N-30D 1 ftftn30da1.txt Annual Report February 28, 2002 Franklin Tax-Free Trust Franklin Florida Insured Tax-Free Income Fund Franklin Insured Tax-Free Income Fund Franklin Massachusetts Insured Tax-Free Income Fund Franklin Michigan Insured Tax-Free Income Fund Franklin Minnesota Insured Tax-Free Income Fund Franklin Ohio Insured Tax-Free Income Fund [GRAPHIC OMITTED] FRANKLIN TEMPLETON INVESTMENTS LOGO THANK YOU FOR INVESTING WITH FRANKLIN TEMPLETON. WE ENCOURAGE OUR INVESTORS TO MAINTAIN A LONG-TERM PERSPECTIVE AND REMEMBER THAT ALL SECURITIES MARKETS MOVE BOTH UP AND DOWN, AS DO FUND SHARE PRICES. WE APPRECIATE YOUR PAST SUPPORT AND LOOK FORWARD TO SERVING YOUR INVESTMENT NEEDS IN THE YEARS AHEAD. [GRAPHIC OMITTED] PICTURE CHARLES B. JOHNSON, center CHAIRMAN FRANKLIN TAX-FREE TRUST SHEILA AMOROSO & RAFAEL R. COSTAS JR. SENIOR VICE PRESIDENTS/CO-DIRECTORS FRANKLIN MUNICIPAL BOND DEPARTMENT FRANKLINTEMPLETON.COM [GRAPHIC OMITTED] Electronic delivery is a convenient alternative to receiving these reports through the mail. Visit franklintempleton.com today, click on Account Services and sign up. SHAREHOLDER LETTER Dear Shareholder: We are pleased to bring you Franklin Tax-Free Trust's annual report for the fiscal year ended February 28, 2002. During the 12 months under review, the U.S. economy weakened further as gross domestic product (GDP) growth declined during the first half of 2001 before contracting at a 1.3% annualized rate in the third quarter. In response to this deteriorating economic activity and the fallout from September 11's tragic events, the Federal Reserve Board (the Fed) continued aggressively cutting interest rates, seeking to lower borrowing costs and stimulate economic growth. Nine interest rate cuts during the 12 months under review reduced the federal funds target rate from 5.50% at the beginning of the period to 1.75% on February 28, 2002, its lowest level in more than 40 years. In November 2001, the National Bureau of Economic Research signaled that the country had been in a mild recession since March 2001, ending the longest economic expansion in the nation's history. Significant, broad-based and sustained downward trends in economic activity were largely to blame, with employment, industrial production and consumer and business spending dropping substantially. Consequently, consumer confidence fell to multi-year lows. However, the Fed's efforts and significant government spending contributed to a surprising fourth quarter GDP growth rate of 1.7% annualized. U.S. securities markets experienced mixed results in response to the war on terrorism, the Fed's actions and declining corporate and economic data. Investors' risk aversion increased, and by the end of third quarter 2001, this sentiment led to significant market volatility. The equity indexes experienced their worst quarterly decline, on a percentage basis, since the quarter that included the crash of 1987. The major stock indexes rebounded significantly in 2001's fourth quarter as indications of a potential economic recovery offered investors some optimism. However, from the end of December 2001 through February 28, 2002, equity markets again experienced volatility and generally fell amid lower corporate earnings announcements and investors' skepticism of corporate integrity following Enron's collapse. CONTENTS Shareholder Letter .............. 1 Special Feature: Making Sense of Dividends ....... 4 Fund Reports Franklin Florida Insured Tax-Free Income Fund ........... 8 Franklin Insured Tax-Free Income Fund ........... 13 Franklin Massachusetts Insured Tax-Free Income Fund ........... 22 Franklin Michigan Insured Tax-Free Income Fund ........... 28 Franklin Minnesota Insured Tax-Free Income Fund ........... 36 Franklin Ohio Insured Tax-Free Income Fund ........... 42 Municipal Bond Ratings .......... 50 Financial Highlights & Statements of Investments ....... 52 Financial Statements ............ 99 Notes to Financial Statements ... 106 Independent Auditors' Report .... 112 Tax Designation ................. 113 Board Members and Officers ...... 114 [PYRAMID GRAPHIC OMITTED] GLOBAL GROWTH GROWTH & INCOME INCOME TAX-FREE INCOME WHAT DOES "TAXABLE EQUIVALENT" MEAN FOR YOU? FOR YIELD AND DISTRIBUTION RATE, THE TAXABLE EQUIVALENT IS THE AMOUNT A TAXABLE INVESTMENT WOULD HAVE TO EARN TO MATCH A TAX-FREE INVESTMENT SUCH AS MUNICIPAL BONDS.* YOU CAN FIND YOUR FUND'S TAXABLE EQUIVALENT DISTRIBUTION RATE AND YIELD IN THE PERFORMANCE SUMMARY OF EACH FUND'S REPORT. *For investors subject to the federal or state alternative minimum tax, a portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. For much of the year under review, fixed income markets, including municipal bonds, generally performed well, aided primarily by falling interest rates and rising investor demand for the perceived safety of bonds versus stocks. Consequently, U.S. Treasuries outperformed the Standard & Poor's 500 Composite Index, a widely used benchmark of equity market performance, during the period. The bond market's progress was not a steady rise, however, and overall the Treasury yield curve, representing yields of short- to long-term Treasuries, steepened. The 30-year Treasury bond's yield increased slightly from 5.31% at the beginning of the year under review to 5.42% on February 28, 2002. At the same time, the 10-year Treasury note's yield declined from 4.92% to 4.88%, and the 2-year Treasury note's yield fell from 4.39% to 3.06%. Short-term interest rates fell more substantially than long-term rates largely due to the Fed's actions and investors' economic worries. The Bond Buyer Municipal Bond Index (Bond Buyer 40), an indicator of municipal bond market performance, experienced volatility before ending the period relatively flat, yielding 5.40% at the beginning of the period and 5.25% on February 28, 2002.1 On October 31, 2001, the Fed's announcement to discontinue new issuance of 30-year debt exacerbated the already disconnected relationship between the long-term municipal market and the Treasury market, which resulted from the Fed's early-2000 introduction of its 30-year Treasury bond buyback program. Subsequently, the 30-year Treasury bond's price rose more than five points, its largest one-day point gain since the bond began trading on a regular basis; the 10-year Treasury note gained nearly one full point in response, while municipals increased marginally. Municipal bonds did, however, benefit from robust retail and institutional demand, and held up well despite widening Treasury yield spreads and an increase in new-issue supply. At the end of the reporting period, municipal bonds continued to offer attractive tax-equivalent yields over comparable taxable investments. Looking forward, we believe the severity and duration of the national economic slowdown will be the key determinants of how state and municipal bond credit quality will fare over the short term. States with broad-based and diversified economies should be best positioned to withstand recessionary pressures that may continue through fiscal year 2002 and that could impact 2003 budget discussions. 1. Source: THE BOND BUYER. The unmanaged Bond Buyer 40 is composed of the yield to maturity of 40 bonds. The index attempts to track the new-issue market as closely as possible, so it changes bonds twice a month, adding all new bonds that meet certain requirements and deleting an equivalent number according to their secondary market trading activity. As a result, the average par call date, average maturity date and average coupon rate change over time. The average maturity has generally been about 29-30 years. 2 However, economic diversity alone may not sustain a state's credit quality. The magnitude of revenue shortfalls will impact financial reserves, and stringent budgetary mechanisms to quickly cut expenditures will also be critical factors for states' credit stability and their underlying municipal bonds. Still, we view the municipal bond market favorably over the long term. Most state and local government finances were very strong through early 2001, allowing greater financial flexibility and cushion to face challenging times. Municipal bond funds continue to be attractive for those investors seeking tax-free income. Depending on your federal and state tax rates, a taxable investment of comparable credit quality would need to offer a higher yield, called the taxable equivalent yield, to match the yield on a tax-free investment. We firmly believe that most people benefit from professional financial advice, and that advice is never more valuable than during a volatile market. For that reason, we encourage you to discuss your financial goals with your investment representative, who can address concerns about volatility and help you diversify your investments and stay focused on the long term. As always, we appreciate your support, welcome your questions and comments and look forward to serving your investment needs in the years ahead. 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 ------------------------------- A NOTE ABOUT DUPLICATE MAILINGS YOU WILL RECEIVE THE FUND'S SHAREHOLDER REPORT EVERY SIX MONTHS. TO REDUCE FUND EXPENSES, WE TRY TO IDENTIFY RELATED SHAREHOLDERS IN A HOUSEHOLD AND SEND ONLY ONE COPY OF THE REPORT. THIS PROCESS, CALLED "HOUSEHOLDING," WILL CONTINUE INDEFINITELY UNLESS YOU INSTRUCT US OTHERWISE. IF YOU PREFER NOT TO HAVE THESE DOCUMENTS HOUSEHOLDED, PLEASE CALL US AT 1-800/632-2301. AT ANY TIME YOU MAY VIEW CURRENT SHAREHOLDER REPORTS ON OUR WEBSITE. ------------------------------- 3 Q&A SPECIAL FEATURE: MAKING SENSE OF DIVIDENDS FREQUENTLY ASKED QUESTIONS ABOUT THE DIVIDEND POLICY OF FRANKLIN TAX-FREE INCOME FUNDS. Have you ever wondered how your fund earns tax-free income and how much of that income is actually paid to you? Or, have you questioned why your monthly dividends fluctuate? Below you'll find answers to these and other commonly asked questions about dividends paid by Franklin's tax-free funds. Q. WHAT'S FRANKLIN TAX-FREE FUNDS' DIVIDEND POLICY AND HOW DOES IT AFFECT MY DIVIDEND PAYMENTS? A. Franklin tax-free income funds attempt to set dividends on a quarterly basis. This means that once a quarter, in March, June, September and December, we establish a fixed dividend amount per share that the funds will distribute over the next three months. While the income the funds accrue varies day-to-day, we do our best to maintain this fixed dividend each quarter to provide our shareholders with a stable income stream. As you know, our goal is to invest for high, current tax-free income. Franklin is one of the few fund companies that work to stabilize dividend payments for three months at a time. Many other tax-free funds distribute dividends on daily income they accrue each month; meaning their dividend payments can fluctuate every month. Q. WHAT ARE THE SOURCES OF THE INCOME MY FUND DISTRIBUTES TO ME AS TAX-FREE DIVIDENDS? A. Your fund earns tax-exempt interest income from its investments in municipal securities, or bonds. A municipal bond is an IOU issued by state and local government agencies to raise money to fund public projects. The issuing municipality makes interest payments to bondholders, in this case the fund, to compensate them for the use of their money until the bond is repaid. ---------------------------------------------------------- Not FDIC Insured o May LoseValue o No Bank Guarantee ---------------------------------------------------------- NOT PART OF THE SHAREHOLDER REPORT 4 Franklin's tax-free funds pay you this investment income as tax-free dividends, less various operating expenses. As you know, these dividends are usually free from federal income taxes.* For a state-specific fund, they may also be free from that state's personal income taxes as well, to the extent dividends are earned from interest on that state's tax-free obligations.* Sometimes, the fund may also pay you accumulated dividends that were not previously distributed. *Alternative minimum taxes may apply. Q. WHAT OTHER FACTORS CAN AFFECT MY MONTHLY DIVIDENDS? A. Generally, interest rates are the biggest determinant of a tax-free fund's earnings level and the amount of dividends paid to you. For example, when interest rates decline, a fund's investment earnings will decline, as cash flow into the fund must be invested at the lower rates. This means dividend payments will also decrease. However, since bond prices tend to move in the opposite direction of interest rates, your fund's net asset value (NAV) will tend to increase, causing your shares to appreciate in price. Similarly, when interest rates rise, the ability of the funds to increase their dividends will rise. Interest rate trends are primarily determined by economic factors such as inflation, strength of the U.S. dollar and the pace of economic growth. Strong economic growth can lead to inflation, and the Federal Reserve may raise interest rates to cool the economy, as we saw last year. On the other hand, if the economy slows down, the Federal Reserve may lower interest rates to stimulate economic growth, as happened earlier this year. Credit quality and maturity periods of the securities in a fund's portfolio also play a role in determining the amount of income available to distribute to shareholders, as explained below. Q. WHY DO SOME TAX-FREE FUNDS PAY HIGHER DIVIDENDS THAN OTHERS? A. Dividends are directly related to the composition of a fund's portfolio. First, the credit quality of securities held helps determine a fund's dividend payment ability. High-yield municipal bond funds, for example, can have higher dividend distributions than other tax-free funds. This is because they hold lower credit-quality municipal bonds that must pay higher yields than other securities to compensate investors for taking on additional risk. NOT PART OF THE SHAREHOLDER REPORT 5 However, they're also subject to higher risk than funds that hold higher quality bonds in their portfolios. Similarly, long-term bond holdings in a fund's portfolio tend to pay higher interest income than short-term bonds to compensate for uncertainty associated with the future. Q. HOW HAS THE CURRENT DECLINING INTEREST RATE ENVIRONMENT AFFECTED MONTHLY DIVIDEND PAYMENTS? A. When interest rates decline, municipal bond issuers often "call," or redeem, their higher-yielding bonds and replace them with new, lower-yielding securities so they can reduce the amount of interest they have to pay on the debt. Most municipal bonds are callable within 10 to 12 years after they're issued. Because interest rates have generally been declining over the past 15 years, our funds are experiencing bond calls on older, higher-income securities. Consequently, many of Franklin's tax-free funds have had to reinvest proceeds from these called bonds into lower-yielding bonds, resulting in lower earnings (dividends). Because funds can only pay out what they earn, many of our funds have had to reduce dividend payments. As you can see in the chart below, in the late 1980s and early 1990s, we were able to invest assets at approximately 8%. As these bonds matured or were called, we've had to reinvest the proceeds at approximately 53/8%. Because we cannot invest cash flow at the higher levels, we've had to reduce dividends. We continue to pay out the income we earn, but our earnings are lower today because we're reinvesting at a lower rate than was available 10-15 years ago. [Line Graphic Omitted] MONTHLY YIELDS OF BOND BUYER 40 APPENDIX DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304 (a) OF REGULATION S-T) GRAPHIC MATERIAL (1) The following line graph tracks the monthly yields of the Bond Buyer 40 from 1/85 to 2/02. Date Bond Buyer 40 Yields ----------------------------------------- Jan 85 10.35% Feb 85 10.20% Mar 85 10.01% Apr 85 9.50% May 85 9.43% Jun 85 9.40% Jul 85 9.45% Aug 85 9.80% Sep 85 9.49% Oct 85 9.24% Nov 85 8.92% Dec 85 8.48% Jan 86 8.04% Feb 86 7.82% Mar 86 7.92% Apr 86 8.14% May 86 7.90% Jun 86 7.96% Jul 86 7.88% Aug 86 7.41% Sep 86 7.56% Oct 86 7.36% Nov 86 7.19% Dec 86 7.18% Jan 87 7.11% Feb 87 7.05% Mar 87 7.18% Apr 87 8.10% May 87 8.29% Jun 87 8.19% Jul 87 8.17% Aug 87 8.16% Sep 87 8.87% Oct 87 8.72% Nov 87 8.62% Dec 87 8.40% Jan 88 7.97% Feb 88 7.85% Mar 88 8.17% Apr 88 8.17% May 88 8.20% Jun 88 8.04% Jul 88 8.05% Aug 88 8.11% Sep 88 7.89% Oct 88 7.73% Nov 88 7.90% Dec 88 7.74% Jan 89 7.66% Feb 89 7.73% Mar 89 7.79% Apr 89 7.58% May 89 7.46% Jun 89 7.29% Jul 89 7.16% Aug 89 7.36% Sep 89 7.47% Oct 89 7.38% Nov 89 7.24% Dec 89 7.25% Jan 90 7.45% Feb 90 7.40% Mar 90 7.52% Apr 90 7.74% May 90 7.53% Jun 90 7.50% Jul 90 7.35% Aug 90 7.64% Sep 90 7.79% Oct 90 7.71% Nov 90 7.47% Dec 90 7.47% Jan 91 7.39% Feb 91 7.36% Mar 91 7.34% Apr 91 7.26% May 91 7.21% Jun 91 7.21% Jul 91 7.11% Aug 91 6.97% Sep 91 6.89% Oct 91 6.85% Nov 91 6.90% Dec 91 6.66% Jan 92 6.72% Feb 92 6.76% Mar 92 6.76% Apr 92 6.74% May 92 6.63% Jun 92 6.49% Jul 92 6.19% Aug 92 6.35% Sep 92 6.39% Oct 92 6.68% Nov 92 6.42% Dec 92 6.39% Jan 93 6.31% Feb 93 6.01% Mar 93 6.04% Apr 93 5.96% May 93 5.89% Jun 93 5.76% Jul 93 5.78% Aug 93 5.60% Sep 93 5.47% Oct 93 5.48% Nov 93 5.65% Dec 93 5.52% Jan 94 5.45% Feb 94 5.77% Mar 94 6.36% Apr 94 6.37% May 94 6.40% Jun 94 6.47% Jul 94 6.33% Aug 94 6.36% Sep 94 6.58% Oct 94 6.85% Nov 94 7.16% Dec 94 6.92% Jan 95 6.66% Feb 95 6.42% Mar 95 6.37% Apr 95 6.35% May 95 6.10% Jun 95 6.28% Jul 95 6.19% Aug 95 6.11% Sep 95 6.07% Oct 95 5.91% Nov 95 5.74% Dec 95 5.56% Jan 96 5.57% Feb 96 5.71% Mar 96 5.96% Apr 96 6.05% May 96 6.09% Jun 96 6.01% Jul 96 5.98% Aug 96 6.02% Sep 96 5.89% Oct 96 5.83% Nov 96 5.66% Dec 96 5.72% Jan 97 5.82% Feb 97 5.76% Mar 97 5.95% Apr 97 5.89% May 97 5.74% Jun 97 5.69% Jul 97 5.40% Aug 97 5.55% Sep 97 5.47% Oct 97 5.40% Nov 97 5.36% Dec 97 5.25% Jan 98 5.19% Feb 98 5.24% Mar 98 5.27% Apr 98 5.39% May 98 5.22% Jun 98 5.22% Jul 98 5.26% Aug 98 5.11% Sep 98 4.99% Oct 98 5.13% Nov 98 5.10% Dec 98 5.16% Jan 99 5.09% Feb 99 5.17% Mar 99 5.23% Apr 99 5.28% May 99 5.37% Jun 99 5.53% Jul 99 5.59% Aug 99 5.78% Sep 99 5.89% Oct 99 6.08% Nov 99 6.12% Dec 99 6.22% Jan 00 6.31% Feb 00 6.17% Mar 00 5.94% Apr 00 6.00% May 00 6.13% Jun 00 5.91% Jul 00 5.79% Aug 00 5.72% Sep 00 5.82% Oct 00 5.74% Nov 00 5.75% Dec 00 5.47% Jan 01 5.45% Feb 01 5.40% Mar 01 5.30% Apr 01 5.49% May 01 5.42% June 01 5.38% Jul 01 5.25% Aug 01 5.12% Sep 01 5.22% Oct 01 5.20% Nov 01 5.30% Dec 01 5.44% Jan 02 5.33% Feb 02 5.25% Source: S&P Micropal (Bond Buyer 40, as of 2/28/02) One cannot invest in an index; indexes are unmanaged. 6 NOT PART OF THE SHAREHOLDER REPORT Many of the securities being called today have provided high levels of income over the past 10 years, as interest rates have trended down. Though we can't predict interest rate cycles, we'll continue to focus on producing the highest monthly tax-free income possible through our disciplined management approach. Q. WHAT OTHER TYPES OF INCOME CAN MY FUND DISTRIBUTE? A. Your fund also earns income from short- and long-term capital gains, which are taxable to shareholders, whether you reinvest them or receive them as cash. Though we work to reduce capital gains, in periods of sustained low interest rates, they are often unavoidable. While short-term capital gains (on securities held in a portfolio for 12 months or less) are treated as ordinary income distributions and taxed at regular income tax rates, long-term capital gains (on securities held in a portfolio for more than 12 months) are taxed at lower rates. Sometimes, a fund may invest part of its portfolio in private activity bonds, which are basically municipal bonds issued to finance private activity. Interest earned from such bonds is exempt from federal income tax, but it's a preference item when calculating your alternative minimum tax (AMT) liability. So, as required by the Internal Revenue Code, this income must be added to your regular tax income to calculate your AMT income and AMT tax liability, if any. In case your fund makes any capital gains distributions, you can find the exact amount of the distributions on your Form 1099. For complete information on your tax liabilities, we suggest you consult a qualified tax professional. [FRANKLIN TEMPLETON INVESTMENTS LOGO OMITTED] DIVQ INS 04/2002 7 FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL INCOME TAX THROUGH A PORTFOLIO CONSISTING MAINLY OF INSURED FLORIDA MUNICIPAL BONDS.1 IN ADDITION, THE FUND'S SHARES ARE FREE FROM FLORIDA'S ANNUAL INTANGIBLES TAX. -------------------------------------------------------------------------------- STATE UPDATE [Florida Map Graphic Omitted] The national economic recession, exacerbated by the September 11 attacks, negatively impacted Florida's service-based economy. Over the past decade, the state's economy shifted away from manufacturing toward services due to tourism industry and business services sector growth. At year-end 2001, the state's unemployment rate rose to 6.0%, higher than the 5.8% national average.2 Due to Florida's reliance on sales tax to fund 70% of its operations, it suffered from declining consumer confidence and reduced travel and tourism in late 2001. The state's above-average financial reserve levels and strong budget controls should help mitigate these concerns in the near term. Florida's constitutional budget stabilization and working capital reserve balances are projected to be $940 million and $300 million on June 30, 2002.3 In addition, the state already implemented spending reductions that addressed more than half of fiscal year 2002's budget shortfall. 1. For investors subject to the federal alternative minimum tax, a portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The insurance guarantees the scheduled payment of principal and interest on the insured securities in the Fund's portfolio, but does not guarantee the insured securities' market value, the value of the Fund's shares or the Fund's distributions. Fund shares are not insured. No representation is made as to any insurer's ability to meet its obligation to the Fund if called upon to do so. A non-diversified fund may be subject to greater risk of adverse economic or regulatory developments in that state than a fund with broader geographical diversification. 2. Source: Bureau of Labor Statistics. 3. Source: Standard & Poor's, RATINGSDIRECT, 2/1/02. This does not indicate Standard & Poor's rating of the Fund. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 53. 8 Despite rapidly growing debt levels during the past few years, Florida's tax-supported debt levels remained moderate during the period at $955 per capita and 3.6% of personal income.4 To counter this accelerated debt issuance, Florida introduced a debt affordability model in 1999. The state established a framework for evaluating and limiting future bond programs to an acceptable debt-to-revenue ratio. Looking forward, Florida's history of conservative fiscal management should help support it during this time of budget stress. Standard & Poor's, an independent credit rating agency, holds a stable outlook for the Sunshine State and maintained its AA+ general obligation rating.3 However, Moody's Investors Service, another independent credit rating agency, revised Florida's outlook to negative from stable. Moody's anticipates the state will continue to experience budget pressures in the near future.5 PORTFOLIO NOTES The municipal bond market experienced occasional intervals of rising interest rates during the year under review, specifically following the release of stronger-than-expected economic data such as we saw in November and December. Overall, however, yields fell slightly. Because bond prices rise when yields fall, Franklin Florida Insured Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $10.36 on February 28, 2001, to $10.50 on February 28, 2002. A low interest rate environment during the year under review helped municipalities to refinance debt, and many refunding deals came to market during the year. With total state municipal bond issuance in 2001 rising 31.8% -- from roughly $10.7 billion to $14.1 billion -- Florida ranked fifth in terms of new bond sales nationwide.6 Although bond supply was up, demand was up as well, which generally supported municipal bond prices. Several new closed-end funds entered the marketplace nationally, and there was solid participation by institutional and retail buyers. Additionally, the market for insured bonds remained strong as the spread, or yield difference, between high-grade and more speculative-grade bonds continued to be comparatively narrow. 4. Source: Standard & Poor's, RATINGSDIRECT, 9/20/01. 5. Source: Moody's Investors Service, FLORIDA (STATE OF), 12/19/01. 6. Source: THE BOND BUYER, 1/2/02. PORTFOLIO BREAKDOWN Franklin Florida Insured Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ----------------------------- Utilities* 26.1% Other Revenue 15.4% Subject to Government Appropriations 13.9% Prerefunded 12.5% Tax-Supported 11.4% Transportation 9.2% Housing 7.6% Higher Education 1.7% Hospital & Health Care 1.4% General Obligation 0.8% *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. 9 DIVIDEND DISTRIBUTIONS* Franklin Florida Insured Tax-Free Income Fund - Class A 3/1/01-2/28/02 DIVIDEND MONTH PER SHARE ----------------------------- March 4.05 cents April 4.05 cents May 4.05 cents June 4.00 cents July 4.00 cents August 4.00 cents September 4.00 cents October 4.00 cents November 4.00 cents December 4.00 cents January 4.00 cents February 4.00 cents ----------------------------- TOTAL 48.15 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. During the period, we sought to sell prerefunded municipal bonds when interest rates were trending upward, as well as those with relatively low booked yields and shorter call protection. The proceeds from these transactions were used to buy bonds with higher yields and longer call protection. As a result, we improved the portfolio's overall structure and kept the Fund as fully invested as possible. With these strategies in mind, we sold Tampa Water & Sewer and Seminole County Sales Tax revenue bonds. Purchases during the year included Tampa Sales Tax Revenue, Broward County School Board COP and Escambia County Utilities Authority Utility System Revenue bonds. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. The proceeds were reinvested at current, lower interest rates, causing the Fund's dividend distribution to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 11 shows that at the end of this reporting period the Fund's distribution rate was 4.38%. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum federal personal income tax bracket of 38.6% would need to earn 7.13% from a taxable investment to match the Fund's tax-free distribution rate. Looking forward, we are optimistic about the long-term outlook for Florida's economy, its municipal bonds and Franklin Florida Insured Tax-Free Income Fund. The fixed income market should remain relatively stable as we believe the economy will experience a moderate recovery within a benign inflationary environment. Most importantly, we believe municipal bonds, and the Fund, will remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, monthly tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 10 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF THE FUND'S OPERATING EXPENSES. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPH DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $10.50 $10.36 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4815 PERFORMANCE INCEPTION CLASS A 1-YEAR 5-YEAR (4/30/93) -------------------------------------------------------------------------------- Cumulative Total Return1 +6.14% +34.01% +62.94% Average Annual Total Return2 +1.63% +5.12% +5.17% Avg. Ann. Total Return (3/31/02)3 -1.08% +5.09% +4.90% Distribution Rate4 4.38% Taxable Equivalent Distribution Rate5 7.13% 30-Day Standardized Yield6 3.52% Taxable Equivalent Yield5 5.73% FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND ------------------------------------------ CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a higher initial sales charge; thus actual total returns would be lower. Past expense reductions by the Fund's manager increased the Fund's total returns. Without these reductions, the Fund's total returns would have been lower. ------------------------------------------ 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include the sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge. 3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 4. Distribution rate is based on an annualization of the 4.0 cent per share current monthly dividend and the maximum offering price of $10.97 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the 2002 maximum federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC,is based on the earnings of the Fund's portfolio for the month ended 2/28/02. ------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. ------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 11 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE, FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 -------------------------------- 1-Year +1.63% 5-Year +5.12% Since Inception (4/30/93) +5.17% [Line Graph Omitted] CLASS A (4/30/93-2/28/02) GRAPHICAL MATERIAL (2) The following line graph compares the performance of the Franklin Florida Insured Tax-Free Income Fund - Class A to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 4/30/93 to 2/28/02. -------------------------------------------------------------- Franklin Lehman Brothers CPI Florida Insured Municipal Bond Tax-Free Income Index Fund-Class A -------------------------------------------------------------- 04/30/1993 $9,579 $10,000 $10,000 05/31/1993 $9,550 $10,056 $10,014 06/30/1993 $9,703 $10,224 $10,028 07/31/1993 $9,736 $10,237 $10,028 08/31/1993 $9,938 $10,450 $10,056 09/30/1993 $10,039 $10,569 $10,077 10/31/1993 $10,072 $10,589 $10,119 11/30/1993 $9,923 $10,496 $10,126 12/31/1993 $10,223 $10,718 $10,126 01/31/1994 $10,335 $10,840 $10,153 02/28/1994 $9,959 $10,559 $10,187 03/31/1994 $9,324 $10,129 $10,222 04/30/1994 $9,396 $10,215 $10,236 05/31/1994 $9,462 $10,304 $10,244 06/30/1994 $9,373 $10,241 $10,278 07/31/1994 $9,648 $10,429 $10,306 08/31/1994 $9,583 $10,465 $10,347 09/30/1994 $9,385 $10,312 $10,375 10/31/1994 $9,072 $10,128 $10,383 11/30/1994 $8,858 $9,945 $10,396 12/31/1994 $9,214 $10,163 $10,396 01/31/1995 $9,616 $10,454 $10,438 02/28/1995 $9,980 $10,758 $10,479 03/31/1995 $10,073 $10,882 $10,514 04/30/1995 $10,084 $10,895 $10,549 05/31/1995 $10,460 $11,243 $10,570 06/30/1995 $10,307 $11,145 $10,591 07/31/1995 $10,376 $11,251 $10,591 08/31/1995 $10,508 $11,394 $10,618 09/30/1995 $10,586 $11,465 $10,640 10/31/1995 $10,789 $11,632 $10,675 11/30/1995 $11,019 $11,825 $10,667 12/31/1995 $11,174 $11,938 $10,660 01/31/1996 $11,202 $12,029 $10,723 02/29/1996 $11,074 $11,947 $10,757 03/31/1996 $11,354 $11,794 $10,813 04/30/1996 $11,305 $11,761 $10,855 05/31/1996 $11,314 $11,757 $10,876 06/30/1996 $11,474 $11,885 $10,882 07/31/1996 $11,594 $11,992 $10,903 08/31/1996 $11,578 $11,989 $10,924 09/30/1996 $11,813 $12,157 $10,959 10/31/1996 $11,910 $12,294 $10,994 11/30/1996 $12,133 $12,519 $11,015 12/31/1996 $12,061 $12,467 $11,015 01/31/1997 $11,522 $12,491 $11,050 02/28/1997 $11,641 $12,605 $11,084 03/31/1997 $11,449 $12,438 $11,112 04/30/1997 $11,568 $12,542 $11,125 05/31/1997 $11,740 $12,732 $11,119 06/30/1997 $11,875 $12,868 $11,132 07/31/1997 $12,269 $13,224 $11,145 08/31/1997 $12,129 $13,100 $11,166 09/30/1997 $12,266 $13,256 $11,194 10/31/1997 $12,383 $13,341 $11,222 11/30/1997 $12,468 $13,419 $11,216 12/31/1997 $12,669 $13,615 $11,202 01/31/1998 $12,809 $13,756 $11,223 02/28/1998 $12,801 $13,760 $11,245 03/31/1998 $12,820 $13,772 $11,266 04/30/1998 $12,783 $13,710 $11,286 05/31/1998 $12,958 $13,927 $11,307 06/30/1998 $13,010 $13,981 $11,320 07/31/1998 $13,068 $14,016 $11,334 08/31/1998 $13,260 $14,233 $11,347 09/30/1998 $13,386 $14,411 $11,361 10/31/1998 $13,407 $14,411 $11,388 11/30/1998 $13,500 $14,462 $11,388 12/31/1998 $13,515 $14,498 $11,381 01/31/1999 $13,634 $14,670 $11,409 02/28/1999 $13,571 $14,606 $11,422 03/31/1999 $13,607 $14,626 $11,457 04/30/1999 $13,620 $14,663 $11,540 05/31/1999 $13,537 $14,578 $11,540 06/30/1999 $13,331 $14,368 $11,540 07/31/1999 $13,354 $14,420 $11,575 08/31/1999 $13,174 $14,304 $11,603 09/30/1999 $13,105 $14,310 $11,658 10/31/1999 $12,876 $14,155 $11,679 11/30/1999 $13,014 $14,305 $11,686 12/31/1999 $12,894 $14,198 $11,686 01/31/2000 $12,826 $14,136 $11,722 02/29/2000 $12,999 $14,300 $11,791 03/31/2000 $13,363 $14,611 $11,887 04/30/2000 $13,240 $14,525 $11,895 05/31/2000 $13,110 $14,450 $11,909 06/30/2000 $13,520 $14,833 $11,971 07/31/2000 $13,754 $15,039 $11,998 08/31/2000 $13,962 $15,270 $11,998 09/30/2000 $13,834 $15,191 $12,061 10/31/2000 $14,019 $15,357 $12,081 11/30/2000 $14,158 $15,473 $12,088 12/31/2000 $14,590 $15,855 $12,081 01/31/2001 $14,622 $16,012 $12,157 02/28/2001 $14,702 $16,064 $12,206 03/31/2001 $14,833 $16,208 $12,234 04/30/2001 $14,637 $16,033 $12,283 05/31/2001 $14,753 $16,206 $12,338 06/30/2001 $14,863 $16,315 $12,359 07/31/2001 $15,143 $16,556 $12,325 08/31/2001 $15,405 $16,830 $12,325 09/30/2001 $15,340 $16,772 $12,380 10/31/2001 $15,535 $16,972 $12,338 11/30/2001 $15,401 $16,829 $12,317 12/31/2001 $15,241 $16,669 $12,269 01/31/2002 $15,448 $16,958 $12,297 02/28/2002 $15,607 $17,161 $12,346 -------------------------------------------------------------- 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 12 FRANKLIN INSURED TAX-FREE INCOME FUND -------------------------------------------------------------------------------- Your Fund's Goal: Franklin Insured Tax-Free Income Fund seeks to provide high, current income exempt from regular federal income tax through a portfolio consisting mainly of insured municipal bonds.1 -------------------------------------------------------------------------------- PORTFOLIO NOTES The municipal bond market was volatile but overall slightly stronger over the Fund's 12-month reporting period. Municipal debt and other financial markets were driven primarily by governmental responses to the recession and war on terrorism. The bond markets were further affected by the government's October announcement that 30-year Treasury bond issuance would cease, the culmination of an aggressive 30-year Treasury buyback program begun in early 2000. The municipal bond market's historical tendency to trend with government fixed-income securities diverged. After the government announcement, the 30-year Treasury gained more than five points and the 10-year note rose nearly one point while municipal bonds were up only marginally. For the 12 months ended February 28, 2002, the yield on the 30-year Treasury bond rose from 5.31% to 5.42%, while the 10-year Treasury bond yield remained nearly flat, moving from 4.92% to 4.88%. In contrast, municipal bond yields declined moderately, with the Bond Buyer Municipal Bond Index falling from a yield of 5.40% on February 28, 2001, to 5.25% on February 28, 2002.2 1. These dividends are generally subject to state and local income taxes, if any. For investors subject to the federal or state alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The insurance guarantees the scheduled payment of principal and interest on the insured securities in the Fund's portfolio, but does not guarantee the insured securities' market value, the value of the Fund's shares or the Fund's distributions. Fund shares are not insured. No representation is made as to any insurer's ability to meet its obligation to the Fund if called upon to do so. 2. Source: THE BOND BUYER, 3/1/02. The unmanaged Bond Buyer Municipal Bond Index is composed of the yield to maturity of 40 bonds. The index attempts to track the new-issue market as closely as possible, so it changes bonds twice a month, adding all new bonds that meet certain requirements and deleting an equivalent number according to their secondary market trading activity. As a result, the average par call date, average maturity date and average coupon rate change over time. The average maturity has generally been about 29-30 years. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 57. 13 PORTFOLIO BREAKDOWN Franklin Insured Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ----------------------------- Hospital & Health Care 23.9% Utilities 18.3% Prerefunded 17.5% General Obligation 11.4% Transportation 11.3% Higher Education 5.6% Subject to Government Appropriations 4.0% Tax-Supported 3.9% Housing 2.7% Other Revenue 1.1% Corporate-Backed 0.3% The combination of low interest rates and generally declining tax receipts sparked a significant outbreak of municipal bond activity. Many municipalities took advantage of lower borrowing costs to issue new debt and refinance existing debt from earlier, higher interest rate cycles. The need for capital improvement also contributed to the fervor, and 2001 closed near a record high for new municipal bond issuance, at $286.3 billion.3 As 2002 began, the momentum continued with an unprecedented January issuance of $20.4 billion in long-term bonds.4 The flood of new municipal bonds in the market was well received by institutional and retail buyers, keeping demand buoyant as increasingly cautious investors shifted assets into the perceived safety of municipal bonds and other fixed-income securities. Municipal bonds endured a series of mild rallies and declines as stock prices suffered through a volatile year. Since the equity markets and economy weakened appreciably overall, municipal bonds kept their edge on stocks due largely to investor uncertainties as to when an economic recovery would occur, a sentiment that typically moves money away from the heightened risks posed by equity securities. With the Standard & Poor's 500 and Nasdaq Composite indexes posting double-digit losses for the 12 months under review, investors were inclined to reallocate into more conservative assets, helping prop up municipal securities' demand.5 Although the weak economic fundamentals hardly changed in the last few months of the reporting period, investors reversed course late in 2001, moving back into the stock market and ending the final government bond rally of the reporting period. Investors viewed the Treasury market as overbought and grew optimistic about an early-2002 economic recovery, bolstered by reports that the nation's inventories and gross domestic product were stabilizing. Approximately 46% of 2001's new municipal bond issuance was insured. Despite a significant increase in supply, demand for insured bonds remained strong as the spread, or yield difference, between high-grade and more speculative-grade bonds continued to be comparatively narrow. We also saw the emergence of XL Capital, 3. Source: THE BOND BUYER, 1/2/02. 4. Source: THE BOND BUYER, 2/1/02. 5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group presentation. It is a market value-weighted index (outstanding shares times price), with each stock's weight in the index proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Nasdaq Composite Index measures all Nasdaq National Market common stocks. The index is market value-weighted and includes over 4,000 companies. The indexes are unmanaged and include reinvested dividends. 14 the country's fifth AAA-rated insurer, into the municipal bond market during 2001. XL Capital is in the process of establishing its business, and we anticipate that until we analyze the company's model, we will only purchase XL Capital insured bonds for the Fund if the underlying credit is of high-grade quality. As mentioned, municipal bond yields generally decreased during the Fund's fiscal year. Because bond prices rise as yields fall, Franklin Insured Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.98 per share on February 28, 2001, to $12.13 per share on February 28, 2002. We focused primarily on remaining fully invested throughout the year under review, as the yield spread between short- and long-maturity bonds remained fairly wide. Volatility in the municipal bond marketplace provided us with an opportunity to purchase national trading bonds which, when markets weaken, offer wider yield spreads compared to specialty state bonds. Specialty state bonds generally trade at lower yields than those of other state bonds due to supply/demand characteristics and credit quality. Due to increased demand and positive cash flow into the Fund, sales of portfolio holdings were minimal. Purchases during the 12-month reporting period included Austin, Texas, Water & Wastewater System; Detroit, Michigan, Water Supply System; Harris County, Texas, Houston Sports Authority (stadium); and Michigan State Trunk Line revenue bonds. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields.1 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 4.55%, based on an annualization of the current 4.8 cent ($0.048) per share dividend and the maximum offering price of $12.67 on February 28, 2002. This tax-free rate is 15 DIVIDEND DISTRIBUTIONS* Franklin Insured Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------------------- MONTH CLASS A CLASS B CLASS C -------------------------------------------------------------------------------- March 5.00 cents 4.41 cents 4.41 cents April 5.00 cents 4.41 cents 4.41 cents May 5.00 cents 4.41 cents 4.41 cents June 5.00 cents 4.44 cents 4.46 cents July 5.00 cents 4.44 cents 4.46 cents August 5.00 cents 4.44 cents 4.46 cents September 4.98 cents 4.46 cents 4.42 cents October 4.98 cents 4.46 cents 4.42 cents November 4.98 cents 4.46 cents 4.42 cents December 4.89 cents 4.31 cents 4.30 cents January 4.89 cents 4.31 cents 4.30 cents February 4.89 cents 4.31 cents 4.30 cents -------------------------------------------------------------------------------- TOTAL 59.61 CENTS 52.86 CENTS 52.77 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum federal personal income tax bracket of 38.6% would need to earn 7.41% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. Looking ahead, we are optimistic about the long-term outlook for municipal bonds and Franklin Insured Tax-Free Income Fund. Given our income-oriented investment approach, we generally expect the Fund to perform comparatively well in terms of total return and tax-free income distribution for shareholders with long-term investment horizons. It is important to remember that, over time, the tax-free income from municipal bonds will ultimately drive the Fund's total return performance. 16 The economy's direction was still uncertain and its fundamentals remained weak at period-end. Nonetheless, we believe the Fund's broad portfolio diversification should help it hold up against any short-term volatility in the municipal bond and other markets. We also expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income portion of their portfolios. Most importantly, we believe municipal bonds, and the Fund, will remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 17 FRANKLIN INSURED TAX-FREE INCOME FUND ------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. ------------------------------- PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.15 $12.13 $11.98 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5961 CLASS B CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $12.17 $12.00 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5286 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $12.21 $12.05 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5277 18 Past performance does not guarantee future results. PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +6.39% +32.08% +84.66% Average Annual Total Return2 +1.89% +4.81% +5.86% Avg. Ann. Total Return (3/31/02)3 -0.66% +4.63% +5.64% Distribution Rate4 4.55% Taxable Equivalent Distribution Rate5 7.41% 30-Day Standardized Yield6 3.70% Taxable Equivalent Yield5 6.03% INCEPTION CLASS B 1-YEAR (2/1/00) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.96% +20.01% Average Annual Total Return2 +1.96% +7.86% Avg. Ann. Total Return (3/31/02)3 -0.73% +6.61% Distribution Rate4 4.17% Taxable Equivalent Distribution Rate5 6.79% 30-Day Standardized Yield6 3.33% Taxable Equivalent Yield5 5.42% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.84% +28.46% +43.97% Average Annual Total Return2 +3.81% +4.93% +5.32% Avg. Ann. Total Return (3/31/02)3 +1.13% +4.77% +4.98% Distribution Rate4 4.13% Taxable Equivalent Distribution Rate5 6.73% 30-Day Standardized Yield6 3.29% Taxable Equivalent Yield5 5.36% 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the 2002 maximum federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. ------------------------------ Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. ------------------------------ For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 19 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +1.89% 5-Year +4.81% 10-Year +5.86% [Line Graph Omitted] CLASS A (3/1/92-2/28/02) The following line graph compares the performance of the Franklin Insured Tax-Free Income Fund - Class A to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 3/1/92 to 2/28/02. -------------------------------------------------------------- Date Franklin Lehman Brothers CPI Insured Municipal Bond Tax-Free Income Index Fund-Class A -------------------------------------------------------------- 03/01/1992 $9,571 $10,000 $10,000 03/31/1992 $9,602 $10,003 $10,051 04/30/1992 $9,677 $10,092 $10,065 05/31/1992 $9,819 $10,211 $10,079 06/30/1992 $9,946 $10,383 $10,115 07/31/1992 $10,310 $10,694 $10,137 08/31/1992 $10,170 $10,590 $10,165 09/30/1992 $10,185 $10,659 $10,194 10/31/1992 $10,018 $10,555 $10,229 11/30/1992 $10,261 $10,744 $10,244 12/31/1992 $10,399 $10,853 $10,236 01/31/1993 $10,537 $10,979 $10,287 02/28/1993 $10,836 $11,377 $10,323 03/31/1993 $10,777 $11,256 $10,359 04/30/1993 $10,851 $11,370 $10,388 05/31/1993 $10,892 $11,433 $10,402 06/30/1993 $11,079 $11,624 $10,417 07/31/1993 $11,098 $11,639 $10,417 08/31/1993 $11,326 $11,882 $10,446 09/30/1993 $11,449 $12,017 $10,468 10/31/1993 $11,464 $12,040 $10,511 11/30/1993 $11,428 $11,934 $10,518 12/31/1993 $11,633 $12,186 $10,518 01/31/1994 $11,743 $12,325 $10,547 02/28/1994 $11,506 $12,005 $10,582 03/31/1994 $11,142 $11,517 $10,618 04/30/1994 $11,187 $11,615 $10,633 05/31/1994 $11,264 $11,716 $10,641 06/30/1994 $11,224 $11,644 $10,677 07/31/1994 $11,401 $11,857 $10,706 08/31/1994 $11,432 $11,899 $10,749 09/30/1994 $11,327 $11,724 $10,778 10/31/1994 $11,182 $11,515 $10,785 11/30/1994 $10,994 $11,307 $10,799 12/31/1994 $11,215 $11,556 $10,799 01/31/1995 $11,478 $11,886 $10,842 02/28/1995 $11,744 $12,232 $10,886 03/31/1995 $11,846 $12,373 $10,922 04/30/1995 $11,869 $12,387 $10,958 05/31/1995 $12,139 $12,783 $10,980 06/30/1995 $12,081 $12,671 $11,002 07/31/1995 $12,141 $12,792 $11,002 08/31/1995 $12,249 $12,954 $11,030 09/30/1995 $12,307 $13,036 $11,052 10/31/1995 $12,462 $13,225 $11,089 11/30/1995 $12,632 $13,444 $11,081 12/31/1995 $12,741 $13,573 $11,073 01/31/1996 $12,815 $13,677 $11,138 02/29/1996 $12,762 $13,584 $11,174 03/31/1996 $12,635 $13,410 $11,232 04/30/1996 $12,602 $13,372 $11,276 05/31/1996 $12,626 $13,367 $11,297 06/30/1996 $12,747 $13,513 $11,304 07/31/1996 $12,833 $13,634 $11,326 08/31/1996 $12,852 $13,631 $11,347 09/30/1996 $13,011 $13,822 $11,384 10/31/1996 $13,126 $13,978 $11,420 11/30/1996 $13,305 $14,234 $11,442 12/31/1996 $13,274 $14,175 $11,442 01/31/1997 $13,291 $14,201 $11,478 02/28/1997 $13,385 $14,332 $11,514 03/31/1997 $13,262 $14,141 $11,543 04/30/1997 $13,355 $14,260 $11,556 05/31/1997 $13,511 $14,476 $11,550 06/30/1997 $13,631 $14,630 $11,563 07/31/1997 $13,952 $15,036 $11,577 08/31/1997 $13,832 $14,894 $11,599 09/30/1997 $13,974 $15,072 $11,628 10/31/1997 $14,064 $15,168 $11,657 11/30/1997 $14,156 $15,258 $11,650 12/31/1997 $14,352 $15,480 $11,636 01/31/1998 $14,475 $15,640 $11,658 02/28/1998 $14,469 $15,645 $11,681 03/31/1998 $14,503 $15,659 $11,703 04/30/1998 $14,458 $15,588 $11,724 05/31/1998 $14,663 $15,834 $11,745 06/30/1998 $14,733 $15,896 $11,759 07/31/1998 $14,779 $15,936 $11,773 08/31/1998 $14,977 $16,183 $11,787 09/30/1998 $15,146 $16,385 $11,801 10/31/1998 $15,154 $16,385 $11,830 11/30/1998 $15,207 $16,443 $11,830 12/31/1998 $15,222 $16,484 $11,823 01/31/1999 $15,361 $16,680 $11,851 02/28/1999 $15,299 $16,606 $11,865 03/31/1999 $15,348 $16,630 $11,901 04/30/1999 $15,374 $16,671 $11,988 05/31/1999 $15,293 $16,575 $11,988 06/30/1999 $15,096 $16,336 $11,988 07/31/1999 $15,118 $16,395 $12,024 08/31/1999 $14,934 $16,264 $12,053 09/30/1999 $14,907 $16,270 $12,110 10/31/1999 $14,697 $16,094 $12,132 11/30/1999 $14,845 $16,265 $12,140 12/31/1999 $14,704 $16,143 $12,140 01/31/2000 $14,613 $16,072 $12,176 02/29/2000 $14,807 $16,258 $12,248 03/31/2000 $15,163 $16,613 $12,348 04/30/2000 $15,069 $16,515 $12,356 05/31/2000 $14,971 $16,429 $12,370 06/30/2000 $15,358 $16,864 $12,435 07/31/2000 $15,601 $17,099 $12,463 08/31/2000 $15,832 $17,362 $12,463 09/30/2000 $15,720 $17,272 $12,528 10/31/2000 $15,902 $17,460 $12,549 11/30/2000 $16,037 $17,593 $12,557 12/31/2000 $16,470 $18,027 $12,549 01/31/2001 $16,571 $18,206 $12,629 02/28/2001 $16,620 $18,264 $12,679 03/31/2001 $16,748 $18,428 $12,708 04/30/2001 $16,556 $18,229 $12,759 05/31/2001 $16,725 $18,426 $12,816 06/30/2001 $16,860 $18,550 $12,838 07/31/2001 $17,108 $18,824 $12,802 08/31/2001 $17,364 $19,135 $12,802 09/30/2001 $17,285 $19,070 $12,860 10/31/2001 $17,492 $19,297 $12,816 11/30/2001 $17,387 $19,135 $12,794 12/31/2001 $17,229 $18,953 $12,744 01/31/2002 $17,487 $19,281 $12,774 02/28/2002 $17,679 $19,512 $12,825 AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 -------------------------------- 1-Year +1.96% Since Inception (2/1/00) +7.86% CLASS B (2/1/00-2/28/02) [Line Graph Omitted] The following line graph compares the performance of the Franklin Insured Tax-Free Income Fund - Class B to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 2/1/00 to 2/28/02. -------------------------------------------------------------- Date Franklin Insured Lehman CPI Tax-Free Income Brothers Fund-Class B Municipal Bond Index -------------------------------------------------------------- 02/01/2000 $10,000 $10,000 $10,000 02/29/2000 $10,131 $10,116 $10,059 03/31/2000 $10,369 $10,337 $10,141 04/30/2000 $10,309 $10,276 $10,148 05/31/2000 $10,237 $10,222 $10,160 06/30/2000 $10,497 $10,493 $10,213 07/31/2000 $10,657 $10,639 $10,236 08/31/2000 $10,810 $10,803 $10,236 09/30/2000 $10,737 $10,747 $10,289 10/31/2000 $10,847 $10,864 $10,307 11/30/2000 $10,943 $10,946 $10,313 12/31/2000 $11,235 $11,217 $10,307 01/31/2001 $11,297 $11,328 $10,372 02/28/2001 $11,327 $11,364 $10,413 03/31/2001 $11,417 $11,466 $10,437 04/30/2001 $11,282 $11,342 $10,479 05/31/2001 $11,391 $11,465 $10,526 06/30/2001 $11,478 $11,542 $10,544 07/31/2001 $11,650 $11,712 $10,514 08/31/2001 $11,819 $11,906 $10,514 09/30/2001 $11,761 $11,865 $10,562 10/31/2001 $11,895 $12,006 $10,526 11/30/2001 $11,819 $11,906 $10,508 12/31/2001 $11,706 $11,792 $10,467 01/31/2002 $11,876 $11,996 $10,491 02/28/2002 $11,701 $12,140 $10,533 Past performance does not guarantee future results. 20 PERFORMANCE SUMMARY (CONT.) CLASS C (5/1/95-2/28/02) [Line Graph Omitted] The following line graph compares the performance of the Franklin Insured Tax-Free Income Fund - Class C to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 5/1/95 to 2/28/02. ---------------------------------------------------------------- Date Franklin Lehman CPI Insured Brothers Tax-Free Municipal Income Bond Fund-Class C Index ---------------------------------------------------------------- 05/01/1995 $9,901 $10,000 $10,000 05/31/1995 $10,137 $10,319 $10,020 06/30/1995 $10,091 $10,229 $10,040 07/31/1995 $10,136 $10,326 $10,040 08/31/1995 $10,222 $10,458 $10,066 09/29/1995 $10,274 $10,523 $10,086 10/31/1995 $10,397 $10,676 $10,120 11/30/1995 $10,525 $10,853 $10,112 12/29/1995 $10,619 $10,957 $10,105 01/31/1996 $10,674 $11,041 $10,165 02/29/1996 $10,627 $10,966 $10,198 03/29/1996 $10,515 $10,825 $10,251 04/30/1996 $10,492 $10,795 $10,291 05/31/1996 $10,507 $10,791 $10,310 06/28/1996 $10,602 $10,908 $10,316 07/31/1996 $10,678 $11,006 $10,336 08/30/1996 $10,681 $11,004 $10,356 09/30/1996 $10,808 $11,158 $10,389 10/31/1996 $10,898 $11,284 $10,422 11/29/1996 $11,040 $11,491 $10,442 12/31/1996 $11,008 $11,443 $10,442 01/31/1997 $11,017 $11,464 $10,475 02/28/1997 $11,099 $11,570 $10,508 03/31/1997 $10,982 $11,416 $10,534 04/30/1997 $11,062 $11,512 $10,547 05/31/1997 $11,185 $11,686 $10,540 06/30/1997 $11,279 $11,811 $10,553 07/31/1997 $11,537 $12,138 $10,565 08/31/1997 $11,434 $12,024 $10,586 09/30/1997 $11,544 $12,167 $10,612 10/31/1997 $11,613 $12,245 $10,639 11/30/1997 $11,683 $12,317 $10,632 12/31/1997 $11,848 $12,497 $10,619 01/31/1998 $11,935 $12,626 $10,640 02/28/1998 $11,933 $12,629 $10,660 03/31/1998 $11,945 $12,641 $10,680 04/30/1998 $11,902 $12,584 $10,699 05/31/1998 $12,074 $12,783 $10,719 06/30/1998 $12,126 $12,832 $10,731 07/31/1998 $12,157 $12,865 $10,744 08/31/1998 $12,314 $13,064 $10,757 09/30/1998 $12,447 $13,227 $10,770 10/31/1998 $12,447 $13,227 $10,796 11/30/1998 $12,484 $13,274 $10,796 12/31/1998 $12,491 $13,307 $10,789 01/31/1999 $12,598 $13,465 $10,815 02/28/1999 $12,543 $13,406 $10,828 03/31/1999 $12,575 $13,425 $10,861 04/30/1999 $12,590 $13,458 $10,940 05/31/1999 $12,519 $13,380 $10,940 06/30/1999 $12,352 $13,187 $10,940 07/31/1999 $12,366 $13,235 $10,973 08/31/1999 $12,220 $13,129 $10,999 09/30/1999 $12,182 $13,134 $11,052 10/31/1999 $11,995 $12,992 $11,072 11/30/1999 $12,121 $13,130 $11,079 12/31/1999 $12,001 $13,032 $11,079 01/31/2000 $11,922 $12,974 $11,112 02/29/2000 $12,075 $13,125 $11,177 03/31/2000 $12,357 $13,411 $11,269 04/30/2000 $12,276 $13,332 $11,276 05/31/2000 $12,191 $13,263 $11,289 06/30/2000 $12,500 $13,614 $11,348 07/31/2000 $12,690 $13,803 $11,374 08/31/2000 $12,870 $14,016 $11,374 09/30/2000 $12,785 $13,943 $11,433 10/31/2000 $12,915 $14,095 $11,453 11/30/2000 $13,019 $14,202 $11,460 12/31/2000 $13,374 $14,553 $11,453 01/31/2001 $13,437 $14,697 $11,525 02/28/2001 $13,470 $14,744 $11,571 03/31/2001 $13,578 $14,877 $11,598 04/30/2001 $13,417 $14,716 $11,644 05/31/2001 $13,535 $14,875 $11,696 06/30/2001 $13,638 $14,974 $11,716 07/31/2001 $13,841 $15,196 $11,683 08/31/2001 $14,040 $15,447 $11,683 09/30/2001 $13,970 $15,394 $11,736 10/31/2001 $14,129 $15,578 $11,696 11/30/2001 $14,039 $15,447 $11,676 12/31/2001 $13,905 $15,300 $11,631 01/31/2002 $14,118 $15,565 $11,657 02/28/2002 $14,254 $15,751 $11,704 AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 -------------------------------- 1-Year +3.81% 5-Year +4.93% Since Inception (5/1/95) +5.32% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 21 FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND MASSACHUSETTS STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF INSURED MASSACHUSETTS MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- COMMONWEALTH UPDATE2 [Massachusetts map graphic omitted] Massachusetts consistently demonstrated favorable financial performance in recent years, fostered by effective budgetary management, strengthened cash and reserve levels and greatly reduced reliance on short-term borrowing for operations. These prudent practices contributed positively to the commonwealth's ability to maintain fiscal balance while implementing significant necessary spending increases during the current economic downturn. The commonwealth can benefit from its ample reserves to deal with the sharp drop in tax revenues caused by the weakened economy, a trend of increased spending pressure in the area of Medicaid and other health-related programs, emerging pressures in the areas of public assistance and protection, and a relatively high degree of uncertainty regarding the timing and strength of an eventual economic recovery. Every industry in the commonwealth slowed, particularly the manufacturing sector. Also, the commonwealth's previously booming financial services and information technology industries faced large layoffs. Job losses mounted across all industries, and the commonwealth's unemployment rate rose from 2.7% in February 2001 to 4.4% in February 2002; however, it still remained below the 5.5% national rate at period-end, according to the U.S Bureau of Labor Statistics. Tightening fiscal conditions and a heavy debt load are adding sizable pressures to the commonwealth's waning economy, compounded by revised revenue forecasts which 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The insurance guarantees the scheduled payment of principal and interest on the insured securities in the Fund's portfolio, but does not guarantee the insured securities' market value, the value of the Fund's shares, or the Fund's distributions. Fund shares are not insured. No representation is made as to any insurer's ability to meet its obligation to the Fund if called upon to do so. 2. Source: Moody's Investors Service, MASSACHUSETTS (COMMONWEALTH OF), 1/14/02. This does not indicate Moody's rating of the Fund. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 71. 22 point to a 7% decline in tax collections and a large $1.4 billion revenue shortfall for fiscal year 2002. Tapping cash reserves and cutting recurring spending for fiscal year 2002 is estimated to reduce the budget gap to $900 million in fiscal year 2003, but many challenges still exist. Among them is the need to begin the fiscal year 2003 budget process immediately amid weaker revenue generation and narrowing reserves; ongoing spending pressures, especially in health care and transportation funding; and the further phase-in of personal state income tax reductions. Furthermore, the commonwealth has significant ongoing debt needs and the third-highest debt levels in the nation, on a per-capita basis and as a percentage of personal income. In 2001, total tax-supported debt amounted to $19 billion or 8.5% of total personal income, well above the 50-state median of 2.1%. Faced with such challenges, Massachusetts' retained its high investment-grade, Aa2 credit rating according to Moody's, an independent credit rating agency. However, Moody's changed its outlook from stable to negative in the second half of the reporting period, reflecting Massachusetts' new and significant economic uncertainties. Although the slower baseline revenue growth that has emerged will now require greater spending discipline, Massachusetts still has a number of credit strengths to affirm its current, high investment-grade standing: a fundamentally diverse and broad economic base despite the recession; high wealth and income levels, with the nation's fourth-highest per capita state income; and proven long-term financial discipline and flexibility that has produced strong reserves. PORTFOLIO NOTES The municipal bond market experienced occasional intervals of rising interest rates during the year under review, specifically following the release of stronger-than-expected economic data such as we saw in November and December. Overall, however, municipal bond yields decreased slightly. Because bond prices rise when yields fall, Franklin Massachusetts Insured Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.54 on February 28, 2001, to $11.64 on February 28, 2002. New municipal bond issuance in Massachusetts increased 4.4% in 2001 to roughly $9.6 billion, up from about $9.2 billion one year earlier.3 A low interest rate environment during the year under review helped municipalities to refinance debt, and PORTFOLIO BREAKDOWN Franklin Massachusetts Insured Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ Hospital & Health Care 23.4% Higher Education 19.8% Transportation 18.3% General Obligation 12.1% Utilities 11.4% Prerefunded 8.0% Housing 3.8% Other Revenue 3.2% 3. Source: THE BOND BUYER, 1/2/02. 23 DIVIDEND DISTRIBUTIONS* Franklin Massachusetts Insured Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------ MONTH CLASS A CLASS C -------------------------------------------------------------------------------- March 4.69 cents 4.15 cents April 4.69 cents 4.15 cents May 4.69 cents 4.15 cents June 4.69 cents 4.16 cents July 4.69 cents 4.16 cents August 4.69 cents 4.16 cents September 4.64 cents 4.11 cents October 4.64 cents 4.11 cents November 4.64 cents 4.11 cents December 4.64 cents 4.08 cents January 4.64 cents 4.08 cents February 4.64 cents 4.08 cents -------------------------------------------------------------------------------- TOTAL 55.98 CENTS 49.50 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. many refunding deals came to market during the year, diminishing the impact of new issues on the total outstanding bond supply. Although bond supply was up, demand was up as well, which generally supported municipal bond prices. Several new closed-end funds entered the marketplace nationally, and there was solid participation by institutional and retail buyers. Additionally, the market for insured bonds remained strong as the spread, or yield difference, between high-grade and more speculative-grade bonds continued to be comparatively narrow. We focused primarily on investing new cash inflows into the portfolio, and attempted to enhance the portfolio's income-producing potential by selling lower coupon and prerefunded bonds and buying higher yielding and longer-term securities. We also sold bonds close to their call dates and purchased bonds with longer call dates to help improve the predictability of the Fund's future dividend payments. To book tax losses, we sold certain securities. Such losses can be used to offset any current or future capital gains, possibly lowering shareholders' future tax liabilities. As a result, we improved the portfolio's overall structure and kept the Fund as fully invested as 24 possible. With these strategies in mind, we bought Massachusetts State Water and Massachusetts Route 3 North Transportation Improvement bonds, among others. Some bonds sold during the reporting period included Winthrop GO, Springfield GO, Massachusetts State Health & Education Authority and Massachusetts State Independent Financial Authority bonds. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 26 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 4.64 cent ($0.0464) per share dividend and the maximum offering price of $12.16 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Massachusetts state personal income tax bracket of 41.85% would need to earn 7.88% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, we are optimistic about the long-term outlook for Massachusetts, its municipal bonds and Franklin Massachusetts Insured Tax-Free Income Fund. The fixed income market should remain healthy for the remainder of 2002 as we believe the economy will continue to recover slowly within a benign inflationary environment. Most importantly, we think municipal bonds will remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 25 FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND ------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. ------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Massachusetts state personal income tax bracket of 41.85%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $11.64 $11.54 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5598 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.09 $11.70 $11.61 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4950 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +5.87% +32.12% +84.60% Average Annual Total Return2 +1.39% +4.82% +5.86% Avg. Ann. Total Return (3/31/02)3 -1.06% +4.72% +5.64% Distribution Rate4 4.58% Taxable Equivalent Distribution Rate5 7.88% 30-Day Standardized Yield6 3.68% Taxable Equivalent Yield5 6.33% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.16% +28.42% +43.71% Average Annual Total Return2 +3.09% +4.91% +5.30% Avg. Ann. Total Return (3/31/02)3 +0.60% +4.81% +4.96% Distribution Rate4 4.16% Taxable Equivalent Distribution Rate5 7.15% 30-Day Standardized Yield6 3.26% Taxable Equivalent Yield5 5.61% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- 26 Past performance does not guarantee future results. PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. [Line Graph Omitted] CLASS A (3/1/92-2/28/02) The following line graph compares the performance of the Franklin Massachusetts Insured Tax-Free Income Fund - Class A to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 3/1/92 to 2/28/02. -------------------------------------------------------------- Date Franklin Lehman Brothers CPI Massachusetts Municipal Bond Insured Index Tax-Free Income Fund-Class A -------------------------------------------------------------- 03/01/1992 $9,573 $10,000 $10,000 03/31/1992 $9,599 $10,003 $10,051 04/30/1992 $9,680 $10,092 $10,065 05/31/1992 $9,807 $10,211 $10,079 06/30/1992 $9,954 $10,383 $10,115 07/31/1992 $10,282 $10,694 $10,137 08/31/1992 $10,147 $10,590 $10,165 09/30/1992 $10,159 $10,659 $10,194 10/31/1992 $9,969 $10,555 $10,229 11/30/1992 $10,222 $10,744 $10,244 12/31/1992 $10,373 $10,853 $10,236 01/31/1993 $10,513 $10,979 $10,287 02/28/1993 $10,806 $11,377 $10,323 03/31/1993 $10,812 $11,256 $10,359 04/30/1993 $10,894 $11,370 $10,388 05/31/1993 $10,924 $11,433 $10,402 06/30/1993 $11,101 $11,624 $10,417 07/31/1993 $11,127 $11,639 $10,417 08/31/1993 $11,335 $11,882 $10,446 09/30/1993 $11,443 $12,017 $10,468 10/31/1993 $11,464 $12,040 $10,511 11/30/1993 $11,423 $11,934 $10,518 12/31/1993 $11,597 $12,186 $10,518 01/31/1994 $11,720 $12,325 $10,547 02/28/1994 $11,524 $12,005 $10,582 03/31/1994 $11,145 $11,517 $10,618 04/30/1994 $11,168 $11,615 $10,633 05/31/1994 $11,235 $11,716 $10,641 06/30/1994 $11,207 $11,644 $10,677 07/31/1994 $11,370 $11,857 $10,706 08/31/1994 $11,397 $11,899 $10,749 09/30/1994 $11,283 $11,724 $10,778 10/31/1994 $11,158 $11,515 $10,785 11/30/1994 $10,977 $11,307 $10,799 12/31/1994 $11,177 $11,556 $10,799 01/31/1995 $11,462 $11,886 $10,842 02/28/1995 $11,739 $12,232 $10,886 03/31/1995 $11,833 $12,373 $10,922 04/30/1995 $11,876 $12,387 $10,958 05/31/1995 $12,113 $12,783 $10,980 06/30/1995 $12,068 $12,671 $11,002 07/31/1995 $12,149 $12,792 $11,002 08/31/1995 $12,249 $12,954 $11,030 09/30/1995 $12,327 $13,036 $11,052 10/31/1995 $12,475 $13,225 $11,089 11/30/1995 $12,628 $13,444 $11,081 12/31/1995 $12,750 $13,573 $11,073 01/31/1996 $12,812 $13,677 $11,138 02/29/1996 $12,774 $13,584 $11,174 03/31/1996 $13,207 $13,410 $11,232 04/30/1996 $13,159 $13,372 $11,276 05/31/1996 $13,182 $13,367 $11,297 06/30/1996 $13,296 $13,513 $11,304 07/31/1996 $13,395 $13,634 $11,326 08/31/1996 $13,412 $13,631 $11,347 09/30/1996 $13,565 $13,822 $11,384 10/31/1996 $13,682 $13,978 $11,420 11/30/1996 $13,879 $14,234 $11,442 12/31/1996 $13,829 $14,175 $11,442 01/31/1997 $13,267 $14,201 $11,478 02/28/1997 $13,372 $14,332 $11,514 03/31/1997 $13,202 $14,141 $11,543 04/30/1997 $13,305 $14,260 $11,556 05/31/1997 $13,498 $14,476 $11,550 06/30/1997 $13,645 $14,630 $11,563 07/31/1997 $14,012 $15,036 $11,577 08/31/1997 $13,881 $14,894 $11,599 09/30/1997 $14,036 $15,072 $11,628 10/31/1997 $14,113 $15,168 $11,657 11/30/1997 $14,205 $15,258 $11,650 12/31/1997 $14,411 $15,480 $11,636 01/31/1998 $14,510 $15,640 $11,658 02/28/1998 $14,510 $15,645 $11,681 03/31/1998 $14,525 $15,659 $11,703 04/30/1998 $14,494 $15,588 $11,724 05/31/1998 $14,690 $15,834 $11,745 06/30/1998 $14,774 $15,896 $11,759 07/31/1998 $14,803 $15,936 $11,773 08/31/1998 $14,993 $16,183 $11,787 09/30/1998 $15,153 $16,385 $11,801 10/31/1998 $15,105 $16,385 $11,830 11/30/1998 $15,168 $16,443 $11,830 12/31/1998 $15,188 $16,484 $11,823 01/31/1999 $15,317 $16,680 $11,851 02/28/1999 $15,288 $16,606 $11,865 03/31/1999 $15,334 $16,630 $11,901 04/30/1999 $15,369 $16,671 $11,988 05/31/1999 $15,294 $16,575 $11,988 06/30/1999 $15,083 $16,336 $11,988 07/31/1999 $15,102 $16,395 $12,024 08/31/1999 $14,891 $16,264 $12,053 09/30/1999 $14,819 $16,270 $12,110 10/31/1999 $14,596 $16,094 $12,132 11/30/1999 $14,761 $16,265 $12,140 12/31/1999 $14,622 $16,143 $12,140 01/31/2000 $14,536 $16,072 $12,176 02/29/2000 $14,775 $16,258 $12,248 03/31/2000 $15,129 $16,613 $12,348 04/30/2000 $15,014 $16,515 $12,356 05/31/2000 $14,880 $16,429 $12,370 06/30/2000 $15,322 $16,864 $12,435 07/31/2000 $15,599 $17,099 $12,463 08/31/2000 $15,807 $17,362 $12,463 09/30/2000 $15,685 $17,272 $12,528 10/31/2000 $15,898 $17,460 $12,549 11/30/2000 $16,049 $17,593 $12,557 12/31/2000 $16,555 $18,027 $12,549 01/31/2001 $16,626 $18,206 $12,629 02/28/2001 $16,688 $18,264 $12,679 03/31/2001 $16,803 $18,428 $12,708 04/30/2001 $16,569 $18,229 $12,759 05/31/2001 $16,727 $18,426 $12,816 06/30/2001 $16,892 $18,550 $12,838 07/31/2001 $17,146 $18,824 $12,802 08/31/2001 $17,437 $19,135 $12,802 09/30/2001 $17,350 $19,070 $12,860 10/31/2001 $17,560 $19,297 $12,816 11/30/2001 $17,432 $19,135 $12,794 12/31/2001 $17,249 $18,953 $12,744 01/31/2002 $17,485 $19,281 $12,774 02/28/2002 $17,675 $19,512 $12,825 [Line Graph Omitted] CLASS C (5/1/95-2/28/02) The following line graph compares the performance of the Franklin Massachusetts Insured Tax-Free Income Fund - Class C to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 5/1/95 to 2/28/02. ------------------------------------------------------------------ Date Franklin Lehman CPI Massachusetts Brothers Insured Municipal Tax-Free Income Bond Fund-Class C Index ------------------------------------------------------------------ 05/01/1995 $9,904 $10,000 $10,000 05/31/1995 $10,114 $10,319 $10,020 06/30/1995 $10,080 $10,229 $10,040 07/31/1995 $10,141 $10,326 $10,040 08/31/1995 $10,227 $10,458 $10,066 09/29/1995 $10,278 $10,523 $10,086 10/31/1995 $10,395 $10,676 $10,120 11/30/1995 $10,528 $10,853 $10,112 12/29/1995 $10,623 $10,957 $10,105 01/31/1996 $10,669 $11,041 $10,165 02/29/1996 $10,633 $10,966 $10,198 03/29/1996 $10,622 $10,825 $10,251 04/30/1996 $10,586 $10,795 $10,291 05/31/1996 $10,607 $10,791 $10,310 06/28/1996 $10,687 $10,908 $10,316 07/31/1996 $10,771 $11,006 $10,336 08/30/1996 $10,771 $11,004 $10,356 09/30/1996 $10,900 $11,158 $10,389 10/31/1996 $10,981 $11,284 $10,422 11/29/1996 $11,128 $11,491 $10,442 12/31/1996 $11,089 $11,443 $10,442 01/31/1997 $10,991 $11,464 $10,475 02/28/1997 $11,082 $11,570 $10,508 03/31/1997 $10,937 $11,416 $10,534 04/30/1997 $11,008 $11,512 $10,547 05/31/1997 $11,162 $11,686 $10,540 06/30/1997 $11,288 $11,811 $10,553 07/31/1997 $11,576 $12,138 $10,565 08/31/1997 $11,462 $12,024 $10,586 09/30/1997 $11,594 $12,167 $10,612 10/31/1997 $11,651 $12,245 $10,639 11/30/1997 $11,721 $12,317 $10,632 12/31/1997 $11,874 $12,497 $10,619 01/31/1998 $11,960 $12,626 $10,640 02/28/1998 $11,954 $12,629 $10,660 03/31/1998 $11,960 $12,641 $10,680 04/30/1998 $11,930 $12,584 $10,699 05/31/1998 $12,085 $12,783 $10,719 06/30/1998 $12,148 $12,832 $10,731 07/31/1998 $12,176 $12,865 $10,744 08/31/1998 $12,315 $13,064 $10,757 09/30/1998 $12,440 $13,227 $10,770 10/31/1998 $12,406 $13,227 $10,796 11/30/1998 $12,442 $13,274 $10,796 12/31/1998 $12,463 $13,307 $10,789 01/31/1999 $12,561 $13,465 $10,815 02/28/1999 $12,521 $13,406 $10,828 03/31/1999 $12,562 $13,425 $10,861 04/30/1999 $12,585 $13,458 $10,940 05/31/1999 $12,518 $13,380 $10,940 06/30/1999 $12,340 $13,187 $10,940 07/31/1999 $12,351 $13,235 $10,973 08/31/1999 $12,174 $13,129 $10,999 09/30/1999 $12,098 $13,134 $11,052 10/31/1999 $11,912 $12,992 $11,072 11/30/1999 $12,050 $13,130 $11,079 12/31/1999 $11,932 $13,032 $11,079 01/31/2000 $11,846 $12,974 $11,112 02/29/2000 $12,046 $13,125 $11,177 03/31/2000 $12,327 $13,411 $11,269 04/30/2000 $12,227 $13,332 $11,276 05/31/2000 $12,112 $13,263 $11,289 06/30/2000 $12,465 $13,614 $11,348 07/31/2000 $12,683 $13,803 $11,374 08/31/2000 $12,845 $14,016 $11,374 09/30/2000 $12,742 $13,943 $11,433 10/31/2000 $12,909 $14,095 $11,453 11/30/2000 $13,025 $14,202 $11,460 12/31/2000 $13,440 $14,553 $11,453 01/31/2001 $13,480 $14,697 $11,525 02/28/2001 $13,537 $14,744 $11,571 03/31/2001 $13,622 $14,877 $11,598 04/30/2001 $13,427 $14,716 $11,644 05/31/2001 $13,547 $14,875 $11,696 06/30/2001 $13,662 $14,974 $11,716 07/31/2001 $13,869 $15,196 $11,683 08/31/2001 $14,086 $15,447 $11,683 09/30/2001 $14,022 $15,394 $11,736 10/31/2001 $14,172 $15,578 $11,696 11/30/2001 $14,076 $15,447 $11,676 12/31/2001 $13,910 $15,300 $11,631 01/31/2002 $14,105 $15,565 $11,657 02/28/2002 $14,233 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 27 FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND MICHIGAN STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF INSURED MICHIGAN MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE [Michigan map graphic omitted] Michigan's financial performance, impressive throughout the 1990s, bodes well for its ability to weather the recent economic malaise. Many of the cost-containment initiatives enacted in the 1990s remain in place today, and provide the state aggressive management controls and conservative fiscal practices. During the year under review, Michigan's economy and budgetary fortitude experienced challenges as state revenues waned substantially. Michigan is the eighth-largest state in the nation in terms of population and jobs, with manufacturing providing 22% of non-farm employment, sixth highest in the country. Employment growth has stalled and monthly unemployment levels surpassed the national average in 2001 for the first time since the early 1990s.2 The manufacturing sector fell into recession long before the rest of the economy and may remain weak, particularly because low consumer confidence could delay a recovery in durable goods production. Labor contracts have prevented some layoffs, but hours worked have declined, thereby depressing earnings. Fortunately, Michigan is seeing gains in economic diversification, which will reduce the severity of the national economic recession's effect on the state's employment base relative to past recessions.3 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The insurance guarantees the scheduled payment of principal and interest on the insured securities in the Fund's portfolio, but does not guarantee the insured securities' market value, the value of the Fund's shares, or the Fund's distributions. Fund shares are not insured. No representation is made as to any insurer's ability to meet its obligation to the Fund if called upon to do so. 2. Source: Moody's Investors Service, "RATING UPDATE: MOODY'S REVISES OUTLOOK FOR STATE OF MICHIGAN TO NEGATIVE," 12/19/01. 3. Source: Standard & Poor's, RATINGSDIRECT, 10/4/01. This does not indicate Standard & Poor's rating of the Fund. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 77. 28 Michigan's government has identified a number of recurring and non-recurring sources to close the budget gaps and achieve balance, including spending cuts via executive order, sale of state land, and a shift from relying on pay-as-you-go financing to bond financing of capital projects. Additionally, plans are in place to use about half of Michigan's rainy day fund, and the state budget director has ordered a hiring freeze and across-the-board spending cuts within state operations. Michigan's debt position is well managed, and the state maintains historically very low debt levels. The state ranks 31st in debt per capita and 33rd in debt as a percentage of personal income.4 Looking forward, Michigan should be able to maintain long-term structural balance and its current credit rating of AAA, according to Standard & Poor's.3 However, independent credit rating agency Moody's revised the state's credit outlook from stable to negative in December 2001. This outlook is based on evidence of serious weakness in the highly cyclical auto manufacturing sector and slowdowns in other state industries, shortfalls in tax revenues and other recessionary drains including rising welfare and Medicaid costs, as well as new spending requirements.2 In its favor, the state is better positioned to meet the difficulties of weaker tax revenue than in the early 1990s due to proportionately larger reserves, improved monitoring of revenues and spending, and the ability and willingness to take swift actions to restore budget balance. PORTFOLIO NOTES The municipal bond market experienced occasional intervals of rising interest rates during the year under review, specifically following the release of stronger-than-expected economic data such as we saw in November and December. Overall, however, municipal bond yields decreased. Because bond prices rise when yields fall, Franklin Michigan Insured Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $12.08 on February 28, 2001, to $12.25 on February 28, 2002. Michigan's bond supply increased 86.9% in 2001 to roughly $9.9 billion, a substantial increase from one year earlier.5 A low interest rate environment during the year under review helped municipalities to refinance debt, and many refunding deals came to market. Although bond supply was up, demand was up as well, which generally supported municipal bond prices. Several new closed-end funds entered the 4. Source: Moody's Investors Service, MICHIGAN (STATE OF), 10/5/01. 5. Source: THE BOND BUYER, 1/2/02. PORTFOLIO BREAKDOWN Franklin Michigan Insured Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ Prerefunded 34.0% General Obligation 23.7% Hospital & Health Care 13.5% Utilities 12.3% Transportation 8.6% Higher Education 2.8% Subject to Government Appropriations 1.9% Other Revenue 1.8% Tax-Supported 1.2% Housing 0.2% 29 DIVIDEND DISTRIBUTIONS* Franklin Michigan Insured Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------------------- MONTH CLASS A CLASS B CLASS C -------------------------------------------------------------------------------- March 4.98 cents 4.38 cents 4.40 cents April 4.98 cents 4.38 cents 4.40 cents May 4.98 cents 4.38 cents 4.40 cents June 4.88 cents 4.32 cents 4.32 cents July 4.88 cents 4.32 cents 4.32 cents August 4.88 cents 4.32 cents 4.32 cents September 4.88 cents 4.31 cents 4.32 cents October 4.88 cents 4.31 cents 4.32 cents November 4.88 cents 4.31 cents 4.32 cents December 4.88 cents 4.29 cents 4.30 cents January 4.88 cents 4.29 cents 4.30 cents February 4.88 cents 4.29 cents 4.30 cents -------------------------------------------------------------------------------- TOTAL 58.86 CENTS 51.90 CENTS 52.02 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. marketplace nationally, and there was solid participation by institutional and retail buyers. Additionally, the market for insured bonds remained strong as the spread, or yield difference, between high-grade and more speculative-grade bonds continued to be comparatively narrow. We focused primarily on a balanced approach of reducing the Fund's percentage of prerefunded bonds and offsetting the gains by selling other bonds with built-in tax losses. Prerefunded bonds tend to experience rapid price declines to their call price as they approach approximately five years to their call date, so we sold bonds close to their call dates and purchased those with longer call dates. Overall, these measures improved the portfolio's structure and income earning potential while helping to protect share value. During the reporting period, we bought Michigan State Trunk Line Revenue, Detroit City School District GO, Detroit Water Supply System Revenue and Detroit Public Improvements GO bonds. Sales consisted primarily of bonds that were refunded. 30 The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 32 shows that at the end of this reporting period the Fund's Class A shares' distribution rate was 4.58%, based on an annualization of the current 4.88 cent ($0.0488) per share dividend and the maximum offering price of $12.79 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Michigan state personal income tax bracket of 41.18% would need to earn 7.79% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. Looking forward, we hold an optimistic outlook for Michigan, its municipal bonds and Franklin Michigan Insured Tax-Free Income Fund. The fixed income market should remain healthy for the remainder of 2002 as we believe the economy will continue to recover slowly within a benign inflationary environment. Most importantly, we think demand for municipal bonds could remain quite strong as investors seek the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 31 FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND ------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. ------------------------------- PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $12.25 $12.08 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5886 CLASS B CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $12.29 $12.12 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5190 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $12.34 $12.17 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5202 32 Past performance does not guarantee future results. PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +6.44% +33.41% +87.29% Average Annual Total Return2 +1.89% +5.02% +6.01% Avg. Ann. Total Return (3/31/02)3 -0.95% +4.88% +5.77% Distribution Rate4 4.58% Taxable Equivalent Distribution Rate5 7.79% 30-Day Standardized Yield6 3.42% Taxable Equivalent Yield5 5.81% INCEPTION CLASS B 1-YEAR (2/1/00) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.81% +19.05% Average Annual Total Return2 +1.81% +7.43% Avg. Ann. Total Return (3/31/02)3 -1.00% +6.13% Distribution Rate4 4.22% Taxable Equivalent Distribution Rate5 7.17% 30-Day Standardized Yield6 3.06% Taxable Equivalent Yield5 5.20% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.80% +29.71% +45.74% Average Annual Total Return2 +3.78% +5.13% +5.51% Avg. Ann. Total Return (3/31/02)3 +0.97% +5.00% +5.14% Distribution Rate4 4.15% Taxable Equivalent Distribution Rate5 7.06% 30-Day Standardized Yield6 3.02% Taxable Equivalent Yield5 5.13% 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Michigan state personal income tax bracket of 41.18%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. ------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. ------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 33 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +1.89% 5-Year +5.02% 10-Year +6.01% [Line Graph Omitted] CLASS A (3/1/92-2/28/02) The following line graph compares the performance of the Franklin Michigan Insured Tax-Free Income Fund - Class A to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 3/1/92 to 2/28/02. -------------------------------------------------------------- Date Franklin Lehman CPI Michigan Brothers Insured Municipal Tax-Free Income Bond Fund-Class A Index -------------------------------------------------------------- 03/01/1992 $9,572 $10,000 $10,000 03/31/1992 $9,602 $10,003 $10,051 04/30/1992 $9,693 $10,092 $10,065 05/31/1992 $9,844 $10,211 $10,079 06/30/1992 $9,988 $10,383 $10,115 07/31/1992 $10,349 $10,694 $10,137 08/31/1992 $10,212 $10,590 $10,165 09/30/1992 $10,234 $10,659 $10,194 10/31/1992 $10,061 $10,555 $10,229 11/30/1992 $10,299 $10,744 $10,244 12/31/1992 $10,429 $10,853 $10,236 01/31/1993 $10,558 $10,979 $10,287 02/28/1993 $10,852 $11,377 $10,323 03/31/1993 $10,834 $11,256 $10,359 04/30/1993 $10,906 $11,370 $10,388 05/31/1993 $10,965 $11,433 $10,402 06/30/1993 $11,147 $11,624 $10,417 07/31/1993 $11,147 $11,639 $10,417 08/31/1993 $11,369 $11,882 $10,446 09/30/1993 $11,503 $12,017 $10,468 10/31/1993 $11,553 $12,040 $10,511 11/30/1993 $11,496 $11,934 $10,518 12/31/1993 $11,694 $12,186 $10,518 01/31/1994 $11,796 $12,325 $10,547 02/28/1994 $11,552 $12,005 $10,582 03/31/1994 $11,187 $11,517 $10,618 04/30/1994 $11,258 $11,615 $10,633 05/31/1994 $11,316 $11,716 $10,641 06/30/1994 $11,271 $11,644 $10,677 07/31/1994 $11,440 $11,857 $10,706 08/31/1994 $11,469 $11,899 $10,749 09/30/1994 $11,342 $11,724 $10,778 10/31/1994 $11,193 $11,515 $10,785 11/30/1994 $11,011 $11,307 $10,799 12/31/1994 $11,235 $11,556 $10,799 01/31/1995 $11,494 $11,886 $10,842 02/28/1995 $11,773 $12,232 $10,886 03/31/1995 $11,875 $12,373 $10,922 04/30/1995 $11,898 $12,387 $10,958 05/31/1995 $12,180 $12,783 $10,980 06/30/1995 $12,108 $12,671 $11,002 07/31/1995 $12,177 $12,792 $11,002 08/31/1995 $12,286 $12,954 $11,030 09/30/1995 $12,353 $13,036 $11,052 10/31/1995 $12,509 $13,225 $11,089 11/30/1995 $12,691 $13,444 $11,081 12/31/1995 $12,789 $13,573 $11,073 01/31/1996 $12,872 $13,677 $11,138 02/29/1996 $12,816 $13,584 $11,174 03/31/1996 $13,235 $13,410 $11,232 04/30/1996 $13,221 $13,372 $11,276 05/31/1996 $13,211 $13,367 $11,297 06/30/1996 $13,354 $13,513 $11,304 07/31/1996 $13,460 $13,634 $11,326 08/31/1996 $13,446 $13,631 $11,347 09/30/1996 $13,630 $13,822 $11,384 10/31/1996 $13,746 $13,978 $11,420 11/30/1996 $13,972 $14,234 $11,442 12/31/1996 $13,917 $14,175 $11,442 01/31/1997 $13,333 $14,201 $11,478 02/28/1997 $13,437 $14,332 $11,514 03/31/1997 $13,276 $14,141 $11,543 04/30/1997 $13,368 $14,260 $11,556 05/31/1997 $13,547 $14,476 $11,550 06/30/1997 $13,665 $14,630 $11,563 07/31/1997 $14,000 $15,036 $11,577 08/31/1997 $13,864 $14,894 $11,599 09/30/1997 $14,007 $15,072 $11,628 10/31/1997 $14,098 $15,168 $11,657 11/30/1997 $14,179 $15,258 $11,650 12/31/1997 $14,418 $15,480 $11,636 01/31/1998 $14,540 $15,640 $11,658 02/28/1998 $14,566 $15,645 $11,681 03/31/1998 $14,571 $15,659 $11,703 04/30/1998 $14,544 $15,588 $11,724 05/31/1998 $14,748 $15,834 $11,745 06/30/1998 $14,847 $15,896 $11,759 07/31/1998 $14,890 $15,936 $11,773 08/31/1998 $15,076 $16,183 $11,787 09/30/1998 $15,257 $16,385 $11,801 10/31/1998 $15,262 $16,385 $11,830 11/30/1998 $15,326 $16,443 $11,830 12/31/1998 $15,352 $16,484 $11,823 01/31/1999 $15,490 $16,680 $11,851 02/28/1999 $15,476 $16,606 $11,865 03/31/1999 $15,524 $16,630 $11,901 04/30/1999 $15,547 $16,671 $11,988 05/31/1999 $15,463 $16,575 $11,988 06/30/1999 $15,275 $16,336 $11,988 07/31/1999 $15,310 $16,395 $12,024 08/31/1999 $15,147 $16,264 $12,053 09/30/1999 $15,119 $16,270 $12,110 10/31/1999 $14,971 $16,094 $12,132 11/30/1999 $15,107 $16,265 $12,140 12/31/1999 $15,002 $16,143 $12,140 01/31/2000 $14,935 $16,072 $12,176 02/29/2000 $15,077 $16,258 $12,248 03/31/2000 $15,393 $16,613 $12,348 04/30/2000 $15,312 $16,515 $12,356 05/31/2000 $15,240 $16,429 $12,370 06/30/2000 $15,629 $16,864 $12,435 07/31/2000 $15,844 $17,099 $12,463 08/31/2000 $16,076 $17,362 $12,463 09/30/2000 $15,989 $17,272 $12,528 10/31/2000 $16,144 $17,460 $12,549 11/30/2000 $16,252 $17,593 $12,557 12/31/2000 $16,660 $18,027 $12,549 01/31/2001 $16,773 $18,206 $12,629 02/28/2001 $16,850 $18,264 $12,679 03/31/2001 $17,007 $18,428 $12,708 04/30/2001 $16,856 $18,229 $12,759 05/31/2001 $17,011 $18,426 $12,816 06/30/2001 $17,116 $18,550 $12,838 07/31/2001 $17,363 $18,824 $12,802 08/31/2001 $17,604 $19,135 $12,802 09/30/2001 $17,551 $19,070 $12,860 10/31/2001 $17,757 $19,297 $12,816 11/30/2001 $17,622 $19,135 $12,794 12/31/2001 $17,463 $18,953 $12,744 01/31/2002 $17,767 $19,281 $12,774 02/28/2002 $17,928 $19,512 $12,825 AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 -------------------------------- 1-Year +1.81% Since Inception (2/1/00) +7.43% [Line Graph Omitted] CLASS B (2/1/00-2/28/02) The following line graph compares the performance of the Franklin Michigan Insured Tax-Free Income Fund - Class B to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 2/1/00 to 2/28/02. -------------------------------------------------------------- Date Michigan Lehman Brothers Insured Municipal Bond CPI Tax-Free Income Index Fund-Class B -------------------------------------------------------------- 02/01/2000 $10,000 $10,000 $10,000 02/29/2000 $10,111 $10,116 $10,059 03/31/2000 $10,309 $10,337 $10,141 04/30/2000 $10,249 $10,276 $10,148 05/31/2000 $10,204 $10,222 $10,160 06/30/2000 $10,459 $10,493 $10,213 07/31/2000 $10,599 $10,639 $10,236 08/31/2000 $10,748 $10,803 $10,236 09/30/2000 $10,694 $10,747 $10,289 10/31/2000 $10,793 $10,864 $10,307 11/30/2000 $10,860 $10,946 $10,313 12/31/2000 $11,127 $11,217 $10,307 01/31/2001 $11,207 $11,328 $10,372 02/28/2001 $11,253 $11,364 $10,413 03/31/2001 $11,342 $11,466 $10,437 04/30/2001 $11,244 $11,342 $10,479 05/31/2001 $11,342 $11,465 $10,526 06/30/2001 $11,408 $11,542 $10,544 07/31/2001 $11,566 $11,712 $10,514 08/31/2001 $11,721 $11,906 $10,514 09/30/2001 $11,691 $11,865 $10,562 10/31/2001 $11,812 $12,006 $10,526 11/30/2001 $11,718 $11,906 $10,508 12/31/2001 $11,607 $11,792 $10,467 01/31/2002 $11,802 $11,996 $10,491 02/28/2002 $11,605 $12,140 $10,533 Past performance does not guarantee future results. 34 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 -------------------------------------- 1-Year +3.78% 5-Year +5.18% Since Inception (5/1/95) +5.51% [Line Graph Omitted] CLASS C (5/1/95-2/28/02) The following line graph compares the performance of the Franklin Michigan Insured Tax-Free Income Fund - Class C to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 5/1/95 to 2/28/01. -------------------------------------------------------------------- Date Franklin Lehman CPI Michigan Brothers Insured Municipal Bond Tax-Free Index Income Fund-Class C -------------------------------------------------------------------- 05/01/1995 $9,899 $10,000 $10,000 05/31/1995 $10,154 $10,319 $10,020 06/30/1995 $10,098 $10,229 $10,040 07/31/1995 $10,150 $10,326 $10,040 08/31/1995 $10,235 $10,458 $10,066 09/29/1995 $10,295 $10,523 $10,086 10/31/1995 $10,418 $10,676 $10,120 11/30/1995 $10,564 $10,853 $10,112 12/29/1995 $10,640 $10,957 $10,105 01/31/1996 $10,704 $11,041 $10,165 02/29/1996 $10,649 $10,966 $10,198 03/29/1996 $10,629 $10,825 $10,251 04/30/1996 $10,611 $10,795 $10,291 05/31/1996 $10,507 $10,791 $10,310 06/28/1996 $10,602 $10,908 $10,316 07/31/1996 $10,683 $11,006 $10,336 08/30/1996 $10,683 $11,004 $10,356 09/30/1996 $10,820 $11,158 $10,389 10/31/1996 $10,909 $11,284 $10,422 11/29/1996 $11,079 $11,491 $10,442 12/31/1996 $11,035 $11,443 $10,442 01/31/1997 $11,032 $11,464 $10,475 02/28/1997 $11,121 $11,570 $10,508 03/31/1997 $10,974 $11,416 $10,534 04/30/1997 $11,045 $11,512 $10,547 05/31/1997 $11,187 $11,686 $10,540 06/30/1997 $11,287 $11,811 $10,553 07/31/1997 $11,557 $12,138 $10,565 08/31/1997 $11,431 $12,024 $10,586 09/30/1997 $11,552 $12,167 $10,612 10/31/1997 $11,611 $12,245 $10,639 11/30/1997 $11,682 $12,317 $10,632 12/31/1997 $11,871 $12,497 $10,619 01/31/1998 $11,965 $12,626 $10,640 02/28/1998 $11,981 $12,629 $10,660 03/31/1998 $11,978 $12,641 $10,680 04/30/1998 $11,951 $12,584 $10,699 05/31/1998 $12,112 $12,783 $10,719 06/30/1998 $12,197 $12,832 $10,731 07/31/1998 $12,226 $12,865 $10,744 08/31/1998 $12,371 $13,064 $10,757 09/30/1998 $12,514 $13,227 $10,770 10/31/1998 $12,512 $13,227 $10,796 11/30/1998 $12,559 $13,274 $10,796 12/31/1998 $12,575 $13,307 $10,789 01/31/1999 $12,682 $13,465 $10,815 02/28/1999 $12,666 $13,406 $10,828 03/31/1999 $12,696 $13,425 $10,861 04/30/1999 $12,709 $13,458 $10,940 05/31/1999 $12,635 $13,380 $10,940 06/30/1999 $12,476 $13,187 $10,940 07/31/1999 $12,498 $13,235 $10,973 08/31/1999 $12,361 $13,129 $10,999 09/30/1999 $12,332 $13,134 $11,052 10/31/1999 $12,197 $12,992 $11,072 11/30/1999 $12,311 $13,130 $11,079 12/31/1999 $12,210 $13,032 $11,079 01/31/2000 $12,150 $12,974 $11,112 02/29/2000 $12,271 $13,125 $11,177 03/31/2000 $12,521 $13,411 $11,269 04/30/2000 $12,438 $13,332 $11,276 05/31/2000 $12,385 $13,263 $11,289 06/30/2000 $12,693 $13,614 $11,348 07/31/2000 $12,861 $13,803 $11,374 08/31/2000 $13,041 $14,016 $11,374 09/30/2000 $12,965 $13,943 $11,433 10/31/2000 $13,083 $14,095 $11,453 11/30/2000 $13,175 $14,202 $11,460 12/31/2000 $13,486 $14,553 $11,453 01/31/2001 $13,582 $14,697 $11,525 02/28/2001 $13,637 $14,744 $11,571 03/31/2001 $13,745 $14,877 $11,598 04/30/2001 $13,628 $14,716 $11,644 05/31/2001 $13,734 $14,875 $11,696 06/30/2001 $13,825 $14,974 $11,716 07/31/2001 $14,016 $15,196 $11,683 08/31/2001 $14,202 $15,447 $11,683 09/30/2001 $14,165 $15,394 $11,736 10/31/2001 $14,311 $15,578 $11,696 11/30/2001 $14,197 $15,447 $11,676 12/31/2001 $14,063 $15,300 $11,631 01/31/2002 $14,300 $15,565 $11,657 02/28/2002 $14,427 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 35 FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND MINNESOTA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF INSURED MINNESOTA MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE [Minnesota map graphic omitted] Even though Minnesota's diverse economy slowed, the state's financial health held up well as the recession took hold over 2001. While many states suffered credit quality downgrades during the year under review as the weak economy strained coffers nationwide, Minnesota retained its AAA rating according to Standard & Poor's, an independent credit rating agency.2 This highest rating reflects the state's strong financial position, the result of moderate debt levels, conservative financial management practices and planning, and a solid economic base diversified among services, trade and manufacturing. However, the recession began to take effect, with net revenues up 4.3% in fiscal year 2001 compared to 2000 but $36.5 million below forecast.3 The state's softening economy still outperformed the national averages in terms of income growth and unemployment rates, with total Minnesota unemployment ending 2001 at 4.0% amid a tight labor market, still well below the national average of 5.8%.4 Through the 12-month reporting period, the services sector has provided offsetting growth to 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The insurance guarantees the scheduled payment of principal and interest on the insured securities in the Fund's portfolio, but does not guarantee the insured securities' market value, the value of the Fund's shares, or the Fund's distributions. Fund shares are not insured. No representation is made as to any insurer's ability to meet its obligation to the Fund if called upon to do so. 2. Source: Standard & Poor's, RATINGSDIRECT, 9/27/01. This does not indicate Standard & Poor's rating of the Fund. 3. Source: Moody's Investors Service, MINNESOTA (STATE OF), 10/2/01. 4. Source: Bureau of Labor Statistics. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 85. 36 the lagging manufacturing sector. Over the latter half of 2001, however, the health care industry had setbacks, which in concert with slowing manufacturing production could impede continued economic growth. As in past years, Minnesota's debt ratios continued to straddle its own historical norms and national medians. For 2001, debt per capita was $546 or 1.8% of personal income, compared with national medians of $541 and 2.1% of personal income.3 Looking ahead, Minnesota appears well-poised to remain insulated from any further cyclical vulnerability, and its outlook is stable. This outlook reflects the expectation of solid economic performance and continued sound financial practices. PORTFOLIO NOTES The municipal bond market experienced occasional intervals of rising interest rates during the year under review, specifically following the release of stronger-than-expected economic data such as we saw in November and December. Overall, however, municipal bond yields decreased slightly. Because bond prices rise when yields fall, Franklin Minnesota Insured Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.89 on February 28, 2001, to $11.99 on February 28, 2002. Minnesota's new municipal bond issuance increased 10.2% in 2001 to $5.1 billion, up from approximately $4.6 billion one year earlier.5 A low interest rate environment during the year helped municipalities to refinance debt, and many refunding deals came to market during the year, diminishing the impact of new issues on the total outstanding bond supply. Although bond supply was up, demand was up as well, which generally supported municipal bond prices. Several new closed-end funds entered the marketplace nationally, and there was solid participation by institutional and retail buyers. Additionally, the market for insured bonds remained strong as the spread, or yield difference, between high-grade and more speculative-grade bonds continued to be comparatively narrow. We focused primarily on investing new cash inflows into the portfolio, and attempted to enhance the portfolio's income-producing potential by selling lower coupon and prerefunded bonds and buying higher yielding and longer-term securities. Prerefunded bonds tend to experience rapid price declines to their call price as they approach 5. Source: THE BOND BUYER, 1/2/02. PORTFOLIO BREAKDOWN Franklin Minnesota Insured Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ General Obligation 31.8% Hospital & Health Care 21.1% Housing 18.4% Utilities 10.0% Prerefunded 6.6% Transportation 5.3% Higher Education 2.3% Tax-Supported 1.8% Subject to Government Appropriations 1.6% Other Revenue 1.1% 37 DIVIDEND DISTRIBUTIONS* Franklin Minnesota Insured Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------- MONTH CLASS A CLASS C -------------------------------------------------------------------------------- March 4.85 cents 4.27 cents April 4.85 cents 4.27 cents May 4.85 cents 4.27 cents June 4.85 cents 4.31 cents July 4.85 cents 4.31 cents August 4.85 cents 4.31 cents September 4.78 cents 4.23 cents October 4.78 cents 4.23 cents November 4.78 cents 4.23 cents December 4.78 cents 4.21 cents January 4.78 cents 4.21 cents February 4.78 cents 4.21 cents -------------------------------------------------------------------------------- TOTAL 57.78 CENTS 51.06 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. approximately five years to their call date, so we sold bonds close to their call dates and purchased those with longer call dates to help improve the predictability of the Fund's future dividend payments. To book tax losses, we sold certain securities. Such losses can be used to offset any current or future capital gains, possibly lowering shareholders' future tax liabilities. Overall, these measures improved the portfolio's structure and income earning potential while keeping the Fund as fully invested as possible. During the reporting period, we sold Park Rapids ISD No. 309 GO, Minnesota Agriculture & Economic Development Board Revenue and Minneapolis and St. Paul Housing RDA for Health Care System Revenue bonds. Purchases included Farmington ISD GO, Minnesota State Higher Education Facilities Authority Revenue and Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue bonds. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") 38 Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 40 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 4.78 cent ($0.0478) per share dividend and the maximum offering price of $12.52 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Minnesota state personal income tax bracket of 43.42% would need to earn 8.09% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, we hold an optimistic long-term outlook for Minnesota, its municipal bonds and Franklin Minnesota Insured Tax-Free Income Fund. The fixed income market should remain healthy for the remainder of 2002 as we believe the economy will continue to recover slowly within a benign inflationary environment. Most importantly, we think municipal bonds will remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 39 FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND ------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. ------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Minnesota state personal income tax bracket of 43.42%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $11.99 $11.89 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5778 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $12.05 $11.95 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5106 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +5.84% +30.08% +78.19% Average Annual Total Return2 +1.32% +4.49% +5.49% Avg. Ann. Total Return (3/31/02)3 -1.04% +4.38% +5.28% Distribution Rate4 4.58% Taxable Equivalent Distribution Rate5 8.09% 30-Day Standardized Yield6 3.79% Taxable Equivalent Yield5 6.70% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.22% +26.55% +40.37% Average Annual Total Return2 +3.18% +4.61% +4.93% Avg. Ann. Total Return (3/31/02)3 +0.85% +4.53% +4.66% Distribution Rate4 4.15% Taxable Equivalent Distribution Rate5 7.33% 30-Day Standardized Yield6 3.43% Taxable Equivalent Yield5 6.06% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- 40 Past performance does not guarantee future results. PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. [Line Graph Omitted] CLASS A (3/1/92-2/28/02) The following line graph compares the performance of the Franklin Minnesota Insured Tax-Free Income Fund - Class A to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 3/1/92 to 2/28/02. ---------------------------------------------------------------- Date Franklin Lehman Brothers Minnesota Insured Municipal Bond CPI Tax-Free Income Index Fund-Class A ---------------------------------------------------------------- 03/01/1992 $9,573 $10,000 $10,000 03/31/1992 $9,619 $10,003 $10,051 04/30/1992 $9,693 $10,092 $10,065 05/31/1992 $9,834 $10,211 $10,079 06/30/1992 $9,959 $10,383 $10,115 07/31/1992 $10,298 $10,694 $10,137 08/31/1992 $10,149 $10,590 $10,165 09/30/1992 $10,147 $10,659 $10,194 10/31/1992 $9,970 $10,555 $10,229 11/30/1992 $10,212 $10,744 $10,244 12/31/1992 $10,350 $10,853 $10,236 01/31/1993 $10,478 $10,979 $10,287 02/28/1993 $10,758 $11,377 $10,323 03/31/1993 $10,742 $11,256 $10,359 04/30/1993 $10,823 $11,370 $10,388 05/31/1993 $10,870 $11,433 $10,402 06/30/1993 $11,039 $11,624 $10,417 07/31/1993 $11,047 $11,639 $10,417 08/31/1993 $11,236 $11,882 $10,446 09/30/1993 $11,348 $12,017 $10,468 10/31/1993 $11,379 $12,040 $10,511 11/30/1993 $11,323 $11,934 $10,518 12/31/1993 $11,488 $12,186 $10,518 01/31/1994 $11,587 $12,325 $10,547 02/28/1994 $11,367 $12,005 $10,582 03/31/1994 $11,047 $11,517 $10,618 04/30/1994 $11,082 $11,615 $10,633 05/31/1994 $11,167 $11,716 $10,641 06/30/1994 $11,128 $11,644 $10,677 07/31/1994 $11,284 $11,857 $10,706 08/31/1994 $11,321 $11,899 $10,749 09/30/1994 $11,205 $11,724 $10,778 10/31/1994 $11,050 $11,515 $10,785 11/30/1994 $10,861 $11,307 $10,799 12/31/1994 $11,079 $11,556 $10,799 01/31/1995 $11,349 $11,886 $10,842 02/28/1995 $11,611 $12,232 $10,886 03/31/1995 $11,710 $12,373 $10,922 04/30/1995 $11,731 $12,387 $10,958 05/31/1995 $11,976 $12,783 $10,980 06/30/1995 $11,915 $12,671 $11,002 07/31/1995 $11,982 $12,792 $11,002 08/31/1995 $12,088 $12,954 $11,030 09/30/1995 $12,162 $13,036 $11,052 10/31/1995 $12,304 $13,225 $11,089 11/30/1995 $12,450 $13,444 $11,081 12/31/1995 $12,555 $13,573 $11,073 01/31/1996 $12,614 $13,677 $11,138 02/29/1996 $12,548 $13,584 $11,174 03/31/1996 $12,407 $13,410 $11,232 04/30/1996 $12,383 $13,372 $11,276 05/31/1996 $12,393 $13,367 $11,297 06/30/1996 $12,510 $13,513 $11,304 07/31/1996 $12,613 $13,634 $11,326 08/31/1996 $12,598 $13,631 $11,347 09/30/1996 $12,753 $13,822 $11,384 10/31/1996 $12,864 $13,978 $11,420 11/30/1996 $13,028 $14,234 $11,442 12/31/1996 $12,993 $14,175 $11,442 01/31/1997 $13,018 $14,201 $11,478 02/28/1997 $13,118 $14,332 $11,514 03/31/1997 $12,993 $14,141 $11,543 04/30/1997 $13,082 $14,260 $11,556 05/31/1997 $13,233 $14,476 $11,550 06/30/1997 $13,349 $14,630 $11,563 07/31/1997 $13,652 $15,036 $11,577 08/31/1997 $13,564 $14,894 $11,599 09/30/1997 $13,692 $15,072 $11,628 10/31/1997 $13,767 $15,168 $11,657 11/30/1997 $13,846 $15,258 $11,650 12/31/1997 $13,995 $15,480 $11,636 01/31/1998 $14,103 $15,640 $11,658 02/28/1998 $14,117 $15,645 $11,681 03/31/1998 $14,147 $15,659 $11,703 04/30/1998 $14,123 $15,588 $11,724 05/31/1998 $14,299 $15,834 $11,745 06/30/1998 $14,362 $15,896 $11,759 07/31/1998 $14,394 $15,936 $11,773 08/31/1998 $14,550 $16,183 $11,787 09/30/1998 $14,680 $16,385 $11,801 10/31/1998 $14,723 $16,385 $11,830 11/30/1998 $14,773 $16,443 $11,830 12/31/1998 $14,792 $16,484 $11,823 01/31/1999 $14,901 $16,680 $11,851 02/28/1999 $14,851 $16,606 $11,865 03/31/1999 $14,922 $16,630 $11,901 04/30/1999 $14,934 $16,671 $11,988 05/31/1999 $14,877 $16,575 $11,988 06/30/1999 $14,673 $16,336 $11,988 07/31/1999 $14,694 $16,395 $12,024 08/31/1999 $14,498 $16,264 $12,053 09/30/1999 $14,458 $16,270 $12,110 10/31/1999 $14,224 $16,094 $12,132 11/30/1999 $14,380 $16,265 $12,140 12/31/1999 $14,239 $16,143 $12,140 01/31/2000 $14,159 $16,072 $12,176 02/29/2000 $14,360 $16,258 $12,248 03/31/2000 $14,705 $16,613 $12,348 04/30/2000 $14,598 $16,515 $12,356 05/31/2000 $14,474 $16,429 $12,370 06/30/2000 $14,863 $16,864 $12,435 07/31/2000 $15,084 $17,099 $12,463 08/31/2000 $15,333 $17,362 $12,463 09/30/2000 $15,234 $17,272 $12,528 10/31/2000 $15,409 $17,460 $12,549 11/30/2000 $15,538 $17,593 $12,557 12/31/2000 $15,933 $18,027 $12,549 01/31/2001 $16,056 $18,206 $12,629 02/28/2001 $16,130 $18,264 $12,679 03/31/2001 $16,280 $18,428 $12,708 04/30/2001 $16,117 $18,229 $12,759 05/31/2001 $16,267 $18,426 $12,816 06/30/2001 $16,382 $18,550 $12,838 07/31/2001 $16,593 $18,824 $12,802 08/31/2001 $16,814 $19,135 $12,802 09/30/2001 $16,749 $19,070 $12,860 10/31/2001 $16,933 $19,297 $12,816 11/30/2001 $16,843 $19,135 $12,794 12/31/2001 $16,688 $18,953 $12,744 01/31/2002 $16,925 $19,281 $12,774 02/28/2002 $17,060 $19,512 $12,825 [Line Graph Omitted] CLASS C (5/1/95-2/28/02) The following line graph compares the performance of the Franklin Minnesota Insured Tax-Free Income Fund - Class C to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 5/1/95 to 2/28/02. ------------------------------------------------------------------- Date Franklin Lehman CPI Minnesota Brothers Insured Tax-Free Municipal Income Bond Fund-Class C Index ------------------------------------------------------------------- 05/01/1995 $9,900 $10,000 $10,000 05/31/1995 $10,118 $10,319 $10,020 06/30/1995 $10,061 $10,229 $10,040 07/31/1995 $10,112 $10,326 $10,040 08/31/1995 $10,204 $10,458 $10,066 09/29/1995 $10,254 $10,523 $10,086 10/31/1995 $10,367 $10,676 $10,120 11/30/1995 $10,494 $10,853 $10,112 12/29/1995 $10,577 $10,957 $10,105 01/31/1996 $10,621 $11,041 $10,165 02/29/1996 $10,559 $10,966 $10,198 03/29/1996 $10,437 $10,825 $10,251 04/30/1996 $10,411 $10,795 $10,291 05/31/1996 $10,422 $10,791 $10,310 06/28/1996 $10,508 $10,908 $10,316 07/31/1996 $10,589 $11,006 $10,336 08/30/1996 $10,580 $11,004 $10,356 09/30/1996 $10,697 $11,158 $10,389 10/31/1996 $10,784 $11,284 $10,422 11/29/1996 $10,917 $11,491 $10,442 12/31/1996 $10,882 $11,443 $10,442 01/31/1997 $10,896 $11,464 $10,475 02/28/1997 $10,981 $11,570 $10,508 03/31/1997 $10,870 $11,416 $10,534 04/30/1997 $10,940 $11,512 $10,547 05/31/1997 $11,061 $11,686 $10,540 06/30/1997 $11,162 $11,811 $10,553 07/31/1997 $11,399 $12,138 $10,565 08/31/1997 $11,320 $12,024 $10,586 09/30/1997 $11,421 $12,167 $10,612 10/31/1997 $11,478 $12,245 $10,639 11/30/1997 $11,537 $12,317 $10,632 12/31/1997 $11,666 $12,497 $10,619 01/31/1998 $11,750 $12,626 $10,640 02/28/1998 $11,755 $12,629 $10,660 03/31/1998 $11,774 $12,641 $10,680 04/30/1998 $11,749 $12,584 $10,699 05/31/1998 $11,890 $12,783 $10,719 06/30/1998 $11,937 $12,832 $10,731 07/31/1998 $11,957 $12,865 $10,744 08/31/1998 $12,081 $13,064 $10,757 09/30/1998 $12,183 $13,227 $10,770 10/31/1998 $12,211 $13,227 $10,796 11/30/1998 $12,246 $13,274 $10,796 12/31/1998 $12,266 $13,307 $10,789 01/31/1999 $12,351 $13,465 $10,815 02/28/1999 $12,294 $13,406 $10,828 03/31/1999 $12,345 $13,425 $10,861 04/30/1999 $12,359 $13,458 $10,940 05/31/1999 $12,297 $13,380 $10,940 06/30/1999 $12,124 $13,187 $10,940 07/31/1999 $12,146 $13,235 $10,973 08/31/1999 $11,968 $13,129 $10,999 09/30/1999 $11,929 $13,134 $11,052 10/31/1999 $11,732 $12,992 $11,072 11/30/1999 $11,854 $13,130 $11,079 12/31/1999 $11,733 $13,032 $11,079 01/31/2000 $11,663 $12,974 $11,112 02/29/2000 $11,823 $13,125 $11,177 03/31/2000 $12,111 $13,411 $11,269 04/30/2000 $12,018 $13,332 $11,276 05/31/2000 $11,910 $13,263 $11,289 06/30/2000 $12,212 $13,614 $11,348 07/31/2000 $12,398 $13,803 $11,374 08/31/2000 $12,596 $14,016 $11,374 09/30/2000 $12,509 $13,943 $11,433 10/31/2000 $12,645 $14,095 $11,453 11/30/2000 $12,735 $14,202 $11,460 12/31/2000 $13,063 $14,553 $11,453 01/31/2001 $13,157 $14,697 $11,525 02/28/2001 $13,211 $14,744 $11,571 03/31/2001 $13,327 $14,877 $11,598 04/30/2001 $13,188 $14,716 $11,644 05/31/2001 $13,303 $14,875 $11,696 06/30/2001 $13,392 $14,974 $11,716 07/31/2001 $13,569 $15,196 $11,683 08/31/2001 $13,730 $15,447 $11,683 09/30/2001 $13,671 $15,394 $11,736 10/31/2001 $13,815 $15,578 $11,696 11/30/2001 $13,736 $15,447 $11,676 12/31/2001 $13,603 $15,300 $11,631 01/31/2002 $13,800 $15,565 $11,657 02/28/2002 $13,896 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 41 FRANKLIN OHIO INSURED TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN OHIO INSURED TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND OHIO STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF INSURED OHIO MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE [OHIO'S map graphic omitted] Ohio's long history of prudent and flexible financial management, a consistently healthy balance sheet, an increasingly diverse and stable economy and moderate debt levels boosted the state's ability to remain stable during the national recession. This resiliency, built up throughout the 1990s, was tested in 2001 as the sudden economic stagnation created revenue shortfalls and caused substantial projected budget gaps of more than $700 million each for fiscal years 2002 and 2003.2 The state responded by rearranging priorities and working out a plan to cut spending and restore budget balance. One measure in the Ohio legislature's response was the adoption of a plan that identified roughly $860 million in new revenue enhancements over the current biennium, including closing tax loopholes, using rainy day funds and redirecting a portion of tobacco settlement funds to help close the budget gaps.2 With these and other new challenges in mind, independent credit rating agency Moody's maintained Ohio's solid Aa1 credit rating throughout the year but changed its outlook from stable to negative in December 2001.3 Ohio's slowdown is broad-based, affecting all sectors, although manufacturing and transportation have shed the most jobs. During the year under review, Ohio unemployment rose from 3.8% in February 2001 to 5.0% by February 2002, still below 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The insurance guarantees the scheduled payment of principal and interest on the insured securities in the Fund's portfolio, but does not guarantee the insured securities' market value, the value of the Fund's shares, or the Fund's distributions. Fund shares are not insured. No representation is made as to any insurer's ability to meet its obligation to the Fund if called upon to do so. 2. Source: Moody's Investors Service, Ohio (State of), 1/11/02. 3. Source: Moody's Investors Service, Ohio (State of), 12/19/01. This does not indicate Moody's rating of the Fund. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 91. 42 the 5.5% national unemployment rate at period-end.4 The auto machinery, steel and air transportation industries in particular may not see improvement soon, and job losses in those sectors are likely to have ripple effects for other sectors. Key economic factors supporting the state include wealth and income levels on par with the national averages, a slowly growing and diversifying employment base and a long trend of strong residential building activity that complements its moderate population growth. Ohio's outstanding state debt per capita fell over 2001, to a modest $576 per capita and 2.0% of annual personal income, very near the national medians of $541 and 2.1%.5 Personal income growth, however, waned over 2001 along with employment growth, which fell to 0.2% for 2001 from 1.4% one year earlier.2 Fortunately, Ohio has enacted proactive planning for fiscal uncertainties through the previous implementation and funding of a budget stabilization fund and other reserve funds. The state is now in a better position to meet the challenges of weaker tax revenue due to proportionately larger reserves, improved monitoring of revenues and spending, and the ability and willingness to take decisive steps to restore budget balance. Looking forward, Ohio appears to have the resources to handle the current environment of economic uncertainty. PORTFOLIO NOTES The municipal bond market experienced occasional intervals of rising interest rates during the year under review, specifically following the release of stronger-than-expected economic data such as we saw in November and December. Overall, however, municipal bond yields decreased slightly. Because bond prices rise when yields fall, Franklin Ohio Insured Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $12.21 on February 28, 2001, to $12.37 on February 28, 2002. New municipal bond issuance in Ohio increased 73.9% in 2001 to $9.3 billion, up from roughly $5.3 billion one year earlier.6 A low interest rate environment during the year helped municipalities to refinance debt, and many refunding deals came to market during the year, diminishing the impact of new issues on the total outstanding bond supply. Although Ohio's bond supply was up significantly, demand was up as well, which generally supported municipal bond prices. Several new closed-end 4. Source: Bureau of Labor Statistics. 5. Source: Standard & Poor's, RATINGSDIRECT, 2/12/02. 6. Source: THE BOND BUYER, 1/2/02. PORTFOLIO BREAKDOWN Franklin Ohio Insured Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ----------------------------- General Obligation 35.6% Utilities 22.2% Prerefunded 16.4% Hospital & Health Care 6.2% Higher Education 5.5% Transportation 4.1% Housing 3.3% Corporate-Backed 3.1% Tax-Supported 2.1% Subject to Government Appropriations 0.9% Other Revenue 0.6% 43 DIVIDEND DISTRIBUTIONS* Franklin Ohio Insured Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------------------- MONTH CLASS A CLASS B CLASS C -------------------------------------------------------------------------------- March 5.05 cents 4.45 cents 4.47 cents April 5.05 cents 4.45 cents 4.47 cents May 5.05 cents 4.45 cents 4.47 cents June 5.05 cents 4.49 cents 4.49 cents July 5.05 cents 4.49 cents 4.49 cents August 5.05 cents 4.49 cents 4.49 cents September 5.05 cents 4.49 cents 4.49 cents October 5.05 cents 4.49 cents 4.49 cents November 5.05 cents 4.49 cents 4.49 cents December 4.95 cents 4.35 cents 4.36 cents January 4.95 cents 4.35 cents 4.36 cents February 4.95 cents 4.35 cents 4.36 cents -------------------------------------------------------------------------------- Total 60.30 cents 53.34 cents 53.43 cents *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. funds entered the marketplace nationally, and there was solid participation by institutional and retail buyers. Additionally, the market for insured bonds remained strong as the spread, or yield difference, between high-grade and more speculative-grade bonds continued to be comparatively narrow. We focused primarily on investing new cash inflows into the portfolio, and attempted to enhance the portfolio's income-producing potential by selling lower coupon and prerefunded bonds and buying higher yielding and longer-term securities. Prerefunded bonds tend to experience rapid price declines to their call price as they approach approximately five years to their call date, so we sold bonds close to their call dates and purchased those with longer call dates to help improve the predictability of the Fund's future dividend payments. We sold certain securities to book tax losses. Such losses can be used to offset any current or future capital gains, possibly lowering shareholders' future tax liabilities. Overall, these measures improved the portfolio's structure and income earning potential while keeping the Fund as fully invested as possible. During the reporting period, we bought Hamilton County Sales Tax, 44 Greene County Water System Revenue, Ohio State Turnpike Commission Turnpike Revenue and Akron Bath Copley Joint Township Hospital District Revenue for Hospital Improvement Children's Hospital Center bonds. Sales included Perrysburg GO, Cleveland Waterworks Revenue, Lake County Hospital Revenue and Lincolnview Local School District bonds. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 46 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 4.95 cent ($0.0495) per share dividend and the maximum offering price of $12.92 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Ohio state personal income tax bracket of 43.21% would need to earn 8.10% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. Looking forward, we hold an optimistic long-term outlook for Ohio, its municipal bonds and Franklin Ohio Insured Tax-Free Income Fund. The fixed income market should remain healthy for the remainder of 2002 as we believe the economy will continue to recover slowly within a benign inflationary environment. Most importantly, we think municipal bonds will remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 45 FRANKLIN OHIO INSURED TAX-FREE INCOME FUND ------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. ------------------------------- PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $12.37 $12.21 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.6030 CLASS B Change 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $12.40 $12.23 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5334 CLASS C Change 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $12.45 $12.28 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5343 46 Past performance does not guarantee future results. PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +6.41% +31.81% +85.14% Average Annual Total Return2 +1.91% +4.77% +5.89% Avg. Ann. Total Return (3/31/02)3 -0.49% +4.69% +5.70% Distribution Rate4 4.60% Taxable Equivalent Distribution Rate5 8.10% 30-Day Standardized Yield6 3.50% Taxable Equivalent Yield5 6.16% INCEPTION CLASS B 1-YEAR (2/1/00) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.89% +18.97% Average Annual Total Return2 +1.89% +7.39% Avg. Ann. Total Return (3/31/02)3 -0.49% +6.32% Distribution Rate4 4.24% Taxable Equivalent Distribution Rate5 7.47% 30-Day Standardized Yield6 3.14% Taxable Equivalent Yield5 5.53% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.87% +28.32% +44.47% Average Annual Total Return2 +3.86% +4.91% +5.38% Avg. Ann. Total Return (3/31/02)3 +1.40% +4.83% +5.06% Distribution Rate4 4.17% Taxable Equivalent Distribution Rate5 7.34% 30-Day Standardized Yield6 3.09% Taxable Equivalent Yield5 5.44% 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Ohio state personal income tax bracket of 43.21%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. ------------------------------ Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. ------------------------------ For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 47 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +1.91% 5-Year +4.77% 10-Year +5.89% [Line Graph Omitted] CLASS A (3/1/92-2/28/02) The following line graph compares the performance of the Franklin Ohio Insured Tax-Free Income Fund - Class A to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 3/1/92 to 2/28/02. --------------------------------------------------------------- Date Franklin Ohio Lehman CPI Insured Brothers Tax-Free Income Municipal Fund-Class A Bond Index --------------------------------------------------------------- 03/01/1992 $9,576 $10,000 $10,000 03/31/1992 $9,605 $10,003 $10,051 04/30/1992 $9,694 $10,092 $10,065 05/31/1992 $9,827 $10,211 $10,079 06/30/1992 $9,954 $10,383 $10,115 07/31/1992 $10,302 $10,694 $10,137 08/31/1992 $10,166 $10,590 $10,165 09/30/1992 $10,171 $10,659 $10,194 10/31/1992 $10,000 $10,555 $10,229 11/30/1992 $10,251 $10,744 $10,244 12/31/1992 $10,398 $10,853 $10,236 01/31/1993 $10,542 $10,979 $10,287 02/28/1993 $10,860 $11,377 $10,323 03/31/1993 $10,867 $11,256 $10,359 04/30/1993 $10,930 $11,370 $10,388 05/31/1993 $10,979 $11,433 $10,402 06/30/1993 $11,177 $11,624 $10,417 07/31/1993 $11,186 $11,639 $10,417 08/31/1993 $11,396 $11,882 $10,446 09/30/1993 $11,519 $12,017 $10,468 10/31/1993 $11,541 $12,040 $10,511 11/30/1993 $11,494 $11,934 $10,518 12/31/1993 $11,699 $12,186 $10,518 01/31/1994 $11,818 $12,325 $10,547 02/28/1994 $11,548 $12,005 $10,582 03/31/1994 $11,142 $11,517 $10,618 04/30/1994 $11,195 $11,615 $10,633 05/31/1994 $11,282 $11,716 $10,641 06/30/1994 $11,239 $11,644 $10,677 07/31/1994 $11,415 $11,857 $10,706 08/31/1994 $11,444 $11,899 $10,749 09/30/1994 $11,298 $11,724 $10,778 10/31/1994 $11,122 $11,515 $10,785 11/30/1994 $10,942 $11,307 $10,799 12/31/1994 $11,173 $11,556 $10,799 01/31/1995 $11,467 $11,886 $10,842 02/28/1995 $11,752 $12,232 $10,886 03/31/1995 $11,853 $12,373 $10,922 04/30/1995 $11,866 $12,387 $10,958 05/31/1995 $12,165 $12,783 $10,980 06/30/1995 $12,084 $12,671 $11,002 07/31/1995 $12,142 $12,792 $11,002 08/31/1995 $12,269 $12,954 $11,030 09/30/1995 $12,326 $13,036 $11,052 10/31/1995 $12,480 $13,225 $11,089 11/30/1995 $12,660 $13,444 $11,081 12/31/1995 $12,777 $13,573 $11,073 01/31/1996 $12,849 $13,677 $11,138 02/29/1996 $12,772 $13,584 $11,174 03/31/1996 $12,619 $13,410 $11,232 04/30/1996 $12,603 $13,372 $11,276 05/31/1996 $12,634 $13,367 $11,297 06/30/1996 $12,773 $13,513 $11,304 07/31/1996 $12,876 $13,634 $11,326 08/31/1996 $12,871 $13,631 $11,347 09/30/1996 $13,061 $13,822 $11,384 10/31/1996 $13,185 $13,978 $11,420 11/30/1996 $13,396 $14,234 $11,442 12/31/1996 $13,351 $14,175 $11,442 01/31/1997 $13,355 $14,201 $11,478 02/28/1997 $13,458 $14,332 $11,514 03/31/1997 $13,299 $14,141 $11,543 04/30/1997 $13,400 $14,260 $11,556 05/31/1997 $13,577 $14,476 $11,550 06/30/1997 $13,706 $14,630 $11,563 07/31/1997 $14,046 $15,036 $11,577 08/31/1997 $13,912 $14,894 $11,599 09/30/1997 $14,064 $15,072 $11,628 10/31/1997 $14,129 $15,168 $11,657 11/30/1997 $14,219 $15,258 $11,650 12/31/1997 $14,440 $15,480 $11,636 01/31/1998 $14,572 $15,640 $11,658 02/28/1998 $14,564 $15,645 $11,681 03/31/1998 $14,571 $15,659 $11,703 04/30/1998 $14,536 $15,588 $11,724 05/31/1998 $14,738 $15,834 $11,745 06/30/1998 $14,795 $15,896 $11,759 07/31/1998 $14,838 $15,936 $11,773 08/31/1998 $15,008 $16,183 $11,787 09/30/1998 $15,197 $16,385 $11,801 10/31/1998 $15,225 $16,385 $11,830 11/30/1998 $15,276 $16,443 $11,830 12/31/1998 $15,300 $16,484 $11,823 01/31/1999 $15,424 $16,680 $11,851 02/28/1999 $15,387 $16,606 $11,865 03/31/1999 $15,447 $16,630 $11,901 04/30/1999 $15,472 $16,671 $11,988 05/31/1999 $15,379 $16,575 $11,988 06/30/1999 $15,191 $16,336 $11,988 07/31/1999 $15,213 $16,395 $12,024 08/31/1999 $15,030 $16,264 $12,053 09/30/1999 $15,029 $16,270 $12,110 10/31/1999 $14,833 $16,094 $12,132 11/30/1999 $14,967 $16,265 $12,140 12/31/1999 $14,839 $16,143 $12,140 01/31/2000 $14,774 $16,072 $12,176 02/29/2000 $14,953 $16,258 $12,248 03/31/2000 $15,277 $16,613 $12,348 04/30/2000 $15,186 $16,515 $12,356 05/31/2000 $15,130 $16,429 $12,370 06/30/2000 $15,485 $16,864 $12,435 07/31/2000 $15,710 $17,099 $12,463 08/31/2000 $15,936 $17,362 $12,463 09/30/2000 $15,851 $17,272 $12,528 10/31/2000 $15,991 $17,460 $12,549 11/30/2000 $16,124 $17,593 $12,557 12/31/2000 $16,524 $18,027 $12,549 01/31/2001 $16,623 $18,206 $12,629 02/28/2001 $16,671 $18,264 $12,679 03/31/2001 $16,811 $18,428 $12,708 04/30/2001 $16,649 $18,229 $12,759 05/31/2001 $16,789 $18,426 $12,816 06/30/2001 $16,895 $18,550 $12,838 07/31/2001 $17,125 $18,824 $12,802 08/31/2001 $17,378 $19,135 $12,802 09/30/2001 $17,357 $19,070 $12,860 10/31/2001 $17,535 $19,297 $12,816 11/30/2001 $17,447 $19,135 $12,794 12/31/2001 $17,307 $18,953 $12,744 01/31/2002 $17,577 $19,281 $12,774 02/28/2002 $17,731 $19,512 $12,825 AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 ---------------------------- 1-Year +1.89% Since Inception (2/1/00)+7.39% [Line Graph Omitted] CLASS B (2/1/00-2/28/02) The following line graph compares the performance of the Franklin Ohio Insured Tax-Free Income Fund - Class B to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 2/1/00 to 2/28/02. ------------------------------------------------------------------ Date Franklin Ohio Lehman Brothers CPI Insured Tax-Free Municipal Bond Income Index Fund-Class B ------------------------------------------------------------------ 02/01/2000 $10,000 $10,000 $10,000 02/29/2000 $10,119 $10,116 $10,059 03/31/2000 $10,334 $10,337 $10,141 04/30/2000 $10,276 $10,276 $10,148 05/31/2000 $10,231 $10,222 $10,160 06/30/2000 $10,475 $10,493 $10,213 07/31/2000 $10,613 $10,639 $10,236 08/31/2000 $10,770 $10,803 $10,236 09/30/2000 $10,709 $10,747 $10,289 10/31/2000 $10,798 $10,864 $10,307 11/30/2000 $10,892 $10,946 $10,313 12/31/2000 $11,148 $11,217 $10,307 01/31/2001 $11,209 $11,328 $10,372 02/28/2001 $11,237 $11,364 $10,413 03/31/2001 $11,326 $11,466 $10,437 04/30/2001 $11,211 $11,342 $10,479 05/31/2001 $11,309 $11,465 $10,526 06/30/2001 $11,375 $11,542 $10,544 07/31/2001 $11,524 $11,712 $10,514 08/31/2001 $11,688 $11,906 $10,514 09/30/2001 $11,670 $11,865 $10,562 10/31/2001 $11,782 $12,006 $10,526 11/30/2001 $11,718 $11,906 $10,508 12/31/2001 $11,618 $11,792 $10,467 01/31/2002 $11,803 $11,996 $10,491 02/28/2002 $11,597 $12,140 $10,533 48 Past performance does not guarantee future results. PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 -------------------------------------- 1-Year +3.86% 5-Year +4.91% Since Inception (5/1/95) +5.38% [Line Graph Omitted] CLASS C (5/1/95-2/28/02) The following line graph compares the performance of the Franklin Ohio Insured Tax-Free Income Fund - Class C to that of the Lehman Brothers Municipal Bond Index7, and to the Consumer Price Index7 based on a $10,000 investment from 5/1/95 to 2/28/02. -------------------------------------------------------------- Date Franklin Ohio Lehman CPI Insured Brothers Tax-Free Municipal Bond Income Index Fund-Class C -------------------------------------------------------------- 05/01/1995 $9,900 $10,000 $10,000 05/31/1995 $10,152 $10,319 $10,020 06/30/1995 $10,079 $10,229 $10,040 07/31/1995 $10,132 $10,326 $10,040 08/31/1995 $10,233 $10,458 $10,066 09/29/1995 $10,275 $10,523 $10,086 10/31/1995 $10,407 $10,676 $10,120 11/30/1995 $10,551 $10,853 $10,112 12/29/1995 $10,644 $10,957 $10,105 01/31/1996 $10,707 $11,041 $10,165 02/29/1996 $10,637 $10,966 $10,198 03/29/1996 $10,505 $10,825 $10,251 04/30/1996 $10,488 $10,795 $10,291 05/31/1996 $10,507 $10,791 $10,310 06/28/1996 $10,609 $10,908 $10,316 07/31/1996 $10,707 $11,006 $10,336 08/30/1996 $10,697 $11,004 $10,356 09/30/1996 $10,841 $11,158 $10,389 10/31/1996 $10,946 $11,284 $10,422 11/29/1996 $11,114 $11,491 $10,442 12/31/1996 $11,071 $11,443 $10,442 01/31/1997 $11,070 $11,464 $10,475 02/28/1997 $11,150 $11,570 $10,508 03/31/1997 $11,014 $11,416 $10,534 04/30/1997 $11,093 $11,512 $10,547 05/31/1997 $11,233 $11,686 $10,540 06/30/1997 $11,334 $11,811 $10,553 07/31/1997 $11,618 $12,138 $10,565 08/31/1997 $11,503 $12,024 $10,586 09/30/1997 $11,613 $12,167 $10,612 10/31/1997 $11,669 $12,245 $10,639 11/30/1997 $11,739 $12,317 $10,632 12/31/1997 $11,916 $12,497 $10,619 01/31/1998 $12,018 $12,626 $10,640 02/28/1998 $12,006 $12,629 $10,660 03/31/1998 $12,016 $12,641 $10,680 04/30/1998 $11,971 $12,584 $10,699 05/31/1998 $12,130 $12,783 $10,719 06/30/1998 $12,181 $12,832 $10,731 07/31/1998 $12,201 $12,865 $10,744 08/31/1998 $12,344 $13,064 $10,757 09/30/1998 $12,493 $13,227 $10,770 10/31/1998 $12,510 $13,227 $10,796 11/30/1998 $12,545 $13,274 $10,796 12/31/1998 $12,549 $13,307 $10,789 01/31/1999 $12,655 $13,465 $10,815 02/28/1999 $12,618 $13,406 $10,828 03/31/1999 $12,661 $13,425 $10,861 04/30/1999 $12,676 $13,458 $10,940 05/31/1999 $12,595 $13,380 $10,940 06/30/1999 $12,436 $13,187 $10,940 07/31/1999 $12,449 $13,235 $10,973 08/31/1999 $12,293 $13,129 $10,999 09/30/1999 $12,276 $13,134 $11,052 10/31/1999 $12,122 $12,992 $11,072 11/30/1999 $12,224 $13,130 $11,079 12/31/1999 $12,115 $13,032 $11,079 01/31/2000 $12,048 $12,974 $11,112 02/29/2000 $12,187 $13,125 $11,177 03/31/2000 $12,444 $13,411 $11,269 04/30/2000 $12,365 $13,332 $11,276 05/31/2000 $12,313 $13,263 $11,289 06/30/2000 $12,606 $13,614 $11,348 07/31/2000 $12,782 $13,803 $11,374 08/31/2000 $12,960 $14,016 $11,374 09/30/2000 $12,886 $13,943 $11,433 10/31/2000 $12,992 $14,095 $11,453 11/30/2000 $13,093 $14,202 $11,460 12/31/2000 $13,410 $14,553 $11,453 01/31/2001 $13,484 $14,697 $11,525 02/28/2001 $13,517 $14,744 $11,571 03/31/2001 $13,624 $14,877 $11,598 04/30/2001 $13,488 $14,716 $11,644 05/31/2001 $13,605 $14,875 $11,696 06/30/2001 $13,684 $14,974 $11,716 07/31/2001 $13,862 $15,196 $11,683 08/31/2001 $14,059 $15,447 $11,683 09/30/2001 $14,037 $15,394 $11,736 10/31/2001 $14,171 $15,578 $11,696 11/30/2001 $14,095 $15,447 $11,676 12/31/2001 $13,975 $15,300 $11,631 01/31/2002 $14,185 $15,565 $11,657 02/28/2002 $14,303 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 49 MUNICIPAL BOND RATINGS MOODY'S Aaa: Best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt-edged." Interest payments are protected by a large or exceptionally stable margin, and principal is secure. Although the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: High quality by all standards. Together with the Aaa group, they comprise what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa because margins of protection may not be as large, fluctuation of protective elements may be of greater amplitude, or there may be other elements which make the long-term risks appear larger. A: Possess many favorable investment attributes and are considered upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa: Medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Ba: Contain speculative elements. Often the protection of interest and principal payments may be very moderate and, thereby, not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. 50 Caa: Poor standing. Such issues may be in default, or elements of danger with respect to principal or interest may be present. Ca: Obligations that are highly speculative. Such issues are often in default or have other marked shortcomings. C: Lowest-rated class of bonds. Issues rated C can be regarded as having extremely poor prospects of ever attaining any real investment standing. S&P AAA: The highest rating assigned by S&P to a debt obligation and indicates the ultimate degree of protection as to principal and interest. AA: Also qualify as high-grade obligations, and, in the majority of instances, differ from AAA issues only in a small degree. A: Generally regarded as upper medium-grade. They have considerable investment strength but are not entirely free from adverse effects of changes in economic and trade conditions. Interest and principal are regarded as safe. BBB: Regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, B, CCC, CC: Regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds likely will have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C: Reserved for income bonds on which no interest is being paid. D: In default and payment of interest and/or repayment of principal is in arrears. 51 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year $10.36 $ 9.61 $10.53 $10.43 $ 9.99 ----------------------------------------------------------------------- Income from investment operations: Net investment incomea .48 .49 .48 .51 .53 Net realized and unrealized gains (losses) .14 .74 (.92) .10 .44 ----------------------------------------------------------------------- Total from investment operations .62 1.23 (.44) .61 .97 ----------------------------------------------------------------------- Less distributions from net investment income (.48) (.48) (.48) (.51) (.53) ----------------------------------------------------------------------- Net asset value, end of year $10.50 $10.36 $ 9.61 $10.53 $10.43 ======================================================================= Total returnb 6.14% 13.10% (4.22)% 6.01% 9.94% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) $127,595 $116,581 $108,831 $124,488 $101,506 Ratios to average net assets: Expenses .78% .78% .76% .42% .35% Expenses excluding waiver and payments by affiliate .78% .78% .77% .79% .80% Net investment income 4.58% 4.87% 4.79% 4.88% 5.16% Portfolio turnover rate 23.17% 29.18% 23.92% 1.81% 8.08%
aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. 52 See notes to financial statements. FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 95.3% Alachua County Public Improvement Revenue, AMBAC Insured, 5.25%, 8/01/29 ............................... $2,500,000 $ 2,526,950 Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/20 ......................................... 1,000,000 1,003,130 Bay Medical Center Hospital Revenue, Bay Medical Center Project, AMBAC Insured, 5.00%, 10/01/27 ........ 1,025,000 1,006,099 Broward County HFAR, FSA Insured, 5.65%, 11/01/22 ..................................................................................... 405,000 414,882 5.70%, 11/01/29 ..................................................................................... 225,000 228,211 Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/26 ............................................................... 2,850,000 2,818,166 Series B, FSA Insured, 5.00%, 7/01/26 ............................................................... 3,000,000 2,962,350 Canaveral Port Authority Revenue, Refunding, Series B, FGIC Insured, 5.625%, 6/01/21 ................... 1,000,000 1,043,400 Citrus County PCR, Florida Power Corp., Refunding, MBIA Insured, 6.625%, 1/01/27 ....................... 2,435,000 2,491,005 Dade County HFA, MFMR, Siesta Pointe Apartments, Series A, FSA Insured, 5.75%, 9/01/29 ................. 1,890,000 1,924,757 Dade County Water and Sewer System Revenue, FGIC Insured, 5.25%, 10/01/21 .............................. 1,000,000 1,022,520 Escambia County HFA, SFMR, Multi County Program, Series A, MBIA Insured, 6.40%, 10/01/30 ............... 1,950,000 2,032,115 Escambia County Utilities Authority Utility System Revenue, FGIC Insured, 5.00%, 1/01/31 ........................................................................ 1,775,000 1,748,215 Refunding, Series B, FGIC Insured, 5.00%, 1/01/22 ................................................... 2,000,000 1,999,860 Florida HFAR, Spinnaker Cove Apartments, Series G, AMBAC Insured, 6.50%, 7/01/36 ....................... 1,600,000 1,696,128 Florida HFC Revenue, Housing Logans Pointe Apartments, Series F-1, FSA Insured, 5.90%, 12/01/19 .......................... 1,205,000 1,268,708 Marina Bay Apartments, Series S, FSA Insured, 5.85%, 8/01/41 ........................................ 1,070,000 1,128,208 Florida State Board Regent Housing Revenue, University of Florida, FGIC Insured, 5.25%, 7/01/30 ........ 2,000,000 2,018,940 Florida State Department of General Services Division Facilities Management Revenue, Florida Facilities Pool, Series B, FSA Insured, 5.50%, 9/01/28 ......................................... 550,000 568,447 Gulf Breeze Revenue, FGIC Insured, 5.80%, 12/01/20 ....................................................................... 1,250,000 1,356,775 Local Government Loan Program, FGIC Insured, 6.05%, 12/01/13 ........................................ 1,915,000 2,126,703 Hernando County Water and Sewer Revenue, FGIC Insured, 6.00%, 6/01/19 ...................................................................................... 1,035,000 1,065,698 Pre-Refunded, 6.00%, 6/01/19 ........................................................................ 965,000 995,118 Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, MBIA Insured, 6.25%, 12/01/34 ..................................................................................... 1,500,000 1,656,090 Hillsborough County School Board COP, MBIA Insured, 5.375%, 7/01/26 .................................... 2,000,000 2,033,100 Indian River County Water and Sewer Revenue, FGIC Insured, 5.50%, 9/01/26 .............................. 1,250,000 1,292,650 Indian Trail Water Control District Improvement Revenue Bonds, MBIA Insured, 5.75%, 8/01/16 ...................................................................................... 1,090,000 1,169,930 5.50%, 8/01/22 ...................................................................................... 500,000 515,190 Jacksonville Transportation Revenue, MBIA Insured, 5.00%, 10/01/26 ..................................... 2,000,000 1,983,160 Jacksonville Water and Sewer Revenue, United Water Project, AMBAC Insured, 6.35%, 8/01/25 .............. 1,000,000 1,104,050 Lake Clarke Shores Utility Systems Revenue, Refunding and Improvement, FGIC Insured, 5.80%, 10/01/18 ..................................................................................... 1,415,000 1,514,064 Lakeland Utilities Tax Revenue, Refunding and Improvement, Series A, FGIC Insured, 6.00%, 10/01/17 ..................................................................................... 500,000 548,475 Lee County Airport Revenue, Series B, FSA Insured, 5.75%, 10/01/33 ..................................... 4,000,000 4,210,280 Lee County IDA, Utilities Revenue, Bonita Springs Utilities Project, Refunding, MBIA Insured, 6.05%, 11/01/15 ............................................................................................ 2,000,000 2,171,340 11/01/20 ............................................................................................ 1,500,000 1,617,285 Lynn Haven Capital Improvement Revenue, MBIA Insured, 5.50%, 12/01/32 ....................................................................... 2,000,000 2,071,520 Series A, MBIA Insured, 5.75%, 12/01/16 ............................................................. 1,000,000 1,078,850 Marion County Utility System Revenue, FGIC Insured, 5.00%, 12/01/31 .................................... 1,500,000 1,477,050 Martin County Consolidated Utilities System Revenue, Refunding, FGIC Insured, 6.00%, 10/01/24 .......... 215,000 229,669 Martin County Improvement Revenue, Refunding, AMBAC Insured, 6.00%, 10/01/14 ........................... 1,000,000 1,113,950 Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ..................................... 3,000,000 2,955,180 Miami-Dade County Aviation Revenue, Miami International Airport, Series B, FGIC Insured, 5.75%, 10/01/29 ..................................................................................... 2,500,000 2,640,325 Miramar Wastewater Improvement Assessment Revenue, FGIC Insured, Pre-Refunded, 6.75%, 10/01/25 ......... 2,000,000 2,246,300 Nassau County Public Improvement Revenue, MBIA Insured, 5.00%, 5/01/31 ................................. 5,000,000 4,924,200 Ocoee Water and Sewer System Revenue, AMBAC Insured, 5.625%, 10/01/26 .................................. 4,220,000 4,389,982 Orange County Capital Improvement Revenue, AMBAC Insured, Pre-Refunded, 6.00%, 10/01/22 ........................................................ 500,000 523,425 Refunding, AMBAC Insured, 6.00%, 10/01/22 ........................................................... 490,000 511,153
53 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) Orange County Health Facilities Authority Revenue, MBIA Insured, 6.00%, 11/01/24 ....................................................................... $ 700,000 $ 731,612 Series A, MBIA Insured, Pre-Refunded, 6.00%, 11/01/24 ............................................... 1,700,000 1,786,241 Orange County Public Services Tax Revenue, FGIC Insured, 6.00%, 10/01/24 ............................... 1,000,000 1,092,760 Orange County School Board COP, AMBAC Insured, 5.50%, 8/01/25 .......................................... 1,000,000 1,032,540 Orange County Tourist Development Tax Revenue, AMBAC Insured, 5.50%, 10/01/22 ............................................................................................ 1,000,000 1,039,460 10/01/31 ............................................................................................ 2,500,000 2,589,050 Osceola County HFA, MFHR, Tierra Vista Apartment Project, Series A, FSA Insured, 5.70%, 12/01/17 ..................................................................................... 480,000 493,051 Osceola County Transportation Revenue, Osceola Parkway Project, MBIA Insured, 6.10%, 4/01/17 ........... 1,225,000 1,253,163 Palm Beach County Criminal Justice Facilities Revenue, FGIC Insured, 6.00%, 6/01/15 .................... 1,000,000 1,092,310 Palm Beach County IDR, South Florida Fair Project, AMBAC Insured, 5.50%, 6/01/31 ....................... 2,000,000 2,062,600 Palm Beach County Public Improvement Revenue, Convention Center Project, FGIC Insured, 5.125%, 11/01/30 .................................................................................... 2,000,000 1,989,440 Palm Beach County School Board COP, Series A, AMBAC Insured, 5.125%, 8/01/24 ...................................................................... 5,000,000 5,021,800 FGIC Insured, 6.00%, 8/01/22 ........................................................................ 3,000,000 3,481,080 Polk County Capital Improvement Revenue, Special Tax, FSA Insured, 5.75%, 12/01/21 ..................... 1,000,000 1,079,600 Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/26 .................................... 1,000,000 988,950 Puerto Rico Commonwealth GO, FSA Insured, Pre-Refunded, 6.00%, 7/01/22 ................................. 1,000,000 1,030,140 Puerto Rico PBA Revenue, Government Facilities, Series A, AMBAC Insured, 5.50%, 7/01/25 ................ 1,000,000 1,026,320 Sarasota County Utilities System Revenue, FGIC Insured, 5.75%, 10/01/27 ................................ 520,000 546,312 Seminole County School Board COP, Series A, MBIA Insured, Pre-Refunded, 6.125%, 7/01/14 ................ 1,000,000 1,107,840 St. Lucie West Services District Special Assessment Revenue, Port St. Lucie, Water Management Benefit, Refunding, senior lien,Series A, MBIA Insured, 5.25%, 5/01/25 ................ 5,000,000 5,072,250 St. Lucie West Services District Utility Revenue, senior lien, MBIA Insured, 6.125%, 10/01/32 .......... 2,240,000 2,471,302 Stuart Utilities Revenue, FGIC Insured, Pre-Refunded, 6.70%, 10/01/14 ..................................................................................... 500,000 537,560 6.80%, 10/01/24 ..................................................................................... 500,000 538,330 Tampa Sales Tax Revenue, Series A, AMBAC Insured, 5.00%, 10/01/26 ...................................... 1,000,000 991,580 Tavares Water and Sewer Revenue, AMBAC Insured, 5.50%, 10/01/30 ........................................ 1,000,000 1,028,850 Titusville Water and Sewer Revenue, MBIA Insured, Pre-Refunded, 6.20%, 10/01/14 ........................ 490,000 548,271 Village Center CDD, Recreational Revenue, Refunding, Series A, MBIA Insured, 5.00%, 11/01/21 ........... 1,000,000 1,002,460 West Melbourne Water and Sewer Revenue, Refunding and Improvement, FGIC Insured, 6.75%, 10/01/14 ..................................................................................... 500,000 553,590 ------------ TOTAL LONG TERM INVESTMENTS (COST $114,663,550) ........................................................ 121,612,065 ------------ aSHORT TERM INVESTMENTS 3.4% Nassau County Solid Waste System Revenue, Refunding, Weekly VRDN and Put, 1.20%, 7/01/13 ............... 200,000 200,000 Orange County School Board COP, Series B, Daily VRDN and Put, 1.25%, 8/01/25 ........................... 1,100,000 1,100,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .................................................................... 500,000 500,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ........................................... 2,550,000 2,550,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $4,350,000) ......................................................... 4,350,000 ------------ TOTAL INVESTMENTS (COST $119,013,550) 98.7% ............................................................ 125,962,065 OTHER ASSETS, LESS LIABILITIES 1.3% .................................................................... 1,632,791 ------------ NET ASSETS 100.0% ...................................................................................... $127,594,856 ------------
See glossary of terms on page 98. aVariable 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 as specified dates. 54 See notes to financial statements. FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN INSURED TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------------- CLASS A 2002 2001 2000C 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................................... $11.98 $11.24 $12.26 $12.31 $12.15 -------------------------------------------------------- Income from investment operations: Net investment incomea ................................................ .59 .60 .61 .63 .66 Net realized and unrealized gains (losses) ............................ .16 .74 (1.00) .06 .29 -------------------------------------------------------- Total from investment operations ....................................... .75 1.34 (.39) .69 .95 -------------------------------------------------------- Less distributions from: Net investment income ................................................. (.60) (.60) (.61) (.64) (.67) Net realized gains .................................................... -- -- (.02) (.10) (.12) -------------------------------------------------------- Total distributions .................................................... (.60) (.60) (.63) (.74) (.79) -------------------------------------------------------- Net asset value, end of year ........................................... $12.13 $11.98 $11.24 $12.26 $12.31 ======================================================== Total returnb .......................................................... 6.39% 12.24% (3.21)% 5.72% 8.09% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................ $1,554,245 $1,472,089 $1,445,546 $1,727,014 $1,685,260 Ratios to average net assets: Expenses .............................................................. .63% .62% .62% .62% .61% Net investment income ................................................. 4.90% 5.23% 5.23% 5.11% 5.44% Portfolio turnover rate ................................................ 8.48% 10.40% 13.29% 13.16% 27.77% CLASS B ------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................................... $12.00 $11.24 $11.14 --------------------------------- Income from investment operations: Net investment incomea ................................................ .53 .55 .05 Net realized and unrealized gains ..................................... .17 .75 .10 --------------------------------- Total from investment operations ....................................... .70 1.30 .15 --------------------------------- Less distributions from net investment income .......................... (.53) (.54) (.05) --------------------------------- Net asset value, end of year ........................................... $12.17 $12.00 $11.24 ================================= Total returnb .......................................................... 5.96% 11.80% 1.31% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................ $38,158 $6,291 $63 Ratio to average net assets: Expenses .............................................................. 1.18% 1.18% 1.18%d Net investment income ................................................. 4.35% 4.68% 5.23%d Portfolio turnover rate ................................................ 8.48% 10.40% 13.29%
aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. cFor the period February 1, 2000 (effective date) to February 29, 2000 for Class B. dAnnualized 55 FRANKLIN TAX-FREE TRUST Financial Highlights (continued) FRANKLIN INSURED TAX-FREE INCOME FUND (CONT.)
