 $11,906 $12,987 $11,167
7/31/2003 $11,485 $12,533 $11,179
8/31/2003 $11,569 $12,626 $11,222
9/30/2003 $11,901 $12,997 $11,258
10/31/2003 $11,855 $12,932 $11,246
11/30/2003 $11,994 $13,067 $11,216
12/31/2003 $12,100 $13,175 $11,204
1/31/2004 $12,239 $13,250 $11,258
2/29/2004 $12,423 $13,450 $11,319
3/31/2004 $12,397 $13,403 $11,392
4/30/2004 $12,052 $13,086 $11,429
5/31/2004 $11,983 $13,038 $11,495
6/30/2004 $12,035 $13,086 $11,532
7/31/2004 $12,253 $13,258 $11,514
8/31/2004 $12,495 $13,524 $11,520
9/30/2004 $12,581 $13,595 $11,544
10/31/2004 $12,700 $13,712 $11,605
11/30/2004 $12,594 $13,599 $11,611
12/31/2004 $12,769 $13,765 $11,568
1/31/2005 $12,934 $13,894 $11,593
2/28/2005 $12,928 $13,848 $11,660
3/31/2005 $12,865 $13,760 $11,751
4/30/2005 $13,066 $13,977 $11,830
5/31/2005 $13,175 $14,076 $11,818
6/30/2005 $13,238 $14,163 $11,824
7/31/2005 $13,151 $14,099 $11,878
8/31/2005 $13,169 $14,242 $11,939
9/30/2005 $13,058 $14,146 $12,085
10/31/2005 $12,970 $14,060 $12,109
11/30/2005 $12,999 $14,127 $12,012
12/31/2005 $13,135 $14,249 $11,964
1/31/2006 $13,140 $14,287 $12,055
2/28/2006 $13,276 $14,383 $12,079
3/31/2006 $13,163 $14,284 $12,146
4/30/2006 $13,144 $14,279 $12,249
5/31/2006 $13,173 $14,343 $12,310
6/30/2006 $13,142 $14,289 $12,334
7/31/2006 $13,279 $14,459 $12,371
8/31/2006 $13,465 $14,673 $12,395
9/30/2006 $13,567 $14,775 $12,334
10/31/2006 $13,645 $14,868 $12,267
11/30/2006 $13,773 $14,992 $12,249
12/31/2006 $13,729 $14,939 $12,267
1/31/2007 $13,685 $14,901 $12,305
2/28/2007 $13,862 $15,097 $12,371
3/31/2007 $13,805 $15,060 $12,483
4/30/2007 $13,835 $15,104 $12,564
5/31/2007 $13,766 $15,038 $12,641
6/30/2007 $13,685 $14,960 $12,666
7/31/2007 $13,765 $15,076 $12,663
8/31/2007 $13,646 $15,011 $12,639
9/30/2007 $13,852 $15,233 $12,674
10/31/2007 $13,895 $15,301 $12,701
11/30/2007 $13,926 $15,398 $12,777
12/31/2007 $13,982 $15,441 $12,768
1/31/2008 $14,076 $15,636 $12,832
2/29/2008 $13,290 $14,920 $12,869
3/31/2008 $13,768 $15,346 $12,980
4/30/2008 $13,939 $15,526 $13,059
5/31/2008 $14,072 $15,620 $13,169
6/30/2008 $13,858 $15,443 $13,302
7/31/2008 $13,825 $15,502 $13,372
8/31/2008 $13,959 $15,683 $13,318
9/30/2008 $13,183 $14,948 $13,300
10/31/2008 $12,942 $14,795 $13,166
11/30/2008 $12,894 $14,842 $12,913
12/31/2008 $12,993 $15,059 $12,780
1/31/2009 $13,448 $15,610 $12,835
2/28/2009 $13,663 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 2/28/09
- ---------------- -------
1-Year +3.49%
5-Year +2.51%
10-Year +3.74%
ADVISOR CLASS (3/1/99-2/28/09)(8)
(PERFORMANCE GRAPH)
FRANKLIN ARIZONA TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - ADVISOR CLASS MUNICIPAL BOND INDEX CPI
- ---------- --------------------------- -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,033 $10,014 $10,030
4/30/1999 $10,048 $10,039 $10,103
5/31/1999 $10,011 $ 9,981 $10,103
6/30/1999 $ 9,861 $ 9,837 $10,103
7/31/1999 $ 9,885 $ 9,873 $10,134
8/31/1999 $ 9,757 $ 9,794 $10,158
9/30/1999 $ 9,745 $ 9,798 $10,207
10/31/1999 $ 9,570 $ 9,692 $10,225
11/30/1999 $ 9,641 $ 9,795 $10,231
12/31/1999 $ 9,547 $ 9,722 $10,231
1/31/2000 $ 9,471 $ 9,679 $10,261
2/29/2000 $ 9,580 $ 9,792 $10,322
3/31/2000 $ 9,810 $10,006 $10,407
4/30/2000 $ 9,752 $ 9,947 $10,413
5/31/2000 $ 9,694 $ 9,895 $10,426
6/30/2000 $ 9,927 $10,157 $10,480
7/31/2000 $10,067 $10,299 $10,505
8/31/2000 $10,227 $10,457 $10,505
9/30/2000 $10,176 $10,403 $10,559
10/31/2000 $10,280 $10,516 $10,578
11/30/2000 $10,345 $10,596 $10,584
12/31/2000 $10,537 $10,858 $10,578
1/31/2001 $10,583 $10,965 $10,644
2/28/2001 $10,619 $11,000 $10,687
3/31/2001 $10,695 $11,099 $10,711
4/30/2001 $10,594 $10,978 $10,754
5/31/2001 $10,680 $11,097 $10,802
6/30/2001 $10,787 $11,171 $10,821
7/31/2001 $10,974 $11,336 $10,790
8/31/2001 $11,112 $11,523 $10,790
9/30/2001 $11,057 $11,484 $10,839
10/31/2001 $11,104 $11,621 $10,802
11/30/2001 $10,947 $11,523 $10,784
12/31/2001 $10,851 $11,414 $10,742
1/31/2002 $10,970 $11,612 $10,766
2/28/2002 $11,110 $11,752 $10,809
3/31/2002 $10,909 $11,522 $10,869
4/30/2002 $11,070 $11,747 $10,930
5/31/2002 $11,108 $11,818 $10,930
6/30/2002 $11,207 $11,943 $10,936
7/31/2002 $11,350 $12,097 $10,948
8/31/2002 $11,482 $12,242 $10,985
9/30/2002 $11,752 $12,510 $11,003
10/31/2002 $11,523 $12,303 $11,021
11/30/2002 $11,463 $12,252 $11,021
12/31/2002 $11,683 $12,510 $10,997
1/31/2003 $11,644 $12,479 $11,046
2/28/2003 $11,810 $12,653 $11,131
3/31/2003 $11,825 $12,661 $11,198
4/30/2003 $11,905 $12,744 $11,173
5/31/2003 $12,193 $13,043 $11,155
6/30/2003 $12,186 $12,987 $11,167
7/31/2003 $11,758 $12,533 $11,179
8/31/2003 $11,851 $12,626 $11,222
9/30/2003 $12,200 $12,997 $11,258
10/31/2003 $12,159 $12,932 $11,246
11/30/2003 $12,309 $13,067 $11,216
12/31/2003 $12,424 $13,175 $11,204
1/31/2004 $12,562 $13,250 $11,258
2/29/2004 $12,758 $13,450 $11,319
3/31/2004 $12,737 $13,403 $11,392
4/30/2004 $12,397 $13,086 $11,429
5/31/2004 $12,320 $13,038 $11,495
6/30/2004 $12,379 $13,086 $11,532
7/31/2004 $12,612 $13,258 $11,514
8/31/2004 $12,869 $13,524 $11,520
9/30/2004 $12,963 $13,595 $11,544
10/31/2004 $13,093 $13,712 $11,605
11/30/2004 $12,989 $13,599 $11,611
12/31/2004 $13,177 $13,765 $11,568
1/31/2005 $13,355 $13,894 $11,593
2/28/2005 $13,343 $13,848 $11,660
3/31/2005 $13,283 $13,760 $11,751
4/30/2005 $13,511 $13,977 $11,830
5/31/2005 $13,619 $14,076 $11,818
6/30/2005 $13,691 $14,163 $11,824
7/31/2005 $13,619 $14,099 $11,878
8/31/2005 $13,631 $14,242 $11,939
9/30/2005 $13,534 $14,146 $12,085
10/31/2005 $13,436 $14,060 $12,109
11/30/2005 $13,485 $14,127 $12,012
12/31/2005 $13,621 $14,249 $11,964
1/31/2006 $13,633 $14,287 $12,055
2/28/2006 $13,782 $14,383 $12,079
3/31/2006 $13,681 $14,284 $12,146
4/30/2006 $13,668 $14,279 $12,249
5/31/2006 $13,705 $14,343 $12,310
6/30/2006 $13,679 $14,289 $12,334
7/31/2006 $13,817 $14,459 $12,371
8/31/2006 $14,019 $14,673 $12,395
9/30/2006 $14,119 $14,775 $12,334
10/31/2006 $14,221 $14,868 $12,267
11/30/2006 $14,361 $14,992 $12,249
12/31/2006 $14,322 $14,939 $12,267
1/31/2007 $14,282 $14,901 $12,305
2/28/2007 $14,476 $15,097 $12,371
3/31/2007 $14,423 $15,060 $12,483
4/30/2007 $14,461 $15,104 $12,564
5/31/2007 $14,382 $15,038 $12,641
6/30/2007 $14,315 $14,960 $12,666
7/31/2007 $14,407 $15,076 $12,663
8/31/2007 $14,288 $15,011 $12,639
9/30/2007 $14,499 $15,233 $12,674
10/31/2007 $14,565 $15,301 $12,701
11/30/2007 $14,591 $15,398 $12,777
12/31/2007 $14,657 $15,441 $12,768
1/31/2008 $14,763 $15,636 $12,832
2/29/2008 $13,950 $14,920 $12,869
3/31/2008 $14,450 $15,346 $12,980
4/30/2008 $14,652 $15,526 $13,059
5/31/2008 $14,787 $15,620 $13,169
6/30/2008 $14,580 $15,443 $13,302
7/31/2008 $14,539 $15,502 $13,372
8/31/2008 $14,689 $15,683 $13,318
9/30/2008 $13,887 $14,948 $13,300
10/31/2008 $13,638 $14,795 $13,166
11/30/2008 $13,606 $14,842 $12,913
12/31/2008 $13,710 $15,059 $12,780
1/31/2009 $14,186 $15,610 $12,835
2/28/2009 $14,435 $15,692 $12,899
Annual Report | 13
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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.
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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 7/1/08, 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 7/1/08, 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 6/30/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 7/1/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -1.28%.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 ARIZONA TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 982.40 $3.10
Hypothetical (5% return before expenses) $1,000 $1,021.67 $3.16
CLASS B
Actual $1,000 $ 979.80 $5.84
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
CLASS C
Actual $1,000 $ 978.90 $5.79
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
ADVISOR CLASS
Actual $1,000 $ 982.80 $2.61
Hypothetical (5% return before expenses) $1,000 $1,022.17 $2.66
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.63%; B: 1.19%; C: 1.18%; and Advisor:
0.53%), multiplied by the average account value over the period, multiplied
by 181/365 to reflect the one-half year period.
16 | 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)
CREDIT QUALITY BREAKDOWN*
Franklin Colorado Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA 17.8%
AA 36.3%
A 15.7%
BBB 11.8%
Not Rated by S&P 18.4%
* 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 0.3% 1.6%
AA or Aa 8.0% 0.1%
A 7.5% --
BBB or Baa -- 0.7%
Below Investment Grade -- 0.2%
---- ---
Total 15.8% 2.6%
This annual report for Franklin Colorado Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
(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 107.
Annual Report | 17
DIVIDEND DISTRIBUTIONS*
Franklin Colorado Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.24 cents 3.68 cents
April 2008 4.24 cents 3.68 cents
May 2008 4.24 cents 3.68 cents
June 2008 4.24 cents 3.71 cents
July 2008 4.24 cents 3.71 cents
August 2008 4.24 cents 3.71 cents
September 2008 4.29 cents 3.76 cents
October 2008 4.29 cents 3.76 cents
November 2008 4.29 cents 3.76 cents
December 2008 4.29 cents 3.82 cents
January 2009 4.29 cents 3.82 cents
February 2009 4.29 cents 3.82 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.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$11.14 on February 29, 2008, to $10.79 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 50.98 cents per share for the same period.(2) The
Performance Summary beginning on page 21 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.60% based on an
annualization of the current 4.32 cent per share dividend and the maximum
offering price of $11.27 on February 28, 2009. An investor in the 2009 maximum
combined effective federal and Colorado personal income tax bracket of 38.01%
would need to earn a distribution rate of 7.42% from a taxable investment to
match the Fund's Class A tax-free distribution rate. For the Fund's Class C
shares' performance, please see the Performance Summary.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
18 | Annual Report
STATE UPDATE
Colorado's diverse industry base and well-educated workforce helped support its
economy in the middle of a national downturn. Its growing population, partly due
to in-migration, contributed to employment and personal income trends that were
better than the national average. As of February 2009, the state's unemployment
rate was 7.2%, compared to the country's 8.1% rate.(3) In December 2008, the
state government announced job creation and economic development proposals that
included provisions to give companies tax incentives to create jobs in Colorado,
increase credit availability to small businesses, fund workforce training
programs geared toward clean energy industries and attract such companies to the
state.
Colorado's financial position has improved since the 2005 passage of Referendum
C, which modified the state's existing Taxpayer Bill of Rights (TABOR)
constitutional revenue cap through 2010. Referendum C had the effect of raising
limits on revenues that can be kept in the general fund instead of being
returned to taxpayers. Preliminary revenue growth in the current fiscal year
came in below projections and forecasts for future years were revised downward,
but state finances were somewhat cushioned by fully funded reserves. The state
government was quick to adapt to a weakening revenue environment, as it
implemented a midyear hiring freeze for the executive branch and postponed some
capital spending and construction projects in October 2008.
Colorado has very low debt levels due to constitutional limitations on long-term
general obligation debt issuance, with state tax-supported debt consisting
largely of general fund lease obligations. The state's balanced operations aided
by quarterly revenue forecasts and midyear budget adjustments led independent
credit rating agency Standard & Poor's to assign Colorado an issuer credit
rating of AA with a stable outlook.(4)
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
PORTFOLIO BREAKDOWN
Franklin Colorado Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 22.5%
Utilities 19.5%
Hospital & Health Care 16.6%
Higher Education 10.9%
Tax-Supported 9.4%
General Obligation 8.2%
Subject to Government Appropriations 6.9%
Transportation 2.8%
Housing 2.1%
Other Revenue 1.0%
Corporate-Backed 0.1%
* Does not include short-term investments and other net assets.
(3.) Source: Bureau of Labor Statistics.
(4.) This does not indicate Standard & Poor's rating of the Fund.
Annual Report | 19
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, 2009, 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.
20 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.35 $10.79 $11.14
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5098
CLASS C (SYMBOL: FCOIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.34 $10.88 $11.22
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4476
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +1.43% +10.47% +43.25%
Average Annual Total Return(2) -2.85% +1.13% +3.21%
Avg. Ann. Total Return (3/31/09)(3) -5.45% +1.28% +3.23%
Distribution Rate(4) 4.60%
Taxable Equivalent Distribution Rate(5) 7.42%
30-Day Standardized Yield(6) 4.04%
Taxable Equivalent Yield(5) 6.52%
Total Annual Operating Expenses(7) 0.67%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +0.94% +7.49% +35.64%
Average Annual Total Return(2) -0.03% +1.45% +3.10%
Avg. Ann. Total Return (3/31/09)(3) -2.73% +1.61% +3.11%
Distribution Rate(4) 4.24%
Taxable Equivalent Distribution Rate(5) 6.84%
30-Day Standardized Yield(6) 3.68%
Taxable Equivalent Yield(5) 5.94%
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 (800) 342-5236.
Annual Report | 21
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -2.85%
5-Year +1.13%
10-Year +3.21%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN COLORADO BARCLAYS CAPITAL
TAX-FREE MUNICIPAL
DATE INCOME FUND - CLASS A BOND INDEX CPI
- ---------- --------------------- ---------------- -------
3/1/1999 $ 9,579 $10,000 $10,000
3/31/1999 $ 9,610 $10,014 $10,030
4/30/1999 $ 9,618 $10,039 $10,103
5/31/1999 $ 9,561 $ 9,981 $10,103
6/30/1999 $ 9,425 $ 9,837 $10,103
7/31/1999 $ 9,432 $ 9,873 $10,134
8/31/1999 $ 9,302 $ 9,794 $10,158
9/30/1999 $ 9,285 $ 9,798 $10,207
10/31/1999 $ 9,121 $ 9,692 $10,225
11/30/1999 $ 9,211 $ 9,795 $10,231
12/31/1999 $ 9,103 $ 9,722 $10,231
1/31/2000 $ 9,011 $ 9,679 $10,261
2/29/2000 $ 9,136 $ 9,792 $10,322
3/31/2000 $ 9,379 $10,006 $10,407
4/30/2000 $ 9,319 $ 9,947 $10,413
5/31/2000 $ 9,251 $ 9,895 $10,426
6/30/2000 $ 9,497 $10,157 $10,480
7/31/2000 $ 9,617 $10,299 $10,505
8/31/2000 $ 9,771 $10,457 $10,505
9/30/2000 $ 9,701 $10,403 $10,559
10/31/2000 $ 9,813 $10,516 $10,578
11/30/2000 $ 9,891 $10,596 $10,584
12/31/2000 $10,161 $10,858 $10,578
1/31/2001 $10,239 $10,965 $10,644
2/28/2001 $10,283 $11,000 $10,687
3/31/2001 $10,362 $11,099 $10,711
4/30/2001 $10,290 $10,978 $10,754
5/31/2001 $10,379 $11,097 $10,802
6/30/2001 $10,503 $11,171 $10,821
7/31/2001 $10,674 $11,336 $10,790
8/31/2001 $10,854 $11,523 $10,790
9/30/2001 $10,770 $11,484 $10,839
10/31/2001 $10,887 $11,621 $10,802
11/30/2001 $10,804 $11,523 $10,784
12/31/2001 $10,674 $11,414 $10,742
1/31/2002 $10,847 $11,612 $10,766
2/28/2002 $10,948 $11,752 $10,809
3/31/2002 $10,798 $11,522 $10,869
4/30/2002 $10,936 $11,747 $10,930
5/31/2002 $11,001 $11,818 $10,930
6/30/2002 $11,103 $11,943 $10,936
7/31/2002 $11,234 $12,097 $10,948
8/31/2002 $11,337 $12,242 $10,985
9/30/2002 $11,601 $12,510 $11,003
10/31/2002 $11,350 $12,303 $11,021
11/30/2002 $11,300 $12,252 $11,021
12/31/2002 $11,538 $12,510 $10,997
1/31/2003 $11,506 $12,479 $11,046
2/28/2003 $11,676 $12,653 $11,131
3/31/2003 $11,651 $12,661 $11,198
4/30/2003 $11,734 $12,744 $11,173
5/31/2003 $12,003 $13,043 $11,155
6/30/2003 $11,958 $12,987 $11,167
7/31/2003 $11,536 $12,533 $11,179
8/31/2003 $11,639 $12,626 $11,222
9/30/2003 $11,963 $12,997 $11,258
10/31/2003 $11,888 $12,932 $11,246
11/30/2003 $12,023 $13,067 $11,216
12/31/2003 $12,139 $13,175 $11,204
1/31/2004 $12,235 $13,250 $11,258
2/29/2004 $12,423 $13,450 $11,319
3/31/2004 $12,387 $13,403 $11,392
4/30/2004 $12,075 $13,086 $11,429
5/31/2004 $12,030 $13,038 $11,495
6/30/2004 $12,056 $13,086 $11,532
7/31/2004 $12,237 $13,258 $11,514
8/31/2004 $12,450 $13,524 $11,520
9/30/2004 $12,529 $13,595 $11,544
10/31/2004 $12,649 $13,712 $11,605
11/30/2004 $12,539 $13,599 $11,611
12/31/2004 $12,724 $13,765 $11,568
1/31/2005 $12,888 $13,894 $11,593
2/28/2005 $12,840 $13,848 $11,660
3/31/2005 $12,803 $13,760 $11,751
4/30/2005 $13,000 $13,977 $11,830
5/31/2005 $13,092 $14,076 $11,818
6/30/2005 $13,151 $14,163 $11,824
7/31/2005 $13,112 $14,099 $11,878
8/31/2005 $13,248 $14,242 $11,939
9/30/2005 $13,166 $14,146 $12,085
10/31/2005 $13,083 $14,060 $12,109
11/30/2005 $13,153 $14,127 $12,012
12/31/2005 $13,280 $14,249 $11,964
1/31/2006 $13,295 $14,287 $12,055
2/28/2006 $13,411 $14,383 $12,079
3/31/2006 $13,326 $14,284 $12,146
4/30/2006 $13,320 $14,279 $12,249
5/31/2006 $13,358 $14,343 $12,310
6/30/2006 $13,316 $14,289 $12,334
7/31/2006 $13,456 $14,459 $12,371
8/31/2006 $13,654 $14,673 $12,395
9/30/2006 $13,749 $14,775 $12,334
10/31/2006 $13,845 $14,868 $12,267
11/30/2006 $13,986 $14,992 $12,249
12/31/2006 $13,931 $14,939 $12,267
1/31/2007 $13,910 $14,901 $12,305
2/28/2007 $14,086 $15,097 $12,371
3/31/2007 $14,030 $15,060 $12,483
4/30/2007 $14,067 $15,104 $12,564
5/31/2007 $14,011 $15,038 $12,641
6/30/2007 $13,954 $14,960 $12,666
7/31/2007 $14,051 $15,076 $12,663
8/31/2007 $13,899 $15,011 $12,639
9/30/2007 $14,128 $15,233 $12,674
10/31/2007 $14,189 $15,301 $12,701
11/30/2007 $14,240 $15,398 $12,777
12/31/2007 $14,290 $15,441 $12,768
1/31/2008 $14,352 $15,636 $12,832
2/29/2008 $13,529 $14,920 $12,869
3/31/2008 $13,969 $15,346 $12,980
4/30/2008 $14,253 $15,526 $13,059
5/31/2008 $14,378 $15,620 $13,169
6/30/2008 $14,160 $15,443 $13,302
7/31/2008 $14,150 $15,502 $13,372
8/31/2008 $14,264 $15,683 $13,318
9/30/2008 $13,422 $14,948 $13,300
10/31/2008 $13,217 $14,795 $13,166
11/30/2008 $13,018 $14,842 $12,913
12/31/2008 $13,136 $15,059 $12,780
1/31/2009 $13,442 $15,610 $12,835
2/28/2009 $13,721 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year -0.03%
5-Year +1.45%
10-Year +3.10%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN COLORADO BARCLAYS CAPITAL
TAX-FREE MUNICIPAL
DATE INCOME FUND - CLASS C BOND INDEX CPI
- ---------- --------------------- ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,028 $10,014 $10,030
4/30/1999 $10,031 $10,039 $10,103
5/31/1999 $ 9,976 $ 9,981 $10,103
6/30/1999 $ 9,822 $ 9,837 $10,103
7/31/1999 $ 9,825 $ 9,873 $10,134
8/31/1999 $ 9,686 $ 9,794 $10,158
9/30/1999 $ 9,655 $ 9,798 $10,207
10/31/1999 $ 9,481 $ 9,692 $10,225
11/30/1999 $ 9,569 $ 9,795 $10,231
12/31/1999 $ 9,462 $ 9,722 $10,231
1/31/2000 $ 9,363 $ 9,679 $10,261
2/29/2000 $ 9,487 $ 9,792 $10,322
3/31/2000 $ 9,726 $10,006 $10,407
4/30/2000 $ 9,660 $ 9,947 $10,413
5/31/2000 $ 9,595 $ 9,895 $10,426
6/30/2000 $ 9,844 $10,157 $10,480
7/31/2000 $ 9,962 $10,299 $10,505
8/31/2000 $10,116 $10,457 $10,505
9/30/2000 $10,040 $10,403 $10,559
10/31/2000 $10,151 $10,516 $10,578
11/30/2000 $10,235 $10,596 $10,584
12/31/2000 $10,508 $10,858 $10,578
1/31/2001 $10,584 $10,965 $10,644
2/28/2001 $10,615 $11,000 $10,687
3/31/2001 $10,700 $11,099 $10,711
4/30/2001 $10,612 $10,978 $10,754
5/31/2001 $10,698 $11,097 $10,802
6/30/2001 $10,830 $11,171 $10,821
7/31/2001 $11,000 $11,336 $10,790
8/31/2001 $11,179 $11,523 $10,790
9/30/2001 $11,080 $11,484 $10,839
10/31/2001 $11,204 $11,621 $10,802
11/30/2001 $11,104 $11,523 $10,784
12/31/2001 $10,976 $11,414 $10,742
1/31/2002 $11,148 $11,612 $10,766
2/28/2002 $11,245 $11,752 $10,809
3/31/2002 $11,077 $11,522 $10,869
4/30/2002 $11,223 $11,747 $10,930
5/31/2002 $11,283 $11,818 $10,930
6/30/2002 $11,382 $11,943 $10,936
7/31/2002 $11,511 $12,097 $10,948
8/31/2002 $11,611 $12,242 $10,985
9/30/2002 $11,875 $12,510 $11,003
10/31/2002 $11,614 $12,303 $11,021
11/30/2002 $11,557 $12,252 $11,021
12/31/2002 $11,804 $12,510 $10,997
1/31/2003 $11,756 $12,479 $11,046
2/28/2003 $11,933 $12,653 $11,131
3/31/2003 $11,893 $12,661 $11,198
4/30/2003 $11,972 $12,744 $11,173
5/31/2003 $12,241 $13,043 $11,155
6/30/2003 $12,199 $12,987 $11,167
7/31/2003 $11,765 $12,533 $11,179
8/31/2003 $11,864 $12,626 $11,222
9/30/2003 $12,186 $12,997 $11,258
10/31/2003 $12,104 $12,932 $11,246
11/30/2003 $12,234 $13,067 $11,216
12/31/2003 $12,336 $13,175 $11,204
1/31/2004 $12,427 $13,250 $11,258
2/29/2004 $12,622 $13,450 $11,319
3/31/2004 $12,580 $13,403 $11,392
4/30/2004 $12,259 $13,086 $11,429
5/31/2004 $12,208 $13,038 $11,495
6/30/2004 $12,228 $13,086 $11,532
7/31/2004 $12,395 $13,258 $11,514
8/31/2004 $12,614 $13,524 $11,520
9/30/2004 $12,687 $13,595 $11,544
10/31/2004 $12,803 $13,712 $11,605
11/30/2004 $12,686 $13,599 $11,611
12/31/2004 $12,877 $13,765 $11,568
1/31/2005 $13,025 $13,894 $11,593
2/28/2005 $12,982 $13,848 $11,660
3/31/2005 $12,928 $13,760 $11,751
4/30/2005 $13,120 $13,977 $11,830
5/31/2005 $13,205 $14,076 $11,818
6/30/2005 $13,269 $14,163 $11,824
7/31/2005 $13,214 $14,099 $11,878
8/31/2005 $13,344 $14,242 $11,939
9/30/2005 $13,255 $14,146 $12,085
10/31/2005 $13,177 $14,060 $12,109
11/30/2005 $13,231 $14,127 $12,012
12/31/2005 $13,351 $14,249 $11,964
1/31/2006 $13,360 $14,287 $12,055
2/28/2006 $13,481 $14,383 $12,079
3/31/2006 $13,379 $14,284 $12,146
4/30/2006 $13,366 $14,279 $12,249
5/31/2006 $13,398 $14,343 $12,310
6/30/2006 $13,362 $14,289 $12,334
7/31/2006 $13,484 $14,459 $12,371
8/31/2006 $13,674 $14,673 $12,395
9/30/2006 $13,774 $14,775 $12,334
10/31/2006 $13,852 $14,868 $12,267
11/30/2006 $13,998 $14,992 $12,249
12/31/2006 $13,936 $14,939 $12,267
1/31/2007 $13,897 $14,901 $12,305
2/28/2007 $14,077 $15,097 $12,371
3/31/2007 $14,015 $15,060 $12,483
4/30/2007 $14,045 $15,104 $12,564
5/31/2007 $13,983 $15,038 $12,641
6/30/2007 $13,920 $14,960 $12,666
7/31/2007 $14,009 $15,076 $12,663
8/31/2007 $13,853 $15,011 $12,639
9/30/2007 $14,073 $15,233 $12,674
10/31/2007 $14,127 $15,301 $12,701
11/30/2007 $14,171 $15,398 $12,777
12/31/2007 $14,214 $15,441 $12,768
1/31/2008 $14,269 $15,636 $12,832
2/29/2008 $13,439 $14,920 $12,869
3/31/2008 $13,878 $15,346 $12,980
4/30/2008 $14,150 $15,526 $13,059
5/31/2008 $14,267 $15,620 $13,169
6/30/2008 $14,046 $15,443 $13,302
7/31/2008 $14,030 $15,502 $13,372
8/31/2008 $14,136 $15,683 $13,318
9/30/2008 $13,301 $14,948 $13,300
10/31/2008 $13,081 $14,795 $13,166
11/30/2008 $12,892 $14,842 $12,913
12/31/2008 $12,989 $15,059 $12,780
1/31/2009 $13,295 $15,610 $12,835
2/28/2009 $13,564 $15,692 $12,899
22 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 23
Your Fund's Expenses
FRANKLIN COLORADO TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
24 | 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 962.00 $3.31
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.41
CLASS C
Actual $1,000 $ 959.60 $5.93
Hypothetical (5% return before expenses) $1,000 $1,018.74 $6.11
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.68% and C: 1.22%), multiplied by the
average account value over the period, multiplied by 181/365 to reflect the
one-half year period.
Annual Report | 25
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)
CREDIT QUALITY BREAKDOWN*
Franklin Connecticut Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA 25.5%
AA 29.8%
A 13.8%
BBB 23.7%
Not Rated by S&P 7.2%
* 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 1.3% --
AA or Aa 0.6% --
A 3.7% --
BBB or Baa 0.5% 0.2%
Below Investment Grade 0.9% --
--- ---
Total 7.0% 0.2%
This annual report for Franklin Connecticut Tax-Free Income Fund covers the
fiscal year ended February 28, 2009.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$10.39 on February 29, 2008, to $10.18 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 44.71 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 114.
26 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Connecticut Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 3.78 cents 3.26 cents
April 2008 3.78 cents 3.26 cents
May 2008 3.78 cents 3.26 cents
June 2008 3.78 cents 3.29 cents
July 2008 3.78 cents 3.29 cents
August 2008 3.78 cents 3.29 cents
September 2008 3.73 cents 3.24 cents
October 2008 3.73 cents 3.24 cents
November 2008 3.73 cents 3.24 cents
December 2008 3.73 cents 3.29 cents
January 2009 3.73 cents 3.29 cents
February 2009 3.73 cents 3.29 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.
period.(2) The Performance Summary beginning on page 29 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.23%
based on an annualization of the current 3.75 cent per share dividend and the
maximum offering price of $10.63 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Connecticut personal income tax bracket
of 38.25% would need to earn a distribution rate of 6.85% from a taxable
investment to match the Fund's Class A tax-free distribution rate. For the
Fund's Class C shares' performance, please see the Performance Summary.
The Fund was subject to bond calls during the period 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 addition, the Fund had prerefunded bonds that reached their
maturity or call dates. In general, we were limited to reinvesting these
proceeds as well as those 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
Economic conditions in Connecticut weakened amid a national recession. Although
supported by a diverse and highly developed economy, the state
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 27
PORTFOLIO BREAKDOWN
Franklin Connecticut Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Higher Education 22.9%
Prerefunded 18.0%
Utilities 16.8%
Other Revenue 13.5%
Hospital & Health Care 11.7%
General Obligation 7.6%
Housing 5.6%
Corporate-Backed 1.2%
Tax-Supported 1.1%
Subject to Government Appropriations 0.8%
Transportation 0.8%
* Does not include short-term investments and other net assets.
suffered losses in jobs and tax revenues largely due to its close links to Wall
Street and its battered financial services and insurance industries. As of
February 2009, the state's 7.4% unemployment rate was lower than the country's
8.1% rate.(3) To foster an economic recovery, in January 2009 the governor
proposed a statewide stimulus package targeting job creation, school
construction, transportation and social services. The plan, funded by bonds,
also included provisions to reinforce the manufacturing sector by helping small
manufacturers create and retain jobs. Exports, particularly in industrial
machinery, grew steadily in the past few years and proved to be a point of
strength for the state with its double-digit increase in 2008.
Due to weaker-than-forecast tax revenues, Connecticut's budget deficit for the
current fiscal year was projected to be higher than estimated. Revenues in
personal, corporate and sales taxes all declined, but incoming federal stimulus
funds and a fully funded reserve pool -- more than double the balance before the
last recession and reaching its highest level ever in this fiscal year -- helped
achieve fiscal balance and afforded Connecticut the flexibility to manage
through the downbeat climate.
Given the state's high wealth and income levels, Connecticut's debt levels were
high but manageable. The state's conservative fiscal management with embedded
and likely sustainable practices led independent credit rating agency Standard &
Poor's to assign Connecticut's general obligation bonds a long-term rating of AA
with a stable outlook.(4)
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) This does not indicate Standard & Poor's rating of the Fund.
28 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.21 $10.18 $10.39
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4471
CLASS C (SYMBOL: FCTIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.20 $10.24 $10.44
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.3895
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +2.31% +13.45% +43.20%
Average Annual Total Return(2) -2.03% +1.67% +3.21%
Avg. Ann. Total Return (3/31/09)(3) -4.78% +1.69% +3.19%
Distribution Rate(4) 4.23%
Taxable Equivalent Distribution Rate(5) 6.85%
30-Day Standardized Yield(6) 3.83%
Taxable Equivalent Yield(5) 6.20%
Total Annual Operating Expenses(7) 0.69%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +1.83% +10.39% +35.70%
Average Annual Total Return(2) +0.85% +2.00% +3.10%
Avg. Ann. Total Return (3/31/09)(3) -2.18% +2.02% +3.07%
Distribution Rate(4) 3.86%
Taxable Equivalent Distribution Rate(5) 6.25%
30-Day Standardized Yield(6) 3.46%
Taxable Equivalent Yield(5) 5.60%
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 (800) 342-5236.
Annual Report | 29
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -2.03%
5-Year +1.67%
10-Year +3.21%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN BARCLAYS
CONNECTICUT CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS A BOND INDEX CPI
- ---------- --------------- ---------- -------
3/1/1999 $ 9,575 $10,000 $10,000
3/31/1999 $ 9,598 $10,014 $10,030
4/30/1999 $ 9,595 $10,039 $10,103
5/31/1999 $ 9,557 $ 9,981 $10,103
6/30/1999 $ 9,399 $ 9,837 $10,103
7/31/1999 $ 9,422 $ 9,873 $10,134
8/31/1999 $ 9,280 $ 9,794 $10,158
9/30/1999 $ 9,259 $ 9,798 $10,207
10/31/1999 $ 9,090 $ 9,692 $10,225
11/30/1999 $ 9,157 $ 9,795 $10,231
12/31/1999 $ 9,038 $ 9,722 $10,231
1/31/2000 $ 8,928 $ 9,679 $10,261
2/29/2000 $ 9,005 $ 9,792 $10,322
3/31/2000 $ 9,244 $10,006 $10,407
4/30/2000 $ 9,177 $ 9,947 $10,413
5/31/2000 $ 9,111 $ 9,895 $10,426
6/30/2000 $ 9,344 $10,157 $10,480
7/31/2000 $ 9,468 $10,299 $10,505
8/31/2000 $ 9,621 $10,457 $10,505
9/30/2000 $ 9,572 $10,403 $10,559
10/31/2000 $ 9,670 $10,516 $10,578
11/30/2000 $ 9,741 $10,596 $10,584
12/31/2000 $ 9,934 $10,858 $10,578
1/31/2001 $ 9,987 $10,965 $10,644
2/28/2001 $10,040 $11,000 $10,687
3/31/2001 $10,139 $11,099 $10,711
4/30/2001 $10,031 $10,978 $10,754
5/31/2001 $10,151 $11,097 $10,802
6/30/2001 $10,231 $11,171 $10,821
7/31/2001 $10,428 $11,336 $10,790
8/31/2001 $10,616 $11,523 $10,790
9/30/2001 $10,543 $11,484 $10,839
10/31/2001 $10,702 $11,621 $10,802
11/30/2001 $10,599 $11,523 $10,784
12/31/2001 $10,494 $11,414 $10,742
1/31/2002 $10,664 $11,612 $10,766
2/28/2002 $10,795 $11,752 $10,809
3/31/2002 $10,590 $11,522 $10,869
4/30/2002 $10,772 $11,747 $10,930
5/31/2002 $10,826 $11,818 $10,930
6/30/2002 $10,929 $11,943 $10,936
7/31/2002 $11,083 $12,097 $10,948
8/31/2002 $11,208 $12,242 $10,985
9/30/2002 $11,475 $12,510 $11,003
10/31/2002 $11,224 $12,303 $11,021
11/30/2002 $11,175 $12,252 $11,021
12/31/2002 $11,415 $12,510 $10,997
1/31/2003 $11,386 $12,479 $11,046
2/28/2003 $11,543 $12,653 $11,131
3/31/2003 $11,545 $12,661 $11,198
4/30/2003 $11,620 $12,744 $11,173
5/31/2003 $11,904 $13,043 $11,155
6/30/2003 $11,853 $12,987 $11,167
7/31/2003 $11,314 $12,533 $11,179
8/31/2003 $11,368 $12,626 $11,222
9/30/2003 $11,646 $12,997 $11,258
10/31/2003 $11,594 $12,932 $11,246
11/30/2003 $11,734 $13,067 $11,216
12/31/2003 $11,831 $13,175 $11,204
1/31/2004 $11,896 $13,250 $11,258
2/29/2004 $12,091 $13,450 $11,319
3/31/2004 $12,090 $13,403 $11,392
4/30/2004 $11,763 $13,086 $11,429
5/31/2004 $11,719 $13,038 $11,495
6/30/2004 $11,796 $13,086 $11,532
7/31/2004 $11,984 $13,258 $11,514
8/31/2004 $12,194 $13,524 $11,520
9/30/2004 $12,283 $13,595 $11,544
10/31/2004 $12,406 $13,712 $11,605
11/30/2004 $12,328 $13,599 $11,611
12/31/2004 $12,485 $13,765 $11,568
1/31/2005 $12,643 $13,894 $11,593
2/28/2005 $12,621 $13,848 $11,660
3/31/2005 $12,576 $13,760 $11,751
4/30/2005 $12,770 $13,977 $11,830
5/31/2005 $12,862 $14,076 $11,818
6/30/2005 $12,919 $14,163 $11,824
7/31/2005 $12,897 $14,099 $11,878
8/31/2005 $13,024 $14,242 $11,939
9/30/2005 $12,933 $14,146 $12,085
10/31/2005 $12,875 $14,060 $12,109
11/30/2005 $12,933 $14,127 $12,012
12/31/2005 $13,051 $14,249 $11,964
1/31/2006 $13,075 $14,287 $12,055
2/28/2006 $13,169 $14,383 $12,079
3/31/2006 $13,085 $14,284 $12,146
4/30/2006 $13,108 $14,279 $12,249
5/31/2006 $13,131 $14,343 $12,310
6/30/2006 $13,094 $14,289 $12,334
7/31/2006 $13,225 $14,459 $12,371
8/31/2006 $13,406 $14,673 $12,395
9/30/2006 $13,489 $14,775 $12,334
10/31/2006 $13,561 $14,868 $12,267
11/30/2006 $13,681 $14,992 $12,249
12/31/2006 $13,643 $14,939 $12,267
1/31/2007 $13,616 $14,901 $12,305
2/28/2007 $13,775 $15,097 $12,371
3/31/2007 $13,723 $15,060 $12,483
4/30/2007 $13,770 $15,104 $12,564
5/31/2007 $13,718 $15,038 $12,641
6/30/2007 $13,666 $14,960 $12,666
7/31/2007 $13,751 $15,076 $12,663
8/31/2007 $13,636 $15,011 $12,639
9/30/2007 $13,836 $15,233 $12,674
10/31/2007 $13,896 $15,301 $12,701
11/30/2007 $13,945 $15,398 $12,777
12/31/2007 $13,955 $15,441 $12,768
1/31/2008 $14,068 $15,636 $12,832
2/29/2008 $13,408 $14,920 $12,869
3/31/2008 $13,818 $15,346 $12,980
4/30/2008 $14,022 $15,526 $13,059
5/31/2008 $14,136 $15,620 $13,169
6/30/2008 $14,016 $15,443 $13,302
7/31/2008 $14,013 $15,502 $13,372
8/31/2008 $14,102 $15,683 $13,318
9/30/2008 $13,399 $14,948 $13,300
10/31/2008 $13,199 $14,795 $13,166
11/30/2008 $13,048 $14,842 $12,913
12/31/2008 $13,018 $15,059 $12,780
1/31/2009 $13,510 $15,610 $12,835
2/28/2009 $13,711 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +0.85%
5-Year +2.00%
10-Year +3.10%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN BARCLAYS
CONNECTICUT CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS C BOND INDEX CPI
- ---------- --------------- ---------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,019 $10,014 $10,030
4/30/1999 $10,020 $10,039 $10,103
5/31/1999 $ 9,967 $ 9,981 $10,103
6/30/1999 $ 9,798 $ 9,837 $10,103
7/31/1999 $ 9,826 $ 9,873 $10,134
8/31/1999 $ 9,665 $ 9,794 $10,158
9/30/1999 $ 9,639 $ 9,798 $10,207
10/31/1999 $ 9,459 $ 9,692 $10,225
11/30/1999 $ 9,524 $ 9,795 $10,231
12/31/1999 $ 9,397 $ 9,722 $10,231
1/31/2000 $ 9,279 $ 9,679 $10,261
2/29/2000 $ 9,363 $ 9,792 $10,322
3/31/2000 $ 9,606 $10,006 $10,407
4/30/2000 $ 9,533 $ 9,947 $10,413
5/31/2000 $ 9,451 $ 9,895 $10,426
6/30/2000 $ 9,687 $10,157 $10,480
7/31/2000 $ 9,812 $10,299 $10,505
8/31/2000 $ 9,965 $10,457 $10,505
9/30/2000 $ 9,910 $10,403 $10,559
10/31/2000 $10,007 $10,516 $10,578
11/30/2000 $10,076 $10,596 $10,584
12/31/2000 $10,270 $10,858 $10,578
1/31/2001 $10,319 $10,965 $10,644
2/28/2001 $10,369 $11,000 $10,687
3/31/2001 $10,467 $11,099 $10,711
4/30/2001 $10,350 $10,978 $10,754
5/31/2001 $10,478 $11,097 $10,802
6/30/2001 $10,557 $11,171 $10,821
7/31/2001 $10,754 $11,336 $10,790
8/31/2001 $10,942 $11,523 $10,790
9/30/2001 $10,862 $11,484 $10,839
10/31/2001 $11,021 $11,621 $10,802
11/30/2001 $10,910 $11,523 $10,784
12/31/2001 $10,797 $11,414 $10,742
1/31/2002 $10,966 $11,612 $10,766
2/28/2002 $11,096 $11,752 $10,809
3/31/2002 $10,880 $11,522 $10,869
4/30/2002 $11,062 $11,747 $10,930
5/31/2002 $11,111 $11,818 $10,930
6/30/2002 $11,212 $11,943 $10,936
7/31/2002 $11,364 $12,097 $10,948
8/31/2002 $11,487 $12,242 $10,985
9/30/2002 $11,755 $12,510 $11,003
10/31/2002 $11,503 $12,303 $11,021
11/30/2002 $11,449 $12,252 $11,021
12/31/2002 $11,678 $12,510 $10,997
1/31/2003 $11,643 $12,479 $11,046
2/28/2003 $11,808 $12,653 $11,131
3/31/2003 $11,794 $12,661 $11,198
4/30/2003 $11,865 $12,744 $11,173
5/31/2003 $12,149 $13,043 $11,155
6/30/2003 $12,101 $12,987 $11,167
7/31/2003 $11,537 $12,533 $11,179
8/31/2003 $11,586 $12,626 $11,222
9/30/2003 $11,863 $12,997 $11,258
10/31/2003 $11,804 $12,932 $11,246
11/30/2003 $11,951 $13,067 $11,216
12/31/2003 $12,044 $13,175 $11,204
1/31/2004 $12,104 $13,250 $11,258
2/29/2004 $12,297 $13,450 $11,319
3/31/2004 $12,280 $13,403 $11,392
4/30/2004 $11,954 $13,086 $11,429
5/31/2004 $11,904 $13,038 $11,495
6/30/2004 $11,976 $13,086 $11,532
7/31/2004 $12,148 $13,258 $11,514
8/31/2004 $12,366 $13,524 $11,520
9/30/2004 $12,439 $13,595 $11,544
10/31/2004 $12,569 $13,712 $11,605
11/30/2004 $12,484 $13,599 $11,611
12/31/2004 $12,637 $13,765 $11,568
1/31/2005 $12,790 $13,894 $11,593
2/28/2005 $12,762 $13,848 $11,660
3/31/2005 $12,710 $13,760 $11,751
4/30/2005 $12,899 $13,977 $11,830
5/31/2005 $12,985 $14,076 $11,818
6/30/2005 $13,049 $14,163 $11,824
7/31/2005 $13,021 $14,099 $11,878
8/31/2005 $13,131 $14,242 $11,939
9/30/2005 $13,045 $14,146 $12,085
10/31/2005 $12,970 $14,060 $12,109
11/30/2005 $13,023 $14,127 $12,012
12/31/2005 $13,135 $14,249 $11,964
1/31/2006 $13,152 $14,287 $12,055
2/28/2006 $13,241 $14,383 $12,079
3/31/2006 $13,163 $14,284 $12,146
4/30/2006 $13,167 $14,279 $12,249
5/31/2006 $13,196 $14,343 $12,310
6/30/2006 $13,153 $14,289 $12,334
7/31/2006 $13,266 $14,459 $12,371
8/31/2006 $13,440 $14,673 $12,395
9/30/2006 $13,517 $14,775 $12,334
10/31/2006 $13,595 $14,868 $12,267
11/30/2006 $13,709 $14,992 $12,249
12/31/2006 $13,664 $14,939 $12,267
1/31/2007 $13,619 $14,901 $12,305
2/28/2007 $13,783 $15,097 $12,371
3/31/2007 $13,725 $15,060 $12,483
4/30/2007 $13,766 $15,104 $12,564
5/31/2007 $13,708 $15,038 $12,641
6/30/2007 $13,649 $14,960 $12,666
7/31/2007 $13,728 $15,076 $12,663
8/31/2007 $13,607 $15,011 $12,639
9/30/2007 $13,787 $15,233 $12,674
10/31/2007 $13,841 $15,301 $12,701
11/30/2007 $13,895 $15,398 $12,777
12/31/2007 $13,899 $15,441 $12,768
1/31/2008 $13,991 $15,636 $12,832
2/29/2008 $13,332 $14,920 $12,869
3/31/2008 $13,744 $15,346 $12,980
4/30/2008 $13,939 $15,526 $13,059
5/31/2008 $14,032 $15,620 $13,169
6/30/2008 $13,920 $15,443 $13,302
7/31/2008 $13,911 $15,502 $13,372
8/31/2008 $13,992 $15,683 $13,318
9/30/2008 $13,279 $14,948 $13,300
10/31/2008 $13,088 $14,795 $13,166
11/30/2008 $12,920 $14,842 $12,913
12/31/2008 $12,885 $15,059 $12,780
1/31/2009 $13,376 $15,610 $12,835
2/28/2009 $13,570 $15,692 $12,899
30 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 31
Your Fund's Expenses
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
32 | 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- ---------------- ----------------------
CLASS A
Actual $1,000 $ 972.70 $3.33
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.41
CLASS C
Actual $1,000 $ 970.20 $6.01
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.16
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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 | 33
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 state
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) The Fund invests primarily
in municipal securities issued by U.S. territories such as Puerto Rico, Guam and
the Virgin Islands.
CREDIT QUALITY BREAKDOWN*
Franklin Double Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 25.3%
AA 12.3%
A 6.2%
BBB 51.7%
Below Investment Grade 0.4%
Not Rated by S&P 4.1%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
- ------- ------- --------
AAA or Aaa -- 0.1%
BBB or Baa 3.1% 0.9%
--- ---
Total 3.1% 1.0%
This annual report for Franklin Double Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$11.10 on February 29, 2008, to $10.54 on February 28, 2009. 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 120.
34 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Double Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.09 cents 3.54 cents
April 2008 4.09 cents 3.54 cents
May 2008 4.09 cents 3.54 cents
June 2008 4.15 cents 3.62 cents
July 2008 4.15 cents 3.62 cents
August 2008 4.15 cents 3.62 cents
September 2008 4.15 cents 3.63 cents
October 2008 4.15 cents 3.63 cents
November 2008 4.15 cents 3.63 cents
December 2008 4.15 cents 3.70 cents
January 2009 4.15 cents 3.70 cents
February 2009 4.15 cents 3.70 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.
Class A shares paid dividends totaling 49.44 cents per share for the same
period.(2) The Performance Summary beginning on page 37 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.60%
based on an annualization of the current 4.22 cent per share dividend and the
maximum offering price of $11.01 on February 28, 2009. An investor in the 2009
maximum federal income tax bracket of 35.00% would need to earn a distribution
rate of 7.08% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class C shares' performance, please see the
Performance Summary.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
Franklin Double Tax-Free Income Fund was the first mutual fund of its kind to
offer both state and federal income tax exemptions in all 50 states. We do
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 35
PORTFOLIO BREAKDOWN
Franklin Double Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 19.9%
Utilities 18.4%
General Obligation 18.2%
Transportation 12.2%
Subject to Government Appropriations 8.9%
Tax-Supported 7.6%
Other Revenue 4.7%
Housing 4.3%
Higher Education 3.2%
Hospital & Health Care 2.6%
* Does not include short-term investments and other net assets.
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 106 different positions across 10 different
sectors as of February 28, 2009. Issuers represented in the portfolio included
Puerto Rico (84.4% of the Fund's total long-term investments), Virgin Islands
(11.2%) and Guam (4.4%).
Many municipal bond 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 has also
helped 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, 2009, 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.
36 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.56 $10.54 $11.10
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4944
CLASS C (SYMBOL: FPRIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.56 $10.58 $11.14
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4335
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -0.62% +8.40% +40.70%
Average Annual Total Return(2) -4.82% +0.74% +3.02%
Avg. Ann. Total Return (3/31/09)(3) -9.80% +0.23% +2.70%
Distribution Rate(4) 4.60%
Taxable Equivalent Distribution Rate(5) 7.08%
30-Day Standardized Yield(6) 4.18%
Taxable Equivalent Yield(5) 6.43%
Total Annual Operating Expenses(7) 0.69%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -1.17% +5.43% +33.41%
Average Annual Total Return(2) -2.12% +1.06% +2.92%
Avg. Ann. Total Return (3/31/09)(3) -7.24% +0.54% +2.59%
Distribution Rate(4) 4.28%
Taxable Equivalent Distribution Rate(5) 6.58%
30-Day Standardized Yield(6) 3.82%
Taxable Equivalent Yield(5) 5.88%
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 (800) 342-5236.
Annual Report | 37
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -4.82%
5-Year +0.74%
10-Year +3.02%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN DOUBLE TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS A MUNICIPAL BOND INDEX CPI
- ---------- ------------------------ -------------------- -------
3/1/1999 $ 9,573 $10,000 $10,000
3/31/1999 $ 9,619 $10,014 $10,030
4/30/1999 $ 9,641 $10,039 $10,103
5/31/1999 $ 9,615 $ 9,981 $10,103
6/30/1999 $ 9,487 $ 9,837 $10,103
7/31/1999 $ 9,517 $ 9,873 $10,134
8/31/1999 $ 9,400 $ 9,794 $10,158
9/30/1999 $ 9,406 $ 9,798 $10,207
10/31/1999 $ 9,296 $ 9,692 $10,225
11/30/1999 $ 9,361 $ 9,795 $10,231
12/31/1999 $ 9,267 $ 9,722 $10,231
1/31/2000 $ 9,181 $ 9,679 $10,261
2/29/2000 $ 9,289 $ 9,792 $10,322
3/31/2000 $ 9,483 $10,006 $10,407
4/30/2000 $ 9,439 $ 9,947 $10,413
5/31/2000 $ 9,387 $ 9,895 $10,426
6/30/2000 $ 9,618 $10,157 $10,480
7/31/2000 $ 9,755 $10,299 $10,505
8/31/2000 $ 9,910 $10,457 $10,505
9/30/2000 $ 9,866 $10,403 $10,559
10/31/2000 $ 9,926 $10,516 $10,578
11/30/2000 $10,005 $10,596 $10,584
12/31/2000 $10,216 $10,858 $10,578
1/31/2001 $10,277 $10,965 $10,644
2/28/2001 $10,321 $11,000 $10,687
3/31/2001 $10,391 $11,099 $10,711
4/30/2001 $10,309 $10,978 $10,754
5/31/2001 $10,425 $11,097 $10,802
6/30/2001 $10,514 $11,171 $10,821
7/31/2001 $10,694 $11,336 $10,790
8/31/2001 $10,857 $11,523 $10,790
9/30/2001 $10,726 $11,484 $10,839
10/31/2001 $10,862 $11,621 $10,802
11/30/2001 $10,767 $11,523 $10,784
12/31/2001 $10,646 $11,414 $10,742
1/31/2002 $10,812 $11,612 $10,766
2/28/2002 $10,968 $11,752 $10,809
3/31/2002 $10,769 $11,522 $10,869
4/30/2002 $10,981 $11,747 $10,930
5/31/2002 $11,024 $11,818 $10,930
6/30/2002 $11,114 $11,943 $10,936
7/31/2002 $11,243 $12,097 $10,948
8/31/2002 $11,363 $12,242 $10,985
9/30/2002 $11,627 $12,510 $11,003
10/31/2002 $11,429 $12,303 $11,021
11/30/2002 $11,405 $12,252 $11,021
12/31/2002 $11,633 $12,510 $10,997
1/31/2003 $11,560 $12,479 $11,046
2/28/2003 $11,702 $12,653 $11,131
3/31/2003 $11,697 $12,661 $11,198
4/30/2003 $11,721 $12,744 $11,173
5/31/2003 $12,023 $13,043 $11,155
6/30/2003 $11,967 $12,987 $11,167
7/31/2003 $11,512 $12,533 $11,179
8/31/2003 $11,616 $12,626 $11,222
9/30/2003 $11,932 $12,997 $11,258
10/31/2003 $11,864 $12,932 $11,246
11/30/2003 $12,030 $13,067 $11,216
12/31/2003 $12,135 $13,175 $11,204
1/31/2004 $12,189 $13,250 $11,258
2/29/2004 $12,428 $13,450 $11,319
3/31/2004 $12,420 $13,403 $11,392
4/30/2004 $12,070 $13,086 $11,429
5/31/2004 $11,959 $13,038 $11,495
6/30/2004 $12,047 $13,086 $11,532
7/31/2004 $12,248 $13,258 $11,514
8/31/2004 $12,504 $13,524 $11,520
9/30/2004 $12,570 $13,595 $11,544
10/31/2004 $12,700 $13,712 $11,605
11/30/2004 $12,606 $13,599 $11,611
12/31/2004 $12,758 $13,765 $11,568
1/31/2005 $12,931 $13,894 $11,593
2/28/2005 $12,922 $13,848 $11,660
3/31/2005 $12,870 $13,760 $11,751
4/30/2005 $13,067 $13,977 $11,830
5/31/2005 $13,167 $14,076 $11,818
6/30/2005 $13,246 $14,163 $11,824
7/31/2005 $13,193 $14,099 $11,878
8/31/2005 $13,316 $14,242 $11,939
9/30/2005 $13,218 $14,146 $12,085
10/31/2005 $13,131 $14,060 $12,109
11/30/2005 $13,133 $14,127 $12,012
12/31/2005 $13,257 $14,249 $11,964
1/31/2006 $13,314 $14,287 $12,055
2/28/2006 $13,461 $14,383 $12,079
3/31/2006 $13,350 $14,284 $12,146
4/30/2006 $13,340 $14,279 $12,249
5/31/2006 $13,353 $14,343 $12,310
6/30/2006 $13,321 $14,289 $12,334
7/31/2006 $13,471 $14,459 $12,371
8/31/2006 $13,667 $14,673 $12,395
9/30/2006 $13,783 $14,775 $12,334
10/31/2006 $13,877 $14,868 $12,267
11/30/2006 $14,006 $14,992 $12,249
12/31/2006 $13,950 $14,939 $12,267
1/31/2007 $13,928 $14,901 $12,305
2/28/2007 $14,128 $15,097 $12,371
3/31/2007 $14,083 $15,060 $12,483
4/30/2007 $14,132 $15,104 $12,564
5/31/2007 $14,086 $15,038 $12,641
6/30/2007 $14,016 $14,960 $12,666
7/31/2007 $14,112 $15,076 $12,663
8/31/2007 $13,958 $15,011 $12,639
9/30/2007 $14,162 $15,233 $12,674
10/31/2007 $14,222 $15,301 $12,701
11/30/2007 $14,210 $15,398 $12,777
12/31/2007 $14,139 $15,441 $12,768
1/31/2008 $14,261 $15,636 $12,832
2/29/2008 $13,554 $14,920 $12,869
3/31/2008 $13,934 $15,346 $12,980
4/30/2008 $14,204 $15,526 $13,059
5/31/2008 $14,352 $15,620 $13,169
6/30/2008 $14,194 $15,443 $13,302
7/31/2008 $14,158 $15,502 $13,372
8/31/2008 $14,309 $15,683 $13,318
9/30/2008 $13,411 $14,948 $13,300
10/31/2008 $13,028 $14,795 $13,166
11/30/2008 $12,789 $14,842 $12,913
12/31/2008 $12,299 $15,059 $12,780
1/31/2009 $13,278 $15,610 $12,835
2/28/2009 $13,470 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year -2.12%
5-Year +1.06%
10-Year +2.92%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN DOUBLE TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---------- ------------------------ -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,052 $10,014 $10,030
4/30/1999 $10,062 $10,039 $10,103
5/31/1999 $10,029 $ 9,981 $10,103
6/30/1999 $ 9,900 $ 9,837 $10,103
7/31/1999 $ 9,927 $ 9,873 $10,134
8/31/1999 $ 9,801 $ 9,794 $10,158
9/30/1999 $ 9,802 $ 9,798 $10,207
10/31/1999 $ 9,674 $ 9,692 $10,225
11/30/1999 $ 9,737 $ 9,795 $10,231
12/31/1999 $ 9,643 $ 9,722 $10,231
1/31/2000 $ 9,550 $ 9,679 $10,261
2/29/2000 $ 9,658 $ 9,792 $10,322
3/31/2000 $ 9,855 $10,006 $10,407
4/30/2000 $ 9,796 $ 9,947 $10,413
5/31/2000 $ 9,747 $ 9,895 $10,426
6/30/2000 $ 9,982 $10,157 $10,480
7/31/2000 $10,119 $10,299 $10,505
8/31/2000 $10,275 $10,457 $10,505
9/30/2000 $10,225 $10,403 $10,559
10/31/2000 $10,283 $10,516 $10,578
11/30/2000 $10,359 $10,596 $10,584
12/31/2000 $10,572 $10,858 $10,578
1/31/2001 $10,631 $10,965 $10,644
2/28/2001 $10,680 $11,000 $10,687
3/31/2001 $10,747 $11,099 $10,711
4/30/2001 $10,658 $10,978 $10,754
5/31/2001 $10,763 $11,097 $10,802
6/30/2001 $10,850 $11,171 $10,821
7/31/2001 $11,031 $11,336 $10,790
8/31/2001 $11,203 $11,523 $10,790
9/30/2001 $11,054 $11,484 $10,839
10/31/2001 $11,198 $11,621 $10,802
11/30/2001 $11,086 $11,523 $10,784
12/31/2001 $10,966 $11,414 $10,742
1/31/2002 $11,130 $11,612 $10,766
2/28/2002 $11,276 $11,752 $10,809
3/31/2002 $11,076 $11,522 $10,869
4/30/2002 $11,288 $11,747 $10,930
5/31/2002 $11,327 $11,818 $10,930
6/30/2002 $11,405 $11,943 $10,936
7/31/2002 $11,542 $12,097 $10,948
8/31/2002 $11,659 $12,242 $10,985
9/30/2002 $11,925 $12,510 $11,003
10/31/2002 $11,717 $12,303 $11,021
11/30/2002 $11,687 $12,252 $11,021
12/31/2002 $11,925 $12,510 $10,997
1/31/2003 $11,844 $12,479 $11,046
2/28/2003 $11,974 $12,653 $11,131
3/31/2003 $11,964 $12,661 $11,198
4/30/2003 $11,984 $12,744 $11,173
5/31/2003 $12,287 $13,043 $11,155
6/30/2003 $12,223 $12,987 $11,167
7/31/2003 $11,754 $12,533 $11,179
8/31/2003 $11,863 $12,626 $11,222
9/30/2003 $12,179 $12,997 $11,258
10/31/2003 $12,094 $12,932 $11,246
11/30/2003 $12,266 $13,067 $11,216
12/31/2003 $12,357 $13,175 $11,204
1/31/2004 $12,407 $13,250 $11,258
2/29/2004 $12,655 $13,450 $11,319
3/31/2004 $12,641 $13,403 $11,392
4/30/2004 $12,271 $13,086 $11,429
5/31/2004 $12,153 $13,038 $11,495
6/30/2004 $12,235 $13,086 $11,532
7/31/2004 $12,444 $13,258 $11,514
8/31/2004 $12,697 $13,524 $11,520
9/30/2004 $12,758 $13,595 $11,544
10/31/2004 $12,883 $13,712 $11,605
11/30/2004 $12,773 $13,599 $11,611
12/31/2004 $12,931 $13,765 $11,568
1/31/2005 $13,100 $13,894 $11,593
2/28/2005 $13,085 $13,848 $11,660
3/31/2005 $13,027 $13,760 $11,751
4/30/2005 $13,219 $13,977 $11,830
5/31/2005 $13,313 $14,076 $11,818
6/30/2005 $13,376 $14,163 $11,824
7/31/2005 $13,316 $14,099 $11,878
8/31/2005 $13,445 $14,242 $11,939
9/30/2005 $13,341 $14,146 $12,085
10/31/2005 $13,247 $14,060 $12,109
11/30/2005 $13,243 $14,127 $12,012
12/31/2005 $13,361 $14,249 $11,964
1/31/2006 $13,413 $14,287 $12,055
2/28/2006 $13,543 $14,383 $12,079
3/31/2006 $13,436 $14,284 $12,146
4/30/2006 $13,420 $14,279 $12,249
5/31/2006 $13,427 $14,343 $12,310
6/30/2006 $13,388 $14,289 $12,334
7/31/2006 $13,532 $14,459 $12,371
8/31/2006 $13,722 $14,673 $12,395
9/30/2006 $13,833 $14,775 $12,334
10/31/2006 $13,921 $14,868 $12,267
11/30/2006 $14,044 $14,992 $12,249
12/31/2006 $13,981 $14,939 $12,267
1/31/2007 $13,953 $14,901 $12,305
2/28/2007 $14,158 $15,097 $12,371
3/31/2007 $14,095 $15,060 $12,483
4/30/2007 $14,149 $15,104 $12,564
5/31/2007 $14,085 $15,038 $12,641
6/30/2007 $14,009 $14,960 $12,666
7/31/2007 $14,109 $15,076 $12,663
8/31/2007 $13,938 $15,011 $12,639
9/30/2007 $14,134 $15,233 $12,674
10/31/2007 $14,188 $15,301 $12,701
11/30/2007 $14,170 $15,398 $12,777
12/31/2007 $14,092 $15,441 $12,768
1/31/2008 $14,207 $15,636 $12,832
2/29/2008 $13,499 $14,920 $12,869
3/31/2008 $13,869 $15,346 $12,980
4/30/2008 $14,131 $15,526 $13,059
5/31/2008 $14,271 $15,620 $13,169
6/30/2008 $14,107 $15,443 $13,302
7/31/2008 $14,078 $15,502 $13,372
8/31/2008 $14,209 $15,683 $13,318
9/30/2008 $13,314 $14,948 $13,300
10/31/2008 $12,928 $14,795 $13,166
11/30/2008 $12,686 $14,842 $12,913
12/31/2008 $12,196 $15,059 $12,780
1/31/2009 $13,157 $15,610 $12,835
2/28/2009 $13,341 $15,692 $12,899
38 | 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 THE MUNICIPAL SECURITIES OF 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the 2009 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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 | 39
Your Fund's Expenses
FRANKLIN DOUBLE TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 941.30 $3.32
Hypothetical (5% return before expenses) $1,000 $1,021.37 $3.46
CLASS C
Actual $1,000 $ 938.90 $5.96
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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 | 41
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
three to 10 years.
CREDIT QUALITY BREAKDOWN*
Franklin Federal Intermediate-Term Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 29.9%
AA 35.8%
A 21.2%
BBB 6.4%
Below Investment Grade 0.7%
Not Rated by S&P 6.0%
* 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 -- 0.4%
AA or Aa 2.7% --
A 1.3% --
BBB or Baa 1.6% --
--- ---
Total 5.6% 0.4%
This annual report for Franklin Federal Intermediate-Term Tax-Free Income Fund
covers the fiscal year ended February 28, 2009.
(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 127.
42 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Federal Intermediate-Term Tax-Free Income Fund
DIVIDEND PER SHARE
--------------------------------------------
MONTH CLASS A CLASS C ADVISOR CLASS**
- ----- ---------- ---------- ------------------
March 2008 3.51 cents 2.96 cents --
April 2008 3.51 cents 2.96 cents --
May 2008 3.51 cents 2.96 cents --
June 2008 3.51 cents 2.98 cents --
July 2008 3.51 cents 2.98 cents --
August 2008 3.51 cents 2.98 cents --
September 2008 3.63 cents 3.12 cents --
October 2008 3.63 cents 3.12 cents --
November 2008 3.63 cents 3.12 cents --
December 2008 3.68 cents 3.20 cents 2.33 cents
January 2009 3.68 cents 3.20 cents 3.76 cents
February 2009 3.68 cents 3.20 cents 3.76 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.
** Effective 12/1/08, the Fund began offering Advisor Class shares. See the
prospectus for details.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$11.04 on February 29, 2008, to $10.99 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 42.85 cents per share for the same period.(2) 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 3.68 cent per share dividend and the maximum
offering price of $11.24 on February 28, 2009. An investor in the 2009 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
6.05% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class C and Advisor shares' performance,
please see the Performance Summary.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 43
PORTFOLIO BREAKDOWN
Franklin Federal Intermediate-Term
Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Utilities 25.5%**
General Obligation 20.6%
Hospital & Health Care 16.9%
Subject to Government Appropriations 12.1%
Other Revenue 8.6%
Transportation 6.6%
Prerefunded 4.1%
Tax-Supported 2.5%
Higher Education 1.9%
Corporate-Backed 1.2%
* Does not include short-term investments and other net assets.
** The Fund may invest more than 25% in municipal securities that finance
similar types of projects such as utilities. A change that affects one
project may affect all similar projects, thereby increasing market risk.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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, 2009, 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 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.05 $10.99 $11.04
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4285
CLASS C (SYMBOL: FCITX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.05 $11.01 $11.06
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.3668
ADVISOR CLASS (SYMBOL: N/A) CHANGE 2/28/09 12/1/08
- --------------------------- ------ ------- -------
Net Asset Value (NAV) +$0.42 $11.00 $10.58
DISTRIBUTIONS (12/1/08-2/28/09)
Dividend Income $0.1083
Annual Report | 45
Performance Summary (CONTINUED)
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; ADVISOR CLASS:
NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +3.48% +12.49% +45.89%
Average Annual Total Return(2) +1.19% +1.92% +3.61%
Avg. Ann. Total Return (3/31/09)(3) -1.48% +2.06% +3.61%
Distribution Rate(4) 3.93%
Taxable Equivalent Distribution Rate(5) 6.05%
30-Day Standardized Yield(6) 3.30%
Taxable Equivalent Yield(5) 5.08%
Total Annual Operating Expenses(7) 0.71%
CLASS C 1-YEAR 5-YEAR INCEPTION (7/1/03)
- ------- ------ ------- ------------------
Cumulative Total Return(1) +2.90% +9.49% +12.73%
Average Annual Total Return(2) +1.91% +1.83% +2.14%
Avg. Ann. Total Return (3/31/09)(3) -0.74% +1.97% +2.10%
Distribution Rate(4) 3.46%
Taxable Equivalent Distribution Rate(5) 5.32%
30-Day Standardized Yield(6) 2.84%
Taxable Equivalent Yield(5) 4.37%
Total Annual Operating Expenses(7) 1.26%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------- -------
Cumulative Total Return(1) +3.60% +12.61% +46.06%
Average Annual Total Return(2) +3.60% +2.40% +3.86%
Avg. Ann. Total Return (3/31/09)(3) +0.91% +2.55% +3.86%
Distribution Rate(4) 4.11%
Taxable Equivalent Distribution Rate(5) 6.32%
30-Day Standardized Yield(6) 3.74%
Taxable Equivalent Yield(5) 5.75%
Total Annual Operating Expenses(7) 0.61%
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 (800) 342-5236.