YEAR ENDED FEBRUARY 28, -------------------------------------------------------- CLASS C 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................................... $12.05 $11.31 $12.33 $12.38 $12.21 -------------------------------------------------------- Income from investment operations: Net investment incomea ................................................ .53 .55 .55 .57 .60 Net realized and unrealized gains (losses) ............................ .16 .73 (1.00) .05 .29 -------------------------------------------------------- Total from investment operations ....................................... .69 1.28 (.45) .62 .89 -------------------------------------------------------- Less distributions from: Net investment income ................................................. (.53) (.54) (.55) (.57) (.60) Net realized gains .................................................... -- -- (.02) (.10) (.12) -------------------------------------------------------- Total distributions .................................................... (.53) (.54) (.57) (.67) (.72) Net asset value, end of year ........................................... $12.21 $12.05 $11.31 $12.33 $12.38 ======================================================== Total returnb .......................................................... 5.84% 11.55% (3.74)% 5.12% 7.52% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................ $90,403 $62,212 $56,627 $65,166 $38,057 Ratios to average net assets: Expenses .............................................................. 1.18% 1.18% 1.18% 1.18% 1.18% Net investment income ................................................. 4.35% 4.67% 4.66% 4.54% 4.86% Portfolio turnover rate ................................................ 8.48% 10.40% 13.29% 13.16% 27.77% aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. 56 See notes to financial statements.
FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 98.8% BONDS 97.5% ALABAMA 3.1% Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan, Series A, AMBAC Insured, 5.25%, 8/15/21 ...................................................................................... $ 2,700,000 $ 2,748,060 Alabama State Board Educational Revenue, Southern Union State Junior College, MBIA Insured, Pre-Refunded, 6.50%, 7/01/12 ........................................................................ 1,000,000 1,034,640 Anniston Regional Medical Center Board Revenue, Series A, AMBAC Insured, 5.25%, 6/01/18 ................ 5,000,000 5,100,100 Bessemer Governmental Utility Services Corp. Water Supply Revenue, MBIA Insured, 5.25%, 6/01/32 ........ 5,000,000 5,019,500 Daphne Utilities Board Water Gas and Sewer Revenue, Series B, AMBAC Insured, 5.50%, 6/01/30 ............ 1,670,000 1,717,345 East Alabama Health Care Authority Health Care Facilities Revenue, Tax Anticipation Bond, Series A, MBIA Insured, 5.25%, 9/01/28 .......................................... 7,000,000 6,989,990 Huntsville Health Care Authority Facilities Revenue, Series A, MBIA Insured, 6.375%, 6/01/22 ........... 300,000 307,962 Jefferson County Sewer Revenue, Capital Improvement wts., Series A, FGIC Insured, 5.125%, 2/01/29 ................................... 12,050,000 11,971,073 wts., Series D, FGIC Insured, 5.75%, 2/01/22 ........................................................ 5,000,000 5,215,850 Montgomery Medical Clinic Board Health Care Facilities Revenue, Jackson Hospital and Clinic, Refunding, AMBAC Insured, 6.00%, 3/01/26 .................................. 4,000,000 4,315,840 Muscle Shoals GO, Warrants, MBIA Insured, 5.50%, 8/01/30 ............................................... 2,000,000 2,062,240 University of Alabama University Revenue, FGIC Insured, 5.25%, 10/01/27 ................................ 5,975,000 6,028,476 ------------- 52,511,076 ------------- ALASKA 1.1% Alaska Energy Authority Power Revenue, Bradley Lake Project, BIG Insured, 6.25%, 7/01/21 ............... 5,000 5,070 Alaska Energy Authority Utilities Revenue, Refunding, FSA Insured, 5.20%, 7/01/17 ...................... 3,000,000 3,072,780 Alaska Industrial Development and Export Authority Revenue, Revolving Fund, Refunding, Series A, MBIA Insured, 6.125%, 4/01/27 ....................................................................... 5,000,000 5,418,300 Alaska State HFC Revenue, Refunding, Series A, MBIA Insured, 6.00%, 6/01/27 ...................................................................................... 5,000,000 5,174,250 5.875%, 12/01/30 .................................................................................... 215,000 219,324 6.10%, 12/01/37 ..................................................................................... 5,000,000 5,158,600 University of Alaska Revenues, Series B, AMBAC Insured, Pre-Refunded, 6.50%, 10/01/17 .................. 250,000 257,385 ------------- 19,305,709 ------------- ARIZONA 3.0% Arizona State Municipal Financing Program COP, Series 1986-20, BIG Insured, ETM, 7.70%, 8/01/10 ........ 6,000,000 7,456,440 Cochise County USD No. 68, GO, Sierra Vista, Refunding, FGIC Insured, 7.50%, 7/01/10 ................... 500,000 624,010 Maricopa County IDA, Hospital Facility Revenue, Samaritan Health Services, Refunding, Series A, MBIA Insured, ETM, 7.00%, 12/01/16 .................................................................. 300,000 371,301 Mesa IDAR, Discovery Health System, Series A, MBIA Insured, 5.75%, 1/01/25 ...................................................................................... 18,000,000 18,965,340 5.625%, 1/01/29 ..................................................................................... 12,655,000 13,185,245 Navajo County PCR, Arizona Public Service Co., Series A, MBIA Insured, 5.875%, 8/15/28 ................. 3,000,000 3,180,210 Salt River Project Agricultural Improvement and Power District Electric System Revenue, Refunding, Series A, FGIC Insured, 5.50%, 1/01/19 ................................................... 1,150,000 1,174,254 Tucson Water Revenue, Series 1994-A, MBIA Insured, Pre-Refunded, 6.00%, 7/01/21 ........................ 5,000,000 5,654,050 ------------- 50,610,850 ------------- ARKANSAS .9% Arkansas State Development Finance Authority Water Revenue, Refunding, Series A, MBIA Insured, 6.50%, 7/01/10 ........................................................................ 2,000,000 2,333,880 Little Rock School District GO, Refunding, Series B, FSA Insured, 5.50%, 2/01/33 .................................................... 3,970,000 4,087,671 Series C, FSA Insured, 5.25%, 2/01/33 ............................................................... 7,790,000 7,877,949 Paragould Water and Electric Revenue, AMBAC Insured, 5.65%, 12/01/25 ................................... 1,000,000 1,049,090 ------------- 15,348,590 ------------- CALIFORNIA 1.9% Corona COP, Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 ........................... 15,000,000 20,862,900 Lancaster RDA, Tax Allocation, Lancaster Residential Redevelopment, Refunding, MBIA Insured, 6.10%, 8/01/19 ...................................................................................... 1,515,000 1,563,026 Oakland RDA Tax Allocation, Central District Redevelopment, Refunding, AMBAC Insured, 5.50%, 2/01/14 ... 250,000 282,198 Sacramento MUD, Electric Revenue, Refunding, Series D, MBIA Insured, 5.25%, 11/15/20 ................... 2,750,000 2,819,300 San Francisco BART, District Sales Tax Revenue, FGIC Insured, 5.50%, 7/01/20 ........................... 1,035,000 1,080,354 San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Refunding, Series A, MBIA Insured, 5.25%, 1/15/30 ...................................................................................... 4,000,000 4,078,160 Stockton East Water District COP, 1990 Project, Series A, AMBAC Insured, 6.40%, 4/01/22 ................ 1,460,000 1,493,609 ------------- 32,179,547 -------------
57 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) COLORADO 4.6% Arapahoe County COP, Refunding, FSA Insured, 6.625%, 12/01/16 .......................................... $ 8,695,000 $ 9,082,449 Broomfield COP, AMBAC Insured, 6.00%, 12/01/29 ......................................................... 3,000,000 3,242,250 Centennial Water and Sanitation District Water and Sewer Revenue, Refunding, Series A, FSA Insured, 5.125%, 12/01/17 .................................................................................... 5,000,000 5,124,050 Colorado Health Facilities Authority Revenue, Community Provider Pooled Loan Program, Series A, FSA Insured, 7.25%, 7/15/17 ......................................................................... 334,000 341,782 Colorado Public Highway Authority Revenue, Highway E-470, Refunding, Senior Series A, MBIA Insured, 5.00%, 9/01/21 ...................................................................................... 5,000,000 5,021,650 Colorado Springs Hospital Revenue, Refunding, MBIA Insured, 6.00%, 12/15/24 ............................ 2,455,000 2,671,286 Colorado State Board of Agriculture Revenue, MBIA Insured, 6.40%, 3/01/11 ............................................................................................. 350,000 354,295 3/01/17 ............................................................................................. 440,000 445,399 Colorado Water Resource and Power Development Authority Small Water Resource Revenue, Series A, FGIC Insured, 6.70%, 11/01/12 ....................................................................... 2,000,000 2,064,180 Denver City and County Airport Revenue, Series C, MBIA Insured, ETM, 6.125%, 11/15/25 ....................................................... 8,000,000 8,764,163 Series E, MBIA Insured, 5.50%, 11/15/25 ............................................................. 5,000,000 5,148,000 Denver City and County Revenue, Children's Hospital Association Project, FGIC Insured, 6.00%, 10/01/15 ..................................................................................... 3,000,000 3,232,170 Garfield, Pitkin and Eagle Counties Reorganized School District No. 1 GO, MBIA Insured, Pre-Refunded, 6.60%, 12/15/14 ..................................................................................... 3,600,000 3,984,120 Goldsmith Metropolitan District GO, Refunding, MBIA Insured, 6.125%, 12/01/12 .......................... 2,000,000 2,062,080 Jefferson County COP, Refunding, MBIA Insured, 6.65%, 12/01/08 ......................................... 5,000,000 5,273,000 Jefferson County SFMR, Refunding, Series A, MBIA Insured, 8.875%, 10/01/13 ............................. 50,000 51,060 La Plata County School District No. R-9 GO, Durango City, FGIC Insured, 6.55%, 11/01/12 ................ 490,000 509,698 Morgan County PCR, First Mortgage, Public Service Co., Refunding, Series A, MBIA Insured, 5.50%, 6/01/12 ...................................................................................... 1,000,000 1,050,570 Mountain College Residence Hall Authority Revenue, MBIA Insured, 5.625%, 6/01/12 ..................................................................................... 1,900,000 2,028,326 5.75%, 6/01/23 ...................................................................................... 3,000,000 3,144,180 Post-Secondary Educational Facilities Authority Revenue, University of Denver Project, Refunding, Connie Lee Insured, 6.00%, 3/01/10 .................................................................. 1,000,000 1,048,570 Regional Transportation District Sales Tax Revenue, FGIC Insured, 6.25%, 11/01/12 ...................... 235,000 244,941 University of Colorado Hospital Authority Revenue, Refunding, Series A, AMBAC Insured, 5.20%, 11/15/17 ..................................................................................... 5,425,000 5,573,374 5.25%, 11/15/22 ..................................................................................... 7,800,000 7,882,992 ------------- 78,344,585 ------------- CONNECTICUT .4% Connecticut State Health and Educational Facilities Authority Revenue, Danbury Hospital, Series E, MBIA Insured, 6.50%, 7/01/14 ............................................ 335,000 342,739 Mansfield Nursing Home, AMBAC Insured, 6.00%, 11/01/22 .............................................. 2,450,000 2,646,882 Trinity College, Series D, FGIC Insured, Pre-Refunded, 6.125%, 7/01/24 .............................. 2,000,000 2,216,640 New Haven Air Rights Parking Facility Revenue, Refunding, MBIA Insured, 6.50%, 12/01/15 ................ 2,000,000 2,061,700 ------------- 7,267,961 ------------- DELAWARE .2% Delaware State EDA Revenue, PCR, Refunding, Series B, AMBAC Insured, 6.75%, 5/01/19 .................... 1,000,000 1,027,440 Delaware State Health Facilities Authority Revenue, Medical Center, MBIA Insured, Pre-Refunded, 7.00%, 10/01/15 ..................................................................................... 2,900,000 3,182,257 ------------- 4,209,697 ------------- FLORIDA 3.7% Cape Coral Franchise Fees Revenue, AMBAC Insured, 5.40%, 12/01/13 ...................................... 1,800,000 1,857,168 Celebration CDD, Special Assessment, Series B, MBIA Insured, 5.50%, 5/01/19 ............................ 1,000,000 1,038,470 Dade County Seaport Revenue, Refunding, Series E, MBIA Insured, 8.00%, 10/01/08 ........................ 200,000 248,966 Greater Orlando Aviation Authority Orlando Airport Facilities Revenue, Series B, FGIC Insured, 5.25%, 10/01/28 ..................................................................................... 2,500,000 2,508,450 Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, MBIA Insured, 6.25%, 12/01/34 ..... 1,000,000 1,104,060 Hillsborough County IDAR, University Community Hospital, MBIA Insured, 5.80%, 8/15/24 .................. 3,000,000 3,164,520 Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/30 ......................................... 5,000,000 4,925,000 Jacksonville Transportation Revenue, MBIA Insured, 5.25%, 10/01/29 ..................................... 11,000,000 11,131,560 Lee County IDA, Utilities Revenue, Bonita Springs Utilities Project, Refunding, MBIA Insured, 6.05%, 11/01/15 ............................................................................................ 1,000,000 1,085,670 11/01/20 ............................................................................................ 1,000,000 1,078,190 Lee County Solid Waste System Revenue, MBIA Insured, 5.375%, 10/01/15 .................................. 2,000,000 2,079,340 Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/21 ........................... 5,000,000 5,723,250 Opa-Locka Capital Improvement Revenue, FGIC Insured, 6.125%, 1/01/24 ................................... 1,000,000 1,076,700
58 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) FLORIDA (CONT.) Orange County Health Facilities Authority Revenue, MBIA Insured, 6.00%, 11/01/24 ....................................................................... $ 260,000 $ 271,742 Series A, MBIA Insured, Pre-Refunded, 6.00%, 11/01/24 ............................................... 740,000 777,540 Orange County Tourist Development Tax Revenue, AMBAC Insured, 5.50%, 10/01/31 .......................... 1,000,000 1,035,620 Orlando and Orange County Expressway Authority Expressway Revenue, junior lien, FGIC Insured, 6.50%, 7/01/10 ............................................................................................. 100,000 117,775 7/01/12 ............................................................................................. 225,000 267,968 Osceola County Transportation Revenue, Osceola Parkway Project, MBIA Insured, 6.10%, 4/01/17 ........... 1,000,000 1,022,990 Pinellas County Health Facilities Authority Revenue, Baycare Health System, FSA Insured, 5.00%, 11/15/30 ..................................................................................... 4,000,000 3,904,400 Polk County IDAR, Winter Haven Hospital, Series 2, MBIA Insured, 6.25%, 9/01/15 ........................ 925,000 971,176 Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/24 .................................... 5,000,000 4,973,350 Reedy Creek ID, Utilities Revenue, Refunding, Series 1, MBIA Insured, 5.00%, 10/01/19 .................. 3,500,000 3,515,225 Sumter County School District Revenue, Multi-District Loan Program, FSA Insured, 7.15%, 11/01/15 ....... 250,000 317,910 Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ............................ 2,000,000 2,042,360 Tampa Bay Water Utility System Revenue, FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 .................... 2,000,000 2,284,560 Volusia County Educational Facility Authority Revenue, Embry Riddle Aeronautical University, Refunding, Series B, AMBAC Insured, 5.25%, 10/15/19 .................................................... 3,500,000 3,607,345 ------------- 62,131,305 ------------- GEORGIA 4.0% Atlanta Airport Facilities Revenue, Refunding, Series A, FGIC Insured, 5.50%, 1/01/26 .................. 13,750,000 14,255,863 Atlanta GO, Refunding, FGIC Insured, 5.00%, 12/01/20 ............................................................................................ 4,775,000 4,801,788 12/01/23 ............................................................................................ 6,000,000 6,002,940 Atlanta Water and Wastewater Revenue, Series A, FGIC Insured, 5.00%, 11/01/29 ..................................................................................... 4,750,000 4,714,470 Pre-Refunded, 5.00%, 11/01/29 ....................................................................... 5,250,000 5,705,385 Brunswick Water and Sewer Revenue, Refunding and Improvement, MBIA Insured, 6.10%, 10/01/14 ............ 1,535,000 1,781,644 Burke County Development Authority PCR, Georgia Power Co. Plant Vogtle, Refunding, 2nd Series, AMBAC Insured, 5.25%, 5/01/34 .............................................................. 5,000,000 5,025,550 Cherokee County Water and Sewage Authority Revenue, FGIC Insured, 5.00%, 8/01/27 ........................................................................ 1,500,000 1,485,030 MBIA Insured, 6.90%, 8/01/18 ........................................................................ 15,000 15,398 Fitzgerald Housing Authority Mortgage Revenue, Bridge Creek, Refunding, Series A, MBIA Insured, 6.50%, 7/01/24 ...................................................................................... 995,000 1,009,835 Georgia Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus Regional Healthcare Systems, MBIA Insured, 5.50%, 8/01/19 ...................................................... 15,000,000 15,648,000 Henry County Water and Sewer Authority Revenue, FGIC Insured, 5.625%, 2/01/30 .......................... 3,500,000 3,676,610 Macon-Bibb County Urban Development Authority Revenue, MFH, Refunding, Series A, MBIA Insured, 5.55%, 1/01/24 ...................................................................................... 1,590,000 1,619,129 Rockdale County Water and Sewer Authority Revenue, Refunding, Series A, MBIA Insured, 5.375%, 7/01/29 .. 2,300,000 2,360,743 ------------- 68,102,385 ------------- HAWAII 1.3% Hawaii County GO, Refunding and Improvement, Series A, FGIC Insured, 5.60%, 5/01/12 ............................................................................................. 1,000,000 1,112,090 5/01/13 ............................................................................................. 1,000,000 1,106,690 Hawaii State Department of Budget and Finance Special Purpose Mortgage Revenue, Hawaiian Electric Co. and Subsidiaries, MBIA Insured, 6.55%, 12/01/22 ............................... 3,000,000 3,158,160 St. Francis Medical Centers, Refunding, FSA Insured, 6.50%, 7/01/22 ................................. 4,000,000 4,135,880 Hawaii State Department of Budget and Finance Special Purpose Revenue, Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ................................ ............................. 2,000,000 2,104,740 Hawaii State Harbor Capital Improvement Revenue, FGIC Insured, 6.40%, 7/01/05 ............................................................................................. 535,000 553,094 7/01/06 ............................................................................................. 605,000 625,461 7/01/07 ............................................................................................. 610,000 630,630 Honolulu City and County GO, Series C, FGIC Insured, 5.00%, 7/01/20 .................................... 6,250,000 6,227,250 Kauai County GO, Series A, FGIC Insured, Pre-Refunded, 6.125%, 8/01/23 ................................. 1,755,000 2,032,501 ------------- 21,686,496 -------------
59 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) IDAHO .1% Boise State University Revenues, Student Fee, MBIA Insured, Pre-Refunded, 6.50%, 4/01/19 ............... $ 1,000,000 $ 1,096,170 ------------- ILLINOIS 2.2% Chicago Board of Education GO, Chicago School Reform, Series A, AMBAC Insured, 5.25%, 12/01/30 ......... 2,000,000 2,006,140 Chicago Board of Education Lease COP, Refunding, Series A, MBIA Insured, 6.25%, 1/01/09 ................ 320,000 364,850 Cicero GO, FSA Insured, 6.90%, 12/01/12 ................................................................ 1,500,000 1,584,645 Cook County Community College District No. 508 COP, FGIC Insured, 8.75%, 1/01/05 ....................... 5,000,000 5,794,150 Illinois Health Facilities Authority Revenue, Community Provider Pooled Loan Program, Series A, FSA Insured, 7.35%, 8/15/10 ....................... 3,476,000 3,556,296 Michael Reese Hospital, Series A, FSA Insured, ETM, 7.60%, 2/15/05 .................................. 2,380,000 2,598,341 Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%, 11/15/28 ................. 5,000,000 4,903,350 Refunding, Series B, MBIA Insured, ETM, 7.90%, 8/15/03 .............................................. 278,000 295,222 Series 1990, FSA Insured, 7.75%, 8/15/10 ............................................................ 2,339,000 2,385,780 Series 1990, FSA Insured, ETM, 7.75%, 8/15/10 ....................................................... 50,000 63,612 Series B, MBIA Insured, 7.90%, 8/15/03 .............................................................. 1,192,000 1,196,887 Illinois State COP, FSA Insured, Pre-Refunded, 6.95%, 7/01/13 .......................................... 5,750,000 5,967,868 Macon County and Decatur COP, Decatur Public Building Commission, FGIC Insured, 6.50%, 1/01/06 ......... 300,000 335,907 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 4,242,576 Onterie Center HFC, Mortgage Revenue, Refunding, MBIA Insured, 7.05%, 7/01/27 .......................... 2,000,000 2,062,960 Regional Transportation Authority Revenue, Series A, AMBAC Insured, 7.20%, 11/01/20 .................... 300,000 384,147 ------------- 37,742,731 ------------- INDIANA .2% Indiana Health Facility Financing Authority Hospital Revenue, Community Hospital Project, Refunding and Improvement, MBIA Insured, 6.40%, 5/01/12 ............................................... 250,000 256,645 Indianapolis Gas Utility Revenue, Refunding, Series B, FGIC Insured, 4.00%, 6/01/15 .................... 500,000 471,895 Jasper County PCR, Northern Indiana Public Service Co., Refunding, MBIA Insured, 7.10%, 7/01/17 ........ 500,000 513,310 Patoka Lake Regional Water and Sewer District Waterworks Revenue, Series A, AMBAC Insured, Pre-Refunded, 6.45%, 1/01/15 ........................................................................ 1,500,000 1,626,195 Rockport PCR, Michigan Power Co., Refunding, Series B, FGIC Insured, 7.60%, 3/01/16 .................... 185,000 191,967 ------------- 3,060,012 ------------- IOWA .1% Greater Iowa Housing Assistance Corp. Mortgage Revenue, Logan Park Project, Refunding, Series B, MBIA Insured, 6.50%, 1/01/24 ........................................................................ 2,085,000 2,115,024 ------------- KANSAS .4% Burlington PCR, Kansas Gas and Electric Co. Project, Refunding, MBIA Insured, 7.00%, 6/01/31 ........... 3,350,000 3,428,725 Cowley and Shawnee Counties SFMR, GNMA Secured, 7.35%, 12/01/11 ........................................ 455,000 460,642 Kansas State Development Finance Authority Health Facility Revenue, MBIA Insured, 5.80%, 11/15/21 ...... 1,330,000 1,385,208 Wichita Hospital Revenue, St. Francis, Refunding and Improvement, MBIA Insured, 6.25%, 10/01/10 ........ 2,000,000 2,086,800 ------------- 7,361,375 ------------- KENTUCKY 1.0% Jefferson County Capital Projects Corp. Lease Revenue, MBIA Insured, 5.375%, 6/01/22 ..................................................................................... 2,000,000 2,044,920 5.50%, 6/01/28 ...................................................................................... 750,000 774,315 Jefferson County Health Facilities Revenue, Jewish Hospital Healthcare Services Inc., AMBAC Insured, 6.55%, 5/01/22 ...................................................................................... 1,000,000 1,026,810 Kenton County Water District No. 1 Waterworks Revenue, Series B, FGIC Insured, 5.70%, 2/01/20 .......... 1,250,000 1,308,175 Kentucky Economic Development Finance Authority Hospital Facilities Revenue, St. Elizabeth Medical Center Project, Series A, FGIC Insured, 6.00%, 12/01/22 ............................................... 2,375,000 2,572,909 Kentucky Economic Development Finance Authority Medical Center Revenue, Ashland Hospital Corp., Refunding and Improvement, Series A, FSA Insured, 6.125%, 2/01/12 ..................................... 1,000,000 1,054,400 Louisville and Jefferson County Metropolitan Sewer District Sewer and Drain System Revenue, Series A, AMBAC Insured, Pre-Refunded, 6.75%, 5/15/25 ......................................................... 2,000,000 2,272,720 MBIA Insured, 5.50%, 5/15/3 ......................................................................... 5,000,000 5,160,800 ------------- 16,215,049 -------------
60 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) LOUISIANA .2% Louisiana Local Government Environmental Facilities CDA Revenue, Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/31 .................................................... $ 3,485,000 $ 3,546,162 New Orleans GO, Public Improvement, FGIC Insured, Pre-Refunded, 7.50%, 9/01/21 ......................... 500,000 514,930 ------------- 4,061,092 ------------- MAINE .4% Maine State Health and Higher Educational Facilities Authority Revenue, Series B, FSA Insured, Pre-Refunded, 7.00%, 7/01/24 ................................................. 2,000,000 2,252,640 Series C, FSA Insured, 6.20%, 7/01/25 ............................................................... 2,015,000 2,207,997 Old Orchard Beach GO, MBIA Insured, Pre-Refunded, 6.65%, 9/01/11 ............................................................................................. 1,180,000 1,242,398 9/01/12 ............................................................................................. 535,000 564,853 ------------- 6,267,888 ------------- MARYLAND .6% Baltimore Revenue, Wastewater Project, Refunding, Series A, FSA Insured, 5.75%, 7/01/30 ................ 5,880,000 6,217,747 Maryland State CDA, Department of Housing and Community Development MFHR, Infrastructure Financing, Series A, AMBAC Insured, Pre-Refunded, 6.70%, 6/01/22 ........................................................ 820,000 846,953 Department of Housing and Community Development Revenue, Infrastructure Financing, Series A, AMBAC Insured, 6.625%, 6/01/12 .................................................................................. 245,000 251,088 Pre-Refunded, 6.625%, 6/01/12 .................................................................... 1,755,000 1,812,370 Maryland State Health and Higher Educational Facilities Authority Revenue, University of Maryland Medical System, Series B, FGIC Insured, 7.00%, 7/01/22 .......................... 200,000 246,090 ------------- 9,374,248 ------------- MASSACHUSETTS 5.9% Central Berkshire Religious School District GO, Series B, FSA Insured, 5.125%, 3/01/18 ................. 1,125,000 1,146,026 Massachusetts Municipal Wholesale Electric Co. Power Supply System Revenue, Refunding, Series A, AMBAC Insured, 6.00%, 7/01/18 ....................................................................... 4,455,000 4,522,716 Massachusetts State Health and Educational Facilities Authority Revenue, Bay State Medical Center, Series E, FSA Insured, 6.00%, 7/01/26 ..................................... 10,000,000 10,833,900 Caregroup Issue, Series A, MBIA Insured, 5.00%, 7/01/25 ............................................. 4,250,000 4,141,200 Caregroup Issue, Series A, MBIA Insured, Pre-Refunded, 5.00%, 7/01/25 ............................... 750,000 764,903 Central New England Health, Series B, AMBAC Insured, 5.20%, 8/01/28 ................................. 5,000,000 5,010,350 Harvard Pilgrim Health, Series A, FSA Insured, 5.00%, 7/01/18 ....................................... 3,000,000 2,957,010 Lahey Clinic Medical Center, Series B, MBIA Insured, 5.375%, 7/01/23 ................................ 1,000,000 1,007,620 Massachusetts General Hospital, Series F, AMBAC Insured, Pre-Refunded, 6.25%, 7/01/20 ............... 9,220,000 9,948,840 McLean Hospital, Series C, FGIC Insured, Pre-Refunded, 6.625%, 7/01/15 .............................. 1,085,000 1,125,275 Northeastern University, Series E, MBIA Insured, 6.55%, 10/01/22 .................................... 8,500,000 8,893,380 Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ................................. 9,700,000 9,801,559 Simmons College, Series C, MBIA Insured, 5.125%, 10/01/28 ........................................... 8,000,000 7,993,920 Stonehill College, Series E, MBIA Insured, 6.60%, 7/01/20 ........................................... 1,120,000 1,159,155 Stonehill College, Series E, MBIA Insured, Pre-Refunded, 6.60%, 7/01/20 ............................. 880,000 912,595 Youville Hospital, Refunding, Series B, MBIA Insured, 6.00%, 2/15/25 ................................ 2,000,000 2,184,200 Massachusetts State Industrial Finance Agency Revenue, Babson College, Series A, MBIA Insured, Pre-Refunded, 6.50%, 10/01/22 ............................... 3,000,000 3,149,070 Combined Jewish Philanthropies, Refunding, Series A, AMBAC Insured, 6.375%, 2/01/15 ................. 5,000,000 5,418,250 Suffolk University, AMBAC Insured, 5.25%, 7/01/17 ................................................... 3,000,000 3,093,510 Massachusetts State Port Authority Revenue, Refunding, Series A, FGIC Insured, 6.00%, 7/01/23 ................................................... 4,000,000 4,240,840 Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/20 .................................. 1,590,000 1,633,502 Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/21 .................................. 1,560,000 1,599,827 Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/23 .................................. 2,155,000 2,198,186 Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/24 .................................. 2,910,000 2,961,245 Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, sub. lien, Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 .............................................................. 2,100,000 2,064,657 ------------- 98,761,736 -------------
61 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) MICHIGAN 7.4% Chippewa Valley Schools GO, Refunding, AMBAC Insured, 5.00%, 5/01/27 ................................... $ 1,000,000 $ 985,850 Detroit City School District GO, Series A, FSA Insured, 5.125%, 5/01/31 ................................ 6,500,000 6,475,170 Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/21 ............................... 12,390,000 12,329,289 Detroit Sewage Disposal Revenue, MBIA Insured, 5.00%, 7/01/25 .......................................... 6,000,000 5,902,200 Detroit Water Supply System Revenue, senior lien, Series A, FGIC Insured, 5.25%, 7/01/33 ............... 20,000,000 20,071,600 Ecorse Public School District GO, FGIC Insured, 5.50%, 5/01/27 ......................................... 7,250,000 7,460,903 Jackson County Hospital Finance Authority Hospital Revenue, W.A. Foote Memorial Hospital, Series A, AMBAC Insured, 5.25%, 6/01/17 ....................................................................... 500,000 511,435 Kalamazoo Hospital Finance Authority Hospital Facility Revenue, Bronson Methodist Hospital, Refunding and Improvement, MBIA Insured, 5.875%, 5/15/26 ............................................ 5,500,000 5,809,760 Series A, MBIA Insured, Pre-Refunded, 6.375%, 5/15/17 ............................................... 2,000,000 2,150,480 Marquette City Hospital Finance Authority Revenue, Marquette General Hospital, Refunding, Series D, FSA Insured, 6.10%, 4/01/19 ......................................................................... 5,000,000 5,430,550 Michigan Municipal Bond Authority Revenue, Clean Water Revolving, MBIA Insured, 5.00%, 10/01/23 ........ 5,095,000 5,068,200 Michigan State Hospital Finance Authority Revenue, Hospital Botsford Obligation, Refunding, Series A, MBIA Insured, 5.25%, 2/15/22 ..................... 2,000,000 2,015,440 Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ......................... 6,725,000 6,665,887 Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 .......................... 10,000,000 9,656,100 St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ........................ 2,500,000 2,648,000 Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co. Pollution Project, Refunding, Series BB, AMBAC Insured, 7.00%, 5/01/21 ................................................... 250,000 313,293 Michigan State Trunk Line, Revenue, Series A, FSA Insured, 5.25%, 11/01/30 ............................. 20,000,000 20,164,400 Saginaw Valley State University Revenue, AMBAC Insured, 5.30%, 7/01/28 ................................. 3,400,000 3,445,390 Yale Public Schools District GO, FSA Insured, 5.375%, 5/01/27 .......................................... 3,845,000 3,899,099 Zeeland Public Schools GO, Refunding, MBIA Insured, 5.25%, 5/01/24 ..................................... 3,180,000 3,206,903 ------------- 124,209,949 ------------- MINNESOTA 5.2% Eden Prairie MFHR, Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%, 1/20/31 .................... 2,000,000 2,088,540 Medford ISD No. 763, GO, Series A, FSA Insured, 5.125%, 2/01/26 ........................................ 2,475,000 2,479,257 Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue, Series C, FGIC Insured, 5.25%, 1/01/26 ........................................................................ 8,000,000 8,049,920 Minneapolis and St. Paul Metropolitan Apartments Community Apartment Revenue, Series C, 5.25%, 1/01/32 ............................................................................ 4,500,000 4,515,390 Minneapolis Special School District No. 001 COP, Refunding, Series B, FGIC Insured, 4.625%, 2/01/17 ..................................................................................... 1,635,000 1,611,554 Minnesota Agriculture and Economic Development Board Revenue, Health Care System, Fairview Hospital, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 .................................................... 12,280,000 12,829,407 Minnesota State HFA, Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 ................. 1,750,000 1,813,665 Northern Municipal Power Agency Electric System Revenue, Refunding, Series B, AMBAC Insured, 5.50%, 1/01/18 ......................................................................................... 2,100,000 2,163,504 Robbinsdale ISD No. 281, GO, MBIA Insured, 5.00%, 2/01/22 .............................................. 7,340,000 7,339,633 Sauk Rapids ISD No. 47, GO, Series A, MBIA Insured, 5.75%, 2/01/26 ..................................... 11,850,000 12,516,681 South Washington County ISD No. 833 GO, Series B, FSA Insured, 5.00%, 2/01/22 .......................... 10,970,000 10,969,452 Southern Minnesota Municipal Power Agency Power Supply System Revenue, Series A, AMBAC Insured, 5.75%, 1/01/18 ...................................................................................... 2,870,000 3,000,585 St. Louis Park Health Care Facilities Revenue, Health System of Minnesota Obligated Group, Refunding, Series A, AMBAC Insured, 5.20%, 7/01/16 ..................................................... 6,500,000 6,608,420 Washington County GO, Governmental Housing, Scandia II Project, Series B, FGIC Insured, 6.30%, 7/01/24 .................... 1,200,000 1,274,712 Raymie Johnson Apartments, Refunding, Series C, FGIC Insured, 6.30%, 1/01/20 ........................ 2,415,000 2,566,250 Western Minnesota Municipal Power Agency Power Supply Revenue, Series A, MBIA Insured, 6.125%, 1/01/16 ..................................................................................... 4,125,000 4,180,935 Woodbury COP, Series A, AMBAC Insured, 5.35%, 2/01/21 .................................................. 2,915,000 2,978,897 ------------- 86,986,802 ------------- MISSISSIPPI Harrison County Wastewater Management District Revenue, Wastewater Treatment Facilities, Refunding, Series A, FGIC Insured, 8.50%, 2/01/13 ..................................................... 200,000 272,714 ------------- MISSOURI .7% Kansas City IDA, Mortgage Revenue, Presidential Gardens, Refunding, Series A, FNMA Insured, 5.55%, 8/01/25 ...................................................................................... 340,000 347,837 Missouri State Health and Educational Facilities Authority Health Facilities Revenue, Heartland Health System Project, AMBAC Insured, 6.35%, 11/15/17 ........................................................ 1,000,000 1,054,810 St. Charles County Public Facilities Authority Leasehold Revenue, FGIC Insured, 6.375%, 3/15/07 ........ 2,850,000 2,910,990 St. Louis County Mortgage Revenue, GNMA Secured, 8.125%, 9/01/19 ....................................... 150,000 150,830
62 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) MISSOURI (CONT.) St. Louis Municipal Finance Corp. Leasehold Revenue, City Justice Center, Refunding, Series A, AMBAC Insured, 5.95%, 2/15/16 ............................. $ 2,000,000 $ 2,254,260 Refunding and Improvement, FGIC Insured, Pre-Refunded, 6.25%, 2/15/12 ............................... 2,025,000 2,228,938 St. Louis School District GO, Refunding, FGIC Insured, 6.00%, 4/01/12 .................................. 2,950,000 3,073,870 ------------- 12,021,535 ------------- MONTANA 1.0% Forsyth County PCR, Puget Sound Power and Light Co. Project, AMBAC Insured, 6.80%, 3/01/22 ............. 4,475,000 4,575,374 Helena Water Revenue, Series C, FGIC Insured, 6.65%, 11/01/12 .......................................... 750,000 780,638 Montana State Board Workers Compensation Investment Program Revenue, MBIA Insured, ETM, 6.875%, 6/01/20 ..................................................................................... 8,500,000 9,925,789 Montana State University Revenue, Higher Education Facilities, Acquisition and Improvement, Series C, MBIA Insured, 6.00%, 11/15/14 ................................................................ 1,000,000 1,003,190 ------------- 16,284,991 ------------- NEBRASKA .6% Lancaster County Hospital Authority Revenue, Bryan Memorial Hospital Project No. 1, MBIA Insured, ETM, 6.70%, 6/01/22 ................................................................................. 2,500,000 2,984,675 Lincoln Hospital Revenue, Lincoln General Hospital, Series A, FSA Insured, Pre-Refunded, 6.20%, 12/01/14 ..................................................................................... 2,000,000 2,111,400 Municipal Energy Agency of Nebraska Power Supply System Revenue, Refunding, Series A, AMBAC Insured, 6.00%, 4/01/15 ............................................................................................. 2,000,000 2,123,120 4/01/17 ............................................................................................. 1,350,000 1,380,942 Nebraska Educational Finance Authority Revenue, Creighton University Project, AMBAC Insured, 5.95%, 1/01/11 ....................................................................... 1,000,000 1,079,970 ------------- 9,680,107 ------------- NEVADA .7% Carson City Hospital Revenue, Series B, AMBAC Insured, 5.40%, 3/01/17 .................................. 1,000,000 1,028,290 Clark County GO, Series A, AMBAC Insured, 6.50%, 6/01/17 ............................................... 250,000 300,683 Clark County School District GO, Series A, MBIA Insured, 7.00%, 6/01/10 ................................ 4,000,000 4,791,400 Director of State Department of Business and Industry Revenue, Las Vegas Monorail Project, First Tier, AMBAC Insured, 5.625%, 1/01/34 ............................................................. 5,000,000 5,180,900 ------------- 11,301,273 ------------- NEW HAMPSHIRE .7% New Hampshire Higher Education and Health Facilities Authority Revenue, Mary Hitchcock Memorial Hospital, FGIC Insured, 5.75%, 8/15/23 ...................................... 6,750,000 7,439,985 University System, Refunding, MBIA Insured, 6.25%, 7/01/20 .......................................... 4,000,000 4,143,000 ------------- 11,582,985 ------------- NEW JERSEY .7% Essex County Improvement Authority Revenue, Garden State Cancer Center Project, AMBAC Insured, 6.00%, 12/01/20 .................................. 2,525,000 2,763,411 Jail and Youth House Projects, AMBAC Insured, Pre-Refunded, 7.00%, 12/01/24 ......................... 3,000,000 3,436,230 Middlesex County COP, MBIA Insured, 5.30%, 6/15/29 ..................................................... 3,575,000 3,636,990 Mount Laurel Township Municipal Utility Authority, Utility System Revenue, Refunding, Series, A, MBIA Insured, 6.00%, 7/01/15 .................................................. 785,000 810,936 Series A, MBIA Insured, Pre-Refunded, 6.00%, 7/01/15 ................................................ 1,215,000 1,318,640 New Jersey State Turnpike Authority Turnpike Revenue, Refunding, Series C, AMBAC Insured, 6.50%, 1/01/16 ...................................................................................... 300,000 364,701 ------------- 12,330,908 ------------- NEW MEXICO .5% Farmington PCR, Public Service Co. of New Mexico, Refunding, Series A, AMBAC Insured, 6.375%, 12/15/22 .................................................................................... 5,000,000 5,271,500 Gallup PCR, Plains Electric Generation, Refunding, MBIA Insured, 6.65%, 8/15/17 ........................ 2,000,000 2,081,740 New Mexico Mortgage Finance Authority SFM Program Revenue, Series C, FGIC Insured, 8.625%, 7/01/17 ..... 440,000 441,566 ------------- 7,794,806 ------------- NEW YORK 6.8% Central Square GO, Central School District, FGIC Insured, 6.50%, 6/15/10 ............................... 900,000 1,071,135 Dutchess County IDA, Civic Facilities Revenue, Bard College Project, AMBAC Insured, 5.375%, 6/01/27 ..................................................................................... 3,945,000 4,009,659 Nassau Health Care Corp. Health System Revenue, Nassau County Guaranteed, FSA Insured, 5.75%, 8/01/29 ............................................................................ 5,000,000 5,274,550 New York City GO, Series C, Sub Series C-1, MBIA Insured, Pre-Refunded, 6.625%, 8/01/12 ................ 105,000 108,885
63 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) NEW YORK (CONT.) New York City Municipal Water Finance Authority Water and Sewer System Revenue, Refunding, Series B, FGIC Insured, 5.25%, 6/15/29 ................................................... $10,405,000 $ 10,487,095 Series B, AMBAC Insured, 5.25%, 6/15/29 ............................................................. 5,000,000 5,039,450 New York City Trust Cultural Resources Revenue, New York Botanical Garden, MBIA Insured, 5.80%, 7/01/26 ...................................................................................... 2,000,000 2,120,680 New York State Dormitory Authority Revenue, Brooklyn Law School, FSA Insured, 6.40%, 7/01/11 .................................................... 4,000,000 4,092,600 Mental Health Services Facilities Improvement, Series B, MBIA Insured, 5.25%, 8/15/31 ............... 15,000,000 15,088,350 Mount Sinai School of Medicine, Refunding, MBIA Insured, 6.75%, 7/01/15 ............................. 1,500,000 1,535,025 Pace University, MBIA Insured, 5.70%, 7/01/22 ....................................................... 7,500,000 7,878,975 Pace University, Refunding, MBIA Insured, 5.75%, 7/01/26 ............................................ 2,500,000 2,659,250 Pooled Capital Program, FGIC Insured, 7.80%, 12/01/05 ............................................... 495,000 500,589 St. John's University, MBIA Insured, 5.70%, 7/01/26 ................................................. 15,000,000 15,652,800 Vassar Brothers Hospital, FSA Insured, 5.375%, 7/01/25 .............................................. 4,000,000 4,062,680 New York State Energy Research and Development Authority PCR, Niagara Mohawk Power Corp., Refunding, Series A, FGIC Insured, 6.625%, 10/01/13 ..................... 3,500,000 3,581,760 Rochester Gas and Electric Project, Refunding, Series B, MBIA Insured, 6.50%, 5/15/32 ............... 5,000,000 5,142,600 Niagara Frontier Transportation Authority Airport Revenue, Greater Buffalo International Airport, Series A, AMBAC Insured, 6.25%, 4/01/24 ............................................................. 9,000,000 9,646,560 Port Authority of New York and New Jersey Revenue, Consolidated, 102nd Series, MBIA Insured, 5.625%, 10/15/17 .................................................................................... 5,000,000 5,150,400 5.875%, 10/15/27 .................................................................................... 10,000,000 10,303,500 Upper Mohawk Valley Regional Water Finance Authority Water Systems Revenue, Refunding, Series A, FSA Insured, 5.125%, 10/01/26 ............................................................. 1,495,000 1,500,053 ------------- 114,906,596 ------------- NORTH CAROLINA 2.3% Asheville Water System Revenue, FGIC Insured, 5.70%, 8/01/25 ........................................... 1,000,000 1,049,080 Catawba County Hospital Revenue, Catawba Memorial Hospital Project, Refunding, AMBAC Insured, 5.00%, 10/01/17 ..................................................................................... 1,125,000 1,136,903 New Hanover County Hospital Revenue, New Hanover Regional Medical Center Project, MBIA Insured, 5.00%, 10/01/28 ..................................................................................... 2,000,000 1,962,440 North Carolina Medical Care Commission Health Care Facilities Revenue, Novant Health Project, Series B, MBIA Insured, 5.00%, 10/01/28 ...................................... 8,300,000 8,120,554 Wakemed Project, AMBAC Insured, 5.00%, 10/01/27 ..................................................... 6,750,000 6,616,080 North Carolina Medical Care Commission Hospital Revenue, Rex Healthcare Project, AMBAC Insured, 5.00%, 6/01/17 ............................................... 5,000,000 5,063,650 Wayne Memorial Hospital Project, Refunding, AMBAC Insured, 5.00%, 10/01/21 .......................... 5,000,000 4,981,250 North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, MBIA Insured, ETM, 6.50%, 1/01/10 ...................................................................................... 20,000 23,108 Raleigh Durham Airport Authority Airport Revenue, Series A, FGIC Insured, 5.00%, 11/01/25 .............. 5,000,000 4,992,800 Raleigh Durham Airport Revenue, Series A, FGIC Insured, 5.00%, 11/01/31 ................................ 4,000,000 3,969,160 ------------- 37,915,025 ------------- NORTH DAKOTA .3% Grand Forks Health Care System Revenue, Altru Health System Obligation Group, MBIA Insured, 5.625%, 8/15/27 ..................................................................................... 5,390,000 5,529,709 ------------- OHIO 4.8% Clermont County Building and Road Improvement, Refunding, AMBAC Insured, 5.60%, 9/01/14 ................ 2,000,000 2,132,580 Cleveland Airport System Revenue, Series A, FSA Insured, 5.00%, 1/01/31 ...................................................................................... 7,000,000 6,863,290 5.125%, 1/01/27 ..................................................................................... 4,000,000 3,903,680 Cleveland Waterworks Revenue, Refunding and Improvement, Series I, FSA Insured, 5.00%, 1/01/23 ...................................................................................... 2,750,000 2,749,808 Elyria GO, FGIC Insured, 5.40%, 12/01/17 ............................................................... 2,400,000 2,489,568 Hamilton County Sales Tax, Hamilton County Football, Project B, MBIA Insured, 5.00%, 12/01/27 ..................................................................................... 3,250,000 3,217,240 Hamilton Wastewater System Revenue, Series A, FSA Insured, 5.15%, 10/15/17 ............................. 3,015,000 3,104,696 Hamilton Waterworks Mortgage Revenue, Series A, MBIA Insured, 6.30%, 10/15/21 .......................... 1,750,000 1,788,850 Licking Heights Local School District GO, School Facilities Construction and Improvements, Series A, FGIC Insured, 5.625%, 12/01/28 ............................................................... 3,465,000 3,621,514 Lucas County Hospital Revenue, Promedica Healthcare Obligation Group, Refunding, AMBAC Insured, 5.375%, 11/15/29 ..................................................................... 5,000,000 5,080,800 Medina City School District GO, FGIC Insured, 5.25%, 12/01/28 .......................................... 7,500,000 7,580,100 Ohio Municipal Electric Generation Agency Revenue, Certificates of Beneficial Interest, AMBAC Insured, 5.375%, 2/15/24 ...................................................................... 5,500,000 5,678,365 Ohio State GO, Common Schools, FSA Insured, 5.00%, 9/15/21 ............................................. 3,230,000 3,246,990 Ohio State Turnpike Commission Turnpike Revenue, Series A, MBIA Insured, Pre-Refunded, 5.50%, 2/15/26 ...................................................................................... 14,000,000 15,547,140
64 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) OHIO (CONT.) Springfield City School District GO, FGIC Insured, 5.20%, 12/01/23 ..................................... $ 3,860,000 $ 3,927,627 Streetsboro City School District GO, School Improvement, MBIA Insured, 5.125%, 12/01/21 ................ 3,700,000 3,749,284 University of Cincinnati COP, University Center Project, MBIA Insured, 5.125%, 6/01/24 ................. 2,950,000 2,963,895 West Holmes Local School District GO, MBIA Insured, 5.375%, 12/01/17 ................................... 3,100,000 3,227,565 ------------- 80,872,992 ------------- OKLAHOMA .5% Grady County HFA, SFMR, Refunding, Series A, FGIC Insured, 6.70%, 1/01/12 .............................. 230,000 235,808 McGee Creek Authority Water Revenue, MBIA Insured, 6.00%, 1/01/23 ...................................... 300,000 343,170 Oklahoma State Turnpike Authority Turnpike Revenue, First Senior, Series A, AMBAC Insured, 6.00%, 1/01/12 ........................................................................................ 2,000,000 2,066,080 Okmulgee County Governmental Building Authority Sales Tax Revenue, First Mortgage, MBIA Insured, 6.20%, 3/01/20 .......................................................................... 1,625,000 1,767,545 Tulsa County Home Finance Authority Mortgage Revenue, Series D, GNMA Secured, 6.95%, 12/01/22 ....................................................................................... 135,000 137,604 Tulsa Industrial Authority Revenue, Holland Hall School Project, FSA Insured, Pre-Refunded, 6.75%, 12/01/14 ....................................................................................... 3,270,000 3,721,979 ------------- 8,272,186 ------------- OREGON 1.8% Chemeketa Community College District GO, FGIC Insured, Pre-Refunded, 5.95%, 6/01/16 .................... 3,000,000 3,347,130 Clackamas Community College District Revenue, MBIA Insured, Pre-Refunded, 5.80%, 6/01/26 ............... 2,500,000 2,774,450 Deschutes and Jefferson Counties School District No. 2-J GO, Redmond, MBIA Insured, 5.60%, 6/01/09 ........................................................................................ 1,500,000 1,571,745 Josephine County School District No. 7 GO, FGIC Insured, 5.70%, 6/01/13 ................................ 5,000,000 5,317,650 Northern Wasco County Peoples Utilities District Electric Revenue, FGIC Insured, 5.625%, 12/01/22 ...................................................................................... 1,000,000 1,037,520 Ontario Catholic Health Revenue, Holy Rosary Medical Center, MBIA Insured, 5.50%, 11/15/12 ............. 700,000 744,786 Oregon Health Sciences University Revenue, Series B, MBIA Insured, 5.25%, 7/01/15 ...................... 1,500,000 1,560,375 Oregon State Department of Administrative Services COP, Series A, AMBAC Insured, Pre-Refunded, 5.80%, 5/01/24 ......................................................... 5,000,000 5,620,000 MBIA Insured, 5.70%, 5/01/17 ........................................................................ 1,000,000 1,047,840 Port of Portland International Airport Revenue, Portland International Airport, Series 11, FGIC Insured, 5.625%, 7/01/26 ......................................................................... 1,000,000 1,020,410 Washington County Unified Sewer Agency Revenue, senior lien, FGIC Insured, 5.50%, 10/01/16 ....................................................................... 1,845,000 1,929,243 Series A, AMBAC Insured, Pre-Refunded, 6.125%, 10/01/12 ............................................. 1,000,000 1,096,820 Western Lane Hospital District Hospital Facilities Authority Revenue, Sisters of St. Joseph of Peace Health and Hospital Services, Refunding, MBIA Insured, 5.875%, 8/01/12 ............. 3,000,000 3,238,410 ------------- 30,306,379 ------------- PENNSYLVANIA 2.0% Allegheny County Hospital Development Authority Revenue, Health System, Series A, MBIA Insured, 6.50%, 11/15/30 ......................................................................... 10,000,000 11,297,800 Beaver County GO, Series A, MBIA Insured, Pre-Refunded, 5.90%, 10/01/26 ................................ 2,000,000 2,246,940 Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital, Refunding, Series B, Connie Lee Insured, Pre-Refunded, 6.375%, 7/01/18 ........................................... 5,000,000 5,179,600 Pennsylvania Convention Center Authority Revenue, Series A, FGIC Insured, ETM, 6.00%, 9/01/19 .......... 500,000 572,245 Pennsylvania State Turnpike Oil Commission Franchise Tax Revenue, Refunding, Series P, AMBAC Insured, 6.00%, 12/01/17 ............................................................... 500,000 524,930 Philadelphia Airport Revenue, Philadelphia Airport System, Series A, AMBAC Insured, 6.10%, 6/15/25 ........................................................................................ 4,000,000 4,305,080 Philadelphia Water and Wastewater Revenue, FSA Insured, 5.50%, 6/15/15 ......................................................................... 665,000 697,770 FSA Insured, Pre-Refunded, 5.50%, 6/15/15 ........................................................... 335,000 357,793 Series A, FGIC Insured, 5.25%, 11/01/24 ............................................................. 2,000,000 2,022,640 Pittsburgh and Allegheny County Public Auditorium Revenue, Regional Asset District Sales Tax, AMBAC Insured, 5.25%, 2/01/31 ......................................................................... 6,000,000 6,040,200 Pittsburgh Water and Sewer System Authority Revenue, Refunding, FGIC Insured, ETM, 7.25%, 9/01/14 ...................................................................................... 90,000 110,214 ------------- 33,355,212 ------------- RHODE ISLAND 1.2% Kent County Water Authority General Revenue, Series A, MBIA Insured, 6.35%, 7/15/14 .................... 2,100,000 2,309,454 Providence GO, Series A, FSA Insured, 5.70%, 7/15/19 ................................................... 3,000,000 3,153,720 Rhode Island Clean Water Financing Agency Revenue, Cranston Wastewater Treatment System, MBIA Insured, 5.80%, 9/01/22 ........................................................................... 7,785,000 8,184,915 Rhode Island Port Authority and EDC Revenue, Shepard Building Project, Series B, AMBAC Insured, Pre-Refunded, 6.75%, 6/01/25 ............................................................ 2,000,000 2,234,320 Rhode Island State GO, Series A, FGIC Insured, 6.25%, 6/15/07 ...................................................................................... 145,000 149,650 Pre-Refunded, 6.25%, 6/15/07 ........................................................................ 30,000 31,007
65 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) RHODE ISLAND (CONT.) Rhode Island State Health and Educational Building Corp. Revenue, Higher Educational Facilities, Roger Williams Facility, Connie Lee Insured, Pre-Refunded, 7.25%, 11/15/24 ............................................... $ 2,000,000 $ 2,298,720 Hospital Financing Lifespan Obligation Group, MBIA Insured, 5.75%, 5/15/23 .............. 1,750,000 1,844,553 ------------ 20,206,339 ------------ SOUTH CAROLINA .3% Piedmont Municipal Power Agency Electric Revenue, Refunding, FGIC Insured, 6.25%, 1/01/21 .. 200,000 232,390 Richland County Hospital Facilities Revenue, Community Provider, Pooled Loan Program, Series A, FSA Insured, ETM, 7.125%, 7/01/17 ............................................. 3,000,000 3,729,690 Spartanburg Sanitation Sewer District Sewer System Revenue, Implementation, MBIA Insured, Pre-Refunded, 5.50%, 6/01/27 .............................................. 500,000 556,965 ------------- 4,519,045 ------------- SOUTH DAKOTA .9% Brookings COP, AMBAC Insured, 5.10%, 12/01/18 .............................................. 5,000,000 5,087,800 Grant County PCR, Refunding, MBIA Insured, 5.90%, 6/01/23 .................................. 4,800,000 5,040,384 Sioux Falls Medical Clinic Revenue, AMBAC Insured, 8.00%, 9/01/08 .......................... 1,625,000 1,671,620 South Dakota Lease Revenue, Series A, FSA Insured, 6.75%, 12/15/16 ......................... 2,720,000 3,355,120 South Dakota State University Revenue, Housing and Auxiliary Facilities, Refunding, Series A, MBIA Insured, 5.50%, 4/01/17 ....................................... 20,000 20,675 ------------- 15,175,599 ------------- TENNESSEE .8% Greater Tennessee Housing Assistance Revenue, Section 8, Refunding, Series A, MBIA Insured, 6.00%, 7/01/24 ............................................................ 1,370,000 1,383,892 Johnson City Health and Educational Facilities Board Hospital Revenue, Series 2000 A, MBIA Insured, Pre-Refunded, 5.125%, 7/01/25 ..................................... 2,780,000 2,794,484 Johnson City Health and Educational Revenue, Medical Center Hospital, Refunding and Improvement, MBIA Insured, ETM, 5.25%, 7/01/28 ............................ 8,500,000 8,643,395 ------------- 12,821,771 ------------- TEXAS 13.6% Austin Combined Utility System Revenue, BIG Insured, Pre-Refunded, 8.625%, 11/15/17 .......................................................... 1,000,000 1,014,040 Austin Hotel Occupancy Tax Revenue, Refunding, sub. lien, AMBAC Insured, 5.625%, 11/15/21 ........................................................................ 2,355,000 2,455,511 5.80%, 11/15/29 ......................................................................... 13,750,000 14,453,313 Austin Utility System Revenue, Refunding, FGIC Insured, 6.00%, 5/15/15 ..................... 10,000 10,015 Austin Water and Wastewater System Revenue, Refunding, Series B, FSA Insured, 5.125%, 5/15/27 ......................................................................... 11,125,000 11,054,023 5.25%, 5/15/31 .......................................................................... 5,000,000 5,017,700 Bell County Health Facilities Development Corporate Revenue, Hospital Cook Children's Medical, Refunding, FSA Insured, 5.30%, 12/01/23 ............................. 5,000,000 5,034,350 Bexar County HFC Revenue, Series A, GNMA Secured, 8.20%, 4/01/22 ........................... 1,735,000 1,735,850 Brazos River Authority Revenue, Houston Light and Power Co. Project, Refunding, Series A, AMBAC Insured, 6.70%, 3/01/17 ...................................... 2,000,000 2,044,780 Coastal Bend Health Facilities Development Corp. Revenue, Series B, AMBAC Insured, ETM, 6.30%, 1/01/17 ...................................................... 12,230,000 12,868,895 Dallas-Fort Worth International Airport Revenue, Joint Series A, FGIC Insured, 6.00%, 11/01/21 ........................................... 2,210,000 2,327,439 Refunding and Improvement, Joint Series A, FGIC Insured, 5.625%, 11/01/21 ............... 12,000,000 12,382,440 Faulkey Gully MUD, GO, AMBAC Insured, 6.625%, 3/01/07 ......................................................................... 295,000 295,699 Pre-Refunded, 6.625%, 3/01/07 ........................................................... 1,225,000 1,225,000 Fort Bend County Levee ID No. 011, GO, AMBAC Insured, 6.00%, 9/01/21 ................................................................................. 1,395,000 1,497,226 9/01/22 ................................................................................. 1,495,000 1,604,554 9/01/23 ................................................................................. 1,610,000 1,727,980 Grand Prairie Health Facilities Revenue, Dallas/Fort Worth Medical Center Project, Refunding, AMBAC Insured, 6.875%, 11/01/10 .............................................. 2,700,000 2,746,278 Harris County Health Facilities Development Corp. Revenue, Christus Health, Refunding, Series A, MBIA Insured, 5.375%, 7/01/29 ...................................... 22,000,000 22,093,500 Harris County Hospital District Mortgage Revenue, AMBAC Insured, 7.40%, 2/15/10 .......................................................................... 1,330,000 1,554,837 ETM, 7.40%, 2/15/10 ..................................................................... 1,020,000 1,177,895 Harris County Houston Sports Authority Revenue, senior lien, Series G, MBIA Insured, 5.25%, 11/15/30 ........................................................... 21,325,000 21,403,689
66 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) TEXAS (CONT.) Harris County Toll Road Revenue, senior lien, Series A, AMBAC Insured, 6.50%, 8/15/17 .................................... $ 1,580,000 $ 1,643,532 senior lien, Series B, AMBAC Insured, 6.625%, 8/15/17 ................................... 240,000 244,807 Series A, FGIC Insured, 6.50%, 8/15/11 .................................................. 35,000 36,407 Houston Airport System Revenue, sub. lien, Series B, FSA Insured, 5.50%, 7/01/30 ........... 4,700,000 4,809,839 Houston Water and Sewer System Revenue, junior lien, Refunding, Series C, MBIA Insured, 5.75%, 12/01/15 ......................... 500,000 526,200 junior lien, Series B, FGIC Insured, 5.75%, 12/01/30 .................................... 10,000,000 10,524,900 junior lien, Series C, FGIC Insured, 5.375%, 12/01/27 ................................... 6,800,000 6,900,368 Series A, MBIA Insured, 6.375%, 12/01/22 ................................................ 1,840,000 1,944,843 Series A, MBIA Insured, Pre-Refunded, 6.375%, 12/01/22 4,540,000 4,798,689 Lubbock HFC, SFMR, Mortgage Extension Program, Refunding, Series B, BIG Insured, 8.875%, 12/01/12 ........................................................... 25,000 25,018 Matagorda County Navigation District No. 1 Revenue, Houston Industries Inc. Project, Refunding, Series A, MBIA Insured, 5.25%, 11/01/29 ............................. 3,185,000 3,166,368 Series B, MBIA Insured, 5.15%, 11/01/29 ................................................. 2,750,000 2,713,865 Palo Duro River Authority GO, Refunding, FSA Insured, 6.375%, 8/01/08 ...................... 6,000,000 6,900,300 aPflugerville Revenue, Certificates Obligation, FGIC Insured, 5.20%, 8/01/32 ................ 3,000,000 2,995,290 5.25%, 8/01/27 .......................................................................... 3,320,000 3,335,704 Portland Community Center Complex Development Corp. Sales Tax Revenue, Refunding, AMBAC Insured, 5.45%, 2/15/25 ................................................ 1,450,000 1,477,927 San Antonio Water Revenue, MBIA Insured, 6.50%, 5/15/10 ............................................................ 2,740,000 2,822,173 MBIA Insured, Pre-Refunded, 6.50%, 5/15/10 .............................................. 180,000 196,485 Refunding and Improvement, MBIA Insured, 5.60%, 5/15/21 ................................. 3,250,000 3,361,248 San Marcos Waterworks and Sewer Systems Revenue, Series 1998, FSA Insured, 5.125%, 8/15/20 . 2,870,000 2,884,120 San Patricio County COP, MBIA Insured, Pre-Refunded, 6.60%, 4/01/07 ........................ 2,500,000 2,509,500 Smithville HDC, Mortgage Revenue, Smithville Retirement, Refunding, Series A, MBIA Insured, 6.40%, 1/01/22 ........................................................... 995,000 1,045,506 Southeast HDC, Mortgage Revenue, Stonegate Retirement, MBIA Insured, 6.40%, 1/01/24 ........ 1,080,000 1,134,140 Tarrant County Health Facilities Development Corp. Health Systems Revenue, Harris Methodist Health, MBIA Insured, ETM, 6.00%, 9/01/24 ............................. 3,250,000 3,681,080 Tarrant County Health Facilities Development Corp. Hospital Revenue, Fort Worth Osteopathic Hospital, MBIA Insured, 5.125%, 5/15/21 ..................................... 2,905,000 2,895,995 Texas Health Facilities Development Corp. Hospital Revenue, All Saints Episcopal Hospitals, Refunding, Series B, MBIA Insured, 6.25%, 8/15/22 .......................................................................... 2,500,000 2,690,825 6.375%, 8/15/23 ......................................................................... 4,885,000 5,266,519 Texas State Turnpike Authority Revenue, Dallas North Tollway, Refunding, AMBAC Insured, 5.00%, 1/01/20 ................................................ 7,250,000 7,232,528 Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical Center Project, Series B, FSA Insured, 5.50%, 11/01/17 .................................................. 1,000,000 1,042,390 Series C, FSA Insured, 5.60%, 11/01/27 .................................................. 1,430,000 1,468,367 Series D, FSA Insured, 5.375%, 11/01/27 ................................................. 9,700,000 9,792,247 United ISD, GO, 5.125%, 8/15/26 ............................................................ 3,000,000 2,981,280 ------------- 228,773,474 ------------- US TERRITORIES District of Columbia HFA, RMR, Series 1986-1, FGIC Insured, 7.75%, 9/01/16 ................. 450,000 453,375 ------------- UTAH .9% Intermountain Power Agency Power Supply Revenue, Refunding, Series B, MBIA Insured, 5.75%, 7/01/19 ............................................................ 3,250,000 3,461,153 Provo Electric System Revenue, Refunding, Series A, AMBAC Insured, ETM, 10.375%, 9/15/15 ... 40,000 56,642 Utah County Hospital Revenue, IHC Health Services Inc., MBIA Insured, 5.25%, 8/15/21 ................................................................................. 5,000,000 5,048,800 8/15/26 ................................................................................. 5,000,000 5,007,950 Utah State Board of Regents Student Loan Revenue, Series H, AMBAC Insured, 6.70%, 11/01/15 . 1,080,000 1,114,787 ------------- 14,689,332 ------------- VERMONT .3% Vermont HFAR, Home Mortgage Purchase, Series B, MBIA Insured, 7.60%, 12/01/24 .............. 4,760,000 4,835,445 Vermont Municipal Bond Bank Revenue, Series 2, FSA Insured, 6.25%, 12/01/19 ................ 1,000,000 1,051,680 ------------- 5,887,125 -------------
67 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) VIRGINIA .8% Chesapeake IDA, Public Facilities Lease Revenue, Chesapeake Jail Project, MBIA Insured, 6.00%, 6/01/12 ................................................. $ 5,000,000 $ 5,461,550 Danville IDA, Hospital Revenue, Danville Regional Medical Center, FGIC Insured, Pre-Refunded, 6.50%, 10/01/24 ............................................. 1,000,000 1,116,930 Spotsylvania County Water and Sewer System Revenue, MBIA Insured, 5.40%, 6/01/27 ........... 3,850,000 3,946,943 Winchester IDA, Educational Facilities Revenue, First Mortgage, Shenandoah University Project, MBIA Insured, 5.00%, 10/01/18 ......................................................................... 1,000,000 1,014,590 5.25%, 10/01/28 ......................................................................... 1,420,000 1,443,458 ------------- 12,983,471 ------------- WASHINGTON 4.6% Douglas County PUD No. 1, Electric Systems Revenue, MBIA Insured, 6.00%, 1/01/15 ........... 900,000 970,407 King County Public Hospital District No. 1 Hospital Facilities Revenue, Valley Medical Center, King County Sewer, MBIA Insured, 6.125%, 1/01/33 ....................... 3,000,000 3,222,000 Kitsap County School District No. 100-C GO, MBIA Insured, Pre-Refunded, 6.60%, 12/01/08 .... 1,015,000 1,050,028 Klickitat County PUD No. 1 Electric Revenue, FGIC Insured, 5.65%, 10/01/15 1,000,000 1,047,740 5.75%, 10/01/27 ......................................................................... 1,000,000 1,045,610 Mason County GO, School District No. 402, Pioneer, MBIA Insured, Pre-Refunded, 6.60%, 12/01/11 ........................................................... 1,040,000 1,160,942 Pierce County GO, School District No. 003 Puyallup, FGIC Insured, 5.70%, 12/01/15 .......... 1,000,000 1,063,140 Port of Longview GO, MBIA Insured, 6.00%, 11/01/15 ......................................... 2,000,000 2,155,060 Seatac Storm Water Revenue, MBIA Insured, Pre-Refunded, 6.50%, 12/01/13 .................... 2,890,000 3,177,439 Seattle Municipality Metropolitan Sewer Revenue, Series W, MBIA Insured, Pre-Refunded, 6.30%, 1/01/33 ............................................................ 11,000,000 11,651,640 Seattle Water System Revenue, FGIC Insured, 5.625%, 8/01/26 ................................ 2,000,000 2,067,720 Snohomish County PUD No. 1, Electric Revenue, Generation System, FGIC Insured, ETM, 6.65%, 1/01/16 ....................................................... 4,250,000 4,551,793 Tacoma Electric System Revenue, AMBAC Insured, Pre-Refunded, 6.25%, 1/01/11 ............................................. 30,000 32,174 Refunding, FGIC Insured, 6.25%, 1/01/15 ................................................. 6,190,000 6,757,623 Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ........................................ 3,400,000 3,494,350 Thurston and Pierce Counties Community Schools GO, Series B, AMBAC Insured, 6.65%, 12/01/09 .......................................................... 1,305,000 1,458,480 Washington State GO, Various Purpose, Series C, FSA Insured, 5.25%, 1/01/26 ................ 6,000,000 6,041,640 Washington State Health Care Facilities Authority Revenue, Providence Services, MBIA Insured, 5.50%, 12/01/26 ...................................... 5,000,000 5,089,800 Swedish Health Services, Refunding, AMBAC Insured, 5.50%, 11/15/28 ...................... 13,000,000 13,232,570 Washington State Public Power Supply System Revenue, Nuclear Project No. 1, Refunding, Series A, MBIA Insured, 6.25%, 7/01/17 ....................................... 420,000 434,259 Washington State University Revenues, Housing and Dining System, Refunding, MBIA Insured, 6.40%, 10/01/24 ........................................................... 6,130,000 6,828,268 Western Washington University Revenue, Housing and Dining System, MBIA Insured, 6.375%, 10/01/22 .......................................................... 80,000 82,832 Refunding, MBIA Insured, 6.375%, 10/01/21 ............................................... 770,000 771,640 Refunding, MBIA Insured, 6.70%, 10/01/11 ................................................ 235,000 235,538 Yakima-Tieton Irrigation District Revenue, Refunding, FSA Insured, 6.20%, 6/01/19 .......... 350,000 374,626 ------------- 77,997,319 ------------- WEST VIRGINIA 1.3% Harrison County Community Solid Waste Disposal Revenue, Potomac Edison Co., Series C, AMBAC Insured, 6.75%, 8/01/24 ................................................. 11,560,000 12,753,686 Monongalia County Building Community Hospital Revenue, Monongalia General Hospital, Refunding, Series B, MBIA Insured, 6.50%, 7/01/17 ............................. 1,000,000 1,014,100 West Virginia State GO, Series A, FGIC Insured, 5.00%, 11/01/21 ............................ 5,000,000 4,993,450 West Virginia State University Revenue, Refunding, AMBAC Insured, 6.00%, 4/01/12 ........... 2,250,000 2,388,510 West Virginia State Water Development Authority Revenue, Loan Program, Refunding, Series A, FSA Insured, 7.00%, 11/01/25 ....................................... 445,000 453,900 ------------- 21,603,646 ------------- WISCONSIN .3% Superior Limited Obligation Revenue, Midwest Energy Resources, Refunding, Series E, FGIC Insured, 6.90%, 8/01/21 .................................................. 3,000,000 3,750,060 Wisconsin State Health and Educational Facilities Authority Revenue, SSM Health Care, Refunding, Series AA, MBIA Insured, 6.25%, 6/01/20 ..................... 500,000 514,880 Wisconsin State Health and Educational Revenue, Community Provider Program, Series A, FSA Insured, 7.50%, 1/15/04 ................................................... 528,000 529,954 ------------- 4,794,894 -------------
68 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) WYOMING 1.2% Gillette Health Facilities Revenue, Lutheran Hospital and Home Society, Refunding, MBIA Insured, 5.90%, 1/01/16 ................................................. $ 500,000 $ 522,770 Natrona County Hospital Revenue, Wyoming Medical Center Projects, Refunding, AMBAC Insured, 6.00%, 9/15/24 ................................................ 9,885,000 10,587,329 Wyoming CDA, SFMR, Series A, AMBAC Insured, 6.00%, 6/01/23 .................................. 6,750,000 6,900,390 Wyoming Municipal Power Agency Power Supply System Revenue, Series A, MBIA Insured, Pre-Refunded, 6.125%, 1/01/16 ................................... 2,000,000 2,115,120 -------------- 20,125,609 -------------- TOTAL BONDS ................................................................................ 1,641,408,694 -------------- ZERO COUPON BONDS 1.3% Kentucky Economic Development Finance Authority Revenue, Norton Healthcare Inc., Series C, MBIA Insured, zero cpn to 10/01/05, 6.15% thereafter, 10/01/26, ......................... 12,195,000 10,375,018 zero cpn to 10/01/05, 6.05% thereafter, 10/01/20, MBIA Insured, ......................... 12,760,000 10,872,541 -------------- TOTAL ZERO COUPON BONDS .................................................................... 21,247,559 -------------- TOTAL LONG TERM INVESTMENTS (COST $1,577,727,192) .......................................... 1,662,656,253 -------------- b SHORT-TERM INVESTMENTS .4% MASSACHUSETTS .2% Massachusetts Health and Educational Facilities Authority Revenue, Massachusetts Institute Technology, Series J-1, Weekly VRDN and Put, .90%, 7/01/31 ...................................................................... 4,000,000 4,000,000 -------------- NEW YORK .2% New York City GO, Fiscal 1994, Series A-4, Daily VRDN and Put, 1.10.%, 8/01/21 ............................ 200,000 200,000 Series H, Sub Series H-3, Daily VRDN and Put, 1.25%, 8/01/23 ............................ 2,300,000 2,300,000 -------------- 2,500,000 -------------- US TERRITORIES Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 .... 200,000 200,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $6,700,000) .............................................. 6,700,000 -------------- TOTAL INVESTMENTS (COST $1,584,427,192) 99.2% ............................................... 1,669,356,253 -------------- OTHER ASSETS, LESS LIABILITIES .8% .......................................................... 13,449,928 -------------- NET ASSETS 100.0% ........................................................................... $1,682,806,181 ==============
See glossary of terms on page 98. aSufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. bVariable 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. See notes to financial statements. 69
FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, ------------------------------------------------------------------------------------------------------------------------------------ CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................................... $11.54 $10.75 $11.71 $11.75 $11.54 ---------------------------------------------------------- Income from investment operations: Net investment incomea .................................................. .55 .57 .58 .59 .61 Net realized and unrealized gains (losses) .............................. .11 .79 (.96) .03 .35 ---------------------------------------------------------- Total from investment operations ......................................... .66 1.36 (.38) .62 .96 ---------------------------------------------------------- Less distributions from: Net investment income ................................................... (.56) (.57) (.58) (.59) (.62) Net realized gains ...................................................... -- -- -- (.07) (.13) ---------------------------------------------------------- Total distributions ...................................................... (.56) (.57) (.58) (.66) (.75) ---------------------------------------------------------- Net asset value, end of year ............................................. $11.64 $11.54 $10.75 $11.71 $11.75 ========================================================== Total returnb ............................................................ 5.87% 12.94% (3.34)% 5.36% 8.50% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .......................................... $382,300 $327,650 $306,531 $340,109 $328,147 Ratios to average net assets: Expenses ................................................................ .69% .70% .68% .68% .68% Net investment income ................................................... 4.79% 5.12% 5.16% 4.99% 5.21% Portfolio turnover rate .................................................. 6.31% 15.69% 25.75% 6.80% 30.46% CLASS C ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................................... $11.61 $10.81 $11.76 $11.80 $11.59 ---------------------------------------------------------- Income from investment operations: Net investment incomea .................................................. .49 .51 .52 .52 .55 Net realized and unrealized gains (losses) .............................. .09 .80 (.96) .03 .34 ---------------------------------------------------------- Total from investment operations ......................................... .58 1.31 (.44) .55 .89 ---------------------------------------------------------- Less distributions from: Net investment income ................................................... (.49) (.51) (.51) (.52) (.55) Net realized gains ...................................................... -- -- -- (.07) (.13) ---------------------------------------------------------- Total distributions ...................................................... (.49) (.51) (.51) (.59) (.68) ---------------------------------------------------------- Net asset value, end of year ............................................. $11.70 $11.61 $10.81 $11.76 $11.80 ========================================================== Total returnb ............................................................ 5.16% 12.35% (3.78)% 4.74% 7.86% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .......................................... $32,354 $28,397 $27,253 $26,271 $13,937 Ratios to average net assets: Expenses ................................................................ 1.24% 1.25% 1.24% 1.24% 1.25% Net investment income ................................................... 4.24% 4.57% 4.60% 4.44% 4.59% Portfolio turnover rate .................................................. 6.31% 15.69% 25.75% 6.80% 30.46% aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year.
See notes to financial statements. 70 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 98.6% Ashburnham and Westminister Regional School District GO, MBIA Insured, 6.00%, 12/15/13 ......................................................................... $ 2,700,000 $ 2,938,734 Attleboro GO, AMBAC Insured, Pre-Refunded, 6.00%, 7/01/11 ................................................................................. 1,045,000 1,154,756 7/01/12 ................................................................................. 1,045,000 1,154,756 7/01/13 ................................................................................. 685,000 756,946 7/01/14 ................................................................................. 755,000 834,298 Blackstone-Milville School District GO, AMBAC Insured, Pre-Refunded, 6.50%, 5/01/08 ................................................................................. 705,000 724,789 5/01/09 ................................................................................. 750,000 771,053 5/01/10 ................................................................................. 795,000 817,316 Boston GO, MBIA Insured, 5.00%, 2/01/21 ............................................................ 3,000,000 3,009,150 Series A, MBIA Insured, 5.00%, 2/01/22 .................................................. 2,940,000 2,944,410 Boston Revenue, Boston City Hospital, Refunding, Series B, MBIA Insured, 5.75%, 2/15/23 .... 10,245,000 10,410,764 Chelsea GO, State Qualified, Refunding, AMBAC Insured, 5.125%, 6/15/16 ..................... 1,750,000 1,802,815 Dudley Charleston Regional School District GO, Series B, FGIC Insured, 5.25%, 5/01/19 ...... 3,140,000 3,318,792 Foxborough Stadium Infrastructure Improvement Revenue, 5.75%, 6/01/25 ...................... 4,000,000 4,231,600 Greater Lawrence Sanitary District GO, MBIA Insured, 5.625%, 6/15/20 ....................... 1,000,000 1,065,310 Holyoke Gas and Electric Department Revenue, Series A, MBIA Insured, 5.00%, 12/01/26 ....... 9,805,000 9,667,240 Holyoke GO, School Project Loans, MBIA Insured, Pre-Refunded, 8.05%, 6/15/04 ............... 1,000,000 1,048,510 Hudson GO, MBIA Insured, 6.00%, 5/15/13 ................................................................................. 250,000 272,560 5/15/14 ................................................................................. 240,000 261,658 Kingston GO, FGIC Insured, 5.50%, 11/15/19 ................................................. 2,055,000 2,158,038 Lawrence GO, AMBAC Insured, 5.00%, 2/01/21 ................................................. 1,000,000 1,002,800 Lenox GO, Refunding, AMBAC Insured, 6.60%, 10/15/11 ......................................................................... 1,000,000 1,025,150 6.625%, 10/15/15 ........................................................................ 500,000 512,590 Lowell GO, FGIC Insured, 5.85%, 2/15/20 ............................................................ 1,595,000 1,723,110 State Qualified, AMBAC Insured, 5.00%, 2/01/21 .......................................... 1,330,000 1,334,376 State Qualified, AMBAC Insured, 5.00%, 2/01/22 .......................................... 1,405,000 1,407,276 Ludlow GO, School Project, Limited Tax, MBIA Insured, 7.30%, 11/01/07 ......................................................................... 210,000 251,206 7.30%, 11/01/08 ......................................................................... 210,000 253,949 7.40%, 11/01/09 ......................................................................... 210,000 258,697 Lynn Water and Sewer Commission General Revenue, Series A, FSA Insured, 5.125%, 12/01/17 ... 3,000,000 3,062,280 Mansfield GO, Municipal Purpose Loan, FGIC Insured, 5.125%, 8/15/17 ........................ 1,685,000 1,728,439 Mashpee Water District GO, MBIA Insured, 6.40%, 10/15/12 500,000 523,575 Massachusetts Bay Transportation Authority COP, BIG Insured, 7.75%, 1/15/06 ................ 2,500,000 2,732,450 Massachusetts Bay Transportation Authority Revenue, General Transportation System, Series C, FGIC Insured, 5.25%, 3/01/15 .................................................. 2,000,000 2,158,600 Series D, MBIA Insured, 5.00%, 3/01/27 .................................................. 5,000,000 4,922,850 Massachusetts Education Loan Authority Revenue, Issue D, Series A, MBIA Insured, 7.25%, 1/01/09 .......................................................................... 1,045,000 1,058,606 Massachusetts Municipal Wholesale Electric Co. Power Supply System Revenue, Series D, MBIA Insured, 6.125%, 7/01/19 ................................................. 4,395,000 4,551,110 Massachusetts State College Building Authority Project Revenue, Series 1, MBIA Insured, 5.375%, 5/01/23 .......................................................... 5,000,000 5,117,600 Massachusetts State Development Finance Agency Revenue, Series A, GNMA Secured, 6.90%, 10/20/41 ................................................. 2,090,000 2,406,050 Western New England College, AMBAC Insured, 5.25%, 7/01/20 .............................. 1,500,000 1,539,585 Massachusetts State Health and Educational Facilities Authority Revenue, Bay State Medical Center, Refunding, Series D, FGIC Insured, 6.00%, 7/01/15 ............. 1,500,000 1,602,555 Bay State Medical Center, Series E, FSA Insured, 6.00%, 7/01/26 ......................... 1,500,000 1,625,085 Berkshire Health System, Series D, MBIA Insured, 6.00%, 10/01/19 ........................ 5,500,000 6,002,425 Beverly Hospital, Lot 1, Refunding, Series D, MBIA Insured, 7.30%, 7/01/13 .............. 1,720,000 1,727,482 Boston College, Series J, FGIC Insured, 6.625%, 7/01/21 20,000 20,470 Brandeis University, Refunding, Series I, MBIA Insured, 4.75%, 10/01/20 ................. 3,000,000 2,895,750 Cable Housing and Health Services, Series A, MBIA Insured, 5.25%, 7/01/23 ............... 1,000,000 1,002,960 Catholic Health East, Series A, AMBAC Insured, 5.00%, 11/15/28 .......................... 6,575,000 6,367,427 Children's Hospital, Refunding, Series E, AMBAC Insured, 6.20%, 10/01/16 ................ 2,200,000 2,294,864 71
FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.) PRINCIPAL FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) Massachusetts State Health and Educational Facilities Authority Revenue, (cont.) Community College Program, Series A, Connie Lee Insured, Pre-Refunded, 6.50%, 10/01/09 .. $ 1,000,000 $ 1,049,690 Cooley Dickinson Hospital, Series B, AMBAC Insured, 5.50%, 11/15/18 ..................... 3,500,000 3,599,190 Cooley Dickinson Hospital, Series B, AMBAC Insured, 5.50%, 11/15/25 ..................... 7,720,000 7,794,421 Dana-Farber Cancer Institute, Refunding, Series F, FGIC Insured, 6.00%, 12/01/15 ........ 1,000,000 1,083,330 Harvard University, Refunding, Series DD, 5.00%, 7/15/35 ................................ 7,000,000 6,887,860 Lahey Clinic Medical Center, Series B, MBIA Insured, 5.375%, 7/01/23 .................... 21,730,000 21,895,583 Massachusetts General Hospital, Refunding, Series F, AMBAC Insured, 6.00%, 7/01/15 ...... 2,500,000 2,670,925 Massachusetts General Hospital, Series F, AMBAC Insured, Pre-Refunded, 6.25%, 7/01/20 ... 7,000,000 7,553,350 McLean Hospital, Series C, FGIC Insured, Pre-Refunded, 6.625%, 7/01/15 .................. 1,280,000 1,327,514 Mt. Auburn Hospital, Series B-1, MBIA Insured, 6.30%, 8/15/24 ........................... 6,500,000 7,129,200 Newton-Wellesley Hospital, Series E, MBIA Insured, 6.00%, 7/01/18 ....................... 1,300,000 1,412,619 Newton-Wellesley Hospital, Series E, MBIA Insured, 6.00%, 7/01/25 ....................... 6,750,000 7,321,455 Northeastern University, Series E, MBIA Insured, 6.55%, 10/01/22 ........................ 3,900,000 4,080,492 Northeastern University, Series I, MBIA Insured, 5.00%, 10/01/29 ........................ 1,250,000 1,226,113 Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ..................... 5,000,000 5,052,350 Series I, MBIA Insured, 6.125%, 7/01/17 ................................................. 610,000 630,398 Simmons College, Series C, MBIA Insured, 5.125%, 10/01/28 ............................... 1,600,000 1,598,784 Springfield College, AMBAC Insured, 5.00%, 10/15/27 ..................................... 2,500,000 2,460,825 Stonehill College, MBIA Insured, 6.55%, 7/01/12 ......................................... 495,000 512,226 Stonehill College, Series E, MBIA Insured, 6.60%, 7/01/20 ............................... 1,550,000 1,604,188 Stonehill College, Series E, MBIA Insured, Pre-Refunded, 6.55%, 7/01/12 ................. 395,000 409,568 Stonehill College, Series E, MBIA Insured, Pre-Refunded, 6.60%, 7/01/20 ................. 1,450,000 1,503,708 Stonehill College, Series F, AMBAC Insured, 5.75%, 7/01/26 .............................. 1,690,000 1,759,594 Suffolk University, Series B, Connie Lee Insured, 6.35%, 7/01/22 ........................ 3,000,000 3,100,470 Tufts University, FGIC Insured, 5.95%, 8/15/18 .......................................... 4,000,000 4,151,160 Tufts University, Series I, 5.25%, 2/15/30 .............................................. 4,000,000 4,022,560 University of Massachusetts Project, Series A, FGIC Insured, 5.875%, 10/01/29 ........... 4,000,000 4,298,160 University of Massachusetts, Worcester Campus, Series B, FGIC Insured, 5.25%, 10/01/31 .. 3,500,000 3,523,415 Wellesley College, Series F, 5.125%, 7/01/39 ............................................ 7,500,000 7,382,850 Wheelock College, Series B, MBIA Insured, 5.625%, 10/01/30 .............................. 1,770,000 1,846,287 Williams College, Series F, MBIA Insured, 5.50%, 7/01/26 ................................ 2,500,000 2,569,575 Massachusetts State HFA, Housing Revenue, Rental, Series A, AMBAC Insured, 5.95%, 7/01/30 ........................ 2,000,000 2,057,840 MFHR, Section 8 Assisted, Series A, GNMA Secured, ETM, 7.00%, 4/01/21 ................... 430,000 535,956 SFHR, Series 53, MBIA Insured, 6.15%, 12/01/29 .......................................... 2,335,000 2,408,926 SFHR, Series 57, MBIA Insured, 5.55%, 6/01/25 ........................................... 4,085,000 4,138,023 SFHR, Series 59, AMBAC Insured, 5.50%, 12/01/30 ......................................... 3,985,000 4,031,983 Massachusetts State Industrial Finance Agency Assisted Living Facility Revenue, Arbors at Taunton Project, GNMA Secured, 5.50%, 6/20/40 ................................. 1,985,000 1,992,980 Massachusetts State Industrial Finance Agency Electrical Utility Revenue, Nantucket Electric Co., Series A, AMBAC Insured, 5.875%, 7/01/17 .................................. 4,000,000 4,258,400 Massachusetts State Industrial Finance Agency Revenue, Babson College, Series A, MBIA Insured, Pre-Refunded, 6.50%, 10/01/22 ................... 3,105,000 3,259,287 Combined Jewish Philanthropies, Refunding, Series A, AMBAC Insured, 6.375%, 2/01/15 ..... 2,010,000 2,178,137 Simons Rock College, AMBAC Insured, 5.50%, 6/01/27 ...................................... 1,560,000 1,601,995 St. Marks School Issue, MBIA Insured, 5.375%, 1/01/21 ................................... 2,665,000 2,714,756 Suffolk University, AMBAC Insured, 5.25%, 7/01/27 ....................................... 4,000,000 4,031,120 Trustees Deerfield Academy, 5.25%, 10/01/27 ............................................. 2,800,000 2,824,248 Western New England College, AMBAC Insured, 5.00%, 7/01/28 .............................. 4,000,000 3,930,720 WGBH Educational Foundation, Refunding, AMBAC Insured, 5.00%, 3/01/28 ................... 2,500,000 2,457,150 Worcester Polytechnic Institute, Refunding, MBIA Insured, 5.125%, 9/01/17 ............... 3,720,000 3,804,667 Worcester Polytechnic Institute, Refunding, Series II, MBIA Insured, 5.50%, 9/01/21 ..... 2,000,000 2,073,180 Worcester Polytechnic Institute, Refunding, Series II, MBIA Insured, 5.125%, 9/01/27 .... 4,000,000 4,001,200 Massachusetts State Port Authority Revenue, Series A, FSA Insured, 5.125%, 7/01/17 .................................................. 2,000,000 2,022,760 Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/19 ...................... 2,215,000 2,283,776 Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/22 ...................... 2,310,000 2,360,497 Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/29 ....................... 7,450,000 7,632,451 Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/39 ....................... 1,000,000 1,022,670
72
FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.) PRINCIPAL FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) Massachusetts State Port Authority Revenue, (cont.) US Airways Project, MBIA Insured, 6.00%, 9/01/21 ........................................ $ 4,700,000 $ 4,971,895 US Airways Project, Series A, MBIA Insured, 5.875%, 9/01/23 ............................. 4,500,000 4,665,465 Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, Series A, MBIA Insured, 5.00%, 1/01/37 .................................................. 10,000,000 9,616,900 sub. lien, Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 ........................... 10,000,000 9,831,700 sub. lien, Series B, MBIA Insured, 5.25%, 1/01/29 ....................................... 5,000,000 5,028,100 Massachusetts State Water Pollution Abatement Trust Revenue, Pool Program Bonds, Series 6, 5.50%, 8/01/30 ............................................ 3,695,000 3,823,697 Pool Program Bonds, Series 7, 5.125%, 2/01/31 ........................................... 6,000,000 5,977,260 Water Revenue Authority Program, Refunding, Sub Series A, 5.75%, 8/01/29 ................ 5,000,000 5,279,100 Massachusetts State Water Resource Authority Revenue, Refunding, Series A, FGIC Insured, 5.75%, 8/01/39 .................................................. 9,275,000 9,808,405 Series B, MBIA Insured, 5.00%, 3/01/22 .................................................. 1,500,000 1,496,235 Melrose GO, MBIA Insured, 6.00%, 8/15/11 .......................................................................... 200,000 219,004 6.05%, 8/15/12 .......................................................................... 200,000 219,488 6.10%, 8/15/13 .......................................................................... 200,000 219,322 6.10%, 8/15/14 .......................................................................... 200,000 219,322 New Bedford GO, Municipal Purpose Loan, FGIC Insured, 5.00%, 5/01/21 ....................... 3,685,000 3,697,271 Norfolk GO, AMBAC Insured, 6.00%, 1/15/10 ................................................................................. 450,000 476,420 1/15/11 ................................................................................. 425,000 449,952 1/15/12 ................................................................................. 375,000 397,016 1/15/13 300,000 317,613 Route 3 North Transportation Improvement Association Lease Revenue, MBIA Insured, 5.375%, 6/15/33 ......................................................................... 15,475,000 15,685,151 Shrewsbury GO, Municipal Purpose Loan, 5.00%, 8/15/20 ...................................... 2,075,000 2,092,949 Somerville Housing Authority Revenue, Clarendon Hill, GNMA Secured, 7.95%, 11/20/30 ........ 3,000,000 3,010,680 South Essex Sewer District GO, AMBAC Insured, 6.25%, 11/01/11 .......................................................... 330,000 337,095 Series B, MBIA Insured, Pre-Refunded, 7.00%, 6/01/24 .................................... 2,800,000 3,146,556 Southbridge GO, AMBAC Insured, 6.375%, 1/01/12 ............................................. 2,375,000 2,456,320 Springfield GO, Municipal Purpose Loan, FGIC Insured, 5.00%, 8/01/21 ............................................................ 5,000,000 5,024,500 FSA Insured, 5.00%, 11/15/18 ............................................................ 1,500,000 1,516,755 Springfield Water and Sewer Commission Revenue, Series A, AMBAC Insured, 5.00%, 11/01/21 ... 2,775,000 2,774,806 Wakefield GO, FGIC Insured, 5.00%, 2/01/21 ................................................. 1,070,000 1,073,520 Whately GO, AMBAC Insured, 6.20%, 1/15/07 .......................................................................... 215,000 222,597 6.30%, 1/15/08 .......................................................................... 215,000 222,675 6.40%, 1/15/10 .......................................................................... 200,000 207,209 Whitman Hanson Regional School District GO, Refunding, FGIC Insured, 5.00%, 6/15/21 ........ 1,960,000 1,966,095 Winthrop GO, AMBAC Insured, 5.00%, 11/01/20 ................................................ 1,230,000 1,237,477 Worcester GO, Refunding, Series E, MBIA Insured, 6.00%, 10/01/15 ........................... 1,335,000 1,464,495 ------------ TOTAL LONG TERM INVESTMENTS (COST $389,234,869) 408,686,439 ------------
73 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------------------- aSHORT TERM INVESTMENTS 1.1% Massachusetts State Health and Educational Facilities Authority Revenue, Capital Assets Program, Series D, MBIA Insured, Daily VRDN and Put, 1.30%, 1/01/35 .............................. $ 300,000 $ 300,000 Series E, Daily VRDN and Put, 1.35%, 1/01/35 ............................................ 100,000 100,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, ................... 3,300,000 3,300,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ................... 900,000 900,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $4,600,000) ............................................. 4,600,000 ------------ TOTAL INVESTMENTS (COST $393,834,869) 99.7% ................................................ 413,286,439 OTHER ASSETS, LESS LIABILITIES .3% ......................................................... 1,367,138 ------------ NET ASSETS 100.0% .......................................................................... $414,653,577 ============ See glossary of terms on page 98. aVariable 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. See notes to financial statements.
74 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, ---------------------------------------------------------- CLASS A 2002 2001 2000C 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................................... $12.08 $11.37 $12.28 $12.20 $12.00 ---------------------------------------------------------- Income from investment operations: Net investment incomea .................................................. .58 .60 .60 .61 .63 Net realized and unrealized gains (losses) .............................. .18 .70 (.91) .13 .34 ---------------------------------------------------------- Total from investment operations ......................................... .76 1.30 (.31) .74 .97 ---------------------------------------------------------- Less distributions from: Net investment income ................................................... (.59) (.59) (.60) (.61) (.64) Net realized gains ...................................................... -- -- --d (.05) (.13) ---------------------------------------------------------- Total distributions ...................................................... (.59) (.59) (.60) (.66) (.77) ---------------------------------------------------------- Net asset value, end of year ............................................. $12.25 $12.08 $11.37 $12.28 $12.20 ========================================================== Total returnb ............................................................ 6.44% 11.74% (2.57)% 6.23% 8.37% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..........................................$1,185,152 $1,084,743 $1,057,787 $1,161,345 $1,142,565 Ratios to average net assets: Expenses ................................................................ .64% .64% .63% .63% .63% Net investment income ................................................... 4.81% 5.10% 5.10% 4.98% 5.24% Portfolio turnover rate .................................................. 8.86% 10.34% 13.73% 7.37% 20.08% CLASS B ---------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................................... $12.12 $11.38 $11.31 --------------------------------- Income from investment operations: Net investment incomea .................................................. .52 .54 .05 Net realized and unrealized gains .17 .73 .07 -------------------------------- Total from investment operations ......................................... .69 1.27 .12 -------------------------------- Less distributions from net investment income ............................ (.52) (.53) (.05) -------------------------------- Net asset value, end of year ............................................. $12.29 $12.12 $11.38 ================================ Total returnb ............................................................ 5.81% 11.28% 1.11% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .......................................... $30,225 $7,818 $228 Ratio to average net assets: Expenses ................................................................ 1.19% 1.20% 1.19%e Net investment income ................................................... 4.25% 4.52% 4.88%e Portfolio turnover rate .................................................. 8.86% 10.34% 13.73% aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. cFor the period February 1, 2000 (effective date) to February 29, 2000 for Class B. dThe fund made a capital gain distribution of $.0003. eAnnualized
75 FRANKLIN TAX-FREE TRUST Financial Highlights (continued) FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND (CONT.)
YEAR ENDED FEBRUARY 28, --------------------------------------------------------- CLASS C 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $12.17 $11.45 $12.36 $12.27 $12.07 --------------------------------------------------------- Income from investment operations: Net investment incomea .................................................. .52 .54 .54 .55 .57 Net realized and unrealized gains (losses) .............................. .17 .71 (.92) .13 .33 --------------------------------------------------------- Total from investment operations ......................................... .69 1.25 (.38) .68 .90 --------------------------------------------------------- Less distributions from: Net investment income ................................................... (.52) (.53) (.53) (.54) (.57) Net realized gains ...................................................... -- -- --c (.05) (.13) ---------------------------------------------------------- Total distributions ...................................................... (.52) (.53) (.53) (.59) (.70) --------------------------------------------------------- Net asset value, end of year ............................................. $12.34 $12.17 $11.45 $12.36 $12.27 ========================================================== Total returnb ............................................................ 5.80% 11.14% (3.11)% 5.71% 7.70% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .......................................... $77,514 $53,620 $49,038 $49,970 $32,873 Ratios to average net assets: Expenses ................................................................ 1.19% 1.20% 1.19% 1.19% 1.20% Net investment income ................................................... 4.26% 4.54% 4.54% 4.42% 4.67% Portfolio turnover rate .................................................. 8.86% 10.34% 13.73% 7.37% 20.08% aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. cThe fund made a capital gain distribution of $.0003.