46 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year +1.19%
5-Year +1.92%
10-Year +3.61%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN FEDERAL INTERMEDIATE-TERM BARCLAYS CAPITAL MUNICIPAL BOND
DATE TAX-FREE INCOME FUND - CLASS A INDEX: 10-YEAR COMPONENT CPI
- ---------- ---------------------------------- ------------------------------- -------
3/1/1999 $ 9,775 $10,000 $10,000
3/31/1999 $ 9,776 $ 9,995 $10,030
4/30/1999 $ 9,812 $10,022 $10,103
5/31/1999 $ 9,761 $ 9,951 $10,103
6/30/1999 $ 9,649 $ 9,766 $10,103
7/31/1999 $ 9,676 $ 9,832 $10,134
8/31/1999 $ 9,616 $ 9,796 $10,158
9/30/1999 $ 9,636 $ 9,829 $10,207
10/31/1999 $ 9,531 $ 9,759 $10,225
11/30/1999 $ 9,587 $ 9,866 $10,231
12/31/1999 $ 9,527 $ 9,815 $10,231
1/31/2000 $ 9,466 $ 9,774 $10,261
2/29/2000 $ 9,532 $ 9,851 $10,322
3/31/2000 $ 9,680 $10,043 $10,407
4/30/2000 $ 9,637 $ 9,992 $10,413
5/31/2000 $ 9,576 $ 9,933 $10,426
6/30/2000 $ 9,753 $10,203 $10,480
7/31/2000 $ 9,858 $10,344 $10,505
8/31/2000 $10,008 $10,505 $10,505
9/30/2000 $ 9,993 $10,456 $10,559
10/31/2000 $10,071 $10,563 $10,578
11/30/2000 $10,102 $10,621 $10,584
12/31/2000 $10,237 $10,871 $10,578
1/31/2001 $10,354 $11,011 $10,644
2/28/2001 $10,404 $11,029 $10,687
3/31/2001 $10,483 $11,123 $10,711
4/30/2001 $10,438 $10,986 $10,754
5/31/2001 $10,546 $11,105 $10,802
6/30/2001 $10,617 $11,171 $10,821
7/31/2001 $10,755 $11,324 $10,790
8/31/2001 $10,923 $11,518 $10,790
9/30/2001 $10,916 $11,502 $10,839
10/31/2001 $11,017 $11,644 $10,802
11/30/2001 $10,921 $11,494 $10,784
12/31/2001 $10,805 $11,372 $10,742
1/31/2002 $10,954 $11,587 $10,766
2/28/2002 $11,095 $11,752 $10,809
3/31/2002 $10,905 $11,511 $10,869
4/30/2002 $11,125 $11,777 $10,930
5/31/2002 $11,186 $11,833 $10,930
6/30/2002 $11,337 $11,980 $10,936
7/31/2002 $11,458 $12,140 $10,948
8/31/2002 $11,570 $12,298 $10,985
9/30/2002 $11,804 $12,591 $11,003
10/31/2002 $11,599 $12,363 $11,021
11/30/2002 $11,527 $12,261 $11,021
12/31/2002 $11,773 $12,529 $10,997
1/31/2003 $11,719 $12,462 $11,046
2/28/2003 $11,925 $12,677 $11,131
3/31/2003 $11,933 $12,684 $11,198
4/30/2003 $12,024 $12,778 $11,173
5/31/2003 $12,356 $13,144 $11,155
6/30/2003 $12,279 $13,081 $11,167
7/31/2003 $11,758 $12,532 $11,179
8/31/2003 $11,870 $12,640 $11,222
9/30/2003 $12,258 $13,065 $11,258
10/31/2003 $12,158 $12,965 $11,246
11/30/2003 $12,281 $13,105 $11,216
12/31/2003 $12,404 $13,243 $11,204
1/31/2004 $12,462 $13,299 $11,258
2/29/2004 $12,683 $13,533 $11,319
3/31/2004 $12,590 $13,456 $11,392
4/30/2004 $12,249 $13,084 $11,429
5/31/2004 $12,244 $13,092 $11,495
6/30/2004 $12,282 $13,136 $11,532
7/31/2004 $12,451 $13,316 $11,514
8/31/2004 $12,709 $13,607 $11,520
9/30/2004 $12,769 $13,680 $11,544
10/31/2004 $12,875 $13,788 $11,605
11/30/2004 $12,715 $13,632 $11,611
12/31/2004 $12,864 $13,793 $11,568
1/31/2005 $12,959 $13,909 $11,593
2/28/2005 $12,875 $13,822 $11,660
3/31/2005 $12,757 $13,701 $11,751
4/30/2005 $12,998 $13,966 $11,830
5/31/2005 $13,082 $14,060 $11,818
6/30/2005 $13,143 $14,141 $11,824
7/31/2005 $13,035 $14,021 $11,878
8/31/2005 $13,177 $14,191 $11,939
9/30/2005 $13,068 $14,063 $12,085
10/31/2005 $12,970 $13,956 $12,109
11/30/2005 $13,032 $14,042 $12,012
12/31/2005 $13,141 $14,171 $11,964
1/31/2006 $13,169 $14,217 $12,055
2/28/2006 $13,244 $14,301 $12,079
3/31/2006 $13,121 $14,154 $12,146
4/30/2006 $13,103 $14,129 $12,249
5/31/2006 $13,167 $14,226 $12,310
6/30/2006 $13,114 $14,162 $12,334
7/31/2006 $13,273 $14,351 $12,371
8/31/2006 $13,479 $14,597 $12,395
9/30/2006 $13,580 $14,703 $12,334
10/31/2006 $13,645 $14,791 $12,267
11/30/2006 $13,747 $14,908 $12,249
12/31/2006 $13,681 $14,838 $12,267
1/31/2007 $13,627 $14,772 $12,305
2/28/2007 $13,802 $14,980 $12,371
3/31/2007 $13,771 $14,949 $12,483
4/30/2007 $13,802 $14,997 $12,564
5/31/2007 $13,723 $14,919 $12,641
6/30/2007 $13,656 $14,838 $12,666
7/31/2007 $13,759 $14,972 $12,663
8/31/2007 $13,777 $15,009 $12,639
9/30/2007 $13,955 $15,210 $12,674
10/31/2007 $13,998 $15,263 $12,701
11/30/2007 $14,104 $15,432 $12,777
12/31/2007 $14,123 $15,475 $12,768
1/31/2008 $14,352 $15,790 $12,832
2/29/2008 $13,785 $15,134 $12,869
3/31/2008 $14,153 $15,523 $12,980
4/30/2008 $14,260 $15,616 $13,059
5/31/2008 $14,329 $15,693 $13,169
6/30/2008 $14,197 $15,531 $13,302
7/31/2008 $14,253 $15,650 $13,372
8/31/2008 $14,412 $15,869 $13,318
9/30/2008 $13,757 $15,293 $13,300
10/31/2008 $13,627 $15,167 $13,166
11/30/2008 $13,609 $15,367 $12,913
12/31/2008 $13,785 $15,710 $12,780
1/31/2009 $14,297 $16,448 $12,835
2/28/2009 $14,261 $16,323 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +1.91%
5-Year +1.83%
Since Inception (7/1/03) +2.14%
CLASS C (7/1/03-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN FEDERAL INTERMEDIATE-TERM BARCLAYS CAPITAL MUNICIPAL BOND
DATE TAX-FREE INCOME FUND - CLASS C INDEX: 10-YEAR COMPONENT CPI
- ---------- ---------------------------------- ------------------------------- -------
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 $10,668 $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 $11,020 $11,451 $11,078
3/31/2007 $10,982 $11,428 $11,179
4/30/2007 $11,010 $11,464 $11,251
5/31/2007 $10,942 $11,405 $11,320
6/30/2007 $10,883 $11,343 $11,342
7/31/2007 $10,960 $11,446 $11,339
8/31/2007 $10,969 $11,474 $11,318
9/30/2007 $11,106 $11,627 $11,349
10/31/2007 $11,136 $11,668 $11,374
11/30/2007 $11,215 $11,797 $11,441
12/31/2007 $11,225 $11,830 $11,434
1/31/2008 $11,402 $12,070 $11,490
2/29/2008 $10,947 $11,569 $11,524
3/31/2008 $11,233 $11,867 $11,624
4/30/2008 $11,312 $11,937 $11,694
5/31/2008 $11,361 $11,997 $11,793
6/30/2008 $11,252 $11,872 $11,912
7/31/2008 $11,291 $11,964 $11,974
8/31/2008 $11,411 $12,131 $11,926
9/30/2008 $10,889 $11,691 $11,910
10/31/2008 $10,780 $11,594 $11,789
11/30/2008 $10,761 $11,747 $11,564
12/31/2008 $10,895 $12,009 $11,444
1/31/2009 $11,294 $12,574 $11,494
2/28/2009 $11,273 $12,478 $11,551
Annual Report | 47
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 2/28/09
- ---------------- -------
1-Year +3.60%
5-Year +2.40%
10-Year +3.86%
ADVISOR CLASS (3/1/99-2/28/09)(8)
(PERFORMANCE GRAPH)
FRANKLIN FEDERAL INTERMEDIATE-TERM BARCLAYS CAPITAL MUNICIPAL BOND
DATE TAX-FREE INCOME FUND - ADVISOR CLASS INDEX: 10-YEAR COMPONENT CPI
- ---------- ------------------------------------ ------------------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,001 $ 9,995 $10,030
4/30/1999 $10,038 $10,022 $10,103
5/31/1999 $ 9,986 $ 9,951 $10,103
6/30/1999 $ 9,871 $ 9,766 $10,103
7/31/1999 $ 9,899 $ 9,832 $10,134
8/31/1999 $ 9,837 $ 9,796 $10,158
9/30/1999 $ 9,857 $ 9,829 $10,207
10/31/1999 $ 9,751 $ 9,759 $10,225
11/30/1999 $ 9,807 $ 9,866 $10,231
12/31/1999 $ 9,746 $ 9,815 $10,231
1/31/2000 $ 9,684 $ 9,774 $10,261
2/29/2000 $ 9,752 $ 9,851 $10,322
3/31/2000 $ 9,903 $10,043 $10,407
4/30/2000 $ 9,859 $ 9,992 $10,413
5/31/2000 $ 9,797 $ 9,933 $10,426
6/30/2000 $ 9,978 $10,203 $10,480
7/31/2000 $10,084 $10,344 $10,505
8/31/2000 $10,239 $10,505 $10,505
9/30/2000 $10,223 $10,456 $10,559
10/31/2000 $10,303 $10,563 $10,578
11/30/2000 $10,335 $10,621 $10,584
12/31/2000 $10,473 $10,871 $10,578
1/31/2001 $10,592 $11,011 $10,644
2/28/2001 $10,644 $11,029 $10,687
3/31/2001 $10,724 $11,123 $10,711
4/30/2001 $10,678 $10,986 $10,754
5/31/2001 $10,789 $11,105 $10,802
6/30/2001 $10,861 $11,171 $10,821
7/31/2001 $11,002 $11,324 $10,790
8/31/2001 $11,174 $11,518 $10,790
9/30/2001 $11,167 $11,502 $10,839
10/31/2001 $11,270 $11,644 $10,802
11/30/2001 $11,173 $11,494 $10,784
12/31/2001 $11,053 $11,372 $10,742
1/31/2002 $11,206 $11,587 $10,766
2/28/2002 $11,350 $11,752 $10,809
3/31/2002 $11,156 $11,511 $10,869
4/30/2002 $11,381 $11,777 $10,930
5/31/2002 $11,443 $11,833 $10,930
6/30/2002 $11,598 $11,980 $10,936
7/31/2002 $11,722 $12,140 $10,948
8/31/2002 $11,836 $12,298 $10,985
9/30/2002 $12,075 $12,591 $11,003
10/31/2002 $11,866 $12,363 $11,021
11/30/2002 $11,792 $12,261 $11,021
12/31/2002 $12,044 $12,529 $10,997
1/31/2003 $11,989 $12,462 $11,046
2/28/2003 $12,199 $12,677 $11,131
3/31/2003 $12,207 $12,684 $11,198
4/30/2003 $12,301 $12,778 $11,173
5/31/2003 $12,641 $13,144 $11,155
6/30/2003 $12,561 $13,081 $11,167
7/31/2003 $12,029 $12,532 $11,179
8/31/2003 $12,143 $12,640 $11,222
9/30/2003 $12,540 $13,065 $11,258
10/31/2003 $12,438 $12,965 $11,246
11/30/2003 $12,564 $13,105 $11,216
12/31/2003 $12,689 $13,243 $11,204
1/31/2004 $12,749 $13,299 $11,258
2/29/2004 $12,975 $13,533 $11,319
3/31/2004 $12,880 $13,456 $11,392
4/30/2004 $12,531 $13,084 $11,429
5/31/2004 $12,526 $13,092 $11,495
6/30/2004 $12,565 $13,136 $11,532
7/31/2004 $12,738 $13,316 $11,514
8/31/2004 $13,001 $13,607 $11,520
9/30/2004 $13,063 $13,680 $11,544
10/31/2004 $13,171 $13,788 $11,605
11/30/2004 $13,007 $13,632 $11,611
12/31/2004 $13,160 $13,793 $11,568
1/31/2005 $13,257 $13,909 $11,593
2/28/2005 $13,171 $13,822 $11,660
3/31/2005 $13,050 $13,701 $11,751
4/30/2005 $13,297 $13,966 $11,830
5/31/2005 $13,383 $14,060 $11,818
6/30/2005 $13,446 $14,141 $11,824
7/31/2005 $13,335 $14,021 $11,878
8/31/2005 $13,480 $14,191 $11,939
9/30/2005 $13,368 $14,063 $12,085
10/31/2005 $13,268 $13,956 $12,109
11/30/2005 $13,332 $14,042 $12,012
12/31/2005 $13,444 $14,171 $11,964
1/31/2006 $13,472 $14,217 $12,055
2/28/2006 $13,549 $14,301 $12,079
3/31/2006 $13,423 $14,154 $12,146
4/30/2006 $13,405 $14,129 $12,249
5/31/2006 $13,470 $14,226 $12,310
6/30/2006 $13,416 $14,162 $12,334
7/31/2006 $13,578 $14,351 $12,371
8/31/2006 $13,789 $14,597 $12,395
9/30/2006 $13,892 $14,703 $12,334
10/31/2006 $13,959 $14,791 $12,267
11/30/2006 $14,063 $14,908 $12,249
12/31/2006 $13,996 $14,838 $12,267
1/31/2007 $13,941 $14,772 $12,305
2/28/2007 $14,119 $14,980 $12,371
3/31/2007 $14,088 $14,949 $12,483
4/30/2007 $14,119 $14,997 $12,564
5/31/2007 $14,039 $14,919 $12,641
6/30/2007 $13,970 $14,838 $12,666
7/31/2007 $14,075 $14,972 $12,663
8/31/2007 $14,094 $15,009 $12,639
9/30/2007 $14,276 $15,210 $12,674
10/31/2007 $14,320 $15,263 $12,701
11/30/2007 $14,428 $15,432 $12,777
12/31/2007 $14,448 $15,475 $12,768
1/31/2008 $14,683 $15,790 $12,832
2/29/2008 $14,102 $15,134 $12,869
3/31/2008 $14,479 $15,523 $12,980
4/30/2008 $14,588 $15,616 $13,059
5/31/2008 $14,658 $15,693 $13,169
6/30/2008 $14,523 $15,531 $13,302
7/31/2008 $14,581 $15,650 $13,372
8/31/2008 $14,744 $15,869 $13,318
9/30/2008 $14,074 $15,293 $13,300
10/31/2008 $13,941 $15,167 $13,166
11/30/2008 $13,922 $15,367 $12,913
12/31/2008 $14,109 $15,710 $12,780
1/31/2009 $14,643 $16,448 $12,835
2/28/2009 $14,606 $16,323 $12,899
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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.
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 C
and Advisor) per share on 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the 2009 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 12/1/08, 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 12/1/08, 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 11/30/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 12/1/08
(commencement of sales), the cumulative total return of Advisor Class
shares was +5.00%.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
48 | Annual Report
Your Fund's Expenses
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 49
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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 989.80 $3.40
Hypothetical (5% return before expenses) $1,000 $1,021.37 $3.46
CLASS C
Actual $1,000 $ 987.10 $6.11
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21
ADVISOR CLASS
Actual (12/1/08-2/28/09) $1,000 $1,050.00 $1.49
Hypothetical (5% return before expenses) $1,000 $1,021.87 $2.96
* Expenses are calculated using the most recent six-month expense ratio
annualized for each class (A: 0.69%; C: 1.24%; and Advisor: 0.59%),
multiplied by the average account value over the period, multiplied by
181/365 (Hypothetical for all share classes; Actual for Classes A and C) to
reflect the one-half year period. For Actual Advisor Class expenses, the
multiplier is 90/365 to reflect the number of days since inception.
50 | Annual Report
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.
CREDIT QUALITY BREAKDOWN*
Franklin Federal Limited-Term Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA 34.6%
AA 34.1%
A 17.0%
BBB 4.5%
Not Rated by S&P 9.8%
* 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 0.3% --
AA or Aa 3.8% --
A 0.3% 4.8%
BBB or Baa 0.6% --
--- ---
Total 5.0% 4.8%
We are pleased to bring you Franklin Federal Limited-Term Tax-Free Income Fund's
annual report for the fiscal year ended February 28, 2009.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, increased from
$9.96 on February 29, 2008, to $10.11 on February 28, 2009. 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 139.
Annual Report | 51
DIVIDEND DISTRIBUTIONS*
Franklin Federal Limited-Term
Tax-Free Income Fund - Class A
MONTH DIVIDEND PER SHARE
- ----- ------------------
March 2008 2.33 cents
April 2008 2.33 cents
May 2008 2.33 cents
June 2008 2.50 cents
July 2008 2.50 cents
August 2008 2.50 cents
September 2008 2.90 cents
October 2008 2.20 cents
November 2008 2.20 cents
December 2008 2.20 cents
January 2009 1.90 cents
February 2009 1.90 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.
PORTFOLIO BREAKDOWN
Franklin Federal Limited-Term
Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
General Obligation 25.1%
Utilities 14.2%
Hospital & Health Care 14.0%
Subject to Government Appropriations 12.4%
Tax-Supported 12.2%
Higher Education 9.2%
Other Revenue 8.5%
Housing 2.3%
Transportation 1.2%
Corporate-Backed 0.9%
* Does not include short-term investments and other net assets.
Class A shares paid dividends totaling 27.56 cents per share for the same
period.(2) 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 2.21%. An
investor in the 2009 maximum federal income tax bracket of 35.00% would need to
earn a distribution rate of 3.40% from a taxable investment to match the Fund's
Class A tax-free distribution rate.
During the fiscal year, overnight and weekly interest rates fluctuated between a
high of 7.96% and a low of 0.46%, which affected the Fund's overall earnings. In
addition, spreads fluctuated significantly between shorter- and longer-term
bonds and higher and lower quality securities. As a result, the Fund experienced
lower income, which caused dividend distributions to decline, as shown in the
dividend distributions table. In 2008's latter half, fear gripped the markets;
however, as that fear subsided, the municipal market normalized somewhat, and we
increased the average life of the Fund's portfolio during the period to take
advantage of what we believed were attractive tax-free yields.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
52 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.15 $10.11 $9.96
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.2756
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.
CLASS A 1-YEAR 5-YEAR INCEPTION (9/2/03)
- ------- ------ ------- ------------------
Cumulative Total Return(2) +4.33% +13.12% +15.09%
Average Annual Total Return(3) +1.98% +2.04% +2.17%
Avg. Ann. Total Return (3/31/09)(4) +1.15% +2.13% +2.19%
Distribution Rate(5) 2.21%
Taxable Equivalent Distribution Rate(6) 3.40%
30-Day Standardized Yield(7) 2.05%
Taxable Equivalent Yield(6) 3.15%
Total Annual Operating Expenses(8)
Without Waiver 1.19%
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 (800) 342-5236.
THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF
INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT
EXCLUDING RULE 12B-1 FEES), FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.35%
(OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO
LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 6/30/09.
Annual Report | 53
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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
CLASS A 2/28/09
- ------- -------
1-Year +1.98%
5-Year +2.04%
Since Inception (9/2/03) +2.17%
CLASS A (9/2/03-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN FEDERAL LIMITED-TERM BARCLAYS CAPITAL MUNICIPAL
DATE TAX-FREE INCOME FUND - CLASS A BOND INDEX 5-YEAR COMPONENT CPI
- ---------- ------------------------------ --------------------------- -------
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 $10,633 $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 $10,935 $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 $11,003 $10,932
1/31/2007 $10,337 $10,979 $10,965
2/28/2007 $10,396 $11,079 $11,024
3/31/2007 $10,423 $11,105 $11,124
4/30/2007 $10,440 $11,122 $11,196
5/31/2007 $10,457 $11,089 $11,265
6/30/2007 $10,475 $11,069 $11,287
7/31/2007 $10,526 $11,165 $11,284
8/31/2007 $10,566 $11,251 $11,263
9/30/2007 $10,628 $11,353 $11,294
10/31/2007 $10,658 $11,396 $11,318
11/30/2007 $10,709 $11,518 $11,386
12/31/2007 $10,750 $11,570 $11,378
1/31/2008 $10,877 $11,857 $11,434
2/29/2008 $10,775 $11,566 $11,468
3/31/2008 $10,898 $11,793 $11,567
4/30/2008 $10,912 $11,782 $11,637
5/31/2008 $10,937 $11,818 $11,735
6/30/2008 $10,910 $11,698 $11,853
7/31/2008 $10,992 $11,862 $11,916
8/31/2008 $11,052 $12,023 $11,868
9/30/2008 $10,952 $11,775 $11,852
10/31/2008 $10,932 $11,776 $11,732
11/30/2008 $11,012 $12,028 $11,507
12/31/2008 $11,047 $12,238 $11,388
1/31/2009 $11,279 $12,611 $11,438
2/28/2009 $11,250 $12,450 $11,495
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 A: Prior to 2/1/06, these shares were offered without an initial sales
charge; thus actual total returns would have differed.
(1.) If the manager and administrator had not waived fees, the Fund's
distribution rate and total return would have been lower and yield for the
period would have been 1.60%.
(2.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Distribution rate is based on an annualization of the 1.90 cent per share
current monthly dividend and the maximum offering price of $10.34 on
2/28/09.
(6.) Taxable equivalent distribution rate and yield assume the 2009 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 2/28/09.
(8.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(9.) Source: (C) 2009 Morningstar. The BC 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
Baa3/BBB-. 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.
54 | 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:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 55
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.
Therefore, the second line of the table 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 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
- ------- ----------------- -------------- ----------------------
Actual $1,000 $1,017.00 $2.75
Hypothetical (5% return before expenses) $1,000 $1,022.07 $2.76
* Expenses are calculated using the most recent six-month annualized expense
ratio, net of expense waivers, of 0.55%, multiplied by the average account
value over the period, multiplied by 181/365 to reflect the one-half year
period.
56 | 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 net assets in securities that pay interest free from such
tax.(1) 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 2/28/09**
(PIE CHART)
AAA 12.2%
AA 11.3%
A 13.4%
BBB 21.9%
Below Investment Grade 15.0%
Not Rated by S&P 26.2%
* 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 1.2% 3.7%
AA or Aa 0.3% 0.3%
A 1.8% 1.2%
BBB or Baa 1.4% 2.0%
Below Investment Grade 3.7% 10.6%
--- ----
Total 8.4% 17.8%
This annual report for Franklin High Yield Tax-Free Income Fund covers the
fiscal year ended February 28, 2009.
(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 151.
Annual Report | 57
DIVIDEND DISTRIBUTIONS*
Franklin High Yield Tax-Free Income Fund
DIVIDEND PER SHARE
----------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS
- ----- ---------- ---------- ---------- -------------
March 2008 4.45 cents 3.96 cents 3.97 cents 4.53 cents
April 2008 4.45 cents 3.96 cents 3.97 cents 4.53 cents
May 2008 4.45 cents 3.96 cents 3.97 cents 4.53 cents
June 2008 4.52 cents 4.06 cents 4.05 cents 4.60 cents
July 2008 4.52 cents 4.06 cents 4.05 cents 4.60 cents
August 2008 4.52 cents 4.06 cents 4.05 cents 4.60 cents
September 2008 4.62 cents 4.17 cents 4.16 cents 4.71 cents
October 2008 4.62 cents 4.17 cents 4.16 cents 4.71 cents
November 2008 4.62 cents 4.17 cents 4.16 cents 4.71 cents
December 2008 4.62 cents 4.24 cents 4.24 cents 4.69 cents
January 2009 4.62 cents 4.24 cents 4.24 cents 4.69 cents
February 2009 4.62 cents 4.24 cents 4.24 cents 4.69 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.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$9.98 on February 29, 2008, to $8.75 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 54.27 cents per share for the same 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 6.14% based on an
annualization of the current 4.68 cent per share dividend and the maximum
offering price of $9.14 on February 28, 2009. An investor in the 2009 maximum
federal income tax bracket of 35.00% would need to earn a distribution rate of
9.45% from a taxable investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class B, C and Advisor shares' performance,
please see the Performance Summary.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
58 | Annual Report
During the reporting 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 any changes 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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 High Yield Tax-Free Income Fund 2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Utilities 24.1%
Hospital & Health Care 18.7%
Prerefunded 15.5%
Transportation 11.5%
Tax-Supported 8.7%
Corporate-Backed 7.1%
Other Revenue 4.8%
Subject to Government Appropriations 4.6%
General Obligation 2.3%
Housing 1.5%
Higher Education 1.2%
* Does not include short-term investments and other net assets.
Annual Report | 59
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.23 $8.75 $9.98
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5427
CLASS B (SYMBOL: FYIBX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.24 $8.81 $10.05
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4899
CLASS C (SYMBOL: FHYIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.24 $8.86 $10.10
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4895
ADVISOR CLASS (SYMBOL: FHYVX) CHANGE 2/28/09 2/29/08
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$1.23 $8.77 $10.00
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.5522
60 | 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ -------
Cumulative Total Return(1) -7.09% +5.46% +31.93%
Average Annual Total Return(2) -11.02% +0.19% +2.36%
Avg. Ann. Total Return (3/31/09)(3) -12.85% +0.23% +2.33%
Distribution Rate(4) 6.14%
Taxable Equivalent Distribution Rate(5) 9.45%
30-Day Standardized Yield(6) 5.75%
Taxable Equivalent Yield(5) 8.85%
Total Annual Operating Expenses(7) 0.62%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ -------
Cumulative Total Return(1) -7.66% +2.54% +26.37%
Average Annual Total Return(2) -11.16% +0.18% +2.37%
Avg. Ann. Total Return (3/31/09)(3) -12.96% +0.23% +2.34%
Distribution Rate(4) 5.88%
Taxable Equivalent Distribution Rate(5) 9.05%
30-Day Standardized Yield(6) 5.46%
Taxable Equivalent Yield(5) 8.40%
Total Annual Operating Expenses(7) 1.17%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ -------
Cumulative Total Return(1) -7.62% +2.62% +24.87%
Average Annual Total Return(2) -8.50% +0.52% +2.25%
Avg. Ann. Total Return (3/31/09)(3) -10.36% +0.54% +2.21%
Distribution Rate(4) 5.81%
Taxable Equivalent Distribution Rate(5) 8.94%
30-Day Standardized Yield(6) 5.47%
Taxable Equivalent Yield(5) 8.42%
Total Annual Operating Expenses(7) 1.17%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------ -------
Cumulative Total Return(1) -6.99% +5.75% +32.29%
Average Annual Total Return(2) -6.99% +1.12% +2.84%
Avg. Ann. Total Return (3/31/09)(3) -8.88% +1.17% +2.81%
Distribution Rate(4) 6.49%
Taxable Equivalent Distribution Rate(5) 9.98%
30-Day Standardized Yield(6) 6.13%
Taxable Equivalent Yield(5) 9.43%
Total Annual Operating Expenses(7) 0.52%
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 (800) 342-5236.
Annual Report | 61
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -11.02%
5-Year +0.19%
10-Year +2.36%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN HIGH YIELD BARCLAYS CAPITAL
TAX-FREE MUNICIPAL
DATE INCOME FUND - CLASS A BOND INDEX CPI
- ---------- --------------------- ---------------- -------
3/1/1999 $ 9,575 $10,000 $10,000
3/31/1999 $ 9,603 $10,014 $10,030
4/30/1999 $ 9,640 $10,039 $10,103
5/31/1999 $ 9,601 $ 9,981 $10,103
6/30/1999 $ 9,495 $ 9,837 $10,103
7/31/1999 $ 9,540 $ 9,873 $10,134
8/31/1999 $ 9,433 $ 9,794 $10,158
9/30/1999 $ 9,427 $ 9,798 $10,207
10/31/1999 $ 9,258 $ 9,692 $10,225
11/30/1999 $ 9,331 $ 9,795 $10,231
12/31/1999 $ 9,195 $ 9,722 $10,231
1/31/2000 $ 9,111 $ 9,679 $10,261
2/29/2000 $ 9,202 $ 9,792 $10,322
3/31/2000 $ 9,392 $10,006 $10,407
4/30/2000 $ 9,350 $ 9,947 $10,413
5/31/2000 $ 9,292 $ 9,895 $10,426
6/30/2000 $ 9,376 $10,157 $10,480
7/31/2000 $ 9,488 $10,299 $10,505
8/31/2000 $ 9,619 $10,457 $10,505
9/30/2000 $ 9,584 $10,403 $10,559
10/31/2000 $ 9,650 $10,516 $10,578
11/30/2000 $ 9,652 $10,596 $10,584
12/31/2000 $ 9,734 $10,858 $10,578
1/31/2001 $ 9,797 $10,965 $10,644
2/28/2001 $ 9,852 $11,000 $10,687
3/31/2001 $ 9,944 $11,099 $10,711
4/30/2001 $ 9,896 $10,978 $10,754
5/31/2001 $ 9,999 $11,097 $10,802
6/30/2001 $10,083 $11,171 $10,821
7/31/2001 $10,244 $11,336 $10,790
8/31/2001 $10,406 $11,523 $10,790
9/30/2001 $10,319 $11,484 $10,839
10/31/2001 $10,396 $11,621 $10,802
11/30/2001 $10,376 $11,523 $10,784
12/31/2001 $10,307 $11,414 $10,742
1/31/2002 $10,444 $11,612 $10,766
2/28/2002 $10,493 $11,752 $10,809
3/31/2002 $10,403 $11,522 $10,869
4/30/2002 $10,523 $11,747 $10,930
5/31/2002 $10,563 $11,818 $10,930
6/30/2002 $10,644 $11,943 $10,936
7/31/2002 $10,694 $12,097 $10,948
8/31/2002 $10,755 $12,242 $10,985
9/30/2002 $10,826 $12,510 $11,003
10/31/2002 $10,569 $12,303 $11,021
11/30/2002 $10,651 $12,252 $11,021
12/31/2002 $10,837 $12,510 $10,997
1/31/2003 $10,847 $12,479 $11,046
2/28/2003 $10,909 $12,653 $11,131
3/31/2003 $10,835 $12,661 $11,198
4/30/2003 $10,961 $12,744 $11,173
5/31/2003 $11,215 $13,043 $11,155
6/30/2003 $11,247 $12,987 $11,167
7/31/2003 $11,042 $12,533 $11,179
8/31/2003 $11,074 $12,626 $11,222
9/30/2003 $11,376 $12,997 $11,258
10/31/2003 $11,430 $12,932 $11,246
11/30/2003 $11,571 $13,067 $11,216
12/31/2003 $11,702 $13,175 $11,204
1/31/2004 $11,834 $13,250 $11,258
2/29/2004 $11,977 $13,450 $11,319
3/31/2004 $11,954 $13,403 $11,392
4/30/2004 $11,774 $13,086 $11,429
5/31/2004 $11,729 $13,038 $11,495
6/30/2004 $11,784 $13,086 $11,532
7/31/2004 $11,919 $13,258 $11,514
8/31/2004 $12,111 $13,524 $11,520
9/30/2004 $12,190 $13,595 $11,544
10/31/2004 $12,315 $13,712 $11,605
11/30/2004 $12,348 $13,599 $11,611
12/31/2004 $12,507 $13,765 $11,568
1/31/2005 $12,657 $13,894 $11,593
2/28/2005 $12,689 $13,848 $11,660
3/31/2005 $12,663 $13,760 $11,751
4/30/2005 $12,873 $13,977 $11,830
5/31/2005 $12,989 $14,076 $11,818
6/30/2005 $13,094 $14,163 $11,824
7/31/2005 $13,140 $14,099 $11,878
8/31/2005 $13,234 $14,242 $11,939
9/30/2005 $13,061 $14,146 $12,085
10/31/2005 $12,984 $14,060 $12,109
11/30/2005 $13,025 $14,127 $12,012
12/31/2005 $13,189 $14,249 $11,964
1/31/2006 $13,230 $14,287 $12,055
2/28/2006 $13,382 $14,383 $12,079
3/31/2006 $13,349 $14,284 $12,146
4/30/2006 $13,367 $14,279 $12,249
5/31/2006 $13,409 $14,343 $12,310
6/30/2006 $13,438 $14,289 $12,334
7/31/2006 $13,581 $14,459 $12,371
8/31/2006 $13,776 $14,673 $12,395
9/30/2006 $13,894 $14,775 $12,334
10/31/2006 $14,014 $14,868 $12,267
11/30/2006 $14,172 $14,992 $12,249
12/31/2006 $14,177 $14,939 $12,267
1/31/2007 $14,169 $14,901 $12,305
2/28/2007 $14,316 $15,097 $12,371
3/31/2007 $14,269 $15,060 $12,483
4/30/2007 $14,326 $15,104 $12,564
5/31/2007 $14,252 $15,038 $12,641
6/30/2007 $14,178 $14,960 $12,666
7/31/2007 $14,236 $15,076 $12,663
8/31/2007 $14,003 $15,011 $12,639
9/30/2007 $14,234 $15,233 $12,674
10/31/2007 $14,279 $15,301 $12,701
11/30/2007 $14,231 $15,398 $12,777
12/31/2007 $14,156 $15,441 $12,768
1/31/2008 $14,269 $15,636 $12,832
2/29/2008 $13,594 $14,920 $12,869
3/31/2008 $13,886 $15,346 $12,980
4/30/2008 $14,043 $15,526 $13,059
5/31/2008 $14,158 $15,620 $13,169
6/30/2008 $13,986 $15,443 $13,302
7/31/2008 $13,924 $15,502 $13,372
8/31/2008 $14,043 $15,683 $13,318
9/30/2008 $13,154 $14,948 $13,300
10/31/2008 $12,320 $14,795 $13,166
11/30/2008 $12,045 $14,842 $12,913
12/31/2008 $11,713 $15,059 $12,780
1/31/2009 $12,365 $15,610 $12,835
2/28/2009 $12,632 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------- -------
1-Year -11.16%
5-Year +0.18%
10-Year +2.37%
CLASS B (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN HIGH YIELD BARCLAYS CAPITAL
TAX-FREE MUNICIPAL
DATE INCOME FUND - CLASS B BOND INDEX CPI
- ---------- --------------------- ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,025 $10,014 $10,030
4/30/1999 $10,058 $10,039 $10,103
5/31/1999 $10,013 $ 9,981 $10,103
6/30/1999 $ 9,897 $ 9,837 $10,103
7/31/1999 $ 9,948 $ 9,873 $10,134
8/31/1999 $ 9,832 $ 9,794 $10,158
9/30/1999 $ 9,821 $ 9,798 $10,207
10/31/1999 $ 9,641 $ 9,692 $10,225
11/30/1999 $ 9,711 $ 9,795 $10,231
12/31/1999 $ 9,566 $ 9,722 $10,231
1/31/2000 $ 9,474 $ 9,679 $10,261
2/29/2000 $ 9,564 $ 9,792 $10,322
3/31/2000 $ 9,756 $10,006 $10,407
4/30/2000 $ 9,719 $ 9,947 $10,413
5/31/2000 $ 9,644 $ 9,895 $10,426
6/30/2000 $ 9,727 $10,157 $10,480
7/31/2000 $ 9,848 $10,299 $10,505
8/31/2000 $ 9,969 $10,457 $10,505
9/30/2000 $ 9,928 $10,403 $10,559
10/31/2000 $ 9,992 $10,516 $10,578
11/30/2000 $ 9,999 $10,596 $10,584
12/31/2000 $10,078 $10,858 $10,578
1/31/2001 $10,139 $10,965 $10,644
2/28/2001 $10,181 $11,000 $10,687
3/31/2001 $10,281 $11,099 $10,711
4/30/2001 $10,226 $10,978 $10,754
5/31/2001 $10,327 $11,097 $10,802
6/30/2001 $10,408 $11,171 $10,821
7/31/2001 $10,569 $11,336 $10,790
8/31/2001 $10,731 $11,523 $10,790
9/30/2001 $10,636 $11,484 $10,839
10/31/2001 $10,711 $11,621 $10,802
11/30/2001 $10,685 $11,523 $10,784
12/31/2001 $10,610 $11,414 $10,742
1/31/2002 $10,745 $11,612 $10,766
2/28/2002 $10,800 $11,752 $10,809
3/31/2002 $10,693 $11,522 $10,869
4/30/2002 $10,811 $11,747 $10,930
5/31/2002 $10,857 $11,818 $10,930
6/30/2002 $10,924 $11,943 $10,936
7/31/2002 $10,970 $12,097 $10,948
8/31/2002 $11,038 $12,242 $10,985
9/30/2002 $11,105 $12,510 $11,003
10/31/2002 $10,828 $12,303 $11,021
11/30/2002 $10,906 $12,252 $11,021
12/31/2002 $11,101 $12,510 $10,997
1/31/2003 $11,095 $12,479 $11,046
2/28/2003 $11,164 $12,653 $11,131
3/31/2003 $11,073 $12,661 $11,198
4/30/2003 $11,196 $12,744 $11,173
5/31/2003 $11,460 $13,043 $11,155
6/30/2003 $11,487 $12,987 $11,167
7/31/2003 $11,274 $12,533 $11,179
8/31/2003 $11,300 $12,626 $11,222
9/30/2003 $11,602 $12,997 $11,258
10/31/2003 $11,651 $12,932 $11,246
11/30/2003 $11,789 $13,067 $11,216
12/31/2003 $11,916 $13,175 $11,204
1/31/2004 $12,044 $13,250 $11,258
2/29/2004 $12,183 $13,450 $11,319
3/31/2004 $12,154 $13,403 $11,392
4/30/2004 $11,967 $13,086 $11,429
5/31/2004 $11,915 $13,038 $11,495
6/30/2004 $11,977 $13,086 $11,532
7/31/2004 $12,107 $13,258 $11,514
8/31/2004 $12,284 $13,524 $11,520
9/30/2004 $12,369 $13,595 $11,544
10/31/2004 $12,478 $13,712 $11,605
11/30/2004 $12,506 $13,599 $11,611
12/31/2004 $12,673 $13,765 $11,568
1/31/2005 $12,805 $13,894 $11,593
2/28/2005 $12,832 $13,848 $11,660
3/31/2005 $12,811 $13,760 $11,751
4/30/2005 $13,016 $13,977 $11,830
5/31/2005 $13,127 $14,076 $11,818
6/30/2005 $13,226 $14,163 $11,824
7/31/2005 $13,266 $14,099 $11,878
8/31/2005 $13,353 $14,242 $11,939
9/30/2005 $13,174 $14,146 $12,085
10/31/2005 $13,092 $14,060 $12,109
11/30/2005 $13,127 $14,127 $12,012
12/31/2005 $13,285 $14,249 $11,964
1/31/2006 $13,320 $14,287 $12,055
2/28/2006 $13,466 $14,383 $12,079
3/31/2006 $13,415 $14,284 $12,146
4/30/2006 $13,438 $14,279 $12,249
5/31/2006 $13,474 $14,343 $12,310
6/30/2006 $13,497 $14,289 $12,334
7/31/2006 $13,634 $14,459 $12,371
8/31/2006 $13,821 $14,673 $12,395
9/30/2006 $13,934 $14,775 $12,334
10/31/2006 $14,047 $14,868 $12,267
11/30/2006 $14,198 $14,992 $12,249
12/31/2006 $14,196 $14,939 $12,267
1/31/2007 $14,182 $14,901 $12,305
2/28/2007 $14,322 $15,097 $12,371
3/31/2007 $14,279 $15,060 $12,483
4/30/2007 $14,336 $15,104 $12,564
5/31/2007 $14,263 $15,038 $12,641
6/30/2007 $14,187 $14,960 $12,666
7/31/2007 $14,247 $15,076 $12,663
8/31/2007 $14,013 $15,011 $12,639
9/30/2007 $14,239 $15,233 $12,674
10/31/2007 $14,289 $15,301 $12,701
11/30/2007 $14,242 $15,398 $12,777
12/31/2007 $14,166 $15,441 $12,768
1/31/2008 $14,278 $15,636 $12,832
2/29/2008 $13,603 $14,920 $12,869
3/31/2008 $13,895 $15,346 $12,980
4/30/2008 $14,054 $15,526 $13,059
5/31/2008 $14,170 $15,620 $13,169
6/30/2008 $13,996 $15,443 $13,302
7/31/2008 $13,937 $15,502 $13,372
8/31/2008 $14,053 $15,683 $13,318
9/30/2008 $13,166 $14,948 $13,300
10/31/2008 $12,334 $14,795 $13,166
11/30/2008 $12,053 $14,842 $12,913
12/31/2008 $11,726 $15,059 $12,780
1/31/2009 $12,377 $15,610 $12,835
2/28/2009 $12,637 $15,692 $12,899
62 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year -8.50%
5-Year +0.52%
10-Year +2.25%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN HIGH YIELD BARCLAYS CAPITAL
TAX-FREE MUNICIPAL
DATE INCOME FUND - CLASS C BOND INDEX CPI
- ---------- --------------------- ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,024 $10,014 $10,030
4/30/1999 $10,057 $10,039 $10,103
5/31/1999 $10,003 $ 9,981 $10,103
6/30/1999 $ 9,888 $ 9,837 $10,103
7/31/1999 $ 9,940 $ 9,873 $10,134
8/31/1999 $ 9,815 $ 9,794 $10,158
9/30/1999 $ 9,814 $ 9,798 $10,207
10/31/1999 $ 9,635 $ 9,692 $10,225
11/30/1999 $ 9,697 $ 9,795 $10,231
12/31/1999 $ 9,552 $ 9,722 $10,231
1/31/2000 $ 9,461 $ 9,679 $10,261
2/29/2000 $ 9,551 $ 9,792 $10,322
3/31/2000 $ 9,742 $10,006 $10,407
4/30/2000 $ 9,704 $ 9,947 $10,413
5/31/2000 $ 9,630 $ 9,895 $10,426
6/30/2000 $ 9,722 $10,157 $10,480
7/31/2000 $ 9,832 $10,299 $10,505
8/31/2000 $ 9,962 $10,457 $10,505
9/30/2000 $ 9,922 $10,403 $10,559
10/31/2000 $ 9,985 $10,516 $10,578
11/30/2000 $ 9,982 $10,596 $10,584
12/31/2000 $10,062 $10,858 $10,578
1/31/2001 $10,122 $10,965 $10,644
2/28/2001 $10,173 $11,000 $10,687
3/31/2001 $10,263 $11,099 $10,711
4/30/2001 $10,209 $10,978 $10,754
5/31/2001 $10,309 $11,097 $10,802
6/30/2001 $10,400 $11,171 $10,821
7/31/2001 $10,560 $11,336 $10,790
8/31/2001 $10,721 $11,523 $10,790
9/30/2001 $10,617 $11,484 $10,839
10/31/2001 $10,701 $11,621 $10,802
11/30/2001 $10,666 $11,523 $10,784
12/31/2001 $10,590 $11,414 $10,742
1/31/2002 $10,735 $11,612 $10,766
2/28/2002 $10,780 $11,752 $10,809
3/31/2002 $10,683 $11,522 $10,869
4/30/2002 $10,800 $11,747 $10,930
5/31/2002 $10,836 $11,818 $10,930
6/30/2002 $10,913 $11,943 $10,936
7/31/2002 $10,960 $12,097 $10,948
8/31/2002 $11,017 $12,242 $10,985
9/30/2002 $11,084 $12,510 $11,003
10/31/2002 $10,808 $12,303 $11,021
11/30/2002 $10,896 $12,252 $11,021
12/31/2002 $11,079 $12,510 $10,997
1/31/2003 $11,084 $12,479 $11,046
2/28/2003 $11,142 $12,653 $11,131
3/31/2003 $11,062 $12,661 $11,198
4/30/2003 $11,185 $12,744 $11,173
5/31/2003 $11,448 $13,043 $11,155
6/30/2003 $11,463 $12,987 $11,167
7/31/2003 $11,251 $12,533 $11,179
8/31/2003 $11,277 $12,626 $11,222
9/30/2003 $11,588 $12,997 $11,258
10/31/2003 $11,637 $12,932 $11,246
11/30/2003 $11,774 $13,067 $11,216
12/31/2003 $11,890 $13,175 $11,204
1/31/2004 $12,017 $13,250 $11,258
2/29/2004 $12,167 $13,450 $11,319
3/31/2004 $12,138 $13,403 $11,392
4/30/2004 $11,951 $13,086 $11,429
5/31/2004 $11,900 $13,038 $11,495
6/30/2004 $11,950 $13,086 $11,532
7/31/2004 $12,079 $13,258 $11,514
8/31/2004 $12,266 $13,524 $11,520
9/30/2004 $12,340 $13,595 $11,544
10/31/2004 $12,459 $13,712 $11,605
11/30/2004 $12,487 $13,599 $11,611
12/31/2004 $12,653 $13,765 $11,568
1/31/2005 $12,785 $13,894 $11,593
2/28/2005 $12,811 $13,848 $11,660
3/31/2005 $12,791 $13,760 $11,751
4/30/2005 $12,995 $13,977 $11,830
5/31/2005 $13,104 $14,076 $11,818
6/30/2005 $13,203 $14,163 $11,824
7/31/2005 $13,242 $14,099 $11,878
8/31/2005 $13,330 $14,242 $11,939
9/30/2005 $13,152 $14,146 $12,085
10/31/2005 $13,069 $14,060 $12,109
11/30/2005 $13,104 $14,127 $12,012
12/31/2005 $13,261 $14,249 $11,964
1/31/2006 $13,296 $14,287 $12,055
2/28/2006 $13,453 $14,383 $12,079
3/31/2006 $13,402 $14,284 $12,146
4/30/2006 $13,425 $14,279 $12,249
5/31/2006 $13,448 $14,343 $12,310
6/30/2006 $13,472 $14,289 $12,334
7/31/2006 $13,620 $14,459 $12,371
8/31/2006 $13,794 $14,673 $12,395
9/30/2006 $13,918 $14,775 $12,334
10/31/2006 $14,031 $14,868 $12,267
11/30/2006 $14,181 $14,992 $12,249
12/31/2006 $14,180 $14,939 $12,267
1/31/2007 $14,165 $14,901 $12,305
2/28/2007 $14,304 $15,097 $12,371
3/31/2007 $14,251 $15,060 $12,483
4/30/2007 $14,300 $15,104 $12,564
5/31/2007 $14,221 $15,038 $12,641
6/30/2007 $14,141 $14,960 $12,666
7/31/2007 $14,192 $15,076 $12,663
8/31/2007 $13,955 $15,011 $12,639
9/30/2007 $14,177 $15,233 $12,674
10/31/2007 $14,214 $15,301 $12,701
11/30/2007 $14,173 $15,398 $12,777
12/31/2007 $14,080 $15,441 $12,768
1/31/2008 $14,184 $15,636 $12,832
2/29/2008 $13,515 $14,920 $12,869
3/31/2008 $13,782 $15,346 $12,980
4/30/2008 $13,943 $15,526 $13,059
5/31/2008 $14,050 $15,620 $13,169
6/30/2008 $13,875 $15,443 $13,302
7/31/2008 $13,794 $15,502 $13,372
8/31/2008 $13,917 $15,683 $13,318
9/30/2008 $13,027 $14,948 $13,300
10/31/2008 $12,191 $14,795 $13,166
11/30/2008 $11,915 $14,842 $12,913
12/31/2008 $11,586 $15,059 $12,780
1/31/2009 $12,231 $15,610 $12,835
2/28/2009 $12,487 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 2/28/09
- ---------------- -------
1-Year -6.99%
5-Year +1.12%
10-Year +2.84%
ADVISOR CLASS (3/1/99-2/28/09)(8)
(PERFORMANCE GRAPH)
FRANKLIN HIGH YIELD BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - ADVISOR CLASS BOND INDEX CPI
- ---------- --------------------- ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,030 $10,014 $10,030
4/30/1999 $10,068 $10,039 $10,103
5/31/1999 $10,027 $ 9,981 $10,103
6/30/1999 $ 9,918 $ 9,837 $10,103
7/31/1999 $ 9,966 $ 9,873 $10,134
8/31/1999 $ 9,854 $ 9,794 $10,158
9/30/1999 $ 9,848 $ 9,798 $10,207
10/31/1999 $ 9,672 $ 9,692 $10,225
11/30/1999 $ 9,747 $ 9,795 $10,231
12/31/1999 $ 9,605 $ 9,722 $10,231
1/31/2000 $ 9,517 $ 9,679 $10,261
2/29/2000 $ 9,613 $ 9,792 $10,322
3/31/2000 $ 9,811 $10,006 $10,407
4/30/2000 $ 9,768 $ 9,947 $10,413
5/31/2000 $ 9,707 $ 9,895 $10,426
6/30/2000 $ 9,795 $10,157 $10,480
7/31/2000 $ 9,912 $10,299 $10,505
8/31/2000 $10,048 $10,457 $10,505
9/30/2000 $10,012 $10,403 $10,559
10/31/2000 $10,081 $10,516 $10,578
11/30/2000 $10,083 $10,596 $10,584
12/31/2000 $10,168 $10,858 $10,578
1/31/2001 $10,235 $10,965 $10,644
2/28/2001 $10,292 $11,000 $10,687
3/31/2001 $10,388 $11,099 $10,711
4/30/2001 $10,338 $10,978 $10,754
5/31/2001 $10,445 $11,097 $10,802
6/30/2001 $10,533 $11,171 $10,821
7/31/2001 $10,701 $11,336 $10,790
8/31/2001 $10,871 $11,523 $10,790
9/30/2001 $10,779 $11,484 $10,839
10/31/2001 $10,860 $11,621 $10,802
11/30/2001 $10,839 $11,523 $10,784
12/31/2001 $10,767 $11,414 $10,742
1/31/2002 $10,910 $11,612 $10,766
2/28/2002 $10,961 $11,752 $10,809
3/31/2002 $10,868 $11,522 $10,869
4/30/2002 $10,993 $11,747 $10,930
5/31/2002 $11,035 $11,818 $10,930
6/30/2002 $11,119 $11,943 $10,936
7/31/2002 $11,172 $12,097 $10,948
8/31/2002 $11,235 $12,242 $10,985
9/30/2002 $11,309 $12,510 $11,003
10/31/2002 $11,041 $12,303 $11,021
11/30/2002 $11,127 $12,252 $11,021
12/31/2002 $11,321 $12,510 $10,997
1/31/2003 $11,331 $12,479 $11,046
2/28/2003 $11,396 $12,653 $11,131
3/31/2003 $11,319 $12,661 $11,198
4/30/2003 $11,451 $12,744 $11,173
5/31/2003 $11,716 $13,043 $11,155
6/30/2003 $11,749 $12,987 $11,167
7/31/2003 $11,535 $12,533 $11,179
8/31/2003 $11,568 $12,626 $11,222
9/30/2003 $11,884 $12,997 $11,258
10/31/2003 $11,941 $12,932 $11,246
11/30/2003 $12,088 $13,067 $11,216
12/31/2003 $12,225 $13,175 $11,204
1/31/2004 $12,362 $13,250 $11,258
2/29/2004 $12,512 $13,450 $11,319
3/31/2004 $12,488 $13,403 $11,392
4/30/2004 $12,300 $13,086 $11,429
5/31/2004 $12,253 $13,038 $11,495
6/30/2004 $12,311 $13,086 $11,532
7/31/2004 $12,451 $13,258 $11,514
8/31/2004 $12,652 $13,524 $11,520
9/30/2004 $12,734 $13,595 $11,544
10/31/2004 $12,864 $13,712 $11,605
11/30/2004 $12,899 $13,599 $11,611
12/31/2004 $13,066 $13,765 $11,568
1/31/2005 $13,222 $13,894 $11,593
2/28/2005 $13,256 $13,848 $11,660
3/31/2005 $13,229 $13,760 $11,751
4/30/2005 $13,448 $13,977 $11,830
5/31/2005 $13,569 $14,076 $11,818
6/30/2005 $13,679 $14,163 $11,824
7/31/2005 $13,726 $14,099 $11,878
8/31/2005 $13,824 $14,242 $11,939
9/30/2005 $13,644 $14,146 $12,085
10/31/2005 $13,564 $14,060 $12,109
11/30/2005 $13,607 $14,127 $12,012
12/31/2005 $13,777 $14,249 $11,964
1/31/2006 $13,790 $14,287 $12,055
2/28/2006 $13,950 $14,383 $12,079
3/31/2006 $13,917 $14,284 $12,146
4/30/2006 $13,949 $14,279 $12,249
5/31/2006 $13,980 $14,343 $12,310
6/30/2006 $13,986 $14,289 $12,334
7/31/2006 $14,163 $14,459 $12,371
8/31/2006 $14,353 $14,673 $12,395
9/30/2006 $14,491 $14,775 $12,334
10/31/2006 $14,616 $14,868 $12,267
11/30/2006 $14,782 $14,992 $12,249
12/31/2006 $14,789 $14,939 $12,267
1/31/2007 $14,781 $14,901 $12,305
2/28/2007 $14,936 $15,097 $12,371
3/31/2007 $14,888 $15,060 $12,483
4/30/2007 $14,948 $15,104 $12,564
5/31/2007 $14,873 $15,038 $12,641
6/30/2007 $14,797 $14,960 $12,666
7/31/2007 $14,859 $15,076 $12,663
8/31/2007 $14,617 $15,011 $12,639
9/30/2007 $14,859 $15,233 $12,674
10/31/2007 $14,907 $15,301 $12,701
11/30/2007 $14,871 $15,398 $12,777
12/31/2007 $14,780 $15,441 $12,768
1/31/2008 $14,899 $15,636 $12,832
2/29/2008 $14,197 $14,920 $12,869
3/31/2008 $14,503 $15,346 $12,980
4/30/2008 $14,681 $15,526 $13,059
5/31/2008 $14,789 $15,620 $13,169
6/30/2008 $14,611 $15,443 $13,302
7/31/2008 $14,547 $15,502 $13,372
8/31/2008 $14,672 $15,683 $13,318
9/30/2008 $13,747 $14,948 $13,300
10/31/2008 $12,878 $14,795 $13,166
11/30/2008 $12,593 $14,842 $12,913
12/31/2008 $12,248 $15,059 $12,780
1/31/2009 $12,929 $15,610 $12,835
2/28/2009 $13,229 $15,692 $12,899
Annual Report | 63
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the 2009 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 2/28/09.
(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 -4.04% and -1.30%.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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.
64 | Annual Report
Your Fund's Expenses
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | 65
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 899.30 $3.01
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
CLASS B
Actual $1,000 $ 896.50 $5.60
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
CLASS C
Actual $1,000 $ 897.00 $5.60
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
ADVISOR CLASS
Actual $1,000 $ 900.00 $2.54
Hypothetical (5% return before expenses) $1,000 $1,022.12 $2.71
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.64%; B: 1.19%; C: 1.19%; and Advisor:
0.54%), multiplied by the average account value over the period, multiplied
by 181/365 to reflect the one-half year period.
66 | Annual Report
Franklin New Jersey Tax-Free Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin New Jersey Tax-Free Income Fund
seeks to provide 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)
CREDIT QUALITY BREAKDOWN*
Franklin New Jersey Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 25.2%
AA 32.7%
A 12.0%
BBB 13.5%
Below Investment Grade 0.4%
Not Rated by S&P 16.2%
* 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 0.3% 0.1%
AA or Aa 3.4% --
A 10.1% --
BBB or Baa 1.5% 0.3%
Below Investment Grade 0.5% --
---- ---
Total 15.8% 0.4%
This annual report for Franklin New Jersey Tax-Free Income Fund covers the
fiscal year ended February 28, 2009.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$11.45 on February 29, 2008, to $11.29 on February 28, 2009. 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 180.
Annual Report | 67
DIVIDEND DISTRIBUTIONS*
Franklin New Jersey Tax-Free Income Fund
DIVIDEND PER SHARE
---------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS**
- ----- ---------- ---------- ---------- ------------------
March 2008 4.19 cents 3.63 cents 3.63 cents --
April 2008 4.19 cents 3.63 cents 3.63 cents --
May 2008 4.19 cents 3.63 cents 3.63 cents --
June 2008 4.19 cents 3.66 cents 3.64 cents --
July 2008 4.10 cents 3.57 cents 3.55 cents 3.03 cents
August 2008 4.10 cents 3.57 cents 3.55 cents 4.19 cents
September 2008 4.10 cents 3.56 cents 3.56 cents 4.19 cents
October 2008 4.10 cents 3.56 cents 3.56 cents 4.19 cents
November 2008 4.10 cents 3.56 cents 3.56 cents 4.19 cents
December 2008 4.10 cents 3.61 cents 3.61 cents 4.19 cents
January 2009 4.10 cents 3.61 cents 3.61 cents 4.19 cents
February 2009 4.10 cents 3.61 cents 3.61 cents 4.19 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.
** Effective 7/1/08, the Fund began offering Advisor Class shares. See the
prospectus for details.
Class A shares paid dividends totaling 49.18 cents per share for the same
period.(2) The Performance Summary beginning on page 71 shows that at the end of
this reporting period the Fund's Class A shares' distribution rate was 4.22%
based on an annualization of the current 4.15 cent per share dividend and the
maximum offering price of $11.79 on February 28, 2009. An investor in the 2009
maximum combined effective federal and New Jersey personal income tax bracket of
40.83% would need to earn a distribution rate of 7.13% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class B,
C and Advisor shares' performance, please see the Performance Summary.
The Fund was subject to bond calls during the fiscal 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 addition, the Fund had prerefunded bonds that reached their
maturity or call dates. In general, we were limited to reinvesting these
proceeds
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
68 | Annual Report
as well as those 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 suffered along with most other states during the current
national recession. Despite a diverse economic base, the state experienced job
losses and a slumping real estate market, which hampered income performance.
Although employment levels remained relatively stable through mid-2008, non-farm
employment declined through the rest of the year and into 2009. The financial
and manufacturing sectors experienced significant job losses, as did
construction amid a softer housing market. At period-end, New Jersey's
unemployment rate was 8.2% compared with the 8.1% national rate.(3)
The state's economy is supported by high wealth and personal income levels.
However, per-capita personal income, which continued to be among the highest
nationally, grew only slightly in 2008's second and third quarters. Net
tax-supported debt in December 2008 was the third highest nationally; however,
since 2006 growth in such debt has been relatively flat, despite issuance for
school construction and other programs, due to aggressive debt amortization.
Independent credit rating agency Standard & Poor's assigned New Jersey's general
obligation bonds a rating of AA with a stable outlook.(4) The rating and outlook
reflected the state's economic diversity, high wealth and income levels, and
continued improvement in balancing resources and needs in an increasingly
difficult economic environment.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 for details.
PORTFOLIO BREAKDOWN
Franklin New Jersey Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 29.2%
Hospital & Health Care 17.8%
Subject to Government Appropriations 12.8%
Transportation 12.3%
Higher Education 9.6%
Utilities 6.1%
General Obligation 4.8%
Other Revenue 3.7%
Housing 2.1%
Tax-Supported 1.4%
Corporate-Backed 0.2%
* Does not include short-term investments and other net assets.
(3.) Source: Bureau of Labor Statistics.
(4.) This does not indicate Standard & Poor's rating of the Fund.
Annual Report | 69
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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
70 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.16 $11.29 $11.45
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4918
CLASS B (SYMBOL: FNJBX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.16 $11.36 $11.52
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4288
CLASS C (SYMBOL: FNIIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.16 $11.39 $11.55
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4281
ADVISOR CLASS (SYMBOL: N/A) CHANGE 2/28/09 7/1/08
- --------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.49 $11.29 $11.78
DISTRIBUTIONS (7/1/08-2/28/09)
Dividend Income $0.3304
Annual Report | 71
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +2.94% +14.52% +49.73%
Average Annual Total Return(2) -1.45% +1.87% +3.67%
Avg. Ann. Total Return (3/31/09)(3) -4.19% +1.92% +3.65%
Distribution Rate(4) 4.22%
Taxable Equivalent Distribution Rate(5) 7.13%
30-Day Standardized Yield(6) 3.53%
Taxable Equivalent Yield(5) 5.97%
Total Annual Operating Expenses(7) 0.64%
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ------- ------ ------- ------------------
Cumulative Total Return(1) +2.36% +11.44% +50.51%
Average Annual Total Return(2) -1.58% +1.85% +4.61%
Avg. Ann. Total Return (3/31/09)(3) -4.42% +1.87% +4.58%
Distribution Rate(4) 3.86%
Taxable Equivalent Distribution Rate(5) 6.52%
30-Day Standardized Yield(6) 3.14%
Taxable Equivalent Yield(5) 5.31%
Total Annual Operating Expenses(7) 1.19%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +2.35% +11.39% +41.70%
Average Annual Total Return(2) +1.36% +2.18% +3.55%
Avg. Ann. Total Return (3/31/09)(3) -1.47% +2.23% +3.53%
Distribution Rate(4) 3.83%
Taxable Equivalent Distribution Rate(5) 6.47%
30-Day Standardized Yield(6) 3.15%
Taxable Equivalent Yield(5) 5.32%
Total Annual Operating Expenses(7) 1.19%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------- -------
Cumulative Total Return(1) +3.01% +14.59% +49.82%
Average Annual Total Return(2) +3.01% +2.76% +4.13%
Avg. Ann. Total Return (3/31/09)(3) +0.12% +2.82% +4.10%
Distribution Rate(4) 4.51%
Taxable Equivalent Distribution Rate(5) 7.62%
30-Day Standardized Yield(6) 3.76%
Taxable Equivalent Yield(5) 6.35%
Total Annual Operating Expenses(7) 0.54%
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 (800) 342-5236.
72 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -1.45%
5-Year +1.87%
10-Year +3.67%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN
NEW JERSEY BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS A BOND INDEX CPI
- ---------- --------------- ---------------- -------
3/1/1999 $ 9,576 $10,000 $10,000
3/31/1999 $ 9,608 $10,014 $10,030
4/30/1999 $ 9,632 $10,039 $10,103
5/31/1999 $ 9,583 $ 9,981 $10,103
6/30/1999 $ 9,469 $ 9,837 $10,103
7/31/1999 $ 9,502 $ 9,873 $10,134
8/31/1999 $ 9,371 $ 9,794 $10,158
9/30/1999 $ 9,338 $ 9,798 $10,207
10/31/1999 $ 9,223 $ 9,692 $10,225
11/30/1999 $ 9,297 $ 9,795 $10,231
12/31/1999 $ 9,205 $ 9,722 $10,231
1/31/2000 $ 9,147 $ 9,679 $10,261
2/29/2000 $ 9,273 $ 9,792 $10,322
3/31/2000 $ 9,484 $10,006 $10,407
4/30/2000 $ 9,424 $ 9,947 $10,413
5/31/2000 $ 9,357 $ 9,895 $10,426
6/30/2000 $ 9,605 $10,157 $10,480
7/31/2000 $ 9,734 $10,299 $10,505
8/31/2000 $ 9,889 $10,457 $10,505
9/30/2000 $ 9,828 $10,403 $10,559
10/31/2000 $ 9,950 $10,516 $10,578
11/30/2000 $10,029 $10,596 $10,584
12/31/2000 $10,275 $10,858 $10,578
1/31/2001 $10,327 $10,965 $10,644
2/28/2001 $10,406 $11,000 $10,687
3/31/2001 $10,485 $11,099 $10,711
4/30/2001 $10,377 $10,978 $10,754
5/31/2001 $10,493 $11,097 $10,802
6/30/2001 $10,581 $11,171 $10,821
7/31/2001 $10,742 $11,336 $10,790
8/31/2001 $10,886 $11,523 $10,790
9/30/2001 $10,819 $11,484 $10,839
10/31/2001 $10,945 $11,621 $10,802
11/30/2001 $10,860 $11,523 $10,784
12/31/2001 $10,756 $11,414 $10,742
1/31/2002 $10,929 $11,612 $10,766
2/28/2002 $11,066 $11,752 $10,809
3/31/2002 $10,858 $11,522 $10,869
4/30/2002 $11,052 $11,747 $10,930
5/31/2002 $11,116 $11,818 $10,930
6/30/2002 $11,217 $11,943 $10,936
7/31/2002 $11,338 $12,097 $10,948
8/31/2002 $11,469 $12,242 $10,985
9/30/2002 $11,723 $12,510 $11,003
10/31/2002 $11,480 $12,303 $11,021
11/30/2002 $11,438 $12,252 $11,021
12/31/2002 $11,686 $12,510 $10,997
1/31/2003 $11,634 $12,479 $11,046
2/28/2003 $11,776 $12,653 $11,131
3/31/2003 $11,792 $12,661 $11,198
4/30/2003 $11,877 $12,744 $11,173
5/31/2003 $12,150 $13,043 $11,155
6/30/2003 $12,105 $12,987 $11,167
7/31/2003 $11,642 $12,533 $11,179
8/31/2003 $11,736 $12,626 $11,222
9/30/2003 $12,031 $12,997 $11,258
10/31/2003 $11,985 $12,932 $11,246
11/30/2003 $12,130 $13,067 $11,216
12/31/2003 $12,246 $13,175 $11,204
1/31/2004 $12,331 $13,250 $11,258
2/29/2004 $12,519 $13,450 $11,319
3/31/2004 $12,502 $13,403 $11,392
4/30/2004 $12,188 $13,086 $11,429
5/31/2004 $12,152 $13,038 $11,495
6/30/2004 $12,208 $13,086 $11,532
7/31/2004 $12,379 $13,258 $11,514
8/31/2004 $12,603 $13,524 $11,520
9/30/2004 $12,703 $13,595 $11,544
10/31/2004 $12,813 $13,712 $11,605
11/30/2004 $12,713 $13,599 $11,611
12/31/2004 $12,877 $13,765 $11,568
1/31/2005 $13,063 $13,894 $11,593
2/28/2005 $13,036 $13,848 $11,660
3/31/2005 $12,977 $13,760 $11,751
4/30/2005 $13,175 $13,977 $11,830
5/31/2005 $13,287 $14,076 $11,818
6/30/2005 $13,357 $14,163 $11,824
7/31/2005 $13,318 $14,099 $11,878
8/31/2005 $13,443 $14,242 $11,939
9/30/2005 $13,349 $14,146 $12,085
10/31/2005 $13,276 $14,060 $12,109
11/30/2005 $13,335 $14,127 $12,012
12/31/2005 $13,449 $14,249 $11,964
1/31/2006 $13,464 $14,287 $12,055
2/28/2006 $13,579 $14,383 $12,079
3/31/2006 $13,482 $14,284 $12,146
4/30/2006 $13,496 $14,279 $12,249
5/31/2006 $13,522 $14,343 $12,310
6/30/2006 $13,480 $14,289 $12,334
7/31/2006 $13,631 $14,459 $12,371
8/31/2006 $13,805 $14,673 $12,395
9/30/2006 $13,912 $14,775 $12,334
10/31/2006 $13,995 $14,868 $12,267
11/30/2006 $14,137 $14,992 $12,249
12/31/2006 $14,094 $14,939 $12,267
1/31/2007 $14,062 $14,901 $12,305
2/28/2007 $14,252 $15,097 $12,371
3/31/2007 $14,196 $15,060 $12,483
4/30/2007 $14,245 $15,104 $12,564
5/31/2007 $14,188 $15,038 $12,641
6/30/2007 $14,120 $14,960 $12,666
7/31/2007 $14,217 $15,076 $12,663
8/31/2007 $14,125 $15,011 $12,639
9/30/2007 $14,354 $15,233 $12,674
10/31/2007 $14,404 $15,301 $12,701
11/30/2007 $14,466 $15,398 $12,777
12/31/2007 $14,469 $15,441 $12,768
1/31/2008 $14,603 $15,636 $12,832
2/29/2008 $13,925 $14,920 $12,869
3/31/2008 $14,353 $15,346 $12,980
4/30/2008 $14,551 $15,526 $13,059
5/31/2008 $14,651 $15,620 $13,169
6/30/2008 $14,494 $15,443 $13,302
7/31/2008 $14,520 $15,502 $13,372
8/31/2008 $14,669 $15,683 $13,318
9/30/2008 $13,924 $14,948 $13,300
10/31/2008 $13,665 $14,795 $13,166
11/30/2008 $13,565 $14,842 $12,913
12/31/2008 $13,655 $15,059 $12,780
1/31/2009 $14,161 $15,610 $12,835
2/28/2009 $14,337 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------- -------
1-Year -1.58%
5-Year +1.85%
Since Inception (2/1/00) +4.61%
CLASS B (2/1/00-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN
NEW JERSEY BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS B BOND INDEX CPI
- ---------- --------------- ---------------- -------
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 $10,748 $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 $13,360 $10,960
11/30/2003 $13,031 $13,500 $10,930
12/31/2003 $13,138 $13,611 $10,918
1/31/2004 $13,223 $13,689 $10,972
2/29/2004 $13,418 $13,895 $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 $13,971 $11,226
9/30/2004 $13,570 $14,046 $11,250
10/31/2004 $13,682 $14,166 $11,309
11/30/2004 $13,569 $14,049 $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 $14,306 $11,363
3/31/2005 $13,836 $14,216 $11,451
4/30/2005 $14,028 $14,440 $11,528
5/31/2005 $14,141 $14,542 $11,517
6/30/2005 $14,220 $14,632 $11,523
7/31/2005 $14,161 $14,566 $11,576
8/31/2005 $14,286 $14,713 $11,635
9/30/2005 $14,192 $14,614 $11,777
10/31/2005 $14,108 $14,526 $11,801
11/30/2005 $14,164 $14,595 $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 $14,757 $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 $15,159 $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 $15,394 $11,991
2/28/2007 $15,018 $15,597 $12,056
3/31/2007 $14,964 $15,559 $12,165
4/30/2007 $15,009 $15,605 $12,244
5/31/2007 $14,942 $15,536 $12,319
6/30/2007 $14,864 $15,455 $12,343
7/31/2007 $14,959 $15,575 $12,340
8/31/2007 $14,856 $15,508 $12,317
9/30/2007 $15,076 $15,737 $12,351
10/31/2007 $15,134 $15,807 $12,378
11/30/2007 $15,192 $15,908 $12,451
12/31/2007 $15,188 $15,952 $12,443
1/31/2008 $15,321 $16,153 $12,505
2/29/2008 $14,609 $15,414 $12,541
3/31/2008 $15,057 $15,854 $12,650
4/30/2008 $15,266 $16,040 $12,726
5/31/2008 $15,372 $16,137 $12,834
6/30/2008 $15,204 $15,955 $12,963
7/31/2008 $15,235 $16,015 $13,031
8/31/2008 $15,388 $16,203 $12,979
9/30/2008 $14,608 $15,443 $12,961
10/31/2008 $14,339 $15,285 $12,830
11/30/2008 $14,230 $15,334 $12,584
12/31/2008 $14,329 $15,558 $12,454
1/31/2009 $14,857 $16,127 $12,508
2/28/2009 $15,051 $16,212 $12,571
Annual Report | 73
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +1.36%
5-Year +2.18%
10-Year +3.55%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN
NEW JERSEY BARCLAYS CAPITAL
TAX-FREE INCOME MUNICIPAL
DATE FUND - CLASS C BOND INDEX CPI
- ---------- --------------- ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,020 $10,014 $10,030
4/30/1999 $10,040 $10,039 $10,103
5/31/1999 $ 9,994 $ 9,981 $10,103
6/30/1999 $ 9,863 $ 9,837 $10,103
7/31/1999 $ 9,892 $ 9,873 $10,134
8/31/1999 $ 9,752 $ 9,794 $10,158
9/30/1999 $ 9,713 $ 9,798 $10,207
10/31/1999 $ 9,589 $ 9,692 $10,225
11/30/1999 $ 9,662 $ 9,795 $10,231
12/31/1999 $ 9,563 $ 9,722 $10,231
1/31/2000 $ 9,489 $ 9,679 $10,261
2/29/2000 $ 9,624 $ 9,792 $10,322
3/31/2000 $ 9,846 $10,006 $10,407
4/30/2000 $ 9,771 $ 9,947 $10,413
5/31/2000 $ 9,697 $ 9,895 $10,426
6/30/2000 $ 9,948 $10,157 $10,480
7/31/2000 $10,086 $10,299 $10,505
8/31/2000 $10,232 $10,457 $10,505
9/30/2000 $10,174 $10,403 $10,559
10/31/2000 $10,286 $10,516 $10,578
11/30/2000 $10,362 $10,596 $10,584
12/31/2000 $10,610 $10,858 $10,578
1/31/2001 $10,659 $10,965 $10,644
2/28/2001 $10,744 $11,000 $10,687
3/31/2001 $10,811 $11,099 $10,711
4/30/2001 $10,704 $10,978 $10,754
5/31/2001 $10,818 $11,097 $10,802
6/30/2001 $10,903 $11,171 $10,821
7/31/2001 $11,064 $11,336 $10,790
8/31/2001 $11,206 $11,523 $10,790
9/30/2001 $11,142 $11,484 $10,839
10/31/2001 $11,256 $11,621 $10,802
11/30/2001 $11,164 $11,523 $10,784
12/31/2001 $11,052 $11,414 $10,742
1/31/2002 $11,233 $11,612 $10,766
2/28/2002 $11,368 $11,752 $10,809
3/31/2002 $11,150 $11,522 $10,869
4/30/2002 $11,334 $11,747 $10,930
5/31/2002 $11,403 $11,818 $10,930
6/30/2002 $11,501 $11,943 $10,936
7/31/2002 $11,619 $12,097 $10,948
8/31/2002 $11,747 $12,242 $10,985
9/30/2002 $12,001 $12,510 $11,003
10/31/2002 $11,749 $12,303 $11,021
11/30/2002 $11,700 $12,252 $11,021
12/31/2002 $11,947 $12,510 $10,997
1/31/2003 $11,889 $12,479 $11,046
2/28/2003 $12,028 $12,653 $11,131
3/31/2003 $12,039 $12,661 $11,198
4/30/2003 $12,119 $12,744 $11,173
5/31/2003 $12,400 $13,043 $11,155
6/30/2003 $12,338 $12,987 $11,167
7/31/2003 $11,863 $12,533 $11,179
8/31/2003 $11,953 $12,626 $11,222
9/30/2003 $12,245 $12,997 $11,258
10/31/2003 $12,203 $12,932 $11,246
11/30/2003 $12,344 $13,067 $11,216
12/31/2003 $12,445 $13,175 $11,204
1/31/2004 $12,536 $13,250 $11,258
2/29/2004 $12,720 $13,450 $11,319
3/31/2004 $12,698 $13,403 $11,392
4/30/2004 $12,375 $13,086 $11,429
5/31/2004 $12,322 $13,038 $11,495
6/30/2004 $12,384 $13,086 $11,532
7/31/2004 $12,550 $13,258 $11,514
8/31/2004 $12,770 $13,524 $11,520
9/30/2004 $12,854 $13,595 $11,544
10/31/2004 $12,969 $13,712 $11,605
11/30/2004 $12,863 $13,599 $11,611
12/31/2004 $13,021 $13,765 $11,568
1/31/2005 $13,202 $13,894 $11,593
2/28/2005 $13,169 $13,848 $11,660
3/31/2005 $13,103 $13,760 $11,751
4/30/2005 $13,296 $13,977 $11,830
5/31/2005 $13,402 $14,076 $11,818
6/30/2005 $13,477 $14,163 $11,824
7/31/2005 $13,421 $14,099 $11,878
8/31/2005 $13,540 $14,242 $11,939
9/30/2005 $13,439 $14,146 $12,085
10/31/2005 $13,371 $14,060 $12,109
11/30/2005 $13,413 $14,127 $12,012
12/31/2005 $13,521 $14,249 $11,964
1/31/2006 $13,530 $14,287 $12,055
2/28/2006 $13,639 $14,383 $12,079
3/31/2006 $13,547 $14,284 $12,146
4/30/2006 $13,544 $14,279 $12,249
5/31/2006 $13,574 $14,343 $12,310
6/30/2006 $13,526 $14,289 $12,334
7/31/2006 $13,659 $14,459 $12,371
8/31/2006 $13,837 $14,673 $12,395
9/30/2006 $13,925 $14,775 $12,334
10/31/2006 $14,013 $14,868 $12,267
11/30/2006 $14,148 $14,992 $12,249
12/31/2006 $14,099 $14,939 $12,267
1/31/2007 $14,061 $14,901 $12,305
2/28/2007 $14,231 $15,097 $12,371
3/31/2007 $14,180 $15,060 $12,483
4/30/2007 $14,222 $15,104 $12,564
5/31/2007 $14,160 $15,038 $12,641
6/30/2007 $14,086 $14,960 $12,666
7/31/2007 $14,175 $15,076 $12,663
8/31/2007 $14,077 $15,011 $12,639
9/30/2007 $14,297 $15,233 $12,674
10/31/2007 $14,340 $15,301 $12,701
11/30/2007 $14,407 $15,398 $12,777
12/31/2007 $14,391 $15,441 $12,768
1/31/2008 $14,517 $15,636 $12,832
2/29/2008 $13,842 $14,920 $12,869
3/31/2008 $14,258 $15,346 $12,980
4/30/2008 $14,445 $15,526 $13,059
5/31/2008 $14,537 $15,620 $13,169
6/30/2008 $14,376 $15,443 $13,302
7/31/2008 $14,407 $15,502 $13,372
8/31/2008 $14,535 $15,683 $13,318
9/30/2008 $13,784 $14,948 $13,300
10/31/2008 $13,523 $14,795 $13,166
11/30/2008 $13,431 $14,842 $12,913
12/31/2008 $13,513 $15,059 $12,780
1/31/2009 $14,003 $15,610 $12,835
2/28/2009 $14,170 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 2/28/09
- ---------------- -------
1-Year +3.01%
5-Year +2.76%
10-Year +4.13%
ADVISOR CLASS (3/1/99-2/28/09)(8)
(PERFORMANCE GRAPH)
FRANKLIN
NEW JERSEY
TAX-FREE INCOME BARCLAYS CAPITAL
FUND - ADVISOR MUNICIPAL
DATE CLASS BOND INDEX CPI
- ---------- --------------- ---------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,033 $10,014 $10,030
4/30/1999 $10,058 $10,039 $10,103
5/31/1999 $10,008 $ 9,981 $10,103
6/30/1999 $ 9,889 $ 9,837 $10,103
7/31/1999 $ 9,923 $ 9,873 $10,134
8/31/1999 $ 9,786 $ 9,794 $10,158
9/30/1999 $ 9,752 $ 9,798 $10,207
10/31/1999 $ 9,631 $ 9,692 $10,225
11/30/1999 $ 9,709 $ 9,795 $10,231
12/31/1999 $ 9,613 $ 9,722 $10,231
1/31/2000 $ 9,552 $ 9,679 $10,261
2/29/2000 $ 9,684 $ 9,792 $10,322
3/31/2000 $ 9,904 $10,006 $10,407
4/30/2000 $ 9,842 $ 9,947 $10,413
5/31/2000 $ 9,771 $ 9,895 $10,426
6/30/2000 $10,030 $10,157 $10,480
7/31/2000 $10,165 $10,299 $10,505
8/31/2000 $10,327 $10,457 $10,505
9/30/2000 $10,264 $10,403 $10,559
10/31/2000 $10,391 $10,516 $10,578
11/30/2000 $10,474 $10,596 $10,584
12/31/2000 $10,730 $10,858 $10,578
1/31/2001 $10,785 $10,965 $10,644
2/28/2001 $10,868 $11,000 $10,687
3/31/2001 $10,950 $11,099 $10,711
4/30/2001 $10,837 $10,978 $10,754
5/31/2001 $10,958 $11,097 $10,802
6/30/2001 $11,050 $11,171 $10,821
7/31/2001 $11,218 $11,336 $10,790
8/31/2001 $11,368 $11,523 $10,790
9/30/2001 $11,299 $11,484 $10,839
10/31/2001 $11,430 $11,621 $10,802
11/30/2001 $11,341 $11,523 $10,784
12/31/2001 $11,232 $11,414 $10,742
1/31/2002 $11,413 $11,612 $10,766
2/28/2002 $11,556 $11,752 $10,809
3/31/2002 $11,339 $11,522 $10,869
4/30/2002 $11,542 $11,747 $10,930
5/31/2002 $11,609 $11,818 $10,930
6/30/2002 $11,714 $11,943 $10,936
7/31/2002 $11,840 $12,097 $10,948
8/31/2002 $11,977 $12,242 $10,985
9/30/2002 $12,243 $12,510 $11,003
10/31/2002 $11,989 $12,303 $11,021
11/30/2002 $11,944 $12,252 $11,021
12/31/2002 $12,204 $12,510 $10,997
1/31/2003 $12,149 $12,479 $11,046
2/28/2003 $12,298 $12,653 $11,131
3/31/2003 $12,315 $12,661 $11,198
4/30/2003 $12,404 $12,744 $11,173
5/31/2003 $12,688 $13,043 $11,155
6/30/2003 $12,641 $12,987 $11,167
7/31/2003 $12,158 $12,533 $11,179
8/31/2003 $12,256 $12,626 $11,222
9/30/2003 $12,564 $12,997 $11,258
10/31/2003 $12,516 $12,932 $11,246
11/30/2003 $12,668 $13,067 $11,216
12/31/2003 $12,788 $13,175 $11,204
1/31/2004 $12,877 $13,250 $11,258
2/29/2004 $13,073 $13,450 $11,319
3/31/2004 $13,056 $13,403 $11,392
4/30/2004 $12,728 $13,086 $11,429
5/31/2004 $12,690 $13,038 $11,495
6/30/2004 $12,749 $13,086 $11,532
7/31/2004 $12,928 $13,258 $11,514
8/31/2004 $13,162 $13,524 $11,520
9/30/2004 $13,266 $13,595 $11,544
10/31/2004 $13,381 $13,712 $11,605
11/30/2004 $13,276 $13,599 $11,611
12/31/2004 $13,447 $13,765 $11,568
1/31/2005 $13,642 $13,894 $11,593
2/28/2005 $13,614 $13,848 $11,660
3/31/2005 $13,552 $13,760 $11,751
4/30/2005 $13,759 $13,977 $11,830
5/31/2005 $13,876 $14,076 $11,818
6/30/2005 $13,949 $14,163 $11,824
7/31/2005 $13,908 $14,099 $11,878
8/31/2005 $14,039 $14,242 $11,939
9/30/2005 $13,940 $14,146 $12,085
10/31/2005 $13,864 $14,060 $12,109
11/30/2005 $13,926 $14,127 $12,012
12/31/2005 $14,045 $14,249 $11,964
1/31/2006 $14,061 $14,287 $12,055
2/28/2006 $14,181 $14,383 $12,079
3/31/2006 $14,079 $14,284 $12,146
4/30/2006 $14,094 $14,279 $12,249
5/31/2006 $14,121 $14,343 $12,310
6/30/2006 $14,078 $14,289 $12,334
7/31/2006 $14,235 $14,459 $12,371
8/31/2006 $14,417 $14,673 $12,395
9/30/2006 $14,528 $14,775 $12,334
10/31/2006 $14,616 $14,868 $12,267
11/30/2006 $14,764 $14,992 $12,249
12/31/2006 $14,719 $14,939 $12,267
1/31/2007 $14,686 $14,901 $12,305
2/28/2007 $14,884 $15,097 $12,371
3/31/2007 $14,825 $15,060 $12,483
4/30/2007 $14,876 $15,104 $12,564
5/31/2007 $14,817 $15,038 $12,641
6/30/2007 $14,746 $14,960 $12,666
7/31/2007 $14,847 $15,076 $12,663
8/31/2007 $14,751 $15,011 $12,639
9/30/2007 $14,990 $15,233 $12,674
10/31/2007 $15,042 $15,301 $12,701
11/30/2007 $15,107 $15,398 $12,777
12/31/2007 $15,110 $15,441 $12,768
1/31/2008 $15,251 $15,636 $12,832
2/29/2008 $14,542 $14,920 $12,869
3/31/2008 $14,990 $15,346 $12,980
4/30/2008 $15,196 $15,526 $13,059
5/31/2008 $15,300 $15,620 $13,169
6/30/2008 $15,136 $15,443 $13,302
7/31/2008 $15,168 $15,502 $13,372
8/31/2008 $15,322 $15,683 $13,318
9/30/2008 $14,547 $14,948 $13,300
10/31/2008 $14,281 $14,795 $13,166
11/30/2008 $14,172 $14,842 $12,913
12/31/2008 $14,272 $15,059 $12,780
1/31/2009 $14,800 $15,610 $12,835
2/28/2009 $14,982 $15,692 $12,899
74 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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.
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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 7/1/08, 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 7/1/08, 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 6/30/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 7/1/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -1.29%.
(9.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 977.20 $3.14
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
CLASS B
Actual $1,000 $ 974.70 $5.78
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
CLASS C
Actual $1,000 $ 974.70 $5.83
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
ADVISOR CLASS
Actual $1,000 $ 977.70 $2.65
Hypothetical (5% return before expenses) $1,000 $1,022.12 $2.71
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.64%; B: 1.18%; C: 1.19%; and Advisor:
0.54%), 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)
CREDIT QUALITY BREAKDOWN*
Franklin Oregon Tax-Free Income Fund
2/28/09
% OF TOTAL
RATINGS LONG-TERM INVESTMENTS**
- ------- -----------------------
AAA 21.0%
AA 32.5%
A 9.7%
BBB 13.4%
Below Investment Grade 0.7%
Not Rated by S&P 22.7%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
- ------- ------- --------
AAA or Aaa 0.9% --
AA or Aa 13.5% --
A 6.1% 0.3%
BBB or Baa 1.0% 0.7%
Below Investment Grade -- 0.2%
---- ---
Total 21.5% 1.2%
This annual report for Franklin Oregon Tax-Free Income Fund covers the fiscal
year ended February 28, 2009.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$11.25 on February 29, 2008, to $11.21 on February 28, 2009. The Fund's Class A
shares paid dividends totaling 48.43 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 190.
78 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Oregon Tax-Free Income Fund
DIVIDEND PER SHARE
-----------------------
MONTH CLASS A CLASS C
- ----- ---------- ----------
March 2008 4.06 cents 3.50 cents
April 2008 4.06 cents 3.50 cents
May 2008 4.06 cents 3.50 cents
June 2008 4.06 cents 3.52 cents
July 2008 4.06 cents 3.52 cents
August 2008 4.06 cents 3.52 cents
September 2008 4.06 cents 3.53 cents
October 2008 4.06 cents 3.53 cents
November 2008 4.06 cents 3.53 cents
December 2008 4.08 cents 3.59 cents
January 2009 4.08 cents 3.59 cents
February 2009 4.08 cents 3.59 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.
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 4.28%
based on an annualization of the current 4.18 cent per share dividend and the
maximum offering price of $11.71 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Oregon personal income tax bracket of
40.85% would need to earn a distribution rate of 7.24% 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 has diversified in recent years from its traditional industries
of lumber, agriculture and wood products into such industries as high technology
manufacturing. As a result, the state's revenue growth stemmed from a surge in
employment, rebounding personal and corporate incomes, an increase in capital
gains from a rising stock market, and, to a lesser extent, real estate sales.
With rising unemployment and poor stock market performance during the reporting
period, revenues came in below expectations and continued to
(2.) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Annual Report | 79
PORTFOLIO BREAKDOWN
Franklin Oregon Tax-Free Income Fund
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 25.1%
General Obligation 20.1%
Transportation 11.8%
Hospital & Health Care 11.6%
Utilities 8.3%
Subject to Government Appropriations 7.1%
Higher Education 6.2%
Other Revenue 4.4%
Housing 3.6%
Tax-Supported 1.1%
Corporate-Backed 0.7%
* Does not include short-term investments and other net assets.
be revised downward. In a December 2008 revenue forecast, personal and corporate
income taxes declined, and capital gains were expected to drop significantly.
Real estate, however, seemed to be less impacted by national trends when
compared with other regions. At period-end, the state's unemployment rate was
10.8% compared with the 8.1% national rate.(3)
In light of downward revenue revisions for the 2009-2011 biennial budget,
Oregon's governor announced administrative cuts over the next three fiscal years
including salary freezes, elimination of some scheduled salary increases, and 26
furlough days for many employees. For the current 2007-2009 budget, the
governor's plan relied heavily on spending cuts and 20% of available federal
stimulus funds to address the deficit. The state's ways and means committee
recently outlined additional spending cuts, which would balance the 2007-2009
budget unless revenues weaken further.
Oregon's 2008 net tax-supported debt was 5.0% of personal income and $1,636 per
capita compared with the national medians of 2.6% and $889.(4) Independent
credit rating agency Standard & Poor's (S&P) assigned Oregon's general
obligation bonds a rating of AA with a stable outlook.(5) The rating and outlook
reflected S&P's expectations that the state will address revenue shortfalls with
necessary cuts and that any new programs will be funded by additional revenues.
The state is helped by having a rainy day fund, established after strong
economic growth during the 2005-2007 biennium, and an education stability fund.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Moody's Investors Service, "New Issue: Oregon (State of)," 2/26/09.
(5.) This does not indicate S&P's rating of the Fund.
80 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.04 $11.21 $11.25
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4843
CLASS C (SYMBOL: FORIX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.03 $11.33 $11.36
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4213
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +4.02% +16.03% +49.55%
Average Annual Total Return(2) -0.40% +2.13% +3.65%
Avg. Ann. Total Return (3/31/09)(3) -3.23% +2.09% +3.61%
Distribution Rate(4) 4.28%
Taxable Equivalent Distribution Rate(5) 7.24%
30-Day Standardized Yield(6) 3.56%
Taxable Equivalent Yield(5) 6.02%
Total Annual Operating Expenses(7) 0.64%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +3.50% +12.82% +41.54%
Average Annual Total Return(2) +2.50% +2.44% +3.54%
Avg. Ann. Total Return (3/31/09)(3) -0.49% +2.41% +3.50%
Distribution Rate(4) 3.89%
Taxable Equivalent Distribution Rate(5) 6.58%
30-Day Standardized Yield(6) 3.18%
Taxable Equivalent Yield(5) 5.38%
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 (800) 342-5236.
Annual Report | 81
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -0.40%
5-Year +2.13%
10-Year +3.65%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN OREGON TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS A MUNICIPAL BOND INDEX CPI
- ---------- ------------------------ -------------------- -------
3/1/1999 $ 9,571 $10,000 $10,000
3/31/1999 $ 9,594 $10,014 $10,030
4/30/1999 $ 9,609 $10,039 $10,103
5/31/1999 $ 9,559 $ 9,981 $10,103
6/30/1999 $ 9,410 $ 9,837 $10,103
7/31/1999 $ 9,441 $ 9,873 $10,134
8/31/1999 $ 9,315 $ 9,794 $10,158
9/30/1999 $ 9,297 $ 9,798 $10,207
10/31/1999 $ 9,145 $ 9,692 $10,225
11/30/1999 $ 9,235 $ 9,795 $10,231
12/31/1999 $ 9,141 $ 9,722 $10,231
1/31/2000 $ 9,089 $ 9,679 $10,261
2/29/2000 $ 9,206 $ 9,792 $10,322
3/31/2000 $ 9,418 $10,006 $10,407
4/30/2000 $ 9,356 $ 9,947 $10,413
5/31/2000 $ 9,295 $ 9,895 $10,426
6/30/2000 $ 9,544 $10,157 $10,480
7/31/2000 $ 9,673 $10,299 $10,505
8/31/2000 $ 9,829 $10,457 $10,505
9/30/2000 $ 9,766 $10,403 $10,559
10/31/2000 $ 9,861 $10,516 $10,578
11/30/2000 $ 9,922 $10,596 $10,584
12/31/2000 $10,151 $10,858 $10,578
1/31/2001 $10,203 $10,965 $10,644
2/28/2001 $10,247 $11,000 $10,687
3/31/2001 $10,326 $11,099 $10,711
4/30/2001 $10,216 $10,978 $10,754
5/31/2001 $10,313 $11,097 $10,802
6/30/2001 $10,393 $11,171 $10,821
7/31/2001 $10,556 $11,336 $10,790
8/31/2001 $10,719 $11,523 $10,790
9/30/2001 $10,651 $11,484 $10,839
10/31/2001 $10,778 $11,621 $10,802
11/30/2001 $10,691 $11,523 $10,784
12/31/2001 $10,575 $11,414 $10,742
1/31/2002 $10,729 $11,612 $10,766
2/28/2002 $10,856 $11,752 $10,809
3/31/2002 $10,672 $11,522 $10,869
4/30/2002 $10,856 $11,747 $10,930
5/31/2002 $10,909 $11,818 $10,930
6/30/2002 $11,009 $11,943 $10,936
7/31/2002 $11,129 $12,097 $10,948
8/31/2002 $11,239 $12,242 $10,985
9/30/2002 $11,476 $12,510 $11,003
10/31/2002 $11,239 $12,303 $11,021
11/30/2002 $11,204 $12,252 $11,021
12/31/2002 $11,434 $12,510 $10,997
1/31/2003 $11,390 $12,479 $11,046
2/28/2003 $11,543 $12,653 $11,131
3/31/2003 $11,537 $12,661 $11,198
4/30/2003 $11,621 $12,744 $11,173
5/31/2003 $11,924 $13,043 $11,155
6/30/2003 $11,898 $12,987 $11,167
7/31/2003 $11,479 $12,533 $11,179
8/31/2003 $11,563 $12,626 $11,222
9/30/2003 $11,860 $12,997 $11,258
10/31/2003 $11,813 $12,932 $11,246
11/30/2003 $11,959 $13,067 $11,216
12/31/2003 $12,064 $13,175 $11,204
1/31/2004 $12,139 $13,250 $11,258
2/29/2004 $12,338 $13,450 $11,319
3/31/2004 $12,332 $13,403 $11,392
4/30/2004 $12,046 $13,086 $11,429
5/31/2004 $12,019 $13,038 $11,495
6/30/2004 $12,055 $13,086 $11,532
7/31/2004 $12,216 $13,258 $11,514
8/31/2004 $12,431 $13,524 $11,520
9/30/2004 $12,499 $13,595 $11,544
10/31/2004 $12,631 $13,712 $11,605
11/30/2004 $12,529 $13,599 $11,611
12/31/2004 $12,703 $13,765 $11,568
1/31/2005 $12,868 $13,894 $11,593
2/28/2005 $12,850 $13,848 $11,660
3/31/2005 $12,778 $13,760 $11,751
4/30/2005 $12,998 $13,977 $11,830
5/31/2005 $13,100 $14,076 $11,818
6/30/2005 $13,169 $14,163 $11,824
7/31/2005 $13,117 $14,099 $11,878
8/31/2005 $13,264 $14,242 $11,939
9/30/2005 $13,167 $14,146 $12,085
10/31/2005 $13,080 $14,060 $12,109
11/30/2005 $13,138 $14,127 $12,012
12/31/2005 $13,251 $14,249 $11,964
1/31/2006 $13,275 $14,287 $12,055
2/28/2006 $13,401 $14,383 $12,079
3/31/2006 $13,288 $14,284 $12,146
4/30/2006 $13,300 $14,279 $12,249
5/31/2006 $13,334 $14,343 $12,310
6/30/2006 $13,266 $14,289 $12,334
7/31/2006 $13,426 $14,459 $12,371
8/31/2006 $13,610 $14,673 $12,395
9/30/2006 $13,702 $14,775 $12,334
10/31/2006 $13,783 $14,868 $12,267
11/30/2006 $13,911 $14,992 $12,249
12/31/2006 $13,853 $14,939 $12,267
1/31/2007 $13,818 $14,901 $12,305
2/28/2007 $14,006 $15,097 $12,371
3/31/2007 $13,947 $15,060 $12,483
4/30/2007 $13,995 $15,104 $12,564
5/31/2007 $13,936 $15,038 $12,641
6/30/2007 $13,877 $14,960 $12,666
7/31/2007 $13,960 $15,076 $12,663
8/31/2007 $13,913 $15,011 $12,639
9/30/2007 $14,117 $15,233 $12,674
10/31/2007 $14,165 $15,301 $12,701
11/30/2007 $14,250 $15,398 $12,777
12/31/2007 $14,263 $15,441 $12,768
1/31/2008 $14,397 $15,636 $12,832
2/29/2008 $13,762 $14,920 $12,869
3/31/2008 $14,142 $15,346 $12,980
4/30/2008 $14,351 $15,526 $13,059
5/31/2008 $14,438 $15,620 $13,169
6/30/2008 $14,328 $15,443 $13,302
7/31/2008 $14,366 $15,502 $13,372
8/31/2008 $14,503 $15,683 $13,318
9/30/2008 $13,728 $14,948 $13,300
10/31/2008 $13,606 $14,795 $13,166
11/30/2008 $13,555 $14,842 $12,913
12/31/2008 $13,683 $15,059 $12,780
1/31/2009 $14,141 $15,610 $12,835
2/28/2009 $14,314 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +2.50%
5-Year +2.44%
10-Year +3.54%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN OREGON TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---------- ------------------------ -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,011 $10,014 $10,030
4/30/1999 $10,030 $10,039 $10,103
5/31/1999 $ 9,964 $ 9,981 $10,103
6/30/1999 $ 9,814 $ 9,837 $10,103
7/31/1999 $ 9,833 $ 9,873 $10,134
8/31/1999 $ 9,707 $ 9,794 $10,158
9/30/1999 $ 9,675 $ 9,798 $10,207
10/31/1999 $ 9,522 $ 9,692 $10,225
11/30/1999 $ 9,602 $ 9,795 $10,231
12/31/1999 $ 9,509 $ 9,722 $10,231
1/31/2000 $ 9,442 $ 9,679 $10,261
2/29/2000 $ 9,559 $ 9,792 $10,322
3/31/2000 $ 9,782 $10,006 $10,407
4/30/2000 $ 9,714 $ 9,947 $10,413
5/31/2000 $ 9,647 $ 9,895 $10,426
6/30/2000 $ 9,890 $10,157 $10,480
7/31/2000 $10,027 $10,299 $10,505
8/31/2000 $10,183 $10,457 $10,505
9/30/2000 $10,114 $10,403 $10,559
10/31/2000 $10,207 $10,516 $10,578
11/30/2000 $10,265 $10,596 $10,584
12/31/2000 $10,495 $10,858 $10,578
1/31/2001 $10,544 $10,965 $10,644
2/28/2001 $10,575 $11,000 $10,687
3/31/2001 $10,669 $11,099 $10,711
4/30/2001 $10,551 $10,978 $10,754
5/31/2001 $10,646 $11,097 $10,802
6/30/2001 $10,713 $11,171 $10,821
7/31/2001 $10,884 $11,336 $10,790
8/31/2001 $11,047 $11,523 $10,790
9/30/2001 $10,963 $11,484 $10,839
10/31/2001 $11,087 $11,621 $10,802
11/30/2001 $10,993 $11,523 $10,784
12/31/2001 $10,869 $11,414 $10,742
1/31/2002 $11,022 $11,612 $10,766
2/28/2002 $11,155 $11,752 $10,809
3/31/2002 $10,963 $11,522 $10,869
4/30/2002 $11,146 $11,747 $10,930
5/31/2002 $11,194 $11,818 $10,930
6/30/2002 $11,291 $11,943 $10,936
7/31/2002 $11,418 $12,097 $10,948
8/31/2002 $11,515 $12,242 $10,985
9/30/2002 $11,751 $12,510 $11,003
10/31/2002 $11,505 $12,303 $11,021
11/30/2002 $11,465 $12,252 $11,021
12/31/2002 $11,702 $12,510 $10,997
1/31/2003 $11,652 $12,479 $11,046
2/28/2003 $11,801 $12,653 $11,131
3/31/2003 $11,781 $12,661 $11,198
4/30/2003 $11,871 $12,744 $11,173
5/31/2003 $12,173 $13,043 $11,155
6/30/2003 $12,140 $12,987 $11,167
7/31/2003 $11,711 $12,533 $11,179
8/31/2003 $11,779 $12,626 $11,222
9/30/2003 $12,073 $12,997 $11,258
10/31/2003 $12,030 $12,932 $11,246
11/30/2003 $12,171 $13,067 $11,216
12/31/2003 $12,283 $13,175 $11,204
1/31/2004 $12,343 $13,250 $11,258
2/29/2004 $12,548 $13,450 $11,319
3/31/2004 $12,536 $13,403 $11,392
4/30/2004 $12,232 $13,086 $11,429
5/31/2004 $12,200 $13,038 $11,495
6/30/2004 $12,241 $13,086 $11,532
7/31/2004 $12,387 $13,258 $11,514
8/31/2004 $12,597 $13,524 $11,520
9/30/2004 $12,670 $13,595 $11,544
10/31/2004 $12,797 $13,712 $11,605
11/30/2004 $12,678 $13,599 $11,611
12/31/2004 $12,858 $13,765 $11,568
1/31/2005 $13,017 $13,894 $11,593
2/28/2005 $12,994 $13,848 $11,660
3/31/2005 $12,915 $13,760 $11,751
4/30/2005 $13,118 $13,977 $11,830
5/31/2005 $13,224 $14,076 $11,818
6/30/2005 $13,287 $14,163 $11,824
7/31/2005 $13,230 $14,099 $11,878
8/31/2005 $13,370 $14,242 $11,939
9/30/2005 $13,267 $14,146 $12,085
10/31/2005 $13,175 $14,060 $12,109
11/30/2005 $13,226 $14,127 $12,012
12/31/2005 $13,334 $14,249 $11,964
1/31/2006 $13,351 $14,287 $12,055
2/28/2006 $13,470 $14,383 $12,079
3/31/2006 $13,352 $14,284 $12,146
4/30/2006 $13,357 $14,279 $12,249
5/31/2006 $13,385 $14,343 $12,310
6/30/2006 $13,311 $14,289 $12,334
7/31/2006 $13,464 $14,459 $12,371
8/31/2006 $13,640 $14,673 $12,395
9/30/2006 $13,726 $14,775 $12,334
10/31/2006 $13,811 $14,868 $12,267
11/30/2006 $13,920 $14,992 $12,249
12/31/2006 $13,868 $14,939 $12,267
1/31/2007 $13,827 $14,901 $12,305
2/28/2007 $14,006 $15,097 $12,371
3/31/2007 $13,942 $15,060 $12,483
4/30/2007 $13,982 $15,104 $12,564
5/31/2007 $13,917 $15,038 $12,641
6/30/2007 $13,841 $14,960 $12,666
7/31/2007 $13,929 $15,076 $12,663
8/31/2007 $13,876 $15,011 $12,639
9/30/2007 $14,060 $15,233 $12,674
10/31/2007 $14,113 $15,301 $12,701
11/30/2007 $14,190 $15,398 $12,777
12/31/2007 $14,196 $15,441 $12,768
1/31/2008 $14,321 $15,636 $12,832
2/29/2008 $13,678 $14,920 $12,869
3/31/2008 $14,057 $15,346 $12,980
4/30/2008 $14,256 $15,526 $13,059
5/31/2008 $14,347 $15,620 $13,169
6/30/2008 $14,220 $15,443 $13,302
7/31/2008 $14,250 $15,502 $13,372
8/31/2008 $14,379 $15,683 $13,318
9/30/2008 $13,600 $14,948 $13,300
10/31/2008 $13,473 $14,795 $13,166
11/30/2008 $13,429 $14,842 $12,913
12/31/2008 $13,536 $15,059 $12,780
1/31/2009 $13,990 $15,610 $12,835
2/28/2009 $14,154 $15,692 $12,899
82 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 987.00 $3.15
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
CLASS C
Actual $1,000 $ 984.50 $5.86
Hypothetical (5% return before expenses) $1,000 $1,018.89 $5.96
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.64% 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 | 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)
CREDIT QUALITY BREAKDOWN*
Franklin Pennsylvania Tax-Free Income Fund
Based on Total Long-Term Investments as of 2/28/09**
(PIE CHART)
AAA 27.9%
AA 32.0%
A 11.8%
BBB 12.8%
Not Rated by S&P 15.5%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's
is the secondary rating agency. Securities not rated by an independent
rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
- ------- ------- --------
AAA or Aaa 2.5% --
AA or Aa 5.6% --
A 4.6% --
BBB or Baa 2.3% --
Below Investment Grade -- 0.5%
---- ---
Total 15.0% 0.5%
This annual report for Franklin Pennsylvania Tax-Free Income Fund covers AAA the
fiscal year ended February 28, 2009.
PERFORMANCE OVERVIEW
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
The Fund's Class A share price, as measured by net asset value, decreased from
$9.82 on February 29, 2008, to $9.65 on February 28, 2009. 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 200.
86 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Pennsylvania Tax-Free Income Fund
DIVIDEND PER SHARE
------------------------------------
MONTH CLASS A CLASS B CLASS C
- ----- ---------- ---------- ----------
March 2008 3.60 cents 3.11 cents 3.11 cents
April 2008 3.60 cents 3.11 cents 3.11 cents
May 2008 3.60 cents 3.11 cents 3.11 cents
June 2008 3.60 cents 3.14 cents 3.12 cents
July 2008 3.60 cents 3.14 cents 3.12 cents
August 2008 3.60 cents 3.14 cents 3.12 cents
September 2008 3.60 cents 3.14 cents 3.14 cents
October 2008 3.60 cents 3.14 cents 3.14 cents
November 2008 3.60 cents 3.14 cents 3.14 cents
December 2008 3.63 cents 3.22 cents 3.22 cents
January 2009 3.63 cents 3.22 cents 3.22 cents
February 2009 3.63 cents 3.22 cents 3.22 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.
Class A shares paid dividends totaling 43.13 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 4.38%
based on an annualization of the current 3.68 cent per share dividend and the
maximum offering price of $10.08 on February 28, 2009. An investor in the 2009
maximum combined effective federal and Pennsylvania personal income tax bracket
of 37.00% would need to earn a distribution rate of 6.95% from a taxable
investment to match the Fund's Class A tax-free distribution rate. For the
Fund's Class B and C shares' performance, please see the Performance Summary.
COMMONWEALTH UPDATE
During the year under review, Pennsylvania's economy felt the effects of the
national economic slowdown. Although employment reached record levels in January
2008 and was still near those levels by October, the commonwealth continued to
shed manufacturing jobs. The recession and slowing manufacturing sector affected
other areas, and employment declined in finance, construction, trade and
information services. On the other hand, professional services and the
(2.) 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
2/28/09
% OF TOTAL
LONG-TERM INVESTMENTS*
----------------------
Prerefunded 24.1%
General Obligation 19.5%
Higher Education 19.3%
Transportation 9.7%
Hospital & Health Care 8.8%
Utilities 6.6%
Other Revenue 4.3%
Housing 3.2%
Subject to Government Appropriations 2.2%
Corporate-Backed 1.9%
Tax-Supported 0.4%
* Does not include short-term investments and other net assets.
education and health sectors were relatively stable. At period-end,
Pennsylvania's unemployment rate was 7.5% compared with the 8.1% national
rate.(3)
The commonwealth has strong financial management trends, including actions to
preserve budget balance in recent years. Fiscal year 2008 general fund revenues
exceeded estimates; however, tax collections have failed to meet budgeted
estimates since fiscal year 2009 began in July 2008. In October, the governor
implemented plans to reduce spending, freeze hiring and suspend new vehicle
purchases, and additional expenditure cuts were announced in December in an
attempt to bridge the budget shortfall. The commonwealth also has access to a
budget stabilization fund, which ended fiscal year 2008 with about $748 million,
and approximately $1.7 billion from other reserve funds.(4)
In recent years, net tax-supported debt growth for Pennsylvania has been similar
to its personal income growth. The ratio of debt to personal income was 2.4%,
equal to the 50-state median, and net tax-supported debt per capita was $870,
which was below the $889 national median.(4) The commonwealth's debt issuance is
expected to increase in coming years due to bond authorizations for economic
stimulus and infrastructure improvements; however, debt levels are expected to
remain moderate relative to tax base resources. Independent credit rating agency
Moody's Investors Service assigned Pennsylvania's general obligation debt a
rating of Aa2 with a stable outlook.(5) The rating and outlook reflected the
commonwealth's past conservative fiscal practices, lagging economic trends and
the need to address the projected budgetary shortfall.
MANAGER'S DISCUSSION
We used various investment strategies during the 12 months under review as we
sought to maximize tax-free income for shareholders. Please read the discussion
on page 6 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.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Moody's Investors Service, "New Issue: Pennsylvania (Commonwealth
of)," 12/8/08.
(5.) This does not indicate Moody's rating of the Fund.
88 | Annual Report
Performance Summary as of 2/28/09
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 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.17 $9.65 $9.82
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.4313
CLASS B (SYMBOL: FBPTX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.18 $9.68 $9.86
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.3771
CLASS C (SYMBOL: FRPTX) CHANGE 2/28/09 2/29/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.17 $9.73 $9.90
DISTRIBUTIONS (3/1/08-2/28/09)
Dividend Income $0.3765
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +2.72% +13.02% +46.60%
Average Annual Total Return(2) -1.69% +1.59% +3.45%
Avg. Ann. Total Return (3/31/09)(3) -3.88% +1.73% +3.46%
Distribution Rate(4) 4.38%
Taxable Equivalent Distribution Rate(5) 6.95%
30-Day Standardized Yield(6) 3.80%
Taxable Equivalent Yield(5) 6.03%
Total Annual Operating Expenses(7) 0.66%
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ------- ------ ------- ------------------
Cumulative Total Return(1) +2.04% +9.92% +48.75%
Average Annual Total Return(2) -1.89% +1.57% +4.47%
Avg. Ann. Total Return (3/31/09)(3) -3.97% +1.69% +4.46%
Distribution Rate(4) 4.04%
Taxable Equivalent Distribution Rate(5) 6.41%
30-Day Standardized Yield(6) 3.43%
Taxable Equivalent Yield(5) 5.44%
Total Annual Operating Expenses(7) 1.21%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- -------
Cumulative Total Return(1) +2.13% +9.95% +38.81%
Average Annual Total Return(2) +1.14% +1.92% +3.33%
Avg. Ann. Total Return (3/31/09)(3) -1.10% +2.05% +3.34%
Distribution Rate(4) 4.01%
Taxable Equivalent Distribution Rate(5) 6.36%
30-Day Standardized Yield(6) 3.44%
Taxable Equivalent Yield(5) 5.46%
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 (800) 342-5236.
90 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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 2/28/09
- ------- -------
1-Year -1.69%
5-Year +1.59%
10-Year +3.45%
CLASS A (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND - BARCLAYS CAPITAL
DATE CLASS A MUNICIPAL BOND INDEX CPI
- ---------- ---------------------- -------------------- -------
3/1/1999 $ 9,572 $10,000 $10,000
3/31/1999 $ 9,585 $10,014 $10,030
4/30/1999 $ 9,616 $10,039 $10,103
5/31/1999 $ 9,555 $ 9,981 $10,103
6/30/1999 $ 9,439 $ 9,837 $10,103
7/31/1999 $ 9,461 $ 9,873 $10,134
8/31/1999 $ 9,316 $ 9,794 $10,158
9/30/1999 $ 9,292 $ 9,798 $10,207
10/31/1999 $ 9,117 $ 9,692 $10,225
11/30/1999 $ 9,215 $ 9,795 $10,231
12/31/1999 $ 9,115 $ 9,722 $10,231
1/31/2000 $ 9,042 $ 9,679 $10,261
2/29/2000 $ 9,161 $ 9,792 $10,322
3/31/2000 $ 9,386 $10,006 $10,407
4/30/2000 $ 9,331 $ 9,947 $10,413
5/31/2000 $ 9,287 $ 9,895 $10,426
6/30/2000 $ 9,525 $10,157 $10,480
7/31/2000 $ 9,656 $10,299 $10,505
8/31/2000 $ 9,817 $10,457 $10,505
9/30/2000 $ 9,781 $10,403 $10,559
10/31/2000 $ 9,864 $10,516 $10,578
11/30/2000 $ 9,908 $10,596 $10,584
12/31/2000 $10,112 $10,858 $10,578
1/31/2001 $10,196 $10,965 $10,644
2/28/2001 $10,241 $11,000 $10,687
3/31/2001 $10,346 $11,099 $10,711
4/30/2001 $10,228 $10,978 $10,754
5/31/2001 $10,334 $11,097 $10,802
6/30/2001 $10,410 $11,171 $10,821
7/31/2001 $10,579 $11,336 $10,790
8/31/2001 $10,749 $11,523 $10,790
9/30/2001 $10,721 $11,484 $10,839
10/31/2001 $10,839 $11,621 $10,802
11/30/2001 $10,779 $11,523 $10,784
12/31/2001 $10,656 $11,414 $10,742
1/31/2002 $10,838 $11,612 $10,766
2/28/2002 $10,957 $11,752 $10,809
3/31/2002 $10,747 $11,522 $10,869
4/30/2002 $10,921 $11,747 $10,930
5/31/2002 $10,988 $11,818 $10,930
6/30/2002 $11,109 $11,943 $10,936
7/31/2002 $11,242 $12,097 $10,948
8/31/2002 $11,364 $12,242 $10,985
9/30/2002 $11,596 $12,510 $11,003
10/31/2002 $11,423 $12,303 $11,021
11/30/2002 $11,392 $12,252 $11,021
12/31/2002 $11,615 $12,510 $10,997
1/31/2003 $11,606 $12,479 $11,046
2/28/2003 $11,752 $12,653 $11,131
3/31/2003 $11,753 $12,661 $11,198
4/30/2003 $11,855 $12,744 $11,173
5/31/2003 $12,116 $13,043 $11,155
6/30/2003 $12,080 $12,987 $11,167
7/31/2003 $11,646 $12,533 $11,179
8/31/2003 $11,736 $12,626 $11,222
9/30/2003 $12,009 $12,997 $11,258
10/31/2003 $11,962 $12,932 $11,246
11/30/2003 $12,088 $13,067 $11,216
12/31/2003 $12,167 $13,175 $11,204
1/31/2004 $12,247 $13,250 $11,258
2/29/2004 $12,413 $13,450 $11,319
3/31/2004 $12,363 $13,403 $11,392
4/30/2004 $12,091 $13,086 $11,429
5/31/2004 $12,054 $13,038 $11,495
6/30/2004 $12,064 $13,086 $11,532
7/31/2004 $12,228 $13,258 $11,514
8/31/2004 $12,428 $13,524 $11,520
9/30/2004 $12,498 $13,595 $11,544
10/31/2004 $12,617 $13,712 $11,605
11/30/2004 $12,519 $13,599 $11,611
12/31/2004 $12,674 $13,765 $11,568
1/31/2005 $12,830 $13,894 $11,593
2/28/2005 $12,804 $13,848 $11,660
3/31/2005 $12,754 $13,760 $11,751
4/30/2005 $12,936 $13,977 $11,830
5/31/2005 $13,021 $14,076 $11,818
6/30/2005 $13,094 $14,163 $11,824
7/31/2005 $13,042 $14,099 $11,878
8/31/2005 $13,178 $14,242 $11,939
9/30/2005 $13,088 $14,146 $12,085
10/31/2005 $13,024 $14,060 $12,109
11/30/2005 $13,072 $14,127 $12,012
12/31/2005 $13,184 $14,249 $11,964
1/31/2006 $13,207 $14,287 $12,055
2/28/2006 $13,332 $14,383 $12,079
3/31/2006 $13,253 $14,284 $12,146
4/30/2006 $13,251 $14,279 $12,249
5/31/2006 $13,287 $14,343 $12,310
6/30/2006 $13,231 $14,289 $12,334
7/31/2006 $13,370 $14,459 $12,371
8/31/2006 $13,548 $14,673 $12,395
9/30/2006 $13,635 $14,775 $12,334
10/31/2006 $13,723 $14,868 $12,267
11/30/2006 $13,851 $14,992 $12,249
12/31/2006 $13,820 $14,939 $12,267
1/31/2007 $13,790 $14,901 $12,305
2/28/2007 $13,958 $15,097 $12,371
3/31/2007 $13,914 $15,060 $12,483
4/30/2007 $13,963 $15,104 $12,564
5/31/2007 $13,919 $15,038 $12,641
6/30/2007 $13,860 $14,960 $12,666
7/31/2007 $13,949 $15,076 $12,663
8/31/2007 $13,863 $15,011 $12,639
9/30/2007 $14,048 $15,233 $12,674
10/31/2007 $14,111 $15,301 $12,701
11/30/2007 $14,202 $15,398 $12,777
12/31/2007 $14,224 $15,441 $12,768
1/31/2008 $14,356 $15,636 $12,832
2/29/2008 $13,656 $14,920 $12,869
3/31/2008 $14,012 $15,346 $12,980
4/30/2008 $14,243 $15,526 $13,059
5/31/2008 $14,349 $15,620 $13,169
6/30/2008 $14,189 $15,443 $13,302
7/31/2008 $14,198 $15,502 $13,372
8/31/2008 $14,333 $15,683 $13,318
9/30/2008 $13,417 $14,948 $13,300
10/31/2008 $13,243 $14,795 $13,166
11/30/2008 $13,193 $14,842 $12,913
12/31/2008 $13,303 $15,059 $12,780
1/31/2009 $13,716 $15,610 $12,835
2/28/2009 $14,033 $15,692 $12,899
AVERAGE ANNUAL TOTAL RETURN
CLASS B 2/28/09
- ------- -------
1-Year -1.89%
5-Year +1.57%
Since Inception (2/1/00) +4.47%
CLASS B (2/1/00-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN PENNSYLVANIA TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS B MUNICIPAL BOND INDEX CPI
- ---------- ------------------------------ -------------------- -------
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 $10,748 $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 $13,360 $10,960
11/30/2003 $13,101 $13,500 $10,930
12/31/2003 $13,181 $13,611 $10,918
1/31/2004 $13,261 $13,689 $10,972
2/29/2004 $13,442 $13,895 $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 $13,971 $11,226
9/30/2004 $13,491 $14,046 $11,250
10/31/2004 $13,612 $14,166 $11,309
11/30/2004 $13,501 $14,049 $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 $14,306 $11,363
3/31/2005 $13,728 $14,216 $11,451
4/30/2005 $13,918 $14,440 $11,528
5/31/2005 $14,015 $14,542 $11,517
6/30/2005 $14,087 $14,632 $11,523
7/31/2005 $14,026 $14,566 $11,576
8/31/2005 $14,151 $14,713 $11,635
9/30/2005 $14,063 $14,614 $11,777
10/31/2005 $13,987 $14,526 $11,801
11/30/2005 $14,019 $14,595 $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 $14,757 $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 $15,159 $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 $15,394 $11,991
2/28/2007 $14,879 $15,597 $12,056
3/31/2007 $14,825 $15,559 $12,165
4/30/2007 $14,857 $15,605 $12,244
5/31/2007 $14,803 $15,536 $12,319
6/30/2007 $14,733 $15,455 $12,343
7/31/2007 $14,836 $15,575 $12,340
8/31/2007 $14,723 $15,508 $12,317
9/30/2007 $14,927 $15,737 $12,351
10/31/2007 $14,987 $15,807 $12,378
11/30/2007 $15,076 $15,908 $12,451
12/31/2007 $15,078 $15,952 $12,443
1/31/2008 $15,211 $16,153 $12,505
2/29/2008 $14,470 $15,414 $12,541
3/31/2008 $14,849 $15,854 $12,650
4/30/2008 $15,093 $16,040 $12,726
5/31/2008 $15,206 $16,137 $12,834
6/30/2008 $15,036 $15,955 $12,963
7/31/2008 $15,045 $16,015 $13,031
8/31/2008 $15,186 $16,203 $12,979
9/30/2008 $14,219 $15,443 $12,961
10/31/2008 $14,034 $15,285 $12,830
11/30/2008 $13,978 $15,334 $12,584
12/31/2008 $14,101 $15,558 $12,454
1/31/2009 $14,535 $16,127 $12,508
2/28/2009 $14,875 $16,212 $12,571
Annual Report | 91
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 2/28/09
- ------- -------
1-Year +1.14%
5-Year +1.92%
10-Year +3.33%
CLASS C (3/1/99-2/28/09)
(PERFORMANCE GRAPH)
FRANKLIN PENNSYLVANIA TAX-FREE BARCLAYS CAPITAL
DATE INCOME FUND - CLASS C MUNICIPAL BOND INDEX CPI
- ---------- ------------------------------ -------------------- -------
3/1/1999 $10,000 $10,000 $10,000
3/31/1999 $10,018 $10,014 $10,030
4/30/1999 $10,036 $10,039 $10,103
5/31/1999 $ 9,968 $ 9,981 $10,103
6/30/1999 $ 9,843 $ 9,837 $10,103
7/31/1999 $ 9,861 $ 9,873 $10,134
8/31/1999 $ 9,706 $ 9,794 $10,158
9/30/1999 $ 9,676 $ 9,798 $10,207
10/31/1999 $ 9,491 $ 9,692 $10,225
11/30/1999 $ 9,588 $ 9,795 $10,231
12/31/1999 $ 9,480 $ 9,722 $10,231
1/31/2000 $ 9,401 $ 9,679 $10,261
2/29/2000 $ 9,519 $ 9,792 $10,322
3/31/2000 $ 9,747 $10,006 $10,407
4/30/2000 $ 9,687 $ 9,947 $10,413
5/31/2000 $ 9,637 $ 9,895 $10,426
6/30/2000 $ 9,877 $10,157 $10,480
7/31/2000 $10,008 $10,299 $10,505
8/31/2000 $10,170 $10,457 $10,505
9/30/2000 $10,128 $10,403 $10,559
10/31/2000 $10,209 $10,516 $10,578
11/30/2000 $10,250 $10,596 $10,584
12/31/2000 $10,455 $10,858 $10,578
1/31/2001 $10,537 $10,965 $10,644
2/28/2001 $10,588 $11,000 $10,687
3/31/2001 $10,680 $11,099 $10,711
4/30/2001 $10,554 $10,978 $10,754
5/31/2001 $10,669 $11,097 $10,802
6/30/2001 $10,742 $11,171 $10,821
7/31/2001 $10,910 $11,336 $10,790
8/31/2001 $11,080 $11,523 $10,790
9/30/2001 $11,046 $11,484 $10,839
10/31/2001 $11,162 $11,621 $10,802
11/30/2001 $11,096 $11,523 $10,784
12/31/2001 $10,964 $11,414 $10,742
1/31/2002 $11,145 $11,612 $10,766
2/28/2002 $11,262 $11,752 $10,809
3/31/2002 $11,042 $11,522 $10,869
4/30/2002 $11,214 $11,747 $10,930
5/31/2002 $11,278 $11,818 $10,930
6/30/2002 $11,396 $11,943 $10,936
7/31/2002 $11,527 $12,097 $10,948
8/31/2002 $11,647 $12,242 $10,985
9/30/2002 $11,877 $12,510 $11,003
10/31/2002 $11,707 $12,303 $11,021
11/30/2002 $11,670 $12,252 $11,021
12/31/2002 $11,892 $12,510 $10,997
1/31/2003 $11,876 $12,479 $11,046
2/28/2003 $12,019 $12,653 $11,131
3/31/2003 $12,016 $12,661 $11,198
4/30/2003 $12,103 $12,744 $11,173
5/31/2003 $12,374 $13,043 $11,155
6/30/2003 $12,332 $12,987 $11,167
7/31/2003 $11,886 $12,533 $11,179
8/31/2003 $11,959 $12,626 $11,222
9/30/2003 $12,230 $12,997 $11,258
10/31/2003 $12,187 $12,932 $11,246
11/30/2003 $12,308 $13,067 $11,216
12/31/2003 $12,383 $13,175 $11,204
1/31/2004 $12,458 $13,250 $11,258
2/29/2004 $12,628 $13,450 $11,319
3/31/2004 $12,572 $13,403 $11,392
4/30/2004 $12,292 $13,086 $11,429
5/31/2004 $12,249 $13,038 $11,495
6/30/2004 $12,253 $13,086 $11,532
7/31/2004 $12,412 $13,258 $11,514
8/31/2004 $12,609 $13,524 $11,520
9/30/2004 $12,673 $13,595 $11,544
10/31/2004 $12,787 $13,712 $11,605
11/30/2004 $12,682 $13,599 $11,611
12/31/2004 $12,833 $13,765 $11,568
1/31/2005 $12,984 $13,894 $11,593
2/28/2005 $12,964 $13,848 $11,660
3/31/2005 $12,895 $13,760 $11,751
4/30/2005 $13,072 $13,977 $11,830
5/31/2005 $13,163 $14,076 $11,818
6/30/2005 $13,231 $14,163 $11,824
7/31/2005 $13,174 $14,099 $11,878
8/31/2005 $13,304 $14,242 $11,939
9/30/2005 $13,209 $14,146 $12,085
10/31/2005 $13,138 $14,060 $12,109
11/30/2005 $13,180 $14,127 $12,012
12/31/2005 $13,286 $14,249 $11,964
1/31/2006 $13,303 $14,287 $12,055
2/28/2006 $13,409 $14,383 $12,079
3/31/2006 $13,323 $14,284 $12,146
4/30/2006 $13,327 $14,279 $12,249
5/31/2006 $13,344 $14,343 $12,310
6/30/2006 $13,295 $14,289 $12,334
7/31/2006 $13,428 $14,459 $12,371
8/31/2006 $13,599 $14,673 $12,395
9/30/2006 $13,680 $14,775 $12,334
10/31/2006 $13,761 $14,868 $12,267
11/30/2006 $13,882 $14,992 $12,249
12/31/2006 $13,858 $14,939 $12,267
1/31/2007 $13,821 $14,901 $12,305
2/28/2007 $13,969 $15,097 $12,371
3/31/2007 $13,932 $15,060 $12,483
4/30/2007 $13,961 $15,104 $12,564
5/31/2007 $13,911 $15,038 $12,641
6/30/2007 $13,846 $14,960 $12,666
7/31/2007 $13,941 $15,076 $12,663
8/31/2007 $13,836 $15,011 $12,639
9/30/2007 $14,027 $15,233 $12,674
10/31/2007 $14,069 $15,301 $12,701
11/30/2007 $14,153 $15,398 $12,777
12/31/2007 $14,168 $15,441 $12,768
1/31/2008 $14,293 $15,636 $12,832
2/29/2008 $13,594 $14,920 $12,869
3/31/2008 $13,939 $15,346 $12,980
4/30/2008 $14,161 $15,526 $13,059
5/31/2008 $14,273 $15,620 $13,169
6/30/2008 $14,094 $15,443 $13,302
7/31/2008 $14,110 $15,502 $13,372
8/31/2008 $14,223 $15,683 $13,318
9/30/2008 $13,314 $14,948 $13,300
10/31/2008 $13,136 $14,795 $13,166
11/30/2008 $13,081 $14,842 $12,913
12/31/2008 $13,183 $15,059 $12,780
1/31/2009 $13,583 $15,610 $12,835
2/28/2009 $13,881 $15,692 $12,899
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE 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 2/28/09.
(5.) Taxable equivalent distribution rate and yield assume the published rates
as of 12/29/08 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 2/28/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2009 Morningstar. The BC 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 Baa3/BBB-. 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:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
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
VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 978.60 $3.24
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
CLASS B
Actual $1,000 $ 976.00 $5.93
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
CLASS C
Actual $1,000 $ 976.10 $5.93
Hypothetical (5% return before expenses) $1,000 $1,018.79 $6.06
* Expenses are calculated using the most recent six-month expense ratio,
annualized 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 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.30 $ 11.16 $ 11.09 $ 11.21 $ 11.21
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.47 0.47 0.48 0.48 0.50
Net realized and unrealized gains (losses) .. (0.12) (0.86) 0.06 (0.12) (0.01)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.35 (0.39) 0.54 0.36 0.49
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.47) (0.47) (0.47) (0.48) (0.49)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.18 $ 10.30 $ 11.16 $ 11.09 $ 11.21
======== ======== ======== ======== ========
Total return(f) ................................ 3.42% (3.62)% 5.05% 3.25% 4.61%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.62% 0.63% 0.63% 0.63% 0.63%
Net investment income .......................... 4.61% 4.29% 4.32% 4.34% 4.52%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $920,248 $914,411 $928,840 $885,864 $852,608
Portfolio turnover rate ........................ 21.01% 16.53% 6.56% 33.22% 27.99%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 95
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------
CLASS B 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.36 $ 11.22 $ 11.15 $ 11.27 $ 11.26
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.42 0.41 0.42 0.43 0.44
Net realized and unrealized gains (losses) .. (0.13) (0.86) 0.06 (0.13) --(d)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.29 (0.45) 0.48 0.30 0.44
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.41) (0.41) (0.41) (0.42) (0.43)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.24 $ 10.36 $ 11.22 $ 11.15 $ 11.27
======== ======== ======== ======== ========
Total return(f) ................................ 2.84% (4.12)% 4.45% 2.68% 4.09%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.17% 1.18% 1.17% 1.18% 1.18%
Net investment income .......................... 4.06% 3.74% 3.78% 3.79% 3.97%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 14,276 $ 17,854 $ 21,061 $ 22,315 $ 23,753
Portfolio turnover rate ........................ 21.01% 16.53% 6.56% 33.22% 27.99%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
96 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.41 $ 11.27 $ 11.20 $ 11.32 $ 11.31
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.42 0.41 0.42 0.43 0.44
Net realized and unrealized gains (losses) .. (0.13) (0.86) 0.06 (0.13) --(d)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.29 (0.45) 0.48 0.30 0.44
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.41) (0.41) (0.41) (0.42) (0.43)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.29 $ 10.41 $ 11.27 $ 11.20 $ 11.32
======== ======== ======== ======== ========
Total return(f) ................................ 2.82% (4.11)% 4.42% 2.66% 4.09%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.17% 1.18% 1.18% 1.18% 1.18%
Net investment income .......................... 4.06% 3.74% 3.77% 3.79% 3.97%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 78,805 $ 64,441 $ 58,386 $ 51,071 $ 44,055
Portfolio turnover rate ........................ 21.01% 16.53% 6.56% 33.22% 27.99%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 97
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND
PERIOD ENDED
FEBRUARY 28,
ADVISOR CLASS 2009(a)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................ $10.64
------
Income from investment operations(b):
Net investment income(c) ..................................... 0.33
Net realized and unrealized gains (losses) ................... (0.47)
------
Total from investment operations ................................ (0.14)
------
Less distributions from net investment income ................... (0.32)
------
Redemption fees(d, e) ........................................... --
------
Net asset value, end of period .................................. $10.18
======
Total return(f) ................................................. (1.28)%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses ........................................................ 0.52%
Net investment income ........................................... 4.71%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................... $ 5
Portfolio turnover rate ......................................... 21.01%
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
98 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS 99.1%
ARIZONA 84.3%
Arizona Health Facilities Authority Hospital System Revenue,
John C. Lincoln Health Network, Pre-Refunded, 5.75%, 12/01/32 ............... $ 3,280,000 $ 3,745,236
Phoenix Baptist Hospital, MBIA Insured, ETM, 6.25%, 9/01/11 ................. 785,000 816,816
Arizona Health Facilities Authority Revenue,
Banner Health, Refunding, Series D, BHAC Insured, 5.50%, 1/01/38 ............ 15,000,000 15,050,700
Banner Health, Series A, 5.00%, 1/01/35 ..................................... 10,000,000 8,700,100
Banner Health, Series D, 5.50%, 1/01/38 ..................................... 17,500,000 16,219,000
Catholic Healthcare West, Series A, 6.625%, 7/01/20 ......................... 6,390,000 6,932,000
Arizona School Facilities Board COP, 5.50%, 9/01/23 ......................... 10,000,000 10,466,500
Arizona State Board of Regents COP, University of Arizona Main Campus,
Series A-1,
AMBAC Insured, Pre-Refunded, 5.125%, 6/01/25 ................................ 2,000,000 2,173,080
Arizona State Board of Regents University System Revenue, Series C, 6.00%,
7/01/26 .................................................................. 2,500,000 2,746,875
7/01/27 .................................................................. 3,000,000 3,274,920
7/01/28 .................................................................. 3,350,000 3,633,376
Arizona State Municipal Financing Program COP, Refunding, Series 14,
AMBAC Insured,
5.00%, 8/01/33 ........................................................... 1,000,000 973,830
Arizona State University COP,
Arizona State University Project, Series 2002, MBIA Insured, Pre-Refunded,
5.10%,
7/01/24 .................................................................. 1,875,000 2,087,288
Arizona State University Project, Series 2002, MBIA Insured, Pre-Refunded,
5.10%,
7/01/25 .................................................................. 2,640,000 2,938,901
Downtown Campus/Mercado Project, Series A, MBIA Insured, 5.80%, 7/01/24 ..... 1,350,000 1,350,176
Research Infrastructure Projects, AMBAC Insured, 5.00%, 9/01/30 ............. 17,250,000 16,698,172
Arizona State University Revenues,
FGIC Insured, 5.00%, 7/01/23 ................................................ 2,890,000 2,946,500
FGIC Insured, 5.00%, 7/01/25 ................................................ 2,250,000 2,275,920
System, FGIC Insured, Pre-Refunded, 5.875%, 7/01/25 ......................... 1,000,000 1,027,510
System, Refunding, AMBAC Insured, 5.00%, 7/01/27 ............................ 1,895,000 1,879,158
Arizona Student Loan Acquisition Authority Student Loan Revenue,
junior sub., Refunding, Series B-1, 6.15%, 5/01/29 .......................... 1,000,000 882,560
Refunding, Senior Series A-1, 5.90%, 5/01/24 ................................ 1,500,000 1,384,770
Arizona Tourism and Sports Authority Tax Revenue, Multipurpose Stadium Facility,
Series A,
MBIA Insured, 5.00%, 7/01/28 ................................................ 7,000,000 6,905,640
Douglas Community Housing Corp. MFR, Rancho La Perilla, Series A, GNMA Secured,
6.125%, 7/20/41 ............................................................. 2,230,000 2,258,187
Downtown Phoenix Hotel Corp. Revenue,
Senior Series A, FGIC Insured, 5.00%, 7/01/40 ............................ 26,485,000 18,658,947
sub. bond, Series B, FGIC Insured, 5.00%, 7/01/36 ........................ 18,995,000 16,387,746
sub. bond, Series B, FGIC Insured, 5.00%, 7/01/40 ........................ 12,845,000 10,967,446
Gilbert Water Resource Municipal Property Corp. Water System Development Fee
Water
Revenue, sub. lien, MBIA Insured, 5.00%, 10/01/29 ........................... 25,000,000 23,975,500
Glendale IDA Hospital Revenue, John C. Lincoln Health, Refunding,
5.00%, 12/01/32 .......................................................... 4,025,000 2,998,424
5.00%, 12/01/42 .......................................................... 12,870,000 9,089,824
Series B, 5.00%, 12/01/37 ................................................ 3,000,000 2,169,270
Glendale IDAR, Midwestern University, Refunding, 5.00%, 5/15/31 ................ 7,080,000 6,230,400
Annual Report | 99
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Glendale Municipal Property Corp. Excise Tax Revenue, Series A, AMBAC
Insured, 5.00%,
7/01/33 ..................................................................... $ 1,000,000 $ 987,450
Glendale Water and Sewer Revenue, sub. lien, AMBAC Insured, 5.00%, 7/01/23 ..... 2,000,000 2,045,880
Glendale Western Loop 101 Public Facilities Corp. Excise Tax Revenue,
third lien, Series A,
6.25%, 7/01/38 .............................................................. 10,000,000 10,148,300
Goodyear Community Facilities Utilities District No. 1 GO, AMBAC Insured, 5.00%,
7/15/32 ..................................................................... 8,945,000 8,633,714
Greater Arizona Development Authority Infrastructure Revenue,
Series A, MBIA Insured, 5.00%, 8/01/26 ................................... 4,425,000 4,446,461
Series B, MBIA Insured, 5.00%, 8/01/35 ................................... 9,090,000 8,556,781
Marana Municipal Property Corp. Municipal Facilities Revenue,
Refunding, MBIA Insured, 5.25%, 7/01/22 .................................. 1,100,000 1,109,680
Series A, 5.00%, 7/01/28 ................................................. 3,000,000 2,916,480
Maricopa County Hospital Revenue, Sun Health Corp., Pre-Refunded, 5.00%,
4/01/35 ..................................................................... 12,090,000 12,937,993
Maricopa County IDA, MFHR,
Senior National Health Facilities II, Project A, FSA Insured, ETM, 5.50%,
1/01/18 ............................................................... 2,000,000 2,292,840
Villas de Merced Apartment Project, Series A, GNMA Secured, 5.50%,
12/20/37 .............................................................. 570,000 543,848
Western Groves Apartments, Series A-1, AMBAC Insured, 5.30%, 12/01/22 .... 1,650,000 1,526,630
Maricopa County IDA Health Facility Revenue,
Catholic Healthcare West, Refunding, Series A, 5.375%, 7/01/23 ........... 7,000,000 6,544,090
Catholic Healthcare West, Refunding, Series A, 5.50%, 7/01/26 ............ 13,950,000 12,756,717
Catholic Healthcare West Project, Refunding, Series A, 5.00%, 7/01/16 .... 8,635,000 8,653,047
Catholic Healthcare West Project, Refunding, Series A, ACA Insured, 5.00%,
7/01/16 ............................................................... 1,520,000 1,523,177
Catholic Healthcare West Project, Refunding, Series A, ACA Insured, 5.00%,
7/01/21 ............................................................... 9,600,000 9,106,176
Mayo Clinic, 5.00%, 11/15/36 ............................................. 25,750,000 22,719,997
Maricopa County IDA Hospital Facility Revenue,
Mayo Clinic Hospital, 5.25%, 11/15/37 .................................... 16,000,000 14,724,320
Mayo Clinic Hospital, AMBAC Insured, 5.25%, 11/15/37 ..................... 3,000,000 2,733,000
Samaritan Health Services, Series A, MBIA Insured, ETM, 7.00%, 12/01/16 .. 1,890,000 2,351,103
Maricopa County IDA Senior Living Healthcare Revenue, Immanuel Care, Refunding,
Series A,
GNMA Secured, 5.00%, 8/20/35 ................................................ 1,725,000 1,471,028
Maricopa County PCC, PCR, Public Service Co. Palo Verde Project, Series A,
AMBAC Insured,
5.05%, 5/01/29 .............................................................. 11,500,000 8,998,405
Maricopa County USD No. 89 Dysart GO, School Improvement, Project 06, Series B,
FSA Insured, 5.00%, 7/01/27 ................................................. 5,015,000 5,079,393
McAllister Academic Village LLC Revenue, Arizona State University Hassayampa,
Refunding,
5.25%, 7/01/33 ........................................................... 5,000,000 5,010,600
5.00%, 7/01/38 ........................................................... 5,000,000 4,784,800
Assured Guaranty, 5.25%, 7/01/33 ......................................... 2,525,000 2,500,836
Assured Guaranty, 5.00%, 7/01/38 ......................................... 3,825,000 3,611,488
Mesa Utility System Revenue,
MBIA Insured, Pre-Refunded, 5.00%, 7/01/26 ............................... 10,000,000 11,394,000
Refunding, Second Series, FGIC Insured, 4.50%, 7/01/28 ................... 2,500,000 2,387,875
Navajo County School District GO, School Improvement, Project 2008, Assured
Guaranty,
5.50%, 7/01/28 .............................................................. 1,045,000 1,052,284
Nogales Municipal Development Authority Inc. GO, MBIA Insured, 5.00%, 6/01/36 .. 6,075,000 5,017,403
100 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Northern Arizona University COP, Northern Arizona University Research Projects,
AMBAC Insured, 5.00%,
9/01/27 .................................................................. $ 2,355,000 $ 2,256,302
9/01/30 .................................................................. 6,360,000 5,633,434
Northern Arizona University System Revenues,
5.00%, 6/01/38 ........................................................... 5,000,000 4,510,800
AMBAC Insured, 5.00%, 6/01/32 ............................................ 7,380,000 6,687,756
Peoria Water and Sewer Revenue, FGIC Insured, 5.00%, 7/01/19 ................... 1,300,000 1,304,277
Phoenix Civic Improvement Corp. Airport Revenue, senior lien,
Series A, 5.00%, 7/01/38 ................................................. 10,000,000 9,700,000
Series B, FGIC Insured, 5.25%, 7/01/22 ................................... 3,000,000 2,896,620
Series B, FGIC Insured, 5.25%, 7/01/23 ................................... 5,000,000 4,767,200
Series B, FGIC Insured, 5.25%, 7/01/27 ................................... 15,250,000 13,674,370
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 3,190,045
7/01/28 .................................................................. 2,000,000 1,595,340
7/01/29 .................................................................. 2,000,000 1,579,340
7/01/36 .................................................................. 5,000,000 3,718,900
7/01/37 .................................................................. 7,000,000 5,201,490
Phoenix Civic Improvement Corp. Excise Tax Revenue,
Adams Street Garage Project, senior lien, Series B, Pre-Refunded, 5.35%,
7/01/24 ............................................................... 2,985,000 3,061,535
Subordinated, Civic Plaza Expansion Project, Series A, FGIC Insured,
5.00%, 7/01/41 ........................................................... 5,000,000 4,866,800
Subordinated, Civic Plaza Expansion Project, Series A, MBIA Insured,
5.00%, 7/01/35 ........................................................... 9,550,000 9,384,594
Phoenix Civic Improvement Corp. Wastewater System Revenue,
junior lien, FGIC Insured, Pre-Refunded, 6.00%, 7/01/19 .................. 3,000,000 3,229,830
junior lien, FGIC Insured, Pre-Refunded, 6.00%, 7/01/20 .................. 3,670,000 3,951,159
junior lien, FGIC Insured, Pre-Refunded, 6.00%, 7/01/24 .................. 24,715,000 26,608,416
junior lien, MBIA Insured, 5.00%, 7/01/28 ................................ 2,000,000 2,017,540
junior lien, MBIA Insured, 5.00%, 7/01/29 ................................ 3,405,000 3,423,727
junior lien, Refunding, FGIC Insured, 5.00%, 7/01/20 ..................... 9,710,000 9,964,305
junior lien, Refunding, FGIC Insured, 5.125%, 7/01/21 .................... 10,000,000 10,291,700
junior lien, Refunding, FGIC Insured, 5.00%, 7/01/24 ..................... 7,050,000 7,135,869
junior lien, Refunding, FSA Insured, 5.00%, 7/01/37 ...................... 22,515,000 21,817,260
senior lien, Refunding, 5.50%, 7/01/24 ................................... 2,500,000 2,736,350
Phoenix Civic Improvement Corp. Water System Revenue, junior lien,
Refunding, FGIC Insured,
5.00%, 7/01/26 .............................................................. 3,250,000 3,278,470
Phoenix GO, Various Purpose, Series B, 5.00%, 7/01/27 .......................... 8,360,000 8,809,099
Phoenix HFC Mortgage Revenue, Section 8 Project, Refunding, Series A, MBIA
Insured,
6.90%, 1/01/23 .............................................................. 1,065,000 1,068,770
Phoenix IDA Government Office Lease Revenue,
Capitol Mall LLC Project, AMBAC Insured, Pre-Refunded, 5.50%, 9/15/27 .... 22,300,000 23,830,895
Capitol Mall LLC Project, Refunding, AMBAC Insured, 5.00%, 9/15/26 ....... 3,445,000 3,343,166
Capitol Mall LLC Project, Refunding, AMBAC Insured, 5.00%, 9/15/27 ....... 4,615,000 4,421,262
Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/21 ............... 4,300,000 4,323,908
Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/28 ............... 4,000,000 3,657,480
Annual Report | 101
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Phoenix IDA Student Housing Revenue, Downtown Phoenix Student Housing LLC,
Series A, AMBAC Insured, 5.00%, 7/01/37 .................................. $ 18,400,000 $ 17,337,032
Series C, AMBAC Insured, 5.00%, 7/01/37 .................................. 10,000,000 9,422,300
Phoenix Municipal Housing Revenue, Fillmore Gardens Project, Refunding, 6.30%,
6/01/09 ..................................................................... 135,000 136,146
Pima County IDA, SFMR, Series B-1, GNMA Secured, 6.10%, 5/01/31 ................ 30,000 30,092
Pima County IDA Lease Revenue, Pima County Arizona, 5.00%, 9/01/39 ............. 15,000,000 13,409,100
Pinal County Electric District No. 4 Electric System Revenue, 6.00%,
12/01/23 ................................................................. 525,000 475,241
12/01/28 ................................................................. 740,000 619,225
12/01/38 ................................................................. 1,150,000 898,403
(a) Rio Nuevo Multipurpose Facilities District Excise Tax Revenue, sub.
lien, Assured Guaranty,
6.50%, 7/15/24 .............................................................. 4,220,000 4,570,218
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 6,189,060
Series A, 5.00%, 1/01/37 ................................................. 16,000,000 15,809,280
Series A, 5.00%, 1/01/39 ................................................. 25,000,000 24,655,000
Salt Verde Financial Corp. Senior Gas Revenue, 5.00%,
12/01/32 ................................................................. 10,000,000 6,621,200
12/01/37 ................................................................. 10,000,000 6,452,200
San Luis Civic Improvement Corp. Municipal Facilities Excise Tax Revenue,
XLCA Insured,
5.00%, 7/01/38 .............................................................. 8,650,000 7,553,353
Scottsdale GO, Refunding, 5.00%, 7/01/22 ....................................... 3,000,000 3,113,520
Scottsdale IDA Hospital Revenue, Scottsdale Healthcare,
Pre-Refunded, 5.70%, 12/01/21 ............................................ 2,000,000 2,235,320
Pre-Refunded, 5.80%, 12/01/31 ............................................ 14,865,000 16,653,705
Refunding, Series A, 5.25%, 9/01/30 ...................................... 5,000,000 4,152,000
Scottsdale Municipal Property Corp. Excise Tax Revenue, Pre-Refunded,
5.00%, 7/01/24 .............................................................. 5,000,000 5,710,500
Show Low IDA Hospital Revenue, Navapache Regional Medical Center, Radian
Insured, 5.00%,
12/01/25 ................................................................. 1,420,000 1,066,818
12/01/30 ................................................................. 5,160,000 3,571,907
12/01/35 ................................................................. 2,000,000 1,332,220
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 3,367,140
Tempe Arizona IDA Lease Revenue, State University Foundation, AMBAC
Insured, 5.00%,
7/01/28 .................................................................. 4,275,000 4,186,550
7/01/34 .................................................................. 11,510,000 10,923,335
Tolleson IDA, MFR, Copper Cove Project, Series A, GNMA Secured,
5.40%, 11/20/22 .......................................................... 1,090,000 1,096,289
5.45%, 11/20/32 .......................................................... 1,285,000 1,230,516
Tucson Airport Authority Inc. Revenue, sub. lien, AMBAC Insured,
5.35%, 6/01/31 .............................................................. 10,000,000 8,512,300
Tucson IDA Lease Revenue, University of Arizona/Marshall Foundation, Series A,
AMBAC Insured, 5.00%, 7/15/32 ............................................... 1,000,000 856,510
102 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Tucson Water Revenue, Series D, FGIC Insured, Pre-Refunded, 5.25%, 7/01/23 ..... $ 3,000,000 $ 3,046,500
University Medical Center Corp. Revenue, 5.00%, 7/01/35 ........................ 7,000,000 5,346,670
University of Arizona COP,
Parking and Student Housing, AMBAC Insured, Pre-Refunded, 5.75%, 6/01/24 .... 1,115,000 1,128,369
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/26 ..... 7,070,000 6,695,997
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/28 ..... 7,000,000 6,392,470
University of Arizona Projects, Series B, AMBAC Insured, 5.00%, 6/01/31 ..... 5,565,000 4,922,076
University of Arizona Projects, Series B, AMBAC Insured, Pre-Refunded,
5.125%, 6/01/22 .......................................................... 2,250,000 2,488,995
Yavapai County IDA Hospital Facility Revenue, Yavapai Regional Medical Center,
Series A, 6.00%, 8/01/33 .................................................... 2,000,000 1,531,880
Series B, 5.625%, 8/01/33 ................................................... 2,315,000 1,682,496
Series B, 5.625%, 8/01/37 ................................................... 12,435,000 8,844,518
Yavapai County USD No. 28 Camp Verde GO, Refunding, FGIC Insured,
6.00%, 7/01/09 ............................................................... 75,000 75,959
Yuma IDA Hospital Revenue, Yuma Regional Medical Center, FSA Insured,
Pre-Refunded,
5.50%, 8/01/21 .............................................................. 2,015,000 2,214,243
Yuma Municipal Property Corp. Revenue, Municipal Facilities, AMBAC
Insured, 5.00%,
7/01/25 ..................................................................... 3,100,000 3,114,787
--------------
854,020,017
--------------
U.S. TERRITORIES 14.8%
PUERTO RICO 14.4%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue,
Asset-Backed Bonds,
Refunding, 5.50%, 5/15/39 ................................................... 5,000,000 3,395,500
Puerto Rico Commonwealth GO,
Public Improvement, Series A, 5.375%, 7/01/28 ............................ 3,355,000 2,932,639
Series A, 5.25%, 7/01/37 ................................................. 10,000,000 8,154,600
Puerto Rico Commonwealth Highway and Transportation Authority
Transportation Revenue,
Series B, Pre-Refunded, 6.00%, 7/01/39 ................................... 19,250,000 20,618,290
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................. 5,000,000 5,541,800
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 ....... 4,440,000 4,453,808
Hospital Auxilio Mutuo Obligation Group Project, Series A, MBIA Insured,
6.25%, 7/01/24 ........................................................... 2,790,000 2,789,805
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ........................................ 8,190,000 6,922,597
Series D, Pre-Refunded, 5.375%, 7/01/33 ..................................... 21,810,000 24,062,101
Series I, 5.00%, 7/01/36 .................................................... 7,000,000 5,505,010
Series I, Pre-Refunded, 5.375%, 7/01/34 ..................................... 40,000,000 44,934,800
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.50%, 8/01/29 ................................................ 15,000,000 16,525,050
--------------
145,836,000
--------------
Annual Report | 103
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN ARIZONA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS 0.4%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien,
Refunding,
Series A, 5.50%, 10/01/13.................................................... $ 2,500,000 $ 2,480,975
Virgin Islands Water and Power Authority Water System Revenue,
Refunding, 5.50%,
7/01/17...................................................................... 1,500,000 1,460,835
--------------
3,941,810
--------------
TOTAL U.S. TERRITORIES.......................................................... 149,777,810
--------------
TOTAL INVESTMENTS (COST $1,052,440,087) 99.1%................................... 1,003,797,827
--------------
OTHER ASSETS, LESS LIABILITIES 0.9%............................................. 9,537,068
--------------
NET ASSETS 100.0%............................................................... $1,013,334,895
==============
See Abbreviations on page 238.
(a) Security purchased on a delayed delivery basis. See Note 1(b).
The accompanying notes are an integral part of these financial statements.