See notes to financial statements. 76 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.) OSC (attached)
PRINCIPAL FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.3% Allegan Public School GO, AMBAC Insured, Pre-Refunded, 5.75%, 5/01/22 ....................... $ 4,165,000 $ 4,642,850 Allendale Public School District GO, MBIA Insured, 5.875%, 5/01/14 ......................................................................... 1,335,000 1,418,905 Pre-Refunded, 6.00%, 5/01/24 ............................................................ 3,750,000 4,086,525 Almont Community Schools GO, FGIC Insured, 5.50% 5/01/26 .................................... 1,925,000 1,959,862 Alpena Public Schools GO, MBIA Insured, Pre-Refunded, 5.625%, 5/01/22 ....................... 1,665,000 1,846,235 Anchor Bay School District GO, MBIA Insured, Pre-Refunded, 5.50%, 5/01/26 .............................................. 7,380,000 8,139,919 School Building and Site, Series I, FGIC Insured, 6.00%, 5/01/29 ........................ 2,000,000 2,282,700 School Building and Site, Series II, FGIC Insured, 5.70%, 5/01/25 ....................... 5,000,000 5,634,450 School Building and Site, Series II, FGIC Insured, 5.75%, 5/01/30 ....................... 3,750,000 4,238,850 Avondale School District GO, AMBAC Insured, Pre-Refunded, 5.75%, 5/01/22..................... 4,000,000 4,458,920 Bath Community Schools GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/25 ....................... 1,625,000 1,797,851 Battle Creek Downtown Development Authority Tax Allocation, Refunding, MBIA Insured, 5.125%, 5/01/20 ............................................................... 4,500,000 4,533,930 Berkley City School District GO, FGIC Insured, Pre-Refunded, 6.00%, 1/01/19 ................. 2,125,000 2,335,758 Brandon School District GO, FGIC Insured, Pre-Refunded, 5.875%, 5/01/16 ................................................................................. 5,540,000 6,208,955 5/01/26 ................................................................................. 7,000,000 7,845,250 Breitung Township School District GO, Refunding, MBIA Insured, 6.30%, 5/01/15 .............. 2,935,000 3,016,388 Brown City Community School District GO, Building and Site, FGIC Insured, 5.00%, 5/01/26 ................................................................................. 4,445,000 4,365,212 5/01/31 ................................................................................. 3,200,000 3,137,216 Byron Center Public Schools GO, Refunding, MBIA Insured, 5.875%, 5/01/24 ................... 135,000 141,689 Caledonia Community Schools, MBIA Insured, Pre-Refunded, 5.85%, 5/01/22 .............................................. 4,500,000 5,037,435 Refunding, AMBAC Insured, 6.625%, 5/01/14 ............................................... 3,750,000 3,852,188 Calumet, Laurium and Keweenah Public Schools GO, FSA Insured, Pre-Refunded, 5.875%, 5/01/20 .............................................................. 875,000 955,413 Cedar Springs Public School District GO, MBIA Insured, Pre-Refunded, 5.875%, 5/01/19 ................................................................................. 2,425,000 2,647,858 5/01/24 ................................................................................. 3,875,000 4,226,773 Central Michigan University Revenue, FGIC Insured, 5.00%, 10/01/27 ......................................................................... 500,000 492,880 Pre-Refunded, 5.625%, 10/01/22 .......................................................... 2,500,000 2,783,100 Central Montcalm Public School GO, MBIA Insured, 6.00%, 5/01/29 ............................ 1,400,000 1,507,646 Charles Stewart Mott Community College GO, FGIC Insured, 5.50%, 5/01/21 .................... 3,550,000 3,689,125 Charlotte Public School District GO, FGIC Insured, 5.375%, 5/01/29 ......................... 5,000,000 5,084,200 Chelsea School District GO, FGIC Insured, Pre-Refunded, 5.875%, 5/01/25 .................... 3,140,000 3,471,364 Coldwater Community Schools GO, MBIA Insured, Pre-Refunded, 6.20%, 5/01/15 .......................................................................... 1,100,000 1,213,828 6.30%, 5/01/23 .......................................................................... 1,700,000 1,879,469 De Witt Public Schools GO, AMBAC Insured, Pre-Refunded, 5.70%, 5/01/21 .......................................................................... 6,905,000 7,680,984 5.50%, 5/01/26 .......................................................................... 5,500,000 6,066,335 Dearborn EDC Hospital Revenue, Oakwood Obligation Group, Refunding, Series A, MBIA Insured, 5.25%, 8/15/21 ....................................... 1,000,000 1,009,030 Series A, FGIC Insured, 5.75%, 11/15/15 ................................................. 100,000 106,465 Detroit City School District GO, Series A, AMBAC Insured, Pre-Refunded, 5.70%, 5/01/25 ............................................. 14,000,000 15,719,200 FSA Insured, 5.125%, 5/01/31 ............................................................ 16,280,000 16,217,810 Detroit Public Improvements GO, Series A-1, MBIA Insured, 5.00%, 4/01/20 ................... 10,610,000 10,584,536 Detroit Sewage Disposal Revenue, Refunding, Series B, MBIA Insured, 5.25%, 7/01/21 ....................................... 12,585,000 12,717,772 Series A, MBIA Insured, 5.50%, 7/01/20 .................................................. 215,000 222,523 Series A, MBIA Insured, 5.00%, 7/01/27 .................................................. 22,000,000 21,656,800 Detroit Water Supply System Revenue, Refunding, FGIC Insured, ETM, 6.25%, 7/01/12 ............................................ 5,000,000 5,169,900 second lien, Series B, FGIC Insured, 5.50%, 7/01/33 ..................................... 20,000,000 20,749,800 senior lien, Series A, FGIC Insured, 5.00%, 7/01/30 ..................................... 11,400,000 11,145,780 senior lien, Series A, FGIC Insured, 5.25%, 7/01/33 ..................................... 9,625,000 9,659,458
77 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Detroit Water Supply System Revenue, (cont.) senior lien, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/01/29 ...................... $ 1,500,000 $ 1,712,340 Series A, MBIA Insured, 5.00%, 7/01/27 .................................................. 5,750,000 5,644,258 Detroit/Wayne County Stadium Authority Revenue, FGIC Insured, 5.25%, 2/01/27 ............... 5,500,000 5,515,510 Dexter Community Schools GO, Refunding, AMBAC Insured, 5.70%, 5/01/14 ...................... 1,050,000 1,109,777 East Detroit School District GO, FGIC Insured, 6.10%, 5/01/16 .......................................................................... 1,025,000 1,114,472 Pre-Refunded, 6.10%, 5/01/16 ............................................................ 4,975,000 5,619,163 East Grand Rapids Public School District GO, FSA Insured, 6.00%, 5/01/29 ................... 4,775,000 5,449,946 Eastern Michigan University Revenue, FGIC Insured, 5.50%, 6/01/27 ............................................................ 9,100,000 10,180,898 Refunding, AMBAC Insured, 6.375%, 6/01/14 ............................................... 1,000,000 1,020,600 Ecorse Public School District GO, FGIC Insured, 5.50%, 5/01/17 ............................. 5,000,000 5,234,150 Farmington Hills EDC Revenue, Botsford Continuing Care, Series A, MBIA Insured, 5.75%, 2/15/25 ............................................................ 100,000 103,778 Ferndale School District GO, FGIC Insured, 5.50%, 5/01/22 ............................................................ 3,000,000 3,308,910 Refunding, FGIC Insured, 5.375%, 5/01/21 ................................................ 3,500,000 3,552,395 Ferris State College Revenue, AMBAC Insured, Pre-Refunded, 6.15%, 10/01/14 ......................................................................... 1,000,000 1,086,560 6.25%, 10/01/19 ......................................................................... 1,000,000 1,088,110 Ferris State University Revenue, AMBAC Insured, Pre-Refunded, 5.75%, 10/01/17 ............................................ 2,500,000 2,803,775 AMBAC Insured, Pre-Refunded, 5.85%, 10/01/22 ............................................ 2,500,000 2,815,350 AMBAC Insured, Pre-Refunded, 5.90%, 10/01/26 ............................................ 6,840,000 7,718,666 FGIC Insured, 5.25%, 10/01/26 ........................................................... 1,500,000 1,509,615 FGIC Insured, 5.25%, 10/01/31 ........................................................... 3,255,000 3,273,521 Fowlerville Community School District GO, MBIA Insured, Pre-Refunded, 5.60%, 5/01/21 ............................................................ 2,000,000 2,215,340 Gladstone Area Public Schools GO, AMBAC Insured, 5.50%, 5/01/26 .......................................................................... 695,000 710,255 Pre-Refunded, 5.50%, 5/01/26 ............................................................ 805,000 887,891 Gogebic-Iron Wastewater Authority Wastewater Treatment System Revenue, Refunding, MBIA Insured, 5.95%, 1/01/15 ................................................. 1,015,000 1,104,878 Grand Haven Area Public Schools GO, MBIA Insured, Pre-Refunded, 6.05%, 5/01/14 .............................................. 4,540,000 4,856,710 Refunding, MBIA Insured, 6.05%, 5/01/14 ................................................. 460,000 490,043 Grand Ledge Public School District GO, MBIA Insured, Pre-Refunded, 6.60%, 5/01/24 ............................................................ 10,000,000 11,118,500 Grand Rapids Building Authority GO, AMBAC Insured, 5.50%, 8/01/20 .......................... 2,000,000 2,083,160 Grand Rapids Downtown Development Authority Tax Increment Revenue, MBIA Insured, 6.875%, 6/01/24 ........................................................... 7,500,000 8,309,700 Grand Traverse County Hospital Revenue, Munson Healthcare, Series A, AMBAC Insured, 6.25%, 7/01/12 .......................................................................... 815,000 842,034 6.25%, 7/01/22 .......................................................................... 2,395,000 2,474,442 Pre-Refunded, 6.25%, 7/01/12 ............................................................ 1,685,000 1,745,407 Pre-Refunded, 6.25%, 7/01/22 ............................................................ 5,505,000 5,702,354 Grosse-Ile Township School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 ......... 5,250,000 5,914,073 Hamilton Community School District GO, Refunding, FGIC Insured, 5.00%, 5/01/24 ............. 2,000,000 1,983,980 Hancock Hospital Finance Authority Revenue, Portage Health, MBIA Insured, 5.45%, 8/01/47 ... 4,400,000 4,451,876 Harrison Community Schools GO, AMBAC Insured, Pre-Refunded, 6.25%, 5/01/13 ................. 4,715,000 5,207,812 Hartland Consolidated School District GO, FGIC Insured, 6.00%, 5/01/29 ..................... 30,000,000 34,431,000 Haslett Public School District GO, MBIA Insured, Pre-Refunded, 5.70%, 5/01/26 .............................................. 3,900,000 4,338,282 Refunding, FSA Insured, 6.625%, 5/01/19 ................................................. 3,875,000 3,980,594 Holland School District GO, Refunding, AMBAC Insured, 6.375%, 5/01/10 ...................... 2,000,000 2,053,740 Hopkins Public Schools GO, FGIC Insured, Pre-Refunded, 5.70%, 5/01/21 .......................................................................... 2,025,000 2,252,570 5.70%, 5/01/21 .......................................................................... 1,975,000 2,196,951 5.50%, 5/01/26 .......................................................................... 505,000 557,000 5.50%, 5/01/26 .......................................................................... 495,000 545,970 Houghton-Portage Township School District GO, Refunding, AMBAC Insured, 6.00%, 5/01/14 ..... 2,000,000 2,052,580
78 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Howell Public Schools GO, MBIA Insured, 5.875%, 5/01/22 ......................................................................... $ 2,000,000 $ 2,267,140 6.00%, 5/01/25 .......................................................................... 1,600,000 1,802,384 Hudsonville Public Schools GO, Series B, FGIC Insured, Pre-Refunded, 6.05%, 5/01/19 .......................................................................... 2,000,000 2,200,680 6.10%, 5/01/24 .......................................................................... 2,000,000 2,202,760 Huron Michigan School District GO, FSA Insured, 5.25%, 5/01/21 .......................................................................... 1,500,000 1,523,865 5.375%, 5/01/26 ......................................................................... 2,500,000 2,547,775 Huron Valley School District GO, FGIC Insured, Pre-Refunded, 5.875%, 5/01/16 ............................................. 100,000 112,061 FGIC Insured, Pre-Refunded, 5.75%, 5/01/22 .............................................. 2,450,000 2,731,089 Refunding, FGIC Insured, 6.125%, 5/01/20 ................................................ 11,535,000 12,298,156 Jenison Public Schools GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/16 ...................... 130,000 145,067 Kalamazoo City School District GO, Building and Site, FSA Insured, 5.00%, 5/01/21 .......... 4,000,000 3,989,960 Kalamazoo Hospital Finance Authority Hospital Facility Revenue, Borgess Medical Center, Series A, AMBAC Insured, ETM, 5.625%, 6/01/14 ................... 3,805,000 4,121,957 Bronson Methodist Hospital, Refunding, MBIA Insured, 5.25%, 5/15/18 ..................... 250,000 254,983 Bronson Methodist Hospital, Refunding, MBIA Insured, 5.50%, 5/15/28 ..................... 10,000,000 10,237,500 Bronson Methodist Hospital, Refunding and Improvement, MBIA Insured, 5.875%, 5/15/26 .... 26,165,000 27,638,613 Bronson Methodist Hospital, Refunding and Improvement, Series A, MBIA Insured, Pre-Refunded, 6.25%, 5/15/12 .......................................... 5,000,000 5,368,850 Bronson Methodist Hospital, Refunding and Improvement, Series A, MBIA Insured, Pre-Refunded, 6.375%, 5/15/17 ......................................... 2,460,000 2,645,090 Kelloggsville Public School District GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/13 ........ 1,000,000 1,061,430 Kenowa Hills Public Schools GO, MBIA Insured, 5.875%, 5/01/21 ................................................................................. 1,510,000 1,583,129 5/01/26 ................................................................................. 7,000,000 7,328,230 Kent County Building Authority GO, 5.00%, 6/01/26 .......................................... 21,885,000 21,610,781 Lake Orion Community School District GO, Refunding, AMBAC Insured, 5.50%, 5/01/20 .......... 2,200,000 2,229,128 Lake Shore Public Schools GO, Macomb County, FSA Insured, 5.50%, 5/01/20 ................... 2,000,000 2,054,860 Lake St. Clair Shores Drain District GO, Series A, MBIA Insured, 5.125%, 10/01/29 .......... 1,000,000 1,000,300 Lake Superior State University Revenue, AMBAC Insured, Pre-Refunded, 6.375%, 11/15/15 ........................................... 1,500,000 1,691,190 Refunding, AMBAC Insured, 5.25%, 11/15/31 ............................................... 2,000,000 2,011,920 Lakeview Community Schools GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/16 .................. 100,000 111,473 Lakewood Public Schools GO, MBIA Insured, 5.375%, 5/01/20 ......................................................................... 2,000,000 2,185,020 5.75%, 5/01/22 .......................................................................... 800,000 885,648 Lansing Building Authority Revenue, Refunding, MBIA Insured, 5.60%, 6/01/19 ................ 1,470,000 1,524,993 Lenawee County Hospital Finance Authority Hospital Revenue, Lenawee Health Alliance, Refunding, Series A, AMBAC Insured, 5.20%, 7/01/19 .......................................................................... 2,115,000 2,141,332 Leslie Public Schools GO, Ingham and Jackson Counties, AMBAC Insured, Pre-Refunded, 6.00%, 5/01/25 ............................................................ 3,500,000 3,882,515 Lincoln Consolidated School District GO, FSA Insured, 5.00%, 5/01/28 ............................................................. 1,000,000 987,000 Pre-Refunded, FGIC Insured, 5.85%, 5/01/21 .............................................. 130,000 142,500 Refunding, FGIC Insured, 5.85%, 5/01/21 ................................................. 10,000 10,606 Lincoln Park School District GO, FGIC Insured, Pre-Refunded, 5.85%, 5/01/15 .............................................. 2,885,000 3,230,565 FGIC Insured, Pre-Refunded, 5.90%, 5/01/26 .............................................. 6,050,000 6,786,406 Refunding, FGIC Insured, 5.00%, 5/01/26 ................................................. 400,000 395,000 Livonia Municipal Building Authority GO, FGIC Insured, 5.25%, 5/01/30 ...................... 3,950,000 3,978,361 Lowell Area Schools GO, FGIC Insured, 5.625%, 5/01/25 ................................................................................. 3,125,000 3,277,719 5/01/30 ................................................................................. 3,250,000 3,395,503 Marquette City Hospital Finance Authority Revenue, Marquette General Hospital, Refunding, Series D, FSA Insured, 5.875%, 4/01/11 ......................................................................... 4,525,000 4,910,666 6.10%, 4/01/19 .......................................................................... 5,225,000 5,674,925 Menominee Area Public School District GO, Refunding, AMBAC Insured, 6.00%, 5/01/20 ......... 2,675,000 2,848,180 Merrill Community School District GO, FGIC Insured, Pre-Refunded, 5.60%, 5/01/26 ........... 4,000,000 4,430,680
79 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Michigan Higher Education Student Loan Authority Revenue, Series XVII-E, AMBAC Insured, 5.40%, 6/01/19 .......................................................................... $ 5,000,000 $ 5,079,300 5.50%, 6/01/25 .......................................................................... 5,000,000 5,065,600 Michigan Municipal Bond Authority Revenue, Local Government Loan Program, Series C, MBIA Insured, 6.00%, 11/01/10 .................. 3,790,000 4,148,686 Series B, AMBAC Insured, 6.75%, 11/01/14 ................................................ 1,010,000 1,130,685 Series B, AMBAC Insured, 6.80%, 11/01/14 ................................................ 1,135,000 1,272,063 Series B, AMBAC Insured, 6.80%, 11/01/23 ................................................ 280,000 314,045 Series G, AMBAC Insured, Pre-Refunded, 6.75%, 11/01/14 .................................. 5,480,000 6,222,978 Series G, AMBAC Insured, Pre-Refunded, 6.80%, 11/01/14 .................................. 515,000 585,483 Series G, AMBAC Insured, Pre-Refunded, 6.80%, 11/01/23 .................................. 545,000 619,589 Michigan State Building Authority Revenue, Facilities Program, Refunding, Series I, FSA Insured, 4.75%, 10/15/18 ......................................................................... 3,000,000 2,952,450 5.00%, 10/15/24 ......................................................................... 5,000,000 4,959,600 Michigan State COP, AMBAC Insured, 5.50%, 6/01/27 .......................................... 12,000,000 12,391,920 Michigan State HDA, Rental Housing Revenue, Series A, AMBAC Insured, 6.00%, 4/01/16 ......................... 200,000 213,930 SFMR, Refunding, Series B, FHA Insured, 6.20%, 6/01/27 .................................. 25,000 25,738 SFMR, Refunding, Series E, FHA Insured, 6.20%, 12/01/27 ................................. 195,000 201,141 SFMR, Series A, AMBAC Insured, 5.95%, 6/01/17 ........................................... 2,500,000 2,594,875 SFMR, Series D, FHA Insured, 5.95%, 12/01/16 ............................................ 250,000 263,863 Michigan State Hospital Finance Authority Revenue, Ascension Health Credit, Refunding, Series A, MBIA Insured, 6.125%, 11/15/23 ............ 15,175,000 16,145,441 Crittenton Hospital, Series A, FGIC Insured, 6.75%, 3/01/20 ............................. 1,705,000 1,708,990 Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured, 5.50%, 8/15/24 ...................................................................... 15,000,000 15,367,350 Detroit Medical Center Obligation Group, Refunding, Series A, AMBAC Insured, 5.25%, 8/15/27 ...................................................................... 10,000,000 10,005,800 Mercy Health Services, Refunding, Series T, MBIA Insured, 5.75%, 8/15/15 ................ 10,525,000 11,289,010 Mercy Health Services, Refunding, Series X, MBIA Insured, 6.00%, 8/15/34 ................ 11,000,000 11,809,270 Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.375%, 8/15/26 .................... 6,000,000 6,280,620 Mercy Health Services, Series R, AMBAC Insured, ETM, 5.375%, 8/15/26 .................... 1,750,000 1,831,848 Mercy Health Services, Series U, ETM, 5.75%, 8/15/26 .................................... 300,000 320,574 Mercy Health Services, Series W, FSA Insured, ETM, 5.25%, 8/15/27 ....................... 8,605,000 8,806,873 Mercy Mount Clemens Corp., Refunding, Series A, MBIA Insured, 5.75%, 5/15/29 ............ 4,890,000 5,140,417 Mid-Michigan Obligation Group, Refunding, Series A, FSA Insured, 5.375%, 6/01/27 ........ 7,500,000 7,586,850 Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ............. 7,500,000 7,434,075 Sparrow Obligation Group, MBIA Insured, 5.90%, 11/15/26 ................................. 100,000 106,124 St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.00%, 5/15/13 ............ 3,445,000 3,648,944 St. John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 6.25%, 5/15/14 ............ 9,545,000 10,015,569 St.John's Hospital, Refunding, Series A, AMBAC Insured, ETM, 5.125%, 5/15/17 ............ 14,500,000 14,993,870 Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co. Pollution Project, Refunding, Series AA, FGIC Insured, 6.95%, 5/01/11 ................................................. 5,000,000 6,061,250 Series BB, AMBAC Insured, 7.00%, 5/01/21 ................................................ 3,000,000 3,759,510 Series BB, MBIA Insured, 6.05%, 10/01/23 ................................................ 1,285,000 1,389,625 Series BB, MBIA Insured, 6.20%, 8/15/25 ................................................. 10,250,000 11,276,538 Series CC, MBIA Insured, 6.05%, 10/01/23 ................................................ 5,825,000 6,299,272 Michigan State Trunk Line, Revenue, Refunding, Series A, MBIA Insured, 4.75%, 11/01/20 ...................................... 3,300,000 3,177,207 Refunding, Series A, MBIA Insured, 5.00%, 11/01/26 ...................................... 3,050,000 3,011,479 Refunding, Series B, AMBAC Insured, 5.50%, 10/01/21 ..................................... 1,400,000 1,426,348 Series A, FGIC Insured, 5.50%, 10/01/21 ................................................. 375,000 382,058 Series A, FGIC Insured, Pre-Refunded, 5.625%, 11/01/20 .................................. 2,765,000 3,103,408 Series A, FGIC Insured, Pre-Refunded, 5.625%, 11/01/26 .................................. 8,990,000 10,090,286 Series A, FSA Insured, 5.00%, 11/01/25 .................................................. 15,000,000 14,814,600 Series A, FSA Insured, 5.25%, 11/01/30 .................................................. 29,000,000 29,238,380 Series B-2, MBIA Insured, 5.50%, 10/01/21 ............................................... 1,160,000 1,183,838 Milan Michigan Area Schools GO, Series A, FGIC Insured, 5.75%, 5/01/24 ..................... 3,500,000 3,719,555
80 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Monroe County PCR, Detroit Edison Co., Series 1, MBIA Insured, 6.875%, 9/01/22 ................................................. $ 4,000,000 $ 4,173,200 Series 1-B, MBIA Insured, 6.55%, 9/01/24 ................................................ 4,000,000 4,326,600 Series CC, MBIA Insured, 6.55%, 6/01/24 ................................................. 1,150,000 1,232,110 Muskegon Public Schools GO, Series 95, FGIC Insured, 5.25%, 5/01/18 ................................................................................. 1,900,000 1,937,468 5/01/21 ................................................................................. 2,000,000 2,028,140 Northview Public Schools District GO, MBIA Insured, 5.80%, 5/01/21 ............................................................ 235,000 247,213 MBIA Insured, Pre-Refunded, 5.80%, 5/01/21 .............................................. 4,265,000 4,767,588 Refunding, FGIC Insured, 5.00%, 5/01/21 ................................................. 3,450,000 3,451,587 Novi Community School District GO, Building and Site, FGIC Insured, 5.30%, 5/01/21 ......................................... 1,960,000 1,994,182 FGIC Insured, Pre-Refunded, 6.125%, 5/01/18 ............................................. 4,750,000 5,085,398 Oakland, Washtenaw, etc. Counties Community College District Revenue, AMBAC Insured, 6.65%, 5/01/11 ........................................................... 3,500,000 3,598,665 Oakridge Public Schools GO, FSA Insured, 5.00%, 5/01/23 .......................................................................... 500,000 498,025 5.125%, 5/01/28 ......................................................................... 500,000 500,880 Plymouth-Canton Community School District GO, Refunding, AMBAC Insured, 5.50%, 5/01/13 ................................................ 4,000,000 4,230,520 Series C, FGIC Insured, Pre-Refunded, 6.50%, 5/01/16 .................................... 3,500,000 3,598,140 Series C, MBIA Insured, Pre-Refunded, 6.50%, 5/01/16 .................................... 3,000,000 3,084,120 Port Huron School District GO, Refunding, AMBAC Insured, 6.00%, 5/01/12 .................... 4,500,000 4,617,585 Portage Lake Water and Sewer Authority GO, Refunding, AMBAC Insured, 6.10%, 10/01/14 ......................................................................... 770,000 846,430 6.20%, 10/01/20 ......................................................................... 670,000 740,156 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured, Pre-Refunded, 9.00%, 7/01/09 ............................................................ 2,310,000 2,690,873 Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series B, MBIA Insured, 5.875%, 7/01/35 ........................................................... 25,000,000 27,516,750 Puerto Rico Electric Power Authority Revenue, Refunding, Series U, FSA Insured, 6.00%, 7/01/14 ............................................................. 3,400,000 3,720,314 Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ................. 8,700,000 8,924,460 Redford USD, GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 ................................ 14,090,000 15,859,704 Rockford Public Schools GO, Refunding, AMBAC Insured, 5.875%, 5/01/19 .......................................................... 3,900,000 4,005,573 FGIC Insured, 5.25%, 5/01/22 ............................................................ 1,250,000 1,263,400 FGIC Insured, 5.25%, 5/01/27 ............................................................ 3,000,000 3,011,880 FSA Insured, 5.875%, 5/01/19 ............................................................ 3,150,000 3,235,271 MBIA Insured, 5.875%, 5/01/12 ........................................................... 1,850,000 1,900,080 MBIA Insured, 5.875%, 5/01/19 ........................................................... 1,925,000 1,977,110 Romulus Community Schools GO, Refunding, FGIC Insured, 5.75%, 5/01/13 ................................................................................. 690,000 729,668 5/01/17 ................................................................................. 1,200,000 1,263,312 5/01/22 ................................................................................. 5,435,000 5,699,358 Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M, MBIA Insured, 5.25%, 11/15/31 ........................................................... 6,500,000 6,499,480 Saginaw Hospital Finance Authority Revenue, Covenant Medical Center, Refunding, Series E, MBIA Insured, 5.375%, 7/01/19 ............. 4,850,000 4,975,518 Covenant Medical Center, Refunding, Series E, MBIA Insured, 5.50%, 7/01/24 .............. 1,750,000 1,796,848 St. Luke's Hospital Project, Refunding, Series C, MBIA Insured, 6.875%, 7/01/14 ......... 5,325,000 5,448,540 St. Luke's Hospital Project, Refunding, Series C, MBIA Insured, 6.75%, 7/01/17 .......... 2,000,000 2,046,200 St. Luke's Hospital Project, Refunding, Series C, MBIA Inusred, 6.00%, 7/01/21 .......... 3,875,000 3,885,075 Saginaw Valley State University Revenue, AMBAC Insured, 5.25%, 7/01/19 ..................... 2,540,000 2,603,475 Schoolcraft Community School District GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/21 .......................................................................... 2,525,000 2,814,693 5.75%, 5/01/21 .......................................................................... 1,050,000 1,170,467 5.375%, 5/01/26 ......................................................................... 295,000 323,642 5.375%, 5/01/26 ......................................................................... 705,000 773,448 South Macomb Disposal Authority Revenue, AMBAC Insured, 5.25%, 9/01/20 ..................... 2,000,000 2,037,000 South Redford School District GO, FGIC Insured, 5.50%, 5/01/22 ............................. 3,155,000 3,237,219
81 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) St. Clair County Building Authority GO, MBIA Insured, 5.25%, 4/01/18 ................................................................................. $ 2,065,000 $ 2,111,194 4/01/21 ................................................................................. 2,400,000 2,434,752 St. Clair County EDC, PCR, Detroit Edison Co., Refunding, Series AA, AMBAC Insured, 6.40%, 8/01/24 ................................................ 10,000,000 11,131,900 Series DD, AMBAC Insured, 6.05%, 8/01/24 ................................................ 7,745,000 8,028,699 Sturgis Public School District, MBIA Insured, Pre-Refunded, 6.10%, 5/01/18 ................. 1,000,000 1,065,420 Taylor Tax Increment Finance Authority Revenue, FSA Insured, 5.00%, 5/01/21 ................ 2,595,000 2,579,015 Tecumseh Public Schools GO, FGIC Insured, 5.50%, 5/01/25 ................................................................................. 5,925,000 6,125,028 5/01/30 ................................................................................. 4,500,000 4,636,710 Three Rivers Community Schools GO, Building and Site, MBIA Insured, Pre-Refunded, 6.00%, 5/01/23 ............................................................ 2,400,000 2,701,440 Vicksburg Community Schools GO, Refunding, MBIA Insured, 5.625%, 5/01/12 ................................................................................. 2,175,000 2,287,665 5/01/20 ................................................................................. 1,000,000 1,029,920 Walled Lake Consolidated School District GO, Refunding, MBIA Insured, 5.50%, 5/01/22 ....... 3,000,000 3,308,910 Warren Consolidated School District GO, FSA Insured, 4.875%, 5/01/22 ......................................................................... 11,850,000 11,588,826 5.00%, 5/01/26 .......................................................................... 14,450,000 14,249,579 Warren Water and Sewer Revenue, FSA Insured, 5.125%, 11/01/23 .............................. 2,450,000 2,458,159 Wayland USD, GO, FGIC Insured, Pre-Refunded, 6.75%, 5/01/24 ................................ 2,000,000 2,263,680 Wayne Charter County Airport Hotel GO, Detroit Metropolitan Airport, Series A, MBIA Insured, 5.25%, 12/01/25 ......................................................................... 17,000,000 17,053,890 5.00%, 12/01/30 ......................................................................... 10,750,000 10,430,188 Wayne Charter County Airport Revenue, Detroit Metropolitan Wayne County, Series A, MBIA Insured, 5.25%, 12/01/18 ................................................. 5,500,000 5,549,390 sub. lien, Refunding, Series C, MBIA Insured, 5.25%, 12/01/21 ........................... 1,000,000 1,035,570 sub. lien, Series B, MBIA Insured, 6.875%, 12/01/11 ..................................... 300,000 306,219 sub. lien, Series B, MBIA Insured, 6.75%, 12/01/21 ...................................... 2,000,000 2,041,460 Wayne County Airport Revenue, sub. lien, Series B, AMBAC Insured, 6.00%, 12/01/20 .......... 10,585,000 10,600,348 Wayne State University Revenue, FGIC Insured, 5.125%, 11/15/29 ............................. 16,900,000 16,916,393 Wayne-Westland Community Schools GO, Refunding, FGIC Insured, 6.10%, 5/01/13 ............... 2,275,000 2,335,151 West Bloomfield School District GO, FGIC Insured, 6.00%, 5/01/19 ................................................................................. 2,100,000 2,410,170 5/01/20 ................................................................................. 2,000,000 2,295,400 West Branch Rose City Area School District GO, FGIC Insured, 5.50%, 5/01/24 ................ 1,400,000 1,444,128 West Ottawa Public School District GO, FGIC Insured, 5.60%, 5/01/21 ............................................................ 2,355,000 2,438,885 FGIC Insured, 5.60%, 5/01/26 ............................................................ 12,100,000 12,492,040 Refunding, FGIC Insured, 6.00%, 5/01/20 ................................................. 6,630,000 6,804,303 Western School District GO, Refunding, MBIA Insured, 5.50%, 5/01/20 ........................ 1,660,000 1,681,978 Williamston Community School District GO, Building and Site, MBIA Insured, 5.375%, 5/01/15 . 4,900,000 5,396,615 Willow Run Community Schools GO, FSA Insured, 5.00%, 5/01/31 ............................... 5,550,000 5,424,681 Wyandotte City School District GO, Refunding, FSA Insured, 5.625%, 5/01/13 ................. 1,800,000 1,898,802 Wyandotte Electric Revenue, Refunding, MBIA Insured, 6.25%, 10/01/17 ....................... 9,980,000 10,424,908 Yale Public Schools District GO, AMBAC Insured, 5.375%, 5/01/17 ......................................................................... 2,000,000 2,071,520 5.50%, 5/01/19 .......................................................................... 1,500,000 1,548,300 Ypsilanti School District GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/20 .............................................. 4,700,000 5,239,231 Refunding, FGIC Insured, 5.375%, 5/01/26 ................................................ 6,750,000 6,829,718 Zeeland Public Schools GO, Series B, MBIA Insured, Pre-Refunded, 6.10%, 5/01/24 ............ 4,000,000 4,405,503 ------------- TOTAL LONG TERM INVESTMENTS (COST $1,190,583,426) .......................................... 1,270,376,041 -------------
82 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------- aSHORT TERM INVESTMENTS .4% Delta County EDC, Environmental Improvement Revenue, Mead Escanaba Paper Project, Refunding, Series C, Daily VRDN and Put, 1.05%, 12/01/23 ............................................................................ $ 700,000 $ 700,000 Farmington Hills Hospital Finance Authority Revenue, Botsford General Hospital, Series B, MBIA Insured, DailyVRDN and Put, 1.20%, 2/15/16 ............................................................................. 300,000 300,000 Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly VRDN and Put, .88%, 12/01/15 ........................................................ 2,600,000 2,600,000 Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ............................................................................. 400,000 400,000 University of Michigan Revenues, Hospital, Refunding, Series A, Daily VRDN and Put, 1.35%, 12/01/19 ....................................................................... 1,600,000 1,600,000 -------------- TOTAL SHORT TERM INVESTMENT (COST $5,600,000) ............................................... 5,600,000 -------------- TOTAL INVESTMENTS (COST $1,196,183,426) 98.7% ............................................... 1,275,976,041 OTHER ASSETS, LESS LIABILITIES 1.3% ......................................................... 16,914,165 -------------- NET ASSETS 100.0% ........................................................................... $1,292,890,206 --------------
See glossary of terms on page 98. aVariable 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. See notes to financial statements. 83 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS A 2002 2001 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................... $11.89 $11.13 $12.14 $12.16 $12.01 ------------------------------------------------ Income from investment operations: Net investment incomea ............................................... .58 .58 .59 .61 .64 Net realized and unrealized gains (losses) ........................... .10 .76 (.99) .01 .25 ------------------------------------------------ Total from investment operations ...................................... .68 1.34 (.40) .62 .89 ------------------------------------------------ Less distributions from: Net investment income ................................................ (.58) (.58) (.59) (.62) (.64) Net realized gains ................................................... -- -- (.02) (.02) (.10) ------------------------------------------------ Total distributions ................................................... (.58) (.58) (.61) (.64) (.74) ------------------------------------------------ Net asset value, end of year .......................................... $11.99 $11.89 $11.13 $12.14 $12.16 ================================================ Total returnb ......................................................... 5.84% 12.31% (3.30)% 5.18% 7.60% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ....................................... $485,818 $465,758 $451,142 $515,174 $495,315 Ratios to average net assets: Expenses ............................................................. .66% .67% .66% .67% .65% Net investment income ................................................ 4.81% 5.04% 5.05% 5.01% 5.29% Portfolio turnover rate ............................................... 4.86% 24.68% 15.79% 16.25% 14.87% CLASS C -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................... $11.95 $11.18 $12.19 $12.21 $12.05 ------------------------------------------------ Income from investment operations: Net investment incomea ............................................... .51 .52 .52 .54 .57 Net realized and unrealized gains (losses) ........................... .10 .76 (.98) .01 .26 ------------------------------------------------ Total from investment operations ...................................... .61 1.28 (.46) .55 .83 ------------------------------------------------ Less distributions from: Net investment income ................................................ (.51) (.51) (.53) (.55) (.57) Net realized gains ................................................... -- -- (.02) (.02) (.10) ------------------------------------------------ Total distributions ................................................... (.51) (.51) (.55) (.57) (.67) ------------------------------------------------ Net asset value, end of year .......................................... $12.05 $11.95 $11.18 $12.19 $12.21 ================================================ Total returnb ......................................................... 5.22% 11.74% (3.84)% 4.58% 7.04% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ....................................... $39,170 $24,738 $21,828 $20,896 $10,131 Ratios to average net assets: Expenses ............................................................. 1.22% 1.23% 1.22% 1.23% 1.22% Net investment income ................................................ 4.26% 4.49% 4.50% 4.44% 4.72% Portfolio turnover rate ............................................... 4.86% 24.68% 15.79% 16.25% 14.87%
aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. 84 See notes to financial statements. FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.5% BONDS 97.7% Albany ISD No. 745, GO, Series A, FSA Insured, 6.00%, 2/01/16 .............................. $ 2,295,000 $ 2,443,073 Anoka-Hennepin ISD 11, GO, School District Credit Enhancement Program, Series A, FSA Insured, 5.00%, 2/01/20 .................................................... 6,130,000 6,151,578 Becker GO, Tax Increment, Refunding, Series D, MBIA Insured, 6.25%, 8/01/15 ................ 4,870,000 4,986,150 Big Lake ISD No. 727, GO, MBIA Insured, 5.70%, 2/01/21 ..................................... 3,085,000 3,376,748 Bloomington Port Authority Lease Revenue, City Hall Lease Obligation, 5.00%, 2/01/18 ....... 1,045,000 1,062,190 Brainerd Health Care Facilities Revenue, Benedictine Health St. Joseph, Refunding, Series D, MBIA Insured, 5.875%, 2/15/13 .................................................. 3,500.000 3,689,805 Brooklyn Center ISD, GO, FSA Insured, 5.00%, 2/01/22 ....................................... 1,000,000 999,950 Buffalo GO, AMBAC Insured, 5.55%, 6/01/17 .................................................. 1,000,000 1,033,020 Buffalo ISD No. 877, GO, FSA Insured, 6.15%, 2/01/18 ............................................................. 2,800,000 2,908,332 Refunding, MBIA Insured, 5.00%, 2/01/22 ................................................. 4,255,000 4,254,787 Burnsville ISD No. 191, GO, Series A, FSA Insured, 6.20%, 2/01/17 .......................... 2,105,000 2,292,240 Burnsville MFR, Coventry Court, Refunding, Series A, GNMA Secured, 5.90%, 9/20/19 .......................................................................... 400,000 423,620 5.95%, 9/20/29 .......................................................................... 1,275,000 1,332,515 6.00%, 9/20/34 .......................................................................... 1,000,000 1,045,770 Caledonia ISD No. 299, GO, MBIA Insured, 5.60%, 2/01/21 .................................... 1,580,000 1,641,241 Centennial ISD, No. 012, GO, Series A, FSA Insured, 5.00%, 2/01/21 ......................... 1,500,000 1,502,250 Champlin EDA, Housing Development, MBIA Insured, 5.625%, 2/01/26 ........................... 250,000 255,113 Chanhassen Apartments Project GO, Series B, AMBAC Insured, 6.20%, 1/01/25 .................. 2,975,000 3,174,028 Columbia Heights ISD No. 013, GO, FSA Insured, 5.50%, 2/01/23 .............................. 4,500,000 4,598,550 Dakota County Housing and RDA, Governmental Housing Revenue, Eagan Senior Housing Facility, MBIA Insured, 5.40%, 1/01/27 ............................. 1,015,000 1,021,506 Dakota County Housing and Redevelopment Authority MFHR, Dakota Station Project, GNMA Secured, 5.65%, 1/20/24 ............................................................ 1,500,000 1,545,000 Dakota County Housing and Redevelopment Authority SFMR, GNMA Secured, 5.75%, 4/01/18 .......................................................................... 2,485,000 2,569,540 5.85%, 10/01/30 ......................................................................... 4,165,000 4,280,037 Deer River ISD No. 317, GO, FSA Insured, 6.00%, 2/01/25 .................................... 1,325,000 1,417,724 Duluth EDA, Health Care Facilities Revenue, The Duluth Clinic, Ltd., AMBAC Insured, Pre-Refunded, 6.20%, 11/01/12 ........................................................... 2,880,000 3,029,472 Health Care Facilities Revenue, The Duluth Clinic, Ltd., AMBAC Insured, Pre-Refunded, 6.30%, 11/01/22 ........................................................... 2,125,000 2,348,465 Hospital Facilities Revenue, St. Lukes Hospital, Series A, Connie Lee Insured, 6.40%, 5/01/12 ...................................................... 3,000,000 3,019,920 Eagan GO, Recreational Facilities, Series A, MBIA Insured, 5.00%, 2/01/21 .................. 3,075,000 3,079,613 Eagan MFHR, Forest Ridge Apartments, Refunding, Series A, GNMA Secured, 5.95%, 9/20/29 .......................................................................... 1,700,000 1,776,398 6.00%, 9/20/34 .......................................................................... 1,480,000 1,547,740 Eden Prairie ISD No. 272, GO, Series A, FSA Insured, Pre-Refunded, 5.75%, 2/01/15 .......................................................................... 1,980,000 2,098,582 Eden Prairie MFHR, Lincoln Park Project, Series A-1, GNMA Secured, 6.40%, 12/20/20 ......................... 1,500,000 1,600,440 Lincoln Park Project, Series A-1, GNMA Secured, 6.55%, 12/20/30 ......................... 3,350,000 3,541,419 Lincoln Park Project, Series A-1, GNMA Secured, 6.65%, 6/20/42 .......................... 7,995,000 8,454,872 Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%, 1/20/31 ........................ 2,000,000 2,088,540 Parkway Apartments Project, Series A, GNMA Secured, 5.80%, 2/20/32 ...................... 7,380,000 7,603,393 Eveleth EDA, GO, Housing Development, MBIA Insured, 5.80%, 7/01/25 ......................... 1,000,000 1,032,630 Faribault ISD No. 656, GO, FSA Insured, 5.75%, 6/01/15 ..................................... 1,500,000 1,605,105 Farmington ISD No.192, GO, MBIA Insured, 5.25%, 2/01/24 .................................... 5,915,000 5,990,239 Ham Lake GO, Anoka County Housing, Senior Housing Project, Series B, MBIA Insured, 6.10%, 1/01/26 ............................................................ 2,180,000 2,238,686 Hibbing Health Care Facilities Revenue, The Duluth Clinic, Ltd., FSA Insured, Pre-Refunded, 5.00%, 11/01/25 ........................................................... 8,000,000 8,577,040 Hopkins Elderly Housing Revenue, St. Therese Project, Refunding, Series A, GNMA Secured, 5.60%, 11/20/17 ......................................................................... 750,000 781,350 5.70%, 11/20/32 ......................................................................... 3,000,000 3,072,960 Hubbard County Housing and RDA, GO, Heritage Center Project, MBIA Insured, 5.50%, 8/01/27 .......................................................................... 1,085,000 1,115,803 Kenyon Wanamingo ISD No. 2172, GO, MBIA Insured, 6.00%, 2/01/22 ............................ 4,030,000 4,366,223 Lakeview ISD No. 2167 GO, MBIA Insured, 5.25%, 2/01/26 ..................................... 3,705,000 3,744,199 Mahtomedi ISD, No. 832 GO, FSA Insured, 5.00%, 2/01/18 ..................................... 3,240,000 3,285,360 Medford ISD No. 763, GO, Series A, FSA Insured, 5.125%, 2/01/29 ............................ 2,700,000 2,697,921
85 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Minneapolis and St. Paul Housing RDA, Health Care System Revenue, Children's Health Care, Series A, FSA Insured, 5.70%, 8/15/16 ........................... $ 1,005,000 $ 1,043,954 Children's Health Care, Series A, FSA Insured, 5.50%, 8/15/25 ........................... 9,000,000 9,066,960 Health One Obligated Group, Series A, MBIA Insured, Pre-Refunded, 7.40%, 8/15/11 ........ 9,890,000 10,157,722 Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue, Series A, AMBAC Insured, 5.20%, 1/01/24 ........................................................... 5,000,000 5,021,950 FGIC Insured, 5.125%, 1/01/31 ........................................................... 7,000,000 6,973,330 FGIC Insured, 5.25%, 1/01/32 ............................................................ 7,000,000 7,023,940 Minneapolis and St. Paul Metropolitan Apartments Community Apartment Revenue, Series C, 5.25%, 1/01/32 .......................................................................... 6,000,000 6,020,520 Minneapolis CDA, St. Paul Housing and RDA, Health Care Facilities Revenue, Carondelet Community Hospitals Inc., Series B, BIG Insured, Pre-Refunded, 8.875%, 11/01/15 .......................................................... 840,000 1,072,798 Minneapolis GO, Sports Arena Project, Refunding, 5.125%, 10/01/20 ....................................... 8,340,000 8,432,824 Sports Arena Project, Refunding, 5.20%, 10/01/24 ........................................ 3,750,000 3,782,850 Various Purpose, 5.125%, 12/01/28 ....................................................... 3,000,000 3,019,200 Minneapolis Hospital Facilities Revenue, Fairview Hospital and Healthcare, Refunding, Series A, MBIA Insured, 6.50%, 1/01/11 .................................................. 530,000 542,243 Series B, MBIA Insured, 6.70%, 1/01/17 .................................................. 7,815,000 7,996,308 Minneapolis MFR, Riverside Plaza, Refunding, GNMA Secured, 5.20%, 12/20/30 ................. 6,320,000 6,153,847 Minneapolis Revenue, University Gateway Project, Series A, 5.25%, 12/01/24 ................. 3,000,000 3,033,780 Minneapolis Special School District No. 001 COP, Series A, MBIA Insured, Pre-Refunded, 5.90%, 2/01/17 ............................................................ 5,000,000 5,532,400 Minnesota Agriculture and Economic Development Board Revenue, Benedictine Health, Refunding, Series A, MBIA Insured, 5.125%, 2/15/29 .................. 11,750,000 11,539,088 Evangelical Lutheran Good Samaritan, Society Project, AMBAC Insured, 5.15%, 12/01/22 .... 5,180,000 5,205,848 Health Care System, Fairview Hospital, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ......................................................................... 18,000,000 18,805,320 Minnesota State HFA, Rental Housing, Refunding, Series D, MBIA Insured, 5.90%, 8/01/15 ....................... 6,310,000 6,602,279 Rental Housing, Refunding, Series D, MBIA Insured, 5.95%, 2/01/18 ....................... 2,325,000 2,409,700 Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 ....................... 2,725,000 2,824,136 SFHR, Series D, 5.45%, 1/01/26 .......................................................... 4,840,000 4,906,647 SFMR, Series E, AMBAC Insured, 5.40%, 1/01/25 ........................................... 8,495,000 8,581,224 SFMR, Series F, MBIA Insured, 6.30%, 7/01/25 ............................................ 1,280,000 1,318,298 SFMR, Series G, AMBAC Insured, 6.25%, 7/01/26 ........................................... 1,725,000 1,780,752 SFMR, Series I, MBIA Insured, 6.25%, 1/01/15 ............................................ 1,255,000 1,291,684 Minnesota State Higher Education Facilities Authority Revenue, Bethel, Refunding, 5.10%, 4/01/28 ....................................................... 7,700,000 7,711,627 University of St. Thomas, Series 4-A1, MBIA Insured, 5.625%, 10/01/16 ................... 1,000,000 1,047,670 Minnetonka MFHR, Brier Creek Project, Refunding, Series A, GNMA Secured, 6.45%, 6/20/24 .................. 2,720,000 2,845,474 Cedar Hills Project, Refunding, Series A, GNMA Secured, 5.90%, 10/20/19 ................. 1,750,000 1,853,968 Cedar Hills Project, Refunding, Series A, GNMA Secured, 5.95%, 10/20/29 ................. 5,955,000 6,234,349 Moorhead EDA, GO, Tax Increment, Series A, MBIA Insured, 5.25%, 2/01/28 .................... 1,890,000 1,904,610 New Hope MFR, North Ridge, Refunding, Series A, GNMA Secured, 6.05%, 1/01/17 .......................................................................... 450,000 473,576 6.20%, 1/01/31 .......................................................................... 5,470,000 5,696,732 Nobles County Housing and RDA, Public Project Revenue, Annual Appropriate Lease Obligation, AMBAC Insured, 5.625%, 2/01/22 .............................................. 1,230,000 1,292,742 North St. Paul Maplewood ISD No. 622, GO, Refunding, Series A, 5.125%, 2/01/25 .................................................... 2,275,000 2,281,234 Series A, MBIA Insured, Pre-Refunded, 7.10%, 2/01/19 .................................... 2,000,000 2,246,060 Northeast Metropolitan ISD No. 916, GO, FSA Insured, 5.80%, 1/01/16 ........................ 5,320,000 5 535,354 Northern Municipal Power Agency Electric System Revenue, Refunding, FSA Insured, 5.00%, 1/01/12 .................................................. 1,030,000 1,079,492 Series C, AMBAC Insured, 6.125%, 1/01/20 ................................................ 8,090,000 8,500,487 aOsseo ISD 279 GO, Series A, FSA Insured, 5.00%, 2/01/20 .................................... 3,000,000 3,011,490 Park Rapids ISD No. 309, GO, MBIA Insured, 5.00%, 2/01/25 .................................. 4,000,000 3,956,800 Plymouth Health Facilities Revenue, Westhealth Project, Series A, FSA Insured, 6.25%, 6/01/16 .......................................................................... 1,600,000 1,743,104 6.125%, 6/01/24 ......................................................................... 1,815,000 1,970,382
86 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Princeton Hospital Revenue, Fairview Hospital and Healthcare, Series C, MBIA Insured, 6.25%, 1/01/21 ............................................................ $ 7,050,000 $ 7,198,191 Princeton ISD No. 477, GO, Mille Lacs County, FSA Insured, 5.125%, 2/01/24 ................. 1,190,000 1,192,749 Prior Lake ISD No. 719, GO, FGIC Insured, 5.125%, 2/01/19 ........................................................... 1,140,000 1,160,782 FSA Insured, 5.50%, 2/01/20 ............................................................. 2,255,000 2,345,696 FSA Insured, 5.50%, 2/01/21 ............................................................. 2,590,000 2,685,571 Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ................. 1,300,000 1,333,540 Robbinsdale GO, Housing Development, Senior Housing Project, Series B, FGIC Insured, 5.875%, 1/01/31 ........................................................... 2,160,000 2,239,898 Robbinsdale Hospital Revenue, North Memorial Medical Center Project, Refunding, Series A, AMBAC Insured, 5.45%, 5/15/13 ................................................. 2,000,000 2,070,560 Rochester Electric Utility Revenue, AMBAC Insured, 5.25%, 12/01/24 ......................... 3,000,000 3,033,270 Rochester Health Care Facilities Revenue, Mayo Foundation, Series B, 5.50%, 11/15/27 ....... 4,000,000 4,068,240 Roseville ISD No. 623, GO, Series A, FSA Insured, 5.80%, 2/01/19 .......................................................................... 1,200,000 1,272,984 5.85%, 2/01/24 .......................................................................... 2,470,000 2,622,498 6.00%, 2/01/25 .......................................................................... 4,260,000 4,615,412 Sauk Rapids ISD No. 47, GO, Series A, MBIA Insured, 5.75%, 2/01/23 ................................................................................. 2,740,000 2,904,290 2/01/26 ................................................................................. 5,000,000 5,281,300 Scott County Housing and Redevelopment Authority Facilities Lease Revenue, AMBAC Insured, 5.70%, 2/01/29 ........................................................... 1,380,000 1,412,527 Scott County Housing and Redevelopment Authority GO, Savage City, Hamilton Apartments Project, AMBAC Insured, 5.70%, 2/01/33 ....................................... 2,285,000 2,338,857 Scott County Housing and Redevelopment Authority Housing Development Revenue GO, River City Centre Project, Series A, FSA Insured, 5.375%, 2/01/27 ......................................................................... 1,520,000 1,539,456 Scott County Housing and Redevelopment Authority MFR, Highview Commons, Series A, GNMA Secured, 6.20%, 1/20/41 .......................................................................... 2,865,000 3,064,490 6.50%, 7/20/41 .......................................................................... 1,300,000 1,413,698 Scott County Housing and Redevelopment Authority Special Benefits Tax Revenue, River City Centre Project, Series B, AMBAC Insured, 5.50%, 2/01/27 .......................................................................... 675,000 689,276 Scott County Housing and Redevelopment Authority Tax Increment Development Revenue, River City Centre Project, Series E, FSA Insured, 5.375%, 2/01/25 ......................................................................... 1,170,000 1,184,391 Shakopee Public Utilities Commission Public Utilities Revenue, MBIA Insured, 6.00%, 2/01/28 .......................................................................... 2,530,000 2,691,237 Southeastern Multi County Housing and RDAR, Housing Development, Goodhue County Apartments B, MBIA Insured, 5.75%, 1/01/31 .............................................. 2,415,000 2,493,005 Southern Minnesota Municipal Power Agency Power Supply System Revenue, Refunding, Series A, MBIA Insured, ETM, 5.75%, 1/01/18 .................................. 1,000,000 1,047,700 Series A, AMBAC Insured, 5.75%, 1/01/18 ................................................. 2,250,000 2,352,375 Series A, FGIC Insured, 5.75%, 1/01/18 .................................................. 1,000,000 1,045,500 Series A, MBIA Insured, 5.75%, 1/01/18 .................................................. 8,865,000 9,268,358 Series B, AMBAC Insured, 6.00%, 1/01/16 ................................................. 5,000,000 5,259,650 Series C, AMBAC Insured, 5.00%, 1/01/17 ................................................. 1,000,000 1,026,320 St. Clair ISD No. 75, GO, MBIA Insured, 5.70%, 4/01/22 ..................................... 2,250,000 2,352,308 St. Cloud Health Care Revenue, St. Cloud Hospital Obligation, Group A, 5.875%, 5/01/30 ..... 17,785,000 18,909,723 St. Cloud Hospital Facilities Revenue, St. Cloud Hospital, Refunding, Series A, AMBAC Insured, 5.00%, 7/01/15 ........................................................... 1,165,000 1,190,875 St. Cloud Housing and RDA Sales Tax Revenue, Paramount Theater Project, Refunding, Series A, FGIC Insured, 5.00%, 3/01/22 .................................................. 1,000,000 996,240 St. Francis ISD No. 15, GO, Series A, FSA Insured, 6.35%, 2/01/13 .......................................................................... 1,500,000 1,672,125 6.375%, 2/01/16 ......................................................................... 5,465,000 6,097,082 St. Louis Park Health Care Facilities Revenue, Health System of Minnesota Obligated Group, Refunding, Series A, AMBAC Insured, 5.20%, 7/01/23 .......................................................................... 6,900,000 6,905,727 aSt. Michael ISD, No. 885, GO, FSA Insured, 5.00%, 2/01/23 .................................. 3,300,000 3,282,906 St. Paul Housing and Redevelopment Authority Parking Revenue, Series A, FSA Insured, 5.75%, 8/01/13 ............................................................. 5,105,000 5,461,533 St. Paul ISD No. 625, COP, Series C, MBIA Insured, 6.10%, 2/01/14 ............................................. 1,075,000 1,143,445 COP, Series C, MBIA Insured, 6.10%, 2/01/15 ............................................. 500,000 531,740 GO, Series A, FSA Insured, 5.75%, 2/01/16 ............................................... 3,500,000 3,650,675 GO, Series C, FSA Insured, 6.00%, 2/01/20 ............................................... 1,600,000 1,719,423 St. Paul Port Authority IDR, Series K, FGIC Insured, 9.50%, 12/01/02 ................................................................................ 5,000 5,040 12/01/14 ................................................................................ 190,000 171,610 Stillwater ISD No. 834, GO, MBIA Insured, 5.75%, 2/01/15 ................................... 2,990,000 3,218,794
87 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Todd Morrisson and Stearns Counties ISD No. 2753, GO, MBIA Insured, 5.00%, 4/01/17 ......... $ 1,500,000 $ 1,511,400 Virginia Governmental Housing Project GO, Refunding, MBIA Insured, 5.90%, 2/01/26 .......... 2,915,000 3,008,483 Walker-Hakensack-Akeley ISD No. 113, GO, Series A, FSA Insured, 6.00%, 2/01/23 ................................................... 1,160,000 1,244,308 Series A, FHA Insured, 6.00%, 2/01/25 ................................................... 1,300,000 1,390,973 Washington County Housing and RDAR, Government Housing, Landfall Terrace Project, Refunding, 5.35%, 2/01/22 .......................................................................... 1,000,000 1,014,140 5.40%, 8/01/27 .......................................................................... 2,015,000 2,033,881 Washington County SFMR, Housing and RDA, GNMA Secured, 7.60%, 12/01/11 ..................... 55,000 55,045 Western Minnesota Municipal Power Agency Power Supply Revenue, Refunding, Series A, AMBAC Insured, 5.50%, 1/01/12 ........................................................... 2,745,000 2,926,526 AMBAC Insured, 5.50%, 1/01/13 ........................................................... 4,500,000 4,774,500 MBIA Insured, 5.50%, 1/01/15 ............................................................ 5,425,000 5,429,991 Worthington ISD No. 518 GO, Series A, FSA Insured, 5.00%, 2/01/24 .......................... 5,000,000 4,960,300 ------------- TOTAL BONDS ................................................................................ 512,736,504 ------------- ZERO COUPON BONDS .8% Southern Minnesota Municipal Power Agency Power Supply System Revenue, Capital Appreciation, Series A, MBIA Insured, 1/01/19 ................................................................................. 5,875,000 2,493,525 1/01/20 ................................................................................. 4,750,000 1,899,334 ------------- TOTAL ZERO COUPON BONDS .................................................................... 4,392,859 ------------- TOTAL LONG TERM INVESTMENTS (COST $495,585,374) ............................................ 517,129,363 bSHORT TERM INVESTMENTS 1.8% Minneapolis GO, Block E Bonds, Series A, Weekly VRDN and Put, 1.05%, 3/01/27 ............................ 300,000 300,000 Convention Center, Weekly VRDN and Put, 1.05%, 12/01/09 ................................. 1,500,000 1,500,000 Convention Center, Weekly VRDN and Put, 1.05%, 12/01/18 ................................. 2,350,000 2,350,000 Judgement, Weekly VRDN and Put, 1.05%, 12/01/10 ......................................... 300,000 300,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ....................................... 4,400,000 4,400,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ........................... 800,000 800,000 ------------- TOTAL SHORT TERM INVESTMENTS (COST $9,650,000) ............................................. 9,650,000 ------------- TOTAL INVESTMENTS (COST $505,235,374) 100.3% ............................................... 526,779,363 OTHER ASSETS, LESS LIABILITIES (.3)% ....................................................... (1,790,914) ------------- NET ASSETS 100.0% .......................................................................... $524,988,449 -------------
See glossary of terms on page 98. aSufficient collateral has been segregated for securities traded on a when issued or delayed delivery basis. bVariable 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. 88 See notes to financial statements. FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS A 2002 2001 2000C 1999 1998 -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................................... $12.21 $11.52 $12.49 $12.45 $12.19 ------------------------------------------------ Income from investment operations: Net investment incomea ................................................ .60 .61 .61 .62 .64 Net realized and unrealized gains (losses) ............................ .16 .68 (.95) .07 .33 ------------------------------------------------ Total from investment operations ....................................... .76 1.29 (.34) .69 .97 ------------------------------------------------ Less distributions from: Net investment income ................................................. (.60) (.60) (.61) (.62) (.64) ------------------------------------------------ Net realized gains .................................................... -- -- (.02) (.03) (.07) ------------------------------------------------ Total distributions .................................................... (.60) (.60) (.63) (.65) (.71) ------------------------------------------------ Net asset value, end of year ........................................... $12.37 $12.21 $11.52 $12.49 $12.45 ================================================ Total returnb .......................................................... 6.41% 11.48% (2.80)% 5.63% 8.22% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................ $752,423 $698,853 $689,084 $776,592 $741,079 Ratios to average net assets: Expenses .............................................................. .65% .66% .64% .65% .64% Net investment income ................................................. 4.86% 5.10% 5.07% 4.98% 5.24% Portfolio turnover rate ................................................ 9.62% 16.45% 9.61% 6.56% 12.84% CLASS B ------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................................... $12.23 $11.52 $11.43 ------------------------------- Income from investment operations: Net investment incomea ................................................ .53 .55 .05 Net realized and unrealized gains ..................................... .17 .70 .09 ------------------------------- Total from investment operations ....................................... .70 1.25 .14 ------------------------------- Less distributions from net investment income .......................... (.53) (.54) (.05) ------------------------------- Net asset value, end of year ........................................... $12.40 $12.23 $11.52 =============================== Total returnb .......................................................... 5.89% 11.04% 1.19% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................ 16,629 $3,649 $76 Ratio to average net assets: Expenses .............................................................. 1.20% 1.22% 1.20%d Net investment income ................................................. 4.31% 4.53% 5.02%d Portfolio turnover rate ................................................ 9.62% 16.45% 9.61%
aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. cFor the period February 1, 2000 (effective date) to February 29, 2000 for Class B. dAnnualized 89 FRANKLIN TAX-FREE TRUST Financial Highlights (continued)
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND (CONT.) YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS C 2002 2001 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................................... $12.28 $11.58 $12.56 $12.51 $12.24 ------------------------------------------------ Income from investment operations: Net investment incomea ................................................ .53 .54 .54 .55 .58 Net realized and unrealized gains (losses) ............................ .17 .69 (.96) .08 .34 ------------------------------------------------ Total from investment operations ....................................... .70 1.23 (.42) .63 .92 ------------------------------------------------ Less distributions from: Net investment income ................................................. (.53) (.53) (.54) (.55) (.58) Net realized gains .................................................... -- -- (.02) (.03) (.07) ------------------------------------------------ Total distributions .................................................... (.53) (.53) (.56) (.58) (.65) ------------------------------------------------ Net asset value, end of year ........................................... $12.45 $12.28 $11.58 $12.56 $12.51 ================================================ Total returnb .......................................................... 5.87% 10.90% (3.41)% 5.10% 7.66% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................ $59,305 $42,072 $40,181 $42,258 $28,178 Ratios to average net assets: Expenses .............................................................. 1.20% 1.22% 1.20% 1.21% 1.20% Net investment income ................................................. 4.31% 4.55% 4.52% 4.42% 4.67% Portfolio turnover rate ................................................ 9.62% 16.45% 9.61% 6.56% 12.84%
aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. 90 See notes to financial statements. FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.3% BONDS 98.2% Akron Bath Copley Joint Township Hospital District Revenue, Hospital Improvement Childrens Hospital Center, FSA Insured, 5.00%, 11/15/22 ......................................................................... $ 5,000,000 $ 4,955,100 Akron GO, Limited Tax, FGIC Insured, 7.50%, 9/01/05 ........................................ 500,000 576,695 Akron Sewer System Revenue, Refunding, MBIA Insured, 5.55%, 12/01/16 ....................... 3,660,000 3,844,647 Akron Waterworks System First Mortgage Revenue, FGIC Insured, 6.00%, 3/01/14 ............... 1,000,000 1,082,850 Allen County Sewer Revenue, MBIA Insured, 5.70%, 12/01/13 .................................. 1,200,000 1,257,204 Anthony Wayne Local School District GO, Refunding, FSA Insured, 5.00%, 12/01/24 ................................................. 3,200,000 3,191,136 School Facilities Construction and Improvement, FSA Insured, 5.65%, 12/01/21 ............ 2,490,000 2,652,921 School Facilities Construction and Improvement, FSA Insured, 5.70%, 12/01/25 ............ 2,335,000 2,487,405 School Facilities Construction and Improvement, FSA Insured, 5.125%, 12/01/30 ........... 2,535,000 2,539,614 Archbold Area Local School District GO, AMBAC Insured, 6.00%, 12/01/21 .......................................................... 2,000,000 2,179,620 Refunding, MBIA Insured, 5.90%, 12/01/11 ................................................ 600,000 605,712 Athens City School District GO, School Facilities Construction and Improvement, FSA Insured, 6.00%, 12/01/24 ............................................................ 2,345,000 2,599,995 Aurora City School District COP, MBIA Insured, 6.10%, 12/01/19 ......................................................................... 1,825,000 2,030,623 6.15%, 12/01/24 ......................................................................... 1,670,000 1,852,013 Aurora City School District GO, Refunding and Improvement, FGIC Insured, 5.80%, 12/01/16 ... 1,075,000 1,153,819 Avon Lake City School District GO, FGIC Insured, 5.50%, 12/01/26 ........................... 4,000,000 4,164,920 Avon Lake Water System Revenue, Series A, AMBAC Insured, 5.75%, 10/01/26 ................... 2,020,000 2,152,027 Avon Local School District GO, AMBAC Insured, 6.00%, 12/01/20 .............................. 2,500,000 2,722,000 Beavercreek Local School District GO, FGIC Insured, 5.70%, 12/01/20 ........................ 8,125,000 8,499,806 Bluffton Exempted Village School District GO, Improvement, AMBAC Insured, 5.50%, 12/01/28 .. 1,190,000 1,290,079 Bowling Green MFHR, Village Apartments, Refunding, Series A, GNMA Secured, 5.40%, 9/20/36 .. 2,940,000 2,912,658 Buckeye Local School District GO, Construction and Improvement Bonds, FGIC Insured, 5.50%, 12/01/25 ........................................................... 750,000 778,913 Butler County GO, AMBAC Insured, 5.75%, 12/01/16 ........................................... 1,000,000 1,067,890 Butler County Hospital Facilities Revenue, Middletown Regional Hospital, Refunding and Improvement, FGIC Insured, 6.75%, 11/15/10 ................................ 2,150,000 2,193,516 Butler County Waterworks Revenue, AMBAC Insured, Pre-Refunded, 6.35%, 12/01/08 ......................................................................... 790,000 827,225 6.40%, 12/01/12 ......................................................................... 500,000 523,745 Central Local School District GO, Classroom Facilities, FSA Insured, 5.75%, 12/01/22 ....... 1,555,000 1,678,778 Chillicothe GO, Limited Tax, AMBAC Insured, 6.05%, 12/01/12 ................................ 675,000 702,243 Circleville GO, Capital Facilities Improvement, AMBAC Insured, 5.625%, 12/01/20 ............ 2,035,000 2,170,918 Clermont County Hospital Facilities Revenue, Mercy Health System, Refunding, Series B, AMBAC Insured, 6.00%, 9/01/19 ................................................. 1,750,000 1,880,218 Clermont County Waterworks Revenue, Refunding, AMBAC Insured, 5.80%, 12/01/18 .............. 11,000,000 11,736,120 Cleveland Airport Systems Revenue, Series A, FGIC Insured, 6.25%, 1/01/20 .................................................. 3,000,000 3,207,180 Series B, FGIC Insured, Pre-Refunded, 6.10%, 1/01/24 .................................... 1,450,000 1,579,108 Cleveland GO, Series 1994, MBIA Insured, Pre-Refunded, 6.70%, 11/15/18 ..................... 2,000,000 2,271,820 Cleveland Waterworks Revenue, Refunding and Improvement, Series I, FSA Insured, 5.00%, 1/01/28 ........................ 11,500,000 11,367,635 Series H, MBIA Insured, Pre-Refunded, 5.75%, 1/01/26 .................................... 17,400,000 19,432,320 Columbus City School District GO, Linden Elementary Construction, FSA Insured, 5.00%, 12/01/28 ......................................................................... 900,000 889,461 Columbus GO, Limited Tax, FGIC Insured, 9.50%, 4/15/03 .................................... 975,000 1,058,665 Columbus Municipal Airport Authority Revenue, Airport Improvement, Port Columbus International, Series B, AMBAC Insured, 5.00%, 1/01/18 ................................. 3,565,000 3,599,224 Columbus Tax Increment Financing Revenue, Easton Project, AMBAC Insured, 5.30%, 12/01/19 .. 1,500,000 1,543,230 Coshocton Sewer System GO, AMBAC Insured, Pre-Refunded, 6.50%, 12/01/12 .................... 1,530,000 1,618,939 Crestview Local School District GO, Construction and Improvement, AMBAC Insured, 6.65%, 12/01/14 ......................................................................... 1,650,000 1,747,730 Cuyahoga County GO, Limited Tax, MBIA Insured, 9.375%, 10/01/04 ............................ 100,000 117,130 Cuyahoga County Hospital Revenue, University Hospitals Health System Inc., AMBAC Insured, 5.40%, 1/15/19 .......................................................................... 1,500,000 1,539,810 5.50%, 1/15/30 .......................................................................... 1,760,000 1,805,179 Cuyahoga County MFHR, Rockefeller Park Project, Series A, GNMA Secured, 5.75%, 1/20/29 ..... 1,000,000 1,025,060
91 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Cuyahoga County Utility System Revenue, AMBAC Insured, 5.125%, 2/15/28 .......................................................... $ 1,000,000 $ 1,002,880 Medical Center Co. Project, Refunding, Series B, MBIA Insured, 6.10%, 8/15/15 ........... 2,945,000 3,202,422 Danville Local School District GO, School Improvement, AMBAC Insured, 5.75%, 12/01/23 ...... 1,180,000 1,271,061 Defiance GO, MBIA Insured, 6.10%, 12/01/14 ......................................................................... 1,000,000 1,104,060 6.20%, 12/01/20 ......................................................................... 750,000 829,170 Delaware City School District GO, FGIC Insured, 5.75%, 12/01/15 ............................ 1,640,000 1,763,443 Dover City School District GO, AMBAC Insured, 6.25%, 12/01/16 .............................. 2,000,000 2,083,640 Dover Municipal Electric System Revenue, FGIC Insured, 6.00%, 12/01/19 ..................... 1,625,000 1,767,269 Dover Waterworks Systems Revenue, AMBAC Insured, 6.00%, 12/01/13 ........................... 1,100,000 1,211,595 Fairborn GO, Limited Tax, Series 1991, MBIA Insured, 7.00%, 10/01/11 ....................... 1,390,000 1,462,850 Fairfield City School District GO, FGIC Insured, 6.00%, 12/01/20 ........................... 1,000,000 1,115,810 Finneytown Local School District GO, FGIC Insured, 5.80%, 12/01/24 ......................... 1,980,000 2,116,541 Fostoria City School District GO, AMBAC Insured, Pre-Refunded, 6.70%, 12/01/16 ............. 2,500,000 2,649,000 Franklin County Hospital Revenue, Childrens Hospital Project, AMBAC Insured, 5.50%, 5/01/21 ............................... 3,365,000 3,497,480 Childrens Hospital Project, AMBAC Insured, 5.50%, 5/01/28 ............................... 4,265,000 4,388,386 Holy Cross Health Systems, AMBAC Insured, 5.875%, 6/01/21 ............................... 2,500,000 2,647,600 Greater Cleveland Regional Transit Authority GO, Capital Improvement, Series A, MBIA Insured, 5.125%, 12/01/21 .......................................................... 1,750,000 1,773,310 Green Local School District GO, Summit County, FGIC Insured, Pre-Refunded, 5.875%, 12/01/14 ........................................................................ 2,800,000 3,124,688 5.90%, 12/01/19 ......................................................................... 5,150,000 5,750,593 Greene County GO, AMBAC Insured, 5.00%, 12/01/22 ................................................................................ 1,475,000 1,478,540 12/01/28 ................................................................................ 2,620,000 2,589,320 Greene County Sewer System Revenue, Governmental Enterprise, AMBAC Insured, 5.625%, 12/01/25 ......................................................... 1,890,000 1,994,952 MBIA Insured, 5.25%, 12/01/25 ........................................................... 5,000,000 5,069,550 Greene County Water System Revenue, Governmental Enterprise, MBIA Insured, 5.25%, 12/01/21 .................................. 5,400,000 5,533,272 Series A, FGIC Insured, 6.125%, 12/01/21 ................................................ 2,100,000 2,320,143 Hamilton City Electric System Mortgage Revenue, Refunding, Series A, FGIC Insured, 6.00%, 10/15/23 ...................................... 11,450,000 11,962,159 Series B, FGIC Insured, 6.30%, 10/15/25 ................................................. 2,340,000 2,448,904 Hamilton County Hospital Facilities Revenue, Bethesda Hospital, Refunding, Series A, AMBAC Insured, 6.25%, 1/01/12 ................................................. 3,650,000 3,840,749 Hamilton County Sales Tax, Series B, AMBAC Insured, 5.60%, 12/01/32 ......................................................................... 1,200,000 1,250,376 Pre-Refunded, 5.25%, 12/01/32 ........................................................... 6,170,000 6,234,106 Hamilton County Sewer System Revenue, Refunding, MBIA Insured, 5.25%, 12/01/21 ........................................................... 1,000,000 1,022,880 Series A, FGIC Insured, 6.05%, 12/01/15 ................................................. 3,010,000 3,309,405 Hamilton GO, One Renaissance Center, Series A, AMBAC Insured, 5.25%, 11/01/18 .......................................................... 1,010,000 1,047,501 AMBAC Insured, 5.25%, 11/01/19 .......................................................... 1,015,000 1,046,698 AMBAC Insured, 5.25%, 11/01/20 .......................................................... 1,120,000 1,150,285 AMBAC Insured, 5.25%, 11/01/21 .......................................................... 1,180,000 1,208,957 Hamilton Wastewater System Revenue, Series A, FSA Insured, 5.90%, 10/15/21 ......................................................................... 3,040,000 3,220,515 5.20%, 10/15/23 ......................................................................... 7,275,000 7,365,792 Hamilton Waterworks Mortgage Revenue, Series A, MBIA Insured, 6.30%, 10/15/21 .............. 4,665,000 4,768,563 Heath City School District GO, School Improvement, Series A, FGIC Insured, 5.60%, 12/01/21 ......................................................................... 1,000,000 1,056,470 5.50%, 12/01/27 ......................................................................... 1,170,000 1,213,430 Highland Local School District GO, School Improvement, FSA Insured, 5.00%, 12/01/23 ................................................................................ 3,680,000 3,753,379 12/01/26 ................................................................................ 3,675,000 3,721,783
92 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Hilliard School District GO, Refunding, FGIC Insured, 6.55%, 12/01/05 ................................................ $ 500,000 $ 565,525 School Improvement, FGIC Insured, 5.75%, 12/01/28 ....................................... 4,000,000 4,285,840 School Improvement, Series A, FGIC Insured, 5.25%, 12/01/28 ............................. 3,010,000 3,051,719 Hudson Local School District GO, Refunding, FGIC Insured, 5.60%, 12/15/14 .................. 2,750,000 2,935,350 Jackson Center Local School District Shelby County GO, Facilities Construction and Improvements, MBIA Insured, 4.90%, 12/01/20 ......................................................................... 1,165,000 1,155,039 5.00%, 12/01/28 ......................................................................... 1,175,000 1,161,241 Jackson Local School District GO, Stark and Summit Counties Local School District, FSA Insured, 5.50%, 12/01/20 ............................................................ 4,000,000 4,177,280 FSA Insured, 5.625%, 12/01/25 ........................................................... 3,500,000 3,678,325 MBIA Insured, 5.50%, 12/01/21 ........................................................... 3,060,000 3,172,914 Kent State University Revenues, General Receipts, AMBAC Insured, Pre-Refunded, 6.45%, 5/01/12 .......................................................................... 1,195,000 1,228,412 Lake County Hospital Facilities Revenue, Lake Hospital System Inc., AMBAC Insured, 5.00%, 8/15/23 .......................................................................... 2,930,000 2,891,969 Lake Local School District GO, Stark County, AMBAC Insured, 6.25%, 12/01/09 ................ 1,000,000 1,061,550 Lake Ohio Local School District GO, MBIA Insured, 5.30%, 12/01/21 ......................................................................... 1,575,000 1,620,360 5.375%, 12/01/25 ........................................................................ 1,900,000 1,955,309 Lakota Local District GO, AMBAC Insured, Pre-Refunded, 6.125%, 12/01/17 .................... 3,200,000 3,584,704 Lebanon City School District GO, FSA Insured, 5.00%, 12/01/29 .............................. 3,000,000 2,959,890 Licking Heights Local School District GO, School Facilities Construction and Improvements, Series A, FGIC Insured, 5.625%, 12/01/28 .................................. 4,000,000 4,180,680 Logan Hocking Local School District GO, Construction and Improvement, MBIA Insured, 5.00%, 12/01/22 ................................................................................ 1,200,000 1,202,664 12/01/29 ................................................................................ 1,000,000 986,630 London City School District GO, School Facilities Construction and Improvement, FGIC Insured, 5.00%, 12/01/22 ................................................................................ 700,000 701,554 12/01/29 ................................................................................ 1,500,000 1,479,945 Lorain County GO, Sewer System Improvement, MBIA Insured, 5.00%, 12/01/19 .................. 1,640,000 1,657,548 Lorain County Health Facilities Revenue, Catholic Healthcare Partners, Series A, AMBAC Insured, 5.50%, 9/01/29 ........................................................... 6,250,000 6,417,250 Lorain County Hospital Revenue, Catholic Healthcare Partners, Refunding, Series B, MBIA Insured, 5.50%, 9/01/27 ............................................................ 5,000,000 5,116,950 Lorain GO, Urban Renewal, MBIA Insured, 5.70%, 12/01/28 .................................... 1,050,000 1,106,753 Louisville City School District GO, FGIC Insured, 5.00%, 12/01/24 .......................... 3,500,000 3,490,305 Loveland City School District GO, Refunding, Series A, MBIA Insured, 5.00%, 12/01/24 ....... 4,000,000 3,988,920 Lucas County GO, Limited Tax, FGIC Insured, 8.00%, 12/01/06 ................................................................................ 120,000 145,308 12/01/08 ................................................................................ 110,000 137,379 12/01/09 ................................................................................ 120,000 151,758 12/01/10 ................................................................................ 220,000 282,091 Lucas County Hospital Revenue, Promedica Healthcare Obligation Group, MBIA Insured, 5.75%, 11/15/14 .................... 300,000 325,212 Promedica Healthcare Obligation Group, Refunding, AMBAC Insured, 5.375%, 11/15/29 ....... 750,000 762,120 Promedica Healthcare Obligation Group, Refunding, MBIA Insured, ETM, 5.75%, 11/15/14 .... 4,460,000 4,911,263 St. Vincent Medical Center, Refunding, Series B, MBIA Insured, 5.25%, 8/15/20 ........... 3,500,000 3,630,865 Madison Local School District Butler County GO, MBIA Insured, 5.75%, 12/01/26 ........................................................... 1,000,000 1,066,340 School Improvement, FGIC Insured, 5.60%, 12/01/26 ....................................... 1,120,000 1,174,746 Mahoning County Hospital Facilities Revenue, Western Reserve Care, MBIA Insured, ETM, 5.50%, 10/15/25 ................................ 4,750,000 5,021,653 Youngstown Hospital Inc. Project, Series B, MBIA Insured, Pre-Refunded, 7.00%, 10/15/08 . 2,000,000 2,069,500 Mahoning County Sewer System Revenue, AMBAC Insured, 5.375%, 12/01/18 ...................... 1,905,000 1,993,792 Marietta City School District GO, Series B, AMBAC Insured, 5.75%, 12/01/07 ................. 1,000,000 1,048,030 Marietta Water Revenue, AMBAC Insured, 5.95%, 12/01/21 ..................................... 3,875,000 4,117,885 Marion County City School District GO, School Facilities Construction and Improvement Project, FSA Insured, 5.55%, 12/01/20 ......................................................................... 1,000,000 1,056,130 5.625%, 12/01/22 ........................................................................ 1,100,000 1,163,712 Marion County GO, AMBAC Insured, 5.05%, 12/01/31 ........................................... 1,500,000 1,488,465
93 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Marysville Exempted Village School District GO, FSA Insured, 5.30%, 12/01/21 ............................................................ $ 2,000,000 $ 2,053,420 FSA Insured, 5.35%, 12/01/25 ............................................................ 2,010,000 2,055,768 FSA Insured, 5.375%, 12/01/29 ........................................................... 2,465,000 2,523,914 School Improvement, AMBAC Insured, 6.00%, 12/01/29 ...................................... 2,890,000 3,188,855 Mason Sewer Systems Revenue, FGIC Insured, 6.00%, 12/01/19 ................................. 1,935,000 2,119,831 Maumee Hospital Revenue, St. Luke's Hospital Project, Refunding, AMBAC Insured, 5.80%, 12/01/14 ......................................................................... 2,755,000 2,954,793 Milford Exempted Village School District GO, School Improvement, FSA Insured, 5.00%, 12/01/22 ......................................................................... 2,000,000 2,004,440 5.00%, 12/01/23 ......................................................................... 1,030,000 1,029,918 5.125%, 12/01/30 ........................................................................ 7,325,000 7,338,332 Minster School District School Facilities and Construction GO, FSA Insured, 5.70%, 12/01/23 ......................................................................... 3,190,000 3,411,003 5.75%, 12/01/27 ......................................................................... 3,260,000 3,493,155 Montgomery County Revenue, Miami Valley Hospital, Refunding, Series A, AMBAC Insured, 6.25%, 11/15/12 .............. 1,600,000 1,677,360 Miami Valley Hospital, Refunding, Series A, AMBAC Insured, 6.25%, 11/15/16 .............. 3,250,000 3,407,138 Sisters of Charity Health Care, Series A, MBIA Insured, 6.625%, 5/15/21 ................. 450,000 458,703 Muskingum County GO, County Office Building Improvement, AMBAC Insured, 7.20%, 12/01/10 ...................... 925,000 935,036 Justice Center Improvement, AMBAC Insured, Pre-Refunded, 6.375%, 12/01/17 ............... 1,695,000 1,791,971 New Albany Community Authority Community Facilities Revenue, Refunding, Series B, AMBAC Insured, 5.125%, 10/01/21 ........................................................................ 3,000,000 3,041,130 5.20%, 10/01/24 ......................................................................... 5,000,000 5,070,300 New Lexington HDC, Mortgage Revenue, Lincoln Park, Refunding, Series A, MBIA Insured, 5.85%, 1/01/21 ............................................................ 990,000 1,027,927 New Philadelphia City School District GO, School Improvement, AMBAC Insured, 6.25%, 12/01/17 .......................................................... 2,000,000 2,083,640 New Richmond Exempted Village School District GO, AMBAC Insured, 7.125%, 9/01/09 ........... 1,500,000 1,538,175 Nordonia Hills Local School District GO, School Improvement, AMBAC Insured, 5.45%, 12/01/25 .......................................................... 3,035,000 3,142,075 North Olmsted GO, AMBAC Insured, 6.25%, 12/15/12 ........................................... 3,800,000 4,021,160 North Ridgeville GO, City School District, AMBAC Insured, 6.30%, 12/01/17 .................. 2,900,000 3,064,314 Oak Hills Local School District GO, MBIA Insured, 5.45%, 12/01/21 .......................... 5,000,000 5,155,800 Obetz GO, Limited Tax, Government Center, MBIA Insured, 5.25%, 12/01/22 .................... 1,000,000 1,023,000 Ohio Capital Corp. HMR, Refunding, Series G, MBIA Insured, 6.35%, 7/01/22 ....................................... 2,000,000 2,101,020 Refunding, Series H, MBIA Insured, 6.90%, 7/01/24 ....................................... 4,215,000 4,236,707 Refunding, Series J, MBIA Insured, 6.50%, 1/01/25 ....................................... 2,000,000 2,008,700 Westview Apartments, Refunding, Series A, MBIA Insured, 6.125%, 1/01/15 ................. 1,625,000 1,703,764 Westview Apartments, Refunding, Series A, MBIA Insured, 6.25%, 1/01/23 .................. 2,565,000 2,670,575 Ohio HFA, MFHR, Northridge Apartments, FGIC Insured, 10.35%, 12/01/25 ............................. 735,000 778,424 MFHR, Wind River Apartment Project, Series A, GNMA Secured, 5.65%, 5/01/32 .............. 2,035,000 2,068,944 RMR, Series C, GNMA Secured, 5.75%, 9/01/30 ............................................. 6,035,000 6,168,132 Ohio Municipal Electric Generation Agency Revenue, Certificates of Beneficial Interest, AMBAC Insured, 5.625%, 2/15/16 .......................................................... 12,000,000 12,561,240 Ohio State Air Quality Development Authority Revenue, Cincinnati Gas and Electric, Refunding, Series B, MBIA Insured, 5.45%, 1/01/24 .......... 3,500,000 3,567,305 Columbus and Southern Power, Series A, FGIC Insured, 6.375%, 12/01/20 ................... 4,000,000 4,210,400 JMG Funding LP Project, AMBAC Insured, 5.625%, 10/01/22 ................................. 6,875,000 7,119,750 JMG Funding LP Project, Refunding, AMBAC Insured, 6.375%, 1/01/29 ....................... 1,230,000 1,349,298 JMG Funding LP Project, Refunding, AMBAC Insured, 6.375%, 4/01/29 ....................... 15,245,000 16,723,613 Ohio Power Co., Refunding, Series C, AMBAC Insured, 5.15%, 5/01/26 ...................... 9,075,000 9,133,625 PCR, Ohio Edison, Refunding, Series B, AMBAC Insured, 5.625%, 11/15/29 .................. 5,400,000 5,578,254 PCR, Pennsylvania Power Co., Refunding, Series A, AMBAC Insured, 6.45%, 5/01/27 ......... 7,000,000 7,188,860 Ohio State Building Authority Revenue, Adult Correctional Facilities, Series A, AMBAC Insured, 5.60%, 4/01/16 ........................................................... 2,000,000 2,110,940 MBIA Insured, 6.125%, 10/01/13 .......................................................... 13,000,000 14,514,760 Ohio State Department of Transportation COP, Panhandle Rail Line Project, FSA Insured, 6.50%, 4/15/12 ............................................................. 1,100,000 1,127,544 Ohio State Education Loan Revenue, Series A-1, AMBAC Insured, 5.85%, 12/01/19 .............. 5,000,000 5,218,000
94 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Ohio State Higher Educational Facility Commission Revenue, Higher Educational Facility Oberlin College, AMBAC Insured, 5.00%, 10/01/26 ............. $ 8,000,000 $ 7,932,640 University Dayton Project, FGIC Insured, 5.80%, 12/01/14 ................................ 1,300,000 1,409,928 University Dayton Project, FGIC Insured, 6.75%, 12/01/15 ................................ 1,725,000 1,828,431 Xavier University Higher Educational Facility, MBIA Insured, 5.375%, 5/15/22 ............ 3,500,000 3,590,965 Ohio State Turnpike Commission Turnpike Revenue, AMBAC Insured, 5.25%, 2/15/31 ........................................................... 13,975,000 14,123,554 Series A, FGIC Insured, Pre-Refunded, 5.75%, 2/15/24 .................................... 1,000,000 1,086,970 Ohio State University General Receipts Athens Revenue, FSA Insured, 5.00%, 12/01/24 ........ 3,025,000 3,016,621 Ohio State Water Development Authority PCR, Facilities Revenue, Pennsylvania Power Co. Project, Refunding, AMBAC Insured, 6.15%, 8/01/23 ................ 3,420,000 3,751,124 Water Control Loan Fund, Water Quality Series, MBIA Insured, 5.125%, 6/01/19 ............ 5,000,000 5,081,000 Ohio State Water Development Authority Revenue, Dayton Power, Refunding, Series A, AMBAC Insured, 6.40%, 8/15/27 ........................ 5,000,000 5,198,850 Fresh Water Service, AMBAC Insured, 5.90%, 12/01/21 ..................................... 8,750,000 9,767,013 Pure Water, Refunding and Improvement, AMBAC Insured, 5.50%, 12/01/11 ................... 1,000,000 1,046,210 Pure Water, Refunding and Improvement, AMBAC Insured, ETM, 5.50%, 12/01/18 .............. 4,450,000 4,608,509 Pure Water, Series I, AMBAC Insured, ETM, 7.00%, 12/01/09 ............................... 2,000,000 2,342,300 Olentangy Local School District GO, BIG Insured, 7.75%, 12/01/08 ............................................................ 375,000 463,811 BIG Insured, 7.75%, 12/01/09 ............................................................ 375,000 469,189 BIG Insured, 7.75%, 12/01/10 ............................................................ 375,000 474,964 FSA Insured, 5.00%, 12/01/25 ............................................................ 1,715,000 1,703,081 FSA Insured, 5.00%, 12/01/30 ............................................................ 4,000,000 3,939,720 School Facilities Construction and Improvement, FSA Insured, 5.625%, 12/01/27 ........... 4,500,000 4,722,750 Olmsted Falls Local School District GO, FGIC Insured, 5.85%, 12/15/17 ...................... 1,500,000 1,622,190 Orrville Water Systems Improvement Revenue, MBIA Insured, 6.125%, 12/01/18 ................. 1,150,000 1,268,163 Ottawa County Sewer System Revenue, Danbury Project, Refunding, AMBAC Insured, 5.50%, 10/01/14 .......................................................... 1,950,000 2,028,663 Painesville Township Local School District GO, Lake County, FGIC Insured, 5.625%, 12/01/09 ........................................................................ 3,240,000 3,485,333 5.65%, 12/01/15 ......................................................................... 4,490,000 4,760,927 Perrysburg Exempted Village School District GO, AMBAC Insured, 6.00%, 12/01/15 .......................................................... 2,000,000 2,119,440 Series B, FSA Insured, 5.00%, 12/01/25 .................................................. 5,000,000 4,965,250 Pickerington Local School District GO, AMBAC Insured, 5.00%, 12/01/25 .......................................................... 7,835,000 7,780,547 School Facilities Construction and Improvement, FGIC Insured, 5.00%, 12/01/28 ........... 3,000,000 2,964,870 Plain Local School District GO, FGIC Insured, 6.00%, 12/01/25 .............................. 4,500,000 4,948,785 Puerto Rico Commonwealth GO, Refunding, MBIA Insured, 5.75%, 7/01/24 ....................... 2,000,000 2,239,000 Puerto Rico PBA Revenue, Government Facilities, Series A, AMBAC Insured, 5.50%, 7/01/21 .... 4,000,000 4,131,760 Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 ................. 11,000,000 11,139,370 Revere Local School District GO, AMBAC Insured, 6.00%, 12/01/16 ............................ 1,600,000 1,739,120 Ridgewood Local School District GO, School Facilities Improvement, FSA Insured, 6.00%, 12/01/24 ......................................................................... 1,730,000 1,918,120 Riverdale Local School District GO, Improvement, FGIC Insured, 5.20%, 12/01/23 ............. 1,195,000 1,215,936 Riverside Local School District GO, School Facilities Construction and Improvement, MBIA Insured, 5.75%, 12/01/22 ........................................................... 1,000,000 1,079,600 Rural Lorain County Water Authority, Water Resource Revenue Improvement, AMBAC Insured, 5.875%, 10/01/24 ......................................................... 3,100,000 3,347,411 Salem GO, AMBAC Insured, 6.50%, 12/01/06 ................................................... 2,000,000 2,292,680 Sidney City School District GO, School Improvement, Refunding, Series B, FGIC Insured, 5.25%, 12/01/23 ........................................................... 1,780,000 1,816,490 South Range Local School District GO, MBIA Insured, 6.15%, 12/01/18 ........................ 700,000 762,650 Southwest Regional Water District Revenue, MBIA Insured, 6.00%, 12/01/15 ................................................................................ 1,000,000 1,094,520 12/01/20 ................................................................................ 700,000 760,256 South-Western City School District of Ohio Franklin and Pickway Counties GO, FGIC Insured, ETM, 7.875%, 12/01/04 ................................................................................ 550,000 631,703 12/01/06 ................................................................................ 600,000 727,092 12/01/07 ................................................................................ 600,000 740,280 St. Henry Local Consolidated School District GO, MBIA Insured, 5.75%, 12/01/22 ............. 1,515,000 1,635,594
95 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) St. Mary's Electric System Mortgage Revenue, AMBAC Insured, 6.65%, 12/01/11 ................ $ 600,000 $ 612,456 St. Mary's Waterworks Revenue, AMBAC Insured, 6.65%, 12/01/11 .............................. 750,000 765,570 Stark County GO, Refunding, AMBAC Insured, 5.70%, 11/15/17 ................................. 2,775,000 2,939,558 Steubenville City School District GO, School Facilities and Implementation, MBIA Insured, 5.60%, 12/01/22 ..................... 1,500,000 1,586,910 Series A, AMBAC Insured, Pre-Refunded, 6.20%, 12/01/17 .................................. 2,075,000 2,270,776 Streetsboro City School District GO, School Improvement, MBIA Insured, 5.00%, 12/01/25 ..... 2,500,000 2,482,625 Struthers City School District GO, AMBAC Insured, 6.50%, 12/01/14 .......................................................... 1,750,000 1,843,643 Refunding, AMBAC Insured, 5.50%, 12/01/22 ............................................... 1,950,000 2,036,522 Summit County GO, Limited Tax, Refunding, Series B, AMBAC Insured, 6.95%, 8/01/08 ......................... 400,000 412,128 Sanitary Sewer System Improvement, FGIC Insured, 5.25%, 12/01/21 ........................ 4,505,000 4,616,183 Swanton Local School District GO, School Improvement, FGIC Insured, 5.25%, 12/01/25 ........ 1,895,000 1,925,964 Sycamore Community City School District COP, Blue Ash Elementary School Project, AMBAC Insured, 5.125%, 12/01/25 ......................................................... 1,000,000 1,005,630 Sylvania City School District GO, FGIC Insured, 5.75%, 12/01/22 ........................................................... 1,500,000 1,674,030 Refunding, FGIC Insured, 5.00%, 12/01/22 ................................................ 1,550,000 1,553,720 Various Purpose, FGIC Insured, 5.30%, 12/01/20 .......................................... 2,225,000 2,294,709 Toledo GO, Limited Tax, AMBAC Insured, 5.95%, 12/01/15 .......................................................... 3,715,000 4,034,862 AMBAC Insured, 6.00%, 12/01/16 .......................................................... 1,000,000 1,109,870 FGIC Insured, 7.375%, 12/01/02 .......................................................... 400,000 416,672 FGIC Insured, 7.375%, 12/01/03 .......................................................... 650,000 709,976 FGIC Insured, 7.375%, 12/01/04 .......................................................... 650,000 734,819 FGIC Insured, 7.375%, 12/01/05 .......................................................... 650,000 751,823 FGIC Insured, 7.375%, 12/01/06 .......................................................... 625,000 737,044 Trumbull County GO, Refunding, MBIA Insured, 5.20%, 12/01/20 ............................... 1,475,000 1,511,388 Trumbull County Hospital Revenue, Refunding and Improvement, Series A, FGIC Insured, Pre-Refunded, 6.25%, 11/15/12 ................................... 1,000,000 1,073,900 Series B, FGIC Insured, Pre-Refunded, 6.90%, 11/15/12 ................................... 2,000,000 2,163,440 Twinsburg GO, Golf Course, Refunding, FGIC Insured, 5.00%, 12/01/21 ................................... 1,000,000 1,003,750 Park Land and Conservation, FGIC Insured, 5.00%, 12/01/21 ............................... 1,000,000 1,003,750 Union Scioto Local School District GO, Classroom Facilities, FSA Insured, 5.50%, 12/01/22 .. 2,600,000 2,715,362 University of Akron General Receipts Revenue, FGIC Insured, 5.70%, 1/01/24 .......................................................................... 7,050,000 7,491,048 5.75%, 1/01/29 .......................................................................... 1,500,000 1,591,425 University of Cincinnati COP, Jefferson Avenue Residence Hall, MBIA Insured, 5.125%, 6/01/28 4,900,000 4,914,994 University of Cincinnati General Receipt, Series AD, MBIA Insured, 5.125%, 6/01/20 ................................................ 1,500,000 1,513,935 Series W, MBIA Insured, 5.85%, 6/01/16 .................................................. 1,630,000 1,737,825 University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 ................. 6,000,000 6,073,440 University of Toledo General Receipt, Refunding, Series A, FGIC Insured, 5.90%, 6/01/20 .... 5,500,000 5,770,215 Upper Arlington County School District GO, MBIA Insured, 5.25%, 12/01/22 ................... 5,000,000 5,068,750 Urbana Wastewater Treatment Plant GO, Improvement, AMBAC Insured, 7.05%, 12/01/11 .......... 1,000,000 1,057,520 Valley Local School District GO, AMBAC Insured, 7.00%, 12/01/13 ............................ 1,400,000 1,545,516 Wadsworth City School District GO, FGIC Insured, 5.75%, 12/01/22 ........................... 1,200,000 1,291,632 Warren GO, MBIA Insured, Pre-Refunded, 6.65%, 11/01/12 ..................................... 2,415,000 2,652,008 Warrensville Heights City School District GO, School Improvement, FGIC Insured, 5.625%, 12/01/20 ........................................................................ 3,500,000 3,716,650 5.75%, 12/01/24 ......................................................................... 2,750,000 2,957,763 aWaterville GO, Refunding, MBIA Insured, 5.05%, 12/01/26 .................................... 1,085,000 1,083,394 Wausen Exempted Village School District GO, Refunding and School Improvements, MBIA Insured, 5.50%, 12/01/17 ........................................................... 1,800,000 1,886,130 Wayne Local School District GO, Warren County, AMBAC Insured, 6.10%, 12/01/24 .............. 1,800,000 1,972,404 Western Reserve Local School District GO, MBIA Insured, 5.75%, 12/01/23 .................... 1,825,000 1,976,986 Westerville, Minerva Park and Blendon Joint Township Hospital District Revenue, St. Ann's Hospital, Refunding, Series B, AMBAC Insured, ETM, 7.00%, 9/15/12 ............. 5,000,000 5,107,300
96 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Westfall Local School District GO, School Facilities Construction Improvement, FGIC Insured, 6.00%, 12/01/22 ........................................................... $ 2,850,000 $ 3,126,963 Wilmington Water Revenue, First Mortgage System, AMBAC Insured, 6.00%, 6/15/21 .......................................................................... 2,510,000 2,706,056 5.25%, 6/15/29 .......................................................................... 3,320,000 3,355,258 Woodmore Local School District GO, Refunding, AMBAC Insured, 5.65%, 12/01/08 ............... 500,000 538,970 Wooster City School District GO, AMBAC Insured, Pre-Refunded, 6.50%, 12/01/17 .............. 8,700,000 9,205,731 Worthington City School District GO, Refunding, FGIC Insured, 6.375%, 12/01/12 ............. 2,350,000 2,425,313 Youngstown State University General Receipts, AMBAC Insured, Pre-Refunded, 6.00%, 12/15/16 . 2,250,000 2,521,410 ------------- TOTAL BONDS 813,643,412 ------------- aZERO COUPON BONDS .1% Marysville Ohio Exempted Village School District 12/01/20 ................................................................................ 1,000,000 376,970 12/01/21 ................................................................................ 1,000,000 355,770 ------------- TOTAL ZERO COUPON BONDS .................................................................... 732,740 ------------- TOTAL LONG TERM INVESTMENTS (COST $769,666,721) ............................................ 814,376,152 ------------- bSHORT TERM INVESTMENTS .5% Cuyahoga County Hospital Revenue, University Hospitals of Cleveland, Daily VRDN and Put, 1.35%, 1/01/16 ................................................................. 830,000 830,000 Ohio State Air Quality Development Authority Revenue, Cincinnati Gas and Electric, Refunding, Series A, Daily VRDN and Put, 1.35%, 9/01/30 ................................. 300,000 300,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ....................................... 1,065,000 1,065,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ............................ 1,500,000 1,500,000 ------------- TOTAL SHORT TERM INVESTMENTS (COST $3,695,000) ............................................. 3,695,000 ------------- TOTAL INVESTMENTS (COST $773,361,721) 98.8% ................................................ 818,071,152 OTHER ASSETS, LESS LIABILITIES 1.2% ........................................................ 10,285,577 ------------- NET ASSETS 100.0% .......................................................................... $828,356,729 =============
See glossary of terms on page 98. aSufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. bVariable 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. See notes to financial statements. 97 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.) GLOSSARY OF TERMS -------------------------------------------------------------------------------- AMBAC - American Municipal Bond Assurance Corp. BART - Bay Area Rapid Transit 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 COP - Certificate of Participation EDA - Economic Development Authority EDC - Economic Development Corp. ETM - Escrow to Maturity FGIC - Financial Guaranty Insurance Co. FHA - Federal Housing Authority/Agency FSA - Financial Security Assistance GNMA - Government National Mortgage Association GO - General Obligation HDA - Housing Development Authority/Agency HDC - Housing Development Corp. HFA - Housing Finance Authority/Agency HFAR - Housing Finance Authority Revenue HFC - Housing Finance Corp. HMR - Home Mortgage Revenue IDA - Industrial Development Authority/Agency IDAR - Industrial Development Authority/Agency Revenue IDR - Industrial Development Revenue ISD - Independent School District LTD. - Limited MBIA - Municipal Bond Investors Assurance Corp. MFH - Multi-Family Housing MFHR - Multi-Family Housing Revenue MFMR - Multi-Family Mortgage Revenue MFR - Multi-Family Revenue MUD - Municipal Utility District PBA - Public Building Authority PCR - Pollution Control Revenue PUD - Public Utility District RDA - Redevelopment Authority/Agency RDAR - Redevelopment Authority/Agency Revenue RMR - Residential Mortgage Revenue SFHR - Single Family Housing Revenue SFM - Single Family Mortgage SFMR - Single Family Mortgage Revenue USD - Unified School District VRDN - Variable Rate Demand Notes 98 FRANKLIN TAX-FREE TRUST Financial Statements STATEMENTS OF ASSETS AND LIABILITIES FEBRUARY 28, 2002
FRANKLIN FRANKLIN FRANKLIN FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND -------------------------------------------------------------------------- Assets: Investments in securities: Cost ................................................. $119,013,550 $1,584,427,192 $393,834,869 $1,196,183,426 ========================================================================== Value ................................................ 125,962,065 1,669,356,253 413,286,439 1,275,976,041 Cash ................................................... 59,622 22,613 24,119 57,884 Receivables: Capital shares sold .................................. 356,401 3,172,308 790,768 1,714,730 Interest ............................................. 1,934,167 21,765,285 5,020,013 19,199,305 -------------------------------------------------------------------------- Total assets ..................................... 128,312,255 1,694,316,459 419,121,339 1,296,947,960 -------------------------------------------------------------------------- Liabilities: Payables: Investment securities purchased ...................... -- 6,290,071 3,015,910 -- Capital shares redeemed .............................. 384,640 878,729 400,903 972,541 Affiliates ........................................... 76,057 867,539 232,010 694,061 Shareholders ......................................... 86,009 1,253,097 258,026 670,206 Distributions to shareholders ......................... 154,349 2,112,256 524,153 1,635,727 Other liabilities ..................................... 16,344 108,586 36,760 85,219 -------------------------------------------------------------------------- Total liabilities ................................ 717,399 11,510,278 4,467,762 4,057,754 -------------------------------------------------------------------------- Net assets, at value ............................ $127,594,856 $1,682,806,181 $414,653,577 $1,292,890,206 ========================================================================== Net assets consist of: Undistributed net investment income ................... $ 13,166 $ (1,691,886) $ (141,776) $ (807,019) Net unrealized appreciation ........................... 6,948,515 84,929,061 19,451,570 79,792,615 Accumulated net realized gain (loss) .................. (2,568,657) (3,409,788) (1,661,241) 1,174,191 Capital shares ........................................ 123,201,832 1,602,978,794 397,005,024 1,212,730,419 -------------------------------------------------------------------------- Net assets, at value ............................ $127,594,856 $1,682,806,181 $414,653,577 $1,292,890,206 ========================================================================== CLASS A: Net assets, at value .................................. $127,594,856 $1,554,245,256 $382,299,739 $1,185,151,603 ========================================================================== Shares outstanding .................................... 12,157,633 128,165,945 32,855,189 96,753,600 ========================================================================== Net asset value per sharea ............................ $10.50 $12.13 $11.64 $12.25 ========================================================================== Maximum offering price per share (net asset value per share / 95.75%) ............... $10.97 $12.67 $12.16 $12.79 ========================================================================== CLASS B: Net assets, at value .................................. -- $ 38,158,324 -- $ 30,224,870 ========================================================================== Shares outstanding .................................... -- 3,135,728 -- 2,458,403 ========================================================================== Net asset value and maximum offering price per sharea . -- $12.17 -- $12.29 ========================================================================== CLASS C: Net assets, at value .................................. -- $ 90,402,601 $ 32,353,838 $ 77,513,733 ========================================================================== Shares outstanding .................................... -- 7,403,003 2,764,292 6,279,946 ========================================================================== Net asset value per sharea ............................ -- $12.21 $11.70 $12.34 ========================================================================== Maximum offering price per share (net asset value per share / 99%) .................. -- $12.33 $11.82 $12.46 ==========================================================================
aRedemption price is equal to net asset value less any applicable contingent deferred sales charge. See notes to financial statements. 99 FRANKLIN TAX-FREE TRUST Financial Statements (continued) STATEMENTS OF ASSETS AND LIABILITIES (CONT.) FEBRUARY 28, 2002
FRANKLIN MINNESOTA FRANKLIN OHIO INSURED TAX-FREE INSURED TAX-FREE INCOME FUND INCOME FUND ----------------------------------------- Assets: Investments in securities: Cost ................................................................................ $505,235,374 $773,361,721 ========================================= Value ............................................................................... 526,779,363 818,071,152 Cash ................................................................................. 14,695 89,298 Receivables: Capital shares sold ................................................................. 1,296,163 3,174,260 Interest ............................................................................ 4,928,547 11,626,362 ----------------------------------------- Total assets ..................................................................... 533,018,768 832,961,072 ----------------------------------------- Liabilities: Payables: Investment securities purchased ..................................................... 6,257,327 1,818,414 Capital shares redeemed ............................................................. 458,156 796,256 Affiliates .......................................................................... 287,430 454,027 Shareholders ........................................................................ 321,288 404,500 Distributions to shareholders ........................................................ 662,404 1,046,313 Other liabilities .................................................................... 43,714 84,833 ----------------------------------------- Total liabilities ............................................................... 8,030,319 4,604,343 ----------------------------------------- Net assets, at value ........................................................... $524,988,449 $828,356,729 ========================================= Net assets consist of: Undistributed net investment income .................................................. $ (376,011) $ (276,849) Net unrealized appreciation .......................................................... 21,543,989 44,709,431 Accumulated net realized loss ........................................................ (4,466,584) (3,465,951) Capital shares ....................................................................... 508,287,055 787,390,098 ----------------------------------------- Net assets, at value ........................................................... $524,988,449 $828,356,729 ========================================= CLASS A: Net assets, at value ................................................................. $485,818,327 $752,422,883 ========================================= Shares outstanding ................................................................... 40,532,705 60,822,051 ========================================= Net asset value per sharea ........................................................... $11.99 $12.37 ========================================= Maximum offering price per share (net asset value per share / 95.75%) ................ $12.52 $12.92 ========================================= CLASS B: Net assets, at value ................................................................. -- $ 16,628,770 ========================================= Shares outstanding ................................................................... -- 1,340,622 ========================================= Net asset value and maximum offering price per sharea ................................ -- $12.40 ========================================= CLASS C: Net assets, at value ................................................................. $ 39,170,122 $ 59,305,076 ========================================= Shares outstanding ................................................................... 3,250,170 4,763,033 ========================================= Net asset value per sharea ........................................................... $12.05 $12.45 ========================================= Maximum offering price per share (net asset value per share / 99%) ................... $12.17 $12.58 =========================================
aRedemption price is equal to net asset value less any applicable contingent deferred sales charge. 100 See notes to financial statements. FRANKLIN TAX-FREE TRUST Financial Statements (continued) STATEMENTS OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 2002
FRANKLIN FRANKLIN FRANKLIN FLORIDA INSURED MASSACHUSETTS FRANKLIN MICHIGAN INSURED TAX-FREE TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ---------------------------------------------------------------------- Investment income: Interest .................................................. $6,552,105 $88,923,365 $20,996,654 $66,722,299 ---------------------------------------------------------------------- Expenses: Management fees (Note 3) .................................. 739,161 7,511,494 1,987,065 5,792,905 Distribution fees (Note 3) Class A .................................................. 122,272 1,401,888 343,250 1,085,373 Class B .................................................. -- 138,120 -- 128,349 Class C .................................................. -- 481,106 191,601 415,165 Transfer agent fees (Note 3) .............................. 49,798 743,473 171,019 652,778 Custodian fees ............................................ 1,225 16,059 3,821 12,204 Reports to shareholders ................................... 7,201 79,266 20,476 69,655 Registration and filing fees .............................. 5,092 104,125 16,584 24,582 Professional fees ......................................... 14,368 31,692 16,476 30,270 Trustees' fees and expenses ............................... 1,288 16,927 4,007 12,824 Other ..................................................... 11,045 89,950 24,235 49,934 ---------------------------------------------------------------------- Total expenses ....................................... 951,450 10,614,100 2,778,534 8,274,039 ---------------------------------------------------------------------- Net investment income ............................... 5,600,655 78,309,265 18,218,120 58,448,260 ---------------------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from investments ................. (104,869) 1,601,265 187,266 3,045,611 Net unrealized appreciation on investments ................ 1,713,127 19,285,155 2,950,145 14,451,636 ---------------------------------------------------------------------- Net realized and unrealized gain ........................... 1,608,258 20,886,420 3,137,411 17,497,247 ---------------------------------------------------------------------- Net increase in net assets resulting from operations ....... $7,208,913 $99,195,685 $21,355,531 $75,945,507 ======================================================================
See notes to financial statements. 101 FRANKLIN TAX-FREE TRUST Financial Statements (continued) STATEMENTS OF OPERATIONS (CONT.) FOR THE YEAR ENDED FEBRUARY 28, 2002
FRANKLIN MINNESOTA FRANKLIN OHIO INSURED TAX-FREE INSURED TAX-FREE INCOME FUND INCOME FUND ------------------------------------- Investment income: Interest ............................................................................... $27,897,792 $43,032,040 ------------------------------------- Expenses: Management fees (Note 3) ............................................................... 2,548,817 3,779,150 Distribution fees (Note 3) Class A ............................................................................... 453,757 704,643 Class B ............................................................................... -- 62,452 Class C ............................................................................... 193,534 319,828 Transfer agent fees (Note 3) ........................................................... 261,109 401,861 Custodian fees ......................................................................... 5,080 7,733 Reports to shareholders ................................................................ 31,059 45,702 Registration and filing fees ........................................................... 14,784 18,643 Professional fees ...................................................................... 17,779 28,993 Trustees' fees and expenses ............................................................ 5,376 8,203 Other .................................................................................. 25,555 41,739 ------------------------------------- Total expenses .................................................................... 3,556,850 5,418,947 ------------------------------------- Net investment income ............................................................ 24,340,942 37,613,093 ------------------------------------- Realized and unrealized gains (losses): Net realized gain from investments ..................................................... 97,505 94,804 Net unrealized appreciation on investments ............................................. 3,995,823 10,998,040 ------------------------------------- Net realized and unrealized gain ........................................................ 4,093,328 11,092,844 ------------------------------------- Net increase in net assets resulting from operations .................................... $28,434,270 $48,705,937 =====================================
102 See notes to financial statements. FRANKLIN TAX-FREE TRUST Financial Statements (continued) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN FLORIDA INSURED FRANKLIN INSURED TAX-FREE INCOME FUND TAX-FREE INCOME FUND -------------------------------------------------------------- 2002 2001 2002 2001 -------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................... $ 5,600,655 $ 5,346,541 $ 78,309,265 $ 77,899,113 Net realized gain (loss) from investments ....................... (104,869) (653,712) 1,601,265 (475,525) Net unrealized appreciation on investments ...................... 1,713,127 8,821,512 19,285,155 94,546,935 -------------------------------------------------------------- Net increase in net assets resulting from operations ........ 7,208,913 13,514,341 99,195,685 171,970,523 Distributions to shareholders from: Net investment income: Class A ........................................................ (5,657,998) (5,285,246) (74,995,218) (74,803,497) Class B ........................................................ -- -- (910,449) (69,273) Class C ........................................................ -- -- (3,224,863) (2,565,333) -------------------------------------------------------------- Total distributions to shareholders .............................. (5,657,998) (5,285,246) (79,130,530) (77,438,103) Capital share transactions: (Note 2) Class A ........................................................ 9,462,927 (479,381) 63,368,441 (64,392,458) Class B ........................................................ -- -- 31,563,478 6,142,910 Class C ........................................................ -- -- 27,216,744 2,073,737 -------------------------------------------------------------- Total capital share transactions ................................. 9,462,927 (479,381) 122,148,663 (56,175,811) Net increase in net assets .................................. 11,013,842 7,749,714 142,213,818 38,356,609 Net assets: Beginning of year ................................................ 116,581,014 108,831,300 1,540,592,363 1,502,235,754 -------------------------------------------------------------- End of year ...................................................... $127,594,856 $116,581,014 $1,682,806,181 $1,540,592,363 ============================================================== Undistributed net investment income included in net assets: End of year ...................................................... $ 13,166 $ 69,168 $ (1,691,886) $ (1,402,559) ==============================================================
See notes to financial statements. 103 FRANKLIN TAX-FREE TRUST Financial Statements (continued) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN MASSACHUSETTS INSURED FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND TAX-FREE INCOME FUND -------------------------------------------------------------- 2002 2001 2002 2001 -------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................... $ 18,218,120 $ 17,179,225 $ 58,448,260 $ 56,155,230 Net realized gain (loss) from investments ....................... 187,266 (465,128) 3,045,611 (490,045) Net unrealized appreciation on investments ...................... 2,950,145 24,369,861 14,451,636 66,898,360 -------------------------------------------------------------- Net increase in net assets resulting from operations ........ 21,355,531 41,083,958 75,945,507 122,563,545 Distributions to shareholders from: Net investment income: Class A ........................................................ (17,126,179) (15,887,604) (55,343,998) (53,459,066) Class B ........................................................ -- -- (829,559) (124,442) Class C ........................................................ (1,257,386) (1,220,582) (2,718,321) (2,181,898) -------------------------------------------------------------- Total distributions to shareholders .............................. (18,383,565) (17,108,186) (58,891,878) (55,765,406) Capital share transactions: (Note 2) Class A ........................................................ 51,896,159 (904,760) 84,602,241 (36,699,951) Class B ........................................................ -- -- 22,108,918 7,409,101 Class C ........................................................ 3,738,134 (807,109) 22,944,215 1,621,257 -------------------------------------------------------------- Total capital share transactions ................................. 55,634,293 (1,711,869) 129,655,374 (27,669,593) Net increase in net assets .................................. 58,606,259 22,263,903 146,709,003 39,128,546 Net assets: Beginning of year ................................................ 356,047,318 333,783,415 1,146,181,203 1,107,052,657 -------------------------------------------------------------- End of year ...................................................... $414,653,577 $356,047,318 $1,292,890,206 $1,146,181,203 ============================================================== Undistributed net investment income included in net assets: End of year ...................................................... $ (141,776) $ (67,524) $ (807,019) $ (466,418) ==============================================================
104 See notes to financial statements. FRANKLIN TAX-FREE TRUST Financial Statements (continued) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN MINNESOTA INSURED FRANKLIN OHIO INSURED TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------------- 2002 2001 2002 2001 ------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................... $ 24,340,942 $ 23,860,011 $ 37,613,093 $ 36,836,263 Net realized gain (loss) from investments ....................... 97,505 (3,186,214) 94,804 (2,272,686) Net unrealized appreciation on investments ...................... 3,995,823 34,513,019 10,998,040 44,062,488 ------------------------------------------------------------- Net increase in net assets resulting from operations ........ 28,434,270 55,186,816 48,705,937 78,626,065 Distributions to shareholders from: Net investment income: Class A ........................................................ (23,247,919) (22,758,162) (35,527,889) (34,715,424) Class B ........................................................ -- -- (411,120) (61,315) Class C ........................................................ (1,265,988) (1,010,156) (2,130,271) (1,818,624) ------------------------------------------------------------- Total distributions to shareholders .............................. (24,513,907) (23,768,318) (38,069,280) (36,595,363) Capital share transactions: (Note 2) Class A ........................................................ 16,379,979 (15,306,119) 43,772,379 (29,839,813) Class B ........................................................ -- -- 12,822,961 3,490,517 Class C ........................................................ 14,191,507 1,413,796 16,551,370 (448,940) ------------------------------------------------------------- Total capital share transactions ................................. 30,571,486 (13,892,323) 73,146,710 (26,798,236) Net increase in net assets .................................. 34,491,849 17,526,175 83,783,367 15,232,466 Net assets: Beginning of year ................................................ 490,496,600 472,970,425 744,573,362 729,340,896 ------------------------------------------------------------- End of year ...................................................... $524,988,449 $490,496,600 $828,356,729 $744,573,362 ============================================================= Undistributed net investment income included in net assets: End of year ...................................................... $ (376,011) $ (284,111) $ (276,849) $ 80,164 =============================================================
See notes to financial statements. 105 FRANKLIN TAX-FREE TRUST Notes to Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Tax-Free Trust (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twenty-five separate series. All Funds included in this report (the Funds) are diversified except the Franklin Florida Insured Tax-Free Income Fund. The investment objective of the Funds included in this report is to provide tax-free income. The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Tax-free bonds generally trade in the over-the-counter market and are valued within the range of the latest quoted bid and asked prices. In the absence of a sale or reported bid and asked prices, information with respect to bond and note transactions, quotations from bond dealers, market transactions in comparable securities, and various relationships between securities are used to determine the value of the security. The Trust may utilize a pricing service, bank or broker/dealer experienced in such matters to perform any of the pricing functions under procedures approved by the Board of Trustees. Securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Trustees. B. INCOME TAXES No provision has been made for income taxes because each fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its income. C. 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. Bond discount and premium are amortized on a yield to maturity basis. Dividends from net investment income are normally declared daily and distributed monthly to shareholders. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets. Other expenses are charged to each fund on a specific identification basis. D. INSURANCE The scheduled payments of interest and principal for each insured municipal security in the Trust are insured by either a new issue insurance policy, a portfolio insurance policy or a secondary insurance policy. Some municipal securities in the Trust are secured by collateral guaranteed by an agency of the U.S. government. Depending on the type of coverage, premiums for insurance are either added to the cost basis of the security, included as an expense of the fund, or paid by a third party. E. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expense during the reporting period. Actual results could differ from those estimates. 106 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.) F. AUDIT GUIDE In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide requires the Funds to amortize all premium and discount on fixed-income securities. Such amortization is included in net investment income but did not impact the net assets or the distributions of the Funds. Prior to March 1, 2001, de minimus market discount on fixed-income securities was included in realized gains and losses. The cumulative effect of this accounting change resulted in an increase in the recorded cost of investments and a corresponding decrease in net unrealized appreciation as listed below:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA OHIO INSURED INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------------------------------ Increase in cost of investments .. $1,167 $582,851 $98,755 $113,550 $94,375 $104,453 The effect of this change for the year ended February 28, 2002 was as listed below: FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA OHIO INSURED INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------------------------------ Increase (decrease) in net investment income ......................... $520 $(131,580) $33,560 $27,254 $22,948 $20,760 Increase (decrease) in unrealized gains (694) 182,493 (25,998) (16,721) (9,638) (15,481) Increase (decrease) in realized gains 174 (50,913) (7,562) (10,533) (13,310) (5,279)
The per share effect of this change for the year ended February 28, 2002 was less than $.005 for each Fund. The statements of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in accounting policy. 2. SHARES OF BENEFICIAL INTEREST The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A CLASS A & CLASS C CLASS A, CLASS B, & CLASS C ------------------------------------------------------------------------------------------------------------------------------------ Franklin Florida Insured Tax-Free Franklin Massachusetts Insured Tax-Free Franklin Insured Tax-Free Income Fund Income Fund Income Fund Franklin Minnesota Insured Tax-Free Franklin Michigan Insured Tax-Free Income Fund Income Fund Franklin Ohio Insured Tax-Free Income Fund
At February 28, 2002, there were an unlimited number of shares authorized (no par value). Transactions in the Funds' shares were as follows:
FRANKLIN FLORIDA INSURED FRANKLIN INSURED TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------------------- CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------- Year ended February 28, 2002 Shares sold .................................................. 2,557,416 $ 26,662,110 16,833,979 $ 202,407,491 Shares issued in reinvestment of distributions ............... 244,438 2,549,200 2,790,550 33,584,610 Shares redeemed .............................................. (1,897,313) (19,748,383) (14,349,903) (172,623,660) ------------------------------------------------------------------- Net increase .................................................. 904,541 $ 9,462,927 5,274,626 $ 63,368,441 =================================================================== Year ended February 28, 2001 Shares sold .................................................. 1,614,142 $ 16,308,931 9,385,439 $ 109,765,798 Shares issued in reinvestment of distributions ............... 211,980 2,118,259 2,839,500 32,960,360 Shares redeemed .............................................. (1,897,552) (18,906,571) (17,897,910) (207,118,616) ------------------------------------------------------------------- Net decrease .................................................. (71,430) $ (479,381) (5,672,971) $ (64,392,458) ===================================================================
107 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.)
FRANKLIN INSURED TAX-FREE INCOME FUND ---------------------------- SHARES AMOUNT CLASS B SHARES: ---------------------------- Year ended February 28, 2002 Shares sold ............................................................................... 2,763,589 $ 33,398,365 Shares issued in reinvestment of distributions ............................................ 45,528 550,595 Shares redeemed ........................................................................... (197,498) (2,385,482) ---------------------------- Net increase ............................................................................... 2,611,619 $ 31,563,478 ============================ Year ended February 28, 2001 Shares sold ............................................................................... 524,141 $ 6,210,205 Shares issued in reinvestment of distributions ............................................ 3,528 41,646 Shares redeemed ........................................................................... (9,186) (108,941) ---------------------------- Net increase ............................................................................... 518,483 $ 6,142,910 ============================ CLASS C SHARES: Year ended February 28, 2002 Shares sold ............................................................................... 2,930,627 $ 35,537,518 Shares issued in reinvestment of distributions ............................................ 156,179 1,892,530 Shares redeemed ........................................................................... (844,569) (10,213,304) ---------------------------- Net increase ............................................................................... 2,242,237 $ 27,216,744 ============================ Year ended February 28, 2001 Shares sold ............................................................................... 1,163,676 $ 13,782,001 Shares issued in reinvestment of distributions ............................................ 125,690 1,468,509 Shares redeemed ........................................................................... (1,134,535) (13,176,773) ---------------------------- Net increase ............................................................................... 154,831 $ 2,073,737 ============================
FRANKLIN MASSACHUSETTS INSURED FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND TAX-FREE INCOME FUND ---------------------------------------------------------- CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------- Year ended February 28, 2002 Shares sold ................................................. 6,667,872 $ 77,240,450 13,042,912 $ 158,406,247 Shares issued in reinvestment of distributions .............. 721,830 8,354,231 2,374,547 28,873,533 Shares redeemed ............................................. (2,922,702) (33,698,522) (8,447,157) (102,677,539) ---------------------------------------------------------- Net increase ................................................. 4,467,000 $ 51,896,159 6,970,302 $ 84,602,241 ========================================================== Year ended February 28, 2001 Shares sold ................................................. 2,507,175 $ 28,085,379 5,928,104 $ 69,912,103 Shares issued in reinvestment of distributions .............. 686,324 7,635,474 2,342,227 27,438,964 Shares redeemed ............................................. (3,317,090) (36,625,613) (11,487,789) (134,051,018) ---------------------------------------------------------- Net decrease ................................................. (123,591) $ (904,760) (3,217,458) $ (36,699,951) ========================================================== CLASS B SHARES: Year ended February 28, 2002 Shares sold ............................................................................... 1,833,326 $ 22,353,029 Shares issued in reinvestment of distributions ............................................ 44,277 540,839 Shares redeemed ........................................................................... (64,486) (784,950) ---------------------------- Net increase ............................................................................... 1,813,117 $ 22,108,918 ============================ Year ended February 28, 2001 Shares sold ............................................................................... 633,064 $ 7,497,511 Shares issued in reinvestment of distributions ............................................ 6,012 71,652 Shares redeemed ........................................................................... (13,826) (160,062) ---------------------------- Net increase ............................................................................... 625,250 $ 7,409,101 ============================
108 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.)
FRANKLIN MASSACHUSETTS INSURED FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND TAX-FREE INCOME FUND ---------------------------------------------------------- CLASS C SHARES: SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------- Year ended February 28, 2002 Shares sold ................................................. 847,308 $ 9,880,628 2,311,583 $ 28,306,118 Shares issued in reinvestment of distributions .............. 73,481 855,041 145,879 1,787,347 Shares redeemed ............................................. (603,298) (6,997,535) (584,374) (7,149,250) ---------------------------------------------------------- Net increase ................................................. 317,491 $ 3,738,134 1,873,088 $ 22,944,215 ========================================================== Year ended February 28, 2001 Shares sold ................................................. 428,505 $ 4,808,613 875,356 $ 10,418,338 Shares issued in reinvestment of distributions .............. 74,932 838,012 121,327 1,431,944 Shares redeemed ............................................. (578,232) (6,453,734) (872,402) (10,229,025) ---------------------------------------------------------- Net increase (decrease) ...................................... (74,795) $ (807,109) 124,281 $ 1,621,257 ========================================================== FRANKLIN MINNESOTA INSURED FRANKLIN OHIO INSURED TAX-FREE INCOME FUND TAX-FREE INCOME FUND ---------------------------------------------------------- CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------- Year ended February 28, 2002 Shares sold ................................................. 4,855,921 $57,927,992 7,349,999 $90,221,895 Shares issued in reinvestment of distributions .............. 1,041,503 12,442,171 1,460,571 17,926,475 Shares redeemed ............................................. (4,531,166) (53,990,184) (5,246,223) (64,375,991) ---------------------------------------------------------- Net increase ................................................. 1,366,258 $16,379,979 3,564,347 $43,772,379 ========================================================== Year ended February 28, 2001 Shares sold ................................................. 2,452,226 $28,465,039 3,974,378 $47,372,116 Shares issued in reinvestment of distributions .............. 1,073,063 12,334,571 1,482,671 17,592,772 Shares redeemed ............................................. (4,898,395) (56,105,729) (8,023,102) (94,804,701) ---------------------------------------------------------- Net decrease ................................................. (1,373,106) $(15,306,119) (2,566,053) $(29,839,813) ========================================================== CLASS B SHARES: Year ended February 28, 2002 Shares sold ............................................................................... 1,079,786 $ 13,286,628 Shares issued in reinvestment of distributions ............................................ 21,747 267,985 Shares redeemed ........................................................................... (59,286) (731,652) ---------------------------- Net increase ............................................................................... 1,042,247 $ 12,822,961 ============================ Year ended February 28, 2001 Shares sold ............................................................................... 288,351 $ 3,449,200 Shares issued in reinvestment of distributions ............................................ 3,437 41,317 ---------------------------- Net increase ............................................................................... 291,788 $ 3,490,517 ============================ CLASS C SHARES: Year ended February 28, 2002 Shares sold ................................................. 1,412,309 $16,980,707 1,725,320 $ 21,331,886 Shares issued in reinvestment of distributions .............. 75,200 903,217 108,112 1,335,244 Shares redeemed ............................................. (307,307) (3,692,417) (496,900) (6,115,760) ---------------------------------------------------------- Net increase ................................................. 1,180,202 $14,191,507 1,336,532 $ 16,551,370 ========================================================== Year ended February 28, 2001 Shares sold ................................................. 377,632 $ 4,380,966 525,831 $ 6,315,062 Shares issued in reinvestment of distributions .............. 63,645 735,338 103,662 1,236,128 Shares redeemed ............................................. (323,446) (3,702,508) (671,869) (8,000,130) ---------------------------------------------------------- Net increase (decrease) ...................................... 117,831 $ 1,413,796 (42,376) $ (448,940) ==========================================================
109 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Certain officers and trustees of the Trust are also officers and/or directors of Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc. (Distributors), Franklin/Templeton Investor Services, LLC (Investor Services), and Franklin Templeton Services, LLC (FT Services), the Funds' investment manager, principal underwriter, transfer agent, and administrative manager, respectively. The Funds pay an investment management fee to Advisers based on the net assets of the Funds as follows: ANNUALIZED FEE RATE MONTH-END NET ASSETS --------------------------------------------------------------------------- .625% First $100 million .500% Over $100 million, up to and including $250 million .450% In excess of $250 million 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. The Funds reimburse Distributors up to .10%, .65%, and .65% per year of their average daily net assets of Class A, Class B, and Class C, respectively, for costs incurred in marketing the Funds' shares. Distributors paid net commissions on sales of the Funds' shares, and received contingent deferred sales charges for the period as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA OHIO INSURED INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------------------------------ Net commissions paid .............. $14,977 $1,323,522 $154,979 $1,158,010 $188,996 $548,373 Contingent deferred sales charges . $ -- $ 57,337 $ 8,018 $ 64,135 $ 8,414 $ 35,839
The Funds paid transfer agent fees of $2,280,038 of which $1,661,501 was paid to Investor Services. 4. INCOME TAXES At February 28, 2002, the Funds had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FLORIDA FRANKLIN MASSACHUSETTS MINNESOTA OHIO INSURED INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND -------------------------------------------------------------------------------- Capital loss carryovers expiring in: 2003 .............................................. $1,100,392 $ -- $ -- $ -- $ -- 2005 .............................................. 167,156 -- -- -- -- 2008 .............................................. 497,948 1,881,009 1,052,269 1,391,185 1,196,416 2009 .............................................. 546,752 1,525,660 608,972 2,286,638 1,741,823 2010 .............................................. 256,409 -- -- 788,761 527,712 -------------------------------------------------------------------------------- $2,568,657 $3,406,669 $1,661,241 $4,466,584 $3,465,951 ================================================================================
Distributions of income to shareholders may not equal net investment income due to differing treatments of dividend distributions for book and tax purposes. 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 treatment of wash sales and bond discounts. 110 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 4. INCOME TAXES (CONT.) For the Funds, the tax characters of distributions paid during the year ended February 28, 2002, were the same for financial statement and tax purposes. At February 28, 2002, the cost of investments, net unrealized appreciation, undistributed tax-exempt income and undistributed short-term and long-term capital gains for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA OHIO INSURED INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------------------------------ Investments at cost ............... $119,011,689 $1,584,029,953 $393,710,116 $1,196,053,155 $505,131,361 $773,241,787 ================================================================================================ Unrealized appreciation ........... $ 6,951,787 $ 85,818,153 $ 19,710,992 $ 80,348,233 $ 22,136,335 $ 45,047,004 Unrealized depreciation ........... (1,411) (491,853) (134,669) (425,347) (488,333) (217,639) ------------------------------------------------------------------------------------------------ Net unrealized appreciation ....... $ 6,950,376 $ 85,326,300 $ 19,576,323 $ 79,922,886 $ 21,648,002 $ 44,829,365 ================================================================================================ Undistributed tax-exempt income ... $ 165,653 $ 20,012 $ 257,625 $ 698,437 $ 182,380 $ 649,529 Undistributed short-term capital gains -- -- -- -- -- -- Undistributed long-term capital gains -- -- -- 1,174,191 -- -- ------------------------------------------------------------------------------------------------ Distributable earnings ............ $ 165,653 $ 20,012 $ 257,625 $ 1,872,628 $ 182,380 $ 649,529 ================================================================================================
5. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended February 28, 2002 were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA OHIO INSURED INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------------------------------ Purchases ........................ $32,543,450 $253,993,215 $78,100,466 $246,042,083 $48,987,023 $144,030,719 Sales ............................ $27,655,338 $133,983,746 $23,723,831 $106,721,068 $24,359,735 $ 73,983,071
6. MERGER On March 8, 2001, the Franklin Arizona Tax-Free Income Fund acquired the net assets of Franklin Arizona Insured Tax-Free Income Fund pursuant to a plan of reorganization approved by Franklin Arizona Insured Tax-Free Income Fund's shareholders. The merger was accomplished by a tax-free exchange of 6,843,792 Class A shares of the Franklin Arizona Tax-Free Income Fund (valued at $10.85) for the net assets of the Franklin Arizona Insured Tax-Free Income Fund which aggregated $74,255,143, including $3,467,723 of unrealized appreciation. The merger was accounted for as a pooling-of-interests without restatement for financial reporting purposes. The combined net assets of the Franklin Arizona Tax-Free Income Fund immediately after the merger were $880,243,633. 111 FRANKLIN TAX-FREE TRUST Independent Auditors' Report 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 each of the funds included in this report constituting a part of the Franklin Tax-Free Trust (hereafter referred to as the "Trust") at February 28, 2002, 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 Trust's 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 auditing standards generally accepted in the United States of America, which 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, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California April 8, 2002 112 FRANKLIN TAX-FREE TRUST Tax Designation Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby designate 100% of the distributions paid from net investment income as exempt-interest dividends for the fiscal year ended February 28, 2002. Under Section 852(b)(3)(C) of the Internal Revenue Code, the Franklin Michigan Insured Tax-Free Income Fund hereby designates $1,174,191 as capital gain dividend for the fiscal year ended February 28, 2002. 113 BOARD MEMBERS AND OFFICERS The name, age and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ FRANK H. ABBOTT, III (80) Trustee Since 1984 108 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Abbott Corporation (an investment company); and FORMERLY, Director, MotherLode Gold Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing) (until 1996). ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (69) Trustee Since 1984 139 Director, RBC Holdings, Inc. (bank holding company) One Franklin Parkway and Bar-S Foods (meat packing company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (69) Trustee Since 1989 140 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Member of the law firm of Pitney, Hardin, Kipp & Szuch. ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (50) Trustee Since 1998 85 Director, Amerada Hess Corporation (exploration and One Franklin Parkway refining of oil and gas); Hercules Incorporated San Mateo, CA 94403-1906 (chemicals, fibers and resins); Beverly Enterprises, Inc. (health care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Digex Incorporated (web hosting provider); and Canadian National Railway (railroad). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993), General Counsel to the United States Treasury Department (1989-1990), and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (72) Trustee Since 1984 108 Director, The California Center for Land Recycling One Franklin Parkway (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). ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (73) Trustee Since 1992 139 Director, Martek Biosciences Corporation; WorldCom, One Franklin Parkway Inc. (communications services); MedImmune, Inc. San Mateo, CA 94403-1906 (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman and Director, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until 1992); and President, National Association of Securities Dealers, Inc. (until 1987). ------------------------------------------------------------------------------------------------------------------------------------
114 INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (69) Chairman of Since 1984 139 None One Franklin Parkway the Board San Mateo, CA 94403-1906 and Trustee PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, JR. (61)President and Since 1984 120 None One Franklin Parkway Trustee San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. ------------------------------------------------------------------------------------------------------------------------------------ SHEILA AMOROSO (42) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (56) Vice President Since 1986 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ RAFAEL R. COSTAS, JR. (37) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ MARTIN L. FLANAGAN (41) Vice President Since 1995 Not Applicable None One Franklin Parkway and Chief San Mateo, CA 94403-1906 Financial Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Member - Office of the President, Chief Financial Officer and Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; Executive Vice President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee, as the case may be, of 52 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (54) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and Director, Property Resources, Inc. and Franklin Properties, Inc.; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). ------------------------------------------------------------------------------------------------------------------------------------
115