104 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN COLORADO TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.14 $ 12.10 $ 12.03 $ 12.04 $ 12.19
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.51 0.51 0.51 0.53 0.54
Net realized and unrealized gains (losses) .. (0.35) (0.97) 0.08 (0.01) (0.15)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.16 (0.46) 0.59 0.52 0.39
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.51) (0.50) (0.52) (0.53) (0.54)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.79 $ 11.14 $ 12.10 $ 12.03 $ 12.04
======== ======== ======== ======== ========
Total return(f) ................................ 1.43% (3.94)% 5.04% 4.41% 3.39%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.66% 0.67% 0.68% 0.69% 0.69%
Net investment income .......................... 4.62% 4.27% 4.31% 4.40% 4.52%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $465,136 $444,475 $426,482 $382,608 $346,589
Portfolio turnover rate ........................ 11.01% 22.57% 15.20% 23.19% 30.06%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 105
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN COLORADO TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.22 $ 12.19 $ 12.12 $ 12.13 $ 12.27
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.46 0.44 0.45 0.47 0.48
Net realized and unrealized gains (losses) .. (0.35) (0.97) 0.07 (0.01) (0.14)
------- ------- ------- ------- -------
Total from investment operations ............... 0.11 (0.53) 0.52 0.46 0.34
------- ------- ------- ------- -------
Less distributions from net investment income .. (0.45) (0.44) (0.45) (0.47) (0.48)
------- ------- ------- ------- -------
Redemption fees(d, e) .......................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 10.88 $ 11.22 $ 12.19 $ 12.12 $ 12.13
======= ======= ======= ======= =======
Total return(f) ................................ 0.94% (4.52)% 4.43% 3.81% 2.88%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.21% 1.22% 1.23% 1.24% 1.24%
Net investment income .......................... 4.07% 3.72% 3.76% 3.85% 3.97%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $69,302 $56,146 $50,938 $43,676 $40,875
Portfolio turnover rate ........................ 11.01% 22.57% 15.20% 23.19% 30.06%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
106 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------- ---------------- --------------
MUNICIPAL BONDS 98.0%
COLORADO 94.8%
Adams County Revenue, Platte Valley Medical Center, Refunding, MBIA Insured,
5.00%, 2/01/31 .............................................................. $ 10,000,000 $ 8,684,700
(a) Adams State College Auxiliary Facilities Revenue, Improvement, Series A,
5.50%, 5/15/34 .............................................................. 2,000,000 2,031,020
Arapahoe County Water and Wastewater GO, Refunding, Series A, MBIA Insured,
5.125%, 12/01/32 ............................................................ 15,000,000 14,088,000
Arkansas River Power Authority Power Revenue, Improvement, XLCA Insured,
5.25%, 10/01/32 .......................................................... 1,690,000 1,222,124
5.25%, 10/01/40 .......................................................... 8,200,000 5,715,236
5.00%, 10/01/43 .......................................................... 10,000,000 6,579,400
Arvada IDR, Wanco Inc. Project, 5.80%, 12/01/17 ................................ 480,000 452,659
Aurora COP, AMBAC Insured, Pre-Refunded, 5.50%, 12/01/30 ....................... 4,935,000 5,311,146
Aurora Hospital Revenue, The Children's Hospital Association Project, Series
D, FSA Insured, 5.00%, 12/01/33 ............................................. 11,000,000 10,231,870
Aurora Water Improvement Revenue, first lien, Series A, AMBAC Insured, 5.00%,
8/01/36 .................................................................. 8,880,000 8,546,378
8/01/39 .................................................................. 23,000,000 22,062,750
Boulder County Development Revenue, University Corp. for Atmospheric
Research, MBIA Insured, 5.00%, 9/01/33 ...................................... 1,500,000 1,345,590
Boulder Larimer and Weld Counties Vrain Valley School District RE-1J GO,
5.00%, 12/15/33 ............................................................. 5,000,000 4,902,150
Bowles Metropolitan District GO, Refunding, FSA Insured, 5.00%, 12/01/33 ....... 2,500,000 2,457,975
Broadlands Metropolitan District No. 2 GO, Refunding, MBIA Insured, 5.25%,
12/01/34 .................................................................... 8,655,000 8,718,181
Broomfield COP,
Master Facilities Lease Purchase, AMBAC Insured, 5.625%, 12/01/22 ........ 1,535,000 1,554,065
Refunding, AMBAC Insured, 6.00%, 12/01/29 ................................ 2,000,000 2,023,240
Broomfield Sales and Use Tax Revenue, Refunding and Improvement, Series A,
AMBAC Insured, 5.00%, 12/01/27 .............................................. 10,000,000 9,668,600
Broomfield Sewer Activity Enterprise Sewer and Wastewater Revenue, AMBAC
Insured, 5.00%, 12/01/31 .................................................... 7,500,000 7,081,050
Colorado Board of Governors University Enterprise System Revenue, Series A,
FGIC Insured, 5.00%, 3/01/37 ................................................ 13,000,000 12,094,420
Colorado Department of Transportation COP, MBIA Insured, 5.00%, 6/15/34 ........ 6,915,000 6,581,144
Colorado Educational and Cultural Facilities Authority Revenue,
James Irwin Charter School, Refunding and Improvement, CIFG Insured,
5.00%, 8/01/37 ........................................................ 6,060,000 5,387,825
Student Housing, Campus Village Apartments, Refunding, 5.50%, 6/01/38 .... 9,000,000 6,894,720
Student Housing, University of Colorado Foundation Project, AMBAC Insured,
Pre-Refunded, 5.00%, 7/01/27 .......................................... 6,545,000 7,186,737
Student Housing, University of Colorado Foundation Project, AMBAC Insured,
Pre-Refunded, 5.00%, 7/01/32 .......................................... 10,005,000 10,985,990
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series D, 6.125%, 10/01/28 .................. 2,500,000 2,631,500
Catholic Health Initiatives, Series D, 6.25%, 10/01/33 ................... 2,000,000 2,066,380
Evangelical Lutheran Project, 5.25%, 6/01/31 ............................. 4,000,000 3,035,720
Evangelical Lutheran Project, Series A, 5.25%, 6/01/34 ................... 3,500,000 2,607,640
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian
Insured, 5.00%, 12/01/25 .............................................. 3,050,000 2,363,293
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian
Insured, 5.00%, 12/01/26 .............................................. 3,205,000 2,443,716
Annual Report | 107
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Colorado Health Facilities Authority Revenue, (continued)
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian
Insured, 5.00%, 12/01/27 .............................................. $ 3,365,000 $ 2,525,163
Hospital, Longmont United Hospital Project, Refunding, Series B, Radian
Insured, 5.00%, 12/01/30 .............................................. 3,000,000 2,146,290
Hospital, Refunding, Series A, FSA Insured, 5.20%, 3/01/31 ............... 10,000,000 9,016,700
Kaiser Permanente, Series A, ETM, 5.35%, 11/01/16 ........................ 8,000,000 8,111,600
Portercare Adventist Health, Pre-Refunded, 6.625%, 11/15/26 .............. 2,500,000 2,864,975
Portercare Adventist Health, Pre-Refunded, 6.50%, 11/15/31 ............... 5,500,000 6,284,850
Valley View Hospital Assn., Refunding, 5.75%, 5/15/36 .................... 2,000,000 1,627,500
Yampa Valley Medical Center Project, Refunding, 5.125%, 9/15/29 .......... 4,000,000 2,903,560
Colorado HFAR,
MF, Project II, Series A-2, 5.30%, 10/01/23 .............................. 1,645,000 1,653,439
MF, Project II, Series A-2, 5.375%, 10/01/32 ............................. 3,605,000 3,569,202
MFH, Castle High, Series A, AMBAC Insured, 5.90%, 12/01/20 ............... 2,630,000 2,641,362
MFH Insured Mortgage, Series A-2, FHA Insured, 6.00%, 10/01/28 ........... 1,000,000 1,000,110
MFH Insured Mortgage, Series C-3, 6.05%, 10/01/32 ........................ 475,000 476,558
Colorado Springs Hospital Revenue,
6.375%, 12/15/30 ......................................................... 3,785,000 3,404,078
FSA Insured, 5.00%, 12/15/32 ............................................. 11,250,000 10,621,687
Pre-Refunded, 6.375%, 12/15/30 ........................................... 3,715,000 4,084,085
Colorado Springs Utilities Revenue, sub. lien, System Improvement, Series
B, 5.00%, 11/15/33 .......................................................... 4,000,000 3,982,840
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 4,915,250
Colorado State Health Facilities Authority Revenue, Parkview Medical Center
Inc. Project, Series A, 5.00%, 9/01/37 ...................................... 8,000,000 5,800,320
Colorado State Higher Education Capital Construction Lease Purchase
Financing Program COP, 5.50%, 11/01/27 ...................................... 7,275,000 7,499,797
Colorado Water Resources and Power Development Authority Clean Water
Revenue, Series A,
6.15%, 9/01/11 ........................................................... 125,000 125,040
6.30%, 9/01/14 ........................................................... 25,000 24,983
Colorado Water Resources and Power Development Authority Small Water
Resource Revenue, Series A, FGIC Insured,
5.80%, 11/01/20 .......................................................... 800,000 820,760
Pre-Refunded, 5.80%, 11/01/20 ............................................ 1,200,000 1,294,068
Colorado Water Resources and Power Development Authority Water Resources
Revenue,
Arapahoe County Water Improvement, Series E, MBIA Insured, 5.00%,
12/01/35 .............................................................. 10,000,000 9,656,000
East Cherry Creek Valley Water Sanitary District, MBIA Insured, 5.00%,
11/15/30 .............................................................. 2,590,000 2,131,881
Parker Water and Sanitary District, MBIA Insured, 5.00%, 9/01/30 ......... 5,000,000 4,298,550
Commerce City COP, AMBAC Insured, 5.00%, 12/15/37 .............................. 13,975,000 13,338,578
Denver City and County Airport Revenue,
Refunding, Series A, AMBAC Insured, 5.625%, 11/15/23 ..................... 4,500,000 4,302,450
Series B, Pre-Refunded, 5.50%, 11/15/33 .................................. 5,000,000 5,805,050
Series D, 7.75%, 11/15/13 ................................................ 740,000 807,414
Denver City and County COP, Series B, AMBAC Insured, Pre-Refunded, 5.50%,
12/01/25 .................................................................... 7,000,000 7,595,910
Denver Convention Center Hotel Authority Revenue, Refunding, senior bond,
XLCA Insured, 5.00%, 12/01/30 ............................................... 15,000,000 10,250,250
108 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Denver Health and Hospital Authority Healthcare Revenue,
Refunding, Series A, 5.25%, 12/01/31 ..................................... $ 9,250,000 $ 7,168,380
Series A, Pre-Refunded, 6.00%, 12/01/23 .................................. 1,000,000 1,113,250
Series A, Pre-Refunded, 6.00%, 12/01/31 .................................. 5,400,000 6,011,550
Series A, Pre-Refunded, 6.25%, 12/01/33 .................................. 3,250,000 3,889,568
Dove Valley Metropolitan District Arapahoe County GO, Refunding, FSA
Insured, 5.00%, 11/01/35 .................................................... 6,375,000 6,282,244
E-470 Public Highway Authority Revenue,
Capital Appreciation, Series A, MBIA Insured, zero cpn., 9/01/33 ......... 3,000,000 371,220
Capital Appreciation, Series B, MBIA Insured, zero cpn., 9/01/32 ......... 7,800,000 1,055,028
Capital Appreciation, Series B, MBIA Insured, zero cpn., 9/01/34 ......... 14,075,000 1,596,527
Senior Series A, MBIA Insured, Pre-Refunded, 5.75%, 9/01/29 .............. 4,575,000 4,868,349
Senior Series A, MBIA Insured, Pre-Refunded, 5.75%, 9/01/35 .............. 10,825,000 11,517,475
El Paso County Mortgage Revenue, Stetson Meadows, Series A, GNMA Secured,
5.25%, 12/20/32 ............................................................. 1,890,000 1,748,420
El Paso County School District No. 38 GO, Pre-Refunded, 6.00%, 12/01/24 ........ 1,500,000 1,631,325
Erie Water Enterprise Revenue, Series A, FSA Insured, 5.00%, 12/01/32 .......... 10,000,000 9,675,300
Fort Lewis College Board Trustees Enterprise Revenue, Series B-1, FGIC
Insured, 5.00%, 10/01/37 .................................................... 12,830,000 11,037,906
Garfield County Building Corp. COP, AMBAC Insured, Pre-Refunded, 5.75%,
12/01/24 .................................................................... 1,000,000 1,045,920
Gunnison Watershed School District No. RE-1J GO, 5.25%, 12/01/33 ............... 1,240,000 1,261,663
La Junta Hospital Revenue, Ark Valley Regional Medical Center Project,
5.75%, 4/01/14 ........................................................... 2,090,000 2,013,443
6.00%, 4/01/19 ........................................................... 1,000,000 913,650
6.10%, 4/01/24 ........................................................... 1,000,000 861,050
Mesa State College Auxiliary Facilities Enterprise Revenue, 6.00%, 5/15/38 ..... 7,000,000 7,387,170
Mesa State College Enterprise Revenue, BHAC Insured, 5.125%, 5/15/37 ........... 5,765,000 5,777,971
Northwest Parkway Public Highway Authority Revenue, Series A, AMBAC Insured,
Pre-Refunded, 5.125%,
6/15/26 .................................................................. 6,550,000 7,191,180
6/15/31 .................................................................. 4,465,000 4,902,079
Public Authority for Colorado Energy Natural Gas Purpose Revenue, 6.50%,
11/15/38 .................................................................... 9,900,000 8,042,265
Pueblo Board Waterworks Water Revenue, Series A, FSA Insured, Pre-Refunded,
6.00%, 11/01/21 ............................................................. 4,300,000 4,662,361
Regional Transportation District Sales Tax Revenue, Fastracks Project,
Refunding, Series A, FSA Insured, 4.50%, 11/01/35 ........................ 5,000,000 4,381,800
Series A, AMBAC Insured, 5.00%, 11/01/31 ................................. 14,150,000 14,091,985
Saddle Rock South Metropolitan District No. 4 GO, Refunding, FSA Insured,
4.50%, 12/01/34 ............................................................. 4,000,000 3,426,880
Thornton Development Authority Tax Increment Revenue, North Washington
Street Urban Renewal, MBIA Insured, 5.00%, 12/01/29 ......................... 6,100,000 6,052,847
Thornton Water Enterprise Revenue, MBIA Insured, 5.00%, 12/01/29 ............... 7,010,000 7,058,159
University of Colorado COP, Series A, AMBAC Insured, Pre-Refunded, 5.00%,
6/01/33 ..................................................................... 3,570,000 3,987,940
University of Colorado Enterprise System Revenue,
Series A, 5.375%, 6/01/38 ................................................ 3,000,000 3,064,920
University of Colorado Regents, MBIA Insured, 5.00%, 6/01/32 ............. 5,000,000 4,938,700
Annual Report | 109
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN COLORADO TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
University of Colorado Hospital Authority Revenue, Series A,
5.00%, 11/15/37 .......................................................... $ 2,000,000 $ 1,492,000
5.25%, 11/15/39 .......................................................... 3,000,000 2,309,790
Pre-Refunded, 5.60%, 11/15/25 ............................................ 1,900,000 2,091,843
University of Northern Colorado Revenue, Auxiliary Facilities Systems,
Refunding and Improvement, AMBAC Insured, 5.00%, 6/01/31 .................... 3,000,000 2,815,920
Ute Water Conservancy District Water Revenue, MBIA Insured, 5.75%, 6/15/20 ..... 5,000,000 5,150,900
Westminster Building Authority COP, MBIA Insured, 5.25%, 12/01/22 .............. 1,555,000 1,605,304
--------------
507,029,801
--------------
U.S. TERRITORIES 3.2%
PUERTO RICO 2.3%
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax
Revenue, Series B, 5.00%, 7/01/41 ........................................... 5,000,000 3,873,350
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 1,279,944
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ..................................... 2,120,000 1,791,930
Series I, Pre-Refunded, 5.375%, 7/01/34 .................................. 5,000,000 5,616,850
--------------
12,562,074
--------------
VIRGIN ISLANDS 0.9%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien,
Refunding, Series A,
5.40%, 10/01/12 .......................................................... 2,500,000 2,499,875
5.50%, 10/01/22 .......................................................... 2,500,000 2,071,075
--------------
4,570,950
--------------
TOTAL U.S. TERRITORIES ......................................................... 17,133,024
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $558,641,089) ........ 524,162,825
--------------
SHORT TERM INVESTMENTS 1.0%
MUNICIPAL BONDS 1.0%
COLORADO 1.0%
(b) Colorado Educational and Cultural Facilities Authority Revenue, National
Jewish Federation Bond Program,
Daily VRDN and Put, 0.65%, 2/01/35 ....................................... 1,900,000 1,900,000
Series A-4, Daily VRDN and Put, 0.65%, 2/01/34 ........................... 2,300,000 2,300,000
Series A10, Daily VRDN and Put, 0.65%, 9/01/37 ........................... 650,000 650,000
(b) Colorado Health Facilities Authority Revenue, The Visiting Nurse Corp.,
Daily VRDN and Put, 1.25%, 7/01/22 .......................................... 290,000 290,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $5,140,000) ................................. 5,140,000
--------------
TOTAL INVESTMENTS (COST $563,781,089) 99.0% .................................... 529,302,825
OTHER ASSETS, LESS LIABILITIES 1.0% ............................................ 5,135,271
--------------
NET ASSETS 100.0% .............................................................. $ 534,438,096
==============
110 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN COLORADO TAX-FREE INCOME FUND
See Abbreviations on page 238.
(a) Security purchased on a when-issued basis. See Note 1(b).
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 111
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.39 $ 11.13 $ 11.10 $ 11.11 $ 11.12
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.46 0.45 0.46 0.48 0.49
Net realized and unrealized gains (losses) .. (0.22) (0.73) 0.04 (0.01) (0.02)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.24 (0.28) 0.50 0.47 0.47
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.45) (0.46) (0.47) (0.48) (0.48)
-------- -------- -------- -------- --------
Redemption fees(d) ............................. --(e) --(e) --(e) -- --(e)
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.18 $ 10.39 $ 11.13 $ 11.10 $ 11.11
======== ======== ======== ======== ========
Total return(f) ................................ 2.31% (2.66)% 4.61% 4.33% 4.38%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.68% 0.69% 0.70% 0.71% 0.71%
Net investment income .......................... 4.39% 4.16% 4.21% 4.30% 4.46%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $338,345 $315,908 $305,258 $274,407 $249,286
Portfolio turnover rate ........................ 9.72% 13.47% 11.18% 7.73% 2.77%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
112 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 10.44 $ 11.19 $ 11.15 $ 11.16 $ 11.17
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.40 0.40 0.41 0.42 0.43
Net realized and unrealized gains (losses) .. (0.21) (0.75) 0.04 (0.01) (0.02)
------- ------- ------- ------- -------
Total from investment operations ............... 0.19 (0.35) 0.45 0.41 0.41
------- ------- ------- ------- -------
Less distributions from net investment income .. (0.39) (0.40) (0.41) (0.42) (0.42)
------- ------- ------- ------- -------
Redemption fees(d) ............................. --(e) --(e) --(e) -- --(e)
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 10.24 $ 10.44 $ 11.19 $ 11.15 $ 11.16
======= ======= ======= ======= =======
Total return(f) ................................ 1.83% (3.28)% 4.10% 3.75% 3.78%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.23% 1.24% 1.25% 1.26% 1.26%
Net investment income .......................... 3.84% 3.61% 3.66% 3.75% 3.91%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $70,541 $55,126 $52,623 $45,564 $40,942
Portfolio turnover rate ........................ 9.72% 13.47% 11.18% 7.73% 2.77%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 113
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------- ---------------- --------------
MUNICIPAL BONDS 98.5%
CONNECTICUT 76.8%
Bridgeport GO, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/15/19 ........... $ 1,000,000 $ 1,071,881
Connecticut State Airport Revenue, Bradley International Airport,
Series A, FGIC Insured,
5.125%, 10/01/26 ............................................................ 3,000,000 2,625,690
Connecticut State Development Authority First Mortgage Gross Revenue,
Health Care Project,
Church Homes Inc., Refunding, 5.80%, 4/01/21 ............................. 4,000,000 3,212,200
Connecticut Baptist Homes Inc. Project, Refunding, Radian Insured,
5.625%, 9/01/22 ....................................................... 2,000,000 1,456,200
The Elim Park Baptist Home Inc. Project, 5.75%, 12/01/23 ................. 750,000 574,208
The Elim Park Baptist Home Inc. Project, Refunding, Series A,
5.375%, 12/01/18 ...................................................... 1,100,000 885,841
Connecticut State Development Authority PCR,
Connecticut Light and Water, Refunding, Series A, 5.85%, 9/01/28 ......... 5,500,000 5,206,685
United Illuminating Co. Project, Mandatory Put 2/01/12, 5.75%,
6/01/26 ............................................................... 1,000,000 1,003,920
Connecticut State Development Authority Revenue, Life Care Facilities,
Seabury Project, Refunding, Radian Insured, 5.00%, 9/01/21 .................. 2,000,000 1,550,040
Connecticut State Development Authority Solid Waste Disposal Facilities
Revenue, PSEG Power
LLC Project, Series A, 5.75%, 11/01/37 ...................................... 5,000,000 3,850,450
Connecticut State Development Authority Water Facility Revenue,
Bridgeport Hydraulic Co. Project, 6.15%, 4/01/35 ............................ 1,000,000 866,690
Connecticut State GO,
Series A, 5.00%, 2/15/29 ................................................. 10,000,000 10,300,100
Series B, Pre-Refunded, 5.00%, 6/15/20 ................................... 10,000,000 10,840,400
Series B, Pre-Refunded, 5.00%, 6/15/22 ................................... 2,000,000 2,223,900
Series C, FSA Insured, 5.00%, 6/01/26 .................................... 5,000,000 5,202,850
Connecticut State Health and Educational Facilities Authority Revenue,
Brunswick School, Series A, MBIA Insured, 5.00%, 7/01/29 ................. 5,000,000 4,575,250
Canterbury School, Series B, Radian Insured, 5.00%, 7/01/36 .............. 1,000,000 749,040
Catholic Health East, Series F, MBIA Insured, 5.75%, 11/15/29 ............ 3,250,000 3,165,338
Child Care Facilities Program, Series C, AMBAC Insured, 5.625%,
7/01/29 ............................................................... 1,215,000 1,179,826
Child Care Facilities Program, Series E, AMBAC Insured, 5.00%,
7/01/31 ............................................................... 1,000,000 921,610
Child Care Facilities Program, Series G, Assured Guaranty, 6.00%,
7/01/28 ............................................................... 2,250,000 2,438,573
Connecticut College, Series D-1, MBIA Insured, Pre-Refunded, 5.75%,
7/01/30 ............................................................... 1,000,000 1,073,330
Danbury Hospital Issue, Refunding, Series G, AMBAC Insured, 5.75%,
7/01/29 ............................................................... 3,500,000 2,936,290
Eastern Connecticut Health Network, Refunding, Series A, Radian
Insured, 6.00%, 7/01/25 ............................................... 2,965,000 2,681,516
Eastern Connecticut Health Network, Refunding, Series C, Radian
Insured, 5.125%, 7/01/30 .............................................. 2,500,000 1,789,825
Eastern Connecticut Health Network, Series A, Radian Insured,
Pre-Refunded, 6.00%, 7/01/25 .......................................... 6,230,000 6,702,982
Fairfield University, Series I, MBIA Insured, Pre-Refunded, 5.50%,
7/01/29 ............................................................... 1,500,000 1,539,180
Fairfield University, Series M, 5.00%, 7/01/26 ........................... 450,000 451,967
Fairfield University, Series M, 5.00%, 7/01/34 ........................... 1,000,000 953,020
Fairfield University, Series N, 5.00%, 7/01/29 ........................... 7,000,000 6,428,450
Greenwich Academy, Series B, FSA Insured, Pre-Refunded, 5.00%, 3/01/32 ... 4,210,000 4,565,029
Hartford University, Series G, Radian Insured, 5.25%, 7/01/26 ............ 5,000,000 3,975,800
Hebrew Home and Hospital, Series B, FHA Insured, 5.15%, 8/01/28 .......... 3,130,000 3,107,088
Horace Bushnell Memorial Hall, Series A, MBIA Insured, 5.625%, 7/01/29 ... 1,000,000 1,012,630
Hospital for Special Care, Series C, Radian Insured, 5.25%, 7/01/37 ...... 2,500,000 1,739,750
Loomis Chafee School, Series G, 5.00%, 7/01/30 ........................... 3,000,000 2,934,360
Loomis Chafee School, Series G, 5.00%, 7/01/38 ........................... 6,285,000 5,996,518
114 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------- ---------------- --------------
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 ................ $ 400,000 $ 490,196
Miss Porter's School Issue, Series B, AMBAC Insured, 5.00%, 7/01/26 ...... 1,730,000 1,747,854
Miss Porter's School Issue, Series B, AMBAC Insured, 5.00%, 7/01/36 ...... 4,415,000 4,305,508
New Horizons Village Project, 7.30%, 11/01/16 ............................ 2,905,000 2,905,174
Norwich Free Academy, Series A, AMBAC Insured, 5.00%, 7/01/34 ............ 1,675,000 1,580,781
Quinnipiac University, Series H, AMBAC Insured, 5.00%, 7/01/36 ........... 5,000,000 4,681,750
Quinnipiac University, Series J, MBIA Insured, 5.00%, 7/01/37 ............ 15,000,000 14,174,850
Quinnipiac University, Series K1, MBIA Insured, 5.00%, 7/01/31 ........... 4,000,000 3,760,400
Renbrook School, Series A, AMBAC Insured, 5.00%, 7/01/37 ................. 1,170,000 1,164,653
Sacred Heart University, Refunding, Series E, Radian Insured, 5.00%,
7/01/28 ............................................................... 4,000,000 3,189,280
Sacred Heart University, Series C, 6.50%, 7/01/16 ........................ 205,000 199,633
Sacred Heart University, Series C, 6.625%, 7/01/26 ....................... 785,000 710,441
Salisbury School, Series C, Assured Guaranty, 5.00%, 7/01/38 ............. 5,000,000 4,835,400
Series B, MBIA Insured, 5.00%, 7/01/33 ................................... 2,000,000 1,681,640
St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ................. 4,615,000 3,605,976
The William W. Backus Hospital, Series F, FSA Insured, 5.00%, 7/01/28 .... 1,500,000 1,433,655
The William W. Backus Hospital, Series F, FSA Insured, 5.125%, 7/01/35 ... 4,025,000 3,810,669
Trinity College, Refunding, Series J, MBIA Insured, 4.50%, 7/01/37 ....... 2,000,000 1,754,960
Trinity College, Series G, AMBAC Insured, Pre-Refunded, 5.00%, 7/01/31 ... 5,425,000 5,948,946
Trinity College, Series H, MBIA Insured, 5.00%, 7/01/26 .................. 1,855,000 1,873,865
Village Families and Children, Series A, AMBAC Insured, 5.00%, 7/01/32 ... 1,000,000 802,740
Westminster School, Series E, XLCA Insured, 5.00%, 7/01/37 ............... 10,660,000 10,223,047
Westover School, Series A, Radian Insured, Pre-Refunded, 5.70%, 7/01/30 .. 2,000,000 2,143,960
Yale University, Series Y-1, 5.00%, 7/01/35 .............................. 15,000,000 15,259,200
Yale University, Series Z-1, 5.00%, 7/01/42 .............................. 10,000,000 10,115,500
Yale-New Haven Hospital, Series J-1, AMBAC Insured, 5.00%, 7/01/31 ....... 12,500,000 11,247,875
Connecticut State HFAR,
Housing Mortgage Finance Program, Refunding, Series E, Sub Series E-2,
5.20%, 11/15/21 ....................................................... 1,840,000 1,843,974
Housing Mortgage Finance Program, Series B, 6.10%, 11/15/31 .............. 2,715,000 2,716,683
Housing Mortgage Finance Program, Series E, Sub Series E-4, 5.05%,
5/15/28 ............................................................... 4,650,000 4,610,149
Housing Mortgage Finance Program, Series F, Sub Series F-2, 5.875%,
11/15/33 ................................................................. 5,000,000 5,142,800
Housing Mortgage Finance Program, Series F, Sub Series F-2, 6.00%,
11/15/38 .............................................................. 2,000,000 2,056,180
Special Obligation, Special Needs Housing, Series 1, AMBAC Insured,
5.00%, 6/15/22 ........................................................ 1,000,000 1,006,840
Special Obligation, Special Needs Housing, Series 1, AMBAC Insured, 5.00%,
6/15/32 ............................................................... 1,000,000 885,270
Connecticut State Higher Education Supplemental Loan Authority Revenue,
Family Education Loan Program, Series A,
AMBAC Insured, 6.00%, 11/15/18 ........................................... 570,000 517,549
MBIA Insured, 5.50%, 11/15/17............................................. 430,000 407,180
Connecticut State Revenue, Revolving Fund, Series A, 5.00%,
7/01/26 .................................................................. 6,025,000 6,256,541
7/01/27 .................................................................. 4,060,000 4,177,578
Connecticut State Special Tax Obligation Revenue, Transportation
Infrastructure,
Series A, FSA Insured, Pre-Refunded, 5.375%, 10/01/18 .................... 1,000,000 1,102,850
Series B, AMBAC Insured, 5.00%, 12/01/20 ................................. 5,000,000 5,154,300
Series B, AMBAC Insured, 5.00%, 12/01/22 ................................. 1,000,000 1,020,420
Annual Report | 115
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
CONNECTICUT (CONTINUED)
Greater New Haven Water Pollution Control Authority Regional Water
Revenue,
Refunding, Series A, MBIA Insured, 5.00%, 11/15/24 ....................... $ 3,315,000 $ 3,304,061
Refunding, Series A, MBIA Insured, 5.00%, 8/15/35 ........................ 3,750,000 3,485,212
Series A, FSA Insured, 5.00%, 11/15/37 ................................... 3,000,000 2,941,530
New Haven GO, Series C, MBIA Insured,
ETM, 5.00%, 11/01/22 ..................................................... 25,000 26,686
Pre-Refunded, 5.00%, 11/01/22 ............................................ 2,975,000 3,305,879
South Central Regional Water Authority Water System Revenue,
Eighteenth Series B, MBIA Insured, 5.25%, 8/01/29 ........................ 1,000,000 1,025,350
Eighteenth Series B, MBIA Insured, 5.25%, 8/01/32 ........................ 1,000,000 1,014,370
Eighteenth Series B-1, MBIA Insured, 5.00%, 8/01/26 ...................... 3,500,000 3,561,180
Refunding, Twenty-second Series, FSA Insured, 5.00%, 8/01/38 ............. 5,000,000 4,894,200
Series A, MBIA Insured, 5.00%, 8/01/33 ................................... 6,000,000 5,941,260
University of Connecticut Revenue, Student Fee,
Refunding, Series A, FGIC Insured, 5.00%, 11/15/26 ....................... 10,000,000 10,217,400
Series A, 5.00%, 5/15/23 ................................................. 10,000,000 10,266,500
Series A, FGIC Insured, Pre-Refunded, 6.00%, 11/15/25 .................... 1,500,000 1,644,120
--------------
313,962,442
--------------
U.S. TERRITORIES 21.7%
PUERTO RICO 20.4%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue,
Asset-Backed Bonds, Refunding,
5.50%, 5/15/39 ........................................................... 4,000,000 2,716,400
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue,
senior lien, Series A,
6.00%, 7/01/44 ........................................................... 1,000,000 895,760
Assured Guaranty, 5.00%, 7/01/28 ......................................... 2,000,000 1,937,240
Puerto Rico Commonwealth GO, Public Improvement,
MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ............................... 1,000,000 1,056,610
Refunding, FSA Insured, 5.125%, 7/01/30 .................................. 835,000 800,957
Series A, 5.00%, 7/01/29 ................................................. 1,000,000 827,120
Series A, 5.125%, 7/01/31 ................................................ 3,195,000 2,597,567
Series A, 5.00%, 7/01/33 ................................................. 465,000 362,700
Series A, 5.00%, 7/01/34 ................................................. 280,000 221,231
Series A, FGIC Insured, Pre-Refunded, 5.00%, 7/01/32 ..................... 1,000,000 1,116,880
Series A, Pre-Refunded, 5.125%, 7/01/31 .................................. 1,000,000 1,090,920
Series A, Pre-Refunded, 5.00%, 7/01/33 ................................... 535,000 605,914
Series B, 5.00%, 7/01/35 ................................................. 1,895,000 1,516,587
Series B, Pre-Refunded, 5.00%, 7/01/35 ................................... 3,105,000 3,628,317
Puerto Rico Commonwealth Highway and Transportation Authority
Transportation Revenue,
Refunding, Series A, 5.00%, 7/01/38 ...................................... 120,000 93,368
Series G, 5.00%, 7/01/33 ................................................. 400,000 316,564
Series G, Pre-Refunded, 5.00%, 7/01/33 ................................... 600,000 680,868
Puerto Rico Convention Center District Authority Hotel Occupancy Tax
Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ............................................ 5,000,000 4,058,150
Puerto Rico Electric Power Authority Power Revenue,
Series HH, FSA Insured, Pre-Refunded, 5.25%, 7/01/29 ..................... 7,000,000 7,476,980
Series II, Pre-Refunded, 5.25%, 7/01/31 .................................. 1,000,000 1,125,800
Series RR, XLCA Insured, Pre-Refunded, 5.00%, 7/01/30 .................... 1,000,000 1,155,510
116 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Electric Power Authority Power Revenue, (continued)
Series TT, 5.00%, 7/01/32 ................................................ $ 18,500,000 $ 15,443,800
Series WW, 5.50%, 7/01/38 ................................................ 6,700,000 5,918,110
Puerto Rico HFAR, Subordinated, Capital Fund Modernization, 5.125%,
12/01/27 .................................................................... 4,250,000 4,296,793
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 3,364,632
Puerto Rico Industrial Tourist Educational Medical and Environmental
Control Facilities Revenue, University Plaza Project, Series A, MBIA Insured,
5.00%, 7/01/33 ........................................................... 1,000,000 803,610
Puerto Rico PBA Guaranteed Revenue, Government Facilities, Refunding,
Series D, 5.375%, 7/01/33 ................................................ 1,995,000 1,686,274
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................. 6,005,000 6,625,076
Series I, 5.00%, 7/01/36 ................................................. 1,000,000 786,430
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation,
Series E, Pre-Refunded, 5.70%, 8/01/25 ...................................... 5,000,000 5,211,000
University of Puerto Rico Revenues, University System, Refunding,
Series P, 5.00%, 6/01/26 ................................................. 5,000,000 3,985,950
Series Q, 5.00%, 6/01/36 ................................................. 1,500,000 1,098,735
--------------
83,501,853
--------------
VIRGIN ISLANDS 1.3%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien,
Refunding, Series A, 5.50%,
10/01/13 ................................................................. 2,500,000 2,480,975
10/01/22 ................................................................. 2,500,000 2,071,075
Virgin Islands Water and Power Authority Electric System Revenue, Refunding,
5.30%,
7/01/21 .................................................................. 1,000,000 893,740
--------------
5,445,790
--------------
TOTAL U.S. TERRITORIES 88,947,643
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $424,274,910) ........ 402,910,085
--------------
SHORT TERM INVESTMENTS 0.1%
MUNICIPAL BONDS 0.1%
CONNECTICUT 0.1%
(a) Connecticut State Health and Educational Facilities Authority Revenue,
Yale University,
Series V-1, Daily VRDN and Put, 0.35%, 7/01/36 ........................... 200,000 200,000
Series V-2, Daily VRDN and Put, 0.35%, 7/01/36 ........................... 100,000 100,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $300,000) ................................... 300,000
--------------
TOTAL INVESTMENTS (COST $424,574,910) 98.6% .................................... 403,210,085
OTHER ASSETS, LESS LIABILITIES 1.4% ............................................ 5,676,056
--------------
NET ASSETS 100.0% .............................................................. $ 408,886,141
==============
See Abbreviations on page 238.
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 117
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN DOUBLE TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.10 $ 12.06 $ 11.98 $ 11.99 $ 12.06
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.50 0.49 0.50 0.50 0.51
Net realized and unrealized gains (losses) .. (0.57) (0.96) 0.08 (0.01) (0.05)
-------- -------- -------- -------- --------
Total from investment operations ............... (0.07) (0.47) 0.58 0.49 0.46
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ....................... (0.49) (0.49) (0.50) (0.50) (0.51)
Net realized gains .......................... -- -- -- -- (0.02)
-------- -------- -------- -------- --------
Total distributions ............................ (0.49) (0.49) (0.50) (0.50) (0.53)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.54 $ 11.10 $ 12.06 $ 11.98 $ 11.99
======== ======== ======== ======== ========
Total return(f) ................................ (0.62)% (4.05)% 4.97% 4.13% 4.01%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.68% 0.69% 0.70% 0.71% 0.72%
Net investment income .......................... 4.58% 4.14% 4.16% 4.17% 4.31%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $468,062 $462,515 $428,458 $370,481 $309,495
Portfolio turnover rate ........................ 14.45% 18.19% 10.88% 14.19% 10.46%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
118 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DOUBLE TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.14 $ 12.11 $ 12.01 $ 12.03 $ 12.10
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.44 0.43 0.43 0.43 0.45
Net realized and unrealized gains (losses) .. (0.57) (0.97) 0.10 (0.02) (0.05)
------- ------- ------- ------- -------
Total from investment operations ............... (0.13) (0.54) 0.53 0.41 0.40
------- ------- ------- ------- -------
Less distributions from:
Net investment income ....................... (0.43) (0.43) (0.43) (0.43) (0.45)
Net realized gains .......................... -- -- -- -- (0.02)
------- ------- ------- ------- -------
Total distributions ............................ (0.43) (0.43) (0.43) (0.43) (0.47)
------- ------- ------- ------- -------
Redemption fees(d, e) .......................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 10.58 $ 11.14 $ 12.11 $ 12.01 $ 12.03
======= ======= ======= ======= =======
Total return(f) ................................ (1.17)% (4.64)% 4.55% 3.47% 3.42%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.23% 1.24% 1.24% 1.26% 1.27%
Net investment income .......................... 4.03% 3.59% 3.62% 3.62% 3.76%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $72,413 $66,985 $58,803 $55,931 $45,621
Portfolio turnover rate ........................ 14.45% 18.19% 10.88% 14.19% 10.46%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 119
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN DOUBLE TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS 97.0%
U.S. TERRITORIES 97.0%
GUAM 4.2%
Guam Education Financing Foundation COP, 5.00%, 10/01/23 ....................... $ 2,500,000 $ 2,261,501
Guam International Airport Authority Revenue,
Series A, MBIA Insured, 5.25%, 10/01/20 .................................. 1,725,000 1,795,984
Series A, MBIA Insured, 5.25%, 10/01/22 .................................. 700,000 721,175
Series B, MBIA Insured, 5.25%, 10/01/22 .................................. 1,000,000 1,030,250
Series B, MBIA Insured, 5.25%, 10/01/23 .................................. 1,000,000 1,025,260
Series C, MBIA Insured, 5.25%, 10/01/21 .................................. 5,000,000 4,708,600
Series C, MBIA Insured, 5.00%, 10/01/23 .................................. 5,000,000 4,419,500
Guam Power Authority Revenue, Refunding, Series A, MBIA Insured,
5.125%, 10/01/29 1,975,000 1,551,876
5.25%, 10/01/34 7,000,000 5,394,690
--------------
22,908,836
--------------
PUERTO RICO 81.9%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed
Bonds, Refunding, 5.50%, 5/15/39 ............................................ 5,000,000 3,395,500
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior lien,
Series A, 6.00%, 7/01/38 ................................................. 3,100,000 2,823,914
Assured Guaranty, 5.125%, 7/01/47 ........................................ 27,000,000 24,903,990
Puerto Rico Commonwealth GO,
Public Improvement, MBIA Insured, Pre-Refunded, 5.75%, 7/01/26 ........... 3,000,000 3,169,830
Public Improvement, Refunding, Series A, 5.50%, 7/01/18 .................. 2,395,000 2,262,365
Public Improvement, Refunding, Series A, 5.50%, 7/01/32 .................. 10,000,000 8,661,300
Public Improvement, Series A, 5.375%, 7/01/28 ............................ 1,300,000 1,136,343
Public Improvement, Series A, 5.00%, 7/01/34 ............................. 1,800,000 1,422,198
Public Improvement, Series A, FGIC Insured, 5.125%, 7/01/31 .............. 3,315,000 2,723,670
Public Improvement, Series A, FGIC Insured, Pre-Refunded, 5.125%,
7/01/31 1,685,000 1,832,101
Public Improvement, Series B, 5.00%, 7/01/35 ............................. 1,825,000 1,460,566
Refunding, Series C, Sub Series C-7, MBIA Insured, 6.00%, 7/01/27 ........ 3,500,000 3,504,585
Refunding, Series C, Sub Series C-7, MBIA Insured, 6.00%, 7/01/28 ........ 1,195,000 1,190,818
Series A, 5.25%, 7/01/29 ................................................. 21,250,000 18,030,412
Series A, 5.25%, 7/01/30 ................................................. 8,575,000 7,216,548
Puerto Rico Commonwealth Highway and Transportation Authority Highway
Revenue,
Refunding, Series CC, FSA Insured, 5.25%, 7/01/32 ........................ 5,500,000 5,441,205
Refunding, Series CC, FSA Insured, 5.25%, 7/01/33 ........................ 5,000,000 4,945,450
Refunding, Series CC, FSA Insured, 5.25%, 7/01/34 ........................ 5,000,000 4,944,350
Series Y, Pre-Refunded, 5.50%, 7/01/36 ................................... 11,850,000 14,241,922
Puerto Rico Commonwealth Highway and Transportation Authority Transportation
Revenue,
Refunding, Series H, 5.00%, 7/01/35 ...................................... 20,000 15,652
Refunding, Series M, 5.00%, 7/01/37 ...................................... 5,455,000 4,318,996
Refunding, Series N, FGIC Insured, 5.25%, 7/01/39 ........................ 20,720,000 17,052,353
Series B, Pre-Refunded, 6.00%, 7/01/39 ................................... 10,000,000 10,710,800
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................. 11,990,000 13,289,236
Series H, Pre-Refunded, 5.00%, 7/01/35 ................................... 80,000 90,782
Series K, Pre-Refunded, 5.00%, 7/01/40 ................................... 9,500,000 11,007,650
120 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN DOUBLE TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax
Revenue,
5.00%, 7/01/37 ........................................................... $ 15,250,000 $ 11,992,905
Series B, 5.00%, 7/01/31 ................................................. 7,500,000 6,122,325
Series B, 5.00%, 7/01/37 ................................................. 9,000,000 7,077,780
Series B, 5.00%, 7/01/41 ................................................. 7,920,000 6,135,386
Puerto Rico Convention Center District Authority Hotel Occupancy Tax
Revenue, Series A,
AMBAC Insured, 5.00%, 7/01/31 ............................................ 20,000,000 16,232,600
CIFG Insured, 5.00%, 7/01/27 ............................................. 900,000 764,559
Puerto Rico Electric Power Authority Power Revenue,
Refunding, Series SS, FSA Insured, 5.00%, 7/01/30 ........................ 3,015,000 2,937,635
Refunding, Series UU, CIFG Insured, 5.00%, 7/01/26 ....................... 6,500,000 5,712,395
Series HH, FSA Insured, Pre-Refunded, 5.25%, 7/01/29 ..................... 1,605,000 1,714,365
Series II, Pre-Refunded, 5.25%, 7/01/31 .................................. 3,000,000 3,377,400
Series NN, Pre-Refunded, 5.125%, 7/01/29 ................................. 4,155,000 4,736,575
Series RR, FGIC Insured, 5.00%, 7/01/22 .................................. 7,000,000 6,334,090
Series TT, 5.00%, 7/01/27 ................................................ 5,000,000 4,340,550
Series TT, 5.00%, 7/01/32 ................................................ 24,300,000 20,285,640
Series TT, 5.00%, 7/01/37 ................................................ 2,235,000 1,823,380
Puerto Rico HFAR,
Capital Fund Program, 4.60%, 12/01/24 .................................... 3,425,000 3,291,117
Capital Fund Program, Pre-Refunded, 4.60%, 12/01/24 ...................... 6,575,000 7,250,450
Subordinated, Capital Fund Modernization, 5.125%, 12/01/27 ............... 8,500,000 8,593,585
Puerto Rico HFC, HMR, MBS, Series A, GNMA Secured, 5.20%, 12/01/33 ............. 10,610,000 10,265,069
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 2,502,125
Dr. Pila Hospital Project, Refunding, FHA Insured, 6.25%, 8/01/32 ........ 500,000 499,970
Hospital Auxilio Mutuo Obligation Group Project, Series A, MBIA Insured,
6.25%, 7/01/24 8,445,000 8,444,409
Mennonite General Hospital Project, 5.625%, 7/01/17 ...................... 575,000 490,573
Mennonite General Hospital Project, 5.625%, 7/01/27 ...................... 1,950,000 1,385,865
Puerto Rico Industrial Tourist Educational Medical and Environmental Control
Facilities Financing Authority Industrial Revenue,
Guaynabo Municipal Government, 5.625%, 7/01/15 ........................... 5,355,000 5,291,543
Guaynabo Municipal Government, 5.625%, 7/01/22 ........................... 3,160,000 3,029,682
Guaynabo Warehouse, Series A, 5.15%, 7/01/19 ............................. 1,250,000 1,169,900
Guaynabo Warehouse, Series A, 5.20%, 7/01/24 ............................. 4,120,000 3,742,361
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 1,680,700
Ana G. Mendez University System Project, Refunding, 5.375%, 2/01/29 ...... 7,850,000 5,873,919
Cogeneration Facility, AES Puerto Rico Project, 6.625%, 6/01/26 .......... 5,970,000 5,351,687
International American University of Puerto Rico Project, MBIA Insured,
4.25%, 10/01/24 ....................................................... 1,000,000 793,390
International American University of Puerto Rico Project, MBIA Insured,
4.375%, 10/01/25 ...................................................... 1,000,000 792,970
International American University of Puerto Rico Project, MBIA Insured,
4.50%, 10/01/29 ....................................................... 3,750,000 2,882,513
University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 ......... 6,000,000 4,821,660
Annual Report | 121
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN DOUBLE TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Municipal Finance Agency GO, Series A, FSA Insured,
5.75%, 8/01/12 ........................................................... $ 7,500,000 $ 7,672,350
5.25%, 8/01/14 ........................................................... 1,500,000 1,534,635
Pre-Refunded, 5.50%, 8/01/23 ............................................. 7,400,000 7,627,032
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%,
8/01/27 .................................................................. 3,500,000 3,409,455
8/01/30 .................................................................. 9,000,000 8,545,950
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ..................................... 3,430,000 2,899,208
Refunding, Series M, 6.25%, 7/01/21 ...................................... 5,000,000 5,033,650
Refunding, Series N, 5.00%, 7/01/32 ...................................... 5,000,000 4,006,400
Refunding, Series N, 5.00%, 7/01/37 ...................................... 10,000,000 7,938,800
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................. 9,070,000 10,006,568
Series I, 5.25%, 7/01/33 ................................................. 4,450,000 3,668,268
Series I, 5.00%, 7/01/36 ................................................. 4,000,000 3,145,720
Series I, Pre-Refunded, 5.25%, 7/01/33 50,000 55,862
Series I, Pre-Refunded, 5.375%, 7/01/34 .................................. 5,000,000 5,616,850
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 ..... 1,250,000 1,127,700
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series
E, Pre-Refunded, 5.50%, 8/01/29 ............................................. 9,000,000 9,915,030
Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue, Series A, 5.25%,
8/01/57 ..................................................................... 15,000,000 12,881,250
--------------
442,618,337
--------------
VIRGIN ISLANDS 10.9%
Virgin Islands HFA, SFR, Refunding, Series A, GNMA Secured,
6.45%, 3/01/16 ........................................................... 150,000 152,267
6.50%, 3/01/25 ........................................................... 390,000 391,638
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/26 .......... 5,000,000 4,281,650
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 .......... 9,220,000 7,442,107
Gross Receipts Taxes Loan Note, Refunding, ACA Insured, 5.00%, 10/01/31 .. 2,500,000 2,041,300
Gross Receipts Taxes Loan Note, Refunding, BHAC Insured, 5.00%,
10/01/28 .............................................................. 3,695,000 3,907,093
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.50%, 10/01/18 ....................................................... 3,000,000 2,641,080
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.50%, 10/01/22 ....................................................... 6,750,000 5,591,902
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.625%, 10/01/25 ...................................................... 3,950,000 3,225,017
Virgin Islands Matching Fund Loan Notes, senior lien, Series A, 5.25%,
10/01/24 .............................................................. 2,000,000 1,755,520
Virgin Islands Port Authority Marine Revenue, Series A, FSA Insured,
5.25%, 9/01/18 ........................................................... 3,930,000 3,734,050
5.00%, 9/01/23 ........................................................... 10,000,000 8,751,400
Virgin Islands Water and Power Authority Electric System Revenue,
Refunding, 5.30%, 7/01/18 ................................................ 4,175,000 3,889,138
Refunding, 5.30%, 7/01/21 ................................................ 1,000,000 893,740
Series A, 5.00%, 7/01/31 ................................................. 3,000,000 2,378,280
122 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN DOUBLE TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
VIRGIN ISLANDS (CONTINUED)
Virgin Islands Water and Power Authority Water System Revenue, Refunding,
5.25%, 7/01/12 ........................................................... $ 4,000,000 $ 3,997,280
5.50%, 7/01/17 ........................................................... 4,000,000 3,895,560
--------------
58,969,022
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $576,542,905) ........ 524,496,195
--------------
SHORT TERM INVESTMENTS (COST $1,005,585) 0.2%
MUNICIPAL BONDS 0.2%
U.S. TERRITORIES 0.2%
PUERTO RICO 0.2%
Puerto Rico Commonwealth TRAN, Series A, Sub Series A2, 3.00%, 7/30/09 ......... 1,000,000 1,006,900
--------------
TOTAL INVESTMENTS (COST $577,548,490) 97.2% .................................... 525,503,095
OTHER ASSETS, LESS LIABILITIES 2.8% ............................................ 14,972,600
--------------
NET ASSETS 100.0% .............................................................. $ 540,475,695
==============
See Abbreviations on page 238.
The accompanying notes are an integral part of these financial statements.
Annual Report | 123
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
---------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.04 $ 11.47 $ 11.42 $ 11.51 $ 11.76
-------- ------- -------- -------- --------
Income from investment operations(b):
Net investment income(c)..................... 0.43 0.42 0.42 0.42 0.42
Net realized and unrealized gains (losses) .. (0.05) (0.43) 0.05 (0.10) (0.25)
-------- ------- -------- -------- --------
Total from investment operations ............... 0.38 (0.01) 0.47 0.32 0.17
-------- ------- -------- -------- --------
Less distributions from net investment income .. (0.43) (0.42) (0.42) (0.41) (0.42)
-------- ------- -------- -------- --------
Redemption fees(d, e)........................... -- -- -- -- --
-------- ------- -------- -------- --------
Net asset value, end of year ................... $ 10.99 $11.04 $ 11.47 $ 11.42 $ 11.51
======== ======= ======== ======== ========
Total return(f)................................. 3.48% (0.11)% 4.22% 2.83% 1.54%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.68% 0.71% 0.69% 0.69% 0.69%
Net investment income .......................... 3.91% 3.67% 3.68% 3.64% 3.67%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $873,648 $699,833 $611,291 $540,348 $493,994
Portfolio turnover rate ........................ 13.05% 17.10% 8.94% 12.62% 9.14%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
124 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.06 $ 11.49 $ 11.44 $ 11.53 $ 11.77
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c)..................... 0.37 0.35 0.36 0.35 0.36
Net realized and unrealized gains (losses) .. (0.05) (0.42) 0.05 (0.09) (0.24)
------- ------- ------- ------- -------
Total from investment operations ............... 0.32 (0.07) 0.41 0.26 0.12
------- ------- ------- ------- -------
Less distributions from net investment income .. (0.37) (0.36) (0.36) (0.35) (0.36)
------- ------- ------- ------- -------
Redemption fees(d, e)........................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 11.01 $ 11.06 $ 11.49 $ 11.44 $ 11.53
======= ======= ======= ======= =======
Total return(f)................................. 2.90% (0.66)% 3.65% 2.27% 1.05%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.23% 1.26% 1.24% 1.24% 1.24%
Net investment income .......................... 3.36% 3.12% 3.13% 3.09% 3.12%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $91,164 $34,763 $28,510 $30,178 $23,384
Portfolio turnover rate ........................ 13.05% 17.10% 8.94% 12.62% 9.14%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 125
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
PERIOD ENDED
FEBRUARY 28,
2009(a)
-------------
ADVISOR CLASS
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $10.58
------
Income from investment operations(b):
Net investment income(c) ..................... 0.11
Net realized and unrealized gains (losses) ... 0.42
------
Total from investment operations ................ 0.53
------
Less distributions from net investment income ... (0.11)
------
Net asset value, end of period .................. $11.00
======
Total return(d) ................................. 5.00%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses ........................................ 0.58%
Net investment income ........................... 4.01%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $5,769
Portfolio turnover rate ......................... 13.05%
(a) For the period December 1, 2008 (effective date) to February 28, 2009.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return is not annualized for periods less than one year.
(e) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
126 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS 94.5%
ALABAMA 5.3%
Alabama Water Pollution Control Authority Revenue, Revolving Fund Loan,
Refunding, Series B, AMBAC Insured,
4.625%, 8/15/13 .......................................................... $ 5,900,000 $ 6,193,938
4.125%, 2/15/14 .......................................................... 3,000,000 3,121,320
East Alabama Health Care Authority Health Care Facilities Revenue,
Mandatory Put 9/01/18, Series A, 5.25%, 9/01/36 .......................... 10,000,000 9,352,100
Mandatory Put 9/01/18, Series B, 5.50%, 9/01/33 .......................... 13,500,000 12,734,415
Tax Anticipation Bond, Series A, MBIA Insured, 4.50%, 9/01/13 ............ 1,925,000 2,022,617
Tax Anticipation Bond, Series A, MBIA Insured, 4.625%, 9/01/14 ........... 2,010,000 2,097,435
Tax Anticipation Bond, Series A, MBIA Insured, 4.50%, 9/01/15 ............ 2,100,000 2,172,849
Huntsville Health Care Authority Revenue, Series A, MBIA Insured,
5.00%, 6/01/17 ........................................................... 2,900,000 2,995,468
Pre-Refunded, 4.80%, 6/01/13 ............................................. 2,400,000 2,656,680
Jefferson County GO, Capital Improvement wts., Series A, MBIA Insured,
5.00%, 4/01/17 .............................................................. 2,195,000 1,801,085
Jefferson County Limited Obligation School wts. Revenue, Series A, 5.25%,
1/01/16 ..................................................................... 2,000,000 1,138,280
Sylacauga GO, wts., AMBAC Insured, Pre-Refunded, 5.50%, 6/01/12 ................ 600,000 645,312
University of Alabama General Revenue, Series A, MBIA Insured, 5.00%, 7/01/15 .. 4,070,000 4,556,976
--------------
51,488,475
--------------
ALASKA 0.4%
Matanuska-Susitna Borough Lease Revenue, Goose Greek Correctional Center,
Assured Guaranty, 5.00%, 9/01/19 ............................................ 3,650,000 4,012,810
--------------
ARIZONA 5.7%
Arizona Health Facilities Authority Revenue,
Banner Health, Series D, 5.50%, 1/01/22 .................................. 5,000,000 5,037,800
Banner Health, Series D, 5.00%, 1/01/23 .................................. 5,000,000 4,730,350
Series A, 5.00%, 1/01/22 ................................................. 8,000,000 7,651,520
Arizona School Facilities Board COP, 5.25%, 9/01/19 ............................ 10,000,000 10,701,800
Arizona School Facilities Board Revenue, Series B, FGIC Insured, 4.00%,
9/01/13 ..................................................................... 5,000,000 5,225,750
Arizona State Board of Regents Arizona State University System Revenue,
Series C, 5.75%,
7/01/20 .................................................................. 500,000 574,230
7/01/21 .................................................................. 500,000 566,685
Arizona State University COP, Research Infrastructure Projects, AMBAC Insured,
5.25%, 9/01/16 .............................................................. 2,505,000 2,756,452
Glendale IDAR, John C Lincoln Health, Refunding, Series B, 5.00%, 12/01/18 ..... 5,605,000 5,060,979
Maricopa County GO, School District No. 97, Deer Valley School Improvement,
Series A, FGIC Insured, 4.75%, 7/01/12 ...................................... 4,000,000 4,313,200
Maricopa County Hospital Revenue, Sun Health Corp., Pre-Refunded, 5.00%,
4/01/18 ..................................................................... 2,000,000 2,263,280
Mesa GO, Refunding, Series A, FGIC Insured, 4.20%, 7/01/16 ..................... 715,000 734,855
Scottsdale IDA Hospital Revenue, Scottsdale Healthcare, Refunding, Series A,
5.00%, 9/01/21 .............................................................. 4,000,000 3,609,040
Tempe Arizona IDA Lease Revenue, State University Foundation, AMBAC Insured,
4.00%,
7/01/15 .................................................................. 1,000,000 994,980
7/01/16 .................................................................. 1,000,000 983,740
--------------
55,204,661
--------------
Annual Report | 127
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
ARKANSAS 0.7%
Arkansas State Development Finance Authority Revenue, State Agencies
Facilities, Corrections, Series B, FSA Insured, 5.00%,
11/01/17 ................................................................. $ 1,955,000 $ 2,149,679
11/01/19 ................................................................. 1,065,000 1,143,395
Conway Hospital Revenue, Conway Regional Medical Improvement, Refunding,
Series A, 6.20%, 8/01/17 .................................................... 1,105,000 1,035,451
University of Arkansas University Revenues, Student Fee University of
Arkansas at Fort Smith, FSA Insured, 4.75%, 12/01/15 ........................ 2,295,000 2,406,032
--------------
6,734,557
--------------
CALIFORNIA 6.8%
California Health Facilities Financing Authority Revenue,
Catholic Healthcare West, Series L, 5.125%, 7/01/22 ...................... 10,000,000 9,801,200
Providence Health and Services, Series C, 6.00%, 10/01/18 ................ 500,000 555,335
Scripps Health, Series A, 5.00%, 10/01/21 ................................ 5,000,000 4,827,800
California State Department of Water Resources Power Supply Revenue, Series
A, Pre-Refunded, 5.125%, 5/01/18 ............................................ 3,000,000 3,373,710
California State GO,
Refunding, 5.00%, 2/01/17 ................................................ 3,000,000 3,115,110
Various Purpose, 5.25%, 11/01/17 ......................................... 10,000,000 10,552,000
Various Purpose, XLCA Insured, 5.00%, 11/01/22 ........................... 4,805,000 4,811,391
California Statewide CDA Revenue, Enloe Medical Center, Series A, California
Mortgage Insured,
5.25%, 8/15/19 ........................................................... 1,990,000 2,027,034
5.375%, 8/15/20 .......................................................... 1,650,000 1,665,147
El Dorado Irrigation District COP, Refunding, Series A, Assured Guaranty,
5.00%, 8/01/22 ........................................................... 2,610,000 2,708,606
5.25%, 8/01/23 ........................................................... 2,860,000 2,988,185
Los Angeles Department of Water and Power Waterworks Revenue, Series B, MBIA
Insured, 4.25%, 7/01/17 ..................................................... 4,000,000 4,178,120
Los Angeles USD, GO,
Series A, MBIA Insured, 4.25%, 7/01/16 ................................... 2,500,000 2,572,525
Series F, 5.00%, 7/01/22 ................................................. 5,675,000 5,817,329
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Capital
Appreciation, Refunding, Series A, 5.65%, 1/15/17 ........................... 3,000,000 2,617,800
Tulare Joint UHSD, GO, Election of 2004, Series A, MBIA Insured, 5.00%,
8/01/16 ..................................................................... 2,870,000 3,154,847
Val Verde USD, COP, FGIC Insured, ETM, 5.00%, 1/01/15 .......................... 1,000,000 1,141,110
--------------
65,907,249
--------------
COLORADO 3.0%
Adams County PCR, Public Service Co. of Colorado Project, Refunding, Series
A, MBIA Insured, 4.375%, 9/01/17 ............................................ 17,000,000 15,005,050
Denver City and County COP, Series B, AMBAC Insured, Pre-Refunded, 5.75%,
12/01/16 .................................................................... 3,000,000 3,268,260
E-470 Public Highway Authority Revenue, Series D1, MBIA Insured, 5.50%,
9/01/24 ..................................................................... 8,000,000 6,797,040
Public Authority for Colorado Energy Natural Gas Purchase Revenue, 5.75%,
11/15/18 .................................................................... 5,000,000 4,396,700
--------------
29,467,050
--------------
128 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA 9.8%
Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/16 ......... $ 5,915,000 $ 6,266,055
Collier County Capital Improvement Revenue, FGIC Insured, 4.60%, 10/01/13 ...... 1,000,000 1,050,390
Collier County School Board COP, FSA Insured, 5.00%, 2/15/22 ................... 5,075,000 5,164,777
Hillsborough County Capacity Assessment Special Assessment Revenue, Series 2006,
FGIC Insured, 5.00%, 3/01/19 ................................................ 5,000,000 4,701,800
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Series A, 5.65%,
5/15/18 ..................................................................... 6,500,000 6,403,345
Jacksonville Water and Sewer System Revenue, Series B, FSA Insured, 4.10%,
10/01/13 .................................................................... 3,000,000 3,000,600
Marion County Public Improvement Revenue, Refunding, MBIA Insured,
4.20%, 12/01/12 .......................................................... 1,400,000 1,471,134
4.30%, 12/01/13 .......................................................... 1,800,000 1,881,054
Miami-Dade County School Board COP, Series A, Assured Guaranty, 5.00%,
2/01/23 ..................................................................... 12,115,000 12,152,072
Orange County School Board COP, Series B, FGIC Insured, 5.00%,
8/01/18 .................................................................. 5,150,000 5,369,802
8/01/19 .................................................................. 5,985,000 6,175,323
Orlando Waste Water Services Revenue, Refunding, Series A, AMBAC Insured, 4.00%,
10/01/14 .................................................................... 5,000,000 5,161,350
Palm Beach County School Board COP, Series E, MBIA Insured, 5.00%, 8/01/21 ..... 6,060,000 6,244,224
Pasco County Solid Waste Disposal and Resource Recovery System Revenue, Series
D, FSA Insured, 5.00%,
10/01/22 ................................................................. 9,490,000 9,733,323
10/01/24 ................................................................. 10,455,000 10,607,016
South Miami Health Facilities Authority Hospital Revenue, Baptist Health South
Florida Group, 5.00%, 8/15/19 ............................................... 5,000,000 4,971,750
Tampa Bay Water Utility System Revenue,
FGIC Insured, Pre-Refunded, 5.75%, 10/01/15 .............................. 1,000,000 1,108,290
Series B, FGIC Insured, Pre-Refunded, 4.75%, 10/01/16 .................... 3,400,000 3,682,540
--------------
95,144,845
--------------
GEORGIA 0.7%
Atlanta Tax Allocation, Atlantic Station Project, Refunding, Assured Guaranty,
5.25%,
12/01/20 ................................................................. 1,500,000 1,534,710
12/01/21 ................................................................. 1,000,000 1,016,030
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center,
5.30%, 12/01/13 ............................................................. 1,020,000 956,393
South Georgia Governmental Services Authority Revenue, FGIC Insured, 5.00%,
1/01/16 ..................................................................... 2,650,000 2,895,814
--------------
6,402,947
--------------
HAWAII 0.3%
Hawaii State Department of Budget and Finance Special Purpose Revenue, Kaiser
Permanente, Series A, ETM ................................................... 2,500,000 2,525,000
--------------
ILLINOIS 1.7%
Illinois Finance Authority Revenue, Rush University Medical Certificates
Billing Group, Series A, 6.75%, 11/01/24 .................................... 5,000,000 5,069,250
Southwestern Illinois Development Authority Revenue, Local Government Program,
Edwardsville Community, FSA Insured, 5.00%, 12/01/19 ........................ 11,005,000 11,868,452
--------------
16,937,702
--------------
Annual Report | 129
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
KENTUCKY 0.2%
Kentucky Economic Development Finance Authority Hospital System Revenue,
Appalachian Regional Health Center Facility, Refunding and Improvement,
5.70%, 10/01/10 .......................................................... $ 1,000,000 $ 962,970
5.75%, 10/01/11 .......................................................... 1,500,000 1,406,250
--------------
2,369,220
--------------
LOUISIANA 3.1%
Louisiana State Citizens Property Insurance Corp. Assessment Revenue, Series B,
AMBAC Insured, 5.00%, 6/01/19 ............................................... 20,000,000 17,766,400
New Orleans Aviation Board Revenue, Restructuring GARBS, Refunding, Series A-1,
Assured Guaranty, 6.00%, 1/01/23 ............................................ 2,000,000 2,035,440
New Orleans GO, Radian Insured, 5.00%, 12/01/25 ................................ 7,915,000 6,663,638
St. John the Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%,
12/01/13 .................................................................... 4,000,000 3,986,440
--------------
30,451,918
--------------
MARYLAND 1.1%
Maryland State EDC Student Housing Revenue, University of Maryland College Park
Projects, Refunding, CIFG Insured, 5.00%,
6/01/19 .................................................................. 1,445,000 1,213,728
6/01/20 .................................................................. 1,000,000 820,990
Maryland State Health and Higher Educational Facilities Authority Revenue,
Peninsula Regional Medical Center, 5.00%, 7/01/18 ........................ 1,600,000 1,596,352
Peninsula Regional Medical Center, 5.00%, 7/01/19 ........................ 1,430,000 1,410,638
Peninsula Regional Medical Center, 5.00%, 7/01/20 ........................ 1,000,000 972,960
Washington County Hospital, 5.25%, 1/01/22 ............................... 1,000,000 827,390
Washington County Hospital, 5.25%, 1/01/23 ............................... 1,250,000 1,017,812
Western Maryland Health, Refunding, Series A, MBIA Insured, 5.00%,
1/01/19 ............................................................... 3,020,000 3,041,895
--------------
10,901,765
--------------
MASSACHUSETTS 1.4%
Massachusetts Educational Financing Authority Education Loan Revenue, Series H,
Assured Guaranty, 6.125%, 1/01/22 ........................................... 7,500,000 7,441,950
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 3,026,520
Massachusetts State Health and Educational Facilities Authority Revenue,
Caregroup, Series B-2, MBIA Insured, 5.375%, 2/01/26 ........................ 1,720,000 1,453,142
Massachusetts State Industrial Finance Agency Revenue, D'Youville Senior Care,
5.50%, 10/01/12 ............................................................. 1,435,000 1,443,409
--------------
13,365,021
--------------
MICHIGAN 8.9%
Detroit GO,
Series A-1, MBIA Insured, 5.00%, 4/01/19 ................................. 5,000,000 4,141,300
Series B, FSA Insured, 5.00%, 4/01/18 .................................... 2,635,000 2,328,181
Series B, FSA Insured, 5.00%, 4/01/19 .................................... 2,515,000 2,156,990
130 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Michigan Municipal Bond Authority Revenue,
Local Government Loan Program, Group A, Refunding, Series B, AMBAC Insured,
5.00%, 12/01/17 .......................................................... $ 1,000,000 $ 993,630
Local Government Loan Program, Group A, Refunding, Series B, AMBAC Insured,
5.00%, 12/01/18 .......................................................... 1,000,000 983,290
School District City of Detroit, FSA Insured, 5.00%, 6/01/17 ................ 10,000,000 10,933,700
Michigan State GO, Refunding, Series A, 5.25%, 11/01/22 ........................ 10,000,000 10,067,100
Michigan State Hospital Finance Authority Revenue,
Ascension Health Credit, Series A, MBIA Insured, Pre-Refunded, 6.00%,
11/15/13 ................................................................. 1,200,000 1,256,784
Trinity Health Credit Group, Mandatory Put 12/01/17, Refunding, Series A,
6.00%, 12/01/34 .......................................................... 10,000,000 11,088,700
(a) Michigan State Revenue, Grant Anticipation Bonds, FSA Insured, 5.25%, 9/15/20 .. 7,500,000 7,760,400
Michigan State Strategic Fund Limited Obligation Revenue, Michigan House
Republic Facilities, Series A, Assured Guaranty, 5.25%,
10/15/22 ................................................................. 4,000,000 4,273,720
10/15/23 ................................................................. 1,000,000 1,055,560
Michigan Tobacco Settlement Finance Authority Revenue, Tobacco Settlement
Asset, Senior Series A, 5.25%, 6/01/22 ...................................... 10,000,000 7,647,200
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital,
Refunding, 6.25%, 9/01/14 ................................................... 3,000,000 3,119,790
Saginaw-Midland Municipal Water Supply Corp. Revenue GO, Water Supply System,
Refunding, MBIA Insured, 4.25%, 9/01/13 ..................................... 1,245,000 1,329,722
South Lyon Community Schools GO, Refunding, FGIC Insured, 5.00%, 5/01/16 ....... 3,040,000 3,466,755
Wayne-Westland Community Schools GO, Refunding,
4.50%, 5/01/12 ........................................................... 1,035,000 1,111,155
4.625%, 5/01/13 .......................................................... 1,095,000 1,189,028
FSA Insured, 5.00%, 5/01/16 .............................................. 2,825,000 3,106,116
Western Townships Utilities Authority GO, Refunding, MBIA Insured, 4.75%,
1/01/17 ..................................................................... 4,290,000 4,341,094
Wyandotte Electric Revenue, Refunding, Assured Guaranty, 5.00%, 10/01/17 ....... 3,955,000 4,142,981
--------------
86,493,196
--------------
MINNESOTA 1.9%
Chaska ISD No. 112 GO, Refunding, Series A, 5.00%, 2/01/16 ..................... 4,000,000 4,083,360
Minneapolis GO, Various Purpose,
5.00%, 12/01/17 .......................................................... 2,480,000 2,627,635
Pre-Refunded, 5.00%, 12/01/17 ............................................ 520,000 572,385
Minneapolis Special School District No. 001 COP, Refunding, Series B, FGIC
Insured, 4.625%, 2/01/17 .................................................... 1,000,000 1,031,400
Mounds View ISD No. 621 GO, MBIA Insured, 5.00%,
2/01/14 .................................................................. 2,340,000 2,508,503
2/01/15 .................................................................. 2,425,000 2,585,559
2/01/16 .................................................................. 2,460,000 2,607,969
Ramsey County GO, Capital Improvement Plan, Series A, 4.75%, 2/01/15 ........... 2,215,000 2,353,925
--------------
18,370,736
--------------
MISSOURI 2.6%
Hannibal IDA Health Facilities Revenue, Refunding, 5.00%, 3/01/19 .............. 1,675,000 1,405,057
Jackson County Reorganized School District No. 7 Lee's Summit GO, School
Building, MBIA Insured, 5.00%, 3/01/16 ...................................... 2,000,000 2,177,380
Annual Report | 131
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
Missouri Joint Municipal Electric Utility Commission Power Project Revenue,
Plum Point Project, MBIA Insured, 5.00%,
1/01/17 .................................................................. $ 1,500,000 $ 1,488,405
1/01/19 .................................................................. 1,000,000 950,810
Southeast Missouri State University System Facilities Revenue, Refunding and
Improvement, MBIA Insured,
4.375%, 4/01/12 .......................................................... 335,000 352,276
4.50%, 4/01/14 ........................................................... 545,000 566,337
4.60%, 4/01/15 ........................................................... 1,360,000 1,406,199
4.70%, 4/01/16 ........................................................... 1,165,000 1,202,396
Springfield Public Utility Revenue, FGIC Insured, 4.50%, 8/01/21 ............... 15,245,000 15,938,038
--------------
25,486,898
--------------
NEVADA 0.5%
Clark County School District GO, Refunding, Series A, MBIA Insured, 4.50%,
6/15/19 ..................................................................... 5,000,000 4,975,300
--------------
NEW JERSEY 2.6%
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 2,647,260
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding,
Series 1, 5.90%, 1/01/15 .................................................... 755,000 693,060
New Jersey State COP, Equipment Lease Purchase, Series A, AMBAC Insured, 5.00%,
6/15/17 ..................................................................... 5,000,000 5,365,950
New Jersey State Transportation Trust Fund Authority Revenue, Transportation
System, Refunding, Series C, FSA Insured, 4.50%, 12/15/10 ................... 10,000,000 10,530,400
Series D, FSA Insured, 5.00%, 6/15/19 ....................................... 5,630,000 5,984,634
--------------
25,221,304
--------------
NEW YORK 13.2%
Erie County IDA School Facility Revenue, City School District Buffalo Project,
Series A, FSA Insured, 5.75%, 5/01/22 ....................................... 5,000,000 5,352,150
Liverpool Central School District GO, Refunding, FSA Insured, 5.00%, 7/15/14 ... 1,560,000 1,685,549
Long Island Power Authority Electric System Revenue, General,
Refunding, Series A, FGIC Insured, 5.00%, 12/01/19 ....................... 7,000,000 7,297,290
Series E, FGIC Insured, 5.00%, 12/01/18 .................................. 8,500,000 9,019,945
MTA Commuter Facilities Revenue, Services Contract, Series R, ETM, 5.50%,
7/01/11 ..................................................................... 2,215,000 2,256,110
MTA Revenue, Transportation,
Refunding, Series F, 5.00%, 11/15/15 ..................................... 1,250,000 1,350,162
Series A, FSA Insured, 5.00%, 11/15/20 ................................... 5,000,000 5,333,650
Series C, 5.00%, 11/15/16 ................................................ 1,150,000 1,239,700
Series C, 5.75%, 11/15/18 ................................................ 15,000,000 17,001,450
MTA Transit Facilities Revenue, Series A, Pre-Refunded, 6.00%, 7/01/15 ......... 1,500,000 1,527,150
New York City GO,
Refunding, Series C, MBIA Insured, 5.875%, 8/01/16 ....................... 5,000 5,227
Refunding, Series G, 5.00%, 8/01/21 ...................................... 7,000,000 7,105,280
Refunding, Series H, 5.00%, 8/01/17 ...................................... 4,330,000 4,521,429
Series C, MBIA Insured, Pre-Refunded, 5.875%, 8/01/16 .................... 1,245,000 1,344,314
Series D1, 5.00%, 12/01/21 ............................................... 5,000,000 5,059,650
Series F, 4.75%, 1/15/16 ................................................. 3,000,000 3,094,860
Series H, 5.00%, 8/01/16 ................................................. 3,000,000 3,157,920
132 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York City GO, (continued)
Series J, Sub Series J-1, FSA Insured, 5.00%, 6/01/20 .................... $ 10,000,000 $ 10,274,300
Series O, 5.00%, 6/01/19 ................................................. 5,000,000 5,137,150
New York City Transitional Finance Authority Building Aid Revenue, Fiscal
2009, Series S-3, 5.00%, 1/15/23 ............................................ 5,000,000 5,140,900
New York City Transitional Finance Authority Revenue, Series C, 4.50%,
2/15/13 ..................................................................... 4,500,000 4,800,375
New York State Dormitory Authority Revenue, Mortgage, St. Barnabas, Series
B, FHA Insured, 4.25%, 8/01/14 .............................................. 2,355,000 2,465,991
New York State Dormitory Authority Revenues, State Supported Debt, 2008,
Mental Health, Refunding, Series D, MBIA Insured, 5.00%, 8/15/17 ............ 190,000 189,322
New York State Energy Research and Development Authority PCR, New York State
Electric and Gas Corp. Project, MBIA Insured, 4.10%, 3/15/15 ................ 7,000,000 7,067,620
New York State Thruway Authority General Revenue, Refunding, Series H, FGIC
Insured, 5.00%, 1/01/22 ..................................................... 10,000,000 10,419,400
Rockland County Solid Waste Management Authority Revenue, Refunding, Series
A, Assured Guaranty, 5.375%, 12/15/18 ....................................... 5,365,000 5,929,452
--------------
127,776,346
--------------
NORTH CAROLINA 5.0%
Asheville Water System Revenue, FSA Insured, Pre-Refunded, 5.25%,
8/01/15 .................................................................. 915,000 1,002,703
8/01/17 .................................................................. 1,020,000 1,117,767
8/01/19 .................................................................. 1,030,000 1,128,725
Charlotte Water and Sewer System Revenue, 5.00%, 6/01/16 ....................... 4,000,000 4,239,920
Charlotte-Mecklenburg Hospital Authority Health Care System Revenue, Carolinas
HealthCare System, Series A, FSA Insured, 5.00%, 1/15/22 .................... 10,000,000 10,300,800
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, Assured Guaranty, 5.25%, 1/01/19 ....................... 15,000,000 15,589,350
Series C, Assured Guaranty, 6.00%, 1/01/19 .................................. 2,500,000 2,669,975
Series D, 6.45%, 1/01/14 .................................................... 1,000,000 1,024,770
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Catawba
Electric, Refunding, Series A, 5.25%, 1/01/20 ............................... 4,500,000 4,630,905
Wake County GO, Public Improvement, 4.50%, 3/01/14 ............................. 6,400,000 6,829,696
--------------
48,534,611
--------------
OHIO 5.4%
Akron GO, Various Purpose, Refunding and Improvement, MBIA Insured, 4.125%,
12/01/14 .................................................................... 1,000,000 1,037,700
Allen County GO, Refunding, AMBAC Insured, 4.75%, 12/01/17 ..................... 2,180,000 2,300,881
American Municipal Power Inc. Revenue, Refunding, 5.25%,
2/15/20 .................................................................. 6,000,000 6,355,500
2/15/21 .................................................................. 11,500,000 11,982,885
Buckeye Tobacco Settlement Financing Authority Revenue, Asset-Backed, Senior
Current Interest Turbo Term Bond, Series A-2, 5.375%, 6/01/24 ............... 4,860,000 3,657,150
Cleveland Municipal School District GO, FSA Insured, 5.00%,
12/01/14 ................................................................. 1,915,000 2,143,766
12/01/15 ................................................................. 1,510,000 1,663,869
12/01/16 ................................................................. 1,400,000 1,529,136
Franklin County Health Care Facilities Revenue, Presbyterian Retirement
Services, Refunding,
5.40%, 7/01/10 ........................................................... 775,000 760,058
5.50%, 7/01/11 ........................................................... 500,000 483,175
Annual Report | 133
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Lake Local School District Wood County GO, MBIA Insured,
5.20%, 12/01/17 .......................................................... $ 375,000 $ 401,126
Pre-Refunded, 5.20%, 12/01/17 ............................................ 2,190,000 2,443,558
Lakewood City School District GO, School Improvement, Refunding, FSA Insured,
4.50%, 12/01/22 ............................................................. 2,900,000 2,969,339
Mahoning County Sewer System Revenue, AMBAC Insured, 5.20%, 12/01/14 ........... 1,360,000 1,429,197
Mason City School District GO, School Improvement, Refunding, FGIC Insured,
5.00%, 12/01/15 ............................................................. 2,670,000 3,044,334
Montgomery County Revenue, Miami Valley Hospital, Mandatory Put 11/15/14,
Refunding, Series B, 5.25%, 11/15/39 ........................................ 4,000,000 4,005,520
Nordonia Hills City School District GO, School Improvement, Refunding, FGIC
Insured, 4.50%, 12/01/21 .................................................... 2,360,000 2,415,649
University of Akron General Receipts Revenue, FGIC Insured, Pre-Refunded,
5.75%, 1/01/14 .............................................................. 2,000,000 2,104,180
Youngstown GO, AMBAC Insured, 6.125%, 12/01/15 ................................. 1,275,000 1,358,665
--------------
52,085,688
--------------
OREGON 1.8%
Deschutes County Hospital Facilities Authority Hospital Revenue, Cascade
Healthcare, Refunding, 7.375%, 1/01/23 ...................................... 2,000,000 2,137,340
Oregon State Department of Administrative Services COP, Series A, FGIC Insured,
5.00%, 11/01/19 ............................................................. 2,340,000 2,570,607
Portland Sewer System Revenue, second lien, Series B, MBIA Insured, 5.00%,
6/15/18 .................................................................. 3,135,000 3,496,591
6/15/19 .................................................................. 3,290,000 3,613,440
Salem Water and Sewer Revenue,
MBIA Insured, 4.10%, 6/01/16 ............................................. 1,035,000 1,067,892
Refunding, FSA Insured, 4.375%, 6/01/11 .................................. 2,160,000 2,294,870
Refunding, FSA Insured, 4.50%, 6/01/12 ................................... 2,250,000 2,442,623
--------------
17,623,363
--------------
PENNSYLVANIA 2.2%
Allegheny County Hospital Development Authority Revenue, University of
Pittsburgh Medical Center, Series B, 5.00%, 6/15/18 ......................... 5,000,000 5,127,800
Allegheny County IDAR, Pollution Control, Refunding, Series A, AMBAC Insured,
4.35%, 12/01/13 ............................................................. 5,000,000 5,339,400
Pennsylvania State Turnpike Commission Turnpike Revenue, Refunding, Series C,
Sub Series C-1, Assured Guaranty, 6.00%, 6/01/23 ............................ 10,000,000 11,051,500
--------------
21,518,700
--------------
SOUTH CAROLINA 0.9%
Charleston County Resource Recovery Revenue, Foster Wheeler Charleston,
Refunding, AMBAC Insured, 5.25%, 1/01/10 .................................... 1,000,000 1,022,200
Rock Hill Utility System Revenue, Refunding and Improvement, Series A, FSA
Insured, 4.00%, 1/01/14 ..................................................... 2,000,000 2,112,480
Scago Educational Facilities Corp. for Pickens School District Revenue, Pickens
County Project, FSA Insured, 5.00%, 12/01/18 ................................ 5,000,000 5,174,800
--------------
8,309,480
--------------
TENNESSEE 0.5%
Tennessee Energy Acquisition Corp. Gas Revenue, Series C, 5.00%, 2/01/22 ....... 6,500,000 4,634,435
--------------
134 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
TEXAS 6.2%
Dallas County Utility and Reclamation District GO, Refunding,
Series A, AMBAC Insured, 5.15%, 2/15/21 ..................................... $ 3,025,000 $ 2,948,558
Series B, AMBAC Insured, 5.15%, 2/15/21 ..................................... 8,025,000 7,822,208
Dallas Waterworks and Sewer System Revenue, Refunding, AMBAC Insured,
4.50%, 10/01/19 ............................................................. 10,000,000 10,560,400
Harris County Hospital District Revenue, senior lien, Refunding,
Series A, MBIA Insured, 5.00%, 2/15/22 ..................................... 4,165,000 4,056,502
Houston Hotel Occupancy Tax and Special Revenue, Convention and
Entertainment, Series B,
AMBAC Insured, 5.00%, 9/01/11 ............................................... 6,000,000 6,456,660
Laredo ISD Public Facility Corp. Lease Revenue, Series C, AMBAC Insured,
5.00%, 8/01/19 .............................................................. 1,000,000 1,034,320
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding,
5.35%, 11/01/10 ............................................................. 2,500,000 2,500,500
Sabine River Authority PCR, Southwestern Electric Co., Refunding, MBIA
Insured, 4.95%, 3/01/18 ..................................................... 15,000,000 15,075,600
Travis County Health Facilities Development Corp. Revenue, Ascension
Health Credit, Series A, MBIA Insured, Pre-Refunded, 6.25%, 11/15/17 ....... 1,500,000 1,573,575
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas
Medical Center, Refunding and Improvement, Series A, 5.25%,
11/01/22 ................................................................. 5,000,000 3,890,300
11/01/23 ................................................................. 5,000,000 3,835,750
--------------
59,754,373
--------------
UTAH 0.2%
Salt Lake County College Revenue, Refunding, 5.00%, 10/01/19 ................... 2,585,000 2,128,618
--------------
U.S. TERRITORIES 2.4%
PUERTO RICO 1.9%
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax
Revenue, Refunding,
Series C, AMBAC Insured, 5.50%, 7/01/24 ..................................... 10,000,000 9,354,500
Puerto Rico Electric Power Authority Power Revenue, Refunding, Series SS,
MBIA Insured,
5.00%, 7/01/24 .............................................................. 10,000,000 9,045,800
--------------
18,400,300
--------------
VIRGIN ISLANDS 0.5%
Virgin Islands PFAR, senior lien, Refunding, Series A, 5.30%, 10/01/11 ......... 4,000,000 4,006,400
Virgin Islands Water and Power Authority Water System Revenue, Refunding,
5.00%, 7/01/09 .............................................................. 520,000 514,790
--------------
4,521,190
--------------
TOTAL U.S. TERRITORIES ......................................................... 22,921,490
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $924,377,357) ........ 916,747,758
--------------
SHORT TERM INVESTMENTS 4.6%
MUNICIPAL BONDS 4.6%
COLORADO 0.4%
(b) Colorado Educational and Cultural Facilities Authority Revenue, National
Jewish Federation Bond Program,
Refunding, Series D-1, Daily VRDN and Put, 0.65%, 7/01/36 ................ 3,380,000 3,380,000
Series A-7, Daily VRDN and Put, 0.65%, 7/01/29 ........................... 600,000 600,000
--------------
3,980,000
--------------
Annual Report | 135
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CONNECTICUT 0.1%
(b) Connecticut State Health and Educational Facilities Authority Revenue,
Yale University,
Series V-2, Daily VRDN and Put, 0.35%, 7/01/36 .............................. $ 1,300,000 $ 1,300,000
--------------
FLORIDA 0.2%
(b) Broward County Educational Facilities Authority Revenue, Nova
Southeastern University,
Series A, Daily VRDN and Put, 0.60%, 4/01/38 ................................ 2,100,000 2,100,000
--------------
KENTUCKY 0.2%
(b) Breckinridge County Lease Program Revenue, Kentucky Assn. Counties
Leasing Trust, Series A, Daily VRDN and Put, 0.60%, 2/01/32 ................. 1,110,000 1,110,000
(b) Lexington-Fayette Urban County Airport Board General Airport Revenue,
Refunding, Series B, Daily VRDN and Put, 0.65%, 7/01/38 ..................... 185,000 185,000
(b) Shelby County Lease Revenue, Series A, Daily VRDN and Put, 0.60%, 9/01/34 ...... 1,120,000 1,120,000
--------------
2,415,000
--------------
MARYLAND 0.4%
(b) Maryland State EDC, EDR, U.S. Pharmacopeial, Refunding, Series A, Daily
VRDN and Put, 0.60%, 7/01/38 ................................................ 2,700,000 2,700,000
(b) Maryland State Health and Higher Educational Facilities Authority
Revenue, Upper Chesapeake Hospital, Refunding, Series A, Daily VRDN and Put,
0.60%, 1/01/43 ........................................................... 800,000 800,000
--------------
3,500,000
--------------
MASSACHUSETTS 0.2%
(b) Massachusetts State Health and Educational Facilities Authority Revenue,
Stonehill College,
Series K, Daily VRDN and Put, 0.45%, 7/01/37 ................................ 1,900,000 1,900,000
--------------
NEVADA 0.3%
(b) Clark County School District GO, Series A, FSA Insured, Daily VRDN and
Put, 0.62%, 6/15/21 ......................................................... 3,270,000 3,270,000
--------------
NEW YORK 0.1%
(b) New York City GO, Refunding, Series H, Sub Series H-3, FSA Insured, Daily
VRDN and Put, 0.60%, 8/01/14 ................................................ 600,000 600,000
--------------
OHIO 0.8%
(b) Allen County Hospital Facilities Revenue, Catholic Healthcare, Series A,
Daily VRDN and Put, 0.55%, 10/01/31 ......................................... 2,100,000 2,100,000
(b) Cuyahoga County Revenue, Cleveland Clinic Health System Obligated Group,
Series B, Sub Series B-1, Daily VRDN and Put, 0.50%, 1/01/39 ................ 5,400,000 5,400,000
--------------
7,500,000
--------------
TENNESSEE 1.9%
(b) Clarksville PBA Revenue,
Metropolitan Government Nashville & Davidson, Refunding, Daily VRDN and
Put, 0.60%, 7/01/26 ...................................................... 4,700,000 4,700,000
Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN and Put, 0.60%,
1/01/33 .................................................................. 3,050,000 3,050,000
Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN and Put, 0.60%,
11/01/35 ................................................................. 2,100,000 2,100,000
136 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TENNESSEE (CONTINUED)
(b) Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan
Pool, Daily VRDN and Put, 0.60%,
4/01/32 .................................................................. $ 5,300,000 $ 5,300,000
7/01/34 .................................................................. 3,300,000 3,300,000
--------------
18,450,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $45,015,000) ................................ 45,015,000
--------------
TOTAL INVESTMENTS (COST $969,392,357) 99.1% .................................... 961,762,758
OTHER ASSETS, LESS LIABILITIES 0.9% ............................................ 8,818,414
--------------
NET ASSETS 100.0% .............................................................. $ 970,581,172
==============
See Abbreviations on page 238.