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (54) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and Deputy General Counsel, Franklin Resources, Inc.; and Senior Vice President, Templeton Worldwide, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). ------------------------------------------------------------------------------------------------------------------------------------ EDWARD V. MCVEY (64) Vice President Since 1985 Not Applicable None 26335 Carmel Rancho Blvd. Carmel, CA 93923 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Distributors, Inc.; Executive Vice President, Templeton/Franklin Investment Services, Inc.; and officer of 29 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ KIMBERLEY MONASTERIO (38) Treasurer and Since 2000 Not Applicable None One Franklin Parkway Principal San Mateo, CA 94403-1906 Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; and officer of 34 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (64) Vice President Since 2000 Not Applicable None One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000) and Director, Templeton Asset Management Ltd. (until 1999). ------------------------------------------------------------------------------------------------------------------------------------ THOMAS WALSH (40) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the registered investment companies comprising the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson and Rupert H. Johnson, Jr. are considered interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Trust's adviser and distributor. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. -------------------------------------------------------------------------------- The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders may call 1-800/DIAL-BEN (1-800/342-5236) to request the SAI. -------------------------------------------------------------------------------- 116 LITERATURE REQUEST For a brochure and prospectus, which contain more complete information, including charges and expenses, call Franklin Templeton at 1-800/DIAL BEN(REGISTRATION MARK) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. 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 determined by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS GLOBAL GROWTH Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Franklin Global Health Care Fund Mutual Discovery Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton International (Ex EM) Fund Templeton Latin America Fund Templeton Pacific Growth Fund Templeton World Fund GLOBAL GROWTH & INCOME Franklin Global Communications Fund Mutual European Fund Templeton Global Bond Fund GLOBAL INCOME Franklin Templeton Hard Currency Fund GROWTH Franklin Aggressive Growth Fund Franklin Biotechnology Discovery Fund(1) Franklin Blue Chip Fund Franklin California Growth Fund Franklin DynaTech Fund Franklin Gold and Precious Metals Fund Franklin Growth Fund Franklin Large Cap Growth Fund Franklin Small Cap Growth Fund II(2) Franklin Small-Mid Cap Growth Fund(3) Franklin Technology Fund GROWTH & INCOME Franklin Balance Sheet Investment Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Growth and Income Fund Franklin Income Fund Franklin Large Cap Value Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Rising Dividends Fund Franklin Small Cap Value Fund(4) Franklin Utilities Fund Mutual Beacon Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund FUND ALLOCATOR SERIES Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(5) Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust(6) Franklin Short-Intermediate U.S. Government Securities Fund(5) Franklin Strategic Income Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(5) Franklin Federal Money Fund(5) Franklin Money Fund(5) TAX-FREE INCOME(7) Double Tax-Free Income Fund(8) Federal Intermediate-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund Tax-Exempt Money Fund(5) STATE-SPECIFIC TAX-FREE INCOME(7) Alabama Arizona California(9) Colorado Connecticut Florida(9) Georgia Kentucky Louisiana Maryland Massachusetts(10) Michigan(10) Minnesota(10) Missouri New Jersey New York(9) North Carolina Ohio(10) Oregon Pennsylvania Tennessee Texas Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(11) 1. On 9/1/01, the fund reopened to new investors. The fund will close again when assets reach $2 billion. 2. The fund is closed to most new investors, with the exception of retirement plan accounts and wrap program accounts. Existing shareholders can continue adding to their account. 3. Formerly Franklin Small Cap Growth Fund I. Effective 9/1/01, the fund's name changed and its investment criteria expanded. 4. Formerly Franklin Value Fund. Effective 11/1/01, the fund's name changed. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. 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. 7. For investors subject to federal or state alternative minimum tax, all or a portion of the dividend income may be subject to such tax, depending on the fund. Distributions of capital gains and ordinary income from accrued market discount, if any, are generally taxable. 8. Formerly Franklin Puerto Rico Tax-Free Income Fund. Effective 12/1/01, the fund's name changed. Its investment goal and strategy remained the same. The fund continues to invest in municipal bonds issued by U.S. territories, including Puerto Rico. 9. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and intermediate-term and money market portfolios (CA and NY). 10. Portfolio of insured municipal securities. 11. The funds of the Franklin Templeton Variable Insurance Products Trust are generally only available as investment options in variable annuity or variable life insurance contracts. 02/02 [GRAPHIC OMITTED] PRESORTED STANDARD FRANKLIN TEMPLETON INVESTMENTS LOGO US POSTAGE One Franklin Parkway PAID San Mateo, CA 94403-1906 BELL CA PERMIT NO. 75 ANNUAL REPORT FRANKLIN TAX-FREE TRUST INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin/Templeton Distributors, Inc. 1-800/DIAL BEN(REGISTRATION MARK) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 This report must be preceded or accompanied by the current Franklin Tax-Free Trust prospectus, which contains more complete information including charges and expenses. 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 A2002 04/02 PRINTED ON RECYCLED PAPER Annual Report February 28, 2002 Franklin Tax-Free Trust 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 Texas Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund [GRAPHIC OMITTED] FRANKLIN TEMPLETON INVESTMENTS LOGO THANK YOU FOR INVESTING WITH FRANKLIN TEMPLETON. WE ENCOURAGE OUR INVESTORS TO MAINTAIN A LONG-TERM PERSPECTIVE AND REMEMBER THAT ALL SECURITIES MARKETS MOVE BOTH UP AND DOWN, AS DO MUTUAL FUND SHARE PRICES. WE APPRECIATE YOUR PAST SUPPORT AND LOOK FORWARD TO SERVING YOUR INVESTMENT NEEDS IN THE YEARS AHEAD. [GRAPHIC OMITTED] PICTURE CHARLES B. JOHNSON, center CHAIRMAN FRANKLIN TAX-FREE TRUST SHEILA AMOROSO & RAFAEL R. COSTAS JR. SENIOR VICE PRESIDENTS/CO-DIRECTORS FRANKLIN MUNICIPAL BOND DEPARTMENT FRANKLINTEMPLETON.COM [GRAPHIC OMITTED] Electronic delivery is a convenient alternative to receiving these reports through the mail. Visit franklintempleton.com today, click on Account Services and sign up. SHAREHOLDER LETTER Dear Shareholder: We are pleased to bring you Franklin Tax-Free Trust's annual report for the fiscal year ended February 28, 2002. During the 12 months under review, the U.S. economy weakened further as gross domestic product (GDP) growth declined during the first half of 2001 before contracting at a 1.3% annualized rate in the third quarter. In response to this deteriorating economic activity and the fallout from September 11's tragic events, the Federal Reserve Board (the Fed) continued aggressively cutting interest rates, seeking to lower borrowing costs and stimulate economic growth. Nine interest rate cuts during the 12 months under review reduced the federal funds target rate from 5.50% at the beginning of the period to 1.75% on February 28, 2002, its lowest level in more than 40 years. In November 2001, the National Bureau of Economic Research signaled that the country had been in a mild recession since March 2001, ending the longest economic expansion in the nation's history. Significant, broad-based and sustained downward trends in economic activity were largely to blame, with employment, industrial production and consumer and business spending dropping substantially. Consequently, consumer confidence fell to multi-year lows. However, the Fed's efforts and significant government spending contributed to a surprising fourth quarter GDP growth rate of 1.7% annualized. U.S. securities markets experienced mixed results in response to the war on terrorism, the Fed's actions and declining corporate and economic data. Investors' risk aversion increased, and by the end of third quarter 2001, this sentiment led to significant market volatility. The equity indexes experienced their worst quarterly decline, on a percentage basis, since the quarter that included the crash of 1987. The major stock indexes rebounded significantly in 2001's fourth quarter as indications of a potential economic recovery offered investors some optimism. However, from the end of December 2001 through February 28, 2002, equity markets again experienced volatility and generally fell amid lower corporate earnings announcements and investors' skepticism of corporate integrity following Enron's collapse. CONTENTS Shareholder Letter .......................... 1 Special Feature: Making Sense of Dividends ................... 4 Fund Reports Franklin Alabama Tax-Free Income Fund ........................ 8 Franklin Florida Tax-Free Income Fund ........................ 14 Franklin Georgia Tax-Free Income Fund ........................ 22 Franklin Kentucky Tax-Free Income Fund ........................ 28 Franklin Louisiana Tax-Free Income Fund ........................ 33 Franklin Maryland Tax-Free Income Fund ........................ 39 Franklin Missouri Tax-Free Income Fund ........................ 45 Franklin North Carolina Tax-Free Income Fund ........................ 51 Franklin Texas Tax-Free Income Fund ........................ 57 Franklin Virginia Tax-Free Income Fund ........................ 63 Municipal Bond Ratings ...................... 69 Financial Highlights & Statements of Investments ................... 71 Financial Statements ........................ 119 Notes to Financial Statements ............... 130 Independent Auditors' Report ................ 138 Tax Designation ............................. 139 Board Members and Officers .................. 140 [GRAPHIC OF PYRAMID OMITTED] Global Growth Growth & Income Income Tax-Free Income WHAT DOES "TAXABLE EQUIVALENT" MEAN FOR YOU? FOR YIELD AND DISTRIBUTION RATE, THE TAXABLE EQUIVALENT IS THE AMOUNT A TAXABLE INVESTMENT WOULD HAVE TO EARN TO MATCH A TAX-FREE INVESTMENT SUCH AS MUNICIPAL BONDS.* YOU CAN FIND YOUR FUND'S TAXABLE EQUIVALENT DISTRIBUTION RATE AND YIELD IN THE PERFORMANCE SUMMARY THAT FOLLOWS YOUR FUND'S REPORT. *For investors subject to the federal or state alternative minimum tax, a portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. For much of the year under review, fixed income markets, including municipal bonds, generally performed well, aided primarily by falling interest rates and rising investor demand for the perceived safety of bonds versus stocks. Consequently, U.S. Treasuries outperformed the Standard & Poor's 500 Composite Index, a widely used benchmark for equity market performance, during the period. The bond market's progress was not a steady rise, however, and overall the Treasury yield curve, representing yields of short- to long-term Treasuries, steepened. The 30-year Treasury bond's yield increased slightly from 5.31% at the beginning of the year under review to 5.42% on February 28, 2002. At the same time, the 10-year Treasury note's yield declined from 4.92% to 4.88%, and the 2-year Treasury note's yield fell from 4.39% to 3.06%. Short-term interest rates fell more substantially than long-term rates largely due to the Fed's actions and investors' economic worries. The Bond Buyer Municipal Bond Index (Bond Buyer 40), an indicator of municipal bond market performance, experienced volatility before ending the period relatively flat, yielding 5.40% at the beginning of the period and 5.25% on February 28, 2002. 1 On October 31, 2001, the Fed's announcement to discontinue new issuance of 30-year debt exacerbated the already disconnected relationship between the long-term municipal market and the Treasury market, which resulted from the Fed's early-2000 introduction of its 30-year Treasury bond buyback program. Subsequently, the 30-year Treasury bond's price rose more than five points, its largest one-day point gain since the bond began trading on a regular basis; the 10-year Treasury note gained nearly one full point in response, while municipals increased marginally. Municipal bonds did, however, benefit from robust retail and institutional demand, and held up well despite widening Treasury yield spreads and an increase in new-issue supply. At the end of the reporting period, municipal bonds continued to offer attractive tax-equivalent yields over comparable taxable investments. Looking forward, we believe the severity and duration of the national economic slowdown will be the key determinants of how state and municipal bond credit quality will fare over the short term. States with broad-based and diversified economies should be best positioned to withstand recessionary pressures that may continue through fiscal year 2002 and that could impact 2003 budget discussions. However, economic diversity alone may not sustain a state's credit quality. The magnitude of revenue short- 1. Source: THE BOND BUYER. The unmanaged Bond Buyer 40 is composed of the yield to maturity of 40 bonds. The index attempts to track the new-issue market as closely as possible, so it changes bonds twice a month, adding all new bonds that meet certain requirements and deleting an equivalent number according to their secondary market trading activity. As a result, the average par call date, average maturity date and average coupon rate change over time. The average maturity has generally been about 29-30 years. 2 falls will impact financial reserves, and stringent budgetary mechanisms to quickly cut expenditures will also be critical factors for states' credit stability and their underlying municipal bonds. Still, we view the municipal bond market favorably over the long term. Most state and local government finances were very strong through early 2001, allowing greater financial flexibility and cushion to face challenging times. Municipal bond funds continue to be attractive for those investors seeking tax-free income. Depending on your federal and state tax rates, a taxable investment of comparable credit quality would need to offer a higher yield, called the taxable equivalent yield, to match the yield on a tax-free investment. We firmly believe that most people benefit from professional financial advice, and that advice is never more valuable than during a volatile market. For that reason, we encourage you to discuss your financial goals with your investment representative, who can address concerns about volatility and help you diversify your investments and stay focused on the long term. As always, we appreciate your support, welcome your questions and comments and look forward to serving your investment needs in the years ahead. Sincerely, /S/SIGNATURE Charles B. Johnson Chairman Franklin Tax-Free Trust /S/SIGNATURE Sheila Amoroso /S/SIGNATURE Rafael R. Costas Jr. Senior Vice Presidents and Co-Directors Franklin Municipal Bond Department -------------------------------------------------------------------------------- A NOTE ABOUT DUPLICATE MAILINGS YOU WILL RECEIVE THE FUND'S SHAREHOLDER REPORT EVERY SIX MONTHS. TO REDUCE FUND EXPENSES, WE TRY TO IDENTIFY RELATED SHAREHOLDERS IN A HOUSEHOLD AND SEND ONLY ONE COPY OF THE REPORT. THIS PROCESS, CALLED "HOUSEHOLDING," WILL CONTINUE INDEFINITELY UNLESS YOU INSTRUCT US OTHERWISE. IF YOU PREFER NOT TO HAVE THESE DOCUMENTS HOUSEHOLDED, PLEASE CALL US AT 1-800/632-2301. AT ANY TIME YOU MAY VIEW CURRENT SHAREHOLDER REPORTS ON OUR WEBSITE. -------------------------------------------------------------------------------- 3 Q & A SPECIAL FEATURE: MAKING SENSE OF DIVIDENDS FREQUENTLY ASKED QUESTIONS ABOUT THE DIVIDEND POLICY OF FRANKLIN TAX-FREE INCOME FUNDS. Have you ever wondered how your fund earns tax-free income and how much of that income is actually paid to you? Or, have you questioned why your monthly dividends fluctuate? Below you'll find answers to these and other commonly asked questions about dividends paid by Franklin's tax-free funds. Q. WHAT'S FRANKLIN TAX-FREE FUNDS' DIVIDEND POLICY AND HOW DOES IT AFFECT MY DIVIDEND PAYMENTS? A. Franklin tax-free income funds attempt to set dividends on a quarterly basis. This means that once a quarter, in March, June, September and December, we establish a fixed dividend amount per share that the funds will distribute over the next three months. While the income the funds accrue varies day-to-day, we do our best to maintain this fixed dividend each quarter to provide our shareholders with a stable income stream. As you know, our goal is to invest for high, current tax-free income. Franklin is one of the few fund companies that work to stabilize dividend payments for three months at a time. Many other tax-free funds distribute dividends on daily income they accrue each month; meaning their dividend payments can fluctuate every month. Q. WHAT ARE THE SOURCES OF THE INCOME MY FUND DISTRIBUTES TO ME AS TAX-FREE DIVIDENDS? A. Your fund earns tax-exempt interest income from its investments in municipal securities, or bonds. A municipal bond is an IOU issued by state and local government agencies to raise money to fund public projects. The issuing municipality makes interest payments to bondholders, in this case the fund, to compensate them for the use of their money until the bond is repaid. -------------------------------------------------------------------------------- NOT FDIC INSURED O MAY LOSE VALUE O NO BANK GUARANTEE -------------------------------------------------------------------------------- NOT PART OF THE SHAREHOLDER REPORT 4 Franklin's tax-free funds pay you this investment income as tax-free dividends, less various operating expenses. As you know, these dividends are usually free from federal income taxes.* For a state-specific fund, they may also be free from that state's personal income taxes as well, to the extent dividends are earned from interest on that state's tax-free obligations.* Sometimes, the fund may also pay you accumulated dividends that were not previously distributed. *Alternative minimum taxes may apply. Q. WHAT OTHER FACTORS CAN AFFECT MY MONTHLY DIVIDENDS? A. Generally, interest rates are the biggest determinant of a tax-free fund's earnings level and the amount of dividends paid to you. For example, when interest rates decline, a fund's investment earnings will decline, as cash flow into the fund must be invested at the lower rates. This means dividend payments will also decrease. However, since bond prices tend to move in the opposite direction of interest rates, your fund's net asset value (NAV) will tend to increase, causing your shares to appreciate in price. Similarly, when interest rates rise, the ability of the funds to increase their dividends will rise. Interest rate trends are primarily determined by economic factors such as inflation, strength of the U.S. dollar and the pace of economic growth. Strong economic growth can lead to inflation, and the Federal Reserve may raise interest rates to cool the economy, as we saw last year. On the other hand, if the economy slows down, the Federal Reserve may lower interest rates to stimulate economic growth, as happened earlier this year. Credit quality and maturity periods of the securities in a fund's portfolio also play a role in determining the amount of income available to distribute to shareholders, as explained below. Q. WHY DO SOME TAX-FREE FUNDS PAY HIGHER DIVIDENDS THAN OTHERS? A. Dividends are directly related to the composition of a fund's portfolio. First, the credit quality of securities held helps determine a fund's dividend payment ability. High-yield municipal bond funds, for example, can have higher dividend distributions than other tax-free funds. This is because they hold lower credit-quality municipal bonds that must pay higher yields than other securities to compensate investors for taking on additional risk. NOT PART OF THE SHAREHOLDER REPORT 5 However, they're also subject to higher risk than funds that hold higher quality bonds in their portfolios. Similarly, long-term bond holdings in a fund's portfolio tend to pay higher interest income than short-term bonds to compensate for uncertainty associated with the future. Q. HOW HAS THE CURRENT DECLINING INTEREST RATE ENVIRONMENT AFFECTED MONTHLY DIVIDEND PAYMENTS? A. When interest rates decline, municipal bond issuers often "call," or redeem, their higher-yielding bonds and replace them with new, lower-yielding securities so they can reduce the amount of interest they have to pay on the debt. Most municipal bonds are callable within 10 to 12 years after they're issued. Because interest rates have generally been declining over the past 15 years, our funds are experiencing bond calls on older, higher-income securities. Consequently, many of Franklin's tax-free funds have had to reinvest proceeds from these called bonds into lower-yielding bonds, resulting in lower earnings (dividends). Because funds can only pay out what they earn, many of our funds have had to reduce dividend payments. As you can see in the chart below, in the late 1980s and early 1990s, we were able to invest assets at approximately 8%. As these bonds matured or were called, we've had to reinvest the proceeds at approximately 53/8%. Because we cannot invest cash flow at the higher levels, we've had to reduce dividends. We continue to pay out the income we earn, but our earnings are lower today because we're reinvesting at a lower rate than was available 10-15 years ago. [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Bond Buyer 40 Yields Jan 85 10.35% Feb 85 10.20% Mar 85 10.01% Apr 85 9.50% May 85 9.43% Jun 85 9.40% Jul 85 9.45% Aug 85 9.80% Sep 85 9.49% Oct 85 9.24% Nov 85 8.92% Dec 85 8.48% Jan 86 8.04% Feb 86 7.82% Mar 86 7.92% Apr 86 8.14% May 86 7.90% Jun 86 7.96% Jul 86 7.88% Aug 86 7.41% Sep 86 7.56% Oct 86 7.36% Nov 86 7.19% Dec 86 7.18% Jan 87 7.11% Feb 87 7.05% Mar 87 7.18% Apr 87 8.10% May 87 8.29% Jun 87 8.19% Jul 87 8.17% Aug 87 8.16% Sep 87 8.87% Oct 87 8.72% Nov 87 8.62% Dec 87 8.40% Jan 88 7.97% Feb 88 7.85% Mar 88 8.17% Apr 88 8.17% May 88 8.20% Jun 88 8.04% Jul 88 8.05% Aug 88 8.11% Sep 88 7.89% Oct 88 7.73% Nov 88 7.90% Dec 88 7.74% Jan 89 7.66% Feb 89 7.73% Mar 89 7.79% Apr 89 7.58% May 89 7.46% Jun 89 7.29% Jul 89 7.16% Aug 89 7.36% Sep 89 7.47% Oct 89 7.38% Nov 89 7.24% Dec 89 7.25% Jan 90 7.45% Feb 90 7.40% Mar 90 7.52% Apr 90 7.74% May 90 7.53% Jun 90 7.50% Jul 90 7.35% Aug 90 7.64% Sep 90 7.79% Oct 90 7.71% Nov 90 7.47% Dec 90 7.47% Jan 91 7.39% Feb 91 7.36% Mar 91 7.34% Apr 91 7.26% May 91 7.21% Jun 91 7.21% Jul 91 7.11% Aug 91 6.97% Sep 91 6.89% Oct 91 6.85% Nov 91 6.90% Dec 91 6.66% Jan 92 6.72% Feb 92 6.76% Mar 92 6.76% Apr 92 6.74% May 92 6.63% Jun 92 6.49% Jul 92 6.19% Aug 92 6.35% Sep 92 6.39% Oct 92 6.68% Nov 92 6.42% Dec 92 6.39% Jan 93 6.31% Feb 93 6.01% Mar 93 6.04% Apr 93 5.96% May 93 5.89% Jun 93 5.76% Jul 93 5.78% Aug 93 5.60% Sep 93 5.47% Oct 93 5.48% Nov 93 5.65% Dec 93 5.52% Jan 94 5.45% Feb 94 5.77% Mar 94 6.36% Apr 94 6.37% May 94 6.40% Jun 94 6.47% Jul 94 6.33% Aug 94 6.36% Sep 94 6.58% Oct 94 6.85% Nov 94 7.16% Dec 94 6.92% Jan 95 6.66% Feb 95 6.42% Mar 95 6.37% Apr 95 6.35% May 95 6.10% Jun 95 6.28% Jul 95 6.19% Aug 95 6.11% Sep 95 6.07% Oct 95 5.91% Nov 95 5.74% Dec 95 5.56% Jan 96 5.57% Feb 96 5.71% Mar 96 5.96% Apr 96 6.05% May 96 6.09% Jun 96 6.01% Jul 96 5.98% Aug 96 6.02% Sep 96 5.89% Oct 96 5.83% Nov 96 5.66% Dec 96 5.72% Jan 97 5.82% Feb 97 5.76% Mar 97 5.95% Apr 97 5.89% May 97 5.74% Jun 97 5.69% Jul 97 5.40% Aug 97 5.55% Sep 97 5.47% Oct 97 5.40% Nov 97 5.36% Dec 97 5.25% Jan 98 5.19% Feb 98 5.24% Mar 98 5.27% Apr 98 5.39% May 98 5.22% Jun 98 5.22% Jul 98 5.26% Aug 98 5.11% Sep 98 4.99% Oct 98 5.13% Nov 98 5.10% Dec 98 5.16% Jan 99 5.09% Feb 99 5.17% Mar 99 5.23% Apr 99 5.28% May 99 5.37% Jun 99 5.53% Jul 99 5.59% Aug 99 5.78% Sep 99 5.89% Oct 99 6.08% Nov 99 6.12% Dec 99 6.22% Jan 00 6.31% Feb 00 6.17% Mar 00 5.94% Apr 00 6.00% May 00 6.13% Jun 00 5.91% Jul 00 5.79% Aug 00 5.72% Sep 00 5.82% Oct 00 5.74% Nov 00 5.75% Dec 00 5.47% Jan 01 5.45% Feb 01 5.40% Mar 01 5.30% Apr 01 5.49% May 01 5.42% June 01 5.38% Jul 01 5.25% Aug 01 5.12% Sep-01 5.22% Oct-01 5.20% Nov-01 5.30% Dec-01 5.44% Jan-02 5.33% Feb-02 5.25% Source: S&P Micropal (Bond Buyer 40, as of 2/28/02) One cannot invest in an index; indexes are unmanaged. NOT PART OF THE SHAREHOLDER REPORT 6 Many of the securities being called today have provided high levels of income over the past 10 years, as interest rates have trended down. Though we can't predict interest rate cycles, we'll continue to focus on producing the highest monthly tax-free income possible through our disciplined management approach. Q. WHAT OTHER TYPES OF INCOME CAN MY FUND DISTRIBUTE? A. Your fund also earns income from short- and long-term capital gains, which are taxable to shareholders, whether you reinvest them or receive them as cash. Though we work to reduce capital gains, in periods of sustained low interest rates, they are often unavoidable. While short-term capital gains (on securities held in a portfolio for 12 months or less) are treated as ordinary income distributions and taxed at regular income tax rates, long-term capital gains (on securities held in a portfolio for more than 12 months) are taxed at lower rates. Sometimes, a fund may invest part of its portfolio in private activity bonds, which are basically municipal bonds issued to finance private activity. Interest earned from such bonds is exempt from federal income tax, but it's a preference item when calculating your alternative minimum tax (AMT) liability. So, as required by the Internal Revenue Code, this income must be added to your regular tax income to calculate your AMT income and AMT tax liability, if any. In case your fund makes any capital gains distributions, you can find the exact amount of the distributions on your Form 1099. For complete information on your tax liabilities, we suggest you consult a qualified tax professional. [FRANKLIN TEMPLETON INVESTMENTS LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS DIVQ INS 04/2002 NOT PART OF THE SHAREHOLDER REPORT 7 [GRAPHIC OMITTED] CREDIT QUALITY BREAKDOWN* Franklin Alabama Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 AAA -- 67.9% AA -- 0.9% A -- 4.4% BBB -- 24.8% Below Investment Grade -- 2.0% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. FRANKLIN ALABAMA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN ALABAMA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND ALABAMA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF ALABAMA MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- STATE UPDATE [STATE OF ALABAMA GRAPHIC OMITTED] Over the past decade, Alabama's economic base expanded and diversified, led by the services, trade and finance sectors. Unlike in previous years, however, these gains failed to offset losses in the state's traditional manufacturing sector for the 12 months ended September 30, 2001. Alabama's overall employment declined 1.2% for the same period while its unemployment rate rose from 4.6% to 5.0%. Similarly, the state's personal income growth rate dramatically slowed in 2000 to 2.2%, below the national average of 4.0%. 2 In 2001, after five years of rising general fund revenues that consistently outpaced estimates, Alabama's governor announced lower expected revenue collections from state and income taxes. State law requires that when actual revenues fall short of estimates, the governor must cut spending allocations through proration. The state implemented spending reductions of $266 million, including the first proration of its Education Trust Fund since 1992. 2 Alabama's prompt reaction to revenue shortfalls helped it maintain adequate fiscal operations. Throughout the 1990s, Alabama's debt ratios improved considerably. In 2001, the state's debt ratios remained fairly stable, with net tax-supported debt as a percentage of personal income declining slightly to 2.2%, and debt per capita rising to $506, compared with the national medians of 2.1% and $541. 2,3 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Moody's Investors Service, ALABAMA (STATE OF), 11/5/01. This does not indicate Moody's rating of the Fund. 3. Source: Moody's Investors Service, MINNESOTA (STATE OF), 10/2/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 72. 8 Looking forward, economic growth prospects for Alabama remain relatively positive, bolstered by several new factories, most notably Mercedes-Benz and Honda. The near-term credit outlook for Alabama's general obligation (GO) bonds is stable, reflecting the state's conservative fiscal and debt management policies. Moody's Investors Service, an independent credit rating agency, retained the state's solid Aa3 general obligation rating. 2 A moderate yet slightly increasing debt load, along with state budgetary spending restrictions, should enable the state's municipal bonds to perform well in the future. PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Alabama Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.08 on February 28, 2001, to $11.22 on February 28, 2002. We focused primarily on remaining fully invested throughout the period, as the yield spread between short- and long-maturity bonds remained fairly wide. Market volatility afforded us the opportunity to purchase bonds at attractive prices. Thus, we attempted to be more active when the market declined and yields increased. Notable purchases include Madison GO, Muscle Shoals GO and Troy State University Student Fee revenue bonds. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Your Fund combines the advantage of high credit quality with tax-free yields. 1 The Performance Summary beginning on page 12 shows that at the end of this reporting period, the Fund's Class A shares' distribution rate was 4.69%, based on an annualization of the current 4.58 cent ($0.0458) per share dividend and the maximum offering price of $11.72 on February 28, 2002. This tax-free rate is generally higher than the PORTFOLIO BREAKDOWN Franklin Alabama Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------------ Hospital & Health Care 24.1% General Obligation 22.4% Utilities 19.5% Corporate-Backed 16.7% Transportation 3.6% Higher Education 3.4% Housing 3.3% Prerefunded 3.0% Subject to Government Appropriations 2.2% Tax-Supported 1.8% 9 DIVIDEND DISTRIBUTIONS* Franklin Alabama Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE --------------------- MONTH CLASS A CLASS C ---------------------------------------------------------------- March 4.75 cents 4.22 cents April 4.75 cents 4.22 cents May 4.75 cents 4.22 cents June 4.73 cents 4.24 cents July 4.73 cents 4.24 cents August 4.73 cents 4.24 cents September 4.73 cents 4.21 cents October 4.73 cents 4.21 cents November 4.73 cents 4.21 cents December 4.48 cents 3.95 cents January 4.48 cents 3.95 cents February 4.48 cents 3.95 cents ---------------------------------------------------------------- TOTAL 56.07 CENTS 49.86 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Alabama state personal income tax bracket of 41.67% would need to earn 8.04% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. 10 Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Alabama Tax-Free Income Fund. With our income-oriented approach, we generally expect the Fund to perform comparatively well in terms of total return and tax-free income distribution for investors with long-term investment horizons. It is important to remember that over time, the tax-free income from municipal bonds will ultimately drive the Fund's total return performance. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 11 FRANKLIN ALABAMA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Alabama state personal income tax bracket of 41.67%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $11.22 $11.08 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5607 CLASS C CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.15 $11.29 $11.14 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4986 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------ Cumulative Total Return 1 +6.49% +26.47% +79.88% Average Annual Total Return 2 +1.98% +3.90% +5.59% Avg. Ann. Total Return (3/31/02) 3 -0.23% +3.77% +5.40% Distribution Rate 4 4.69% Taxable Equivalent Distribution Rate 5 8.04% 30-Day Standardized Yield 6 4.15% Taxable Equivalent Yield 5 7.11% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------- Cumulative Total Return 1 +5.96% +23.06% +39.94% Average Annual Total Return 2 +3.93% +4.03% +4.89% Avg. Ann. Total Return (3/31/02) 3 +1.67% +3.88% +4.59% Distribution Rate 4 4.27% Taxable Equivalent Distribution Rate 5 7.32% 30-Day Standardized Yield 6 3.77% Taxable Equivalent Yield 5 6.46% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 12 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Alabama Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,573 $10,000 $10,000 03/31/1992 $9,589 $10,003 $10,051 04/30/1992 $9,676 $10,092 $10,065 05/31/1992 $9,804 $10,211 $10,079 06/30/1992 $9,943 $10,383 $10,115 07/31/1992 $10,263 $10,694 $10,137 08/31/1992 $10,144 $10,590 $10,165 09/30/1992 $10,169 $10,659 $10,194 10/31/1992 $9,996 $10,555 $10,229 11/30/1992 $10,230 $10,744 $10,244 12/31/1992 $10,386 $10,853 $10,236 01/31/1993 $10,507 $10,979 $10,287 02/28/1993 $10,829 $11,377 $10,323 03/31/1993 $10,787 $11,256 $10,359 04/30/1993 $10,869 $11,370 $10,388 05/31/1993 $10,918 $11,433 $10,402 06/30/1993 $11,076 $11,624 $10,417 07/31/1993 $11,080 $11,639 $10,417 08/31/1993 $11,286 $11,882 $10,446 09/30/1993 $11,434 $12,017 $10,468 10/31/1993 $11,473 $12,040 $10,511 11/30/1993 $11,438 $11,934 $10,518 12/31/1993 $11,658 $12,186 $10,518 01/31/1994 $11,770 $12,325 $10,547 02/28/1994 $11,543 $12,005 $10,582 03/31/1994 $11,150 $11,517 $10,618 04/30/1994 $11,190 $11,615 $10,633 05/31/1994 $11,264 $11,716 $10,641 06/30/1994 $11,228 $11,644 $10,677 07/31/1994 $11,410 $11,857 $10,706 08/31/1994 $11,456 $11,899 $10,749 09/30/1994 $11,331 $11,724 $10,778 10/31/1994 $11,134 $11,515 $10,785 11/30/1994 $10,901 $11,307 $10,799 12/31/1994 $11,140 $11,556 $10,799 01/31/1995 $11,443 $11,886 $10,842 02/28/1995 $11,723 $12,232 $10,886 03/31/1995 $11,837 $12,373 $10,922 04/30/1995 $11,889 $12,387 $10,958 05/31/1995 $12,167 $12,783 $10,980 06/30/1995 $12,110 $12,671 $11,002 07/31/1995 $12,179 $12,792 $11,002 08/31/1995 $12,289 $12,954 $11,030 09/30/1995 $12,365 $13,036 $11,052 10/31/1995 $12,521 $13,225 $11,089 11/30/1995 $12,721 $13,444 $11,081 12/31/1995 $12,842 $13,573 $11,073 01/31/1996 $12,903 $13,677 $11,138 02/29/1996 $12,865 $13,584 $11,174 03/31/1996 $12,736 $13,410 $11,232 04/30/1996 $12,731 $13,372 $11,276 05/31/1996 $12,751 $13,367 $11,297 06/30/1996 $12,886 $13,513 $11,304 07/31/1996 $12,983 $13,634 $11,326 08/31/1996 $12,999 $13,631 $11,347 09/30/1996 $13,162 $13,822 $11,384 10/31/1996 $13,309 $13,978 $11,420 11/30/1996 $13,506 $14,234 $11,442 12/31/1996 $13,479 $14,175 $11,442 01/31/1997 $13,511 $14,201 $11,478 02/28/1997 $13,619 $14,332 $11,514 03/31/1997 $13,499 $14,141 $11,543 04/30/1997 $13,606 $14,260 $11,556 05/31/1997 $13,757 $14,476 $11,550 06/30/1997 $13,903 $14,630 $11,563 07/31/1997 $14,238 $15,036 $11,577 08/31/1997 $14,134 $14,894 $11,599 09/30/1997 $14,308 $15,072 $11,628 10/31/1997 $14,403 $15,168 $11,657 11/30/1997 $14,501 $15,258 $11,650 12/31/1997 $14,699 $15,480 $11,636 01/31/1998 $14,813 $15,640 $11,658 02/28/1998 $14,816 $15,645 $11,681 03/31/1998 $14,849 $15,659 $11,703 04/30/1998 $14,824 $15,588 $11,724 05/31/1998 $14,776 $15,834 $11,745 06/30/1998 $14,758 $15,896 $11,759 07/31/1998 $14,807 $15,936 $11,773 08/31/1998 $14,989 $16,183 $11,787 09/30/1998 $15,127 $16,385 $11,801 10/30/1998 $15,121 $16,385 $11,830 11/30/1998 $15,175 $16,443 $11,830 12/31/1998 $15,201 $16,484 $11,823 01/31/1999 $15,332 $16,680 $11,851 02/28/1999 $15,292 $16,606 $11,865 03/31/1999 $15,353 $16,630 $11,901 04/30/1999 $15,378 $16,671 $11,988 05/31/1999 $15,321 $16,575 $11,988 06/30/1999 $15,136 $16,336 $11,988 07/31/1999 $15,158 $16,395 $12,024 08/31/1999 $14,949 $16,264 $12,053 09/30/1999 $14,946 $16,270 $12,110 10/31/1999 $14,741 $16,094 $12,132 11/30/1999 $14,815 $16,265 $12,140 12/31/1999 $14,652 $16,143 $12,140 01/31/2000 $14,514 $16,072 $12,176 02/29/2000 $14,691 $16,258 $12,248 03/31/2000 $15,037 $16,613 $12,348 04/30/2000 $14,952 $16,515 $12,356 05/31/2000 $14,890 $16,429 $12,370 06/30/2000 $15,241 $16,864 $12,435 07/31/2000 $15,415 $17,099 $12,463 08/31/2000 $15,643 $17,362 $12,463 09/30/2000 $15,526 $17,272 $12,528 10/31/2000 $15,681 $17,460 $12,549 11/30/2000 $15,805 $17,593 $12,557 12/31/2000 $16,086 $18,027 $12,549 01/31/2001 $16,113 $18,206 $12,629 02/28/2001 $16,180 $18,264 $12,679 03/31/2001 $16,281 $18,428 $12,708 04/30/2001 $16,119 $18,229 $12,759 05/31/2001 $16,277 $18,426 $12,816 06/30/2001 $16,433 $18,550 $12,838 07/31/2001 $16,688 $18,824 $12,802 08/31/2001 $16,983 $19,135 $12,802 09/30/2001 $16,913 $19,070 $12,860 10/31/2001 $17,126 $19,297 $12,816 11/30/2001 $17,027 $19,135 $12,794 12/31/2001 $16,852 $18,953 $12,744 01/31/2002 $17,040 $19,281 $12,774 02/28/2002 $17,221 $19,512 $12,825 Total Return 72.21% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Alabama Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,904 $10,000 $10,000 05/31/1995 $10,139 $10,319 $10,020 06/30/1995 $10,094 $10,229 $10,040 07/31/1995 $10,155 $10,326 $10,040 08/31/1995 $10,231 $10,458 $10,066 09/29/1995 $10,298 $10,523 $10,086 10/31/1995 $10,423 $10,676 $10,120 11/30/1995 $10,585 $10,853 $10,112 12/29/1995 $10,689 $10,957 $10,105 01/31/1996 $10,735 $11,041 $10,165 02/29/1996 $10,698 $10,966 $10,198 03/29/1996 $10,586 $10,825 $10,251 04/30/1996 $10,577 $10,795 $10,291 05/31/1996 $10,589 $10,791 $10,310 06/28/1996 $10,696 $10,908 $10,316 07/31/1996 $10,770 $11,006 $10,336 08/30/1996 $10,778 $11,004 $10,356 09/30/1996 $10,907 $11,158 $10,389 10/31/1996 $11,022 $11,284 $10,422 11/29/1996 $11,178 $11,491 $10,442 12/31/1996 $11,150 $11,443 $10,442 01/31/1997 $11,170 $11,464 $10,475 02/28/1997 $11,264 $11,570 $10,508 03/31/1997 $11,159 $11,416 $10,534 04/30/1997 $11,242 $11,512 $10,547 05/31/1997 $11,360 $11,686 $10,540 06/30/1997 $11,475 $11,811 $10,553 07/31/1997 $11,746 $12,138 $10,565 08/31/1997 $11,655 $12,024 $10,586 09/30/1997 $11,793 $12,167 $10,612 10/31/1997 $11,865 $12,245 $10,639 11/30/1997 $11,939 $12,317 $10,632 12/31/1997 $12,105 $12,497 $10,619 01/31/1998 $12,184 $12,626 $10,640 02/28/1998 $12,191 $12,629 $10,660 03/31/1998 $12,202 $12,641 $10,680 04/30/1998 $12,186 $12,584 $10,699 05/31/1998 $12,132 $12,783 $10,719 06/30/1998 $12,122 $12,832 $10,731 07/31/1998 $12,155 $12,865 $10,744 08/31/1998 $12,297 $13,064 $10,757 09/30/1998 $12,404 $13,227 $10,770 10/31/1998 $12,393 $13,227 $10,796 11/30/1998 $12,431 $13,274 $10,796 12/31/1998 $12,446 $13,307 $10,789 01/31/1999 $12,547 $13,465 $10,815 02/28/1999 $12,509 $13,406 $10,828 03/31/1999 $12,552 $13,425 $10,861 04/30/1999 $12,577 $13,458 $10,940 05/31/1999 $12,514 $13,380 $10,940 06/30/1999 $12,368 $13,187 $10,940 07/31/1999 $12,370 $13,235 $10,973 08/31/1999 $12,193 $13,129 $10,999 09/30/1999 $12,197 $13,134 $11,052 10/31/1999 $12,003 $12,992 $11,072 11/30/1999 $12,068 $13,130 $11,079 12/31/1999 $11,930 $13,032 $11,079 01/31/2000 $11,813 $12,974 $11,112 02/29/2000 $11,951 $13,125 $11,177 03/31/2000 $12,225 $13,411 $11,269 04/30/2000 $12,152 $13,332 $11,276 05/31/2000 $12,096 $13,263 $11,289 06/30/2000 $12,374 $13,614 $11,348 07/31/2000 $12,519 $13,803 $11,374 08/31/2000 $12,687 $14,016 $11,374 09/30/2000 $12,586 $13,943 $11,433 10/31/2000 $12,706 $14,095 $11,453 11/30/2000 $12,800 $14,202 $11,460 12/31/2000 $13,033 $14,553 $11,453 01/31/2001 $13,037 $14,697 $11,525 02/28/2001 $13,084 $14,744 $11,571 03/31/2001 $13,160 $14,877 $11,598 04/30/2001 $13,021 $14,716 $11,644 05/31/2001 $13,154 $14,875 $11,696 06/30/2001 $13,262 $14,974 $11,716 07/31/2001 $13,472 $15,196 $11,683 08/31/2001 $13,702 $15,447 $11,683 09/30/2001 $13,640 $15,394 $11,736 10/31/2001 $13,805 $15,578 $11,696 11/30/2001 $13,720 $15,447 $11,676 12/31/2001 $13,561 $15,300 $11,631 01/31/2002 $13,718 $15,565 $11,657 02/28/2002 $13,860 $15,751 $11,704 Total Return 38.60% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 13 CREDIT QUALITY BREAKDOWN* Franklin Florida Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 67.7% AA -- 7.6% A -- 16.4% BBB -- 8.3% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. FRANKLIN FLORIDA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN FLORIDA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL TAX THROUGH A PORTFOLIO CONSISTING MAINLY OF FLORIDA MUNICIPAL BONDS. 1 IN ADDITION, THE FUND'S SHARES ARE FREE FROM FLORIDA'S ANNUAL INTANGIBLES TAX. -------------------------------------------------------------------------------- STATE UPDATE [STATE OF FLORIDA GRAPHIC OMITTED] The national economic recession, exacerbated by the September 11 attacks, negatively impacted Florida's service-based economy. Over the past decade, the state's economy shifted away from manufacturing toward services due to tourism industry and business services sector growth. As of February 28, 2002, the state's unemployment rate rose to 5.5%, the same as the national average. 2 Due to Florida's reliance on sales tax to fund 70% of its operations, it suffered from declining consumer confidence and reduced travel and tourism in late 2001. The state's above-average financial reserve levels and strong budget controls should help mitigate these concerns in the near term. Florida's constitutional budget stabilization and working capital reserve balances are projected to be $940 million and $300 million on June 30, 2002. 3 In addition, the state already implemented spending reductions that addressed more than half of fiscal year 2002's budget shortfall. Despite rapidly growing debt levels during the past few years, Florida's tax-supported debt levels remained moderate during the period at $955 per capita and 3.6% of personal income. 4 To counter this accelerated debt issuance, Florida introduced a debt affordability model in 1999. The state established a framework for evaluating and limiting future bond programs to an acceptable debt-to-revenue ratio. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Bureau of Labor Statistics, 3/28/02. 3. Source: Standard & Poor's, RATINGSDIRECT, 2/1/02. This does not indicate Standard & Poor's rating of the Fund. 4. Source: Standard & Poor's, RATINGSDIRECT, 9/20/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 77. 14 Looking forward, Florida's history of conservative fiscal management should help support it during this time of budget stress. Standard & Poor's, an independent credit rating agency, holds a stable outlook for the state and maintained its AA+ general obligation rating. 3 However, Moody's Investors Service, another independent credit rating agency, revised the state's outlook to negative from stable. Moody's anticipates the state will continue to experience budget pressures in the near future. 5 PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Florida Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.54 on February 28, 2001, to $11.71 on February 28, 2002. As interest rates remained low during the 12 months under review, many municipalities were motivated to borrow, and issuers continued to take advantage of inexpensive borrowing costs. The low interest rate environment, in conjunction with declining tax receipts, sparked a significant outbreak of municipal bond activity. The need for capital improvement also contributed to the fervor, and 2001 closed as the year with the second highest amount of national issuance at $286.6 billion. 6 As 2002 began, the momentum continued with a record January issuance of $20.4 billion in long-term bonds. 7 Issuance increased dramatically in many states. For the year 2001, the supply of Florida bonds was up 31.8%. Additionally, Puerto Rico experienced a tremendous year, closing with $5.9 billion of issuance. 6 These Puerto Rico bonds offered many attractive investment opportunities for Franklin Florida Tax-Free Income Fund as well. As a result, we increased our holdings in territorial securities. It is important to note that Puerto Rico securities are highly liquid and trade well in the secondary market, and their distributions are tax-free in many states. Notable purchases during the reporting period included Florida State Board of Education Capital Outlay GO bonds, and Puerto Rico PBA, South Broward Hospital District, Hillsborough County School Board Sales Tax, and Puerto Rico Commonwealth Highway 5. Source: Moody's Investors Service, FLORIDA (STATE OF), 12/19/01. 6. Source: THE BOND BUYER, 1/2/02. 7. Source: THE BOND BUYER, 2/1/02. PORTFOLIO BREAKDOWN Franklin Florida Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------------- Hospital & Health Care 18.3% Utilities 17.4% Prerefunded 15.2% Transportation 13.2% Tax-Supported 9.8% Housing 8.0% General Obligation 5.5% Subject to Government Appropriations 5.0% Other Revenue 4.9% Higher Education 2.4% Corporate-Backed 0.3% 15 DIVIDEND DISTRIBUTIONS* Franklin Florida Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ---------------------------------- MONTH CLASS A CLASS B CLASS C --------------------------------------------------------------------------- March 5.05 cents 4.46 cents 4.50 cents April 5.05 cents 4.46 cents 4.50 cents May 5.05 cents 4.46 cents 4.50 cents June 5.00 cents 4.50 cents 4.47 cents July 5.00 cents 4.50 cents 4.47 cents August 5.00 cents 4.50 cents 4.47 cents September 4.97 cents 4.44 cents 4.44 cents October 4.97 cents 4.44 cents 4.44 cents November 4.97 cents 4.44 cents 4.44 cents December 4.90 cents 4.33 cents 4.35 cents January 4.90 cents 4.33 cents 4.35 cents February 4.90 cents 4.33 cents 4.35 cents --------------------------------------------------------------------------- TOTAL 59.76 CENTS 53.19 CENTS 53.28 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. and Transportation Authority Transportation revenue bonds. During the 12 months under review, sales included revenue bonds issued by Clearwater MFR, Pinellas County HFA, Tampa Water and Sewer, Florida Municipal Loan Council and Hillsborough County Capital Improvement. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") 16 Your Fund combines the advantage of high credit quality with tax-free yields. 1 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 4.74%, based on an annualization of the current 4.83 cent ($0.0483) per share dividend and the maximum offering price of $12.23 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum federal personal income tax bracket of 38.6% would need to earn 7.72% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Florida Tax-Free Income Fund. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 17 FRANKLIN FLORIDA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ---------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $11.71 $11.54 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5976 CLASS B CHANGE 2/28/02 2/28/01 ---------------------------------------------------------------------------- Net Asset Value (NAV) +$0.19 $11.77 $11.58 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5319 CLASS C CHANGE 2/28/02 2/28/01 ---------------------------------------------------------------------------- Net Asset Value (NAV) +$0.18 $11.83 $11.65 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5328 Past performance does not guarantee future results. 18 PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ----------------------------------------------------------------------------- Cumulative Total Return 1 +6.83% +31.98% +87.17% Average Annual Total Return 2 +2.30% +4.80% +6.01% Avg. Ann. Total Return (3/31/02) 3 -0.34% +4.66% +5.79% Distribution Rate 4 4.74% Taxable Equivalent Distribution Rate 5 7.72% 30-Day Standardized Yield 6 3.99% Taxable Equivalent Yield 5 6.50% INCEPTION CLASS B 1-YEAR (2/1/00) ----------------------------------------------------------------------------- Cumulative Total Return 1 +6.38% +19.80% Average Annual Total Return 2 +2.38% +7.76% Avg. Ann. Total Return (3/31/02) 3 -0.42% +6.49% Distribution Rate 4 4.34% Taxable Equivalent Distribution Rate 5 7.07% 30-Day Standardized Yield 6 3.65% Taxable Equivalent Yield 5 5.94% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ----------------------------------------------------------------------------- Cumulative Total Return 1 +6.26% +28.54% +45.36% Average Annual Total Return 2 +4.19% +4.93% +5.48% Avg. Ann. Total Return (3/31/02) 3 +1.41% +4.79% +5.12% Distribution Rate 4 4.31% Taxable Equivalent Distribution Rate 5 7.02% 30-Day Standardized Yield 6 3.59% Taxable Equivalent Yield 5 5.85% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the 2002 maximum federal personal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 19 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +2.30% 5-Year +4.80% 10-Year +6.01% AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 -------------------------------- 1-Year +2.38% Since Inception (2/1/00) +7.76% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Florida Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,573 $10,000 $10,000 03/31/1992 $9,601 $10,003 $10,051 04/30/1992 $9,689 $10,092 $10,065 05/31/1992 $9,811 $10,211 $10,079 06/30/1992 $9,926 $10,383 $10,115 07/31/1992 $10,282 $10,694 $10,137 08/31/1992 $10,175 $10,590 $10,165 09/30/1992 $10,176 $10,659 $10,194 10/31/1992 $10,016 $10,555 $10,229 11/30/1992 $10,224 $10,744 $10,244 12/31/1992 $10,381 $10,853 $10,236 01/31/1993 $10,515 $10,979 $10,287 02/28/1993 $10,792 $11,377 $10,323 03/31/1993 $10,763 $11,256 $10,359 04/30/1993 $10,856 $11,370 $10,388 05/31/1993 $10,936 $11,433 $10,402 06/30/1993 $11,095 $11,624 $10,417 07/31/1993 $11,112 $11,639 $10,417 08/31/1993 $11,282 $11,882 $10,446 09/30/1993 $11,405 $12,017 $10,468 10/31/1993 $11,486 $12,040 $10,511 11/30/1993 $11,435 $11,934 $10,518 12/31/1993 $11,627 $12,186 $10,518 01/31/1994 $11,750 $12,325 $10,547 02/28/1994 $11,532 $12,005 $10,582 03/31/1994 $11,180 $11,517 $10,618 04/30/1994 $11,232 $11,615 $10,633 05/31/1994 $11,297 $11,716 $10,641 06/30/1994 $11,283 $11,644 $10,677 07/31/1994 $11,448 $11,857 $10,706 08/31/1994 $11,477 $11,899 $10,749 09/30/1994 $11,374 $11,724 $10,778 10/31/1994 $11,238 $11,515 $10,785 11/30/1994 $11,027 $11,307 $10,799 12/31/1994 $11,239 $11,556 $10,799 01/31/1995 $11,535 $11,886 $10,842 02/28/1995 $11,809 $12,232 $10,886 03/31/1995 $11,906 $12,373 $10,922 04/30/1995 $11,951 $12,387 $10,958 05/31/1995 $12,234 $12,783 $10,980 06/30/1995 $12,212 $12,671 $11,002 07/31/1995 $12,284 $12,792 $11,002 08/31/1995 $12,386 $12,954 $11,030 09/30/1995 $12,455 $13,036 $11,052 10/31/1995 $12,605 $13,225 $11,089 11/30/1995 $12,776 $13,444 $11,081 12/31/1995 $12,890 $13,573 $11,073 01/31/1996 $12,954 $13,677 $11,138 02/29/1996 $12,906 $13,584 $11,174 03/31/1996 $12,802 $13,410 $11,232 04/30/1996 $12,776 $13,372 $11,276 05/31/1996 $12,788 $13,367 $11,297 06/30/1996 $12,937 $13,513 $11,304 07/31/1996 $13,015 $13,634 $11,326 08/31/1996 $13,010 $13,631 $11,347 09/30/1996 $13,188 $13,822 $11,384 10/31/1996 $13,303 $13,978 $11,420 11/30/1996 $13,492 $14,234 $11,442 12/31/1996 $13,455 $14,175 $11,442 01/31/1997 $13,466 $14,201 $11,478 02/28/1997 $13,578 $14,332 $11,514 03/31/1997 $13,424 $14,141 $11,543 04/30/1997 $13,545 $14,260 $11,556 05/31/1997 $13,700 $14,476 $11,550 06/30/1997 $13,839 $14,630 $11,563 07/31/1997 $14,167 $15,036 $11,577 08/31/1997 $14,064 $14,894 $11,599 09/30/1997 $14,165 $15,072 $11,628 10/31/1997 $14,260 $15,168 $11,657 11/30/1997 $14,346 $15,258 $11,650 12/31/1997 $14,547 $15,480 $11,636 01/31/1998 $14,699 $15,640 $11,658 02/28/1998 $14,715 $15,645 $11,681 03/31/1998 $14,746 $15,659 $11,703 04/30/1998 $14,720 $15,588 $11,724 05/31/1998 $14,895 $15,834 $11,745 06/30/1998 $14,946 $15,896 $11,759 07/31/1998 $15,005 $15,936 $11,773 08/31/1998 $15,199 $16,183 $11,787 09/30/1998 $15,337 $16,385 $11,801 10/31/1998 $15,357 $16,385 $11,830 11/30/1998 $15,425 $16,443 $11,830 12/31/1998 $15,473 $16,484 $11,823 01/31/1999 $15,590 $16,680 $11,851 02/28/1999 $15,564 $16,606 $11,865 03/31/1999 $15,585 $16,630 $11,901 04/30/1999 $15,623 $16,671 $11,988 05/31/1999 $15,540 $16,575 $11,988 06/30/1999 $15,347 $16,336 $11,988 07/31/1999 $15,357 $16,395 $12,024 08/31/1999 $15,228 $16,264 $12,053 09/30/1999 $15,171 $16,270 $12,110 10/31/1999 $14,953 $16,094 $12,132 11/30/1999 $15,081 $16,265 $12,140 12/31/1999 $14,961 $16,143 $12,140 01/31/2000 $14,863 $16,072 $12,176 02/29/2000 $15,012 $16,258 $12,248 03/31/2000 $15,341 $16,613 $12,348 04/30/2000 $15,256 $16,515 $12,356 05/31/2000 $15,166 $16,429 $12,370 06/30/2000 $15,543 $16,864 $12,435 07/31/2000 $15,770 $17,099 $12,463 08/31/2000 $15,982 $17,362 $12,463 09/30/2000 $15,907 $17,272 $12,528 10/31/2000 $16,068 $17,460 $12,549 11/30/2000 $16,195 $17,593 $12,557 12/31/2000 $16,593 $18,027 $12,549 01/31/2001 $16,696 $18,206 $12,629 02/28/2001 $16,780 $18,264 $12,679 03/31/2001 $16,929 $18,428 $12,708 04/30/2001 $16,772 $18,229 $12,759 05/31/2001 $16,934 $18,426 $12,816 06/30/2001 $17,049 $18,550 $12,838 07/31/2001 $17,338 $18,824 $12,802 08/31/2001 $17,620 $19,135 $12,802 09/30/2001 $17,569 $19,070 $12,860 10/31/2001 $17,801 $19,297 $12,816 11/30/2001 $17,646 $19,135 $12,794 12/31/2001 $17,478 $18,953 $12,744 01/31/2002 $17,748 $19,281 $12,774 02/28/2002 $17,922 $19,512 $12,825 Total Return 79.22% 95.12% 28.25% CLASS B (2/1/00-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Florida Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 02/01/2000 $10,000 $10,000 $10,000 02/29/2000 $10,107 $10,116 $10,059 03/31/2000 $10,333 $10,337 $10,141 04/30/2000 $10,272 $10,276 $10,148 05/31/2000 $10,207 $10,222 $10,160 06/30/2000 $10,464 $10,493 $10,213 07/31/2000 $10,611 $10,639 $10,236 08/31/2000 $10,749 $10,803 $10,236 09/30/2000 $10,695 $10,747 $10,289 10/31/2000 $10,797 $10,864 $10,307 11/30/2000 $10,887 $10,946 $10,313 12/31/2000 $11,139 $11,217 $10,307 01/31/2001 $11,213 $11,328 $10,372 02/28/2001 $11,265 $11,364 $10,413 03/31/2001 $11,359 $11,466 $10,437 04/30/2001 $11,257 $11,342 $10,479 05/31/2001 $11,350 $11,465 $10,526 06/30/2001 $11,422 $11,542 $10,544 07/31/2001 $11,618 $11,712 $10,514 08/31/2001 $11,802 $11,906 $10,514 09/30/2001 $11,763 $11,865 $10,562 10/31/2001 $11,902 $12,006 $10,526 11/30/2001 $11,814 $11,906 $10,508 12/31/2001 $11,697 $11,792 $10,467 01/31/2002 $11,871 $11,996 $10,491 02/28/2002 $11,680 $12,140 $10,533 Total Return 16.80% 21.40% 5.33% Past performance does not guarantee future results. 20 PERFORMANCE SUMMARY (CONT.) CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Florida Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,904 $10,000 $10,000 05/31/1995 $10,176 $10,319 $10,020 06/30/1995 $10,161 $10,229 $10,040 07/31/1995 $10,207 $10,326 $10,040 08/31/1995 $10,295 $10,458 $10,066 09/29/1995 $10,355 $10,523 $10,086 10/31/1995 $10,464 $10,676 $10,120 11/30/1995 $10,610 $10,853 $10,112 12/29/1995 $10,698 $10,957 $10,105 01/31/1996 $10,746 $11,041 $10,165 02/29/1996 $10,702 $10,966 $10,198 03/29/1996 $10,601 $10,825 $10,251 04/30/1996 $10,575 $10,795 $10,291 05/31/1996 $10,579 $10,791 $10,310 06/28/1996 $10,706 $10,908 $10,316 07/31/1996 $10,754 $11,006 $10,336 08/30/1996 $10,744 $11,004 $10,356 09/30/1996 $10,895 $11,158 $10,389 10/31/1996 $10,993 $11,284 $10,422 11/29/1996 $11,142 $11,491 $10,442 12/31/1996 $11,107 $11,443 $10,442 01/31/1997 $11,111 $11,464 $10,475 02/28/1997 $11,200 $11,570 $10,508 03/31/1997 $11,069 $11,416 $10,534 04/30/1997 $11,164 $11,512 $10,547 05/31/1997 $11,286 $11,686 $10,540 06/30/1997 $11,395 $11,811 $10,553 07/31/1997 $11,668 $12,138 $10,565 08/31/1997 $11,568 $12,024 $10,586 09/30/1997 $11,655 $12,167 $10,612 10/31/1997 $11,726 $12,245 $10,639 11/30/1997 $11,791 $12,317 $10,632 12/31/1997 $11,949 $12,497 $10,619 01/31/1998 $12,067 $12,626 $10,640 02/28/1998 $12,074 $12,629 $10,660 03/31/1998 $12,094 $12,641 $10,680 04/30/1998 $12,067 $12,584 $10,699 05/31/1998 $12,205 $12,783 $10,719 06/30/1998 $12,250 $12,832 $10,731 07/31/1998 $12,282 $12,865 $10,744 08/31/1998 $12,444 $13,064 $10,757 09/30/1998 $12,539 $13,227 $10,770 10/31/1998 $12,549 $13,227 $10,796 11/30/1998 $12,608 $13,274 $10,796 12/31/1998 $12,631 $13,307 $10,789 01/31/1999 $12,731 $13,465 $10,815 02/28/1999 $12,703 $13,406 $10,828 03/31/1999 $12,714 $13,425 $10,861 04/30/1999 $12,740 $13,458 $10,940 05/31/1999 $12,667 $13,380 $10,940 06/30/1999 $12,505 $13,187 $10,940 07/31/1999 $12,508 $13,235 $10,973 08/31/1999 $12,386 $13,129 $10,999 09/30/1999 $12,335 $13,134 $11,052 10/31/1999 $12,154 $12,992 $11,072 11/30/1999 $12,262 $13,130 $11,079 12/31/1999 $12,159 $13,032 $11,079 01/31/2000 $12,064 $12,974 $11,112 02/29/2000 $12,179 $13,125 $11,177 03/31/2000 $12,449 $13,411 $11,269 04/30/2000 $12,365 $13,332 $11,276 05/31/2000 $12,286 $13,263 $11,289 06/30/2000 $12,594 $13,614 $11,348 07/31/2000 $12,770 $13,803 $11,374 08/31/2000 $12,935 $14,016 $11,374 09/30/2000 $12,869 $13,943 $11,433 10/31/2000 $12,991 $14,095 $11,453 11/30/2000 $13,099 $14,202 $11,460 12/31/2000 $13,402 $14,553 $11,453 01/31/2001 $13,490 $14,697 $11,525 02/28/2001 $13,551 $14,744 $11,571 03/31/2001 $13,663 $14,877 $11,598 04/30/2001 $13,531 $14,716 $11,644 05/31/2001 $13,642 $14,875 $11,696 06/30/2001 $13,739 $14,974 $11,716 07/31/2001 $13,961 $15,196 $11,683 08/31/2001 $14,180 $15,447 $11,683 09/30/2001 $14,134 $15,394 $11,736 10/31/2001 $14,312 $15,578 $11,696 11/30/2001 $14,194 $15,447 $11,676 12/31/2001 $14,042 $15,300 $11,631 01/31/2002 $14,263 $15,565 $11,657 02/28/2002 $14,397 $15,751 $11,704 Total Return 43.97% 57.51% 17.04% AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 -------------------------------- 1-Year +4.19% 5-Year +4.93% Since Inception (5/1/95) +5.48% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 21 CREDIT QUALITY BREAKDOWN* Franklin Georgia Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 52.8% AA -- 21.7% A -- 10.3% BBB -- 8.4% Below Investment Grade -- 1.4% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. FRANKLIN GEORGIA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN GEORGIA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND GEORGIA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF GEORGIA MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- STATE UPDATE [STATE OF GEORGIA GRAPHIC OMITTED] Owing to a vibrant, expanding economy, low debt burdens and strong financial management, Georgia remains one of the country's most sound economies and a leading producer of new jobs. With a low average cost of living and extensive, modern infrastructure, it is no wonder the state is home to a number of major corporate headquarters. Although the recession has hurt the manufacturing sector, service sector job creation has more than made up for the industrial losses. With a gain of almost 3% in employment growth in 2000, Georgia easily surpassed the national average for the sixth time in the last seven years. 2 As a result of such a stellar performance, Georgia's unemployment stood at 4.5% in December 2001, well below the nation's 5.8% level. 3 Likewise, Georgia is in very sound fiscal condition. The state recorded strong revenue growth of 6.4% in fiscal year 2001, giving Georgia a general fund surplus of $973 million for the year. Debt per capita recently stood at $679, while debt to personal income was 2.6%. 2 Although both of these figures are a bit higher than the national medians, they represent an improvement from where the state was two years ago. Yet, like many states, Georgia is feeling the effects of the national recession, which has produced lower-than-projected revenue collections. Through the first quarter of fiscal year 2002, revenue collections were down 6.3%, as personal income tax receipts fell 2.1% and sales tax collections fell 6.0%. Hit hard by the economic slump, corporate profits in particular suffered and corporate income taxes were down more than 60%. 2 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Moody's Investors Service, GEORGIA (STATE OF), 10/29/01. 3. Source: Bureau of Labor Statistics, 2/4/02. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 85. 22 Looking forward, Georgia seems to be taking the needed steps to solve the problem. The Office of Planning along with the governor have ordered all state agencies to reduce expenditures by 2.5% in fiscal year 2002 and a full 5% in 2003. It is largely proactive management such as this that has convinced Standard & Poor's, an independent credit rating agency, to assign the state's general obligation debt its highest rating, AAA. 4 PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Georgia Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.73 on February 28, 2001, to $11.86 on February 28, 2002. Retail and institutional demand remained extremely strong throughout the year. Demand significantly outpaced supply in Georgia, even as new issue supply increased 5.8% in 2001 versus 2000. 5 The robust demand gave us the opportunity to sell bonds at relatively high retail prices. Notable sales included Atlanta GO, Georgia State GO and Clarke County Hospital Authority Revenue Certificates - Athens Regional Medical Center Project. Franklin Georgia Tax-Free Income Fund is the largest Georgia municipal bond fund. Our size and leverage in the market allowed us to get the first look at primary and secondary market offerings. Subsequently, we were able to invest the proceeds in mostly AAA-rated bonds with good call protection at institutional, or wholesale, prices. Credit spreads, the difference in yields between lower- and higher-rated securities, tightened to the point where we felt that we were not adequately compensated for the added risk of investing in lower-rated securities. Hence, the majority of our investments throughout the 12 months were in A-rated or higher bonds. We found particular value in insured, AAA-rated hospital revenue bonds and multifamily housing revenue bonds. At period-end, 79.9% of the Fund's total long-term investments were rated AA or higher. Throughout the period, we attempted to maintain the Fund's broad diversification. At period-end, hospital & health care represented the Fund's largest weighting, 18.3% of total long-term investments, followed by housing at 16.7%. Important purchases included revenue bonds for Albany Sewer System, DeKalb Water & Sewer, Gainesville & 4. Source: Standard & Poor's, RATINGSDIRECT, 9/15/01. This does not indicate Standard & Poor's rating of the Fund. 5. Source: THE BOND BUYER, 1/2/02. PORTFOLIO BREAKDOWN Franklin Georgia Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS --------------------------------------------- Hospital & Health Care 18.3% Housing 16.7% Higher Education 14.3% Utilities 13.7% Prerefunded 8.7% Corporate-Backed 6.5% Transportation 6.1% General Obligation 5.7% Other Revenue 5.3% Tax-Supported 2.7% Subject to Government Appropriations 2.0% 23 DIVIDEND DISTRIBUTIONS* Franklin Georgia Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ---------------------------------- MONTH CLASS A CLASS C --------------------------------------------------------------------------- March 4.83 cents 4.25 cents April 4.83 cents 4.25 cents May 4.83 cents 4.25 cents June 4.83 cents 4.30 cents July 4.83 cents 4.30 cents August 4.83 cents 4.30 cents September 4.78 cents 4.24 cents October 4.78 cents 4.24 cents November 4.78 cents 4.24 cents December 4.70 cents 4.14 cents January 4.70 cents 4.14 cents February 4.70 cents 4.14 cents --------------------------------------------------------------------------- TOTAL 57.42 CENTS 50.79 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. Hall County Hospital Authority for the Northeast Health System Inc., Valdosta and Lowndes County Hospital Authority for South Georgia Medical Center, and Clayton County MFHR for Southlake Cove and Vineyard Pointe. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at the current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") 24 Keep in mind that your Fund combines the advantage of high credit quality and tax-free yields. 1 The Performance Summary beginning on page 26 shows that at the end of this reporting period, the Fund's Class A shares' distribution rate was 4.55%, based on an annualization of the current 4.7 cent ($0.047) per share dividend and the maximum offering price of $12.39 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Georgia state personal income tax bracket of 42.28% would need to earn 7.88% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, new issue supply should remain relatively high because of low interest rates. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocations of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 25 FRANKLIN GEORGIA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Georgia state personal income tax bracket of 42.28%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ---------------------------------------------------------------------------- Net Asset Value (NAV) +$0.13 $11.86 $11.73 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5742 CLASS C CHANGE 2/28/02 2/28/01 ---------------------------------------------------------------------------- Net Asset Value (NAV) +$0.13 $11.94 $11.81 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5079 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------- Cumulative Total Return 1 +6.15% +29.71% +82.51% Average Annual Total Return 2 +1.65% +4.42% +5.74% Avg. Ann. Total Return (3/31/02) 3 -1.01% +4.25% +5.54% Distribution Rate 4 4.55% Taxable Equivalent Distribution Rate 5 7.88% 30-Day Standardized Yield 6 4.04% Taxable Equivalent Yield 5 7.00% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------- Cumulative Total Return 1 +5.52% +26.18% +42.25% Average Annual Total Return 2 +3.47% +4.55% +5.13% Avg. Ann. Total Return (3/31/02) 3 +0.76% +4.37% +4.80% Distribution Rate 4 4.13% Taxable Equivalent Distribution Rate 5 7.16% 30-Day Standardized Yield 6 3.63% Taxable Equivalent Yiel 5 6.29% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 26 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Georgia Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,571 $10,000 $10,000 03/31/1992 $9,589 $10,003 $10,051 04/30/1992 $9,679 $10,092 $10,065 05/31/1992 $9,805 $10,211 $10,079 06/30/1992 $9,934 $10,383 $10,115 07/31/1992 $10,265 $10,694 $10,137 08/31/1992 $10,149 $10,590 $10,165 09/30/1992 $10,179 $10,659 $10,194 10/31/1992 $9,999 $10,555 $10,229 11/30/1992 $10,228 $10,744 $10,244 12/31/1992 $10,384 $10,853 $10,236 01/31/1993 $10,466 $10,979 $10,287 02/28/1993 $10,754 $11,377 $10,323 03/31/1993 $10,712 $11,256 $10,359 04/30/1993 $10,837 $11,370 $10,388 05/31/1993 $10,902 $11,433 $10,402 06/30/1993 $11,093 $11,624 $10,417 07/31/1993 $11,099 $11,639 $10,417 08/31/1993 $11,293 $11,882 $10,446 09/30/1993 $11,435 $12,017 $10,468 10/31/1993 $11,474 $12,040 $10,511 11/30/1993 $11,432 $11,934 $10,518 12/31/1993 $11,620 $12,186 $10,518 01/31/1994 $11,759 $12,325 $10,547 02/28/1994 $11,508 $12,005 $10,582 03/31/1994 $11,125 $11,517 $10,618 04/30/1994 $11,167 $11,615 $10,633 05/31/1994 $11,243 $11,716 $10,641 06/30/1994 $11,196 $11,644 $10,677 07/31/1994 $11,385 $11,857 $10,706 08/31/1994 $11,432 $11,899 $10,749 09/30/1994 $11,320 $11,724 $10,778 10/31/1994 $11,147 $11,515 $10,785 11/30/1994 $10,929 $11,307 $10,799 12/31/1994 $11,185 $11,556 $10,799 01/31/1995 $11,485 $11,886 $10,842 02/28/1995 $11,727 $12,232 $10,886 03/31/1995 $11,840 $12,373 $10,922 04/30/1995 $11,872 $12,387 $10,958 05/31/1995 $12,146 $12,783 $10,980 06/30/1995 $12,101 $12,671 $11,002 07/31/1995 $12,159 $12,792 $11,002 08/31/1995 $12,277 $12,954 $11,030 09/30/1995 $12,322 $13,036 $11,052 10/31/1995 $12,479 $13,225 $11,089 11/30/1995 $12,640 $13,444 $11,081 12/31/1995 $12,759 $13,573 $11,073 01/31/1996 $12,808 $13,677 $11,138 02/29/1996 $12,771 $13,584 $11,174 03/31/1996 $12,656 $13,410 $11,232 04/30/1996 $12,661 $13,372 $11,276 05/31/1996 $12,693 $13,367 $11,297 06/30/1996 $12,815 $13,513 $11,304 07/31/1996 $12,888 $13,634 $11,326 08/31/1996 $12,903 $13,631 $11,347 09/30/1996 $13,063 $13,822 $11,384 10/31/1996 $13,177 $13,978 $11,420 11/30/1996 $13,347 $14,234 $11,442 12/31/1996 $13,354 $14,175 $11,442 01/31/1997 $13,379 $14,201 $11,478 02/28/1997 $13,471 $14,332 $11,514 03/31/1997 $13,351 $14,141 $11,543 04/30/1997 $13,454 $14,260 $11,556 05/31/1997 $13,600 $14,476 $11,550 06/30/1997 $13,719 $14,630 $11,563 07/31/1997 $14,010 $15,036 $11,577 08/31/1997 $13,918 $14,894 $11,599 09/30/1997 $14,061 $15,072 $11,628 10/31/1997 $14,140 $15,168 $11,657 11/30/1997 $14,233 $15,258 $11,650 12/31/1997 $14,404 $15,480 $11,636 01/31/1998 $14,516 $15,640 $11,658 02/28/1998 $14,519 $15,645 $11,681 03/31/1998 $14,550 $15,659 $11,703 04/30/1998 $14,536 $15,588 $11,724 05/31/1998 $14,718 $15,834 $11,745 06/30/1998 $14,761 $15,896 $11,759 07/31/1998 $14,793 $15,936 $11,773 08/31/1998 $14,968 $16,183 $11,787 09/30/1998 $15,137 $16,385 $11,801 10/31/1998 $15,105 $16,385 $11,830 11/30/1998 $15,169 $16,443 $11,830 12/31/1998 $15,217 $16,484 $11,823 01/31/1999 $15,330 $16,680 $11,851 02/28/1999 $15,278 $16,606 $11,865 03/31/1999 $15,313 $16,630 $11,901 04/30/1999 $15,362 $16,671 $11,988 05/31/1999 $15,277 $16,575 $11,988 06/30/1999 $15,077 $16,336 $11,988 07/31/1999 $15,086 $16,395 $12,024 08/31/1999 $14,911 $16,264 $12,053 09/30/1999 $14,870 $16,270 $12,110 10/31/1999 $14,655 $16,094 $12,132 11/30/1999 $14,765 $16,265 $12,140 12/31/1999 $14,634 $16,143 $12,140 01/31/2000 $14,501 $16,072 $12,176 02/29/2000 $14,710 $16,258 $12,248 03/31/2000 $15,054 $16,613 $12,348 04/30/2000 $14,984 $16,515 $12,356 05/31/2000 $14,898 $16,429 $12,370 06/30/2000 $15,288 $16,864 $12,435 07/31/2000 $15,464 $17,099 $12,463 08/31/2000 $15,708 $17,362 $12,463 09/30/2000 $15,592 $17,272 $12,528 10/31/2000 $15,787 $17,460 $12,549 11/30/2000 $15,921 $17,593 $12,557 12/31/2000 $16,301 $18,027 $12,549 01/31/2001 $16,401 $18,206 $12,629 02/28/2001 $16,463 $18,264 $12,679 03/31/2001 $16,618 $18,428 $12,708 04/30/2001 $16,450 $18,229 $12,759 05/31/2001 $16,590 $18,426 $12,816 06/30/2001 $16,724 $18,550 $12,838 07/31/2001 $16,972 $18,824 $12,802 08/31/2001 $17,242 $19,135 $12,802 09/30/2001 $17,116 $19,070 $12,860 10/31/2001 $17,366 $19,297 $12,816 11/30/2001 $17,228 $19,135 $12,794 12/31/2001 $17,067 $18,953 $12,744 01/31/2002 $17,282 $19,281 $12,774 02/28/2002 $17,470 $19,512 $12,825 Total Return 74.70% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Georgia Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,897 $10,000 $10,000 05/31/1995 $10,129 $10,319 $10,020 06/30/1995 $10,103 $10,229 $10,040 07/31/1995 $10,155 $10,326 $10,040 08/31/1995 $10,240 $10,458 $10,066 09/29/1995 $10,282 $10,523 $10,086 10/31/1995 $10,397 $10,676 $10,120 11/30/1995 $10,536 $10,853 $10,112 12/29/1995 $10,629 $10,957 $10,105 01/31/1996 $10,665 $11,041 $10,165 02/29/1996 $10,630 $10,966 $10,198 03/29/1996 $10,530 $10,825 $10,251 04/30/1996 $10,530 $10,795 $10,291 05/31/1996 $10,550 $10,791 $10,310 06/28/1996 $10,645 $10,908 $10,316 07/31/1996 $10,707 $11,006 $10,336 08/30/1996 $10,712 $11,004 $10,356 09/30/1996 $10,847 $11,158 $10,389 10/31/1996 $10,936 $11,284 $10,422 11/29/1996 $11,062 $11,491 $10,442 12/31/1996 $11,072 $11,443 $10,442 01/31/1997 $11,079 $11,464 $10,475 02/28/1997 $11,160 $11,570 $10,508 03/31/1997 $11,056 $11,416 $10,534 04/30/1997 $11,125 $11,512 $10,547 05/31/1997 $11,248 $11,686 $10,540 06/30/1997 $11,340 $11,811 $10,553 07/31/1997 $11,574 $12,138 $10,565 08/31/1997 $11,493 $12,024 $10,586 09/30/1997 $11,605 $12,167 $10,612 10/31/1997 $11,663 $12,245 $10,639 11/30/1997 $11,734 $12,317 $10,632 12/31/1997 $11,879 $12,497 $10,619 01/31/1998 $11,955 $12,626 $10,640 02/28/1998 $11,962 $12,629 $10,660 03/31/1998 $11,970 $12,641 $10,680 04/30/1998 $11,954 $12,584 $10,699 05/31/1998 $12,097 $12,783 $10,719 06/30/1998 $12,137 $12,832 $10,731 07/31/1998 $12,158 $12,865 $10,744 08/31/1998 $12,295 $13,064 $10,757 09/30/1998 $12,428 $13,227 $10,770 10/31/1998 $12,395 $13,227 $10,796 11/30/1998 $12,441 $13,274 $10,796 12/31/1998 $12,475 $13,307 $10,789 01/31/1999 $12,572 $13,465 $10,815 02/28/1999 $12,524 $13,406 $10,828 03/31/1999 $12,547 $13,425 $10,861 04/30/1999 $12,572 $13,458 $10,940 05/31/1999 $12,499 $13,380 $10,940 06/30/1999 $12,330 $13,187 $10,940 07/31/1999 $12,333 $13,235 $10,973 08/31/1999 $12,184 $13,129 $10,999 09/30/1999 $12,143 $13,134 $11,052 10/31/1999 $11,964 $12,992 $11,072 11/30/1999 $12,057 $13,130 $11,079 12/31/1999 $11,934 $13,032 $11,079 01/31/2000 $11,821 $12,974 $11,112 02/29/2000 $11,985 $13,125 $11,177 03/31/2000 $12,259 $13,411 $11,269 04/30/2000 $12,198 $13,332 $11,276 05/31/2000 $12,122 $13,263 $11,289 06/30/2000 $12,433 $13,614 $11,348 07/31/2000 $12,581 $13,803 $11,374 08/31/2000 $12,762 $14,016 $11,374 09/30/2000 $12,664 $13,943 $11,433 10/31/2000 $12,816 $14,095 $11,453 11/30/2000 $12,919 $14,202 $11,460 12/31/2000 $13,232 $14,553 $11,453 01/31/2001 $13,305 $14,697 $11,525 02/28/2001 $13,349 $14,744 $11,571 03/31/2001 $13,466 $14,877 $11,598 04/30/2001 $13,313 $14,716 $11,644 05/31/2001 $13,430 $14,875 $11,696 06/30/2001 $13,532 $14,974 $11,716 07/31/2001 $13,724 $15,196 $11,683 08/31/2001 $13,935 $15,447 $11,683 09/30/2001 $13,828 $15,394 $11,736 10/31/2001 $14,022 $15,578 $11,696 11/30/2001 $13,905 $15,447 $11,676 12/31/2001 $13,769 $15,300 $11,631 01/31/2002 $13,936 $15,565 $11,657 02/28/2002 $14,079 $15,751 $11,704 Total Return 40.79% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 27 CREDIT QUALITY BREAKDOWN* Franklin Kentucky Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 52.2% AA -- 26.5% A -- 11.5% BBB -- 5.6% Below Investment Grade -- 4.2% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. FRANKLIN KENTUCKY TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN KENTUCKY TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND KENTUCKY STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF KENTUCKY MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- COMMONWEALTH UPDATE 2 [STATE OF KENTUCKY GRAPHIC OMITTED] During the recent, slowing economic times, Kentucky's efforts to diversify its economy have resulted in a more stable economic base, providing for more reliable, steady sources of government income. Although manufacturing and total employment are projected to remain flat in 2002, personal income growth is expected to grow slightly, a positive sign that workers are earning more. Furthermore, sales and use tax collections are expected to grow, albeit at a slower rate than in the past, helping to fill the government's coffers. In addition, debt levels remain manageable, and per capita and based on percent of income are quite moderate. These developments should help Kentucky manage its budgetary challenges. After growing by leaps and bounds throughout the 1990s, Kentucky's economy slowed substantially in the first two years of the new millennium, causing budget shortfalls for fiscal years 2001 and 2002. The commonwealth rallied to pay fiscal year 2001's $159 million deficit, partly with $23 million in budgetary reserves, only to address fiscal year 2002's $290 million shortfall in September 2001. Governor Paul Patton solved the problem by once again dipping into budget reserves, as well as using unneeded appropriations. In October, another shortfall, $171 million, was announced. Additional rounds of spending cuts were implemented to tackle the latest deficit, including deductions in Medicaid and health services, postsecondary education and community-based family and children's services. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 2/4/02. This does not indicate Standard & Poor's rating of the Fund. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 89. 28 Kentucky's outlook is a bit uncertain. The budget deficits have caused a significant reduction in the commonwealth's liquidity. Additional shortfalls in the coming year are likely, and if Kentucky continues to use onetime measures to address these problems, its liquidity will be adversely affected. It is becoming imperative that the commonwealth establish a structural balance by the next biennial budget to preserve its credit profile. Nevertheless, Kentucky's general obligation debt still garners an AA rating, one of the highest from Standard & Poor's, an independent credit rating agency. PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Kentucky Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.03 on February 28, 2001, to $11.13 on February 28, 2002. Retail and institutional demand remained extremely strong throughout the year. Demand significantly outpaced supply in Kentucky, even as new issue supply increased 36.5% in 2001 versus 2000, as issuers took advantage of the relatively low rates to issue municipal bonds. 3 The robust demand gave us opportunities to sell bonds at relatively high retail prices. Notable sales included Madison County Utility District Revenue, Oldham County School District Finance Corp., Louisville and Jefferson County Regional Airport Authority Airport Systems Revenue and Louisville and Jefferson County Metropolitan Sewer District and Drain System Revenue. Subsequently, we invested the proceeds in mostly AAA-rated bonds with good call protection at institutional, or wholesale, prices. Credit spreads, the difference in yields between lower- and higher-rated securities, tightened to the point where we felt that we were not adequately compensated for taking on the added risk of investing in lower-rated securities. Hence, the majority of our investments throughout the 12 months were in A-rated or higher bonds. We found particular value in insured, AAA-rated water revenue bonds and A-rated Commonwealth of Puerto Rico bonds. To remain fully invested, the Fund invested in Puerto Rico bonds, which are highly liquid and tax-free in many states. Throughout the period, we attempted to maintain the Fund's broad diversification. At period-end, utilities represented the Fund's largest weighting, 21.9% of total long-term investments, followed by other revenue bonds, at 18.4%. Important purchases 3. Source: THE BOND BUYER, 1/2/02. PORTFOLIO BREAKDOWN Franklin Kentucky Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------------------ Utilities 21.9% Other Revenue 18.4% Subject to Government Appropriations 17.0% Hospital & Health Care 10.7% General Obligation 8.9% Housing 7.2% Prerefunded 5.8% Transportation 4.4% Corporate-Backed 3.5% Tax-Supported 2.2% 29 DIVIDEND DISTRIBUTIONS* Franklin Kentucky Tax-Free Income Fund - Class A 3/1/01-2/28/02 DIVIDEND MONTH PER SHARE ----------------------------- March 4.76 cents April 4.76 cents May 4.76 cents June 4.71 cents July 4.71 cents August 4.71 cents September 4.71 cents October 4.71 cents November 4.71 cents December 4.30 cents January 4.30 cents February 4.30 cents ----------------------------- TOTAL 55.44 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. included Puerto Rico Commonwealth GO and revenue bonds for Boone Florence Water Commission Water Supply Systems, Puerto Rico Public Building Authority, Campbell and Kenton Counties Sanitation District and Kentucky Infrastructure Authority. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at the current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields. 1 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 4.54%. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Kentucky state personal income tax bracket of 42.28% would need to earn 7.87% from a taxable investment to match the Fund's tax-free distribution rate. Looking forward, new issue supply should remain relatively high because of low interest rates. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocations of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 30 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF THE FUND'S OPERATING EXPENSES. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPH DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $11.13 $11.03 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5544 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------- Cumulative Total Return 1 +6.08% +31.05% +88.53% Average Annual Total Return 2 +1.57% +4.65% +6.08% Avg. Ann. Total Return (3/31/02) 3 -1.01% +4.59% +5.88% Distribution Rate 4 4.54% Taxable Equivalent Distribution Rate 5 7.87% 30-Day Standardized Yield 6 4.22% Taxable Equivalent Yield 5 7.31% -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. FRANKLIN KENTUCKY TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. The Fund's manager has agreed in advance to waive a portion of its management fees, which reduces operating expenses and increases distribution rate, yield and total return to shareholders. Without this waiver, the Fund's distribution rate and total return would have been lower, and yield for the period would have been 3.96%. The fee waiver may be discontinued at any time upon notice to the Fund's Board of Trustees. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include the sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge. 3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 4. Distribution rate is based on an annualization of the current 4.4 cent per share monthly dividend and the maximum offering price of $11.62 on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Kentucky state personal income tax bracket of 42.28%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. Past performance does not guarantee future results. 31 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +1.57% 5-Year +4.65% 10-Year +6.08% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE, FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Kentucky Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,579 $10,000 $10,000 03/31/1992 $9,603 $10,003 $10,051 04/30/1992 $9,683 $10,092 $10,065 05/31/1992 $9,827 $10,211 $10,079 06/30/1992 $9,964 $10,383 $10,115 07/31/1992 $10,368 $10,694 $10,137 08/31/1992 $10,191 $10,590 $10,165 09/30/1992 $10,215 $10,659 $10,194 10/31/1992 $10,047 $10,555 $10,229 11/30/1992 $10,332 $10,744 $10,244 12/31/1992 $10,486 $10,853 $10,236 01/31/1993 $10,605 $10,979 $10,287 02/28/1993 $10,928 $11,377 $10,323 03/31/1993 $10,862 $11,256 $10,359 04/30/1993 $10,979 $11,370 $10,388 05/31/1993 $11,060 $11,433 $10,402 06/30/1993 $11,288 $11,624 $10,417 07/31/1993 $11,323 $11,639 $10,417 08/31/1993 $11,552 $11,882 $10,446 09/30/1993 $11,722 $12,017 $10,468 10/31/1993 $11,796 $12,040 $10,511 11/30/1993 $11,668 $11,934 $10,518 12/31/1993 $11,945 $12,186 $10,518 01/31/1994 $12,077 $12,325 $10,547 02/28/1994 $11,729 $12,005 $10,582 03/31/1994 $11,067 $11,517 $10,618 04/30/1994 $11,154 $11,615 $10,633 05/31/1994 $11,276 $11,716 $10,641 06/30/1994 $11,170 $11,644 $10,677 07/31/1994 $11,427 $11,857 $10,706 08/31/1994 $11,463 $11,899 $10,749 09/30/1994 $11,196 $11,724 $10,778 10/31/1994 $10,871 $11,515 $10,785 11/30/1994 $10,596 $11,307 $10,799 12/31/1994 $10,925 $11,556 $10,799 01/31/1995 $11,358 $11,886 $10,842 02/28/1995 $11,756 $12,232 $10,886 03/31/1995 $11,885 $12,373 $10,922 04/30/1995 $11,893 $12,387 $10,958 05/31/1995 $12,324 $12,783 $10,980 06/30/1995 $12,145 $12,671 $11,002 07/31/1995 $12,216 $12,792 $11,002 08/31/1995 $12,376 $12,954 $11,030 09/30/1995 $12,477 $13,036 $11,052 10/31/1995 $12,699 $13,225 $11,089 11/30/1995 $12,945 $13,444 $11,081 12/31/1995 $13,094 $13,573 $11,073 01/31/1996 $13,156 $13,677 $11,138 02/29/1996 $13,016 $13,584 $11,174 03/31/1996 $12,828 $13,410 $11,232 04/30/1996 $12,817 $13,372 $11,276 05/31/1996 $12,834 $13,367 $11,297 06/30/1996 $13,000 $13,513 $11,304 07/31/1996 $13,087 $13,634 $11,326 08/31/1996 $13,087 $13,631 $11,347 09/30/1996 $13,294 $13,822 $11,384 10/31/1996 $13,457 $13,978 $11,420 11/30/1996 $13,688 $14,234 $11,442 12/31/1996 $13,654 $14,175 $11,442 01/31/1997 $13,658 $14,201 $11,478 02/28/1997 $13,783 $14,332 $11,514 03/31/1997 $13,599 $14,141 $11,543 04/30/1997 $13,722 $14,260 $11,556 05/31/1997 $13,917 $14,476 $11,550 06/30/1997 $14,070 $14,630 $11,563 07/31/1997 $14,450 $15,036 $11,577 08/31/1997 $14,347 $14,894 $11,599 09/30/1997 $14,515 $15,072 $11,628 10/31/1997 $14,599 $15,168 $11,657 11/30/1997 $14,713 $15,258 $11,650 12/31/1997 $14,935 $15,480 $11,636 01/31/1998 $15,066 $15,640 $11,658 02/28/1998 $15,080 $15,645 $11,681 03/31/1998 $15,124 $15,659 $11,703 04/30/1998 $15,066 $15,588 $11,724 05/31/1998 $15,304 $15,834 $11,745 06/30/1998 $15,369 $15,896 $11,759 07/31/1998 $15,402 $15,936 $11,773 08/31/1998 $15,620 $16,183 $11,787 09/30/1998 $15,791 $16,385 $11,801 10/31/1998 $15,755 $16,385 $11,830 11/30/1998 $15,810 $16,443 $11,830 12/31/1998 $15,848 $16,484 $11,823 01/31/1999 $16,000 $16,680 $11,851 02/28/1999 $15,916 $16,606 $11,865 03/31/1999 $15,965 $16,630 $11,901 04/30/1999 $15,989 $16,671 $11,988 05/31/1999 $15,898 $16,575 $11,988 06/30/1999 $15,675 $16,336 $11,988 07/31/1999 $15,683 $16,395 $12,024 08/31/1999 $15,487 $16,264 $12,053 09/30/1999 $15,453 $16,270 $12,110 10/31/1999 $15,206 $16,094 $12,132 11/30/1999 $15,324 $16,265 $12,140 12/31/1999 $15,179 $16,143 $12,140 01/31/2000 $15,044 $16,072 $12,176 02/29/2000 $15,257 $16,258 $12,248 03/31/2000 $15,634 $16,613 $12,348 04/30/2000 $15,468 $16,515 $12,356 05/31/2000 $15,295 $16,429 $12,370 06/30/2000 $15,722 $16,864 $12,435 07/31/2000 $15,991 $17,099 $12,463 08/31/2000 $16,258 $17,362 $12,463 09/30/2000 $16,129 $17,272 $12,528 10/31/2000 $16,326 $17,460 $12,549 11/30/2000 $16,473 $17,593 $12,557 12/31/2000 $16,924 $18,027 $12,549 01/31/2001 $17,000 $18,206 $12,629 02/28/2001 $17,040 $18,264 $12,679 03/31/2001 $17,210 $18,428 $12,708 04/30/2001 $16,991 $18,229 $12,759 05/31/2001 $17,175 $18,426 $12,816 06/30/2001 $17,340 $18,550 $12,838 07/31/2001 $17,609 $18,824 $12,802 08/31/2001 $17,873 $19,135 $12,802 09/30/2001 $17,672 $19,070 $12,860 10/31/2001 $17,930 $19,297 $12,816 11/30/2001 $17,792 $19,135 $12,794 12/31/2001 $17,604 $18,953 $12,744 01/31/2002 $17,864 $19,281 $12,774 02/28/2002 $18,047 $19,512 $12,825 Total Return 80.47% 95.12% 28.25% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 32 FRANKLIN LOUISIANA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN LOUISIANA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND LOUISIANA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF LOUISIANA MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- STATE UPDATE [STATE OF LOUISIANA GRAPHIC OMITTED] Louisiana's commitment to improve its financial structure through reduced borrowing and the adoption of debt limitation measures is beginning to pay solid dividends. The state has sharply curtailed its onetime ballooning debt burden, and is well on its way to reducing debt service to 6% of general state receipts by fiscal year 2004, from the substantial 12.9% incurred in fiscal year 1994. 2 Since the 1980s, Louisiana has ranked near the top nationally in terms of debt per capita and debt as a percentage of personal income. Yet, in fiscal year 2001, these levels declined so considerably that the state's net tax-supported debt was $565 versus the $541 national median and net tax-supported debt as a percentage of personal income was 2.5% compared with the 2.1% median. 3 Furthermore, many analysts expect these levels to fall further. Over the past several years, Louisiana has enacted a number of changes to improve its credit profile. In particular, the state has established measures to control and reduce Medicaid spending, which brought on a financial crisis in fiscal years 1995 and 1996, and limited future increases to grow only slightly. The fiscal year 2001 budget projected Medicaid spending to grow by less than 1%. 3 Other cost-cutting initiatives include matching recurring expenses with recurring revenues to limit future budget shortfalls as well as reducing government head count. Finally, Louisiana has committed to using any budget surplus since 1996 to prepay outstanding debt, paving the way to a more steady fiscal position. However, due to this, the state's general fund reserves remain rather low, a potential problem if the national economy continues to languish. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 6/5/01. This does not indicate Standard & Poor's rating of the Fund. 3. Source: Moody's Investors Service, LOUISIANA (STATE OF), 6/4/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 93. CREDIT QUALITY BREAKDOWN* Franklin Louisiana Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 69.1% AA -- 0.4% A -- 7.1% BBB -- 19.7% Below Investment Grade -- 3.7% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. 33 PORTFOLIO BREAKDOWN Franklin Louisiana Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------------- Utilities 17.9% Higher Education 17.5% Hospital & Health Care 12.4% Tax-Supported 11.0% Corporate-Backed 9.0% Housing 8.7% Prerefunded 6.2% Subject to Government Appropriations 6.2% Other Revenue 5.6% General Obligation 4.9% Transportation 0.6% The outlook for Louisiana is stable. The state will most likely remain on a track of tight fiscal management in both good times and bad. A stronger financial profile should allow the state to weather future economic downturns. Largely due to these factors, Standard & Poor's, an independent credit rating agency, has assigned Louisiana's general obligation debt an A rating, one of the agency's highest grades. 2 PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Louisiana Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.22 on February 28, 2001, to $11.38 on February 28, 2002. Retail and institutional demand remained extremely strong throughout the year. Demand significantly outpaced supply in Louisiana, even as new issue supply increased 51.3% in 2001 versus 2000, as issuers took advantage of the relatively low rates to issue municipal bonds. 4 The robust demand gave us the opportunity to sell bonds at relatively high retail prices. Notable sales included Lake Charles Nonprofit HDC, Louisiana Public Facilities Authority Revenue for Dillard University project and De Soto Parish Environmental Improvement Revenue for International Paper Co. Franklin Louisiana Tax-Free Income Fund is the largest Louisiana municipal bond fund. Our size and leverage in the market allowed us to get the first look at primary and secondary market offerings. Subsequently, we were able to invest the proceeds in mostly AAA-rated bonds with good call protection at institutional, or wholesale, prices. Credit spreads, the difference in yields between lower- and higher-rated securities, tightened to the point where we felt that we were not adequately compensated for the added risk of investing in lower-rated securities. Hence, the majority of our investments throughout the 12 months were in A-rated or better bonds. We found particular value in insured, AAA-rated sales tax revenue and higher education revenue bonds. At period-end, 69.5% of the Fund's total long-term investments were rated AA or higher. Throughout the period, we attempted to maintain the Fund's broad diversification. At period-end, utilities represented the Fund's largest weighting, 17.9% of total long-term investments, followed by higher education, at 17.5%. Important purchases 4. Source: THE BOND BUYER, 1/2/02. 34 DIVIDEND DISTRIBUTIONS* Franklin Louisiana Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE --------------------------------- MONTH CLASS A CLASS C -------------------------------------------------------------- March 4.80 cents 4.25 cents April 4.80 cents 4.25 cents May 4.80 cents 4.25 cents June 4.70 cents 4.20 cents July 4.70 cents 4.20 cents August 4.70 cents 4.20 cents September 4.70 cents 4.18 cents October 4.70 cents 4.18 cents November 4.70 cents 4.18 cents December 4.65 cents 4.11 cents January 4.65 cents 4.11 cents February 4.65 cents 4.11 cents -------------------------------------------------------------- TOTAL 56.55 CENTS 50.22 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. included revenue bonds issued by Jefferson Sales Tax District Special Sales Tax, East Baton Rouge Parish Sales and Use Tax and Louisiana Public Facilities Authority for Tulane University. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at the current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") 35 Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields. 1 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 4.64%, based on an annualization of the current 4.6 cent ($0.046) per share dividend and the maximum offering price of $11.89 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Louisiana state personal income tax bracket of 42.28% would need to earn 8.04% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, new issue supply should remain relatively high because of low interest rates. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocations of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 36 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 --------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $11.38 $11.22 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5655 CLASS C CHANGE 2/28/02 2/28/01 --------------------------------------------------------------------------- Net Asset Value (NAV) +$0.18 $11.47 $11.29 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5022 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ----------------------------------------------------------------------------- Cumulative Total Return 1 +6.73% +31.11% +82.64% Average Annual Total Return 2 +2.17% +4.66% +5.75% Avg. Ann. Total Return (3/31/02) 3 -0.27% +4.48% +5.55% Distribution Rate 4 4.64% Taxable Equivalent Distribution Rate 5 8.04% 30-Day Standardized Yield 6 4.19% Taxable Equivalent Yield 5 7.26% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ----------------------------------------------------------------------------- Cumulative Total Return 1 +6.18% +27.77% +44.95% Average Annual Total Return 2 +4.17% +4.82% +5.43% Avg. Ann. Total Return (3/31/02) 3 -1.67% +4.64% +5.11% Distribution Rate 4 4.21% Taxable Equivalent Distribution Rate 5 7.29% 30-Day Standardized Yield 6 3.79% Taxable Equivalent Yield 5 6.57% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. FRANKLIN LOUISIANA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Louisiana state personal income tax bracket of 42.28%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 37 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +2.17% 5-Year +4.66% 10-Year +5.75% AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 ------------------------------- 1-Year +4.17% 5-Year +4.82% Since Inception (5/1/95) +5.43% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Louisiana Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,578 $10,000 $10,000 03/31/1992 $9,604 $10,003 $10,051 04/30/1992 $9,682 $10,092 $10,065 05/31/1992 $9,803 $10,211 $10,079 06/30/1992 $9,925 $10,383 $10,115 07/31/1992 $10,292 $10,694 $10,137 08/31/1992 $10,164 $10,590 $10,165 09/30/1992 $10,181 $10,659 $10,194 10/31/1992 $10,024 $10,555 $10,229 11/30/1992 $10,233 $10,744 $10,244 12/31/1992 $10,400 $10,853 $10,236 01/31/1993 $10,515 $10,979 $10,287 02/28/1993 $10,814 $11,377 $10,323 03/31/1993 $10,765 $11,256 $10,359 04/30/1993 $10,840 $11,370 $10,388 05/31/1993 $10,882 $11,433 $10,402 06/30/1993 $11,089 $11,624 $10,417 07/31/1993 $11,104 $11,639 $10,417 08/31/1993 $11,274 $11,882 $10,446 09/30/1993 $11,386 $12,017 $10,468 10/31/1993 $11,399 $12,040 $10,511 11/30/1993 $11,375 $11,934 $10,518 12/31/1993 $11,557 $12,186 $10,518 01/31/1994 $11,649 $12,325 $10,547 02/28/1994 $11,448 $12,005 $10,582 03/31/1994 $11,040 $11,517 $10,618 04/30/1994 $11,050 $11,615 $10,633 05/31/1994 $11,144 $11,716 $10,641 06/30/1994 $11,097 $11,644 $10,677 07/31/1994 $11,281 $11,857 $10,706 08/31/1994 $11,315 $11,899 $10,749 09/30/1994 $11,218 $11,724 $10,778 10/31/1994 $11,048 $11,515 $10,785 11/30/1994 $10,790 $11,307 $10,799 12/31/1994 $11,001 $11,556 $10,799 01/31/1995 $11,319 $11,886 $10,842 02/28/1995 $11,581 $12,232 $10,886 03/31/1995 $11,644 $12,373 $10,922 04/30/1995 $11,675 $12,387 $10,958 05/31/1995 $11,958 $12,783 $10,980 06/30/1995 $11,879 $12,671 $11,002 07/31/1995 $11,960 $12,792 $11,002 08/31/1995 $12,070 $12,954 $11,030 09/30/1995 $12,158 $13,036 $11,052 10/31/1995 $12,316 $13,225 $11,089 11/30/1995 $12,497 $13,444 $11,081 12/31/1995 $12,608 $13,573 $11,073 01/31/1996 $12,658 $13,677 $11,138 02/29/1996 $12,596 $13,584 $11,174 03/31/1996 $12,488 $13,410 $11,232 04/30/1996 $12,471 $13,372 $11,276 05/31/1996 $12,513 $13,367 $11,297 06/30/1996 $12,638 $13,513 $11,304 07/31/1996 $12,735 $13,634 $11,326 08/31/1996 $12,772 $13,631 $11,347 09/30/1996 $12,926 $13,822 $11,384 10/31/1996 $13,050 $13,978 $11,420 11/30/1996 $13,248 $14,234 $11,442 12/31/1996 $13,219 $14,175 $11,442 01/31/1997 $13,239 $14,201 $11,478 02/28/1997 $13,347 $14,332 $11,514 03/31/1997 $13,237 $14,141 $11,543 04/30/1997 $13,320 $14,260 $11,556 05/31/1997 $13,472 $14,476 $11,550 06/30/1997 $13,621 $14,630 $11,563 07/31/1997 $13,924 $15,036 $11,577 08/31/1997 $13,842 $14,894 $11,599 09/30/1997 $14,003 $15,072 $11,628 10/31/1997 $14,097 $15,168 $11,657 11/30/1997 $14,182 $15,258 $11,650 12/31/1997 $14,385 $15,480 $11,636 01/31/1998 $14,488 $15,640 $11,658 02/28/1998 $14,480 $15,645 $11,681 03/31/1998 $14,511 $15,659 $11,703 04/30/1998 $14,472 $15,588 $11,724 05/31/1998 $14,662 $15,834 $11,745 06/30/1998 $14,712 $15,896 $11,759 07/31/1998 $14,734 $15,936 $11,773 08/31/1998 $14,928 $16,183 $11,787 09/30/1998 $15,091 $16,385 $11,801 10/30/1998 $15,058 $16,385 $11,830 11/30/1998 $15,112 $16,443 $11,830 12/31/1998 $15,160 $16,484 $11,823 01/31/1999 $15,291 $16,680 $11,851 02/28/1999 $15,236 $16,606 $11,865 03/31/1999 $15,283 $16,630 $11,901 04/30/1999 $15,320 $16,671 $11,988 05/31/1999 $15,234 $16,575 $11,988 06/30/1999 $15,037 $16,336 $11,988 07/31/1999 $15,033 $16,395 $12,024 08/31/1999 $14,834 $16,264 $12,053 09/30/1999 $14,817 $16,270 $12,110 10/31/1999 $14,582 $16,094 $12,132 11/30/1999 $14,709 $16,265 $12,140 12/31/1999 $14,572 $16,143 $12,140 01/31/2000 $14,446 $16,072 $12,176 02/29/2000 $14,635 $16,258 $12,248 03/31/2000 $14,992 $16,613 $12,348 04/30/2000 $14,892 $16,515 $12,356 05/31/2000 $14,799 $16,429 $12,370 06/30/2000 $15,177 $16,864 $12,435 07/31/2000 $15,375 $17,099 $12,463 08/31/2000 $15,615 $17,362 $12,463 09/30/2000 $15,537 $17,272 $12,528 10/31/2000 $15,724 $17,460 $12,549 11/30/2000 $15,892 $17,593 $12,557 12/31/2000 $16,277 $18,027 $12,549 01/31/2001 $16,348 $18,206 $12,629 02/28/2001 $16,400 $18,264 $12,679 03/31/2001 $16,533 $18,428 $12,708 04/30/2001 $16,370 $18,229 $12,759 05/31/2001 $16,543 $18,426 $12,816 06/30/2001 $16,639 $18,550 $12,838 07/31/2001 $16,924 $18,824 $12,802 08/31/2001 $17,174 $19,135 $12,802 09/30/2001 $17,104 $19,070 $12,860 10/31/2001 $17,377 $19,297 $12,816 11/30/2001 $17,264 $19,135 $12,794 12/31/2001 $17,076 $18,953 $12,744 01/31/2002 $17,314 $19,281 $12,774 02/28/2002 $17,494 $19,512 $12,825 Total Return 74.94% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Louisiana Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,901 $10,000 $10,000 05/31/1995 $10,144 $10,319 $10,020 06/30/1995 $10,080 $10,229 $10,040 07/31/1995 $10,160 $10,326 $10,040 08/31/1995 $10,249 $10,458 $10,066 09/29/1995 $10,309 $10,523 $10,086 10/31/1995 $10,446 $10,676 $10,120 11/30/1995 $10,594 $10,853 $10,112 12/29/1995 $10,691 $10,957 $10,105 01/31/1996 $10,728 $11,041 $10,165 02/29/1996 $10,671 $10,966 $10,198 03/29/1996 $10,565 $10,825 $10,251 04/30/1996 $10,554 $10,795 $10,291 05/31/1996 $10,584 $10,791 $10,310 06/28/1996 $10,675 $10,908 $10,316 07/31/1996 $10,761 $11,006 $10,336 08/30/1996 $10,788 $11,004 $10,356 09/30/1996 $10,912 $11,158 $10,389 10/31/1996 $11,009 $11,284 $10,422 11/29/1996 $11,170 $11,491 $10,442 12/31/1996 $11,139 $11,443 $10,442 01/31/1997 $11,158 $11,464 $10,475 02/28/1997 $11,233 $11,570 $10,508 03/31/1997 $11,144 $11,416 $10,534 04/30/1997 $11,208 $11,512 $10,547 05/31/1997 $11,340 $11,686 $10,540 06/30/1997 $11,450 $11,811 $10,553 07/31/1997 $11,708 $12,138 $10,565 08/31/1997 $11,636 $12,024 $10,586 09/30/1997 $11,756 $12,167 $10,612 10/31/1997 $11,829 $12,245 $10,639 11/30/1997 $11,895 $12,317 $10,632 12/31/1997 $12,058 $12,497 $10,619 01/31/1998 $12,139 $12,626 $10,640 02/28/1998 $12,136 $12,629 $10,660 03/31/1998 $12,146 $12,641 $10,680 04/30/1998 $12,108 $12,584 $10,699 05/31/1998 $12,270 $12,783 $10,719 06/30/1998 $12,307 $12,832 $10,731 07/31/1998 $12,318 $12,865 $10,744 08/31/1998 $12,473 $13,064 $10,757 09/30/1998 $12,593 $13,227 $10,770 10/31/1998 $12,571 $13,227 $10,796 11/30/1998 $12,610 $13,274 $10,796 12/31/1998 $12,634 $13,307 $10,789 01/31/1999 $12,747 $13,465 $10,815 02/28/1999 $12,696 $13,406 $10,828 03/31/1999 $12,739 $13,425 $10,861 04/30/1999 $12,753 $13,458 $10,940 05/31/1999 $12,677 $13,380 $10,940 06/30/1999 $12,507 $13,187 $10,940 07/31/1999 $12,497 $13,235 $10,973 08/31/1999 $12,327 $13,129 $10,999 09/30/1999 $12,307 $13,134 $11,052 10/31/1999 $12,109 $12,992 $11,072 11/30/1999 $12,208 $13,130 $11,079 12/31/1999 $12,090 $13,032 $11,079 01/31/2000 $11,981 $12,974 $11,112 02/29/2000 $12,132 $13,125 $11,177 03/31/2000 $12,421 $13,411 $11,269 04/30/2000 $12,333 $13,332 $11,276 05/31/2000 $12,250 $13,263 $11,289 06/30/2000 $12,555 $13,614 $11,348 07/31/2000 $12,712 $13,803 $11,374 08/31/2000 $12,915 $14,016 $11,374 09/30/2000 $12,834 $13,943 $11,433 10/31/2000 $12,982 $14,095 $11,453 11/30/2000 $13,114 $14,202 $11,460 12/31/2000 $13,435 $14,553 $11,453 01/31/2001 $13,488 $14,697 $11,525 02/28/2001 $13,524 $14,744 $11,571 03/31/2001 $13,626 $14,877 $11,598 04/30/2001 $13,485 $14,716 $11,644 05/31/2001 $13,622 $14,875 $11,696 06/30/2001 $13,706 $14,974 $11,716 07/31/2001 $13,920 $15,196 $11,683 08/31/2001 $14,130 $15,447 $11,683 09/30/2001 $14,055 $15,394 $11,736 10/31/2001 $14,272 $15,578 $11,696 11/30/2001 $14,184 $15,447 $11,676 12/31/2001 $14,013 $15,300 $11,631 01/31/2002 $14,199 $15,565 $11,657 02/28/2002 $14,352 $15,751 $11,704 Total Return 43.52% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 38 FRANKLIN MARYLAND TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN MARYLAND TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND MARYLAND STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF MARYLAND MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- [STATE OF MARYLAND GRAPHIC OMITTED] STATE UPDATE Maryland is a wealthy state and its per capita personal income levels remained the fifth highest at 113% of the national average. 2 After a slow recovery from the early 1990s' recession, Maryland's economy rebounded over the past several years and has shown fewer signs of decelerating than other manufacturing-heavy states. The state's broad-based economy was well-balanced and its labor force was stable. Leading employment sectors included services (36.0%), trade (22.2%), government (18.2%) and manufacturing (7.0%). 2 In the aftermath of September 11's tragic events, Maryland's economy was still strong but unemployment applications increased 21% in the three weeks after the attacks. 3 Economic growth helped Maryland build up its reserves, while maintaining prudent budgetary and debt management policies. Each of the past seven years generated operating surpluses. Following September 11, however, the state's legislators expressed deep concerns about the future. The latest estimates show an $83.8 million revenue shortfall during the first two months of Maryland's current fiscal year. 3 The temporary closing of the Baltimore-Washington International Airport contributed to declining revenues. Placing additional pressure on the state's $21 billion budget are the governor's plans for increased security spending. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 7/10/01. 3. Source: Moody's Investors Service, RESEARCH: THE STATE OF THE STATES, 10/18/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 97. CREDIT QUALITY BREAKDOWN* Franklin Maryland Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 55.5% AA -- 18.9 A -- 16.4% BBB -- 9.2% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. 39 PORTFOLIO BREAKDOWN Franklin Maryland Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ---------------------------------------- Hospital & Health Care 24.0% Utilities 21.1% Housing 14.6% General Obligation 11.6% Prerefunded 10.5% Subject to Government Appropriations 7.2% Transportation 4.7% Higher Education 3.7% Tax-Supported 1.7% Corporate-Backed 0.6% Other Revenue 0.3% Looking forward, Maryland's diversified economic base and conservative financial management policies bode well for the state's economic and fiscal future. The state's debt levels were moderate at $899 per capita and 2.6% of personal income, compared with the $541 and 2.1% 2001 national averages. 2,4 Consequently, Moody's Investors Service, an independent credit rating agency, expects Maryland's credit outlook to remain stable and maintained its highest-possible Aaa general obligation bond rating. 5 PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Maryland Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.36 on February 28, 2001, to $11.52 on February 28, 2002. We focused primarily on remaining fully invested throughout the period, as the yield spread between short- and long-maturity bonds remained fairly wide. Maryland municipal bond market activity continued to be light due to the state's low municipal bond supply levels compared with other states. As a result, Maryland issues traded at lower yields than nationally-traded state bonds. Notable purchases during the 12-month period include revenue bonds issued by Puerto Rico Electric Power Authority, Maryland State Transportation Facilities Authority and Maryland State Health and Higher Education Facilities Authority - Mercy Medical Center. Puerto Rico securities are highly liquid and trade well in the secondary market, and their distributions are tax-free in many states. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") 4. Source: Moody's Investors Service, MINNESOTA (STATE OF), 10/2/01. 5. Source: Moody's Investors Service, OUTLOOK FOR STATE SECTOR IS NEGATIVE, 12/01. This does not indicate Moody's rating of the Fund. 40 DIVIDEND DISTRIBUTIONS* Franklin Maryland Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE --------------------------------- MONTH CLASS A CLASS C ------------------------------------------------------------------ March 4.70 cents 4.12 cents April 4.70 cents 4.12 cents May 4.70 cents 4.12 cents June 4.62 cents 4.11 cents July 4.62 cents 4.11 cents August 4.62 cents 4.11 cents September 4.62 cents 4.10 cents October 4.62 cents 4.10 cents November 4.62 cents 4.10 cents December 4.52 cents 3.98 cents January 4.52 cents 3.98 cents February 4.52 cents 3.98 cents ------------------------------------------------------------------ TOTAL 55.38 CENTS 48.93 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. Your Fund combines the advantage of high credit quality with tax-free yields. 1 The Performance Summary beginning on page 43 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 4.52 cent ($0.0452) per share dividend and the maximum offering price of $12.03 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Maryland state and local personal income tax bracket of 43.44% would need to earn 7.97% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. 41 Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Maryland Tax-Free Income Fund. With our income-oriented approach, we generally expect the Fund to perform comparatively well in terms of total return and tax-free income distribution for investors with long-term investment horizons. It is important to remember that over time, the tax-free income from municipal bonds will ultimately drive the Fund's total return performance. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 42 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $11.52 $11.36 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5538 CLASS C CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $11.63 $11.46 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4893 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ----------------------------------------------------------------------------- Cumulative Total Return 1 +6.44% +31.60% +87.06% Average Annual Total Return 2 +1.95% +4.74% +6.00% Avg. Ann. Total Return (3/31/02) 3 -0.54% +4.63% +5.80% Distribution Rate 4 4.51% Taxable Equivalent Distribution Rate 5 7.97% 30-Day Standardized Yield 6 3.85% Taxable Equivalent Yield 5 6.81% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ----------------------------------------------------------------------------- Cumulative Total Return 1 +5.88% +28.18% +46.34% Average Annual Total Return 2 +3.79% +4.87% +5.58% Avg. Ann. Total Return (3/31/02) 3 +1.25% +4.78% +5.24% Distribution Rate 4 4.06% Taxable Equivalent Distribution Rate 5 7.18% 30-Day Standardized Yield 6 3.45% Taxable Equivalent Yield 5 6.10% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. FRANKLIN MARYLAND TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Maryland state and local personal income tax bracket of 43.44%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 43 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +1.95% 5-Year +4.74% 10-Year +6.00% AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 ------------------------------- 1-Year +3.79% 5-Year +4.87% Since Inception (5/1/95) +5.58% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Maryland Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,575 $10,000 $10,000 03/31/1992 $9,589 $10,003 $10,051 04/30/1992 $9,676 $10,092 $10,065 05/31/1992 $9,806 $10,211 $10,079 06/30/1992 $9,930 $10,383 $10,115 07/31/1992 $10,240 $10,694 $10,137 08/31/1992 $10,132 $10,590 $10,165 09/30/1992 $10,155 $10,659 $10,194 $9,992 $10,555 $10,229 11/30/1992 $10,222 $10,744 $10,244 12/31/1992 $10,381 $10,853 $10,236 01/31/1993 $10,507 $10,979 $10,287 02/28/1993 $10,810 $11,377 $10,323 03/31/1993 $10,766 $11,256 $10,359 04/30/1993 $10,860 $11,370 $10,388 05/31/1993 $10,900 $11,433 $10,402 06/30/1993 $11,101 $11,624 $10,417 07/31/1993 $11,132 $11,639 $10,417 08/31/1993 $11,313 $11,882 $10,446 09/30/1993 $11,376 $12,017 $10,468 10/31/1993 $11,425 $12,040 $10,511 11/30/1993 $11,388 $11,934 $10,518 12/31/1993 $11,643 $12,186 $10,518 01/31/1994 $11,745 $12,325 $10,547 02/28/1994 $11,527 $12,005 $10,582 03/31/1994 $11,086 $11,517 $10,618 04/30/1994 $11,095 $11,615 $10,633 05/31/1994 $11,200 $11,716 $10,641 06/30/1994 $11,149 $11,644 $10,677 07/31/1994 $11,345 $11,857 $10,706 08/31/1994 $11,390 $11,899 $10,749 09/30/1994 $11,246 $11,724 $10,778 10/31/1994 $11,028 $11,515 $10,785 11/30/1994 $10,762 $11,307 $10,799 12/31/1994 $11,050 $11,556 $10,799 01/31/1995 $11,394 $11,886 $10,842 02/28/1995 $11,736 $12,232 $10,886 03/31/1995 $11,851 $12,373 $10,922 04/30/1995 $11,859 $12,387 $10,958 05/31/1995 $12,178 $12,783 $10,980 06/30/1995 $12,085 $12,671 $11,002 07/31/1995 $12,253 $12,792 $11,002 08/31/1995 $12,397 $12,954 $11,030 09/30/1995 $12,496 $13,036 $11,052 10/31/1995 $12,645 $13,225 $11,089 11/30/1995 $12,839 $13,444 $11,081 12/31/1995 $12,961 $13,573 $11,073 01/31/1996 $13,010 $13,677 $11,138 02/29/1996 $12,933 $13,584 $11,174 03/31/1996 $12,786 $13,410 $11,232 04/30/1996 $12,777 $13,372 $11,276 05/31/1996 $12,783 $13,367 $11,297 06/30/1996 $12,908 $13,513 $11,304 07/31/1996 $13,017 $13,634 $11,326 08/31/1996 $13,006 $13,631 $11,347 09/30/1996 $13,195 $13,822 $11,384 10/31/1996 $13,319 $13,978 $11,420 11/30/1996 $13,531 $14,234 $11,442 12/31/1996 $13,475 $14,175 $11,442 01/31/1997 $13,493 $14,201 $11,478 02/28/1997 $13,613 $14,332 $11,514 03/31/1997 $13,450 $14,141 $11,543 04/30/1997 $13,556 $14,260 $11,556 05/31/1997 $13,731 $14,476 $11,550 06/30/1997 $13,865 $14,630 $11,563 07/31/1997 $14,205 $15,036 $11,577 08/31/1997 $14,104 $14,894 $11,599 09/30/1997 $14,265 $15,072 $11,628 10/31/1997 $14,343 $15,168 $11,657 11/30/1997 $14,438 $15,258 $11,650 12/31/1997 $14,626 $15,480 $11,636 01/31/1998 $14,738 $15,640 $11,658 02/28/1998 $14,737 $15,645 $11,681 03/31/1998 $14,765 $15,659 $11,703 04/30/1998 $14,747 $15,588 $11,724 05/31/1998 $14,949 $15,834 $11,745 06/30/1998 $15,015 $15,896 $11,759 07/31/1998 $15,058 $15,936 $11,773 08/31/1998 $15,253 $16,183 $11,787 09/30/1998 $15,404 $16,385 $11,801 10/31/1998 $15,419 $16,385 $11,830 11/30/1998 $15,458 $16,443 $11,830 12/31/1998 $15,489 $16,484 $11,823 01/31/1999 $15,617 $16,680 $11,851 02/28/1999 $15,572 $16,606 $11,865 03/31/1999 $15,601 $16,630 $11,901 04/30/1999 $15,662 $16,671 $11,988 05/31/1999 $15,585 $16,575 $11,988 06/30/1999 $15,367 $16,336 $11,988 07/31/1999 $15,400 $16,395 $12,024 08/31/1999 $15,165 $16,264 $12,053 09/30/1999 $15,131 $16,270 $12,110 10/31/1999 $14,889 $16,094 $12,132 11/30/1999 $15,042 $16,265 $12,140 12/31/1999 $14,899 $16,143 $12,140 01/31/2000 $14,795 $16,072 $12,176 02/29/2000 $14,969 $16,258 $12,248 03/31/2000 $15,315 $16,613 $12,348 04/30/2000 $15,266 $16,515 $12,356 05/31/2000 $15,141 $16,429 $12,370 06/30/2000 $15,521 $16,864 $12,435 07/31/2000 $15,763 $17,099 $12,463 08/31/2000 $16,033 $17,362 $12,463 09/30/2000 $15,980 $17,272 $12,528 10/31/2000 $16,138 $17,460 $12,549 11/30/2000 $16,277 $17,593 $12,557 12/31/2000 $16,635 $18,027 $12,549 01/31/2001 $16,736 $18,206 $12,629 02/28/2001 $16,832 $18,264 $12,679 03/31/2001 $16,949 $18,428 $12,708 04/30/2001 $16,812 $18,229 $12,759 05/31/2001 $16,957 $18,426 $12,816 06/30/2001 $17,097 $18,550 $12,838 07/31/2001 $17,339 $18,824 $12,802 08/31/2001 $17,606 $19,135 $12,802 09/30/2001 $17,549 $19,070 $12,860 10/31/2001 $17,763 $19,297 $12,816 11/30/2001 $17,646 $19,135 $12,794 12/31/2001 $17,485 $18,953 $12,744 01/31/2002 $17,723 $19,281 $12,774 02/28/2002 $17,912 $19,512 $12,825 Total Return 79.12% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Maryland Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,900 $10,000 $10,000 05/31/1995 $10,178 $10,319 $10,020 06/30/1995 $10,094 $10,229 $10,040 07/31/1995 $10,237 $10,326 $10,040 08/31/1995 $10,352 $10,458 $10,066 09/29/1995 $10,420 $10,523 $10,086 10/31/1995 $10,557 $10,676 $10,120 11/30/1995 $10,712 $10,853 $10,112 12/29/1995 $10,808 $10,957 $10,105 01/31/1996 $10,852 $11,041 $10,165 02/29/1996 $10,797 $10,966 $10,198 03/29/1996 $10,679 $10,825 $10,251 04/30/1996 $10,657 $10,795 $10,291 05/31/1996 $10,665 $10,791 $10,310 06/28/1996 $10,755 $10,908 $10,316 07/31/1996 $10,839 $11,006 $10,336 08/30/1996 $10,835 $11,004 $10,356 09/30/1996 $10,977 $11,158 $10,389 10/31/1996 $11,083 $11,284 $10,422 11/29/1996 $11,244 $11,491 $10,442 12/31/1996 $11,202 $11,443 $10,442 01/31/1997 $11,210 $11,464 $10,475 02/28/1997 $11,303 $11,570 $10,508 03/31/1997 $11,162 $11,416 $10,534 04/30/1997 $11,244 $11,512 $10,547 05/31/1997 $11,394 $11,686 $10,540 06/30/1997 $11,500 $11,811 $10,553 07/31/1997 $11,775 $12,138 $10,565 08/31/1997 $11,686 $12,024 $10,586 09/30/1997 $11,813 $12,167 $10,612 10/31/1997 $11,872 $12,245 $10,639 11/30/1997 $11,944 $12,317 $10,632 12/31/1997 $12,103 $12,497 $10,619 01/31/1998 $12,179 $12,626 $10,640 02/28/1998 $12,172 $12,629 $10,660 03/31/1998 $12,200 $12,641 $10,680 04/30/1998 $12,169 $12,584 $10,699 05/31/1998 $12,340 $12,783 $10,719 06/30/1998 $12,388 $12,832 $10,731 07/31/1998 $12,418 $12,865 $10,744 08/31/1998 $12,570 $13,064 $10,757 09/30/1998 $12,688 $13,227 $10,770 10/31/1998 $12,695 $13,227 $10,796 11/30/1998 $12,720 $13,274 $10,796 12/31/1998 $12,741 $13,307 $10,789 01/31/1999 $12,840 $13,465 $10,815 02/28/1999 $12,796 $13,406 $10,828 03/31/1999 $12,824 $13,425 $10,861 04/30/1999 $12,857 $13,458 $10,940 05/31/1999 $12,788 $13,380 $10,940 06/30/1999 $12,605 $13,187 $10,940 07/31/1999 $12,626 $13,235 $10,973 08/31/1999 $12,430 $13,129 $10,999 09/30/1999 $12,395 $13,134 $11,052 10/31/1999 $12,193 $12,992 $11,072 11/30/1999 $12,311 $13,130 $11,079 12/31/1999 $12,190 $13,032 $11,079 01/31/2000 $12,101 $12,974 $11,112 02/29/2000 $12,237 $13,125 $11,177 03/31/2000 $12,524 $13,411 $11,269 04/30/2000 $12,467 $13,332 $11,276 05/31/2000 $12,371 $13,263 $11,289 06/30/2000 $12,673 $13,614 $11,348 07/31/2000 $12,852 $13,803 $11,374 08/31/2000 $13,065 $14,016 $11,374 09/30/2000 $13,017 $13,943 $11,433 10/31/2000 $13,151 $14,095 $11,453 11/30/2000 $13,257 $14,202 $11,460 12/31/2000 $13,540 $14,553 $11,453 01/31/2001 $13,614 $14,697 $11,525 02/28/2001 $13,685 $14,744 $11,571 03/31/2001 $13,785 $14,877 $11,598 04/30/2001 $13,655 $14,716 $11,644 05/31/2001 $13,777 $14,875 $11,696 06/30/2001 $13,884 $14,974 $11,716 07/31/2001 $14,072 $15,196 $11,683 08/31/2001 $14,280 $15,447 $11,683 09/30/2001 $14,229 $15,394 $11,736 10/31/2001 $14,394 $15,578 $11,696 11/30/2001 $14,294 $15,447 $11,676 12/31/2001 $14,159 $15,300 $11,631 01/31/2002 $14,343 $15,565 $11,657 02/28/2002 $14,488 $15,751 $11,704 Total Return 44.88% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 44 FRANKLIN MISSOURI TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN MISSOURI TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND MISSOURI STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF MISSOURI MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- STATE UPDATE [STATE OF MISSOURI GRAPHIC OMITTED] Missouri appears well prepared for the current economic slowdown. Through sound financial management, the state was able to build up budget reserve levels during the strong, late-1990s' economy. Because of its focus on responding quickly to fiscal challenges, the state has been able to maintain balanced budgets through the years by adjusting revenues and expenditures as needed. It finished fiscal year 2001 without incurring a deficit despite a significant drop in revenue growth due to the slowing economy, tax cuts and the state's new prescription drug credit for senior citizens. Responding aggressively to the revenue shortfall, Governor Holden announced a 5% budget cut for all state departments as well as transferred $127 million from tobacco settlement proceeds. 2 The fiscal year 2002 budget stipulates that "core" budget growth should be only slightly positive, a move that has called for the elimination of 472 state employee positions. Analysts recently reduced revenue growth projections to 2.9% over 2001 actual collections from 5.6%. 2 Responding to the lower-than-expected collections, the governor once again implemented spending cuts in all state departments. However, health care costs are expected to rise, with pharmacy expenditures projected to double over the next five years, significantly adding to spending pressures. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, FISCAL 2002 ARRIVES WITH U.S. STATE BUDGETS UNDER PRESSURE, 8/16/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 101. CREDIT QUALITY BREAKDOWN* Franklin Missouri Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 58.7% AA -- 14.4% A -- 13.8% BBB -- 11.1% Below Investment Grade -- 2.0% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. 45 PORTFOLIO BREAKDOWN Franklin Missouri Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------------------- Hospital & Health Care 23.8% Higher Education 11.1% Prerefunded 10.8% Transportation 10.8% Subject to Government Appropriations 9.1% Housing 8.7% Utilities 7.2% Tax-Supported 5.5% Other Revenue 5.3% Corporate-Backed 4.0% General Obligation 3.7% Debt levels remain low as Missouri has followed a conservative approach to issuing debt. The Missouri Constitution requires that a majority of voters approve a general obligation bond before it is issued. As a result, Missouri's debt burden stood at $274 per capita versus the $541 state median and debt as a percentage of personal income was only 1.1% compared with the 2.1% state median. 3,4 Debt levels are expected to rise somewhat over the next five years principally due to the $2.25 billion authorization for highway purposes. 4 Missouri's outlook is likewise favorable. Moody's and Standard & Poor's, independent credit rating agencies, consider the state's credit profile stable. As a result, Moody's has assigned Missouri's general obligation debt an Aaa rating, one of its highest marks. 4 PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Missouri Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.77 on February 28, 2001, to $12.00 on February 28, 2002. The supply of Missouri bonds was up 91.9% in 2001 versus 2000, as many municipalities took advantage of the low interest rate environment to refinance debt and issue new bonds. 5 Although new municipal bond supply increased significantly, demand was up as well, a constructive environment for municipal bond prices. Several new closed-end mutual funds recently have entered the marketplace, and there was strong participation by institutional and retail buyers. Throughout the period, we attempted to maintain the Fund's broad diversification. At period-end, hospital & health care represented the Fund's largest weighting, 23.8% of total long-term investments, followed by higher education at 11.1%. Notable purchases during the period included revenue bonds issued by St. Louis Airport, Kansas City Airport, Missouri State Health - University of Missouri, Missouri Development Finance Board Cultural Facilities - Nelson Gallery Foundation and Educational Facilities Authority Health Facilities - SSM Health Care and Washington University. 3. Source: Standard & Poor's, RATINGSDIRECT, 11/9/01. 4. Source: Moody's Investors Service, 5/24/01. This does not indicate Moody's rating of the Fund. 5. Source: THE BOND BUYER, 1/2/02. 46 DIVIDEND DISTRIBUTIONS* Franklin Missouri Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE --------------------------------- MONTH CLASS A CLASS C --------------------------------------------------------------------- March 4.95 cents 4.38 cents April 4.95 cents 4.38 cents May 4.95 cents 4.38 cents June 4.95 cents 4.44 cents July 4.95 cents 4.44 cents August 4.95 cents 4.44 cents September 4.85 cents 4.31 cents October 4.85 cents 4.31 cents November 4.85 cents 4.31 cents December 4.85 cents 4.30 cents January 4.85 cents 4.30 cents February 4.85 cents 4.30 cents --------------------------------------------------------------------- TOTAL 58.80 CENTS 52.29 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at the current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") 47 Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields. 1 The Performance Summary beginning on page 49 shows that at the end of this reporting period, the Fund's Class A shares' distribution rate was 4.64%, based on an annualization of the current 4.85 cent ($0.0485) per share dividend and the maximum offering price of $12.53 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Missouri state personal income tax bracket of 42.28% would need to earn 8.04% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Missouri Tax-Free Income Fund. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocations of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 48 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------- Net Asset Value (NAV) +$0.23 $12.00 $11.77 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5880 CLASS C CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------- Net Asset Value (NAV) +$0.24 $12.06 $11.82 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5229 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------ Cumulative Total Return 1 +7.13% +32.22% +88.27% Average Annual Total Return 2 +2.60% +4.82% +6.07% Avg. Ann. Total Return (3/31/02) 3 -0.24% +4.60% +5.83% Distribution Rate 4 4.64% Taxable Equivalent Distribution Rate 5 8.04% 30-Day Standardized Yield 6 4.00% Taxable Equivalent Yield 5 6.93% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------ Cumulative Total Return 1 +6.61% +28.90% +46.12% Average Annual Total Return 2 +4.54% +5.00% +5.55% Avg. Ann. Total Return (3/31/02) 3 +1.55% +4.76% +5.16% Distribution Rate 4 4.21% Taxable Equivalent Distribution Rate 5 7.29% 30-Day Standardized Yield 6 3.60% Taxable Equivalent Yield 5 6.24% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. FRANKLIN MISSOURI TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Missouri state personal income tax bracket of 42.28%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 49 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +2.60% 5-Year +4.82% 10-Year +6.07% AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 ------------------------------- 1-Year +4.54% 5-Year +5.00% Since Inception (5/1/95) +5.55% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Missouri Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,572 $10,000 $10,000 03/31/1992 $9,596 $10,003 $10,051 04/30/1992 $9,680 $10,092 $10,065 05/31/1992 $9,790 $10,211 $10,079 06/30/1992 $9,901 $10,383 $10,115 07/31/1992 $10,244 $10,694 $10,137 08/31/1992 $10,116 $10,590 $10,165 09/30/1992 $10,149 $10,659 $10,194 10/31/1992 $9,968 $10,555 $10,229 11/30/1992 $10,208 $10,744 $10,244 12/31/1992 $10,371 $10,853 $10,236 01/31/1993 $10,493 $10,979 $10,287 02/28/1993 $10,784 $11,377 $10,323 03/31/1993 $10,763 $11,256 $10,359 04/30/1993 $10,836 $11,370 $10,388 05/31/1993 $10,894 $11,433 $10,402 06/30/1993 $11,088 $11,624 $10,417 07/31/1993 $11,140 $11,639 $10,417 08/31/1993 $11,355 $11,882 $10,446 09/30/1993 $11,513 $12,017 $10,468 10/31/1993 $11,534 $12,040 $10,511 11/30/1993 $11,472 $11,934 $10,518 12/31/1993 $11,748 $12,186 $10,518 01/31/1994 $11,860 $12,325 $10,547 02/28/1994 $11,596 $12,005 $10,582 03/31/1994 $11,179 $11,517 $10,618 04/30/1994 $11,210 $11,615 $10,633 05/31/1994 $11,304 $11,716 $10,641 06/30/1994 $11,260 $11,644 $10,677 07/31/1994 $11,433 $11,857 $10,706 08/31/1994 $11,478 $11,899 $10,749 09/30/1994 $11,323 $11,724 $10,778 10/31/1994 $11,137 $11,515 $10,785 11/30/1994 $10,915 $11,307 $10,799 12/31/1994 $11,151 $11,556 $10,799 01/31/1995 $11,471 $11,886 $10,842 02/28/1995 $11,768 $12,232 $10,886 03/31/1995 $11,869 $12,373 $10,922 04/30/1995 $11,909 $12,387 $10,958 05/31/1995 $12,226 $12,783 $10,980 06/30/1995 $12,158 $12,671 $11,002 07/31/1995 $12,225 $12,792 $11,002 08/31/1995 $12,353 $12,954 $11,030 09/30/1995 $12,406 $13,036 $11,052 10/31/1995 $12,560 $13,225 $11,089 11/30/1995 $12,758 $13,444 $11,081 12/31/1995 $12,899 $13,573 $11,073 01/31/1996 $13,024 $13,677 $11,138 02/29/1996 $12,974 $13,584 $11,174 03/31/1996 $12,813 $13,410 $11,232 04/30/1996 $12,785 $13,372 $11,276 05/31/1996 $12,783 $13,367 $11,297 06/30/1996 $12,916 $13,513 $11,304 07/31/1996 $13,010 $13,634 $11,326 08/31/1996 $13,035 $13,631 $11,347 09/30/1996 $13,217 $13,822 $11,384 10/31/1996 $13,349 $13,978 $11,420 11/30/1996 $13,543 $14,234 $11,442 12/31/1996 $13,506 $14,175 $11,442 01/31/1997 $13,525 $14,201 $11,478 02/28/1997 $13,632 $14,332 $11,514 03/31/1997 $13,501 $14,141 $11,543 04/30/1997 $13,640 $14,260 $11,556 05/31/1997 $13,812 $14,476 $11,550 06/30/1997 $13,945 $14,630 $11,563 07/31/1997 $14,275 $15,036 $11,577 08/31/1997 $14,171 $14,894 $11,599 09/30/1997 $14,354 $15,072 $11,628 10/31/1997 $14,434 $15,168 $11,657 11/30/1997 $14,529 $15,258 $11,650 12/31/1997 $14,743 $15,480 $11,636 01/31/1998 $14,855 $15,640 $11,658 02/28/1998 $14,919 $15,645 $11,681 03/31/1998 $14,938 $15,659 $11,703 04/30/1998 $14,899 $15,588 $11,724 05/31/1998 $15,098 $15,834 $11,745 06/30/1998 $15,147 $15,896 $11,759 07/31/1998 $15,169 $15,936 $11,773 08/31/1998 $15,360 $16,183 $11,787 09/30/1998 $15,533 $16,385 $11,801 10/31/1998 $15,502 $16,385 $11,830 11/30/1998 $15,544 $16,443 $11,830 12/31/1998 $15,594 $16,484 $11,823 01/31/1999 $15,736 $16,680 $11,851 02/28/1999 $15,684 $16,606 $11,865 03/31/1999 $15,731 $16,630 $11,901 04/30/1999 $15,756 $16,671 $11,988 05/31/1999 $15,662 $16,575 $11,988 06/30/1999 $15,422 $16,336 $11,988 07/31/1999 $15,445 $16,395 $12,024 08/31/1999 $15,226 $16,264 $12,053 09/30/1999 $15,197 $16,270 $12,110 10/31/1999 $14,943 $16,094 $12,132 11/30/1999 $15,095 $16,265 $12,140 12/31/1999 $14,922 $16,143 $12,140 01/31/2000 $14,773 $16,072 $12,176 02/29/2000 $14,959 $16,258 $12,248 03/31/2000 $15,337 $16,613 $12,348 04/30/2000 $15,241 $16,515 $12,356 05/31/2000 $15,137 $16,429 $12,370 06/30/2000 $15,549 $16,864 $12,435 07/31/2000 $15,773 $17,099 $12,463 08/31/2000 $16,050 $17,362 $12,463 09/30/2000 $15,947 $17,272 $12,528 10/31/2000 $16,118 $17,460 $12,549 11/30/2000 $16,257 $17,593 $12,557 12/31/2000 $16,662 $18,027 $12,549 01/31/2001 $16,763 $18,206 $12,629 02/28/2001 $16,830 $18,264 $12,679 03/31/2001 $16,961 $18,428 $12,708 04/30/2001 $16,804 $18,229 $12,759 05/31/2001 $16,962 $18,426 $12,816 06/30/2001 $17,087 $18,550 $12,838 07/31/2001 $17,369 $18,824 $12,802 08/31/2001 $17,734 $19,135 $12,802 09/30/2001 $17,638 $19,070 $12,860 10/31/2001 $17,878 $19,297 $12,816 11/30/2001 $17,724 $19,135 $12,794 12/31/2001 $17,499 $18,953 $12,744 01/31/2002 $17,839 $19,281 $12,774 02/28/2002 $18,029 $19,512 $12,825 Total Return 80.29% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Missouri Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,896 $10,000 $10,000 05/31/1995 $10,170 $10,319 $10,020 06/30/1995 $10,108 $10,229 $10,040 07/31/1995 $10,159 $10,326 $10,040 08/31/1995 $10,260 $10,458 $10,066 09/29/1995 $10,308 $10,523 $10,086 10/31/1995 $10,430 $10,676 $10,120 11/30/1995 $10,589 $10,853 $10,112 12/29/1995 $10,700 $10,957 $10,105 01/31/1996 $10,797 $11,041 $10,165 02/29/1996 $10,753 $10,966 $10,198 03/29/1996 $10,607 $10,825 $10,251 04/30/1996 $10,586 $10,795 $10,291 05/31/1996 $10,579 $10,791 $10,310 06/28/1996 $10,684 $10,908 $10,316 07/31/1996 $10,758 $11,006 $10,336 08/30/1996 $10,774 $11,004 $10,356 09/30/1996 $10,910 $11,158 $10,389 10/31/1996 $11,022 $11,284 $10,422 11/29/1996 $11,175 $11,491 $10,442 12/31/1996 $11,120 $11,443 $10,442 01/31/1997 $11,130 $11,464 $10,475 02/28/1997 $11,218 $11,570 $10,508 03/31/1997 $11,114 $11,416 $10,534 04/30/1997 $11,223 $11,512 $10,547 05/31/1997 $11,357 $11,686 $10,540 06/30/1997 $11,461 $11,811 $10,553 07/31/1997 $11,737 $12,138 $10,565 08/31/1997 $11,647 $12,024 $10,586 09/30/1997 $11,791 $12,167 $10,612 10/31/1997 $11,851 $12,245 $10,639 11/30/1997 $11,925 $12,317 $10,632 12/31/1997 $12,093 $12,497 $10,619 01/31/1998 $12,179 $12,626 $10,640 02/28/1998 $12,225 $12,629 $10,660 03/31/1998 $12,235 $12,641 $10,680 04/30/1998 $12,198 $12,584 $10,699 05/31/1998 $12,354 $12,783 $10,719 06/30/1998 $12,400 $12,832 $10,731 07/31/1998 $12,411 $12,865 $10,744 08/31/1998 $12,561 $13,064 $10,757 09/30/1998 $12,687 $13,227 $10,770 10/31/1998 $12,655 $13,227 $10,796 11/30/1998 $12,693 $13,274 $10,796 12/31/1998 $12,717 $13,307 $10,789 01/31/1999 $12,827 $13,465 $10,815 02/28/1999 $12,788 $13,406 $10,828 03/31/1999 $12,820 $13,425 $10,861 04/30/1999 $12,824 $13,458 $10,940 05/31/1999 $12,752 $13,380 $10,940 06/30/1999 $12,542 $13,187 $10,940 07/31/1999 $12,554 $13,235 $10,973 08/31/1999 $12,381 $13,129 $10,999 09/30/1999 $12,341 $13,134 $11,052 10/31/1999 $12,141 $12,992 $11,072 11/30/1999 $12,248 $13,130 $11,079 12/31/1999 $12,102 $13,032 $11,079 01/31/2000 $11,977 $12,974 $11,112 02/29/2000 $12,123 $13,125 $11,177 03/31/2000 $12,423 $13,411 $11,269 04/30/2000 $12,340 $13,332 $11,276 05/31/2000 $12,262 $13,263 $11,289 06/30/2000 $12,578 $13,614 $11,348 07/31/2000 $12,762 $13,803 $11,374 08/31/2000 $12,969 $14,016 $11,374 09/30/2000 $12,893 $13,943 $11,433 10/31/2000 $13,024 $14,095 $11,453 11/30/2000 $13,130 $14,202 $11,460 12/31/2000 $13,450 $14,553 $11,453 01/31/2001 $13,525 $14,697 $11,525 02/28/2001 $13,574 $14,744 $11,571 03/31/2001 $13,684 $14,877 $11,598 04/30/2001 $13,540 $14,716 $11,644 05/31/2001 $13,661 $14,875 $11,696 06/30/2001 $13,756 $14,974 $11,716 07/31/2001 $13,975 $15,196 $11,683 08/31/2001 $14,260 $15,447 $11,683 09/30/2001 $14,189 $15,394 $11,736 10/31/2001 $14,375 $15,578 $11,696 11/30/2001 $14,245 $15,447 $11,676 12/31/2001 $14,059 $15,300 $11,631 01/31/2002 $14,312 $15,565 $11,657 02/28/2002 $14,461 $15,751 $11,704 Total Return 44.61% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 50 FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND NORTH CAROLINA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF NORTH CAROLINA MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- STATE UPDATE [STATE OF NORTH CAROLINA GRAPHIC OMITTED] North Carolina's economy has broadened and now includes concentrations, not only in manufacturing, but in finance, services and trade as well. However, North Carolina was not immune to the domestic economic slowdown that began in 2000. Consequently, employment growth slowed and the unemployment rate rose for the first time since 1993. September 11's tragic events further weakened the state's already fragile economy. Despite slower economic growth and revenue growth below budgeted estimates, North Carolina's commitment toward fiscal integrity helped it retain the AAA and Aaa general obligation (GO) ratings by independent credit rating agencies Standard & Poor's and Moody's Investors Service. 2,3 Standard & Poor's holds a stable outlook for the state due to recently enacted revenue enhancements, cost-cutting measures and reserve fund restoration. On the other hand, Moody's placed the state's GO debt on negative CreditWatch and continues to monitor the state's efforts to restore budget balance and fiscal flexibility. Looking forward, one factor in North Carolina's favor is that much of recent years' decline in reserves can be attributed to one-time expenses. Another positive factor is that the state's per-capita debt levels remained very low at about $387. 4 Continued conservative budget practices and prudent financial management should enable North Carolina municipal obligations to perform well in the future. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 10/19/01. This does not indicate Standard & Poor's rating of the Fund. 3. Source: Moody's Investors Service, NORTH CAROLINA (STATE OF), 7/13/01. This does not indicate Moody's rating of the Fund. 4. Source: Standard & Poor's, RATINGSDIRECT, 3/1/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 106. CREDIT QUALITY BREAKDOWN* Franklin North Carolina Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 56.4% AA -- 14.3% A -- 15.0% BBB -- 14.3% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. 51 PORTFOLIO BREAKDOWN Franklin North Carolina Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------------ Utilities 22.1% Hospital & Health Care 17.7% Prerefunded 13.5% Subject to Government Appropriations 10.9% Transportation 9.5% Housing 8.0% Corporate-Backed 5.7% General Obligation 4.6% Higher Education 3.6% Other Revenue 2.3% Tax-Supported 2.1% PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin North Carolina Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.78 on February 28, 2001, to $11.96 on February 28, 2002. As interest rates remained low during the 12 months under review, many municipalities were motivated to borrow, and issuers continued to take advantage of inexpensive borrowing costs. The low interest rate environment, in conjunction with declining tax receipts, sparked a significant outbreak of municipal bond activity. The need for capital improvement also contributed to the fervor, and 2001 closed as the year with the second highest amount of national issuance at $286.6 billion. 5 As 2002 began, the momentum continued with a record January issuance of $20.4 billion in long-term bonds. 6 Issuance increased dramatically in many states. For the year 2001, the supply of North Carolina bonds was up 48.3%. Additionally, Puerto Rico experienced a tremendous year, closing with $5.9 billion of issuance. 5 These Puerto Rico bonds offered many attractive investment opportunities for Franklin North Carolina Tax-Free Income Fund as well. As a result, we increased our holdings in territorial securities. It is important to note that Puerto Rico securities are highly liquid and trade well in the secondary market, and their distributions are tax-free in many states. Notable purchases during the reporting period included Puerto Rico PBA; Charlotte Storm Water Fee, Puerto Rico Public Finance Corp., Puerto Rico Commonwealth Highway and Transportation Authority Transportation, and Wake County Industrial Facilities and PCFA - Carolina Power and Light Company Project revenue bonds. During the 12 months under review, sales included Puerto Rico Electric Power Authority, Puerto Rico Commonwealth Infrastructure Financing Authority, New Hanover County Hospital - New Hanover Regional Medical Center Project and North Carolina Medical Care Commission Health System Revenue - Catholic Health East Project revenue bonds. 5. Source: THE BOND BUYER, 1/2/02. 6. Source: THE BOND BUYER, 2/1/02. 52 DIVIDEND DISTRIBUTIONS* Franklin North Carolina Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------------- MONTH CLASS A CLASS C ---------------------------------------------------------------- March 5.02 cents 4.43 cents April 5.02 cents 4.43 cents May 5.02 cents 4.43 cents June 5.02 cents 4.48 cents July 5.02 cents 4.48 cents August 5.02 cents 4.48 cents September 4.92 cents 4.37 cents October 4.92 cents 4.37 cents November 4.92 cents 4.37 cents December 4.80 cents 4.24 cents January 4.80 cents 4.24 cents February 4.80 cents 4.24 cents ---------------------------------------------------------------- TOTAL 59.28 CENTS 52.56 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Your Fund combines the advantage of high credit quality with tax-free yields. 1 The Performance Summary beginning on page 55 shows that at the end of this reporting period, the Fund's Class A shares' distribution rate was 4.54%, based on an annualization of the current 4.73 cent ($0.0473) per share dividend and the maximum offering price of $12.49 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and North Carolina state personal income tax bracket of 53 43.67% would need to earn 8.06% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin North Carolina Tax-Free Income Fund. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 54 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ----------------------------------------------------------------------- Net Asset Value (NAV) +$0.18 $11.96 $11.78 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5928 CLASS C CHANGE 2/28/02 2/28/01 ----------------------------------------------------------------------- Net Asset Value (NAV) +$0.18 $12.05 $11.87 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5256 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------ Cumulative Total Return 1 +6.74% +31.70% +84.04% Average Annual Total Return 2 +2.22% +4.75% +5.83% Avg. Ann. Total Return (3/31/02) 3 -0.46% +4.55% +5.62% Distribution Rate 4 4.54% Taxable Equivalent Distribution Rate 5 8.06% 30-Day Standardized Yield 6 4.05% Taxable Equivalent Yield 5 7.19% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------ Cumulative Total Return 1 +6.09% +28.21% +44.84% Average Annual Total Return 2 +4.03% +4.88% +5.41% Avg. Ann. Total Return (3/31/02) 3 +1.31% +4.68% +5.05% Distribution Rate 4 4.12% Taxable Equivalent Distribution Rate 5 7.31% 30-Day Standardized Yield 6 3.67% Taxable Equivalent Yield 5 6.52% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and North Carolina state personal income tax bracket of 43.67%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 55 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +2.22% 5-Year +4.75% 10-Year +5.83% AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 ------------------------------- 1-Year +4.03% 5-Year +4.88% Since Inception (5/1/95) +5.41% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin North Carolina Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,577 $10,000 $10,000 03/31/1992 $9,591 $10,003 $10,051 04/30/1992 $9,666 $10,092 $10,065 05/31/1992 $9,774 $10,211 $10,079 06/30/1992 $9,902 $10,383 $10,115 07/31/1992 $10,259 $10,694 $10,137 08/31/1992 $10,140 $10,590 $10,165 09/30/1992 $10,172 $10,659 $10,194 10/31/1992 $10,044 $10,555 $10,229 11/30/1992 $10,264 $10,744 $10,244 12/31/1992 $10,417 $10,853 $10,236 01/31/1993 $10,546 $10,979 $10,287 02/28/1993 $10,845 $11,377 $10,323 03/31/1993 $10,813 $11,256 $10,359 04/30/1993 $10,894 $11,370 $10,388 05/31/1993 $10,934 $11,433 $10,402 06/30/1993 $11,107 $11,624 $10,417 07/31/1993 $11,112 $11,639 $10,417 08/31/1993 $11,343 $11,882 $10,446 09/30/1993 $11,470 $12,017 $10,468 10/31/1993 $11,499 $12,040 $10,511 11/30/1993 $11,437 $11,934 $10,518 12/31/1993 $11,635 $12,186 $10,518 01/31/1994 $11,745 $12,325 $10,547 02/28/1994 $11,501 $12,005 $10,582 03/31/1994 $11,056 $11,517 $10,618 04/30/1994 $11,115 $11,615 $10,633 05/31/1994 $11,199 $11,716 $10,641 06/30/1994 $11,115 $11,644 $10,677 07/31/1994 $11,314 $11,857 $10,706 08/31/1994 $11,359 $11,899 $10,749 09/30/1994 $11,206 $11,724 $10,778 10/31/1994 $10,990 $11,515 $10,785 11/30/1994 $10,710 $11,307 $10,799 12/31/1994 $10,965 $11,556 $10,799 01/31/1995 $11,305 $11,886 $10,842 02/28/1995 $11,622 $12,232 $10,886 03/31/1995 $11,765 $12,373 $10,922 04/30/1995 $11,775 $12,387 $10,958 05/31/1995 $12,080 $12,783 $10,980 06/30/1995 $11,993 $12,671 $11,002 07/31/1995 $12,051 $12,792 $11,002 08/31/1995 $12,169 $12,954 $11,030 09/30/1995 $12,233 $13,036 $11,052 10/31/1995 $12,419 $13,225 $11,089 11/30/1995 $12,617 $13,444 $11,081 12/31/1995 $12,735 $13,573 $11,073 01/31/1996 $12,795 $13,677 $11,138 02/29/1996 $12,703 $13,584 $11,174 03/31/1996 $12,576 $13,410 $11,232 04/30/1996 $12,570 $13,372 $11,276 05/31/1996 $12,589 $13,367 $11,297 06/30/1996 $12,719 $13,513 $11,304 07/31/1996 $12,811 $13,634 $11,326 08/31/1996 $12,812 $13,631 $11,347 09/30/1996 $12,981 $13,822 $11,384 10/31/1996 $13,110 $13,978 $11,420 11/30/1996 $13,290 $14,234 $11,442 12/31/1996 $13,259 $14,175 $11,442 01/31/1997 $13,275 $14,201 $11,478 02/28/1997 $13,389 $14,332 $11,514 03/31/1997 $13,267 $14,141 $11,543 04/30/1997 $13,380 $14,260 $11,556 05/31/1997 $13,535 $14,476 $11,550 06/30/1997 $13,677 $14,630 $11,563 07/31/1997 $13,980 $15,036 $11,577 08/31/1997 $13,899 $14,894 $11,599 09/30/1997 $14,042 $15,072 $11,628 10/31/1997 $14,143 $15,168 $11,657 11/30/1997 $14,236 $15,258 $11,650 12/31/1997 $14,443 $15,480 $11,636 01/31/1998 $14,565 $15,640 $11,658 02/28/1998 $14,567 $15,645 $11,681 03/31/1998 $14,596 $15,659 $11,703 04/30/1998 $14,568 $15,588 $11,724 05/31/1998 $14,762 $15,834 $11,745 06/30/1998 $14,821 $15,896 $11,759 07/31/1998 $14,865 $15,936 $11,773 08/31/1998 $15,053 $16,183 $11,787 09/30/1998 $15,235 $16,385 $11,801 10/31/1998 $15,227 $16,385 $11,830 11/30/1998 $15,267 $16,443 $11,830 12/31/1998 $15,302 $16,484 $11,823 01/31/1999 $15,440 $16,680 $11,851 02/28/1999 $15,375 $16,606 $11,865 03/31/1999 $15,409 $16,630 $11,901 04/30/1999 $15,432 $16,671 $11,988 05/31/1999 $15,350 $16,575 $11,988 06/30/1999 $15,111 $16,336 $11,988 07/31/1999 $15,120 $16,395 $12,024 08/31/1999 $14,955 $16,264 $12,053 09/30/1999 $14,925 $16,270 $12,110 10/31/1999 $14,701 $16,094 $12,132 11/30/1999 $14,824 $16,265 $12,140 12/31/1999 $14,654 $16,143 $12,140 01/31/2000 $14,534 $16,072 $12,176 02/29/2000 $14,704 $16,258 $12,248 03/31/2000 $15,061 $16,613 $12,348 04/30/2000 $14,965 $16,515 $12,356 05/31/2000 $14,890 $16,429 $12,370 06/30/2000 $15,267 $16,864 $12,435 07/31/2000 $15,499 $17,099 $12,463 08/31/2000 $15,731 $17,362 $12,463 09/30/2000 $15,645 $17,272 $12,528 10/31/2000 $15,826 $17,460 $12,549 11/30/2000 $15,962 $17,593 $12,557 12/31/2000 $16,347 $18,027 $12,549 01/31/2001 $16,460 $18,206 $12,629 02/28/2001 $16,527 $18,264 $12,679 03/31/2001 $16,658 $18,428 $12,708 04/30/2001 $16,463 $18,229 $12,759 05/31/2001 $16,619 $18,426 $12,816 06/30/2001 $16,759 $18,550 $12,838 07/31/2001 $17,079 $18,824 $12,802 08/31/2001 $17,337 $19,135 $12,802 09/30/2001 $17,243 $19,070 $12,860 10/31/2001 $17,466 $19,297 $12,816 11/30/2001 $17,345 $19,135 $12,794 12/31/2001 $17,153 $18,953 $12,744 01/31/2002 $17,425 $19,281 $12,774 02/28/2002 $17,627 $19,512 $12,825 Total Return 76.27% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin North Carolina Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,896 $10,000 $10,000 05/31/1995 $10,155 $10,319 $10,020 06/30/1995 $10,094 $10,229 $10,040 07/31/1995 $10,146 $10,326 $10,040 08/31/1995 $10,240 $10,458 $10,066 09/29/1995 $10,299 $10,523 $10,086 10/31/1995 $10,449 $10,676 $10,120 11/30/1995 $10,609 $10,853 $10,112 12/29/1995 $10,712 $10,957 $10,105 01/31/1996 $10,747 $11,041 $10,165 02/29/1996 $10,666 $10,966 $10,198 03/29/1996 $10,555 $10,825 $10,251 04/30/1996 $10,545 $10,795 $10,291 05/31/1996 $10,554 $10,791 $10,310 06/28/1996 $10,667 $10,908 $10,316 07/31/1996 $10,730 $11,006 $10,336 08/30/1996 $10,726 $11,004 $10,356 09/30/1996 $10,871 $11,158 $10,389 10/31/1996 $10,963 $11,284 $10,422 11/29/1996 $11,117 $11,491 $10,442 12/31/1996 $11,086 $11,443 $10,442 01/31/1997 $11,093 $11,464 $10,475 02/28/1997 $11,182 $11,570 $10,508 03/31/1997 $11,076 $11,416 $10,534 04/30/1997 $11,164 $11,512 $10,547 05/31/1997 $11,298 $11,686 $10,540 06/30/1997 $11,401 $11,811 $10,553 07/31/1997 $11,657 $12,138 $10,565 08/31/1997 $11,574 $12,024 $10,586 09/30/1997 $11,697 $12,167 $10,612 10/31/1997 $11,764 $12,245 $10,639 11/30/1997 $11,846 $12,317 $10,632 12/31/1997 $12,001 $12,497 $10,619 01/31/1998 $12,106 $12,626 $10,640 02/28/1998 $12,103 $12,629 $10,660 03/31/1998 $12,121 $12,641 $10,680 04/30/1998 $12,093 $12,584 $10,699 05/31/1998 $12,257 $12,783 $10,719 06/30/1998 $12,300 $12,832 $10,731 07/31/1998 $12,331 $12,865 $10,744 08/31/1998 $12,479 $13,064 $10,757 09/30/1998 $12,614 $13,227 $10,770 10/31/1998 $12,603 $13,227 $10,796 11/30/1998 $12,639 $13,274 $10,796 12/31/1998 $12,662 $13,307 $10,789 01/31/1999 $12,769 $13,465 $10,815 02/28/1999 $12,711 $13,406 $10,828 03/31/1999 $12,731 $13,425 $10,861 04/30/1999 $12,744 $13,458 $10,940 05/31/1999 $12,671 $13,380 $10,940 06/30/1999 $12,457 $13,187 $10,940 07/31/1999 $12,469 $13,235 $10,973 08/31/1999 $12,319 $13,129 $10,999 09/30/1999 $12,300 $13,134 $11,052 10/31/1999 $12,101 $12,992 $11,072 11/30/1999 $12,195 $13,130 $11,079 12/31/1999 $12,050 $13,032 $11,079 01/31/2000 $11,946 $12,974 $11,112 02/29/2000 $12,090 $13,125 $11,177 03/31/2000 $12,376 $13,411 $11,269 04/30/2000 $12,293 $13,332 $11,276 05/31/2000 $12,216 $13,263 $11,289 06/30/2000 $12,529 $13,614 $11,348 07/31/2000 $12,712 $13,803 $11,374 08/31/2000 $12,895 $14,016 $11,374 09/30/2000 $12,819 $13,943 $11,433 10/31/2000 $12,961 $14,095 $11,453 11/30/2000 $13,066 $14,202 $11,460 12/31/2000 $13,373 $14,553 $11,453 01/31/2001 $13,471 $14,697 $11,525 02/28/2001 $13,511 $14,744 $11,571 03/31/2001 $13,610 $14,877 $11,598 04/30/2001 $13,433 $14,716 $11,644 05/31/2001 $13,564 $14,875 $11,696 06/30/2001 $13,672 $14,974 $11,716 07/31/2001 $13,924 $15,196 $11,683 08/31/2001 $14,126 $15,447 $11,683 09/30/2001 $14,046 $15,394 $11,736 10/31/2001 $14,219 $15,578 $11,696 11/30/2001 $14,115 $15,447 $11,676 12/31/2001 $13,952 $15,300 $11,631 01/31/2002 $14,178 $15,565 $11,657 02/28/2002 $14,334 $15,751 $11,704 Total Return 43.34% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 56 FRANKLIN TEXAS TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN TEXAS TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL INCOME TAX THROUGH A PORTFOLIO CONSISTING MAINLY OF TEXAS MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- STATE UPDATE [STATE OF TEXAS GRAPHIC OMITTED] The Lone Star State is a shining example of economic progress. Adding almost one million new jobs in the past five years, Texas easily surpassed the national economy in job creation. Simultaneously, the state has diversified its economy to be less dependent on the volatile energy sector, where employment has fallen to 12% of the total economy in 2001, compared with 24% in 1980. 2 Most remarkable has been the growth in the high technology sector, which recently ranked second only to California in total jobs. The state's low-cost business environment, educated workforce and presence of technology supply firms gives it an advantage over other technology hubs in attracting and maintaining high-tech companies. Principal tech centers include Austin, Dallas and Houston. Meanwhile, the state's solid economic fundamentals have attracted job seekers as well as those seeking to make investments. According to the 2000 U.S. census, Texas' population ballooned by 22% since 1990, making it the second most populous state. American and foreign investors alike poured money into the state, as they attempted to take advantage of the relatively low cost, educated workforce. With strong job growth and an unemployment rate of 5.7% as of December 2001, Texas will most likely continue to attract new residents. 3 Although the state projects that gross state product growth will slow from the 6% rate it has enjoyed over the past 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 12/5/01. This does not indicate Standard & Poor's rating of the Fund. 3. Source: Bureau of Labor Statistics, 2/7/02. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 111. CREDIT QUALITY BREAKDOWN* Franklin Texas Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 73.0% AA -- 4.6% A -- 0.2% BBB -- 16.6% Below Investment Grade -- 5.6% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. 57 PORTFOLIO BREAKDOWN Franklin Texas Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ----------------------------------------- General Obligation 34.6% Utilities 17.4% Hospital & Health Care 12.5% Corporate-Backed 9.8% Prerefunded 9.3% Transportation 7.5% Housing 5.0% Tax-Supported 1.9% Higher Education 1.0% Other Revenue 1.0% three years to 4% growth through 2003, it still should surpass the national economy's growth. 4 Employment and the labor force are estimated to grow by 2.0% annually over the next five years while the population as a whole is expected to grow by 1.5% annually. 2 However, this type of population growth rate combined with a slowing economy will cause some pressure on public services. The state will have to find ways to address its budgetary needs, especially for education, corrections, Medicaid and transportation. A more lackluster economy would also hamper sales tax collections, which account for more than half of the state's tax revenues. Texas has clearly managed its economy admirably. Accordingly, Standard & Poor's, an independent credit rating agency, assigned the state's general obligation debt an AA rating, one of its highest. 2 PORTFOLIO NOTES Retail and institutional demand for municipal bonds remained extremely strong throughout the year. Demand significantly outpaced supply in Texas, even as new issue supply increased 67.1% in 2001 versus 2000, as issuers took advantage of the relatively low rates to issue municipal bonds. 5 The robust demand gave us opportunities to sell bonds at relatively high retail prices. Notable sales included Brazos River Authority PCR for Texas Utilities Electric Co., Sabine River Authority PCR for Texas Utilities Electric Co. Project and Dallas-Fort Worth International Airport Facilities Improvement Corp. Revenue for American Airlines. Franklin Texas Tax-Free Income Fund is the largest Texas municipal bond fund. Our size and leverage in the market allowed us to get the first look at primary and secondary market offerings. Subsequently, we were able to invest the proceeds in mostly AAA-rated bonds with good call protection at institutional, or wholesale, prices. Credit spreads, the difference in yields between lower- and higher-rated securities, tightened to the point where we felt that we were not adequately compensated for the added risk of investing in lower-rated securities. Hence, the majority of our investments throughout the six months were in A-rated or higher bonds. We found particular value in AAA-rated school district GOs and water utility revenue bonds. At period-end, 77.6% of the Fund's total long-term investments were rated AA or higher. 4. Source: Moody's Investors Service, TEXAS (STATE OF), 11/29/01. 5. Source: THE BOND BUYER, 1/2/02. 58 DIVIDEND DISTRIBUTIONS* Franklin Texas Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------------- MONTH CLASS A CLASS C ------------------------------------------------------------------- March 4.75 cents 4.22 cents April 4.75 cents 4.22 cents May 4.75 cents 4.22 cents June 4.75 cents 4.27 cents July 4.75 cents 4.27 cents August 4.75 cents 4.27 cents September 4.60 cents 4.10 cents October 4.60 cents 4.10 cents November 4.60 cents 4.10 cents December 4.10 cents 3.59 cents January 4.10 cents 3.59 cents February 4.10 cents 3.59 cents ------------------------------------------------------------------- TOTAL 54.60 CENTS 48.54 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. Throughout the period, we attempted to maintain the Fund's broad diversification. At period-end, general obligation bonds represented the Fund's largest weighting, at 34.6% of total long-term investments, followed by utilities at 17.4%. Important purchases included GO bonds for Onalaska ISD, Bridge City ISD and Duncanville ISD as well as revenue bonds for Lower Colorado River Authority and Harris County Houston Sport Authority. The Fund's performance was adversely affected primarily by the negative price return of one position, Asarco Inc., which guarantees $6.0 million of Nueces County, Texas, industrial development bonds held by the Fund. In November 1999, Grupo Mexico SA (Grupo), a publicly traded Mexican industrial conglomerate, purchased Asarco. Grupo's leveraged buyout of Asarco and combination of mining assets created a large, low-cost copper producer, but it also greatly increased the company's total debt. The increased debt, combined with the weak global economy and historically low copper prices, led to downgrades in the corporate credit ratings of all bonds backed by Asarco. On February 28, 2002, our Nueces County IDA holding represented 1.8% of the Fund's total long-term investments. We continue to monitor the situation very closely and stay in direct contact with company officials. 59 The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher-coupon bonds. We could reinvest the proceeds only at the current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of high credit quality with tax-free yields. 1 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 4.70%, based on an annualization of the current 4.3 cent ($0.043) per share dividend and the maximum offering price of $10.97 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum federal income tax bracket of 38.6% would need to earn 7.65% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, new issue supply should remain relatively high because of low interest rates. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocations of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 60 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------ Net Asset Value (NAV) -$0.10 $10.50 $10.60 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5460 CLASS C CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------ Net Asset Value (NAV) -$0.09 $10.66 $10.75 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4854 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------ Cumulative Total Return 1 +4.30% +23.65% +74.44% Average Annual Total Return 2 -0.12% +3.44% +5.26% Avg. Ann. Total Return (3/31/02) 3 -2.73% +3.19% +5.02% Distribution Rate 4 4.70% Taxable Equivalent Distribution Rate 5 7.65% 30-Day Standardized Yield 6 4.36% Taxable Equivalent Yield 5 7.10% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------ Cumulative Total Return 1 +3.75% +20.38% +37.42% Average Annual Total Return 2 +1.72% +3.56% +4.61% Avg. Ann. Total Return (3/31/02) 3 -0.99% +3.36% +4.25% Distribution Rate 4 4.25% Taxable Equivalent Distribution Rate 5 6.92% 30-Day Standardized Yield 6 3.98% Taxable Equivalent Yield 5 6.48% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. FRANKLIN TEXAS TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the 2002 maximum federal personal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 61 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year -0.12% 5-Year +3.44% 10-Year +5.26% AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 ------------------------------- 1-Year +1.72% 5-Year +3.56% Since Inception (5/1/95) +4.61% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Texas Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,573 $10,000 $10,000 03/31/1992 $9,599 $10,003 $10,051 04/30/1992 $9,677 $10,092 $10,065 05/31/1992 $9,797 $10,211 $10,079 06/30/1992 $9,928 $10,383 $10,115 07/31/1992 $10,255 $10,694 $10,137 08/31/1992 $10,111 $10,590 $10,165 09/30/1992 $10,136 $10,659 $10,194 10/31/1992 $9,982 $10,555 $10,229 11/30/1992 $10,197 $10,744 $10,244 12/31/1992 $10,353 $10,853 $10,236 01/31/1993 $10,467 $10,979 $10,287 02/28/1993 $10,789 $11,377 $10,323 03/31/1993 $10,722 $11,256 $10,359 04/30/1993 $10,787 $11,370 $10,388 05/31/1993 $10,828 $11,433 $10,402 06/30/1993 $11,006 $11,624 $10,417 07/31/1993 $11,021 $11,639 $10,417 08/31/1993 $11,200 $11,882 $10,446 09/30/1993 $11,322 $12,017 $10,468 10/31/1993 $11,345 $12,040 $10,511 11/30/1993 $11,380 $11,934 $10,518 12/31/1993 $11,555 $12,186 $10,518 01/31/1994 $11,650 $12,325 $10,547 02/28/1994 $11,474 $12,005 $10,582 03/31/1994 $11,153 $11,517 $10,618 04/30/1994 $11,204 $11,615 $10,633 05/31/1994 $11,289 $11,716 $10,641 06/30/1994 $11,274 $11,644 $10,677 07/31/1994 $11,418 $11,857 $10,706 08/31/1994 $11,454 $11,899 $10,749 09/30/1994 $11,371 $11,724 $10,778 10/31/1994 $11,255 $11,515 $10,785 11/30/1994 $11,063 $11,307 $10,799 12/31/1994 $11,231 $11,556 $10,799 01/31/1995 $11,454 $11,886 $10,842 02/28/1995 $11,684 $12,232 $10,886 03/31/1995 $11,789 $12,373 $10,922 04/30/1995 $11,822 $12,387 $10,958 05/31/1995 $12,082 $12,783 $10,980 06/30/1995 $12,080 $12,671 $11,002 07/31/1995 $12,151 $12,792 $11,002 08/31/1995 $12,273 $12,954 $11,030 09/30/1995 $12,362 $13,036 $11,052 10/31/1995 $12,488 $13,225 $11,089 11/30/1995 $12,637 $13,444 $11,081 12/31/1995 $12,727 $13,573 $11,073 01/31/1996 $12,801 $13,677 $11,138 02/29/1996 $12,763 $13,584 $11,174 03/31/1996 $12,702 $13,410 $11,232 04/30/1996 $12,708 $13,372 $11,276 05/31/1996 $12,742 $13,367 $11,297 06/30/1996 $12,856 $13,513 $11,304 07/31/1996 $12,944 $13,634 $11,326 08/31/1996 $12,949 $13,631 $11,347 09/30/1996 $13,125 $13,822 $11,384 10/31/1996 $13,238 $13,978 $11,420 11/30/1996 $13,402 $14,234 $11,442 12/31/1996 $13,385 $14,175 $11,442 01/31/1997 $13,406 $14,201 $11,478 02/28/1997 $13,505 $14,332 $11,514 03/31/1997 $13,396 $14,141 $11,543 04/30/1997 $13,506 $14,260 $11,556 05/31/1997 $13,660 $14,476 $11,550 06/30/1997 $13,798 $14,630 $11,563 07/31/1997 $14,102 $15,036 $11,577 08/31/1997 $14,007 $14,894 $11,599 09/30/1997 $14,145 $15,072 $11,628 10/31/1997 $14,314 $15,168 $11,657 11/30/1997 $14,399 $15,258 $11,650 12/31/1997 $14,602 $15,480 $11,636 01/31/1998 $14,706 $15,640 $11,658 02/28/1998 $14,708 $15,645 $11,681 03/31/1998 $14,725 $15,659 $11,703 04/30/1998 $14,684 $15,588 $11,724 05/31/1998 $14,873 $15,834 $11,745 06/30/1998 $14,934 $15,896 $11,759 07/31/1998 $14,967 $15,936 $11,773 08/31/1998 $15,151 $16,183 $11,787 09/30/1998 $15,304 $16,385 $11,801 10/31/1998 $15,255 $16,385 $11,830 11/30/1998 $15,309 $16,443 $11,830 12/31/1998 $15,347 $16,484 $11,823 01/31/1999 $15,481 $16,680 $11,851 02/28/1999 $15,423 $16,606 $11,865 03/31/1999 $15,471 $16,630 $11,901 04/30/1999 $15,494 $16,671 $11,988 05/31/1999 $15,446 $16,575 $11,988 06/30/1999 $15,242 $16,336 $11,988 07/31/1999 $15,250 $16,395 $12,024 08/31/1999 $15,072 $16,264 $12,053 09/30/1999 $15,038 $16,270 $12,110 10/31/1999 $14,768 $16,094 $12,132 11/30/1999 $14,855 $16,265 $12,140 12/31/1999 $14,656 $16,143 $12,140 01/31/2000 $14,454 $16,072 $12,176 02/29/2000 $14,620 $16,258 $12,248 03/31/2000 $14,901 $16,613 $12,348 04/30/2000 $14,825 $16,515 $12,356 05/31/2000 $14,741 $16,429 $12,370 06/30/2000 $15,085 $16,864 $12,435 07/31/2000 $15,260 $17,099 $12,463 08/31/2000 $15,477 $17,362 $12,463 09/30/2000 $15,410 $17,272 $12,528 10/31/2000 $15,543 $17,460 $12,549 11/30/2000 $15,597 $17,593 $12,557 12/31/2000 $15,903 $18,027 $12,549 01/31/2001 $15,946 $18,206 $12,629 02/28/2001 $16,014 $18,264 $12,679 03/31/2001 $16,120 $18,428 $12,708 04/30/2001 $15,981 $18,229 $12,759 05/31/2001 $16,146 $18,426 $12,816 06/30/2001 $16,277 $18,550 $12,838 07/31/2001 $16,540 $18,824 $12,802 08/31/2001 $16,752 $19,135 $12,802 09/30/2001 $16,523 $19,070 $12,860 10/31/2001 $16,665 $19,297 $12,816 11/30/2001 $16,528 $19,135 $12,794 12/31/2001 $16,325 $18,953 $12,744 01/31/2002 $16,514 $19,281 $12,774 02/28/2002 $16,702 $19,512 $12,825 Total Return 67.02% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Texas Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,903 $10,000 $10,000 05/31/1995 $10,133 $10,319 $10,020 06/30/1995 $10,126 $10,229 $10,040 07/31/1995 $10,180 $10,326 $10,040 08/31/1995 $10,304 $10,458 $10,066 09/29/1995 $10,373 $10,523 $10,086 10/31/1995 $10,472 $10,676 $10,120 11/30/1995 $10,627 $10,853 $10,112 12/29/1995 $10,706 $10,957 $10,105 01/31/1996 $10,762 $11,041 $10,165 02/29/1996 $10,718 $10,966 $10,198 03/29/1996 $10,671 $10,825 $10,251 04/30/1996 $10,671 $10,795 $10,291 05/31/1996 $10,694 $10,791 $10,310 06/28/1996 $10,793 $10,908 $10,316 07/31/1996 $10,860 $11,006 $10,336 08/30/1996 $10,859 $11,004 $10,356 09/30/1996 $11,001 $11,158 $10,389 10/31/1996 $11,091 $11,284 $10,422 11/29/1996 $11,224 $11,491 $10,442 12/31/1996 $11,206 $11,443 $10,442 01/31/1997 $11,229 $11,464 $10,475 02/28/1997 $11,305 $11,570 $10,508 03/31/1997 $11,199 $11,416 $10,534 04/30/1997 $11,295 $11,512 $10,547 05/31/1997 $11,418 $11,686 $10,540 06/30/1997 $11,528 $11,811 $10,553 07/31/1997 $11,775 $12,138 $10,565 08/31/1997 $11,690 $12,024 $10,586 09/30/1997 $11,799 $12,167 $10,612 10/31/1997 $11,932 $12,245 $10,639 11/30/1997 $11,998 $12,317 $10,632 12/31/1997 $12,169 $12,497 $10,619 01/31/1998 $12,248 $12,626 $10,640 02/28/1998 $12,243 $12,629 $10,660 03/31/1998 $12,252 $12,641 $10,680 04/30/1998 $12,213 $12,584 $10,699 05/31/1998 $12,374 $12,783 $10,719 06/30/1998 $12,407 $12,832 $10,731 07/31/1998 $12,438 $12,865 $10,744 08/31/1998 $12,583 $13,064 $10,757 09/30/1998 $12,702 $13,227 $10,770 10/31/1998 $12,656 $13,227 $10,796 11/30/1998 $12,694 $13,274 $10,796 12/31/1998 $12,720 $13,307 $10,789 01/31/1999 $12,834 $13,465 $10,815 02/28/1999 $12,782 $13,406 $10,828 03/31/1999 $12,802 $13,425 $10,861 04/30/1999 $12,826 $13,458 $10,940 05/31/1999 $12,770 $13,380 $10,940 06/30/1999 $12,596 $13,187 $10,940 07/31/1999 $12,596 $13,235 $10,973 08/31/1999 $12,445 $13,129 $10,999 09/30/1999 $12,413 $13,134 $11,052 10/31/1999 $12,187 $12,992 $11,072 11/30/1999 $12,241 $13,130 $11,079 12/31/1999 $12,084 $13,032 $11,079 01/31/2000 $11,901 $12,974 $11,112 02/29/2000 $12,042 $13,125 $11,177 03/31/2000 $12,265 $13,411 $11,269 04/30/2000 $12,197 $13,332 $11,276 05/31/2000 $12,112 $13,263 $11,289 06/30/2000 $12,409 $13,614 $11,348 07/31/2000 $12,544 $13,803 $11,374 08/31/2000 $12,702 $14,016 $11,374 09/30/2000 $12,642 $13,943 $11,433 10/31/2000 $12,743 $14,095 $11,453 11/30/2000 $12,793 $14,202 $11,460 12/31/2000 $13,035 $14,553 $11,453 01/31/2001 $13,063 $14,697 $11,525 02/28/2001 $13,113 $14,744 $11,571 03/31/2001 $13,204 $14,877 $11,598 04/30/2001 $13,073 $14,716 $11,644 05/31/2001 $13,198 $14,875 $11,696 06/30/2001 $13,311 $14,974 $11,716 07/31/2001 $13,504 $15,196 $11,683 08/31/2001 $13,680 $15,447 $11,683 09/30/2001 $13,478 $15,394 $11,736 10/31/2001 $13,598 $15,578 $11,696 11/30/2001 $13,481 $15,447 $11,676 12/31/2001 $13,299 $15,300 $11,631 01/31/2002 $13,445 $15,565 $11,657 02/28/2002 $13,610 $15,751 $11,704 Total Return 36.10% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 62 FRANKLIN VIRGINIA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN VIRGINIA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND VIRGINIA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF VIRGINIA MUNICIPAL BONDS. 1 -------------------------------------------------------------------------------- COMMONWEALTH UPDATE [STATE OF VIRGINIA GRAPHIC OMITTED] Virginia experienced strong job and earnings growth, particularly in business services and retail trade, prior to the national economic slowdown and September 11's tragic events. However, the slowing U.S. economy negatively impacted the commonwealth's high-technology industry. The terrorist attack on the Pentagon and the subsequent closing of Reagan National Airport resulted in the loss of 2,000 jobs and $330 million in direct economic activity. 2 In particular, Virginia's tourism and hospitality industries suffered after September 11. Unemployment claims increased through September 2001 and job growth slowed but still ranked eighth among the states. The commonwealth experienced slower revenue growth during 2001 after several years of consistent over-performance. Sales tax and individual income tax collections came in below expectations. Virginia anticipates a $1.3 billion revenue shortfall for fiscal year 2002. 3 Legislators have proposed spending cuts, a freeze on the car tax phase-out plan and dipping into the rainy day fund as priorities have shifted to more urgent needs such as public safety. Looking forward, Virginia's low debt burden, significant financial cushion and long history of strong fiscal management could help quickly restore and retain budget balance as the domestic economy recovers. Standard & Poor's, an independent credit rating agency, holds a stable outlook for the commonwealth and maintained its AAA general obligation rating. 4 However, Moody's Investors Service, another independent 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 10/18/01. 3. Source: Moody's Investors Service, VIRGINIA (COMMONWEALTH OF), 12/19/01. 4. Source: Standard & Poor's, RATINGSDIRECT, 10/12/01. This does not indicate Standard & Poor's rating of the Fund. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 114. CREDIT QUALITY BREAKDOWN* Franklin Virginia Tax-Free Income Fund Based on Total Long-Term Investments 2/28/02 [GRAPHIC OMITTED] AAA -- 46.8% AA -- 22.9% A -- 17.3% BBB -- 12.1% Below Investment Grade -- 0.9% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. 63 PORTFOLIO BREAKDOWN Franklin Virginia Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------------ Utilities 18.5% Transportation 16.5% Hospital & Health Care 11.8% General Obligation 11.0% Housing 10.0% Corporate-Backed 8.3% Prerefunded 6.5% Tax-Supported 5.0% Subject to Government Appropriations 4.6% Higher Education 4.3% Other Revenue 3.5% credit rating agency, revised Virginia's outlook to negative from stable. 3 Moody's anticipates the commonwealth's budget to experience ongoing near-term financial stress. PORTFOLIO NOTES Municipal bond yields generally decreased during the year under review. Because bond prices rise when yields fall, Franklin Virginia Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.45 on February 28, 2001, to $11.52 on February 28, 2002. As interest rates remained low during the 12 months under review, many municipalities were motivated to borrow, and issuers continued to take advantage of inexpensive borrowing costs. The low interest rate environment, in conjunction with declining tax receipts, sparked a significant outbreak of municipal bond activity. The need for capital improvement also contributed to the fervor, and 2001 closed as the year with the second highest amount of national issuance at $286.6 billion. 5 As 2002 began, the momentum continued with a record January issuance of $20.4 billion in long-term bonds. 6 Issuance increased dramatically in many states. For the year 2001, the supply of Virginia bonds was up 60.0%. Additionally, Puerto Rico experienced a tremendous year, closing with $5.9 billion of issuance. 5 These Puerto Rico bonds offered many attractive investment opportunities for Franklin Virginia Tax-Free Income Fund as well. As a result, we increased our holdings in territorial securities. It is important to note that Puerto Rico securities are highly liquid and trade well in the secondary market, and their distributions are tax-free in many states. Notable purchases during the reporting period included Bristol GO - Public Improvement bonds and Puerto Rico PBA, Puerto Rico Public Finance Corp., Virginia Commonwealth Transportation Board Transportation and Puerto Rico Commonwealth Highway and Transportation Authority Transportation revenue bonds. During the 12 months under review, sales included West Point IDA - Solid Waste Disposal Revenue; Virginia State Public School Authority GO; and Metropolitan Washington, D.C., Airport Authority System Revenue bonds. 5. Source: THE BOND BUYER, 1/2/02. 6. Source: THE BOND BUYER, 2/1/02. 64 DIVIDEND DISTRIBUTIONS* Franklin Virginia Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ---------------------------------------------------------------------- MONTH CLASS A CLASS C ---------------------------------------------------------------------- March 4.87 cents 4.33 cents April 4.87 cents 4.33 cents May 4.87 cents 4.33 cents June 4.85 cents 4.32 cents July 4.85 cents 4.32 cents August 4.85 cents 4.32 cents September 4.72 cents 4.18 cents October 4.72 cents 4.18 cents November 4.72 cents 4.18 cents December 4.56 cents 4.03 cents January 4.56 cents 4.03 cents February 4.56 cents 4.03 cents ---------------------------------------------------------------------- TOTAL 57.00 CENTS 50.58 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. Our Metropolitan Washington, D.C., Airport holding initially declined in value after September 11's events. The revenue flow interruption from Reagan National Airport's temporary closure led to investor concerns regarding this credit's viability. However, the airport has since reopened and the debt is also supported by revenues from Dulles Airport. Our research staff will continue to carefully monitor this uninsured security, which comprised 2.18% of the Fund's total long-term investments on February 28, 2002. 65 The Fund was subject to bond calls during the 12-month reporting period as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. We could reinvest the proceeds only at current, lower interest rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Your Fund combines the advantage of high credit quality with tax-free yields. 1 The Performance Summary beginning on page 67 shows that at the end of this reporting period, the Fund's Class A shares' distribution rate was 4.55%, based on an annualization of the current 4.56 cent ($0.0456) per share dividend and the maximum offering price of $12.03 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Virginia state personal income tax bracket of 42.13% would need to earn 7.86% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Virginia Tax-Free Income Fund. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 66 PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ----------------------------------------------------------------------- Net Asset Value (NAV) +$0.07 $11.52 $11.45 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5700 CLASS C CHANGE 2/28/02 2/28/01 ----------------------------------------------------------------------- Net Asset Value (NAV) +$0.09 $11.62 $11.53 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5058 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------ Cumulative Total Return 1 +5.73% +29.38% +82.80% Average Annual Total Return 2 +1.22% +4.37% +5.76% Avg. Ann. Total Return (3/31/02) 3 -1.35% +4.22% +5.56% Distribution Rate 4 4.55% Taxable Equivalent Distribution Rate 5 7.86% 30-Day Standardized Yield 6 4.06% Taxable Equivalent Yield 5 7.02% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------ Cumulative Total Return 1 +5.28% +26.08% +42.53% Average Annual Total Return 2 +3.21% +4.53% +5.17% Avg. Ann. Total Return (3/31/02) 3 +0.42% +4.34% +4.83% Distribution Rate 4 4.12% Taxable Equivalent Distribution Rate 5 7.12% 30-Day Standardized Yield 6 3.66% Taxable Equivalent Yield 5 6.32% For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. FRANKLIN VIRGINIA TAX-FREE INCOME FUND -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Virginia state personal income tax bracket of 42.13%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 67 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +1.22% 5-Year +4.37% 10-Year +5.76% AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 ------------------------------- 1-Year +3.21% 5-Year +4.53% Since Inception (5/1/95) +5.17% TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Virginia Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 03/01/1992 $9,579 $10,000 $10,000 03/31/1992 $9,594 $10,003 $10,051 04/30/1992 $9,679 $10,092 $10,065 05/31/1992 $9,788 $10,211 $10,079 06/30/1992 $9,926 $10,383 $10,115 07/31/1992 $10,271 $10,694 $10,137 08/31/1992 $10,168 $10,590 $10,165 09/30/1992 $10,200 $10,659 $10,194 10/31/1992 $10,025 $10,555 $10,229 11/30/1992 $10,249 $10,744 $10,244 12/31/1992 $10,403 $10,853 $10,236 01/31/1993 $10,525 $10,979 $10,287 02/28/1993 $10,819 $11,377 $10,323 03/31/1993 $10,786 $11,256 $10,359 04/30/1993 $10,868 $11,370 $10,388 05/31/1993 $10,927 $11,433 $10,402 06/30/1993 $11,121 $11,624 $10,417 07/31/1993 $11,126 $11,639 $10,417 08/31/1993 $11,332 $11,882 $10,446 09/30/1993 $11,463 $12,017 $10,468 10/31/1993 $11,523 $12,040 $10,511 11/30/1993 $11,500 $11,934 $10,518 12/31/1993 $11,693 $12,186 $10,518 01/31/1994 $11,806 $12,325 $10,547 02/28/1994 $11,580 $12,005 $10,582 03/31/1994 $11,188 $11,517 $10,618 04/30/1994 $11,228 $11,615 $10,633 05/31/1994 $11,292 $11,716 $10,641 06/30/1994 $11,227 $11,644 $10,677 07/31/1994 $11,409 $11,857 $10,706 08/31/1994 $11,465 $11,899 $10,749 09/30/1994 $11,329 $11,724 $10,778 10/31/1994 $11,131 $11,515 $10,785 11/30/1994 $10,877 $11,307 $10,799 12/31/1994 $11,147 $11,556 $10,799 01/31/1995 $11,482 $11,886 $10,842 02/28/1995 $11,762 $12,232 $10,886 03/31/1995 $11,876 $12,373 $10,922 04/30/1995 $11,897 $12,387 $10,958 05/31/1995 $12,186 $12,783 $10,980 06/30/1995 $12,129 $12,671 $11,002 07/31/1995 $12,230 $12,792 $11,002 08/31/1995 $12,350 $12,954 $11,030 09/30/1995 $12,415 $13,036 $11,052 10/31/1995 $12,571 $13,225 $11,089 11/30/1995 $12,750 $13,444 $11,081 12/31/1995 $12,870 $13,573 $11,073 01/31/1996 $12,930 $13,677 $11,138 02/29/1996 $12,869 $13,584 $11,174 03/31/1996 $12,751 $13,410 $11,232 04/30/1996 $12,755 $13,372 $11,276 05/31/1996 $12,774 $13,367 $11,297 06/30/1996 $12,898 $13,513 $11,304 07/31/1996 $12,982 $13,634 $11,326 08/31/1996 $12,984 $13,631 $11,347 09/30/1996 $13,147 $13,822 $11,384 10/31/1996 $13,257 $13,978 $11,420 11/30/1996 $13,441 $14,234 $11,442 12/31/1996 $13,406 $14,175 $11,442 01/31/1997 $13,425 $14,201 $11,478 02/28/1997 $13,533 $14,332 $11,514 03/31/1997 $13,400 $14,141 $11,543 04/30/1997 $13,506 $14,260 $11,556 05/31/1997 $13,679 $14,476 $11,550 06/30/1997 $13,794 $14,630 $11,563 07/31/1997 $14,116 $15,036 $11,577 08/31/1997 $13,999 $14,894 $11,599 09/30/1997 $14,157 $15,072 $11,628 10/31/1997 $14,249 $15,168 $11,657 11/30/1997 $14,356 $15,258 $11,650 12/31/1997 $14,550 $15,480 $11,636 01/31/1998 $14,677 $15,640 $11,658 02/28/1998 $14,691 $15,645 $11,681 03/31/1998 $14,722 $15,659 $11,703 04/30/1998 $14,657 $15,588 $11,724 05/31/1998 $14,882 $15,834 $11,745 06/30/1998 $14,953 $15,896 $11,759 07/31/1998 $14,998 $15,936 $11,773 08/31/1998 $15,190 $16,183 $11,787 09/30/1998 $15,351 $16,385 $11,801 10/31/1998 $15,317 $16,385 $11,830 11/30/1998 $15,369 $16,443 $11,830 12/31/1998 $15,402 $16,484 $11,823 01/31/1999 $15,543 $16,680 $11,851 02/28/1999 $15,489 $16,606 $11,865 03/31/1999 $15,521 $16,630 $11,901 04/30/1999 $15,545 $16,671 $11,988 05/31/1999 $15,473 $16,575 $11,988 06/30/1999 $15,238 $16,336 $11,988 07/31/1999 $15,259 $16,395 $12,024 08/31/1999 $15,049 $16,264 $12,053 09/30/1999 $15,031 $16,270 $12,110 10/31/1999 $14,784 $16,094 $12,132 11/30/1999 $14,923 $16,265 $12,140 12/31/1999 $14,772 $16,143 $12,140 01/31/2000 $14,634 $16,072 $12,176 02/29/2000 $14,821 $16,258 $12,248 03/31/2000 $15,243 $16,613 $12,348 04/30/2000 $15,143 $16,515 $12,356 05/31/2000 $15,037 $16,429 $12,370 06/30/2000 $15,438 $16,864 $12,435 07/31/2000 $15,634 $17,099 $12,463 08/31/2000 $15,886 $17,362 $12,463 09/30/2000 $15,781 $17,272 $12,528 10/31/2000 $15,953 $17,460 $12,549 11/30/2000 $16,020 $17,593 $12,557 12/31/2000 $16,358 $18,027 $12,549 01/31/2001 $16,460 $18,206 $12,629 02/28/2001 $16,570 $18,264 $12,679 03/31/2001 $16,716 $18,428 $12,708 04/30/2001 $16,542 $18,229 $12,759 05/31/2001 $16,701 $18,426 $12,816 06/30/2001 $16,813 $18,550 $12,838 07/31/2001 $17,066 $18,824 $12,802 08/31/2001 $17,300 $19,135 $12,802 09/30/2001 $17,186 $19,070 $12,860 10/31/2001 $17,413 $19,297 $12,816 11/30/2001 $17,315 $19,135 $12,794 12/31/2001 $17,083 $18,953 $12,744 01/31/2002 $17,346 $19,281 $12,774 02/28/2002 $17,500 $19,512 $12,825 Total Return 75.00% 95.12% 28.25% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of plot points used in printed graphic as follows: Date Franklin Virginia Lehman Brothers CPI 7 Tax-Free Municipal Bond Income Fund Index 7 05/01/1995 $9,904 $10,000 $10,000 05/31/1995 $10,174 $10,319 $10,020 06/30/1995 $10,130 $10,229 $10,040 07/31/1995 $10,200 $10,326 $10,040 08/31/1995 $10,303 $10,458 $10,066 09/29/1995 $10,352 $10,523 $10,086 10/31/1995 $10,476 $10,676 $10,120 11/30/1995 $10,619 $10,853 $10,112 12/29/1995 $10,713 $10,957 $10,105 01/31/1996 $10,758 $11,041 $10,165 02/29/1996 $10,702 $10,966 $10,198 03/29/1996 $10,608 $10,825 $10,251 04/30/1996 $10,597 $10,795 $10,291 05/31/1996 $10,608 $10,791 $10,310 06/28/1996 $10,706 $10,908 $10,316 07/31/1996 $10,780 $11,006 $10,336 08/30/1996 $10,768 $11,004 $10,356 09/30/1996 $10,905 $11,158 $10,389 10/31/1996 $10,991 $11,284 $10,422 11/29/1996 $11,138 $11,491 $10,442 12/31/1996 $11,103 $11,443 $10,442 01/31/1997 $11,113 $11,464 $10,475 02/28/1997 $11,197 $11,570 $10,508 03/31/1997 $11,091 $11,416 $10,534 04/30/1997 $11,173 $11,512 $10,547 05/31/1997 $11,311 $11,686 $10,540 06/30/1997 $11,390 $11,811 $10,553 07/31/1997 $11,659 $12,138 $10,565 08/31/1997 $11,557 $12,024 $10,586 09/30/1997 $11,672 $12,167 $10,612 10/31/1997 $11,751 $12,245 $10,639 11/30/1997 $11,833 $12,317 $10,632 12/31/1997 $11,986 $12,497 $10,619 01/31/1998 $12,084 $12,626 $10,640 02/28/1998 $12,090 $12,629 $10,660 03/31/1998 $12,110 $12,641 $10,680 04/30/1998 $12,052 $12,584 $10,699 05/31/1998 $12,240 $12,783 $10,719 06/30/1998 $12,292 $12,832 $10,731 07/31/1998 $12,313 $12,865 $10,744 08/31/1998 $12,463 $13,064 $10,757 09/30/1998 $12,599 $13,227 $10,770 10/31/1998 $12,565 $13,227 $10,796 11/30/1998 $12,602 $13,274 $10,796 12/31/1998 $12,622 $13,307 $10,789 01/31/1999 $12,730 $13,465 $10,815 02/28/1999 $12,669 $13,406 $10,828 03/31/1999 $12,700 $13,425 $10,861 04/30/1999 $12,723 $13,458 $10,940 05/31/1999 $12,648 $13,380 $10,940 06/30/1999 $12,450 $13,187 $10,940 07/31/1999 $12,461 $13,235 $10,973 08/31/1999 $12,284 $13,129 $10,999 09/30/1999 $12,254 $13,134 $11,052 10/31/1999 $12,060 $12,992 $11,072 11/30/1999 $12,166 $13,130 $11,079 12/31/1999 $12,029 $13,032 $11,079 01/31/2000 $11,922 $12,974 $11,112 02/29/2000 $12,056 $13,125 $11,177 03/31/2000 $12,404 $13,411 $11,269 04/30/2000 $12,318 $13,332 $11,276 05/31/2000 $12,227 $13,263 $11,289 06/30/2000 $12,545 $13,614 $11,348 07/31/2000 $12,698 $13,803 $11,374 08/31/2000 $12,896 $14,016 $11,374 09/30/2000 $12,806 $13,943 $11,433 10/31/2000 $12,939 $14,095 $11,453 11/30/2000 $12,988 $14,202 $11,460 12/31/2000 $13,254 $14,553 $11,453 01/31/2001 $13,330 $14,697 $11,525 02/28/2001 $13,414 $14,744 $11,571 03/31/2001 $13,536 $14,877 $11,598 04/30/2001 $13,390 $14,716 $11,644 05/31/2001 $13,500 $14,875 $11,696 06/30/2001 $13,595 $14,974 $11,716 07/31/2001 $13,792 $15,196 $11,683 08/31/2001 $13,962 $15,447 $11,683 09/30/2001 $13,877 $15,394 $11,736 10/31/2001 $14,052 $15,578 $11,696 11/30/2001 $13,968 $15,447 $11,676 12/31/2001 $13,775 $15,300 $11,631 01/31/2002 $13,979 $15,565 $11,657 02/28/2002 $14,116 $15,751 $11,704 Total Return 41.16% 57.51% 17.04% 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 68 MUNICIPAL BOND RATINGS MOODY'S AAA: Best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt-edged." Interest payments are protected by a large or exceptionally stable margin, and principal is secure. Although the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA: High quality by all standards. Together with the Aaa group, they comprise what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa because margins of protection may not be as large, fluctuation of protective elements may be of greater amplitude, or there may be other elements which make the long-term risks appear larger. A: Possess many favorable investment attributes and are considered upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA: Medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. BA: Contain speculative elements. Often the protection of interest and principal payments may be very moderate and, thereby, not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. 69 CAA: Poor standing. Such issues may be in default, or elements of danger with respect to principal or interest may be present. CA: Obligations that are highly speculative. Such issues are often in default or have other marked shortcomings. C: Lowest-rated class of bonds. Issues rated C can be regarded as having extremely poor prospects of ever attaining any real investment standing. S&P AAA: The highest rating assigned by S&P to a debt obligation and indicates the ultimate degree of protection as to principal and interest. AA: Also qualify as high-grade obligations, and, in the majority of instances, differ from AAA issues only in a small degree. A: Generally regarded as upper medium-grade. They have considerable investment strength but are not entirely free from adverse effects of changes in economic and trade conditions. Interest and principal are regarded as safe. BBB: Regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, B, CCC, CC: Regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds likely will have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C: Reserved for income bonds on which no interest is being paid. D: In default, and payment of interest and/or repayment of principal is in arrears. 70 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN ALABAMA TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, ------------------------------------------------------------------------------------------------------------------------ CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year $11.08 $10.62 $11.68 $11.98 $11.73 ------------------------------------------------ Income from investment operations: Net investment income a .56 .58 .61 .62 .64 Net realized and unrealized gains (losses) .14 .47 (1.06) (.25) .36 ------------------------------------------------ Total from investment operations .70 1.05 (.45) .37 1.00 Less distributions from: Net investment income (.56) (.59) (.60) (.62) (.65) Net realized gains -- -- (.01) (.05) (.10) ------------------------------------------------ Total distributions (.56) (.59) (.61) (.67) (.75) ------------------------------------------------ Net asset value, end of year $11.22 $11.08 $10.62 $11.68 $11.98 ================================================ Total return b 6.49% 10.11% (3.92)% 3.21% 8.79% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) $215,649 $210,198 $203,256 $238,670 $216,982 Ratios to average net assets: Expenses .73% .73% .72% .71% .72% Net investment income 5.05% 5.32% 5.46% 5.23% 5.39% Portfolio turnover rate 9.94% 11.12% 20.99% 8.67% 10.44% CLASS C ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................... $11.14 $10.68 $11.74 $12.04 $11.78 ------------------------------------------------ Income from investment operations: Net investment income a .............................................. .50 .52 .55 .56 .58 Net realized and unrealized gains (losses) ........................... .15 .47 (1.06) (.25) .36 ------------------------------------------------ Total from investment operations ...................................... .65 .99 (.51) .31 .94 Less distributions from: Net investment income ................................................ (.50) (.53) (.54) (.56) (.58) Net realized gains ................................................... -- -- (.01) (.05) (.10) ------------------------------------------------ Total distributions ................................................... (.50) (.53) (.55) (.61) (.68) ------------------------------------------------ Net asset value, end of year .......................................... $11.29 $11.14 $10.68 $11.74 $12.04 ================================================ Total return b ........................................................ 5.96% 9.46% (4.46)% 2.62% 8.23% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ....................................... $18,462 $14,475 $14,056 $14,895 $9,469 Ratios to average net assets: Expenses ............................................................. 1.28% 1.28% 1.27% 1.27% 1.29% Net investment income ................................................ 4.50% 4.77% 4.91% 4.67% 4.80% Portfolio turnover rate ............................................... 9.94% 11.12% 20.99% 8.67% 10.44%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 71 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 96.6% Alabama Building Renovation Finance Authority Revenue, Refunding, AMBAC Insured, 5.625%, 9/01/24 ..................................................................$ 2,500,000 $ 2,588,250 Alabama Drinking Water Finance Authority Revenue, Revolving Fund Loan, Series A, AMBAC Insured, 5.25%, 8/15/24 ................................................................... 1,805,000 1,825,848 Alabama HFA, SFMR, Series A-1, GNMA Secured, 6.50%, 4/01/17 ...................................................... 2,790,000 2,869,599 Series A-2, GNMA Secured, 6.80%, 4/01/25 ...................................................... 1,130,000 1,175,370 Series D-2, GNMA Secured, 5.75%, 10/01/23 ..................................................... 1,775,000 1,819,766 Alabama State Docks Department Docks Facilities Revenue, MBIA Insured, 6.30%, 10/01/21 ................................................................. 4,500,000 4,969,620 Refunding, MBIA Insured, 5.50%, 10/01/22 ...................................................... 1,000,000 1,031,660 Alabama State IDA, Solid Waste Disposal Revenue, Pine City Fiber Co., 6.45%, 12/01/23 ............ 2,000,000 1,995,120 Alabaster Water and Gas Board Revenue, AMBAC Insured, 6.35%, 9/01/14 ............................. 2,215,000 2,442,414 Alexander City Utility Revenue, wts., Refunding, FSA Insured, 6.20%, 8/15/10 ..................... 2,000,000 2,167,500 Athens Electric Revenue, wts., MBIA Insured, 6.00%, 6/01/25 ...................................... 1,000,000 1,086,330 Athens Water and Sewer Revenue, wts., AMBAC Insured, 6.10%, 8/01/18 .............................. 1,500,000 1,555,245 Auburn GO, FSA Insured, 5.00%, 1/01/24 ........................................................... 1,500,000 1,480,275 Baldwin County Eastern Shore Health Care Authority Hospital Revenue, 5.75%, 4/01/27 .............. 1,000,000 895,320 Bessemer Medical Clinic Board Revenue, Bessemer Carraway Center, Refunding, Series A, MBIA Insured, 7.25%, 4/01/15 .................................................................... 1,000,000 1,006,470 Birmingham Baptist Medical Center Special Care Facilities Financing Authority Revenue, Baptist Health System Inc., Refunding, MBIA Insured, 5.875%, 11/15/19 ...................................................................................... 3,500,000 3,702,720 11/15/26 ...................................................................................... 2,000,000 2,094,880 Birmingham GO, Refunding, Series B, 6.25%, 4/01/16 ............................................... 1,000,000 1,023,530 Birmingham Southern College Private Educational Building Authority Tuition Revenue, Refunding, 5.35%, 12/01/19 ...................................................................... 1,000,000 1,015,160 Birmingham Special Care Facilities Financing Authority Revenue, Health Care, Medical Center East, MBIA Insured, 7.00%, 7/01/12 ............................................... 1,200,000 1,228,080 Birmingham-Jefferson Civic Center Authority Special Tax, Capital Outlay, 7.40%, 1/01/08 ................................................................................ 285,000 285,527 7.25%, 1/01/12 ................................................................................ 640,000 641,152 Camden IDB, PCR, Facilities Revenue, MacMillian Bloedel Project, Refunding, Series A, 7.75%, 5/01/09 ........................................................................ 3,250,000 3,300,798 Clarke and Mobile Counties Gas District Revenue, AMBAC Insured, 5.875%, 12/01/23 ................. 4,000,000 4,266,920 Coffee County PBA, Building Revenue, wts., FSA Insured, 6.10%, 9/01/16 ........................... 1,000,000 1,107,920 Colbert County Health Care Authority Revenue, Helen Keller Hospital, Refunding, 8.75%, 6/01/09 ....................................................................... 1,605,000 1,631,178 Courtland IDBR, Champion International Corp., Refunding, Series A, 7.20%, 12/01/13 ............................ 4,000,000 4,141,480 Environmental Improvement Revenue, Champion International Corp. Project, Refunding, 6.40%, 11/01/26 .................................................................... 2,000,000 2,057,520 Solid Waste Disposal Revenue, Champion International Corp. Project, Series A, 6.50%, 9/01/25 .. 5,000,000 5,131,850 Culman and Jefferson County Gas District Gas Revenue, MBIA Insured, 5.85%, 7/01/24 ............... 2,000,000 2,125,660 Fairfield GO, wts., AMBAC Insured, Pre-Refunded, 6.30%, 6/01/22 .................................. 1,750,000 1,805,633 Fairfield IDB, Environmental Improvement Revenue, USX Corp. Project, Refunding, 5.45%, 9/01/14 ................................................................................ 2,000,000 1,980,360 Series A, 6.70%, 12/01/24 ..................................................................... 3,500,000 3,623,095 Florence Electric Revenue, wts., FSA Insured, 5.25%, 6/01/19 ..................................... 1,415,000 1,444,276 Guam Airport Authority Revenue, Series A, 6.50%, 10/01/23 ........................................ 1,000,000 1,031,330 Gulf Shores GO, wts., Refunding, AMBAC Insured, 6.00%, 9/01/21 ................................... 1,935,000 2,098,953 Houston County Health Care Authority Revenue, AMBAC Insured, 6.125%, 10/01/25 ............................................................... 1,000,000 1,069,700 AMBAC Insured, 6.250%, 10/01/30 ............................................................... 3,150,000 3,406,883 Southeast Medical Center, MBIA Insured, 6.125%, 10/01/12 ...................................... 2,070,000 2,117,320 Jackson IDBR, Solid Waste, Boise Cascade, Refunding, 5.70%, 12/01/27 ............................. 4,150,000 3,770,773 Jasper County Waterworks and Sewer Board Water and Sewer Revenue, AMBAC Insured, 6.15%, 6/01/14 .. 1,000,000 1,094,860 Jefferson County Sewer Revenue, Capital Improvement wts., Series A, FGIC Insured, 5.00%, 2/01/33 .............................. 5,000,000 4,854,300 Capital Improvement wts., Series A, FGIC Insured, 5.375%, 2/01/36 ............................. 6,000,000 6,065,280 wts., ETM, 7.50%, 9/01/13 ..................................................................... 200,000 205,574 wts., Series D, FGIC Insured, 5.75%, 2/01/27 .................................................. 6,000,000 6,243,060
72 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Lauderdale County and Florence Health Care Authority Revenue, Coffee Health Group, Series A, MBIA Insured, 5.625%, 7/01/21 ............................................................................. $ 3,000,000 $ 3,139,650 5.375%, 7/01/29 ............................................................................. 5,000,000 5,071,000 Madison GO, wts., AMBAC Insured, 5.35%, 2/01/26 ............................................................... 2,410,000 2,454,392 MBIA Insured, 6.00%, 4/01/23 ................................................................ 2,000,000 2,165,660 Series B, MBIA Insured, 6.25%, 2/01/15 ...................................................... 1,560,000 1,694,846 Marshall County Health Care Authority Hospital Revenue, Boaz-Albertville Medical Center, Refunding, 6.50%, 1/01/18 .................................. 10,810,000 10,872,158 Guntersville-Arab Medical Center, Refunding, 7.60%, 10/01/07 ................................ 2,530,000 2,585,103 McIntosh IDB, Environmental Improvement Revenue, CIBA Specialty, Refunding, Series C, 5.375%, 6/01/28 ..................................................................... 3,000,000 2,939,790 Mobile Airport Authority Revenue, Mae Project, 7.375%, 11/01/12 ................................ 1,000,000 1,014,820 Mobile County Board School Commissioners GO, Capital Outlay Warrants, Series B, AMBAC Insured, 5.10%, 3/01/22 .............................................................................. 2,265,000 2,274,717 5.125%, 3/01/31 ............................................................................. 3,500,000 3,513,160 Mobile Housing Assistance Corp. MFHR, Refunding, Series A, FSA Insured, 7.625%, 2/01/21 ........ 1,325,000 1,333,507 Montgomery Medical Clinic Board Health Care Facilities Revenue, Jackson Hospital and Clinic, Refunding, AMBAC Insured, 6.00%, 3/01/26 ...................................................... 6,000,000 6,473,760 Morgan County Decatur Health Care Authority Hospital Revenue, Decatur General Hospital, Refunding, Connie Lee Insured, 6.375%, 3/01/24 ................................................ 5,750,000 6,240,878 Moulton Waterworks Board Water Revenue, Series A, 6.30%, 1/01/18 ............................... 1,500,000 1,512,135 Muscle Shoals GO, Refunding, wts., MBIA Insured, 5.80%, 8/01/16 .............................................................................. 1,725,000 1,829,587 5.90%, 8/01/25 .............................................................................. 7,000,000 7,332,920 5.50%, 8/01/30 .............................................................................. 2,150,000 2,216,908 Oneonta Utilities Board Utility Revenue, FSA Insured, 6.90%, 11/01/24 .......................... 230,000 258,614 Oxford GO, School wts., AMBAC Insured, 6.00%, 5/01/30 .......................................... 4,275,000 4,616,102 Phoenix County IDB, Environmental Improvement Revenue, Mead Coated Board Project, Refunding, Series A, 5.30%, 4/01/27 ........................................................... 8,300,000 8,053,324 Piedmont IDBR, Springs Industrial Project, 8.25%, 9/01/10 ...................................... 780,000 793,221 Puerto Rico Commonwealth GO, Public Improvement, Refunding, FSA Insured, 5.25%, 7/01/27 ...................................................... 2,500,000 2,566,550 Series A, 5.125%, 7/01/31 ................................................................... 5,000,000 4,928,700 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.90%, 7/01/07 ...................................................................... 5,000 5,021 Puerto Rico Commonwealth Urban Renewal and Housing Corp. Commonwealth Appropriation, Refunding, 7.875%, 10/01/04 ................................................................... 145,000 145,973 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series A, 5.00%, 6/01/26 .............................................................................. 1,000,000 956,610 MBIA Insured, 5.00%, 8/01/31 ................................................................ 2,000,000 1,990,740 Russellville GO, wts., Refunding, MBIA Insured, 5.75%, 12/01/26 ................................ 2,500,000 2,607,400 St. Clair County Board of Education, School Tax Anticipation wts., Series C, FSA Insured, 5.85%, 2/01/29 ....................................................................... 4,815,000 5,065,332 Sylacauga GO, wts., AMBAC Insured, 5.50%, 6/01/25 .............................................. 1,700,000 1,752,207 Tallassee GO, Water, Gas and Sewer wts., AMBAC Insured, 5.25%, 5/01/31 ......................... 1,135,000 1,140,244 Troy State University Student Fee Revenue, MBIA Insured, 5.00%, 11/01/21 ....................... 2,215,000 2,209,352 University of North Alabama Revenue, General Fee, Series A, FSA Insured, 5.375%, 11/01/17 ...... 4,395,000 4,572,600 Valley Special Care Facilities Financing Authority Revenue, Lanier Memorial Hospital, Series A, 5.65%, 11/01/22 ..................................................................... 3,465,000 3,012,091 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/13 .................................................................................... 1,700,000 1,785,645 10/01/22 .................................................................................... 2,300,000 2,313,935 Warrior River Water Authority Water Revenue, FSA Insured, 5.40%, 8/01/29 .............................................................................. 4,250,000 4,327,945 5.50%, 8/01/34 .............................................................................. 4,735,000 4,848,545 ------------ TOTAL LONG TERM INVESTMENTS (COST $217,935,215) ................................................ 226,089,701 ------------
73 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN ALABAMA TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- a SHORT TERM INVESTMENTS 1.9% McIntosh IDB, Environmental Improvement Revenue, CIBA Specialty, Refunding, Series D, Daily VRDN and Put, 1.40%, 7/01/28 .............................................................$ 1,200,000 $ 1,200,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ............................................. 1,700,000 1,700,000 West Jefferson IDB, PCR, Alabama Power Co. Project, Refunding, Daily VRDN and Put, 1.40%, 6/01/28 ............................................................................ 1,500,000 1,500,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $4,400,000) .................................................. 4,400,000 ------------ TOTAL INVESTMENTS (COST $222,335,215) 98.5% ..................................................... 230,489,701 OTHER ASSETS, LESS LIABILITIES 1.5% ............................................................. 3,620,965 ------------ NET ASSETS 100.0% ............................................................................... $234,110,666 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principle balance plus accrued interest at specified dates. See notes to financial statements. 74 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN FLORIDA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------------------ CLASS A 2002 2001 2000 D 1999 1998 --------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $11.54 $10.89 $11.91 $11.87 $11.59 ------------------------------------------------------------ Income from investment operations: Net investment income a ......................................... .59 .61 .61 .62 .64 Net realized and unrealized gains (losses) ...................... .18 .64 (1.02) .05 .30 ------------------------------------------------------------ Total from investment operations ................................. .77 1.25 (.41) .67 .94 ------------------------------------------------------------ Less distributions from: Net investment income ........................................... (.60) (.60) (.61) (.62) (.65) Net realized gains .............................................. -- -- -- e (.01) (.01) ------------------------------------------------------------ Total distributions .............................................. (.60) (.60) (.61) (.63) (.66) ------------------------------------------------------------ Net asset value, end of year ..................................... $11.71 $11.54 $10.89 $11.91 $11.87 ============================================================ Total return b ................................................... 6.83% 11.77% (3.54)% 5.75% 8.37% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $1,609,946 $1,538,593 $1,509,624 $1,785,720 $1,650,068 Ratios to average net assets: Expenses ........................................................ .62% .62% .62% .61% .61% Net investment income ........................................... 5.05% 5.41% 5.37% 5.19% 5.45% Portfolio turnover rate .......................................... 13.91% 12.05% 26.39% 7.66% 5.60% CLASS B -------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $11.58 $10.90 $10.83 ------------------------------------ Income from investment operations: Net investment income a ......................................... .52 .55 .05 Net realized and unrealized gains ............................... .20 .67 .07 ------------------------------------ Total from investment operations ................................. .72 1.22 .12 ------------------------------------ Less distributions from net investment income .................... (.53) (.54) (.05) ------------------------------------ Net asset value, end of year ..................................... $11.77 $11.58 $10.90 ==================================== Total return b ................................................... 6.38% 11.42% 1.07% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $30,875 $7,412 $304 Ratios to average net assets: Expenses ........................................................ 1.17% 1.17% 1.17% c Net investment income ........................................... 4.50% 4.81% 5.32% c Portfolio turnover rate .......................................... 13.91% 12.05% 26.39%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period February 1, 2000 (effective date) to February 29, 2000 for Class B. e The fund made a capital gain distribution of $.0009. 75 FRANKLIN TAX-FREE TRUST Financial Highlights (CONTINUED) FRANKLIN FLORIDA TAX-FREE INCOME FUND (CONT.)