(a) Security purchased on a delayed delivery basis. See Note 1(b).
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 137
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 9.96 $ 9.93 $ 9.91 $ 9.99 $ 10.12
-------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.27 0.31 0.29 0.21 0.15
Net realized and unrealized gains (losses) .. 0.16 0.05 0.02 (0.09) (0.14)
-------- ------- ------- ------- -------
Total from investment operations ............... 0.43 0.36 0.31 0.12 0.01
-------- ------- ------- ------- -------
Less distributions from net investment income .. (0.28) (0.33) (0.29) (0.20) (0.14)
-------- ------- ------- ------- -------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year ................... $ 10.11 $ 9.96 $ 9.93 $ 9.91 $ 9.99
======== ======= ======= ======= =======
Total return(f) ................................ 4.33% 3.64% 3.20% 1.23% 0.14%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................. 1.03% 1.19% 1.16% 1.09% 1.13%
Expenses net of waiver and payments by
affiliates .................................. 0.53% 0.50% 0.50% 0.50% 0.50%
Net investment income .......................... 2.70% 3.12% 2.88% 2.07% 1.49%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $184,887 $43,914 $18,683 $26,005 $33,254
Portfolio turnover rate ........................ 12.69% 18.39% 57.74% 32.42% 15.79%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
138 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS 73.3%
ALABAMA 1.0%
East Alabama Health Care Authority Health Care Facilities Revenue,
Mandatory Put 9/01/13, Series B, 5.00%, 9/01/33 ............................. $ 1,000,000 $ 976,640
Mandatory Put 9/01/18, Series A, 5.25%, 9/01/36 ............................. 1,000,000 935,210
--------------
1,911,850
--------------
CALIFORNIA 12.9%
Alameda-Contra Costa Transit District COP, FHR Computer System Project,
4.00%, 8/01/12 .............................................................. 925,000 971,898
Brea and Olinda USD, GO, Election of 1999, Series A, FGIC Insured, 2.60%,
8/01/09 ..................................................................... 120,000 120,701
California Educational Facilities Authority Revenue, Santa Clara University,
Refunding, Series A, FSA Insured, 2.625%, 9/01/09 ........................... 100,000 100,933
California Health Facilities Financing Authority Revenue,
Catholic Healthcare West, Series G, 5.00%, 7/01/09 .......................... 750,000 759,150
Sutter Health, Series A, 5.00%, 8/15/12 ..................................... 1,000,000 1,060,300
California State Economic Recovery GO, Series A,
4.00%, 7/01/10 .............................................................. 1,000,000 1,032,660
5.25%, 7/01/13 .............................................................. 200,000 217,270
California State GO, Refunding,
5.00%, 4/01/15 .............................................................. 500,000 535,060
FSA Insured, 5.25%, 2/01/10 ................................................. 445,000 457,825
California Statewide CDA, PCR, Southern California Edison Co., Mandatory Put
4/01/13,
Refunding, Series A, XLCA Insured, 4.10%, 4/01/28 ........................... 1,500,000 1,453,470
California Statewide CDA Revenue,
CHF-Irvine LLC, UCI East Campus Apartments, Phase II, 5.00%, 5/15/14 ........ 1,000,000 930,880
Methodist Hospital of Southern California Project, FHA Insured, 5.50%,
2/01/13 .................................................................. 2,430,000 2,602,336
Fontana PFA Lease Revenue, AMBAC Insured, 5.00%, 9/01/14 ....................... 375,000 401,719
Hercules RDA Tax Allocation Revenue, Series A, AMBAC Insured, 5.00%, 8/01/14 ... 1,430,000 1,571,770
Long Beach Bond Finance Authority Natural Gas Purchase Revenue, Series A,
5.00%,
11/15/09 .................................................................... 400,000 395,536
Lynwood USD, GO, Election of 2002, Series A, FSA Insured, 4.00%, 8/01/10 ....... 100,000 103,243
Northern California Power Agency Public Power Revenue, Hydroelectric Project
No. 1, Refunding,
Series C, Assured Guaranty, 5.00%, 7/01/15 .................................. 1,000,000 1,118,070
Pacifica COP, AMBAC Insured, 4.50%, 1/01/13 .................................... 1,050,000 1,110,375
Palo Verde Community College District COP, AMBAC Insured, 5.00%, 1/01/15 ....... 745,000 795,697
Poway RDA Tax Allocation, Paguay Redevelopment Project, Series A, MBIA
Insured, 3.00%,
6/15/09 ..................................................................... 100,000 100,402
Rio Linda Unified Elementary School District, Election of 2002, Series A,
FSA Insured, 4.00%,
8/01/10 ..................................................................... 100,000 102,960
San Jose RDA Tax Allocation, Series A, 6.125%, 8/01/15 ......................... 3,000,000 3,193,080
Santa Clara County Financing Authority Revenue, El Camino, Series B, AMBAC
Insured, 5.00%,
2/01/14 ..................................................................... 1,000,000 1,041,420
2/01/15 ..................................................................... 1,025,000 1,065,303
Southern California Public Power Authority Natural Gas Project Revenue,
Project No. 1, Series A,
5.00%, 11/01/15 ............................................................. 1,000,000 840,100
Tustin USD School Facilities ID No. 2002-1 GO, Capital Appreciation,
Election of 2002, Series C, FSA Insured, zero cpn.,
6/01/09 .................................................................. 445,000 443,896
6/01/18 .................................................................. 810,000 564,278
West Kern Community College District COP, AMBAC Insured, 4.50%, 11/01/14 ....... 780,000 826,270
--------------
23,916,602
--------------
Annual Report | 139
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
COLORADO 0.9%
Regional Transportation District COP, Transit Vehicles, Series A, AMBAC
Insured, 5.00%,
12/01/15 .................................................................... $ 1,500,000 $ 1,614,405
--------------
FLORIDA 3.9%
Florida State Hurricane Catastrophe Fund Finance Corp. Revenue, Series A,
4.25%, 7/01/14 .............................................................. 3,000,000 2,927,220
Miami-Dade County GO, 5.00%, 7/01/12 ........................................... 3,000,000 3,228,810
Sarasota County GO, Environmentally Sensitive Program, 4.00%, 10/01/09 ......... 1,065,000 1,084,255
--------------
7,240,285
--------------
ILLINOIS 1.5%
Chicago Wastewater Transmission Revenue, Series A, BHAC Insured,
5.00%, 1/01/16 .............................................................. 1,425,000 1,581,080
5.50%, 1/01/17 .............................................................. 1,000,000 1,146,130
--------------
2,727,210
--------------
INDIANA 0.3%
Avon Community School Building Corp. Revenue, First Management, AMBAC
Insured, 4.25%,
1/15/11 ..................................................................... 520,000 531,398
--------------
KANSAS 0.3%
Junction City COP, Radian Insured, 4.00%,
9/01/09 ..................................................................... 215,000 217,073
9/01/10 ..................................................................... 310,000 315,443
--------------
532,516
--------------
KENTUCKY 0.6%
Kentucky Rural Water Finance Corp. Public Project Revenue, Flexible Term
Program, Series D,
4.00%, 8/01/09 .............................................................. 1,170,000 1,182,812
--------------
LOUISIANA 0.8%
Louisiana Local Government Environmental Facilities and CDA Revenue,
Shreveport Utility
System Projects, MBIA Insured, 4.00%, 12/01/14 .............................. 500,000 499,975
Louisiana State Citizens Property Insurance Corp. Assessment Revenue,
Series B,
AMBAC Insured, 5.00%, 6/01/09 ............................................... 1,000,000 1,001,180
--------------
1,501,155
--------------
MICHIGAN 2.8%
Charlevoix Public School District GO, School Building and Site, FSA
Insured, 3.00%,
5/01/10 ..................................................................... 800,000 817,816
5/01/11 ..................................................................... 800,000 830,232
Wyandotte Electric Revenue, Refunding, Assured Guaranty, 5.00%, 10/01/13 ....... 3,355,000 3,565,962
--------------
5,214,010
--------------
MINNESOTA 6.1%
Farmington GO, Improvement, Series B, FSA Insured, 3.50%, 2/01/14 .............. 455,000 483,023
Minneapolis Health Care System Revenue, Fairview Health Services, Series A,
5.00%,
11/15/12 .................................................................... 1,000,000 1,025,350
Northern Municipal Power Agency Electric System Revenue, Refunding, Series A,
Assured Guaranty, 5.00%,
1/01/12 .................................................................. 2,000,000 2,133,240
1/01/15 .................................................................. 5,000,000 5,394,600
St. Paul ISD No. 625 GO, Refunding, Series B, 4.50%, 2/01/10 ................... 2,190,000 2,266,015
--------------
11,302,228
--------------
140 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
MISSISSIPPI 0.9%
Mississippi Development Bank Special Obligation Revenue, Jackson Public
School District GO Bond Project, FSA Insured, 5.00%,
4/01/11 .................................................................. $ 1,000,000 $ 1,068,900
4/01/12 .................................................................. 500,000 548,435
--------------
1,617,335
--------------
NEBRASKA 0.4%
University of Nebraska Facilities Corp. Revenue, University of Nebraska
Medical Center Research Center, 4.00%, 2/15/10 .............................. 750,000 772,095
--------------
NEVADA 0.1%
Henderson Local ID No. T-6 Special Assessment, Senior Limited Obligation,
Refunding, Series A,
FSA Insured, 2.85%, 11/01/09 ................................................ 265,000 268,575
--------------
NEW YORK 15.9%
Albany IDA Civic Facility Revenue, St. Peter's Hospital Project, Series A,
4.75%, 11/15/09 ............................................................. 295,000 294,481
Amherst IDA Civic Facility Revenue, Mandatory Put 10/01/11, Refunding,
Series A,
Radian Insured, 4.20%, 10/01/31 ............................................. 1,340,000 1,344,181
Buffalo GO, General Improvement, Series A, Assured Guaranty, 5.00%, 2/01/11 .... 1,110,000 1,170,950
Erie County Water Authority Water Revenue, Refunding, 4.00%, 12/01/10 .......... 1,000,000 1,046,510
Hempstead Town IDA Civic Facility Revenue, Adelphi University Civic
Facility, 3.75%, 10/01/09 ................................................... 315,000 319,586
Monroe County GO, Refunding, Series A, Assured Guaranty, 5.00%, 6/01/11 ........ 2,135,000 2,267,882
New York City IDA Civic Facility Revenue, USTA National Tennis Center Inc. .....
Project, Refunding,
FSA Insured, 5.00%, 11/15/09 ................................................ 600,000 617,736
New York City IDAR, Capital Appreciation, Yankee Stadium, Pilot, Assured
Guaranty, zero cpn., 3/01/14 ................................................ 5,335,000 4,310,040
New York City Trust for Cultural Resources Revenue, Museum of Modern Art,
Refunding, Series 1A, 5.00%, 10/01/10 ....................................... 500,000 525,690
New York Local Government Assistance Corp. Revenue, senior lien, Refunding,
Series A, 5.00%, 4/01/11 .................................................... 300,000 320,922
New York State Dormitory Authority Revenues,
Kateri Residence, Refunding, 4.00%, 7/01/10 ................................. 230,000 232,063
Non-State Supported Debt, Aids Long Term Health Care Facility, Refunding,
5.00%, 11/01/11 .......................................................... 1,000,000 1,050,180
Non-State Supported Debt, Fordham University, Series B, Assured Guaranty,
3.25%, 7/01/13 ........................................................... 610,000 639,365
Non-State Supported Debt, Manhattan College, Series B, Radian Insured, 5.00%,
7/01/13 .................................................................. 840,000 837,682
Non-State Supported Debt, Rochester General Hospital, Refunding, Radian
Insured, 5.00%, 12/01/15 ................................................. 100,000 92,627
Non-State Supported Debt, School District Financing Program, Series A, FSA
Insured, 5.00%, 10/01/15 ................................................. 1,000,000 1,121,690
State Supported Debt, FSA Insured, 5.00%, 2/15/15 ........................... 1,000,000 1,099,600
The New York and Presbyterian Hospital, Mortgage, Refunding, Series A, FHA
Insured, 5.00%, 8/15/09 .................................................. 1,000,000 1,017,710
White Plains Hospital, Mortgage, FHA Insured, 3.55%, 2/15/10 ................ 10,000 10,002
New York State Environmental Facilities Corp. Special Obligation Revenue,
Riverbank State Park, Refunding, CIFG Insured, 5.00%, 4/01/16 ............... 200,000 229,302
Annual Report | 141
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York State Urban Development Corp. Revenue,
Refunding, Series D, 5.00%, 1/01/15 ...................................... $ 4,000,000 $ 4,328,840
State Personal Income Tax, Empire State, Series C-1, 2.80%, 12/15/09 ..... 245,000 249,055
Poughkeepsie Town GO, Public Improvement, Refunding, FSA Insured, 5.00%,
4/15/15 ..................................................................... 250,000 279,808
Scarsdale Union Free School District GO, Refunding, 3.25%, 12/01/10 ............ 500,000 517,960
Suffolk County IDA Civic Facility Revenue, Westhampton Free Associates
Library, AMBAC Insured, 3.25%,
6/15/09 .................................................................. 150,000 150,476
6/15/12 .................................................................. 300,000 314,280
Syracuse GO, Public Improvement, Series A, FSA Insured, 3.25%, 6/15/12 ......... 725,000 755,269
Triborough Bridge and Tunnel Authority Revenues, Refunding, Series C, 5.00%,
11/15/12 .................................................................... 1,000,000 1,110,530
Warren and Washington Counties IDAR, Hudson Falls Recovery, Refunding,
Series A, AMBAC Insured, 3.375%, 11/01/10 ................................... 300,000 307,383
Western Nassau County Water Authority Water System Revenue, AMBAC Insured,
3.00%, 5/01/09 .............................................................. 215,000 215,507
Yonkers GO, Series A, 4.00%, 11/01/09 .......................................... 2,565,000 2,584,032
--------------
29,361,339
--------------
OHIO 3.9%
Ohio State Department of Administrative Services COP, Administrative
Knowledge System, Series A, MBIA Insured, 5.25%, 9/01/15 .................... 6,205,000 6,972,682
Ohio State Higher Educational Facility Revenue, Otterbein College 2007
Project, CIFG Insured, 4.50%, 12/01/11 ......................................... 210,000 227,506
--------------
7,200,188
--------------
PENNSYLVANIA 1.5%
University of Pittsburgh of the Commonwealth System of Higher Education
Revenue, University Capital Project, Mandatory Put 9/15/13,
Series A, 5.50%, 9/15/39 .................................................... 2,500,000 2,736,275
--------------
SOUTH CAROLINA 0.6%
Florence County Hospital Revenue, McLeod Regional Medical Center Project,
Refunding,
Series A, FSA Insured, 5.00%, 11/01/09 ...................................... 1,000,000 1,026,240
--------------
SOUTH DAKOTA 0.2%
South Dakota HDA Revenue, Series D, 2.90%, 5/01/09 ............................. 320,000 321,075
--------------
TENNESSEE 3.0%
Sevier County PBA Revenue, Local Government Public Improvement, Series
VII-D-1, 5.00%,
6/01/15 ..................................................................... 5,000,000 5,496,400
--------------
TEXAS 4.5%
Brock ISD, GO, Capital Appreciation, zero cpn., 8/15/16 ........................ 460,000 359,439
Harris County Hospital District Revenue, senior lien, Refunding, Series A,
MBIA Insured, 5.00%,
2/15/12 ..................................................................... 745,000 783,487
Harris County MTA Lease Revenue COP, Series A, Assured Guaranty, 5.00%,
11/01/11 .................................................................... 2,200,000 2,386,076
Houston Hotel Occupancy Tax and Special Revenue, Convention and
Entertainment, Refunding,
Series A, AMBAC Insured, 5.25%, 9/01/09 ..................................... 1,260,000 1,282,176
142 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Lubbock Educational Facilities Authority Revenue, Lubbock Christian,
Refunding and Improvement, 4.50%, 11/01/10 .................................. $ 395,000 $ 386,417
San Antonio Water Revenue, System, Series A, FSA Insured, 5.50%, 5/15/13 ....... 500,000 557,380
Tarrant County Cultural Education Facilities Finance Corp. Revenue, Christus
Health, Refunding,
Series A, Assured Guaranty, 5.75%, 7/01/18 .................................. 2,000,000 2,127,420
Willow Fork Drain District GO, Series A, Radian Insured, 5.00%, 9/01/14 ........ 500,000 498,860
--------------
8,381,255
--------------
WASHINGTON 7.7%
Energy Northwest Electric Revenue, Project 1, Refunding, Series A, 5.00%,
7/01/11 ..................................................................... 375,000 402,908
Greater Wenatchee Regional Events Center Public Facilities District Revenue,
Revenue and
Special Tax, BAN, Series A, 5.25%, 12/01/11 ................................. 7,000,000 7,162,750
King County Housing Authority Revenue, Birch Creek Apartments Project,
4.40%, 5/01/18 .............................................................. 2,290,000 2,290,572
Snohomish County School District No. 2 Everett GO, Refunding, FGIC Insured,
5.00%, 12/01/14 ............................................................. 250,000 282,085
Washington State GO, Motor Vehicle Tax, Series F, AMBAC Insured, zero cpn.,
12/01/09 .................................................................... 1,000,000 990,800
Washington State Health Care Facilities Authority Revenue,
Kadlec Medical Center, Series A, Assured Guaranty, 5.00%, 12/01/10 ....... 1,000,000 1,029,690
MultiCare Health System, Series A, FSA Insured, 4.00%, 8/15/13 ........... 250,000 258,330
MultiCare Health System, Series A, FSA Insured, 4.00%, 8/15/14 ........... 310,000 317,313
MultiCare Health System, Series B, FSA Insured, 4.00%, 8/15/13 ........... 250,000 258,330
MultiCare Health System, Series B, FSA Insured, 4.00%, 8/15/14 ........... 600,000 614,154
MultiCare Health System, Series B, FSA Insured, 4.00%, 8/15/15 ........... 625,000 635,656
--------------
14,242,588
--------------
WYOMING 0.3%
Sweetwater County Improvement Project Powers Board Lease Revenue, MBIA
Insured, 5.00%, 12/15/10 .................................................... 500,000 530,260
--------------
U.S. TERRITORIES 3.2%
GUAM 0.1%
Guam International Airport Authority Revenue, Series A, MBIA Insured, 2.75%,
10/01/09 .................................................................... 125,000 124,030
--------------
PUERTO RICO 3.1%
Puerto Rico Commonwealth Highway and Transportation Authority Highway
Revenue, Refunding,
Series X, MBIA Insured, 5.50%, 7/01/13 ...................................... 580,000 578,631
Puerto Rico Electric Power Authority Power Revenue, Series WW, 5.25%, 7/01/13 .. 1,000,000 995,720
Puerto Rico Industrial Tourist Educational Medical and Environmental Control
Facilities Financing
Authority Revenue, Ana G. Mendez University System Project, 5.00%, 3/01/11 .. 545,000 521,729
Puerto Rico Municipal Finance Agency GO, Series A, FSA Insured, 5.75%,
8/01/12 ..................................................................... 3,000,000 3,068,940
Puerto Rico PBA Guaranteed Revenue, Mandatory Put 7/01/17, Refunding, AMBAC
Insured, 5.50%, 7/01/35 ..................................................... 750,000 688,710
--------------
5,853,730
--------------
TOTAL U.S. TERRITORIES ................................................................ 5,977,760
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $133,630,203) ............... 135,605,856
--------------
Annual Report | 143
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS 24.1%
MUNICIPAL BONDS 24.1%
CALIFORNIA 2.2%
(a) California HFAR, MFH, Series D, Daily VRDN and Put, 3.25%, 2/01/31 ............. $ 605,000 $ 605,000
(a) California State Department of Water Resources Power Supply Revenue,
Series B-3, Daily VRDN and Put, 0.35%, 5/01/22 .............................. 300,000 300,000
(a) California State Economic Recovery Revenue, Series C-2, Daily VRDN and
Put, 0.70%, 7/01/23 ......................................................... 900,000 900,000
(a) California State GO, Kindergarten-University, Refunding,
Series B-2, Daily VRDN and Put, 0.55%, 5/01/34 ........................... 300,000 300,000
Series B-3, Daily VRDN and Put, 0.45%, 5/01/34 ........................... 300,000 300,000
(a) California Statewide CDA Revenue, Series A, Assured Guaranty, Weekly VRDN
and Daily Put, 0.48%, 3/01/37 ............................................... 200,000 200,000
(a) Irvine Ranch Water District GO, ID No. 284, Series A, Daily VRDN and Put,
0.45%, 11/15/13 ............................................................. 700,000 700,000
(a) Irvine Ranch Water District Revenue, Consolidated Bonds, Daily VRDN and
Put, 0.38%, 10/01/10 ........................................................ 400,000 400,000
(a) Metropolitan Water District of Southern California Waterworks Revenue,
Authorization, Series B, Weekly VRDN and Put, 0.35%, 7/01/28 ................ 400,000 400,000
--------------
4,105,000
--------------
COLORADO 1.8%
(a) Colorado Educational and Cultural Facilities Authority Revenue, National
Jewish Federation Bond Program,
Daily VRDN and Put, 0.65%, 2/01/35 ....................................... 700,000 700,000
Refunding, Series A-8, Daily VRDN and Put, 0.65%, 9/01/35 ................ 1,010,000 1,010,000
Series A-11, Daily VRDN and Put, 0.65%, 8/01/27 .......................... 1,600,000 1,600,000
--------------
3,310,000
--------------
FLORIDA 1.7%
Citizens Property Insurance Corp. Revenue, Senior Secured High Risk Notes,
Series A-2, 4.50%, 6/01/09 .................................................. 3,000,000 3,002,400
(a) Florida State Municipal Power Agency Revenue, All Requirements Power
Supply, Refunding,
Series C, Daily VRDN and Put, 0.60%, 10/01/35 ............................... 200,000 200,000
--------------
3,202,400
--------------
KENTUCKY 0.5%
(a) Breckinridge County Lease Program Revenue, Kentucky Assn. Counties Leasing
Trust, Series A, Daily VRDN and Put, 0.60%, 2/01/32 ......................... 300,000 300,000
(a) Christian County Assn. of County Leasing Trust Lease Program Revenue,
Refunding, Series A, Daily VRDN and Put, 0.60%, 4/01/37 ..................... 600,000 600,000
--------------
900,000
--------------
MARYLAND 0.3%
(a) Maryland State EDC, EDR, U.S. Pharmacopeial, Refunding, Series A, Daily
VRDN and Put, 0.60%, 7/01/38 ................................................ 600,000 600,000
--------------
MASSACHUSETTS 0.2%
(a) Massachusetts State Health and Educational Facilities Authority Revenue,
Stonehill College,
Series K, Daily VRDN and Put, 0.45%, 7/01/37 ................................ 300,000 300,000
--------------
144 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN 1.5%
Charlevoix Public School District GO, School Building and Site, FSA Insured,
3.00%, 5/01/09 .............................................................. $ 800,000 $ 802,824
Detroit GO, MBIA Insured, 5.00%, 4/01/09 ....................................... 2,000,000 1,995,200
--------------
2,798,024
--------------
NEBRASKA 0.1%
(a) Nebraska Educational Finance Authority Revenue, Creighton University
Projects, Refunding, Daily VRDN and Put, 0.60%, 7/01/35 ..................... 200,000 200,000
--------------
NEW HAMPSHIRE 0.1%
(a) New Hampshire Health and Education Facilities Authority Revenue,
University of New Hampshire,
Series A, Daily VRDN and Put, 0.70%, 7/01/35 ................................ 200,000 200,000
--------------
NEW YORK 6.8%
Ithaca City GO, BAN, Series A, 3.25%, 1/15/10 .................................. 5,000,000 5,028,850
(a) Nassau County IDA Civic Facility Revenue, Cold Spring Harbor, Refunding
and Improvement,
Daily VRDN and Put, 0.40%, 1/01/34 .......................................... 400,000 400,000
(a) New York City GO, Refunding,
Series E, Sub Series E-5, Daily VRDN and Put, 0.55%, 8/01/10 ............. 135,000 135,000
Series H, Sub Series H-3, FSA Insured, Daily VRDN and Put,
0.60%, 8/01/14 ........................................................ 1,100,000 1,100,000
Series H, Sub Series H-3, FSA Insured, Daily VRDN and Put,
0.60%, 8/01/19 ........................................................ 100,000 100,000
(a) New York City IDAR, Liberty, One Bryant Park LLC, Series B, Daily VRDN and
Put, 0.50%, 11/01/39 ........................................................ 500,000 500,000
(a) New York City Municipal Water Finance Authority Water and Sewer System
Revenue, Second
General Resolution, Refunding, Series CC, Sub Series CC-1, Daily VRDN and
Put, 0.45%, 6/15/38 ...................................................... 200,000 200,000
New York State Dormitory Authority Revenues, State University, Refunding,
Series B,
MBIA Insured, zero cpn., 5/01/09 ............................................ 5,200,000 5,184,660
--------------
12,648,510
--------------
NORTH CAROLINA 1.6%
(a) Charlotte COP, Central Yard Project, Series A, Weekly VRDN and Put, 0.67%,
3/01/25 ..................................................................... 1,600,000 1,600,000
(a) North Carolina Medical Care Commission Health Care Facilities Revenue,
Wake Forest University,
Refunding, Series D, Daily VRDN and Put, 0.60%, 7/01/34 ..................... 1,300,000 1,300,000
--------------
2,900,000
--------------
OHIO 0.7%
(a) Allen County Hospital Facilities Revenue, Catholic Healthcare, Series A,
Daily VRDN and Put,
0.55%, 10/01/31 ............................................................. 500,000 500,000
University of Toledo General Receipts Bonds Revenue, Series A, Assured
Guaranty, 3.00%, 6/01/09 .................................................... 750,000 752,963
--------------
1,252,963
--------------
OREGON 1.2%
Oregon State Department of Administrative Services COP, Series A, FSA
Insured, 5.00%, 5/01/09 ..................................................... 2,180,000 2,194,497
--------------
SOUTH CAROLINA 0.4%
Spartanburg County Regional Health Services District Revenue, Refunding,
Series D, Assured Guaranty, 4.00%, 4/15/09 .................................. 740,000 742,353
--------------
Annual Report | 145
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN FEDERAL LIMITED-TERM TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- -------------------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TENNESSEE 1.2%
(a) Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund,
Daily VRDN and Put, 0.60%, 7/01/34 .......................................... $ 1,030,000 $ 1,030,000
(a) Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan
Pool, Daily VRDN and Put, 0.60%,
7/01/34 .................................................................. 1,000,000 1,000,000
7/01/38 .................................................................. 200,000 200,000
--------------
2,230,000
--------------
TEXAS 0.3%
(a) Tarrant County Cultural Education Facilities Finance Corp. Revenue, Texas
Health Resources,
Refunding, Series C, Daily VRDN and Put, 0.35%, 11/15/33 .................... 560,000 560,000
--------------
VIRGINIA 1.7%
Fairfax County Redevelopment and Housing Authority Revenue, Affordable
Housing, BAN,
Series B, 4.00%, 10/01/09 ................................................... 3,000,000 3,056,160
--------------
WASHINGTON 1.8%
Spokane County School District No. 81 Spokane GO, Convertible Deferred
Interest, MBIA Insured,
3.875%, 6/01/09 ............................................................. 3,350,000 3,361,691
--------------
TOTAL SHORT TERM INVESTMENTS (COST $44,517,467) ................................ 44,561,598
--------------
TOTAL INVESTMENTS (COST $178,147,670) 97.4% .................................... 180,167,454
OTHER ASSETS, LESS LIABILITIES 2.6% ............................................ 4,719,163
--------------
NET ASSETS 100.0% .............................................................. $ 184,886,617
==============
See Abbreviations on page 238.
(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.
The accompanying notes are an integral part of these financial statements.
146 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 9.98 $ 11.04 $ 10.83 $ 10.81 $ 10.78
---------- ---------- ---------- ---------- ----------
Income from investment operations(b):
Net investment income(c) ...................... 0.55 0.53 0.54 0.55 0.58
Net realized and unrealized gains (losses) .... (1.24) (1.06) 0.20 0.03 0.03
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. (0.69) (0.53) 0.74 0.58 0.61
---------- ---------- ---------- ---------- ----------
Less distributions from net investment
income ........................................ (0.54) (0.53) (0.53) (0.56) (0.58)
---------- ---------- ---------- ---------- ----------
Redemption fees(d, e) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 8.75 $ 9.98 $ 11.04 $ 10.83 $ 10.81
========== ========== ========== ========== ==========
Total return(f) .................................. (7.09) (5.03)% 6.99% 5.45% 5.94%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.63% 0.62% 0.62% 0.63% 0.62%
Net investment income ............................ 5.77% 4.98% 4.97% 5.11% 5.44%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $4,255,784 $4,784,743 $5,329,032 $5,070,599 $4,714,804
Portfolio turnover rate .......................... 19.10% 20.10% 10.90% 11.63% 8.60%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 147
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------
CLASS B 2009 2008(a) 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.05 $ 11.11 $ 10.90 $ 10.87 $ 10.84
---------- ---------- ---------- ---------- ----------
Income from investment operations(b):
Net investment income(c) ...................... 0.50 0.48 0.48 0.50 0.52
Net realized and unrealized gains (losses) .... (1.25) (1.07) 0.20 0.03 0.04
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. (0.75) (0.59) 0.68 0.53 0.56
---------- ---------- ---------- ---------- ----------
Less distributions from net investment income .... (0.49) (0.47) (0.47) (0.50) (0.53)
---------- ---------- ---------- ---------- ----------
Redemption fees(d, e) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 8.81 $ 10.05 $ 11.11 $ 10.90 $ 10.87
========== ========== ========== ========== ==========
Total return(f) .................................. (7.66)% (5.53)% 6.36% 4.93% 5.32%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.18% 1.17% 1.17% 1.18% 1.18%
Net investment income ............................ 5.22% 4.43% 4.42% 4.56% 4.88%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 87,208 $ 139,855 $ 215,121 $ 240,628 $ 258,063
Portfolio turnover rate .......................... 19.10% 20.10% 10.90% 11.63% 8.60%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
148 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.10 $ 11.16 $ 10.95 $ 10.91 $ 10.88
---------- ---------- ---------- ---------- ----------
Income from investment operations(b):
Net investment income(c) ...................... 0.50 0.48 0.49 0.50 0.52
Net realized and unrealized gains (losses) .... (1.25) (1.07) 0.19 0.03 0.03
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. (0.75) (0.59) 0.68 0.53 0.55
---------- ---------- ---------- ---------- ----------
Less distributions from net investment income .... (0.49) (0.47) (0.47) (0.49) (0.52)
---------- ---------- ---------- ---------- ----------
Redemption fees(d, e) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 8.86 $ 10.10 $ 11.16 $ 10.95 $ 10.91
========== ========== ========== ========== ==========
Total return(f) .................................. (7.62) (5.51)% 6.34% 5.00% 5.29%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.18% 1.17% 1.17% 1.18% 1.18%
Net investment income ............................ 5.22% 4.43% 4.42% 4.56% 4.88%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 663,766 $ 697,697 $ 761,994 $ 695,270 $ 588,921
Portfolio turnover rate .......................... 19.10% 20.10% 10.90% 11.63% 8.60%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 149
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-------------------------------------------------
ADVISOR CLASS 2009 2008(a) 2007 2006(B)
- ------------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 10.00 $ 11.06 $ 10.85 $ 10.76
---------- ---------- ---------- ----------
Income from investment operations(c):
Net investment income(d) ...................... 0.56 0.55 0.55 0.10
Net realized and unrealized gains (losses) .... (1.24) (1.07) 0.20 0.04
---------- ---------- ---------- ----------
Total from investment operations ................. (0.68) (0.52) 0.75 0.14
---------- ---------- ---------- ----------
Less distributions from net investment income .... (0.55) (0.54) (0.54) (0.05)
---------- ---------- ---------- ----------
Redemption fees(e, f) ............................ -- -- -- --
---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 8.77 $ 10.00 $ 11.06 $ 10.85
========== ========== ========== ==========
Total return(g) .................................. (6.99) (4.94)% 7.08% 1.34%
RATIOS TO AVERAGE NET ASSETS(h)
Expenses ......................................... 0.53% 0.52% 0.52% 0.53%
Net investment income ............................ 5.87% 5.08% 5.07% 5.21%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 170,562 $ 143,331 $ 53,127 $ 471
Portfolio turnover rate .......................... 19.10% 20.10% 10.90% 11.63%
(a) For the year ended February 29.
(b) For the period January 3, 2006 (effective date) to February 28, 2006.
(c) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(d) Based on average daily shares outstanding.
(e) Amount rounds to less than $0.01 per share.
(f) Effective September 1, 2008, the redemption fee was eliminated.
(g) Total return is not annualized for periods less than one year.
(h) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
150 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS 96.4%
ALABAMA 0.4%
Camden IDB Exempt Facilities Revenue, Weyerhaeuser,
Series A, Pre-Refunded, 6.125%, 12/01/24 ................................. $ 3,000,000 $ 3,490,590
Series B, Pre-Refunded, 6.375%, 12/01/24 ................................. 1,750,000 2,000,827
Oneonta Eastern Health Systems Special Care Facilities Financing Authority GO,
Pre-Refunded, 7.75%, 7/01/21 ................................................ 9,420,000 10,102,385
Phenix City IDB Environmental Improvement Revenue, MeadWestvaco-Mead Coated
Board Project, Refunding, Series B, 6.10%, 5/15/30 .......................... 5,800,000 3,970,274
--------------
19,564,076
--------------
ALASKA 0.1%
Alaska Industrial Development and Export Authority Power Revenue, Upper Lynn
Canal Regional Power,
5.70%, 1/01/12 ........................................................... 1,080,000 1,031,983
5.80%, 1/01/18 ........................................................... 1,495,000 1,266,684
5.875%, 1/01/32 .......................................................... 6,900,000 4,952,889
--------------
7,251,556
--------------
ARIZONA 4.7%
Apache County IDA,
IDR, Tucson Electric Power Co. Project, Refunding, Series C, 5.85%,
3/01/26 ............................................................... 16,500,000 14,379,915
PCR, Tucson Electric Power Co. Project, Refunding, Series A, 5.85%,
3/01/28 ............................................................... 53,150,000 45,249,252
PCR, Tucson Electric Power Co. Project, Refunding, Series B, 5.875%,
3/01/33 ............................................................... 33,800,000 27,792,726
Arizona Health Facilities Authority Hospital System Revenue, John C. Lincoln
Health Network, Pre-Refunded, 6.375%, 12/01/37 .............................. 2,500,000 2,910,600
Arizona Health Facilities Authority Revenue, Catholic Healthcare West, Series A,
6.625%, 7/01/20 ............................................................. 3,940,000 4,274,191
Casa Grande IDA Hospital Revenue, Casa Grande Regional Medical Center, Series A,
7.25%, 12/01/32 ............................................................. 14,500,000 11,242,720
Coconino County PCC Revenue, Tucson Electric Power Navajo, Refunding,
Series A, 7.125%, 10/01/32 ............................................... 21,125,000 17,775,420
Series B, 7.00%, 10/01/32 ................................................ 9,500,000 9,007,615
Downtown Phoenix Hotel Corp. Revenue, sub. bond, Series B, FGIC Insured, 5.00%,
7/01/36 ..................................................................... 10,000,000 8,627,400
Maricopa County IDA Health Facility Revenue,
Catholic Healthcare West, Refunding, Series A, 5.50%, 7/01/26 ............... 7,500,000 6,858,450
Catholic Healthcare West Project, Refunding, Series A, ACA Insured, 5.00%,
7/01/16 .................................................................. 5,450,000 5,461,391
Maricopa County PCC, PCR, Public Service Co. of Colorado, Refunding, Series A,
5.75%, 11/01/22 ............................................................. 9,800,000 8,371,062
Phoenix Civic Improvement Corp. Airport Revenue, senior lien, Series A, 5.00%,
7/01/38 ..................................................................... 15,000,000 14,550,000
Pima County IDAR,
Industrial Development, Tucson Electric Power, Series A, 6.375%, 9/01/29.. 35,000,000 31,313,100
Tucson Electric Power Co. Project, Series A, 6.10%, 9/01/25 .............. 10,140,000 8,312,062
Salt Verde Financial Corp. Senior Gas Revenue, 5.00%, 12/01/37 ................. 10,000,000 6,452,200
University Medical Center Corp. Revenue, 5.00%, 7/01/35 ........................ 10,175,000 7,771,767
Yuma County IDA Water and Sewer Exempt Facility Revenue, Water and Sewer,
Refunding, Series A, 6.375%, 12/01/37 ....................................... 15,500,000 11,896,560
--------------
242,246,431
--------------
Annual Report | 151
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
ARKANSAS 0.3%
Arkansas State Development Finance Authority Industrial Facilities Revenue,
Potlatch Corp. Projects, Series A, 7.75%, 8/01/25 ........................... $ 3,800,000 $ 2,820,170
Baxter County IDR, Aeroquip Corp. Project, Refunding, 5.80%, 10/01/13 .......... 2,400,000 2,541,840
Calhoun County Solid Waste Disposal Revenue, Georgia-Pacific Corp. Project,
6.375%, 11/01/26 ............................................................ 10,000,000 6,139,600
Warren Solid Waste Disposal Revenue, Potlatch Corp. Project, 7.00%, 4/01/12 .... 3,150,000 2,946,227
--------------
14,447,837
--------------
CALIFORNIA 15.4%
ABAG 1915 Act Special Assessment, Windemere Ranch AD, 1999-1, Pre-Refunded,
6.375%, 9/02/32 ............................................................. 9,735,000 11,171,497
Aliso Viejo CFD No. 2005-01 Special Tax, Glenwood at Aliso Viejo, 6.00%,
9/01/38 ..................................................................... 5,200,000 3,708,796
Anaheim PFAR, Refunding, Series A-2, FGIC Insured, 4.75%, 9/01/29 .............. 24,000,000 21,548,400
Azusa Special Tax, Escrow, CFD No. 2005-1, Improvement Area 1, 5.00%, 9/01/37 .. 5,500,000 2,914,450
Beaumont Financing Authority Local Agency Revenue, Improvement Area No. 19C,
Series A, 5.35%, 9/01/36 .................................................... 3,680,000 2,418,386
Beaumont PFAR, Sewer Enterprise Project, Series A, Pre-Refunded, 6.90%,
9/01/23 ..................................................................... 4,085,000 4,965,031
Calabasas Special Tax, CFD No. 01-1, Refunding, 6.25%, 9/01/31 ................. 5,780,000 6,598,853
California County Tobacco Securitization Agency Tobacco Revenue, Asset-Backed,
Alameda County, 5.875%, 6/01/35 ............................................. 3,700,000 2,398,562
California Educational Facilities Authority Revenue, Pooled College and
University Financing, Refunding, Series B, 6.125%, 6/01/09 .................. 10,000 10,006
California Health Facilities Financing Authority Revenue, Marshall Medical
Center, Series A, California Mortgage Insured, 5.00%,
11/01/24 ................................................................. 2,295,000 2,024,236
11/01/29 ................................................................. 2,220,000 1,796,135
11/01/33 ................................................................. 3,130,000 2,438,145
California HFAR, Home Mortgage, Series K, 4.70%, 8/01/31 ....................... 20,000,000 15,278,000
California Infrastructure and Economic Development Bank Revenue, Department of
Social Services Administration Building, AMBAC Insured, 5.00%,
12/01/30 ................................................................. 10,300,000 9,627,410
12/01/35 ................................................................. 5,000,000 4,508,950
California PCFA Solid Waste Disposal Revenue, Keller Canyon Landfill Co.
Project, 6.875%, 11/01/27 ................................................... 10,000,000 9,385,800
California State GO,
Refunding, 5.25%, 4/01/30 ................................................ 50,000 48,999
Refunding, 5.25%, 4/01/32 ................................................ 40,000 38,751
Various Purpose, Refunding, 5.00%, 6/01/31 ............................... 22,000,000 20,491,460
California Statewide CDA Revenue,
Elder Care Alliance, Series A, Pre-Refunded, 8.25%, 11/15/32 ............. 13,090,000 16,481,750
Eskaton Village Grass Valley, Pre-Refunded, 8.25%, 11/15/31 .............. 2,945,000 3,299,725
John F. Kennedy University, 6.75%, 10/01/33 .............................. 8,000,000 6,141,520
Monterey Institute International, 5.50%, 7/01/31 ......................... 13,240,000 13,440,056
Prospect Sierra School, Pre-Refunded, 6.75%, 9/01/32 ..................... 6,440,000 7,031,450
St. Joseph Health System, Series B, FGIC Insured, 5.75%, 7/01/47 ......... 5,000,000 4,809,550
St. Joseph Health System, Series E, FSA Insured, 5.25%, 7/01/47 .......... 10,000,000 9,214,200
Sutter Health, Refunding, Series A, 5.00%, 11/15/43 ...................... 25,000,000 20,696,000
Thomas Jefferson School of Law, Series A, 7.25%, 10/01/38 ................ 11,730,000 8,874,449
152 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
California Statewide CDA Special Tax Revenue, CFD 2007-1, Orinda, 6.00%,
9/01/37 ..................................................................... $ 10,000,000 $ 7,442,200
Chabot-Las Positas Community College District GO, Capital Appreciation Bonds,
Series C, AMBAC Insured, zero cpn.,
8/01/33 .................................................................. 21,015,000 4,541,341
8/01/34 .................................................................. 10,000,000 2,022,900
8/01/43 .................................................................. 31,515,000 3,667,400
8/01/45 .................................................................. 34,035,000 3,482,801
Chino CFD Special Tax, No. 03-3, Improvement Area 2, 5.00%, 9/01/36 ............ 2,215,000 1,374,607
Chula Vista CFD Special Tax,
No. 07-I, Otay Ranch Village Eleven, 5.875%, 9/01/34 ..................... 3,075,000 2,226,761
No. 13-I, Otay Ranch Village Seven, 5.35%, 9/01/36 ....................... 2,650,000 1,577,545
No. 99-1, Otay Ranch Spa One, Pre-Refunded, 6.10%, 9/01/31 ............... 4,890,000 5,341,543
Corona COP, Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 ... 8,100,000 8,885,457
El Dorado County CFD Special Tax, Promontory Specific, Series No. 2001-1, 6.30%,
9/01/31 ..................................................................... 3,500,000 2,675,085
Emeryville RDA, MFHR, Emery Bay Apartments II,
Series A, Pre-Refunded, 5.85%, 10/01/28 .................................. 12,625,000 13,323,036
sub. lien, Series C, Pre-Refunded, 7.875%, 10/01/28 ...................... 1,780,000 1,930,926
Foothill/Eastern Corridor Agency Toll Road Revenue, Capital Appreciation,
Refunding,
zero cpn., 1/15/22 ....................................................... 49,115,000 17,839,059
zero cpn., 1/15/31 ....................................................... 4,000,000 587,320
zero cpn., 1/15/34 ....................................................... 4,500,000 499,410
zero cpn., 1/15/36 ....................................................... 4,000,000 365,360
zero cpn. to 7/15/09, 5.85% thereafter, 1/15/23 .......................... 35,000,000 28,947,800
Fullerton CFD No. 1 Special Tax, Amerige Heights, 6.20%, 9/01/32 ............... 3,500,000 2,881,620
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue,
Asset-Backed, Senior Series A-1, 5.75%, 6/01/47 .......................... 10,000,000 5,985,000
Asset-Backed, Series A-3, Pre-Refunded, 7.875%, 6/01/42 .................. 10,000,000 12,240,200
Enhanced, Asset-Backed, Refunding, Series A, 5.00%, 6/01/45 .............. 30,750,000 23,664,585
Enhanced, Series A, AMBAC Insured, 5.00%, 6/01/45 ........................ 13,250,000 10,196,935
Lake Elsinore 1915 Act Special Assessment, AD No. 93-1, Limited Obligation,
Refunding, 7.00%, 9/02/30 ................................................... 7,715,000 6,475,817
Lee Lake Water District CFD No. 3 Special Tax, Retreat, 5.95%, 9/01/34 ......... 5,000,000 3,720,650
Livermore CFD Special Tax, No. 06-1, Shea Properties, 5.40%, 9/01/36 ........... 6,595,000 4,247,576
Los Angeles MFR, Refunding,
Series J-1B, 7.125%, 1/01/24 ............................................. 120,000 99,289
Series J-1C, 7.125%, 1/01/24 ............................................. 455,000 376,472
Series J-2B, 8.50%, 1/01/24 .............................................. 635,000 528,447
(a) Series J-2C, 8.50%, 1/01/24 .............................................. 2,100,000 1,747,620
Los Angeles Regional Airports Improvement Corp. Lease Revenue,
(b) Facilities Lease, United Air Lines Inc., Los Angeles International
Airport, Refunding, 6.875%, 11/15/12 .................................. 9,500,000 4,666,590
Facilities Sublease, Delta Air Lines Inc., Los Angeles International
Airport, Refunding, 6.35%, 11/01/25 ................................... 12,000,000 8,317,560
Los Angeles Wastewater System Revenue, Refunding, Series A, MBIA Insured, 5.00%,
6/01/30 ..................................................................... 7,530,000 7,519,609
Murrieta 1915 Act Special Tax, CFD No. 2000-1, 6.375%, 9/01/30 ................. 4,000,000 3,146,200
Annual Report | 153
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Poway USD Special Tax,
CFD No. 10, Area A, 6.10%, 9/01/31 ....................................... $ 1,995,000 $ 1,568,309
CFD No. 11, Area A, 5.375%, 9/01/28 ...................................... 2,965,000 2,168,186
CFD No. 11, Area A, 5.375%, 9/01/34 ...................................... 2,235,000 1,591,611
CFD No. 14, Del Sur, 5.25%, 9/01/36 ...................................... 7,500,000 4,963,050
Rocklin Special Tax, CFD No. 10, Whitney, 5.00%, 9/01/35 ....................... 7,315,000 4,624,177
Romoland School District Special Tax, CFD 1,
Improvement Area 1, 5.35%, 9/01/28 ....................................... 7,015,000 5,206,042
Improvement Area 1, 5.40%, 9/01/36 ....................................... 6,175,000 4,127,679
Improvement Area 2, 5.35%, 9/01/38 ....................................... 7,900,000 4,617,787
Roseville Special Tax, CFD No. 1, Westpark, 5.25%, 9/01/25 ..................... 1,550,000 1,088,332
San Francisco City and County RDA Lease Revenue, George R. Moscone Center,
zero cpn.,
7/01/09 .................................................................. 3,750,000 3,716,775
7/01/10 .................................................................. 4,500,000 4,401,360
7/01/12 .................................................................. 4,500,000 4,043,925
7/01/13 .................................................................. 4,250,000 3,636,087
7/01/14 .................................................................. 2,250,000 1,846,125
San Francisco Uptown Parking Corp. Parking Revenue, Union Square, MBIA Insured,
6.00%, 7/01/31 .............................................................. 8,920,000 9,137,024
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, Series A, 5.60%, 1/15/16 ................ 22,500,000 20,025,675
Capital Appreciation, Refunding, Series A, 5.65%, 1/15/17 ................ 20,000,000 17,452,000
Capital Appreciation, Refunding, Series A, 5.75%, 1/15/23 ................ 20,000,000 15,829,200
Capital Appreciation, Refunding, Series A, 5.75%, 1/15/24 ................ 20,000,000 16,396,600
junior lien, ETM, zero cpn., 1/01/10 ..................................... 15,000,000 14,880,750
junior lien, ETM, zero cpn., 1/01/12 ..................................... 30,100,000 28,582,057
junior lien, ETM, zero cpn., 1/01/24 ..................................... 52,700,000 27,966,309
junior lien, ETM, zero cpn., 1/01/25 ..................................... 45,200,000 22,247,440
junior lien, ETM, zero cpn., 1/01/26 ..................................... 131,900,000 61,164,668
junior lien, ETM, zero cpn., 1/01/27 ..................................... 139,100,000 60,877,115
senior lien, 5.00%, 1/01/33 .............................................. 11,930,000 8,397,050
Saugus USD Special Tax, 6.00%, 9/01/33 ......................................... 3,150,000 2,427,295
Seal Beach CFD No. 05-01 Special Tax, Pacific Gateway Business Center, 5.30%,
9/01/36 ..................................................................... 2,000,000 1,337,200
Stockton 1915 Act Special Assessment, Limited Obligation, Mosher AD No. 2003-2,
6.30%, 9/02/33 .............................................................. 6,000,000 4,827,780
Stockton Special Tax, Spanos Park West CFD No. 2001-1, Pre-Refunded, 6.375%,
9/01/32 ..................................................................... 4,100,000 4,841,362
Tustin CFD No. 06-01 Special Tax, Legacy/Columbus, Series A, 6.00%, 9/01/36 .... 20,000,000 13,082,800
Upland CFD No. 2003-2 Special Tax, San Antonio, Improvement Area 1, Series A,
6.00%, 9/01/34 .............................................................. 6,520,000 5,015,119
West Sacramento Special Tax, CFD No. 16, Pre-Refunded, 6.00%, 9/01/33 .......... 3,000,000 3,406,680
--------------
799,398,857
--------------
COLORADO 4.3%
Arkansas River Power Authority Power Revenue, Improvement, 6.00%, 10/01/40 ..... 10,000,000 8,929,900
Colorado Health Facilities Authority Revenue, Hospital, Refunding, Series C,
FSA Insured, 5.25%, 3/01/40 ................................................. 20,000,000 17,521,000
154 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Denver City and County Airport Revenue, Series D, 7.75%, 11/15/13 .............. $ 410,000 $ 447,351
Denver City and County Special Facilities Airport Revenue, United Airlines
Project, Refunding, Series A, 5.25%, 10/01/32 ............................... 25,000,000 13,412,000
Denver Convention Center Hotel Authority Revenue, Refunding, senior bond,
XLCA Insured, 5.00%,
12/01/30 ................................................................. 15,000,000 10,250,250
12/01/35 ................................................................. 15,000,000 9,854,100
Denver Health and Hospital Authority Healthcare Revenue, Series A, Pre-Refunded,
6.25%, 12/01/33 ............................................................. 4,000,000 4,787,160
E-470 Public Highway Authority Revenue, Capital Appreciation,
Refunding, Series B, MBIA Insured, zero cpn., 9/01/37 .................... 15,720,000 1,388,862
Refunding, Series B, MBIA Insured, zero cpn., 9/01/38 .................... 20,000,000 1,615,000
Refunding, Series B, MBIA Insured, zero cpn., 9/01/39 .................... 30,000,000 2,238,900
Series A, MBIA Insured, zero cpn., 9/01/28 ............................... 15,000,000 2,969,550
Series B, MBIA Insured, zero cpn., 9/01/29 ............................... 10,000,000 1,797,200
Series B, MBIA Insured, zero cpn., 9/01/30 ............................... 17,300,000 2,827,339
Series B, MBIA Insured, zero cpn., 9/01/31 ............................... 10,000,000 1,487,700
Eagle County Airport Terminal Corp. Revenue, Series A,
7.00%, 5/01/21 ........................................................... 730,000 572,145
7.125%, 5/01/31 .......................................................... 1,215,000 862,310
Eagle County Sports and Housing Facilities Revenue, Vail Associate Project,
Refunding, 6.95%, 8/01/19 ................................................... 41,200,000 35,390,388
Littleton MFHR, Riverpoint, Series C, Pre-Refunded, 8.00%, 12/01/29 ............ 2,660,000 2,980,849
McKay Landing Metropolitan District No. 002 GO,
Limited Tax, Pre-Refunded, 7.50%, 12/01/19 ............................... 2,545,000 2,786,011
Subordinated, Series A, Pre-Refunded, 7.50%, 12/01/34 .................... 2,000,000 2,210,220
Public Authority for Colorado Energy Natural Gas Purchase Revenue,
6.125%, 11/15/23 ......................................................... 1,000,000 844,230
6.25%, 11/15/28 .......................................................... 12,500,000 10,226,500
6.50%, 11/15/38 .......................................................... 90,100,000 73,192,735
Saddle Rock South Metropolitan District No. 3 GO, Limited Mill Levy Obligation,
Pre-Refunded, 7.35%, 12/01/19 ............................................... 2,740,000 2,945,199
Superior Metropolitan District No. 1 Special Revenue, Refunding, AMBAC Insured,
5.00%, 12/01/28 ............................................................. 7,640,000 7,700,279
(a, c) Villages Castle Rock Metropolitan District No. 4 Revenue, Refunding, 8.50%,
6/01/31 ..................................................................... 3,000,000 2,551,620
--------------
221,788,798
--------------
CONNECTICUT 1.7%
Connecticut State Development Authority PCR,
Connecticut Light and Water, Refunding, Series A, 5.85%, 9/01/28 ......... 53,825,000 50,954,513
Western Massachusetts Electric Co., Refunding, Series A, 5.85%, 9/01/28 .. 12,500,000 11,596,125
Connecticut State Development Authority Water Facility Revenue, Bridgeport
Hydraulic Co. Project, 6.15%, 4/01/35 ....................................... 3,000,000 2,600,070
Connecticut State Health and Educational Facilities Authority Revenue,
Sacred Heart University, Series C, 6.50%, 7/01/16 ........................ 345,000 335,968
St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ................. 5,650,000 4,414,684
Connecticut State HFAR, Housing Mortgage Finance Program, Refunding, Series C-1,
6.30%, 11/15/17 ............................................................. 16,060,000 16,145,921
--------------
86,047,281
--------------
Annual Report | 155
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
DISTRICT OF COLUMBIA 1.1%
District of Columbia Ballpark Revenue, Series B-1, FGIC Insured, 5.00%,
2/01/35 ..................................................................... $ 18,000,000 $ 13,525,020
District of Columbia Hospital Revenue, Children's Hospital Obligation
Group, Assured Guaranty,
5.25%, 7/15/38 ........................................................... 11,000,000 9,740,170
District of Columbia Revenue,
Gains-Georgetown University, Capital Appreciation, AMBAC Insured, zero
cpn. to 3/31/18,
5.00% thereafter, 4/01/36 ................................................ 27,105,000 12,877,043
Methodist Home Issue, 6.00%, 1/01/29 ........................................ 4,750,000 3,331,983
District of Columbia Tobacco Settlement FICO Revenue,
Asset-Backed Bonds, Refunding, 6.50%, 5/15/33 ............................... 22,000,000 14,303,740
Capital Appreciation, Asset-Backed Bonds, Series A, zero cpn., 6/15/46 ...... 175,000,000 3,529,750
Capital Appreciation, Asset-Backed Bonds, Series B, zero cpn., 6/15/46 ...... 66,000,000 1,378,740
--------------
58,686,446
--------------
FLORIDA 7.5%
Bartram Springs CDD Special Assessment, Refunding, 4.75%, 5/01/34 .............. 4,800,000 2,472,528
Beacon Tradeport CDD Special Assessment, Commercial Project, Series A,
Pre-Refunded,
6.00%, 5/01/16 ........................................................... 20,615,000 22,163,393
6.20%, 5/01/22 ........................................................... 23,590,000 26,068,365
Brighton Lakes CDD Special Assessment, Series B, Pre-Refunded, 7.625%, 5/01/31 . 3,035,000 3,291,457
Brooks of Bonita Springs CDD Capital Improvement Revenue, 6.85%, 5/01/31 ....... 1,340,000 1,018,748
Capital Region CDD Capital Improvement Revenue, Series A-2, 6.85%, 5/01/31 ..... 2,175,000 1,848,489
Championsgate CDD Capital Improvement Revenue, Series A, 6.25%, 5/01/20 ........ 2,320,000 1,822,499
Citrus County Hospital Board Revenue, Citrus Memorial Hospital, Refunding,
6.375%,
8/15/32 ..................................................................... 10,550,000 8,766,311
East Homestead CDD Special Assessment Revenue, 5.45%, 5/01/36 .................. 1,425,000 841,947
Falcon Trace CDD Special Assessment, Pre-Refunded, 6.00%, 5/01/20 .............. 3,690,000 3,792,914
Fleming Plantation CDD Special Assessment, Series B, Pre-Refunded, 7.375%,
5/01/31 ..................................................................... 9,900,000 10,738,431
Florida State Board of Education Capital Outlay GO, Public Education,
Refunding, Series D,
6.00%, 6/01/23 .............................................................. 5,000,000 5,845,350
Groves CDD Special Assessment Revenue, Series A, Pre-Refunded, 7.75%,
5/01/32 ..................................................................... 1,700,000 1,846,098
Halifax Hospital Medical Center Hospital Revenue,
Refunding and Improvement, Series A, 5.375%, 6/01/46 ..................... 18,000,000 13,021,920
Series A, Pre-Refunded, 7.25%, 10/01/24 .................................. 4,700,000 5,225,037
Series A, Pre-Refunded, 7.25%, 10/01/29 .................................. 1,400,000 1,556,394
Hawk's Point CDD Special Assessment, Hawk's Point Community Development,
Series A,
5.30%, 5/01/39 .............................................................. 1,450,000 760,714
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Series A, 5.65%,
5/15/18 ..................................................................... 6,500,000 6,403,345
Hillsborough County IDAR, Refunding, Series B, 5.25%,
10/01/28 ................................................................. 1,500,000 1,175,790
10/01/34 ................................................................. 7,250,000 5,456,495
Indian Trace CDD, GO, Water Management Special Benefit, sub. lien,
Refunding, Series B,
8.25%, 5/01/11 .............................................................. 7,065,000 6,829,735
Indian Trace Development District Special Assessment, Isles at Weston
Project, 5.50%,
5/01/33 ..................................................................... 2,860,000 1,783,296
Indian Trail ID, GO, Water Control and Improvement, Unit Development 18,
ETM, 6.875%, 8/01/10 ..................................................... 315,000 327,597
Pre-Refunded, 7.00%, 8/01/20 ............................................. 2,445,000 2,608,033
Pre-Refunded, 7.25%, 8/01/31 ............................................. 5,725,000 6,119,681
156 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Indigo CDD Capital Improvement Revenue, Refunding,
Series A, 7.00%, 5/01/31 ................................................. $ 895,000 $ 760,320
Series C, 7.00%, 5/01/30 ................................................. 4,570,000 3,893,503
Islands at Doral CDD Special Assessment, 6.125%, 5/01/24 ....................... 1,760,000 1,454,077
Lake Ashton CDD Revenue, Series A, 7.40%, 5/01/32 .............................. 1,490,000 1,198,750
Lakeland Retirement Community Revenue, first mortgage, Carpenters Estates,
Accredited Investors, Refunding,
5.875%, 1/01/19 .......................................................... 1,350,000 1,095,161
6.25%, 1/01/28 ........................................................... 1,230,000 918,490
6.375%, 1/01/43 .......................................................... 2,250,000 1,579,748
Lee County Transportation Facilities Revenue, Sanibel Bridges and
Causeway, Series B,
CIFG Insured, 5.00%, 10/01/30 ............................................... 11,505,000 10,499,463
Mediterra North CDD Capital Improvement Revenue, Series A, 6.80%, 5/01/31 ...... 7,685,000 6,669,888
Mediterra South CDD Capital Improvement Revenue,
6.85%, 5/01/31 ........................................................... 2,300,000 1,911,898
Series B, 6.95%, 5/01/31 ................................................. 6,955,000 5,996,810
Mediterranea CDD Special Assessment, Series A, 5.60%, 5/01/37 .................. 1,525,000 856,349
Miami-Dade County School Board COP, Series B, Assured Guaranty, 5.00%, 5/01/33 . 14,310,000 13,312,164
Midtown Miami Community Development Special Assessment Revenue,
Series A, 6.25%, 5/01/37 ................................................. 7,500,000 5,068,350
Series B, 6.50%, 5/01/37 ................................................. 3,945,000 2,792,744
Mount Dora Country Club CDD Special Assessment Revenue, 7.75%, 5/01/13 ......... 275,000 262,603
North Springs ID Special Assessment Revenue, Parkland Isles Project,
Series A, 7.00%,
5/01/19 ..................................................................... 560,000 476,739
Northern Palm Beach County ID Revenue, Water Control and Improvement,
Unit of Development No. 43,
6.10%, 8/01/21 ........................................................... 415,000 323,493
Pre-Refunded, 6.10%, 8/01/21 ............................................. 1,960,000 2,178,971
Northern Palm Beach County ID Special Assessment, Water Control and
Improvement Bonds,
Unit of Development No. 46, Series A, 5.35%, 8/01/41 ........................ 800,000 419,688
Oakstead CDD Revenue, Capital Improvement, Series A, Pre-Refunded, 7.20%,
5/01/32 ..................................................................... 3,150,000 3,400,834
Orange County Health Facilities Authority Revenue, Hospital, Adventist
Health System Inc.,
Pre-Refunded, 5.625%, 11/15/32 .............................................. 10,000,000 11,362,900
Palm Glades CDD Revenue, Special Assessment, Series A, 5.30%, 5/01/36 .......... 1,300,000 725,270
Parklands West CDD Revenue, Special Assessment, Series A, 6.90%, 5/01/32 ....... 2,700,000 1,912,842
Parkway Center CDD Special Assessment, Series A, Pre-Refunded, 8.25%, 5/01/31 .. 1,333,332 1,454,745
Pelican Marsh CDD Special Assessment Revenue,
Series A, 7.10%, 5/01/20 ................................................. 3,000,000 2,487,960
Series A, 7.20%, 5/01/31 ................................................. 6,245,000 4,815,082
Series B, 6.90%, 5/01/11 ................................................. 340,000 324,027
Pensacola Airport Revenue, Airport Revenue Bonds, Refunding, 6.00%, 10/01/28 ... 7,000,000 6,578,250
Poinciana CDD Special Assessment, Series A, 7.125%, 5/01/31 .................... 10,040,000 8,662,211
Port St. Lucie Utility Revenue, System, Refunding, Series A, MBIA
Insured, 5.00%,
9/01/29 ..................................................................... 11,025,000 10,351,593
Portico CDD Capital Improvement Revenue, 5.45%, 5/01/37 ........................ 2,900,000 1,567,479
Portofino Cove CDD Special Assessment, Series A, 5.50%, 5/01/38 ................ 1,595,000 869,371
Portofino Landings CDD Special Assessment, Series A, 5.40%, 5/01/38 ............ 2,795,000 1,498,260
Portofino Springs CDD Special Assessment, Series A, 5.50%, 5/01/38 ............. 1,000,000 545,060
Annual Report | 157
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Reserve CDD Capital Improvement Revenue, Stormwater Management, 8.25%,
5/01/14 ..................................................................... $ 1,445,000 $ 1,396,751
Reserve CDD No. 2 Capital Improvement Revenue, 7.125%, 5/01/30 ................. 3,430,000 2,705,138
Reserve CDD Utility Revenue, Stormwater Management, Refunding, Series A, 6.625%,
12/01/22 .................................................................... 3,450,000 2,755,170
River Place St. Lucie CDD Special Assessment Revenue,
Series A, 7.625%, 5/01/21 ................................................ 1,045,000 924,522
Series A, 7.625%, 5/01/30 ................................................ 1,590,000 1,319,175
Series B, 7.25%, 5/01/10 ................................................. 970,000 940,134
Riverwood CDD Special Assessment Revenue, Series A, 7.75%, 5/01/14 ............. 505,000 467,888
Sampson Creek CDD Capital Improvement Revenue, Series A, Pre-Refunded, 6.95%,
5/01/31 ..................................................................... 2,685,000 2,845,912
Somerset County Revenue, Somerset CDD, 5.30%, 5/01/37 .......................... 8,170,000 4,150,687
South Broward Hospital District Revenue, South Broward Hospital District
Obligated Group, Refunding,
4.75%, 5/01/32 ........................................................... 11,235,000 9,556,603
5.00%, 5/01/36 ........................................................... 12,500,000 10,400,625
South Miami Health Facilities Authority Hospital Revenue, Baptist Health
South Florida Group,
5.00%,
8/15/32 .................................................................. 15,000,000 12,535,950
8/15/37 .................................................................. 19,860,000 16,272,490
South-Dade Venture CDD Special Assessment Revenue, 6.00%, 5/01/24 .............. 2,555,000 1,999,569
St. Lucie West Services District Capital Improvement Revenue, Cascades
Project, 6.10%,
5/01/18 ..................................................................... 1,745,000 1,413,816
St. Lucie West Services District Special Assessment Revenue, Port St.