YEAR ENDED FEBRUARY 28, --------------------------------------------------- CLASS C 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................ $11.65 $10.98 $12.01 $11.96 $11.67 --------------------------------------------------- Income from investment operations: Net investment income a .......................................... .53 .55 .55 .55 .60 Net realized and unrealized gains (losses) ....................... .18 .66 (1.04) .06 .29 --------------------------------------------------- Total from investment operations .................................. .71 1.21 (.49) .61 .89 --------------------------------------------------- Less distributions from: Net investment income ............................................ (.53) (.54) (.54) (.55) (.59) Net realized gains ............................................... -- -- -- c (.01) (.01) --------------------------------------------------- Total distributions ............................................... (.53) (.54) (.54) (.56) (.60) --------------------------------------------------- Net asset value, end of year ...................................... $11.83 $11.65 $10.98 $12.01 $11.96 =================================================== Total return b .................................................... 6.26% 11.26% (4.14)% 5.21% 7.80% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................... $90,895 $74,194 $72,135 $82,596 $56,027 Ratios to average net assets: Expenses ......................................................... 1.17% 1.17% 1.17% 1.17% 1.17% Net investment income ............................................ 4.51% 4.86% 4.83% 4.63% 4.88% Portfolio turnover rate ........................................... 13.91% 12.05% 26.39% 7.66% 5.60%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c The fund made a capital gain distribution of $.0009. See notes to financial statements. 76 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.3% BONDS 91.8% Alachua County Health Facilities Authority Revenue, Shands Teaching Hospital, Series A, MBIA Insured, 5.80%, 12/01/26 ................................................................. $10,000,000 $ 10,613,300 Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/21 ................................. 2,000,000 2,003,060 Bay County Hospital System Revenue, Bay Medical Center Project, Pre-Refunded, 8.00%, 10/01/12 .. 10,130,000 11,453,485 Bay County Resource Recovery Revenue, Series A, MBIA Insured, Pre-Refunded, 6.60%, 7/01/11 ........................................ 3,710,000 3,847,418 Series B, MBIA Insured, Pre-Refunded, 6.60%, 7/01/12 ........................................ 18,150,000 18,822,276 Bay County Water System Revenue, AMBAC Insured, Pre-Refunded, 6.50%, 9/01/07 .............................................................................. 525,000 548,825 6.60%, 9/01/11 .............................................................................. 675,000 705,962 Brevard County Health Facilities Authority Health Care Facilities Revenue, Health First Inc. Project, MBIA Insured, 5.00%, 4/01/26 ......................................................... 5,000,000 4,917,300 Brevard County Health Facilities Authority Revenue, Wuesthoff Memorial Hospital, Series B, Pre-Refunded, 7.20%, 4/01/13 .................................................................. 5,000,000 5,120,850 Brevard County HFA, SFMR, Multi-County Program, GNMA Secured, 6.40%, 9/01/30 .......................................... 2,970,000 3,096,106 Refunding, Series B, FSA Insured, 7.00%, 3/01/13 ............................................ 380,000 388,801 Brevard County School Board COP, Refunding, Series A, AMBAC Insured, 5.40%, 7/01/11 ............ 4,415,000 4,844,933 Broward County Educational Facilities Authority Revenue, Nova Southeastern University Project, Refunding, Connie Lee Insured, 6.125%, 4/01/17 ....................................... 2,250,000 2,446,335 Broward County Health Facilities Authority Revenue, Catholic Health Services, Refunding, 5.50%, 8/15/20 ..................................................................... 9,360,000 9,849,809 Broward County HFA, MFHR, Bridgewater Place Apartments Project, Series A, 5.45%, 10/01/34 ............................. 3,000,000 2,855,340 Cross Keys Apartments Project, Series A, 5.80%, 10/01/33 .................................... 1,995,000 1,994,900 Cross Keys Apartments Project, Series A, 5.85%, 4/01/39 ..................................... 5,795,000 5,785,960 Stirling Apartments Phase II, Series A, 5.35%, 10/01/29 ..................................... 1,000,000 948,930 Stirling Apartments Phase II, Series A, 5.40%, 4/01/39 ...................................... 2,000,000 1,884,320 Broward County HFAR, Series D, 6.90%, 6/01/09 .............................................................................. 155,000 158,615 7.375%, 6/01/21 ............................................................................. 515,000 525,439 Broward County Professional Sports Facilities Tax Revenue, Civic Arena Project, Series A, MBIA Insured, 5.750%, 9/01/21 ............................................................................. 5,000,000 5,273,650 5.625%, 9/01/28 ............................................................................. 10,000,000 10,340,300 Broward County School Board COP, Series A, FSA Insured, 5.00%, 7/01/26 ......................... 21,500,000 21,259,845 Cape Canaveral Hospital District Revenue COP, Refunding, 5.25%, 1/01/28 ........................ 3,500,000 3,422,300 Celebration CDD, Special Assessment, MBIA Insured, 6.00%, 5/01/10 ................................................................ 3,640,000 3,932,074 MBIA Insured, 6.10%, 5/01/16 ................................................................ 2,645,000 2,862,763 Series A, MBIA Insured, 5.50%, 5/01/18 ...................................................... 1,470,000 1,531,328 Citrus County PCR, Florida Power Corp., Crystal River, Refunding, Series A, 6.625%, 1/01/27 ................................................................... 11,100,000 11,365,623 Series B, 6.35%, 2/01/22 .................................................................... 20,400,000 20,896,128 Clay County Housing Finance Authority Revenue, SFM Multi County Program, GNMA Secured, 5.30%, 10/01/29 ............................................................................... 4,625,000 4,661,029 Clearwater MFR, Rental Housing, Drew Gardens Projects, Refunding, Series A, FHA Insured, 6.50%, 10/01/25 ............................................................................... 2,700,000 2,769,687 Clermont Water and Sewer Revenue, Refunding, FSA Insured, 5.375%, 12/01/30 ..................... 5,000,000 5,080,200 Collier County Water and Sewer District Revenue, Sewer Assessment, East and South Naples Project, MBIA Insured, 7.15%, 10/01/11 ........................................................ 80,000 80,061 Crossing At Fleming Island CDD, Florida Special Assessment Revenue, Refunding, Series B, MBIA Insured, 5.80%, 5/01/16 .................................................................. 5,980,000 6,572,797 Dade County Aviation Revenue, Miami International Airport, Series B, FSA Insured, 5.125%, 10/01/22 ..................................................... 4,750,000 4,705,113 Series C, FSA Insured, 5.125%, 10/01/27 ..................................................... 9,550,000 9,462,236 Dade County HFA, SFMR, Refunding, Series D, FSA Insured, 6.95%, 12/15/12 ...................................................... 95,000 97,356 Series E, FNMA Insured, GNMA Secured, 7.00%, 3/01/24 ........................................ 210,000 212,407 Dade County IDA, Solid Waste Disposal Revenue, Florida Power and Light Co. Project, 7.15%, 2/01/23 ....................................................................................... 5,695,000 5,790,163 Dade County Special Obligation, Courthouse Center Project, Pre-Refunded, 6.10%, 4/01/20 ........ 5,000,000 5,589,950 Dade County Water and Sewer System Revenue, FGIC Insured, 5.75%, 10/01/22 ............................................................................. 5,000,000 5,294,350 5.50%, 10/01/25 ............................................................................. 11,500,000 11,737,015 5.25%, 10/01/26 ............................................................................. 13,000,000 13,153,270
77 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Dovera CDD, Special Assessment Revenue, 7.625%, 5/01/03 ............................................................................. $ 105,000 $ 107,167 7.875%, 5/01/12 ............................................................................. 715,000 730,894 Duval County HFA, MFHR, Mortgage, Eagles Point North, Series A, MBIA Insured, 5.60%, 7/01/17 .................. 1,000,000 1,034,830 MFHR, Mortgage, Eagles Point North, Series A, MBIA Insured, 5.70%, 7/01/27 .................. 2,000,000 2,042,840 SFMR, GNMA Secured, 5.20%, 10/01/19 ......................................................... 2,995,000 3,030,311 SFMR, GNMA Secured, 5.30%, 4/01/31 .......................................................... 1,680,000 1,681,882 SFMR, Series 1988, GNMA Secured, 8.625%, 12/01/19 ........................................... 15,000 15,585 Enterprise CDD, Water and Sewer Revenue, MBIA Insured, 5.50%, 5/01/26 .......................... 3,000,000 3,113,370 Escambia County Health Facilities Authority Health Facility Revenue, Baptist Hospital and Baptist Manor, 5.125%, 10/01/19 ........................................ 8,750,000 8,168,125 Baptist Hospital and Baptist Manor, Pre-Refunded, 6.75%, 10/01/14 ........................... 3,415,000 3,740,552 Baptist Hospital and Baptist Manor, Refunding, 6.75%, 10/01/14 .............................. 410,000 425,818 Florida Health Care Facility Loan VHA Project, AMBAC Insured, 5.95%, 7/01/20 ................ 10,000,000 11,117,600 Escambia County Health Facilities Authority Revenue, Ascension Health Credit, Refunding, Series A-2, AMBAC Insured, 5.75%, 11/15/29 .................................................... 25,000,000 26,433,250 Escambia County HFA, SFMR, Multi County Program, Series A, MBIA Insured, 6.40%, 10/01/30 ............................... 9,785,000 10,197,046 Multi-County Program, MBIA Insured, 5.20%, 4/01/32 .......................................... 7,245,000 7,168,565 Multi-County Program, Series C, GNMA Secured, 5.80%, 10/01/19 ............................... 1,285,000 1,323,075 Escambia County Revenue, Series B, Sub Series 1, MBIA Insured, 7.20%, 1/01/15 .................. 2,210,000 2,258,532 Escambia County School Board COP, FSA Insured, 6.375%, 2/01/12 ................................. 1,210,000 1,211,198 First Florida Governmental Financing Commission Revenue, AMBAC Insured, 5.75%, 7/01/16 ......... 3,700,000 4,146,738 Florida Board of Education Capital Outlay GO, Public Education, Refunding, Series G, FGIC Insured, 5.00%, 6/01/31 .................................................................. 10,000,000 9,848,100 Florida HFA, MFHR, Refunding, Series A, 6.95%, 10/01/21 .................................................. 2,900,000 2,902,784 SFMR, Series A, 8.60%, 7/01/16 .............................................................. 140,000 140,167 Florida HFAR, General Mortgage, Refunding, Series A, 6.40%, 6/01/24 ....................................... 2,980,000 3,068,059 Homeowner Mortgage, Series 1, MBIA Insured, 5.625%, 7/01/17 ................................. 4,830,000 5,048,944 MFH, Citrus Meadows Apartments Project, Series Q, 7.65%, 6/20/31 ............................ 4,000,000 4,035,840 MFH, Driftwood Terrace Project, Series I, 7.65%, 12/20/31 ................................... 3,400,000 3,413,668 Reserve at Kanapaha, Series G, AMBAC Insured, 5.70%, 7/01/37 ................................ 5,000,000 5,086,300 Reserve at Northshore, Series H, AMBAC Insured, 5.70%, 5/01/37 .............................. 2,000,000 2,035,800 Riverfront Apartments, Series A, AMBAC Insured, 6.25%, 4/01/37 .............................. 1,300,000 1,367,379 Florida HFC Revenue, Brenwood Trace Apartments, Series E-1, FSA Insured, 5.80%, 12/01/38 ......................... 5,000,000 5,153,300 Homeowner Mortgage, Series 4, FSA Insured, 6.25%, 7/01/22 ................................... 5,600,000 5,852,728 Housing Brenwood Trace Apartments, Series E-1, FSA Insured, 5.65%, 6/01/19 .................. 1,250,000 1,302,150 Housing Deer Meadows Apartments, Series R, FNMA Insured, 6.00%, 5/01/32 ..................... 3,505,000 3,661,323 Housing Waverly Apartments, Series C-1, FSA Insured, 6.50%, 7/01/40 ......................... 3,000,000 3,202,500 Florida Intergovernmental Finance Commission Capital Revenue, Series C-1, AMBAC Insured, 5.00%, 2/01/21 .............................................................................. 1,355,000 1,358,970 5.125%, 2/01/31 ............................................................................. 5,000,000 4,996,000 Florida Municipal Loan Council Revenue, Series B, MBIA Insured, 5.75%, 11/01/29 ................ 1,500,000 1,591,125 Florida Ports Financing Commission Revenue, State Transportation Trust Fund-Intermodal Program, FGIC Insured, 5.50%, 10/01/23 ................................................................. 7,000,000 7,231,140 Florida State Board of Education Capital Outlay GO, Public Education, Refunding, Series D, 5.75%, 6/01/22 ......................................................... 25,900,000 27,816,600 Refunding, Series D, 6.00%, 6/01/23 ......................................................... 15,000,000 17,183,250 Refunding, Series G, FGIC Insured, 5.00%, 6/01/27 ........................................... 7,500,000 7,425,150 Series B, Pre-Refunded, 5.875%, 6/01/24 ..................................................... 5,000,000 5,534,750 Series C, FGIC Insured, 5.75%, 6/01/29 ...................................................... 5,000,000 5,289,500 Series F, FGIC Insured, 5.50%, 6/01/26 ...................................................... 10,000,000 10,236,400
78 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Florida State Board Regent Housing Revenue, University of Central Florida, AMBAC Insured, 5.75%, 10/01/29 ............................... $ 8,650,000 $ 9,171,682 University of Florida, FGIC Insured, 5.75%, 7/01/25 ......................................... 3,400,000 3,627,052 University of Florida, FGIC Insured, 5.25%, 7/01/30 ......................................... 2,060,000 2,079,508 Florida State Community Services Corp. Walton County Water and Sewer Revenue, 7.00%, 3/01/18 .............................................................................. 2,045,000 2,135,307 Pre-Refunded, 7.00%, 3/01/18 ................................................................ 505,000 529,144 Florida State Correctional Privatization Commission COP, Correctional Facility Bay Project, MBIA Insured, 6.00%, 8/01/15 .................................................................. 6,000,000 6,648,060 Florida State Department of Corrections COP, Okeechobee Correctional Facility, AMBAC Insured, 6.25%, 3/01/15 ....................................................................... 2,960,000 3,234,481 Florida State Department of General Services Division Facilities Management Revenue, Florida Facilities Pool, Series B, FSA Insured, 5.50%, 9/01/28 ................................ 10,000,000 10,335,400 Florida State Mid-Bay Bridge Authority Revenue, Exchangeable, 6.05%, 10/01/22 ............................................................... 7,000,000 7,173,530 Exchangeable, Series A, 5.95%, 10/01/13 ..................................................... 13,505,000 14,332,046 Exchangeable, Series D, 6.10%, 10/01/22 ..................................................... 17,240,000 17,725,134 Series A, ETM, 6.875%, 10/01/22 ............................................................. 6,000,000 7,458,600 Florida State Turnpike Authority Turnpike Revenue, Department of Transportation, Series A, FGIC Insured, 5.50%, 7/01/21 ...................................................... 5,000,000 5,130,850 Series B, 5.00%, 7/01/30 .................................................................... 3,455,000 3,382,998 Gainesville Utilities Systems Revenue, Series A, 5.20%, 10/01/26 ................................................................... 7,590,000 7,627,419 Series B, 6.00%, 10/01/17 ................................................................... 3,500,000 3,579,800 Gateway Services District Revenue, Transportation Roadway Service Charges, 8.75%, 5/01/14 ...... 5,395,000 5,759,756 Hialeah Housing Authority Revenue, Affordable Housing Program, Refunding, GNMA Secured, 5.30%, 12/20/18 ............................................................................... 1,240,000 1,273,864 Highlands County Health Facilities Authority Revenue, Adventist Health Systems, 5.25%, 11/15/20 ............................................................................. 11,000,000 10,556,370 Refunding, 5.25%, 11/15/28 .................................................................. 2,750,000 2,581,095 Series A, 6.00%, 11/15/31 ................................................................... 16,000,000 16,376,640 Hillsborough County Assessment Revenue, Capacity Assessment Special, FSA Insured, 5.125%, 3/01/20 ............................................................................... 1,000,000 1,011,610 Hillsborough County Aviation Authority Revenue, Tampa International Airport, Series B, FGIC Insured, 5.875%, 10/01/23 ................................................................ 5,000,000 5,262,300 Hillsborough County Capital Improvement Revenue, County Center Project, Second Series, Pre-Refunded, 6.75%, 7/01/22 .................................................................. 1,250,000 1,296,688 Hillsborough County HFA Mortgage Revenue, SF, Series A, GNMA Secured, 5.875%, 4/01/30 .......... 5,000,000 5,146,900 Hillsborough County IDAR, Colonial Penn Insurance Project, 7.35%, 8/01/13 ...................... 5,300,000 5,477,550 Hillsborough County School Board COP, Master Lease Program, Series A, MBIA Insured, 5.375%, 7/01/21 ............................... 5,000,000 5,160,350 Master Lease Program, Series A, MBIA Insured, 5.25%, 7/01/22 ................................ 5,000,000 5,087,300 MBIA Insured, 5.375%, 7/01/26 ............................................................... 8,000,000 8,132,400 Series B, MBIA Insured, 5.125%, 7/01/26 ..................................................... 5,000,000 5,001,600 Hillsborough County School Board Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/26 ............. 14,000,000 13,882,120 Indian River County Hospital District Revenue, Refunding, FSA Insured, 5.70%, 10/01/15 ......... 1,000,000 1,077,880 Jacksonville Capital Improvement Revenue Certificates, Gator Bowl Project, AMBAC Insured, 5.875%, 10/01/25 .............................................................................. 5,000,000 5,299,250 Jacksonville Electric Authority Revenue, Water and Sewer, Series A, 6.125%, 10/01/39 .................................................................. 20,330,000 22,347,346 Series B, FGIC Insured, 5.40%, 10/01/20 ..................................................... 3,000,000 3,098,820 Jacksonville Health Facilities Authority IDR, National Benevolent-Cypress Village, Series A, 7.05%, 3/01/24 .............................................................................. 500,000 527,190 7.10%, 3/01/30 .............................................................................. 1,220,000 1,290,479 Jacksonville Hospital Revenue, University Medical Center Inc. Project, Connie Lee Insured, 6.60%, 2/01/21 .............................................................................. 1,750,000 1,786,488 Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%, 10/01/23 ................................. 5,000,000 5,003,600 Jacksonville Transportation Revenue, MBIA Insured, 5.25%, 10/01/29 ............................................................................. 17,955,000 18,169,742 5.00%, 10/01/31 ............................................................................. 25,000,000 24,619,500 Kissimmee Water and Sewer Revenue, Refunding, AMBAC Insured, 6.00%, 10/01/15 ................... 5,000,000 5,200,800 Lakeland Hospital System Revenue, Lakeland Regional Health System, Series A, MBIA Insured, 5.50%, 11/15/26 ...................................................................... 10,000,000 10,340,800 Lakeland Utilities Tax Revenue, Refunding and Improvement, Series A, FGIC Insured, 6.00%, 10/01/17 4,500,000 4,936,275 Lee County Airport Revenue, Series A, FSA Insured, 6.00%, 10/01/32 ............................. 11,405,000 12,218,861
79 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Lee County Hospital Board of Directors Hospital Revenue, Lee Memorial Health System, Series A, MBIA Insured, 5.875%, 4/01/24 ................................................................. $18,000,000 $ 19,081,620 Lee County IDA, Health Care Facilities Revenue, Shell Point Village Project, Refunding, Series A, 5.50%, 11/15/29 ........................................................ 4,000,000 3,535,360 Series A, 5.50%, 11/15/21 ................................................................... 7,500,000 6,788,400 Lee County Transportation Facilities Revenue, MBIA Insured, 5.75%, 10/01/27 .................... 5,000,000 5,299,450 Leesburg Hospital Revenue, Leesburg Regional Medical Center Project, Capital Improvement, Series A, Pre-Refunded, 7.375%, 7/01/11 ................................ 1,250,000 1,299,200 Capital Improvement, Series A, Pre-Refunded, 7.50%, 7/01/21 ................................. 2,115,000 2,199,092 Refunding, Series A, 6.125%, 7/01/18 ........................................................ 7,000,000 7,126,280 Manatee County HFA, SFMR, Series A, GNMA Secured, 6.85%, 11/01/23 .............................. 2,865,000 2,909,723 Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/21 ................... 5,575,000 6,381,424 Marion County Utility System Revenue, FGIC Insured, 5.00%, 12/01/31 ............................ 5,000,000 4,923,500 Martin County Consolidated Utilities System Revenue, Refunding, FGIC Insured, 6.00%, 10/01/24 .. 735,000 785,149 Melbourne Water and Sewer Revenue, FGIC Insured, 5.25%, 10/01/30 ............................... 6,000,000 6,067,260 Miami Beach Special Obligation, Subordinated, FGIC Insured, ETM, 7.375%, 12/01/08 .............. 1,795,000 1,817,958 Miami Beach Water and Sewer Revenue, AMBAC Insured, 5.00%, 9/01/30 ............................. 7,000,000 6,895,420 Miami-Dade County Educational Facilities Authority Revenue, Series A, AMBAC Insured, 5.75%, 4/01/29 ................................................................................ 10,000,000 10,642,100 Miami-Dade County HFA, MFHR, Cedar Grove Apartments, FSA Insured, 5.50%, 8/01/27 ................................... 2,015,000 2,023,705 MFMR, Villa Esperanza Apartments Project, 5.25%, 10/01/19 ................................... 430,000 419,861 MFMR, Villa Esperanza Apartments Project, 5.40%, 10/01/33 ................................... 1,500,000 1,436,490 Miami-Dade County IDAR, Airis Miami ll LLC Project, AMBAC Insured, 6.00%, 10/15/25 ............. 4,500,000 4,814,730 Miami-Dade County School Board COP, Series A, MBIA Insured, 5.00%, 5/01/31 ..................... 10,000,000 9,818,600 Miramar Wastewater Improvement Assessment Revenue, FGIC Insured, Pre-Refunded, 6.75%, 10/01/25 ...................................................................................... 6,500,000 7,300,475 Nassau County PCR, ITT Rayonier Inc. Project, Refunding, 6.25%, 6/01/10 ........................ 5,000,000 5,089,050 North Broward Hospital District Revenue, Improvement, 6.00%, 1/15/31 ................................................................. 25,530,000 26,196,333 Refunding and Improvement, MBIA Insured, 5.375%, 1/15/24 .................................... 10,000,000 10,156,900 Refunding and Improvement, MBIA Insured, 5.75%, 1/15/27 ..................................... 19,370,000 20,149,643 North Miami Health Facilities Authority Revenue, Catholic Health Services Obligation Group, 6.00%, 8/15/16 ..................................................................................... 2,000,000 2,121,580 8/15/24 ..................................................................................... 1,750,000 1,811,250 North Port Utilities Revenue, FGIC Insured, Pre-Refunded, 6.25%, 10/01/22 ...................... 1,500,000 1,572,405 Northern Palm Beach County Water Control District Revenue, Unit Development No. 31, Project 2, 6.75%, 11/01/07 ............................................................................. 725,000 796,318 6.625%, 11/01/13 ............................................................................ 1,470,000 1,611,635 Orange County HFAR, Adventist Health System, 6.375%, 11/15/20 ................................................... 3,000,000 3,182,940 Adventist Health System, 6.50%, 11/15/30 .................................................... 10,750,000 11,405,535 Mayflower Retirement Project, Refunding, Asset Guaranteed, 5.25%, 6/01/29 ................... 4,000,000 3,988,160 MBIA Insured, 6.00%, 11/01/24 ............................................................... 285,000 297,871 Regional Healthcare System, Series E, 6.00%, 10/01/26 ....................................... 12,000,000 12,423,240 Orange County HFA, Homeowner Revenue, Series C-1, GNMA Secured, 5.70%, 9/01/26 ................. 2,240,000 2,286,794 Orange County Public Services Tax Revenue, FGIC Insured, 6.00%, 10/01/24 ....................... 5,050,000 5,518,438 Orange County Tourist Development Tax Revenue, AMBAC Insured, 5.50%, 10/01/31 .............................................................. 10,500,000 10,874,010 Refunding, MBIA Insured, 5.125%, 10/01/20 ................................................... 10,000,000 10,080,000 Orlando and Orange County Expressway Authority Expressway Revenue, junior lien, FGIC Insured, 5.00%, 7/01/28 ................................................... 18,500,000 18,285,215 senior lien, AMBAC Insured, ETM, 7.625%, 7/01/18 ............................................ 265,000 307,458 Orlando Community RDA, Tax Increment Revenue, Series A, 6.50%, 10/01/11 ............................................................................. 2,155,000 2,204,996 6.75%, 10/01/16 ............................................................................. 2,585,000 2,645,489 Osceola County Gas Tax Revenue, Refunding and Improvement, FGIC Insured, 6.00%, 4/01/13 ........ 3,500,000 3,715,460 Osceola County IDAR, Community Provider Pooled Loan Program, Series A, FSA Insured, 7.75%, 7/01/10 ....................................................... 3,931,000 3,995,311 Series C, FSA Insured, 7.60%, 7/01/10 ....................................................... 750,000 760,665
80 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Osceola County Sales Tax Revenue, FSA Insured, 5.00%, 4/01/24 .................................. $10,000,000 $ 9,946,700 Pace Property Finance Authority Inc. Utility Systems Revenue, Refunding and Improvement, AMBAC Insured, 6.125%, 9/01/07 ............................................................................. 270,000 273,213 6.250%, 9/01/13 ............................................................................. 685,000 693,357 Palm Beach County Criminal Justice Facilities Revenue, FGIC Insured, 6.00%, 6/01/15 ............ 5,000,000 5,461,550 Palm Beach County Financing Authority MFR, Housing Windsor Park Apartment Project, Series A, 5.90%, 6/01/38 ................................................................................ 1,000,000 1,003,770 Palm Beach County HFA, SFM Purchase Revenue, Series B, GNMA Secured, 7.60%, 3/01/23 ............ 2,565,000 2,604,219 Palm Beach County HFAR, Acts Retirement-Life Communities, 5.125%, 11/15/29 ..................... 3,650,000 3,344,897 Palm Beach County IDR, Lourdes-Noreen McKeen Residence, Geriatric Care Inc. Project, 6.55%, 12/01/16 ............... 1,755,000 1,865,249 Lourdes-Noreen McKeen Residence, Geriatric Care Inc. Project, 6.625%, 12/01/26 .............. 4,000,000 4,223,640 South Florida Fair Project, AMBAC Insured, 5.50%, 6/01/31 ................................... 5,000,000 5,156,500 Palm Beach County Public Improvement Revenue, Convention Center Project, FGIC Insured, 5.125%, 11/01/30 .............................................................................. 10,000,000 9,947,200 Palm Beach County School Board COP, Series A, AMBAC Insured, 5.125%, 8/01/24 .............................................................. 15,000,000 15,065,400 FGIC Insured, 6.00%, 8/01/22 ................................................................ 5,000,000 5,801,800 Pensacola Airport Revenue, Series A, MBIA Insured, 5.75%, 10/01/27 ............................. 5,615,000 5,863,127 Pensacola-Westwood Homes Development Corp. Revenue, Mortgage Loan, Refunding, FNMA Secured, 6.40%, 7/15/23 ................................................................................ 930,000 942,332 Pinellas County Health Facilities Authority Revenue, Baycare Health System, FSA Insured, 5.00%, 11/15/30 ............................................................................... 11,500,000 11,225,150 Pinellas County PCR, Florida Power and Light Co., Refunding, 7.20%, 12/01/14 ................... 12,200,000 12,422,162 Plantation Health Facilities Authority Revenue, Covenant Retirement Community Inc., Pre-Refunded, 7.625%, 12/01/12 ............................................................................ 1,500,000 1,599,210 7.750%, 12/01/22 ............................................................................ 3,000,000 3,201,180 Polk County Capital Improvement Revenue, Special Tax, FSA Insured, 5.75%, 12/01/21 ............. 2,350,000 2,537,060 Polk County HFAR, Refunding, Series A, GNMA Secured, 7.15%, 9/01/23 ............................ 2,035,000 2,061,048 Polk County IDAR, Solid Waste Disposal Facility, Tampa Electric Co. Project, 5.85%, 12/01/30 ... 20,500,000 21,188,595 Port Everglades Authority Port Improvement Revenue, Series 1986, ETM, 7.50%, 11/01/06 .......... 575,000 651,412 Port St. Lucie Special Assessment Revenue, Utility Service Area 5, 6, and 7A, MBIA Insured, 5.00%, 9/01/21 ................................................................................ 10,000,000 10,032,300 Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.125%, 7/01/31 ..................... 11,150,000 10,991,001 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, MBIA Insured, 5.00%, 7/01/38 ...................................................... 12,800,000 12,735,360 Series B, 6.00%, 7/01/39 .................................................................... 5,000,000 5,846,000 Series D, 5.375%, 7/01/36 ................................................................... 5,000,000 5,052,900 Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 .................. 15,000,000 15,011,550 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Revenue, Cogen Facilities, 6.625%, 6/01/26 .................................................... 6,000,000 6,340,740 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.375%, 7/01/33 .......... 5,000,000 5,052,900 Santa Rosa County Health Facilities Authority Revenue, Gulf Breeze Hospital Inc., Series A, 6.20%, 10/01/14 ..................................................................... 14,350,000 14,619,924 Santa Rosa County IDR, Refunding, Holley Navarre Water System Project, 6.75%, 5/01/24 .......... 4,290,000 4,450,961 Sarasota County Solid Waste System Revenue, AMBAC Insured, 5.50%, 10/01/16 ..................... 5,250,000 5,563,688 Sarasota County Utilities System Revenue, FGIC Insured, 5.75%, 10/01/27 ............................................................................. 18,000,000 18,910,800 Refunding, Series A, 5.25%, 10/01/25 ........................................................ 9,000,000 9,099,270 Seminole County School Board COP, Series B, MBIA Insured, Pre-Refunded, 6.50%, 7/01/21 ......... 5,000,000 5,533,900 South Broward Hospital District Revenue, 5.625%, 5/01/32 ....................................... 15,000,000 15,054,300 South Florida Water Management District Special Obligation, Land Acquisition Bonds, AMBAC Insured, 6.00%, 10/01/15 ................................................................ 1,000,000 1,076,350 St. John's County IDA, IDR, Professional Golf Hall of Fame Project, MBIA Insured, Pre-Refunded, 5.80%, 9/01/16 .................................................................. 4,660,000 5,251,214 St. Lucie West Services District Capital Improvement Revenue, Lake Charles Project, Refunding, 7.50%, 8/01/04 ................................................................................ 95,000 96,993 St. Lucie West Services District Utility Revenue, senior lien, MBIA Insured, 6.125%, 10/01/32 .. 10,000,000 11,032,600 Sunrise Lakes Recreation District GO, Phase 4, Refunding, AMBAC Insured, 5.25%, 8/01/24 .................................................... 4,320,000 4,371,278 Series A, Pre-Refunded, 6.75%, 8/01/15 ...................................................... 3,080,000 3,528,479 Series A, Pre-Refunded, 6.75%, 8/01/24 ...................................................... 6,120,000 7,011,133 Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 .................... 2,550,000 2,604,009 Tallahassee Consolidated Utility System Revenue, Series 1994, 6.20%, 10/01/19 .................. 3,400,000 3,698,044 Tallahassee Health Facilities Revenue, Tallahassee Memorial Healthcare Project, 6.375%, 12/01/30 .............................................................................. 2,500,000 2,619,875
81 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Tampa Allegheny Health System Revenue, St. Joseph, MBIA Insured, Pre-Refunded, 6.50%, 12/01/23 . $ 7,000,000 $ 7,931,420 Tampa Bay Water Utility System Revenue, FGIC Insured, Pre-Refunded, 5.75%, 10/01/29 ................................................. 25,000,000 28,557,000 Series B, FGIC Insured, 5.00%, 10/01/26 ..................................................... 5,000,000 4,957,900 Series B, FGIC Insured, 5.00%, 10/01/31 ..................................................... 16,000,000 15,756,480 Tampa Florida Sports Authority Revenue, Sales Tax Payments, Stadium Project, 5.25%, 1/01/27 .... 5,860,000 5,919,772 Tampa Sports Authority Revenue, Guaranteed Package, Tampa Bay Arena Project, MBIA Insured, 6.00%, 10/01/15 .................. 1,000,000 1,155,500 Guaranteed Package, Tampa Bay Arena Project, MBIA Insured, 6.05%, 10/01/20 .................. 1,715,000 1,976,469 Guaranteed Package, Tampa Bay Arena Project, MBIA Insured, 6.10%, 10/01/26 .................. 2,695,000 3,128,464 Interlock Agreement, Tampa Bay, MBIA Insured, Pre-Refunded, 6.125%, 10/01/26 ................ 6,800,000 7,618,040 Tampa Water and Sewer Revenue, 5.50%, 10/01/29 ............................................................................. 14,490,000 16,297,917 sub. lien, Series A, AMBAC Insured, 7.25%, 10/01/16 ......................................... 1,330,000 1,335,107 Tampa-Hillsborough County Expressway Authority Revenue, AMBAC Insured, 5.00%, 7/01/22 .......... 5,000,000 4,999,650 Titusville Water and Sewer Revenue, MBIA Insured, Pre-Refunded, 6.20%, 10/01/14 ................ 6,000,000 6,713,520 Viera East CDD Revenue, Special Assessment, Series B, 6.75%, 5/01/14 .............................................................................. 300,000 302,430 ETM, 6.75%, 5/01/14 ......................................................................... 7,190,000 8,268,141 Viera East CDD, Special Assessment, 8.625%, 5/01/14 ......................................................... 10,640,000 11,349,369 Special Assessment, ETM, 7.50%, 5/01/03 ..................................................... 770,000 789,281 Special Assessment, Pre-Refunded, 8.50%, 5/01/04 ............................................ 655,000 685,890 Special Assessment, Pre-Refunded, 7.50%, 5/01/12 ............................................ 5,225,000 5,378,876 Special Assessment, Refunding, 6.30%, 5/01/26 ............................................... 7,355,000 7,708,114 Special Assessment, Refunding, Series A, 6.00%, 5/01/14 ..................................... 11,295,000 11,455,615 Special Assessment, Water Management, Refunding, Series A, 6.50%, 5/01/22 ................... 11,340,000 11,562,944 Special Assessment, Water Management, Series B, 6.50%, 5/01/05 .............................. 465,000 474,216 Special Assessment, Water Management, Series B, 6.50%, 5/01/22 .............................. 4,580,000 4,670,043 Water and Sewer Revenue, 7.875%, 5/01/03 .................................................... 1,770,000 1,801,276 Water and Sewer Revenue, 6.75%, 5/01/09 ..................................................... 2,850,000 2,959,839 Village Center CDD, Recreational Revenue, Series A, MBIA Insured, 5.20%, 11/01/25 .............. 10,000,000 10,080,700 Volusia County Educational Facility Authority Revenue, Educational Facilities, Embry Riddle University, Refunding, Series B, AMBAC Insured, 5.25%, 10/15/22 ............................................................................. 2,000,000 2,037,340 Educational Facilities, Stetson University Inc. Project, AMBAC Insured, 5.25%, 6/01/29 ...... 5,000,000 5,052,900 Embry Riddle Aeronautical University, Connie Lee Insured, Pre-Refunded, 6.625%, 10/15/22 .... 500,000 526,225 Volusia County School Board COP, Master Lease Program, FSA Insured, 5.50%, 8/01/24 ............. 5,000,000 5,183,500 West Lake CDD, Special Assessment Revenue, MBIA Insured, 5.75%, 5/01/17 ........................ 1,950,000 2,120,820 West Orange Healthcare District Revenue, Series A, 5.65%, 2/01/22 .............................. 6,450,000 6,503,148 West Palm Beach Utility System Revenue, FGIC Insured, 5.50%, 10/01/29 .......................... 5,000,000 5,135,550 -------------- TOTAL BONDS .................................................................................... 1,589,825,788 -------------- ZERO COUPON BONDS 6.5% Broward County HFAR, SFMR, Refunding, Series B, FHA Insured, 4/01/29 ........................... 7,185,000 1,103,975 Broward County Water and Sewer Utility Revenue, Refunding, Series A, AMBAC Insured, 10/01/08 ... 3,670,000 2,847,223 Clay County Housing Finance Authority Revenue, SFMR, GNMA Secured, 4/01/33 ..................... 3,980,000 491,769 Dade County Guaranteed Entitlement Revenue, Capital Appreciation, AMBAC Insured, Pre-Refunded, 8/01/18 ....................................................................................... 17,020,000 6,052,993 Duval County Housing Finance Authority SFMR, Capital Appreciation, GNMA Secured, 10/01/32 ...... 3,850,000 489,874 Florida HFC Revenue, Capital Appreciation, Homeowner Mortgage, Series 4, FSA Insured, 7/01/30 .................... 10,000,000 1,479,700 Deferred Interest, Homeowner Mortgage, Series 1, MBIA Insured, 7/01/17 ...................... 3,005,000 1,340,861 Deferred Interest, Homeowner Mortgage, Series 2, MBIA Insured, 1/01/29 ...................... 48,595,000 10,430,431 Florida State Mid-Bay Bridge Authority Revenue, Series A, AMBAC Insured, 10/01/25 .................................................................................... 9,845,000 2,702,649 10/01/26 .................................................................................... 2,500,000 648,125
82 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FLORIDA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT ZERO COUPON BONDS (CONT.) Fort Pierce Utilities Authority Revenue, Capital Appreciation, Series B, AMBAC Insured, 10/01/20 ................................................................................... $ 3,090,000 $ 1,188,816 10/01/21 ................................................................................... 2,585,000 948,281 10/01/22 ................................................................................... 3,090,000 1,068,306 10/01/23 ................................................................................... 3,060,000 998,386 10/01/24 ................................................................................... 2,560,000 782,592 Hillsborough County HFA Mortgage Revenue, SF, Series A, GNMA Secured, 4/01/32 ................. 3,170,000 501,843 Lakeland Electric and Water Revenue, Capital Appreciation, ETM, 10/01/14 ...................... 5,770,000 3,233,393 Melbourne Water and Sewer Revenue, Capital Appreciation, FGIC Insured, ETM, 10/01/26 .......... 1,500,000 408,900 Miami-Dade County Special Obligation, sub. lien, Refunding, Series A, MBIA Insured, 10/01/25 ..................................... 22,365,000 6,111,235 Sub Series B, MBIA Insured, 10/01/36 ....................................................... 5,635,000 801,917 Sub Series C, MBIA Insured, 10/01/28 ....................................................... 8,305,000 1,890,384 Palm Beach County HFAR, Capital Appreciation, Refunding, Series A-1, FNMA Insured, 4/01/32 .... 5,655,000 815,790 Pinellas County HFA, SFHMR, Multi County B-1, GNMA Secured, 9/01/31 ........................... 2,525,000 374,483 Port Everglades Authority Port Improvement Revenue, Capital Appreciation, 9/01/10 .............................................................. 24,525,000 16,949,470 Capital Appreciation, ETM, 9/01/10 ......................................................... 25,475,000 17,826,640 Refunding, Series A, 9/01/02 ............................................................... 10,575,000 10,485,324 Refunding, Series A, 9/01/03 ............................................................... 9,075,000 8,800,935 Refunding, Series A, 9/01/04 ............................................................... 3,550,000 3,328,940 Port St. Lucie Utility Revenue, MBIA Insured, 9/01/29 ......................................... 20,000,000 4,084,200 Sarasota Special Obligated Revenue, Refunding, AMBAC Insured, 11/01/09 ................................................................................... 1,365,000 995,208 11/01/12 ................................................................................... 1,780,000 1,106,695 11/01/15 ................................................................................... 2,180,000 1,134,580 -------------- TOTAL ZERO COUPON BONDS ....................................................................... 111,423,918 -------------- TOTAL LONG TERM INVESTMENTS (COST $1,604,021,985) ............................................. 1,701,249,706 -------------- a SHORT TERM INVESTMENTS .3% Jacksonville Revenue, YMCA Florida First Coast Project, Weekly VRDN and Put, 1.20%, 3/01/18 ... 120,000 120,000 Orange County School Board COP, Series B, Daily VRDN and Put, 1.25%, 8/01/25 .................. 5,300,000 5,300,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ............................................................................... 135,000 135,000 -------------- TOTAL SHORT TERM INVESTMENTS (COST $5,555,000) ................................................ 5,555,000 -------------- TOTAL INVESTMENTS (COST $1,609,576,985) 98.6% ................................................. 1,706,804,706 OTHER ASSETS, LESS LIABILITIES 1.4% ........................................................... 24,911,787 -------------- NET ASSETS 100.0% ............................................................................. $1,731,716,493 ==============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 83 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN GEORGIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, -------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................. $11.73 $11.03 $12.07 $12.12 $11.86 -------------------------------------------------- Income from investment operations: Net investment income a ............................................ .57 .59 .59 .61 .63 Net realized and unrealized gains (losses) ......................... .14 .70 (1.03) .01 .27 -------------------------------------------------- Total from investment operations .................................... .71 1.29 (.44) .62 .90 -------------------------------------------------- Less distributions from: Net investment income .............................................. (.58) (.59) (.60) (.61) (.64) Net realized gains ................................................. -- -- -- c (.06) -- -------------------------------------------------- Total distributions ................................................. (.58) (.59) (.60) (.67) (.64) -------------------------------------------------- Net asset value, end of year ........................................ $11.86 $11.73 $11.03 $12.07 $12.12 ================================================== Total return b ...................................................... 6.15% 11.93% (3.71)% 5.22% 7.75% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................................... $169,489 $163,352 $151,670 $164,669 $149,642 Ratios to average net assets: Expenses ........................................................... .75% .76% .75% .76% .76% Net investment income .............................................. 4.83% 5.15% 5.14% 5.00% 5.28% Portfolio turnover rate ............................................. 19.66% 18.67% 46.90% 12.84% 14.77% CLASS C ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................. $11.81 $11.10 $12.15 $12.19 $11.92 -------------------------------------------------- Income from investment operations: Net investment incomea ............................................. .51 .53 .53 .54 .57 Net realized and unrealized gains (losses) ......................... .13 .71 (1.05) .02 .27 -------------------------------------------------- Total from investment operations .................................... .64 1.24 (.52) .56 .84 -------------------------------------------------- Less distributions from: Net investment income .............................................. (.51) (.53) (.53) (.54) (.57) Net realized gains ................................................. -- -- -- c (.06) -- -------------------------------------------------- Total distributions ................................................. (.51) (.53) (.53) (.60) (.57) -------------------------------------------------- Net asset value, end of year ........................................ $11.94 $11.81 $11.10 $12.15 $12.19 ================================================== Total returnb ....................................................... 5.52% 11.36% (4.32)% 4.70% 7.19% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................................... $24,672 $16,780 $14,811 $17,277 $9,107 Ratios to average net assets: Expenses ........................................................... 1.30% 1.31% 1.30% 1.31% 1.32% Net investment income .............................................. 4.29% 4.60% 4.58% 4.45% 4.72% Portfolio turnover rate ............................................. 19.66% 18.67% 46.90% 12.84% 14.77%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c The fund made a capital gain distribution of $.002. See notes to financial statements. 84 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.8% Albany Sewer System Revenue, MBIA Insured, 5.00%, 7/01/22 ...................................... $ 2,035,000 $ 2,041,838 Atlanta Airport Facilities Revenue, Refunding, Series A, FGIC Insured, 5.50%, 1/01/26 ........................................... 5,000,000 5,183,950 Refunding, Series A, FGIC Insured, 5.60%, 1/01/30 ........................................... 5,000,000 5,183,050 Series B, AMBAC Insured, 6.00%, 1/01/21 ..................................................... 575,000 609,558 Series B, AMBAC Insured, Pre-Refunded, 6.00%, 1/01/21 ....................................... 525,000 578,655 Atlanta and Fulton County Recreation Authority Revenue, AMBAC Insured, 5.50%, 12/01/20 ......... 1,500,000 1,580,715 Atlanta Development Authority Revenue, Yamacraw Design Center Project, Series A, MBIA Insured, 5.125%, 1/01/23 ...................................................................... 4,150,000 4,248,231 Atlanta Downtown Development Authority Revenue, Underground Atlanta Project, Refunding, 6.25%, 10/01/16 ............................................................................... 2,000,000 2,087,980 Atlanta GO, Series A, Pre-Refunded, 6.125%, 12/01/23 ........................................... 2,000,000 2,245,140 Atlanta HDC, Mortgage Revenue, Oakland City/West, Refunding, Series A, FHA Insured, 6.375%, 3/01/23 ............................................................................... 1,480,000 1,523,527 Atlanta Urban Residential Finance Authority MFHR, Defoors Ferry Manor Project, 5.90%, 10/01/18 ................................................ 1,700,000 1,782,790 Fulton Cotton Mill, GNMA Secured, 6.00%, 5/20/17 ............................................ 1,040,000 1,097,054 Fulton Cotton Mill, GNMA Secured, 6.125%, 5/20/27 ........................................... 1,560,000 1,615,349 Atlanta Water and Wastewater Revenue, Series A, FGIC Insured, 5.00%, 11/01/29 ............................................................................. 905,000 898,231 Pre-Refunded, 5.00%, 11/01/29 ............................................................... 1,095,000 1,189,980 Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.25%, 12/01/22 ............................................................................. 2,500,000 2,169,500 5.375%, 12/01/28 ............................................................................ 2,000,000 1,725,560 Barnesville Water and Sewer Revenue, 6.85%, 9/01/17 ............................................ 1,000,000 1,026,520 Brunswick and Glynn County Development Authority Revenue, Georgia Pacific Project, Refunding, 5.55%, 3/01/26 ................................................................................ 4,000,000 3,416,680 Carroll City County Hospital Authority Revenue Anticipation Certificate, Tanner Medical Center Inc. Project, AMBAC Insured, 5.00%, 7/01/28 ................................................... 1,000,000 985,530 Cherokee County Water and Sewage Authority Revenue, MBIA Insured, 6.90%, 8/01/18 ............... 10,000 10,266 Clayton County Development Authority Revenue, Gateway Village Project, Series A, 6.00%, 8/01/23 ................................................................................ 3,500,000 3,817,415 Clayton County Housing Authority MFHR, (b)Southlake Cove Project A, GNMA Collateral, 5.60%, 12/20/24 ................................ 2,000,000 2,047,180 Vineyard Pointe, Series A, GNMA Secured, 5.50%, 10/20/32 .................................... 1,485,000 1,507,884 Clayton County MFHR, Pointe Clear Apartments Project, FSA Insured, 5.70%, 7/01/23 .............. 995,000 1,025,507 Cobb County Kennestone Hospital Authority Revenue, Series A, MBIA Insured, ETM, 7.75%, 2/01/07 . 85,000 96,047 College Park Business and IDAR, Civic Center Project, AMBAC Insured, 5.75%, 9/01/26 ............ 2,000,000 2,155,140 Columbia County GO, Courthouse/Detention Center Projects, 5.00%, 2/01/24 ....................... 2,000,000 1,986,740 Conyers Water and Sewer Revenue, Series A, AMBAC Insured, ETM, 6.60%, 7/01/15 .................. 1,000,000 1,100,210 De Kalb County Housing Authority MFHR, Castaway Apartments, Series A, GNMA Insured, 5.40%, 2/20/29 ....................................................................................... 3,065,000 3,056,725 De Kalb County Water and Sewer Revenue, 5.125%, 10/01/31 ....................................... 5,000,000 5,009,150 Fayette County PFAR, Criminal Justice Center Project, Refunding, 5.00%, 6/01/26 ..................................................................................... 3,000,000 2,983,080 6/01/30 ..................................................................................... 3,000,000 2,963,970 Fitzgerald Housing Authority Mortgage Revenue, Bridge Creek, Refunding, Series A, MBIA Insured, 6.50%, 7/01/24 .................................................................. 910,000 923,568 Forsyth County GO, 5.75%, 2/01/19 .............................................................. 1,500,000 1,609,995 Fulton County Building Authority Revenue, Human Resources and Government Facilities Program, 7.10%, 1/01/15 ........................... 750,000 758,430 Judicial Center Facilities Project, Refunding, 6.50%, 1/01/15 ............................... 1,000,000 1,014,910 Fulton County Development Authority Revenue, Georgia Tech Foundation, Sac II Project, Series A 5.25%, 11/01/30 ...................................................................... 5,000,000 5,037,300 Fulton County Development Authority Special Facilities Revenue, Delta Airlines Inc. Project, 5.45%, 5/01/23 ................................................................................ 1,000,000 788,560 Gainesville and Hall County Hospital Authority Revenue, Anticipation Certificates, Northeast Health System Inc. Project, Refunding, 5.50%, 5/15/31 ......................................... 2,500,000 2,442,950 Georgia Municipal Association Inc. COP, City Court Atlanta Project, AMBAC Insured, 5.25%, 12/01/26 ...................................................................................... 2,000,000 2,032,100 Georgia Municipal Electric Authority Power Revenue, Series W, 6.60%, 1/01/18 .............................................................................. 955,000 1,148,703 Pre-Refunded, 6.60%, 1/01/18 ................................................................ 45,000 54,296 Georgia Municipal Gas Authority Gas Revenue, City of Toccoa Project, AMBAC Insured, 5.00%, 6/01/24 ....................................................................................... 1,000,000 997,260 Georgia Private Colleges and Universities Authority Student Housing Revenue, Mercer Housing Corp. Project, Series A, 6.00%, 6/01/24 ....................................................... 2,550,000 2,540,412
85 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) Georgia State HFAR, Homeownership Opportunity Program, Series A-1, 6.75%, 6/01/17 ............................... $ 2,140,000 $ 2,188,214 Homeownership Opportunity Program, Series C, 6.60%, 12/01/23 ................................ 320,000 329,312 MF, Club Candlewood Project, FSA Insured, Pre-Refunded, 7.15%, 1/01/25 ...................... 1,000,000 1,162,530 MF, Lake Vista Apartments Project, Series A, FSA Insured, 5.95%, 1/01/27 .................... 1,000,000 1,038,460 SF, Sub Series C-2, 5.95%, 12/01/31 ......................................................... 4,975,000 5,121,215 SFM, Series B, Sub Series B-2, 6.15%, 12/01/28 .............................................. 1,000,000 1,027,460 SFM, Sub Series B-2, 5.85%, 12/01/28 ........................................................ 2,820,000 2,900,032 Gwinnett County Hospital Authority Revenue Anticipation Certificates, Gwinnett Hospital Systems Inc. Project, Series B, MBIA Insured, 5.30%, 9/01/27 .................................. 3,750,000 3,750,000 Henry County Hospital Authority Revenue, Henry Medical Center Inc. Project, Refunding, AMBAC Insured, 6.00%, 7/01/29 ................................................................. 5,000,000 5,424,150 Hogansville Combined Public Utility System Revenue, Refunding, FSA Insured, 6.00%, 10/01/23 3,300,000 3,784,737 Marietta Development Authority Revenue, First Mortgage, Life College Inc., Refunding, Series A, FSA Insured, 5.75%, 9/01/14 ............................................ 1,800,000 1,913,544 Refunding, Series A, FSA Insured, 5.80%, 9/01/19 ............................................ 1,100,000 1,163,426 Refunding, Series A, FSA Insured, 5.95%, 9/01/19 ............................................ 1,000,000 1,065,800 Series B, FSA Insured, 5.75%, 9/01/14 ....................................................... 800,000 851,000 Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus Regional Healthcare System, MBIA Insured, 5.50%, 8/01/25 ............................................... 7,000,000 7,238,490 Meriwether County PFAR, Meriwether County Schools Project, MBIA Insured, 5.85%, 10/01/26 ....... 1,000,000 1,059,870 Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Series A, MBIA Insured, Pre-Refunded, 6.90%, 7/01/20 .................................................................. 5,930,000 6,670,064 Monroe County Development Authority PCR, Oglethorpe Power Co., Scherer Project, Refunding, Series A, 6.80%, 1/01/12 ...................................................................... 1,500,000 1,779,210 Newton County Hospital Authority Revenue, Newton Health System Project 1999, AMBAC Insured, 6.10%, 2/01/24 ....................................................................... 4,500,000 4,899,375 Private Colleges and Universities Authority Revenue, Emory University Project, Series A, 5.50%, 11/01/25 ......................................... 10,000,000 10,375,600 Mercer University Project, Refunding, Series A, 5.25%, 10/01/25 ............................. 2,500,000 2,496,550 Mercer University Project, Series A, AMBAC Insured, 5.375%, 10/01/29 ........................ 2,000,000 2,012,560 Puerto Rico Commonwealth GO, Public Improvement, Refunding, 5.375%, 7/01/25 .................... 2,000,000 2,017,780 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.90%, 7/01/07 .............................................................................. 15,000 15,062 7.50%, 7/01/09 .............................................................................. 5,000 5,015 Puerto Rico Electric Power Authority Revenue, Refunding, Series U, 6.00%, 7/01/14 ......................................................... 1,000,000 1,060,960 Series T, 6.00%, 7/01/16 .................................................................... 1,000,000 1,057,520 Richmond County Development Authority, Solid Waste Disposal Revenue, International Paper Co. Project, 5.80%, 12/01/20 ...................................................................... 1,500,000 1,503,555 Rockdale County Water and Sewer Authority Revenue, Refunding, Series A, MBIA Insured, 5.375%, 7/01/29 ............................................................................... 5,000,000 5,132,050 Savannah EDA, IDR, Hershey Foods Corp. Project, Refunding, 6.60%, 6/01/12 ...................... 1,000,000 1,025,500 Savannah Hospital Authority Revenue, St. Joseph's Hospital Project, Pre-Refunded, 6.20%, 7/01/23 ....................................................................................... 2,000,000 2,156,240 Savannah Port Authority PCR, Union Carbide Plastic Co. Inc., Refunding, 7.55%, 8/01/04 ......... 4,600,000 4,631,555 St. Mary's Housing Authority MFMR, Cumberland Oaks Apartments, Refunding, Series A, FHA Insured, 7.375%, 9/01/22 ............... 500,000 502,960 Pine Apartments, Series C, FHA Insured, 7.375%, 4/01/22 ..................................... 700,000 702,912 Upper Oconee Basin Water Authority Revenue, FGIC Insured, 5.25%, 7/01/27 ....................... 1,550,000 1,568,630 Valdosta and Lowndes County Hospital Authority Revenue, Certificates, South Georgia Medical Center Project, AMBAC Insured, 5.25%, 10/01/27 ................................................ 3,000,000 3,020,580 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.40%, 10/01/12 ............................................................................. 850,000 897,932 5.50%, 10/01/22 ............................................................................. 1,200,000 1,207,272 5.625%, 10/01/25 ............................................................................ 1,530,000 1,556,454 Walker, Dade and Catoosa Counties Hospital Authority Revenue, Series A, FGIC Insured, Pre-Refunded, 7.00%, 10/01/10 ................................................................. 1,500,000 1,536,045 Walton County Water and Sewer Authority Revenue, Refunding and Improvement, MBIA Insured, 6.00%, 2/01/21 ................................................................................ 50,000 812,295 Ware County Hospital Authority Revenue, Anticipation Certificates, MBIA Insured, 5.25%, 3/01/25 ....................................................................................... 3,000,000 3,037,470 White County IDAR, Springs Industries Inc., Refunding, 6.85%, 6/01/10 .......................... 1,780,000 1,823,895 ------------- TOTAL LONG TERM INVESTMENTS (COST $183,712,943) 191,820,917 -------------
86 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN GEORGIA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- aSHORT TERM INVESTMENTS .9% Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 1.25%, 11/01/41 ..................................................................................... $ 1,200,000 $ 1,200,000 Burke County Development Authority PCR, Georgia Power Co. Plant Vogtle, 1st Series, Daily VRDN and Put, 1.40%, 4/01/32 ................................................................. 300,000 300,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ................................................................. 200,000 200,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $1,700,000) ................................................ 1,700,000 ------------ TOTAL INVESTMENTS (COST $185,412,943) 99.7% ................................................... 193,520,917 OTHER ASSETS, LESS LIABILITIES .3% ............................................................ 640,385 ------------ NET ASSETS 100.0% ............................................................................. $194,161,302 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principle balance plus accrued interest at specified dates. b Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. See notes to financial statements. 87 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN KENTUCKY TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, ------------------------------------------------------ 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................. $11.03 $10.42 $11.47 $11.45 $11.05 ------------------------------------------------------ Income from investment operations: Net investment income a ........................................... .55 .57 .58 .59 .61 Net realized and unrealized gains (losses) ........................ .10 .61 (1.04) .03 .40 ------------------------------------------------------ Total from investment operations ................................... .65 1.18 (.46) .62 1.01 ------------------------------------------------------ Less distributions from net investment income ...................... (.55) (.57) (.59) (.60) (.61) ------------------------------------------------------ Net asset value, end of year ....................................... $11.13 $11.03 $10.42 $11.47 $11.45 ====================================================== Total return b ..................................................... 6.08% 11.65% (4.13)% 5.51% 9.38% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................... $96,299 $76,369 $63,964 $64,516 $54,211 Ratios to average net assets: Expenses .......................................................... .52% .45% .45% .42% .35% Expenses excluding waiver and payments by affiliates .............. .82% .82% .81% .81% .81% Net investment income ............................................. 4.96% 5.34% 5.31% 5.12% 5.40% Portfolio turnover rate ............................................ 6.07% 12.80% 16.31% 10.49% 26.61%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 88 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 97.8% BONDS 96.6% Ashland PCR, Ashland Oil Inc. Project, Refunding, 6.65%, 8/01/09 ................................ $ 700,000 $ 719,810 Ashland Solid Waste Revenue, Ashland Oil Inc. Project, 7.20%, 10/01/20 .......................... 1,000,000 1,012,220 Boone County PCR, Dayton Power and Light Co., Collateralized, Refunding, Series A, 6.50%, 11/15/22 ....................................................................................... 710,000 730,093 Boone Florence Water Commission Water Supply Systems Revenue, Refunding, FGIC Insured, 5.00%, 12/01/22 ....................................................................................... 1,200,000 1,199,904 Bowling Green ISD, Finance Corp. School Building Revenue, 5.75%, 1/01/20 ........................ 1,140,000 1,216,220 Campbell and Kenton Counties Sanitation, District No., Sanitation District Revenue, Series A, FSA Insured, 5.00%, 8/01/19 ...................................................................................... 1,500,000 1,514,475 8/01/24 ...................................................................................... 2,000,000 1,978,640 Carroll County PCR, Kentucky Utilities Co. Project, Collateralized, Series B, 6.25%, 2/01/18 .... 325,000 331,806 Christian County Hospital Revenue, Jennie Stuart Medical Center, Series A, 6.00%, 7/01/17 ....... 1,000,000 1,026,840 Christian County Public Courthouse Corp. Lease Revenue, District Court Facilities Project, 5.125%, 8/01/20 ................................................................................ 1,015,000 1,028,439 Danville Multi-City Lease Revenue, Campbellsville, Series B, MBIA Insured, 6.15%, 7/01/12 ....................................... 1,500,000 1,643,850 Shelbyville, Series H, MBIA Insured, 6.70%, 7/01/11 .......................................... 100,000 103,528 Daviess County Hospital Revenue, Odch Inc., Series A, MBIA Insured, 6.25%, 8/01/12 ...................................................................................... 100,000 103,983 8/01/22 ...................................................................................... 210,000 218,364 Elizabethtown Public Properties Holding Inc. Revenue, First Mortgage, Administrative Office of the Courts, Judicial Facilities Project, MBIA Insured, 5.20%, 4/01/22 ....................... 2,000,000 2,024,880 Fayette County School District Finance Corp. School Building Revenue, 5.50%, 9/01/18 ............................................................................... 2,500,000 2,629,725 Series A, AMBAC Insured, 5.25%, 4/01/20 ...................................................... 2,160,000 2,216,506 Greater Kentucky Housing Assistance Corp. Mortgage Revenue, Section 8 Assisted Projects, Refunding, Series A, MBIA Insured, 6.10%, 1/01/24 ................................................................................. 1,805,000 1,816,733 Guam Airport Authority Revenue, Series A, 6.50%, 10/01/23 ....................................... 400,000 412,532 Guam Power Authority Revenue, Series A, Pre-Refunded, 6.30%, 10/01/22 ........................... 225,000 235,924 Hancock County Solid Waste Disposal Revenue, Willamette Industries Inc. Project, 6.60%, 5/01/26 ........................................................................................ 1,000,000 1,054,030 Hardin County School District Finance Corp. School Building Revenue, 5.75%, 2/01/20 ............. 1,500,000 1,602,045 Hardin County Water District No. 2 Water System Revenue, Series A, AMBAC Insured, 5.00%, 1/01/31 ........................................................................................ 2,620,000 2,568,831 Henry County Water District No. 2 Water Revenue, Refunding, MBIA Insured, 4.75%, 1/01/28 ........ 2,035,000 1,924,866 Hopkins County Hospital Revenue, Trover Clinic Foundation Inc., MBIA Insured, 6.625%, 11/15/11 .. 125,000 127,875 Jefferson County Health Facilities Revenue, Jewish Hospital Healthcare Services Inc., AMBAC Insured, 6.50%, 5/01/15 ................................................................ 750,000 770,048 AMBAC Insured, 6.55%, 5/01/22 ................................................................ 720,000 739,303 Refunding, AMBAC Insured, 5.75%, 1/01/26 ..................................................... 1,000,000 1,049,300 Jefferson County MFHR, Watterson Park Apartments Project, Series A, 6.35%, 11/15/11 ............. 1,930,000 2,011,002 Jefferson County PCR, DuPont, Series A, 6.30%, 7/01/12 .......................................... 450,000 475,079 Jefferson County School District Financial Corp. School Building Revenue, Series A, FSA Insured, 5.25%, 7/01/18 ................................................................................. 1,500,000 1,552,260 Jessamine County School District Finance Corp. School Building Revenue, 5.50%, 1/01/21 .......... 2,500,000 2,592,175 Kenton County Airport Board Revenue, Cincinnati/Northern Kentucky International Airport, Series B, MBIA Insured, 5.75%, 3/01/13 ...... 1,230,000 1,304,772 Special Facilities, Delta Airlines Inc. Project, Series A, 7.50%, 2/01/20 ...................... 445,000 441,493 Special Facilities, Delta Airlines Inc. Project, Series A, 7.125%, 2/01/21 ..................... 325,000 313,391 Special Facilities, Delta Airlines Inc. Project, Series B, 7.25%, 2/01/22 ...................... 445,000 438,970 Kentucky Area Development Districts Financing Trust Lease Program Revenue, City of Ewing, Series C, 6.00%, 6/01/30 ...................................................... 1,285,000 1,331,607 City of Ewing, Series E, 5.70%, 6/01/22 ...................................................... 1,000,000 1,053,020 Ewing Acquisition, 6.00%, 6/01/30 ............................................................ 2,000,000 2,072,540 Kentucky Development Finance Authority Hospital Revenue, St. Elizabeth Medical Center, Refunding and Improvement, Series A,FGIC Insured, 6.00%, 11/01/10 .............................. 750,000 754,523 Kentucky Economic Development Finance Authority Hospital Facilities Revenue, St. Elizabeth Medical Center Project, Series A, FGIC Insured, 6.00%, 12/01/22 ................................ 625,000 677,081 Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 ............................ 2,000,000 1,582,840 Kentucky Economic Development Finance Authority Medical Center Revenue, Ashland Hospital Corp., Refunding and Improvement, Series A, FSA Insured, 6.125%, 2/01/12 ....................... 500,000 527,200
89 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Kentucky Economic Development Finance Authority Revenue, Catholic Health Project, Refunding and Improvement, Series A, 5.00%, 12/01/18 ..................................................... $2,000,000 $ 1,938,100 Kentucky HFC Revenue, Refunding, Series A, 6.375%, 7/01/28 ......................................................... 555,000 575,191 Series B, 6.25%, 7/01/28 ..................................................................... 1,280,000 1,323,443 Series C, FHA Insured, 6.40%, 1/01/17 ........................................................ 910,000 950,277 SFMR, Series A, 6.60%, 7/01/11 ............................................................... 20,000 20,505 SFMR, Series B, 6.60%, 7/01/11 ............................................................... 150,000 153,785 SFMR, Series D, FHA Insured, 7.45%, 1/01/23 .................................................. 5,000 5,063 Kentucky Infrastructure Authority Revenue, Infrastructure Revolving Fund Program, Series J, Pre-Refunded, 6.375%, 6/01/14 ............... 500,000 564,925 Series A, 5.00%, 6/01/19 ..................................................................... 1,140,000 1,147,456 Series A, 5.00%, 6/01/20 ..................................................................... 1,250,000 1,253,575 Series A, 5.00%, 6/01/21 ..................................................................... 1,190,000 1,188,453 Kentucky Rural Water Finance Corp. Public Project Revenue, Flexible Term Program, Series A, 5.00%, 2/01/26 ................................................................................. 1,055,000 1,041,907 Kentucky State Property and Buildings Commission Revenues, Project No. 56, Pre-Refunded, 6.00%, 9/01/14 ................................................. 700,000 776,797 Project No. 62, Refunding, 2nd Series, 5.25%, 10/01/18 ....................................... 3,540,000 3,653,280 Project No. 64, MBIA Insured, 5.50%, 5/01/17 ................................................. 1,535,000 1,612,088 Refunding, Project No. 69, Series A, FSA Insured, 5.00%, 8/01/21 ............................. 2,300,000 2,305,037 Lexington-Fayette Urban County Government Revenue, University of Kentucky Library Project, MBIA Insured, Pre-Refunded, 6.625%, 11/01/13 ............................................................................. 500,000 565,765 6.75%, 11/01/24 .............................................................................. 750,000 851,055 Louisville and Jefferson County Metropolitan Sewer District Sewer and Drain System Revenue, Series A, AMBAC Insured, Pre-Refunded, 6.75%, 5/15/25 ........................................ 300,000 340,908 FGIC Insured, 5.00%, 5/15/30 ................................................................. 2,750,000 2,700,830 Louisville Waterworks Board Water System Revenue, Louisville Water Co., FSA Insured, 5.50%, 11/15/25 ................................................................. 2,000,000 2,065,380 Refunding, FSA Insured, 5.25%, 11/15/24 ...................................................... 2,500,000 2,529,375 McCracken County Hospital Revenue, Mercy Health System, Refunding, Series A, MBIA Insured, 6.40%, 11/01/07 ................................................................................ 500,000 554,750 Northern Kentucky Water Service District Revenue, MBIA Insured, 4.875%, 2/01/20 ................. 1,270,000 1,257,224 Pendleton County Multi-County Lease Revenue, Kentucky Association of Counties Leasing Trust, Series A, 6.50%, 3/01/19 ................................................................ 1,050,000 1,086,141 Puerto Rico Commonwealth GO, Pre-Refunded, 6.45%, 7/01/17 ................................................................. 430,000 480,085 Public Improvement, Refunding, FSA Insured, 5.125%, 7/01/30 .................................. 2,000,000 2,021,280 Public Improvement, Series A, 5.125%, 7/01/31 ................................................ 5,000,000 4,928,700 Puerto Rico Industrial Medical and Environmental Pollution Control Facilities Financing Authority Revenue, Special Facilities, American Airlines Project, Series A, 6.45%, 12/01/25 .... 1,480,000 1,220,052 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.25%, 7/01/36 ............ 1,450,000 1,451,030 Russell Health System Revenue, Our Lady of Bellefonte, Pre-Refunded, 5.50%, 7/01/15 ......................................... 800,000 880,720 Pre-Refunded, 8.10%, 7/01/15 ................................................................. 205,000 242,132 Pre-Refunded, 8.10%, 7/01/15 ................................................................. 145,000 176,184 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.625%, 10/01/25 ........ 2,000,000 2,034,580 ----------- TOTAL BONDS ...................................................................................... 93,024,796 ----------- ZERO COUPON BONDS 1.2% Kentucky Economic Development Finance Authority Revenue, Norton Healthcare Inc., MBIA Insured, Series C, zero cpn to 10/01/05, 6.15% thereafter, 10/01/24 ..................... 405,000 344,200 Series C, MBIA Insured, zero cpn to 10/01/05, 6.15% thereafter, 10/01/25 ..................... 935,000 795,460 ----------- TOTAL ZERO COUPON BONDS ......................................................................... 1,139,660 ----------- TOTAL LONG TERM INVESTMENTS (COST $91,739,563) .................................................. 94,164,456 -----------
90 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN KENTUCKY TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------- aSHORT TERM INVESTMENTS .8% Kentucky Area Development Districts Financing Trust Lease Program Revenue, Ewing Acquisition Project, Weekly VRDN and Put, 1.30%, 6/01/33 .................................................. $ 200,000 $ 200,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .................................................................. 200,000 200,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ............................................ 400,000 400,000 ----------- TOTAL SHORT TERM INVESTMENTS (COST $800,000) ................................................... 800,000 ----------- TOTAL INVESTMENTS (COST $92,539,563) 98.6% ..................................................... 94,964,456 OTHER ASSETS, LESS LIABILITIES 1.4% ............................................................ 1,334,468 ----------- NET ASSETS 100.0% .............................................................................. $96,298,924 ===========
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 91 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN LOUISIANA TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, -------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................. $11.22 $10.55 $11.59 $11.61 $11.32 -------------------------------------------------- Income from investment operations: Net investment income a ............................................ .56 .58 .58 .60 .63 Net realized and unrealized gains (losses) ......................... .16 .67 (1.03) (.01) .30 -------------------------------------------------- Total from investment operations .................................... .72 1.25 (.45) .59 .93 -------------------------------------------------- Less distributions from net investment income ....................... (.56) (.58) (.59) (.61) (.64) -------------------------------------------------- Net asset value, end of year ........................................ $11.38 $11.22 $10.55 $11.59 $11.61 ================================================== Total return b ...................................................... 6.73% 12.05% (3.93)% 5.23% 8.46% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................................... $167,909 $154,750 $144,299 $158,099 $134,922 Ratios to average net assets: Expenses ........................................................... .74% .74% .74% .75% .76% Net investment income .............................................. 4.99% 5.32% 5.29% 5.14% 5.50% Portfolio turnover rate ............................................. 10.05% 8.63% 27.31% 14.99% 15.26% CLASS C ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................. $11.29 $10.62 $11.66 $11.68 $11.37 -------------------------------------------------- Income from investment operations: Net investment income a ............................................ .51 .52 .53 .54 .57 Net realized and unrealized gains (losses) ......................... .17 .67 (1.04) (.01) .32 -------------------------------------------------- Total from investment operations .................................... .68 1.19 (.51) .53 .89 -------------------------------------------------- Less distributions from net investment income ....................... (.50) (.52) (.53) (.55) (.58) -------------------------------------------------- Net asset value, end of year ........................................ $11.47 $11.29 $10.62 $11.66 $11.68 ================================================== Total return b ...................................................... 6.18% 11.46% (4.45)% 4.61% 8.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................................... $16,047 $12,424 $10,730 $9,982 $4,469 Ratios to average net assets: Expenses ........................................................... 1.29% 1.29% 1.29% 1.31% 1.32% Net investment income .............................................. 4.44% 4.77% 4.74% 4.58% 4.95% Portfolio turnover rate ............................................. 10.05% 8.63% 27.31% 14.99% 15.26%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 92 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.0% BONDS 96.6% Bastrop PCR, International Paper Co. Project, Refunding, 6.90%, 3/01/07 ..................... $ 500,000 $ 510,000 Bossier City Public Improvement Sales and Use Tax Revenue, FGIC Insured, 5.00%, 12/01/19 ............................................................ 1,145,000 1,151,355 Refunding, FGIC Insured, 5.00%, 12/01/21 ................................................. 1,875,000 1,874,850 Refunding, FGIC Insured, 5.00%, 12/01/22 ................................................. 1,515,000 1,512,940 Calcasieu Parish Public Trust Authority Mortgage Revenue, Refunding, Series A, 7.75%, 6/01/12 ................................................................. 180,000 183,983 Series B, 6.875%, 11/01/12 ............................................................... 430,000 445,566 Calcasieu Parish Public Trust Authority SFMR, Series A, GNMA Secured, 6.40%, 4/01/32 ........ 225,000 233,125 Calcasieu Parish Public Trust Authority Student Lease Revenue, McNesse Student Housing Project, MBIA Insured, 5.25%, 5/01/21 .................................................................................. 1,505,000 1,534,573 5/01/33 .................................................................................. 2,500,000 2,523,350 De Soto Parish Environmental Improvement Revenue, International Paper Co. Project, Series A, 7.70%, 11/01/18 .......................................................................... 1,500,000 1,612,500 5.65%, 12/01/21 .......................................................................... 1,000,000 972,110 De Soto Parish PCR, Cleco Utility Group Inc. Project, Refunding, AMBAC Insured, 5.875%, 9/01/29 .................................................................................... 11,500,000 12,288,670 Denham Spring Livingston Housing and Mortgage Finance Authority SFHR, Series A, FHA Insured, ETM, 7.20%, 8/01/10 ........................................................................ 1,380,000 1,687,009 East Baton Rouge Mortgage Finance Authority Revenue, SFM Purchase, Refunding, Series A, 6.10%, 10/01/29 ............................................................................ 925,000 956,765 East Baton Rouge Parish PCR, Georgia-Pacific Corp. Project, Refunding, 5.50%, 4/01/09 ....... 2,000,000 1,972,320 East Baton Rouge Parish Sales and Use Tax Revenue, Public Improvement, Series ST, FGIC Insured, 5.00%, 2/01/20 .............................. 1,000,000 1,003,290 Series ST, FGIC Insured, 5.90%, 2/01/18 .................................................. 750,000 791,933 Jefferson Parish School Board Sales and Use Tax Revenue, Series A, ETM, 7.35%, 2/01/03 ...... 500,000 525,825 Jefferson Sales Tax District Special Sales Tax Revenue, Refunding, FSA Insured, 5.00%, 12/01/22 .................................................. 4,500,000 4,493,880 Special Tax Bond, AMBAC Insured, 5.00%, 12/01/20 ......................................... 4,195,000 4,207,501 Lafayette Public Trust Financing Authority SFMR, Series A, ETM, 7.20%, 4/01/11 .............. 30,000 36,858 Lafourche Parish Home Mortgage Authority SFMR, ETM, 7.40%, 7/01/10 .......................... 90,000 103,564 Lake Charles Harbor and Terminal District Port Facilities Revenue, Occidental Petroleum Corp., Refunding, 7.20%, 12/01/20 ................................................................. 3,000,000 3,106,830 Louisiana HFA, Mortgage Revenue, MF, Refunding, Series A, FHA Insured, 7.00%, 7/01/22 ..................................... 2,795,000 2,806,236 MF, Westview Project, 7.80%, 4/01/30 ..................................................... 750,000 765,518 SF, Series A-1, GNMA Secured, 5.45%, 12/01/20 ............................................ 1,850,000 1,882,079 Louisiana Local Government Environmental Facilities CDA Revenue, Parking Facilities Corp. Garage Project, Series A, AMBAC Insured, 5.375%, 10/01/26 .................................. 2,000,000 2,042,680 Louisiana Local Government Environmental Facilities CDAR, Delgado Community College Foundation Project, MBIA Insured, 6.00%, 10/01/29 .............. 1,000,000 1,088,690 Jefferson Parking Garage Project, AMBAC Insured, 5.00%, 9/01/21 .......................... 2,715,000 2,714,973 Louisiana Local Government Environmental Facility Revenue, Baton Rouge Apartments, Series A, MBIA Insured, 6.375%, 1/01/30 .............................................................. 4,265,000 4,558,261 Louisiana Public Facilities Authority Hospital Revenue, Franciscan Missionaries, Series C, MBIA Insured, 5.00%, 7/01/19 .......................... 3,750,000 3,741,113 Pendleton Memorial Methodist, Refunding, 5.25%, 6/01/28 .................................. 5,000,000 3,344,600 Touro Infirmary Project, Series A, 5.625%, 8/15/29 ....................................... 6,000,000 5,706,540 Louisiana Public Facilities Authority Lease Revenue, Orleans Parish School Board Project, FSA Insured, 5.65%, 6/15/11 ................................................................ 1,230,000 1,319,925 Louisiana Public Facilities Authority Revenue, Alton Ochsner Medical Foundation Project, Series C, MBIA Insured, 6.50%, 5/15/22 ......... 930,000 956,431 Centenary College Project, Pre-Refunded, 5.90%, 2/01/17 .................................. 1,000,000 1,123,760 Centenary College Project, Refunding, 5.75%, 2/01/29 ..................................... 7,300,000 7,230,504 Dillard University Project, Refunding, AMBAC Insured, 5.00%, 2/01/18 ..................... 1,500,000 1,514,565 HFA, Mortgage Purchase, FNMA Insured, 6.05%, 1/01/26 ..................................... 1,200,000 1,228,212 MFH, One Lakeshore, Refunding, Series A, GNMA Secured, 6.40%, 7/20/20 .................... 1,900,000 1,983,524 SFM Purchase, Series C, 8.45%, 12/01/12 .................................................. 461,245 474,631 Student Loan, Series A, Sub Series 3, 7.00%, 9/01/06 ..................................... 955,000 983,497 Tulane University, AMBAC Insured, 6.05%, 10/01/25 ........................................ 5,500,000 5,988,400 (b)Tulane University, Refunding, Series A, AMBAC Insured, 5.125%, 7/01/27 ................. 2,000,000 2,003,820 Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/17 .......... 1,000,000 1,029,920 Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/27 .......... 6,015,000 6,070,518
93 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Louisiana State Office Facilities Corp. Lease Revenue, Capital Complex Program, AMBAC Insured, 5.00%, 5/01/21 ............................................................ $ 2,500,000 $ 2,499,825 Series A, MBIA Insured, 5.375%, 3/01/19 .................................................. 3,000,000 3,093,240 Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project, First Stage, Refunding, Series B, 7.20%, 9/01/08 ...................... 1,000,000 1,021,660 Series E, 7.60%, 9/01/10 ................................................................. 480,000 488,702 Louisiana State University Agricultural and Mechanical College University Revenues, Auxiliary, MBIA Insured, 5.50%, 7/01/26 ............................................................... 1,500,000 1,547,490 Mississippi River Bridge Authority Revenue, 6.75%, 11/01/12 ................................. 1,050,000 1,090,772 New Orleans GO, Drain Systems, AMBAC Insured, 5.00%, 12/01/18 ............................................ 1,000,000 1,008,460 Public Improvement, FGIC Insured, 5.125%, 12/01/26 ....................................... 2,000,000 2,005,160 New Roads Electric System Revenue, 7.00%, 7/01/17 ........................................... 1,000,000 1,037,650 Orleans Levee District GO, Levee Improvement, FSA Insured, 5.95%, 11/01/14 .................. 805,000 873,006 Orleans Parish Parishwide School District GO, Refunding, Series B, FGIC Insured, 5.50%, 9/01/20 .................................................................................... 1,000,000 1,030,290 Orleans Parish School Board GO, Series 95, FGIC Insured, 5.375%, 9/01/18 .................... 1,950,000 1,982,487 Ouachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical Center, Refunding, FSA Insured, 5.75%, 5/15/21 ..................................................... 2,500,000 2,629,750 Ouachita Parish La West Ouachita Parish School District Sales and Use Tax, FGIC Insured, 5.75%, 9/01/24 ............................................................................. 1,410,000 1,495,911 Puerto Rico Commonwealth GO, Public Improvement, MBIA Insured, 5.75%, 7/01/26 ............................................................. 4,500,000 5,165,775 Series A, 5.125%, 7/01/31 ................................................................ 2,000,000 1,971,480 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.90%, 7/01/07 ........................................................................... 120,000 120,492 7.75%, 7/01/08 ........................................................................... 50,000 50,195 Puerto Rico Electric Power Authority Power Revenue, Series HH, FSA Insured, 5.25%, 7/01/29 .. 1,000,000 1,016,880 Rapides Parish Housing and Mortgage Finance Authority Revenue, SFM Purchase, FHA Insured, ETM, 7.25%, 8/01/10 ........................................................................ 1,180,000 1,354,840 Shreveport Certificates of Indebtedness Revenue, Refunding, Series A, AMBAC Insured, 5.00%, 10/01/16 ................................................................................... 1,000,000 1,025,980 Shreveport Water and Sewer Revenue, Series A, FGIC Insured, 5.95%, 12/01/14 ................. 3,500,000 3,732,365 St. Bernard Home Mortgage Authority Revenue, SF, Series A, FGIC Insured, ETM, 7.50%, 9/01/10 435,000 545,455 St. Bernard Parish Exempt Facilities Revenue, Mobil Oil Corp. Project, 5.90%, 11/01/26 ...... 1,500,000 1,558,320 St. Bernard Parish Home Mortgage Authority SFMR, Refunding, Series A, 8.00%, 3/25/12 ........ 152,754 154,443 St. Charles Parish PCR, Louisiana Power and Light Co. Project, 7.50%, 6/01/21 .................................... 2,500,000 2,557,975 Union Carbide Corp. Project, Refunding, 5.10%, 1/01/12 ................................... 3,000,000 3,081,450 St. Charles Parish Solid Waste Disposal Revenue, Louisiana Power and Light Co. Project, 7.05%, 4/01/22 ........................................................................... 1,500,000 1,524,315 Series A, 7.00%, 12/01/22 ................................................................ 750,000 776,303 St. John's Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 ................ 2,500,000 2,504,500 St. Tammany's Public Trust Financing Authority SFMR, Series A, ETM, 7.20%, 7/01/10 .................................................................................. 120,000 136,534 7/01/11 .................................................................................. 50,000 62,124 State Colleges and Universities Lease Revenue, University of Southwestern Louisiana, Cajundome, MBIA Insured, 5.65%, 9/01/26 .................................................... 3,080,000 3,221,372 Tangipahoa Parish Hospital Service Revenue, District No. 1, Refunding, AMBAC Insured, 6.25%, 2/01/24 ............................................................................. 5,500,000 5,931,365 Tobacco Settlement Financing Corp. Revenue, Series 2001B, 5.875%, 5/15/39 ................... 3,000,000 2,944,110 University of Louisiana Board of Supervisors Lease Revenue, LaFayette Cajundome Convention, MBIA Insured, 6.25%, 9/01/29 ............................................................... 1,200,000 1,324,390 University System Board of Supervisors Revenue, Northwestern State University Wellness, AMBAC Insured, 5.10%, 4/01/24 .............................................................. 1,000,000 1,002,120 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ..... 3,000,000 3,073,980 West Feliciana Parish PCR, Gulf State Utility Co. Project, 7.70%, 12/01/14 .................. 6,500,000 6,731,790 ------------ TOTAL BONDS 177,660,150 ------------ ZERO COUPON BONDS 1.4% Shreveport Water and Sewer Revenue, Refunding, Series B, FGIC Insured,12/01/11 .............. 5,000,000 2,673,050 ------------ TOTAL LONG TERM INVESTMENTS (COST $174,048,376) ............................................. 180,333,200 ------------
94 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN LOUISIANA TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------- aSHORT TERM INVESTMENTS 1.4% Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project, First Stage, ACES, Refunding, Daily VRDN and Put, 1.30%, 9/01/06 .....................................$ 600,000 $ 600,000 Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ............................................................................ 1,400,000 1,400,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ............................................. 500,000 500,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $2,500,000) .................................................. 2,500,000 ------------ TOTAL INVESTMENTS (COST $176,548,376) 99.4% ..................................................... 182,833,200 OTHER ASSETS, LESS LIABILITIES .6% .............................................................. 1,123,015 ------------ NET ASSETS 100.0% ............................................................................... $183,956,215 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. bSufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. See notes to financial statements. 95 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN MARYLAND TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, -------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................. $11.36 $10.63 $11.66 $11.64 $11.33 -------------------------------------------------- Income from investment operations: Net investment incomea ............................................. .55 .57 .56 .58 .59 Net realized and unrealized gains (losses) ......................... .17 .72 (1.00) .06 .32 -------------------------------------------------- Total from investment operations .................................... .72 1.29 (.44) .64 .91 -------------------------------------------------- Less distributions from: Net investment income .............................................. (.56) (.56) (.56) (.58) (.60) Net realized gains ................................................. -- -- (.03) (.04) -- -------------------------------------------------- Total distributions ................................................. (.56) (.56) (.59) (.62) (.60) -------------------------------------------------- Net asset value, end of year ........................................ $11.52 $11.36 $10.63 $11.66 $11.64 ================================================== Total return b ...................................................... 6.44% 12.44% (3.86)% 5.64% 8.27% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................................... $281,141 $248,964 $221,176 $253,014 $213,005 Ratios to average net assets: Expenses ........................................................... .72% .73% .72% .74% .74% Net investment income .............................................. 4.81% 5.16% 5.07% 4.91% 5.20% Portfolio turnover rate ............................................. 6.39% 13.01% 11.78% 6.02% 3.19% CLASS C ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................. $11.46 $10.72 $11.75 $11.72 $11.40 -------------------------------------------------- Income from investment operations: Net investment income a ............................................ .49 .51 .51 .51 .54 Net realized and unrealized gains (losses) ......................... .17 .73 (1.01) .07 .31 -------------------------------------------------- Total from investment operations .................................... .66 1.24 (.50) .58 .85 -------------------------------------------------- Less distributions from: Net investment income .............................................. (.49) (.50) (.50) (.51) (.53) Net realized gains ................................................. -- -- (.03) (.04) -- -------------------------------------------------- Total distributions ................................................. (.49) (.50) (.53) (.55) (.53) -------------------------------------------------- Net asset value, end of year ........................................ $11.63 $11.46 $10.72 $11.75 $11.72 ================================================== Total return b ...................................................... 5.88% 11.83% (4.37)% 5.11% 7.70% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................................... $33,257 $22,547 $17,298 $16,826 $10,515 Ratios to average net assets: Expenses ........................................................... 1.27% 1.28% 1.27% 1.29% 1.30% Net investment income .............................................. 4.26% 4.61% 4.53% 4.35% 4.63% Portfolio turnover rate ............................................. 6.39% 13.01% 11.78% 6.02% 3.19%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 96 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.1% Anne Arundel County Mortgage Revenue, Refunding, Series A, MBIA Insured, 6.00%, 1/01/26 ......$ 1,650,000 $ 1,691,679 Anne Arundel County PCR, Baltimore Gas and Electric Co. Project, Refunding, 6.00%, 4/01/24 ... 9,500,000 9,806,850 Baltimore Convention Center Revenue, FGIC Insured, Pre-Refunded, 6.15%, 9/01/19 .............. 4,250,000 4,656,598 Baltimore County Mortgage Revenue, Old Orchard Apartments Project, Refunding, Series A, MBIA Insured, 7.00%, 7/01/16 ............................................................................ 1,000,000 1,059,490 7.125%, 1/01/27 ........................................................................... 3,000,000 3,165,570 Baltimore Economic Development Lease Revenue, Armistead Partnership, Refunding, Series A, 6.75%, 8/01/02 ............................................................................ 235,000 238,936 7.00%, 8/01/11 ............................................................................ 3,225,000 3,380,026 Baltimore GO, Consolidated Public Improvement, Series A, FGIC Insured, 5.30%, 10/15/17 ................................................... 1,500,000 1,566,705 Series A, FSA Insured, 5.25%, 10/15/17 .................................................... 3,300,000 3,454,506 Series B, 7.15%, 10/15/08 ................................................................. 1,000,000 1,205,850 Baltimore Port Facilities Revenue, Consolidated Coal Sales, Series A, 6.50%, 10/01/11 ........ 1,850,000 1,909,348 Baltimore Project Revenue, Wastewater Project, Refunding, Series B, FGIC Insured, 5.00%, 7/01/18 ................................................................................... 1,000,000 1,018,330 7/01/28 ................................................................................... 4,000,000 3,993,920 Baltimore Revenue, Wastewater Project, Refunding, Series A, FGIC Insured, 5.80%, 7/01/15 .............................................................. 5,000,000 5,379,300 FSA Insured, 5.75%, 7/01/30 ............................................................... 10,000,000 10,574,400 Carroll County Revenue, Fairhaven and Copper Ridge, Refunding, Series A, Asset Guaranteed, 5.375%, 1/01/16 ........................................................................... 2,000,000 2,097,220 5.50%, 1/01/19 ............................................................................ 1,000,000 1,040,370 5.625%, 1/01/25 ........................................................................... 2,000,000 2,087,980 Gaithersberg Hospital Facilities Revenue, Shady Grove Adventist Hospital, Refunding and Improvement, FSA Insured, 6.00%, 9/01/21 .................................................... 8,000,000 8,699,280 Harford County GO, Consolidated Public Improvement, 4.35%, 1/15/14 ............................................................................ 1,300,000 1,301,053 4.40%, 1/15/15 ............................................................................ 1,450,000 1,442,881 4.40%, 1/15/16 ............................................................................ 1,420,000 1,398,203 4.45%, 1/15/17 ............................................................................ 1,125,000 1,104,548 Harford County Mortgage Revenue, Greenbrier V Apartments Project, Refunding, FHA Insured, 6.50%, 11/01/26 ............................................................................. 3,000,000 3,153,060 Howard County Mortgage Revenue, Normandy Woods III Apartments Project, Refunding, Series A, FHA Insured, 6.10%, 7/01/25 ................................................................. 2,000,000 2,072,880 Maryland Environmental Services COP, Water and Waste Facilities, Series A, 6.70%, 6/01/11 .... 1,900,000 1,939,463 Maryland Local Government Insurance Trust Capitalization Program COP, Series A, 7.125%, 8/01/09 ..................................................................................... 650,000 661,492 Maryland State CDA, Department of Housing and Community Development MFHR, Series A, 6.85%, 5/15/33 ..................................................................................... 1,120,000 1,145,211 Maryland State CDA, Department of Housing and Community Development Revenue, Housing, Series A, 6.00%, 7/01/32 ......................................................... 4,000,000 4,133,360 Residential, Series D, 5.25%, 9/01/29 ..................................................... 4,695,000 4,647,768 Series B, 5.35%, 9/01/30 .................................................................. 2,910,000 2,924,987 SF Program, First Series, 5.00%, 4/01/17 .................................................. 2,045,000 2,059,090 SF Program, Second Series, 5.00%, 4/01/17 ................................................. 3,000,000 3,023,850 Maryland State EDC, Lease Revenue, Hilton Street Facilities, Series A, 7.00%, 1/01/10 ......................... 850,000 880,515 Utility Infrastructure Revenue, University College Park Project, AMBAC Insured, 5.00%, 7/01/19 ........................................................................... 1,710,000 1,731,495 Maryland State Energy Financing Administration Solid Waste Disposal Revenue, Limited Obligation, Wheelabrator Water Projects, 6.45%, 12/01/16 .................................... 3,000,000 3,222,120 Maryland State Health and Higher Educational Facilities Authority Revenue, Anne Arundel Medical Center, FSA Insured, 5.125%, 7/01/33 ................................. 8,365,000 8,384,072 Catholic Health Initiatives, Series A, 6.00%, 12/01/20 .................................... 2,920,000 3,131,437 Catholic Health Initiatives, Series A, 6.00%, 12/01/24 .................................... 2,025,000 2,162,376 Charity Obligation Group, Seriies A, 5.00%, 11/01/19 ...................................... 1,515,000 1,518,924 Charity Obligation Group, Series A, 5.00%, 11/01/29 ....................................... 2,250,000 2,206,868 Doctors Community Hospital, Refunding, 5.75%, 7/01/13 ..................................... 3,000,000 2,832,780 Helix Health Issue, AMBAC Insured, ETM, 5.00%, 7/01/27 .................................... 11,000,000 10,921,130 Johns Hopkins University Issue, 6.00%, 7/01/39 ............................................ 5,000,000 5,766,200 Johns Hopkins, AMBAC Insured, 5.00%, 7/01/27 .............................................. 655,000 652,157 Kernan Hospital, Connie Lee Insured, 6.10%, 7/01/24 ....................................... 1,700,000 1,850,212 Maryland Institue College of Art, 5.625%, 6/01/36 ......................................... 3,600,000 3,580,668
97 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Maryland State Health and Higher Educational Facilities Authority Revenue, (cont.) Mercy Medical Center Project, Refunding, FSA Insured, 5.75%, 7/01/26 ..................... $ 1,500,000 $ 1,570,140 Mercy Medical Center, Refunding, 5.625%, 1/01/31 ......................................... 5,500,000 5,394,950 North Arundel Hospital, 6.50%, 7/01/31 ................................................... 1,320,000 1,399,332 North Arundel Hospital, 6.50%, 7/01/26 ................................................... 1,000,000 1,063,080 Roland Park Place Project, Refunding, 5.625%, 7/01/18 .................................... 2,500,000 2,400,525 Roland Park Place Project, Refunding, 5.625%, 7/01/24 .................................... 2,680,000 2,534,985 University of Maryland Medical System, 6.75%, 7/01/30 .................................... 11,000,000 11,870,210 Upper Chesapeake Hospitals, Series A, FSA Insured, 5.375%, 1/01/28 ....................... 5,000,000 5,078,000 Upper Chesapeake Hospitals, Series A, FSA Insured, 5.125%, 1/01/33 ....................... 7,100,000 7,109,585 Maryland State Health and Higher Revenue, John Hopkins University, Series A, 5.00%, 7/01/32 . 3,000,000 2,949,180 Maryland State Industrial Development Financing Authority Revenue, American Center Physics Headquarters, 6.625%, 1/01/17 .............................................................. 6,000,000 6,369,720 Maryland State Stadium Authority Lease Revenue, Convention Center Expansion, AMBAC Insured, 5.875%, 12/15/14 ........................................................................... 4,655,000 5,074,974 Maryland State Stadium Authority Sports Facilities Lease Revenue, AMBAC Insured, 5.75%, 3/01/22 ........................................................................... 5,000,000 5,215,250 5.80%, 3/01/26 ........................................................................... 2,045,000 2,131,994 Maryland State Transportation Facilities Authority Revenue, Refunding, Series 1992, 5.75%, 7/01/13 .................................................................................... 5,400,000 5,442,120 (b)Maryland Transportation Authority Revenue, AMBAC Insured, 5.00%, 3/01/27 .................. 8,000,000 7,999,920 Maryland Water Quality Financing Administration Revenue, Revolving Loan Fund, Series A, 6.55%, 9/01/14 .................................................................................... 1,000,000 1,032,080 Montgomery County GO, 4.75%, 2/01/17 ........................................................ 5,000,000 5,063,550 Montgomery County Housing Opportunities Commission MFHR, Series B, FHA Insured, 6.00%, 7/01/37 2,500,000 2,596,825 Montgomery County Housing Opportunities Commission MFMR, Series A, 7.00%, 7/01/23 ........... 2,410,000 2,469,623 Montgomery County Housing Opportunities Commission SFMR, Series A, 6.80%, 7/01/17 ........... 850,000 861,620 Montgomery County Revenue Authority Golf Course System Revenue, Series A, 6.125%, 10/01/22 .. 1,000,000 1,005,040 Northeast Solid Waste Disposal Authority Revenue, Montgomery County Resources Recreation Project, Series A, 6.20%, 7/01/10 ........................................................................... 3,100,000 3,272,081 6.30%, 7/01/16 ........................................................................... 6,000,000 6,286,260 Ocean City GO, Refunding, MBIA Insured, 5.75%, 3/15/12 .................................................................................. 1,880,000 2,018,293 3/15/13 .................................................................................. 1,120,000 1,201,234 3/15/14 .................................................................................. 1,180,000 1,262,435 Prince George's County COP, Real Estate Acquisition Program II, MBIA Insured, 6.00%, 9/15/14 ............................................................................. 2,050,000 2,245,632 Prince George's County GO, Consolidated Public Improvement, MBIA Insured, 5.00%, 4/15/18 .... 2,100,000 2,137,716 Prince George's County Hospital Revenue, Dimensions Health Corp., Pre-Refunded, 7.00%, 7/01/22 1,000,000 1,038,320 Prince George's County Housing Authority MFHR, Emerson House Project, Series A, 7.00%, 4/15/19 5,500,000 5,801,400 Prince George's County Housing Authority Mortgage Revenue, New Keystone Apartments Project, Refunding, Series A, MBIA Insured, 6.80%, 7/01/25 .......................................... 2,900,000 2,969,919 Prince George's County IDA, Lease Revenue, Upper Marlboro Justice Center Project, MBIA Insured, 5.80%, 6/30/14 ....................................................... 2,750,000 2,917,943 Prince George's County Parking Authority Revenue, Justice Center Facilities Project, Refunding, 6.45%, 5/01/05 ............................................................................. 500,000 508,425 Prince George's County PCR, Potomac Electric Project, Refunding, 6.00%, 9/01/22 ........................................................................... 1,200,000 1,223,256 6.375%, 1/15/23 .......................................................................... 2,975,000 3,065,351 Puerto Rico Commonwealth GO, Public Improvement, Refunding, 5.75%, 7/01/17 ........................................................................... 3,000,000 3,431,730 FSA Insured, 5.125%, 7/01/30 ............................................................. 7,230,000 7,306,927 FSA Insured, 5.25%, 7/01/27 .............................................................. 2,535,000 2,602,482 Puerto Rico Electric Power Authority Power Revenue, Series HH, FSA Insured, 5.25%, 7/01/29 ................................................... 10,780,000 10,961,966 Series II, 5.25%, 7/01/31 ................................................................ 3,000,000 3,002,310 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.25%, 7/01/36 ........ 2,000,000 2,001,420 Rockville Mortgage Revenue, Summit Apartments Project, Refunding, Series A, MBIA Insured, 5.70%, 1/01/26 ............................................................................. 1,145,000 1,166,102 St. Mary's College Revenue, Academic Fees and Auxiliary Fees Project, Series A, AMBAC Insured, 5.55%, 9/01/30 ............................................................................. 2,000,000 2,071,520 University of Maryland Auxiliary Facilities System and Tuition Revenue, Series A, 5.60%, 4/01/16 .................................................................................... 1,000,000 1,055,450 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 .................................... 1,700,000 1,741,921 Refunding, Series A, 5.50%, 10/01/14 ..................................................... 3,300,000 3,456,715 ------------ TOTAL LONG TERM INVESTMENTS (COST $295,642,432) ............................................. 308,254,669 ------------
98 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MARYLAND TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- aSHORT TERM INVESTMENTS .2% Community Development Administration MF Development Revenue, Avalon Ridge Apartments Project, Refunding, FNMA Insured, Weekly VRDN and Put, 1.10%, 6/15/26 ................................ $ 200,000 $ 200,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ................................................................ 100,000 100,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 .......................................... 400,000 400,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $700,000) ................................................. 700,000 ------------ TOTAL INVESTMENTS (COST $296,342,432) 98.3% .................................................. 308,954,669 OTHER ASSETS, LESS LIABILITIES 1.7% .......................................................... 5,444,168 ------------ NET ASSETS 100.0% ............................................................................ $314,398,837 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. b Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. See notes to financial statements. 99 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN MISSOURI TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, -------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $11.77 $11.02 $12.19 $12.23 $11.83 -------------------------------------------------- Income from investment operations: Net investment income a ............................................. .58 .60 .60 .61 .64 Net realized and unrealized gains (losses) .......................... .24 .75 (1.15) -- .44 -------------------------------------------------- Total from investment operations ..................................... .82 1.35 (.55) .61 1.08 -------------------------------------------------- Less distributions from: Net investment income ............................................... (.59) (.60) (.61) (.62) (.64) Net realized gains .................................................. -- -- (.01) (.03) (.04) -------------------------------------------------- Total distributions .................................................. (.59) (.60) (.62) (.65) (.68) -------------------------------------------------- Net asset value, end of year ......................................... $12.00 $11.77 $11.02 $12.19 $12.23 ================================================== Total return b ....................................................... 7.13% 12.50% (4.62)% 5.12% 9.43% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $425,795 $373,190 $346,649 $386,948 $308,045 Ratios to average net assets: Expenses ............................................................ .68% .69% .69% .70% .71% Net investment income ............................................... 4.91% 5.22% 5.16% 4.99% 5.32% Portfolio turnover rate .............................................. 22.80% 38.38% 18.43% 15.21% 14.30% CLASS C ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $11.82 $11.06 $12.24 $12.27 $11.85 -------------------------------------------------- Income from investment operations: Net investment incomea .............................................. .52 .54 .53 .54 .58 Net realized and unrealized gains (losses) .......................... .24 .75 (1.16) .01 .45 -------------------------------------------------- Total from investment operations ..................................... .76 1.29 (.63) .55 1.03 -------------------------------------------------- Less distributions from: Net investment income ............................................... (.52) (.53) (.54) (.55) (.57) Net realized gains .................................................. -- -- (.01) (.03) (.04) -------------------------------------------------- Total distributions .................................................. (.52) (.53) (.55) (.58) (.61) -------------------------------------------------- Net asset value, end of year ......................................... $12.06 $11.82 $11.06 $12.24 $12.27 -------------------------------------------------- Total return b ....................................................... 6.61% 11.94% (5.21)% 4.58% 8.96% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $41,013 $28,695 $23,537 $20,396 $10,045 Ratios to average net assets: Expenses ............................................................ 1.23% 1.24% 1.24% 1.25% 1.27% Net investment income ............................................... 4.36% 4.67% 4.62% 4.44% 4.75% Portfolio turnover rate .............................................. 22.80% 38.38% 18.43% 15.21% 14.30%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 100 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.7% Belton School District No. 124, GO, Improvement Direct Deposit Program, Refunding, FSA Insured, 5.00%, 3/01/21 ........................................................................ $ 2,205,000 $ 2,212,916 Bi-State Development Agency Missouri Illinois Metropolitan District, St. Clair County Metrolink Extension, Series A, MBIA Insured, 5.00%, 7/01/28 .................................... 1,750,000 1,729,683 Boone County IDA, Health Care Revenue, Retirement Center Project, GNMA Secured, 5.70%, 10/20/22 ....................................................................................... 1,520,000 1,599,222 Cape Girardeau County IDA, Solid Waste Disposal Revenue, Procter and Gamble Paper Products, 5.30%, 5/15/28 ................................................................................. 6,875,000 6,816,700 Cass County COP, FGIC Insured, 5.00%, 4/01/25 ................................................... 2,500,000 2,482,975 Childrens Trust Fund Tobacco Settlement Revenue, 6.00%, 7/01/26 ................................. 2,785,000 2,941,433 Fenton Public Facility Authority Leasehold Revenue, 5.25%, 1/01/18 .............................. 2,250,000 2,226,015 Guam Airport Authority Revenue, Series A, 6.50%, 10/01/23 .................................................................... 1,075,000 1,108,680 Series B, 6.60%, 10/01/10 .................................................................... 500,000 519,330 Series B, 6.70%, 10/01/23 .................................................................... 4,000,000 4,131,320 Hazelwood IDA, MFHR, Lakes Apartments Project, Refunding, Series A, GNMA Secured, 6.10%, 9/20/26 ........................................................................................ 1,745,000 1,811,519 Hickory County School District R-1 Skyline GO, 6.05%, 3/01/20 ................................... 1,100,000 1,191,102 High Ridge Fire Protection District GO, FSA Insured, 5.375%, 11/01/20 ........................... 1,000,000 1,022,160 Howard Bend Levee District Special Tax, 5.65%, 3/01/13 ............................................................................... 1,000,000 1,045,050 5.85%, 3/01/19 ............................................................................... 4,000,000 4,123,360 Jackson County Consolidated School District No. 2 GO, Direct Deposit Program, 5.20%, 3/01/20 .... 2,000,000 2,038,820 Jackson County IDAR, St. Joseph's Health Center Corp., MBIA Insured, 6.50%, 7/01/19 ............. 3,000,000 3,101,910 Jasper County Reorganized School District No. R-7 GO, Direct Deposit Program, 6.00%, 3/01/20 .... 1,025,000 1,150,593 Kansas City Airport Revenue, General Improvement, Series B, FSA Insured, Pre-Refunded, 6.875%, 9/01/12 ........................................................................................ 605,000 678,864 Kansas City IDA, MFHR, Mews Apartments Project, Series A, FNMA Insured, 6.30%, 7/01/20 .......... 3,345,000 3,501,212 Kansas City Land Clearance Redevelopment Authority Lease Revenue, Municipal Auditorium and Muehlebach Hotel, Series A, FSA Insured, 5.90%, 12/01/18 ....................................... 5,000,000 5,344,150 Kansas City MAC Revenue, Leasehold Improvement, Citywide Infrastructure, Series B, FSA Insured, 6.50%, 3/01/14 ........ 7,790,000 8,346,907 Leasehold Roe Bartle, Refunding, Series A, MBIA Insured, 5.00%, 4/15/20 ...................... 10,000,000 10,046,500 Lake of the Ozarks Community Bridge Corp. Bridge System Revenue, Pre-Refunded, 6.25%, 12/01/16 ................................................................ 2,000,000 2,320,740 Pre-Refunded, 6.40%, 12/01/25 ................................................................ 7,000,000 8,151,710 Refunding, 5.25%, 12/01/14 ................................................................... 1,000,000 957,800 Refunding, 5.25%, 12/01/26 ................................................................... 1,000,000 918,310 Lee's Summit IDA, MFHR, Crossroads Apartment Project, Series A, FSA Insured, 6.15%, 10/01/29 .... 2,695,000 2,805,549 Lee's Summit IDAR, John Knox Village Project, 6.55%, 8/15/10 ............................................................................... 1,000,000 1,057,170 6.625%, 8/15/13 .............................................................................. 2,000,000 2,113,160 Missouri Development Finance Board Cultural Facilities Revenue, Nelson Gallery Foundation, Series A, MBIA Insured, 5.00%, 12/01/30 ........................................................ 11,500,000 11,377,985 Missouri School Board Association COP, Pooled Finance Program, Series A-3, BIG Insured, 7.875%, 3/01/06 ..................................................... 5,000 5,095 Series A-5, BIG Insured, 7.375%, 3/01/06 ..................................................... 20,000 20,533 Missouri School Board Association Lease COP, Republic R-3 School District Project, Refunding, FSA Insured, 6.00%, 3/01/16 .................................................................... 2,220,000 2,388,964 Missouri Southern State College Revenue, Auxiliary Enterprise System, MBIA Insured, 5.50%, 4/01/23 ........................................................................ 1,200,000 1,239,744 Missouri State Development Finance Board Infrastructure Facilities Revenue, Midtown Redevelopment Project, Series A, MBIA Insured, 5.75%, 4/01/22 .................................. 10,000,000 10,636,100 Missouri State Development Finance Board Recreation Facilities Revenue, YMCA Greater St. Louis Project, Series A, 5.40%, 9/01/18 .............................................................. 7,420,000 7,611,584 Missouri State Development Finance Board Solid Waste Disposal Revenue, Procter and Gamble Paper Product, 5.20%, 3/15/29 .................................................................. 3,000,000 2,978,430 Missouri State Environmental Improvement and Energy Resources Authority PCR, National Rural Association, Electric Project, Series G-6, AMBAC Insured, 5.85%, 2/01/13 ....................... 2,100,000 2,258,193 Missouri State Environmental Improvement and Energy Resources Authority Water PCR, Revolving Fund Program, Series A, 7.00%, 10/01/10 ............................................ 940,000 954,683 Revolving Fund Program, Series A, Prerefunded, 6.55%, 7/01/14 ................................ 3,610,000 3,742,920 Revolving Fund Program, Series B, 7.125%, 12/01/10 ........................................... 390,000 398,724 Revolving Fund Program, Series B, Prerefunded, 7.20%, 7/01/16 ................................ 1,155,000 1,306,952 State Revolving , Series A, 6.55%, 7/01/14 ................................................... 890,000 920,972 State Revolving Fund Program, Series B, 6.05%, 7/01/16 ....................................... 485,000 518,455 State Revolving Fund Program, Series B, FSA Insured, Prerefunded, 6.05%, 7/01/16 ............. 515,000 569,420
101 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Missouri State Environmental Improvement and Energy Resources Authority Water PCR, (cont.) State Revolving Fund, Series A, 5.75%, 1/01/16 ............................................ $ 150,000 $ 157,880 State Revolving Funds Program, Series B, 5.50%, 7/01/21 ................................... 1,440,000 1,503,922 State Revolving, Series B, 5.80%, 1/01/15 ................................................. 125,000 133,141 State Revolving, Series B, 7.20%, 7/01/16 ................................................. 845,000 944,642 Missouri State GO, State Water Pollution Control, Series A, 5.00%, 6/01/26 ................................... 3,785,000 3,787,498 Stormwater Control, Series A, 5.00%, 6/01/26 .............................................. 1,895,000 1,896,251 Missouri State HDC, MFHR, FHA Insured, 8.50%, 12/01/29 ........................................................ 80,000 80,174 Mortgage Revenue, Series B, GNMA Secured, 6.40%, 12/01/24 ................................. 1,795,000 1,832,623 SFMR, Homeowner Loan, Series D, GNMA Secured, 6.125%, 3/01/28 ............................. 1,435,000 1,475,453 SFMR, Series B, GNMA Secured, 6.10%, 9/01/14 .............................................. 1,290,000 1,345,444 SFMR, Series B, GNMA Secured, 6.45%, 9/01/27 .............................................. 1,160,000 1,204,718 SFMR, Series C, GNMA Secured, 6.90%, 7/01/18 .............................................. 720,000 735,372 Missouri State Health and Educational Facilites Authority Health Facilities Revenue, St. Luke's Episcopal, Presbyterian Hospital, FSA Insured, 5.25%, 12/01/26 ....................... 4,500,000 4,527,945 Missouri State Health and Educational Facilities Authority Educational Facilities Revenue, Maryville University of St. Louis Project, 6.75%, 6/15/30 ................................. 4,500,000 4,699,215 Maryville University of St. Louis Project, 6.50%, 6/15/22 ................................. 1,750,000 1,821,278 Washington University, 5.00%, 11/15/37 .................................................... 11,150,000 10,895,111 Washington University, Refunding, Series B, 5.00%, 3/01/30 ................................ 15,500,000 15,270,135 Washington University, Series B, 6.00%, 3/01/30 ........................................... 13,550,000 15,616,782 Webster University, MBIA Insured, 5.30%, 4/01/27 .......................................... 8,000,000 8,126,320 Missouri State Health and Educational Facilities Authority Health Facilities Revenue, Children's Mercy Hospital, 5.30%, 5/15/28 ................................................. 12,420,000 12,297,415 Freeman Health Systems Project, 5.25%, 2/15/28 ............................................ 2,750,000 2,569,215 Health Midwest, Series A, MBIA Insured, 6.40%, 2/15/15 .................................... 5,000,000 5,107,800 Health Midwest, Series B, MBIA Insured, 6.10%, 6/01/11 .................................... 700,000 761,306 Health Midwest, Series B, MBIA Insured, 6.25%, 6/01/14 .................................... 1,990,000 2,167,070 Health Midwest, Series B, MBIA Insured, 6.25%, 2/15/22 .................................... 1,100,000 1,123,672 Heartland Health System Project, AMBAC Insured, 6.35%, 11/15/17 ........................... 2,745,000 2,895,453 Jefferson Memorial Hospital Obligated Group, 6.75%, 5/15/15 ............................... 4,000,000 4,124,560 Jefferson Memorial Hospital Obligated Group, 6.80%, 5/15/25 ............................... 3,250,000 3,339,440 Lake of the Ozarks General Hospital, 6.25%, 2/15/11 ....................................... 410,000 430,475 Lake of the Ozarks General Hospital, Pre-Refunded, 6.25%, 2/15/11 ......................... 840,000 954,416 Lake of the Ozarks General Hospital, Pre-Refunded, 6.50%, 2/15/21 ......................... 670,000 768,792 Lake of the Ozarks General Hospital, Refunding, 6.50%, 2/15/21 ............................ 330,000 340,458 Lutheran Senior Services, Refunding, 5.875%, 2/01/23 ...................................... 1,000,000 1,004,720 Lutheran Senior Services, Series A, 6.375%, 2/01/27 ....................................... 4,000,000 4,089,320 SSM Health Care, Refunding, Series A, MBIA Insured, 6.25%, 6/01/16 ........................ 795,000 818,659 Missouri State Health and Educational Facilities Revenue, SSM Healthcare System, Series A, AMBAC Insured, 5.25%, 6/01/28 ..................................................... 16,385,000 16,525,747 Missouri State Housing Development Commission Revenue, SF, Homeown Loan C-1, GNMA Secured, 5.90%, 9/01/25 ............................................................................ 8,265,000 8,549,068 5.95%, 3/01/28 ............................................................................ 5,835,000 6,035,141 Monarch-Chesterfield Levee District, MBIA Insured, 5.75%, 3/01/19 ............................ 1,920,000 2,056,243 Northeast State University Recreational Facility Revenue, Campus Recreational Center Project, AMBAC Insured, 5.80%, 6/01/15 ............................................................... 1,000,000 1,053,790 Phelps County Hospital Revenue, Regional Medical Center, Refunding, Connie Lee Insured, 6.00%, 5/15/13 .............................................................................. 5,000,000 5,221,400 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured, Pre-Refunded, 9.00%, 7/01/09 ................................................................ 40,000 46,595 Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y, 5.50%, 7/01/36 ..................................................................................... 11,750,000 12,174,175 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series D, 5.375%, 7/01/36 ................................................................. 2,500,000 2,526,450 (b)5.25%, 7/01/38 4,500,000 4,503,195 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.90%, 7/01/07 ............................................................................ 50,000 50,205 7.75%, 7/01/08 ............................................................................ 475,000 476,853 Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 ................ 10,000,000 10,007,700
102 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ......................... $ 265,000 $ 265,382 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 2,503,075 Puerto Rico PBA Revenue Guaranteed, Government Facilities, Series D, 5.125%, 7/01/22 ........ 1,000,000 1,000,320 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.25%, 7/01/27 ........................................................................... 3,000,000 3,011,640 5.375%, 7/01/33 .......................................................................... 3,785,000 3,825,045 Pulaski County IDA, MFHR, St. Robert Project, Series A, GNMA Secured, 6.00%, 8/20/39 ........ 1,600,000 1,669,120 Raymore GO, FSA Insured, Pre-Refunded, 6.00%, 3/01/14 ....................................... 1,000,000 1,037,970 Springfield Missouri IDAR, Bethesda Living Centers, Refunding, Series A, 5.625%, 8/15/18 .......................................................................... 3,000,000 2,616,540 5.70%, 8/15/28 ........................................................................... 5,250,000 4,405,328 Springfield Public Building Corp. Leasehold Revenue, Springfield Recreational, Series B, AMBAC Insured, 6.125%, 6/01/21 .......................................................................... 3,230,000 3,504,389 6.15%, 6/01/25 ........................................................................... 3,645,000 3,978,882 Springfield School District No. R 12 GO, Missouri Direct Deposit Program, 5.85%, 3/01/20 .... 1,500,000 1,601,430 St. Louis Airport Revenue, Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/26 ...................... 4,000,000 3,966,360 Airport Development Program, Series A, MBIA Insured, 5.25%, 7/01/31 ...................... 18,835,000 19,054,993 Lambert-St. Louis International Airport, Refunding and Improvement, FGIC Insured, 6.125%, 7/01/15 .................................................................................. 75,000 77,471 St. Louis County Housing Authority MFHR, Kensington Square Apartments Project, Refunding, 6.55%, 3/01/14 ........................................................................... 1,000,000 1,016,990 6.65%, 3/01/20 ........................................................................... 2,750,000 2,902,323 St. Louis County IDA, Elderly Housing Revenue, Centenary Towers Apartments Project, 6.40%, 4/01/14 ............. 1,000,000 1,066,930 Elderly Housing Revenue, Centenary Towers Apartments Project, 6.55%, 4/01/19 ............. 1,000,000 1,054,200 Health Facilities Revenue, GNMA Secured, 5.375%, 9/20/31 ................................. 3,310,000 3,359,948 Health Facilities Revenue, Healthcare Jewish Center, GNMA Secured, 5.40%, 2/20/31 ........ 1,000,000 1,016,250 Health Facilities Revenue, Healthcare Jewish Center, GNMA Secured, 5.50%, 2/20/36 ........ 10,460,000 10,761,980 Health Facilities Revenue, Healthcare Nazareth Living, Refunding, 5.625%, 8/15/19 ........ 3,000,000 2,547,870 Health Facilities Revenue, Healthcare Nazareth Living, Refunding, 5.625%, 8/15/29 ........ 3,250,000 2,624,570 Health Facilities Revenue, Mother of Perpetual Help, GNMA Secured, 6.40%, 8/01/35 ........ 1,895,000 2,027,423 MFHR, Lucas Hunt Village Project, GNMA Secured, 5.20%, 9/20/31 ........................... 1,095,000 1,090,062 MFHR, South Summit Apartments, Refunding, Series A, GNMA Secured, 6.10%, 4/20/32 ......... 1,250,000 1,302,588 St. Louis County IDAR, Bethesda Living Centers, Series B, 5.85%, 8/15/28 .................... 1,500,000 1,309,635 St. Louis County Mortgage Revenue, GNMA Secured, 8.125%, 9/01/19 ............................ 20,000 20,111 St. Louis County Regional Convention and Sports Complex Authority Revenue, Convention and Sports Project, Refunding, Series B, 5.75%, 8/15/21 ........................................ 5,565,000 5,854,491 St. Louis IDA, Sewer and Solid Waste Disposal Facilities Revenue, Anheuser-Busch Project, 5.875%, 11/01/26 ........................................................................... 1,100,000 1,139,699 St. Louis Municipal Finance Corp. Leasehold Revenue, City Justice Center Improvement, Series A, AMBAC Insured, 6.00%, 2/15/19 ................. 5,370,000 6,062,623 City Justice Center, Series A, AMBAC Insured, 6.00%, 2/15/20 ............................. 1,000,000 1,094,330 Refunding, Series A, 6.00%, 7/15/13 ...................................................... 10,000,000 10,726,000 St. Louis Parking Facilities Revenue, Pre-Refunded, 6.625%, 12/15/21 ........................ 430,000 456,096 St. Louis Regional Convention and Sports Complex Authority Revenue, Series C, 7.90%, 8/15/21 ........................................................................... 555,000 572,992 Pre-Refunded, 7.90%, 8/15/21 ............................................................. 4,000,000 4,355,320 Taney County IDA, Hospital Revenue, The Skaggs Community Hospital Association, 5.30%, 5/15/18 ........................................................................... 3,000,000 2,855,670 5.40%, 5/15/28 ........................................................................... 1,500,000 1,408,050 University of Missouri Revenues, System Facilities, 5.80%, 11/01/27 .......................................................................... 1,000,000 1,132,960 Refunding, Series B, 5.00%, 11/01/27 ..................................................... 7,865,000 7,785,955 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.40%, 10/01/12 .......................................................................... 2,500,000 2,640,975 5.50%, 10/01/22 .......................................................................... 2,500,000 2,515,150
103 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN MISSOURI TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) West Plains IDA, Hospital Revenue, Ozarks Medical Center Project, Refunding, 5.50%, 11/15/12 .......................................................................... $ 1,000,000 $ 960,090 5.60%, 11/15/17 .......................................................................... 1,700,000 1,560,072 5.65%, 11/15/22 .......................................................................... 1,500,000 1,337,145 West Plains Waterworks System Revenue, AMBAC Insured, 5.625%, 3/01/21 ....................... 1,250,000 1,321,150 ------------ TOTAL LONG TERM INVESTMENTS (COST $444,042,229) ............................................. 460,894,444 ------------ aSHORT TERM INVESTMENTS .8% Missouri State Health and Educational Facilities Authority Educational Facilities Revenue, Refunding, Hannibal-Lagrange College, Weekly VRDN and Put, 1.45%, 7/01/31 .................. 535,000 535,000 Missouri State Health and Educational Facilities Authority Revenue, Christian Health Services, Series A, Weekly VRDN and Put, 1.15%, 11/01/19 ............................................. 1,385,000 1,385,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ......................................... 1,700,000 1,700,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $3,620,000) .............................................. 3,620,000 ------------ TOTAL INVESTMENTS (COST $447,662,229) 99.5% ................................................. 464,514,444 OTHER ASSETS, LESS LIABILITIES .5% .......................................................... 2,293,953 ------------ NET ASSETS 100.0% ........................................................................... $466,808,397 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. bSufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. See notes to financial statements. 104 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, -------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $11.78 $11.04 $12.16 $12.11 $11.73 -------------------------------------------------- Income from investment operations: Net investment income a ............................................. .58 .60 .60 .60 .62 Net realized and unrealized gains (losses) .......................... .19 .73 (1.12) .06 .38 -------------------------------------------------- Total from investment operations ..................................... .77 1.33 (.52) .66 1.00 -------------------------------------------------- Less distributions from net investment income ........................ (.59) (.59) (.60) (.61) (.62) Net asset value, end of year ......................................... $11.96 $11.78 $11.04 $12.16 $12.11 ================================================== Total return b ....................................................... 6.74% 12.38% (4.37)% 5.54% 8.78% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $388,400 $342,402 $315,101 $349,419 $297,406 Ratios to average net assets: Expenses ............................................................ .69% .69% .68% .70% .70% Net investment income ............................................... 4.89% 5.25% 5.18% 4.95% 5.24% Portfolio turnover rate .............................................. 10.85% 9.61% 21.07% 5.44% 9.95% CLASS C ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $11.87 $11.12 $12.24 $12.18 $11.79 -------------------------------------------------- Income from investment operations: Net investment income a ............................................. .52 .54 .54 .54 .56 Net realized and unrealized gains (losses) .......................... .19 .74 (1.13) .06 .39 -------------------------------------------------- Total from investment operations ..................................... .71 1.28 (.59) .60 .95 -------------------------------------------------- Less distributions from net investment income ........................ (.53) (.53) (.53) (.54) (.56) -------------------------------------------------- Net asset value, end of year ......................................... $12.05 $11.87 $11.12 $12.24 $12.18 ================================================== Total return b ....................................................... 6.09% 11.79% (4.88)% 5.02% 8.22% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $57,881 $43,476 $38,577 $38,171 $20,043 Ratios to average net assets: Expenses ............................................................ 1.24% 1.24% 1.23% 1.25% 1.26% Net investment income ............................................... 4.34% 4.70% 4.63% 4.40% 4.69% Portfolio turnover rate .............................................. 10.85% 9.61% 21.07% 5.44% 9.95%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 105 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 97.9% Appalachian State University Revenue, Teachers College Utility System, MBIA Insured, Pre-Refunded, 6.10%, 5/15/13 ............................................... $ 1,075,000 $ 1,186,015 Refunding, MBIA Insured, 5.00%, 5/15/24 .................................................. 3,000,000 2,999,790 Asheville Water System Revenue, FGIC Insured, 5.70%, 8/01/25 ............................................................. 4,000,000 4,196,320 FSA Insured, 5.00%, 8/01/25 .............................................................. 1,000,000 997,220 Broad River Water Authority Water System Revenue, MBIA Insured, 5.375%, 6/01/26 ............. 1,000,000 1,025,650 Buncombe County Metropolitan Sewer District Sewer System Revenue, FSA Insured, 5.00%, 7/01/29 .............................................................. 5,000,000 4,962,800 MBIA Insured, 5.00%, 7/01/26 ............................................................. 1,000,000 998,530 Series B, Pre-Refunded, 6.75%, 7/01/16 ................................................... 10,000 10,374 Centennial Authority Hotel Tax Revenue, Arena Project, FSA Insured, 5.125%, 9/01/19 ......... 5,115,000 5,202,415 Charlotte Airport Revenue, Series B, MBIA Insured, 6.00%, 7/01/24 .................................................................................. 4,000,000 4,288,080 7/01/28 .................................................................................. 6,300,000 6,745,725 Charlotte COP, Convention Facility Project, 5.625%, 12/01/25 ................................ 7,230,000 7,551,735 Charlotte Storm Water Fee Revenue, Refunding, 5.00%, 6/01/25 ................................ 1,000,000 995,840 Charlotte Water and Sewer GO, 5.00%, 2/01/21 ................................................ 4,000,000 4,048,760 Charlotte Water and Sewer System Revenue, 5.25%, 6/01/24 ........................................................................... 3,000,000 3,061,380 5.25%, 6/01/25 ........................................................................... 3,950,000 4,022,048 5.125%, 6/01/26 .......................................................................... 6,000,000 6,044,700 Charlotte-Mecklenberg Hospital Authority Health Care System Revenue, 5.90%, 1/15/16 ........................................................................... 3,465,000 3,680,592 Carolinas Healthcare System, Refunding, Series A, 5.00%, 1/15/31 ......................... 5,000,000 4,851,100 Carolinas Healthcare System, Series A, 5.125%, 1/15/22 ................................... 8,000,000 7,857,680 Coastal Solid Waste Disposal System Authority Revenue, Regional Solid Waste Management, Pre-Refunded, 6.50%, 6/01/08 ............................................................... 3,100,000 3,200,037 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 1,482,480 Concord COP, Series B, MBIA Insured, 5.75%, 6/01/16 ........................................................................... 1,475,000 1,580,404 6.125%, 6/01/21 .......................................................................... 2,180,000 2,383,132 Cumberland County COP, Civic Center Project, Refunding, AMBAC Insured, 5.00%, 12/01/18 ................................................ 3,000,000 3,042,210 Series A, AMBAC Insured, Pre-Refunded, 6.40%, 12/01/19 ................................... 3,500,000 3,956,435 Series A, AMBAC Insured, Pre-Refunded, 6.40%, 12/01/24 ................................... 3,765,000 4,255,994 Cumberland County Finance Corp. Installment Payment Revenue, Detention Center and Mental Health, FSA Insured, Pre-Refunded, 5.625%, 6/01/24 ......................................... 5,000,000 5,556,850 Cumberland County Hospital Facilities Revenue, Cumberland County Hospital Systems Inc., Refunding, 5.25%, 10/01/29 ................................................................. 5,250,000 4,986,135 Dare County COP, AMBAC Insured, 5.125%, 6/01/21 ............................................. 650,000 660,790 Duplin County COP, Social Service Administrative Building, Solid Waste Project, FGIC Insured, 6.75%, 9/01/12 ............................................................................. 2,000,000 2,043,860 Fayetteville Public Works Commission Revenue, Series A, FSA Insured, 6.00%, 3/01/16 ......... 2,000,000 2,040,000 Franklin County COP, AMBAC Insured, 5.00%, 6/01/25 .......................................... 1,250,000 1,246,500 Gastonia Combined Utilities System Revenue, FSA Insured, 5.00%, 5/01/25 .............................................................. 1,000,000 997,210 MBIA Insured, 5.625%, 5/01/19 ............................................................ 1,000,000 1,064,290 Greensboro Enterprise System Revenue, Series A, 5.125%, 6/01/22 ............................. 350,000 354,004 Greensboro HDC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 6.70%, 1/01/24 ......... 1,320,000 1,354,822 Greensboro North Carolina Enterprise Systems Revenue, Series A, 5.125%, 6/01/21 ............. 390,000 395,402 Guam Power Authority Revenue, Series A, Pre-Refunded, 6.375%, 10/01/08 ...................... 1,000,000 1,048,380 Halifax County Industrial Facilities and PCFA Revenue, Champion International Corp. Project, 5.45%, 11/01/33 .......................................................................... 4,000,000 3,808,920 Refunding, 6.45%, 11/01/29 ............................................................... 3,900,000 4,084,665 Haywood County Industrial Facilities and PCFA, Environmental Improvement Revenue, Champion International Project, 6.25%, 9/01/25 ...................................................... 2,000,000 2,038,960 Henderson County COP, Henderson County School Project, AMBAC Insured, 5.00%, 3/01/21 ........ 1,000,000 1,005,880 Kinston Housing Authority Mortgage Revenue, Kinston Towers Project, Refunding, 6.75%, 12/01/18 3,155,000 3,295,745
106 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Martin County Industrial Facilities and PCFA Revenue, Pollution Control, Weyerhaeuser Co. Project, Refunding, 6.375%, 1/01/10 .................. $ 3,000,000 $ 3,090,330 Solid Waste, Weyerhaeuser Co. Project, 5.65%, 12/01/23 ................................... 2,000,000 1,970,280 Solid Waste, Weyerhaeuser Co. Project, 6.00%, 11/01/25 ................................... 5,400,000 5,458,698 Mooresville Grade School District COP, AMBAC Insured, 6.35%, 10/01/14 ....................... 1,000,000 1,045,150 New Hanover County COP, New Hanover County Projects, AMBAC Insured, 5.00%, 12/01/22 ......... 5,000,000 4,993,200 New Hanover County Industrial Facilities and PCFA Revenue, Refunding, 6.70%, 7/01/19 ........ 1,000,000 1,021,790 North Carolina Capital Facilities Finance Agency Educational Facilities Revenue, Meredith College, AMBAC Insured, 5.00%, 6/01/31 ........................................................................... 750,000 738,608 4.875%, 6/01/24 .......................................................................... 1,000,000 981,940 North Carolina Eastern Municipal Power Agency Power System Revenue, Refunding, Series A, 5.75%, 1/01/26 ...................................................... 10,000,000 9,909,400 Refunding, Series A, 6.50%, 1/01/17 ...................................................... 9,000,000 9,231,030 Refunding, Series A, 6.50%, 1/01/18 ...................................................... 3,000,000 3,361,440 Refunding, Series D, 6.75%, 1/01/26 ...................................................... 5,000,000 5,398,700 Series B, MBIA Insured, 5.875%, 1/01/21 .................................................. 5,000,000 5,334,900 North Carolina HFA, MF, Mortgage Loan Resolution, Refunding, Series H, 6.05%, 7/01/28 ........................ 2,500,000 2,575,000 MF, Refunding, Series A, AMBAC Insured, 5.90%, 7/01/20 ................................... 2,780,000 2,887,530 MF, Refunding, Series J, 5.45%, 7/01/17 .................................................. 2,175,000 2,246,775 MFR, Refunding, Series B, 6.90%, 7/01/24 ................................................. 2,925,000 3,000,787 Refunding, Series F, 6.70%, 1/01/27 ...................................................... 4,855,000 5,204,220 SF, Refunding, Series DD, 6.20%, 9/01/27 ................................................. 2,430,000 2,493,739 SF, Series JJ, 6.45%, 9/01/27 ............................................................ 3,970,000 4,119,272 SFR, Refunding, Series S, 6.95%, 3/01/17 ................................................. 925,000 925,000 SFR, Series AA, 6.25%, 3/01/17 ........................................................... 765,000 796,832 SFR, Series RR, 5.85%, 9/01/28 ........................................................... 3,500,000 3,584,525 SFR, Series X, 6.65%, 9/01/19 ............................................................ 1,485,000 1,547,118 North Carolina Medical Care Commission Health Care Facilities Revenue, Novant Health Project, Refunding, Series A, MBIA Insured, 5.00%, 10/01/18 ................ 1,000,000 1,006,890 Novant Health Project, Refunding, Series A, MBIA Insured, 5.00%, 10/01/24 ................ 5,500,000 5,426,520 Scotland Memorial Hospital Project, Asset Guaranteed, 5.50%, 10/01/19 .................... 630,000 644,660 Scotland Memorial Hospital Project, Asset Guaranteed, 5.50%, 10/01/29 .................... 1,220,000 1,231,566 Wakemed Project, AMBAC Insured, 5.00%, 10/01/32 .......................................... 4,205,000 4,114,593 North Carolina Medical Care Commission Health System Revenue, Catholic Health East Project, Series C, AMBAC Insured, 5.00%, 11/15/18 ................................................... 2,500,000 2,517,350 North Carolina Medical Care Commission Hospital Revenue, Annie Penn Memorial Hospital Project, Refunding, 5.25%, 1/01/12 .......................... 1,940,000 2,101,738 Annie Penn Memorial Hospital Project, Refunding, 5.375%, 1/01/22 ......................... 1,920,000 2,026,541 Halifax Memorial Hospital Project, Pre-Refunded, 6.75%, 8/15/24 .......................... 3,500,000 3,653,825 Halifax Regional Medical Center Project, 5.00%, 8/15/18 .................................. 1,500,000 1,344,015 Halifax Regional Medical Center Project, 5.00%, 8/15/24 .................................. 2,800,000 2,433,788 High Point Regional Health System, AMBAC Insured, 5.00%, 10/01/29 ........................ 1,500,000 1,462,695 Mission St. Joseph's Health System Project, MBIA Insured, 5.125%, 10/01/28 ............... 5,000,000 4,981,800 North Carolina Baptist Hospitals Project, Refunding, Series A, 6.00%, 6/01/22 ............ 4,830,000 4,939,544 Northeast Medical Center, AMBAC Insured, 5.50%, 11/01/30 ................................. 1,580,000 1,631,255 Rex Healthcare Project, AMBAC Insured, 5.00%, 6/01/17 .................................... 2,780,000 2,815,389 Southeastern Regional Medical Center, 6.25%, 6/01/29 ..................................... 4,000,000 4,179,280 Transylvania Community Hospital Inc. Project, Refunding, 5.75%, 10/01/19 ................. 1,090,000 992,303 Wake County Hospital System Project, MBIA Insured, 5.375%, 10/01/26 ...................... 10,825,000 10,989,215 Wilson Memorial Hospital Project, Refunding, AMBAC Insured, 5.625%, 11/01/18 ............. 5,000,000 5,214,400 North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Refunding, 6.25%, 1/01/17 ................................................................ 6,820,000 6,999,707 Series A, MBIA Insured, 5.00%, 1/01/20 ................................................... 2,000,000 2,012,720 North Carolina State Education Assistance Authority Revenue, Guaranteed, Student Loan, sub. lien, Series A, 6.05%, 7/01/10 ................................................................. 3,310,000 3,498,240 Series A, 6.30%, 7/01/15 ................................................................. 1,500,000 1,578,675 Series C, 6.35%, 7/01/16 ................................................................. 4,500,000 4,762,530
107 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Onslow County Combined Enterprise System Revenue, MBIA Insured, 6.00%, 6/01/15 .............. $ 2,000,000 $ 2,181,860 Piedmont Triad Airport Authority Airport Revenue, Refunding, Series A, FSA Insured, 6.00%, 7/01/24 .................................................................................... 5,745,000 6,195,465 Pitt County COP, FGIC Insured, 6.00%, 4/01/12 ............................................................. 750,000 767,190 MBIA Insured, 5.85%, 4/01/17 ............................................................. 5,055,000 5,509,343 School Facilities Project, Series A, FSA Insured, 5.25%, 4/01/25 ......................... 1,670,000 1,694,733 School Facilities Project, Series B, FSA Insured, 5.50%, 4/01/25 ......................... 1,000,000 1,042,930 Puerto Rico Commonwealth GO, Pre-Refunded, 6.45%, 7/01/17 ............................................................. 8,050,000 8,987,664 Public Improvement, Series A, 5.125%, 7/01/31 ............................................ 5,000,000 4,928,700 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, MBIA Insured, 5.00%, 7/01/38 ................................................... 2,000,000 1,989,900 Series D, 5.375%, 7/01/36 ................................................................ 5,000,000 5,052,900 (b)Series D, 5.25%, 7/01/38 ............................................................... 3,000,000 3,002,130 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.75%, 7/01/08 ........................................................................... 100,000 100,390 7.50%, 7/01/09 ........................................................................... 25,000 25,090 AMBAC Insured, 5.00%, 7/01/28 ............................................................ 10,000,000 9,984,800 Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 ................................................................ 6,000,000 6,004,620 Series T, Pre-Refunded, 6.375%, 7/01/24 .................................................. 1,000,000 1,119,560 Puerto Rico Electric Power Authority Revenue, Series X, Pre-Refunded, 6.125%, 7/01/21 ....... 4,000,000 4,544,040 Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ......................... 335,000 335,482 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.375%, 7/01/33 ....... 5,000,000 5,052,900 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E, 5.70%, 8/01/25 5,000,000 5,166,650 Raeford HDC Revenue, First Lien, Yadkin Trail, Refunding, Series A, 6.00%, 7/15/22 .......... 1,375,000 1,398,801 Raleigh Durham Airport Authority Airport Revenue, Series A, FGIC Insured, 5.00%, 11/01/25 ... 6,480,000 6,470,669 Raleigh Durham Airport Revenue, Series A, FGIC Insured, 5.00%, 11/01/31 ..................... 8,000,000 7,938,320 Randolph County COP, FSA Insured, 5.75%, 6/01/22 ............................................ 5,500,000 5,847,820 Robeson County Industrial Facilities and PCFA Revenue, Campbell Soup Co. Project, Refunding, 6.40%, 12/01/06 ................................................................. 1,750,000 1,972,985 Rutherford County COP, Public Facilities Project, FGIC Insured, 6.25%, 6/01/23 .............. 1,850,000 2,023,530 Stokes County COP, MBIA Insured, 7.00%, 3/01/06 ............................................. 1,000,000 1,039,710 University of Greensboro Revenue, Housing and Dining System, Series G, MBIA Insured, 6.00%, 4/01/26 ............................................................................. 2,040,000 2,217,480 University of North Carolina Greensboro Revenue, Series A, FSA Insured, 5.00%, 4/01/26 ...... 4,940,000 4,919,252 University of North Carolina Revenue, Series A, 5.00%, 12/01/25 ............................. 4,000,000 3,983,160 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 .......................................................................... 2,000,000 2,049,320 5.625%, 10/01/25 ......................................................................... 1,575,000 1,602,232 Wake County Industrial Facilities and PCFA Revenue, Carolina Power and Light Co., 6.90%, 4/01/09 10,000,000 10,150,000 Carolina Power and Light Company Project, Refunding, 5.375%, 2/01/17 ..................... 8,000,000 8,101,440 Wilkes County COP, Public Improvements Project, FSA Insured, 5.375%, 12/01/20 ............... 1,000,000 1,036,360 Winston-Salem SFMR, 8.00%, 9/01/07 .......................................................... 170,000 172,154 Winston-Salem Water and Sewer System Revenue, Refunding, 5.125%, 6/01/20 ............................................................... 2,500,000 2,538,625 Refunding, 5.125%, 6/01/28 ............................................................... 2,000,000 2,010,120 Series B, 5.70%, 6/01/17 ................................................................. 2,250,000 2,499,141 ------------ TOTAL LONG TERM INVESTMENTS (COST $419,312,937) 436,742,828 ------------
108 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ aSHORT TERM INVESTMENTS 1.4% Charlotte-Mecklenberg Hospital Authority Health Care System Revenue, Series B, Weekly VRDN and Put, 1.15%, 1/15/26 ......................................................................... $ 1,700,000 $ 1,700,000 North Carolina Medical Care Commission Health Care Facilities Revenue, The Givens Estates Inc. Project, Daily VRDN and Put, 1.30%, 12/01/26 ................................................ 200,000 200,000 North Carolina Medical Care Commission Hospital Revenue, Angel Medical Center Inc. Project, Weekly VRDN and Put, 1.20%, 10/01/16 ........................................................ 345,000 345,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ................................................................ 1,800,000 1,800,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 .......................................... 2,450,000 2,450,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $6,495,000) ............................................... 6,495,000 ------------ TOTAL INVESTMENTS (COST $425,807,937) 99.3% .................................................. 443,237,828 OTHER ASSETS, LESS LIABILITIES .7% ........................................................... 3,043,402 ------------ NET ASSETS 100.0% ............................................................................ $446,281,230 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. b Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. See notes to financial statements. 109 FRANKLIN TAX-FREE TRUST Financial Highlights
FRANKLIN TEXAS TAX-FREE INCOME FUND YEAR ENDED FEBRUARY 28, -------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $10.60 $10.22 $11.42 $11.68 $11.37 -------------------------------------------------- Income from investment operations: Net investment incomea .............................................. .54 .58 .58 .60 .62 Net realized and unrealized gains (losses) .......................... (.09) .37 (1.16) (.05) .36 -------------------------------------------------- Total from investment operations ..................................... .45 .95 (.58) .55 .98 -------------------------------------------------- Less distributions from: Net investment income ............................................... (.55) (.57) (.58) (.60) (.64) Net realized gains .................................................. -- -- (.04) (.21) (.03) -------------------------------------------------- Total distributions .................................................. (.55) (.57) (.62) (.81) (.67) -------------------------------------------------- Net asset value, end of year ......................................... $10.50 $10.60 $10.22 $11.42 $11.68 ================================================== Total return b ....................................................... 4.30% 9.53% (5.21)% 4.86% 8.91% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $104,617 $103,010 $104,433 $127,739 $130,578 Ratios to average net assets: Expenses ............................................................ .82% .81% .78% .77% .76% Net investment income ............................................... 5.15% 5.53% 5.35% 5.17% 5.44% Portfolio turnover rate .............................................. 30.75% 14.02% 20.93% 25.26% 34.52% CLASS C ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $10.75 $10.36 $11.57 $11.81 $11.49 -------------------------------------------------- Income from investment operations: Net investment income a ............................................. .49 .53 .53 .53 .58 Net realized and unrealized gains (losses) .......................... (.09) .37 (1.18) (.03) .35 -------------------------------------------------- Total from investment operations ..................................... .40 .90 (.65) .50 .93 -------------------------------------------------- Less distributions from: Net investment income ............................................... (.49) (.51) (.52) (.53) (.58) Net realized gains .................................................. -- -- (.04) (.21) (.03) -------------------------------------------------- Total distributions .................................................. (.49) (.51) (.56) (.74) (.61) -------------------------------------------------- Net asset value, end of year ......................................... $10.66 $10.75 $10.36 $11.57 $11.81 ================================================== Total return b ....................................................... 3.75% 8.90% (5.77)% 4.40% 8.31% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $4,441 $4,486 $4,650 $5,229 $2,076 Ratios to average net assets: Expenses ............................................................ 1.37% 1.36% 1.34% 1.33% 1.33% Net investment income ............................................... 4.59% 4.97% 4.79% 4.61% 4.79% Portfolio turnover rate .............................................. 30.75% 14.02% 20.93% 25.26% 34.52%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 110 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN TEXAS TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.0% Alliance Airport Authority Special Facilities Revenue, American Airlines Inc. Project, 7.00%, 12/01/11 ...................................................................................... $2,250,000 $ 2,045,655 Austin Water and Wastewater System Revenue, Refunding, Series B, FSA Insured, 5.25%, 5/15/31 ... 1,000,000 1,003,540 Bexar County Health Facilities Development Corp. Revenue, Incarnate Word Health Services, Refunding, FSA Insured, ETM, 6.00%, 11/15/15 .................................................. 3,000,000 3,271,740 Bexar County HFC Revenue, GNMA Secured, 8.10%, 3/01/24 ......................................... 65,000 65,995 Bexar County HFC, MFHR, Honey Creek Apartments Project, Series A, MBIA Insured, 6.125%, 4/01/20 ............................................................................. 1,000,000 1,053,330 6.20%, 4/01/30 .............................................................................. 2,845,000 2,965,998 Bexar Metropolitan Water District Waterworks Systems Revenue, Refunding, MBIA Insured, 6.35%, 5/01/25 ................................................................................ 1,890,000 2,078,584 Brazos Higher Education Authority Revenue, Student Loan Inc., Refunding, Series A-2, 6.80%, 12/01/04 ...................................................................................... 825,000 880,102 Bridge City ISD, GO, Refunding, 5.375%, 2/15/32 ................................................ 2,005,000 2,032,649 Cameron County HFC Revenue, Collateralized Mortgage Obligation, Refunding, Series B, FGIC Insured, 7.85%, 3/01/24 .................................................................. 70,000 71,070 Carrollton GO, Improvement, FSA Insured, 5.25%, 8/15/19 ........................................ 1,000,000 1,021,630 Castleberry ISD, Refunding, 6.00%, 8/15/25 ..................................................... 175,000 187,353 Comal County Health Facilities Development Corp. Revenue, McKenna Memorial Hospital, Refunding, FHA Insured, 7.375%, 1/15/21 .................................................................. 1,360,000 1,389,607 Corpus Christi HFC, SFMR, Refunding, Series A, MBIA Insured, 7.70%, 7/01/11 .................... 415,000 423,528 Dallas Area Rapid Transportation, senior lien, AMBAC Insured, 5.00%, 12/01/26 .................. 2,000,000 1,955,420 Dallas Housing Corp. Capital Projects Revenue, Section 8, Assisted Projects, Refunding, 7.70%, 8/01/05 ....................................................................................... 415,000 419,092 Dallas-Fort Worth International Airport Facilities Improvement Corp. Revenue, Delta Airlines Inc., 7.625%, 11/01/21 ........................................................................ 2,000,000 2,004,140 Decatur Hospital Authority Hospital Revenue, Series A, 5.75%, 9/01/29 .......................... 4,235,000 3,771,310 Duncanville ISD, GO, Refunding, Series B, 5.25%, 2/15/32 ....................................... 5,000,000 5,019,050 Edcouch Elsa ISD, GO, 5.50%, 2/15/30 ........................................................... 2,000,000 2,056,920 Fort Worth HFC, HMR, Refunding, Series A, 8.50%, 10/01/11 ...................................... 355,000 366,136 Gulf Coast Waste Disposal Authority Revenue, Champion International Corp., Series A, 6.875%, 12/01/28 .................................... 1,000,000 1,024,100 Valero Energy Corp. Project, 5.70%, 4/01/32 ................................................. 3,000,000 2,887,290 Harlingen Construction ISD, GO, 5.00%, 8/15/26 ................................................. 1,000,000 976,530 Harris County Houston Sports Authority Revenue, senior lien, Series G, MBIA Insured, 5.25%, 11/15/30 ...................................................................................... 2,000,000 2,007,380 Hidalgo County GO, Certificates Obligation, FSA Insured, 5.25%, 8/15/21 ........................ 2,500,000 2,542,750 Houston Airport System Revenue, sub. lien, Series B, FSA Insured, 5.50%, 7/01/30 ............... 2,000,000 2,046,740 Keller ISD, GO, Refunding, 5.375%, 8/15/25 ..................................................... 1,500,000 1,527,975 Laredo ISD, GO, 5.25%, 8/01/24 ................................................................. 4,000,000 4,033,960 Leon County PCR, Nucor Corp. Project, Refunding, Series A, 7.375%, 8/01/09 ..................... 2,000,000 2,047,200 Little Cypress Mauriceville Consolidated ISD, GO, Refunding, 5.90%, 8/01/29 .................... 2,130,000 2,255,414 Lower Colorado River Authority Revenue, Refunding and Improvement, Series A, MBIA Insured, 5.00%, 5/15/26 ................................................................................ 2,500,000 2,444,900 Mesquite Health Facilities Development Corp. Revenue, Retirement Facility, Christian Care Centers Inc., Refunding, Series A, 6.40%, 2/15/16 ..................................................................................... 1,000,000 1,006,320 2/15/20 ..................................................................................... 2,000,000 1,993,560 Montgomery County Texas GO, Library, Refunding, FGIC Insured, 6.75%, 9/01/10 ..................................................................................... 495,000 506,697 9/01/11 ..................................................................................... 530,000 542,524 Northside ISD, GO, Refunding, 5.00%, 2/15/26 ................................................... 2,500,000 2,441,925 Nueces River Authority Environmental Improvement Revenue, Asarco Inc. Project, Refunding, 5.60%, 1/01/27 ................................................................................ 6,000,000 1,920,000 Onalaska ISD, GO, 5.375%, 2/15/32 .............................................................. 2,840,000 2,862,748 Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.65%, 12/01/22 ... 2,000,000 1,926,540 Red River Authority PCR, West Texas Utilities Co. Project, Public Service Co. of Oklahoma, Central Power and Light Co., Refunding, MBIA Insured, 6.00%, 6/01/20 .......................... 7,000,000 7,610,050 Richardson GO, Hotel Occupancy Certificates, Series A, FGIC Insured, 5.75%, 2/15/21 ............ 2,500,000 2,641,750 Sabine River Authority PCR, Southwestern Electric Power Co., Refunding, MBIA Insured, 6.10%, 4/01/18 ....................................................................................... 5,000,000 5,479,850 San Antonio ISD, Building, Series A, 5.00%, 8/15/26 ............................................ 5,000,000 4,882,650 Tarrant County Health Facilities Development Corp. Health Systems Revenue, Harris Methodist Health, FGIC Insured, ETM, 6.00%, 9/01/24 ..................................................... 4,000,000 4,530,560 Tarrant County Health Facilities Development Corp. Revenue, Bethesda Living Centers, Series C, 5.75%, 8/15/18 ..................................................................................... 1,570,000 1,388,382 8/15/28 ..................................................................................... 3,900,000 3,295,773 Texas City IDC, Marine Terminal Revenue, ARCO Pipe Line Co. Project, Refunding, 7.375%, 10/01/20 ...................................................................................... 500,000 623,680 Texas State Department of Housing and Community Affairs HMR, Refunding, Series A, GNMA Secured, 6.95%, 7/01/23 ................................................................................ 1,375,000 1,406,763 Texas State GO, Veterans Housing Assistance Fund I, Refunding, 6.15%, 12/01/25 ................. 1,000,000 1,033,500 Texas State Higher Education Coordinating Board College Student Loan Revenue, senior lien, 7.70%, 10/01/25 ............................................................................... 185,000 187,964
111 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN TEXAS TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) University of Texas University Revenues, Financing System, Refunding, Series A, 5.70%, 8/15/20 ...$1,000,000 $ 1,053,830 Waco Health Facilities Development Corp. Hospital Revenue, Hillcrest Baptist Medical Center Project, MBIA Insured, 7.125%, 9/01/14 .......................................................... 500,000 506,500 Wylie ISD, GO, Pre-Refunded, 7.00%, 8/15/24 ................................................................. 210,000 259,143 Pre-Refunded, 7.00%, 8/15/24 ................................................................. 450,000 555,305 Refunding, 7.00%, 8/15/24 .................................................................... 340,000 398,228 ------------ TOTAL LONG TERM INVESTMENTS (COST $107,931,735) ................................................. 106,931,330 ------------ aSHORT TERM INVESTMENTS .9% Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ............................................................................ 300,000 300,000 Brazos River Harbor Naval District, Brazoria County Revenue, Dow Chemical Company Project, Refunding, Series A, Daily VRDN and Put, 1.65%, 8/01/22 ........................................ 600,000 600,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $900,000) .................................................... 900,000 ------------ TOTAL INVESTMENTS (COST $108,831,735) 98.9% ..................................................... 107,831,330 OTHER ASSETS, LESS LIABILITIES 1.1% ............................................................. 1,227,277 ------------ NET ASSETS 100.0% ............................................................................... $109,058,607 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 112 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN VIRGINIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $11.45 $10.79 $11.88 $11.88 $11.65 ------------------------------------------------- Income from investment operations: Net investment income a ............................................. .56 .59 .59 .60 .62 Net realized and unrealized gains (losses) .......................... .08 .65 (1.09) .03 .35 ------------------------------------------------- Total from investment operations ..................................... .64 1.24 (.50) .63 .97 ------------------------------------------------- Less distributions from: Net investment income ............................................... (.57) (.58) (.59) (.60) (.64) Net realized gains .................................................. -- -- -- (.03) (.10) ------------------------------------------------- Total distributions .................................................. (.57) (.58) (.59) (.63) (.74) ------------------------------------------------- Net asset value, end of year ......................................... $11.52 $11.45 $10.79 $11.88 $11.88 ================================================= Total return b ....................................................... 5.73% 11.80% (4.31)% 5.40% 8.53% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $395,579 $356,599 $327,235 $379,670 $332,199 Ratios to average net assets: Expenses ............................................................ .69% .70% .68% .68% .69% Net investment income ............................................... 4.88% 5.27% 5.19% 4.98% 5.29% Portfolio turnover rate .............................................. 15.36% 8.89% 22.53% 8.90% 12.90% CLASS C ------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $11.53 $10.86 $11.95 $11.95 $11.71 ------------------------------------------------- Income from investment operations: Net investment income a ............................................. .50 .53 .53 .53 .57 Net realized and unrealized gains (losses) .......................... .09 .66 (1.09) .03 .34 ------------------------------------------------- Total from investment operations ..................................... .59 1.19 (.56) .56 .91 Less distributions from: Net investment income ............................................... (.50) (.52) (.53) (.53) (.57) Net realized gains .................................................. -- -- -- (.03) (.10) ------------------------------------------------- Total distributions .................................................. (.50) (.52) (.53) (.56) (.67) ------------------------------------------------- Net asset value, end of year ......................................... $11.62 $11.53 $10.86 $11.95 $11.95 ================================================= Total return b ....................................................... 5.28% 11.23% (4.82)% 4.78% 7.97% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $33,992 $24,766 $21,454 $22,796 $13,186 Ratios to average net assets: Expenses ............................................................ 1.24% 1.24% 1.23% 1.24% 1.25% Net investment income ............................................... 4.34% 4.72% 4.64% 4.42% 4.72% Portfolio turnover rate .............................................. 15.36% 8.89% 22.53% 8.90% 12.90%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 113 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.4% Abingdon IDA, Hospital Facilities Revenue, Johnston Memorial Hospital, Refunding, 5.375%, 7/01/28 ............................................................... $ 5,000,000 $ 4,920,000 Albermarle County IDAR, Martha Jefferson Hospital, Refunding, 5.875%, 10/01/13 ................................... 5,000,000 5,164,400 University of Virginia Health Services Foundation, Pre-Refunded, 6.50%, 10/01/22 ......... 1,125,000 1,180,226 Alexandria IDA, Educational Facilities Revenue, Episcopal High School, 5.875%, 1/01/29 ...... 2,500,000 2,616,225 Augusta County Service Authority Water and Sewer Revenue, MBIA Insured, 5.00%, 11/01/24 ..... 2,250,000 2,251,260 6.30%, 12/01/25 .......................................................................... 2,000,000 1,903,040 5.60%, 12/01/25 .......................................................................... 7,650,000 6,583,131 Series A, 6.55%, 12/01/25 ................................................................ 5,000,000 4,887,600 Bristol GO, Public Improvement, Refunding, FSA Insured, 5.00%, 11/01/22 ..................... 1,005,000 1,007,744 Bristol Utility System Revenue, Refunding, FSA Insured, 5.00%, 7/15/21 ...................... 1,245,000 1,257,836 Chesapeake IDA, Public Facilities Lease Revenue, Chesapeake Jail Project, MBIA Insured, 6.00%, 6/01/12 ............................................................. 3,940,000 4,303,701 Chesapeake Toll Road Revenue, Expressway, Series A, 5.625%, 7/15/19 .................................................................................. 3,250,000 3,326,928 7/15/32 .................................................................................. 8,000,000 7,958,960 Covington-Alleghany County IDA, PCR, Westvaco Corp. Project, Refunding, 6.65%, 9/01/18 ...... 5,000,000 5,237,250 Danville IDA, Hospital Revenue, Danville Regional Medical Center, FGIC Insured, Pre-Refunded, 6.50%, 10/01/24 ............................................................ 5,000,000 5,584,650 Solid Waste Disposal Revenue, International Paper Co., 6.50%, 3/01/19 .................... 500,000 514,970 Fairfax County EDA Revenue, National Wildlife Federation, MBIA Insured, 5.375%, 9/01/29 ..... 8,000,000 8,188,720 Fairfax County IDAR, Health Care, Inova Health System Project, 6.00%, 8/15/26 .............................................. 5,000,000 5,188,800 Inova Health System Project, Refunding, Series A, 5.00%, 8/15/25 ......................... 5,000,000 4,911,800 Inova Health, Refunding, Series A, 5.00%, 8/15/18 ........................................ 2,100,000 2,115,855 Fairfax County Redevelopment and Housing Authority MFHR, Cedar Ridge Apartments, GNMA Secured, 6.30%, 12/20/27 .................................... 4,700,000 4,914,978 Paul Spring Center, Refunding, Series A, FHA Insured, 5.90%, 6/15/17 ..................... 1,000,000 1,059,300 Paul Spring Center, Refunding, Series A, FHA Insured, 6.00%, 12/15/28 .................... 1,000,000 1,046,640 Fairfax County Sewer Revenue, MBIA Insured, 5.875%, 7/15/28 ................................. 5,000,000 5,345,350 Fairfax County Water Authority Revenue, Refunding, 5.00%, 4/01/29 ........................... 1,000,000 991,170 Frederick County IDA, Lease Revenue, Government Complex Facilities Project, MBIA Insured, 6.50%, 12/01/09 ............................................................ 2,040,000 2,311,442 Fredericksburg IDA, Hospital Facilities Revenue, Medicorp Health System Obligation, Refunding, AMBAC Insured, 5.25%, 6/15/23 ................................................. 10,000,000 10,125,800 Gloucester County IDA, Lease Revenue, Courthouse Project, MBIA Insured, 5.50%, 11/01/30 ..... 1,715,000 1,787,922 Greater Richmond Convention Center Authority Hotel Tax Revenue, Convention Center Expansion Project, 6.125%, 6/15/29 .......................................................................... 8,000,000 8,639,440 6.25%, 6/15/32 ........................................................................... 8,175,000 8,891,130 Guam Airport Authority Revenue, Refunding, Series A, 6.375%, 10/01/10 .................................................... 830,000 861,855 Series A, 6.50%, 10/01/23 ................................................................ 1,000,000 1,031,330 Halifax County IDA, Exempt Facilities Revenue, Old Dominion Electric Cooperative Project, 6.50%, 12/01/12 .......................................................................... 3,000,000 3,099,810 Hampton Redevelopment and Housing Authority Senior Living Association Revenue, Refunding, Series A, GNMA Secured, 6.00%, 1/20/26 ........................................ 1,060,000 1,105,315 Hampton Roads Regional Jail Authority Jail Facilities Revenue, Series A, MBIA Insured, 5.00%, 7/01/28 ............................................................. 10,000,000 9,955,800 Hanover County Water and Sewer System Revenue, MBIA Insured, 5.25%, 2/01/26 ................. 4,175,000 4,227,605 Harrisonburg GO, FSA Insured, 5.75%, 12/01/29 ............................................... 1,000,000 1,070,240 Henrico County IDAR, Solid Waste, Browning-Ferris Industries, South Atlantic Inc., Series A, 5.875%, 3/01/17 ................................................................ 1,000,000 948,940 Henry County IDA, Hospital Revenue, Memorial Hospital of Martinsville and Henry, Refunding, 6.00%, 1/01/27 ................................................................ 1,250,000 1,291,563 Isle Wight County IDA, Environmental Improvement Revenue, International Paper Company Project, Series A, 6.60%, 5/01/24 ................................................ 2,000,000 2,103,180 Isle Wight County IDAR, International Paper Co. Project, Series A, 5.85%, 1/01/18 ........... 4,155,000 4,216,785 Leesburg Utilities System Revenue, Refunding, MBIA Insured, 5.125%, 7/01/22 ................. 3,750,000 3,791,925 Loudoun County IDA, Hospital Revenue, Loudoun Hospital Center, FSA Insured, 5.80%, 6/01/26 .. 3,000,000 3,140,100 Loudoun County Sanitation Authority Water and Sewer Revenue, Refunding, FGIC Insured, 5.125%, 1/01/26 ................................................. 3,795,000 3,817,504 Refunding, FGIC Insured, 5.125%, 1/01/30 ................................................. 5,250,000 5,272,103 Series 96, FGIC Insured, 5.25%, 1/01/26 .................................................. 6,500,000 6,592,495 Series 96, FGIC Insured, 5.25%, 1/01/30 .................................................. 1,000,000 1,009,620
114 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Lynchburg IDA, Healthcare Facilities Revenue, Centra Health, Refunding, 5.20%, 1/01/28 ...... $8,000,000 $8,004,480 Lynchburg Redevelopment and Housing Authority Revenue, Waldon Pond III, Refunding, Series A, GNMA Secured, 6.20%, 7/20/27 ................................................... 1,000,000 1,047,380 Metropolitan Washington D.C. Airports Authority General Airport Revenue, Refunding, Series A, FGIC Insured, 5.00%, 10/01/27 ....................................... 5,000,000 4,873,050 Series A, 5.375%, 10/01/23 ............................................................... 3,000,000 3,021,180 Series B, 5.75%, 10/01/20 ................................................................ 6,000,000 6,196,560 Middlesex County IDA, Lease Revenue, School Facilities Project, MBIA Insured, 5.875%, 8/01/21 .......................................................................... 1,420,000 1,539,678 6.10%, 8/01/26 ........................................................................... 1,725,000 1,887,564 Montgomery County IDA, Lease Revenue, Series B, AMBAC Insured, 5.50%, 1/15/22 ............... 1,000,000 1,047,690 Newport News GO, 4.75%, 8/15/20 ............................................................. 3,905,000 3,852,946 Newport News IDA, Mortgage Revenue, Mennowood Communities Inc., Series A, GNMA Secured, 6.25%, 8/01/36 ............................................................. 2,965,000 3,131,781 Newport News Redevelopment and Housing Authority Revenue, Refunding, Series A, GNMA Secured, 5.85%, 12/20/30 ............................................................ 4,060,000 4,208,515 Norfolk Airport Authority Revenue, Series B, FGIC Insured, 5.125%, 7/01/31 .................. 1,440,000 1,423,728 Norfolk IDAR, Health Care, Bon Secours Health, Series B, MBIA Insured, 5.25%, 8/15/26 ....... 3,000,000 3,023,790 Norfolk Parking System Revenue, MBIA Insured, 5.55%, 2/01/27 ................................ 2,000,000 2,074,100 Norfolk Water Revenue, MBIA Insured, 5.90%, 11/01/25 ............................................................ 5,000,000 5,377,950 Refunding, FGIC Insured, 4.75%, 11/01/20 ................................................. 1,250,000 1,227,163 Peninsula Ports Authority Coal Terminal Revenue, Coal Terminal Association Project, Refunding, 7.375%, 6/01/20 ............................................................... 5,480,000 5,623,192 Peninsula Ports Authority Health System Revenue, Riverside Health System Project, Series A, Pre-Refunded, 6.625%, 7/01/18 .................................................. 6,000,000 6,221,700 Peninsula Ports Authority Hospital Facilities Revenue, Whittaker Memorial Hospital Project, Refunding, FHA Insured, 8.70%, 8/01/23 ................................................... 50,000 61,270 Prince William County IDA, MFHR, Remington Place Apartments Project, Series A-1, 6.00%, 12/01/33 .......................................................................... 2,340,000 2,420,075 Prince William County Service Authority Water and Sewer Systems Revenue, FGIC Insured, 5.50%, 7/01/29 ............................................................. 5,000,000 5,191,650 Puerto Rico Commonwealth GO, Public Improvement, Series A, 5.125%, 7/01/31 .................. 5,000,000 4,928,700 Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y, 5.50%, 7/01/36 ........................................................................... 4,500,000 4,662,450 Pre-Refunded, 6.00%, 7/01/22 ............................................................. 2,000,000 2,295,060 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series D, 5.375%, 7/01/36 .......................................................................... 5,000,000 5,052,900 5.25%, 7/01/38 ........................................................................... 3,000,000 3,002,130 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.90%, 7/01/07 ........................................................................... 100,000 100,410 7.75%, 7/01/08 ........................................................................... 350,000 351,365 AMBAC Insured, 5.00%, 7/01/28 ............................................................ 5,000,000 4,992,400 Puerto Rico Electric Power Authority Power Revenue, Series HH, FSA Insured, 5.25%, 7/01/29 .. 5,910,000 6,009,761 Puerto Rico Electric Power Authority Revenue, Refunding, Series Z, 5.25%, 7/01/21 ........... 1,500,000 1,508,055 Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ............................................... 1,810,000 1,812,606 Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 ................... 20,000 23,782 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.375%, 7/01/33 ....... 5,000,000 5,052,900 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E, 5.70%, 8/01/25 ........................................................................... 1,000,000 1,033,330 Richmond GO, FGIC Insured, 5.00%, 7/15/19 ............................................................. 3,690,000 3,728,450 Refunding and Improvement, Series A, FSA Insured, 5.125%, 1/15/24 ........................ 2,000,000 2,019,020 Richmond IDA, Student Housing Revenue, University Real Estate Foundation, 5.55%, 1/01/31 .... 3,400,000 3,471,842 Richmond Metropolitan Authority Expressway Revenue, Refunding, Series B, FGIC Insured, 6.25%, 7/15/22 ........................................ 4,030,000 4,173,146 Series A, FGIC Insured, Pre-Refunded, 6.375%, 7/15/16 .................................... 1,500,000 1,557,435 Series B, FGIC Insured, Pre-Refunded, 6.25%, 7/15/22 ..................................... 970,000 1,006,715 Richmond Public Facilities COP, 800 Megahertz Project, Series A, AMBAC Insured, 5.00%, 8/01/22 ........................................................................... 2,000,000 2,008,840 Spotsylvania County Water and Sewer System Revenue, MBIA Insured, 5.25%, 6/01/22 ........................................................................... 6,500,000 6,609,005 5.40%, 6/01/27 ........................................................................... 6,800,000 6,971,224 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/15 ................................................................................. 1,500,000 1,566,060 10/01/18 ................................................................................. 1,500,000 1,536,990
115 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Virginia Beach Water and Sewer Revenue, 5.25%, 8/01/21 ...................................... $ 1,865,000 $ 1,905,582 Virginia College Building Authority Educational Facilities Revenue GO, Regent University Project, MBIA Insured, 5.125%, 10/01/21 ................................ 5,000,000 5,077,300 Virginia College Building Authority Educational Facilities Revenue, 21st Century College Program, 5.00%, 2/01/21 ............................................. 1,375,000 1,382,411 Hampton University Project, 6.00%, 4/01/20 ............................................... 1,500,000 1,626,315 Marymount University Project, Pre-Refunded, 7.00%, 7/01/22 ............................... 1,750,000 1,816,483 Washington and Lee University, 5.75%, 1/01/19 ............................................ 50,000 52,632 Virginia College Building Authority Virginia Educational Facilities Revenue GO, Regent University Project, MBIA Insured, 5.125%, 10/01/31 ................................ 3,000,000 3,016,800 Virginia Commonwealth Transportation Board Transportation Revenue, U.S. Route 58 Corridor Development Program, Series B, 5.00%, 5/15/24 ..................... 2,000,000 1,999,860 Virginia State Commonwealth Transportation Board Transportation Revenue, US Route 58 Corridor Development Project, Series B, 5.00%, 5/15/26 ....................... 10,000,000 9,957,500 Virginia State HDA Commonwealth Mortgage Revenue, Series J, Sub Series J-1, MBIA Insured, 5.20%, 7/01/19 ................................................. 5,000,000 5,062,250 Virginia State HDA, Commonwealth Mortgage, Series A, Sub Series A-1, 8.10%, 1/01/17 .......................... 5,000 5,019 Commonwealth Mortgage, Series B, Sub Series B-3, 7.375%, 7/01/17 ......................... 45,000 45,125 Commonwealth Mortgage, Series C, Sub Series C-3, 6.00%, 1/01/17 .......................... 2,000,000 2,096,060 Commonwealth Mortgage, Series D, Sub Series D-1, 6.40%, 7/01/17 .......................... 400,000 414,784 Commonwealth Mortgage, Series D, Sub Series D-2, 7.35%, 7/01/17 .......................... 155,000 155,076 MFH, Series C, 5.30%, 11/01/16 ........................................................... 1,000,000 1,024,330 MFH, Series F, 7.10%, 5/01/13 ............................................................ 8,460,000 8,570,826 MFH, Series H, 5.55%, 5/01/15 ............................................................ 1,000,000 1,039,860 Rental Housing, Series J, 5.80%, 2/01/19 ................................................. 2,000,000 2,083,440 Rental Housing, Series L, 5.75%, 2/01/15 ................................................. 1,000,000 1,057,790 SFHR, Series B, Subseries B-1, 5.95%, 7/01/18 ............................................ 2,000,000 2,109,800 Virginia State Public School Authority GO, School Financing, Series A, 5.00%, 8/01/20 .................................................................................. 3,000,000 3,015,420 8/01/21 .................................................................................. 4,000,000 4,006,720 Virginia State Public School Authority Revenue, School Financing, Series C, 5.00%, 8/01/22 .................................................................................. 2,000,000 2,001,620 8/01/26 .................................................................................. 10,925,000 10,818,044 Virginia State Resource Authority Airport Revenue, Revolving Fund, Series A, 5.00%, 8/01/27 ................................................................. 3,000,000 2,940,660 Virginia State Resources Authority Water and Sewer System Revenue, Pooled Loan Program, Series A, ETM, 7.35%, 11/01/16 ...................................... 45,000 47,007 Pooled Loan Program, Series A, ETM, 7.45%, 11/01/16 ...................................... 10,000 10,568 Rapidan Service Authority, Refunding, 5.30%, 10/01/18 .................................... 1,610,000 1,661,568 Virginia State Resources Authority Water System Revenue, Refunding, Series A, 6.125%, 4/01/19 ................................................................ 1,000,000 1,003,490 Virginia State Transportation Board Transportation Contract Revenue, U.S. Route 28 Project, Refunding, 6.50%, 4/01/18 ......................................... 9,000,000 9,208,800 Washington County IDA, College Facilities Revenue, Emory and Henry College Project, 6.375%, 4/01/23 ............. 3,295,000 3,354,837 Hospital Facilities Revenue, First Mortgage, Johnston Memorial Hospital, Pre-Refunded, 7.00%, 7/01/22 ............................................................. 3,000,000 3,114,450 West Point IDA, Solid Waste Disposal Revenue, Chesapeake Corp. Project, Refunding, Series B, 6.25%, 3/01/19 ...................................................... 3,300,000 2,977,557 Winchester IDA, Educational Facilities Revenue, First Mortgage, Shenandoah University Project, Asset Guaranteed, 6.80%, 10/01/24 .......................................................................... 185,000 205,944 Pre-Refunded, 6.80%, 10/01/24 ............................................................ 1,000,000 1,133,850 York County Sewer Revenue, 5.875%, 6/01/24 .................................................................................. 500,000 533,835 6/01/29 .................................................................................. 1,500,000 1,595,834 ------------ TOTAL LONG TERM INVESTMENTS (COST $408,470,237) ............................................. 422,811,903 ------------
116 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN VIRGINIA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- a SHORT TERM INVESTMENTS 1.0% Petersburg VA Hospital Authority Revenue Southside Regional Hospital Facility 1.30%, 7/01/17 .......................................................................... $ 700,000 $ 700,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 ....................................... 300,000 300,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ........................................................ 3,300,000 3,300,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $4,300,000) ............................................. 4,300,000 ------------ TOTAL INVESTMENTS (COST $412,770,237) 99.4% ................................................ 427,111,903 OTHER ASSETS, LESS LIABILITIES .6% ......................................................... 2,458,695 ------------ NET ASSETS 100.0% .......................................................................... $429,570,598 ============
See glossary of terms on page 118. a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. b Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. See notes to financial statements. 117 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.) GLOSSARY OF TERMS -------------------------------------------------------------------------------- ACES - Adjustable Convertible Exempt Securities AMBAC - American Municipal Bond Assurance Corp. BIG - Bond Investors Guaranty Insurance Co. (acquired by MBIA in 1989 and no longer does business under this name). CDA - Community Development Authority/Agency CDAR - Community Development Authority/Agency Revenue CDD - Community Development District COP - Certificate of Participation EDA - Economic Development Authority EDC - Economic Development Corp. EDR - Economic Development Revenue ETM - Escrow to Maturity FGIC - Financial Guaranty Insurance Co. FHA - Federal Housing Authority/Agency FNMA - Federal National Mortgage Association FSA - Financial Security Assistance 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. IDA - Industrial Development Authority/Agency IDAR - Industrial Development Authority/Agency Revenue IDB - Industrial Development Board IDBR - Industrial Development Board Revenue IDC - Industrial Development Corp. IDR - Industrial Development Revenue ISD - Independent School District LLC - Limited Liability Corporation MAC - Municipal Assistance Corporation MBIA - Municipal Bond Investors Assurance Corp. MF - Multi-Family MFH - Multi-Family Housing MFHR - Multi-Family Housing Revenue MFMR - Multi-Family Mortgage Revenue MFR - Multi-Family Revenue PBA - Public Building Authority PCR - Pollution Control Revenue PFAR - Public Financing Authority Revenue RDA - Redevelopment Authority/Agency SF - Single Family SFHR - Single Family Housing Revenue SFM - Single Family Mortgage SFMR - Single Family Mortgage Revenue SFR - Single Family Revenue VHA - Veterans Administration VRDN - Variable Rate Demand Note ZERO CPN. - zero coupon 118 FRANKLIN TAX-FREE TRUST Financial Statements STATEMENTS OF ASSETS AND LIABILITIES FEBRUARY 28, 2002
FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA TAX-FREE FLORIDA TAX-FREE GEORGIA TAX-FREE KENTUCKY TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND -------------------------------------------------------------------------- Assets: Investments in securities: Cost .................................................... $222,335,215 $1,609,576,985 $185,412,943 $92,539,563 ========================================================================== Value ................................................... 230,489,701 1,706,804,706 193,520,917 94,964,456 Cash ................................................... 88,310 103,368 134,797 30,835 Receivables: Capital shares sold ..................................... 617,722 3,916,391 466,520 250,963 Interest ................................................ 3,672,742 26,648,370 2,650,127 1,285,611 -------------------------------------------------------------------------- Total assets ............................................ 234,868,475 1,737,472,835 196,772,361 96,531,865 -------------------------------------------------------------------------- Liabilities: Payables: Investment securities purchased ......................... -- -- 2,054,756 -- Capital shares redeemed ................................. 245,275 1,783,337 105,485 19,892 Affiliates .............................................. 156,769 959,365 138,985 41,500 Shareholders ............................................ 74,214 914,383 53,243 49,170 Distributions to shareholders .......................... 268,894 2,016,948 242,834 108,465 Other liabilities ...................................... 12,657 82,309 15,756 13,914 -------------------------------------------------------------------------- Total liabilities ....................................... 757,809 5,756,342 2,611,059 232,941 -------------------------------------------------------------------------- Net assets, at value ................................... $234,110,666 $1,731,716,493 $194,161,302 $96,298,924 ========================================================================== Net assets consist of: Undistributed net investment income .................... $ (171,230) $ (1,137,364) $ (189,869) $ (66,737) Net unrealized appreciation ............................ 8,154,486 97,227,721 8,107,974 2,424,893 Accumulated net realized loss .......................... (9,312,435) (13,044,146) (2,305,373) (1,520,685) Capital shares ......................................... 235,439,845 1,648,670,282 188,548,570 95,461,453 -------------------------------------------------------------------------- Net assets, at value ................................... $234,110,666 $1,731,716,493 $194,161,302 $96,298,924 ========================================================================== CLASS A: Net assets, at value ................................... $215,648,502 $1,609,945,794 $169,488,812 $96,298,924 ========================================================================== Shares outstanding ..................................... 19,225,422 137,434,801 14,292,449 8,654,218 ========================================================================== Net asset value per share a ............................ $11.22 $11.71 $11.86 $11.13 ========================================================================== Maximum offering price per share (net asset value per share / 95.75%) ................. $11.72 $12.23 $12.39 $11.62 ========================================================================== CLASS B: Net assets, at value ................................... -- $ 30,875,227 -- -- ========================================================================== Shares outstanding ..................................... -- 2,623,104 -- -- ========================================================================== Net asset value and maximum offering price per share a . -- $11.77 -- -- ========================================================================== CLASS C: Net assets, at value ................................... $ 18,462,164 $ 90,895,472 $ 24,672,490 -- ========================================================================== Shares outstanding ..................................... 1,635,644 7,684,029 2,065,769 -- ========================================================================== Net asset value per share a ............................ $11.29 $11.83 $11.94 -- ========================================================================== Maximum offering price per share (net asset value per share / 99%) .................... $11.40 $11.95 $12.06 -- ==========================================================================
a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. See notes to financial statements. 119 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONT.) FEBRUARY 28, 2002
FRANKLIN FRANKLIN FRANKLIN FRANKLIN NORTH CAROLINA LOUISIANA TAX-FREE MARYLAND TAX-FREE MISSOURI TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ----------------------------------------------------------------------- Assets: Investments in securities: Cost ................................................... $176,548,376 $296,342,432 $447,662,229 $425,807,937 ======================================================================= Value .................................................. 182,833,200 308,954,669 464,514,444 443,237,828 Cash .................................................. 17,240 1,498,491 54,815 25,795 Receivables: Investment securities sold ............................. -- 8,091,147 -- -- Capital shares sold .................................... 690,824 473,069 1,252,743 1,049,441 Interest ............................................... 2,864,370 4,150,891 6,985,802 6,128,645 ----------------------------------------------------------------------- Total assets ........................................... 186,405,634 323,168,267 472,807,804 450,441,709 ----------------------------------------------------------------------- Liabilities: Payables: Investment securities purchased ........................ 1,965,040 7,914,258 4,514,906 3,008,812 Capital shares redeemed ................................ 39,452 176,503 441,448 176,589 Affiliates ............................................. 121,403 208,593 291,735 282,899 Shareholders ........................................... 100,565 108,752 198,752 162,884 Distributions to shareholders ......................... 209,153 346,837 529,821 493,443 Other liabilities ..................................... 13,806 14,487 22,745 35,852 ----------------------------------------------------------------------- Total liabilities ...................................... 2,449,419 8,769,430 5,999,407 4,160,479 ----------------------------------------------------------------------- Net assets, at value .................................. $183,956,215 $314,398,837 $466,808,397 $446,281,230 ======================================================================= Net assets consist of: Undistributed net investment income ................... $ (150,792) $ 69,193 $ (112,414) $ (139,006) Net unrealized appreciation ........................... 6,284,824 12,612,237 16,852,215 17,429,891 Accumulated net realized loss ......................... (1,579,822) (2,058,989) (1,738,726) (4,006,853) Capital shares ........................................ 179,402,005 303,776,396 451,807,322 432,997,198 ----------------------------------------------------------------------- Net assets, at value .................................. $183,956,215 $314,398,837 $466,808,397 $446,281,230 ======================================================================= CLASS A: Net assets, at value .................................. $167,908,984 $281,141,409 $425,795,422 $388,400,224 ======================================================================= Shares outstanding .................................... 14,749,560 24,414,076 35,483,374 32,473,342 ======================================================================= Net asset value per share a ........................... $11.38 $11.52 $12.00 $11.96 ======================================================================= Maximum offering price per share (net asset value per share / 95.75%) .................. $11.89 $12.03 $12.53 $12.49 ======================================================================= CLASS C: Net assets, at value .................................. $ 16,047,231 $ 33,257,428 $ 41,012,975 $ 57,881,006 ======================================================================= Shares outstanding .................................... 1,398,992 2,860,438 3,401,957 4,801,606 ======================================================================= Net asset value per share a ........................... $11.47 $11.63 $12.06 $12.05 ======================================================================= Maximum offering price per share (net asset value per share / 99%) ................... $11.59 $11.75 $12.18 $12.17 =======================================================================
a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. See notes to financial statements. 120 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONT.) FEBRUARY 28, 2002 FRANKLIN FRANKLIN TEXAS TAX-FREE VIRGINIA TAX-FREE INCOME FUND INCOME FUND ---------------------------------- Assets: Investments in securities: Cost ........................................ $108,831,735 $412,770,237 ================================== Value ....................................... 107,831,330 427,111,903 Cash ....................................... 23,033 79,064 Receivables: Capital shares sold ......................... 25,653 788,340 Interest .................................... 1,466,446 5,717,867 ---------------------------------- Total assets ................................ 109,346,462 433,697,174 ---------------------------------- Liabilities: Payables: Investment securities purchased ............. -- 3,008,812 Capital shares redeemed ..................... -- 163,735 Affiliates .................................. 82,231 257,875 Shareholders ................................ 64,735 197,299 Distributions to shareholders .............. 126,169 478,551 Other liabilities .......................... 14,720 20,304 ---------------------------------- Total liabilities ........................... 287,855 4,126,576 ---------------------------------- Net assets, at value ....................... $109,058,607 $429,570,598 ================================== Net assets consist of: Undistributed net investment income ........ $ (112,477) $ (196,746) Net unrealized appreciation (depreciation) . (1,000,405) 14,341,666 Accumulated net realized loss .............. (1,871,634) (4,895,408) Capital shares ............................. 112,043,123 420,321,086 ---------------------------------- Net assets, at value ....................... $109,058,607 $429,570,598 ================================== CLASS A: Net assets, at value ....................... $104,617,384 $395,579,066 ================================== Shares outstanding ......................... 9,965,063 34,326,891 ================================== Net asset value per share a ................ $10.50 $11.52 ================================== Maximum offering price per share (net asset value per share / 95.75%) ..... $10.97 $12.03 ================================== CLASS C: Net assets, at value ....................... $ 4,441,223 $ 33,991,532 ================================== Shares outstanding ......................... 416,789 2,926,446 ================================== Net asset value per share a ................ $10.66 $11.62 ================================== Maximum offering price per share (net asset value per share / 99%) ........ $10.77 $11.74 ================================== a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. See notes to financial statements. 121 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 2002
FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA TAX-FREE FLORIDA TAX-FREE GEORGIA TAX-FREE KENTUCKY TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ----------------------------------------------------------------------- Investment income: Interest ............................................... $13,181,063 $ 94,851,040 $10,457,899 $4,730,906 ----------------------------------------------------------------------- Expenses: Management fees (Note 3) ............................... 1,267,908 7,791,826 1,063,682 543,717 Distribution fees (Note 3) Class A ................................................. 212,410 1,568,093 166,385 86,297 Class B ................................................. -- 121,300 -- -- Class C ................................................. 102,709 532,181 133,366 -- Transfer agent fees (Note 3) ........................... 111,235 657,363 103,914 36,926 Custodian fees ......................................... 2,271 16,591 1,892 934 Reports to shareholders ................................ 15,659 110,178 13,768 6,401 Registration and filing fees ........................... 6,443 20,144 5,621 1,920 Professional fees ...................................... 15,540 35,635 17,208 16,203 Trustees' fees and expenses ............................ 2,418 17,636 1,968 892 Other .................................................. 14,777 63,234 16,008 12,519 ----------------------------------------------------------------------- Total expenses .......................................... 1,751,370 10,934,181 1,523,812 705,809 Expenses waived/paid by affiliate (Note 3) .............. -- -- -- (253,075) ----------------------------------------------------------------------- Net expenses ........................................... 1,751,370 10,934,181 1,523,812 452,734 ----------------------------------------------------------------------- Net investment income ................................... 11,429,693 83,916,859 8,934,087 4,278,172 ----------------------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from investments .............. 45,720 (152,470) 369,743 (401,781) Net unrealized appreciation on investments ............. 2,751,996 27,147,509 1,716,012 1,181,237 ----------------------------------------------------------------------- Net realized and unrealized gain ........................ 2,797,716 26,995,039 2,085,755 779,456 ----------------------------------------------------------------------- Net increase in net assets resulting from operations .... $14,227,409 $110,911,898 $11,019,842 $5,057,628 =======================================================================
See notes to financial statements. 122 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF OPERATIONS (CONT.) FOR THE YEAR ENDED FEBRUARY 28, 2002
FRANKLIN FRANKLIN FRANKLIN FRANKLIN NORTH CAROLINA LOUISIANA TAX-FREE MARYLAND TAX-FREE MISSOURI TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------ Investment income: Interest ................................................. $10,057,280 $16,155,644 $24,205,970 $23,154,796 ------------------------------------------------------------------------ Expenses: Management fees (Note 3) ................................. 1,004,401 1,573,898 2,210,623 2,128,574 Distribution fees (Note 3) Class A ................................................... 160,623 264,932 398,537 365,439 Class C ................................................... 95,036 177,674 223,730 321,116 Transfer agent fees (Note 3) ............................. 75,018 164,353 220,551 207,890 Custodian fees ........................................... 1,709 2,917 4,755 4,319 Reports to shareholders .................................. 15,144 21,608 28,233 32,983 Registration and filing fees ............................. 3,563 7,382 8,386 5,743 Professional fees ........................................ 13,959 17,729 20,565 21,086 Trustees' fees and expenses .............................. 1,996 3,049 4,455 4,332 Other .................................................... 13,305 14,781 26,174 32,153 ------------------------------------------------------------------------ Total expenses ............................................ 1,384,754 2,248,323 3,146,009 3,123,635 ------------------------------------------------------------------------ Net investment income .................................... 8,672,526 13,907,321 21,059,961 20,031,161 ------------------------------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from investments ................ 96,862 (4,838) 1,674,887 616,785 Net unrealized appreciation on investments ............... 2,541,561 4,043,121 6,906,721 6,184,485 ------------------------------------------------------------------------ Net realized and unrealized gain .......................... 2,638,423 4,038,283 8,581,608 6,801,270 ------------------------------------------------------------------------ Net increase in net assets resulting from operations ...... $11,310,949 $17,945,604 $29,641,569 $26,832,431 ========================================================================
See notes to financial statements. 123 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF OPERATIONS (CONT.) FOR THE YEAR ENDED FEBRUARY 28, 2002
FRANKLIN FRANKLIN TEXAS TAX-FREE VIRGINIA TAX-FREE INCOME FUND INCOME FUND --------------------------------- Investment income: Interest ......................................................... $ 6,508,714 $22,655,951 --------------------------------- Expenses: Management fees (Note 3) ......................................... 670,672 2,090,157 Distribution fees (Note 3) Class A ........................................................... 92,426 376,962 Class C ........................................................... 29,047 192,385 Transfer agent fees (Note 3) ..................................... 64,699 202,789 Custodian fees ................................................... 1,178 4,460 Reports to shareholders .......................................... 9,946 26,648 Registration and filing fees ..................................... 18,829 7,265 Professional fees ................................................ 17,631 21,493 Trustees' fees and expenses ...................................... 1,156 4,260 Other ............................................................ 10,967 23,832 --------------------------------- Total expenses .................................................... 916,551 2,950,251 --------------------------------- Net investment income ............................................ 5,592,163 19,705,700 --------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from investments ........................ (280,834) 347,704 Net unrealized appreciation (depreciation) on investments ........ (797,341) 2,572,509 --------------------------------- Net realized and unrealized gain (loss) ........................... (1,078,175) 2,920,213 --------------------------------- Net increase in net assets resulting from operations .............. $ 4,513,988 $22,625,913 =================================
See notes to financial statements. 124 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN ALABAMA FRANKLIN FLORIDA TAX-FREE INCOME FUND TAX-FREE INCOME FUND --------------------------------------------------------------- 2002 2001 2002 2001 --------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................. $ 11,429,693 $ 11,645,243 $ 83,916,859 $ 84,651,526 Net realized gain (loss) from investments .............. 45,720 (7,423,932) (152,470) 3,411,816 Net unrealized appreciation on investments ............. 2,751,996 16,719,660 27,147,509 87,282,257 --------------------------------------------------------------- Net increase in net assets resulting from operations ... 14,227,409 20,940,971 110,911,898 175,345,599 Distributions to shareholders from: Net investment income: Class A ............................................... (10,700,336) (11,146,297) (80,840,667) (80,262,897) Class B ............................................... -- -- (828,398) (132,061) Class C ............................................... (703,000) (674,065) (3,731,440) (3,372,889) --------------------------------------------------------------- Total distributions to shareholders ................... (11,403,336) (11,820,362) (85,400,505) (83,767,847) Capital share transactions: (Note 2) Class A ............................................... 2,823,374 (1,604,562) 47,425,161 (58,291,448) Class B ............................................... -- -- 23,155,744 6,931,249 Class C ............................................... 3,790,063 (155,394) 15,424,527 (2,081,139) --------------------------------------------------------------- Total capital share transactions ...................... 6,613,437 (1,759,956) 86,005,432 (53,441,338) Net increase in net assets ............................. 9,437,510 7,360,653 111,516,825 38,136,414 Net assets Beginning of year ..................................... 224,673,156 217,312,503 1,620,199,668 1,582,063,254 --------------------------------------------------------------- End of year ........................................... $234,110,666 $224,673,156 $1,731,716,493 $1,620,199,668 =============================================================== Undistributed net investment income included in net assets: End of year ........................................... $ (171,230) $ (220,851) $ (1,137,364) $ 172,120 ===============================================================
See notes to financial statements. 125 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN GEORGIA FRANKLIN KENTUCKY TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------------ 2002 2001 2002 2001 ------------------------------------------------------------ Increase (decrease) in net assets: Operations: Net investment income .................................. $ 8,934,087 $ 8,580,779 $ 4,278,172 $ 3,684,780 Net realized gain (loss) from investments .............. 369,743 (546,218) (401,781) 7,239 Net unrealized appreciation on investments ............. 1,716,012 10,916,871 1,181,237 3,894,477 ------------------------------------------------------------ Net increase in net assets resulting from operations ... 11,019,842 18,951,432 5,057,628 7,586,496 Distributions to shareholders from: Net investment income: Class A ............................................... (8,112,422) (7,871,554) (4,305,155) (3,681,807) Class C ............................................... (876,577) (677,364) -- -- ------------------------------------------------------------ Total distributions to shareholders ................... (8,988,999) (8,548,918) (4,305,155) (3,681,807) Capital share transactions: (Note 2) Class A ............................................... 4,313,986 2,202,729 19,177,584 8,499,832 Class C ............................................... 7,683,794 1,046,745 -- -- ------------------------------------------------------------ Total capital share transactions ...................... 11,997,780 3,249,474 19,177,584 8,499,832 Net increase in net assets ............................. 14,028,623 13,651,988 19,930,057 12,404,521 Net assets Beginning of year ..................................... 180,132,679 166,480,691 76,368,867 63,964,346 ------------------------------------------------------------ End of year ........................................... $194,161,302 $180,132,679 $96,298,924 $76,368,867 ============================================================ Undistributed net investment income included in net assets: End of year ........................................... $ (189,869) $ (148,402) $ (66,737) $ (50,920) ============================================================
See notes to financial statements. 126 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN LOUISIANA FRANKLIN MARYLAND TAX-FREE INCOME FUND TAX-FREE INCOME FUND ----------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ..................................... $ 8,672,526 $ 8,561,164 $ 13,907,321 $ 12,795,397 Net realized gain (loss) from investments ................. 96,862 19,586 (4,838) (796,712) Net unrealized appreciation on investments ................ 2,541,561 9,892,466 4,043,121 17,083,330 ----------------------------------------------------------- Net increase in net assets resulting from operations ...... 11,310,949 18,473,216 17,945,604 29,082,015 Distributions to shareholders from: Net investment income: Class A .................................................. (8,055,779) (8,028,418) (12,838,697) (11,797,081) Class C .................................................. (647,018) (545,107) (1,158,737) (838,103) ----------------------------------------------------------- Total distributions to shareholders ...................... (8,702,797) (8,573,525) (13,997,434) (12,635,184) Capital share transactions: (Note 2) Class A .................................................. 10,775,720 1,244,874 28,610,176 12,559,463 Class C .................................................. 3,398,647 999,650 10,329,515 4,030,737 ----------------------------------------------------------- Total capital share transactions ......................... 14,174,367 2,244,524 38,939,691 16,590,200 Net increase in net assets ................................ 16,782,519 12,144,215 42,887,861 33,037,031 Net assets Beginning of year ........................................ 167,173,696 155,029,481 271,510,976 238,473,945 ----------------------------------------------------------- End of year .............................................. $183,956,215 $167,173,696 $314,398,837 $271,510,976 =========================================================== Undistributed net investment income included in net assets: End of year .............................................. $ (150,792) $ (154,574) $ 69,193 $ 140,927 ===========================================================
See notes to financial statements. 127 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND TAX-FREE INCOME FUND ----------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ..................................... $ 21,059,961 $ 19,755,062 $ 20,031,161 $ 18,959,550 Net realized gain (loss) from investments ................. 1,674,887 (2,131,097) 616,785 409,042 Net unrealized appreciation on investments ................ 6,906,721 27,260,826 6,184,485 23,088,641 ----------------------------------------------------------- Net increase in net assets resulting from operations ...... 29,641,569 44,884,791 26,832,431 42,457,233 Distributions to shareholders from: Net investment income: Class A .................................................. (19,746,184) (18,553,419) (18,279,079) (16,903,219) Class C .................................................. (1,508,866) (1,181,171) (2,178,794) (1,878,565) ----------------------------------------------------------- Total distributions to shareholders ...................... (21,255,050) (19,734,590) (20,457,873) (18,781,784) Capital share transactions: (Note 2) Class A .................................................. 44,906,663 3,070,959 40,469,665 6,250,078 Class C .................................................. 11,630,382 3,477,960 13,558,636 2,275,480 ----------------------------------------------------------- Total capital share transactions ......................... 56,537,045 6,548,919 54,028,301 8,525,558 Net increase in net assets ................................ 64,923,564 31,699,120 60,402,859 32,201,007 Net assets Beginning of year ........................................ 401,884,833 370,185,713 385,878,371 353,677,364 ----------------------------------------------------------- End of year .............................................. $466,808,397 $401,884,833 $446,281,230 $385,878,371 =========================================================== Undistributed net investment income included in net assets: End of year .............................................. $ (112,414) $ 35,992 $ (139,006) $ 266,458 ===========================================================
See notes to financial statements. 128 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN TEXAS FRANKLIN VIRGINIA TAX-FREE INCOME FUND TAX-FREE INCOME FUND ----------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ..................................... $ 5,592,163 $ 5,907,626 $ 19,705,700 $ 18,897,827 Net realized gain (loss) from investments ................. (280,834) (469,778) 347,704 (1,474,571) Net unrealized appreciation (depreciation) on investments . (797,341) 4,404,326 2,572,509 22,818,280 ----------------------------------------------------------- Net increase in net assets resulting from operations ...... 4,513,988 9,842,174 22,625,913 40,241,536 Distributions to shareholders from: Net investment income: Class A .................................................. (5,401,583) (5,631,249) (18,699,913) (17,724,089) Class C .................................................. (203,796) (219,287) (1,296,345) (1,062,786) ----------------------------------------------------------- Total distributions to shareholders ...................... (5,605,379) (5,850,536) (19,996,258) (18,786,875) Capital share transactions: (Note 2) Class A .................................................. 2,659,947 (5,241,232) 36,567,051 9,261,246 Class C .................................................. (6,028) (336,614) 9,008,872 1,960,015 ----------------------------------------------------------- Total capital share transactions ......................... 2,653,919 (5,577,846) 45,575,923 11,221,261 Net increase (decrease) in net assets ..................... 1,562,528 (1,586,208) 48,205,578 32,675,922 Net assets Beginning of year ........................................ 107,496,079 109,082,287 381,365,020 348,689,098 ----------------------------------------------------------- End of year .............................................. $109,058,607 $107,496,079 $429,570,598 $381,365,020 =========================================================== Undistributed net investment income included in net assets: End of year .............................................. $ (112,477) $ (101,977) $ (196,746) $ 78,178 ===========================================================
See notes to financial statements. 129 FRANKLIN TAX-FREE TRUST Notes to Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Tax-Free Trust (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twenty-six separate series. All Funds included in this report (the Funds) are diversified except for the Franklin Maryland Tax-Free Income Fund. The investment objective of the Funds included in this report is to provide tax-free income. The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Tax-free bonds generally trade in the over-the-counter market and are valued within the range of the latest quoted bid and asked prices. In the absence of a sale or reported bid and asked prices, information with respect to bond and note transactions, quotations from bond dealers, market transactions in comparable securities, and various relationships between securities are used to determine the value of the security. The Trust may utilize a pricing service, bank or broker/dealer experienced in such matters to perform any of the pricing functions under procedures approved by the Board of Trustees. Securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Trustees. B. INCOME TAXES No provision has been made for income taxes because each fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its income. C. 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. Bond discount and premium are amortized on a yield to maturity basis. Dividends from net investment income are normally declared daily and distributed monthly to shareholders. Other distributions are recorded on the ex-dividend date. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets. Other expenses are charged to each fund on a specific identification basis. D. 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 expense during the reporting period. Actual results could differ from those estimates. E. AUDIT GUIDE In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide requires the Funds to amortize all premium and discount on fixed-income securities. Such amortization is included in net investment income but did not impact the net assets or the distributions of the Fund. Prior to March 1, 2001, de minimus market discount on fixed-income securities was included in realized gains and losses. The cumulative effect of this accounting change resulted in an increase in the recorded cost of investments and a corresponding decrease in net unrealized appreciation as listed below: 130 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.) E. AUDIT GUIDE (CONT.)
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Increase in cost of investments .................. $30,787 $329,342 $23,380 $11,618 $39,951 FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN MARYLAND MISSOURI NORTH CAROLINA TEXAS VIRGINIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Increase in cost of investments .................. $18,690 $59,691 $32,748 $4,590 $23,811
The effect of this change for the period ended February 28, 2002 was as listed below:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Increase in net investment income ................ $ 9,627 $ 78,029 $ 6,609 $ 4,589 $ 7,566 Increase (decrease) in unrealized gains .......... (2,103) 77,151 3,326 (4,138) (1,668) Decrease in realized gains ....................... (7,524) (155,180) (9,935) (451) (5,898) FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN MARYLAND MISSOURI NORTH CAROLINA TEXAS VIRGINIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Increase in net investment income ................ $ 4,602 $ 26,125 $ 7,719 $ 1,174 $ 5,667 Increase (decrease) in unrealized gains .......... (4,292) (13,118) 3,780 700 2,509 Decrease in realized gains ....................... (310) (13,007) (11,499) (1,874) (8,176)
The per share effect of this change for the year ended February 28, 2002 was less than $.005 for each Fund. The statements of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in accounting policy. 2. SHARES OF BENEFICIAL INTEREST The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, 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 Income Fund Franklin Alabama Tax-Free Income Fund Franklin Florida Tax-Free 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 Texas Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund
131 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.) At February 28, 2002, there were an unlimited number of shares authorized (no par value). Transactions in the Funds' shares were as follows:
FRANKLIN ALABAMA FRANKLIN FLORIDA TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold ................................................... 1,903,329 $ 21,219,760 17,886,258 $207,704,465 Shares issued in reinvestment of distributions ................ 391,557 4,362,372 2,049,033 23,818,937 Shares redeemed ............................................... (2,046,047) (22,758,758) (15,830,793) (184,098,241) ------------------------------------------------------- Net increase .................................................. 248,839 $ 2,823,374 4,104,498 $ 47,425,161 ======================================================= Year ended February 28, 2001 Shares sold ................................................... 1,699,250 $ 18,558,365 13,516,364 $152,681,503 Shares issued in reinvestment of distributions ................ 439,721 4,787,730 2,126,502 23,842,084 Shares redeemed ............................................... (2,295,699) (24,950,657) (21,000,488) (234,815,035) ------------------------------------------------------- Net decrease .................................................. (156,728) $ (1,604,562) (5,357,622) $(58,291,448) ======================================================= CLASS B SHARES: Year ended February 28, 2002 Shares sold ................................................... 2,057,412 $ 24,027,874 Shares issued in reinvestment of distributions ................ 38,691 452,438 Shares redeemed ............................................... (113,302) (1,324,568) --------------------------- Net increase .................................................. 1,982,801 $ 23,155,744 =========================== Year ended February 28, 2001 Shares sold ................................................... 635,467 $ 7,194,817 Shares issued in reinvestment of distributions ................ 7,269 82,639 Shares redeemed ............................................... (30,279) (346,207) --------------------------- Net increase .................................................. 612,457 $ 6,931,249 =========================== CLASS C SHARES: Year ended February 28, 2002 Shares sold ................................................... 517,391 $ 5,806,178 2,227,645 $ 26,173,881 Shares issued in reinvestment of distributions ................ 28,344 317,846 135,605 1,591,562 Shares redeemed ............................................... (209,353) (2,333,961) (1,050,393) (12,340,916) ------------------------------------------------------- Net increase .................................................. 336,382 $ 3,790,063 1,312,857 $ 15,424,527 ======================================================= Year ended February 28, 2001 Shares sold ................................................... 203,091 $ 2,235,446 886,491 $ 10,140,209 Shares issued in reinvestment of distributions ................ 32,695 357,967 134,612 1,522,130 Shares redeemed ............................................... (252,329) (2,748,807) (1,219,271) (13,743,478) ------------------------------------------------------- Net decrease .................................................. (16,543) $ (155,394) (198,168) $ (2,081,139) =======================================================
132 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.)
FRANKLIN GEORGIA FRANKLIN KENTUCKY TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold ................................................... 1,901,825 $ 22,414,349 2,088,267 $ 23,133,241 Shares issued in reinvestment of distributions ................ 356,854 4,209,728 179,503 1,987,550 Shares redeemed ............................................... (1,888,765) (22,310,091) (536,963) (5,943,207) ------------------------------------------------------- Net increase .................................................. 369,914 $ 4,313,986 1,730,807 $ 19,177,584 ======================================================= Year ended February 28, 2001 Shares sold ................................................... 1,878,459 $ 21,588,508 1,780,794 $ 19,162,623 Shares issued in reinvestment of distributions ................ 336,577 3,832,474 164,838 1,768,573 Shares redeemed ............................................... (2,048,684) (23,218,253) (1,158,948) (12,431,364) ------------------------------------------------------- Net increase .................................................. 166,352 $ 2,202,729 786,684 $ 8,499,832 ======================================================= CLASS C SHARES: Year ended February 28, 2002 Shares sold ................................................... 831,761 $ 9,898,043 Shares issued in reinvestment of distributions ................ 40,162 477,352 Shares redeemed ............................................... (226,796) (2,691,601) ------------------------- Net increase .................................................. 645,127 $ 7,683,794 ========================= Year ended February 28, 2001 Shares sold ................................................... 286,581 $ 3,320,411 Shares issued in reinvestment of distributions ................ 33,273 381,064 Shares redeemed ............................................... (233,927) (2,654,730) ------------------------- Net increase .................................................. 85,927 $ 1,046,745 ========================= FRANKLIN LOUISIANA FRANKLIN MARYLAND TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold ................................................... 2,562,858 $ 28,906,767 4,608,486 $ 52,739,853 Shares issued in reinvestment of distributions ................ 322,698 3,643,943 618,246 7,068,450 Shares redeemed ............................................... (1,933,588) (21,774,990) (2,731,713) (31,198,127) ------------------------------------------------------- Net increase .................................................. 951,968 $ 10,775,720 2,495,019 $ 28,610,176 ======================================================= Year ended February 28, 2001 Shares sold ................................................... 2,002,163 $ 21,614,833 3,194,752 $ 35,363,663 Shares issued in reinvestment of distributions ................ 319,609 3,479,719 587,544 6,468,081 Shares redeemed ............................................... (2,200,167) (23,849,678) (2,670,163) (29,272,281) ------------------------------------------------------- Net increase .................................................. 121,605 $ 1,244,874 1,112,133 $ 12,559,463 ======================================================= CLASS C SHARES: Year ended February 28, 2002 Shares sold ................................................... 392,037 $ 4,458,059 1,107,623 $ 12,800,821 Shares issued in reinvestment of distributions ................ 27,257 310,124 68,404 789,391 Shares redeemed ............................................... (120,390) (1,369,536) (283,146) (3,260,697) ------------------------------------------------------- Net increase .................................................. 298,904 $ 3,398,647 892,881 $ 10,329,515 ======================================================= Year ended February 28, 2001 Shares sold ................................................... 233,029 $ 2,559,444 643,623 $ 7,223,802 Shares issued in reinvestment of distributions ................ 26,231 287,374 55,701 618,835 Shares redeemed ............................................... (169,443) (1,847,168) (345,310) (3,811,900) ------------------------------------------------------- Net increase .................................................. 89,817 $ 999,650 354,014 $ 4,030,737 =======================================================
133 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.)
FRANKLIN MISSOURI FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold 6,106,029 $ 72,567,433 5,920,326 $ 70,188,417 Shares issued in reinvestment of distributions 775,306 9,207,621 804,765 9,534,609 Shares redeemed (3,103,953) (36,868,391) (3,312,035) (39,253,361) ------------------------------------------------------- Net increase 3,777,382 $ 44,906,663 3,413,056 $ 40,469,665 ======================================================= Year ended February 28, 2001 Shares sold 3,998,638 $ 45,719,470 3,505,979 $ 40,156,254 Shares issued in reinvestment of distributions 754,157 8,602,801 755,015 8,624,439 Shares redeemed (4,511,489) (51,251,312) (3,732,478) (42,530,615) ------------------------------------------------------- Net increase 241,306 $ 3,070,959 528,516 $ 6,250,078 ======================================================= CLASS C SHARES: Year ended February 28, 2002 Shares sold 1,094,685 $ 13,069,392 1,683,998 $ 20,097,897 Shares issued in reinvestment of distributions 80,109 955,934 114,967 1,372,578 Shares redeemed (200,165) (2,394,944) (661,037) (7,911,839) ------------------------------------------------------- Net increase 974,629 $ 11,630,382 1,137,928 $ 13,558,636 ======================================================= Year ended February 28, 2001 Shares sold 575,054 $ 6,622,149 783,086 $ 9,097,718 Shares issued in reinvestment of distributions 70,965 813,253 106,739 1,227,846 Shares redeemed (346,432) (3,957,442) (695,566) (8,050,084) ------------------------------------------------------- Net increase 299,587 $ 3,477,960 194,259 $ 2,275,480 ======================================================= FRANKLIN TEXAS FRANKLIN VIRGINIA TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold ................................................... 1,253,755 $ 13,258,083 5,387,624 $ 61,924,622 Shares issued in reinvestment of distributions ................ 216,787 2,290,452 810,410 9,304,109 Shares redeemed ............................................... (1,220,244) (12,888,588) (3,016,599) (34,661,680) ------------------------------------------------------- Net increase .................................................. 250,298 $ 2,659,947 3,181,435 $ 36,567,051 ======================================================= Year ended February 28, 2001 Shares sold ................................................... 545,300 $ 5,712,481 3,580,780 $ 40,088,537 Shares issued in reinvestment of distributions ................ 218,572 2,279,436 793,219 8,848,814 Shares redeemed ............................................... (1,269,617) (13,233,149) (3,568,364) (39,676,105) ------------------------------------------------------- Net increase (decrease) ....................................... (505,745) $ (5,241,232) 805,635 $ 9,261,246 ======================================================= CLASS C SHARES: Year ended February 28, 2002 Shares sold ................................................... 112,161 $ 1,203,823 986,580 $ 11,408,657 Shares issued in reinvestment of distributions ................ 12,801 137,274 65,672 759,900 Shares redeemed ............................................... (125,368) (1,347,125) (273,035) (3,159,685) ------------------------------------------------------- Net increase (decrease) ....................................... (406) $ (6,028) 779,217 $ 9,008,872 ======================================================= Year ended February 28, 2001 Shares sold ................................................... 95,134 $ 1,013,703 590,276 $ 6,639,551 Shares issued in reinvestment of distributions ................ 13,483 142,582 57,367 644,661 Shares redeemed ............................................... (140,416) (1,492,899) (475,419) (5,324,197) ------------------------------------------------------- Net increase (decrease) ....................................... (31,799) $ (336,614) 172,224 $ 1,960,015 =======================================================
134 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Certain officers and trustees of the Trust are also officers and/or directors of Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc. (Distributors), Franklin/Templeton Investor Services, Inc. (Investor Services), and Franklin Templeton Services, Inc. (FT Services), the Funds' investment manager, principal underwriter, transfer agent, and administrative manager, respectively. The Funds pay an investment management fee to Advisers based on the net assets of the Funds as follows: ANNUALIZED FEE RATE MONTH-END NET ASSETS ----------------------------------------------------------------- .625% First $100 million .500% Over $100 million, up to and including $250 million .450% In excess of $250 million 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. Advisers agreed in advance to waive a portion of the management fees for the Franklin Kentucky Tax-Free Income Fund, as noted in the Statement of Operations. The Funds reimburse Distributors up to .10%, .65%, and .65% per year of their average daily net assets of Class A, Class B, and Class C, respectively, for costs incurred in marketing the Funds' shares. Distributors paid (received) net commissions on sales of the Funds' shares, and received contingent deferred sales charges for the year as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ---------------------------------------------------------------------- Net commissions paid (received) .................. $59,340 $1,141,144 $67,847 $(27,592) $26,950 Contingent deferred sales charges ................ $ 6,171 $ 67,102 $ 5,319 $ 69 $ 7,680 FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN MARYLAND MISSOURI NORTH CAROLINA TEXAS VIRGINIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ---------------------------------------------------------------------- Net commissions paid ............................. $73,166 $86,741 $176,161 $35,097 $71,981 Contingent deferred sales charges ................ $24,275 $ 5,332 $ 19,713 $ 3,929 $ 4,807
The Funds paid transfer agent fees of $1,844,737 of which $1,262,819 was paid to Investor Services. 4. INCOME TAXES At February 28, 2002, the Funds had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Capital loss carryovers expiring in: 2003 ............................................ $ -- $ -- $ -- $ 441,699 $ 860,446 2004 ............................................ -- -- -- 65,389 -- 2005 ............................................ -- -- -- 294,278 -- 2008 ............................................ 1,941,746 5,064,848 1,458,712 305,529 545,898 2009 ............................................ 135,955 7,733,926 833,999 -- 171,149 2010 ............................................ 7,179,861 245,369 -- 413,791 -- --------------------------------------------------------------------- $9,257,562 $13,044,143 $2,292,711 $1,520,686 $1,577,493 =====================================================================
135 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 4. INCOME TAXES (CONT.)
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN MARYLAND MISSOURI NORTH CAROLINA TEXAS VIRGINIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Capital loss carryovers expiring in: 2008 ............................................ $ 558,734 $ -- $ 397,992 $ 839,227 $2,299,181 2009 ............................................ 1,288,544 1,738,727 3,608,862 753,447 1,407,973 2010 ............................................ 119,821 -- -- 278,960 1,188,255 --------------------------------------------------------------------- ................................................. $1,967,099 $1,738,727 $4,006,854 $1,871,634 $4,895,409 =====================================================================
At February 28, 2002, the following funds had deferred capital losses occurring subsequent to October 31, 2001. For tax purposes, such losses will be reflected in the year ending February 28, 2003. FRANKLIN FRANKLIN FRANKLIN ALABAMA LOUISIANA MARYLAND TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND -------------------------------------------------------- $54,872 $2,329 $91,891 Distributions of income to shareholders may not equal net investment income due to differing treatments of dividend distributions for book and tax purposes. Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities and bond discount and premiums. Net realized losses differ for financial statement and tax purposes primarily due to differing treatments of bond workout costs and bond discount and premiums. At February 28, 2002, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------- Investments at cost ............................. $222,302,325 $1,609,324,794 $185,405,549 $92,523,807 $176,506,757 ========================================================================= Unrealized appreciation ......................... 9,385,075 100,756,266 9,363,573 3,224,259 8,036,518 Unrealized depreciation ......................... (1,197,699) (3,276,354) (1,248,205) (783,610) (1,710,075) ------------------------------------------------------------------------- Net unrealized appreciation ..................... $ 8,187,376 $ 97,479,912 $ 8,115,368 $ 2,440,649 $ 6,326,443 ========================================================================= Distributable earnings - ordinary income ........ $ 64,774 $ 627,393 $ 32,911 $ 25,972 $ 16,742 ========================================================================= FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN MARYLAND MISSOURI NORTH CAROLINA TEXAS VIRGINIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------------------- Investments at cost ............................. $296,319,450 $447,589,420 $425,778,968 $108,827,845 $412,748,935 ========================================================================= Unrealized appreciation ......................... 13,006,293 20,042,203 18,311,838 4,391,617 16,178,859 Unrealized depreciation ......................... (371,074) (3,117,179) (852,978) (5,388,132) (1,815,891) ------------------------------------------------------------------------- Net unrealized appreciation (depreciation) ...... $ 12,635,219 $ 16,925,024 $ 17,458,860 $ (996,515) $ 14,362,968 ========================================================================= Distributable earnings - ordinary income ........ $ 393,048 $ 344,598 $ 325,469 $ 9,802 $ 260,503 =========================================================================
For the Trust, the tax characters of distributions paid during the year ended February 28, 2002, were the same for financial statement and tax purposes. 136 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 5. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended February 28, 2002 were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Purchases ........................................ $27,231,877 $323,343,149 $48,917,448 $23,654,723 $30,784,723 Sales ............................................ $22,222,502 $227,079,244 $36,144,459 $ 5,088,580 $17,247,925 FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN MARYLAND MISSOURI NORTH CAROLINA TEXAS VIRGINIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------- Purchases ........................................ $59,276,301 $152,358,502 $92,717,428 $37,501,432 $103,319,397 Sales ............................................ $18,260,130 $ 97,478,323 $44,391,088 $32,740,901 $ 57,023,175
137 FRANKLIN TAX-FREE TRUST Independent Auditors' Report 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 each of the funds included in this report constituting part of the Franklin Tax-Free Trust (hereafter referred to as the "Funds") at February 28, 2002, 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 auditing standards generally accepted in the United States of America, which 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, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California April 4, 2002 138 FRANKLIN TAX-FREE TRUST Tax Designation Under Section 852(b)(5)(A) of the Internal Revenue Code, the Trust hereby designates 100% of the distributions paid from net investment income as exempt-interest dividends for the fiscal year ended February 28, 2002. 139 BOARD MEMBERS AND OFFICERS The name, age and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ FRANK H. ABBOTT, III (80) Trustee Since 1984 108 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Abbott Corporation (an investment company); and FORMERLY, Director, MotherLode Gold Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing) (until 1996). ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (69) Trustee Since 1984 139 Director, RBC Holdings, Inc. (bank holding company) One Franklin Parkway and Bar-S Foods (meat packing company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (69) Trustee Since 1989 140 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Member of the law firm of Pitney, Hardin, Kipp & Szuch. ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (50) Trustee Since 1998 85 Director, Amerada Hess Corporation (exploration and One Franklin Parkway refining of oil and gas); Hercules Incorporated San Mateo, CA 94403-1906 (chemicals, fibers and resins); Beverly Enterprises, Inc. (health care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Digex Incorporated (web hosting provider); and Canadian National Railway (railroad). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993), General Counsel to the United States Treasury Department (1989-1990), and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (72) Trustee Since 1984 108 Director, The California Center for Land Recycling One Franklin Parkway (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). ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (73) Trustee Since 1992 139 Director, Martek Biosciences Corporation; WorldCom, One Franklin Parkway Inc. (communications services); MedImmune, Inc. San Mateo, CA 94403-1906 (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman and Director, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until 1992); and President, National Association of Securities Dealers, Inc. (until 1987). ------------------------------------------------------------------------------------------------------------------------------------
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INTERESTED BOARD MEMBERS AND OFFICERS NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (69) Chairman Since 1984 139 None One Franklin Parkway of the Board San Mateo, CA 94403-1906 and Trustee PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, JR. (61) President Since 1984 120 None One Franklin Parkway and Trustee San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. ------------------------------------------------------------------------------------------------------------------------------------ SHEILA AMOROSO (42) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (56) Vice President Since 1986 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ RAFAEL R. COSTAS, JR. (37) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ MARTIN L. FLANAGAN (41) Vice President Since 1995 Not Applicable None One Franklin Parkway and Chief San Mateo, CA 94403-1906 Financial Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Member - Office of the President, Chief Financial Officer and Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; Executive Vice President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee, as the case may be, of 52 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (54) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and Director, Property Resources, Inc. and Franklin Properties, Inc.; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). ------------------------------------------------------------------------------------------------------------------------------------
141
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (54) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and Deputy General Counsel, Franklin Resources, Inc.; and Senior Vice President, Templeton Worldwide, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). ------------------------------------------------------------------------------------------------------------------------------------ EDWARD V. MCVEY (64) Vice President Since 1985 Not Applicable None 26335 Carmel Rancho Blvd. Carmel, CA 93923 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Distributors, Inc.; Executive Vice President, Templeton/Franklin Investment Services, Inc.; and officer of 29 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ KIMBERLEY MONASTERIO (38) Treasurer Since 2000 Not Applicable None One Franklin Parkway and Principal San Mateo, CA 94403-1906 Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; and officer of 34 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (64) Vice President Since 2000 Not Applicable None One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000) and Director, Templeton Asset Management Ltd. (until 1999). ------------------------------------------------------------------------------------------------------------------------------------ THOMAS WALSH (40) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the registered investment companies comprising the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson and Rupert H. Johnson, Jr. are considered interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Trust's adviser and distributor. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. -------------------------------------------------------------------------------- The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders may call 1-800/DIAL-BEN (1-800/342-5236) to request the SAI. -------------------------------------------------------------------------------- 142 This page intentionally left blank. This page intentionally left blank. LITERATURE REQUEST For a brochure and prospectus, which contain more complete information, including charges and expenses, call Franklin Templeton at 1-800/DIAL BEN(REGISTRATION MARK) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. 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 determined by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS GLOBAL GROWTH Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Franklin Global Health Care Fund Mutual Discovery Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton International (Ex EM) Fund Templeton Latin America Fund Templeton Pacific Growth Fund Templeton World Fund GLOBAL GROWTH & INCOME Franklin Global Communications Fund Mutual European Fund Templeton Global Bond Fund GLOBAL INCOME Franklin Templeton Hard Currency Fund GROWTH Franklin Aggressive Growth Fund Franklin Biotechnology Discovery Fund(1) Franklin Blue Chip Fund Franklin California Growth Fund Franklin DynaTech Fund Franklin Gold and Precious Metals Fund Franklin Growth Fund Franklin Large Cap Growth Fund Franklin Small Cap Growth Fund II(2) Franklin Small-Mid Cap Growth Fund(3) Franklin Technology Fund GROWTH & INCOME Franklin Balance Sheet Investment Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Growth and Income Fund Franklin Income Fund Franklin Large Cap Value Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Rising Dividends Fund Franklin Small Cap Value Fund(4) Franklin Utilities Fund Mutual Beacon Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund FUND ALLOCATOR SERIES Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(5) Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust(6) Franklin Short-Intermediate U.S. Government Securities Fund(5) Franklin Strategic Income Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(5) Franklin Federal Money Fund(5) Franklin Money Fund(5) TAX-FREE INCOME(7) Double Tax-Free Income Fund(8) Federal Intermediate-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund Tax-Exempt Money Fund(5) STATE-SPECIFIC TAX-FREE INCOME(7) Alabama Arizona California(9) Colorado Connecticut Florida(9) Georgia Kentucky Louisiana Maryland Massachusetts(10) Michigan(10) Minnesota(10) Missouri New Jersey New York(9) North Carolina Ohio(10) Oregon Pennsylvania Tennessee Texas Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(11) 1. On 9/1/01, the fund reopened to new investors. The fund will close again when assets reach $2 billion. 2. The fund is closed to most new investors, with the exception of retirement plan accounts and wrap program accounts. Existing shareholders can continue adding to their account. 3. Formerly Franklin Small Cap Growth Fund I. Effective 9/1/01, the fund's name changed and its investment criteria expanded. 4. Formerly Franklin Value Fund. Effective 11/1/01, the fund's name changed. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. 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. 7. For investors subject to federal or state alternative minimum tax, all or a portion of the dividend income may be subject to such tax, depending on the fund. Distributions of capital gains and ordinary income from accrued market discount, if any, are generally taxable. 8. Formerly Franklin Puerto Rico Tax-Free Income Fund. Effective 12/1/01, the fund's name changed. Its investment goal and strategy remained the same. The fund continues to invest in municipal bonds issued by U.S. territories, including Puerto Rico. 9. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and intermediate-term and money market portfolios (CA and NY). 10. Portfolio of insured municipal securities. 11. The funds of the Franklin Templeton Variable Insurance Products Trust are generally only available as investment options in variable annuity or variable life insurance contracts. 02/02 [GRAPHIC OMITTED] PRESORTED STANDARD FRANKLIN TEMPLETON INVESTMENTS LOGO US POSTAGE One Franklin Parkway PAID San Mateo, CA 94403-1906 BELL CA PERMIT NO. 75 ANNUAL REPORT FRANKLIN TAX-FREE TRUST INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin/Templeton Distributors, Inc. 1-800/DIAL BEN(REGISTRATION MARK) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 This report must be preceded or accompanied by the current Franklin Tax-Free Trust prospectus, which contains more complete information including charges and expenses. 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 A2002 04/02 PRINTED ON RECYCLED PAPER Annual Report February 28, 2002 Franklin Tax-Free Trust Franklin Arizona Tax-Free Income Fund Franklin Colorado Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin Double Tax-Free Income Fund (formerly Franklin Puerto Rico Tax-Free Income Fund) Franklin Federal Intermediate-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 [GRAPHIC OMITTED] FRANKLIN TEMPLETON INVESTMENTS LOGO THANK YOU FOR INVESTING WITH FRANKLIN TEMPLETON. WE ENCOURAGE OUR INVESTORS TO MAINTAIN A LONG-TERM PERSPECTIVE AND REMEMBER THAT ALL SECURITIES MARKETS MOVE BOTH UP AND DOWN, AS DO MUTUAL FUND SHARE PRICES. WE APPRECIATE YOUR PAST SUPPORT AND LOOK FORWARD TO SERVING YOUR INVESTMENT NEEDS IN THE YEARS AHEAD. [GRAPHIC OMITTED] PICTURE CHARLES B. JOHNSON, center CHAIRMAN FRANKLIN TAX-FREE TRUST SHEILA AMOROSO & RAFAEL R. COSTAS JR. SENIOR VICE PRESIDENTS/CO-DIRECTORS FRANKLIN MUNICIPAL BOND DEPARTMENT FRANKLINTEMPLETON.COM [GRAPHIC OMITTED] Electronic delivery is a convenient alternative to receiving these reports through the mail. Visit franklintempleton.com today, click on Account Services and sign up. SHAREHOLDER LETTER Dear Shareholder: We are pleased to bring you Franklin Tax-Free Trust's annual report for the fiscal year ended February 28, 2002. During the 12 months under review, the U.S. economy weakened further as gross domestic product (GDP) growth declined during the first half of 2001 before contracting at a 1.3% annualized rate in the third quarter. In response to this deteriorating economic activity and the fallout from September 11's tragic events, the Federal Reserve Board (the Fed) continued aggressively cutting interest rates, seeking to lower borrowing costs and stimulate economic growth. Nine interest rate cuts during the 12 months under review reduced the federal funds target rate from 5.50% at the beginning of the period to 1.75% on February 28, 2002, its lowest level in more than 40 years. In November 2001, the National Bureau of Economic Research signaled that the country had been in a mild recession since March 2001, ending the longest economic expansion in the nation's history. Significant, broad-based and sustained downward trends in economic activity were largely to blame, with employment, industrial production and consumer and business spending dropping substantially. Consequently, consumer confidence fell to multi-year lows. However, the Fed's efforts and significant government spending contributed to a surprising fourth quarter GDP growth rate of 1.7% annualized. U.S. securities markets experienced mixed results in response to the war on terrorism, the Fed's actions and declining corporate and economic data. Investors' risk aversion increased, and by the end of third quarter 2001, this sentiment led to significant market volatility. The equity indexes experienced their worst quarterly decline, on a percentage basis, since the quarter that included the crash of 1987. The major stock indexes rebounded significantly in 2001's fourth quarter as indications of a potential economic recovery offered investors some optimism. However, from the end of December 2001 through February 28, 2002, equity markets again experienced volatility and generally fell amid lower corporate earnings announcements and investors' skepticism of corporate integrity following Enron's collapse. CONTENTS Shareholder Letter .............. 1 Special Feature: Making Sense of Dividends ....... 4 Fund Reports Franklin Arizona Tax-Free Income Fund ........... 8 Franklin Colorado Tax-Free Income Fund ........... 16 Franklin Connecticut Tax-Free Income Fund ........... 22 Franklin Double Tax-Free Income Fund ........... 28 Franklin Federal Intermediate-Term Tax-Free Income Fund ........... 34 Franklin High Yield Tax-Free Income Fund ........... 40 Franklin New Jersey Tax-Free Income Fund ........... 48 Franklin Oregon Tax-Free Income Fund ........... 56 Franklin Pennsylvania Tax-Free Income Fund ........... 62 Municipal Bond Ratings .......... 70 Financial Highlights & Statements of Investments ....... 72 Financial Statements ............138 Notes to Financial Statements ...149 Independent Auditors' Report ....157 Tax Designation .................158 Board Members and Officers ......159 [GRAPHIC OF PYRAMID OMITTED] FUND CATEGORY Global Growth Growth & Income Income Tax-Free Income WHAT DOES "TAXABLE EQUIVALENT" MEAN FOR YOU? FOR YIELD AND DISTRIBUTION RATE, THE TAXABLE EQUIVALENT IS THE AMOUNT A TAXABLE INVESTMENT WOULD HAVE TO EARN TO MATCH A TAX-FREE INVESTMENT SUCH AS MUNICIPAL BONDS.* YOU CAN FIND YOUR FUND'S TAXABLE EQUIVALENT DISTRIBUTION RATE AND YIELD IN THE PERFORMANCE SUMMARY THAT FOLLOWS YOUR FUND'S REPORT. *For investors subject to the federal or state alternative minimum tax, a portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. For much of the year under review, fixed income markets, including municipal bonds, generally performed well, aided primarily by falling interest rates and rising investor demand for the perceived safety of bonds versus stocks. Consequently, U.S. Treasuries outperformed the Standard & Poor's 500 Composite Index, a widely used benchmark of equity market performance, during the period. The bond market's progress was not a steady rise, however, and overall the Treasury yield curve, representing yields of short- to long-term Treasuries, steepened. The 30-year Treasury bond's yield increased slightly from 5.31% at the beginning of the year under review to 5.42% on February 28, 2002. At the same time, the 10-year Treasury note's yield declined from 4.92% to 4.88%, and the 2-year Treasury note's yield fell from 4.39% to 3.06%. Short-term interest rates fell more substantially than long-term rates largely due to the Fed's actions and investors' economic worries. The Bond Buyer Municipal Bond Index (Bond Buyer 40), an indicator of municipal bond market performance, experienced volatility before ending the period lower, yielding 5.40% at the beginning of the period and 5.25% on February 28, 2002.1 On October 31, 2001, the Fed's announcement to discontinue new issuance of 30-year debt exacerbated the already disconnected relationship between the long-term municipal market and the Treasury market, which resulted from the Fed's early-2000 introduction of its 30-year Treasury bond buyback program. Subsequently, the 30-year Treasury bond's price rose more than five points, its largest one-day point gain since the bond began trading on a regular basis; the 10-year Treasury note gained nearly one full point in response, while municipals increased marginally. Municipal bonds did, however, benefit from robust retail and institutional demand, and held up well despite widening Treasury yield spreads and an increase in new-issue supply. At the end of the reporting period, municipal bonds continued to offer attractive tax-equivalent yields over comparable taxable investments. Looking forward, we believe the severity and duration of the national economic slowdown will be the key determinants of how state and municipal bond credit quality will fare over the short term. States with broad-based and diversified economies should be best positioned to withstand recessionary pressures that may continue through fiscal year 2002 and that could impact 2003 budget discussions. However, economic 1. Source: THE BOND BUYER. The unmanaged Bond Buyer 40 is composed of the yield to maturity of 40 bonds. The index attempts to track the new-issue market as closely as possible, so it changes bonds twice a month, adding all new bonds that meet certain requirements and deleting an equivalent number according to their secondary market trading activity. As a result, the average par call date, average maturity date and average coupon rate change over time. The average maturity has generally been about 29-30 years. 2 diversity alone may not sustain a state's credit quality. The magnitude of revenue shortfalls will impact financial reserves, and stringent budgetary mechanisms to quickly cut expenditures will also be critical factors for states' credit stability and their underlying municipal bonds. Still, we view the municipal bond market favorably over the long term. Most state and local government finances were very strong through early 2001, allowing greater financial flexibility and cushion to face challenging times. Municipal bond funds continue to be attractive for those investors seeking tax-free income. Depending on your federal and state tax rates, a taxable investment of comparable credit quality would need to offer a higher yield, called the taxable equivalent yield, to match the yield on a tax-free investment. We firmly believe that most people benefit from professional financial advice, and that advice is never more valuable than during a volatile market. For that reason, we encourage you to discuss your financial goals with your investment representative, who can address concerns about volatility and help you diversify your investments and stay focused on the long term. As always, we appreciate your support, welcome your questions and comments and look forward to serving your investment needs in the years ahead. Sincerely, /S/SIGNATURE Charles B. Johnson Chairman Franklin Tax-Free Trust /S/SIGNATURE Sheila Amoroso /S/SIGNATURE Rafael R. Costas Jr. Senior Vice Presidents and Co-Directors Franklin Municipal Bond Department -------------------------------------------------------------------------------- A NOTE ABOUT DUPLICATE MAILINGS YOU WILL RECEIVE THE FUND'S SHAREHOLDER REPORT EVERY SIX MONTHS. TO REDUCE FUND EXPENSES, WE TRY TO IDENTIFY RELATED SHAREHOLDERS IN A HOUSEHOLD AND SEND ONLY ONE COPY OF THE REPORT. THIS PROCESS, CALLED "HOUSEHOLDING," WILL CONTINUE INDEFINITELY UNLESS YOU INSTRUCT US OTHERWISE. IF YOU PREFER NOT TO HAVE THESE DOCUMENTS HOUSEHOLDED, PLEASE CALL US AT 1-800/632-2301. AT ANY TIME YOU MAY VIEW CURRENT SHAREHOLDER REPORTS ON OUR WEBSITE. -------------------------------------------------------------------------------- 3 SPECIAL FEATURE: MAKING SENSE OF DIVIDENDS Q & A FREQUENTLY ASKED QUESTIONS ABOUT THE DIVIDEND POLICY OF FRANKLIN TAX-FREE INCOME FUNDS. Have you ever wondered how your fund earns tax-free income and how much of that income is actually paid to you? Or, have you questioned why your monthly dividends fluctuate? Below you'll find answers to these and other commonly asked questions about dividends paid by Franklin's tax-free funds. Q. WHAT'S FRANKLIN TAX-FREE FUNDS' DIVIDEND POLICY AND HOW DOES IT AFFECT MY DIVIDEND PAYMENTS? A. Franklin tax-free income funds attempt to set dividends on a quarterly basis. This means that once a quarter, in March, June, September and December, we establish a fixed dividend amount per share that the funds will distribute over the next three months. While the income the funds accrue varies day-to-day, we do our best to maintain this fixed dividend each quarter to provide our shareholders with a stable income stream. As you know, our goal is to invest for high, current tax-free income. Franklin is one of the few fund companies that work to stabilize dividend payments for three months at a time. Many other tax-free funds distribute dividends on daily income they accrue each month; meaning their dividend payments can fluctuate every month. Q. WHAT ARE THE SOURCES OF THE INCOME MY FUND DISTRIBUTES TO ME AS TAX-FREE DIVIDENDS? A. Your fund earns tax-exempt interest income from its investments in municipal securities, or bonds. A municipal bond is an IOU issued by state and local government agencies to raise money to fund public projects. The issuing municipality makes interest payments to bondholders, in this case the fund, to compensate them for the use of their money until the bond is repaid. -------------------------------------------------------------------------------- NOT FDIC INSURED o MAY LOSE VALUE o NO BANK GUARANTEE -------------------------------------------------------------------------------- NOT PART OF THE SHAREHOLDER REPORT 4 Franklin's tax-free funds pay you this investment income as tax-free dividends, less various operating expenses. As you know, these dividends are usually free from federal income taxes.* For a state-specific fund, they may also be free from that state's personal income taxes as well, to the extent dividends are earned from interest on that state's tax-free obligations.* Sometimes, the fund may also pay you accumulated dividends that were not previously distributed. *Alternative minimum taxes may apply. Q. WHAT OTHER FACTORS CAN AFFECT MY MONTHLY DIVIDENDS? A. Generally, interest rates are the biggest determinant of a tax-free fund's earnings level and the amount of dividends paid to you. For example, when interest rates decline, a fund's investment earnings will decline, as cash flow into the fund must be invested at the lower rates. This means dividend payments will also decrease. However, since bond prices tend to move in the opposite direction of interest rates, your fund's net asset value (NAV) will tend to increase, causing your shares to appreciate in price. Similarly, when interest rates rise, the ability of the funds to increase their dividends will rise. Interest rate trends are primarily determined by economic factors such as inflation, strength of the U.S. dollar and the pace of economic growth. Strong economic growth can lead to inflation, and the Federal Reserve may raise interest rates to cool the economy, as we saw last year. On the other hand, if the economy slows down, the Federal Reserve may lower interest rates to stimulate economic growth, as happened earlier this year. Credit quality and maturity periods of the securities in a fund's portfolio also play a role in determining the amount of income available to distribute to shareholders, as explained below. Q. WHY DO SOME TAX-FREE FUNDS PAY HIGHER DIVIDENDS THAN OTHERS? A. Dividends are directly related to the composition of a fund's portfolio. First, the credit quality of securities held helps determine a fund's dividend payment ability. High-yield municipal bond funds, for example, can have higher dividend distributions than other tax-free funds. This is because they hold lower credit-quality municipal bonds that must pay higher yields than other securities to compensate investors for taking on additional risk. NOT PART OF THE SHAREHOLDER REPORT 5 However, they're also subject to higher risk than funds that hold higher quality bonds in their portfolios. Similarly, long-term bond holdings in a fund's portfolio tend to pay higher interest income than short-term bonds to compensate for uncertainty associated with the future. Q. HOW HAS THE CURRENT DECLINING INTEREST RATE ENVIRONMENT AFFECTED MONTHLY DIVIDEND PAYMENTS? A. When interest rates decline, municipal bond issuers often "call," or redeem, their higher-yielding bonds and replace them with new, lower-yielding securities so they can reduce the amount of interest they have to pay on the debt. Most municipal bonds are callable within 10 to 12 years after they're issued. Because interest rates have generally been declining over the past 15 years, our funds are experiencing bond calls on older, higher-income securities. Consequently, many of Franklin's tax-free funds have had to reinvest proceeds from these called bonds into lower-yielding bonds, resulting in lower earnings (dividends). Because funds can only pay out what they earn, many of our funds have had to reduce dividend payments. As you can see in the chart below, in the late 1980s and early 1990s, we were able to invest assets at approximately 8%. As these bonds matured or were called, we've had to reinvest the proceeds at approximately 53/8%. Because we cannot invest cash flow at the higher levels, we've had to reduce dividends. We continue to pay out the income we earn, but our earnings are lower today because we're reinvesting at a lower rate than was available 10-15 years ago. MONTHLY YIELDS OF BOND BUYER 40 [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: The following line graph tracks the monthly yields of the Bond Buyer 40 from 1/85 to 2/02. Date Bond Buyer 40 Yields ---------------------------------------------- Jan 85 10.35% Feb 85 10.20% Mar 85 10.01% Apr 85 9.50% May 85 9.43% Jun 85 9.40% Jul 85 9.45% Aug 85 9.80% Sep 85 9.49% Oct 85 9.24% Nov 85 8.92% Dec 85 8.48% Jan 86 8.04% Feb 86 7.82% Mar 86 7.92% Apr 86 8.14% May 86 7.90% Jun 86 7.96% Jul 86 7.88% Aug 86 7.41% Sep 86 7.56% Oct 86 7.36% Nov 86 7.19% Dec 86 7.18% Jan 87 7.11% Feb 87 7.05% Mar 87 7.18% Apr 87 8.10% May 87 8.29% Jun 87 8.19% Jul 87 8.17% Aug 87 8.16% Sep 87 8.87% Oct 87 8.72% Nov 87 8.62% Dec 87 8.40% Jan 88 7.97% Feb 88 7.85% Mar 88 8.17% Apr 88 8.17% May 88 8.20% Jun 88 8.04% Jul 88 8.05% Aug 88 8.11% Sep 88 7.89% Oct 88 7.73% Nov 88 7.90% Dec 88 7.74% Jan 89 7.66% Feb 89 7.73% Mar 89 7.79% Apr 89 7.58% May 89 7.46% Jun 89 7.29% Jul 89 7.16% Aug 89 7.36% Sep 89 7.47% Oct 89 7.38% Nov 89 7.24% Dec 89 7.25% Jan 90 7.45% Feb 90 7.40% Mar 90 7.52% Apr 90 7.74% May 90 7.53% Jun 90 7.50% Jul 90 7.35% Aug 90 7.64% Sep 90 7.79% Oct 90 7.71% Nov 90 7.47% Dec 90 7.47% Jan 91 7.39% Feb 91 7.36% Mar 91 7.34% Apr 91 7.26% May 91 7.21% Jun 91 7.21% Jul 91 7.11% Aug 91 6.97% Sep 91 6.89% Oct 91 6.85% Nov 91 6.90% Dec 91 6.66% Jan 92 6.72% Feb 92 6.76% Mar 92 6.76% Apr 92 6.74% May 92 6.63% Jun 92 6.49% Jul 92 6.19% Aug 92 6.35% Sep 92 6.39% Oct 92 6.68% Nov 92 6.42% Dec 92 6.39% Jan 93 6.31% Feb 93 6.01% Mar 93 6.04% Apr 93 5.96% May 93 5.89% Jun 93 5.76% Jul 93 5.78% Aug 93 5.60% Sep 93 5.47% Oct 93 5.48% Nov 93 5.65% Dec 93 5.52% Jan 94 5.45% Feb 94 5.77% Mar 94 6.36% Apr 94 6.37% May 94 6.40% Jun 94 6.47% Jul 94 6.33% Aug 94 6.36% Sep 94 6.58% Oct 94 6.85% Nov 94 7.16% Dec 94 6.92% Jan 95 6.66% Feb 95 6.42% Mar 95 6.37% Apr 95 6.35% May 95 6.10% Jun 95 6.28% Jul 95 6.19% Aug 95 6.11% Sep 95 6.07% Oct 95 5.91% Nov 95 5.74% Dec 95 5.56% Jan 96 5.57% Feb 96 5.71% Mar 96 5.96% Apr 96 6.05% May 96 6.09% Jun 96 6.01% Jul 96 5.98% Aug 96 6.02% Sep 96 5.89% Oct 96 5.83% Nov 96 5.66% Dec 96 5.72% Jan 97 5.82% Feb 97 5.76% Mar 97 5.95% Apr 97 5.89% May 97 5.74% Jun 97 5.69% Jul 97 5.40% Aug 97 5.55% Sep 97 5.47% Oct 97 5.40% Nov 97 5.36% Dec 97 5.25% Jan 98 5.19% Feb 98 5.24% Mar 98 5.27% Apr 98 5.39% May 98 5.22% Jun 98 5.22% Jul 98 5.26% Aug 98 5.11% Sep 98 4.99% Oct 98 5.13% Nov 98 5.10% Dec 98 5.16% Jan 99 5.09% Feb 99 5.17% Mar 99 5.23% Apr 99 5.28% May 99 5.37% Jun 99 5.53% Jul 99 5.59% Aug 99 5.78% Sep 99 5.89% Oct 99 6.08% Nov 99 6.12% Dec 99 6.22% Jan 00 6.31% Feb 00 6.17% Mar 00 5.94% Apr 00 6.00% May 00 6.13% Jun 00 5.91% Jul 00 5.79% Aug 00 5.72% Sep 00 5.82% Oct 00 5.74% Nov 00 5.75% Dec 00 5.47% Jan 01 5.45% Feb 01 5.40% Mar 01 5.30% Apr 01 5.49% May 01 5.42% June 01 5.38% Jul 01 5.25% Aug 01 5.12% Sep-01 5.22% Oct-01 5.20% Nov-01 5.30% Dec-01 5.44% Jan-02 5.33% Feb-02 5.25% Source: S&P Micropal (Bond Buyer 40, as of 2/28/02). One cannot invest in an index; indexes are unmanaged. NOT PART OF THE SHAREHOLDER REPORT 6 Many of the securities being called today have provided high levels of income over the past 10 years, as interest rates have trended down. Though we can't predict interest rate cycles, we'll continue to focus on producing the highest monthly tax-free income possible through our disciplined management approach. Q. WHAT OTHER TYPES OF INCOME CAN MY FUND DISTRIBUTE? A. Your fund also earns income from short- and long-term capital gains, which are taxable to shareholders, whether you reinvest them or receive them as cash. Though we work to reduce capital gains, in periods of sustained low interest rates, they are often unavoidable. While short-term capital gains (on securities held in a portfolio for 12 months or less) are treated as ordinary income distributions and taxed at regular income tax rates, long-term capital gains (on securities held in a portfolio for more than 12 months) are taxed at lower rates. Sometimes, a fund may invest part of its portfolio in private activity bonds, which are basically municipal bonds issued to finance private activity. Interest earned from such bonds is exempt from federal income tax, but it's a preference item when calculating your alternative minimum tax (AMT) liability. So, as required by the Internal Revenue Code, this income must be added to your regular tax income to calculate your AMT income and AMT tax liability, if any. In case your fund makes any capital gains distributions, you can find the exact amount of the distributions on your Form 1099. For complete information on your tax liabilities, we suggest you consult a qualified tax professional. [GRAPHIC OMITTED] FRANKLIN TEMPLETON INVESTMENTS DIVQ INS 04/2002 NOT PART OF THE SHAREHOLDER REPORT 7 FRANKLIN ARIZONA TAX-FREE INCOME FUND [GRAPHIC OMITTED] CREDIT QUALITY BREAKDOWN* FRANKLIN ARIZONA TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 AAA - 50.2% AA - 12.1% A - 20.6% BBB - 15.5% Below Investment Grade - 1.6% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN ARIZONA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND ARIZONA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF ARIZONA MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE [GRAPHIC OF ARIZONA OMITTED] Arizona has a diverse and expanding economy with rapid population growth. During the past decade, the state was the second-fastest in population growth and is now home to more than 5 million people. The state's economy boasts a balanced mix of employment in the trade, services, finance, utilities and transportation sectors. In particular, growth was driven by the high-technology sector and relatively inexpensive land and housing costs, especially in relation to neighboring southern California. Sales tax collections grew with the population influx, averaging more than 8% annual growth in the past three years.2 However, Arizona is feeling the impact of the general economic slowdown on its revenues, as well as expenditure pressures related to health and education. During the year under review, the state's unemployment rate increased to 6.0% by February 2002, up from 3.8% in February 2001.3 Arizona's general fund finances have been strong since the early 1990s. The state's economy and financial operations experienced large operating surpluses in recent years, but they tightened considerably, while the state has maintained healthy budget reserves that offer a cushion in the face of potential economic volatility. In 1999, Arizona increased the funding level of its rainy day reserve fund to 7.1% of general fund revenues. The state's 2002 general fund budget includes a voter-approved 0.6% sales 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 10/11/01. 3. Source: Bureau of Labor Statistics, 3/26/02. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 74. 8 tax increase for educational programs, known as Proposition 301, which was expected to add $486 million in new revenues in fiscal year 2002. Based on preliminary data, however, collections are below budgeted expectations, and the governor is forecasting a shortfall for the biennium. To address this revenue shortfall, the state is considering a reduction in state revenue-sharing programs with cities and counties, the passage of revenue bonds up to $200 million annually over the biennium, and the possible use of up to $300 million of the rainy day fund.2 Arizona's outlook is stable, reflecting expectations of continued, though slower, economic growth and action to address the current budgetary shortfall. The state is facing expenditure pressures; however, Arizona's resources and active fiscal management should enable the state to accommodate these spending needs and maintain long-term financial stability. PORTFOLIO NOTES Arizona bond supply increased more than 100% in 2001 to $4.95 billion, up from $2.45 billion a year earlier.4 A low interest rate environment during the year helped municipalities to refinance debt, and many refunding deals came to market during the year. Although bond supply was up, demand was up as well, which generally supported municipal bond prices. Several new closed-end funds entered the marketplace nationally, and there was strong participation by institutional and retail buyers. At the end of the year under review, Franklin Arizona Tax-Free Income Fund held $45.9 million par value in Gila County, Arizona, industrial development bonds backed by Asarco Inc. This position represented 1.60% of the Fund's total long-term investments on February 28, 2002, and was rated Ca by Moody's Investors Service and B+ by Standard & Poor's. Grupo Mexico SA, a publicly traded Mexican industrial conglomerate, purchased Asarco in late 1999 and is in the process of combining its Mexican mining operations with those of Asarco and its majority-owned subsidiary, Southern Peru Copper Corp. When this combination is complete, the new company will be the world's fourth-largest copper producer and third-largest holder of copper reserves. Grupo also owns 76% of the largest and most profitable railroad in Mexico, PORTFOLIO BREAKDOWN Franklin Arizona Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS --------------------------------- Utilities 24.9% Hospital & Health Care 20.7% Prerefunded 14.8% Transportation 7.3% Subject to Government Appropriations 7.2% General Obligation 6.7% Housing 5.0% Tax-Supported 4.3% Other Revenue 4.0% Higher Education 3.2% Corporate-Backed 1.9% 4. Source: THE BOND BUYER, 1/2/02. 9 DIVIDEND DISTRIBUTIONS* Franklin Arizona Tax-Free Income Fund 2/28/02 DIVIDEND PER SHARE -------------------------------------- MONTH CLASS A CLASS B CLASS C ----------------------------------------------------------------------------- March 4.73 cents 4.20 cents 4.21 cents April 4.73 cents 4.20 cents 4.21 cents May 4.73 cents 4.20 cents 4.21 cents June 4.73 cents 4.23 cents 4.24 cents July 4.73 cents 4.23 cents 4.24 cents August 4.73 cents 4.23 cents 4.24 cents September 4.60 cents 4.10 cents 4.10 cents October 4.60 cents 4.10 cents 4.10 cents November 4.60 cents 4.10 cents 4.10 cents December 4.60 cents 4.09 cents 4.09 cents January 4.60 cents 4.09 cents 4.09 cents February 4.60 cents 4.09 cents 4.09 cents ----------------------------------------------------------------------------- TOTAL 55.98 CENTS 49.86 CENTS 49.92 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. and its leveraged buyout of Asarco and combination of mining assets creates a large, low-cost copper producer. However, it also greatly increased the company's total debt, which, combined with the weak global economy and historically low copper prices, led to downgrades in the corporate credit ratings of all bonds backed by Asarco. Franklin Arizona Tax-Free Income Fund's performance was adversely affected primarily due to the decline in this position's value. We continue to monitor the situation very closely and stay in direct contact with company officials. We focused primarily on remaining fully invested throughout the period. Notable purchases during the period included Phoenix Civic Improvement Corp. Wastewater System, Scottsdale IDA Hospital, and Salt River Project Arizona Agricultural Improvement and Power District Electric Systems revenue bonds. The utilities and hospital & health care sectors represented the Fund's largest weightings at period-end, comprising 24.9% and 20.7% of total long-term investments. 10 The Fund was subject to bond calls during the 12-month period as municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher coupon bonds. We could reinvest the proceeds only at the current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Keep in mind that your Fund combines the advantage of overall high credit quality with tax-free yields.1 The Performance Summary beginning on page 12 shows that at the end of this reporting period the Fund's Class A shares' distribution rate was 4.86%, based on an annualization of the current 4.55 cent ($0.0455) per share dividend and the maximum offering price of $11.24 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Arizona state personal income tax bracket of 41.69% would need to earn 8.34% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Arizona Tax-Free Income Fund. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 11 FRANKLIN ARIZONA TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------ Net Asset Value (NAV) -$0.07 $10.76 $10.83 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5598 CLASS B CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------ Net Asset Value (NAV) -$0.05 $10.81 $10.86 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4986 CLASS C CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------ Net Asset Value (NAV) -$0.05 $10.85 $10.90 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4992 -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 12 PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------ Cumulative Total Return1 +4.63% +26.37% +78.00% Average Annual Total Return2 +0.19% +3.88% +5.48% Avg. Ann. Total Return (3/31/02)3 -2.34% +3.74% +5.27% Distribution Rate4 4.86% Taxable Equivalent Distribution Rate5 8.34% 30-Day Standardized Yield6 4.26% Taxable Equivalent Yield5 7.31% INCEPTION CLASS B 1-YEAR (2/1/00) ------------------------------------------------------------------------------ Cumulative Total Return1 +4.22% +16.41% Average Annual Total Return2 +0.24% +6.25% Avg. Ann. Total Return (3/31/02)3 -2.47% +5.00% Distribution Rate4 4.51% Taxable Equivalent Distribution Rate5 7.74% 30-Day Standardized Yield6 3.90% Taxable Equivalent Yield5 6.69% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------ Cumulative Total Return1 +4.21% +23.16% +39.00% Average Annual Total Return2 +2.18% +4.05% +4.79% Avg. Ann. Total Return (3/31/02)3 -0.56% +3.87% +4.43% Distribution Rate4 4.43% Taxable Equivalent Distribution Rate5 7.60% 30-Day Standardized Yield6 3.86% Taxable Equivalent Yield5 6.62% 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Arizona state personal income tax bracket of 41.69%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 13 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +0.19% 5-Year +3.88% 10-Year +5.48% CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ---------------------------------------------------------------------------- Date Franklin Arizona Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class A Index7 ---------------------------------------------------------------------------- 03/01/1992 $9,574 $10,000 $10,000 03/31/1992 $9,582 $10,003 $10,051 04/30/1992 $9,655 $10,092 $10,065 05/31/1992 $9,775 $10,211 $10,079 06/30/1992 $9,897 $10,383 $10,115 07/31/1992 $10,258 $10,694 $10,137 08/31/1992 $10,146 $10,590 $10,165 09/30/1992 $10,222 $10,659 $10,194 10/31/1992 $10,109 $10,555 $10,229 11/30/1992 $10,347 $10,744 $10,244 12/31/1992 $10,482 $10,853 $10,236 01/31/1993 $10,615 $10,979 $10,287 02/28/1993 $10,866 $11,377 $10,323 03/31/1993 $10,815 $11,256 $10,359 04/30/1993 $10,879 $11,370 $10,388 05/31/1993 $10,938 $11,433 $10,402 06/30/1993 $11,117 $11,624 $10,417 07/31/1993 $11,114 $11,639 $10,417 08/31/1993 $11,335 $11,882 $10,446 09/30/1993 $11,454 $12,017 $10,468 10/31/1993 $11,485 $12,040 $10,511 11/30/1993 $11,431 $11,934 $10,518 12/31/1993 $11,656 $12,186 $10,518 01/31/1994 $11,770 $12,325 $10,547 02/28/1994 $11,521 $12,005 $10,582 03/31/1994 $11,152 $11,517 $10,618 04/30/1994 $11,205 $11,615 $10,633 05/31/1994 $11,261 $11,716 $10,641 06/30/1994 $11,230 $11,644 $10,677 07/31/1994 $11,404 $11,857 $10,706 08/31/1994 $11,450 $11,899 $10,749 09/30/1994 $11,342 $11,724 $10,778 10/31/1994 $11,181 $11,515 $10,785 11/30/1994 $10,974 $11,307 $10,799 12/31/1994 $11,186 $11,556 $10,799 01/31/1995 $11,432 $11,886 $10,842 02/28/1995 $11,713 $12,232 $10,886 03/31/1995 $11,839 $12,373 $10,922 04/30/1995 $11,871 $12,387 $10,958 05/31/1995 $12,165 $12,783 $10,980 06/30/1995 $12,086 $12,671 $11,002 07/31/1995 $12,167 $12,792 $11,002 08/31/1995 $12,289 $12,954 $11,030 09/30/1995 $12,345 $13,036 $11,052 10/31/1995 $12,517 $13,225 $11,089 11/30/1995 $12,706 $13,444 $11,081 12/31/1995 $12,819 $13,573 $11,073 01/31/1996 $12,882 $13,677 $11,138 02/29/1996 $12,797 $13,584 $11,174 03/31/1996 $12,652 $13,410 $11,232 04/30/1996 $12,634 $13,372 $11,276 05/31/1996 $12,655 $13,367 $11,297 06/30/1996 $12,804 $13,513 $11,304 07/31/1996 $12,891 $13,634 $11,326 08/31/1996 $12,901 $13,631 $11,347 09/30/1996 $13,081 $13,822 $11,384 10/31/1996 $13,200 $13,978 $11,420 11/30/1996 $13,388 $14,234 $11,442 12/31/1996 $13,359 $14,175 $11,442 01/31/1997 $13,384 $14,201 $11,478 02/28/1997 $13,493 $14,332 $11,514 03/31/1997 $13,342 $14,141 $11,543 04/30/1997 $13,448 $14,260 $11,556 05/31/1997 $13,612 $14,476 $11,550 06/30/1997 $13,739 $14,630 $11,563 07/31/1997 $14,056 $15,036 $11,577 08/31/1997 $13,958 $14,894 $11,599 09/30/1997 $14,109 $15,072 $11,628 10/31/1997 $14,191 $15,168 $11,657 11/30/1997 $14,276 $15,258 $11,650 12/31/1997 $14,461 $15,480 $11,636 01/31/1998 $14,578 $15,640 $11,658 02/28/1998 $14,593 $15,645 $11,681 03/31/1998 $14,597 $15,659 $11,703 04/30/1998 $14,568 $15,588 $11,724 05/31/1998 $14,746 $15,834 $11,745 06/30/1998 $14,789 $15,896 $11,759 07/31/1998 $14,835 $15,936 $11,773 08/31/1998 $15,017 $16,183 $11,787 09/30/1998 $15,194 $16,385 $11,801 10/31/1998 $15,182 $16,385 $11,830 11/30/1998 $15,234 $16,443 $11,830 12/31/1998 $15,249 $16,484 $11,823 01/31/1999 $15,408 $16,680 $11,851 02/28/1999 $15,349 $16,606 $11,865 03/31/1999 $15,410 $16,630 $11,901 04/30/1999 $15,433 $16,671 $11,988 05/31/1999 $15,369 $16,575 $11,988 06/30/1999 $15,143 $16,336 $11,988 07/31/1999 $15,178 $16,395 $12,024 08/31/1999 $14,986 $16,264 $12,053 09/30/1999 $14,967 $16,270 $12,110 10/31/1999 $14,693 $16,094 $12,132 11/30/1999 $14,808 $16,265 $12,140 12/31/1999 $14,664 $16,143 $12,140 01/31/2000 $14,547 $16,072 $12,176 02/29/2000 $14,711 $16,258 $12,248 03/31/2000 $15,063 $16,613 $12,348 04/30/2000 $14,972 $16,515 $12,356 05/31/2000 $14,891 $16,429 $12,370 06/30/2000 $15,249 $16,864 $12,435 07/31/2000 $15,464 $17,099 $12,463 08/31/2000 $15,710 $17,362 $12,463 09/30/2000 $15,628 $17,272 $12,528 10/31/2000 $15,792 $17,460 $12,549 11/30/2000 $15,890 $17,593 $12,557 12/31/2000 $16,178 $18,027 $12,549 01/31/2001 $16,252 $18,206 $12,629 02/28/2001 $16,302 $18,264 $12,679 03/31/2001 $16,421 $18,428 $12,708 04/30/2001 $16,269 $18,229 $12,759 05/31/2001 $16,402 $18,426 $12,816 06/30/2001 $16,559 $18,550 $12,838 07/31/2001 $16,854 $18,824 $12,802 08/31/2001 $17,065 $19,135 $12,802 09/30/2001 $16,973 $19,070 $12,860 10/31/2001 $17,051 $19,297 $12,816 11/30/2001 $16,807 $19,135 $12,794 12/31/2001 $16,662 $18,953 $12,744 01/31/2002 $16,846 $19,281 $12,774 02/28/2002 $17,044 $19,512 $12,825 AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 ------------------------------- 1-Year +0.24% Since Inception (2/1/00) +6.25% CLASS B (2/1/00-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Arizona Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class B Index7 -------------------------------------------------------------------------------- 02/01/2000 $10,000 $10,000 $10,000 02/29/2000 $10,121 $10,116 $10,059 03/31/2000 $10,359 $10,337 $10,141 04/30/2000 $10,302 $10,276 $10,148 05/31/2000 $10,240 $10,222 $10,160 06/30/2000 $10,481 $10,493 $10,213 07/31/2000 $10,633 $10,639 $10,236 08/31/2000 $10,795 $10,803 $10,236 09/30/2000 $10,735 $10,747 $10,289 10/31/2000 $10,841 $10,864 $10,307 11/30/2000 $10,914 $10,946 $10,313 12/31/2000 $11,096 $11,217 $10,307 01/31/2001 $11,142 $11,328 $10,372 02/28/2001 $11,171 $11,364 $10,413 03/31/2001 $11,257 $11,466 $10,437 04/30/2001 $11,136 $11,342 $10,479 05/31/2001 $11,232 $11,465 $10,526 06/30/2001 $11,335 $11,542 $10,544 07/31/2001 $11,530 $11,712 $10,514 08/31/2001 $11,669 $11,906 $10,514 09/30/2001 $11,601 $11,865 $10,562 10/31/2001 $11,648 $12,006 $10,526 11/30/2001 $11,489 $11,906 $10,508 12/31/2001 $11,374 $11,792 $10,467 01/31/2002 $11,492 $11,996 $10,491 02/28/2002 $11,341 $12,140 $10,533 Past performance does not guarantee future results. 