Lucie, Water
Management Benefit, Refunding, Series B,
6.00%, 5/01/09 ........................................................... 185,000 185,255
6.25%, 5/01/25 ........................................................... 5,080,000 4,375,556
Stonegate CDD Special Assessment Revenue, 6.00%, 5/01/24 ....................... 2,020,000 1,596,729
Stoneybrook West CDD Special Assessment Revenue, Series A, Pre-Refunded, 7.00%,
5/01/32 ..................................................................... 2,990,000 3,212,157
Tara CDD No. 1 Capital Improvement Revenue, Series A, 7.15%, 5/01/31 ........... 1,255,000 988,802
Venetian CDD Capital Improvement Revenue, Series A, 6.75%, 5/01/34 ............. 8,210,000 5,901,020
Verandah East CDD Revenue, Capital Improvement, Series A, 5.40%, 5/01/37 ....... 1,970,000 1,016,934
Verandah West CDD Revenue, Series A, 6.625%, 5/01/33 ........................... 8,300,000 6,648,964
Village CDD No. 4 Special Assessment Revenue, 7.20%, 5/01/31 ................... 5,740,000 5,109,117
Village CDD No. 8 Special Assessment Revenue, 6.375%, 5/01/38 .................. 10,000,000 7,250,800
Village Center CDD Recreational Revenue,
Sub Series B, 6.25%, 1/01/13 ............................................. 3,380,000 3,199,542
Sub Series B, 8.25%, 1/01/17 ............................................. 1,580,000 1,579,905
Sub Series C, 7.375%, 1/01/19 ............................................ 2,045,000 1,912,750
Vista Lake CDD Capital Improvement Revenue, Series A, Pre-Refunded, 7.20%,
5/01/32 ..................................................................... 2,605,000 2,804,517
Waterchase CDD Capital Improvement Revenue, Series A, Pre-Refunded, 6.70%,
5/01/32 ..................................................................... 2,775,000 3,058,327
Waterlefe CDD Capital Improvement Revenue, Series A, 6.95%, 5/01/31 ............ 1,100,000 905,619
Waters Edge CDD Capital Improvement Revenue, 5.30%, 5/01/36 .................... 1,800,000 1,037,952
Waterstone CDD Capital Improvement Revenue, Series B, 5.50%, 5/01/18 ........... 4,400,000 3,024,208
Westchase East CDD Capital Improvement Revenue, 7.10%, 5/01/21 ................. 1,260,000 1,040,508
Winter Garden Village at Fowler Groves CDD Special Tax, 5.65%, 5/01/37 ......... 1,975,000 1,385,542
--------------
385,928,294
--------------
158 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
GEORGIA 3.3%
Atlanta Tax Allocation, Princeton Lakes Project, 5.50%, 1/01/31 ................ $ 1,035,000 $ 632,561
Atlanta Water and Wastewater Revenue, FSA Insured, 5.00%, 11/01/34 ............. 33,000,000 32,113,950
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center,
5.375%,
12/01/28 .................................................................... 1,470,000 1,086,492
Burke County Development Authority PCR,
Oglethorpe Power, Vogtle Project, Series C, 5.70%, 1/01/43 ............... 55,000,000 47,733,950
Oglethorpe Power Corp., Vogtle Project, Series E, 7.00%, 1/01/23 ......... 25,000,000 26,690,750
Floyd County Development Authority Environmental Improvement Revenue,
Temple-Inland Inc.,
Refunding, 5.70%, 12/01/15 .................................................. 1,575,000 1,400,868
Forsyth County Hospital Authority Revenue, Anticipation Certificate,
Georgia Baptist Health
Care System Project, ETM,
6.25%, 10/01/18 .......................................................... 6,000,000 6,887,700
6.375%, 10/01/28 ......................................................... 8,000,000 9,435,760
Fulton County Residential Care Revenue, Lenbrook Project, Series A, 5.00%,
7/01/27 ..................................................................... 5,000,000 3,093,700
Gainesville RDA Educational Facilities Revenue, Riverside Military
Academy, Refunding,
5.125%, 3/01/37 ............................................................. 6,500,000 3,501,225
Henry County Hospital Authority Revenue, Henry Medical Center Inc.
Project, Refunding,
MBIA Insured, 5.00%, 7/01/34 ................................................ 26,145,000 25,126,914
Main Street Natural Gas Inc. Gas Project Revenue,
Series A, 5.50%, 9/15/28 ................................................. 5,000,000 3,569,950
Series B, 5.00%, 3/15/22 ................................................. 5,500,000 4,097,720
McDuffie County Development Authority Waste Disposal Revenue,
Temple-Inland Forest
Products, 6.95%, 12/01/23 ................................................... 5,120,000 3,801,446
--------------
169,172,986
--------------
IDAHO 0.6%
Idaho Health Facilities Authority Revenue, St. Luke's Health System
Project, Series A, 6.75%,
11/01/37 .................................................................... 12,500,000 12,747,000
Nez Perce County PCR,
Potlatch 84, 7.00%, 12/01/14 ............................................. 5,000,000 4,564,450
Potlatch Corp. Project, Refunding, 6.00%, 10/01/24 ....................... 22,500,000 15,266,475
--------------
32,577,925
--------------
ILLINOIS 3.7%
Antioch Village Special Service Area No. 1 Special Tax, Deercrest Project,
6.625%,
3/01/33 ..................................................................... 3,300,000 2,166,285
Antioch Village Special Service Area No. 2 Special Tax, Clublands Project,
6.625%,
3/01/33 ..................................................................... 5,424,000 3,511,389
Bolingbrook Special Service Area No. 1 Special Tax, Augusta Village
Project, Pre-Refunded,
6.25%, 3/01/32 ........................................................... 3,655,000 4,173,937
6.75%, 3/01/32 ........................................................... 5,347,000 6,095,634
Bolingbrook Special Service Area No. 2 Special Tax, Bloomfield West Project,
Series A,
Pre-Refunded,
6.625%, 3/01/31 .......................................................... 4,328,000 4,772,399
7.00%, 3/01/31 ........................................................... 4,778,000 5,359,196
Bolingbrook Special Service Area No. 3 Special Tax, Lakewood Ridge
Project, Pre-Refunded,
7.05%, 3/01/31 .............................................................. 5,773,000 6,529,898
Bryant PCR, Central Illinois Light Co. Project, Refunding, MBIA Insured,
5.90%, 8/01/23 .............................................................. 11,000,000 10,999,120
Annual Report | 159
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
ILLINOIS (CONTINUED)
Cary Special Tax,
Refunding, Radian Insured, 5.00%, 3/01/30 ................................ $ 3,070,000 $ 2,211,382
Special Service Area No. 1, Cambria Project, Series A, Pre-Refunded,
7.625%, 3/01/30 ....................................................... 2,869,000 3,121,386
Special Service Area No. 2, Foxford Hills Project, Pre-Refunded, 7.50%,
3/01/30 ............................................................... 5,245,000 5,677,817
Chicago O'Hare International Airport Revenue,
General Airport Third Lien, Series A, FGIC Insured, 5.00%, 1/01/33 ....... 15,000,000 14,161,650
Refunding, Series A, FSA Insured, 5.00%, 1/01/38 ......................... 16,500,000 16,177,755
Gilberts Special Service Area No. 9 Special Tax, Big Timber Project,
Pre-Refunded, 7.75%, 3/01/27 ................................................ 6,000,000 6,881,820
Hampshire Special Service Area No. 14 Special Tax, Lakewood Crossing
Subdivision, 5.95%, 3/01/36 ................................................. 7,785,000 4,752,976
Illinois Finance Authority Revenue,
Lutheran Hillside Village, Refunding, 5.25%, 2/01/37 ..................... 7,500,000 4,993,125
Resurrection Health Care, Series A, FSA Insured, 5.25%, 5/15/29 .......... 15,500,000 14,006,265
Sherman Health System, Series A, 5.50%, 8/01/37 .......................... 17,240,000 11,526,664
Illinois Health Facilities Authority Revenue,
Sarah Bush Lincoln Health Center, Refunding, Series B, 6.00%, 2/15/11 .... 1,425,000 1,428,192
Thorek Hospital and Medical Center, Refunding, 5.375%, 8/15/28 ........... 8,595,000 7,194,703
Illinois State Development Finance Authority PCR, Ameren Corp. and Central
Illinois Public Service Co., Refunding, Series A, 5.50%, 3/01/14 ............ 3,515,000 3,206,242
Illinois State Finance Authority Revenue, Rush University Medical Center
Obligation Group, Series B, 7.25%, 11/01/38 ................................. 10,000,000 10,138,200
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue,
McCormick Place Convention Center, ETM, 7.00%, 7/01/26 ...................... 7,500,000 9,651,150
Minooka Special Assessment, Improvement Prairie Ridge Project, 6.875%, 3/01/33.. 3,000,000 2,008,080
Montgomery Special Assessment, Improvement, Lakewood Creek Project,
Pre-Refunded, 7.75%, 3/01/30 ................................................ 4,716,000 5,258,953
Otter Creek Water Reclamation District Kane County GO, Separate Waterworks and
Sewage System, Refunding, XLCA Insured, 5.00%, 1/01/39 ...................... 5,000,000 4,363,300
Plano Special Service Area No. 2 Special Tax, Lakewood Springs Project,
Series B, 6.375%, 3/01/34 ................................................... 7,964,000 5,478,913
Southwestern Development Authority Revenue, Anderson Hospital, 5.625%, 8/15/29.. 2,425,000 1,908,718
Wauconda Special Service Area No. 1 Special Tax, Liberty Lakes Project,
6.00%, 3/01/33 ........................................................... 4,500,000 2,896,830
6.625%, 3/01/33 .......................................................... 5,261,000 3,794,917
Yorkville United City Special Services Area Special Tax,
No. 04, MPI Grande Reserve Project, Series 104, 6.375%, 3/01/34 .......... 4,225,000 2,688,621
No. 2003, Windett Ridge Project, Series 101, 6.875%, 3/01/33 ............. 3,437,000 2,461,511
No. 2005-108, Autumn Creek Project, 6.00%, 3/01/36 ....................... 4,921,000 3,057,024
--------------
192,654,052
--------------
INDIANA 2.2%
Delaware County Hospital Authority Hospital Revenue, Cardinal Health System,
5.25%, 8/01/36 .............................................................. 5,000,000 3,340,500
Goshen Industrial Revenue, Greencroft Hospital Assn. Inc., Refunding, 5.75%,
8/15/19 .................................................................. 3,000,000 2,321,160
8/15/28 .................................................................. 5,000,000 3,380,200
160 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
INDIANA (CONTINUED)
Indiana Health and Educational Facility Financing Authority Hospital Revenue,
5.50%, 3/01/37 .............................................................. $ 8,000,000 $ 6,145,840
Indiana Health and Educational Facility Financing Authority Revenue, Baptist
Homes of Indiana, Refunding, 5.25%, 11/15/35 ................................ 12,000,000 8,973,600
Indiana Health Facility Financing Authority Hospital Revenue,
6.25%, 3/01/25 ........................................................... 5,900,000 5,414,548
6.00%, 3/01/34 ........................................................... 12,000,000 9,969,360
Community Foundation Northwest Indiana, Refunding, Series A, 6.375%,
8/01/31 ............................................................... 11,740,000 10,339,183
Community Foundation Northwest Indiana, Series A, Pre-Refunded, 6.375%,
8/01/31 ............................................................... 36,760,000 40,872,709
Jackson County Scheck Memorial Hospital, Refunding, 5.125%, 2/15/17 ...... 1,500,000 1,463,190
Indiana State Development Finance Authority Environmental Revenue, USX Corp.
Project, Refunding, 5.60%, 12/01/32 ......................................... 8,200,000 6,637,408
Jasper County PCR, Northern Indiana Public Service Co., Refunding, Series C,
MBIA Insured,
5.60%, 11/01/16 .......................................................... 10,000,000 9,968,400
5.85%, 4/01/19 ........................................................... 5,000,000 4,969,700
--------------
113,795,798
--------------
KENTUCKY 0.9%
Kentucky Economic Development Finance Authority Health System Revenue,
Norton Healthcare Inc.,
Refunding, Series C, MBIA Insured, 6.10%, 10/01/22 ....................... 10,650,000 9,795,870
Refunding, Series C, MBIA Insured, 6.15%, 10/01/27 ....................... 3,995,000 3,500,299
Series C, MBIA Insured, Pre-Refunded, 6.10%, 10/01/22 .................... 5,325,000 6,259,484
Series C, MBIA Insured, Pre-Refunded, 6.15%, 10/01/27 .................... 6,005,000 7,071,789
Kentucky Economic Development Finance Authority Hospital System Revenue,
Appalachian Regional Health Center Facility, Refunding and Improvement,
5.875%, 10/01/22 ......................................................... 6,835,000 4,652,858
Kentucky Economic Development Finance Authority Louisville Arena Project
Revenue, Louisville Arena, Sub Series A-1, Assured Guaranty, 6.00%,
12/01/42 .................................................................... 5,000,000 4,985,100
Louisville and Jefferson County Metropolitan Government Health Facilities
Revenue, Jewish Hospital and St. Mary's HealthCare Inc. Project, Refunding,
6.125%, 2/01/37 ............................................................. 11,500,000 11,224,460
--------------
47,489,860
--------------
LOUISIANA 3.4%
Beauregard Parish Revenue, Boise Cascade Corp. Project, Refunding, 6.80%,
2/01/27 ..................................................................... 13,990,000 7,216,042
Calcasieu Parish Inc. IDB, PCR, Gulf States Utilities Co. Project, Refunding,
6.75%, 10/01/12 ............................................................. 4,840,000 4,836,612
Louisiana Local Government Environmental Facilities and CDA Revenue, Westlake
Chemical Corp. Projects, 6.75%, 11/01/32 .................................... 30,000,000 19,323,300
Louisiana Public Facilities Authority Revenue,
FHA Insured Mortgage, Baton Rouge General, MBIA Insured, 5.25%, 7/01/33 .. 20,000,000 17,843,000
Ochsner Clinic Foundation Project, Series B, 5.25%, 5/15/38 .............. 10,000,000 7,355,800
Ochsner Clinic Foundation Project, Series B, 5.50%, 5/15/47 .............. 10,000,000 7,405,100
Louisiana State Citizens Property Insurance Corp. Assessment Revenue, Series B,
AMBAC Insured, 5.00%, 6/01/22 ............................................... 10,000,000 8,393,400
New Orleans GO,
Limited Tax, MBIA Insured, 5.00%, 3/01/21 ................................... 5,000,000 4,359,250
Public Improvement, Series A, Radian Insured, 5.25%, 12/01/36 ............... 13,480,000 10,526,802
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%,
3/01/13 ..................................................................... 4,850,000 4,838,263
Annual Report | 161
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
LOUISIANA (CONTINUED)
Rapides Finance Authority Revenue, Cleco Power LLC Project, Mandatory Put
10/01/11, 6.00%, 10/01/38 ................................................... $ 4,750,000 $ 4,720,788
St. John the Baptist Parish Revenue, Marathon Oil Corp. Project, Series A,
5.125%, 6/01/37 ............................................................. 80,500,000 58,996,035
West Feliciana Parish PCR, Entergy Gulf States Project, Refunding, Series B,
6.60%, 9/01/28 .............................................................. 20,750,000 19,938,052
--------------
175,752,444
--------------
MAINE 0.6%
Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 ........... 4,800,000 2,475,888
Skowhegan PCR, S.D. Warren Co. Project,
Refunding, Series B, 6.65%, 10/15/15 ..................................... 4,940,000 4,426,685
Series A, 6.65%, 10/15/15 ................................................ 24,570,000 22,016,931
--------------
28,919,504
--------------
MARYLAND 0.9%
Maryland State Community Development Administration Development Housing and CDR,
Housing, Series A, 5.875%, 7/01/16 .......................................... 1,440,000 1,441,469
Maryland State EDC Revenue, Chesapeake Bay Conference Center Project, senior
lien,
Refunding, Series A, 4.75%, 12/01/11 ..................................... 935,000 831,692
Refunding, Series A, 5.00%, 12/01/16 ..................................... 3,000,000 1,876,290
Refunding, Series A, 5.00%, 12/01/31 ..................................... 10,000,000 5,209,500
Refunding, Series B, 5.00%, 12/01/16 ..................................... 800,000 500,344
Refunding, Series B, 5.25%, 12/01/31 ..................................... 2,000,000 1,084,500
Series B, Pre-Refunded, 7.50%, 12/01/14 .................................. 1,850,000 1,963,183
Series B, Pre-Refunded, 7.625%, 12/01/22 ................................. 6,740,000 7,163,744
Series B, Pre-Refunded, 7.75%, 12/01/31 .................................. 16,160,000 17,190,846
Maryland State Health and Higher Educational Facilities Authority Revenue,
Anne Arundel Health System, Series A, 6.75%, 7/01/39 ..................... 3,000,000 3,048,630
Edenwald, Series A, 5.40%, 1/01/37 ....................................... 1,200,000 785,460
Washington County Hospital, 6.00%, 1/01/43 ............................... 6,000,000 4,582,620
--------------
45,678,278
--------------
MASSACHUSETTS 0.3%
Massachusetts Bay Transportation Authority Revenue, General Transportation
System, Series A, 7.00%, 3/01/21 ............................................ 2,000,000 2,444,180
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 3,026,520
Massachusetts State Development Finance Agency Revenue,
Berkshire Retirement Project, first mortgage, 5.60%, 7/01/19 ............. 1,030,000 843,230
Berkshire Retirement Project, first mortgage, 5.625%, 7/01/29 ............ 1,620,000 1,164,213
Curry College, Series A, ACA Insured, 5.00%, 3/01/36 ..................... 2,000,000 1,262,060
Loomis Community Project, first mortgage, Refunding, Series A, 5.625%,
7/01/15 ............................................................... 1,850,000 1,652,698
Loomis Community Project, first mortgage, Refunding, Series A, 5.75%,
7/01/23 ............................................................... 3,500,000 2,737,525
Massachusetts State Health and Educational Facilities Authority Revenue, St.
Memorial Medical Center, Refunding, Series A, 6.00%, 10/01/23 ............... 5,805,000 3,929,114
--------------
17,059,540
--------------
162 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
MICHIGAN 4.0%
Delta County EDC Environmental Improvement Revenue, Mead Escanaba Paper,
Series A, Pre-Refunded, 6.25%, 4/15/27 ...................................... $ 10,500,000 $ 11,929,050
Detroit Sewer Disposal System Revenue, second lien, Series A, MBIA Insured,
5.00%, 7/01/35 .............................................................. 25,750,000 20,373,142
Detroit Water Supply System Revenue, second lien, Refunding, Series C, FSA
Insured, 5.00%, 7/01/33 ..................................................... 11,000,000 9,475,400
Garden City Hospital Finance Authority Hospital Revenue, Garden City Hospital
Obligated Group, Refunding, Series A,
5.625%, 9/01/10 .......................................................... 670,000 652,392
5.75%, 9/01/17 ........................................................... 530,000 442,524
5.00%, 8/15/38 ........................................................... 5,250,000 3,022,530
Gaylord Hospital Finance Authority Limited Obligation Revenue, Otsego Memorial
Hospital, Refunding, 6.50%,
1/01/31 .................................................................. 1,000,000 758,130
1/01/37 .................................................................. 1,000,000 736,580
Michigan State Building Authority Revenue,
Facilities Program, Refunding, Series I, 6.00%, 10/15/38 ................. 6,000,000 6,158,160
Facilities Program, Refunding, Series I, AMBAC Insured, 5.00%, 10/15/33 .. 13,495,000 11,666,427
Facilities Program, Refunding, Series II, MBIA Insured, 5.00%, 10/15/29 .. 16,585,000 15,034,800
Refunding, Series IA, FGIC Insured, 5.00%, 10/15/31 ...................... 9,500,000 8,352,780
Michigan State Hospital Finance Authority Revenue,
Detroit Medical Center Obligation Group, Refunding, Series A, 6.25%,
8/15/13 ............................................................... 7,500,000 7,126,200
Detroit Medical Center Obligation Group, Refunding, Series A, 6.50%,
8/15/18 ............................................................... 30,205,000 27,350,325
Detroit Medical Center Obligation Group, Refunding, Series B, 5.50%,
8/15/23 ............................................................... 500,000 383,740
Detroit Medical Center Obligation Group, Series A, 5.25%, 8/15/23 ........ 500,000 373,330
Hospital, Oakwood Obligated Group, Refunding, Series A, 5.00%, 7/15/37 ... 3,680,000 2,605,918
Marquette, 5.00%, 5/15/34 ................................................ 6,000,000 4,061,040
Memorial Healthcare Center, Refunding, 5.75%, 11/15/15 ................... 1,000,000 961,260
Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.75%, 8/15/16 ...... 7,310,000 7,286,974
Sinai Hospital, Refunding, 6.625%, 1/01/16 ............................... 2,610,000 2,444,448
Sinai Hospital, Refunding, 6.70%, 1/01/26 ................................ 7,250,000 6,137,633
Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co.
Pollution Control Project, Refunding, Series C, 5.45%, 9/01/29 .............. 11,000,000 9,523,360
Michigan Tobacco Settlement Finance Authority Revenue, Tobacco Settlement Asset,
Senior Series A, 6.00%, 6/01/34 .......................................... 13,675,000 8,695,112
Senior Series A, 6.00%, 6/01/48 .......................................... 10,000,000 5,879,000
Turbo, Series A, 6.875%, 6/01/42 ......................................... 17,500,000 12,054,175
Royal Oak Hospital Finance Authority Hospital Revenue, William Beaumont
Hospital, Refunding, 8.25%, 9/01/39 ......................................... 20,000,000 21,256,400
Tawas City Hospital Finance Authority Revenue, Tawas St. Joseph's Hospital
Project, Series A, ETM, 5.60%, 2/15/13 ...................................... 945,000 955,140
--------------
205,695,970
--------------
MINNESOTA 1.1%
Hubbard County Solid Waste Disposal Revenue, Potlatch Corp. Project,
7.25%, 8/01/14 .............................................................. 9,000,000 7,994,160
Mahtomedi Senior Housing Revenue, St. Andrews Village Project, Refunding, 5.75%,
12/01/40 .................................................................... 5,000,000 3,132,550
Annual Report | 163
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
MINNESOTA (CONTINUED)
Minneapolis and St. Paul Metropolitan Airports Commission Airport
Revenue, sub. bond,
Refunding, Series C, FGIC Insured, 5.00%, 1/01/31 .............................. $ 6,185,000 $ 5,780,563
Minneapolis Health Care Facility Revenue,
Augustana Chapel View Homes, Series D, 5.875%, 6/01/35 ................... 5,075,000 3,341,888
Jones-Harrison Residence Project, 5.70%, 10/01/35 ........................ 1,000,000 676,650
Minneapolis Health Care System Revenue, Fairview Health Services,
Series A, 6.625%, 11/15/28 ............................................... 11,000,000 11,295,240
Series A, 6.75%, 11/15/32 ................................................ 6,250,000 6,419,062
Series D, AMBAC Insured, 5.00%, 11/15/30 ................................. 1,725,000 1,509,185
Minnesota Agriculture and Economic Development Board Revenue, Health
Care System,
Refunding, Series A, 6.375%, 11/15/29 .................................... 175,000 175,301
Series A, Pre-Refunded, 6.375%, 11/15/29 ................................. 6,325,000 6,932,832
Minnesota State HFAR, Rental Housing, Refunding, Series D, MBIA Insured, 5.95%,
2/01/18 ..................................................................... 320,000 320,525
Roseville MFHR, Rosepointe I Project, Series C, Pre-Refunded, 8.00%, 12/01/29 .. 3,040,000 3,334,120
St. Paul Housing and RDA Hospital Revenue, Healtheast Project, 6.00%, 11/15/35.. 10,000,000 7,392,500
--------------
58,304,576
--------------
MISSISSIPPI 1.2%
Claiborne County PCR, Systems Energy Resources Inc. Project, Refunding, 6.20%,
2/01/26 ..................................................................... 33,295,000 27,870,246
Lowndes County Solid Waste Disposal and PCR, Weyerhaeuser Co. Project,
Refunding,
Series B, 6.70%, 4/01/22 ................................................. 18,775,000 15,530,492
Warren County Gulf Opportunity Zone Revenue, International Paper, Series
A, 6.50%,
9/01/32 ..................................................................... 10,000,000 7,374,800
Warren County Revenue, Gulf Opportunity, International Paper, Series A,
5.50%, 9/01/31 .............................................................. 20,000,000 12,952,600
--------------
63,728,138
--------------
MISSOURI 0.3%
Branson Regional Airport Transportation Development District Airport Revenue,
Series A, 6.00%, 7/01/37 ................................................. 1,200,000 757,692
Series B, 6.00%, 7/01/25 ................................................. 6,000,000 4,123,500
Series B, 6.00%, 7/01/37 ................................................. 5,000,000 3,094,000
Lake of the Ozarks Community Board Corp. Bridge System Revenue,
Refunding, 5.25%,
12/01/20 .................................................................... 8,350,000 6,991,288
West Plains IDA Hospital Revenue, Ozarks Medical Center,
6.30%, 11/15/11 .......................................................... 470,000 462,428
6.75%, 11/15/24 .......................................................... 1,870,000 1,635,652
Refunding, 5.50%, 11/15/12 ............................................... 420,000 398,303
--------------
17,462,863
--------------
MONTANA 0.1%
Forsyth PCR, Puget Sound Energy, Refunding, Series A, AMBAC Insured,
5.00%, 3/01/31 .............................................................. 10,220,000 7,302,292
--------------
NEVADA 1.3%
Clark County ID Special Assessment,
Local ID No. 128, The Summerlin Centre, Series A, 5.00%, 2/01/26 ......... 1,320,000 711,863
Local ID No. 128, The Summerlin Centre, Series A, 5.05%, 2/01/31 ......... 1,035,000 520,822
164 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEVADA (CONTINUED)
Clark County ID Special Assessment, (continued)
Local ID No. 132, Summerlin South Area, Villages 15A and 18, 6.875%,
2/01/21 ............................................................... $ 3,660,000 $ 2,980,887
Local ID No. 142, Mountains Edge, 6.375%, 8/01/23 ........................ 4,095,000 2,851,676
Local ID No. 151, Summerlin-Mesa, 5.00%, 8/01/20 ......................... 760,000 429,567
Local ID No. 151, Summerlin-Mesa, 5.00%, 8/01/25 ......................... 2,395,000 1,329,752
Clark County IDR,
Nevada Power Co. Project, Refunding, Series B, 5.90%, 10/01/30 ........... 5,125,000 3,649,666
Southwest Gas Corp. Project, Series D, AMBAC Insured, 5.55%, 12/01/38 .... 7,260,000 4,576,995
Henderson Health Care Facility Revenue, Catholic Healthcare West, Series
A, 5.625%,
7/01/24 ..................................................................... 7,000,000 6,567,750
Henderson Local ID Special Assessment,
No. T-2, 9.50%, 8/01/11 .................................................. 235,000 221,539
No. T-4C, Green Valley, Refunding, Series A, 5.90%, 11/01/18 ............. 3,065,000 2,409,734
No. T-12, Series A, 7.375%, 8/01/18 ...................................... 33,655,000 24,012,170
No. T-16, 4.90%, 3/01/16 ................................................. 1,355,000 609,709
No. T-16, 5.00%, 3/01/18 ................................................. 975,000 438,321
No. T-16, 5.00%, 3/01/19 ................................................. 965,000 433,661
No. T-16, 5.10%, 3/01/22 ................................................. 1,450,000 651,123
No. T-16, 5.125%, 3/01/25 ................................................ 1,535,000 688,923
No. T-17, 5.00%, 9/01/15 ................................................. 715,000 564,964
No. T-17, 5.00%, 9/01/16 ................................................. 730,000 558,684
No. T-17, 5.00%, 9/01/25 ................................................. 1,375,000 819,679
Las Vegas Local Improvement Bonds Special Assessment,
Special ID No. 404, Refunding, FSA Insured, 5.85%, 11/01/09 .............. 1,180,000 1,181,156
Special ID No. 607, 6.25%, 6/01/24 ....................................... 4,855,000 3,023,548
Las Vegas Special Assessment, ID No. 505, Elkhorn Springs, 8.00%, 9/15/13 ...... 2,185,000 2,160,550
Overton Power District No. 5 Special Obligation Revenue, 8.00%, 12/01/38 ....... 7,500,000 7,919,025
--------------
69,311,764
--------------
NEW HAMPSHIRE 0.3%
New Hampshire Higher Education and Health Facilities Authority Revenue,
Hillcrest Terrace, 7.50%, 7/01/24 ........................................ 15,050,000 12,526,717
New Hampshire Catholic Charities, Refunding, Series A, 5.75%, 8/01/11 .... 620,000 602,119
--------------
13,128,836
--------------
NEW JERSEY 5.0%
Hudson County Improvement Authority Solid Waste Systems Revenue,
Refunding,
Series 1, 6.00%, 1/01/19 ................................................. 2,180,000 1,896,273
Series 1, 6.00%, 1/01/29 ................................................. 5,000,000 3,772,400
Series 2, 6.125%, 1/01/19 ................................................ 2,125,000 1,866,302
Series 2, 6.125%, 1/01/29 ................................................ 5,105,000 3,853,152
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 9,531,423
New Jersey EDA Revenue,
Cigarette Tax, 5.50%, 6/15/24 ............................................ 23,000,000 17,540,720
Cigarette Tax, 5.50%, 6/15/31 ............................................ 6,500,000 4,604,210
Cigarette Tax, 5.75%, 6/15/34 ............................................ 10,000,000 7,213,200
first mortgage, Keswick Pines, Refunding, 5.75%, 1/01/24 ................. 1,500,000 1,108,935
first mortgage, Presbyterian, Series A, 6.25%, 11/01/20 .................. 7,635,000 6,189,007
Annual Report | 165
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey EDA Special Facility Revenue, Continental Airlines Inc. Project,
6.625%, 9/15/12 .......................................................... $ 25,525,000 $ 21,764,657
6.25%, 9/15/19 ........................................................... 32,000,000 23,536,960
6.40%, 9/15/23 ........................................................... 79,890,000 55,515,561
New Jersey Health Care Facilities Financing Authority Revenue,
Capital Appreciation, St. Barnabas Health, Refunding, Series B, zero cpn.,
7/01/33 .................................................................. 57,680,000 5,679,750
Capital Appreciation, St. Barnabas Health, Refunding, Series B, zero cpn.,
7/01/34 .................................................................. 52,330,000 4,673,069
Capital Appreciation, St. Barnabas Health, Refunding, Series B, zero cpn.,
7/01/35 .................................................................. 20,000,000 1,619,400
South Jersey Hospital, 5.00%, 7/01/46 ....................................... 6,000,000 4,587,480
St. Joseph's Healthcare System, 6.625%, 7/01/38 ............................. 25,000,000 18,617,000
Trinitas Hospital Obligation Group, Pre-Refunded, 7.50%, 7/01/30 ............ 5,000,000 5,450,050
New Jersey State Transportation Trust Fund Authority Revenue, Transportation
System, Series A, 6.00%, 12/15/38 ........................................... 55,000,000 57,095,500
Tobacco Settlement FICO Revenue, Capital Appreciation Bonds, Series 1B, zero
cpn.,
6/01/41 ..................................................................... 40,000,000 1,283,200
--------------
257,398,249
--------------
NEW MEXICO 2.7%
Farmington PCR,
Public Service Co. of New Mexico, San Juan Project, Refunding, Series
A, 6.30%, 12/01/16 .................................................... 24,045,000 23,090,413
Public Service Co. of New Mexico, San Juan Project, Refunding, Series B,
6.30%, 12/01/16 ....................................................... 3,175,000 3,048,953
Public Service Co. of New Mexico, San Juan Project, Refunding, Series D,
6.375%,
4/01/22 ............................................................... 66,125,000 60,142,671
Public Service Co. of New Mexico, San Juan Project, Series A, 6.60%,
10/01/29 .............................................................. 9,000,000 7,189,020
Tucson Electric Power Co., Series A, 6.95%, 10/01/20 ..................... 37,000,000 36,938,950
New Mexico State Hospital Equipment Loan Council Hospital Revenue, St. Vincent
Hospital, Series A, Radian Insured, Pre-Refunded,
5.25%, 7/01/30 ........................................................... 4,360,000 4,991,372
5.00%, 7/01/35 ........................................................... 3,470,000 3,922,453
--------------
139,323,832
--------------
NEW YORK 6.3%
Corinth IDA Environmental Improvement Revenue, International Paper Co. Project,
Refunding,
Series A, 5.75%, 2/01/22 ................................................. 2,000,000 1,468,880
Liberty Development Corp. Revenue, Goldman Sachs Headquarters, 5.25%,
10/01/35 .................................................................... 13,000,000 10,653,760
Long Island Power Authority Electric System Revenue, General, Refunding,
Series A, 6.00%,
5/01/33 ..................................................................... 12,500,000 12,960,750
MAC for City of Troy Revenue, Capital Appreciation, Series C, MBIA Insured,
zero cpn.,
7/15/21 .................................................................. 428,010 243,923
1/15/22 .................................................................. 649,658 355,603
MTA Revenue, Transportation, Series F, 5.00%, 11/15/30 ......................... 7,000,000 6,562,150
New York City GO,
Fiscal 2003, Series I, 5.00%, 3/01/25 .................................... 9,000,000 8,806,140
Refunding, Series H, 6.25%, 8/01/15 ...................................... 20,000 20,062
Refunding, Series H, 6.125%, 8/01/25 ..................................... 10,000 9,999
Refunding, Series J, 6.00%, 8/01/21 ...................................... 5,000 5,007
Series B, 7.00%, 2/01/18 ................................................. 115,000 114,985
166 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York City GO, (continued)
Series D, 7.625%, 2/01/14 ................................................ $ 5,000 $ 4,994
Series F, 7.50%, 2/01/21 ................................................. 85,000 84,988
Series G, 7.50%, 2/01/22 ................................................. 10,000 9,999
New York City IDA Civic Facility Revenue,
Amboy Properties Corp. Project, Refunding, 6.75%, 6/01/20 ................ 6,145,000 5,259,997
Series C, 6.80%, 6/01/28 ................................................. 5,000,000 4,428,350
Staten Island University Hospital Project, Series C, 6.45%, 7/01/32 ...... 1,460,000 1,118,696
New York City IDA Special Facility Revenue,
American Airlines Inc., JFK International Airport Project, 7.50%,
8/01/16 ............................................................... 15,000,000 12,591,000
American Airlines Inc., JFK International Airport Project, 7.625%,
8/01/25 ............................................................... 20,000,000 14,931,600
American Airlines Inc., JFK International Airport Project, 7.75%,
8/01/31 ............................................................... 15,000,000 11,252,250
American Airlines Inc., JFK International Airport Project, Series A,
8.00%, 8/01/12 ........................................................ 74,000,000 62,197,000
British Airways PLC Project, 7.625%, 12/01/32 .................................. 15,550,000 11,371,404
New York City IDAR,
Liberty, 7 World Trade Center Project, Series A, 6.25%, 3/01/15 .......... 42,000,000 36,128,400
Liberty, 7 World Trade Center Project, Series A, 6.50%, 3/01/35 .......... 50,000,000 34,946,000
Liberty, 7 World Trade Center Project, Series B, 6.75%, 3/01/15 .......... 3,000,000 2,644,470
Queens Baseball Stadium, Pilot, AMBAC Insured, 5.00%, 1/01/31 ............ 9,500,000 7,907,515
New York City Municipal Water Finance Authority Water and Sewer System
Revenue, Series E,
5.00%, 6/15/34 .............................................................. 10,000,000 9,872,000
New York State Dormitory Authority Revenues, Non-State Supported Debt,
Orange Regional
Medical Center,
6.125%, 12/01/29 ......................................................... 16,000,000 12,284,000
6.25%, 12/01/37 .......................................................... 30,000,000 22,130,400
Oneida County IDAR, Civic Facility, St. Elizabeth Medical, Series B,
6.00%, 12/01/19 ............................................................. 1,000,000 911,160
Port Authority of New York and New Jersey Special Obligation Revenue,
Continental Airlines
Inc., Eastern Project, La Guardia,
9.00%, 12/01/10 .......................................................... 4,520,000 4,532,249
9.125%, 12/01/15 ......................................................... 24,940,000 24,995,866
Utica IDA Civic Facility Revenue, Utica College Civic Facility,
6.75%, 12/01/21 .......................................................... 1,250,000 1,144,063
6.85%, 12/01/31 .......................................................... 2,000,000 1,717,860
--------------
323,665,520
--------------
NORTH CAROLINA 1.9%
Albemarle Hospital Authority Health Care Facilities Revenue, Refunding,
5.25%, 10/01/27 ............................................................. 4,500,000 3,449,025
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 5.75%, 1/01/26 ...................................... 37,500,000 33,701,250
Refunding, Series B, 5.75%, 1/01/24 ...................................... 35,750,000 33,339,377
Series D, 6.70%, 1/01/19 ................................................. 2,000,000 2,038,020
Series D, 6.75%, 1/01/26 ................................................. 13,125,000 13,138,913
North Carolina HFAR, SF, Series II, FHA Insured, 6.20%,
3/01/16 .................................................................. 805,000 801,675
9/01/17 .................................................................. 565,000 565,565
Annual Report | 167
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
North Carolina Medical Care Commission Health Care Facilities Revenue, Pennybyrn
at Maryfield, Series A,
5.75%, 10/01/23 .......................................................... $ 3,625,000 $ 2,552,616
6.00%, 10/01/23 .......................................................... 2,500,000 1,809,050
North Carolina Medical Care Commission Retirement Facilities Revenue, first
mortgage, United Methodist, Refunding, Series C,
5.25%, 10/01/24 .......................................................... 920,000 667,534
5.50%, 10/01/32 .......................................................... 1,600,000 1,096,368
North Carolina Medical Care Commission Revenue, Series A, 6.125%, 10/01/35 ..... 8,250,000 5,377,020
--------------
98,536,413
--------------
NORTH DAKOTA 0.1%
Ward County Health Care Facilities Revenue, Trinity Obligated Group, 5.125%,
7/01/25 .................................................................. 2,250,000 1,714,770
7/01/29 .................................................................. 2,500,000 1,817,350
--------------
3,532,120
--------------
OHIO 0.8%
Buckeye Tobacco Settlement Financing Authority Revenue,
Asset-Backed, Senior Convertible Capital Appreciation Turbo Term Bond,
Series A-3, zero cpn. to 12/01/12, 6.25% thereafter, 6/01/37 .......... 15,000,000 6,425,550
Asset-Backed, Senior Current Interest Turbo Term Bond, Series A-2, 5.75%,
6/01/34 ............................................................... 11,250,000 6,682,725
Asset-Backed, Senior Current Interest Turbo Term Bond, Series A-2, 6.00%,
6/01/42 ............................................................... 5,000,000 2,946,500
Capital Appreciation, Asset-Backed, First Sub Series B, zero cpn.,
6/01/47 ............................................................... 55,000,000 949,850
Franklin County Health Care Facilities Revenue,
Ohio Presbyterian, Series A, Pre-Refunded, 7.125%, 7/01/29 ............... 1,000,000 1,132,740
Presbyterian Retirement Services, Refunding, 5.50%, 7/01/17 .............. 3,100,000 2,658,746
Presbyterian Retirement Services, Refunding, 5.50%, 7/01/21 .............. 950,000 748,885
Miami County Hospital Facilities Revenue, Refunding and Improvement, Upper
Valley Medical Center, 5.25%, 5/15/26 ....................................... 2,750,000 2,205,417
Scioto County Hospital Revenue, Southern Ohio Medical Center, Refunding, 5.75%,
2/15/38 ..................................................................... 17,000,000 14,589,230
Toledo Lucas County Port Authority Airport Revenue, Bax Global Project,
Refunding, Series 1, 6.25%, 11/01/13 ........................................ 3,000,000 2,760,180
--------------
41,099,823
--------------
OKLAHOMA 0.2%
Oklahoma Development Finance Authority Revenue, Comanche County Hospital
Project, Series B, 6.60%, 7/01/31 ........................................... 5,000,000 4,060,050
Tulsa Industrial Authority Revenue, Refunding, MBIA Insured, 5.00%, 10/01/31 ... 5,325,000 5,062,105
Valley View Hospital Authority Revenue, Valley View Regional Medical
Center, Refunding, 6.00%, 8/15/14 ........................................... 3,170,000 2,994,096
--------------
12,116,251
--------------
OREGON 0.1%
Oregon State Health Housing Educational and Cultural Facilities Authority
Revenue, Linfield
College Project, Series A,
6.75%, 10/01/25 .......................................................... 5,000 4,572
Pre-Refunded, 6.75%, 10/01/25 ............................................ 5,215,000 5,736,292
--------------
5,740,864
--------------
168 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA 5.8%
Allegheny County Hospital Development Authority Revenue,
Health System, Series A, MBIA Insured, Pre-Refunded, 6.50%, 11/15/30 ..... $ 10,000,000 $ 11,070,900
Health System, Series B, Pre-Refunded, 9.25%, 11/15/15 ................... 20,490,000 22,901,058
Health System, Series B, Pre-Refunded, 9.25%, 11/15/22 ................... 24,000,000 27,630,240
West Pennsylvania Allegheny Health System, Refunding, 5.00%, 11/15/28 .... 8,360,000 4,857,076
West Pennsylvania Allegheny Health System, Refunding, 5.375%, 11/15/40 ... 70,000,000 38,762,500
Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding, 6.10%,
7/15/20 ..................................................................... 5,500,000 5,193,925
Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 ... 1,925,000 1,929,890
Delaware County IDAR, Resource Recovery Facility, Refunding, Series A,
6.10%, 7/01/13 ........................................................... 34,600,000 34,363,682
6.20%, 7/01/19 ........................................................... 17,525,000 16,225,346
Harrisburg Authority University Revenue, Harrisburg University of Science,
Series A, 5.40%, 9/01/16 ................................................. 700,000 664,027
Series B, 6.00%, 9/01/36 ................................................. 3,000,000 2,317,890
Lancaster County Hospital Authority Revenue, Brethren Village Project, Series A,
6.375%, 7/01/30 .......................................................... 1,000,000 790,580
6.50%, 7/01/40 ........................................................... 3,000,000 2,314,170
Lancaster IDAR, Garden Spot Village Project, Series A, Pre-Refunded,
7.625%, 5/01/31 .......................................................... 1,650,000 1,798,550
New Morgan IDA Solid Waste Disposal Revenue, New Morgan Landfill Co. Inc.,
Project, 6.50%, 4/01/19 ..................................................... 3,160,000 2,951,756
Northampton County General Purpose Authority Hospital Revenue, St. Luke's
Hospital Project, Series A, 5.50%, 8/15/40 .................................. 15,000,000 12,186,450
Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue,
Reliant Energy Seward LLC Project, Series A, 6.75%, 12/01/36 ................ 95,130,000 75,626,447
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 11,660,480
Philadelphia Hospitals and Higher Education Facilities Authority Hospital
Revenue,
Temple University Health System, Refunding, Series B, 5.50%, 7/01/26 ........ 18,000,000 13,693,680
Temple University Hospital, Refunding, Series A, 6.625%, 11/15/23 ........... 7,500,000 6,652,200
Sayre Health Care Facilities Authority Revenue, Guthrie Healthcare System,
Refunding, Series A, 5.75%, 12/01/21 ........................................ 815,000 814,919
Series A, Pre-Refunded, 5.75%, 12/01/21 ..................................... 2,185,000 2,454,432
Washington County IDA, PCR, West Pennsylvania Power Co., Series G, AMBAC
Insured,
6.05%, 4/01/14 .............................................................. 5,025,000 5,025,502
--------------
301,885,700
--------------
RHODE ISLAND 0.2%
Rhode Island State Health and Educational Building Corp. Revenue, Hospital
Financing, Lifespan Obligated Group,
Pre-Refunded, 6.50%, 8/15/32 ................................................ 8,000,000 9,239,600
Refunding, MBIA Insured, 5.75%, 5/15/23 ..................................... 405,000 398,791
Tobacco Settlement Financing Corp. Revenue, Asset-Backed, Series B, zero
cpn., 6/01/52 ............................................................... 90,000,000 760,500
--------------
10,398,891
--------------
Annual Report | 169
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
SOUTH CAROLINA 0.9%
Dorchester County School District No. 002 Installment Purchase Revenue,
Growth Remedy Opportunities Tax Hike, 5.25%, 12/01/29 ....................... $ 16,500,000 $ 16,272,960
Greenville County School District Installment Purchase Revenue, Building
Equity Sooner Tomorrow, 5.00%, 12/01/28 ..................................... 10,000,000 9,986,800
Lancaster Educational Assistance Program Inc. Revenue, School District of
Lancaster County Project, 5.00%, 12/01/26 ................................... 15,015,000 13,945,031
Scago Educational Facilities Corp. for Calhoun School District Revenue,
School Project, Radian Insured, 5.00%, 12/01/26 ............................. 7,540,000 6,610,695
Scago Educational Facilities Corp. for Williamsburg School District
Revenue, Williamsburg County Project, Refunding, Radian Insured,
5.00%, 12/01/31 ............................................................. 2,000,000 1,707,100
--------------
48,522,586
--------------
TENNESSEE 0.9%
Clarksville Natural Gas Acquisition Corp. Gas Revenue, 5.00%, 12/15/20 ......... 5,990,000 4,513,225
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 5,586,609
7/01/28 ..................................................................... 19,400,000 5,171,264
7/01/29 ..................................................................... 19,365,000 4,773,473
7/01/30 ..................................................................... 19,370,000 4,402,026
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 1,862,100
Capital Appreciation, Refunding and Improvement, Series A, FSA Insured,
zero cpn., 1/01/26 ....................................................... 2,610,000 898,440
Covenant Health System, Refunding and Improvement, Series A, zero cpn.,
1/01/37 .................................................................. 12,760,000 1,333,803
Covenant Health System, Refunding and Improvement, Series A, zero cpn.,
1/01/39 .................................................................. 13,755,000 1,224,195
Knox County Health Educational and Housing Facilities Board Revenue,
University Health System Inc., Refunding, 5.25%, 4/01/36 .................... 20,475,000 15,224,186
--------------
44,989,321
--------------
TEXAS 5.5%
Angelina and Neches River Authority Waste Disposal Revenue, Temple-Inland
Forest Products, 6.95%, 5/01/23 ............................................. 1,750,000 1,307,303
Austin Convention Enterprises Inc. Convention Center Revenue, first tier,
Refunding, Series B, 5.75%, 1/01/34 ......................................... 7,000,000 3,943,590
Series A, Pre-Refunded, 6.70%, 1/01/32 ...................................... 10,000,000 10,961,000
Bexar County Health Facilities Development Corp. Revenue, Army Retirement
Residence, Refunding, 5.00%,
7/01/27 ..................................................................... 1,000,000 710,960
7/01/33 ..................................................................... 1,520,000 1,001,376
Brazos County Health Facilities Development Corp. Franciscan Services
Corp. Revenue, Obligation Group, St. Joseph Regional, 5.50%, 1/01/38 ........ 5,250,000 3,983,385
Brazos River Authority PCR,
Texas Utility Co., Refunding, Series A, 7.70%, 4/01/33 ...................... 21,740,000 9,530,816
TXU Electric Co. Project, Refunding, Series A, 8.25%, 10/01/30 .............. 45,000,000 20,182,050
170 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Brazos River Authority PCR, (continued)
TXU Electric Co. Project, Refunding, Series C, 7.70%, 3/01/32 ............... $ 6,800,000 $ 2,981,256
TXU Electric Co. Project, Refunding, Series D-1, 8.25%, 5/01/33 ............. 17,000,000 7,622,290
TXU Energy Co. LLC Project, Mandatory Put 4/01/13, Refunding, Series A,
6.75%,
4/01/38 .................................................................. 1,000,000 651,960
TXU Energy Co. LLC Project, Refunding, Series B, 6.30%, 7/01/32 ............. 9,000,000 3,941,370
TXU Energy Co. LLC Project, Refunding, Series C, 6.75%, 10/01/38 ............ 1,555,000 681,230
Brazos River Harbor Navigation District Brazoria County Environmental
Revenue, Dow Chemical Co. Project, Refunding, Series B-2, 4.95%, 5/15/33 2,500,000 1,578,725
Brownsville Utility System Revenue, Refunding and Improvement, Series A,
AMBAC Insured, 5.00%, 9/01/31 ............................................... 12,500,000 11,884,500
Coppell Special Assessment, Gateway Project, 8.70%, 3/01/12 .................... 1,505,000 1,510,794
Dallas-Fort Worth International Airport Revenue, Joint,
Refunding, Series A, Sub Series A-2, MBIA Insured, 6.10%, 11/01/24 .......... 2,000,000 2,003,500
Series B, MBIA Insured, 6.00%, 11/01/23 ..................................... 4,000,000 4,007,800
Series C, MBIA Insured, 6.25%, 11/01/28 ..................................... 3,250,000 3,250,683
El Paso Health Facilities Development Corp. Revenue, Senior Care Facilities,
Bienvivir Senior Health, Pre-Refunded,
7.00%, 8/15/12 .............................................................. 535,000 583,294
7.50%, 8/15/18 .............................................................. 2,300,000 2,677,752
7.75%, 8/15/31 .............................................................. 3,000,000 3,510,690
Gulf Coast Waste Disposal Authority Waste Disposal Revenue, Valero Energy
Corp. Project, 6.65%, 4/01/32 ............................................... 1,500,000 1,262,070
Harris County Health Facilities Development Corp. Hospital Revenue,
Memorial Hermann Healthcare System, Refunding, Series B, 7.25%, 12/01/35 .... 13,500,000 14,270,310
Houston Airport System Revenue, Special Facilities, Continental Airlines,
Series E, 6.75%, 7/01/21 .................................................... 24,995,000 18,973,705
Lubbock Educational Facilities Authority Revenue, Lubbock Christian,
Refunding and Improvement, 5.25%, 11/01/37 .................................. 1,000,000 696,630
Lufkin Health Facilities Development Corp. Health System Revenue, Memorial
Health System of East Texas, 5.50%,
2/15/32 ..................................................................... 1,000,000 703,860
2/15/37 ..................................................................... 2,500,000 1,705,625
Matagorda County Navigation District No. 1 Revenue, Centerpoint Energy
Project, Refunding, 5.60%, 3/01/27 .......................................... 11,000,000 8,698,360
North Texas Tollway Authority Revenue,
Capital Appreciation, System, first tier, Refunding, Series I, zero cpn.
to 1/01/15, 6.50% thereafter, 1/01/43 .................................... 25,000,000 14,823,750
System, first tier, Refunding, Series A, 5.625%, 1/01/33 .................... 2,000,000 1,912,700
System, first tier, Refunding, Series A, 5.75%, 1/01/48 ..................... 30,000,000 28,315,800
System, first tier, Refunding, Series B, 5.75%, 1/01/40 ..................... 12,680,000 12,150,103
System, first tier, Refunding, Series K-2, 6.00%, 1/01/38 ................... 15,000,000 14,917,050
System, second tier, Refunding, Series F, 5.75%, 1/01/38 .................... 20,000,000 18,321,600
Sabine River Authority PCR, TXU Electric Co. Project, Refunding,
Series A, 5.80%, 7/01/22 .................................................... 1,000,000 468,420
Series B, 6.15%, 8/01/22 .................................................... 13,115,000 6,143,197
Series C, 5.20%, 5/01/28 .................................................... 29,945,000 13,409,670
Texas State Turnpike Authority Revenue, Capital Appreciation, AMBAC
Insured, zero cpn., 8/15/32 ................................................. 51,000,000 11,151,150
Annual Report | 171
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Trinity River Authority PCR, Texas Electric Co. Project, Refunding, 6.25%,
5/01/28 ..................................................................... $ 445,000 $ 194,981
Tyler Health Facilities Development Corp. Hospital Revenue,
East Texas Medical Center, Refunding and Improvement, Series A, 5.375%,
11/01/37 .............................................................. 8,000,000 5,498,960
Mother Frances Hospital, Series B, 5.00%, 7/01/37 ........................ 3,400,000 2,147,100
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 11,608,800
--------------
285,880,165
--------------
UTAH 0.1%
Carbon County Solid Waste Disposal Revenue, Laidlaw Inc./ECDC
Environmental LC Project,
Refunding, Series A, 7.50%, 2/01/10 ......................................... 5,000,000 5,029,250
--------------
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 13,581,150
--------------
VIRGINIA 1.0%
James City County EDA Residential Care Facility Revenue, first mortgage,
Williamsburg Landing, Series A, 5.35%, 9/01/26 .............................. 750,000 510,547
Peninsula Ports Authority Coal Terminal Revenue, Dominion Terminal
Associates, Refunding,
6.00%, 4/01/33 .............................................................. 9,000,000 7,601,580
Tobacco Settlement Financing Corp. Revenue,
Asset-Backed, Pre-Refunded, 5.50%, 6/01/26 ............................... 2,500,000 2,753,125
Asset-Backed, Pre-Refunded, 5.625%, 6/01/37 .............................. 3,000,000 3,456,120
Capital Appreciation Bonds, Second Sub Series D, zero cpn., 6/01/47 ...... 50,000,000 980,500
Senior Series B1, 5.00%, 6/01/47 ......................................... 6,250,000 3,257,750
Virginia Beach Development Authority Residential Care Facility Mortgage
Revenue,
Westminster Canterbury Project,
Refunding, 5.00%, 11/01/22 ............................................... 1,000,000 741,190
Refunding, 5.25%, 11/01/26 ............................................... 2,000,000 1,439,640
Refunding, 5.375%, 11/01/32 .............................................. 1,000,000 688,100
Series A, Pre-Refunded, 7.125%, 11/01/23 ................................. 5,000,000 5,318,100
Series A, Pre-Refunded, 7.25%, 11/01/32 .................................. 9,000,000 9,579,960
Virginia State HDA Commonwealth Mortgage Revenue, 4.80%, 7/01/29 ............... 20,500,000 17,649,680
--------------
53,976,292
--------------
WASHINGTON 1.0%
Douglas County PUD No. 1 Wells Hydroelectric Revenue, Refunding, Series B,
FGIC Insured,
5.00%, 9/01/35 .............................................................. 7,685,000 7,327,263
Skagit County Public Hospital District No. 1 Revenue, Skagit Valley
Hospital, 5.75%,
12/01/32 ................................................................. 2,000,000 1,415,900
Snohomish County Public Hospital District No. 3 GO, AMBAC Insured, 5.00%,
12/01/31 .................................................................... 10,000,000 9,308,600
Washington State Health Care Facilities Authority Revenue,
Kadlec Medical Center, Refunding, Series A, Assured Guaranty, 5.00%,
12/01/30 .............................................................. 4,000,000 3,131,960
Providence Health and Services, Refunding, Series A, FGIC Insured, 5.00%,
10/01/36 .............................................................. 7,000,000 6,374,550
Providence Health and Services, Series A, FGIC Insured, Pre-Refunded,
5.00%, 10/01/36 ....................................................... 305,000 355,716
Virginia Mason Medical, Series B, ACA Insured, 6.00%, 8/15/37 ............ 30,000,000 23,331,000
--------------
51,244,989
--------------
172 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
WEST VIRGINIA 0.3%
County Commission of Harrison County Solid Waste Disposal Revenue,
Allegheny Energy
Supply Co. LLC, Refunding, Series D, 5.50%, 10/15/37 ........................ $ 9,000,000 $ 5,958,000
Pleasants County PCR, County Commission, Series F, 5.25%, 10/15/37 ............. 14,000,000 10,019,940
--------------
15,977,940
--------------
WISCONSIN 0.9%
Central Brown County Water Authority Water System Revenue, Refunding,
AMBAC Insured,
5.00%, 12/01/30 ............................................................. 11,205,000 10,503,455
Kaukauna Environmental Improvement Revenue, International Paper Co.
Project, Series A,
6.70%, 5/01/24 .............................................................. 4,100,000 3,140,928
Wisconsin Housing and EDA Home Ownership Revenue, Series E, 4.90%, 9/01/37 ..... 22,210,000 18,306,592
Wisconsin State Health and Educational Facilities Authority Revenue,
Fort Healthcare Inc. Project, 5.75%, 5/01/24 ............................. 5,000,000 4,374,700
New Castle Place Project, Series A, 7.00%, 12/01/31 ...................... 2,500,000 2,021,025
Thedacare Inc., AMBAC Insured, 5.00%, 12/15/30 ........................... 9,530,000 7,135,302
--------------
45,482,002
--------------
WYOMING 0.2%
Wyoming Municipal Power Agency Power Supply Revenue, Series A,
5.50%, 1/01/28 ........................................................... 1,350,000 1,353,632
5.50%, 1/01/33 ........................................................... 2,360,000 2,277,825
5.50%, 1/01/38 ........................................................... 2,810,000 2,677,284
5.375%, 1/01/42 .......................................................... 2,750,000 2,552,577
--------------
8,861,318
--------------
U.S. TERRITORIES 2.5%
GUAM 0.8%
Guam Government GO, Refunding, Series A,
5.125%, 11/15/27 ......................................................... 7,270,000 5,264,788
5.25%, 11/15/37 .......................................................... 37,000,000 25,340,560
Guam Government Waterworks Authority Water and Wastewater System Revenue,
Water,
6.00%, 7/01/25 ........................................................... 4,000,000 3,528,960
5.875%, 7/01/35 .......................................................... 8,000,000 6,377,360
--------------
40,511,668
--------------
NORTHERN MARIANA ISLANDS 0.4%
Northern Mariana Islands Commonwealth GO, Refunding, Series B, 5.00%,
10/01/33 .................................................................... 25,000,000 16,692,750
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue,
Series A, 6.60%,
3/15/28 .................................................................. 7,655,000 6,730,506
--------------
23,423,256
--------------
PUERTO RICO 0.6%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue,
Asset-Backed Bonds, Refunding,
5.50%, 5/15/39 ........................................................... 11,500,000 7,809,650
5.625%, 5/15/43 .......................................................... 3,500,000 2,341,780
Annual Report | 173
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior
lien, Series A, 6.00%,
7/01/38 .................................................................. $ 4,000,000 $ 3,643,760
7/01/44 .................................................................. 5,200,000 4,657,952
Puerto Rico Commonwealth Highway and Transportation Authority
Transportation Revenue,
Refunding, Series N, FGIC Insured, 5.25%, 7/01/39 .............................. 7,000,000 5,760,930
Puerto Rico Industrial Tourist Educational Medical and Environmental
Control Facilities
Revenue, Cogeneration Facility, AES Puerto Rico Project, 6.625%, 6/01/26 .... 1,365,000 1,223,627
University of Puerto Rico Revenues, University System, Refunding, Series
P, 5.00%,
6/01/30 ..................................................................... 7,645,000 5,825,490
--------------
31,263,189
--------------
VIRGIN ISLANDS 0.7%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, sub. lien,
Refunding, Series E,
5.75%, 10/01/13 .......................................................... 15,000,000 15,030,450
5.875%, 10/01/18 ......................................................... 7,000,000 6,456,730
6.00%, 10/01/22 .......................................................... 14,500,000 13,100,460
--------------
34,587,640
--------------
TOTAL U.S. TERRITORIES ......................................................... 129,785,753
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS
(COST $5,826,024,422) ....................................................... 4,990,422,831
--------------
SHORT TERM INVESTMENTS 1.8%
MUNICIPAL BONDS 1.8%
CALIFORNIA 0.1%
(d) California State Economic Recovery Revenue, Series C-2, Daily VRDN and
Put, 0.70%, 7/01/23 ......................................................... 8,000,000 8,000,000
--------------
MASSACHUSETTS 0.2%
(d) Massachusetts State Health and Educational Facilities Authority Revenue,
Museum of Fine Arts, Series A1, Daily VRDN and Put, 0.45%, 12/01/37 ......... 8,000,000 8,000,000
--------------
NEW HAMPSHIRE 0.4%
(d) New Hampshire Health and Education Facilities Authority Revenue,
Dartmouth College, Refunding, Series A, Daily VRDN and Put, 0.40%,
6/01/31 ..................................................................... 20,000,000 20,000,000
University of North New Hampshire, Daily VRDN and Put, 0.70%, 7/01/33 ....... 3,400,000 3,400,000
--------------
23,400,000
--------------
NORTH CAROLINA 0.1%
(d) Charlotte-Mecklenburg Hospital Authority Health Care System Revenue,
Carolinas HealthCare System, Refunding, Series C, Daily VRDN and Put,
0.55%, 1/15/26 .............................................................. 3,000,000 3,000,000
--------------
OHIO 0.2%
(d) Cuyahoga County Revenue, Cleveland Clinic Health System Obligated Group,
Series B, Sub Series B-1, Daily VRDN and Put, 0.50%, 1/01/39 ................ 9,900,000 9,900,000
--------------
174 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA 0.0%(e)
(d) Geisinger Authority Health System Revenue, Geisinger Health System,
Refunding, Series A, Daily VRDN and Put, 0.45%, 5/15/35 ..................... $ 1,800,000 $ 1,800,000
--------------
TENNESSEE 0.8%
(d) Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond
Fund, Daily VRDN and Put, 0.60%,
7/01/31 ..................................................................... 8,155,000 8,155,000
7/01/34 ..................................................................... 5,700,000 5,700,000
11/01/35 .................................................................... 13,200,000 13,200,000
(d) Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan
Pool, Daily VRDN and Put, 0.60%, 7/01/34 .................................... 12,900,000 12,900,000
--------------
39,955,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $94,055,000) ................................ 94,055,000
--------------
TOTAL INVESTMENTS (COST $5,920,079,422) 98.2% .................................. 5,084,477,831
OTHER ASSETS, LESS LIABILITIES 1.8% ............................................ 92,842,996
--------------
NET ASSETS 100.0% .............................................................. $5,177,320,827
==============
See Abbreviations on page 238.
(a) Security has been deemed illiquid because it may not be able to be sold
within seven days. At February 28, 2009, the aggregate value of these
securities was $4,299,240, representing 0.08% 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) 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.
(e) Rounds to less than 0.1% of net assets.
The accompanying notes are an integral part of these financial statements.
Annual Report | 175
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- ---------- ---------- ---------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.45 $ 12.22 $ 12.15 $ 12.18 $ 12.23
---------- ---------- ---------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.51 0.50 0.51 0.52 0.54
Net realized and unrealized gains (losses) .. (0.18) (0.77) 0.08 (0.02) (0.05)
---------- ---------- ---------- -------- --------
Total from investment operations ............... 0.33 (0.27) 0.59 0.50 0.49
---------- ---------- ---------- -------- --------
Less distributions from net investment income .. (0.49) (0.50) (0.52) (0.53) (0.54)
---------- ---------- ---------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
---------- ---------- ---------- -------- --------
Net asset value, end of year ................... $ 11.29 $ 11.45 $ 12.22 $ 12.15 $ 12.18
========== ========== ========== ======== ========
Total return(f) ................................ 2.94% (2.29)% 4.96% 4.17% 4.13%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.63% 0.64% 0.64% 0.65% 0.65%
Net investment income .......................... 4.41% 4.17% 4.23% 4.28% 4.47%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $1,100,142 $1,081,204 $1,006,797 $892,122 $792,518
Portfolio turnover rate ........................ 10.97% 10.99% 3.65% 8.11% 11.50%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
176 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
CLASS B 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.52 $ 12.28 $ 12.22 $ 12.24 $ 12.29
Income from investment operations(b):
Net investment income(c) .................... 0.44 0.44 0.45 0.46 0.47
Net realized and unrealized gains (losses) .. (0.17) (0.76) 0.06 (0.02) (0.05)
------- ------- ------- ------- -------
Total from investment operations ............... 0.27 (0.32) 0.51 0.44 0.42
------- ------- ------- ------- -------
Less distributions from net investment income .. (0.43) (0.44) (0.45) (0.46) (0.47)
------- ------- ------- ------- -------
Redemption fees(d, e) .......................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 11.36 $ 11.52 $ 12.28 $ 12.22 $ 12.24
======= ======= ======= ======= =======
Total return(f) ................................ 2.36% (2.73)% 4.28% 3.66% 3.55%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.18% 1.19% 1.19% 1.20% 1.20%
Net investment income .......................... 3.86% 3.62% 3.68% 3.73% 3.92%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $47,329 $60,396 $72,203 $78,327 $83,208
Portfolio turnover rate ........................ 10.97% 10.99% 3.65% 8.11% 11.50%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 177
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 11.55 $ 12.31 $ 12.24 $ 12.27 $ 12.32
Income from investment operations(b):
Net investment income(c) .................... 0.45 0.44 0.45 0.46 0.48
Net realized and unrealized gains (losses) .. (0.18) (0.76) 0.07 (0.03) (0.06)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.27 (0.32) 0.52 0.43 0.42
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.43) (0.44) (0.45) (0.46) (0.47)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 11.39 $ 11.55 $ 12.31 $ 12.24 $ 12.27
======== ======== ======== ======== ========
Total return(f) ................................ 2.35% (2.73)% 4.35% 3.57% 3.53%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.18% 1.19% 1.19% 1.20% 1.20%
Net investment income .......................... 3.86% 3.62% 3.68% 3.73% 3.92%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $207,945 $166,918 $158,706 $139,401 $117,356
Portfolio turnover rate ........................ 10.97% 10.99% 3.65% 8.11% 11.50%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
178 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
PERIOD ENDED
FEBRUARY 28,
ADVISOR CLASS 2009(a)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $11.78
Income from investment operations(b):
Net investment income(c) .................... 0.35
Net realized and unrealized gains (losses) .. (0.51)
------
Total from investment operations ............... (0.16)
------
Less distributions from net investment income .. (0.33)
------
Redemption fees(d, e) .......................... --
------
Net asset value, end of period ................. $11.29
======
Total return(f) ................................ (1.29)%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses ....................................... 0.53%
Net investment income .......................... 4.51%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $ 770
Portfolio turnover rate ........................ 10.97%
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
Annual Report | 179
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS 97.5%
DELAWARE 1.0%
Delaware River and Bay Authority Revenue,
MBIA Insured, 5.00%, 1/01/27 ................................................ $ 10,000,000 $ 10,009,600
Series A, AMBAC Insured, Pre-Refunded, 5.75%, 1/01/29 ....................... 4,000,000 4,208,360
--------------
14,217,960
--------------
NEW JERSEY 70.9%
Atlantic County Improvement Authority Luxury Tax Revenue, Convention
Center Project,
MBIA Insured, ETM, 7.40%, 7/01/16 ........................................... 9,500,000 11,493,670
Bergen County Improvement Authority School District Revenue GO, Wyckoff
Township Board
of Education Project, 5.00%, 4/01/32 ........................................ 3,400,000 3,449,640
Bergen County Utilities Authority Water PCR, System, AMBAC Insured, 5.00%,
12/15/31 .................................................................... 3,000,000 3,015,180
Berhards Township School District GO, MBIA Insured, 5.00%, 7/15/30 ............. 10,038,000 11,369,862
Berkeley Township Board of Education GO, FSA Insured, 4.75%, 8/01/22 ........... 1,975,000 2,008,615
Cape May County Industrial PCFA Revenue, Atlantic City Electric Co.,
Refunding, Series A,
MBIA Insured, 6.80%, 3/01/21 ................................................ 5,400,000 6,226,470
Carteret Board of Education COP, MBIA Insured, Pre-Refunded, 5.75%, 1/15/30 .... 1,155,000 1,217,451
Egg Harbor Township School District GO,
FGIC Insured, Pre-Refunded, 5.125%, 7/15/24 .............................. 4,870,000 5,361,480
MBIA Insured, Pre-Refunded, 5.00%, 4/01/29 ............................... 3,195,000 3,663,866
MBIA Insured, Pre-Refunded, 5.00%, 4/01/30 ............................... 3,027,000 3,471,212
Freehold Township Board of Education GO, MBIA Insured, Pre-Refunded,
5.00%, 2/15/30 .............................................................. 1,500,000 1,609,365
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 1,386,660
Series B, 7.00%, 12/01/29 ................................................ 1,250,000 1,261,938
Hammonton School District GO, FGIC Insured, Pre-Refunded, 5.00%,
8/01/26 .................................................................. 1,155,000 1,270,096
8/01/27 .................................................................. 1,215,000 1,336,075
Higher Education Student Assistance Authority Student Loan Revenue, Series
A, MBIA Insured,
6.15%, 6/01/19 .............................................................. 1,150,000 1,105,380
Hoboken GO, Parking Utility, Series A, FGIC Insured, 5.00%, 1/01/23 ............ 4,315,000 4,356,553
Hoboken Parking Authority Parking Revenue, AMBAC Insured, Pre-Refunded,
5.30%, 5/01/27 .............................................................. 3,600,000 3,983,652
Hudson County Improvement Authority Lease Revenue, County Secured, County
Services Building Project, FSA Insured, 5.00%, 4/01/32 ...................... 3,895,000 3,915,410
Hudson County Improvement Authority Parking Revenue, County-Guaranteed,
Harrison Parking
Facility Redevelopment Project, Series C, Assured Guaranty, 5.125%,
1/01/34 .................................................................. 2,000,000 1,987,340
Hudson County Improvement Authority Solid Waste Systems Revenue, Koppers
Site Project,
Series A, 6.125%, 1/01/29 ................................................... 6,510,000 4,913,618
Jersey City GO, Series A, FSA Insured, Pre-Refunded, 5.625%, 3/01/20 ........... 1,000,000 1,058,830
Lafayette Yard Community Development Corp. Revenue, Hotel/Conference
Center Project,
Trenton Guaranteed, MBIA Insured, Pre-Refunded,
6.00%, 4/01/29 ........................................................... 1,750,000 1,868,090
5.80%, 4/01/35 ........................................................... 2,520,000 2,684,657
Middlesex County COP, MBIA Insured,
5.00%, 8/01/31 ........................................................... 3,250,000 3,254,973
zero cpn., 6/15/24 ....................................................... 1,000,000 445,640
180 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
Middlesex County Improvement Authority Lease Revenue, County Guaranteed,
Regional Educational Services Commission, 5.25%, 12/15/33 ................... $ 3,000,000 $ 3,087,630
Middlesex County Improvement Authority Revenue, Administration Building
Residential Project,
FNMA Insured,
5.25%, 7/01/21 ........................................................... 750,000 754,830
5.35%, 7/01/34 ........................................................... 1,575,000 1,431,140
Monroe Township Municipal Utilities Authority Middlesex County Revenue,
FGIC Insured,
Pre-Refunded, 5.00%, 2/01/26 ................................................ 1,000,000 1,071,470
Morristown Parking Authority Parking Revenue, MBIA Insured, 5.00%,
8/01/30 .................................................................. 1,815,000 1,807,831
8/01/33 .................................................................. 2,630,000 2,604,252
Mount Olive Township Board of Education GO, MBIA Insured, Pre-Refunded, 5.00%,
7/15/29 .................................................................. 7,875,000 9,001,834
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 4,782,450
New Jersey EDA Revenue,
Cigarette Tax, 5.50%, 6/15/24 ............................................ 5,000,000 3,813,200
Cigarette Tax, 5.75%, 6/15/34 ............................................ 5,000,000 3,606,600
Hillcrest Health Services System Project, Refunding, AMBAC Insured,
5.375%, 1/01/16 ....................................................... 2,500,000 2,520,400
Jewish Community Housing Corp. Metropolitan Project, 5.90%, 12/01/31 ..... 5,110,000 5,132,075
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/27 .. 5,000,000 4,720,900
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 .. 12,500,000 11,607,500
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 .. 10,000,000 9,516,700
Municipal Rehabilitation, Series A, AMBAC Insured, 5.00%, 4/01/28 ........ 21,740,000 21,475,859
School Facilities Construction, Refunding, Series K, FGIC Insured, 5.25%,
12/15/21 .............................................................. 10,000,000 10,905,400
School Facilities Construction, Series C, MBIA Insured, 4.75%, 6/15/25 ... 16,500,000 16,424,760
School Facilities Construction, Series L, FSA Insured, 5.00%, 3/01/30 .... 10,500,000 10,194,450
School Facilities Construction, Series O, 5.125%, 3/01/28 ................ 5,000,000 4,955,050
School Facilities Construction, Series P, 5.00%, 9/01/30 ................. 4,250,000 4,010,937
School Facilities Construction, Series P, MBIA Insured, 5.00%, 9/01/30 ... 5,480,000 5,430,132
School Facilities Construction, Series U, AMBAC Insured, 5.00%, 9/01/37 .. 5,000,000 4,881,200
School Facilities Construction, Series Y, 5.00%, 9/01/33 ................. 6,000,000 5,516,700
School Facilities Construction, Series Z, Assured Guaranty, 5.50%,
12/15/34 .............................................................. 3,000,000 3,058,830
Series U, 5.00%, 9/01/37 ................................................. 5,000,000 4,809,150
Series U, FSA Insured, 5.00%, 9/01/32 .................................... 2,000,000 1,935,560
Transportation Project Sub Lease, Series A, FSA Insured, Pre-Refunded,
5.25%, 5/01/17 ........................................................ 5,000,000 5,038,150
Transportation Project Sub Lease, Series A, FSA Insured, Pre-Refunded,
5.00%, 5/01/18 ........................................................ 2,000,000 2,014,480
New Jersey EDA State Lease Revenue, Liberty State Park Lease Rental,
Refunding, AMBAC Insured, 5.75%, 3/15/20 .................................... 4,605,000 4,605,829
New Jersey EDA Water Facilities Revenue, Hackensack Water Co. Project,
Refunding, Series A, MBIA Insured, 5.80%, 3/01/24 ........................... 1,000,000 995,050
New Jersey Health Care Facilities Financing Authority Revenue,
Atlantic City Medical Center, Pre-Refunded, 5.75%, 7/01/25 ............... 2,170,000 2,457,395
Atlantic City Medical Center, Refunding, 5.75%, 7/01/25 ..................... 2,830,000 2,791,455
Atlantic Health System Hospital Corp., Series A, 5.00%, 7/01/27 ............. 8,000,000 6,895,600
Atlanticare Regional Medical Center, 5.00%, 7/01/25 ......................... 4,605,000 4,116,640
Annual Report | 181
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey Health Care Facilities Financing Authority Revenue, (continued)
Atlanticare Regional Medical Center, Refunding, 5.00%, 7/01/37 .............. $ 19,490,000 $ 15,651,834
Burdette Tomlin Memorial Hospital, 5.50%, 7/01/29 ........................... 5,725,000 5,121,413
Englewood Hospital, MBIA Insured, 5.00%, 8/01/31 ............................ 9,275,000 9,030,696
Franciscan St. Mary's Hospital, ETM, 5.875%, 7/01/12 ........................ 1,980,000 2,118,065
Hackensack University Medical Center, 6.00%, 1/01/34 ........................ 10,000,000 8,990,400
Hackensack University Medical Center, Refunding, Assured Guaranty,
5.25%, 1/01/31 ........................................................... 5,000,000 4,841,850
Hackensack University Medical Center, Refunding, Assured Guaranty,
5.25%, 1/01/36 ........................................................... 5,000,000 4,942,850
Holy Name Hospital, 5.00%, 7/01/36 .......................................... 5,000,000 3,524,850
Hunterdon Medical Center, Series A, 5.125%, 7/01/35 ......................... 2,000,000 1,516,400
Jersey City Medical Center, AMBAC Insured, 5.00%, 8/01/31 ................... 5,000,000 4,868,300
JFK Medical Center/Hartwyck, Refunding, MBIA Insured, 5.00%, 7/01/25 ........ 7,855,000 5,621,352
Meridian Health System Obligated Group, FSA Insured, 5.25%, 7/01/29 ......... 20,000,000 18,946,200
Meridian Health System Obligated Group Issue, Refunding, FSA Insured,
5.375%, 7/01/24 .......................................................... 6,500,000 6,513,065
Meridian Health System Obligated Group Issue, Tranche I, Assured
Guaranty, 5.00%,
7/01/38 .................................................................. 10,000,000 9,344,200
Meridian Health System Obligated Group Issue, Tranche II, Assured
Guaranty, 5.00%, 7/01/38 ................................................. 10,000,000 9,344,200
Robert Wood Johnson University Hospital, 5.75%, 7/01/25 ..................... 5,000,000 4,942,250
Somerset Medical Center, 5.75%, 7/01/28 ..................................... 11,000,000 6,606,380
South Jersey Hospital, 5.00%, 7/01/36 ....................................... 10,000,000 8,007,300
South Jersey Hospital, 5.00%, 7/01/46 ....................................... 27,200,000 20,796,576
South Jersey Hospital, Pre-Refunded, 5.875%, 7/01/21 ........................ 10,000,000 11,347,300
South Jersey Hospital, Pre-Refunded, 6.00%, 7/01/32 ......................... 18,600,000 21,180,936
Southern Ocean County Hospital, FSA Insured, 5.00%, 7/01/27 ................. 2,000,000 1,883,100
St. Barnabas Health Care System, Series A, 5.00%, 7/01/29 ................... 12,000,000 8,765,280
St. Mary's Hospital Passaic, Series 1, 5.00%, 3/01/26 ....................... 3,355,000 3,027,284
St. Mary's Hospital Passaic, Series 1, 5.00%, 3/01/27 ....................... 3,345,000 2,952,364
St. Peter's University Hospital, Refunding, Series A, 6.875%, 7/01/30 ....... 1,500,000 1,355,250
State Contract Hospital Asset Transitions Program, Series A, 5.25%,
10/01/38 ................................................................. 15,000,000 14,582,550
New Jersey State Educational Facilities Authority Revenue,
College of New Jersey, Refunding, Series D, FSA Insured, 5.00%, 7/01/28 ..... 5,940,000 5,979,204
College of New Jersey, Refunding, Series D, FSA Insured, 5.00%, 7/01/35 ..... 11,000,000 10,840,830
FGIC Insured, Pre-Refunded, 5.50%, 7/01/30 .................................. 6,615,000 7,012,958
Kean University, Series B, MBIA Insured, Pre-Refunded, 5.00%, 7/01/30 ....... 5,240,000 6,066,138
Kean University, Series D, FGIC Insured, 5.00%, 7/01/39 ..................... 15,395,000 14,678,517
Kean University, Series D, FGIC Insured, Pre-Refunded, 5.00%, 7/01/33 ....... 10,000,000 11,214,700
Montclair State University, Refunding, Series A, AMBAC Insured, 5.00%,
7/01/31 .................................................................. 16,000,000 15,517,440
Montclair State University, Refunding, Series A, AMBAC Insured, 5.00%,
7/01/36 .................................................................. 20,000,000 19,109,800
Montclair State University, Series J, 5.25%, 7/01/38 ........................ 2,000,000 1,916,220
Princeton University, Refunding, Series A, 5.00%, 7/01/30 ................... 5,000,000 5,091,900
Princeton University, Refunding, Series E, 5.00%, 7/01/33 ................... 5,000,000 5,115,850
Princeton University, Series D, Pre-Refunded, 5.00%, 7/01/29 ................ 1,000,000 1,142,100
Ramapo College of New Jersey, Series D, AMBAC Insured, Pre-Refunded, 5.00%,
7/01/25 .................................................................. 1,000,000 1,080,850
Ramapo College of New Jersey, Series D, AMBAC Insured, Pre-Refunded,
5.00%, 7/01/31 ........................................................... 1,500,000 1,621,275
182 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey State Educational Facilities Authority Revenue, (continued)
Ramapo College of New Jersey, Series D, MBIA Insured, Pre-Refunded, 5.00%,
7/01/36 .................................................................. $ 6,745,000 $ 7,735,773
Ramapo College of New Jersey, Series E, FGIC Insured, Pre-Refunded, 5.00%,
7/01/34 .................................................................. 2,000,000 2,257,360
Refunding, Series D, 5.00%, 7/01/27 ......................................... 1,325,000 1,058,251
Refunding, Series D, 5.00%, 7/01/33 ......................................... 1,000,000 762,080
Richard Stockton College, Refunding, Series A, 5.375%, 7/01/38 .............. 5,000,000 5,005,050
Richard Stockton College, Refunding, Series F, AMBAC Insured, 5.00%,
7/01/28 .................................................................. 2,370,000 2,326,629
Rowan University, Refunding, Series C, FGIC Insured, 5.00%, 7/01/31 ......... 1,505,000 1,500,876
Rowan University, Refunding, Series D, AMBAC Insured, 5.00%, 7/01/24 ........ 1,755,000 1,810,528
Rowan University, Series C, FGIC Insured, Pre-Refunded, 5.00%, 7/01/31 ...... 495,000 542,208
Rowan University, Series K, FGIC Insured, Pre-Refunded, 5.00%, 7/01/27 ...... 1,000,000 1,113,430
Seton Hall University, Refunding, Series E, 6.25%, 7/01/37 .................. 5,000,000 5,196,100
Seton Hall University Project, Series G, AMBAC Insured, 5.00%, 7/01/26 ...... 1,870,000 1,888,663
Stevens Institute of Technology, Refunding, Series A, 5.00%, 7/01/34 ........ 4,750,000 3,713,882
Stevens Institute of Technology, Refunding, Series I, 5.00%, 7/01/18 ........ 590,000 528,776
Stevens Institute of Technology, Refunding, Series I, 5.00%, 7/01/28 ........ 865,000 684,708
Stevens Institute of Technology, Series I, ETM, 5.00%, 7/01/18 .............. 510,000 518,660
Stevens Institute of Technology, Series I, ETM, 5.00%, 7/01/28 .............. 710,000 716,049
University of Medical Dentistry, Series C, AMBAC Insured, 5.125%, 12/01/29 .. 2,700,000 2,292,219
William Paterson University, Series C, Assured Guaranty, 5.00%, 7/01/38 ..... 5,500,000 5,499,615
New Jersey State Higher Education Assistance Authority Student Loan
Revenue, Series A, Assured Guaranty, 6.125%, 6/01/30 ........................ 10,000,000 9,408,100
New Jersey State Highway Authority Garden State Parkway General Revenue,
ETM, 6.20%, 1/01/10 ......................................................... 2,440,000 2,552,874
New Jersey State Housing and Mortgage Finance Agency MFHR,
Series A1, FSA Insured, 6.35%, 11/01/31 ..................................... 2,000,000 2,005,860
Series B, FSA Insured, 6.25%, 11/01/26 ...................................... 970,000 977,663
Series D, FSA Insured, 5.50%, 5/01/22 ....................................... 765,000 769,498
Series E1, FSA Insured, 5.70%, 5/01/20 ...................................... 2,595,000 2,631,953
Series E1, FSA Insured, 5.75%, 5/01/25 ...................................... 1,165,000 1,174,786
Series I, 5.75%, 11/01/38 ................................................... 4,030,000 3,885,404
New Jersey State Housing and Mortgage Finance Agency Revenue,
Home Buyer, Series CC, MBIA Insured, 5.875%, 10/01/31 ....................... 1,025,000 1,022,960
Home Buyer, Series U, MBIA Insured, 5.85%, 4/01/29 .......................... 3,050,000 3,042,711
Series AA, 6.50%, 10/01/38 .................................................. 9,000,000 9,518,400
New Jersey State Transportation Corp. COP, Federal Transportation
Administration Grants,
Series A, AMBAC Insured, Pre-Refunded, 6.125%, 9/15/15 ...................... 2,000,000 2,056,600
New Jersey State Transportation Trust Fund Authority Revenue,
Capital Appreciation, Transportation System, Series C, FSA Insured,
zero cpn., 12/15/33 ................................................... 10,000,000 2,327,600
Transportation System, Series A, 6.00%, 12/15/38 ......................... 25,000,000 25,952,500
Transportation System, Series A, AMBAC Insured, 5.00%, 12/15/34 .......... 10,000,000 9,379,900
Transportation System, Series B, MBIA Insured, Pre-Refunded, 5.00%,
12/15/21 .............................................................. 10,000,000 11,021,500
Annual Report | 183
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
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 $ 5,044,950
Series A, AMBAC Insured, 5.00%, 1/01/30 .................................. 13,500,000 13,024,935
Series A, MBIA Insured, Pre-Refunded, 5.60%, 1/01/22 ..................... 7,500,000 7,806,825
Series A, MBIA Insured, Pre-Refunded, 5.50%, 1/01/25 ..................... 16,300,000 16,953,467
Series C, FSA Insured, 5.00%, 1/01/35 .................................... 15,175,000 14,850,862
Newark Housing Authority Port Authority Revenue, Newark Marine Terminal,
MBIA Insured, Pre-Refunded,
5.00%, 1/01/26 ........................................................... 3,245,000 3,657,083
5.50%, 1/01/27 ........................................................... 3,240,000 3,725,190
5.50%, 1/01/28 ........................................................... 2,000,000 2,299,500
5.00%, 1/01/34 ........................................................... 29,155,000 32,857,393
5.00%, 1/01/37 ........................................................... 3,965,000 4,468,515
North Hudson Sewer Authority New Jersey Sewer Revenue, Series C, MBIA
Insured, 5.00%,
8/01/22 .................................................................. 1,000,000 1,018,790
8/01/31 .................................................................. 1,000,000 1,004,450
Ocean County Board of Education GO, Cape May, FGIC Insured, Pre-Refunded,
5.00%,
4/01/21 .................................................................. 2,155,000 2,322,314
4/01/22 .................................................................. 2,142,000 2,308,305
Passaic County Improvement Authority Parking Facilities Revenue, Paterson
Parking Deck Project, Series A, FSA Insured, 5.00%, 4/15/35 ................. 1,375,000 1,370,944
Passaic Valley Sewer Commissioners GO, Sewer System, Refunding, Series E,
AMBAC Insured, 5.75%, 12/01/22 .............................................. 8,925,000 9,137,326
Rutgers State University COP, AMBAC Insured, 5.00%, 1/01/34 .................... 1,000,000 994,300
Rutgers State University Revenue, Series F, 5.00%, 5/01/39 ..................... 15,000,000 15,022,650
Salem County Improvement Authority Revenue, City Guaranteed, Finlaw State
Office Building, FSA Insured, 5.25%, 8/15/38 ................................ 1,625,000 1,596,254
South Jersey Transportation Authority Transportation System Revenue,
AMBAC Insured, 5.00%, 11/01/29 .............................................. 12,000,000 11,847,000
Sussex County Municipal Utilities Authority Wastewater Facilities
Revenue, Capital Appreciation, Series B, FSA Insured, zero cpn.,
12/01/35 ................................................................. 2,815,000 586,871
12/01/36 ................................................................. 2,810,000 548,006
12/01/37 ................................................................. 2,815,000 516,130
12/01/38 ................................................................. 2,810,000 481,494
Tobacco Settlement FICO Revenue, Asset-Backed, Pre-Refunded, 6.00%,
6/01/37 ..................................................................... 13,000,000 14,804,010
Union County Utilities Authority Solid Waste Revenue, Sub Lease, Ogden
Martin, Refunding, Series A, AMBAC Insured, 5.35%, 6/01/23 .................. 2,345,000 2,169,547
University of Medicine and Dentistry COP,
AMBAC Insured, 5.00%, 4/15/32 ............................................ 4,625,000 3,664,989
MBIA Insured, 5.00%, 6/15/29 ............................................. 2,090,000 1,682,638
MBIA Insured, 5.00%, 6/15/36 ............................................. 18,000,000 13,838,400
Series A, MBIA Insured, 5.00%, 9/01/22 ................................... 1,700,000 1,608,931
University of Medicine and Dentistry Revenue, Series A, AMBAC Insured, 5.00%,
12/01/24 ................................................................. 2,500,000 2,193,975
12/01/31 ................................................................. 29,395,000 23,235,866
184 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
Upper Freehold Regional School District GO, MBIA Insured, Pre-Refunded, 5.00%,
2/15/35 ..................................................................... $ 8,730,000 $ 10,130,292
West Orange County Board of Education COP, MBIA Insured, Pre-Refunded, 5.625%,
10/01/29 .................................................................... 2,000,000 2,077,280
Woodbridge Township GO, FGIC Insured, 5.00%, 7/15/24 ........................... 1,220,000 1,240,581
--------------
960,866,418
--------------
NEW YORK 5.3%
Port Authority of New York and New Jersey Revenue, Consolidated,
One Hundred Forty-eighth Series, FSA Insured, 5.00%, 8/15/34 ............. 10,000,000 9,816,100
One Hundred Forty-eighth Series, FSA Insured, 5.00%, 8/15/37 ............. 5,000,000 4,888,500
One Hundred Forty-fourth Series, 5.00%, 10/01/29 ......................... 5,000,000 5,024,850
One Hundred Forty-ninth Series, 5.00%, 11/15/31 .......................... 10,000,000 9,945,500
One Hundred Twenty-fifth Series, FSA Insured, 5.00%, 4/15/32 ............. 23,950,000 24,002,211
Refunding, One Hundred Fifty-third Series, 5.00%, 7/15/38 ................ 5,000,000 4,857,300
Refunding, One Hundred Forty-second Series, 5.00%, 7/15/30 ............... 5,940,000 5,946,475
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 6,922,240
--------------
71,403,176
--------------
PENNSYLVANIA 1.7%
Delaware River Joint Toll Bridge Commission Bridge Revenue, Series A,
MBIA Insured, 5.00%, 7/01/35 ................................................ 5,000,000 4,801,750
Delaware River Port Authority Pennsylvania and New Jersey Revenue, FSA Insured,
5.75%,
1/01/22 .................................................................. 8,500,000 8,626,650
1/01/26 .................................................................. 10,000,000 10,110,700
--------------
23,539,100
--------------
U.S. TERRITORIES 18.6%
PUERTO RICO 17.8%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior lien,
Series A, 6.00%, 7/01/44 .................................................... 4,100,000 3,672,616
Puerto Rico Commonwealth GO, Public Improvement,
FSA Insured, Pre-Refunded, 5.125%, 7/01/30 ............................... 13,655,000 14,896,513
Refunding, FSA Insured, 5.125%, 7/01/30 .................................. 8,350,000 8,009,570
Series A, 5.00%, 7/01/29 ................................................. 10,000,000 8,271,200
Series B, 5.00%, 7/01/35 ................................................. 1,825,000 1,460,566
Series B, Pre-Refunded, 5.00%, 7/01/35 ................................... 3,175,000 3,710,115
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue,
Refunding, Series CC, FSA Insured, 5.25%, 7/01/34 ........................... 5,000,000 4,944,350
Puerto Rico Commonwealth Highway and Transportation Authority Transportation
Revenue,
Refunding, Series N, MBIA Insured, 5.25%, 7/01/32 ........................ 10,000,000 8,392,200
Series B, Pre-Refunded, 6.00%, 7/01/39 ................................... 10,000,000 10,710,800
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................. 5,000,000 5,541,800
Annual Report | 185
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
PUERTO RICO (CONTINUED)
Puerto Rico Commonwealth Infrastructure Financing Authority Special Obligation,
Series A, Pre-Refunded, 5.50%, 10/01/32 ..................................... $ 1,000,000 $ 1,065,780
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue,
5.00%, 7/01/37 .............................................................. 8,000,000 6,291,360
Puerto Rico Electric Power Authority Power Revenue,
Series II, Pre-Refunded, 5.25%, 7/01/31 .................................. 13,000,000 14,635,400
Series RR, FGIC Insured, Pre-Refunded, 5.00%, 7/01/35 .................... 46,440,000 53,661,884
Series TT, 5.00%, 7/01/32 ................................................ 22,000,000 18,365,600
Series TT, 5.00%, 7/01/37 ................................................ 17,925,000 14,623,753
Series WW, 5.50%, 7/01/38 ................................................ 16,620,000 14,680,446
Puerto Rico Industrial Tourist Educational Medical and Environmental Control
Facilities Revenue, University Plaza Project, Series A, MBIA Insured, 5.00%,
7/01/33 ..................................................................... 1,000,000 803,610
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ..................................... 6,830,000 5,773,057
Refunding, Series N, 5.00%, 7/01/32 ...................................... 20,000,000 16,025,600
Series D, Pre-Refunded, 5.375%, 7/01/33 .................................. 18,170,000 20,046,234
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series A,
MBIA Insured, Pre-Refunded, 5.00%, 8/01/29 .................................. 5,000,000 5,393,800
--------------
240,976,254
--------------
VIRGIN ISLANDS 0.8%
Virgin Islands PFAR,
Gross Receipts Taxes Loan Note, Radian Insured, 5.00%, 10/01/33 ............. 5,000,000 4,035,850
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.50%, 10/01/15 .......................................................... 2,500,000 2,391,450
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.50%, 10/01/18 .......................................................... 3,045,000 2,680,696
Virgin Islands Matching Fund Loan Notes, senior lien, Refunding, Series A,
5.50%, 10/01/22 .......................................................... 2,000,000 1,656,860
--------------
10,764,856
--------------
TOTAL U.S. TERRITORIES ......................................................... 251,741,110
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS
(COST $1,366,414,408) ....................................................... 1,321,767,764
--------------
SHORT TERM INVESTMENTS 1.4%
MUNICIPAL BONDS 1.4%
NEW JERSEY 0.4%
(a) Mercer County Improvement Authority Revenue, Atlantic Foundation Project,
Refunding, Daily VRDN and Put, 0.45%, 9/01/28 ............................... 4,000,000 4,000,000
(a) New Jersey EDA School Revenue, School Facilities Construction, Series R,
Sub Series R-3, Daily VRDN and Put, 0.40%, 9/01/31 .......................... 1,400,000 1,400,000
--------------
5,400,000
--------------
186 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW YORK 1.0%
(a) Port Authority of New York and New Jersey Special Obligation Revenue, Versatile
Structure Obligations,
Refunding, Series 3, Daily VRDN and Put, 0.28%, 6/01/20 .................. $ 5,000,000 $ 5,000,000
Series 2, Daily VRDN and Put, 0.48%, 5/01/19 ............................. 9,000,000 9,000,000
--------------
14,000,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $19,400,000) ................................ 19,400,000
--------------
TOTAL INVESTMENTS (COST $1,385,814,408) 98.9% .................................. 1,341,167,764
OTHER ASSETS, LESS LIABILITIES 1.1% ............................................ 15,018,200
--------------
NET ASSETS 100.0% .............................................................. $1,356,185,964
==============
See Abbreviations on page 238.
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 187
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN OREGON TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------------
2009 2008(a) 2007 2006 2005
-------- -------- -------- -------- --------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.25 $ 11.93 $ 11.89 $ 11.90 $ 11.95
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) ...................... 0.50 0.49 0.48 0.50 0.52
Net realized and unrealized gains (losses) (0.06) (0.69) 0.04 --(d) (0.04)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.44 (0.20) 0.52 0.50 0.48
-------- -------- -------- -------- --------
Less distributions from net investment income .... (0.48) (0.48) (0.48) (0.51) (0.53)
-------- -------- -------- -------- --------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 11.21 $ 11.25 $ 11.93 $ 11.89 $ 11.90
======== ======== ======== ======== ========
Total return(f) .................................. 4.02% (1.74)% 4.53% 4.28% 4.15%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.64% 0.64% 0.65% 0.66% 0.65%
Net investment income ............................ 4.40% 4.17% 4.19% 4.20% 4.40%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $787,595 $719,647 $686,892 $625,326 $570,324
Portfolio turnover rate .......................... 10.00% 5.30% 4.86% 4.96% 10.45%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
188 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
------------------------------------------------
2009 2008(a) 2007 2006 2005
-------- ------- ------- ------- -------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 11.36 $ 12.05 $ 12.00 $ 12.01 $ 12.06
-------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ...................... 0.44 0.43 0.43 0.44 0.46
Net realized and unrealized gains (losses) .... (0.05) (0.70) 0.04 (0.01) (0.05)
-------- ------- ------- ------- -------
Total from investment operations ................. 0.39 (0.27) 0.47 0.43 0.41
-------- ------- ------- ------- -------
Less distributions from net investment income .... (0.42) (0.42) (0.42) (0.44) (0.46)
-------- ------- ------- ------- -------
Redemption fees(d, e) ............................ -- -- -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 11.33 $ 11.36 $ 12.05 $ 12.00 $ 12.01
======== ======= ======= ======= =======
Total return(f) .................................. 3.50% (2.34)% 3.99% 3.66% 3.55%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.19% 1.19% 1.20% 1.21% 1.20%
Net investment income ............................ 3.85% 3.62% 3.64% 3.65% 3.85%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $123,099 $96,802 $91,743 $84,268 $75,266
Portfolio turnover rate .......................... 10.00% 5.30% 4.86% 4.96% 10.45%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 189
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS 96.1%
OREGON 77.9%
Albany Water Revenue, Refunding, FGIC Insured, 5.00%, 8/01/33 .................. $ 5,990,000 $ 5,544,583
Beaverton School District GO, FSA Insured, 4.125%, 6/01/26 ..................... 1,315,000 1,253,182
Bend Sewer Revenue, AMBAC Insured, Pre-Refunded, 5.375%, 10/01/20 .............. 1,550,000 1,656,454
Benton County Hospital Facilities Authority Revenue, Samaritan Health
Services Project, Refunding,
5.20%, 10/01/17 .......................................................... 4,000,000 3,948,200
5.125%, 10/01/28 ......................................................... 4,500,000 3,737,115
Chemeketa Community College District GO, 5.00%,
6/15/25 .................................................................. 1,500,000 1,585,440
6/15/26 .................................................................. 2,615,000 2,743,475
Clackamas County Canby School District No. 86 GO,
5.25%, 6/15/20 ........................................................... 3,000,000 3,164,940
FSA Insured, 5.00%, 6/15/23 .............................................. 1,000,000 1,042,020
FSA Insured, 5.00%, 6/15/25 .............................................. 1,000,000 1,028,130
Clackamas County Hospital Facility Authority Revenue,
Gross Willamette Falls Project, Refunding, 5.375%, 4/01/22 ............... 2,125,000 1,751,149
Gross Willamette Falls Project, Refunding, 5.125%, 4/01/26 ............... 1,000,000 750,610
Kaiser Permanente, Series A, ETM, 5.375%, 4/01/14 ........................ 2,500,000 2,532,475
Willamette Falls Hospital Project, 6.00%, 4/01/19 ........................ 1,000,000 910,320
Willamette View Inc. Project, Refunding, 6.10%, 11/01/12 ................. 500,000 491,460
Willamette View Inc. Project, Refunding, 6.30%, 11/01/21 ................. 1,500,000 1,327,455
Clackamas County School District No. 7J Lake Oswego GO,
MBIA Insured, Pre-Refunded, 5.00%, 6/01/26 ............................... 5,000,000 5,413,100
Refunding, FSA Insured, 5.25%, 6/01/25 ................................... 3,075,000 3,387,143
Clackamas County School District No. 12 North Clackamas GO, Series A, FSA
Insured, 4.75%, 6/15/31 ..................................................... 7,385,000 7,061,611
Clackamas County School District No. 108 GO, FSA Insured, Pre-Refunded,
5.00%, 6/15/25 .............................................................. 5,000,000 5,426,100
Clackamas Education Service District GO, AMBAC Insured, 4.125%, 6/01/36 ........ 1,000,000 876,660
Columbia Gorge Community College District GO, MBIA Insured, 5.00%, 6/15/22 ..... 1,000,000 1,038,660
Coos County School District No. 13 GO, FSA Insured,
5.00%, 6/15/22 ........................................................... 55,000 56,655
Pre-Refunded, 5.00%, 6/15/22 ............................................. 2,465,000 2,745,147
Curry County School District No. 17-C Brookings Harbor GO, Pre-Refunded,
5.375%, 12/15/20 ............................................................ 2,750,000 2,968,377
Deschutes and Jefferson Counties School District No. 2J Redmond GO,
5.50%, 6/15/34 ........................................................... 5,000,000 5,206,000
Series A, FGIC Insured, 5.00%, 6/15/21 ................................... 1,000,000 1,044,210
Deschutes County Administrative School District No. 1 GO, Series A, FSA
Insured, Pre-Refunded, 5.125%, 6/15/21 ...................................... 3,500,000 3,808,070
Deschutes County Hospital Facilities Authority Hospital Revenue, Cascade
Healthcare,
Refunding, 8.25%, 1/01/38 ................................................ 20,000,000 22,025,000
Series B, AMBAC Insured, 5.375%, 1/01/35 ................................. 7,000,000 6,675,620
Emerald Peoples Utility District Revenue, Refunding, Series A, FSA Insured,
5.25%, 11/01/21 ............................................................. 1,000,000 1,013,110
Eugene Electric Utility Revenue, Refunding, 5.00%, 8/01/33 ..................... 10,060,000 9,823,892
Gresham Stormwater Revenue, FGIC Insured, Pre-Refunded, 5.30%, 5/01/21 ......... 1,190,000 1,293,625
High Desert Education Service District GO, AMBAC Insured, 4.50%, 6/01/30 ....... 1,010,000 977,700
190 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Hillsboro GO, AMBAC Insured, 5.00%, 6/01/29 .................................... $ 5,360,000 $ 5,376,723
Hillsboro Hospital Facility Authority Revenue, Hospital Tuality Healthcare
Project, Radian Insured,
5.375%,
10/01/26 ................................................................. 2,000,000 1,668,840
10/01/31 ................................................................. 2,000,000 1,573,320
Jackson County Airport Revenue, Series A, XLCA Insured, 5.25%,
12/01/27 ................................................................. 1,000,000 895,970
12/01/32 ................................................................. 1,000,000 853,220
12/01/37 ................................................................. 1,475,000 1,227,421
Jackson County School District No. 4 GO, FSA Insured,
5.00%, 6/15/20 ........................................................... 1,450,000 1,491,107
Pre-Refunded, 5.00%, 6/15/20 ............................................. 550,000 596,871
Jackson County School District No. 6 Central Point GO, Refunding, FSA
Insured, 4.75%,
6/15/20 ..................................................................... 2,005,000 2,103,085
Jackson County School District No. 9 Eagle Point GO, Pre-Refunded, 5.00%,
6/15/20 .................................................................. 1,680,000 1,823,170
6/15/21 .................................................................. 1,500,000 1,627,830
Jackson County School District No. 549C Medford GO,
5.00%, 6/15/33 ........................................................... 3,225,000 3,193,427
Series B, FSA Insured, 5.00%, 12/15/32 ................................... 5,765,000 5,717,035
Keizer Special Assessment, Keizer Station Area A Local, 5.20%, 6/01/31 ......... 3,500,000 3,265,395
Klamath Falls Intercommunity Hospital Authority Revenue, Merle West Medical
Center Project,
Pre-Refunded, 6.25%, 9/01/31 ............................................. 3,290,000 3,839,858
Refunding, 6.25%, 9/01/31 ................................................ 1,960,000 1,645,596
Refunding, Assured Guaranty, 5.00%, 9/01/36 .............................. 5,000,000 4,086,650
Lane and Douglas Counties School District No. 45J3 GO, South Lane District,
Refunding,
FSA Insured, 4.75%, 6/15/25 ................................................. 3,510,000 3,549,066
Lane County Metropolitan Wastewater Management Commission Revenue,
5.25%, 11/01/28 .......................................................... 5,000,000 5,129,150
FGIC Insured, 4.75%, 11/01/26 ............................................ 1,615,000 1,573,446
Lane County School District No. 19 Springfield GO, FSA Insured, zero cpn.,
6/15/27 .................................................................. 5,580,000 2,020,295
6/15/28 .................................................................. 2,000,000 673,160
6/15/29 .................................................................. 1,925,000 602,910
Lane County School District No. 52 Bethel GO, Refunding, FSA Insured, 5.00%,
6/15/20 .................................................................. 5,700,000 5,935,581
Lebanon GO, AMBAC Insured, 5.00%,
6/01/25 .................................................................. 1,635,000 1,659,149
6/01/27 .................................................................. 1,675,000 1,680,477
Linn County Community School District No. 9 GO,
Lebanon, FGIC Insured, Pre-Refunded, 5.55%, 6/15/21 ...................... 1,155,000 1,324,924
Lebanon, FGIC Insured, Pre-Refunded, 5.60%, 6/15/30 ...................... 9,495,000 10,911,369
MBIA Insured, Pre-Refunded, 5.375%, 6/15/30 .............................. 5,000,000 5,282,850
Linn County School District No. 55 GO, Sweet Home, FSA Insured,
Pre-Refunded, 5.00%,
6/15/29 ..................................................................... 1,000,000 1,085,220
Medford Hospital Facilities Authority Revenue, Asante Health System,
Refunding, Series A,
MBIA Insured, 5.00%,
8/15/18 .................................................................. 2,570,000 2,454,324
8/15/24 .................................................................. 1,715,000 1,464,576
Annual Report | 191
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Multnomah County Educational Facilities Revenue, University of Portland
Project, Pre-Refunded,
6.00%, 4/01/25 .............................................................. $ 2,000,000 $ 2,102,880
Multnomah County School District No. 7 Reynolds GO, Series 2005, MBIA
Insured, 5.00%,
6/01/35 ..................................................................... 3,220,000 3,114,674
Multnomah-Clackamas Counties Centennial School District No. 28-302 GO, FGIC
Insured,
Pre-Refunded, 5.00%, 6/15/21 ................................................ 5,000,000 5,426,100
Multnomah-Clackamas Counties Centennial School District No. 28-JT GO,
Capital Appreciation,
AMBAC Insured, zero cpn., 6/01/16 ........................................... 2,260,000 1,685,192
Northern Wasco County Peoples Utilities District Hydroelectric Revenue,
McNary Dam Fishway
Project, 5.20%, 12/01/24 .................................................... 5,000,000 5,001,000
Oak Lodge Water District GO, AMBAC Insured, 7.50%, 12/01/09 .................... 215,000 218,507
Oregon Coast Community College District GO, MBIA Insured, 5.00%, 6/15/23 ....... 3,745,000 3,831,884
Oregon Health and Science University Revenue,
Capital Appreciation, Refunding, Series A, MBIA Insured, zero cpn.,
7/01/21 ............................................................... 11,480,000 5,523,143
Series A, MBIA Insured, 5.00%, 7/01/32 ................................... 24,750,000 19,333,215
Oregon State Department of Administrative Services COP,
FSA Insured, 4.625%, 5/01/30 ............................................. 7,795,000 7,309,060
Refunding, Series A, AMBAC Insured, 5.00%, 5/01/24 ....................... 10,000,000 10,082,200
Refunding, Series B, AMBAC Insured, 5.00%, 5/01/26 ....................... 7,500,000 7,575,825
Refunding, Series B, FSA Insured, 5.00%, 5/01/21 ......................... 1,805,000 1,878,897
Series A, AMBAC Insured, Pre-Refunded, 6.00%, 5/01/26 .................... 2,000,000 2,135,340
Series A, FSA Insured, 5.00%, 5/01/23 .................................... 2,695,000 2,810,777
Series A, FSA Insured, 5.00%, 5/01/30 .................................... 13,205,000 13,329,523
Series B, FGIC Insured, 5.00%, 11/01/30 .................................. 19,100,000 18,825,342
Oregon State Department of Administrative Services Lottery Revenue, Oregon
Administration,
Lottery, Series A, FSA Insured, 5.00%,
4/01/25 .................................................................. 5,000,000 5,229,550
4/01/27 .................................................................. 2,000,000 2,069,740
Oregon State Department of Transportation Highway User Tax Revenue,
Refunding, Series A, 5.00%, 11/15/25 ..................................... 1,295,000 1,338,305
Refunding, Series A, 5.00%, 11/15/29 ..................................... 3,330,000 3,380,849
senior lien, Series A, 4.50%, 11/15/32 ................................... 20,000,000 18,490,600
Series A, 5.00%, 11/15/28 ................................................ 15,000,000 15,289,200
Series A, Pre-Refunded, 5.125%, 11/15/23 ................................. 5,000,000 5,651,350
(a) Oregon State EDR, Georgia-Pacific Corp. Project, Series CLVII, 6.35%,
8/01/25 ..................................................................... 7,910,000 4,915,986
Oregon State Facilities Authority Revenue,
Senior College in Student Housing Project, Series A, XLCA Insured, 5.00%,
7/01/35 ............................................................... 3,660,000 2,530,780
University of Portland Projects, Series A, 5.00%, 4/01/32 ................ 6,545,000 5,652,197
Willamette University Projects, Refunding, Series A, FGIC Insured, 5.00%,
10/01/35 .............................................................. 5,210,000 4,735,265
Oregon State GO,
Alternative Energy Project, Series B, 6.00%, 10/01/26 .................... 1,680,000 1,861,810
Elderly and Disabled Housing, Series A, 6.00%, 8/01/15 ................... 910,000 915,160
Elderly and Disabled Housing, Series A, 6.00%, 8/01/21 ................... 455,000 456,479
Elderly and Disabled Housing, Series A, 5.375%, 8/01/28 .................. 1,435,000 1,364,427
Elderly and Disabled Housing, Series A, 4.70%, 8/01/42 ................... 3,205,000 2,580,249
Elderly and Disabled Housing, Series B, 6.10%, 8/01/17 ................... 1,410,000 1,416,853
Elderly and Disabled Housing, Series B, 6.25%, 8/01/23 ................... 2,015,000 2,023,141
Elderly and Disabled Housing, Series C, 6.50%, 8/01/22 ................... 335,000 334,956
192 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Oregon State GO, (continued)
State Board of Higher Education, Refunding, Series A, 5.00%, 8/01/30 ..... $ 1,705,000 $ 1,721,675
State Board of Higher Education, Refunding, Series B, 5.00%, 8/01/38 ..... 1,500,000 1,483,965
State Board of Higher Education, Refunding, Series E, 5.00%, 8/01/29 ..... 7,745,000 7,828,723
State Board of Higher Education, Series A, 5.00%, 8/01/31 ................ 1,695,000 1,709,543
State Board of Higher Education, Series A, 5.00%, 8/01/36 ................ 2,715,000 2,719,860
State Board of Higher Education, Series A, 5.00%, 8/01/37 ................ 5,555,000 5,538,002
State Board of Higher Education, Series A, Pre-Refunded, 5.60%, 8/01/25 .. 8,000,000 8,245,360
State Board of Higher Education, Series A, Pre-Refunded, 5.00%, 8/01/31 .. 2,000,000 2,177,360
State Board of Higher Education, Series A, Pre-Refunded, 5.00%, 8/01/35 .. 6,000,000 6,940,260
State Board of Higher Education, Series C, 5.00%, 8/01/37 ................ 1,115,000 1,111,588
Veteran's Welfare, Series 77, 5.30%, 10/01/29 ............................ 1,480,000 1,480,858
Veteran's Welfare, Series A, 5.70%, 10/01/32 ............................. 2,190,000 2,165,100
Oregon State Health Housing Educational and Cultural Facilities Authority
Revenue,
Peacehealth, AMBAC Insured, 5.00%, 11/15/26 .............................. 5,500,000 5,516,170
Reed College Project, Series A, 5.75%, 7/01/32 ........................... 10,735,000 10,997,793
Oregon State Housing and Community Services Department MFHR, Series B, 6.00%,
7/01/31 ..................................................................... 5,000,000 5,000,450
Oregon State Housing and Community Services Department Mortgage Revenue,
SFM Program, Series A, 6.35%, 7/01/14 .................................... 380,000 380,460
SFM Program, Series A, 6.40%, 7/01/18 .................................... 235,000 236,170
SFM Program, Series A, 6.45%, 7/01/26 .................................... 555,000 556,410
SFM Program, Series C, 6.20%, 7/01/15 .................................... 440,000 442,240
SFM Program, Series C, 6.40%, 7/01/26 .................................... 260,000 260,621
SFM Program, Series D, 6.80%, 7/01/27 .................................... 340,000 340,384
SFM Program, Series H, FHA Insured, 5.75%, 7/01/30 ....................... 1,270,000 1,272,515
SFMR, Refunding, Series G, 5.35%, 7/01/30 ................................ 5,880,000 5,908,283
Polk Marion and Benton Counties School District No. 13J GO, FSA Insured,
Pre-Refunded,
5.80%, 6/15/20 .............................................................. 1,985,000 2,109,321
Port Astoria PCR, James River Project, Refunding, 6.55%, 2/01/15 ............... 945,000 816,036
Port of Portland International Airport Revenue,
Portland International Airport, Refunding, Series D, FGIC Insured, 5.00%,
7/01/23 .................................................................. 3,000,000 2,761,230
Portland International Airport, Series 7B, MBIA Insured, Pre-Refunded,
7.10%, 7/01/21 ........................................................... 2,800,000 3,174,500
Portland International Airport, Series 12C, FGIC Insured, 5.00%, 7/01/18 .... 1,500,000 1,514,295
Portland International Airport, Series A, AMBAC Insured, 5.50%, 7/01/24 ..... 22,000,000 22,290,840
Series Nineteen, 5.50%, 7/01/38 ............................................. 23,000,000 23,916,550
Port St. Helens PCR, Portland General Electric Co. Project, Series A,
5.25%, 8/01/14 .............................................................. 3,600,000 3,222,864
Portland Community College District GO, Series B, Pre-Refunded, 5.00%,
6/01/21 ..................................................................... 6,290,000 6,809,680
Portland EDR, Broadway Project, Refunding, Series A, 6.50%, 4/01/35 ............ 5,000,000 5,172,700
Portland GO,
Central City Streetcar Project, Series A, 4.75%, 4/01/21 .................... 3,600,000 3,602,628
Limited Tax, Series A, 5.00%, 6/01/24 ....................................... 10,000,000 10,215,100
Limited Tax, Series A, MBIA Insured, 5.125%, 6/01/30 ........................ 6,315,000 6,386,801
Limited Tax, Series B, zero cpn., 6/01/21 ................................... 1,000,000 570,340
Portland Housing Authority MFR, Housing, Lovejoy Station Apartments
Project, MBIA Insured,
6.00%, 7/01/33 .............................................................. 2,000,000 1,873,540
Annual Report | 193
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Portland MFR,
Civic Stadium Housing Project, Series A, 6.00%, 3/01/17 .................. $ 925,000 $ 927,238
Housing Garden Park Estates Project, Series A, GNMA Secured, 5.875%,
3/20/37 ............................................................... 3,150,000 3,153,780
Portland River District Urban Renewal and Redevelopment Revenue, Series A,
AMBAC Insured,
5.00%, 6/15/21 .............................................................. 3,000,000 3,104,820
Portland Sewer System Revenue,
first lien, Series A, FSA Insured, 5.00%, 10/01/24 ....................... 6,235,000 6,496,184
second lien, Refunding, Series A, FSA Insured, 5.00%, 6/01/23 ............ 2,500,000 2,584,650
second lien, Series B, MBIA Insured, 5.00%, 6/15/28 ...................... 5,105,000 5,201,280
Portland Urban Renewal and Redevelopment Revenue, Interstate Corridor,
Refunding, Series A,
FGIC Insured, 5.00%,
6/15/24 .................................................................. 1,295,000 1,254,557
6/15/25 .................................................................. 2,385,000 2,261,743
Portland Urban Renewal and Redevelopment Tax Allocation, Convention Center,
Series A,
AMBAC Insured, 5.50%, 6/15/20 ............................................... 3,000,000 3,091,170
Portland Water System Revenue,
MBIA Insured, 4.50%, 10/01/27 ............................................ 1,000,000 963,360
MBIA Insured, 4.50%, 10/01/28 ............................................ 3,895,000 3,674,932
second lien, Series A, MBIA Insured, 4.375%, 10/01/25 .................... 3,415,000 3,314,872
Redmond GO, Series C, MBIA Insured, 5.00%, 6/01/33 ............................. 1,260,000 1,264,196
Salem Hospital Facility Authority Revenue,
Salem Hospital Project, Series A, 5.00%, 8/15/27 ............................ 11,000,000 9,639,740
Salem Hospital Project, Series A, 5.00%, 8/15/36 ............................ 27,000,000 21,999,870
Series A, 5.75%, 8/15/23 .................................................... 10,000,000 10,021,300
Salem-Keizer School District No. 24J GO,
(b) Deferred Interest, Series B, zero cpn., 6/15/30 ............................ 8,500,000 2,496,960
Pre-Refunded, 5.00%, 6/01/19 ............................................. 9,500,000 9,602,600
Southwestern Community College District GO, MBIA Insured, Pre-Refunded,
5.00%, 6/01/28 .............................................................. 1,100,000 1,242,351
Sunrise Water Authority Water Revenue, sub. lien,
Series B, XLCA Insured, 5.00%, 9/01/25 ................................... 1,160,000 1,105,457
XLCA Insured, 5.00%, 3/01/25 ............................................. 1,660,000 1,697,035
Tillamook and Yamhill Counties School District No. 101 Nestucca Valley GO,
FSA Insured,
5.00%, 6/15/25 .............................................................. 1,560,000 1,608,188
Tri-County Metropolitan Transportation District Revenue, Limited
Obligation, Airport Light Rail,
Series 1, Pre-Refunded, 5.65%, 6/01/29 ...................................... 14,080,000 14,392,998
Washington and Clackamas Counties Tigard-Tualatin School District No. 23J
GO, MBIA Insured,
Pre-Refunded, 5.00%, 6/15/22 ................................................ 7,000,000 7,783,650
Washington Clackamas and Yamhill Counties School District No. 88J GO,
Sherwood,
Series A, MBIA Insured, zero cpn., 6/15/27 ............................... 3,500,000 1,257,305
Series A, MBIA Insured, zero cpn., 6/15/28 ............................... 2,960,000 988,166
Series A, MBIA Insured, zero cpn., 12/15/31 .............................. 3,515,000 913,338
Series B, MBIA Insured, 4.50%, 12/15/31 .................................. 2,900,000 2,547,186
Washington County Clean Water Services Sewer Revenue, senior lien, FGIC
Insured, 5.00%,
10/01/19 .................................................................... 3,905,000 4,020,744
Washington County GO,
Obligations, Refunding, 4.375%, 6/01/26 .................................. 1,000,000 985,060
Pre-Refunded, 5.00%, 6/01/26 ............................................. 10,000,000 10,826,200
194 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
OREGON (CONTINUED)
Washington County School District No. 48J Beaverton GO, Pre-Refunded, 5.00%,
6/01/22 ..................................................................... $ 4,155,000 $ 4,621,731
Washington Multnomah and Yamhill Counties School District No. 1J Hillsboro GO,
FSA Insured, 5.60%, 4/01/20 ................................................. 1,000,000 1,053,830
Yamhill County McMinnville School District No. 40 GO, FSA Insured, 5.00%,
6/15/28 ..................................................................... 4,000,000 4,042,960
--------------
709,669,825
--------------
U.S. TERRITORIES 18.2%
PUERTO RICO 17.4%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue, Asset-Backed
Bonds, Refunding, 5.625%, 5/15/43 ........................................... 10,000,000 6,690,800
Puerto Rico Commonwealth GO,
Public Improvement, Refunding, Series A, 5.50%, 7/01/32 .................. 15,000,000 12,991,950
Public Improvement, Series A, 5.00%, 7/01/29 ............................. 10,000,000 8,271,200
Public Improvement, Series A, 5.125%, 7/01/31 ............................ 9,885,000 8,036,604
Public Improvement, Series A, 5.375%, 7/01/33 ............................ 10,000,000 8,455,600
Public Improvement, Series A, Pre-Refunded, 5.125%, 7/01/31 .............. 5,115,000 5,580,056
Refunding, Series C, Sub Series C-7, MBIA Insured, 6.00%, 7/01/28 ........ 4,500,000 4,484,250
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue,
Series Y, Pre-Refunded, 5.50%, 7/01/36 ...................................... 13,000,000 15,624,050
Puerto Rico Commonwealth Highway and Transportation Authority Transportation
Revenue,
Refunding, Series N, FGIC Insured, 5.25%, 7/01/39 ........................ 10,000,000 8,229,900
Series D, Pre-Refunded, 5.375%, 7/01/36 .................................. 10,000,000 11,083,600
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue,
Series A, AMBAC Insured, 5.00%, 7/01/31 ..................................... 6,250,000 5,072,687
Puerto Rico Electric Power Authority Power Revenue,
Series II, FSA Insured, Pre-Refunded, 5.125%, 7/01/26 .................... 9,150,000 10,343,892
Series II, Pre-Refunded, 5.25%, 7/01/31 .................................. 12,000,000 13,509,600
Series RR, FGIC Insured, Pre-Refunded, 5.00%, 7/01/35 .................... 10,000,000 11,555,100
Series WW, 5.25%, 7/01/33 ................................................ 9,690,000 8,370,125
Puerto Rico PBA Guaranteed Revenue, Government Facilities, Refunding,
Series M-3, MBIA Insured, 6.00%, 7/01/25 .................................... 15,000,000 14,708,250
Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E,
Pre-Refunded, 5.50%, 8/01/29 ................................................ 5,000,000 5,508,350
--------------
158,516,014
--------------
VIRGIN ISLANDS 0.8%
Virgin Islands PFAR, Virgin Islands Matching Fund Loan Notes, senior lien,
Refunding, Series A, 5.50%,
10/01/15 ................................................................. 1,635,000 1,564,008
10/01/18 ................................................................. 2,400,000 2,112,864
Virgin Islands Water and Power Authority Electric System Revenue, Refunding,
5.30%,
7/01/18 .................................................................. 2,500,000 2,328,825
7/01/21 .................................................................. 1,400,000 1,251,236
--------------
7,256,933
--------------
TOTAL U.S. TERRITORIES ......................................................... 165,772,947
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS (COST $892,699,403) ........ 875,442,772
--------------
Annual Report | 195
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN OREGON TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------- ---------------- --------------
SHORT TERM INVESTMENTS (COST $8,725,000) 1.0%
MUNICIPAL BONDS 1.0%
OREGON 1.0%
(c) Medford Hospital Facilities Authority Revenue, Rogue Valley Manor Project, Daily
VRDN and Put, 0.65%, 8/15/37 ................................................ $ 8,725,000 $ 8,725,000
--------------
TOTAL INVESTMENTS (COST $901,424,403) 97.1% .................................... 884,167,772
OTHER ASSETS, LESS LIABILITIES 2.9% ............................................ 26,525,738
--------------
NET ASSETS 100.0% .............................................................. $ 910,693,510
==============
See Abbreviations on page 238.
(a) The Internal Revenue Service has issued a preliminary adverse
determination, ruling that the income generated by the bond is taxable. The
issuer of the bond is contesting this determination and, until such time as
this is finalized, the Fund will continue to recognize interest income
earned on the bond as tax-exempt. The Trust's management believes that the
final outcome of this matter will not have a material adverse impact to the
Fund and/or its shareholders.
(b) Security purchased on a when-issued basis. See Note 1(b).
(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.
The accompanying notes are an integral part of these financial statements.
196 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------
CLASS A 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 9.82 $ 10.47 $ 10.44 $ 10.48 $ 10.62
-------- -------- -------- -------- --------
Income from investment operations(b):
Net investment income(c) .................... 0.44 0.44 0.44 0.46 0.47
Net realized and unrealized gains (losses) .. (0.18) (0.65) 0.04 (0.04) (0.15)
-------- -------- -------- -------- --------
Total from investment operations ............... 0.26 (0.21) 0.48 0.42 0.32
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.43) (0.44) (0.45) (0.46) (0.46)
-------- -------- -------- -------- --------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 9.65 $ 9.82 $ 10.47 $ 10.44 $ 10.48
======== ======== ======== ======== ========
Total return(f) ................................ 2.72% (2.16)% 4.71% 4.08% 3.19%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.65% 0.66% 0.66% 0.66% 0.66%
Net investment income .......................... 4.53% 4.24% 4.26% 4.37% 4.52%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $820,227 $770,164 $747,279 $718,293 $693,804
Portfolio turnover rate ........................ 11.50% 16.68% 6.99% 13.07% 7.48%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 197
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------
CLASS B 2009 2008(a) 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 9.86 $ 10.51 $ 10.47 $ 10.51 $ 10.65
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.39 0.38 0.39 0.40 0.41
Net realized and unrealized gains (losses) .. (0.19) (0.65) 0.04 (0.04) (0.14)
------- ------- ------- ------- -------
Total from investment operations ............... 0.20 (0.27) 0.43 0.36 0.27
------- ------- ------- ------- -------
Less distributions from net investment income .. (0.38) (0.38) (0.39) (0.40) (0.41)
------- ------- ------- ------- -------
Redemption fees(d, e) .......................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 9.68 $ 9.86 $ 10.51 $ 10.47 $ 10.51
======= ======= ======= ======= =======
Total return(f) ................................ 2.04% (2.68)% 4.22% 3.51% 2.61%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.20% 1.21% 1.21% 1.21% 1.21%
Net investment income .......................... 3.98% 3.69% 3.71% 3.82% 3.97%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $30,177 $37,339 $43,897 $47,623 $51,913
Portfolio turnover rate ........................ 11.50% 16.68% 6.99% 13.07% 7.48%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
198 | Annual Report
Franklin Tax-Free Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------
CLASS C 2009 2008(a) 2007 2006 2005
- ------- -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 9.90 $ 10.55 $ 10.51 $ 10.56 $ 10.69
-------- -------- -------- ------- -------
Income from investment operations(b):
Net investment income(c) .................... 0.39 0.38 0.39 0.40 0.42
Net realized and unrealized gains (losses) .. (0.18) (0.65) 0.04 (0.05) (0.15)
-------- -------- -------- ------- -------
Total from investment operations ............... 0.21 (0.27) 0.43 0.35 0.27
-------- -------- -------- ------- -------
Less distributions from net investment income .. (0.38) (0.38) (0.39) (0.40) (0.40)
-------- -------- -------- ------- -------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- ------- -------
Net asset value, end of year ................... $ 9.73 $ 9.90 $ 10.55 $ 10.51 $ 10.56
======== ======== ======== ======= =======
Total return(f) ................................ 2.13% (2.68)% 4.19% 3.40% 2.69%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.20% 1.21% 1.21% 1.21% 1.21%
Net investment income .......................... 3.98% 3.69% 3.71% 3.82% 3.97%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $135,480 $107,286 $100,495 $88,237 $79,551
Portfolio turnover rate ........................ 11.50% 16.68% 6.99% 13.07% 7.48%
(a) For the year ended February 29.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 199
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------ ---------------- --------------
MUNICIPAL BONDS 98.2%
PENNSYLVANIA 91.6%
Allegheny County Airport Authority Airport Revenue, Pittsburgh
International Airport, Refunding, FGIC Insured, 5.75%, 1/01/18 .............. $ 1,000,000 $ 982,970
Allegheny County COP, AMBAC Insured, 5.00%, 12/01/28 ........................... 4,000,000 4,009,600
Allegheny County GO,
MBIA Insured, Pre-Refunded, 5.00%, 11/01/27 .............................. 1,000,000 1,122,600
Notes, Series C-60, FSA Insured, 5.00%, 11/01/27 ......................... 3,000,000 3,056,820
Series C-61, Assured Guaranty, 5.00%, 12/01/33 ........................... 5,000,000 4,747,950
Allegheny County Higher Education Building Authority University Revenue,
Duquesne University,
5.00%, 3/01/28 ........................................................... 3,000,000 2,889,570
5.00%, 3/01/33 ........................................................... 1,300,000 1,176,916
Series A, XLCA Insured, 5.00%, 3/01/29 ................................... 5,000,000 4,774,900
Series A, XLCA Insured, 5.00%, 3/01/33 ................................... 6,630,000 6,046,030
Allegheny County Hospital Development Authority Revenue, Health System,
Series A, MBIA Insured, Pre-Refunded, 6.50%, 11/15/30 ....................... 10,000,000 11,070,900
Allegheny County IDAR,
County Guaranteed, Refunding, Series B, MBIA Insured, 5.00%, 11/01/29 .... 1,485,000 1,453,073
County Guaranteed, Series B, MBIA Insured, Pre-Refunded, 5.00%,
11/01/29 .............................................................. 7,515,000 8,450,617
Environmental Improvement, USX Corp., Refunding, 6.10%, 1/15/18 .......... 2,000,000 1,932,200
Environmental Improvement, USX Corp., Refunding, 5.50%, 12/01/29 ......... 10,000,000 8,172,900
Environmental Improvement, USX Corp., Refunding, 5.60%, 9/01/30 .......... 7,530,000 6,165,940
Series A, MBIA Insured, Pre-Refunded, 5.00%, 11/01/29 .................... 5,000,000 5,622,500
Allegheny County Port Authority Special Revenue, Transportation,
MBIA Insured, Pre-Refunded, 6.125%, 3/01/29 .............................. 15,000,000 15,150,000
Refunding, FGIC Insured, 5.00%, 3/01/25 .................................. 13,250,000 12,992,685
Refunding, FGIC Insured, 5.00%, 3/01/29 .................................. 16,500,000 15,815,745
Allegheny County Residential Finance Authority Mortgage Revenue, SFM,
Refunding, Series DD-1, GNMA Secured, 5.35%, 11/01/19 .................... 265,000 266,190
Refunding, Series DD-2, GNMA Secured, 5.40%, 11/01/29 .................... 1,215,000 1,162,451
Series II-2, GNMA Secured, 5.90%, 11/01/32 ............................... 745,000 746,326
Allegheny County Sanitation Authority Sewer Revenue,
FGIC Insured, 5.00%, 12/01/37 ............................................ 11,745,000 10,850,736
Refunding, Series A, MBIA Insured, 5.00%, 12/01/30 ....................... 7,000,000 6,514,760
Allegheny Valley School District GO, MBIA Insured, 5.00%, 11/01/28 ............. 1,550,000 1,565,097
Allentown Parking Authority Parking Revenue, FSA Insured, 5.00%, 11/15/35 ...... 4,430,000 4,253,154
Armstrong County GO, Refunding, MBIA Insured, 5.40%, 6/01/31 ................... 2,500,000 2,523,400
Bedford County GO, AMBAC Insured, 5.00%, 9/01/35 ............................... 1,000,000 925,810
Bucks County IDAR, AMBAC Insured, 5.125%, 9/15/31 .............................. 3,675,000 3,426,496
Butler Area School District GO, FSA Insured, Pre-Refunded, 5.00%, 4/01/31 ...... 4,000,000 4,543,200
Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 ... 1,600,000 1,604,064
Catasauqua Area School District GO, Refunding, FSA Insured, 5.00%, 2/15/36 ..... 6,000,000 5,843,880
Clarion County Hospital Authority Revenue, Clarion Hospital Project,
Refunding,
5.55%, 7/01/09 ........................................................... 1,215,000 1,212,011
5.60%, 7/01/10 ........................................................... 600,000 593,862
5.75%, 7/01/12 ........................................................... 1,795,000 1,744,202
5.75%, 7/01/17 ........................................................... 2,200,000 1,975,820
5.625%, 7/01/21 .......................................................... 1,500,000 1,255,950
Connellsville Area School District GO, Series B, FSA Insured, 5.00%,
11/15/37 .................................................................... 1,000,000 999,930
200 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Cumberland County Municipal Authority College Revenue, Dickinson College,
Assn. of Independent Colleges and Universities of Pennsylvania Financing
Program, Series GG1, MBIA Insured, 5.00%, 5/01/34 ..................... $ 7,610,000 $ 7,376,449
Series A, AMBAC Insured, Pre-Refunded, 5.50%, 11/01/30 ................... 1,200,000 1,286,100
Dauphin County General Authority Hospital Revenue, Hapsco-Western Hospital
Project,
Series B, MBIA Insured, ETM, 6.25%, 7/01/16 .............................. 5,000,000 5,703,550
Deer Lakes School District GO, Assured Guaranty, 5.50%, 4/01/39 ................ 7,500,000 7,633,200
Delaware County Authority College Revenue,
Cabrini College, Radian Insured, Pre-Refunded, 5.875%, 7/01/29 ........... 5,245,000 5,328,186
Cabrini College, Refunding, Radian Insured, 5.875%, 7/01/29 .............. 1,140,000 1,140,125
Eastern College, Series C, 5.625%, 10/01/28 .............................. 2,210,000 1,691,468
Haverford College, 5.75%, 11/15/29 ....................................... 3,500,000 3,611,020
Haverford College, 6.00%, 11/15/30 ....................................... 1,750,000 1,813,473
Delaware County Authority Hospital Revenue, Crozer Keystone Obligation,
Group A, 5.00%, 12/15/31 .................................................... 5,000,000 3,334,450
Delaware County Authority Revenue,
Dunwoody Village Project, Pre-Refunded, 6.25%, 4/01/30 ................... 1,800,000 1,907,388
Health Facilities, Mercy Health Corp. Project, ETM, 6.00%, 12/15/26 ...... 10,800,000 11,790,468
Delaware County IDAR, Philadelphia Suburban Water Co. Project, FGIC
Insured, 6.00%, 6/01/29 ..................................................... 2,000,000 1,883,220
Delaware County University Authority Revenue, Villanova University, Series
A, MBIA Insured, 5.00%,
12/01/28 .................................................................... 3,000,000 2,865,660
Delaware Valley Regional Finance Authority Local Government Revenue, Series
B,
AMBAC Insured, 5.60%, 7/01/17 ............................................... 5,000,000 5,410,500
Erie County Hospital Authority Revenue, Hamot Health Foundation, CIFG
Insured, 5.00%,
11/01/35 .................................................................... 6,000,000 4,527,900
Erie County IDA Environmental Improvement Revenue, International Paper Co.
Project,
Refunding, Series B, 6.00%, 9/01/16 ......................................... 600,000 499,392
Erie GO, Series E, FGIC Insured, 5.25%, 11/15/25 ............................... 5,000,000 5,002,100
Erie Higher Education Building Authority College Revenue, Mercyhurst
College, 5.50%,
3/15/38 ..................................................................... 2,000,000 1,590,320
Erie School District GO, AMBAC Insured, Pre-Refunded, 5.80%, 9/01/29 ........... 3,000,000 3,214,080
Erie Water Authority Revenue, FSA Insured, 5.00%, 12/01/43 ..................... 7,000,000 6,439,440
Greater Johnstown School District GO, Series C, MBIA Insured, 5.125%,
8/01/25 ..................................................................... 3,610,000 3,662,850
Hazleton Health Services Authority Hospital Revenue, Hazleton General
Hospital, 5.50%,
7/01/27 ..................................................................... 1,500,000 1,162,710
Indiana County IDAR, Indiana University of Pennsylvania, Refunding, AMBAC
Insured, 5.00%,
11/01/29 .................................................................... 1,250,000 1,200,138
Johnstown RDA Sewer Revenue, Series A, FSA Insured, Pre-Refunded, 5.00%,
8/15/34 ..................................................................... 1,825,000 2,089,990
Lancaster County Hospital Authority Revenue, Health Center,
Masonic Homes Project, 5.00%, 11/01/31 ................................... 3,000,000 2,451,900
Willow Valley Retirement Project, 5.875%, 6/01/21 ........................ 1,000,000 941,500
Lancaster Parking Authority Parking Revenue, Guaranteed, Series A, AMBAC
Insured, 5.00%,
12/01/32 ................................................................. 1,700,000 1,611,651
12/01/35 ................................................................. 2,500,000 2,349,075
Latrobe IDAR, St. Vincent College Project, 5.70%, 5/01/31 ...................... 1,500,000 1,233,945
Lehigh County General Purpose Authority Revenues, Lehigh Valley Hospital,
Health Network,
Series B, FSA Insured, 5.25%, 7/01/19 ....................................... 2,750,000 2,874,245
Annual Report | 201
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Lehigh County General Purpose Hospital Revenue, Lehigh Valley Health,
Series B, FSA Insured,
5.00%, 7/01/35 .............................................................. $ 11,250,000 $ 10,352,700
Lower Merion School District GO, 5.00%, 9/01/32 ................................ 5,000,000 5,065,550
Lower Merion Township School District GO, Refunding, 4.375%, 5/15/18 ........... 1,000,000 1,040,960
Lycoming County Authority College Revenue, Pennsylvania College of
Technology,
AMBAC Insured, 5.25%, 5/01/32 ............................................ 5,030,000 3,922,595
Refunding, AMBAC Insured, 5.35%, 7/01/26 ................................. 2,400,000 2,287,776
Mercer County GO, FGIC Insured, 5.00%, 10/01/31 ................................ 2,000,000 1,896,260
Mercer County IDA Water Facilities Revenue, MBIA Insured, 6.00%, 7/01/30 ....... 5,000,000 4,591,100
Monroe County Hospital Authority Revenue, Hospital, Pocono Medical Center,
5.00%, 1/01/27 ........................................................... 1,000,000 777,150
5.125%, 1/01/37 .......................................................... 2,000,000 1,446,360
5.25%, 1/01/43 ........................................................... 2,000,000 1,434,920
Montgomery County GO, 5.00%, 9/15/22 ........................................... 3,335,000 3,437,151
Montgomery County Higher Education and Health Authority Revenue, Foulkeways
at Gwynedd Project, Pre-Refunded, 6.75%,
11/15/24 ................................................................. 400,000 420,720
11/15/30 ................................................................. 1,000,000 1,051,800
Montgomery County IDA Retirement Community Revenue, ACTS Retirement-Life
Communities Inc. Obligated Group,
5.25%, 11/15/28 .......................................................... 5,000,000 3,608,300
Refunding, Series B, 5.00%, 11/15/22 ..................................... 1,000,000 771,690
Montour School District GO, FSA Insured, 5.00%,
4/01/32 .................................................................. 5,000,000 4,959,250
4/01/37 .................................................................. 12,500,000 12,314,000
Muhlenberg School District GO, Series AA, FGIC Insured, Pre-Refunded,
6.00%, 9/01/23 ........................................................... 4,000,000 4,303,440
Norristown Area School District GO, FGIC Insured, Pre-Refunded, 5.00%,
9/01/27 .................................................................. 5,000,000 5,562,550
Northampton Borough Municipal Authority Water Revenue, MBIA Insured,
5.00%, 5/15/34 ........................................................... 445,000 425,327
Pre-Refunded, 5.00%, 5/15/34 ............................................. 1,955,000 2,221,349
Northampton County General Purpose Authority Hospital Revenue, St. Luke's
Hospital Project,
Series A, 5.50%, 8/15/35 .................................................... 10,000,000 8,276,600
Northampton County General Purpose Authority Revenue, Lafayette College,
Refunding, 5.00%,
11/01/34 .................................................................... 20,000,000 19,912,800
Northeastern York School District GO, Series B, FGIC Insured, 5.00%,
4/01/30 .................................................................. 1,000,000 994,800
4/01/31 .................................................................. 2,000,000 1,965,800
Norwin School District GO,
FGIC Insured, Pre-Refunded, 6.00%, 4/01/30 ............................... 5,000,000 5,287,750
FSA Insured, 5.00%, 4/01/37 .............................................. 10,000,000 9,577,900
FSA Insured, Pre-Refunded, 5.00%, 4/01/35 ................................ 3,000,000 3,479,310
Series A, MBIA Insured, 5.00%, 4/01/30 ................................... 1,000,000 969,550
Series B, MBIA Insured, Pre-Refunded, 5.00%, 4/01/31 ..................... 6,390,000 6,692,950
Pennsbury School District GO, FGIC Insured, Pre-Refunded, 5.00%, 1/15/22 ....... 2,835,000 3,155,298
Pennsylvania Economic Development Financing Authority Revenue, Lincoln
University,
Series A, FGIC Insured, 5.00%, 6/01/33 ...................................... 3,325,000 3,078,451
Pennsylvania HFA, SFMR, Refunding, Series 103C, 5.45%, 10/01/38 ................ 10,000,000 9,840,800
202 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Pennsylvania HFAR,
Future Income Growth Securities, SFM, Series 64, 5.25%, 4/01/30 .......... $ 3,050,000 $ 2,789,072
SFM, Refunding, Series 63A, zero cpn., 4/01/30 ........................... 10,885,000 2,655,722
SFM, Refunding, Series 72A, 5.25%, 4/01/21 ............................... 7,000,000 6,993,490
Pennsylvania State Higher Educational Facilities Authority College and
University Revenues,
Allegheny College, Series B, 6.125%, 11/01/13 ............................ 35,000 35,022
Drexel University, MBIA Insured, 5.75%, 5/01/22 .......................... 3,095,000 3,108,711
Marywood University Project, MBIA Insured, Pre-Refunded, 5.65%, 6/01/25 .. 2,500,000 2,640,800
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 13,341,090
Pennsylvania State Higher Educational Facilities Authority Revenue,
Bryn Mawr College, AMBAC Insured, 5.125%, 12/01/29 ....................... 1,500,000 1,506,690
Bryn Mawr College, Refunding, AMBAC Insured, 5.00%, 12/01/37 ............. 5,000,000 4,969,400
Drexel University, Series A, 5.00%, 5/01/20 .............................. 1,485,000 1,509,696
Drexel University, Series A, 5.20%, 5/01/29 .............................. 750,000 719,213
Drexel University, Series A, MBIA Insured, 5.00%, 5/01/37 ................ 25,525,000 24,019,025
La Salle University, Series A, 5.00%, 5/01/37 ............................ 2,500,000 1,814,375
Philadelphia University, Refunding, 5.00%, 6/01/30 ....................... 2,295,000 1,593,143
Scranton University, Refunding, Series A, XLCA Insured, 5.00%, 11/01/35 .. 5,000,000 4,659,350
State System of Higher Education, MBIA Insured, 5.00%, 6/15/37 ........... 7,000,000 6,733,090
State System of Higher Education, Series R, FSA Insured, 5.00%, 6/15/24 .. 3,140,000 3,144,459
Temple University, First Series, MBIA Insured, Pre-Refunded, 5.00%,
7/15/31 ............................................................... 1,500,000 1,647,015
Temple University, Refunding, MBIA Insured, 5.00%, 4/01/28 ............... 5,000,000 4,945,300
Temple University, Refunding, MBIA Insured, 5.00%, 4/01/33 ............... 10,000,000 9,515,900
Trustees University of Pennsylvania, Refunding, Series C, 5.00%,
7/15/38 ............................................................... 5,000,000 5,002,400
University of Pennsylvania Health System, Refunding, Series B, 6.00%,
8/15/26 ............................................................... 5,000,000 5,257,300
University Sciences Philadelphia, Assured Guaranty, 5.00%, 11/01/32 5,000,000 4,904,450
University Sciences Philadelphia, Refunding, Series A, XLCA Insured,
5.00%,
11/01/36 .............................................................. 8,315,000 7,354,784
Widener University, 5.00%, 7/15/31 ....................................... 500,000 395,345
Widener University, 5.00%, 7/15/39 ....................................... 5,750,000 4,362,180
Pennsylvania State Public School Building Authority Community College
Revenue, Community College Philadelphia Project, 6.00%, 6/15/28 ............. 5,000,000 5,202,000
Pennsylvania State Public School Building Authority Lease Revenue, School
District of Philadelphia Project,
FSA Insured, Pre-Refunded, 5.00%, 6/01/33 ................................ 15,000,000 16,853,400
Refunding, Series B, FSA Insured, 5.00%, 6/01/26 ......................... 5,000,000 5,070,100
Refunding, Series B, FSA Insured, 4.75%, 6/01/30 ......................... 5,000,000 4,768,000
Pennsylvania State Public School Building Authority Revenue,
Career Institute of Technology, FGIC Insured, 5.00%, 11/15/28 ............ 1,000,000 945,040
Central Montgomery County Area, FGIC Insured, 5.00%, 5/15/24 ............. 2,500,000 2,534,050
Lehigh Career and Technical Institution, MBIA Insured, Pre-Refunded,
5.00%,
10/01/31 .............................................................. 1,000,000 1,093,390
Pennsylvania State Turnpike Commission Oil Franchise Tax Revenue, Series B,
MBIA Insured,
5.00%, 12/01/24 .......................................................... 1,655,000 1,668,075
Pre-Refunded, 5.00%, 12/01/31 ............................................ 5,000,000 5,651,000
Pennsylvania State Turnpike Commission Revenue, AMBAC Insured,
Pre-Refunded, 5.00%,
7/15/31 ..................................................................... 10,000,000 10,967,800
Annual Report | 203
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Pennsylvania State Turnpike Commission Turnpike Revenue,
Refunding, Series C, Sub Series C-1, Assured Guaranty, 6.25%, 6/01/38 ....... $ 5,000,000 $ 5,403,750
Series A, AMBAC Insured, 5.00%, 12/01/34 .................................... 5,000,000 4,865,500
Series R, AMBAC Insured, 5.00%, 12/01/26 .................................... 2,000,000 2,022,560
Series R, AMBAC Insured, 5.00%, 12/01/30 .................................... 11,125,000 11,036,779
sub. bond, Series A, Assured Guaranty, 5.00%, 6/01/39 ....................... 20,000,000 19,905,600
Pennsylvania State University Revenue, 5.00%, 9/01/35 .......................... 1,000,000 991,290
Philadelphia Authority for IDR,
Cultural and Commercial Corridors Program, Series A, FGIC Insured, 5.00%,
12/01/23 ................................................................. 6,205,000 5,684,152
Cultural and Commercial Corridors Program, Series A, FGIC Insured, 5.00%,
12/01/25 ................................................................. 5,690,000 5,023,075
Please Touch Museum Project, 5.25%, 9/01/36 ................................. 7,210,000 5,109,439
Series B, AMBAC Insured, 5.25%, 7/01/31 ..................................... 2,000,000 1,663,000
Philadelphia Gas Works Revenue, Twelfth Series B, MBIA Insured, ETM, 7.00%,
5/15/20 ..................................................................... 865,000 1,054,037
Philadelphia GO, Series B, Assured Guaranty, 7.125%, 7/15/38 ................... 10,000,000 10,587,600
Philadelphia Hospitals and Higher Education Facilities Authority Hospital
Revenue, Temple
University Health System, Refunding, Series A,
5.50%, 7/01/30 ........................................................... 5,000,000 3,614,300
5.00%, 7/01/34 ........................................................... 5,000,000 3,253,650
Philadelphia Housing Authority Capital Fund Program Revenue, Series A, FSA
Insured, 5.00%,
12/01/21 .................................................................... 5,000,000 5,137,550
Philadelphia IDA Lease Revenue, Series B, FSA Insured, Pre-Refunded, 5.125%,
10/01/26 .................................................................... 12,000,000 13,242,240
Philadelphia Parking Authority Airport Parking Revenue, FSA Insured, 5.25%,
9/01/22 ..................................................................... 3,250,000 3,191,500
9/01/29 ..................................................................... 13,000,000 11,529,700
Philadelphia RDAR, Neighborhood Transformation, Series C, FGIC Insured,
5.00%,
4/15/31 ..................................................................... 14,565,000 11,783,085
Philadelphia School District GO,
Series C, MBIA Insured, Pre-Refunded, 5.75%, 3/01/29 ........................ 8,000,000 8,388,720
Series D, FGIC Insured, Pre-Refunded, 5.125%, 6/01/34 ....................... 5,000,000 5,717,450
Series E, 6.00%, 9/01/38 .................................................... 5,000,000 5,057,650
Philadelphia Water and Wastewater Revenue, Series A,
FGIC Insured, 5.00%, 11/01/31 ............................................... 2,765,000 2,597,164
FSA Insured, 5.00%, 7/01/28 ................................................. 5,000,000 4,896,550
FSA Insured, 5.00%, 7/01/29 ................................................. 11,645,000 11,283,073
FSA Insured, 5.00%, 7/01/35 ................................................. 4,500,000 4,230,270
Pine-Richland School District GO, FSA Insured, 5.00%, 7/15/35 .................. 200,000 192,066
Pittsburgh Public Parking Authority Parking Revenue, AMBAC Insured,
Pre-Refunded, 6.00%,
12/01/24 .................................................................... 2,000,000 2,126,400
Pittsburgh Urban RDA Mortgage Revenue, Series C, GNMA Secured, 5.70%,
4/01/30 ..................................................................... 1,295,000 1,271,573
Pittsburgh Urban RDA Tax Allocation, Pre-Refunded, 6.10%, 5/01/19 .............. 1,000,000 1,008,890
Pittsburgh Water and Sewer Authority Revenue, FGIC Insured, ETM, 7.25%,
9/01/14 ..................................................................... 825,000 932,613
Plum Boro School District GO, FGIC Insured, Pre-Refunded, 5.25%, 9/15/30 ....... 8,870,000 9,716,109
Reading Area Water Authority Water Revenue, FSA Insured, 5.00%, 12/01/27 ....... 3,685,000 3,759,548
Reading GO, FSA Insured, 6.00%, 11/01/28 ....................................... 2,000,000 2,040,940
Reading School District GO, FSA Insured, 5.00%, 1/15/36 ........................ 18,500,000 17,862,675
204 | Annual Report
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Sayre Health Care Facilities Authority Revenue, Guthrie Healthcare System,
Refunding, Series A, 5.875%, 12/01/31 ....................................... $ 555,000 $ 497,441
Series A, Pre-Refunded, 5.875%, 12/01/31 .................................... 1,945,000 2,191,354
Scranton School District GO,
Series A, FSA Insured, 5.00%, 7/15/38 ....................................... 5,430,000 5,331,228
Series C, FSA Insured, 5.00%, 7/15/38 ....................................... 5,000,000 4,909,050
Scranton-Lackawanna Health and Welfare Authority Revenue, University of
Scranton,
XLCA Insured, 5.00%, 11/01/37 ............................................... 8,125,000 7,507,012
Seneca Valley School District GO, MBIA Insured, Pre-Refunded, 5.375%,
1/01/21 ..................................................................... 2,000,000 2,214,120
Snyder County Higher Education Authority University Revenue, Susquehanna
University Project,
5.00%, 1/01/38 .............................................................. 4,000,000 3,637,120
Southcentral General Authority Revenue,
WellSpan Health Obligated Group, MBIA Insured, ETM, 5.25%, 5/15/31 ........ 1,875,000 1,957,838
WellSpan Health Obligated Group, MBIA Insured, Pre-Refunded, 5.25%, 5/15/31 8,125,000 8,887,450
WellSpan Health Obligated Group, Refunding, Series A, 6.00%, 6/01/25 ........ 10,000,000 10,307,400
York College of Pennsylvania, Associates, XLCA Insured, 5.00%, 5/01/37 ...... 2,090,000 1,933,355
Southern Lehigh School District GO, Series A, FGIC Insured, Pre-Refunded,
5.00%,
9/01/25 ..................................................................... 6,900,000 7,721,031
Southmoreland School District GO, MBIA Insured, 5.00%, 4/01/27 ................. 5,025,000 5,071,933
State Public School Building Authority College Revenue,
Delaware County Community College Project, FSA Insured, 5.00%, 10/01/32 ..... 1,000,000 980,960
Montgomery County Community College, FSA Insured, 5.00%, 5/01/28 .......... . 1,225,000 1,252,930
Westmoreland County Community College, FGIC Insured, 5.25%, 10/15/22 ........ 2,170,000 2,196,192
Susquehanna Area Regional Airport Authority Airport System Revenue,
Refunding, Series A, AMBAC Insured, 5.00%, 1/01/28 .......................... 2,000,000 1,610,300
Series A, 6.50%, 1/01/38 .................................................... 4,000,000 2,913,880
Upper St. Clair Township School District GO,
FSA Insured, Pre-Refunded, 5.00%, 7/15/28 ................................... 465,000 513,509
Refunding, FSA Insured, 5.00%, 7/15/28 ...................................... 535,000 539,911
Washington County Authority Revenue, Capital Projects and Equipment Program,
Refunding,
AMBAC Insured, 6.15%, 12/01/29 .............................................. 1,000,000 945,750
Washington County GO,
Refunding, Series A, AMBAC Insured, 5.125%, 9/01/27 ......................... 4,295,000 4,354,529
Series A, AMBAC Insured, Pre-Refunded, 5.125%, 9/01/27 .................... 705,000 791,877
West Allegheny School District GO, Refunding, Series D, FGIC Insured, 4.75%,
9/01/19 ..................................................................... 2,000,000 2,037,940
9/01/20 ..................................................................... 3,805,000 3,853,628
West Mifflin Area School District GO, FSA Insured, 5.125%, 4/01/31 ............. 1,000,000 1,004,840
(a) Whitehall Coplay School District GO, Series A, FSA Insured, 5.375%,
11/15/34 .................................................................... 6,000,000 6,048,720
Wilkes-Barre Finance Authority Revenue, Wilkes University Project,
Refunding, 5.00%,
3/01/37 ..................................................................... 4,500,000 2,957,175
Wyoming Area School District GO, Refunding, Series A, MBIA Insured, 5.00%,
9/01/26 ..................................................................... 5,005,000 5,054,950
--------------
902,164,503
--------------
Annual Report | 205
Franklin Tax-Free Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (CONTINUED)
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------ ---------------- --------------
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES 6.6%
PUERTO RICO 6.2%
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, senior
lien, Series A,
6.00%, 7/01/44 .............................................................. $ 2,100,000 $ 1,881,096
Puerto Rico Commonwealth GO,
Public Improvement, Series A, 5.00%, 7/01/29 ................................ 4,000,000 3,308,480
Public Improvement, Series A, 5.00%, 7/01/33 ................................ 13,960,000 10,888,800
Public Improvement, Series A, Pre-Refunded, 5.00%, 7/01/33 .................. 16,040,000 18,166,102
Series A, 5.00%, 7/01/28 .................................................... 5,000,000 4,124,650
Series A, 5.25%, 7/01/37 .................................................... 10,000,000 8,154,600
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax
Revenue, 5.00%,
7/01/37 ..................................................................... 7,010,000 5,512,804
Puerto Rico Electric Power Authority Power Revenue, Series TT, 5.00%,
7/01/32 ..................................................................... 5,100,000 4,257,480
Puerto Rico PBA Guaranteed Revenue, Government Facilities, Series I,
5.00%, 7/01/36 .............................................................. 5,950,000 4,679,259
--------------
60,973,271
--------------
VIRGIN ISLANDS 0.4%
Virgin Islands PFAR, Gross Receipts Taxes Loan Note, Radian Insured, 5.00%,
10/01/33 .................................................................... 5,000,000 4,035,850
--------------
TOTAL U.S. TERRITORIES ......................................................... 65,009,121
--------------
TOTAL MUNICIPAL BONDS BEFORE SHORT TERM INVESTMENTS
(COST $1,003,864,096) ....................................................... 967,173,624
--------------
SHORT TERM INVESTMENTS (COST $9,350,000) 0.9%
MUNICIPAL BONDS 0.9%
PENNSYLVANIA 0.9%
(b) Geisinger Authority Health System Revenue, Geisinger Health System,
Refunding, Series A,
Daily VRDN and Put, 0.45%, 5/15/35 .......................................... 9,350,000 9,350,000
--------------
TOTAL INVESTMENTS (COST $1,013,214,096) 99.1% .................................. 976,523,624
OTHER ASSETS, LESS LIABILITIES 0.9% ............................................ 9,360,609
--------------
NET ASSETS 100.0% .............................................................. $ 985,884,233
==============
See Abbreviations on page 238.
(a) Security purchased on a when-issued basis. See Note 1(b).
(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.
The accompanying notes are an integral part of these financial statements.
206 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2009
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 ..................................... $1,052,440,087 $563,781,089 $424,574,910 $577,548,490
============== ============ ============ ============
Value .................................... $1,003,797,827 $529,302,825 $403,210,085 $525,503,095
Cash ........................................ 4,265,393 5,018 1,474,519 9,335,143
Receivables:
Capital shares sold ...................... 1,520,809 1,276,388 596,611 1,249,673
Interest ................................. 11,803,275 7,883,235 4,398,417 5,984,362
Other assets ................................ 2,143 1,132 866 1,104
-------------- ------------ ------------ ------------
Total assets .......................... 1,021,389,447 538,468,598 409,680,498 542,073,377
-------------- ------------ ------------ ------------
Liabilities:
Payables:
Investment securities purchased .......... 4,632,693 2,034,120 -- --
Capital shares redeemed .................. 1,755,544 1,069,708 253,626 651,533
Affiliates ............................... 524,984 300,084 242,277 310,675
Distributions to shareholders ............ 1,035,508 545,692 235,317 551,977
Accrued expenses and other liabilities ...... 105,823 80,898 63,137 83,497
-------------- ------------ ------------ ------------
Total liabilities ..................... 8,054,552 4,030,502 794,357 1,597,682
-------------- ------------ ------------ ------------
Net assets, at value ............... $1,013,334,895 $534,438,096 $408,886,141 $540,475,695
============== ============ ============ ============
Net assets consist of:
Paid-in capital ............................. $1,078,362,275 $574,548,070 $433,238,900 $595,059,920
Undistributed net investment income
(distributions in excess of net
investment income) ....................... 346,303 (40,520) 142,501 86,948
Net unrealized appreciation (depreciation) .. (48,642,260) (34,478,264) (21,364,825) (52,045,395)
Accumulated net realized gain (loss) ........ (16,731,423) (5,591,190) (3,130,435) (2,625,778)
-------------- ------------ ------------ ------------
Net assets, at value ............... $1,013,334,895 $534,438,096 $408,886,141 $540,475,695
============== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 207
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
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 ........................ $920,248,416 $465,135,803 $338,345,149 $468,062,434
------------ ------------ ------------ ------------
Shares outstanding .......................... 90,413,061 43,111,394 33,232,445 44,395,956
------------ ------------ ------------ ------------
Net asset value per share(a) ................ $ 10.18 $ 10.79 $ 10.18 $ 10.54
------------ ------------ ------------ ------------
Maximum offering price per share (net asset
value per share / 95.75%) ................ $ 10.63 $ 11.27 $ 10.63 $ 11.01
------------ ------------ ------------ ------------
CLASS B:
Net assets, at value ........................ $ 14,276,416 -- -- --
------------ ------------ ------------ ------------
Shares outstanding .......................... 1,394,289 -- -- --
------------ ------------ ------------ ------------
Net asset value and maximum offering price
per share(a) ............................. $ 10.24 -- -- --
------------ ------------ ------------ ------------
CLASS C:
Net assets, at value ........................ $ 78,805,280 $ 69,302,293 $ 70,540,992 $ 72,413,261
------------ ------------ ------------ ------------
Shares outstanding .......................... 7,655,689 6,371,352 6,890,259 6,842,997
------------ ------------ ------------ ------------
Net asset value and maximum offering price
per share(a) ............................. $ 10.29 $ 10.88 $ 10.24 $ 10.58
------------ ------------ ------------ ------------
ADVISOR CLASS:
Net assets, at value ........................ $ 4,783 -- -- --
------------ ------------ ------------ ------------
Shares outstanding .......................... 470 -- -- --
------------ ------------ ------------ ------------
Net asset value and maximum offering price
per share ................................ $ 10.18 -- -- --
------------ ------------ ------------ ------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
208 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
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 ..................................... $969,392,357 $178,147,670 $5,920,079,422 $1,385,814,408
============ ============ ============== ==============
Value .................................... $961,762,758 $180,167,454 $5,084,477,831 $1,341,167,764
Cash ........................................ 5,430 56,374 1,179,148 31,732
Receivables:
Investment securities sold ............... -- 4,110,762 -- --
Capital shares sold ...................... 10,094,538 1,859,047 12,972,846 3,241,101
Interest ................................. 11,470,852 1,692,415 95,761,846 14,897,140
Other assets ................................ 2,007 386 10,570 2,851
------------ ------------ -------------- --------------
Total assets .......................... 983,335,585 187,886,438 5,194,402,241 1,359,340,588
------------ ------------ -------------- --------------
Liabilities:
Payables:
Investment securities purchased .......... 7,946,263 -- -- --
Capital shares redeemed .................. 3,316,911 2,820,944 9,027,636 1,449,066
Affiliates ............................... 519,246 38,138 2,793,934 767,341
Distributions to shareholders ............ 820,245 90,411 4,362,477 776,685
Accrued expenses and other liabilities ...... 151,748 50,328 897,367 161,532
------------ ------------ -------------- --------------
Total liabilities ..................... 12,754,413 2,999,821 17,081,414 3,154,624
------------ ------------ -------------- --------------
Net assets, at value ............... $970,581,172 $184,886,617 $5,177,320,827 $1,356,185,964
============ ============ ============== ==============
Net assets consist of:
Paid-in capital ............................. $989,331,590 $183,400,824 $6,412,706,640 $1,402,742,609
Undistributed net investment income
(distributions in excess of net investment
income) .................................. (48,901) 142,853 14,467,950 956,429
Net unrealized appreciation (depreciation) ..... (7,629,599) 2,019,784 (835,601,591) (44,646,644)
Accumulated net realized gain (loss) ........... (11,071,918) (676,844) (414,252,172) (2,866,430)
------------ ------------ -------------- --------------
Net assets, at value ............... $970,581,172 $184,886,617 $5,177,320,827 $1,356,185,964
============ ============ ============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 209
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
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
------------- ------------ -------------- --------------
CLASS A:
Net assets, at value ..................... $873,648,260 $184,886,617 $4,255,784,327 $1,100,142,210
------------ ------------ -------------- --------------
Shares outstanding ....................... 79,486,951 18,283,129 486,235,925 97,411,741
------------ ------------ -------------- --------------
Net asset value per share(a) ............. $ 10.99 $ 10.11 $ 8.75 $ 11.29
------------ ------------ -------------- --------------
Maximum offering price per share (net
asset value per share / 97.75%, 97.75%,
95.75% and 95.75%, respectively) ...... $ 11.24 $ 10.34 $ 9.14 $ 11.79
------------ ------------ -------------- --------------
CLASS B:
Net assets, at value ..................... -- -- $ 87,208,304 $ 47,329,239
------------ ------------ -------------- --------------
Shares outstanding ....................... -- -- 9,893,349 4,166,084
------------ ------------ -------------- --------------
Net asset value and maximum offering price
per share(a) .......................... -- -- $ 8.81 $ 11.36
------------ ------------ -------------- --------------
CLASS C:
Net assets, at value ..................... $ 91,163,726 -- $ 663,766,044 $ 207,944,764
------------ ------------ -------------- --------------
Shares outstanding ....................... 8,278,730 -- 74,913,716 18,249,027
------------ ------------ -------------- --------------
Net asset value and maximum offering price
per share(a) .......................... $ 11.01 -- $ 8.86 $ 11.39
------------ ------------ -------------- --------------
ADVISOR CLASS:
Net assets, at value ..................... $ 5,769,186 -- $ 170,562,152 $ 769,751
------------ ------------ -------------- --------------
Shares outstanding ....................... 524,389 -- 19,443,078 68,153
------------ ------------ -------------- --------------
Net asset value and maximum offering price
per share ............................. $ 11.00 -- $ 8.77 $ 11.29
------------ ------------ -------------- --------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
210 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009
Franklin Franklin
Oregon Pennsylvania
Tax-Free Tax-Free
Income Fund Income Fund
------------ --------------
Assets:
Investments in securities:
Cost ...................................................... $901,424,403 $1,013,214,096
============ ==============
Value ..................................................... $884,167,772 $ 976,523,624
Cash ......................................................... 18,591,523 186,040
Receivables:
Capital shares sold ....................................... 3,314,552 3,113,212
Interest .................................................. 10,141,990 15,243,227
Other assets ................................................. 1,915 2,048
------------ --------------
Total assets ........................................... 916,217,752 995,068,151
------------ --------------
Liabilities:
Payables:
Investment securities purchased ........................... 2,501,720 5,912,089
Capital shares redeemed ................................... 1,888,464 1,625,773
Affiliates ................................................ 495,333 559,200
Distributions to shareholders ............................. 532,654 951,505
Accrued expenses and other liabilities ....................... 106,071 135,351
------------ --------------
Total liabilities ...................................... 5,524,242 9,183,918
------------ --------------
Net assets, at value ................................ $910,693,510 $ 985,884,233
============ ==============
Net assets consist of:
Paid-in capital .............................................. $929,789,588 $1,028,275,725
Undistributed net investment income .......................... 2,209,538 616,324
Net unrealized appreciation (depreciation) ................... (17,256,631) (36,690,472)
Accumulated net realized gain (loss) ......................... (4,048,985) (6,317,344)
------------ --------------
Net assets, at value ................................ $910,693,510 $ 985,884,233
============ ==============
CLASS A:
Net assets, at value ......................................... $787,594,609 $ 820,226,764
============ ==============
Shares outstanding ........................................... 70,285,099 85,035,519
============ ==============
Net asset value per share(a) ................................. $ 11.21 $ 9.65
============ ==============
Maximum offering price per share (net asset value
per share / 95.75%) ....................................... $ 11.71 $ 10.08
============ ==============
CLASS B:
Net assets, at value ......................................... -- $ 30,177,206
============ ==============
Shares outstanding ........................................... -- 3,117,727
============ ==============
Net asset value and maximum offering price per share(a) ...... -- $ 9.68
============ ==============
CLASS C:
Net assets, at value ......................................... $123,098,901 $ 135,480,263
============ ==============
Shares outstanding ........................................... 10,868,636 13,925,535
============ ==============
Net asset value and maximum offering price per share(a) ...... $ 11.33 $ 9.73
============ ==============
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 211
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended February 28, 2009
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 ................................... $ 54,031,820 $ 28,204,733 $ 20,541,518 $ 29,270,581
------------ ------------ ------------ ------------
Expenses:
Management fees (Note 3a) .................. 4,895,096 2,651,898 2,076,665 2,752,341
Distribution fees: (Note 3c)
Class A ................................. 941,519 467,834 332,866 482,761
Class B ................................. 106,786 -- -- --
Class C ................................. 480,852 424,591 424,051 475,386
Transfer agent fees (Note 3e) .............. 302,999 219,095 146,607 277,705
Custodian fees ............................. 15,296 8,017 6,017 8,190
Reports to shareholders .................... 51,682 38,302 26,144 48,843
Registration and filing fees ............... 35,706 15,667 12,645 57,743
Professional fees .......................... 41,277 30,782 27,874 29,906
Trustees' fees and expenses ................ 8,722 4,479 3,374 4,701
Other ...................................... 58,900 41,385 41,577 41,694
------------ ------------ ------------ ------------
Total expenses ....................... 6,938,835 3,902,050 3,097,820 4,179,270
------------ ------------ ------------ ------------
Net investment income ............. 47,092,985 24,302,683 17,443,698 25,091,311
------------ ------------ ------------ ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from
investments ............................. 5,104,625 (476,720) 256,393 (514,867)
Net change in unrealized appreciation
(depreciation) on investments ........... (23,832,562) (19,209,407) (11,406,182) (32,138,084)
------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss) ........................................ (18,727,937) (19,686,127) (11,149,789) (32,652,951)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ..................... $ 28,365,048 $ 4,616,556 $ 6,293,909 $ (7,561,640)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
212 | Annual Report
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2009
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
------------- ------------ ------------- ------------
Investment income:
Interest ................................... $38,704,816 $3,175,154 $ 360,324,717 $ 69,194,635
----------- ---------- ------------- ------------
Expenses:
Management fees (Note 3a) .................. 4,082,482 477,845 25,413,217 6,421,010
Administrative fees (Note 3b) .............. -- 195,235 -- --
Distribution fees: (Note 3c)
Class A ................................. 769,893 143,273 4,501,568 1,118,264
Class B ................................. -- -- 746,987 359,326
Class C ................................. 363,216 -- 4,589,725 1,271,370
Transfer agent fees (Note 3e) .............. 478,960 31,235 2,714,111 550,208
Custodian fees ............................. 12,825 1,597 81,888 20,631
Reports to shareholders .................... 85,265 8,443 406,103 92,087
Registration and filing fees ............... 123,226 52,514 218,036 36,440
Professional fees .......................... 38,091 32,466 176,180 45,932
Trustees' fees and expenses ................ 6,888 749 48,196 11,554
Other ...................................... 70,608 65,632 592,131 84,291
----------- ---------- ------------- ------------
Total expenses ....................... 6,031,454 1,008,989 39,488,142 10,011,113
Expenses waived/paid by affiliates
(Note 3f) ......................... -- (487,059) -- --
----------- ---------- ------------- ------------
Net expenses ...................... 6,031,454 521,930 39,488,142 10,011,113
----------- ---------- ------------- ------------
Net investment income .......... 32,673,362 2,653,224 320,836,575 59,183,522
----------- ---------- ------------- ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .. (5,898,016) 1,360 (60,042,484) (1,555,323)
Net change in unrealized appreciation
(depreciation) on investments ........... 853,246 2,228,049 (704,879,658) (27,966,668)
----------- ---------- ------------- ------------
Net realized and unrealized gain (loss) ....... (5,044,770) 2,229,409 (764,922,142) (29,521,991)
----------- ---------- ------------- ------------
Net increase (decrease) in net assets resulting
from operations ............................ $27,628,592 $4,882,633 $(444,085,567) $ 29,661,531
=========== ========== ============= ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 213
Franklin Tax-Free Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended February 28, 2009
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------ ------------
Investment income:
Interest .................................... $ 44,228,069 $ 49,850,794
------------ ------------
Expenses:
Management fees (Note 3a) ................... 4,216,252 4,584,567
Distribution fees: (Note 3c)
Class A .................................. 766,411 778,998
Class B .................................. -- 221,413
Class C .................................. 722,799 812,293
Transfer agent fees (Note 3e) ............... 299,692 475,430
Custodian fees .............................. 13,158 14,417
Reports to shareholders ..................... 52,626 73,564
Registration and filing fees ................ 15,865 20,439
Professional fees ........................... 39,731 40,409
Trustees' fees and expenses ................. 7,337 8,066
Other ....................................... 68,801 72,716
------------ ------------
Total expenses ........................ 6,202,672 7,102,312
------------ ------------
Net investment income .............. 38,025,397 42,748,482
------------ ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ... 2,267,270 (192,563)
Net change in unrealized appreciation
(depreciation) on investments ............ (10,042,779) (21,524,495)
------------ ------------
Net realized and unrealized gain (loss) ........ (7,775,509) (21,717,058)
------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 30,249,888 $ 21,031,424
============ ============
The accompanying notes are an integral part of these financial statements.
214 | 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,
------------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
-------------- -------------- ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................... $ 47,092,985 $ 43,894,585 $ 24,302,683 $ 20,910,430
Net realized gain (loss) from investments.. 5,104,625 1,596,150 (476,720) 168,730
Net change in unrealized appreciation
(depreciation) on investments .......... (23,832,562) (82,873,545) (19,209,407) (42,674,984)
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ........ 28,365,048 (37,382,810) 4,616,556 (21,595,824)
-------------- -------------- ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ................................ (42,645,873) (41,226,722) (21,514,143) (18,762,346)
Class B ................................ (645,470) (721,813) -- --
Class C ................................ (2,907,445) (2,337,570) (2,616,170) (1,975,690)
Advisor Class .......................... (148) -- -- --
-------------- -------------- ------------ ------------
Total distributions to shareholders .......... (46,198,936) (44,286,105) (24,130,313) (20,738,036)
-------------- -------------- ------------ ------------
Capital share transactions: (Note 2)
Class A ................................ 22,129,364 60,653,009 37,449,907 55,622,490
Class B ................................ (3,377,558) (1,728,316) -- --
Class C ................................ 15,704,782 11,159,964 15,881,168 9,911,611
Advisor Class .......................... 5,000 -- -- --
-------------- -------------- ------------ ------------
Total capital share transactions ............. 34,461,588 70,084,657 53,331,075 65,534,101
-------------- -------------- ------------ ------------
Redemption fees .............................. 1,058 3,235 71 108
-------------- -------------- ------------ ------------
Net increase (decrease) in net
assets ........................... 16,628,758 (11,581,023) 33,817,389 23,200,349
Net assets:
Beginning of year ......................... 996,706,137 1,008,287,160 500,620,707 477,420,358
-------------- -------------- ------------ ------------
End of year ............................... $1,013,334,895 $ 996,706,137 $534,438,096 $500,620,707
============== ============== ============ ============
Undistributed net investment income
(distributions in excess of net
investment income) included in net assets:
End of year ............................... $ 346,303 $ (544,290) $ (40,520) $ (213,171)
============== ============== ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
Annual Report | 215
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,
--------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
------------ ------------ ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income .................... $ 17,443,698 $ 15,190,520 $ 25,091,311 $ 21,548,060
Net realized gain (loss) from investments 256,393 95,770 (514,867) (1,152,627)
Net change in unrealized appreciation
(depreciation) on investments ......... (11,406,182) (25,882,364) (32,138,084) (43,332,175)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations .......... 6,293,909 (10,596,074) (7,561,640) (22,936,742)
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ............................... (14,619,347) (13,244,839) (21,851,064) (19,216,814)
Class C ............................... (2,439,850) (1,981,566) (2,889,132) (2,343,586)
------------ ------------ ------------ ------------
Total distributions to shareholders ......... (17,059,197) (15,226,405) (24,740,196) (21,560,400)
------------ ------------ ------------ ------------
Capital share transactions: (Note 2)
Class A .................................. 31,280,348 32,628,406 33,331,759 72,989,889
Class C .................................. 17,336,628 6,344,477 9,945,890 13,745,139
------------ ------------ ------------ ------------
Total capital share transactions ............ 48,616,976 38,972,883 43,277,649 86,735,028
------------ ------------ ------------ ------------
Redemption fees ............................. 905 2,135 2 432
------------ ------------ ------------ ------------
Net increase (decrease) in net
assets ............................. 37,852,593 13,152,539 10,975,815 42,238,318
Net assets:
Beginning of year ........................ 371,033,548 357,881,009 529,499,880 487,261,562
------------ ------------ ------------ ------------
End of year .............................. $408,886,141 $371,033,548 $540,475,695 $529,499,880
============ ============ ============ ============
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of year .............................. $ 142,501 $ (226,283) $ 86,948 $ (243,881)
============ ============ ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
216 | 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,
--------------------------- --------------------------
2009 2008(a) 2009 2008(a)
------------ ------------ ------------ -----------
Increase (decrease) in net assets:
Operations:
Net investment income ..................... $ 32,673,362 $ 24,865,467 $ 2,653,224 $ 812,853
Net realized gain (loss) from investments.. (5,898,016) (1,463,582) 1,360 6,997
Net change in unrealized appreciation
(depreciation) on investments .......... 853,246 (25,535,275) 2,228,049 15,741
------------ ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations .............. 27,628,592 (2,133,390) 4,882,633 835,591
------------ ------------ ------------ -----------
Distributions to shareholders from:
Net investment income:
Class A ................................ (30,459,619) (24,178,554) (2,560,784) (848,587)
Class C ................................ (1,859,248) (929,706) -- --
Advisor Class .......................... (15,691) -- -- --
------------ ------------ ------------ -----------
Total distributions to shareholders .......... (32,334,558) (25,108,260) (2,560,784) (848,587)
------------ ------------ ------------ -----------
Capital share transactions: (Note 2)
Class A ................................... 178,559,999 114,449,992 138,650,302 25,243,504
Class C ................................... 56,328,454 7,574,428 -- --
Advisor Class ............................. 5,798,352 -- -- --
------------ ------------ ------------ -----------
Total capital share transactions ............. 240,686,805 122,024,420 138,650,302 25,243,504
------------ ------------ ------------ -----------
Redemption fees .............................. 4,722 11,727 195 1,188
------------ ------------ ------------ -----------
Net increase (decrease) in net
assets .............................. 235,985,561 94,794,497 140,972,346 25,231,696
Net assets:
Beginning of year ............................ 734,595,611 639,801,114 43,914,271 18,682,575
------------ ------------ ------------ -----------
End of year .................................. $970,581,172 $734,595,611 $184,886,617 $43,914,271
============ ============ ============ ===========
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of year .................................. $ (48,901) $ (381,164) $ 142,853 $ 14,365
============ ============ ============ ===========
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
Annual Report | 217
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,
------------------------------- -------------------------------
2009 2008(a) 2009 2008(a)
-------------- -------------- -------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ....................... $ 320,836,575 $ 302,240,275 $ 59,183,522 $ 53,319,442
Net realized gain (loss) from
investments .............................. (60,042,484) (65,781,744) (1,555,323) 585,689
Net change in unrealized appreciation
(depreciation) on investments ............ (704,879,658) (549,544,067) (27,966,668) (85,633,954)
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations ............. (444,085,567) (313,085,536) 29,661,531 (31,728,823)
-------------- -------------- -------------- --------------
Distributions to shareholders from:
Net investment income:
Class A .................................. (265,600,315) (253,354,831) (48,093,024) (44,993,101)
Class B .................................. (5,867,253) (7,712,274) (2,065,841) (2,418,675)
Class C .................................. (36,047,885) (32,097,488) (7,248,870) (6,021,906)
Advisor Class ............................ (9,414,085) (4,961,732) (26,899) --
-------------- -------------- -------------- --------------
Total distributions to shareholders ............ (316,929,538) (298,126,325) (57,434,634) (53,433,682)
-------------- -------------- -------------- --------------
Capital share transactions: (Note 2)
Class A .................................. 96,370,949 (34,911,873) 41,516,354 144,596,476
Class B .................................. (38,213,935) (58,694,299) (12,231,096) (7,663,204)
Class C .................................. 62,822,395 9,046,334 45,319,925 19,023,864
Advisor Class ............................ 51,724,633 102,101,660 833,205 --
-------------- -------------- -------------- --------------
Total capital share transactions ............... 172,704,042 17,541,822 75,438,388 155,957,136
-------------- -------------- -------------- --------------
Redemption fees ................................ 6,664 20,713 2,210 18,285
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets .... (588,304,399) (593,649,326) 47,667,495 70,812,916
Net assets:
Beginning of year .............................. 5,765,625,226 6,359,274,552 1,308,518,469 1,237,705,553
-------------- -------------- -------------- --------------
End of year .................................... $5,177,320,827 $5,765,625,226 $1,356,185,964 $1,308,518,469
============== ============== ============== ==============
Undistributed net investment income
(distributions in excess of net
investment income) included in net assets:
End of year .................................... $ 14,467,950 $ 10,520,494 $ 956,429 $ (783,499)
============== ============== ============== ==============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
218 | 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,
--------------------------- ---------------------------
2009 2008(a) 2009 2008(a)
------------ ------------ ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 38,025,397 $ 33,232,275 $ 42,748,482 $ 37,896,936
Net realized gain (loss) from investments .. 2,267,270 (1,037,084) (192,563) 2,020,609
Net change in unrealized appreciation
(depreciation) on investments ........... (10,042,779) (47,614,903) (21,524,495) (61,479,260)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ............ 30,249,888 (15,419,712) 21,031,424 (21,561,715)
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ................................. (32,925,838) (29,363,730) (35,456,429) (32,486,231)
Class B ................................. -- -- (1,313,880) (1,502,874)
Class C ................................. (4,109,955) (3,328,278) (4,778,492) (3,775,781)
------------ ------------ ------------ ------------
Total distributions to shareholders ........... (37,035,793) (32,692,008) (41,548,801) (37,764,886)
------------ ------------ ------------ ------------
Capital share transactions: (Note 2)
Class A ................................. 73,767,265 75,212,282 66,846,896 72,804,990
Class B ................................. -- -- (6,521,436) (4,030,087)
Class C ................................. 27,262,962 10,709,229 31,286,715 13,664,921
------------ ------------ ------------ ------------
Total capital share transactions .............. 101,030,227 85,921,511 91,612,175 82,439,824
------------ ------------ ------------ ------------
Redemption fees ............................... 1,026 3,271 501 4,771
------------ ------------ ------------ ------------
Net increase (decrease) in net assets ... 94,245,348 37,813,062 71,095,299 23,117,994
Net assets:
Beginning of year ............................. 816,448,162 778,635,100 914,788,934 891,670,940
------------ ------------ ------------ ------------
End of year ................................... $910,693,510 $816,448,162 $985,884,233 $914,788,934
============ ============ ============ ============
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of year ................................... $ 2,209,538 $ 1,220,279 $ 616,324 $ (580,859)
============ ============ ============ ============
(a) For the year ended February 29.
The accompanying notes are an integral part of these financial statements.
Annual Report | 219
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Free Trust (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
twenty-four separate funds, ten of which are included in this report (Funds).
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. Effective July 1, 2008, the Franklin Arizona Tax-Free Income Fund and the
Franklin New Jersey Tax-Free Income Fund began offering a new class of shares,
Advisor Class. Effective December 1, 2008, the Franklin Federal
Intermediate-Term Tax-Free Income Fund began offering a new class of shares,
Advisor Class. Each class of shares differs by its initial sales load,
contingent deferred sales charges, distribution fees, voting rights on matters
affecting a single class and its exchange privilege.
CLASS A
Franklin Federal Limited-Term Tax-Free Income Fund
CLASS A & CLASS C
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Double Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
CLASS A, CLASS B & CLASS C
Franklin Pennsylvania Tax-Free Income Fund
CLASS A, CLASS C & ADVISOR CLASS
Franklin Federal Intermediate-Term Tax-Free Income Fund
CLASS A, CLASS B, CLASS C & ADVISOR CLASS
Franklin Arizona Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin New Jersey 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
220 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
time at which trading in a security is completed and the close of the NYSE that
might call into question the availability (including the reliability) of the
value of a portfolio security held by the fund. If such an event occurs, the
securities may be valued using fair value procedures, which may include the use
of independent pricing services. All security valuation procedures are approved
by the Trust's Board of Trustees.
B. SECURITIES PURCHASED ON A WHEN-ISSUED AND DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued and 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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of February 28, 2009, and have
determined that no provision for income tax is required in the Funds' financial
statements.
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 of
America. 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.
Annual Report | 221
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Realized and unrealized gains and losses and net investment income, not
including 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. Insurance
companies typically insure municipal bonds that tend to be of very high quality,
with the majority of underlying municipal bonds rated A or better. However,
there is a risk that in the event of an issuer default, the insurer may not be
able to fulfill its obligations under the terms of the policy.
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 was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Funds and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
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, on behalf of the Funds, 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.
222 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2009, there were an unlimited number of shares authorized
(without par value). Transactions in the Funds' shares were as follows:
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ----------- -------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ...................................... 17,238,832 $ 179,568,520 11,044,781 $ 123,137,478
Shares issued in reinvestment of distributions ... 2,367,049 24,288,648 1,178,442 13,011,390
Shares redeemed .................................. (17,953,631) (181,727,804) (9,027,007) (98,698,961)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 1,652,250 $ 22,129,364 3,196,216 $ 37,449,907
=========== =============== =========== =============
Year ended February 29, 2008
Shares sold ...................................... 16,249,411 $ 177,756,709 8,421,827 $ 99,998,830
Shares issued in reinvestment of distributions ... 2,063,970 22,538,873 917,420 10,876,440
Shares redeemed .................................. (12,817,463) (139,642,573) (4,661,778) (55,252,780)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 5,495,918 $ 60,653,009 4,677,469 $ 55,622,490
=========== =============== =========== =============
CLASS B SHARES:
Year ended February 28, 2009
Shares sold ...................................... 26,738 $ 274,783
Shares issued in reinvestment of distributions ... 39,754 411,280
Shares redeemed .................................. (395,158) (4,063,621)
----------- ---------------
Net increase (decrease) .......................... (328,666) $ (3,377,558)
=========== ===============
Year ended February 29, 2008
Shares sold ...................................... 110,231 $ 1,185,921
Shares issued in reinvestment of distributions ... 38,372 421,666
Shares redeemed .................................. (302,851) (3,335,903)
----------- ---------------
Net increase (decrease) .......................... (154,248) $ (1,728,316)
=========== ===============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ...................................... 2,875,619 $ 30,210,078 2,631,956 $ 29,904,244
Shares issued in reinvestment of distributions ... 185,682 1,923,396 166,791 1,852,485
Shares redeemed .................................. (1,594,568) (16,428,692) (1,431,043) (15,875,561)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 1,466,733 $ 15,704,782 1,367,704 $ 15,881,168
=========== =============== =========== =============
Year ended February 29, 2008
Shares sold ...................................... 1,910,476 $ 21,108,685 1,637,001 $ 19,595,410
Shares issued in reinvestment of distributions ... 132,425 1,461,258 110,452 1,319,254
Shares redeemed .................................. (1,035,304) (11,409,979) (921,903) (11,003,053)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 1,007,597 $ 11,159,964 825,550 $ 9,911,611
=========== =============== =========== =============
ADVISOR CLASS SHARES:
Period ended February 28, 2009(a)
Shares sold ...................................... 470 $ 5,000
=========== ===============
(a) For the period July 1, 2008 (effective date) to February 28, 2009.
Annual Report | 223
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ----------- -------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ...................................... 11,862,212 $ 123,167,352 11,257,062 $ 122,507,234
Shares issued in reinvestment of distributions ... 827,813 8,550,106 1,439,308 15,609,611
Shares redeemed .................................. (9,864,969) (100,437,110) (9,974,418) (104,785,086)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 2,825,056 $ 31,280,348 2,721,952 $ 33,331,759
=========== =============== =========== =============
Year ended February 29, 2008
Shares sold ...................................... 7,329,502 $ 80,072,069 11,692,561 $ 138,191,821
Shares issued in reinvestment of distributions ... 696,086 7,604,451 1,130,372 13,331,291
Shares redeemed .................................. (5,040,494) (55,048,114) (6,662,902) (78,533,223)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 2,985,094 $ 32,628,406 6,160,031 $ 72,989,889
=========== =============== =========== =============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ...................................... 2,845,749 $ 29,996,105 2,544,898 $ 28,039,246
Shares issued in reinvestment of distributions ... 153,663 1,592,772 179,371 1,949,699
Shares redeemed .................................. (1,387,600) (14,252,249) (1,895,711) (20,043,055)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 1,611,812 $ 17,336,628 828,558 $ 9,945,890
=========== =============== =========== =============
Year ended February 29, 2008
Shares sold ...................................... 1,374,411 $ 15,127,228 1,965,445 $ 23,306,648
Shares issued in reinvestment of distributions ... 111,175 1,220,793 129,458 1,531,953
Shares redeemed .................................. (910,872) (10,003,544) (938,169) (11,093,462)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 574,714 $ 6,344,477 1,156,734 $ 13,745,139
=========== =============== =========== =============
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ----------- -------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ...................................... 46,595,106 $ 510,936,101 13,845,442 $ 138,586,300
Shares issued on merger (Note 9) ................. -- -- 5,130,761 51,153,690
Shares issued in reinvestment of distributions ... 1,709,078 18,865,223 181,546 1,821,134
Shares redeemed .................................. (32,181,764) (351,241,325) (5,282,411) (52,910,822)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 16,122,420 $ 178,559,999 13,875,338 $ 138,650,302
=========== =============== =========== =============
Year ended February 29, 2008
Shares sold ...................................... 23,760,378 $ 270,017,318 3,660,204 $ 36,547,690
Shares issued in reinvestment of distributions ... 1,389,981 15,783,901 63,352 631,847
Shares redeemed .................................. (15,080,606) (171,351,227) (1,197,060) (11,936,033)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 10,069,753 $ 114,449,992 2,526,496 $ 25,243,504
=========== =============== =========== =============
224 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FEDERAL
INTERMEDIATE-TERM
TAX-FREE INCOME FUND
-----------------------------
SHARES AMOUNT
----------- ---------------
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ...................................... 6,525,110 $ 71,485,775
Shares issued in reinvestment of distributions ... 98,173 1,082,195
Shares redeemed .................................. (1,486,661) (16,239,516)
----------- ---------------
Net increase (decrease) .......................... 5,136,622 $ 56,328,454
=========== ===============
Year ended February 29, 2008
Shares sold ...................................... 1,317,329 $ 15,038,582
Shares issued in reinvestment of distributions ... 52,715 599,721
Shares redeemed .................................. (709,443) (8,063,875)
----------- ---------------
Net increase (decrease) .......................... 660,601 $ 7,574,428
=========== ===============
ADVISOR CLASS SHARES:
Period ended February 28, 2009(a)
Shares sold ................................... 536,388 $ 5,931,495
Shares issued in reinvestment of
distributions .............................. 487 5,387
Shares redeemed ............................... (12,486) (138,530)
----------- ---------------
Net increase (decrease)........................ 524,389 $ 5,798,352
=========== ===============
(a) For the period December 1, 2008 (effective date) to February 28, 2009.
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ----------- -------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ...................................... 99,498,655 $ 944,382,913 26,211,231 $ 302,139,948
Shares issued in reinvestment of distributions ... 16,553,818 155,044,587 2,667,263 30,416,202
Shares redeemed .................................. (109,063,108) (1,003,056,551) (25,875,804) (291,039,796)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... 6,989,365 $ 96,370,949 3,002,690 $ 41,516,354
=========== =============== =========== =============
Year ended February 29, 2008
Shares sold ...................................... 71,501,765 $ 764,154,777 24,068,387 $ 289,322,709
Shares issued in reinvestment of distributions ... 13,397,140 143,166,037 2,259,938 27,128,809
Shares redeemed .................................. (88,406,003) (942,232,687) (14,338,394) (171,855,042)
----------- --------------- ----------- -------------
Net increase (decrease) .......................... (3,507,098) $ (34,911,873) 11,989,931 $ 144,596,476
=========== =============== =========== =============
Annual Report | 225
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND(a)
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
CLASS B SHARES:
Year ended February 28, 2009
Shares sold ...................................... 409,414 $ 3,782,361 123,361 $ 1,417,153
Shares issued in reinvestment of distributions ... 358,840 3,406,236 121,523 1,396,494
Shares redeemed .................................. (4,787,219) (45,402,532) (1,322,152) (15,044,743)
----------- ------------- ---------- ------------
Net increase (decrease) .......................... (4,018,965) $ (38,213,935) (1,077,268) $(12,231,096)
=========== ============= ========== ============
Year ended February 29, 2008
Shares sold ...................................... 237,078 $ 2,567,299 49,149 $ 593,550
Shares issued in reinvestment of distributions ... 410,319 4,420,903 130,747 1,579,036
Shares redeemed .................................. (6,094,265) (65,682,501) (814,055) (9,835,790)
----------- ------------- ---------- ------------
Net increase (decrease) .......................... (5,446,868) $ (58,694,299) (634,159) $ (7,663,204)
=========== ============= ========== ============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ...................................... 22,102,468 $ 213,928,128 6,637,192 $ 77,489,763
Shares issued in reinvestment of distributions ... 2,321,734 21,963,042 420,048 4,823,386
Shares redeemed .................................. (18,591,917) (173,068,775) (3,260,430) (36,993,224)
----------- ------------- ---------- ------------
Net increase (decrease) .......................... 5,832,285 $ 62,822,395 3,796,810 $ 45,319,925
=========== ============= ========== ============
Year ended February 29, 2008
Shares sold ...................................... 12,606,168 $ 136,314,998 3,963,378 $ 48,078,882
Shares issued in reinvestment of distributions ... 1,779,774 19,232,738 323,070 3,910,931
Shares redeemed .................................. (13,586,770) (146,501,402) (2,721,708) (32,965,949)
----------- ------------- ---------- ------------
Net increase (decrease) .......................... 799,172 $ 9,046,334 1,564,740 $ 19,023,864
=========== ============= ========== ============
ADVISOR CLASS SHARES:
Year ended February 28, 2009
Shares sold ...................................... 17,120,226 $ 159,988,036 111,166 $ 1,311,170
Shares issued in reinvestment of distributions ... 249,047 2,299,853 1,279 14,197
Shares redeemed .................................. (12,252,212) (110,563,256) (44,292) (492,162)
----------- ------------- ---------- ------------
Net increase (decrease) .......................... 5,117,061 $ 51,724,633 68,153 $ 833,205
=========== ============= ========== ============
Year ended February 29, 2008
Shares sold ...................................... 13,907,786 $ 148,681,975
Shares issued in reinvestment of distributions ... 58,477 621,453
Shares redeemed .................................. (4,444,576) (47,201,768)
----------- -------------
Net increase (decrease) .......................... 9,521,687 $ 102,101,660
=========== =============
(a) For the period July 1, 2008 (effective date) to February 28, 2009, for
Advisor Class.
226 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES:
Year ended February 28, 2009
Shares sold ...................................... 14,721,824 $ 167,284,597 16,594,823 $ 161,859,979
Shares issued in reinvestment of distributions ... 2,080,516 23,381,133 2,232,346 21,701,112
Shares redeemed .................................. (10,487,489) (116,898,465) (12,195,590) (116,714,195)
----------- ------------- ----------- -------------
Net increase (decrease) .......................... 6,314,851 $ 73,767,265 6,631,579 $ 66,846,896
=========== ============= =========== =============
Year ended February 29, 2008
Shares sold ...................................... 11,545,590 $ 135,606,551 14,217,025 $ 146,656,423
Shares issued in reinvestment of distributions ... 1,724,194 20,243,343 1,888,388 19,462,421
Shares redeemed .................................. (6,879,077) (80,637,612) (9,056,899) (93,313,854)
----------- ------------- ----------- -------------
Net increase (decrease) .......................... 6,390,707 $ 75,212,282 7,048,514 $ 72,804,990
=========== ============= =========== =============
CLASS B SHARES:
Year ended February 28, 2009
Shares sold ...................................... 43,566 $ 424,464
Shares issued in reinvestment of distributions ... 83,291 815,180
Shares redeemed .................................. (797,396) (7,761,080)
----------- -------------
Net increase (decrease) .......................... (670,539) $ (6,521,436)
=========== =============
Year ended February 29, 2008
Shares sold ...................................... 34,269 $ 356,647
Shares issued in reinvestment of distributions ... 89,957 930,268
Shares redeemed .................................. (513,532) (5,317,002)
----------- -------------
Net increase (decrease) .......................... (389,306) $ (4,030,087)
=========== =============
CLASS C SHARES:
Year ended February 28, 2009
Shares sold ...................................... 3,723,660 $ 42,658,970 4,895,633 $ 48,518,545
Shares issued in reinvestment of distributions ... 248,209 2,815,631 309,413 3,027,106
Shares redeemed .................................. (1,621,344) (18,211,639) (2,112,955) (20,258,936)
----------- ------------- ----------- -------------
Net increase (decrease) .......................... 2,350,525 $ 27,262,962 3,092,091 $ 31,286,715
=========== ============= =========== =============
Year ended February 29, 2008
Shares sold ...................................... 2,110,384 $ 25,039,193 2,532,495 $ 26,319,542
Shares issued in reinvestment of distributions ... 185,508 2,199,832 228,837 2,376,995
Shares redeemed .................................. (1,393,397) (16,529,796) (1,449,463) (15,031,616)
----------- ------------- ----------- -------------
Net increase (decrease) .......................... 902,495 $ 10,709,229 1,311,869 $ 13,664,921
=========== ============= =========== =============
Annual Report | 227
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
- ---------- ----------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Funds, except the Franklin Federal Limited-Term Tax-Free Income Fund, pay an
investment management fee to Advisers based on the month-end net assets of 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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
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
FT Services provides administrative services to the Funds. The Franklin Federal
Limited-Term Tax-Free Income Fund pays an administrative fee to FT Services of
0.20% per year of its respective average daily net assets. Under an agreement
with Advisers, the administrative fee for the Funds, except the Franklin Federal
Limited-Term Tax-Free Income Fund, is paid by Advisers based on each fund's
average daily net assets, and is not an additional expense of the funds.
228 | 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, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act.
On December 2, 2008, the Trust's Board of Trustees approved a modification to
the Class A distribution plan, for those funds that had a Class A compensation
plan, changing the form of the plan from a compensation to a reimbursement
distribution plan. Under the distribution plan 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. This change
was effective February 1, 2009. Under the Class A reimbursement distribution
plans, costs exceeding the maximum for the current plan year cannot be
reimbursed in subsequent periods. Prior to February 1, 2009, under the Franklin
Federal Limited-Term Tax-Free Income Fund's Class A compensation distribution
plan, the fund paid Distributors for costs incurred in connection with the
servicing, sale and distribution of the fund's shares up to a certain percentage
per year of its average daily net assets.
In addition, under the Funds' Class B and C 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
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%
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% 0.15% 0.10% 0.10%
Compensation Plans:
Class B ......... -- -- 0.65% 0.65%
Class C ......... 0.65% -- 0.65% 0.65%
Annual Report | 229
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
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 ........ $296,412 $222,316 $161,870 $232,847
Contingent deferred sales charges retained .... $ 88,224 $ 38,003 $ 70,098 $ 41,150
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 ........ $120,674 $47,084 $1,243,084 $359,593
Contingent deferred sales charges retained .... $ 81,841 $60,386 $ 322,599 $183,230
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------- ------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ........ $455,042 $353,302
Contingent deferred sales charges retained .... $ 82,854 $ 80,939
230 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
For the year ended February 28, 2009, 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 ........................... $184,477 $122,417 $91,863 $157,562
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 ........................... $238,034 $16,651 $1,628,519 $332,658
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------- -----------
Transfer agent fees ........................... $178,156 $298,741
F. WAIVER AND EXPENSE REIMBURSEMENTS
For the Franklin Federal Limited-Term Tax-Free Income Fund, FT Services and
Advisers have agreed in advance to waive all or a portion of their respective
fees and to assume payment of other expenses through June 30, 2010. Total
expenses waived or paid are not subject to reimbursement by the fund subsequent
to the fund's fiscal year end. After June 30, 2010, FT Services and Advisers may
discontinue this waiver at any time upon notice to the fund's Board of Trustees.
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At February 28, 2009, 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:
2011 ............................... $ -- $ 81,665 $ 53,698 $ --
2012 ............................... 13,433,836 4,695,674 3,034,219 --
2013 ............................... -- -- -- 200,921
2014 ............................... 2,638,564 -- -- 152,458
2015 ............................... 659,023 -- -- 134,018
2016 ............................... -- -- -- 503,897
2017 ............................... -- -- -- 944,001
----------- ---------- ---------- ----------
$16,731,423 $4,777,339 $3,087,917 $1,935,295
=========== ========== ========== ==========
Annual Report | 231
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (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
------------- ------------ ------------ -----------
Capital loss carryforwards expiring in:
2010 ............................... $ 614,893 $ -- $ 63,519,381 $ --
2011 ............................... -- -- 131,377,453 --
2012 ............................... 2,156,839 -- 50,621,589 1,217,817
2013 ............................... 373,568 -- 35,250,377 --
2014 ............................... 213,358 337,388 7,711,279 --
2015 ............................... 361,303 321,499 -- --
2016 ............................... 1,114,337 17,957 62,972,830 --
2017 ............................... 6,237,620 -- 15,478,643 898,017
----------- -------- ------------ ----------
$11,071,918 $676,844(a) $366,931,552 $2,115,834
=========== ======== ============ ==========
(a) Includes $212,721 and $118,982 from the merged Franklin California
Limited-Term Tax-Free Income Fund and Franklin New York Limited-Term
Tax-Free Income Fund, respectively, which may be carried over to offset
future capital gains.
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
----------- ------------
Capital loss carryforwards expiring in:
2010 ............................... $ 361,802 $4,700,564
2012 ............................... 2,455,722 --
2013 ............................... -- 876,215
2016 ............................... 972,134 --
---------- ----------
$3,789,658 $5,576,779
========== ==========
During the year end February 28, 2009, the funds utilized capital loss
carryforwards as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT FEDERAL LIMITED- OREGON PENNSYLVANIA
TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
- ----------- ----------- ----------- ---------------- ----------- ------------
$5,108,081 $168,407 $314,628 $1,407 $2,464,208 $172,957
On February 28, 2009, the following funds had expired capital loss
carryforwards, which were reclassified to paid-in capital.
FRANKLIN
FRANKLIN FRANKLIN FEDERAL FRANKLIN
COLORADO CONNECTICUT INTERMEDIATE- HIGH YIELD
TAX-FREE TAX-FREE TERM TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
- ----------- ----------- ------------- -----------
$630,826 $112,853 $1,207,419 $73,985,675
232 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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, 2009, deferred losses were as follows:
FRANKLIN FRANKLIN FEDERAL FRANKLIN
COLORADO HIGH YIELD NEW JERSEY OREGON
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
- ----------- ----------- ----------- -----------
$788,740 $45,398,195 $750,597 $196,593
The tax character of distributions paid during the years ended February 28, 2009
and February 29, 2008, was as follows:
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from tax exempt
income ........................ $46,198,936 $44,286,105 $24,130,313 $20,738,036
=========== =========== =========== ===========
FRANKLIN CONNECTICUT FRANKLIN DOUBLE
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from tax exempt
income ........................ $17,059,197 $15,226,405 $24,740,196 $21,560,400
=========== =========== =========== ===========
FRANKLIN FEDERAL FRANKLIN FEDERAL
INTERMEDIATE-TERM LIMITED-TERM
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- ---------------------
2009 2008 2009 2008
----------- ----------- ---------- --------
Distributions paid from tax exempt
income ........................ $32,334,558 $25,108,260 $2,560,784 $848,587
=========== =========== ========== ========
FRANKLIN HIGH YIELD FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
--------------------------- -------------------------
2009 2008 2009 2008
------------ ------------ ----------- -----------
Distributions paid from tax exempt
income ........................ $316,929,538 $298,126,325 $57,434,634 $53,433,682
============ ============ =========== ===========
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Distributions paid from tax exempt
income ........................ $37,035,793 $32,692,008 $41,548,801 $37,764,886
=========== =========== =========== ===========
Annual Report | 233
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
At February 28, 2009, the cost of investments, net unrealized appreciation
(depreciation) and 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 ........................... $1,052,287,834 $563,775,425 $424,607,977
============== ============ ============
Unrealized appreciation ....................... $ 30,000,365 $ 14,088,337 $ 7,762,119
Unrealized depreciation ....................... (78,490,372) (48,560,937) (29,160,011)
-------------- ------------ ------------
Net unrealized appreciation (depreciation) .... $ (48,490,007) $(34,472,600) $(21,397,892)
============== ============ ============
Distributable earnings - undistributed tax
exempt income .............................. $ 1,229,558 $ 474,397 $ 368,367
============== ============ ============
FRANKLIN FRANKLIN
FRANKLIN FEDERAL FEDERAL
DOUBLE INTERMEDIATE- LIMITED-TERM
TAX-FREE TERM TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------- ------------- ------------
Cost of investments ........................... $578,216,590 $969,353,399 $178,119,966
============ ============ ============
Unrealized appreciation ....................... $ 13,176,382 $ 23,590,433 $ 2,920,945
Unrealized depreciation ....................... (65,889,877) (31,181,074) (873,457)
------------ ------------ ------------
Net unrealized appreciation (depreciation) .... $(52,713,495) $ (7,590,641) $ 2,047,488
============ ============ ============
Distributable earnings - undistributed tax
exempt income .............................. $ 616,541 $ 732,386 $ 205,561
============ ============ ============
FRANKLIN FRANKLIN FRANKLIN
HIGH YIELD NEW JERSEY OREGON
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------- -------------- ------------
Cost of investments ........................... $ 5,917,913,687 $1,385,623,144 $901,412,227
=============== ============== ============
Unrealized appreciation ....................... $ 184,243,359 $ 46,958,877 $ 31,942,179
Unrealized depreciation ....................... (1,017,679,215) (91,414,257) (49,186,634)
--------------- -------------- ------------
Net unrealized appreciation (depreciation) .... $ (833,435,856) $ (44,455,380) $(17,244,455)
=============== ============== ============
Undistributed tax exempt income ............... $ 14,117,022 $ 1,541,852 $ 2,667,283
Undistributed ordinary income ................. 625,245 -- --
--------------- -------------- ------------
Distributable earnings ........................ $ 14,742,267 $ 1,541,852 $ 2,667,283
=============== ============== ============
FRANKLIN
PENNSYLVANIA
TAX-FREE
INCOME FUND
---------------
Cost of investments ........................... $1,013,803,673
==============
Unrealized appreciation ....................... $ 29,222,593
Unrealized depreciation ....................... (66,502,642)
--------------
Net unrealized appreciation (depreciation) .... $ (37,280,049)
==============
Distributable earnings - undistributed tax
exempt income .............................. $ 1,416,840
==============
234 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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, 2009, 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 ..................................... $240,934,675 $113,975,606 $87,452,837 $116,144,491
Sales ......................................... $213,169,382 $ 57,189,295 $38,341,317 $ 78,083,063
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 ..................................... $323,662,989 $82,834,975 $1,198,994,059 $216,159,089
Sales ......................................... $106,167,226 $ 9,175,000 $1,039,735,100 $146,710,761
FRANKLIN FRANKLIN
OREGON PENNSYLVANIA
TAX-FREE TAX-FREE
INCOME FUND INCOME FUND
------------ ------------
Purchases ..................................... $160,911,692 $194,790,884
Sales ......................................... $ 85,387,128 $108,579,849
6. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin High Yield Tax-Free Income Fund has 29.30% of its portfolio
invested in high yield or other securities rated below investment grade. These
securities may be more sensitive to economic conditions causing greater price
volatility and are potentially subject to a greater risk of loss due to default
than higher rated securities.
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, 2009, the value of this security was $4,666,590, representing 0.09% of the
fund's net assets. The fund discontinues accruing income on securities for which
income has been deemed uncollectible and provides an estimate for losses on
interest receivable. The securities have been identified on the accompanying
Statement of Investments.
Annual Report | 235
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. 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 Federal Intermediate-Term Tax-Free Income Fund, the Franklin Federal
Limited-Term Tax-Free Income Fund and the Franklin High Yield Tax-Free Income
Fund. Such concentration may subject the funds to risks associated with
industrial or regional matters, and economic, political or legal developments
occurring within those states and U.S. territories. In addition, investments in
these securities are sensitive to interest rate changes and credit risk of the
issuer and may subject the funds to increased market volatility. The market for
these investments may be limited, which may make them difficult to buy or sell.
8. OTHER CONSIDERATIONS
Officers, directors or employees of the Franklin High Yield Tax-Free Income
Fund's Investment Manager, may serve from time to time as members of
bondholders' steering committees or official creditors' committees. Such
participation may result in the possession by the Investment Manager of material
non-public information which, pursuant to the fund's policies and the
requirements of applicable securities laws, could prevent the fund from trading
in the securities of such companies for limited or extended periods of time.
9. MERGER
On November 12, 2008, the Franklin Federal Limited-Term Tax-Free Income Fund
acquired the net assets of the Franklin California Limited-Term Tax-Free Income
Fund and the Franklin New York Limited-Term Tax-Free Income Fund pursuant to a
plan of reorganization approved by the Franklin California Limited-Term Tax-Free
Income Fund and the Franklin New York Limited-Term Tax-Free Income Fund's
shareholders. The merger was accomplished by a tax free exchange, and the net
assets acquired and shares issued were as follows:
SHARES ISSUED BY FRANKLIN FEDERAL
FUND NAME NET ASSETS LIMITED-TERM TAX-FREE INCOME FUND
- --------- ----------- ---------------------------------
Franklin California Limited-Term Tax-Free Income Fund $28,352,779 2,843,809
Franklin New York Limited-Term Tax-Free Income Fund 22,800,911 2,286,952
----------- ---------
Total $51,153,690 5,130,761
=========== =========
The net asset figures shown above include ($197,146) and $32,188 of unrealized
appreciation (depreciation) for the Franklin California Limited-Term Tax-Free
Income Fund and the Franklin New York Limited-Term Tax-Free Income Fund,
respectively. The combined net assets of the fund immediately after the merger
were $151,234,644.
236 | Annual Report
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CREDIT FACILITY
Effective January 23, 2009, the Funds, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to
interest charged on any borrowings made by the Funds and other costs incurred by
the Funds, pay their share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon their
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee based upon the unused portion of the Global Credit
Facility. During the year, the Funds incurred commitment fees of $2,816 of their
pro rata portion of the Global Credit Facility, which is reflected in Other
expenses on the Statements of Operations. During the year ended February 28,
2009, the Funds did not utilize the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on March 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Funds have determined that the implementation
of SFAS 157 did not have a material impact on the Funds' financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Trust's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Funds' investments and are summarized in the following fair
value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
At February 28, 2009, all of the Funds' investments in securities carried at
fair value were in Level 2 inputs.
Annual Report | 237
Franklin Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ABBREVIATIONS
SELECTED PORTFOLIO
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
BHAC - Berkshire Hathaway Assurance Corp.
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
FICO - Financing Corp.
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance Inc.
GARBS - General Airport Revenue Bonds
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
ID - Improvement District
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority Revenue
IDB - Industrial Development Bond/Board
IDR - Industrial Development Revenue
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
PCC - Pollution Control Corp.
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFA - Public Financing Authority
PFAR - Public Financing Authority Revenue
PUD - Public Utility District
RDA - Redevelopment Agency/Authority
RDAR - Redevelopment Agency Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
TRAN - Tax and Revenue Anticipation Note
UHSD - Unified/Union High School District
USD - Unified/Union School District
XLCA - XL Capital Assurance
238 | Annual Report
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 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 Franklin Tax-Free
Trust, hereafter referred to as the "Funds") at February 28, 2009, 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, 2009 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
April 17, 2009
Annual Report | 239
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, 2009. A portion of the Funds'
exempt-interest dividends may be subject to the federal alternative minimum tax.
In January 2010, shareholders will be notified of amounts for use in preparing
their 2009 income tax returns.
240 | Annual Report
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 136 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 113 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public
Employees Retirement Systems (CALPERS) (1971 - 2008); member and Chairman of the Board, Sutter Community
Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of
Transportation.
SAM GINN (1937) Trustee Since 2007 113 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the
Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific
Telesis Groups (telephone holding company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 136 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 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).
Annual Report | 241
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 W.T. LAHAYE (1929) Trustee Since 1984 113 Center for Creative Land Recycling
One Franklin Parkway (brownfield 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).
FRANK A. OLSON (1932) Trustee Since 2005 136 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and Sentient
San Mateo, CA 94403-1906 Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (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 (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and
FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider)
(1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia
School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 113 None
One Franklin Parkway Independent 2007 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private
and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail)
(1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office
supplies) (1992-1996); Senior Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines)
(1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
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 Trustee and Since 1984 136 None
(1933) Chairman of
One Franklin Parkway the Board
San Mateo, CA 94403-1906
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 42 of the investment companies in Franklin Templeton Investments.
242 | 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
- --------------------------- -------------- -------------- ----------------------- ------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 90 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.;
Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of
the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton
Investments.
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.
JENNIFER J. BOLT (1964) Chief Since December Not Applicable Not Applicable
One Franklin Parkway Executive 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global
Advisors Limited; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
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 Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer and Officer since
Vice President 2004 and Vice
- AML President -
Compliance AML 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).
Annual Report | 243
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------- --------------- ----------------- ----------------------- ------------------------
LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable
One Franklin Parkway Chief Financial 2004, Chief
San Mateo, CA 94403-1906 Officer and Financial Officer
Chief and Chief
Accounting Accounting
Officer Officer
since 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 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).
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/or director, as the case maybe, of
some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin
Templeton Investments.
RUPERT H. JOHNSON, JR. President and President since Not Applicable Not Applicable
(1940) Chief 1993 and Chief
One Franklin Parkway Executive Executive Officer
San Mateo, CA 94403-1906 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.
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; and officer of 30 of the investment companies in
Franklin Templeton Investments.
244 | 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
- --------------------------- --------------- ----------------- ----------------------- ------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
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).
THOMAS WALSH (1961) 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.
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson is considered to be an interested person of the Trust
under the federal securities laws due to his position as officer and
director and major shareholder of Franklin Resources, Inc. (Resources),
which is the parent company of the Trust's investment manager and
distributor. Gregory E. Johnson is considered to be an interested person of
the Trust under the federal securities laws due to his position as an
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson and
Jennifer J. Bolt.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON 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. WILSON IS AN INDEPENDENT BOARD MEMBER 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 (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
Annual Report | 245
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 24, 2009, 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 additional material, including 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. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
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 it showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
246 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund 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
predesignated 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, and the continuous
enhancements to and high industry ranking given the Franklin Templeton website.
Particular attention was given to the overall performance and actions taken by
the Manager and its affiliates in response to problems arising out of the market
turmoil and financial crisis experienced during the past year. In this respect,
the Board noted that management's independent credit analysis and diligent risk
management procedures had minimized exposure of funds within the Franklin
Templeton complex to subprime mortgages and that its continuous monitoring of
counterparty credit risk had limited fund exposure to firms experiencing
financial difficulties like Bear Stearns and AIG. The same type of conservative
approach and attention to risk had also prevented any structured investment
products or other volatile instruments from being held in the portfolios of any
of the money market funds within the Franklin Templeton complex, including the
sweep money fund utilized by many of the funds as part of their cash management.
The Board also took into account, among other things, management's efforts in
establishing a $725 million global credit facility for the benefit of the Funds
and other accounts managed by Franklin Templeton Investments to provide a source
of cash for temporary and emergency purposes or to meet unusual redemption
requests as well as the strong financial position of the Manager's parent
company and its commitment to the mutual fund business. The Board also noted
that during the past year Franklin Templeton Investments, like many other fund
managers, had announced a hiring freeze and implemented employee reductions and
the Board discussed with management the nature of such reductions and steps
being taken to minimize any negative impact on the nature and quality of
services being provided the Funds.
Annual Report | 247
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 report prepared for each individual Fund showed
its investment performance or those of its Class A shares for a Fund 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, 2008, and for additional periods ended that date up to 10
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,
other than Franklin Federal Limited-Term Tax-Free Income Fund, was above the
median of its Lipper universe for the one-year period with most being in the
highest or second-highest quintile of their Lipper universe for the previous
three-, five- and 10-year periods as well. The Lipper reports showed the total
return for most such Funds to be above the median of their performance universe
during 2008 with the majority being in the first or second-highest quintile of
their performance universe during the previous three-, five-and 10-year periods
on an annualized basis. 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 Lipper report for Franklin Federal Limited-Term
Tax-Free Income Fund covered the five years of its operations and showed its
income return to be in the second-lowest quintile of its performance universe
for 2008, and on an annualized basis, to be in the middle and second-lowest
quintiles of such universe for the previous three- and five-year periods,
respectively. In discussing such performance, management pointed out the Fund,
consistent with its investment objective, invested in securities with shorter
maturities than those generally held by funds in its performance universe and
also avoided lower quality bonds or those subject to the alternative minimum
tax. The Board was satisfied with such explanation and noted that the Lipper
report showed such Fund's total return for 2008 and on an annualized basis for
the previous three- and five-year periods in each case to be above the median of
its performance universe.
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. Lipper expense data
is based upon historical information taken from each Fund's most recent annual
report and, as a result of the severe decline in mutual fund industry assets
during the last quarter of 2008, is based on asset levels that are higher than
the levels currently existing for most funds. While recognizing the limitations
inherent in Lipper's methodology and recognizing that current expense ratios may
increase as assets decline, the Board believed that the independent analysis
conducted by Lipper remained an appropriate measure of comparative expenses. In
reviewing comparative costs, Lipper provides information on each Fund's
contractual investment management fee in comparison with the contractual
investment management fee that
248 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
would have been charged by other funds within its Lipper expense group assuming
they were similar in size to 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 reports showed that the contractual
investment management fee rates for each Fund were at or below the median of
their respective Lipper expense groups. The Lipper reports further showed that
the actual total expense rates for all Funds were below the medians of their
respective Lipper expense groups. 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 during the 12-month period ended September 30,
2008, being the most recent fiscal year-end for Franklin Resources, Inc., the
Manager's parent. During such period, the assets of the Franklin Templeton U.S.
fund business were significantly higher than currently existing, and to such
extent the profitability analysis does not reflect current fund operations.
While taking this into account in assessing the significance of the Fund
profitability analysis, the Board recognized such analysis was made at a given
point in time and that the decline in assets and effect on profitability would
be reflected in the profitability analysis covering Franklin Resources' 2009
fiscal year period. In reviewing the analysis, 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 for 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
Annual Report | 249
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
and recent SEC and other regulatory 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 its interest in a joint
venture entity that 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
Franklin Federal Limited-Term Tax-Free Income Fund provides an initial fee of
0.50% on the first $100 million of assets; 0.45% on the next $150 million of
assets; 0.425% on the next $250 million of assets; and 0.40% on assets in excess
of $500 million. The fee structure under the investment management agreement
with each other Fund provides an initial fee of 0.625% on the first $100 million
of assets; 0.5% on the next $150 million of assets; 0.45% on assets in excess of
$250 million; with additional breakpoints beginning at 0.44% on assets in excess
of $7.5 billion and continuing 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.
250 | Annual Report
Franklin Tax-Free Trust
SHAREHOLDER INFORMATION (CONTINUED)
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager 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 (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 (800)
SEC-0330.
Annual Report | 251
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(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 FUNDS
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
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 Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin TempletoN Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage
Portfolio Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(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.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN TAX-FREE TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2009 04/09
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 John B. Wilson and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $702,517 for the fiscal year ended February 28, 2009 and $695,082 for the
fiscal year ended February 29, 2008.
(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
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $4,000 for the fiscal year ended
February 28, 2009 and $0 for the fiscal year ended February 29, 2008. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $18,159 for the fiscal year ended February 28,
2009 and $0 for the fiscal year ended February 29, 2008. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant other than
services reported in paragraphs (a)-(c) of Item 4 were $265,918 for the fiscal
year ended February 28, 2009 and $0 for the fiscal year ended February 29, 2008.
The services for which these fees were paid included review of materials
provided to the fund Board in connection with the investment management contract
renewal process.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were 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 $288,077 for the fiscal year ended February 28, 2009 and $0 for
the fiscal year ended February 29, 2008.
(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 Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, Chief Financial Officer and Chief Accounting 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/Laura F. Fergerson
-------------------
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date April 27, 2009
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/Laura F. Fergerson
-------------------
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date April 27, 2009
By /s/Gaston Gardey
-------------------
Gaston Gardey
Chief Financial Officer and Chief Accounting Officer
Date April 27, 2009