14 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 --------------------------------- 1-Year +2.18% 5-Year +4.05% Since Inception (5/1/95) +4.79% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Arizona Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class C Index7 -------------------------------------------------------------------------------- 05/01/1995 $9,902 $10,000 $10,000 05/31/1995 $10,167 $10,319 $10,020 06/30/1995 $10,095 $10,229 $10,040 07/31/1995 $10,157 $10,326 $10,040 08/31/1995 $10,262 $10,458 $10,066 09/29/1995 $10,314 $10,523 $10,086 10/31/1995 $10,442 $10,676 $10,120 11/30/1995 $10,602 $10,853 $10,112 12/29/1995 $10,682 $10,957 $10,105 01/31/1996 $10,737 $11,041 $10,165 02/29/1996 $10,654 $10,966 $10,198 03/29/1996 $10,539 $10,825 $10,251 04/30/1996 $10,519 $10,795 $10,291 05/31/1996 $10,529 $10,791 $10,310 06/28/1996 $10,639 $10,908 $10,316 07/31/1996 $10,714 $11,006 $10,336 08/30/1996 $10,716 $11,004 $10,356 09/30/1996 $10,859 $11,158 $10,389 10/31/1996 $10,961 $11,284 $10,422 11/29/1996 $11,111 $11,491 $10,442 12/31/1996 $11,081 $11,443 $10,442 01/31/1997 $11,088 $11,464 $10,475 02/28/1997 $11,175 $11,570 $10,508 03/31/1997 $11,056 $11,416 $10,534 04/30/1997 $11,139 $11,512 $10,547 05/31/1997 $11,268 $11,686 $10,540 06/30/1997 $11,357 $11,811 $10,553 07/31/1997 $11,614 $12,138 $10,565 08/31/1997 $11,538 $12,024 $10,586 09/30/1997 $11,656 $12,167 $10,612 10/31/1997 $11,716 $12,245 $10,639 11/30/1997 $11,781 $12,317 $10,632 12/31/1997 $11,927 $12,497 $10,619 01/31/1998 $12,028 $12,626 $10,640 02/28/1998 $12,034 $12,629 $10,660 03/31/1998 $12,032 $12,641 $10,680 04/30/1998 $11,992 $12,584 $10,699 05/31/1998 $12,132 $12,783 $10,719 06/30/1998 $12,173 $12,832 $10,731 07/31/1998 $12,192 $12,865 $10,744 08/31/1998 $12,347 $13,064 $10,757 09/30/1998 $12,497 $13,227 $10,770 10/31/1998 $12,470 $13,227 $10,796 11/30/1998 $12,505 $13,274 $10,796 12/31/1998 $12,511 $13,307 $10,789 01/31/1999 $12,634 $13,465 $10,815 02/28/1999 $12,581 $13,406 $10,828 03/31/1999 $12,635 $13,425 $10,861 04/30/1999 $12,647 $13,458 $10,940 05/31/1999 $12,579 $13,380 $10,940 06/30/1999 $12,390 $13,187 $10,940 07/31/1999 $12,413 $13,235 $10,973 08/31/1999 $12,251 $13,129 $10,999 09/30/1999 $12,231 $13,134 $11,052 10/31/1999 $12,003 $12,992 $11,072 11/30/1999 $12,089 $13,130 $11,079 12/31/1999 $11,967 $13,032 $11,079 01/31/2000 $11,867 $12,974 $11,112 02/29/2000 $11,995 $13,125 $11,177 03/31/2000 $12,275 $13,411 $11,269 04/30/2000 $12,196 $13,332 $11,276 05/31/2000 $12,124 $13,263 $11,289 06/30/2000 $12,408 $13,614 $11,348 07/31/2000 $12,575 $13,803 $11,374 08/31/2000 $12,768 $14,016 $11,374 09/30/2000 $12,708 $13,943 $11,433 10/31/2000 $12,822 $14,095 $11,453 11/30/2000 $12,908 $14,202 $11,460 12/31/2000 $13,135 $14,553 $11,453 01/31/2001 $13,177 $14,697 $11,525 02/28/2001 $13,208 $14,744 $11,571 03/31/2001 $13,310 $14,877 $11,598 04/30/2001 $13,169 $14,716 $11,644 05/31/2001 $13,282 $14,875 $11,696 06/30/2001 $13,403 $14,974 $11,716 07/31/2001 $13,633 $15,196 $11,683 08/31/2001 $13,797 $15,447 $11,683 09/30/2001 $13,718 $15,394 $11,736 10/31/2001 $13,774 $15,578 $11,696 11/30/2001 $13,573 $15,447 $11,676 12/31/2001 $13,451 $15,300 $11,631 01/31/2002 $13,591 $15,565 $11,657 02/28/2002 $13,764 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 15 FRANKLIN COLORADO TAX-FREE INCOME FUND CREDIT QUALITY BREAKDOWN* FRANKLIN COLORADO TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 [PIE CHART OMITTED] AAA - 67.9% AA - 7.7% A - 11.4% BBB - 12.1% Below Investment Grade - 0.9% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN COLORADO TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND COLORADO STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF COLORADO MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE [GRAPHIC OF COLORADO OMITTED] Colorado has a record of solid financial performance during the past several years, driven by a trend of strong economic expansion. The state has enjoyed significant growth in population, employment and personal income, leading to impressive increases in state tax revenues over the past five years and enabling the state to refund substantial amounts of surplus revenue to residents each year. In addition, Colorado has implemented moderate permanent tax cuts and maintained general fund reserves well in excess of the statutory minimum of 4% of appropriations. The state projects a small cash deficit of $95 million in the general fund for its fiscal year ending June 30, 2002, due in large part to the national economic slowdown.2 However, there are substantial balances in other state funds and accounts, estimated at more than $2 billion, that may be borrowed by the state treasurer if necessary.3 Slower job growth in the state reflects layoffs in technology and other sectors. A number of statutory and constitutional limits and requirements affecting spending and revenue growth strongly influence Colorado's finances. The Taxpayer Bill of Rights (TABOR) limits state revenue and expenditure growth to the population growth rate plus the inflation rate. Revenues exceeding this limit must be refunded, unless voters approve otherwise. TABOR also requires voter approval for any new tax or tax rate 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's, RATINGSDIRECT, 10/8/01. 3. Source: Moody's Investors Service, COLORADO (STATE OF), 9/27/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 80. 16 increase. The state expects reserves to begin to recover in 2003, partially due to a census population revision, 3% higher than previously estimated, which increases the amount of revenue that may be retained as opposed to refunded each year in accordance with TABOR. The outlook for Colorado is stable. Although the state's 2002 budget, even after anticipated revisions, remains vulnerable to further economic slowing, as well as possibly lower capital gains income, the state may rely on other available funds. In addition, despite the drop in projected cash balances, Colorado anticipated collecting $93.2 million in excess 2002 revenues under the state's constitutional revenue limit, which will have to be rebated to taxpayers in fiscal year 2003.3 The state expects to end fiscal year 2002 with a modest general fund reserve. PORTFOLIO NOTES Colorado bond supply increased 33.8% in 2001 to $6.04 billion, up from $4.51 billion a year earlier.4 A low interest rate environment during the year helped municipalities to refinance debt, and many refunding deals came to market during the year. Although bond supply was up, demand was up as well, which generally supported municipal bond prices. Several new closed-end funds entered the marketplace nationally, and there was strong participation by institutional and retail buyers. Municipal bond yields generally decreased over the 12-month reporting period. Because bond prices rise as yields fall, the Fund's Class A share price, as measured by net asset value, increased from $11.64 on February 28, 2001, to $11.79 on February 28, 2002. Unfortunately, the Fund was subject to calls as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher coupon bonds. We could reinvest the proceeds only at current, lower rates, causing the Fund's dividend distribution to decline during the 12-month period. (Please read our special feature, "Making Sense of Dividends.") We focused primarily on remaining fully invested throughout the period, as the yield spread between short- and long-maturity bonds remained fairly wide. Market volatility afforded us the opportunity to purchase bonds at attractive prices. Thus, we attempted PORTFOLIO BREAKDOWN Franklin Colorado Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS -------------------------------- Hospital & Health Care 21.5% Transportation 20.2% Subject to Government Appropriations 10.8% Housing 10.2% Prerefunded 9.3% Utilities 9.1% Tax-Supported 7.6% General Obligation 4.0% Higher Education 3.2% Corporate-Backed 2.8% Other Revenue 1.3% 4. Source: THE BOND BUYER, 1/2/02. 17 DIVIDEND DISTRIBUTIONS* Franklin Colorado Tax-Free Income Fund 2/28/02 DIVIDEND PER SHARE ----------------------------------------------------------------------- MONTH CLASS A CLASS C ----------------------------------------------------------------------- March 4.93 cents 4.38 cents April 4.93 cents 4.38 cents May 4.93 cents 4.38 cents June 4.93 cents 4.40 cents July 4.93 cents 4.40 cents August 4.93 cents 4.40 cents September 4.85 cents 4.32 cents October 4.85 cents 4.32 cents November 4.85 cents 4.32 cents December 4.85 cents 4.29 cents January 4.85 cents 4.29 cents February 4.85 cents 4.29 cents ----------------------------------------------------------------------- TOTAL 58.68 CENTS 52.17 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. to be more active when the market declined and yields increased. Purchases during the reporting period included Northwest Parkway Public Highway, Denver Health and Hospital Authority, Broomfield Sales and Use Tax, and Broomfield Sewer Activity Enterprise Sewer and Wastewater revenue bonds. The hospital & health care and transportation sectors represented the Fund's largest weightings at period-end, comprising 21.5% and 20.2% of total long-term investments. Keep in mind that your Fund combines the advantage of overall high credit quality with tax-free yields.1 The Performance Summary beginning on page 20 shows that at the end of this reporting period the Fund's Class A shares' distribution rate was 4.73%, based on an annualization of the current 4.85 cent ($0.0485) per share dividend and the maximum offering price of $12.31 on February 28, 2002. This tax-free rate is 18 generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Arizona state personal income tax bracket of 41.44% would need to earn 8.08% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking ahead, we are optimistic about the long-term outlook for municipal bonds and Franklin Colorado Tax-Free Income Fund. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 19 FRANKLIN COLORADO TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.15 $11.79 $11.64 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5868 CLASS C CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $11.86 $11.70 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5217 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------- Cumulative Total Return1 +6.48% +30.96% +87.90% Average Annual Total Return2 +1.93% +4.64% +6.05% Avg. Ann. Total Return (3/31/02)3 -0.25% +4.57% +5.87% Distribution Rate4 4.73% Taxable Equivalent Distribution Rate5 8.08% 30-Day Standardized Yield6 3.93% Taxable Equivalent Yield5 6.71% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) ------------------------------------------------------------------------------- Cumulative Total Return1 +5.95% +27.54% +45.30% Average Annual Total Return2 +3.88% +4.77% +5.46% Avg. Ann. Total Return (3/31/02)3 +1.48% +4.70% +5.16% Distribution Rate4 4.31% Taxable Equivalent Distribution Rate5 7.36% 30-Day Standardized Yield6 3.53% Taxable Equivalent Yield5 6.03% -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Colorado state personal income tax bracket of 41.44%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 20 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Lehman Brothers CPI7 Colorado Municipal Bond Tax-Free Income Index7 Fund-Class A -------------------------------------------------------------------------------- 03/01/1992 $9,579 $10,000 $10,000 03/31/1992 $9,606 $10,003 $10,051 04/30/1992 $9,688 $10,092 $10,065 05/31/1992 $9,826 $10,211 $10,079 06/30/1992 $9,958 $10,383 $10,115 07/31/1992 $10,333 $10,694 $10,137 08/31/1992 $10,226 $10,590 $10,165 09/30/1992 $10,249 $10,659 $10,194 10/31/1992 $10,078 $10,555 $10,229 11/30/1992 $10,351 $10,744 $10,244 12/31/1992 $10,505 $10,853 $10,236 01/31/1993 $10,621 $10,979 $10,287 02/28/1993 $10,972 $11,377 $10,323 03/31/1993 $10,915 $11,256 $10,359 04/30/1993 $11,001 $11,370 $10,388 05/31/1993 $11,052 $11,433 $10,402 06/30/1993 $11,221 $11,624 $10,417 07/31/1993 $11,247 $11,639 $10,417 08/31/1993 $11,475 $11,882 $10,446 09/30/1993 $11,613 $12,017 $10,468 10/31/1993 $11,655 $12,040 $10,511 11/30/1993 $11,623 $11,934 $10,518 12/31/1993 $11,845 $12,186 $10,518 01/31/1994 $11,967 $12,325 $10,547 02/28/1994 $11,711 $12,005 $10,582 03/31/1994 $11,251 $11,517 $10,618 04/30/1994 $11,275 $11,615 $10,633 05/31/1994 $11,353 $11,716 $10,641 06/30/1994 $11,274 $11,644 $10,677 07/31/1994 $11,487 $11,857 $10,706 08/31/1994 $11,515 $11,899 $10,749 09/30/1994 $11,370 $11,724 $10,778 10/31/1994 $11,182 $11,515 $10,785 11/30/1994 $10,970 $11,307 $10,799 12/31/1994 $11,201 $11,556 $10,799 01/31/1995 $11,550 $11,886 $10,842 02/28/1995 $11,838 $12,232 $10,886 03/31/1995 $11,942 $12,373 $10,922 04/30/1995 $11,975 $12,387 $10,958 05/31/1995 $12,287 $12,783 $10,980 06/30/1995 $12,210 $12,671 $11,002 07/31/1995 $12,279 $12,792 $11,002 08/31/1995 $12,454 $12,954 $11,030 09/30/1995 $12,511 $13,036 $11,052 10/31/1995 $12,681 $13,225 $11,089 11/30/1995 $12,879 $13,444 $11,081 12/31/1995 $13,000 $13,573 $11,073 01/31/1996 $13,063 $13,677 $11,138 02/29/1996 $13,035 $13,584 $11,174 03/31/1996 $12,918 $13,410 $11,232 04/30/1996 $12,913 $13,372 $11,276 05/31/1996 $12,922 $13,367 $11,297 06/30/1996 $13,035 $13,513 $11,304 07/31/1996 $13,133 $13,634 $11,326 08/31/1996 $13,138 $13,631 $11,347 09/30/1996 $13,316 $13,822 $11,384 10/31/1996 $13,446 $13,978 $11,420 11/30/1996 $13,645 $14,234 $11,442 12/31/1996 $13,621 $14,175 $11,442 01/31/1997 $13,637 $14,201 $11,478 02/28/1997 $13,746 $14,332 $11,514 03/31/1997 $13,591 $14,141 $11,543 04/30/1997 $13,698 $14,260 $11,556 05/31/1997 $13,861 $14,476 $11,550 06/30/1997 $14,009 $14,630 $11,563 07/31/1997 $14,357 $15,036 $11,577 08/31/1997 $14,228 $14,894 $11,599 09/30/1997 $14,423 $15,072 $11,628 10/31/1997 $14,513 $15,168 $11,657 11/30/1997 $14,608 $15,258 $11,650 12/31/1997 $14,824 $15,480 $11,636 01/31/1998 $14,975 $15,640 $11,658 02/28/1998 $14,965 $15,645 $11,681 03/31/1998 $14,996 $15,659 $11,703 04/30/1998 $14,945 $15,588 $11,724 05/31/1998 $15,169 $15,834 $11,745 06/30/1998 $15,229 $15,896 $11,759 07/31/1998 $15,261 $15,936 $11,773 08/31/1998 $15,451 $16,183 $11,787 09/30/1998 $15,626 $16,385 $11,801 10/31/1998 $15,591 $16,385 $11,830 11/30/1998 $15,657 $16,443 $11,830 12/31/1998 $15,676 $16,484 $11,823 01/31/1999 $15,818 $16,680 $11,851 02/28/1999 $15,752 $16,606 $11,865 03/31/1999 $15,813 $16,630 $11,901 04/30/1999 $15,824 $16,671 $11,988 05/31/1999 $15,725 $16,575 $11,988 06/30/1999 $15,505 $16,336 $11,988 07/31/1999 $15,514 $16,395 $12,024 08/31/1999 $15,306 $16,264 $12,053 09/30/1999 $15,277 $16,270 $12,110 10/31/1999 $15,002 $16,094 $12,132 11/30/1999 $15,157 $16,265 $12,140 12/31/1999 $14,979 $16,143 $12,140 01/31/2000 $14,828 $16,072 $12,176 02/29/2000 $15,030 $16,258 $12,248 03/31/2000 $15,428 $16,613 $12,348 04/30/2000 $15,329 $16,515 $12,356 05/31/2000 $15,225 $16,429 $12,370 06/30/2000 $15,628 $16,864 $12,435 07/31/2000 $15,824 $17,099 $12,463 08/31/2000 $16,077 $17,362 $12,463 09/30/2000 $15,958 $17,272 $12,528 10/31/2000 $16,148 $17,460 $12,549 11/30/2000 $16,274 $17,593 $12,557 12/31/2000 $16,711 $18,027 $12,549 01/31/2001 $16,844 $18,206 $12,629 02/28/2001 $16,909 $18,264 $12,679 03/31/2001 $17,043 $18,428 $12,708 04/30/2001 $16,929 $18,229 $12,759 05/31/2001 $17,076 $18,426 $12,816 06/30/2001 $17,276 $18,550 $12,838 07/31/2001 $17,562 $18,824 $12,802 08/31/2001 $17,859 $19,135 $12,802 09/30/2001 $17,715 $19,070 $12,860 10/31/2001 $17,915 $19,297 $12,816 11/30/2001 $17,775 $19,135 $12,794 12/31/2001 $17,563 $18,953 $12,744 01/31/2002 $17,850 $19,281 $12,774 02/28/2002 $17,989 $19,512 $12,825 CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Colorado Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class C Index7 -------------------------------------------------------------------------------- 05/01/1995 $9,896 $10,000 $10,000 05/31/1995 $10,157 $10,319 $10,020 06/30/1995 $10,096 $10,229 $10,040 07/31/1995 $10,149 $10,326 $10,040 08/31/1995 $10,288 $10,458 $10,066 09/29/1995 $10,330 $10,523 $10,086 10/31/1995 $10,474 $10,676 $10,120 11/30/1995 $10,632 $10,853 $10,112 12/29/1995 $10,726 $10,957 $10,105 01/31/1996 $10,773 $11,041 $10,165 02/29/1996 $10,745 $10,966 $10,198 03/29/1996 $10,642 $10,825 $10,251 04/30/1996 $10,633 $10,795 $10,291 05/31/1996 $10,635 $10,791 $10,310 06/28/1996 $10,733 $10,908 $10,316 07/31/1996 $10,798 $11,006 $10,336 08/30/1996 $10,808 $11,004 $10,356 09/30/1996 $10,949 $11,158 $10,389 10/31/1996 $11,050 $11,284 $10,422 11/29/1996 $11,208 $11,491 $10,442 12/31/1996 $11,183 $11,443 $10,442 01/31/1997 $11,190 $11,464 $10,475 02/28/1997 $11,274 $11,570 $10,508 03/31/1997 $11,141 $11,416 $10,534 04/30/1997 $11,224 $11,512 $10,547 05/31/1997 $11,351 $11,686 $10,540 06/30/1997 $11,475 $11,811 $10,553 07/31/1997 $11,744 $12,138 $10,565 08/31/1997 $11,644 $12,024 $10,586 09/30/1997 $11,787 $12,167 $10,612 10/31/1997 $11,856 $12,245 $10,639 11/30/1997 $11,938 $12,317 $10,632 12/31/1997 $12,108 $12,497 $10,619 01/31/1998 $12,224 $12,626 $10,640 02/28/1998 $12,221 $12,629 $10,660 03/31/1998 $12,229 $12,641 $10,680 04/30/1998 $12,183 $12,584 $10,699 05/31/1998 $12,360 $12,783 $10,719 06/30/1998 $12,402 $12,832 $10,731 07/31/1998 $12,430 $12,865 $10,744 08/31/1998 $12,579 $13,064 $10,757 09/30/1998 $12,715 $13,227 $10,770 10/31/1998 $12,681 $13,227 $10,796 11/30/1998 $12,728 $13,274 $10,796 12/31/1998 $12,738 $13,307 $10,789 01/31/1999 $12,847 $13,465 $10,815 02/28/1999 $12,787 $13,406 $10,828 03/31/1999 $12,831 $13,425 $10,861 04/30/1999 $12,834 $13,458 $10,940 05/31/1999 $12,759 $13,380 $10,940 06/30/1999 $12,565 $13,187 $10,940 07/31/1999 $12,567 $13,235 $10,973 08/31/1999 $12,393 $13,129 $10,999 09/30/1999 $12,353 $13,134 $11,052 10/31/1999 $12,126 $12,992 $11,072 11/30/1999 $12,243 $13,130 $11,079 12/31/1999 $12,106 $13,032 $11,079 01/31/2000 $11,979 $12,974 $11,112 02/29/2000 $12,136 $13,125 $11,177 03/31/2000 $12,439 $13,411 $11,269 04/30/2000 $12,355 $13,332 $11,276 05/31/2000 $12,277 $13,263 $11,289 06/30/2000 $12,595 $13,614 $11,348 07/31/2000 $12,746 $13,803 $11,374 08/31/2000 $12,944 $14,016 $11,374 09/30/2000 $12,843 $13,943 $11,433 10/31/2000 $12,988 $14,095 $11,453 11/30/2000 $13,094 $14,202 $11,460 12/31/2000 $13,439 $14,553 $11,453 01/31/2001 $13,538 $14,697 $11,525 02/28/2001 $13,572 $14,744 $11,571 03/31/2001 $13,683 $14,877 $11,598 04/30/2001 $13,574 $14,716 $11,644 05/31/2001 $13,684 $14,875 $11,696 06/30/2001 $13,848 $14,974 $11,716 07/31/2001 $14,071 $15,196 $11,683 08/31/2001 $14,300 $15,447 $11,683 09/30/2001 $14,167 $15,394 $11,736 10/31/2001 $14,332 $15,578 $11,696 11/30/2001 $14,201 $15,447 $11,676 12/31/2001 $14,038 $15,300 $11,631 01/31/2002 $14,258 $15,565 $11,657 02/28/2002 $14,379 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 21 FRANKLIN CONNECTICUT TAX-FREE INCOME FUND -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN CONNECTICUT TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND CONNECTICUT STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF CONNECTICUT MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE [GRAPHIC OF CONNECTICUT OMITTED] Connecticut's ability to plan and then adjust has helped the state cope with the negative effects of a slowing national economy. Conservative financial management in the midst of the 1990s' bull market helped produce budget surpluses, which were largely due to capital gains taxes. However, Connecticut remained cautious and wisely planned to treat these as non-recurring revenues to avoid spending commitments. When the country entered a recession in March, Connecticut's economy held up relatively well with moderate growth. Still, no state was completely immune from the national economy's ills, and Connecticut's budget faced a $302 million operating deficit for fiscal year 2002.2 The state responded quickly to projected revenue reductions resulting from weakness in personal income tax, sales and use tax, and inheritance and estate tax collections. In mid-November, a special legislative session convened to enact budget reductions and lower expenditure appropriations. Along with the governor's allotment modifications, these adjustments brought the revised deficit to a more manageable shortfall of less than 1% of general fund expenditures.3 CREDIT QUALITY BREAKDOWN* FRANKLIN CONNECTICUT TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 [PIE CHART OMITTED] AAA - 50.2% AA - 15.4% A - 14.7% BBB - 19.7% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. A non-diversified fund may be subject to greater risk of adverse economic or regulatory developments in that state than a fund with a broader geographical diversification. 2. Source: Standard & Poor's, RATINGSDIRECT, 12/4/01. This does not indicate Standard & Poor's rating of the Fund. 3. Source: Moody's Investors Service, CONNECTICUT (STATE OF), 11/30/01. This does not indicate Moody's rating of the Fund. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 84. 22 Although Connecticut's borrowing rate relative to the rest of the nation remains high, the state's ratio of debt to personal income has fallen slightly. The state boasts of consistently strong resident wealth levels and the nation's highest per-capita income, while maintaining an unemployment rate well below the national average. Steady growth for highly skilled and well-paid jobs in the financial services and high-tech industries has helped offset some of Connecticut's manufacturing losses. Careful and responsive budgeting should enable Connecticut's economy to remain flexible. Surpluses have been safely tucked into the state's rainy day reserve fund, which is fully funded at approximately $595 million.2 Although the duration and depth of any economic downturn is difficult to predict, Connecticut seems well-positioned to weather the current cycle. With its diverse and high wealth economy, the state maintains a stable outlook. Standard & Poor's and Moody's, two independent credit rating agencies, assigned Connecticut's general obligation debt their higher ratings of AA and Aa2.2, 3 PORTFOLIO NOTES Municipal bond yields generally declined during the year under review. Because bond prices rise when yields fall, Franklin Connecticut Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $10.63 on February 28, 2001, to $10.88 on February 28, 2002. As interest rates remained low during the 12 months under review, many municipalities were motivated to borrow, and issuers continued to take advantage of inexpensive borrowing costs. The low interest rate environment, in conjunction with declining tax receipts, sparked a significant outbreak of municipal bond activity. The need for capital improvement also contributed to the fervor, and 2001 closed as the year with the second highest amount of national issuance for the past decade at $286.6 billion.4 As 2002 began, the momentum continued with a record January issuance of $20.4 billion in long-term bonds.5 PORTFOLIO BREAKDOWN Franklin Connecticut Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------- Hospital & Health Care* 25.1% Higher Education 20.6% General Obligation 12.6% Utilities 11.7% Housing 8.5% Prerefunded 7.6% Subject to Government Appropriations 5.3% Other Revenue 3.9% Transportation 2.3% Tax-Supported 1.7% Corporate-Backed 0.7% *The Fund may invest more than 25% in municipal securities that finance similar types of projects such as hospital & health care. A change that affects one project may affect all similar projects, thereby increasing market risk. 4. Source: THE BOND BUYER, 1/2/02. 5. Source: THE BOND BUYER, 2/1/02. 23 DIVIDEND DISTRIBUTIONS* Franklin Connecticut Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ----------------------------- MONTH CLASS A CLASS C ----------------------------------------------------------------------------- March 4.56 cents 4.05 cents April 4.56 cents 4.05 cents May 4.56 cents 4.05 cents June 4.46 cents 3.97 cents July 4.46 cents 3.97 cents August 4.46 cents 3.97 cents September 4.40 cents 3.91 cents October 4.40 cents 3.91 cents November 4.40 cents 3.91 cents December 4.30 cents 3.79 cents January 4.30 cents 3.79 cents February 4.30 cents 3.79 cents ----------------------------------------------------------------------------- TOTAL 53.16 CENTS 47.16 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. Issuance increased dramatically in many states. For the year 2001, the supply of Connecticut bonds was up 66.8%. Additionally, Puerto Rico experienced a tremendous year, closing with $5.9 billion of issuance.4 These Puerto Rico bonds offered many attractive investment opportunities for Franklin Connecticut Tax-Free Income Fund as well. As a result, we increased our holdings in territorial securities. Notable purchases during the reporting period included Puerto Rico PBA, Puerto Rico Public Finance Corp. and Puerto Rico Electric Power Authority Power revenue bonds. It is important to note that Puerto Rico securities are highly liquid and trade well in the secondary market, and their distributions are tax-free in many states. We also purchased University of Connecticut Revenue bonds. During the 12 months under review, sales included New Haven GO, Connecticut State Airport Revenue and Puerto Rico Municipal Finance Agency Revenue bonds. 24 Your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 26 shows that at the end of this reporting period the Fund's Class A shares' distribution rate was 4.54%, based on an annualization of the current 4.3 cent ($0.043) per share dividend and the maximum offering price of $11.36 on February 28, 2002. An investor in the maximum combined federal and Connecticut state personal income tax bracket of 41.36% would need to earn 7.74% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. The Fund was subject to bond calls during the 12-month reporting period. Many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. The Fund could reinvest the proceeds only at current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Looking ahead, we are optimistic about the long-term outlook for municipal bonds and Franklin Connecticut Tax-Free Income Fund. We believe our broad portfolio diversification should help cushion the Fund from volatility, and we expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income portion of their portfolios. Most importantly, we believe municipal bonds will continue to be desirable due to the tax efficiencies they offer. We intend to maintain our conservative buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 25 FRANKLIN CONNECTICUT TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.25 $10.88 $10.63 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5316 CLASS C CHANGE 2/28/02 2/28/01 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.26 $10.92 $10.66 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4716 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------- Cumulative Total Return1 +7.53% +29.35% +79.46% Average Annual Total Return2 +2.98% +4.38% +5.56% Avg. Ann. Total Return (3/31/02)3 +0.02% +4.13% +5.35% Distribution Rate4 4.54% Taxable Equivalent Distribution Rate5 7.74% 30-Day Standardized Yield6 4.20% Taxable Equivalent Yield5 7.16% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +7.01% +25.96% +42.18% Average Annual Total Return2 +4.93% +4.51% +5.13% Avg. Ann. Total Return (3/31/02)3 +1.88% +4.28% +4.76% Distribution Rate4 4.12% Taxable Equivalent Distribution Rate5 7.03% 30-Day Standardized Yield6 3.81% Taxable Equivalent Yield5 6.50% -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Connecticut state personal income tax bracket of 41.36%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 26 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Lehman Brothers CPI7 Connecticut Municipal Bond Tax-Free Income Index7 Fund-Class A -------------------------------------------------------------------------------- 03/01/1992 $9,574 10,000 10,000 03/31/1992 $9,587 10,003 10,051 04/30/1992 $9,655 10,092 10,065 05/31/1992 $9,795 10,211 10,079 06/30/1992 $9,910 10,383 10,115 07/31/1992 $10,231 10,694 10,137 08/31/1992 $10,103 10,590 10,165 09/30/1992 $10,126 10,659 10,194 10/31/1992 $9,968 10,555 10,229 11/30/1992 $10,198 10,744 10,244 12/31/1992 $10,366 10,853 10,236 01/31/1993 $10,501 10,979 10,287 02/28/1993 $10,805 11,377 10,323 03/31/1993 $10,759 11,256 10,359 04/30/1993 $10,842 11,370 10,388 05/31/1993 $10,881 11,433 10,402 06/30/1993 $11,072 11,624 10,417 07/31/1993 $11,074 11,639 10,417 08/31/1993 $11,317 11,882 10,446 09/30/1993 $11,451 12,017 10,468 10/31/1993 $11,478 12,040 10,511 11/30/1993 $11,429 11,934 10,518 12/31/1993 $11,646 12,186 10,518 01/31/1994 $11,749 12,325 10,547 02/28/1994 $11,498 12,005 10,582 03/31/1994 $11,094 11,517 10,618 04/30/1994 $11,082 11,615 10,633 05/31/1994 $11,188 11,716 10,641 06/30/1994 $11,116 11,644 10,677 07/31/1994 $11,314 11,857 10,706 08/31/1994 $11,338 11,899 10,749 09/30/1994 $11,204 11,724 10,778 10/31/1994 $10,994 11,515 10,785 11/30/1994 $10,715 11,307 10,799 12/31/1994 $11,015 11,556 10,799 01/31/1995 $11,297 11,886 10,842 02/28/1995 $11,543 12,232 10,886 03/31/1995 $11,625 12,373 10,922 04/30/1995 $11,666 12,387 10,958 05/31/1995 $11,944 12,783 10,980 06/30/1995 $11,847 12,671 11,002 07/31/1995 $11,916 12,792 11,002 08/31/1995 $12,070 12,954 11,030 09/30/1995 $12,169 13,036 11,052 10/31/1995 $12,318 13,225 11,089 11/30/1995 $12,479 13,444 11,081 12/31/1995 $12,592 13,573 11,073 01/31/1996 $12,653 13,677 11,138 02/29/1996 $12,586 13,584 11,174 03/31/1996 $12,472 13,410 11,232 04/30/1996 $12,485 13,372 11,276 05/31/1996 $12,515 13,367 11,297 06/30/1996 $12,642 13,513 11,304 07/31/1996 $12,728 13,634 11,326 08/31/1996 $12,763 13,631 11,347 09/30/1996 $12,895 13,822 11,384 10/31/1996 $12,995 13,978 11,420 11/30/1996 $13,162 14,234 11,442 12/31/1996 $13,154 14,175 11,442 01/31/1997 $13,183 14,201 11,478 02/28/1997 $13,280 14,332 11,514 03/31/1997 $13,175 14,141 11,543 04/30/1997 $13,258 14,260 11,556 05/31/1997 $13,436 14,476 11,550 06/30/1997 $13,560 14,630 11,563 07/31/1997 $13,866 15,036 11,577 08/31/1997 $13,777 14,894 11,599 09/30/1997 $13,928 15,072 11,628 10/31/1997 $13,994 15,168 11,657 11/30/1997 $14,091 15,258 11,650 12/31/1997 $14,270 15,480 11,636 01/31/1998 $14,386 15,640 11,658 02/28/1998 $14,423 15,645 11,681 03/31/1998 $14,439 15,659 11,703 04/30/1998 $14,446 15,588 11,724 05/31/1998 $14,624 15,834 11,745 06/30/1998 $14,684 15,896 11,759 07/31/1998 $14,739 15,936 11,773 08/31/1998 $14,896 16,183 11,787 09/30/1998 $15,034 16,385 11,801 10/31/1998 $15,022 16,385 11,830 11/30/1998 $15,073 16,443 11,830 12/31/1998 $15,122 16,484 11,823 01/31/1999 $15,280 16,680 11,851 02/28/1999 $15,234 16,606 11,865 03/31/1999 $15,279 16,630 11,901 04/30/1999 $15,273 16,671 11,988 05/31/1999 $15,208 16,575 11,988 06/30/1999 $14,960 16,336 11,988 07/31/1999 $14,993 16,395 12,024 08/31/1999 $14,771 16,264 12,053 09/30/1999 $14,736 16,270 12,110 10/31/1999 $14,463 16,094 12,132 11/30/1999 $14,576 16,265 12,140 12/31/1999 $14,390 16,143 12,140 01/31/2000 $14,214 16,072 12,176 02/29/2000 $14,334 16,258 12,248 03/31/2000 $14,710 16,613 12,348 04/30/2000 $14,603 16,515 12,356 05/31/2000 $14,504 16,429 12,370 06/30/2000 $14,874 16,864 12,435 07/31/2000 $15,074 17,099 12,463 08/31/2000 $15,317 17,362 12,463 09/30/2000 $15,234 17,272 12,528 10/31/2000 $15,394 17,460 12,549 11/30/2000 $15,505 17,593 12,557 12/31/2000 $15,808 18,027 12,549 01/31/2001 $15,893 18,206 12,629 02/28/2001 $15,974 18,264 12,679 03/31/2001 $16,135 18,428 12,708 04/30/2001 $15,964 18,229 12,759 05/31/2001 $16,154 18,426 12,816 06/30/2001 $16,280 18,550 12,838 07/31/2001 $16,599 18,824 12,802 08/31/2001 $16,898 19,135 12,802 09/30/2001 $16,775 19,070 12,860 10/31/2001 $17,035 19,297 12,816 11/30/2001 $16,866 19,135 12,794 12/31/2001 $16,699 18,953 12,744 01/31/2002 $16,968 19,281 12,774 02/28/2002 $17,176 19,512 12,825 CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Lehman Brothers CPI7 Connecticut Municipal Bond Index7 Tax-Free Income Fund-Class C -------------------------------------------------------------------------------- 05/01/1995 $9,898 $10,000 $10,000 05/31/1995 $10,137 $10,319 $10,020 06/30/1995 $10,058 $10,229 $10,040 07/31/1995 $10,111 $10,326 $10,040 08/31/1995 $10,246 $10,458 $10,066 09/29/1995 $10,334 $10,523 $10,086 10/31/1995 $10,454 $10,676 $10,120 11/30/1995 $10,585 $10,853 $10,112 12/29/1995 $10,655 $10,957 $10,105 01/31/1996 $10,701 $11,041 $10,165 02/29/1996 $10,635 $10,966 $10,198 03/29/1996 $10,533 $10,825 $10,251 04/30/1996 $10,549 $10,795 $10,291 05/31/1996 $10,568 $10,791 $10,310 06/28/1996 $10,641 $10,908 $10,316 07/31/1996 $10,719 $11,006 $10,336 08/30/1996 $10,765 $11,004 $10,356 09/30/1996 $10,871 $11,158 $10,389 10/31/1996 $10,951 $11,284 $10,422 11/29/1996 $11,085 $11,491 $10,442 12/31/1996 $11,063 $11,443 $10,442 01/31/1997 $11,082 $11,464 $10,475 02/28/1997 $11,171 $11,570 $10,508 03/31/1997 $11,077 $11,416 $10,534 04/30/1997 $11,142 $11,512 $10,547 05/31/1997 $11,286 $11,686 $10,540 06/30/1997 $11,395 $11,811 $10,553 07/31/1997 $11,637 $12,138 $10,565 08/31/1997 $11,557 $12,024 $10,586 09/30/1997 $11,687 $12,167 $10,612 10/31/1997 $11,727 $12,245 $10,639 11/30/1997 $11,814 $12,317 $10,632 12/31/1997 $11,958 $12,497 $10,619 01/31/1998 $12,049 $12,626 $10,640 02/28/1998 $12,075 $12,629 $10,660 03/31/1998 $12,083 $12,641 $10,680 04/30/1998 $12,084 $12,584 $10,699 05/31/1998 $12,226 $12,783 $10,719 06/30/1998 $12,270 $12,832 $10,731 07/31/1998 $12,311 $12,865 $10,744 08/31/1998 $12,435 $13,064 $10,757 09/30/1998 $12,545 $13,227 $10,770 10/31/1998 $12,528 $13,227 $10,796 11/30/1998 $12,565 $13,274 $10,796 12/31/1998 $12,599 $13,307 $10,789 01/31/1999 $12,725 $13,465 $10,815 02/28/1999 $12,681 $13,406 $10,828 03/31/1999 $12,712 $13,425 $10,861 04/30/1999 $12,712 $13,458 $10,940 05/31/1999 $12,642 $13,380 $10,940 06/30/1999 $12,431 $13,187 $10,940 07/31/1999 $12,464 $13,235 $10,973 08/31/1999 $12,264 $13,129 $10,999 09/30/1999 $12,229 $13,134 $11,052 10/31/1999 $11,999 $12,992 $11,072 11/30/1999 $12,087 $13,130 $11,079 12/31/1999 $11,927 $13,032 $11,079 01/31/2000 $11,777 $12,974 $11,112 02/29/2000 $11,883 $13,125 $11,177 03/31/2000 $12,190 $13,411 $11,269 04/30/2000 $12,096 $13,332 $11,276 05/31/2000 $11,995 $13,263 $11,289 06/30/2000 $12,294 $13,614 $11,348 07/31/2000 $12,454 $13,803 $11,374 08/31/2000 $12,648 $14,016 $11,374 09/30/2000 $12,575 $13,943 $11,433 10/31/2000 $12,701 $14,095 $11,453 11/30/2000 $12,786 $14,202 $11,460 12/31/2000 $13,029 $14,553 $11,453 01/31/2001 $13,094 $14,697 $11,525 02/28/2001 $13,151 $14,744 $11,571 03/31/2001 $13,277 $14,877 $11,598 04/30/2001 $13,130 $14,716 $11,644 05/31/2001 $13,291 $14,875 $11,696 06/30/2001 $13,388 $14,974 $11,716 07/31/2001 $13,643 $15,196 $11,683 08/31/2001 $13,882 $15,447 $11,683 09/30/2001 $13,776 $15,394 $11,736 10/31/2001 $13,983 $15,578 $11,696 11/30/2001 $13,839 $15,447 $11,676 12/31/2001 $13,696 $15,300 $11,631 01/31/2002 $13,910 $15,565 $11,657 02/28/2002 $14,073 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 27 FRANKLIN DOUBLE TAX-FREE INCOME FUND CREDIT QUALITY BREAKDOWN* FRANKLIN DOUBLE TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 [PIE CHART OMITTED] AAA - 37.8% AA - 3.8% A - 29.6% BBB - 28.8% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN DOUBLE TAX-FREE INCOME FUND (FORMERLY FRANKLIN PUERTO RICO TAX-FREE INCOME FUND) SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND MANY STATES' PERSONAL INCOME TAXES THROUGH A PORTFOLIO OF MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- PORTFOLIO NOTES On February 28, 2002, Franklin Double Tax-Free Income Fund was well diversified, and issuers represented in the portfolio included Puerto Rico (78% of the Fund's total long-term investments), Guam (11%), Virgin Islands (8%) and Mariana Islands (3%). At the end of the period, the entire portfolio was investment-grade quality, with AAA-rated securities representing 37.8% of the Fund's total long-term investments. Municipal bond issuance in Puerto Rico was strong during the past several years, as the commonwealth aggressively refinanced its debt and passed along savings to their issuers as interest rates declined. This benefited Franklin Double Tax-Free Income Fund during the 12 months under review because the value of these prerefunded bonds increased substantially, contributing to the Fund's performance. The Fund's Class A share price, as measured by net asset value, increased from $11.55 on February 28, 2001, to $11.68 on February 28, 2002. Puerto Rico has an established political and economic link with the U.S., which has been the foundation for economic expansion and consistent growth in real income over the past two decades. Aided by the robust U.S. economy of the late 1990s, the -------------------------------------------------------------------------------- EFFECTIVE DECEMBER 1, 2001, FRANKLIN PUERTO RICO TAX-FREE INCOME FUND CHANGED ITS NAME TO FRANKLIN DOUBLE TAX-FREE INCOME FUND. THE NEW NAME MORE ACCURATELY REFLECTS THE FUND'S ABILITY TO INVEST IN MUNICIPAL SECURITIES ISSUED BY U.S. TERRITORIES, INCLUDING PUERTO RICO. -------------------------------------------------------------------------------- 1. For investors subject to the federal and state alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 87. 28 commonwealth's economy adjusted reasonably well to the phase-out of Section 936 tax benefits available to U.S. corporations operating in Puerto Rico, a significant portion of the island's manufacturing base. The ten-year phase-out, in its sixth year, may not significantly alter the island's long-term trend of expansion and diversification. However, Puerto Rico's economy has suffered recently, reflecting the U.S. national slowdown. During the 12 months under review, Puerto Rico's economy continued its trend of growth in real gross product and personal income levels, although the pace slowed significantly. A favorable combination of forces in recent years, including the robust U.S. economy, generally low oil prices and strong business conditions in the pharmaceuticals industry, influenced the island's economic momentum. However, there have been losses in government and manufacturing jobs recently, as well as such high-profile plant closures as Intel, Sara Lee and Star-Kist. The tourism industry witnessed significant growth during the past decade, with hotel registrations by non-residents of 1.17 million in fiscal year 2001, up 70% from fiscal year 1993.2 In the aftermath of the September terrorist attacks in the U.S., Puerto Rico's economy likely will be impacted by near-term tourism weakness, although the magnitude is unpredictable. Going forward, the outlook for the island is stable, reflecting adequate liquidity to cushion the general fund while the government works to restore budget balance in a slowing economy. Fiscal year 2002 budget adjustments appear realistic, as does the overall plan to reduce spending versus 2001. Puerto Rico's tax-supported debt growth matched that of income growth during the past couple years, down after having grown at almost twice the rate of income growth previously. Debt service has remained manageable due to the commonwealth's ability to impose high, local tax rates on individual and corporate incomes given the absence of federal income tax on the island. During 2001, Puerto Rico bond issuance was up 42% compared with 2000.3 About half of this represented refunding of previously PORTFOLIO BREAKDOWN Franklin Double Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ Prerefunded 19.8% Transportation 15.5% Utilities 13.1% General Obligation 12.4% Subject to Government Appropriations 9.8% Hospital & Health Care 7.6% Higher Education 7.3% Housing 6.8% Tax-Supported 4.2% Other Revenue 3.1% Corporate-Backed 0.4% 2. Source: Moody's Investors Service, PUERTO RICO (COMMONWEALTH OF), 10/8/01. 3. Source: THE BOND BUYER, 1/2/02. 29 DIVIDEND DISTRIBUTIONS* Franklin Double Tax-Free Income Fund 2/28/02 DIVIDEND PER SHARE ---------------------------- MONTH CLASS A CLASS C ------------------------------------------------------------------------------ March 4.85 cents 4.31 cents April 4.85 cents 4.31 cents May 4.85 cents 4.31 cents June 4.85 cents 4.33 cents July 4.85 cents 4.33 cents August 4.85 cents 4.33 cents September 4.75 cents 4.21 cents October 4.75 cents 4.21 cents November 4.75 cents 4.21 cents December 4.75 cents 4.19 cents January 4.75 cents 4.19 cents February 4.75 cents 4.19 cents ------------------------------------------------------------------------------ TOTAL 57.60 CENTS 51.12 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. issued bonds and half was new issuance. The abundant supply allowed us to purchase most of our securities in the primary market. Notable purchases made by the Fund included Puerto Rico Commonwealth GO, and Puerto Rico PBA, Puerto Rico Public Finance Corp., Puerto Rico Electric Power Authority Power, and Puerto Rico Commonwealth Highway and Transportation Authority revenue bonds. The Fund was subject to bond calls during the 12-month reporting period as municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding higher coupon bonds. We could reinvest the proceeds only at current, lower rates, causing the Fund's dividend distributions to decline. (Please see our special feature, "Making Sense of Dividends.") 30 Keep in mind that your Fund combines the advantage of overall high credit quality with tax-free yields.1 The Performance Summary beginning on page 32 shows that at the end of this reporting period the Fund's Class A shares' distribution rate was 4.67%, based on an annualization of the current 4.75 cent ($0.0475) per share dividend and the maximum offering price of $12.20 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum federal personal income tax bracket of 38.6% would need to earn 7.61% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Double Tax-Free Income Fund. If, as we expect, Puerto Rico's bond issuance stabilizes in the rest of 2002, such bonds should hold their value, as they are in demand by investors from many states because of the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 31 FRANKLIN DOUBLE TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.13 $11.68 $11.55 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5760 Long-Term Capital Gain $0.0022 -------------------------------------------------------------------------------- Total $0.5782 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.12 $11.70 $11.58 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5112 Long-Term Capital Gain $0.0022 -------------------------------------------------------------------------------- Total $0.5134 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +6.29% +31.74% +84.74% Average Annual Total Return2 +1.79% +4.76% +5.87% Avg. Ann. Total Return (3/31/02)3 -0.76% +4.58% +5.64% Distribution Rate4 4.67% Taxable Equivalent Distribution Rate5 7.61% 30-Day Standardized Yield6 3.93% Taxable Equivalent Yield5 6.40% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.59% +28.08% +44.65% Average Annual Total Return2 +3.52% +4.86% +5.40% Avg. Ann. Total Return (3/31/02)3 +1.00% +4.75% +5.06% Distribution Rate4 4.27% Taxable Equivalent Distribution Rate5 6.95% 30-Day Standardized Yield6 3.52% Taxable Equivalent Yield5 5.73% -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the 2002 maximum federal personal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- Franklin Double Tax-Free Income Fund paid distributions derived from long-term capital gains of 0.22 cents ($0.0022) per share in December 2001. The Fund hereby designates such distributions as capital gain dividends per Internal Revenue Code Section 852 (b)(3). For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 32 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Double Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class A Index7 -------------------------------------------------------------------------------- 03/01/1992 $9,576 $10,000 $10,000 03/31/1992 $9,610 $10,003 $10,051 04/30/1992 $9,684 $10,092 $10,065 05/31/1992 $9,801 $10,211 $10,079 06/30/1992 $9,947 $10,383 $10,115 07/31/1992 $10,246 $10,694 $10,137 08/31/1992 $10,157 $10,590 $10,165 09/30/1992 $10,170 $10,659 $10,194 10/31/1992 $10,045 $10,555 $10,229 11/30/1992 $10,260 $10,744 $10,244 12/31/1992 $10,420 $10,853 $10,236 01/31/1993 $10,533 $10,979 $10,287 02/28/1993 $10,797 $11,377 $10,323 03/31/1993 $10,731 $11,256 $10,359 04/30/1993 $10,814 $11,370 $10,388 05/31/1993 $10,882 $11,433 $10,402 06/30/1993 $11,030 $11,624 $10,417 07/31/1993 $11,029 $11,639 $10,417 08/31/1993 $11,227 $11,882 $10,446 09/30/1993 $11,373 $12,017 $10,468 10/31/1993 $11,395 $12,040 $10,511 11/30/1993 $11,364 $11,934 $10,518 12/31/1993 $11,566 $12,186 $10,518 01/31/1994 $11,670 $12,325 $10,547 02/28/1994 $11,467 $12,005 $10,582 03/31/1994 $11,073 $11,517 $10,618 04/30/1994 $11,127 $11,615 $10,633 05/31/1994 $11,205 $11,716 $10,641 06/30/1994 $11,130 $11,644 $10,677 07/31/1994 $11,304 $11,857 $10,706 08/31/1994 $11,362 $11,899 $10,749 09/30/1994 $11,232 $11,724 $10,778 10/31/1994 $11,039 $11,515 $10,785 11/30/1994 $10,820 $11,307 $10,799 12/31/1994 $11,071 $11,556 $10,799 01/31/1995 $11,337 $11,886 $10,842 02/28/1995 $11,655 $12,232 $10,886 03/31/1995 $11,730 $12,373 $10,922 04/30/1995 $11,785 $12,387 $10,958 05/31/1995 $12,096 $12,783 $10,980 06/30/1995 $11,957 $12,671 $11,002 07/31/1995 $12,048 $12,792 $11,002 08/31/1995 $12,179 $12,954 $11,030 09/30/1995 $12,257 $13,036 $11,052 10/31/1995 $12,426 $13,225 $11,089 11/30/1995 $12,579 $13,444 $11,081 12/31/1995 $12,677 $13,573 $11,073 01/31/1996 $12,761 $13,677 $11,138 02/29/1996 $12,668 $13,584 $11,174 03/31/1996 $12,584 $13,410 $11,232 04/30/1996 $12,589 $13,372 $11,276 05/31/1996 $12,598 $13,367 $11,297 06/30/1996 $12,754 $13,513 $11,304 07/31/1996 $12,838 $13,634 $11,326 08/31/1996 $12,854 $13,631 $11,347 09/30/1996 $13,040 $13,822 $11,384 10/31/1996 $13,158 $13,978 $11,420 11/30/1996 $13,354 $14,234 $11,442 12/31/1996 $13,320 $14,175 $11,442 01/31/1997 $13,324 $14,201 $11,478 02/28/1997 $13,432 $14,332 $11,514 03/31/1997 $13,299 $14,141 $11,543 04/30/1997 $13,406 $14,260 $11,556 05/31/1997 $13,601 $14,476 $11,550 06/30/1997 $13,714 $14,630 $11,563 07/31/1997 $14,046 $15,036 $11,577 08/31/1997 $13,962 $14,894 $11,599 09/30/1997 $14,120 $15,072 $11,628 10/31/1997 $14,197 $15,168 $11,657 11/30/1997 $14,304 $15,258 $11,650 12/31/1997 $14,490 $15,480 $11,636 01/31/1998 $14,590 $15,640 $11,658 02/28/1998 $14,616 $15,645 $11,681 03/31/1998 $14,670 $15,659 $11,703 04/30/1998 $14,642 $15,588 $11,724 05/31/1998 $14,840 $15,834 $11,745 06/30/1998 $14,887 $15,896 $11,759 07/31/1998 $14,920 $15,936 $11,773 08/31/1998 $15,098 $16,183 $11,787 09/30/1998 $15,271 $16,385 $11,801 10/31/1998 $15,250 $16,385 $11,830 11/30/1998 $15,302 $16,443 $11,830 12/31/1998 $15,322 $16,484 $11,823 01/31/1999 $15,475 $16,680 $11,851 02/28/1999 $15,445 $16,606 $11,865 03/31/1999 $15,530 $16,630 $11,901 04/30/1999 $15,566 $16,671 $11,988 05/31/1999 $15,516 $16,575 $11,988 06/30/1999 $15,313 $16,336 $11,988 07/31/1999 $15,359 $16,395 $12,024 08/31/1999 $15,175 $16,264 $12,053 09/30/1999 $15,182 $16,270 $12,110 10/31/1999 $15,000 $16,094 $12,132 11/30/1999 $15,111 $16,265 $12,140 12/31/1999 $14,960 $16,143 $12,140 01/31/2000 $14,821 $16,072 $12,176 02/29/2000 $14,993 $16,258 $12,248 03/31/2000 $15,305 $16,613 $12,348 04/30/2000 $15,233 $16,515 $12,356 05/31/2000 $15,156 $16,429 $12,370 06/30/2000 $15,529 $16,864 $12,435 07/31/2000 $15,750 $17,099 $12,463 08/31/2000 $16,000 $17,362 $12,463 09/30/2000 $15,923 $17,272 $12,528 10/31/2000 $16,025 $17,460 $12,549 11/30/2000 $16,150 $17,593 $12,557 12/31/2000 $16,485 $18,027 $12,549 01/31/2001 $16,587 $18,206 $12,629 02/28/2001 $16,652 $18,264 $12,679 03/31/2001 $16,768 $18,428 $12,708 04/30/2001 $16,639 $18,229 $12,759 05/31/2001 $16,827 $18,426 $12,816 06/30/2001 $16,965 $18,550 $12,838 07/31/2001 $17,264 $18,824 $12,802 08/31/2001 $17,526 $19,135 $12,802 09/30/2001 $17,307 $19,070 $12,860 10/31/2001 $17,534 $19,297 $12,816 11/30/2001 $17,378 $19,135 $12,794 12/31/2001 $17,185 $18,953 $12,744 01/31/2002 $17,453 $19,281 $12,774 02/28/2002 $17,695 $19,512 $12,825 CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin Double Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class C Index7 -------------------------------------------------------------------------------- 05/01/1995 $9,904 $10,000 $10,000 05/31/1995 $10,168 $10,319 $10,020 06/30/1995 $10,045 $10,229 $10,040 07/31/1995 $10,125 $10,326 $10,040 08/31/1995 $10,229 $10,458 $10,066 09/29/1995 $10,289 $10,523 $10,086 10/31/1995 $10,425 $10,676 $10,120 11/30/1995 $10,558 $10,853 $10,112 12/29/1995 $10,626 $10,957 $10,105 01/31/1996 $10,700 $11,041 $10,165 02/29/1996 $10,618 $10,966 $10,198 03/29/1996 $10,534 $10,825 $10,251 04/30/1996 $10,543 $10,795 $10,291 05/31/1996 $10,535 $10,791 $10,310 06/28/1996 $10,661 $10,908 $10,316 07/31/1996 $10,727 $11,006 $10,336 08/30/1996 $10,745 $11,004 $10,356 09/30/1996 $10,887 $11,158 $10,389 10/31/1996 $10,979 $11,284 $10,422 11/29/1996 $11,129 $11,491 $10,442 12/31/1996 $11,095 $11,443 $10,442 01/31/1997 $11,103 $11,464 $10,475 02/28/1997 $11,188 $11,570 $10,508 03/31/1997 $11,051 $11,416 $10,534 04/30/1997 $11,144 $11,512 $10,547 05/31/1997 $11,301 $11,686 $10,540 06/30/1997 $11,389 $11,811 $10,553 07/31/1997 $11,660 $12,138 $10,565 08/31/1997 $11,584 $12,024 $10,586 09/30/1997 $11,710 $12,167 $10,612 10/31/1997 $11,768 $12,245 $10,639 11/30/1997 $11,841 $12,317 $10,632 12/31/1997 $11,999 $12,497 $10,619 01/31/1998 $12,075 $12,626 $10,640 02/28/1998 $12,091 $12,629 $10,660 03/31/1998 $12,141 $12,641 $10,680 04/30/1998 $12,113 $12,584 $10,699 05/31/1998 $12,260 $12,783 $10,719 06/30/1998 $12,295 $12,832 $10,731 07/31/1998 $12,316 $12,865 $10,744 08/31/1998 $12,467 $13,064 $10,757 09/30/1998 $12,594 $13,227 $10,770 10/31/1998 $12,570 $13,227 $10,796 11/30/1998 $12,617 $13,274 $10,796 12/31/1998 $12,628 $13,307 $10,789 01/31/1999 $12,738 $13,465 $10,815 02/28/1999 $12,708 $13,406 $10,828 03/31/1999 $12,781 $13,425 $10,861 04/30/1999 $12,794 $13,458 $10,940 05/31/1999 $12,748 $13,380 $10,940 06/30/1999 $12,586 $13,187 $10,940 07/31/1999 $12,619 $13,235 $10,973 08/31/1999 $12,462 $13,129 $10,999 09/30/1999 $12,464 $13,134 $11,052 10/31/1999 $12,298 $12,992 $11,072 11/30/1999 $12,381 $13,130 $11,079 12/31/1999 $12,264 $13,032 $11,079 01/31/2000 $12,145 $12,974 $11,112 02/29/2000 $12,280 $13,125 $11,177 03/31/2000 $12,529 $13,411 $11,269 04/30/2000 $12,454 $13,332 $11,276 05/31/2000 $12,397 $13,263 $11,289 06/30/2000 $12,695 $13,614 $11,348 07/31/2000 $12,870 $13,803 $11,374 08/31/2000 $13,069 $14,016 $11,374 09/30/2000 $13,001 $13,943 $11,433 10/31/2000 $13,077 $14,095 $11,453 11/30/2000 $13,173 $14,202 $11,460 12/31/2000 $13,440 $14,553 $11,453 01/31/2001 $13,517 $14,697 $11,525 02/28/2001 $13,567 $14,744 $11,571 03/31/2001 $13,655 $14,877 $11,598 04/30/2001 $13,543 $14,716 $11,644 05/31/2001 $13,677 $14,875 $11,696 06/30/2001 $13,784 $14,974 $11,716 07/31/2001 $14,020 $15,196 $11,683 08/31/2001 $14,238 $15,447 $11,683 09/30/2001 $14,043 $15,394 $11,736 10/31/2001 $14,232 $15,578 $11,696 11/30/2001 $14,086 $15,447 $11,676 12/31/2001 $13,936 $15,300 $11,631 01/31/2002 $14,145 $15,565 $11,657 02/28/2002 $14,326 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 33 FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND CREDIT QUALITY BREAKDOWN* FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 [PIE CHART OMITTED] AAA - 49.3% AA - 5.2% A - 13.2% BBB - 29.9% BELOW INVESTMENT GRADE - 2.4% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL INCOME TAX THROUGH A PORTFOLIO OF MUNICIPAL BONDS WITH AN AVERAGE WEIGHTED MATURITY (THE TIME IN WHICH A DEBT MUST BE REPAID) BETWEEN 3 AND 10 YEARS.1 -------------------------------------------------------------------------------- PORTFOLIO NOTES Fluctuating long-term interest rates contributed to municipal bond market volatility; however, by the close of the 12 months ended February 28, 2002, municipal bonds posted slightly stronger performance. During the year under review, the economy absorbed the federal government's responses to a slumping economy and the war on terrorism. For the reporting period, the 30-year Treasury bond's yield increased, from 5.31% at the beginning of the period to 5.42% at the end. In contrast, the municipal bond market no longer trended with the long-term Treasury market and actually saw yields decrease during the same time. On October 31, the Federal Reserve Board (the Fed) announced that it would no longer issue 30-year bonds. This decision exacerbated the already disconnected relationship between the long-term municipal bond market and Treasuries resulting from the Fed's 30-year bond buyback program introduction in early 2000. Immediately following the Fed's statement, the 30-year Treasury bond rose 5.0625 points, its largest one-day gain since the bond began trading on a regular basis, and the 10-year Treasury note gained nearly one full point. Meanwhile, municipal bonds were up only marginally. Economic fundamentals hardly changed as 2001 closed, yet investors reversed the Treasury market rally due, in part, to their expectations of an early 2002 economic recovery and their belief the Treasury market 1. These dividends are generally subject to state and local income taxes, if any. For investors subject to the federal or state alternative minimum tax, a portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. A non-diversified fund may be subject to greater risk of adverse economic or regulatory developments than a fund with broader diversification. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 90. 34 was overbought. With reports of fourth quarter gross domestic product growth at a surprisingly positive 1.7% annualized rate, many analysts believed the economy might already be stabilizing from a short-lived recession. In an attempt to stimulate the weakened economy, the Fed lowered the federal funds target rate to 1.75% by February 28, 2002, its lowest level since 1961. The municipal bond market saw yields decrease slightly, as stocks remained volatile amid the uncertainty of the exact timing of an economic recovery. Bond yields and prices move in opposite directions; thus, bond prices rose. For the 12-month period, the Nasdaq Composite Index (Nasdaq), Standard & Poor's 500 Composite Index (S&P 500) and Dow Jones Industrial Average (the Dow) posted negative total returns of -18.56%, -9.59% and -1.97%, respectively.2 Equity market volatility helped direct investors toward allocating their assets into more conservative investments such as municipal bonds. Municipal bond supply for 2001 remained strong with more than $286 billion in new issuance, of which approximately $131 billion, or 46%, was insured.3 The increased municipal bond supply, a result of lower overall interest rates, was well-received, and institutional and retail demand remained high. Following the September 11 attacks, New York bonds generally performed well while the nation's airlines suffered economic troubles. Municipal credits that were most directly impacted by the attacks included New York and New Jersey Port Authority, Battery Park City Authority and, to a lesser extent, New York City GO bonds. Although the long-term implications are difficult to predict, we believe that the debt of affected issues will be paid for the short term. We expect payments will arise from a combination of federal aid, insurance claims, general fund balances, debt service reserve accounts and other revenue sources that were not impacted as a result of the attacks. New York City also plans to issue short-term debt to meet immediate financial needs until federal aid arrives. The past few years of economic prosperity allowed the city to build an estimated $2.6 billion general fund surplus, which should help cushion the expenses PORTFOLIO BREAKDOWN Franklin Federal Intermediate-Term Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ Utilities 22.6% General Obligation 18.7% Hospital & Health Care 11.5% Subject to Government Appropriations 10.8% Corporate-Backed 9.7% Tax-Supported 8.3% Transportation 8.0% Higher Education 6.2% Prerefunded 2.3% Housing 1.7% Other Revenue 0.2% 2. Source: Standard & Poor's Micropal. The Nasdaq measures all Nasdaq National Market common stocks. The index is market value-weighted and includes over 4,000 companies. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Dow is a price-weighted index based on the average market price of 30 blue chip stocks; total return, calculated by Wilshire Associates, Inc., includes reinvested dividends. 3. Source: THE BOND BUYER, 1/2/02. 35 DIVIDEND DISTRIBUTIONS* Franklin Federal Intermediate-Term Tax-Free Income Fund - Class A 3/1/01-2/28/02 DIVIDEND MONTH PER SHARE ------------------------------ March 4.30 cents April 4.30 cents May 4.30 cents June 4.30 cents July 4.30 cents August 4.30 cents September 4.30 cents October 4.30 cents November 4.30 cents December 4.15 cents January 4.15 cents February 4.15 cents ------------------------------ TOTAL 51.15 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. incurred in the search, recovery and clean-up activities. Fortunately, the overall impact on Franklin Federal Intermediate-Term Tax-Free Income Fund has been minimal due to the portfolio's diversification and our low levels of exposure to the credits that were directly affected. Municipal bond yields generally declined during the 12 months under review. Because bond prices rise when yields fall, Franklin Federal Intermediate-Term Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $10.94 on February 28, 2001, to $11.14 on February 28, 2002. The Fund primarily focused on decreasing its weighting of BBB- or lower-rated securities and increasing its percentage of A- or higher-rated credits to increase the Fund's liquidity. On February 28, 2002, 67.7% of the Fund's total long-term investments were rated A or higher. Significant purchases during the year under review included Alabama Water Pollution Control Authority, New Jersey State Transportation Trust Fund Authority and Charlotte Water and Sewer System revenue bonds. Some recent sales were Stamford Housing Authority MFR and North Central Health Facility Development bonds. Your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 38 shows that at the end of this reporting period the Fund's Class A distribution rate was 4.21%. An investor in the maximum federal personal income tax bracket of 38.6% would need to earn 6.86% from a taxable investment to match the Fund's tax-free distribution rate. 36 The Fund was subject to bond calls during the 12-month reporting period. Many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. The Fund could reinvest the proceeds only at current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Given our income-oriented investment approach, we generally expect the Fund to perform comparatively well in terms of total return and tax-free income distribution for investors with long-term investment horizons. It is important to remember that over time, the tax-free income from municipal bonds will ultimately drive the Fund's total return performance. Looking ahead, we are optimistic about the long-term outlook for municipal bonds and Franklin Federal Intermediate-Term Tax-Free Income Fund. We believe our broad portfolio diversification should help protect the Fund from volatility, and we expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income portion of their portfolios. Most importantly, we believe municipal bonds will continue to be desirable due to the tax efficiencies they offer. We intend to maintain our conservative buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 37 FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF THE FUND'S OPERATING EXPENSES. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPH DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.20 $11.14 $10.94 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5115 PERFORMANCE INCEPTION CLASS A 1-YEAR 5-YEAR (9/21/92) -------------------------------------------------------------------------------- Cumulative Total Return1 +6.64% +28.96% +74.61% Average Annual Total Return2 +4.26% +4.74% +5.83% Avg. Ann. Total Return (3/31/02)3 +1.69% +4.57% +5.58% Distribution Rate4 4.21% Taxable Equivalent Distribution Rate5 6.86% 30-Day Standardized Yield6 3.60% Taxable Equivalent Yield5 5.86% -------------------------------------------------------------------------------- CLASS A: Subject to the maximum 2.25% initial sales charge. Past expense reductions by the Fund's manager increased the Fund's total returns. Without these reductions, the Fund's total returns would have been lower. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include the sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the maximum sales charge. 3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 4. Distribution rate is based on an annualization of the current 4.0 cent per share monthly dividend and the maximum offering price of $11.40 on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the 2002 maximum federal personal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 38 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE APPLICABLE, MAXIMUM SALES CHARGE, FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (9/21/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------- Date Franklin Federal Lehman Brothers CPI7 Intermediate-Term Municipal 10-Year Tax-Free Income Bond Index7 Fund-Class A -------------------------------------------------------------------------- 09/21/1992 $9,775 $10,000 $10,000 09/30/1992 $9,785 $10,025 $10,008 10/31/1992 $9,746 $9,923 $10,043 11/30/1992 $9,932 $10,104 $10,057 12/31/1992 $10,025 $10,221 $10,050 01/31/1993 $10,107 $10,393 $10,100 02/28/1993 $10,402 $10,774 $10,135 03/31/1993 $10,435 $10,616 $10,171 04/30/1993 $10,512 $10,717 $10,199 05/31/1993 $10,545 $10,755 $10,213 06/30/1993 $10,702 $10,966 $10,228 07/31/1993 $10,759 $10,994 $10,228 08/31/1993 $10,949 $11,221 $10,256 09/30/1993 $11,054 $11,359 $10,278 10/31/1993 $11,118 $11,378 $10,320 11/30/1993 $11,053 $11,284 $10,327 12/31/1993 $11,296 $11,525 $10,327 01/31/1994 $11,425 $11,666 $10,355 02/28/1994 $11,216 $11,347 $10,390 03/31/1994 $10,871 $10,913 $10,426 04/30/1994 $10,927 $11,033 $10,440 05/31/1994 $11,017 $11,122 $10,447 06/30/1994 $10,988 $11,074 $10,483 07/31/1994 $11,138 $11,260 $10,511 08/31/1994 $11,218 $11,304 $10,553 09/30/1994 $11,129 $11,152 $10,582 10/31/1994 $10,984 $10,990 $10,589 11/30/1994 $10,835 $10,782 $10,603 12/31/1994 $10,991 $10,976 $10,603 01/31/1995 $11,247 $11,260 $10,645 02/28/1995 $11,452 $11,579 $10,688 03/31/1995 $11,561 $11,735 $10,723 04/30/1995 $11,584 $11,749 $10,759 05/31/1995 $11,879 $12,122 $10,780 06/30/1995 $11,819 $12,047 $10,802 07/31/1995 $11,926 $12,224 $10,802 08/31/1995 $12,088 $12,390 $10,830 09/30/1995 $12,194 $12,469 $10,851 10/31/1995 $12,339 $12,613 $10,887 11/30/1995 $12,491 $12,782 $10,880 12/31/1995 $12,575 $12,860 $10,872 01/31/1996 $12,653 $12,989 $10,936 02/29/1996 $12,591 $12,936 $10,971 03/31/1996 $12,781 $12,776 $11,028 04/30/1996 $12,777 $12,731 $11,071 05/31/1996 $12,765 $12,695 $11,092 06/30/1996 $12,887 $12,816 $11,099 07/31/1996 $12,967 $12,939 $11,120 08/31/1996 $12,974 $12,939 $11,141 09/30/1996 $13,103 $13,072 $11,177 10/31/1996 $13,240 $13,237 $11,213 11/30/1996 $13,414 $13,504 $11,234 12/31/1996 $13,413 $13,444 $11,234 01/31/1997 $13,119 $13,496 $11,270 02/28/1997 $13,233 $13,623 $11,305 03/31/1997 $13,109 $13,440 $11,333 04/30/1997 $13,209 $13,540 $11,347 05/31/1997 $13,294 $13,732 $11,340 06/30/1997 $13,448 $13,883 $11,353 07/31/1997 $13,748 $14,273 $11,367 08/31/1997 $13,679 $14,135 $11,389 09/30/1997 $13,786 $14,314 $11,417 10/31/1997 $13,861 $14,390 $11,446 11/30/1997 $13,938 $14,456 $11,439 12/31/1997 $14,121 $14,685 $11,425 01/31/1998 $14,292 $14,848 $11,447 02/28/1998 $14,296 $14,846 $11,468 03/31/1998 $14,304 $14,836 $11,490 04/30/1998 $14,280 $14,754 $11,511 05/31/1998 $14,463 $15,005 $11,532 06/30/1998 $14,505 $15,061 $11,546 07/31/1998 $14,554 $15,085 $11,559 08/31/1998 $14,716 $15,347 $11,573 09/30/1998 $14,860 $15,576 $11,587 10/31/1998 $14,856 $15,582 $11,615 11/30/1998 $14,900 $15,629 $11,615 12/31/1998 $14,940 $15,677 $11,608 01/31/1999 $15,115 $15,917 $11,636 02/28/1999 $15,037 $15,774 $11,650 03/31/1999 $15,047 $15,766 $11,685 04/30/1999 $15,101 $15,809 $11,770 05/31/1999 $15,017 $15,698 $11,770 06/30/1999 $14,847 $15,406 $11,770 07/31/1999 $14,887 $15,509 $11,805 08/31/1999 $14,799 $15,452 $11,834 09/30/1999 $14,829 $15,504 $11,890 10/31/1999 $14,664 $15,394 $11,912 11/30/1999 $14,755 $15,562 $11,919 12/31/1999 $14,664 $15,481 $11,919 01/31/2000 $14,570 $15,418 $11,955 02/29/2000 $14,669 $15,539 $12,025 03/31/2000 $14,895 $15,842 $12,124 04/30/2000 $14,828 $15,763 $12,131 05/31/2000 $14,740 $15,670 $12,146 06/30/2000 $15,013 $16,097 $12,209 07/31/2000 $15,174 $16,319 $12,237 08/31/2000 $15,406 $16,572 $12,237 09/30/2000 $15,378 $16,495 $12,301 10/31/2000 $15,503 $16,664 $12,322 11/30/2000 $15,549 $16,754 $12,329 12/31/2000 $15,751 $17,147 $12,322 01/31/2001 $15,934 $17,368 $12,399 02/28/2001 $16,005 $17,398 $12,449 03/31/2001 $16,130 $17,546 $12,477 04/30/2001 $16,064 $17,330 $12,527 05/31/2001 $16,231 $17,519 $12,584 06/30/2001 $16,333 $17,624 $12,605 07/31/2001 $16,552 $17,866 $12,570 08/31/2001 $16,812 $18,171 $12,570 09/30/2001 $16,793 $18,146 $12,626 10/31/2001 $16,954 $18,371 $12,583 11/30/2001 $16,805 $18,134 $12,562 12/31/2001 $16,627 $17,941 $12,513 01/31/2002 $16,858 $18,281 $12,542 02/28/2002 $17,068 $18,542 $12,592 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal 10-Year Bond Index includes bonds that have a minimum credit rating of at least Baa and a maturity of at least 10 years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 39 FRANKLIN HIGH YIELD TAX-FREE INCOME FUND CREDIT QUALITY BREAKDOWN* FRANKLIN HIGH YIELD TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 AAA - 21.3% AA - 3.6% A - 11.8% BBB - 25.3% BELOW INVESTMENT GRADE - 38.0% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN HIGH YIELD TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL INCOME TAX THROUGH A PORTFOLIO CONSISTING MAINLY OF HIGHER-YIELDING, MEDIUM- TO LOWER-RATED AND NON-RATED MUNICIPAL BONDS.1 AS DISCUSSED IN THE FUND'S PROSPECTUS, THESE SECURITIES ENTAIL GREATER RISK THAN HIGHER-RATED MUNICIPAL SECURITIES. -------------------------------------------------------------------------------- PORTFOLIO NOTES The municipal bond market experienced positive returns during the 12 months under review, as weakening corporate profits, a national economic recession and the impact of the September 11 events contributed to financial market volatility. Municipal bonds generally performed well during the reporting period, while the Nasdaq Composite Index (Nasdaq) and Standard & Poor's 500 Composite Index (S&P 500) were down 18.56% and 9.59%.2 The stock markets' continued decline and volatility provided investors with a very valuable lesson in the benefits of diversification. Individuals with portfolios heavily weighed in stocks could appreciate how fixed income instruments can provide stable, attractive after-tax yields. Within this economic environment, Franklin High Yield Tax-Free Income Fund maintained its relatively high quality with 24.9% of the Fund's total long-term investments rated AA or higher on February 28, 2002. During the year under review, municipal bond yields generally declined. Because bond prices rise when yields fall, Franklin High Yield Tax-Free Income Fund's Class A share price, as measured by net asset value, 1. These dividends are generally subject to state and local income tax, if any. For investors subject to the federal or state alternative minimum tax, a portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Standard & Poor's Micropal. The Nasdaq measures all Nasdaq National Market common stocks. The index is market value-weighted and includes over 4,000 companies. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 98. 40 rose from $10.50 on February 28, 2001, to $10.58 on February 28, 2002. Starting in March 2002, the Fund increased its dividend distribution to 5.00 cents per share, up from 4.85 cents per share at the beginning of the reporting period. Municipal bonds continued to post strong performance in the latter half of 2001, as income remained the major component of total return. At the end of the reporting period, municipal bonds offered attractive yields and a significant tax advantage over a comparable taxable investment. On February 28, 2002, the Bond Buyer Municipal Bond Index (Bond Buyer 40), an indicator of municipal bond market performance, yielded 5.25%, while the 10-year U.S. Treasury note yielded 4.88%, resulting in a municipal-to-Treasury yield ratio of 123.7%, higher than the 94% 10-year average.3 The Performance Summary beginning on page 44 shows that at the end of the reporting period, the Fund's Class A shares' distribution rate was 5.43%, based on an annualization of the current 5.0 cent ($0.050) per share dividend and the maximum offering price of $11.05 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum federal income tax bracket of 38.6% would need to earn 8.84% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. Many high yield bonds, particularly those issued by airlines, were confronted with liquidity concerns during the year under review. The impact of the Enron events and the resulting concern over general accounting practices spilled into other issuers of high yield debt as well. Knowing how to diversify and adhering to our "bottom-up" strategy with an emphasis on finding value are very important to us. Because of our size, research and experience in the municipal arena, we can be very selective. We PORTFOLIO BREAKDOWN Franklin High Yield Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ Utilities 24.6% Tax-Supported 15.3% Prerefunded 15.0% Hospital & Health Care 14.0% Transportation 9.0% Corporate-Backed 6.5% General Obligation 5.6% Other Revenue 4.5% Housing 3.0% Subject to Government Appropriations 1.8% Higher Education 0.7% 3. Source: THE BOND BUYER, 3/1/02. The unmanaged Bond Buyer 40 is composed of the yield to maturity of 40 bonds. The index attempts to track the new-issue market as closely as possible, so it changes bonds twice a month, adding all new bonds that meet certain requirements and deleting an equivalent number according to their secondary market trading activity. As a result, the average par call date, average maturity date and average coupon rate change over time. The average maturity has generally been 29-30 years. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. 41 DIVIDEND DISTRIBUTIONS* Franklin High Yield Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------------------------ MONTH CLASS A CLASS B CLASS C ------------------------------------------------------------------------------- March 4.85 cents 4.33 cents 4.35 cents April 4.85 cents 4.33 cents 4.35 cents May 4.85 cents 4.33 cents 4.35 cents June 4.85 cents 4.36 cents 4.36 cents July 4.85 cents 4.36 cents 4.36 cents August 4.85 cents 4.36 cents 4.36 cents September 4.95 cents 4.47 cents 4.46 cents October 4.95 cents 4.47 cents 4.46 cents November 4.95 cents 4.47 cents 4.46 cents December 4.95 cents 4.45 cents 4.44 cents January 4.95 cents 4.45 cents 4.44 cents February 4.95 cents 4.45 cents 4.44 cents ------------------------------------------------------------------------------- TOTAL 58.80 CENTS 52.83 CENTS 52.83 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. believe the Fund's performance in this volatile market reflects the strength of Franklin's thorough analysis. With one of the largest municipal bond research staffs, we look to buy quality, greater essential use municipal bonds, with strong underlying security features at low prices, and thus, relatively high yields. When analyzing a potential credit, we review financial statements, visit project sites where appropriate and interview financial officers and auditors. When the September 11 events left the airline industry in a financial crisis due to reductions in passenger traffic and the resulting yields, the Fund realized the merit of having a large research staff. Although airline-backed municipal issues represented less than 5% of the Fund's total long-term investments, the vast majority of our airline positions had the additional security of assets at a major, international hub airport. In the unlikely event of an airline bankruptcy, these bonds are still backed by a leasehold interest in valuable airport assets such as terminal gates, which are readily transferable to another, more financially stable airline. 42 Looking ahead, we believe that investors will continue to seek conservative, fixed-income alternatives. We are optimistic about the long-term outlook for the high yield municipal bond market and Franklin High Yield Tax-Free Income Fund. The traditional, greater essential use sectors such as transportation, utilities and land secured bonds should, in our opinion, perform well. We believe our broad portfolio diversification should help cushion the Fund from volatility, and we expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income portion of their portfolios. Most importantly, we believe municipal bonds will continue to be desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 43 FRANKLIN HIGH YIELD TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $10.58 $10.50 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5880 CLASS B CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $10.64 $10.54 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5283 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.09 $10.67 $10.58 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5283 -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 44 PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +6.53% +26.52% +90.93% Average Annual Total Return2 +1.96% +3.91% +6.21% Avg. Ann. Total Return (3/31/02)3 +0.14% +3.90% +6.08% Distribution Rate4 5.43% Taxable Equivalent Distribution Rate5 8.84% 30-Day Standardized Yield6 4.87% Taxable Equivalent Yield5 7.93% INCEPTION CLASS B 1-YEAR 3-YEAR (1/1/99) -------------------------------------------------------------------------------- Cumulative Total Return1 +6.10% +8.04% +9.08% Average Annual Total Return2 +2.10% +1.73% +1.95% Avg. Ann. Total Return (3/31/02)3 +0.04% +1.29% +1.59% Distribution Rate4 5.06% Taxable Equivalent Distribution Rate5 8.24% 30-Day Standardized Yield6 4.55% Taxable Equivalent Yield5 7.41% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.98% +23.17% +43.14% Average Annual Total Return2 +3.90% +4.05% +5.23% Avg. Ann. Total Return (3/31/02)3 +2.04% +4.04% +5.03% Distribution Rate4 5.01% Taxable Equivalent Distribution Rate5 8.16% 30-Day Standardized Yield6 4.50% Taxable Equivalent Yield5 7.33% 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the 2002 maximum federal personal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 45 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 --------------------------- 1-Year +1.96% 5-Year +3.91% 10-Year +6.21% CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ---------------------------------------------------------------------------- Date Franklin High Yield Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class A Index7 ---------------------------------------------------------------------------- 03/01/1992 $9,573 $10,000 $10,000 03/31/1992 $9,620 $10,003 $10,051 04/30/1992 $9,722 $10,092 $10,065 05/31/1992 $9,867 $10,211 $10,079 06/30/1992 $10,011 $10,383 $10,115 07/31/1992 $10,354 $10,694 $10,137 08/31/1992 $10,198 $10,590 $10,165 09/30/1992 $10,213 $10,659 $10,194 10/31/1992 $10,075 $10,555 $10,229 11/30/1992 $10,320 $10,744 $10,244 12/31/1992 $10,483 $10,853 $10,236 01/31/1993 $10,620 $10,979 $10,287 02/28/1993 $10,920 $11,377 $10,323 03/31/1993 $10,896 $11,256 $10,359 04/30/1993 $10,972 $11,370 $10,388 05/31/1993 $11,033 $11,433 $10,402 06/30/1993 $11,230 $11,624 $10,417 07/31/1993 $11,243 $11,639 $10,417 08/31/1993 $11,483 $11,882 $10,446 09/30/1993 $11,612 $12,017 $10,468 10/31/1993 $11,632 $12,040 $10,511 11/30/1993 $11,678 $11,934 $10,518 12/31/1993 $11,873 $12,186 $10,518 01/31/1994 $12,003 $12,325 $10,547 02/28/1994 $11,862 $12,005 $10,582 03/31/1994 $11,513 $11,517 $10,618 04/30/1994 $11,522 $11,615 $10,633 05/31/1994 $11,590 $11,716 $10,641 06/30/1994 $11,615 $11,644 $10,677 07/31/1994 $11,766 $11,857 $10,706 08/31/1994 $11,802 $11,899 $10,749 09/30/1994 $11,718 $11,724 $10,778 10/31/1994 $11,600 $11,515 $10,785 11/30/1994 $11,410 $11,307 $10,799 12/31/1994 $11,565 $11,556 $10,799 01/31/1995 $11,847 $11,886 $10,842 02/28/1995 $12,137 $12,232 $10,886 03/31/1995 $12,304 $12,373 $10,922 04/30/1995 $12,357 $12,387 $10,958 05/31/1995 $12,658 $12,783 $10,980 06/30/1995 $12,673 $12,671 $11,002 07/31/1995 $12,757 $12,792 $11,002 08/31/1995 $12,884 $12,954 $11,030 09/30/1995 $12,987 $13,036 $11,052 10/31/1995 $13,155 $13,225 $11,089 11/30/1995 $13,323 $13,444 $11,081 12/31/1995 $13,451 $13,573 $11,073 01/31/1996 $13,527 $13,677 $11,138 02/29/1996 $13,516 $13,584 $11,174 03/31/1996 $13,382 $13,410 $11,232 04/30/1996 $13,395 $13,372 $11,276 05/31/1996 $13,426 $13,367 $11,297 06/30/1996 $13,558 $13,513 $11,304 07/31/1996 $13,659 $13,634 $11,326 08/31/1996 $13,709 $13,631 $11,347 09/30/1996 $13,896 $13,822 $11,384 10/31/1996 $14,078 $13,978 $11,420 11/30/1996 $14,291 $14,234 $11,442 12/31/1996 $14,281 $14,175 $11,442 01/31/1997 $14,324 $14,201 $11,478 02/28/1997 $14,451 $14,332 $11,514 03/31/1997 $14,337 $14,141 $11,543 04/30/1997 $14,445 $14,260 $11,556 05/31/1997 $14,628 $14,476 $11,550 06/30/1997 $14,808 $14,630 $11,563 07/31/1997 $15,183 $15,036 $11,577 08/31/1997 $15,096 $14,894 $11,599 09/30/1997 $15,345 $15,072 $11,628 10/31/1997 $15,454 $15,168 $11,657 11/30/1997 $15,553 $15,258 $11,650 12/31/1997 $15,794 $15,480 $11,636 01/31/1998 $15,968 $15,640 $11,658 02/28/1998 $16,005 $15,645 $11,681 03/31/1998 $16,018 $15,659 $11,703 04/30/1998 $16,006 $15,588 $11,724 05/31/1998 $16,206 $15,834 $11,745 06/30/1998 $16,279 $15,896 $11,759 07/31/1998 $16,307 $15,936 $11,773 08/31/1998 $16,498 $16,183 $11,787 09/30/1998 $16,597 $16,385 $11,801 10/31/1998 $16,579 $16,385 $11,830 11/30/1998 $16,529 $16,443 $11,830 12/31/1998 $16,554 $16,484 $11,823 01/31/1999 $16,689 $16,680 $11,851 02/28/1999 $16,679 $16,606 $11,865 03/31/1999 $16,739 $16,630 $11,901 04/30/1999 $16,801 $16,671 $11,988 05/31/1999 $16,729 $16,575 $11,988 06/30/1999 $16,552 $16,336 $11,988 07/31/1999 $16,628 $16,395 $12,024 08/31/1999 $16,447 $16,264 $12,053 09/30/1999 $16,433 $16,270 $12,110 10/31/1999 $16,136 $16,094 $12,132 11/30/1999 $16,270 $16,265 $12,140 12/31/1999 $16,034 $16,143 $12,140 01/31/2000 $15,886 $16,072 $12,176 02/29/2000 $16,042 $16,258 $12,248 03/31/2000 $16,369 $16,613 $12,348 04/30/2000 $16,296 $16,515 $12,356 05/31/2000 $16,201 $16,429 $12,370 06/30/2000 $16,347 $16,864 $12,435 07/31/2000 $16,545 $17,099 $12,463 08/31/2000 $16,772 $17,362 $12,463 09/30/2000 $16,704 $17,272 $12,528 10/31/2000 $16,823 $17,460 $12,549 11/30/2000 $16,821 $17,593 $12,557 12/31/2000 $16,959 $18,027 $12,549 01/31/2001 $17,073 $18,206 $12,629 02/28/2001 $17,165 $18,264 $12,679 03/31/2001 $17,330 $18,428 $12,708 04/30/2001 $17,247 $18,229 $12,759 05/31/2001 $17,426 $18,426 $12,816 06/30/2001 $17,569 $18,550 $12,838 07/31/2001 $17,857 $18,824 $12,802 08/31/2001 $18,139 $19,135 $12,802 09/30/2001 $17,981 $19,070 $12,860 10/31/2001 $18,124 $19,297 $12,816 11/30/2001 $18,085 $19,135 $12,794 12/31/2001 $17,966 $18,953 $12,744 01/31/2002 $18,203 $19,281 $12,774 02/28/2002 $18,274 $19,512 $12,825 AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 -------------------------------- 1-Year +2.10% 3-Year +1.73% Since Inception (1/1/99) +1.95% CLASS B (1/1/99-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ---------------------------------------------------------------------------- Date Franklin High Lehman Brothers CPI7 Yield Tax-Free Municipal Bond Income Index7 Fund-Class B ---------------------------------------------------------------------------- 01/01/1999 $10,000 $10,000 $10,000 01/31/1999 10,095 $10,119 $10,024 02/28/1999 10,085 $10,074 $10,036 03/31/1999 10,110 $10,089 $10,066 04/30/1999 10,143 $10,114 $10,140 05/31/1999 10,098 $10,055 $10,140 06/30/1999 9,981 $9,910 $10,140 07/31/1999 10,033 $9,946 $10,170 08/31/1999 9,915 $9,866 $10,194 09/30/1999 9,905 $9,870 $10,243 10/31/1999 9,723 $9,764 $10,262 11/30/1999 9,794 $9,867 $10,268 12/31/1999 9,647 $9,793 $10,268 01/31/2000 9,555 $9,750 $10,299 02/29/2000 9,646 $9,863 $10,360 03/31/2000 9,839 $10,078 $10,444 04/30/2000 9,801 $10,019 $10,451 05/31/2000 9,726 $9,967 $10,463 06/30/2000 9,810 $10,231 $10,518 07/31/2000 9,931 $10,373 $10,542 08/31/2000 10,054 $10,533 $10,542 09/30/2000 10,013 $10,478 $10,597 10/31/2000 10,077 $10,592 $10,615 11/30/2000 10,084 $10,673 $10,621 12/31/2000 10,164 $10,936 $10,615 01/31/2001 10,225 $11,045 $10,682 02/28/2001 $10,006 $11,080 $10,724 03/31/2001 9,839 $11,180 $10,749 04/30/2001 9,801 $11,059 $10,792 05/31/2001 9,726 $11,178 $10,841 06/30/2001 9,810 $11,253 $10,859 07/31/2001 9,931 $11,420 $10,829 08/31/2001 10,054 $11,608 $10,829 09/30/2001 10,013 $11,569 $10,877 10/31/2001 10,077 $11,707 $10,840 11/30/2001 10,084 $11,608 $10,822 12/31/2001 10,164 $11,498 $10,780 01/31/2002 10,225 $11,697 $10,804 02/28/2002 $10,630 $11,837 $10,848 Past performance does not guarantee future results. 46 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 --------------------------------- 1-Year +3.90% 5-Year +4.05% Since Inception (5/1/95) +5.23% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: -------------------------------------------------------------------------------- Date Franklin High Yield Lehman Brothers CPI7 Tax-Free Income Fund-Class C Municipal Bond Index7 -------------------------------------------------------------------------------- 05/01/1995 $9,899 $10,000 $10,000 05/31/1995 $10,152 $10,319 $10,020 06/30/1995 $10,168 $10,229 $10,040 07/31/1995 $10,239 $10,326 $10,040 08/31/1995 $10,335 $10,458 $10,066 09/29/1995 $10,412 $10,523 $10,086 10/31/1995 $10,540 $10,676 $10,120 11/30/1995 $10,678 $10,853 $10,112 12/29/1995 $10,775 $10,957 $10,105 01/31/1996 $10,830 $11,041 $10,165 02/29/1996 $10,817 $10,966 $10,198 03/29/1996 $10,705 $10,825 $10,251 04/30/1996 $10,711 $10,795 $10,291 05/31/1996 $10,729 $10,791 $10,310 06/28/1996 $10,829 $10,908 $10,316 07/31/1996 $10,905 $11,006 $10,336 08/30/1996 $10,938 $11,004 $10,356 09/30/1996 $11,083 $11,158 $10,389 10/31/1996 $11,221 $11,284 $10,422 11/29/1996 $11,385 $11,491 $10,442 12/31/1996 $11,371 $11,443 $10,442 01/31/1997 $11,410 $11,464 $10,475 02/28/1997 $11,505 $11,570 $10,508 03/31/1997 $11,409 $11,416 $10,534 04/30/1997 $11,489 $11,512 $10,547 05/31/1997 $11,628 $11,686 $10,540 06/30/1997 $11,765 $11,811 $10,553 07/31/1997 $12,056 $12,138 $10,565 08/31/1997 $11,982 $12,024 $10,586 09/30/1997 $12,184 $12,167 $10,612 10/31/1997 $12,253 $12,245 $10,639 11/30/1997 $12,325 $12,317 $10,632 12/31/1997 $12,520 $12,497 $10,619 01/31/1998 $12,652 $12,626 $10,640 02/28/1998 $12,674 $12,629 $10,660 03/31/1998 $12,678 $12,641 $10,680 04/30/1998 $12,664 $12,584 $10,699 05/31/1998 $12,815 $12,783 $10,719 06/30/1998 $12,866 $12,832 $10,731 07/31/1998 $12,893 $12,865 $10,744 08/31/1998 $13,026 $13,064 $10,757 09/30/1998 $13,098 $13,227 $10,770 10/31/1998 $13,089 $13,227 $10,796 11/30/1998 $13,043 $13,274 $10,796 12/31/1998 $13,045 $13,307 $10,789 01/31/1999 $13,156 $13,465 $10,815 02/28/1999 $13,142 $13,406 $10,828 03/31/1999 $13,181 $13,425 $10,861 04/30/1999 $13,223 $13,458 $10,940 05/31/1999 $13,149 $13,380 $10,940 06/30/1999 $13,005 $13,187 $10,940 07/31/1999 $13,070 $13,235 $10,973 08/31/1999 $12,910 $13,129 $10,999 09/30/1999 $12,906 $13,134 $11,052 10/31/1999 $12,669 $12,992 $11,072 11/30/1999 $12,755 $13,130 $11,079 12/31/1999 $12,566 $13,032 $11,079 01/31/2000 $12,446 $12,974 $11,112 02/29/2000 $12,561 $13,125 $11,177 03/31/2000 $12,810 $13,411 $11,269 04/30/2000 $12,760 $13,332 $11,276 05/31/2000 $12,668 $13,263 $11,289 06/30/2000 $12,787 $13,614 $11,348 07/31/2000 $12,934 $13,803 $11,374 08/31/2000 $13,105 $14,016 $11,374 09/30/2000 $13,048 $13,943 $11,433 10/31/2000 $13,134 $14,095 $11,453 11/30/2000 $13,126 $14,202 $11,460 12/31/2000 $13,227 $14,553 $11,453 01/31/2001 $13,307 $14,697 $11,525 02/28/2001 $13,371 $14,744 $11,571 03/31/2001 $13,491 $14,877 $11,598 04/30/2001 $13,421 $14,716 $11,644 05/31/2001 $13,553 $14,875 $11,696 06/30/2001 $13,669 $14,974 $11,716 07/31/2001 $13,884 $15,196 $11,683 08/31/2001 $14,096 $15,447 $11,683 09/30/2001 $13,955 $15,394 $11,736 10/31/2001 $14,071 $15,578 $11,696 11/30/2001 $14,022 $15,447 $11,676 12/31/2001 $13,922 $15,300 $11,631 01/31/2002 $14,112 $15,565 $11,657 02/28/2002 $14,170 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 47 FRANKLIN NEW JERSEY TAX-FREE INCOME FUND CREDIT QUALITY BREAKDOWN* FRANKLIN NEW JERSEY TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 [PIE CHART OMITTED] AAA - 73.7% AA - 6.4% A - 12.2% BBB - 6.1% Below Investment Grade - 1.6% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN NEW JERSEY TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND NEW JERSEY STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF NEW JERSEY MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE [GRAPHIC OF NEW JERSEY OMITTED] After accumulating budget reserves near record levels by mid-2001, New Jersey's economy struggled with the effects of a national slowdown and the impact of the September 11 attacks. As manufacturing demand weakened countrywide, the state likewise suffered continued job losses in this sector, along with telecommunications services layoffs. Unexpected benefits rose from the relocation of many New York City financial industry workers to New Jersey as well as potential construction contracts related to rebuilding damaged sites. Fortunately, the state's large pharmaceutical industry remained strong. At 5.2% in February 2002, unemployment remained below the national average of 5.5%.2 With 12% personal income growth for the past two years, New Jersey continued to rank as the nation's second highest in per-capita income level.3 However, the state's outstanding debt has increased faster than its population and personal income during the past decade. As of October 2001, the ratio of debt to personal income was 5.4%, the sixth highest among U.S. states.3 When the state revisited its budget in 2002, New Jersey's economy faced projected revenue shortfalls of $2.5 billion and $462 million in unbudgeted expenditures, or roughly 10% of original appropriations.4 Not surprisingly, the governor's resolution plan, proposed in February, involved utilization of a portion of the state's operating reserve. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Bureau of Labor Statistics, 3/26/02. 3. Source: Moody's Investors Service, NEW JERSEY (STATE OF), 10/15/01. 4. Source: Standard & Poor's, RATINGSDIRECT, 2/12/02. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 120. 48 Standard & Poor's revised New Jersey's economic outlook from stable to negative and placed the state's debt on CreditWatch in January. However, to date, the independent credit rating agency maintained its AA rating for New Jersey's GO bonds and related appropriation debt.5 On March 4, 2002, independent credit agency Moody's lowered its rating from Aa1 to Aa2, which is still investment-grade.6 Although revenue shortfalls and their resulting fiscal problems exist, the governor and state legislature have responded firmly. New Jersey's long-term outlook is relatively positive due to the state's highly educated workforce and its concentration of technical industries. PORTFOLIO NOTES Municipal bond yields generally declined during the year under review. Because bond prices rise when yields fall, Franklin New Jersey Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.70 on February 28, 2001, to $11.85 on February 28, 2002. As interest rates remained low during the 12 months under review, many municipalities were motivated to borrow, and issuers continued to take advantage of inexpensive borrowing costs. The low interest rate environment, in conjunction with declining tax receipts, sparked a significant outbreak of municipal bond activity. The need for capital improvement also contributed to the fervor, and 2001 closed as the year with the second highest amount of national issuance for the past decade at $286.6 billion.7 As 2002 began, the momentum continued with a record January issuance of $20.4 billion in long-term bonds.8 Issuance increased dramatically in many states. For the year 2001, the supply of New Jersey bonds was up 13%. Additionally, Puerto Rico experienced a tremendous year, closing with $5.9 billion of issuance.7 These Puerto Rico bonds offered many attractive investment opportunities for Franklin New Jersey Tax-Free Income Fund as well. As a result, we increased our holdings in territorial securities. Notable purchases during PORTFOLIO BREAKDOWN Franklin New Jersey Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ----------------------------- Transportation 19.3% Hospital & Health Care 18.8% General Obligation 14.2% Utilities 13.0% Prerefunded 12.3% Housing 10.4% Higher Education 5.6% Corporate-Backed 1.9% Subject to Government Appropriations 1.9% Other Revenue 1.5% Tax-Supported 1.1% 5. Source: Standard & Poor's, RATINGSDIRECT, 1/11/02. This does not indicate Standard & Poor's rating of the Fund. 6. Source: Moody's Investors Service, NEW JERSEY (STATE OF), 3/4/02. This does not indicate Moody's rating of the Fund. 7. Source: THE BOND BUYER, 1/2/02. 8. Source: THE BOND BUYER, 2/1/02. 49 DIVIDEND DISTRIBUTIONS* Franklin New Jersey Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ------------------------------------------- MONTH CLASS A CLASS B CLASS C -------------------------------------------------------------------------------- March 4.89 cents 4.31 cents 4.33 cents April 4.89 cents 4.31 cents 4.33 cents May 4.89 cents 4.31 cents 4.33 cents June 4.80 cents 4.26 cents 4.29 cents July 4.80 cents 4.26 cents 4.29 cents August 4.80 cents 4.26 cents 4.29 cents September 4.72 cents 4.17 cents 4.18 cents October 4.72 cents 4.17 cents 4.18 cents November 4.72 cents 4.17 cents 4.18 cents December 4.72 cents 4.17 cents 4.15 cents January 4.72 cents 4.17 cents 4.15 cents February 4.72 cents 4.17 cents 4.15 cents -------------------------------------------------------------------------------- TOTAL 57.39 CENTS 50.73 CENTS 50.85 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. the reporting period included Puerto Rico PBA Revenue, Freehold Township Board Education GO, New Jersey State Transportation Trust Fund Authority Revenue and New Jersey State Housing and Mortgage Finance Agency MFHR GO bonds. It is important to note that Puerto Rico securities are highly liquid and trade well in the secondary market, and their distributions are tax-free in many states. During the 12 months under review, sales included Guam Power Authority Revenue, Lopatcong Township Board of Education GO and New Jersey State Sports and Exposition Authority Convention Center Luxury Tax bonds. The September 11 attacks impacted the Fund's Port Authority of New York and New Jersey holding. As the World Trade Center (WTC) owners, Port Authority will likely experience revenue declines since the WTC leases accounted for approximately 13% of revenue. Port Authority receives the majority of its revenues from other sources such as fees and tolls from bridges, tunnels and airports, which provides for the debt service of the outstanding bonds. The outlook on the debt remains steady as reserve funds are intact to cover principal and interest for the near term. We held 6.21% of total long-term investments of the credit on February 28, 2002, of which 2.26% is insured. Our research analysts continually and carefully monitor the credit and this holding in particular. 50 Your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 52 shows that at the end of this reporting period the Fund's Class A shares' distribution rate was 4.58%, based on an annualization of the current 4.72 cent ($0.0472) per share dividend and the maximum offering price of $12.38 on February 28, 2002. An investor in the maximum combined federal and New Jersey state personal income tax bracket of 42.51% would need to earn 7.97% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. The Fund was subject to bond calls during the 12-month reporting period. Many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. The Fund could reinvest the proceeds only at current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Looking ahead, we are optimistic about the long-term outlook for municipal bonds and Franklin New Jersey Tax-Free Income Fund. We believe our broad portfolio diversification should help cushion the Fund from volatility, and we expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income portion of their portfolios. Most importantly, we believe municipal bonds will continue to be desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 51 FRANKLIN NEW JERSEY TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.15 $11.85 $11.70 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5739 CLASS B CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $11.90 $11.74 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5073 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $11.93 $11.77 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5085 -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 52 PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +6.35% +32.33% +83.50% Average Annual Total Return2 +1.82% +4.84% +5.79% Avg. Ann. Total Return (3/31/02)3 -0.86% +4.63% +5.58% Distribution Rate4 4.58% Taxable Equivalent Distribution Rate5 7.97% 30-Day Standardized Yield6 3.97% Taxable Equivalent Yield5 6.91% INCEPTION CLASS B 1-YEAR (2/1/00) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.82% +20.01% Average Annual Total Return2 +1.82% +7.86% Avg. Ann. Total Return (3/31/02)3 -0.92% +6.54% Distribution Rate4 4.18% Taxable Equivalent Distribution Rate5 7.27% 30-Day Standardized Yield6 3.63% Taxable Equivalent Yield5 6.31% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.81% +28.87% +45.56% Average Annual Total Return2 +3.75% +4.99% +5.50% Avg. Ann. Total Return (3/31/02)3 +1.10% +4.78% +5.13% Distribution Rate4 4.15% Taxable Equivalent Distribution Rate5 7.22% 30-Day Standardized Yield6 3.56% Taxable Equivalent Yield5 6.19% 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and New Jersey state personal income tax bracket of 42.51%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 53 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ----------------------------- 1-Year +1.82% 5-Year +4.84% 10-Year +5.79% CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: --------------------------------------------------------------------------- Date Franklin New Lehman Brothers CPI7 Jersey Tax-Free Municipal Bond Income Fund-Class A Index7 --------------------------------------------------------------------------- 03/01/1992 $9,576 $10,000 $10,000 03/31/1992 $9,592 $10,003 $10,051 04/30/1992 $9,677 $10,092 $10,065 05/31/1992 $9,795 $10,211 $10,079 06/30/1992 $9,932 $10,383 $10,115 07/31/1992 $10,281 $10,694 $10,137 08/31/1992 $10,156 $10,590 $10,165 09/30/1992 $10,164 $10,659 $10,194 10/31/1992 $10,047 $10,555 $10,229 11/30/1992 $10,277 $10,744 $10,244 12/31/1992 $10,410 $10,853 $10,236 01/31/1993 $10,505 $10,979 $10,287 02/28/1993 $10,805 $11,377 $10,323 03/31/1993 $10,748 $11,256 $10,359 04/30/1993 $10,821 $11,370 $10,388 05/31/1993 $10,871 $11,433 $10,402 06/30/1993 $11,055 $11,624 $10,417 07/31/1993 $11,070 $11,639 $10,417 08/31/1993 $11,274 $11,882 $10,446 09/30/1993 $11,384 $12,017 $10,468 10/31/1993 $11,415 $12,040 $10,511 11/30/1993 $11,363 $11,934 $10,518 12/31/1993 $11,554 $12,186 $10,518 01/31/1994 $11,657 $12,325 $10,547 02/28/1994 $11,415 $12,005 $10,582 03/31/1994 $11,000 $11,517 $10,618 04/30/1994 $11,031 $11,615 $10,633 05/31/1994 $11,115 $11,716 $10,641 06/30/1994 $11,042 $11,644 $10,677 07/31/1994 $11,223 $11,857 $10,706 08/31/1994 $11,269 $11,899 $10,749 09/30/1994 $11,124 $11,724 $10,778 10/31/1994 $10,929 $11,515 $10,785 11/30/1994 $10,698 $11,307 $10,799 12/31/1994 $10,953 $11,556 $10,799 01/31/1995 $11,271 $11,886 $10,842 02/28/1995 $11,548 $12,232 $10,886 03/31/1995 $11,658 $12,373 $10,922 04/30/1995 $11,678 $12,387 $10,958 05/31/1995 $11,983 $12,783 $10,980 06/30/1995 $11,915 $12,671 $11,002 07/31/1995 $11,981 $12,792 $11,002 08/31/1995 $12,108 $12,954 $11,030 09/30/1995 $12,182 $13,036 $11,052 10/31/1995 $12,357 $13,225 $11,089 11/30/1995 $12,542 $13,444 $11,081 12/31/1995 $12,660 $13,573 $11,073 01/31/1996 $12,718 $13,677 $11,138 02/29/1996 $12,635 $13,584 $11,174 03/31/1996 $12,496 $13,410 $11,232 04/30/1996 $12,478 $13,372 $11,276 05/31/1996 $12,486 $13,367 $11,297 06/30/1996 $12,619 $13,513 $11,304 07/31/1996 $12,723 $13,634 $11,326 08/31/1996 $12,704 $13,631 $11,347 09/30/1996 $12,886 $13,822 $11,384 10/31/1996 $13,006 $13,978 $11,420 11/30/1996 $13,210 $14,234 $11,442 12/31/1996 $13,170 $14,175 $11,442 01/31/1997 $13,178 $14,201 $11,478 02/28/1997 $13,284 $14,332 $11,514 03/31/1997 $13,164 $14,141 $11,543 04/30/1997 $13,268 $14,260 $11,556 05/31/1997 $13,415 $14,476 $11,550 06/30/1997 $13,536 $14,630 $11,563 07/31/1997 $13,865 $15,036 $11,577 08/31/1997 $13,750 $14,894 $11,599 09/30/1997 $13,905 $15,072 $11,628 10/31/1997 $13,996 $15,168 $11,657 11/30/1997 $14,090 $15,258 $11,650 12/31/1997 $14,273 $15,480 $11,636 01/31/1998 $14,396 $15,640 $11,658 02/28/1998 $14,398 $15,645 $11,681 03/31/1998 $14,429 $15,659 $11,703 04/30/1998 $14,390 $15,588 $11,724 05/31/1998 $14,585 $15,834 $11,745 06/30/1998 $14,658 $15,896 $11,759 07/31/1998 $14,692 $15,936 $11,773 08/31/1998 $14,880 $16,183 $11,787 09/30/1998 $15,026 $16,385 $11,801 10/31/1998 $15,068 $16,385 $11,830 11/30/1998 $15,095 $16,443 $11,830 12/31/1998 $15,143 $16,484 $11,823 01/31/1999 $15,271 $16,680 $11,851 02/28/1999 $15,206 $16,606 $11,865 03/31/1999 $15,266 $16,630 $11,901 04/30/1999 $15,302 $16,671 $11,988 05/31/1999 $15,221 $16,575 $11,988 06/30/1999 $15,049 $16,336 $11,988 07/31/1999 $15,097 $16,395 $12,024 08/31/1999 $14,894 $16,264 $12,053 09/30/1999 $14,839 $16,270 $12,110 10/31/1999 $14,653 $16,094 $12,132 11/30/1999 $14,778 $16,265 $12,140 12/31/1999 $14,633 $16,143 $12,140 01/31/2000 $14,539 $16,072 $12,176 02/29/2000 $14,737 $16,258 $12,248 03/31/2000 $15,070 $16,613 $12,348 04/30/2000 $14,973 $16,515 $12,356 05/31/2000 $14,872 $16,429 $12,370 06/30/2000 $15,264 $16,864 $12,435 07/31/2000 $15,472 $17,099 $12,463 08/31/2000 $15,719 $17,362 $12,463 09/30/2000 $15,617 $17,272 $12,528 10/31/2000 $15,814 $17,460 $12,549 11/30/2000 $15,936 $17,593 $12,557 12/31/2000 $16,321 $18,027 $12,549 01/31/2001 $16,406 $18,206 $12,629 02/28/2001 $16,529 $18,264 $12,679 03/31/2001 $16,658 $18,428 $12,708 04/30/2001 $16,488 $18,229 $12,759 05/31/2001 $16,671 $18,426 $12,816 06/30/2001 $16,808 $18,550 $12,838 07/31/2001 $17,070 $18,824 $12,802 08/31/2001 $17,297 $19,135 $12,802 09/30/2001 $17,187 $19,070 $12,860 10/31/2001 $17,393 $19,297 $12,816 11/30/2001 $17,254 $19,135 $12,794 12/31/2001 $17,088 $18,953 $12,744 01/31/2002 $17,361 $19,281 $12,774 02/28/2002 $17,563 $19,512 $12,825 AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 --------------------------------- 1-Year +1.82% Since Inception (2/1/00) +7.86% CLASS B (2/1/00-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ----------------------------------------------------------------------- Date Franklin New Lehman Brothers CPI7 Jersey Tax-Free Municipal Bond Income Index7 Fund-Class B ----------------------------------------------------------------------- 02/01/2000 $10,000 $10,000 $10,000 02/29/2000 $10,144 $10,116 $10,059 03/31/2000 $10,368 $10,337 $10,141 04/30/2000 $10,298 $10,276 $10,148 05/31/2000 $10,223 $10,222 $10,160 06/30/2000 $10,496 $10,493 $10,213 07/31/2000 $10,642 $10,639 $10,236 08/31/2000 $10,807 $10,803 $10,236 09/30/2000 $10,733 $10,747 $10,289 10/31/2000 $10,863 $10,864 $10,307 11/30/2000 $10,942 $10,946 $10,313 12/31/2000 $11,201 $11,217 $10,307 01/31/2001 $11,254 $11,328 $10,372 02/28/2001 $11,343 $11,364 $10,413 03/31/2001 $11,426 $11,466 $10,437 04/30/2001 $11,303 $11,342 $10,479 05/31/2001 $11,423 $11,465 $10,526 06/30/2001 $11,511 $11,542 $10,544 07/31/2001 $11,684 $11,712 $10,514 08/31/2001 $11,833 $11,906 $10,514 09/30/2001 $11,762 $11,865 $10,562 10/31/2001 $11,898 $12,006 $10,526 11/30/2001 $11,788 $11,906 $10,508 12/31/2001 $11,680 $11,792 $10,467 01/31/2002 $11,861 $11,996 $10,491 02/28/2002 $11,701 $12,140 $10,533 Past performance does not guarantee future results. 54 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 -------------------------------- 1-Year +3.75% 5-Year +4.99% Since Inception (5/1/95) +5.50% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ------------------------------------------------------------------------------ Date Franklin New Lehman Brothers CPI7 Jersey Tax-Free Municipal Bond Income Fund-Class C Index7 ------------------------------------------------------------------------------ 05/01/1995 $9,904 $10,000 $10,000 05/31/1995 $10,174 $10,319 $10,020 06/30/1995 $10,111 $10,229 $10,040 07/31/1995 $10,172 $10,326 $10,040 08/31/1995 $10,275 $10,458 $10,066 09/29/1995 $10,341 $10,523 $10,086 10/31/1995 $10,482 $10,676 $10,120 11/30/1995 $10,635 $10,853 $10,112 12/29/1995 $10,730 $10,957 $10,105 01/31/1996 $10,783 $11,041 $10,165 02/29/1996 $10,700 $10,966 $10,198 03/29/1996 $10,577 $10,825 $10,251 04/30/1996 $10,557 $10,795 $10,291 05/31/1996 $10,568 $10,791 $10,310 06/28/1996 $10,675 $10,908 $10,316 07/31/1996 $10,759 $11,006 $10,336 08/30/1996 $10,729 $11,004 $10,356 09/30/1996 $10,877 $11,158 $10,389 10/31/1996 $10,970 $11,284 $10,422 11/29/1996 $11,135 $11,491 $10,442 12/31/1996 $11,095 $11,443 $10,442 01/31/1997 $11,095 $11,464 $10,475 02/28/1997 $11,189 $11,570 $10,508 03/31/1997 $11,084 $11,416 $10,534 04/30/1997 $11,166 $11,512 $10,547 05/31/1997 $11,283 $11,686 $10,540 06/30/1997 $11,380 $11,811 $10,553 07/31/1997 $11,651 $12,138 $10,565 08/31/1997 $11,560 $12,024 $10,586 09/30/1997 $11,675 $12,167 $10,612 10/31/1997 $11,744 $12,245 $10,639 11/30/1997 $11,816 $12,317 $10,632 12/31/1997 $11,974 $12,497 $10,619 01/31/1998 $12,061 $12,626 $10,640 02/28/1998 $12,067 $12,629 $10,660 03/31/1998 $12,086 $12,641 $10,680 04/30/1998 $12,039 $12,584 $10,699 05/31/1998 $12,207 $12,783 $10,719 06/30/1998 $12,252 $12,832 $10,731 07/31/1998 $12,272 $12,865 $10,744 08/31/1998 $12,433 $13,064 $10,757 09/30/1998 $12,549 $13,227 $10,770 10/31/1998 $12,578 $13,227 $10,796 11/30/1998 $12,594 $13,274 $10,796 12/31/1998 $12,628 $13,307 $10,789 01/31/1999 $12,728 $13,465 $10,815 02/28/1999 $12,680 $13,406 $10,828 03/31/1999 $12,711 $13,425 $10,861 04/30/1999 $12,735 $13,458 $10,940 05/31/1999 $12,673 $13,380 $10,940 06/30/1999 $12,513 $13,187 $10,940 07/31/1999 $12,547 $13,235 $10,973 08/31/1999 $12,373 $13,129 $10,999 09/30/1999 $12,322 $13,134 $11,052 10/31/1999 $12,163 $12,992 $11,072 11/30/1999 $12,259 $13,130 $11,079 12/31/1999 $12,134 $13,032 $11,079 01/31/2000 $12,039 $12,974 $11,112 02/29/2000 $12,208 $13,125 $11,177 03/31/2000 $12,489 $13,411 $11,269 04/30/2000 $12,394 $13,332 $11,276 05/31/2000 $12,303 $13,263 $11,289 06/30/2000 $12,621 $13,614 $11,348 07/31/2000 $12,796 $13,803 $11,374 08/31/2000 $12,983 $14,016 $11,374 09/30/2000 $12,905 $13,943 $11,433 10/31/2000 $13,050 $14,095 $11,453 11/30/2000 $13,144 $14,202 $11,460 12/31/2000 $13,455 $14,553 $11,453 01/31/2001 $13,518 $14,697 $11,525 02/28/2001 $13,624 $14,744 $11,571 03/31/2001 $13,711 $14,877 $11,598 04/30/2001 $13,577 $14,716 $11,644 05/31/2001 $13,721 $14,875 $11,696 06/30/2001 $13,828 $14,974 $11,716 07/31/2001 $14,035 $15,196 $11,683 08/31/2001 $14,215 $15,447 $11,683 09/30/2001 $14,129 $15,394 $11,736 10/31/2001 $14,279 $15,578 $11,696 11/30/2001 $14,159 $15,447 $11,676 12/31/2001 $14,018 $15,300 $11,631 01/31/2002 $14,246 $15,565 $11,657 02/28/2002 $14,416 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 55 FRANKLIN OREGON TAX-FREE INCOME FUND CREDIT QUALITY BREAKDOWN* FRANKLIN OREGON TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 [PIE CHART OMITTED] AAA - 38.8% AA - 34.7% A - 14.2% BBB - 10.0% Below Investment Grade - 2.3% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN OREGON TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND OREGON STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF OREGON MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- STATE UPDATE2 [GRAPHIC OF OREGON OMITTED] Oregon continues to diversify away from its traditional industries of lumber, agriculture and wood products into high-technology manufacturing; however, the state's economy is slowing, with job growth expected to be flat in 2002 before increasing again in 2003. In its favor, the state has a history of conservative revenue forecasting and strong financial controls that compensate for low budget reserves. In addition, Oregon maintains low debt levels and has experienced improving resident wealth levels. The state's net tax-supported debt of 1.6% of aggregate personal income is below the national median of 2.1%. During the 12 months under review, Oregon's economy weakened, hurt by the high-technology sector's underperformance and the national economic slowdown. The state's economy is expected to underperform the nation over the near term. Since December 2000, the state has lost approximately 12,000 mostly high-technology manufacturing jobs, but unlike in past years, the services and trade sectors did not post gains to offset these job losses. The state anticipates posting negative growth for 2001, but expects its economic downturn to bottom out during first quarter 2002. For the 2001-2003 biennium, the state assumes personal income tax collections will fall by 2% and corporate income tax receipts will drop by 7% compared with 1999-2001. Oregon's ability to recover will depend largely on how well its trading partners fare during the global economic slowdown. Despite growth in exports to Canada in recent years, demand for Oregon products continues to depend heavily on Asian market strength. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. 2. Source: Moody's Investors Service, OREGON (STATE OF), 11/29/01. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 126. 56 The outlook for Oregon is stable, reflecting the state's strong economic base and the expected maintenance of adequate reserve levels despite expenditure pressures. Oregon's debt burden is expected to remain moderate over the near term, and the state has strong financial controls and a solid record of fiscal management. PORTFOLIO NOTES The municipal bond market experienced short periods of time when rates trended upward, specifically in November and December 2001 with the release of stronger-than-expected economic data. Overall, however, municipal bond yields decreased. Because bond prices rise as yields fall, Franklin Oregon Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $11.42 on February 28, 2001, to $11.52 on February 28, 2002. During the reporting period, the Fund experienced strong net inflows as well as calls on higher coupon bonds, as many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. We invested the resulting proceeds at current, lower interest rates. Due to these circumstances, the Fund's dividend distributions declined. (Please read our special feature, "Making Sense of Dividends.") The Fund attempted to take advantage of market conditions by selling bonds with low booked yields and shorter call protection, and using the proceeds to buy bonds with current coupon rates, higher booked yields and longer call structures. As a result, the portfolio's overall structure improved. In December 2001 and January 2002, Puerto Rico sold four new issues in the primary market, each approximately $1 billion in size. With demand outpacing supply in Oregon, the Fund benefited from purchasing territory securities at significantly higher yields relative to Oregon state bonds. As the largest municipal bond fund in Oregon with $557 million in total long-term investments as of February 28, 2002, Franklin Oregon Tax-Free Income Fund is able to use its size and Franklin's significant presence in the municipal bond market to structure issues to fit the portfolio's needs. The Fund has continued to maintain its high quality, and at period-end, 73.5% of the Fund's total long-term investments were rated AA or higher. Notable purchases we made during the period included Puerto Rico Electric Power Authority Power, Puerto Rico Commonwealth Highway and Transportation Authority, Puerto Rico Public Finance Corp., and Eugene Electric Utility revenue bonds, and Deschutes County Administrative School District No. 1 GO bonds. Some holdings we sold included Puerto Rico Commonwealth Highway PORTFOLIO BREAKDOWN Franklin Oregon Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ General Obligation 22.2% Transportation 15.6% Housing 13.5% Hospital & Health Care 11.9% Utilities 8.7% Prerefunded 7.2% Corporate-Backed 6.1% Higher Education 5.4% Subject to Government Appropriations 4.6% Other Revenue 2.9% Tax-Supported 1.9% 57 DIVIDEND DISTRIBUTIONS* Franklin Oregon Tax-Free Income Fund 2/28/02 DIVIDEND PER SHARE -------------------------------- MONTH CLASS A CLASS C -------------------------------------------------------------------------------- March 4.80 cents 4.24 cents April 4.80 cents 4.24 cents May 4.80 cents 4.24 cents June 4.80 cents 4.28 cents July 4.80 cents 4.28 cents August 4.80 cents 4.28 cents September 4.65 cents 4.12 cents October 4.65 cents 4.12 cents November 4.65 cents 4.12 cents December 4.50 cents 3.97 cents January 4.50 cents 3.97 cents February 4.50 cents 3.97 cents -------------------------------------------------------------------------------- TOTAL 56.25 CENTS 49.83 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. and Transportation Authority and Guam Power Authority revenue bonds, and Oregon State and Jackson County School District No. 9 Eagle Point GO bonds. Keep in mind that your Fund combines the advantage of overall high credit quality with tax-free yields.1 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 4.49%, based on an annualization of the current 4.5 cent ($0.045) per share dividend and the maximum offering price of $12.03 on February 28, 2002. This tax-free rate is generally higher than the after-tax return on a comparable quality taxable investment. An investor in the maximum combined federal and Oregon state personal income tax bracket of 44.13% would need to earn 8.04% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rate and its taxable equivalent for Class C shares. 58 During 2001, Oregon's issuance of municipal bonds increased 32.7% from the previous year.3 Retail demand for Oregon municipal bonds was particularly strong, and this increased supply was easily absorbed. Looking forward, we are optimistic about the long-term outlook for municipal bonds and Franklin Oregon Tax-Free Income Fund. We believe the fixed income market should remain healthy as the economy's recovery slowly continues and inflation remains low. We expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income allocation of their portfolios. Most importantly, we believe municipal bonds should remain desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. 3. Source: THE BOND BUYER, 1/2/02. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 59 FRANKLIN OREGON TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $11.52 $11.42 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5625 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.12 $11.61 $11.49 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4983 PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +5.95% +29.03% +78.47% Average Annual Total Return2 +1.42% +4.32% +5.50% Avg. Ann. Total Return (3/31/02)3 -1.07% +4.11% +5.29% Distribution Rate4 4.49% Taxable Equivalent Distribution Rate5 8.04% 30-Day Standardized Yield6 4.00% Taxable Equivalent Yield5 7.16% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +5.50% +25.62% +41.77% Average Annual Total Return2 +3.42% +4.45% +5.09% Avg. Ann. Total Return (3/31/02)3 +0.71% +4.25% +4.76% Distribution Rate4 4.05% Taxable Equivalent Distribution Rate5 7.25% 30-Day Standardized Yield6 3.60% Taxable Equivalent Yield5 6.44% -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Oregon state personal income tax bracket of 44.13%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 60 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED DIVIDENDS. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ----------------------------------------------------------------------------- Date Franklin Oregon Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class A Index7 ----------------------------------------------------------------------------- 03/01/1992 $9,571 $10,000 $10,000 03/31/1992 $9,603 $10,003 $10,051 04/30/1992 $9,669 $10,092 $10,065 05/31/1992 $9,768 $10,211 $10,079 06/30/1992 $9,905 $10,383 $10,115 07/31/1992 $10,230 $10,694 $10,137 08/31/1992 $10,091 $10,590 $10,165 09/30/1992 $10,114 $10,659 $10,194 10/31/1992 $9,984 $10,555 $10,229 11/30/1992 $10,204 $10,744 $10,244 12/31/1992 $10,367 $10,853 $10,236 01/31/1993 $10,487 $10,979 $10,287 02/28/1993 $10,796 $11,377 $10,323 03/31/1993 $10,744 $11,256 $10,359 04/30/1993 $10,825 $11,370 $10,388 05/31/1993 $10,873 $11,433 $10,402 06/30/1993 $11,010 $11,624 $10,417 07/31/1993 $11,033 $11,639 $10,417 08/31/1993 $11,199 $11,882 $10,446 09/30/1993 $11,346 $12,017 $10,468 10/31/1993 $11,385 $12,040 $10,511 11/30/1993 $11,312 $11,934 $10,518 12/31/1993 $11,498 $12,186 $10,518 01/31/1994 $11,606 $12,325 $10,547 02/28/1994 $11,378 $12,005 $10,582 03/31/1994 $10,975 $11,517 $10,618 04/30/1994 $11,002 $11,615 $10,633 05/31/1994 $11,073 $11,716 $10,641 06/30/1994 $11,014 $11,644 $10,677 07/31/1994 $11,193 $11,857 $10,706 08/31/1994 $11,235 $11,899 $10,749 09/30/1994 $11,088 $11,724 $10,778 10/31/1994 $10,878 $11,515 $10,785 11/30/1994 $10,654 $11,307 $10,799 12/31/1994 $10,929 $11,556 $10,799 01/31/1995 $11,238 $11,886 $10,842 02/28/1995 $11,535 $12,232 $10,886 03/31/1995 $11,645 $12,373 $10,922 04/30/1995 $11,663 $12,387 $10,958 05/31/1995 $11,958 $12,783 $10,980 06/30/1995 $11,869 $12,671 $11,002 07/31/1995 $11,946 $12,792 $11,002 08/31/1995 $12,094 $12,954 $11,030 09/30/1995 $12,157 $13,036 $11,052 10/31/1995 $12,320 $13,225 $11,089 11/30/1995 $12,495 $13,444 $11,081 12/31/1995 $12,580 $13,573 $11,073 01/31/1996 $12,659 $13,677 $11,138 02/29/1996 $12,596 $13,584 $11,174 03/31/1996 $12,466 $13,410 $11,232 04/30/1996 $12,468 $13,372 $11,276 05/31/1996 $12,485 $13,367 $11,297 06/30/1996 $12,616 $13,513 $11,304 07/31/1996 $12,697 $13,634 $11,326 08/31/1996 $12,708 $13,631 $11,347 09/30/1996 $12,855 $13,822 $11,384 10/31/1996 $12,962 $13,978 $11,420 11/30/1996 $13,131 $14,234 $11,442 12/31/1996 $13,123 $14,175 $11,442 01/31/1997 $13,138 $14,201 $11,478 02/28/1997 $13,242 $14,332 $11,514 03/31/1997 $13,143 $14,141 $11,543 04/30/1997 $13,234 $14,260 $11,556 05/31/1997 $13,379 $14,476 $11,550 06/30/1997 $13,486 $14,630 $11,563 07/31/1997 $13,778 $15,036 $11,577 08/31/1997 $13,731 $14,894 $11,599 09/30/1997 $13,862 $15,072 $11,628 10/31/1997 $13,940 $15,168 $11,657 11/30/1997 $14,034 $15,258 $11,650 12/31/1997 $14,205 $15,480 $11,636 01/31/1998 $14,316 $15,640 $11,658 02/28/1998 $14,330 $15,645 $11,681 03/31/1998 $14,337 $15,659 $11,703 04/30/1998 $14,323 $15,588 $11,724 05/31/1998 $14,495 $15,834 $11,745 06/30/1998 $14,544 $15,896 $11,759 07/31/1998 $14,577 $15,936 $11,773 08/31/1998 $14,765 $16,183 $11,787 09/30/1998 $14,911 $16,385 $11,801 10/31/1998 $14,879 $16,385 $11,830 11/30/1998 $14,943 $16,443 $11,830 12/31/1998 $14,977 $16,484 $11,823 01/31/1999 $15,116 $16,680 $11,851 02/28/1999 $15,063 $16,606 $11,865 03/31/1999 $15,109 $16,630 $11,901 04/30/1999 $15,131 $16,671 $11,988 05/31/1999 $15,048 $16,575 $11,988 06/30/1999 $14,818 $16,336 $11,988 07/31/1999 $14,864 $16,395 $12,024 08/31/1999 $14,671 $16,264 $12,053 09/30/1999 $14,640 $16,270 $12,110 10/31/1999 $14,400 $16,094 $12,132 11/30/1999 $14,548 $16,265 $12,140 12/31/1999 $14,401 $16,143 $12,140 01/31/2000 $14,317 $16,072 $12,176 02/29/2000 $14,499 $16,258 $12,248 03/31/2000 $14,831 $16,613 $12,348 04/30/2000 $14,733 $16,515 $12,356 05/31/2000 $14,644 $16,429 $12,370 06/30/2000 $15,035 $16,864 $12,435 07/31/2000 $15,241 $17,099 $12,463 08/31/2000 $15,486 $17,362 $12,463 09/30/2000 $15,382 $17,272 $12,528 10/31/2000 $15,536 $17,460 $12,549 11/30/2000 $15,629 $17,593 $12,557 12/31/2000 $15,986 $18,027 $12,549 01/31/2001 $16,069 $18,206 $12,629 02/28/2001 $16,133 $18,264 $12,679 03/31/2001 $16,260 $18,428 $12,708 04/30/2001 $16,090 $18,229 $12,759 05/31/2001 $16,244 $18,426 $12,816 06/30/2001 $16,368 $18,550 $12,838 07/31/2001 $16,629 $18,824 $12,802 08/31/2001 $16,886 $19,135 $12,802 09/30/2001 $16,774 $19,070 $12,860 10/31/2001 $16,980 $19,297 $12,816 11/30/2001 $16,839 $19,135 $12,794 12/31/2001 $16,656 $18,953 $12,744 01/31/2002 $16,897 $19,281 $12,774 02/28/2002 $17,088 $19,512 $12,825 CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ------------------------------------------------------------------------ Date Franklin Oregon Lehman Brothers CPI7 Tax-Free Income Municipal Bond Fund-Class C Index7 ------------------------------------------------------------------------ 05/01/1995 $9,903 $10,000 $10,000 05/31/1995 $10,173 $10,319 $10,020 06/30/1995 $10,091 $10,229 $10,040 07/31/1995 $10,150 $10,326 $10,040 08/31/1995 $10,279 $10,458 $10,066 09/29/1995 $10,328 $10,523 $10,086 10/31/1995 $10,460 $10,676 $10,120 11/30/1995 $10,602 $10,853 $10,112 12/29/1995 $10,677 $10,957 $10,105 01/31/1996 $10,739 $11,041 $10,165 02/29/1996 $10,685 $10,966 $10,198 03/29/1996 $10,570 $10,825 $10,251 04/30/1996 $10,558 $10,795 $10,291 05/31/1996 $10,576 $10,791 $10,310 06/28/1996 $10,681 $10,908 $10,316 07/31/1996 $10,744 $11,006 $10,336 08/30/1996 $10,750 $11,004 $10,356 09/30/1996 $10,869 $11,158 $10,389 10/31/1996 $10,954 $11,284 $10,422 11/29/1996 $11,101 $11,491 $10,442 12/31/1996 $11,079 $11,443 $10,442 01/31/1997 $11,097 $11,464 $10,475 02/28/1997 $11,177 $11,570 $10,508 03/31/1997 $11,089 $11,416 $10,534 04/30/1997 $11,160 $11,512 $10,547 05/31/1997 $11,276 $11,686 $10,540 06/30/1997 $11,360 $11,811 $10,553 07/31/1997 $11,600 $12,138 $10,565 08/31/1997 $11,565 $12,024 $10,586 09/30/1997 $11,671 $12,167 $10,612 10/31/1997 $11,730 $12,245 $10,639 11/30/1997 $11,793 $12,317 $10,632 12/31/1997 $11,941 $12,497 $10,619 01/31/1998 $12,028 $12,626 $10,640 02/28/1998 $12,034 $12,629 $10,660 03/31/1998 $12,034 $12,641 $10,680 04/30/1998 $12,008 $12,584 $10,699 05/31/1998 $12,155 $12,783 $10,719 06/30/1998 $12,190 $12,832 $10,731 07/31/1998 $12,211 $12,865 $10,744 08/31/1998 $12,363 $13,064 $10,757 09/30/1998 $12,479 $13,227 $10,770 10/31/1998 $12,445 $13,227 $10,796 11/30/1998 $12,492 $13,274 $10,796 12/31/1998 $12,516 $13,307 $10,789 01/31/1999 $12,626 $13,465 $10,815 02/28/1999 $12,587 $13,406 $10,828 03/31/1999 $12,607 $13,425 $10,861 04/30/1999 $12,630 $13,458 $10,940 05/31/1999 $12,544 $13,380 $10,940 06/30/1999 $12,357 $13,187 $10,940 07/31/1999 $12,379 $13,235 $10,973 08/31/1999 $12,223 $13,129 $10,999 09/30/1999 $12,181 $13,134 $11,052 10/31/1999 $11,987 $12,992 $11,072 11/30/1999 $12,092 $13,130 $11,079 12/31/1999 $11,976 $13,032 $11,079 01/31/2000 $11,891 $12,974 $11,112 02/29/2000 $12,036 $13,125 $11,177 03/31/2000 $12,316 $13,411 $11,269 04/30/2000 $12,229 $13,332 $11,276 05/31/2000 $12,149 $13,263 $11,289 06/30/2000 $12,454 $13,614 $11,348 07/31/2000 $12,628 $13,803 $11,374 08/31/2000 $12,824 $14,016 $11,374 09/30/2000 $12,733 $13,943 $11,433 10/31/2000 $12,852 $14,095 $11,453 11/30/2000 $12,923 $14,202 $11,460 12/31/2000 $13,210 $14,553 $11,453 01/31/2001 $13,272 $14,697 $11,525 02/28/2001 $13,308 $14,744 $11,571 03/31/2001 $13,429 $14,877 $11,598 04/30/2001 $13,281 $14,716 $11,644 05/31/2001 $13,401 $14,875 $11,696 06/30/2001 $13,484 $14,974 $11,716 07/31/2001 $13,704 $15,196 $11,683 08/31/2001 $13,907 $15,447 $11,683 09/30/2001 $13,798 $15,394 $11,736 10/31/2001 $13,960 $15,578 $11,696 11/30/2001 $13,840 $15,447 $11,676 12/31/2001 $13,683 $15,300 $11,631 01/31/2002 $13,873 $15,565 $11,657 02/28/2002 $14,039 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 61 FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND CREDIT QUALITY BREAKDOWN* FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND BASED ON TOTAL LONG-TERM INVESTMENTS 2/28/02 [PIE CHART OMITTED] AAA - 67.5% AA - 8.1% A - 9.8% BBB - 14.6% *Quality breakdown may include internal ratings for bonds not rated by an independent rating agency. -------------------------------------------------------------------------------- YOUR FUND'S GOAL: FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND SEEKS TO PROVIDE HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL AND PENNSYLVANIA STATE PERSONAL INCOME TAXES THROUGH A PORTFOLIO CONSISTING MAINLY OF PENNSYLVANIA MUNICIPAL BONDS.1 -------------------------------------------------------------------------------- COMMONWEALTH UPDATE [GRAPHIC OF PENNSYLVANIA OMITTED] Prudent practices and a "save for a rainy day" attitude have contributed to Pennsylvania's stable economy. Since the early 1990s, the commonwealth applied its budget surpluses to build its reserves. Strong financial management worked to minimize debt issuance and exercise budget restraint, while estimating revenues conservatively. The prolonged national economic slowdown and its resulting negative effect for individual states have affected, but not toppled, the commonwealth's well-prepared budget. Recently revised general fund estimates for 2002 project revenue increases of 3.7% and a rise in spending of 3.5%. Additionally, Pennsylvania now anticipates making use of approximately half of its $1.13 billion stabilization reserve in fiscal years 2002 and 2003.2 The commonwealth's financial position, with its diverse economic base, admirable educational facilities and excellent health care system, provided some shelter against the national recession, as services held up much better than the manufacturing side. A range of industries, such as software, tourism, biotechnology and business services, experienced job growth. Not surprisingly, despite its lagging labor force expansion rate, the commonwealth's 5.6% unemployment rate in February 2002 remained very close to the 5.5% national rate.3 Significant employment gains are expected from the business, health care and consumer services sectors, while mining, manufacturing and machinery sectors will likely continue their decline. 1. For investors subject to the federal alternative minimum tax, a small portion of this income may be subject to such tax. Distributions of capital gains and of ordinary income from accrued market discount, if any, are generally taxable. The Fund's shares are free from Pennsylvania personal property tax and income is free from Philadelphia School Investment Net Income Tax. 2. Source: Moody's Investors Service, PENNSYLVANIA (COMMONWEALTH OF), 2/12/02. This does not indicate Moody's rating of the Fund. 3. Source: Bureau of Labor Statistics, 3/26/02. The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 132. 62 While keeping close to national averages, Pennsylvania's tax-supported debt ratio has demonstrated an improving trend compared to other states, staying roughly equivalent to the pace of its personal income growth. Personal income per capita reached 102% of the national average for a debt to personal income ratio of just 2.3%, moving it closer to the 50-state median.4 Keeping in step with Pennsylvania's characteristically flexible and prudent financial management practices, commonwealth officials are examining revenue collections and analyzing alternate budget scenarios should the nation remain in an economic slowdown. Although the duration and depth of any economic downturn is difficult to predict, Pennsylvania seems well-positioned to cope with the current cycle's potential negative effects. With a low debt burden, the commonwealth can comfortably draw from its reserves while maintaining a stable outlook for its economy. Moody's and Standard & Poor's, two independent credit rating agencies, assigned Pennsylvania's general obligation debt their higher ratings of Aa2 and AA.2, 4 PORTFOLIO NOTES Municipal bond yields generally declined during the year under review. Because bond prices rise when yields fall, Franklin Pennsylvania Tax-Free Income Fund's Class A share price, as measured by net asset value, rose from $10.12 on February 28, 2001, to $10.29 on February 28, 2002. As interest rates remained low during the 12 months under review, many municipalities were motivated to borrow, and issuers continued to take advantage of inexpensive borrowing costs. The low interest rate environment, in conjunction with declining tax receipts, sparked a significant outbreak of municipal bond activity. The need for capital improvement also contributed to the fervor, and 2001 closed as the year with the second highest amount of national issuance for the past decade at $286.6 billion.5 As 2002 began, the momentum continued with a record January issuance of $20.4 billion in long-term bonds.6 PORTFOLIO BREAKDOWN Franklin Pennsylvania Tax-Free Income Fund 2/28/02 % OF TOTAL LONG-TERM INVESTMENTS ------------------------------ Hospital & Health Care 21.4% Prerefunded 16.0% General Obligation 13.2% Utilities 12.3% Higher Education 10.2% Transportation 8.5% Housing 7.5% Corporate-Backed 4.9% Other Revenue 3.1% Tax-Supported 1.7% Subject to Government Appropriations 1.2% 4. Source: Standard & Poor's, RATINGSDIRECT, 9/27/01. This does not indicate Standard & Poor's rating of the Fund. 5. Source: THE BOND BUYER, 1/2/02. 6. Source: THE BOND BUYER, 2/1/02. 63 DIVIDEND DISTRIBUTIONS* Franklin Pennsylvania Tax-Free Income Fund 3/1/01-2/28/02 DIVIDEND PER SHARE ----------------------------------------------- MONTH CLASS A CLASS B CLASS C -------------------------------------------------------------------------------- March 4.40 cents 3.92 cents 3.92 cents April 4.40 cents 3.92 cents 3.92 cents May 4.40 cents 3.92 cents 3.92 cents June 4.40 cents 3.94 cents 3.95 cents July 4.40 cents 3.94 cents 3.95 cents August 4.40 cents 3.94 cents 3.95 cents September 4.32 cents 3.84 cents 3.84 cents October 4.32 cents 3.84 cents 3.84 cents November 4.32 cents 3.84 cents 3.84 cents December 4.25 cents 3.75 cents 3.77 cents January 4.25 cents 3.75 cents 3.77 cents February 4.25 cents 3.75 cents 3.77 cents -------------------------------------------------------------------------------- TOTAL 52.11 CENTS 46.35 CENTS 46.44 CENTS *Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity during the month. Income distributions include all accrued income earned by the Fund during the reporting period. Issuance increased dramatically in many states. For the year 2001, the supply of Pennsylvania bonds was up 98.5%, providing many investment opportunities for the Fund.5 Notable purchases during the reporting period included Erie GO, Upper St. Clair Township School District GO, Greater Johnstown School District GO and Philadelphia Water and Wastewater Revenue bonds. During the 12 months under review, sales included Philadelphia GO, Philadelphia Gas Works Revenue 2nd Series, Jeanette Health Service Authority Hospital Revenue and Pennsylvania EDA Financing Authority Revenue - Amtrak bonds. Your Fund combines the advantage of high credit quality with tax-free yields.1 The Performance Summary beginning on page 66 shows that at the end of this reporting period the Fund's Class A shares' distribution rate was 4.74%, based on an annualization of the current 4.25 cent ($0.0425) per share dividend and the maximum offering 64 price of $10.75 on February 28, 2002. An investor in the maximum combined federal and Pennsylvania state personal income tax bracket of 40.32% would need to earn 7.94% from a taxable investment to match the Fund's tax-free distribution rate. The Performance Summary also shows the distribution rates and their taxable equivalents for Class B and C shares. The Fund was subject to bond calls during the 12-month reporting period. Many municipal bond issuers sought to take advantage of lower interest rates and exercised call options on their outstanding, higher-coupon bonds. The Fund could reinvest the proceeds only at current, lower rates, causing the Fund's dividend distributions to decline. (Please read our special feature, "Making Sense of Dividends.") Looking ahead, we are optimistic about the long-term outlook for municipal bonds and Franklin Pennsylvania Tax-Free Income Fund. We believe our broad portfolio diversification should help cushion the Fund from volatility, and we expect demand for municipal bonds to remain strong as investors continue to diversify by increasing the fixed income portion of their portfolios. Most importantly, we believe municipal bonds will continue to be desirable due to the tax efficiencies they offer. We intend to maintain our conservative, buy-and-hold investment strategy as we attempt to provide shareholders with high, current, tax-free income. -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of February 28, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any state, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- 65 FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND PERFORMANCE SUMMARY AS OF 2/28/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $10.29 $10.12 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.5211 CLASS B CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.18 $10.31 $10.13 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4635 CLASS C CHANGE 2/28/02 2/28/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.17 $10.35 $10.18 DISTRIBUTIONS (3/1/01-2/28/02) Dividend Income $0.4644 -------------------------------------------------------------------------------- CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. -------------------------------------------------------------------------------- Past performance does not guarantee future results. 66 PERFORMANCE SUMMARY (CONT.) PERFORMANCE CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return1 +7.01% +31.04% +87.12% Average Annual Total Return2 +2.45% +4.64% +6.00% Avg. Ann. Total Return (3/31/02)3 -0.54% +4.44% +5.76% Distribution Rate4 4.74% Taxable Equivalent Distribution Rate5 7.94% 30-Day Standardized Yield6 4.01% Taxable Equivalent Yield5 6.72% INCEPTION CLASS B 1-YEAR (2/1/00) -------------------------------------------------------------------------------- Cumulative Total Return1 +6.50% +19.96% Average Annual Total Return2 +2.50% +7.83% Avg. Ann. Total Return (3/31/02)3 -0.58% +6.50% Distribution Rate4 4.40% Taxable Equivalent Distribution Rate5 7.37% 30-Day Standardized Yield6 3.68% Taxable Equivalent Yield5 6.17% INCEPTION CLASS C 1-YEAR 5-YEAR (5/1/95) -------------------------------------------------------------------------------- Cumulative Total Return1 +6.38% +27.53% +44.21% Average Annual Total Return2 +4.35% +4.76% +5.35% Avg. Ann. Total Return (3/31/02)3 +1.39% +4.58% +4.98% Distribution Rate4 4.33% Taxable Equivalent Distribution Rate5 7.26% 30-Day Standardized Yield6 3.62% Taxable Equivalent Yield5 6.07% 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current, applicable, maximum sales charge(s) for that class. 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 B) per share on 2/28/02. 5. Taxable equivalent distribution rate and yield assume the published rates as of 12/10/01 for the maximum combined federal and Pennsylvania state personal income tax bracket of 40.32%, based on the federal income tax rate of 38.6%. 6. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the month ended 2/28/02. -------------------------------------------------------------------------------- Bond prices, and thus the Fund's share price, generally move in the opposite direction from interest rates. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 67 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE CURRENT, APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED INTEREST. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. THE CONSUMER PRICE INDEX (CPI), CALCULATED BY THE U.S. BUREAU OF LABOR STATISTICS, IS A COMMONLY USED MEASURE OF THE INFLATION RATE. AVERAGE ANNUAL TOTAL RETURN CLASS A 2/28/02 ---------------------------- 1-Year +2.45% 5-Year +4.64% 10-Year +6.00% CLASS A (3/1/92-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ------------------------------------------------------------------------ Date Franklin Lehman Brothers CPI7 Pennsylvania Municipal Bond Tax-Free Income Index7 Fund-Class A ------------------------------------------------------------------------ 03/01/1992 $9,576 $10,000 $10,000 03/31/1992 $9,604 $10,003 $10,051 04/30/1992 $9,694 $10,092 $10,065 05/31/1992 $9,805 $10,211 $10,079 06/30/1992 $9,965 $10,383 $10,115 07/31/1992 $10,309 $10,694 $10,137 08/31/1992 $10,213 $10,590 $10,165 09/30/1992 $10,253 $10,659 $10,194 10/31/1992 $10,146 $10,555 $10,229 11/30/1992 $10,365 $10,744 $10,244 12/31/1992 $10,490 $10,853 $10,236 01/31/1993 $10,634 $10,979 $10,287 02/28/1993 $10,929 $11,377 $10,323 03/31/1993 $10,900 $11,256 $10,359 04/30/1993 $10,967 $11,370 $10,388 05/31/1993 $11,030 $11,433 $10,402 06/30/1993 $11,203 $11,624 $10,417 07/31/1993 $11,196 $11,639 $10,417 08/31/1993 $11,416 $11,882 $10,446 09/30/1993 $11,545 $12,017 $10,468 10/31/1993 $11,577 $12,040 $10,511 11/30/1993 $11,537 $11,934 $10,518 12/31/1993 $11,715 $12,186 $10,518 01/31/1994 $11,815 $12,325 $10,547 02/28/1994 $11,612 $12,005 $10,582 03/31/1994 $11,289 $11,517 $10,618 04/30/1994 $11,300 $11,615 $10,633 05/31/1994 $11,383 $11,716 $10,641 06/30/1994 $11,358 $11,644 $10,677 07/31/1994 $11,526 $11,857 $10,706 08/31/1994 $11,563 $11,899 $10,749 09/30/1994 $11,453 $11,724 $10,778 10/31/1994 $11,306 $11,515 $10,785 11/30/1994 $11,098 $11,307 $10,799 12/31/1994 $11,330 $11,556 $10,799 01/31/1995 $11,601 $11,886 $10,842 02/28/1995 $11,875 $12,232 $10,886 03/31/1995 $11,989 $12,373 $10,922 04/30/1995 $12,010 $12,387 $10,958 05/31/1995 $12,299 $12,783 $10,980 06/30/1995 $12,256 $12,671 $11,002 07/31/1995 $12,330 $12,792 $11,002 08/31/1995 $12,439 $12,954 $11,030 09/30/1995 $12,512 $13,036 $11,052 10/31/1995 $12,652 $13,225 $11,089 11/30/1995 $12,835 $13,444 $11,081 12/31/1995 $12,955 $13,573 $11,073 01/31/1996 $13,021 $13,677 $11,138 02/29/1996 $12,961 $13,584 $11,174 03/31/1996 $12,850 $13,410 $11,232 04/30/1996 $12,840 $13,372 $11,276 05/31/1996 $12,870 $13,367 $11,297 06/30/1996 $12,993 $13,513 $11,304 07/31/1996 $13,084 $13,634 $11,326 08/31/1996 $13,084 $13,631 $11,347 09/30/1996 $13,252 $13,822 $11,384 10/31/1996 $13,368 $13,978 $11,420 11/30/1996 $13,547 $14,234 $11,442 12/31/1996 $13,537 $14,175 $11,442 01/31/1997 $13,575 $14,201 $11,478 02/28/1997 $13,678 $14,332 $11,514 03/31/1997 $13,549 $14,141 $11,543 04/30/1997 $13,664 $14,260 $11,556 05/31/1997 $13,828 $14,476 $11,550 06/30/1997 $13,965 $14,630 $11,563 07/31/1997 $14,286 $15,036 $11,577 08/31/1997 $14,187 $14,894 $11,599 09/30/1997 $14,335 $15,072 $11,628 10/31/1997 $14,432 $15,168 $11,657 11/30/1997 $14,535 $15,258 $11,650 12/31/1997 $14,750 $15,480 $11,636 01/31/1998 $14,902 $15,640 $11,658 02/28/1998 $14,899 $15,645 $11,681 03/31/1998 $14,912 $15,659 $11,703 04/30/1998 $14,890 $15,588 $11,724 05/31/1998 $15,054 $15,834 $11,745 06/30/1998 $15,133 $15,896 $11,759 07/31/1998 $15,164 $15,936 $11,773 08/31/1998 $15,333 $16,183 $11,787 09/30/1998 $15,497 $16,385 $11,801 10/31/1998 $15,466 $16,385 $11,830 11/30/1998 $15,535 $16,443 $11,830 12/31/1998 $15,559 $16,484 $11,823 01/31/1999 $15,699 $16,680 $11,851 02/28/1999 $15,660 $16,606 $11,865 03/31/1999 $15,692 $16,630 $11,901 04/30/1999 $15,742 $16,671 $11,988 05/31/1999 $15,636 $16,575 $11,988 06/30/1999 $15,450 $16,336 $11,988 07/31/1999 $15,483 $16,395 $12,024 08/31/1999 $15,252 $16,264 $12,053 09/30/1999 $15,211 $16,270 $12,110 10/31/1999 $14,920 $16,094 $12,132 11/30/1999 $15,087 $16,265 $12,140 12/31/1999 $14,924 $16,143 $12,140 01/31/2000 $14,805 $16,072 $12,176 02/29/2000 $14,996 $16,258 $12,248 03/31/2000 $15,362 $16,613 $12,348 04/30/2000 $15,271 $16,515 $12,356 05/31/2000 $15,207 $16,429 $12,370 06/30/2000 $15,595 $16,864 $12,435 07/31/2000 $15,809 $17,099 $12,463 08/31/2000 $16,073 $17,362 $12,463 09/30/2000 $16,010 $17,272 $12,528 10/31/2000 $16,151 $17,460 $12,549 11/30/2000 $16,220 $17,593 $12,557 12/31/2000 $16,548 $18,027 $12,549 01/31/2001 $16,688 $18,206 $12,629 02/28/2001 $16,755 $18,264 $12,679 03/31/2001 $16,931 $18,428 $12,708 04/30/2001 $16,742 $18,229 $12,759 05/31/2001 $16,917 $18,426 $12,816 06/30/2001 $17,036 $18,550 $12,838 07/31/2001 $17,320 $18,824 $12,802 08/31/2001 $17,599 $19,135 $12,802 09/30/2001 $17,545 $19,070 $12,860 10/31/2001 $17,745 $19,297 $12,816 11/30/2001 $17,643 $19,135 $12,794 12/31/2001 $17,444 $18,953 $12,744 01/31/2002 $17,742 $19,281 $12,774 02/28/2002 $17,911 $19,512 $12,825 AVERAGE ANNUAL TOTAL RETURN CLASS B 2/28/02 --------------------------------- 1-Year +2.50% Since Inception (2/1/00) +7.83% CLASS B (2/1/00-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ------------------------------------------------------------------------ Date Franklin Lehman Brothers CPI7 Pennsylvania Municipal Bond Tax-Free Income Index7 Fund-Class B ------------------------------------------------------------------------ 02/01/2000 $10,000 $10,000 $10,000 02/29/2000 $10,127 $10,116 $10,059 03/31/2000 $10,370 $10,337 $10,141 04/30/2000 $10,315 $10,276 $10,148 05/31/2000 $10,255 $10,222 $10,160 06/30/2000 $10,512 $10,493 $10,213 07/31/2000 $10,662 $10,639 $10,236 08/31/2000 $10,835 $10,803 $10,236 09/30/2000 $10,787 $10,747 $10,289 10/31/2000 $10,877 $10,864 $10,307 11/30/2000 $10,919 $10,946 $10,313 12/31/2000 $11,135 $11,217 $10,307 01/31/2001 $11,225 $11,328 $10,372 02/28/2001 $11,265 $11,364 $10,413 03/31/2001 $11,377 $11,466 $10,437 04/30/2001 $11,244 $11,342 $10,479 05/31/2001 $11,357 $11,465 $10,526 06/30/2001 $11,442 $11,542 $10,544 07/31/2001 $11,627 $11,712 $10,514 08/31/2001 $11,809 $11,906 $10,514 09/30/2001 $11,767 $11,865 $10,562 10/31/2001 $11,895 $12,006 $10,526 11/30/2001 $11,823 $11,906 $10,508 12/31/2001 $11,683 $11,792 $10,467 01/31/2002 $11,877 $11,996 $10,491 02/28/2002 $11,696 $12,140 $10,533 Past performance does not guarantee future results. 68 PERFORMANCE SUMMARY (CONT.) AVERAGE ANNUAL TOTAL RETURN CLASS C 2/28/02 --------------------------------- 1-Year +4.35% 5-Year +4.76% Since Inception (5/1/95) +5.35% CLASS C (5/1/95-2/28/02) [GRAPHIC OMITTED] EDGAR representation of data points used in printed graphic as follows: ------------------------------------------------------------------------ Date Franklin Lehman Brothers CPI7 Pennsylvania Municipal Bond Tax-Free Income Index7 Fund-Class C ------------------------------------------------------------------------ 05/01/1995 $9,903 $10,000 $10,000 05/31/1995 $10,156 $10,319 $10,020 06/30/1995 $10,115 $10,229 $10,040 07/31/1995 $10,172 $10,326 $10,040 08/31/1995 $10,256 $10,458 $10,066 09/29/1995 $10,322 $10,523 $10,086 10/31/1995 $10,431 $10,676 $10,120 11/30/1995 $10,567 $10,853 $10,112 12/29/1995 $10,671 $10,957 $10,105 01/31/1996 $10,720 $11,041 $10,165 02/29/1996 $10,667 $10,966 $10,198 03/29/1996 $10,571 $10,825 $10,251 04/30/1996 $10,557 $10,795 $10,291 05/31/1996 $10,588 $10,791 $10,310 06/28/1996 $10,672 $10,908 $10,316 07/31/1996 $10,752 $11,006 $10,336 08/30/1996 $10,737 $11,004 $10,356 09/30/1996 $10,869 $11,158 $10,389 10/31/1996 $10,968 $11,284 $10,422 11/29/1996 $11,109 $11,491 $10,442 12/31/1996 $11,094 $11,443 $10,442 01/31/1997 $11,120 $11,464 $10,475 02/28/1997 $11,199 $11,570 $10,508 03/31/1997 $11,088 $11,416 $10,534 04/30/1997 $11,177 $11,512 $10,547 05/31/1997 $11,304 $11,686 $10,540 06/30/1997 $11,410 $11,811 $10,553 07/31/1997 $11,666 $12,138 $10,565 08/31/1997 $11,581 $12,024 $10,586 09/30/1997 $11,694 $12,167 $10,612 10/31/1997 $11,768 $12,245 $10,639 11/30/1997 $11,857 $12,317 $10,632 12/31/1997 $12,026 $12,497 $10,619 01/31/1998 $12,131 $12,626 $10,640 02/28/1998 $12,134 $12,629 $10,660 03/31/1998 $12,139 $12,641 $10,680 04/30/1998 $12,103 $12,584 $10,699 05/31/1998 $12,243 $12,783 $10,719 06/30/1998 $12,301 $12,832 $10,731 07/31/1998 $12,309 $12,865 $10,744 08/31/1998 $12,452 $13,064 $10,757 09/30/1998 $12,567 $13,227 $10,770 10/31/1998 $12,549 $13,227 $10,796 11/30/1998 $12,597 $13,274 $10,796 12/31/1998 $12,611 $13,307 $10,789 01/31/1999 $12,719 $13,465 $10,815 02/28/1999 $12,682 $13,406 $10,828 03/31/1999 $12,712 $13,425 $10,861 04/30/1999 $12,734 $13,458 $10,940 05/31/1999 $12,643 $13,380 $10,940 06/30/1999 $12,488 $13,187 $10,940 07/31/1999 $12,509 $13,235 $10,973 08/31/1999 $12,316 $13,129 $10,999 09/30/1999 $12,277 $13,134 $11,052 10/31/1999 $12,039 $12,992 $11,072 11/30/1999 $12,166 $13,130 $11,079 12/31/1999 $12,030 $13,032 $11,079 01/31/2000 $11,929 $12,974 $11,112 02/29/2000 $12,077 $13,125 $11,177 03/31/2000 $12,364 $13,411 $11,269 04/30/2000 $12,287 $13,332 $11,276 05/31/2000 $12,229 $13,263 $11,289 06/30/2000 $12,533 $13,614 $11,348 07/31/2000 $12,699 $13,803 $11,374 08/31/2000 $12,904 $14,016 $11,374 09/30/2000 $12,849 $13,943 $11,433 10/31/2000 $12,956 $14,095 $11,453 11/30/2000 $13,006 $14,202 $11,460 12/31/2000 $13,262 $14,553 $11,453 01/31/2001 $13,368 $14,697 $11,525 02/28/2001 $13,424 $14,744 $11,571 03/31/2001 $13,543 $14,877 $11,598 04/30/2001 $13,386 $14,716 $11,644 05/31/2001 $13,532 $14,875 $11,696 06/30/2001 $13,620 $14,974 $11,716 07/31/2001 $13,840 $15,196 $11,683 08/31/2001 $14,054 $15,447 $11,683 09/30/2001 $14,005 $15,394 $11,736 10/31/2001 $14,158 $15,578 $11,696 11/30/2001 $14,071 $15,447 $11,676 12/31/2001 $13,907 $15,300 $11,631 01/31/2002 $14,136 $15,565 $11,657 02/28/2002 $14,280 $15,751 $11,704 7. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index includes about 40,000 bonds from across the country. All bonds included have a minimum credit rating of at least Baa and a maturity of at least two years, and have been issued within the last five years as part of a deal of over $50 million. Bonds subject to the alternative minimum tax or with floating or zero coupons are excluded. Bonds will be added and the index will be updated monthly with a one-month lag. Past performance does not guarantee future results. 69 MUNICIPAL BOND RATINGS MOODY'S Aaa: Best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt-edged." Interest payments are protected by a large or exceptionally stable margin, and principal is secure. Although the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: High quality by all standards. Together with the Aaa group, they comprise what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa because margins of protection may not be as large, fluctuation of protective elements may be of greater amplitude, or there may be other elements which make the long-term risks appear larger. A: Possess many favorable investment attributes and are considered upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa: Medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Ba: Contain speculative elements. Often the protection of interest and principal payments may be very moderate and, thereby, not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. 70 Caa: Poor standing. Such issues may be in default, or elements of danger with respect to principal or interest may be present. Ca: Obligations that are highly speculative. Such issues are often in default or have other marked shortcomings. C: Lowest-rated class of bonds. Issues rated C can be regarded as having extremely poor prospects of ever attaining any real investment standing. S&P AAA: The highest rating assigned by S&P to a debt obligation and indicates the ultimate degree of protection as to principal and interest. AA: Also qualify as high-grade obligations, and, in the majority of instances, differ from AAA issues only in a small degree. A: Generally regarded as upper medium-grade. They have considerable investment strength but are not entirely free from adverse effects of changes in economic and trade conditions. Interest and principal are regarded as safe. BBB: Regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, B, CCC, CC: Regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds likely will have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C: Reserved for income bonds on which no interest is being paid. D: In default and payment of interest and/or repayment of principal is in arrears. 71 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN ARIZONA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, -------------------------------------------------- CLASS A 2002 2001 2000C 1999 1998 --------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $10.83 $10.31 $11.38 $11.44 $11.24 -------------------------------------------------- Income from investment operations: Net investment incomea .............................................. .55 .57 .57 .59 .61 Net realized and unrealized gains (losses) .......................... (.06) .52 (1.02) (.01) .29 -------------------------------------------------- Total from investment operations ..................................... .49 1.09 (.45) .58 .90 -------------------------------------------------- Less distributions from: Net investment income ............................................... (.56) (.57) (.58) (.59) (.62) Net realized gains .................................................. -- -- (.04) (.05) (.08) -------------------------------------------------- Total distributions .................................................. (.56) (.57) (.62) (.64) (.70) -------------------------------------------------- Net asset value, end of year ......................................... $10.76 $10.83 $10.31 $11.38 $11.44 ================================================== Total returnb ........................................................ 4.63% 10.80% (4.15)% 5.17% 8.23% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $877,126 $777,553 $756,274 $861,020 $810,250 Ratios to average net assets: Expenses ............................................................ .64% .64% .62% .63% .63% Net investment income ............................................... 5.12% 5.39% 5.30% 5.11% 5.40% Portfolio turnover rate .............................................. 27.59% 24.38% 20.55% 14.11% 20.02% CLASS B ------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $10.86 $10.32 $10.24 ------------------------------ Income from investment operations: Net investment incomea .............................................. .50 .52 .05 Net realized and unrealized gains ................................... (.05) .53 .07 ------------------------------ Total from investment operations ..................................... .45 1.05 .12 ------------------------------ Less distributions from net investment income ........................ (.50) (.51) (.04) ------------------------------ Net asset value, end of year .......................................... $10.81 $10.86 $10.32 ============================== Total returnb ......................................................... 4.22% 10.37% 1.21% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ....................................... $11,798 $3,700 $176 Ratios to average net assets: Expenses ............................................................. 1.19% 1.19% 1.18%d Net investment income ................................................ 4.57% 4.82% 5.26%d Portfolio turnover rate ............................................... 27.59% 24.38% 20.55%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c For the period February 1, 2000 (effective date) to February 29, 2000 for Class B. dAnnualized 72 FRANKLIN TAX-FREE TRUST Financial Highlights (CONTINUED) FRANKLIN ARIZONA TAX-FREE INCOME FUND (CONT.)
YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS C 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................. $10.90 $10.38 $11.45 $11.51 $11.30 ------------------------------------------------ Income from investment operations: Net investment incomea ........................................ .50 .52 .52 .52 .56 Net realized and unrealized gains (losses) .................... (.05) .51 (1.03) (.01) .29 ------------------------------------------------ Total from investment operations ............................... .45 1.03 (.51) .51 .85 ------------------------------------------------ Less distributions from: Net investment income ......................................... (.50) (.51) (.52) (.52) (.56) Net realized gains ............................................ -- -- (.04) (.05) (.08) ------------------------------------------------ Total distributions ............................................ (.50) (.51) (.56) (.57) (.64) ------------------------------------------------ Net asset value, end of year ................................... $10.85 $10.90 $10.38 $11.45 $11.51 ================================================ Total returnb .................................................. 4.21% 10.13% (4.65)% 4.54% 7.67% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................ $31,526 $23,840 $22,671 $23,871 $14,537 Ratios to average net assets: Expenses ...................................................... 1.19% 1.19% 1.18% 1.19% 1.19% Net investment income ......................................... 4.57% 4.84% 4.75% 4.55% 4.82% Portfolio turnover rate ........................................ 27.59% 24.38% 20.55% 14.11% 20.02%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 73 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 99.7% Arizona Capital Facilities Finance Corp. Student Housing Revenue, Arizona State University Project, 6.25%, 9/01/32 ........................................ $ 3,825,000 $ 3,879,583 Arizona Educational Loan Marketing Corp. Revenue, Senior Series, 6.375%, 9/01/05 ............................................ 10,000,000 10,228,000 Series B, 7.00%, 3/01/03 .................................................. 1,000,000 1,013,500 Series B, 7.00%, 3/01/05 .................................................. 1,000,000 1,024,920 Sub Series, 6.625%, 9/01/05 ............................................... 1,000,000 1,023,610 Arizona Health Facilities Authority Hospital System Revenue, Phoenix Baptist Hospital, MBIA Insured, ETM, 6.25%, 9/01/11 ............................... 2,000,000 2,090,680 Arizona Health Facilities Authority Revenue, Catholic Healthcare West, Series A, 6.625%, 7/01/20 ....................................................... 6,390,000 6,635,248 Arizona School Facilities Board Revenue, State School Improvement, 5.00%, 7/01/19 2,000,000 2,035,660 Arizona State Board Regents COP, University of Arizona Main Campus, Series A-1, AMBAC Insured, 5.125%, 6/01/25 ............................................ 2,000,000 2,019,640 Arizona State COP, FSA Insured, 6.625%, 9/01/08 ................................ 5,000,000 5,100,000 Refunding, Series B, AMBAC Insured, 6.25%, 9/01/10 ........................ 5,000,000 5,205,150 Arizona State Municipal Financing Program COP, Dysart School, Series 22, MBIA Insured, ETM, 7.875%, 8/01/05 .............. 1,350,000 1,575,801 Peoria School, Series 19, MBIA Insured, ETM, 7.75%, 8/01/04 ............... 500,000 564,910 Series 20, MBIA Insured, ETM, 7.625%, 8/01/06 ............................. 3,250,000 3,740,620 Series 25, MBIA Insured, 7.875%, 8/01/14 .................................. 500,000 661,880 Arizona State University COP, Downtown Campus/Mercado Project, Series A, MBIA Insured, 5.80%, 7/01/24 .................................................. 1,350,000 1,410,710 Arizona State University Revenue, FGIC Insured, 5.875%, 7/01/25 ................ 1,000,000 1,073,340 Arizona State Wastewater Management Authority Wastewater Treatment Financial Assistance Revenue, Pre-Refunded, 6.80%, 7/01/11 .......................... 4,000,000 4,150,720 Arizona Student Loan Acquisition Authority Student Loan Revenue, junior subordinate, Refunding, Series B-1, 6.15%, 5/01/29 ................. 1,000,000 1,038,990 Refunding, Senior Series A-1, 5.90%, 5/01/24 .............................. 1,500,000 1,561,455 Arizona Water Infrastructure Finance Authority Revenue, Water Quality, Series A, 5.05%, 10/01/20 ................................................. 1,890,000 1,920,051 Casa Grande Excise Tax Revenue, FGIC Insured, 6.00%, 4/01/10 ............................................................ 400,000 427,256 6.20%, 4/01/15 ............................................................ 930,000 1,001,945 Casa Grande IDA, IDR, Frito Lay/PepsiCo, 6.65%, 12/01/14 ................................... 500,000 523,665 PCR, Frito Lay/PepsiCo, 6.60%, 12/01/10 ................................... 1,800,000 1,886,310 Chandler GO, FGIC Insured, Pre-Refunded, 6.80%, 7/01/13 ............................................................ 1,750,000 1,948,678 6.85%, 7/01/14 ............................................................ 1,625,000 1,811,323 Chandler IDA, MFHR, Hacienda Apartments Project, Refunding, Series A, GNMA Secured, 6.05%, 7/20/30 ............................................................ 4,055,000 4,143,805 Chandler Street and Highway Revenue, MBIA Insured, Pre-Refunded, 6.85%, 7/01/13 1,250,000 1,393,325 Chandler Water and Sewer Revenue, Refunding, FGIC Insured, 6.25%, 7/01/13 ..... 2,165,000 2,238,264 Coconino County PCR, Arizona Public Service Co., Refunding, Series A, MBIA Insured, 5.875%, 8/15/28 5,275,000 5,599,624 Nevada Power Co., 6.375%, 10/01/36 ........................................ 4,000,000 4,011,440 Nevada Power Co., Series B, 5.80%, 11/01/32 ............................... 6,500,000 6,077,175 Douglas Community Housing Corp. MFR, Rancho La Perilla, Series A, GNMA Secured, 6.125%, 7/20/41 ........................................................... 2,265,000 2,371,591 Eloy Municipal Property Corp. Facilities Revenue, 7.80%, 7/01/09 .............. 640,000 651,533 Gila County IDAR, Asarco Inc., Refunding, 5.55%, 1/01/27 ...................... 45,900,000 14,688,000 Gilbert ID No. 11, Special Assessment, FGIC Insured, 7.60%, 1/01/05 ........... 1,500,000 1,534,860 Gilbert Water and Sewer Revenue, Refunding, FGIC Insured, 6.50%, 7/01/12 ................................................................... 1,500,000 1,639,710 7/01/22 ................................................................... 3,250,000 3,551,145 Glendale IDA, Educational Facilities Revenue, American Graduate School International, Connie Lee Insured, Pre-Refunded, 7.00%, 7/01/14 .......................... 1,000,000 1,144,860 Connie Lee Insured, Pre-Refunded, 7.125%, 7/01/20 ......................... 1,250,000 1,436,000 Refunding, Connie Lee Insured, 5.875%, 7/01/15 ............................ 2,200,000 2,349,006 Glendale IDAR, Midwestern University, Series A, 5.375%, 5/15/28 ........................................................... 15,000,000 14,904,900 Connie Lee Insured, 6.00%, 5/15/16 ........................................ 455,000 499,535 Connie Lee Insured, 6.00%, 5/15/26 ........................................ 340,000 368,040 MBIA Insured, 5.375%, 5/15/28 ............................................. 2,000,000 2,052,460 Pre-Refunded, 6.00%, 5/15/16 .............................................. 1,485,000 1,687,391 Pre-Refunded, 6.00%, 5/15/26 .............................................. 1,660,000 1,886,241
74 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Goodyear Community Facilities General District No. 1 GO, MBIA Insured, 5.20%, 7/15/25 $ 1,500,000 $ 1,523,235 Goodyear Community Facilities Utilities District No. 1 GO, MBIA Insured, 5.20%, 7/15/25 1,000,000 1,015,490 Guam Power Authority Revenue, Series A, Pre-Refunded, 6.30%, 10/01/12 .................................................................. 3,630,000 3,804,059 10/01/22 .................................................................. 4,000,000 4,194,200 Lake Havasu City Wastewater COP, FGIC Insured, 7.00%, 6/01/05 ................. 2,235,000 2,273,219 Marana Municipal Property Corp. Municipal Facilities Revenue, Refunding, MBIA Insured, 5.25%, 7/01/22 ............................................................ 1,100,000 1,125,971 Maricopa County COP, 6.00%, 6/01/04 ........................................... 6,160,000 6,276,732 Maricopa County GO, School District No. 8, Osborn, Refunding, Series A, FGIC Insured, 5.875%, 7/01/14 1,410,000 1,515,313 School District No. 8, Osborn, Series A, FGIC Insured, Pre-Refunded, 5.875%, 7/01/14 1,000,000 1,125,660 School District No. 11, Peoria Unified, AMBAC Insured, Pre-Refunded, 6.10%, 7/01/10 2,980,000 3,271,355 School District No. 11, Peoria Unified, Refunding, AMBAC Insured, 6.10%, 7/01/10 4,020,000 4,271,330 School District No. 28, Kyrene Elementary, Series B, FGIC Insured, 6.00%, 7/01/14 2,500,000 2,715,025 School District No. 31, Series A, AMBAC Insured, Pre-Refunded, 6.20%, 7/01/13 570,000 627,011 USD No. 41, Gilbert, 6.25%, 7/01/15 ....................................... 160,000 173,598 USD No. 41, Gilbert, Pre-Refunded, 6.25%, 7/01/15 ......................... 1,840,000 2,113,406 USD No. 65, Littleton School Improvement, Series B, FGIC Insured, 6.40%, 7/01/14 1,175,000 1,286,637 USD No. 69, Paradise Valley, Series A, Pre-Refunded, 7.10%, 7/01/05 ....... 1,000,000 1,099,890 USD No. 80, Chandler, FGIC Insured, Pre-Refunded, 6.00%, 7/01/13 .......... 1,600,000 1,781,264 Maricopa County Hospital Revenue, Sun Health Corp., 5.30%, 4/01/29 ............................................................ 15,595,000 13,821,537 Refunding, 5.80%, 4/01/08 ................................................. 3,870,000 4,057,076 Refunding, 5.90%, 4/01/09 ................................................. 2,120,000 2,228,523 Refunding, 6.125%, 4/01/18 ................................................ 15,650,000 15,823,402 Maricopa County IDA, Health Facilities Revenue, Catholic Healthcare West Project, Refunding, Series A, 5.00%, 7/01/16 ....................................... 13,100,000 11,943,925 Health Facilities Revenue, Catholic Healthcare West Project, Refunding, Series A, 5.00%, 7/01/21 ....................................................... 17,600,000 15,298,272 Hospital Facility Revenue, Mayo Clinic Hospital, 5.25%, 11/15/37 .......... 18,000,000 17,883,540 Hospital Facility Revenue, Mayo Clinic Hospital, AMBAC Insured, 5.25%, 11/15/37 3,000,000 3,019,620 Hospital Facility Revenue, Samaritan Health Services, Refunding, Series A, MBIA Insured, ETM, 7.00%, 12/01/16 ................................................. 1,890,000 2,339,196 IDR, Citizens Utilities Co. Project, 6.20%, 5/01/30 ....................... 5,000,000 4,678,700 MFHR, Bay Club at Mesa Cove Project, Series A, MBIA Insured, 5.80%, 9/01/35 3,000,000 3,104,850 MFHR, Madera Pointe Apartments Project, Refunding, FSA Insured, 5.90%, 6/01/26 2,105,000 2,177,917 MFHR, Metro Gardens, Mesa Ridge Project, Series A, MBIA Insured, 5.15%, 7/01/29 2,350,000 2,353,267 MFHR, Senior National Health Facilities II, Project A, FSA Insured, 5.50%, 1/01/18 2,000,000 2,099,340 MFHR, Tierra Antigua Project, Series A-1, AMBAC Insured, 5.30%, 12/01/21 .. 1,585,000 1,587,251 MFHR, Villas De Merced Apartment Project, Series A, GNMA Secured, 5.50%, 12/20/37 570,000 571,750 MFHR, Western Groves Apartments, Series A-1, AMBAC Insured, 5.30%, 12/01/22 1,785,000 1,786,196 Maricopa County IDAR, SFMR, GNMA Secured, 6.25%, 12/01/30 ..................... 635,000 667,753 Maricopa County School District No. 3 GO, Tempe Elementary, AMBAC Insured, Pre-Refunded, 6.00%, 7/01/13 ............................... 255,000 281,783 Refunding, AMBAC Insured, 6.00%, 7/01/13 .................................. 445,000 486,923 Mesa IDAR, Discovery Health System, Series A, MBIA Insured, 5.75%, 1/01/25 ............................................................ 41,500,000 43,725,645 5.625%, 1/01/29 ........................................................... 18,000,000 18,754,200 Mesa Street and Highway Revenue, FSA Insured, 5.00%, 7/01/19 .................. 2,500,000 2,528,850 Mesa Utility System Revenue, FGIC Insured, 5.00%, 7/01/21 ..................... 10,750,000 10,852,985 Mohave County Hospital District No. 1 GO, Kingman Regional Medical Center Project, FGIC Insured, Pre-Refunded, 6.50%, 6/01/15 ................................ 2,110,000 2,153,044 Mohave County IDA, Health Care Revenue, Refunding, GNMA Secured, 6.375%, 11/01/31 ............ 1,585,000 1,689,008 IDR, Citizens Utilities Co. Project, 6.60%, 5/01/29 ....................... 4,100,000 4,043,502 Navajo County PCR, Arizona Public Service Co., Refunding, Series A, 5.875%, 8/15/28 54,500,000 54,995,405 Northern Arizona University System Revenue, Refunding, FGIC Insured, 6.40%, 6/01/07 2,750,000 2,811,023 Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.60%, 3/15/28 ............................................................ 8,595,000 8,541,883 Oro Valley Municipal Property Corp. Revenue, Municipal Water System, MBIA Insured, 5.75%, 7/01/17 ............................................................ 500,000 527,585 Peoria Municipal Development Authority Water and Sewer Revenue, Refunding, FGIC Insured, 6.625%, 7/01/06 .................................................. 240,000 243,638 Peoria Water and Sewer Revenue, FGIC Insured, 5.00%, 7/01/19 .................. 1,300,000 1,315,002
75 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Phoenix Airport Revenue, Refunding, Series B, MBIA Insured, 6.20%, 7/01/10 ......................... $ 700,000 $ 762,083 Refunding, Series C, MBIA Insured, 6.30%, 7/01/10 ......................... 1,680,000 1,824,413 Refunding, Series C, MBIA Insured, 6.40%, 7/01/11 ......................... 1,785,000 1,942,383 Refunding, Series C, MBIA Insured, 6.40%, 7/01/12 ......................... 570,000 620,257 Series D, MBIA Insured, 6.30%, 7/01/10 .................................... 1,800,000 1,954,728 Series D, MBIA Insured, 6.40%, 7/01/11 .................................... 3,825,000 4,162,250 Series D, MBIA Insured, 6.40%, 7/01/12 .................................... 820,000 892,299 Phoenix Civic Improvement Corp. Excise Tax Revenue, Adams Street Garage Project, senior lien, Series B, 5.35%, 7/01/24 ........ 2,985,000 3,061,326 Municipal Courthouse Project, senior lien, Series A, 5.375%, 7/01/29 ...... 18,310,000 18,733,877 Phoenix Civic Improvement Corp. Municipal Facilities Excise Tax Revenue, MBIA Insured, Pre-Refunded, 6.90%, 7/01/21 ..................................... 2,000,000 2,250,580 Phoenix Civic Improvement Corp. Wastewater System Revenue, junior lien, FGIC Insured, 6.00%, 7/01/19 .............................................. 3,000,000 3,477,210 FGIC Insured, 6.00%, 7/01/20 .............................................. 3,670,000 4,253,787 FGIC Insured, 6.00%, 7/01/24 .............................................. 24,715,000 28,646,415 Refunding, FGIC Insured, 5.00%, 7/01/20 ................................... 9,710,000 9,810,304 Refunding, FGIC Insured, 5.125%, 7/01/21 .................................. 10,000,000 10,188,600 Refunding, FGIC Insured, 5.00%, 7/01/24 ................................... 7,050,000 7,059,941 Phoenix Civic Improvement Corp. Water System Revenue, Pre-Refunded, 5.95%, 7/01/16 ............................................................ 3,665,000 4,104,763 6.00%, 7/01/19 ............................................................ 3,000,000 3,366,030 Phoenix Civic Plaza Building Corp. Revenue, 6.00%, 7/01/14 .................... 4,300,000 4,673,885 Phoenix GO, 5.25%, 7/01/22 ............................................................ 5,420,000 5,591,272 Refunding, 6.375%, 7/01/13 ................................................ 5,000,000 5,169,550 Phoenix HFC, Mortgage Revenue, Project A, Refunding, MBIA Insured, 6.50%, 7/01/24 ........................ 2,725,000 2,761,788 Section 8 Project, Refunding, Series A, MBIA Insured, 6.90%, 1/01/23 ...... 1,750,000 1,772,575 Section 8 Project, Refunding, Series A, MBIA Insured, 7.25%, 1/01/23 ...... 2,260,000 2,284,272 Phoenix IDA, Government Office Lease Revenue, Capital Mall Project, AMBAC Insured, 5.375%, 9/15/22 2,000,000 2,069,760 Government Office Lease Revenue, Capital Mall Project, AMBAC Insured, 5.50%, 9/15/27 24,300,000 25,185,978 Government Office Lease Revenue, Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/21 ....................................................... 4,300,000 4,343,860 Government Office Lease Revenue, Capitol Mall LLC II Project, AMBAC Insured, 5.00%, 9/15/28 ....................................................... 4,000,000 3,988,280 Hospital Revenue, Refunding, Series B, Connie Lee Insured, 5.75%, 12/01/16 3,500,000 3,756,480 SFMR, FNMA Insured, 6.30%, 12/01/12 ....................................... 460,000 485,190 Phoenix IDAR, SFMR, Series 1B, FNMA Insured, 6.20%, 6/01/22 ................... 420,000 441,399 Phoenix Municipal Housing Revenue, Fillmore Gardens Project, Refunding, 6.30%, 6/01/09 1,500,000 1,599,810 Phoenix Street and Highway Revenue, ETM, 6.80%, 7/01/03 ....................................................... 1,000,000 1,067,320 Refunding, 6.60%, 7/01/07 ................................................. 5,000,000 5,152,750 Pima County IDA, Health Care Corp. Revenue, Carondelet St. Joseph's and St. Mary's Hospital, BIG Insured, 8.00%, 7/01/13 ............................................... 65,000 65,280 Health Care Corp. Revenue, Carondelet St. Joseph's and St. Mary's Hospital, MBIA Insured, 6.75%, 7/01/10 .............................................. 2,250,000 2,302,650 MFR, Fountaine Village Apartments, GNMA Secured, 5.55%, 12/20/20 .......... 625,000 647,956 MFR, Series A, FNMA Insured, 6.00%, 12/01/21 .............................. 2,720,000 2,862,637 SFMR, GNMA Secured, 6.40%, 11/01/09 ....................................... 605,000 634,330 SFMR, GNMA Secured, 6.625%, 11/01/14 ...................................... 405,000 423,249 SFMR, GNMA Secured, 6.75%, 11/01/27 ....................................... 2,695,000 2,805,252 SFMR, Refunding, Series A, 7.625%, 2/01/12 ................................ 1,605,000 1,619,638 SFMR, Series B-1, GNMA Secured, 6.10%, 5/01/31 ............................ 885,000 913,718 Pinal County USD No. 43, GO, Apache Junction Improvement, Refunding, Series A, FGIC Insured, 5.85%, 7/01/15 2,500,000 2,811,925 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured, Pre-Refunded, 9.00%, 7/01/09 65,000 75,717 Puerto Rico Commonwealth GO, MBIA Insured, Pre-Refunded, 6.45%, 7/01/17 ....... 845,000 943,426 Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series B, 6.00%, 7/01/26 .................................................. 2,000,000 2,107,460 Series B, 6.00%, 7/01/39 .................................................. 19,600,000 22,916,320
76 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Puerto Rico Commonwealth Highway and Transportation Authority Revenue, (cont.) Series D, 5.375%, 7/01/36 ................................................. $ 5,000,000 $ 5,052,900 Series Y, 5.00%, 7/01/36 .................................................. 10,000,000 9,774,600 Series Y, 5.50%, 7/01/36 .................................................. 7,450,000 7,718,945 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.75%, 7/01/08 ............................................................ 1,550,000 1,556,045 7.50%, 7/01/09 ............................................................ 335,000 336,206 Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 . 28,395,000 28,416,864 Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ................................ 1,050,000 1,051,512 Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 .... 40,000 47,564 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Financing Authority Hospital Revenue, Dr. Pila Hospital, Refunding, 5.875%, 8/01/12 ............................. 5,225,000 5,506,419 Hospital Auxilio Mutuo Obligation, Series A, MBIA Insured, 6.25%, 7/01/24 . 2,790,000 3,047,294 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.375%, 7/01/33 ........................................................... 20,000,000 20,211,600 5.25%, 7/01/27 ............................................................ 6,550,000 6,575,414 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E, 5.50%, 8/01/29 ............................................................ 15,000,000 15,320,850 Salt River Project Agricultural Improvement and Power District Electric System Revenue, Refunding, Series A, 5.75%, 1/01/13 ....................................... 2,435,000 2,555,484 Series A, 6.00%, 1/01/31 .................................................. 2,325,000 2,331,626 Series A, MBIA Insured, 6.00%, 1/01/31 .................................... 1,185,000 1,188,437 Series C, 6.20%, 1/01/12 .................................................. 3,340,000 3,411,276 Series C, 6.25%, 1/01/19 .................................................. 5,685,000 5,806,261 Series C, 5.00%, 1/01/25 .................................................. 2,040,000 2,040,102 Series D, 6.25%, 1/01/27 .................................................. 4,270,000 4,361,036 aSalt River Project Arizona Agriculture Improvement and Power District Electric Systems Revenue, Salt River Project, Refunding, Series A, 5.125%, 1/01/27 . 15,000,000 15,091,800 Santa Cruz County IDAR, Citizens Utilities Co. Project, 6.60%, 5/01/29 ........ 8,000,000 7,889,760 Scottsdale GO, 5.00%, 7/01/24 ............................................................ 8,225,000 8,191,524 Refunding, 5.00%, 7/01/22 ................................................. 4,000,000 4,002,920 Scottsdale IDA, Hospital Revenue, Scottsdale Healthcare, 5.70%, 12/01/21 .................................... 2,000,000 2,001,400 Scottsdale Healthcare, 5.80%, 12/01/31 .................................... 14,865,000 14,875,257 Scottsdale Memorial Hospital, Refunding, Series A, AMBAC Insured, 5.70%, 9/01/15 1,250,000 1,296,700 Sedona Sewer Sales Tax Revenue, Refunding, 6.75%, 7/01/07 ............................................................ 3,800,000 4,078,844 7.00%, 7/01/12 ............................................................ 5,000,000 5,310,550 Sierra Vista Municipal Property Corp. Facilities Revenue, AMBAC Insured, 6.15%, 1/01/15 360,000 387,961 Surprise Municipal Property Corp. Excise Tax Revenue, FGIC Insured, 5.70%, 7/01/20 8,000,000 8,490,960 Tolleson IDA, MFR, Copper Cove Project, Series A, GNMA Secured, 5.40%, 11/20/22 ........................................................... 1,090,000 1,115,375 5.45%, 11/20/32 ........................................................... 1,285,000 1,307,834 Tucson Apartment Authority Inc. Revenue, Series B, AMBAC Insured, 5.00%, 6/01/20 ................................... 3,450,000 3,425,264 sub lien, AMBAC Insured, 5.35%, 6/01/31 ................................... 10,000,000 10,100,800 Tucson GO, Series 1984-G, FGIC Insured, Pre-Refunded, 6.25%, 7/01/18 ................. 650,000 715,748 Series A, 5.25%, 7/01/20 .................................................. 1,050,000 1,072,953 Tucson Water Revenue, Series A, FGIC Insured, 5.00%, 7/01/23 .................................... 3,600,000 3,613,068 Series D, FGIC Insured, 5.25%, 7/01/23 .................................... 3,000,000 3,054,510 Series D, FGIC Insured, 5.25%, 7/01/24 .................................... 2,700,000 2,744,064 University of Arizona COP, Administrative and Packaging Facility Project, Series B, MBIA Insured, 6.00%, 7/15/16 500,000 546,745 Administrative and Packaging Facility Project, Series B, MBIA Insured, 6.00%, 7/15/23 1,625,000 1,768,665 Parking and Student Housing, AMBAC Insured, 5.75%, 6/01/24 ................ 1,115,000 1,173,470
77 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) University of Arizona COP, (cont.) Residence Life Project, Series A, FSA Insured, 5.80%, 9/01/13 ............. $ 1,000,000 $ 1,080,200 University of Arizona Projects, Series B, AMBAC Insured, 5.125%, 6/01/22 .. 2,250,000 2,290,208 University of Arizona System Revenue, Pre-Refunded, 6.25%, 6/01/11 ............................................................ 1,000,000 1,106,310 6.35%, 6/01/14 ............................................................ 1,300,000 1,441,024 University of Arizona University Revenues, Arizona Board of Regents System, Series A, FGIC Insured, 5.80%, 6/01/24 .................................... 2,000,000 2,104,080 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/13 .................................................................. 2,500,000 2,625,950 10/01/22 .................................................................. 3,750,000 3,772,725 Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%, 7/01/18 2,475,000 2,445,522 Virgin Islands Water and Power Authority Water System Revenue, Refunding, 5.50%, 7/01/17 1,500,000 1,493,730 Yavapai County GO, Elementary School District No. 6 Cottonwood-Oak Creek, Project of 1993, Series B, AMBAC Insured, 6.70%, 7/01/09 ................................... 250,000 274,403 USD No. 28 Camp Verde, Refunding, FGIC Insured, 6.00%, 7/01/09 ............ 775,000 848,570 Yavapai County IDA, IDR, Citizens Utilities Co. Project, 5.45%, 6/01/33 ....................... 6,000,000 4,963,799 Residential Care Facility Revenue, Margaret T. Morris Center, Series A, GNMA Secured, 5.40%, 2/20/38 .............................................. 1,575,000 1,579,378 Yuma IDA, Hospital Revenue, Regency Apartments, Refunding, Series A, GNMA Secured, 5.50%, 12/20/32 .... 920,000 925,823 Yuma Regional Medical Center, FSA Insured, 5.50%, 8/01/21 ................. 2,015,000 2,094,209 Yuma Municipal Property Corp. Revenue, Municipal Facilities, AMBAC Insured, 5.00%, 7/01/25 3,100,000 3,101,859 ------------ TOTAL LONG TERM INVESTMENTS (COST $914,708,727) ............................... 917,667,906 ------------ bSHORT TERM INVESTMENTS .7% Apache County IDA, IDR, Tucson Electric Power Co. Project, Springerville Project, Series C, Weekly VRDN and Put, 1.15%, 12/15/18 ............................ 150,000 150,000 Pinal County IDA, PCR, Magma-Copper Co., Newmont Mining Corp., Daily VRDN and Put, 1.30%, 12/01/09 ...................................................... 5,500,000 5,500,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 400,000 400,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $6,050,000) ................................ 6,050,000 ------------ TOTAL INVESTMENTS (COST $920,758,727) 100.4% .................................. 923,717,906 OTHER ASSETS, LESS LIABILITIES (.4)% .......................................... (3,267,924) ------------ NET ASSETS 100.0% ............................................................. $920,449,982 ============
See glossary of terms on page 137. a Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. b Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 78 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN COLORADO TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, --------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $11.64 $10.90 $12.05 $12.11 $11.80 --------------------------------------------------- Income from investment operations: Net investment incomea ......................................... .58 .59 .59 .60 .63 Net realized and unrealized gains (losses) ..................... .16 .74 (1.13) .02 .39 --------------------------------------------------- Total from investment operations ................................ .74 1.33 (.54) .62 1.02 --------------------------------------------------- Less distributions from: Net investment income .......................................... (.59) (.59) (.60) (.60) (.64) Net realized gains ............................................. -- -- (.01) (.08) (.07) --------------------------------------------------- Total distributions ............................................. (.59) (.59) (.61) (.68) (.71) --------------------------------------------------- Net asset value, end of year .................................... $11.79 $11.64 $10.90 $12.05 $12.11 --------------------------------------------------- Total returnb ................................................... 6.48% 12.50% (4.57)% 5.24% 8.86% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $309,109 $285,169 $264,563 $301,381 $266,599 Ratios to average net assets: Expenses ....................................................... .70% .71% .70% .70% .71% Net investment income .......................................... 4.95% 5.27% 5.18% 4.93% 5.28% Portfolio turnover rate ......................................... 20.72% 50.05% 29.30% 12.60% 22.97% CLASS C ---------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $11.70 $10.96 $12.11 $12.17 $11.84 --------------------------------------------------- Income from investment operations: Net investment incomea ......................................... .52 .54 .53 .54 .57 Net realized and unrealized gains (losses) ..................... .16 .73 (1.14) .02 .40 --------------------------------------------------- Total from investment operations ................................ .68 1.27 (.61) .56 .97 --------------------------------------------------- Less distributions from: Net investment income .......................................... (.52) (.53) (.53) (.54) (.57) Net realized gains ............................................. -- -- (.01) (.08) (.07) --------------------------------------------------- Total distributions ............................................. (.52) (.53) (.54) (.62) (.64) --------------------------------------------------- Net asset value, end of year .................................... $11.86 $11.70 $10.96 $12.11 $12.17 --------------------------------------------------- Total returnb ................................................... 5.95% 11.83% (5.08)% 4.63% 8.39% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $34,473 $23,450 $20,564 $21,899 $10,855 Ratios to average net assets: Expenses ....................................................... 1.25% 1.26% 1.25% 1.26% 1.27% Net investment income .......................................... 4.40% 4.72% 4.63% 4.38% 4.72% Portfolio turnover rate ......................................... 20.72% 50.05% 29.30% 12.60% 22.97%
aBased on average shares outstanding effective year ended February 29, 2000. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 79 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.1% Arapahoe County Capital Improvement Transportation Fund Highway Revenue, Vehicle Registration, Series A, MBIA Insured, Pre-Refunded, 6.15%, 8/31/26 ........ $ 3,000,000 $ 3,422,190 Arapahoe County COP, Refunding, FSA Insured, 6.625%, 12/01/16 ................. 805,000 840,871 Arapahoe County MFR, Centennial East Project, Series A-1, AMBAC Insured, 5.95%, 12/01/33 ....... 2,820,000 2,873,524 Housing Development Reserve, South Creek Project, Series A, FSA Insured, 6.45%, 6/01/32 3,120,000 3,316,030 Arvada IDR, Wanco Inc. Project, 5.25%, 12/01/07 ........................................................... 100,000 105,664 5.80%, 12/01/17 ........................................................... 480,000 495,048 Arvada MFHR, Springwood Community Project, Refunding, 6.35%, 8/20/16 .......... 1,000,000 1,036,630 Aurora COP, AMBAC Insured, 5.50%, 12/01/30 ............................................ 4,935,000 5,114,634 Refunding, 6.25%, 12/01/09 ................................................ 2,850,000 3,132,977 Bayfield School District No. 10 GO, MBIA Insured, Pre-Refunded, 6.65%, 6/01/15 1,000,000 1,121,000 Boulder County Hospital Revenue, Longmont United Hospital Project, 5.50%, 12/01/12 ........................................................... 1,000,000 1,003,660 5.80%, 12/01/13 ........................................................... 2,000,000 2,011,340 5.60%, 12/01/17 ........................................................... 3,385,000 3,315,404 5.875%, 12/01/20 .......................................................... 1,285,000 1,269,773 Boulder County MFHR, Cloverbasin Village II Apartments, Series A, FSA Insured, 6.10%, 10/01/24 ........................................................... 1,280,000 1,327,782 6.15%, 10/01/31 ........................................................... 2,830,000 2,947,870 Broomfield COP, AMBAC Insured, 6.00%, 12/01/29 ............................................ 2,000,000 2,161,500 Master Facilities Lease Purchase, AMBAC Insured, 5.625%, 12/01/22 ......... 1,535,000 1,608,849 Broomfield Sales and Use Tax Revenue, Refunding and Improvement, Series A, AMBAC Insured, 5.00%, 12/01/27 .................................................. 10,000,000 9,927,600 Broomfield Sewer Activity Enterprise Sewer and Wastewater Revenue, AMBAC Insured, 5.00%, 12/01/31 ........................................................... 7,500,000 7,362,750 Colorado Educational and Cultural Facilities Authority Revenue, University of Denver Project, Series A, MBIA Insured, 5.00%, 3/01/24 .................... 1,750,000 1,738,450 Colorado Educational and Cultural Facilities Authority Revenue and Improvement, University of Denver Project, Refunding, AMBAC Insured, 5.375%, 3/01/23 ... 4,000,000 4,119,200 Colorado Health Facilities Authority Revenue, Birchwood Manor Project, Series A, GNMA Secured, 7.625%, 4/01/26 .......... 1,615,000 1,616,599 Catholic Health Initiatives, Series A, 5.00%, 12/01/28 .................... 1,800,000 1,715,706 Community Provider Pooled Loan Program, FSA Insured, 6.75%, 7/15/17 ....... 954,000 975,942 Community Provider Pooled Loan Program, Series A, FSA Insured, 7.25%, 7/15/17 1,685,000 1,724,261 Covenant Retirement Communities, 6.75%, 12/01/15 .......................... 1,750,000 1,859,340 Covenant Retirement Communities, 6.75%, 12/01/25 .......................... 4,950,000 5,195,867 GNMA Secured, Series A, 5.70%, 12/20/31 ................................... 2,820,000 2,920,928 Hospital Improvement, NCMC Inc. Project, FSA Insured, 5.75%, 5/15/24 ...... 5,000,000 5,262,900 Kaiser Permanente, Series A, 5.35%, 11/01/16 .............................. 8,000,000 8,095,760 Mercy Medical Center Durango, 6.20%, 11/15/15 ............................. 1,250,000 1,288,763 National Benevolent Association, Refunding, Series A, 5.20%, 1/01/18 ...... 700,000 601,594 National Benevolent Association, Refunding, Series A, 5.25%, 1/01/27 ...... 1,180,000 979,813 National Benevolent Association, Series B, 5.25%, 2/01/28 ................. 2,500,000 2,073,050 National Benevolent Association, Series C, 7.00%, 3/01/24 ................. 1,185,000 1,236,311 National Benevolent Association, Series C, 7.125%, 3/01/30 ................ 1,295,000 1,353,016 Oakbrook Manor, Series A, GNMA Secured, 7.25%, 4/01/11 .................... 295,000 296,755 Oakbrook Manor, Series A, GNMA Secured, 7.625%, 4/01/26 ................... 885,000 885,876 Parkview Medical Center Inc. Project, 5.25%, 9/01/18 ...................... 1,660,000 1,585,931 Parkview Medical Center Inc. Project, 5.30%, 9/01/25 ...................... 1,615,000 1,518,019 Portercare Adventist Health, 6.625%, 11/15/26 ............................. 2,500,000 2,675,000 Portercare Adventist Health, 6.50%, 11/15/31 .............................. 5,500,000 5,834,455 Sisters of Charity Leavenworth, 5.00%, 12/01/25 ........................... 1,000,000 978,160 Colorado HFAR, MF, Series A, Pre-Refunded, 6.80%, 8/01/14 ................................ 3,030,000 3,157,169 MF, Series A, Pre-Refunded, 6.85%, 8/01/24 ................................ 5,650,000 5,888,261 MF, Series A, Pre-Refunded, 6.875%, 8/01/30 ............................... 1,250,000 1,302,838
80 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Colorado HFAR, (cont.) MF, Series A-2, 6.00%, 10/01/28 ........................................... $ 1,000,000 $ 1,036,620 MFH, Castle High, Series A, AMBAC Insured, 5.90%, 12/01/20 ................ 2,630,000 2,740,855 MFH, Insured Mortgage, Series C-3, 6.05%, 10/01/32 ........................ 1,535,000 1,592,394 Multi Family Project II-A-2, 5.30%, 10/01/23 .............................. 2,000,000 2,002,460 Project II-A-2, 5.375%, 10/01/32 .......................................... 4,390,000 4,389,824 Colorado Public Highway Authority Revenue, Highway E-470, Refunding, Series A, MBIA Insured, 5.00%, 9/01/26 ......................... 10,000,000 9,902,400 Series A, MBIA Insured, 5.75%, 9/01/29 .................................... 4,575,000 4,910,348 Series A, MBIA Insured, 5.75%, 9/01/35 .................................... 10,825,000 11,463,242 Colorado Springs Hospital Revenue, Refunding, 6.375%, 12/15/30 ................ 7,500,000 7,806,225 Colorado Springs Utilities Revenue, Refunding and Improvement, Series A, 5.375%, 11/15/26 10,000,000 10,163,300 Colorado State Board of Community Colleges and Occupational Education Revenue, Red Rocks Community College Project, AMBAC Insured, Pre-Refunded, 6.00%, 11/01/19 90,000 100,202 Colorado Water Resource and Power Development Authority Clean Water Revenue, Series A, 6.15%, 9/01/11 ............................................................ 1,765,000 1,841,540 6.30%, 9/01/14 ............................................................ 25,000 26,032 Pre-Refunded, 6.30%, 9/01/14 .............................................. 975,000 1,018,202 Colorado Water Resource and Power Development Authority Small Water Resource Revenue, Series A, FGIC Insured, 6.70%, 11/01/12 ........................................................... 750,000 774,068 5.80%, 11/01/20 ........................................................... 2,000,000 2,143,080 Denver City and County Airport Revenue, Refunding, Series A, 5.00%, 11/15/25 ...................................... 12,000,000 11,626,680 Series A, 7.50%, 11/15/23 ................................................. 3,315,000 3,594,090 Series A, AMBAC Insured, 5.625%, 11/15/23 ................................. 4,500,000 4,638,375 Series A, Pre-Refunded, 7.50%, 11/15/12 ................................... 3,000,000 3,188,190 Series A, Pre-Refunded, 7.50%, 11/15/23 ................................... 685,000 789,415 Series B, FSA Insured, 5.00%, 11/15/25 .................................... 4,750,000 4,652,768 Series D, 7.75%, 11/15/13 ................................................. 1,000,000 1,230,160 Denver City and County COP, Series B, AMBAC Insured, 5.50%, 12/01/25 .......... 17,000,000 17,568,140 Denver City and County Revenue, Children's Hospital Association Project, FGIC Insured, 6.00%, 10/01/15 ............................................. 3,150,000 3,393,779 Denver City and County Special Facilities Airport Revenue, United Airlines Inc. Project, Series A, 6.875%, 10/01/32 ....................................... 5,000,000 2,925,300 Denver Health and Hospital Authority Healthcare Revenue, Series A, 6.00%, 12/01/23 .................................................................. 1,000,000 1,009,430 12/01/31 .................................................................. 1,200,000 1,205,136 Dolores County School District GO, FSA Insured, 5.375%, 12/01/25 .............. 1,400,000 1,430,716 Douglas County School District No. 1 GO, Douglas and Elbert Counties, Improvement, Series A, MBIA Insured, 6.50%, 12/15/16 ................................... 230,000 254,969 El Paso County School District No. 2 Harrison GO, FGIC Insured, 5.25%, 12/01/26 4,000,000 4,054,480 El Paso County School District No. 38 GO, 6.00%, 12/01/24 ..................... 1,500,000 1,734,885 Fort Collins PCR, Anheuser-Busch Co. Project, Refunding, 6.00%, 9/01/31 ....... 5,325,000 5,546,733 Frisco Fire Protection District GO, Refunding and Improvement, 7.20%, 12/01/05 30,000 30,339 Garfield County Building Corp. COP, AMBAC Insured, 5.75%, 12/01/19 .................................................................. 1,500,000 1,596,210 12/01/24 .................................................................. 1,000,000 1,062,670 Greeley MFR, Housing Mortgage, Creek Stone Project, FHA Insured, 5.95%, 7/01/28 1,000,000 1,030,980 Guam Airport Authority Revenue, Refunding, Series A, 6.375%, 10/01/10 ..................................... 400,000 415,352 Series A, 6.50%, 10/01/23 ................................................. 800,000 825,064 Guam Power Authority Revenue, Series A, Pre-Refunded, 6.375%, 10/01/08 ........ 1,000,000 1,048,380 Jefferson County District Wide Sales Tax Revenue, Local ID, MBIA Insured, 6.30%, 6/01/22 7,450,000 7,690,784 Jefferson County SFMR, Refunding, Series A, MBIA Insured, 8.875%, 10/01/13 .... 80,000 81,695 La Junta Hospital Revenue, Ark Valley Regional Medical Center Project, 5.75%, 4/01/14 ............................................................ 2,090,000 2,077,335 6.00%, 4/01/19 ............................................................ 1,000,000 987,340 6.10%, 4/01/24 ............................................................ 1,000,000 990,380 Lakewood MFHR, Mortgage, FHA Insured, 6.65%, 10/01/25 ........................................................... 1,235,000 1,300,369 6.70%, 10/01/36 ........................................................... 3,025,000 3,187,927
81 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Las Animas County School District No. 1 COP, Refunding, 6.15%, 12/01/08 ........................................................... $ 1,000,000 $ 1,081,440 6.20%, 12/01/10 ........................................................... 935,000 1,008,697 Montrose County COP, 6.35%, 6/15/06 ........................................... 1,850,000 1,990,730 Mountain College Residence Hall Authority Revenue, MBIA Insured, 5.75%, 6/01/23 2,000,000 2,096,120 Northwest Parkway Public Highway Authority Revenue, Series A, AMBAC Insured, 5.125%, 6/15/26 7,500,000 7,534,500 Northwest Parkway Public Highway Revenue, Series A, AMBAC Insured, 5.125%, 6/15/31 4,465,000 4,466,518 Pitkin County Open Space Acquisition GO, Refunding, AMBAC Insured, 5.375%, 12/01/30 2,940,000 2,938,030 Post-Secondary Educational Facilities Authority Revenue, Auraria Foundation Project, FSA Insured, 6.00%, 9/01/15 ...................................... 1,000,000 1,108,470 Pueblo Board Waterworks Water Revenue, Improvement, Series A, FSA Insured, 6.00%, 11/01/21 4,300,000 4,677,540 Pueblo County COP, Public Parking, 6.90%, 7/01/15 ............................. 465,000 486,078 Pueblo County GO, MBIA Insured, 6.00%, 6/01/16 ................................ 4,395,000 4,764,576 Pueblo County School District No. 70 GO, Pueblo Rural, AMBAC Insured, Pre-Refunded, 6.40%, 12/01/14 .............................. 1,000,000 1,111,000 FGIC Insured, 6.00%, 12/01/19 ............................................. 3,995,000 4,599,483 Pueblo Urban Renewal Authority Tax Increment Revenue, Refunding, AMBAC Insured, 6.10%, 12/01/15 ........................................................... 1,000,000 1,078,990 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured, Pre-Refunded, 9.00%, 7/01/09 ..................................... 55,000 64,068 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 1,336,642 Regional Transportation District Sales Tax Revenue, FGIC Insured, 6.25%, 11/01/12 ............................................. 160,000 166,768 Series A, FGIC Insured, 5.125%, 11/01/20 .................................. 1,735,000 1,765,970 Summit County Sports Facilities Revenue, Keystone Resorts Project, Ralston Purina Co., Refunding, 7.875%, 9/01/08 .................................... 2,750,000 3,289,495 aUniversity of Colorado Enterprise Systems Revenue, Series A, FGIC Insured, 5.00%, 6/01/27 3,000,000 2,965,830 University of Colorado Hospital Authority Revenue, Series A, 5.60%, 11/15/25 .. 1,900,000 1,909,700 UTE Water Conservancy District Colorado Water Revenue, MBIA Insured, 5.75%, 6/15/20 5,000,000 5,359,600 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.40%, 10/01/12 ........................................................... 2,500,000 2,640,975 5.50%, 10/01/22 ........................................................... 2,500,000 2,515,150 Westminster Building Authority COP, MBIA Insured, 5.25%, 12/01/22 ............. 1,555,000 1,586,971 ------------ TOTAL LONG TERM INVESTMENTS (COST $322,917,822) ............................... 336,897,264 ------------ bSHORT TERM INVESTMENTS .8% Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 (COST $2,800,000) ........... 2,800,000 2,800,000 ------------ TOTAL INVESTMENTS (COST $325,717,822) 98.9% ................................... 339,697,264 OTHER ASSETS, LESS LIABILITIES 1.1% ........................................... 3,884,533 ------------ NET ASSETS 100.0% ............................................................. $343,581,797 ============
See glossary of terms on page 137. a Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. b Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 82 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS A 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................. $10.63 $10.06 $11.27 $11.23 $10.92 ------------------------------------------------ Income from investment operations: Net investment incomea ............................................ .53 .56 .56 .58 .60 Net realized and unrealized gains (losses) ........................ .25 .56 (1.21) .04 .32 ------------------------------------------------ Total from investment operations ................................... .78 1.12 (.65) .62 .92 ------------------------------------------------ Less distributions from net investment income ...................... (.53) (.55) (.56) (.58) (.61) ------------------------------------------------ Net asset value, end of year ....................................... $10.88 $10.63 $10.06 $11.27 $11.23 =============================================== Total returnb ...................................................... 7.53% 11.43% (5.90)% 5.62% 8.62% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................... $266,100 $228,844 $207,745 $245,016 $203,643 Ratios to average net assets: Expenses .......................................................... .70% .73% .71% .72% .73% Net investment income ............................................. 4.91% 5.37% 5.26% 5.08% 5.41% Portfolio turnover rate ............................................ 15.45% 10.11% 30.61% 5.87% 18.54% CLASS C ---------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................. $10.66 $10.10 $11.30 $11.26 $10.94 ------------------------------------------------ Income from investment operations: Net investment incomea ............................................ .47 .50 .50 .52 .55 Net realized and unrealized gains (losses) ........................ .26 .56 (1.20) .03 .31 ------------------------------------------------ Total from investment operations ................................... .73 1.06 (.70) .55 .86 ------------------------------------------------ Less distributions from net investment income ...................... (.47) (.50) (.50) (.51) (.54) ------------------------------------------------ Net asset value, end of year ....................................... $10.92 $10.66 $10.10 $11.30 $11.26 =============================================== Total returnb ...................................................... 7.01% 10.69% (6.32)% 5.02% 8.08% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................... $38,368 $27,256 $25,007 $23,443 $8,636 Ratios to average net assets: Expenses .......................................................... 1.25% 1.28% 1.26% 1.28% 1.29% Net investment income ............................................. 4.36% 4.83% 4.73% 4.53% 4.85% Portfolio turnover rate ............................................ 15.45% 10.11% 30.61% 5.87% 18.54%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 83 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.6% Bridgeport GO, Series A, FGIC Insured, 5.875%, 7/15/19 ........................ $ 1,000,000 $ 1,100,300 Connecticut State Airport Revenue, Bradley International Airport, Series A, FGIC Insured, 5.125%, 10/01/26 ............................................ 3,000,000 2,964,750 Connecticut State Development Authority First Mortgage Gross Revenue, Health Care Project, Baptist Homes Inc. Project, Refunding, Asset Guaranteed, 5.625%, 9/01/22 ... 2,000,000 2,084,300 Church Homes Inc., Refunding, 5.80%, 4/01/21 ............................... 4,000,000 3,635,320 Elim Park Baptist Home, Refunding, Series A, 5.375%, 12/01/18 .............. 1,100,000 1,007,534 Connecticut State Development Authority Revenue, Life Care Facilities, Seabury Project, Refunding, Asset Guaranteed, 5.00%, 9/01/21 ...................... 2,000,000 1,973,040 Connecticut State Development Authority Solid Waste Disposal Facilities Revenue, Pfizer Inc. Project, 7.00%, 7/01/25 ....................................... 2,000,000 2,233,800 Connecticut State Development Authority Water Facility Revenue, Bridgeport Hydraulic Co. Project, 6.15%, 4/01/35 ............................................................. 1,000,000 1,044,020 6.00%, 9/01/36 ............................................................. 10,000,000 10,258,700 Refunding, 7.25%, 6/01/20 .................................................. 1,000,000 1,006,730 Connecticut State GO, Series B, 5.00%, 6/15/20 ................................ 10,000,000 10,110,300 Connecticut State Health and Educational Facilities Authority Revenue, Abbot Terrace Health Center Project, Series A, 6.00%, 11/01/14 ............. 2,000,000 2,135,320 Brunswick School, Series A, MBIA Insured, 5.00%, 7/01/29 ................... 5,000,000 4,992,250 Catholic Health East, Series F, MBIA Insured, 5.75%, 11/15/29 .............. 3,250,000 3,445,293 Child Care Facilities Program, Series C, AMBAC Insured, 5.625%, 7/01/29 .... 1,250,000 1,311,350 Child Care Facilities Program, Series E, AMBAC Insured, 5.00%, 7/01/31 ..... 1,000,000 989,300 Choate Rosemary Hall, Series A, MBIA Insured, Pre-Refunded, 7.00%, 7/01/25 . 1,500,000 1,677,780 Connecticut College Project, Series D-1, MBIA Insured, 5.75%, 7/01/30 ...... 1,000,000 1,064,130 Danbury Hospital Issue, Refunding, Series G, AMBAC Insured, 5.75%, 7/01/29 . 3,500,000 3,703,280 Eastern Connecticut Health Network, Refunding, Series A, Asset Guaranteed, 6.00%, 7/01/25 9,195,000 9,953,312 Fairfield University, Series I, MBIA Insured, 5.25%, 7/01/25 ............... 2,500,000 2,545,925 Fairfield University, Series I, MBIA Insured, 5.50%, 7/01/29 ............... 8,000,000 8,276,480 Greenwich Academy, Series B, FSA Insured, 5.00%, 3/01/32 ................... 4,210,000 4,223,093 Greenwich Hospital, Series A, MBIA Insured, 5.80%, 7/01/26 ................. 2,000,000 2,104,460 Hartford University, Series C, Pre-Refunded, 8.00%, 7/01/18 ................ 1,215,000 1,307,109 Hartford University, Series D, 6.80%, 7/01/22 .............................. 5,000,000 5,097,950 Hebrew Home and Hospital, Series B, FHA Insured, 5.15%, 8/01/28 ............ 3,800,000 3,807,524 Horace Bushnell Memorial Hall, Series A, MBIA Insured, 5.625%, 7/01/29 ..... 1,000,000 1,049,210 Hospital for Special Care, Refunding, Series B, 5.375%, 7/01/17 ............ 7,205,000 6,736,675 Hospital for Special Care, Refunding, Series B, 5.50%, 7/01/27 ............. 12,500,000 11,462,625 Lutheran General Health Care System, ETM, 7.375%, 7/01/19 .................. 500,000 625,875 New Horizons Village Project, 7.30%, 11/01/16 .............................. 2,905,000 3,163,952 Sacred Heart University, Refunding, Series E, Asset Guaranteed, 5.00%, 7/01/28 4,000,000 3,930,720 Sacred Heart University, Series C, 6.50%, 7/01/16 .......................... 235,000 247,255 Sacred Heart University, Series C, 6.625%, 7/01/26 ......................... 785,000 808,754 Sacred Heart University, Series C, Pre-Refunded, 6.50%, 7/01/16 ............ 765,000 882,810 Sacred Heart University, Series C, Pre-Refunded, 6.625%, 7/01/26 ........... 6,215,000 7,203,309 Sacred Heart University, Series D, Pre-Refunded, 6.20%, 7/01/27 ............ 1,000,000 1,150,870 St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ................... 4,615,000 4,091,382 St. Mary's Hospital, Refunding, Series E, 5.875%, 7/01/22 .................. 3,510,000 3,232,289 Trinity College, Series E, MBIA Insured, 5.875%, 7/01/26 ................... 2,000,000 2,117,060 Trinity College, Series G, AMBAC Insured, 5.00%, 7/01/31 ................... 5,425,000 5,466,664 University of Connecticut Foundation, Series A, 5.375%, 7/01/29 ............ 1,250,000 1,266,875 Westover School, Series A, Asset Guaranteed, 5.70%, 7/01/30 ................ 2,000,000 2,093,540 Windham Community Memorial Hospital, Series C, 6.00%, 7/01/20 .............. 8,000,000 7,525,520 Yale New Haven Hospital, Refunding, Series H, MBIA Insured, 5.70%, 7/01/25 . 4,000,000 4,171,880 Connecticut State HFAR, Housing Finance Mortgage Project, Series B, 6.10%, 11/15/31 ................ 2,715,000 2,814,749 Housing Mortgage Finance Program, Series B, 6.75%, 11/15/23 ................ 14,705,000 15,178,648 Housing Mortgage Finance Program, Series C-1, 6.60%, 11/15/23 .............. 95,000 97,852 Housing Mortgage Finance Program, Series C-2, 6.25%, 11/15/18 .............. 1,500,000 1,590,900 Housing Mortgage Finance Program, Sub Series B-1, 5.30%, 11/15/28 .......... 1,700,000 1,731,518 Housing Mortgage Finance Program, Sub Series C-2, 5.85%, 11/15/28 .......... 1,250,000 1,281,763 Housing Mortgage Finance Program, Sub Series D-1, 5.55%, 11/15/28 .......... 1,000,000 1,022,520 Housing Mortgage Finance Program, Sub Series E-2, 5.20%, 11/15/21 .......... 1,840,000 1,884,381 Connecticut State Higher Education Supplemental Loan Authority Revenue, Family Education Loan Program, Series A, 7.00%, 11/15/05 ............................................................ 590,000 603,393 7.20%, 11/15/10 ............................................................ 175,000 178,990
84 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Connecticut State Higher Education Supplemental Loan Authority Revenue, Family Education Loan Program, Series A, (cont.) AMBAC Insured, 6.00%, 11/15/18 ............................................. $ 1,925,000 $ 2,142,235 MBIA Insured, 5.50%, 11/15/17 .............................................. 1,900,000 2,006,836 Connecticut State Special Tax Obligation Revenue, Transportation Infrastructure, Series A, FSA Insured, 5.375%, 10/01/18 ........................................................... 2,000,000 2,095,180 5.00%, 10/01/21 ............................................................ 4,000,000 4,014,960 Eastern Connecticut Resource Recovery Authority Solid Waste Revenue, Wheelabrator Lisbon Project, Series A, 5.50%, 1/01/15 .................................. 8,000,000 7,638,080 Griswold GO, AMBAC Insured, 7.50%, 4/01/06 .................................... 200,000 233,750 Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ............................................................ 250,000 259,665 6.70%, 10/01/23 ............................................................ 1,300,000 1,342,679 Guam Power Authority Revenue, Series A, Pre-Refunded, 6.75%, 10/01/24 ......... 5,500,000 6,266,700 Plainfield GO, Series 1988, 7.30%, 9/01/10 ................................................ 150,000 153,231 Series 1991, 7.25%, 9/01/05 ................................................ 335,000 343,124 Series 1991, 7.30%, 9/01/07 ................................................ 335,000 343,124 Series 1991, 7.30%, 9/01/09 ................................................ 335,000 342,213 Puerto Rico Commonwealth GO, Public Improvement, MBIA Insured, 5.75%, 7/01/26 ............................................... 1,775,000 2,037,611 Refunding, FSA Insured, 5.125%, 7/01/30 .................................... 4,000,000 4,042,560 Series A, 5.125%, 7/01/31 .................................................. 5,000,000 4,928,700 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, 5.00%, 7/01/38 ......................................... 2,500,000 2,402,800 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, AMBAC Insured, 5.00%, 7/01/28 ................................... 5,000,000 4,992,400 Puerto Rico Electric Power Authority Power Revenue, Series HH, FSA Insured, 5.25%, 7/01/29 ..................................... 13,000,000 13,219,440 Series II, 5.25%, 7/01/31 .................................................. 1,000,000 1,000,770 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Financing Authority Industrial Revenue, Guaynabo Warehouse, Series A, 5.15%, 7/01/19 .................................................. 4,845,000 4,630,706 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Revenue, University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 1,000,000 995,220 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.375%, 7/01/33 5,000,000 5,052,900 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E, 5.70%, 8/01/25 ............................................................ 11,000,000 11,366,630 State Health and Education Facilities Authority Revenue, MBIA Insured, 5.00%, 7/01/29 3,000,000 2,995,350 University of Connecticut Revenue, Student Fee, a Refunding, Series A, FGIC Insured, 5.00%, 11/15/26 ......................... 10,000,000 9,985,200 Series A, 5.00%, 5/15/23 ................................................... 10,000,000 10,015,100 Series A, FGIC Insured, Pre-Refunded, 6.00%, 11/15/25 ...................... 1,500,000 1,749,465 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/13 ................................................................... 2,500,000 2,625,950 10/01/22 ................................................................... 2,500,000 2,515,150 Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%, 7/01/21 1,000,000 952,300 ------------ TOTAL LONG TERM INVESTMENTS (COST $292,962,941) 300,355,358 ------------ bSHORT TERM INVESTMENTS 1.2% Connecticut State Health and Educational Facilities Authority Revenue, Yale University, Series T-1, Weekly VRDN and Put, 1.10%, 7/01/29 ............... 2,800,000 2,800,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding , MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .............................. 100,000 100,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ..... 500,000 500,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $3,400,000) ................................ 3,400,000 ------------ TOTAL INVESTMENTS (COST $296,362,941) 99.8% ................................... 303,755,358 OTHER ASSETS, LESS LIABILITIES .2% ............................................ 712,323 ------------ NET ASSETS 100.0% ............................................................. $304,467,681 ============
See glossary of terms on page 137. a Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. b Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 85 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN DOUBLE TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS A 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................. $11.55 $10.95 $11.88 $11.86 $11.51 ------------------------------------------------ Income from investment operations: Net investment incomea ............................................ .56 .58 .59 .60 .62 Net realized and unrealized gains (losses) ........................ .15 .60 (.92) .06 .36 ------------------------------------------------ Total from investment operations ................................... .71 1.18 (.33) .66 .98 ------------------------------------------------ Less distributions from: Net investment income ............................................. (.58) (.58) (.58) (.60) (.62) Net realized gains ................................................ --c -- (.02) (.04) (.01) ------------------------------------------------ Total distributions ................................................ (.58) (.58) (.60) (.64) (.63) ------------------------------------------------ Net asset value, end of year ....................................... $11.68 $11.55 $10.95 $11.88 $11.86 ================================================ Total returnb ...................................................... 6.29% 11.06% (2.91)% 5.68% 8.78% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................... $239,081 $205,678 $195,157 $218,753 $210,325 Ratios to average net assets: Expenses .......................................................... .75% .77% .74% .74% .75% Net investment income ............................................. 4.84% 5.18% 5.14% 4.98% 5.35% Portfolio turnover rate ............................................ 33.53% 42.32% 13.41% 20.19% 7.94% CLASS C --------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................. $11.58 $10.97 $11.89 $11.87 $11.53 ------------------------------------------------ Income from investment operations: Net investment incomea ............................................ .50 .52 .53 .53 .56 Net realized and unrealized gains (losses) ........................ .13 .61 (.92) .06 .34 ------------------------------------------------ Total from investment operations ................................... .63 1.13 (.39) .59 .90 ------------------------------------------------ Less distributions from: Net investment income ............................................. (.51) (.52) (.51) (.53) (.55) Net realized gains ................................................ --c -- (.02) (.04) (.01) ------------------------------------------------ Total distributions ................................................ (.51) (.52) (.53) (.57) (.56) ------------------------------------------------ Net asset value, end of year ....................................... $11.70 $11.58 $10.97 $11.89 $11.87 ================================================ Total returnb ...................................................... 5.59% 10.54% (3.37)% 5.09% 8.07% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................... $17,971 $10,413 $7,270 $7,050 $3,615 Ratios to average net assets: Expenses .......................................................... 1.30% 1.32% 1.30% 1.30% 1.31% Net investment income ............................................. 4.29% 4.63% 4.60% 4.43% 4.78% Portfolio turnover rate ............................................ 33.53% 42.32% 13.41% 20.19% 7.94%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c The fund made a capital gain distribution of $.002. See notes to financial statements. 86 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN DOUBLE TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 97.9% Childrens Trust Fund Tobacco Settlement Revenue, 6.00%, 7/01/26 ............... $ 7,500,000 $ 7,921,275 Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ........................................................... 1,675,000 1,739,756 6.70%, 10/01/23 ........................................................... 5,800,000 5,990,414 Guam Government GO, Series A, 5.90%, 9/01/05 ............................................................ 4,575,000 4,609,770 6.00%, 9/01/06 ............................................................ 1,085,000 1,093,886 Guam Government Limited Obligation Highway Revenue, Refunding, Series A, FSA Insured, 6.30%, 5/01/12 ................................................... 5,590,000 5,745,178 Guam Power Authority Revenue, Series A, Pre-Refunded, 6.30%, 10/01/22 ........................................................... 6,190,000 6,490,525 6.75%, 10/01/24 ........................................................... 2,680,000 3,053,592 Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.60%, 3/15/28 ............................................................ 6,710,000 6,668,532 Puerto Rico Commonwealth GO, Pre-Refunded, 6.40%, 7/01/11 .............................................. 2,000,000 2,230,700 Public Improvement, MBIA Insured, 5.75%, 7/01/26 .......................... 10,000,000 11,479,500 Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series B, 6.00%, 7/01/39 .................................................. 10,000,000 11,692,000 Series D, 5.375%, 7/01/36 ................................................. 7,500,000 7,579,350 Series D, 5.25%, 7/01/38 .................................................. 3,500,000 3,502,485 Series Y, 5.50%, 7/01/36 .................................................. 11,850,000 12,277,785 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.90%, 7/01/07 ............................................................ 580,000 582,378 7.75%, 7/01/08 ............................................................ 300,000 301,170 7.50%, 7/01/09 ............................................................ 660,000 662,376 Puerto Rico Commonwealth Urban Renewal and Housing Corp. Commonwealth Appropriation, Refunding, 7.875%, 10/01/04 ............................................... 2,040,000 2,053,688 Puerto Rico Electric Power Authority Power Revenue, Series HH, FSA Insured, 5.25%, 7/01/29 .................................... 3,605,000 3,665,852 Series II, 5.25%, 7/01/31 ................................................. 8,000,000 8,006,160 Series T, Pre-Refunded, 6.375%, 7/01/24 ................................... 5,000,000 5,597,800 Puerto Rico HFC Home Mortgage Revenue, Mortgage Backed Securities, Series A, 5.20%, 12/01/33 10,000,000 10,058,200 Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 10/01/15 ............................... 390,000 390,554 MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ................................ 1,265,000 1,266,822 Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 .... 2,060,000 2,449,525 Puerto Rico Housing Bank and Financing Authority SFMR, Affordable Housing Mortgage, First Portfolio, 6.25%, 4/01/29 ........................................... 1,915,000 1,994,894 Puerto Rico Industrial Medical and Environmental Pollution Control Facilities Financing Authority Revenue, PepsiCo Inc. Project, 6.25%, 11/15/13 ........ 900,000 936,630 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 2,597,900 Dr. Pila Hospital Project, Refunding, FHA Insured, 6.25%, 8/01/32 ......... 500,000 520,710 Hospital Auxilio Mutuo Obligation, Series A, MBIA Insured, 6.25%, 7/01/24 . 8,445,000 9,223,798 Mennonite General Hospital Project, 5.625%, 7/01/17 ....................... 855,000 724,117 Mennonite General Hospital Project, 6.50%, 7/01/26 ........................ 5,000,000 4,547,200 Mennonite General Hospital Project, 5.625%, 7/01/27 ....................... 2,000,000 1,605,840 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Financing Authority Industrial Revenue, Guaynabo Municipal Government, 5.625%, 7/01/15 ............................ 6,550,000 6,662,529 Guaynabo Municipal Government, 5.625%, 7/01/22 ............................ 3,160,000 3,163,887 Guaynabo Warehouse, Series A, 5.20%, 7/01/24 .............................. 4,120,000 3,861,305 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Revenue, Ana G. Mendez University Systems Project, Refunding, 5.375%, 12/01/21 ..... 2,000,000 1,984,200 Ana G. Mendez University Systems Project, Refunding, 5.375%, 2/01/29 ...... 6,050,000 5,894,394 Ana G. Mendez University Systems Project, Refunding, 5.50%, 12/01/31 ...... 3,565,000 3,538,869 Cogen Facilities, 6.625%, 6/01/26 ......................................... 10,000,000 10,567,900 University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 .......... 7,000,000 6,966,540 Puerto Rico Municipal Finance Agency GO, Series A, FSA Insured, 5.50%, 8/01/23 7,400,000 7,752,536 Puerto Rico Municipal Finance Agency Revenue, Series A, Pre-Refunded, 6.50%, 7/01/19 1,000,000 1,116,390 Puerto Rico PBA Revenue, Guaranteed, Government Facilities, Series D, 5.375%, 7/01/33 ........................................................... 10,000,000 10,105,800 5.25%, 7/01/36 ............................................................ 7,500,000 7,505,325
87 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN DOUBLE TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 .... $ 1,250,000 $ 1,265,838 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series A, 5.00%, 6/01/26 .................................................. 3,865,000 3,697,298 Series E, 5.50%, 8/01/29 .................................................. 7,000,000 7,149,730 Virgin Islands HFA, SFR, Refunding, Series A, GNMA Secured, 6.45%, 3/01/16 ............................................................ 365,000 382,392 6.50%, 3/01/25 ............................................................ 865,000 898,095 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ........................................................... 3,000,000 3,073,980 5.50%, 10/01/22 ........................................................... 3,000,000 3,018,180 5.625%, 10/01/25 .......................................................... 3,000,000 3,051,870 Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%, 7/01/18 ................................................................... 1,700,000 1,679,753 7/01/21 ................................................................... 1,000,000 952,300 Virgin Islands Water and Power Authority Water System Revenue, Refunding, 5.25%, 7/01/12 ............................................................ 4,000,000 4,088,960 5.50%, 7/01/17 ............................................................ 4,000,000 3,983,279 ------------ TOTAL LONG TERM INVESTMENTS (COST $239,876,217) ............................... 251,621,712 ------------ aSHORT TERM INVESTMENTS 1.6% Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .............................. 3,500,000 3,500,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ..... 700,000 700,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $4,200,000) ................................ 4,200,000 ------------ TOTAL INVESTMENTS (COST $244,076,217) 99.5% .................................. 255,821,712 OTHER ASSETS, LESS LIABILITIES .5% ............................................ 1,231,082 ------------ NET ASSETS 100.0% ............................................................. $257,052,794 ============
See glossary of terms on page 137. 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. See notes to financial statements. 88 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------ 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................................... $10.94 $10.52 $11.30 $11.25 $10.94 ------------------------------------------------ Income from investment operations: Net investment incomea .................................................. .50 .52 .51 .51 .53 Net realized and unrealized gains (losses) .............................. .21 .42 (.78) .06 .33 ------------------------------------------------ Total from investment operations ......................................... .71 .94 (.27) .57 .86 ------------------------------------------------ Less distributions from net investment income ............................ (.51) (.52) (.51) (.52) (.55) ------------------------------------------------ Net asset value, end of year ............................................. $11.14 $10.94 $10.52 $11.30 $11.25 ================================================ Total returnb ............................................................ 6.64% 9.10% (2.43)% 5.17% 8.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .......................................... $240,157 $164,450 $170,907 $195,598 $139,545 Ratios to average net assets: Expenses ................................................................ .77% .76% .73% .75% .75% Expenses excluding waiver and payments by affiliate ..................... .77% .76% .75% .78% .82% Net investment income ................................................... 4.49% 4.88% 4.72% 4.53% 4.83% Portfolio turnover rate .................................................. 7.47% 8.87% 31.27% 16.57% 23.32%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 89 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 95.5% BONDS 94.6% ALABAMA 3.0% Alabama Water Pollution Control Authority Revenue, Revolving Fund Loan, Refunding, Series B, AMBAC Insured, 4.625%, 8/15/13 ....................... $ 5,900,000 $ 5,949,029 Morgan County Decatur Health Care Authority Hospital Revenue, Refunding, Connie Lee Insured, 5.80%, 3/01/04 ............................................... 500,000 530,115 Sylacauga GO, wts., AMBAC Insured, 5.50%, 6/01/12 ............................. 600,000 662,328 ----------- 7,141,472 ----------- ALASKA .2% Alaska State HFC Revenue, Veteran's Mortgage, First Series, GNMA Secured, 5.80%, 6/01/04 340,000 356,752 Anchorage Parking Authority Revenue, 5th Avenue Garage Lease Project, Refunding, ETM, 6.50%, 12/01/02 ...................................................... 50,000 51,886 ----------- 408,638 ----------- ARIZONA .9% Maricopa County GO, School District No. 40, Glendale Improvement, 6.10%, 7/01/08 1,000,000 1,081,210 Mesa GO, FGIC Insured, 4.50%, 7/01/14 ......................................... 1,000,000 1,009,050 ----------- 2,090,260 ----------- ARKANSAS 1.4% Conway Hospital Revenue, Conway Regional Medical Improvement, Refunding, Series A, 6.20%, 8/01/17 .................................................. 1,105,000 1,133,399 University of Arkansas Revenue, Student Fee University of Arkansas at Fort Smith, FSA Insured, 4.75%, 12/01/15 .............................................. 2,295,000 2,334,245 ----------- 3,467,644 ----------- CALIFORNIA 2.1% ABAG Finance Corp. COP, ABAG XXVI, Series B, 6.30%, 10/01/02 .................. 100,000 102,427 Bakersfield PFA, Refunding, Series A, 5.80%, 9/15/05 .......................... 2,655,000 2,715,800 California Educational Facilities Authority Revenue, Pooled College and University Financing, Refunding, Series B, 5.90%, 6/01/03 ................. 1,500,000 1,571,175 San Diego Port Facilities Revenue, National Steel and Ship Building Co., Refunding, 6.60%, 12/01/02 ................................................ 100,000 101,595 San Francisco Downtown Parking Corp. Parking Revenue, 6.25%, 4/01/04 .......... 200,000 212,884 San Joaquin County COP, General Hospital Project, ETM, 5.90%, 9/01/03 ......... 200,000 212,816 Southern California Rapid Transit District Revenue, Special Benefit AD A2, 6.00%, 9/01/02 100,000 101,921 ----------- 5,018,618 ----------- COLORADO 2.0% Denver City and County COP, Series B, AMBAC Insured, 5.75%, 12/01/16 .......... 3,000,000 3,279,480 Montrose County COP, 6.20%, 6/15/03 ........................................... 1,500,000 1,582,365 ----------- 4,861,845 ----------- CONNECTICUT 1.2% Connecticut State Health and Educational Facilities Authority Revenue, Sacred Heart University, Refunding, Series C, 6.00%, 7/01/05 ....................................... 135,000 144,702 Series C, ETM, 6.00%, 7/01/05 ............................................. 425,000 467,411 Connecticut State HFAR, Housing Mortgage Finance Program, Series C-2, 6.00%, 11/15/10 2,000,000 2,151,320 ----------- 2,763,433 ----------- FLORIDA 9.4% Collier County Capital Improvement Revenue, FGIC Insured, 4.60%, 10/01/13 ..... 1,000,000 1,021,830 Hillsborough County School Board Sales Tax Revenue, AMBAC Insured, 4.25%, 10/01/12 1,800,000 1,806,984 Jacksonville Electric Authority Revenue, Electric System, Sub Series A, 5.00%, 10/01/16 3,420,000 3,444,898 Marion County Public Improvement Revenue, Refunding, MBIA Insured, 4.10%, 12/01/11 ........................................................... 1,600,000 1,601,184 4.20%, 12/01/12 ........................................................... 1,400,000 1,399,930 4.30%, 12/01/13 ........................................................... 1,800,000 1,793,322 Meadow Pointe II CDD, Capital Improvement Revenue, Series A, 5.25%, 8/01/03 ... 55,000 55,063 Nassau County PCR, ITT Rayonier Inc. Project, Refunding, 6.25%, 6/01/10 ....... 1,000,000 1,017,810 Northern Palm Beach County Water Control District Revenue, Unit Development No. 31, Program 1, Refunding, 6.60%, 11/01/03 ..................................... 405,000 428,628 Program 2, Refunding, 6.60%, 11/01/03 320,000 338,669 Palm Beach County IDR, Lourdes-Noreen McKeen Residence, Geriatric Care Inc. Project, 6.20%, 12/01/08 ........................................................... 275,000 295,757 6.30%, 12/01/09 ........................................................... 580,000 622,369
90 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) FLORIDA (CONT.) Tampa Bay Water Utility System Revenue, FGIC Insured, Pre-Refunded, 5.75%, 10/01/15 ............................... $ 1,000,000 $ 1,142,280 Series B, FGIC Insured, 4.75%, 10/01/15 ................................... 4,140,000 4,193,903 Series B, FGIC Insured, 4.75%, 10/01/16 ................................... 3,400,000 3,418,088 ----------- 22,580,715 ----------- GEORGIA 1.8% Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.30%, 12/01/13 1,020,000 965,032 Fulton County Development Authority Special Facilities Revenue, Delta Airlines Inc. Project, Refunding, 6.85%, 11/01/07 .................................. 100,000 98,839 Wayne County Development Authority PCR, ITT Rayonier Inc. Project, Refunding, 6.10%, 11/01/07 3,105,000 3,218,022 ----------- 4,281,893 ----------- HAWAII 1.3% Hawaii State Department of Budget and Finance Special Purpose Revenue, Kaiser Permanente, Series A, 5.10%, 3/01/14 ............................... 2,500,000 2,493,325 Kapi 'Olani Health Obligation, 5.60%, 7/01/06 ............................. 500,000 528,790 ----------- 3,022,115 ----------- ILLINOIS 1.8% Chicago O'Hare International Airport Special Facilities Revenue, United Airlines Inc. Project, Refunding, Series A, 5.35%, 9/01/16 ......................... 2,000,000 980,280 Illinois Educational Facilities Authority Revenue, Columbia College, 5.875%, 12/01/03 370,000 391,364 Illinois HDA Revenue, Homeowner Mortgage, Sub Series A-1, 6.10%, 2/01/05 ...... 360,000 381,337 Illinois Health Facilities Authority Revenue, St. Elizabeth's Hospital, 6.00%, 7/01/05 .................................. 265,000 283,190 Victory Health Services, Series A, 5.25%, 8/15/09 ......................... 1,170,000 1,196,898 Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue, McCormick Place Convention Center, ETM, 5.75%, 7/01/06 .................... 1,000,000 1,074,770 ----------- 4,307,839 ----------- INDIANA 2.4% Franklin EDR, Hoover Universal Inc. Project, Johnson Controls, Refunding, 6.10%, 12/01/04 2,000,000 2,136,720 Sullivan PCR, Indiana-Michigan Power Co. Project, Refunding, Series C, 5.95%, 5/01/09 3,500,000 3,623,585 ----------- 5,760,305 ----------- KENTUCKY .9% Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian Regional Health Center Facility, Refunding and Improvement, 5.70%, 10/01/10 ........................................................... 1,000,000 883,560 5.75%, 10/01/11 ........................................................... 1,500,000 1,307,100 ----------- 2,190,660 ----------- LOUISIANA 1.7% Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project, First Stage, Refunding, Series B, 6.20%, 9/01/03 ................. 100,000 104,268 St. John's Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 .. 4,000,000 4,007,200 ----------- 4,111,468 ----------- MARYLAND .1% Baltimore Economic Development Lease Revenue, Armistead Partnership, Refunding, Series A, 6.75%, 8/01/02 .................................................. 90,000 91,508 ----------- MASSACHUSETTS 5.1% Massachusetts State Development Finance Agency Resource Recovery Revenue, Waste Management Inc. Project, Series B, 6.90%, 12/01/29 ........................ 3,000,000 3,287,220 Massachusetts State Development Finance Agency Revenue, Loomis Community Project, First Mortgage, Refunding, Series A, 5.50%, 7/01/08 ....................... 3,225,000 3,182,462 Massachusetts State Industrial Finance Agency Resource Recovery Revenue, Ogden Haverhill Project, Refunding, Series A, 5.15%, 12/01/07 ........................................................... 2,000,000 1,800,200 5.20%, 12/01/08 ........................................................... 2,000,000 1,763,720 Massachusetts State Industrial Finance Agency Revenue, D'Youville Senior Care, 5.50%, 10/01/12 ........................................................... 1,745,000 1,839,841 New England Educational Loan Marketing Corp. Student Loan Revenue, Refunding, Series B, 5.60%, 6/01/02 .................................................. 415,000 419,192 ----------- 12,292,635 -----------
91 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) MICHIGAN 4.2% Chippewa County Hospital Financing Authority Revenue, Chippewa County War Memorial Hospital, Refunding, Series B, 5.30%, 11/01/07 ................... $ 815,000 $ 829,271 Detroit GO, Refunding, Series B, 6.375%, 4/01/06 .............................. 1,000,000 1,096,920 Ferris State University Revenue, Refunding, AMBAC Insured, 5.00%, 10/01/18 .... 2,640,000 2,646,758 Michigan State Hospital Finance Authority Revenue, Ascension Health Credit, Series A, MBIA Insured, 6.00%, 11/15/13 ................................... 1,200,000 1,313,748 Western Townships Utilities Authority GO, Refunding, MBIA Insured, 4.75%, 1/01/17 4,290,000 4,249,202 ----------- 10,135,899 ----------- MINNESOTA 4.8% Minneapolis GO, Various Purpose, 5.00%, 12/01/17 .............................. 3,000,000 3,064,770 Minneapolis Special School District No. 001 COP, Refunding, Series B, FGIC Insured, 4.625%, 2/01/17 .................................................. 1,000,000 985,660 Mounds View ISD No. 621, GO, MBIA Insured, 5.00%, 2/01/14 ................................................................... 2,340,000 2,444,013 2/01/15 ................................................................... 2,425,000 2,513,100 2/01/16 ................................................................... 2,460,000 2,529,593 ----------- 11,537,136 ----------- MISSOURI 2.9% Lake of the Ozarks Community Bridge Corp. Bridge System Revenue, Refunding, 5.00%, 12/01/08 3,000,000 2,969,370 Southeast Missouri State University System Facilities Revenue, Refunding and Improvement, MBIA Insured, 4.375%, 4/01/12 ........................................................... 335,000 339,124 4.50%, 4/01/14 ............................................................ 545,000 545,387 4.60%, 4/01/15 ............................................................ 1,360,000 1,364,964 4.70%, 4/01/16 ............................................................ 1,165,000 1,168,379 West Plains IDA, Hospital Revenue, Ozarks Medical Center Project, Refunding, 5.00%, 11/15/04 560,000 562,621 ----------- 6,949,845 ----------- NEW HAMPSHIRE .3% New Hampshire Higher Education and Health Facilities Authority Revenue, New Hampshire Catholic Charities, Refunding, Series A, 5.10%, 8/01/04 ......... 715,000 711,139 ----------- NEW JERSEY 6.4% Gloucester County Improvement Authority Solid Waste Resource Recovery Revenue, Waste Management Inc., Refunding, Project Series A, 6.85%, 12/01/29 ...... 2,625,000 2,938,583 Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding, Series 1, 5.90%, 1/01/15 .................................................. 925,000 921,624 New Jersey EDA Revenue, Economic Growth, 2nd Series F-1, 6.00%, 12/01/02 ...... 20,000 20,470 New Jersey Health Care Facilities Financing Authority Revenue, Monmouth Medical Center, Refunding, Series C, FSA Insured, ETM, 5.80%, 7/01/04 ............. 1,000,000 1,080,790 New Jersey State Transportation Trust Fund Authority Revenue, Transportation System, Refunding, Series C, FSA Insured, 4.50%, 12/15/10 ................. 10,000,000 10,404,100 ----------- 15,365,567 ----------- NEW YORK 9.5% MTA Commuter Facilities Revenue, Services Contract, Refunding, Series R, 5.50%, 7/01/11 2,215,000 2,409,610 MTA Transportation Facilities Revenue, Series A, 6.00%, 7/01/15 ............... 1,500,000 1,642,845 New York City GO, Pre-Refunded, 6.50%, 8/01/04 .............................................. 105,000 108,810 Refunding, Series H, 5.90%, 8/01/09 ....................................... 500,000 546,470 Refunding, Series J, 6.00%, 8/01/08 ....................................... 3,000,000 3,327,060 Series C, 6.50%, 8/01/04 .................................................. 410,000 423,210 Series C, 6.50%, 8/01/07 .................................................. 1,490,000 1,538,008 Series C, MBIA Insured, 5.875%, 8/01/16 ................................... 1,250,000 1,373,125 Series C, Pre-Refunded, 6.50%, 8/01/07 .................................... 360,000 373,064 Series H, 7.00%, 2/01/05 .................................................. 20,000 20,368 Series J, 6.00%, 2/15/04 .................................................. 1,000,000 1,066,790 New York City Health and Hospital Corp. Revenue, Refunding, Series A, 6.00%, 2/15/06 2,500,000 2,595,175 New York City IDA, Civic Facility Revenue, New York Blood Center Inc. Project, ETM, 6.80%, 5/01/02 ....................................................... 60,000 60,514 New York State Dormitory Authority Revenue, Mental Health Services Facilities Improvement, Refunding, Series D, 5.60%, 2/15/07 ....................................... 140,000 153,692 Series D, 5.00%, 8/15/17 .................................................. 2,000,000 2,024,680
92 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) NEW YORK (CONT.) New York State HFAR, Health Facilities, New York City, Refunding, Series A, 5.90%, 5/01/05 $ 1,000,000 $ 1,092,330 New York State Thruway Authority Service Contract Revenue, Local Highway and Bridge, 5.75%, 4/01/08 ................................................................... 500,000 549,015 4/01/09 ................................................................... 1,150,000 1,254,938 Port Authority of New York and New Jersey Special Obligation Revenue, 3rd Installment, 7.00%, 10/01/07 .............................................. 1,000,000 1,101,790 Ulster County Resource Recovery Agency Solid Waste System Revenue, 5.90%, 3/01/07 1,100,000 1,146,035 ----------- 22,807,529 ----------- NORTH CAROLINA 8.9% Asheville Water System Revenue, FSA Insured, 5.25%, 8/01/15 ................................................................... 915,000 967,832 8/01/17 ................................................................... 1,020,000 1,060,637 8/01/19 ................................................................... 1,030,000 1,059,994 Charlotte Water and Sewer System Revenue, 5.00%, 6/01/16 ...................... 4,000,000 4,122,600 North Carolina Eastern Municipal Power Agency Power System Revenue, Refunding, Series D, 6.00%, 1/01/09 ....................................... 1,000,000 1,081,110 Series D, 6.45%, 1/01/14 .................................................. 1,000,000 1,086,100 North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue, Refunding, Series B, 6.50%, 1/01/09 .................................................. 5,000,000 5,565,950 aWake County GO, Public Improvement, 4.50%, 3/01/14 ............................ 6,400,000 6,435,840 ----------- 21,380,063 ----------- OHIO 4.9% Allen County GO, AMBAC Insured, 4.75%, 12/01/17 ............................... 2,180,000 2,183,488 Franklin County Health Care Facilities Revenue, Presbyterian Retirement Services, Refunding, 5.25%, 7/01/08 ............................................................ 575,000 557,227 5.40%, 7/01/10 ............................................................ 775,000 742,853 5.50%, 7/01/11 ............................................................ 500,000 479,205 Lake Ohio Local School District GO, 5.20%, 12/01/17 ........................... 2,565,000 2,676,398 Mahoning County Sewer System Revenue, AMBAC Insured, 5.20%, 12/01/14 .......... 1,360,000 1,445,340 University of Akron General Receipts Revenue, FGIC Insured, 5.75%, 1/01/14 .... 2,000,000 2,198,120 Youngstown GO, AMBAC Insured, 6.125%, 12/01/15 ................................ 1,275,000 1,501,313 ----------- 11,783,944 ----------- OKLAHOMA 1.8% Jackson County Memorial Hospital Authority Revenue, Jackson County Memorial Hospital Project, Refunding, 6.75%, 8/01/04 ............................... 975,000 986,310 Okmulgee County Governmental Building Authority Sales Tax Revenue, First Mortgage, MBIA Insured, 5.60%, 3/01/10 ............................................................ 1,635,000 1,797,960 6.00%, 3/01/15 ............................................................ 700,000 767,634 Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding, 5.75%, 8/15/06 ................................................. 680,000 703,086 ----------- 4,254,990 ----------- OREGON .6% Clackamas County Hospital Facilities Authority Revenue, Willamette View Inc. Project, Refunding, 6.00%, 11/01/06 ................................................ 500,000 500,155 Hillsboro Hospital Facility Authority Revenue, Hospital Tuality Healthcare Project, Refunding, 5.75%, 10/01/12 ................................................ 1,000,000 1,015,180 ----------- 1,515,335 ----------- PENNSYLVANIA 1.8% Cambria County Hospital Development Authority Revenue, Conemaugh Valley Memorial Hospital, Refunding and Improvement, Series B, Connie Lee Insured, Pre-Refunded, 5.90%, 7/01/03 .............................................. 100,000 103,440 Chartiers Valley Industrial and Commercial Development Authority Revenue, First Mortgage, Asbury Place Project, ETM, 6.25%, 2/01/06 ...................... 120,000 122,407 Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding, 5.40%, 7/01/07 ............................................................ 1,135,000 1,097,749 Delaware County IDA, PCR, Peco Energy Co. Project, Refunding, Series A, 5.20%, 4/01/21 ............................................................ 1,000,000 1,036,950 Northeastern Hospital and Educational Authority College Revenue, Kings College Project, Refunding, Series B, 5.60%, 7/15/03 .............................. 410,000 427,454 Schuylkill County IDA, Resource Recovery Revenue, Schuylkill Energy Resources Inc., 6.50%, 1/01/10 ............................................................ 1,440,000 1,466,078 ----------- 4,254,078 ----------- SOUTH CAROLINA .4% Charleston County Resource Recovery Revenue, Foster Wheeler Charleston, Refunding, AMBAC Insured, 5.25%, 1/01/10 ............................................ 1,000,000 1,055,000 -----------
93 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) SOUTH DAKOTA .3% South Dakota HDA Revenue, Homeownership Mortgage, Series D, 6.05%, 5/01/04 .... $ 795,000 $ 834,496 ----------- TENNESSEE .1% bMetropolitan Government of Nashville and Davidson County IDBR, Osco Treatment Inc., Refunding and Improvement, 6.00%, 5/01/03 ........................... 278,895 105,980 ----------- TEXAS 5.2% Abilene Higher Educational Facilities Revenue, Abilene Christian University, 5.90%, 10/01/05 ........................................................... 720,000 780,552 Refunding, ETM, 5.90%, 10/01/05 ........................................... 65,000 71,687 Goose Creek Consolidated ISD, GO, 5.00%, 2/15/15 .............................. 1,000,000 1,009,500 Houston Hotel Occupancy Tax and Special Revenue, Convention and Entertainment, Series B, AMBAC Insured, 5.00%, 9/01/11 ................................... 6,000,000 6,401,460 Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.35%, 11/01/10 ........................................................... 2,500,000 2,538,250 Travis County Health Facilities Development Corp. Revenue, Ascension Health Credit, Refunding, Series A, MBIA Insured, 6.25%, 11/15/17 ....................................................................... 1,500,000 1,637,715 ----------- 12,439,164 ----------- U.S. TERRITORIES 4.6% District of Columbia GO, Refunding, Series A, 5.875%, 6/01/05 ...................................... 200,000 213,970 Series A, ETM, 5.875%, 6/01/05 ............................................ 500,000 548,080 Puerto Rico Electric Power Authority Revenue, Series T, 6.00%, 7/01/04 ........ 1,345,000 1,453,044 Virgin Islands PFA, senior lien, Refunding, Series A, 5.30%, 10/01/11 ......... 4,000,000 4,226,400 Virgin Islands Water and Power Authority Water System Revenue, Refunding, 4.875%, 7/01/06 ........................................................... 2,000,000 2,078,380 5.00%, 7/01/09 ............................................................ 2,400,000 2,461,944 ----------- 10,981,818 ----------- UTAH .1% Salt Lake County College Revenue, Westminster College Project, 5.50%, 10/01/12 340,000 354,239 ----------- VIRGINIA 1.2% Covington-Alleghany County IDA, PCR, Westvaco Corp. Project, Refunding, 5.85%, 9/01/04 2,800,000 2,962,372 ----------- WASHINGTON .7% Marysville Water and Sewer Revenue, Refunding, MBIA Insured, 5.75%, 12/01/05 .. 600,000 638,562 Washington State Public Power Supply System Revenue, Nuclear Project No. 1, Refunding, Series A, AMBAC Insured, 5.70%, 7/01/09 ........................ 1,000,000 1,081,580 ----------- 1,720,142 ----------- WEST VIRGINIA .4% West Virginia Public Energy Authority Energy Revenue, Morgantown Association Project, Series A, 5.05%, 7/01/08 ......................................... 970,000 1,014,756 ----------- WISCONSIN .2% Wisconsin State GO, Refunding, Series 1, 5.50%, 5/01/10 ....................... 500,000 533,880 ----------- TOTAL BONDS 227,088,420 ----------- ZERO COUPON BONDS .9% San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, senior lien, Refunding, Series A,1/15/17 ............................................... 3,000,000 2,080,045 ----------- TOTAL LONG TERM INVESTMENTS (COST $223,426,948) 229,168,465 ----------- cSHORT TERM INVESTMENTS 4.2% CALIFORNIA .2% California HFAR, MFH, Series D, Daily VRDN and Put, 1.15%, 2/01/31 ............ 500,000 500,000 ----------- FLORIDA 1.7% Sarasota County Revenue, Sarasota Family YMCA Project, Weekly VRDN and Put, 1.15%, 10/01/21 700,000 700,000 Pinellas County Health Facilities Authority Revenue, Pooled Hospital Loan Program, Refunding, AMBAC Insured, Daily VRDN and Put, 1.15%, 12/01/15 .............................................................. 3,300,000 3,300,000 ----------- 4,000,000 ----------- GEORGIA .7% Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 1.25%, 11/01/41 ........................................................... 1,800,000 1,800,000 -----------
94 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- cSHORT TERM INVESTMENTS (CONT.) NEW YORK 1.3% Long Island Power Authority Electric Systems Revenue, Sub Series 2, Daily VRDN and Put, 1.20%, 5/01/33 ................................................... $ 800,000 $ 800,000 New York City GO, Series H, Sub Series H-3, Daily VRDN and Put, 1.25%, 8/01/23 .............. 700,000 700,000 Sub Series A-7, Daily VRDN and Put, 1.20%, 8/01/20 ........................ 200,000 200,000 New York City Transitional Finance Authority Revenue, Future Tax Secured, Sub Series B-1, Daily VRDN and Put, 1.30%, 11/01/27 ........................... 1,500,000 1,500,000 ------------ 3,200,000 ------------ U.S. TERRITORIES .3% Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .............................. 200,000 200,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ..... 600,000 600,000 ------------ ............................................................................... 800,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $10,300,000) ............................... 10,300,000 ------------ TOTAL INVESTMENTS (COST $233,726,948) 99.7% ................................... 239,468,465 OTHER ASSETS, LESS LIABILITIES .3% ............................................ 688,631 ------------ NET ASSETS 100.0% ............................................................. $240,157,096 ============
See glossary of terms on page 137. a Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. b See Note 6 regarding defaulted securities. 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. See notes to financial statements. 95 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------------ CLASS A 2002 2001 2000 1999D 1998 -------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................... $10.50 $10.41 $11.49 $11.68 $11.21 ------------------------------------------------------ Income from investment operations: Net investment incomea ............................................... .61 .62 .65 .66 .69 Net realized and unrealized gains (losses) ........................... .06 .09 (1.08) (.18) .47 ------------------------------------------------------ Total from investment operations ...................................... .67 .71 (.43) .48 1.16 ------------------------------------------------------ Less distributions from: Net investment income ................................................ (.59) (.62) (.65) (.65) (.69) Net realized gains ................................................... -- -- --c (.02) -- ------------------------------------------------------ Total distributions ................................................... (.59) (.62) (.65) (.67) (.69) ------------------------------------------------------ Net asset value, end of year .......................................... $10.58 $10.50 $10.41 $11.49 $11.68 ====================================================== Total returnb ......................................................... 6.53% 6.99% (3.81)% 4.21% 10.64% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ....................................... $4,660,764 $4,709,402 $5,017,322 $5,988,204 $5,742,939 Ratios to average net assets: Expenses ............................................................. .62% .62% .61% .62% .61% Net investment income ................................................ 5.78% 5.90% 5.92% 5.64% 5.98% Portfolio turnover rate ............................................... 10.18% 11.08% 25.35% 18.55% 15.84% CLASS B -------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................... $10.54 $10.45 $11.52 $11.51 ------------------------------------------ Income from investment operations: Net investment incomea ............................................... .56 .56 .59 .11 Net realized and unrealized gains (losses) ........................... .07 .09 (1.07) -- ------------------------------------------ Total from investment operations ...................................... .63 .65 (.48) .11 ------------------------------------------ Less distributions from: Net investment income ................................................ (.53) (.56) (.59) (.10) Net realized gains ................................................... -- -- --c -- ------------------------------------------ Total distributions ................................................... (.53) (.56) (.59) (.10) ------------------------------------------ Net asset value, end of year .......................................... $10.64 $10.54 $10.45 $11.52 ========================================== Total returnb ......................................................... 6.10% 6.38% (4.27)% .96% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ....................................... $175,655 $136,030 $92,099 $15,487 Ratios to average net assets: Expenses ............................................................. 1.18% 1.18% 1.17% 1.18%e Net investment income ................................................ 5.23% 5.33% 5.44% 5.06%e Portfolio turnover rate ............................................... 10.18% 11.08% 25.35% 18.55%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c The fund made a capital gain distribution of $.003. d For the period January 1, 1999 (effective date) to February 28, 1999 for Class B. e Annualized 96 FRANKLIN TAX-FREE TRUST Financial Highlights (CONTINUED) FRANKLIN HIGH YIELD TAX-FREE INCOME FUND (CONT.)
YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS C 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $10.58 $10.48 $11.56 $11.75 $11.26 ------------------------------------------------ Income from investment operations: Net investment incomea ................................................. .56 .56 .59 .60 .63 Net realized and unrealized gains (losses) ............................. .06 .10 (1.08) (.18) .48 ------------------------------------------------ Total from investment operations ........................................ .62 .66 (.49) .42 1.11 ------------------------------------------------ Less distributions from: Net investment income .................................................. (.53) (.56) (.59) (.59) (.62) Net realized gains ..................................................... -- -- --c (.02) -- ------------------------------------------------ Total distributions ..................................................... (.53) (.56) (.59) (.61) (.62) ------------------------------------------------ Net asset value, end of year ............................................ $10.67 $10.58 $10.48 $11.56 $11.75 ================================================ Total returnb ........................................................... 5.98% 6.45% (4.41)% 3.69% 10.15% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $504,900 $501,372 $540,932 $631,974 $423,264 Ratios to average net assets: Expenses ............................................................... 1.18% 1.18% 1.17% 1.18% 1.18% Net investment income .................................................. 5.23% 5.34% 5.35% 5.07% 5.38% Portfolio turnover rate ................................................. 10.18% 11.08% 25.35% 18.55% 15.84%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c The fund made a capital gain distribution of $.003. See notes to financial statements. 97 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 96.2% BONDS 89.1% ALABAMA .3% Marshall County Health Care Authority Hospital Revenue, Boaz-Albertville Medical Center, Refunding, 6.20%, 1/01/08 ................................. $ 3,300,000 $ 3,357,585 Oneonta Eastern Health Systems Special Care Facilities Financing Authority GO, 7.75%, 7/01/21 ........................................................ 11,765,000 13,111,504 ------------ 16,469,089 ------------ ALASKA .7% Alaska Industrial Development and Export Authority Power Revenue, Upper Lynn Canal Regional Power, 5.70%, 1/01/12 ............................................................ 3,000,000 2,798,550 5.80%, 1/01/18 ............................................................ 1,495,000 1,285,177 5.875%, 1/01/32 ........................................................... 6,900,000 5,661,174 Alaska Industrial Development and Export Authority Revenue, Revolving Fund, Refunding, Series A, 6.20%, 4/01/10 ....................................... 675,000 704,005 Alaska State HFC Revenue, Refunding, Series A, MBIA Insured, 6.00%, 12/01/15 ........................ 2,635,000 2,760,136 Refunding, Series A, MBIA Insured, 6.10%, 12/01/37 ........................ 22,000,000 22,697,840 Series A, MBIA Insured, 5.85%, 12/01/15 ................................... 2,340,000 2,442,703 ------------ 38,349,585 ------------ ARIZONA 6.7% Apache County IDA, IDR, Tucson Electric Power Co. Project, Series C, 5.85%, 3/01/26 .......... 16,500,000 15,626,325 PCR, Tucson Electric Power Co. Project, Series A, 5.85%, 3/01/28 .......... 53,150,000 50,168,817 PCR, Tucson Electric Power Co. Project, Series B, 5.875%, 3/01/33 ......... 33,800,000 31,809,518 Arizona Health Facilities Authority Revenue, Bethesda Foundation Project, Series A, 6.375%, 8/15/15 .................... 400,000 388,576 Bethesda Foundation Project, Series A, 6.40%, 8/15/27 ..................... 4,000,000 3,784,360 Catholic Healthcare West, Series A, 6.625%, 7/01/20 ....................... 4,340,000 4,506,569 Coconino County PCR, Tucson Electric Power Navajo, Refunding, Series A, 7.125%, 10/01/32 ................................................ 21,125,000 21,986,478 Series B, 7.00%, 10/01/32 ................................................. 9,500,000 9,889,215 Gila County IDAR, Asarco Inc., Refunding, 5.55%, 1/01/27 ...................... 4,000,000 1,280,000 Maricopa County IDA, Health Facilities Revenue, Catholic Healthcare West Project, Refunding, Series A, 5.00%, 7/01/16 ....................................... 6,500,000 5,926,375 Maricopa County Pollution Control Corp. PCR, El Paso Electric, Series A, 6.375%, 7/01/14 ............................... 32,000,000 32,816,960 Public Service Co. of Colorado, Palo Verde, Refunding, Series A, 6.375%, 8/15/23 8,500,000 8,666,175 Public Service Co. of Colorado, Refunding, Series A, 5.75%, 11/01/22 ...... 9,800,000 9,740,612 Pima County IDAR, Tucson Electric Power Co. Project, Series A, 6.10%, 9/01/25 .................................................. 3,990,000 3,916,744 Series B, 6.00%, 9/01/29 .................................................. 94,690,000 93,434,411 Series C, 6.00%, 9/01/29 .................................................. 53,500,000 52,790,590 Red Hawk Canyon Community Facility Revenue, 7.625%, 6/01/05 ................... 9,375,000 9,780,094 Salt River Project Agricultural Improvement and Power District Electric System Revenue, Series A, 6.00%, 1/01/31 ......................................... 3,180,000 3,189,063 ------------ 359,700,882 ------------ ARKANSAS .3% Arkansas State Development Finance Authority, Tobacco Settlement Revenue, Biosciences Institute College, 5.125%, 12/01/28 ........................... 1,250,000 1,224,063 Baxter County IDR, Aeroquip/Trinova Corp. Project, Refunding, 5.80%, 10/01/13 . 2,400,000 2,626,752 Calhoun County Solid Waste Disposal Revenue, Georgia-Pacific Corp. Project, 6.375%, 11/01/26 10,000,000 9,563,000 Independence County PCR, Arkansas Power and Light Co. Project, Refunding, 6.25%, 1/01/21 5,000,000 5,092,250 ------------ 18,506,065 ------------ CALIFORNIA 7.8% ABAG 1915 Act Revenue, Windemere Ranch AD 1, 7.45%, 9/02/30 ................... 38,610,000 41,181,812 Adelanto Water Authority Revenue, Water Systems Acquisition Project, sub. lien, Series A, Pre-Refunded, 7.50%, 9/01/28 .................................... 21,330,000 27,078,862 Alameda County MFHR, Claremont House Project, Refunding, Series A, 8.00%, 12/01/23 12,350,000 13,297,863 aArroyo Grande Hospital System COP, Vista Hospital Systems, Refunding, Series A, 7.315%, 7/01/20 ...................................... 22,515,000 8,330,550 Series A, 7.70%, 7/01/06 .................................................. 2,500,000 925,000
98 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) CALIFORNIA (CONT.) Avenal PFAR, Refunding, 7.00%, 9/02/10 ............................................................ $ 1,345,000 $ 1,428,525 7.25%, 9/02/27 ............................................................ 3,665,000 3,865,915 Azusa RDA, Tax Allocation, Merged Area Project, Refunding, Series A, 6.75%, 8/01/23 2,850,000 3,002,618 Beaumont PFAR, Sewer Enterprise Project, Series A, Pre-Refunded, 6.90%, 9/01/23 4,525,000 5,437,104 Benicia 1915 Act, Fleetside Industrial Park Assessment, Refunding, 6.20%, 9/02/06 ............................................................ 265,000 275,049 6.30%, 9/02/07 ............................................................ 285,000 295,217 6.40%, 9/02/08 ............................................................ 300,000 310,827 6.50%, 9/02/09 ............................................................ 320,000 331,414 6.60%, 9/02/10 ............................................................ 340,000 352,087 6.70%, 9/02/11 ............................................................ 360,000 372,708 6.80%, 9/02/12 ............................................................ 245,000 253,653 Calabasas Special Tax, CFD No. 01-1, Refunding, 6.25%, 9/01/31 ................ 6,000,000 6,047,400 California Educational Facilities Authority Revenue, Pooled College and University Financing, Series B, 6.125%, 6/01/09 ...................................... 3,000,000 3,153,840 California PCFA, Solid Waste Disposal Revenue, Keller Canyon Landfill Co. Project, 6.875%, 11/01/27 ................................................. 5,480,000 5,411,062 California Special Districts Association Finance Corp. COP, Series V, 7.50%, 5/01/13 715,000 757,686 California State GO, Refunding, 5.125%, 6/01/31 ............................... 25,000,000 24,680,750 California Statewide CDA Revenue, Eskaton Village Grass Valley, 8.25%, 11/15/31 ............................. 3,500,000 3,741,185 Monterey Institute International, 7.75%, 7/01/31 .......................... 15,370,000 15,692,463 Capistrano USD, CFD, Special Tax No. 9, Pre-Refunded, 6.60%, 9/01/05 ........................... 285,000 311,762 Special Tax No. 9, Pre-Refunded, 6.70%, 9/01/06 ........................... 280,000 306,704 Special Tax No. 9, Pre-Refunded, 6.80%, 9/01/07 ........................... 325,000 356,470 Special Tax No. 9, Pre-Refunded, 6.90%, 9/01/08 ........................... 260,000 285,353 Special Tax No. 90-2 Talega, 5.875%, 9/01/31 .............................. 3,500,000 3,502,485 Special Tax No. 92-1, Pre-Refunded, 7.00%, 9/01/18 ........................ 1,000,000 1,099,770 Chula Vista CFD, Special Tax No. 99-1, Otay Ranch Special Assessment 1, 6.10%, 9/01/31 4,890,000 4,901,198 Corona COP, Corona Community Hospital Project, ETM, 9.425%, 9/01/06 ................... 5,555,000 6,546,401 Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 .......... 8,820,000 12,267,385 a Vista Hospital System, Refunding, Series B, 7.70%, 7/01/06 ................ 11,100,000 4,107,000 a Vista Hospital System, Refunding, Series B, 7.20%, 7/01/20 ................ 10,885,000 4,027,450 Emeryville RDA, MFHR, Emery Bay Apartments II, Refunding, Series A, 5.85%, 10/01/28 ...................................... 14,530,000 13,549,661 sub. lien, Refunding, Series B, 6.35%, 10/01/28 ........................... 3,425,000 3,285,089 sub. lien, Refunding, Series C, 7.875%, 10/01/28 .......................... 2,035,000 1,930,136 Foothill/Eastern Corridor Agency Toll Road Revenue, senior lien, Series A, Pre-Refunded, 6.50%, 1/01/32 .............................................. 37,675,000 43,717,317 Gateway Improvement Authority Revenue, Marin City CFD, Series A, Pre-Refunded, 7.75%, 9/01/25 ............................................................ 4,485,000 5,279,383 Hesperia PFAR, Series B, 7.375%, 10/01/23 ..................................... 6,365,000 6,578,864 Lake Elsinore 1915 Act, AD No. 93-1, Limited Obligation, Refunding, 7.00%, 9/02/30 ............................. 8,670,000 9,076,536 Special Assessment, Series A, Pre-Refunded, 7.90%, 9/02/24 ................ 6,000,000 6,373,860 Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ............................. 3,065,000 3,083,543 Los Angeles MFR, Refunding, Series J-1A, 7.125%, 1/01/24 .............................................. 10,000 10,087 Series J-1B, 7.125%, 1/01/24 .............................................. 675,000 687,056 Series J-1C, 7.125%, 1/01/24 .............................................. 1,435,000 1,467,058 Series J-2A, 8.50%, 1/01/24 ............................................... 490,000 498,541 Series J-2B, 8.50%, 1/01/24 ............................................... 3,190,000 3,263,625 Series J-2C, 8.50%, 1/01/24 ............................................... 6,755,000 6,922,997 Los Angeles Regional Airports Improvement Corp. Lease Revenue, Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 ... 22,500,000 19,945,350 United Airlines, International Airport, Refunding, 6.875%, 11/15/12 ....... 9,500,000 6,365,475 Murrieta CFD, 1915 Act, No. 2000-1, Special Tax, 6.375%, 9/01/30 .............. 4,000,000 4,014,480
99 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) CALIFORNIA (CONT.) Oakland Revenue, YMCA East Bay Project, Refunding, 7.10%, 6/01/10 ............. $ 2,235,000 $ 2,447,504 Orinda 1915 Act, Special Assessment, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 . 2,676,000 2,697,488 aPalmdale Special Tax CFD, No. 93-1, Ritter Ranch Project, Series A, 8.50%, 9/01/24 23,500,000 11,750,000 Perris PFA, Local Agency Revenue, Series B, 7.125%, 8/15/15 ........................................................... 2,035,000 2,103,783 7.25%, 8/15/23 ............................................................ 4,095,000 4,242,092 Poway USD, Special Tax GO, CFD No. 10, Area A, 6.10%, 9/01/31 ................. 3,000,000 3,021,690 Riverside County COP, Airforce Village Project West Inc., Series A, Pre-Refunded, 8.125%, 6/15/07 ................................................................... 7,160,000 7,437,450 6/15/12 ................................................................... 5,290,000 5,494,988 San Bernardino County Finance Authority Revenue, Public Improvement, AD, Refunding, Series A, 6.50%, 9/02/04 ............................................................ 815,000 831,699 7.00%, 9/02/17 ............................................................ 2,390,000 2,421,070 San Francisco Downtown Parking Corp. Parking Revenue, 6.55%, 4/01/12 ............................................................ 1,800,000 1,899,774 6.65%, 4/01/18 ............................................................ 2,150,000 2,260,854 San Francisco Uptown Parking Corp. Parking Revenue, Union Square, MBIA Insured, 6.00%, 7/01/31 ............................................................ 8,920,000 9,859,276 San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, senior lien, 5.00%, 1/01/33 ............................................................ 5,930,000 5,283,037 San Jose MFHR, Timberwood Apartments, Series B, 9.25%, 2/01/10 ................ 1,445,000 1,449,971 aSan Luis Obispo COP, Vista Hospital System Inc., 6.45%, 7/01/29 ............... 22,000,000 8,140,000 San Ramon 1915 Act, Special Assessment, Fostoria Parkway Reassessment District No. 9, 6.30%, 9/02/03 ............................................................ 50,000 52,224 6.80%, 9/02/15 ............................................................ 680,000 705,908 South San Francisco RDA Tax Allocation, Gateway Redevelopment Project, Pre-Refunded, 7.60%, 9/01/18 ............................................................ 2,000,000 2,101,960 ------------- 414,185,394 ------------- COLORADO 1.7% Arvada MFHR, Springwood Community Project, 6.45%, 2/20/26 ..................... 3,000,000 3,096,180 Colorado Health Facilities Authority Revenue, Rocky Mountain Adventist Health Center, Refunding, 6.25%, 2/01/04 ......... 900,000 949,464 Rocky Mountain Adventist Health Center, Refunding, ETM, 6.25%, 2/01/04 .... 100,000 107,379 Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.45%, 7/01/08 ............................................. 1,135,000 1,084,640 Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.75%, 7/01/20 ............................................. 3,000,000 2,571,660 Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.875%, 7/01/28 ............................................ 4,290,000 3,596,307 Denver City and County Airport Revenue, Series D, 7.75%, 11/15/13 ............. 500,000 615,080 Denver City and County Special Facilities Airport Revenue, United Airlines Inc. Project, Series A, 6.875%, 10/01/32 ....................................... 11,760,000 6,880,306 Eagle County Air Terminal Corp. Revenue, Series A, 7.00%, 5/01/21 ............................................................ 1,150,000 1,049,571 7.25%, 5/01/31 ............................................................ 1,705,000 1,533,682 Eagle County Airport Terminal Project Revenue, 7.50%, 5/01/21 ................. 2,105,000 2,122,514 Eagle County Sports and Housing Facilities Revenue, Vail Associate Project, Refunding, 6.95%, 8/01/19 ................................................. 41,200,000 40,990,704 Littleton MFHR, Riverpoint, Refunding, Series C, 8.00%, 12/01/29 .............. 2,935,000 3,189,993 McKay Landing Metropolitan District No. 2 GO, Ltd. Tax, 7.50%, 12/01/19 ....... 3,860,000 4,132,902 Saddle Rock South Metropolitan District No. 2 GO, Ltd. Mill Levy Obligation, 7.20%, 12/01/19 ........................................................... 915,000 974,191 Saddle Rock South Metropolitan District No. 3 GO, Ltd. Mill Levy Obligation, 7.35%, 12/01/19 ........................................................... 3,655,000 3,875,725 University of Colorado Hospital Authority Revenue, Series A, 5.60%, 11/15/31 .. 9,000,000 9,012,510 bVillages Castle Rock Metropolitan District No. 4, Revenue, Refunding, 8.50%, 6/01/31 3,000,000 2,494,770 ------------- 88,277,578 ------------- CONNECTICUT 2.0% Connecticut State Development Authority PCR, Connecticut Light and Water, Refunding, Series A, 5.85%, 9/01/28 .......... 56,325,000 57,614,843 Western Massachusetts Electric Co., Refunding, Series A, 5.85%, 9/01/28 ... 12,500,000 12,706,250 Connecticut State Development Authority Water Facility Revenue, Bridgeport Hydraulic Co. Project, 6.15%, 4/01/35 ..................................... 3,000,000 3,132,060 Connecticut State Health and Educational Facilities Authority Revenue, Sacred Heart University, Series C, 6.50%, 7/01/16 ......................... 420,000 441,903 Sacred Heart University, Series C, Pre-Refunded, 6.50%, 7/01/16 ........... 1,580,000 1,823,320
100 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) CONNECTICUT (CONT.) Connecticut State Health and Educational Facilities Authority Revenue, (cont.) St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 .................. $ 5,650,000 $ 5,008,951 Windham Community Memorial Hospital, Series C, 6.00%, 7/01/11 ............. 2,000,000 2,016,280 Connecticut State HFAR, Housing Mortgage Finance Program, Series C-1, 6.30%, 11/15/17 ............................................... 19,995,000 21,267,482 Sub Series F-1, 6.00%, 5/15/17 ............................................ 3,500,000 3,692,990 ------------- 107,704,079 ------------- FLORIDA 10.6% Beacon Tradeport CDD, Special Assessment, Commercial Project, Series A, 5.80%, 5/01/04 .............................. 4,350,000 4,385,583 Commercial Project, Series A, 6.00%, 5/01/16 .............................. 27,760,000 27,881,589 Commercial Project, Series A, 6.20%, 5/01/22 .............................. 23,590,000 23,617,364 Industrial Project, Series B, 6.125%, 5/01/17 ............................. 15,305,000 14,998,900 Industrial Project, Series B, 6.375%, 5/01/22 ............................. 8,835,000 8,835,000 Brighton Lakes CDD, GO, Special Assessment, Series B, 7.375%, 5/01/07 9,455,000 9,645,802 7.625%, 5/01/31 ........................................................... 3,360,000 3,577,627 Brooks of Bonita Springs CDD, Capital Improvement Revenue, 6.85%, 5/01/31 ............................................................ 1,555,000 1,587,873 Series A, 6.20%, 5/01/19 .................................................. 9,545,000 9,573,062 Brooks of Bonita Springs II CDD, Capital Improvement Revenue, Series A, 7.00%, 5/01/31 .................................................. 12,955,000 13,541,732 Series B, 6.60%, 5/01/07 .................................................. 8,525,000 8,843,494 Capital Region CDD, Capital Improvement Revenue, Series A-2, 6.85%, 5/01/31 ... 2,485,000 2,543,074 Capron Trails CDD, 9.50%, 12/01/10 ............................................ 5,795,000 5,885,634 Cedar Hammock CDD, Capital Improvement Revenue, 6.375%, 11/01/04 .............. 17,715,000 18,070,009 Championsgate CDD, Capital Improvement Revenue, Series A, 6.25%, 5/01/20 .................................................. 2,835,000 2,701,840 Series B, 5.70%, 5/01/05 .................................................. 1,415,000 1,414,873 Falcon Trace CDD, Special Assessment, 6.00%, 5/01/20 .......................... 3,695,000 3,630,559 Fleming Plantation CDD, Special Assessment, Series B, 7.375%, 5/01/31 ......... 10,000,000 10,849,700 Florida State Board of Education Capital Outlay GO, Public Education, Refunding, Series D, 6.00%, 6/01/23 .................................................. 5,000,000 5,727,750 Gateway Services District Water Management Benefit Tax Revenue, Second Assessment Area, Phase One, 8.00%, 5/01/20 ........................................... 3,950,000 4,185,499 Groves CDD, Special Assessment Revenue, Series A, 7.75%, 5/01/32 .................................................. 1,825,000 1,887,488 Series B, 7.625%, 5/01/08 ................................................. 12,900,000 13,154,130 Halifax Hospital Medical Center Hospital Revenue, Series A, 7.25%, 10/01/24 .................................................................. 4,700,000 4,984,632 10/01/29 .................................................................. 1,400,000 1,479,296 Heritage Harbor CDD, Special Assessment Revenue, Series A, 6.70%, 5/01/19 .................................................. 1,790,000 1,812,232 Series B, 6.00%, 5/01/03 .................................................. 1,525,000 1,533,647 Heritage Palms CDD, Capital Improvement Revenue, 6.25%, 11/01/04 .............. 4,600,000 4,685,008 Highlands County Health Facilities Authority Revenue, Adventist Health Systems, Refunding, 5.25%, 11/15/28 ................................................ 4,750,000 4,458,255 Indian Trace CDD, Water Management Special Benefit, Refunding, Sub Series B, 8.25%, 5/01/05 ................................................................... 5,510,000 5,887,655 5/01/11 ................................................................... 12,760,000 14,095,462 Indian Trail ID GO, Water Control and Improvement, Unit Development 18, 6.875%, 8/01/10 ........................................................... 1,085,000 1,133,782 7.00%, 8/01/20 ............................................................ 2,445,000 2,534,878 7.25%, 8/01/31 ............................................................ 5,725,000 5,945,584 Indigo CDD, Capital Improvement Revenue, Refunding, Series A, 7.00%, 5/01/31 ....................................... 980,000 1,005,411 Series C, 7.00%, 5/01/30 .................................................. 5,200,000 5,334,836 Lake Ashton CDD Revenue, Series A, 7.40%, 5/01/32 ............................. 2,000,000 2,044,080
101 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) FLORIDA (CONT.) Lakeland Retirement Community Revenue, First Mortgage, Carpenters Home, Refunding, Series A, 6.75%, 1/01/19 ....................................... $ 15,345,000 $ 14,981,937 Lakeside Plantation CDD, Capital Improvement Revenue, 7.00%, 5/01/07 .......... 6,000,000 6,126,300 Lakewood Ranch CDD, Special Assessment Revenue, 6.00%, 5/01/08 ................ 5,185,000 5,256,294 Lakewood Ranch CDD 2, Benefit Special Assessment, 6.25%, 5/01/18 ............................................................ 3,215,000 3,214,679 Series A, 8.125%, 5/01/17 ................................................. 4,085,000 4,365,068 Series B, 8.125%, 5/01/17 ................................................. 265,000 283,168 Lakewood Ranch CDD 3, Special Assessment Revenue, 7.625%, 5/01/18 ............. 5,345,000 5,646,405 Marion County IDAR, Little Sumter Utility Co. Project, 7.15%, 10/01/30 ........ 4,250,000 4,329,220 Meadow Pointe II CDD, Capital Improvement Revenue, Series A, 5.25%, 8/01/03 ... 40,000 40,046 Mediterra North CDD, Capital Improvement Revenue, Series A, 6.80%, 5/01/31 .... 9,000,000 9,112,050 Mediterra South CDD, Capital Improvement Revenue, 6.85%, 5/01/31 ............................................................ 2,790,000 2,848,981 Series B, 6.25%, 5/01/04 .................................................. 850,000 863,957 Series B, 6.95%, 5/01/31 .................................................. 7,840,000 8,145,054 Miami-Dade County IDAR, Special Facilities, United Airlines Inc. Project, 6.05%, 3/01/35 5,000,000 2,401,850 Mount Dora Country Club CDD, Special Assessment Revenue, 7.125%, 5/01/05 ........................................................... 1,630,000 1,677,629 7.75%, 5/01/13 ............................................................ 1,160,000 1,198,930 North Springs ID, Special Assessment, Water Management, Series A, Pre-Refunded, 8.20%, 5/01/24 1,865,000 2,103,776 Special Assessment, Water Management, Series B, 8.30%, 5/01/24 ............ 1,635,000 1,713,251 Special Assessment Revenue, Parkland Isles Project, Series A, 7.00%, 5/01/19 1,175,000 1,222,364 Special Assessment Revenue, Parkland Isles Project, Series B, 6.25%, 5/01/05 215,000 219,220 Northern Palm Beach County ID Revenue, Water Control and Improvement, Unit Development No. 43, 6.10%, 8/01/21 ............................................................ 3,000,000 3,020,460 6.125%, 8/01/31 ........................................................... 800,000 791,872 Northwood CDD, Special Assessment Revenue, 6.40%, 5/01/02 ............................................................ 1,380,000 1,381,283 Series B, 7.60%, 5/01/17 .................................................. 1,440,000 1,472,890 Oaksted CDD, Capital Improvement, Series A, 7.20%, 5/01/32 .................... 3,500,000 3,637,305 Palm Beach County HFAR, Abbey Del Ray South Project, Refunding, 8.25%, 10/01/15 6,000,000 6,205,200 Parklands West CDD Revenue, Special Assessment, Series A, 6.90%, 5/01/32 ...... 3,000,000 3,019,200 Parkway Center CDD, Special Assessment, Series A, 8.25%, 5/01/31 .................................................. 2,500,000 2,261,725 Series B, 8.00%, 5/01/10 .................................................. 2,700,000 2,304,180 Pelican Marsh CDD, Special Assessment Revenue, Series A, 7.10%, 5/01/20 .................................................. 4,030,000 4,232,306 Series A, 7.20%, 5/01/31 .................................................. 6,470,000 6,793,241 Series A, ETM, 8.25%, 5/01/02 ............................................. 270,000 272,897 Series A, ETM, 8.25%, 5/01/03 ............................................. 295,000 317,078 Series A, ETM, 8.25%, 5/01/04 ............................................. 315,000 354,892 Series A, Pre-Refunded, 8.25%, 5/01/16 .................................... 6,590,000 7,550,295 Series B, 6.90%, 5/01/11 .................................................. 14,520,000 15,243,096 Series C, 7.00%, 5/01/19 .................................................. 12,690,000 13,193,920 Series D, 6.95%, 5/01/19 .................................................. 5,125,000 5,299,045 Piney-Z CDD, Capital Improvement Revenue, Series A, 7.25%, 5/01/19 .................................................. 895,000 910,824 Series B, 6.50%, 5/01/02 .................................................. 3,120,000 3,121,498 Poinciana CDD, Special Assessment, Series A, 7.125%, 5/01/31 .................. 11,000,000 11,456,830 Reserve CDD, Capital Improvement Revenue, Stormwater Management, 8.25%, 5/01/14 ........ 3,720,000 3,856,412 Utility Revenue, Stormwater Management, Refunding, Series A, 6.625%, 12/01/22 4,305,000 4,380,036 Reserve CDD No. 2, Capital Improvement Revenue, 7.125%, 5/01/30 ............... 4,635,000 4,792,775 River Place St. Lucie CDD, Special Assessment Revenue, Series A, 7.625%, 5/01/21 ................................................. 1,280,000 1,310,694 Series A, 7.625%, 5/01/30 ................................................. 1,590,000 1,628,128 Series B, 7.25%, 5/01/10 .................................................. 8,180,000 8,360,369
102 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) FLORIDA (CONT.) Riverwood Community Development Revenue, Special AD, Series A, 6.75%, 5/01/04 ............................................................ $ 2,105,000 $ 2,151,247 7.75%, 5/01/14 ............................................................ 1,125,000 1,199,284 Sampson Creek CDD Capital Improvement Revenue, Series A, 6.95%, 5/01/31 ....... 3,000,000 3,089,610 St. John's County IDA, Health Care Revenue, Glenmoor St. John's Project, Series A, 8.00%, 1/01/17 .................................................. 10,375,000 10,751,198 St. Lucie West Services District Capital Improvement Revenue, Cascades Project, 6.10%, 5/01/18 .......................................... 2,480,000 2,467,178 Lake Charles Project, 6.375%, 8/01/02 ..................................... 1,025,000 1,024,313 Lakeforest Project, 6.25%, 10/01/04 ....................................... 5,265,000 5,335,604 Tortoise Cay Project, 6.50%, 10/01/05 ..................................... 2,685,000 2,730,027 St. Lucie West Services District Revenue, Port St. Lucie, Pre-Refunded, 7.875%, 5/01/20 18,610,000 20,858,460 St. Lucie West Services District Special Assessment Revenue, Port St. Lucie, . Water Management Benefit, Refunding, Series B, 6.00%, 5/01/09 ............. 1,205,000 1,235,137 6.25%, 5/01/25 ............................................................ 5,080,000 5,111,140 St. Lucie West Services District Water Management Benefit Tax Revenue, Pre-Refunded, 7.70%, 5/01/25 .............................................. 4,750,000 5,382,035 Stoneybrook West Community Development Special Assessment, Series A, 7.00%, 5/01/32 3,150,000 3,257,037 Sumter County IDAR, Little Sumter Utility Co. Project, 6.75%, 10/01/27 ........................................................... 2,845,000 2,790,518 7.25%, 10/01/27 ........................................................... 4,135,000 4,176,970 Tampa Revenue, Aquarium Inc. Project, Pre-Refunded, 7.55%, 5/01/12 ............ 8,000,000 8,236,240 Tara CDD No. 1, Capital Improvement Revenue, Series A, 7.15%, 5/01/31 ......... 1,460,000 1,554,141 Village CDD No. 1, Capital Improvement Revenue, 8.40%, 5/01/12 ............................................................ 360,000 368,327 8.00%, 5/01/15 ............................................................ 1,825,000 1,865,716 Village CDD No. 4, Special Assessment Revenue, 7.20%, 5/01/31 ................. 10,000,000 10,536,100 Village Center CDD, Recreational Revenue, Sub Series B, 6.30%, 1/01/07 .............................................. 1,590,000 1,608,889 Sub Series B, 6.25%, 1/01/13 .............................................. 7,665,000 7,820,293 Sub Series B, 8.25%, 1/01/17 .............................................. 2,430,000 2,592,251 Sub Series C, 7.375%, 1/01/19 ............................................. 2,550,000 2,614,184 Vista Lake CDD, Capital Improvement Revenue, Series A, 7.20%, 5/01/32 ......... 3,000,000 3,128,130 Waterchase CDD, Capital Improvement Revenue, Series A, 6.70%, 5/01/32 ......... 3,000,000 3,037,080 Waterlefe CDD, Capital Improvement Revenue, Series A, 6.95%, 5/01/31 .......... 1,250,000 1,279,075 Westchase East CDD, Capital Improvement Revenue, 7.10%, 5/01/21 ............... 1,600,000 1,672,000 ------------- 564,264,154 ------------- GEORGIA .3% Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.375%, 12/01/28 1,470,000 1,268,287 Forsyth County Hospital Authority Revenue, Anticipation Certificate, Georgia Baptist Health Care System Project, 6.25%, 10/01/18 ........................................................... 6,000,000 5,819,280 6.375%, 10/01/28 .......................................................... 8,000,000 7,669,200 ------------- 14,756,767 ------------- HAWAII .1% Hawaii State Department of Transportation Special Facilities Revenue, Continental Airlines Inc. Project, Refunding, 7.00%, 6/01/20 .......................... 4,350,000 3,681,971 ------------- IDAHO .3% Nez Perce County PCR, Potlatch Corp. Project, Refunding, 6.00%, 10/01/24 ...... 17,500,000 16,549,575 ------------- ILLINOIS 2.7% Bolingbrook Special Service Area No. 2, Special Tax, GO, Bloomfield West Project, Series A, 7.00%, 3/01/31 .................................................. 5,000,000 5,015,100 Bolingbrook Special Service Area No. 3, Special Tax, Lakewood Ridge Project, 7.05%, 3/01/31 5,905,000 5,913,858 Bryant PCR, Central Illinois Light Co. Project, Refunding, MBIA Insured, 5.90%, 8/01/23 11,000,000 11,682,770 Cary Special Tax, Special Service Area No. 1 Cambridge, Series A, 7.625%, 3/01/30 ........... 4,000,000 4,246,840 Special Service Area No. 2 Foxford Hill, 7.50%, 3/01/30 ................... 5,500,000 5,647,510 Chicago O'Hare International Airport Special Facilities Revenue, American ..... Airlines Inc. Project, 8.20%, 12/01/24 .................................... 7,830,000 7,709,575 Gilberts Special Service Area No. 9, Special Tax, Big Timber Project, 7.75%, 3/01/27 6,000,000 6,084,000 Illinois Development Finance Authority Hospital Revenue, Adventist Health System, Sunbelt Obligation, 5.65%, 11/15/24 ....................................... 8,500,000 8,214,655 Illinois Development Finance Authority PCR, Commonwealth Edison Co. Project, Refunding, Series 1991, 7.25%, 6/01/11 .................................... 7,000,000 7,160,720
103 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) ILLINOIS (CONT.) Illinois Educational Facilities Authority Revenue, Osteopathic Health Systems, ETM, 7.125%, 5/15/11 ...................................................... $ 2,330,000 $ 2,399,248 Pre-Refunded, 7.25%, 5/15/22 .............................................. 7,000,000 8,752,520 Illinois Health Facilities Authority Revenue, Northwestern Medical Center, MBIA Insured, Pre-Refunded, 6.625%, 11/15/25 . 6,500,000 7,359,690 Rush Presbyterian Hospital, Refunding, Series A, MBIA Insured, 6.25%, 11/15/20 9,000,000 9,905,850 Sarah Bush Lincoln Health Center, Pre-Refunded, 7.25%, 5/15/12 ............ 1,890,000 1,948,514 Sarah Bush Lincoln Health Center, Refunding, Series B, 6.00%, 2/15/11 ..... 3,370,000 3,573,683 St. Elizabeth's Hospital, 6.25%, 7/01/16 .................................. 1,215,000 1,261,024 St. Elizabeth's Hospital, 6.375%, 7/01/26 ................................. 6,695,000 6,874,292 Thorek Hospital and Medical Center, Refunding, 5.375%, 8/15/28 ............ 8,595,000 7,515,812 Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue, McCormick Place Convention Center, ETM, 7.00%, 7/01/26 ....................................................... 7,500,000 9,653,250 Pre-Refunded, 6.25%, 7/01/17 .............................................. 11,000,000 12,607,760 Montgomery Special Assessment, Improvement, Lakewood Creek Project, 7.75%, 3/01/30 5,000,000 5,118,650 aRobbins Resource Recovery Revenue, Restructuring Project, Series A, 8.375%, 10/15/16 ................................................ 72,728,515 1,090,928 Series B, 8.375%, 10/15/16 ................................................ 28,458,984 426,885 Southwestern Development Authority Revenue, Anderson Hospital, 5.625%, 8/15/29 2,425,000 2,257,142 ------------- 142,420,276 ------------- INDIANA 1.4% Crawfordsville Industrial EDR, Kroger Co., Refunding, 7.70%, 11/01/12 ......... 5,000,000 5,207,200 Goshen Industrial Revenue, Greencroft Hospital Association Inc., Refunding, 5.75%, 8/15/19 ................................................................... 3,000,000 2,601,030 8/15/28 ................................................................... 5,000,000 4,147,900 Indiana Health Facility Financing Authority Hospital Revenue, Community Foundation Northwest Indiana, Series A, 6.375%, 8/01/31 ......... 56,500,000 55,069,420 Jackson County Scheck Memorial Hospital, Refunding, 5.125%, 2/15/17 ....... 1,500,000 1,363,890 Indiana State Development Finance Authority Environmental Revenue, USX Corp. Project, Refunding, 5.60%, 12/01/32 ....................................... 8,200,000 7,632,970 ------------- 76,022,410 ------------- IOWA .4% Tobacco Settlement Revenue Management Authority, Tobacco Settlement Revenue, Asset Backed, Series B, 5.60%, 6/01/35 .................................... 25,250,000 23,458,513 ------------- KANSAS .1% Prairie Village Revenue, Claridge Court Project, Series A, 8.75%, 8/15/23 ..... 5,730,000 6,023,720 ------------- KENTUCKY .6% Kenton County Airport Board Revenue, Special Facilities, Delta Airlines Inc. Project, Series A, 7.50%, 2/01/20 .................................................. 11,230,000 11,141,508 Series B, 7.25%, 2/01/22 .................................................. 3,595,000 3,546,288 Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 6,835,000 5,409,356 Powderly IDR, First Mortgage Revenue, Kroger Co., Refunding, 7.375%, 9/01/06 .. 575,000 594,861 Russell Health System Revenue, Pre-Refunded, 8.10%, 7/01/15 ................... 7,500,000 9,003,356 ------------- 29,695,369 ------------- LOUISIANA 1.8% Beauregard Parish Revenue, Boise Cascade Corporate Project, Refunding, 6.80%, 2/01/27 13,990,000 14,021,617 Calcasieu Parish Public Trust Authority Mortgage Revenue, Refunding, Series A, 7.75%, 6/01/12 595,000 608,167 Lake Charles Harbor and Terminal District Port Facilities Revenue, Trunkline Co. Project, Refunding, 7.75%, 8/15/22 ..................................................... 35,000,000 36,771,350 Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 4,850,000 4,957,816 Tobacco Settlement Financing Corp. Revenue, Series 2001B, 5.875%, 5/15/39 ..... 11,500,000 11,285,755 West Feliciana Parish PCR, Entergy Gulf States Project, Refunding, Series B, 6.60%, 9/01/28 .......... 20,750,000 21,030,333 Series A, 7.50%, 5/01/15 .................................................. 8,740,000 9,025,011 ------------- 97,700,049 -------------
104 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) MAINE .6% Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 .......... $ 4,800,000 $ 4,864,752 Skowhegan PCR, S.D. Warren Co., Series A, 6.65%, 10/15/15 ................................................. 24,570,000 24,654,767 Series B, 6.65%, 10/15/15 ................................................. 4,940,000 4,957,043 ------------- 34,476,562 ------------- MARYLAND .9% Gaithersberg Hospital Facilities Revenue, Shady Grove Adventist Hospital, Refunding and Improvement, Series B, 8.50%, 9/01/03 ............................................................ 1,520,000 1,604,360 8.50%, 9/01/07 ............................................................ 5,340,000 6,194,186 Pre-Refunded, 8.50%, 9/01/22 .............................................. 3,385,000 3,570,667 Maryland State CDA, Department of Housing and Community Development Revenue, Series A, 5.875%, 7/01/16 ................................................. 3,535,000 3,726,279 Maryland State EDC Revenue, Chesapeake Bay, senior lien, Series B, 7.50%, 12/01/14 .................................... 1,915,000 1,908,470 senior lien, Series B, 7.625%, 12/01/22 ................................... 6,740,000 6,711,018 Series B, 7.75%, 12/01/31 ................................................. 16,160,000 16,082,594 Takoma Park Hospital Facilities Revenue, Washington Adventist Hospital Project, Series B, 8.50%, 9/01/03 ................................................................... 1,610,000 1,696,972 9/01/07 ................................................................... 6,975,000 8,054,660 ------------- 49,549,206 ------------- MASSACHUSETTS .7% Massachusetts Bay Transportation Authority Revenue, General Transportation System, Series A, 7.00%, 3/01/21 .................................................. 2,000,000 2,511,920 Massachusetts Municipal Wholesale Electric Co. Power Supply System Revenue, Series A, 6.75%, 7/01/11 .................................................. 4,435,000 4,599,938 Series B, 6.75%, 7/01/17 .................................................. 3,170,000 3,288,938 Massachusetts State Development Finance Agency Resource Recovery Revenue, Waste Management Inc. Project, Series B, 6.90%, 12/01/29 .............................................................. 3,000,000 3,287,220 Massachusetts State Development Finance Agency Revenue, Berkshire Retirement Project, First Mortgage, 5.60%, 7/01/19 .............. 1,030,000 894,813 Berkshire Retirement Project, First Mortgage, 5.625%, 7/01/29 ............. 1,620,000 1,329,955 Loomis Community Project, First Mortgage, Refunding, Series A, 5.75%, 7/01/23 3,500,000 3,199,035 Loomis Community Project, First Mortgage, Series A, 5.625%, 7/01/15 ....... 1,850,000 1,730,435 Massachusetts State Health and Educational Facilities Authority Revenue, Saint Memorial Medical Center, Refunding, Series A, 5.75%, 10/01/06 ........................................................... 3,250,000 3,160,950 6.00%, 10/01/23 ........................................................... 6,235,000 5,577,519 aMassachusetts State Industrial Finance Agency Solid Waste Disposal Revenue, Massachusetts Paper Co. Project, senior lien, 8.50%, 11/01/12 ............................................................. 39,820,661 5,973,099 ------------- 35,553,822 ------------- MICHIGAN 4.0% Cadillac Local Development Finance Authority Tax Increment Revenue, Refunding, 8.50%, 3/01/10 ............................................................ 4,765,000 5,180,079 Detroit GO, Refunding, Series B, 6.375%, 4/01/07 ...................................... 7,535,000 8,189,189 Refunding, Series B, 6.25%, 4/01/08 ....................................... 3,000,000 3,235,140 Series A, Pre-Refunded, 6.80%, 4/01/15 .................................... 5,160,000 5,831,987 Dickinson County Memorial Hospital System Revenue, Pre-Refunded, 8.125%, 11/01/24 4,250,000 4,951,930 Garden City Hospital Financing Authority Hospital Revenue, Refunding, 5.625%, 9/01/10 ........................................................... 2,000,000 1,639,300 5.75%, 9/01/17 ............................................................ 1,000,000 720,040 Kent Hospital Finance Authority Health Care Revenue, Butterworth Health System, Series A, MBIA Insured, Pre-Refunded, 6.125%, 1/15/21 ............................................................. 11,770,000 13,292,450 Michigan State Hospital Finance Authority Revenue, Ascension Health Credit, Refunding, Series A, MBIA Insured, 6.125%, 11/15/23 18,000,000 19,151,100 Detroit Medical Center Obligation Group, Refunding, Series A, 6.25%, 8/15/13 7,500,000 7,215,450 Detroit Medical Center Obligation Group, Refunding, Series A, 6.50%, 8/15/18 30,205,000 28,940,619 Detroit Medical Center Obligation Group, Refunding, Series B, 5.50%, 8/15/23 500,000 420,740 Detroit Medical Center Obligation Group, Series A, 5.25%, 8/15/23 ......... 500,000 406,890
105 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) MICHIGAN (CONT.) Michigan State Hospital Finance Authority Revenue, (cont.) Detroit Medical Center Obligation Group, Series A, 5.25%, 8/15/28 ......... $ 7,000,000 $ 5,547,430 Memorial Healthcare Center, Refunding, 5.75%, 11/15/15 .................... 1,000,000 985,020 Memorial Healthcare Center, Refunding, 5.875%, 11/15/21 ................... 1,000,000 964,320 Mercy Health Services, Series Q, AMBAC Insured, ETM, 5.75%, 8/15/16 ....... 7,310,000 7,899,698 Sinai Hospital, Refunding, 6.625%, 1/01/16 ................................ 2,990,000 2,948,469 Sinai Hospital, Refunding, 6.70%, 1/01/26 ................................. 7,250,000 7,055,918 Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co. Pollution Control Project, Refunding, Series C, 5.45%, 9/01/29 29,000,000 28,795,550 Detroit Edison Co. Pollution Project, Refunding, Series BB, MBIA Insured, 6.20%, 8/15/25 7,825,000 8,608,674 Midland County EDR, Refunding, Series A, 6.875%, 7/23/09 ................................................. 35,000,000 36,675,450 Series B, 6.75%, 7/23/09 .................................................. 4,000,000 4,196,960 Tawas City Hospital Finance Authority Revenue, Tawas St. Joseph's Hospital Project, Refunding, Series A, ETM, 5.60%, 2/15/13 .................................. 2,025,000 2,196,457 Wayne County Downriver Systems Sewer Disposal Revenue, Series A, Pre-Refunded, 7.00%, 11/01/13 ........................................................... 1,900,000 1,988,350 Wayne County GO, IDA, Building Authority, Pre-Refunded, 8.00%, 3/01/17 ..................... 4,500,000 4,590,000 South Huron Valley Wastewater Control, Refunding, ETM, 7.875%, 5/01/02 .... 240,000 242,237 ------------- 211,869,447 ------------- MINNESOTA 2.0% Burnsville Solid Waste Revenue, Freeway Transfer Inc. Project, 9.00%, 4/01/10 . 1,395,000 1,412,033 Duluth Commercial Development Revenue, Duluth Radisson Hotel Project, Refunding, 8.00%, 12/01/15 ........................................................... 5,000,000 4,273,700 International Falls PCR, Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/22 1,500,000 1,363,650 Maplewood Health Care Facility Revenue, Health East Project, 5.95%, 11/15/06 .. 2,200,000 2,066,834 Minneapolis and St. Paul Metropolitan Airports Commission Special Facilities Revenue, Northwest Airlines, Series B, 6.50%, 4/01/25 .............................. 3,750,000 3,604,013 Northwest Airlines Project, Series A, 7.00%, 4/01/25 ...................... 5,000,000 4,054,650 Minneapolis CDA, Supported Development Revenue, Limited Tax, Series 3-A, 8.375%, 12/01/19 600,000 616,530 Minneapolis Revenue, Walker Methodist Senior Services, Series A, 5.875%, 11/15/18 .......................................................... 2,500,000 2,259,450 6.00%, 11/15/28 ........................................................... 2,500,000 2,213,125 Minnesota Agriculture and Economic Development Board Revenue, Health Care System, Series A, 6.375%, 11/15/29 ................................................ 6,500,000 6,882,200 Minnesota State HFA, Rental Housing, Refunding, Series D, MBIA Insured, 5.95%, 2/01/18 2,845,000 2,948,643 Northwest Multi-County RDAR, Government Housing, Pooled Housing Project, 7.40%, 7/01/26 5,165,000 3,463,442 Robbinsdale MFHR, Copperfield Phase II Apartments, Refunding, 9.00%, 3/01/25 .. 4,110,000 4,240,123 Roseville MFHR, Rosepointe I Project, Refunding, Series C, 8.00%, 12/01/29 .... 3,355,000 3,622,628 bSouth Central Multi-County Housing and RDAR, Pooled Housing, 8.00%, 2/01/25 ... 10,000,000 6,004,300 St. Cloud IDR, Nahan Printing, 9.75%, 6/01/20 ................................. 5,510,000 5,525,153 St. Paul Housing and RDA, Tax Allocation, Housing Tax, 8.625%, 9/01/07 ........ 1,000,000 1,035,020 St. Paul Port Authority Commercial Development, Theole Printing Project, 9.00%, 10/01/21 540,000 541,102 St. Paul Port Authority IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/09 ..................... 40,000 37,838 SDA Enterprises, Series F, 10.25%, 10/01/10 ............................... 1,095,000 1,015,842 Series A-I, 9.00%, 12/01/02 ............................................... 260,000 260,429 Series A-I, 9.00%, 12/01/12 ............................................... 4,300,000 3,781,592 Series A-II, 9.00%, 12/01/02 .............................................. 255,000 255,421 Series A-II, 9.00%, 12/01/12 .............................................. 4,235,000 3,724,428 Series A-III, 9.00%, 12/01/02 ............................................. 265,000 265,437 Series A-III, 9.00%, 12/01/12 ............................................. 4,430,000 3,895,919 Series A-IV, 9.00%, 12/01/02 .............................................. 205,000 205,338 Series A-IV, 9.00%, 12/01/12 .............................................. 3,375,000 2,968,110 Series C, 10.00%, 12/01/02 ................................................ 715,000 725,246 Series C, 10.00%, 12/01/06 ................................................ 2,930,000 2,790,093 Series C, 9.875%, 12/01/08 ................................................ 3,100,000 2,915,116 Series F, 8.00%, 9/01/02 .................................................. 25,000 25,006 Series F, 10.25%, 10/01/02 ................................................ 90,000 90,212
106 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) MINNESOTA (CONT.) St. Paul Port Authority IDR, (cont.) Series F, 8.00%, 9/01/19 .................................................. $ 775,000 $ 598,060 Series I, 10.75%, 12/01/02 ................................................ 15,000 15,066 Series J, 9.50%, 12/01/02 ................................................. 95,000 95,295 Series J, 9.50%, 12/01/11 ................................................. 1,325,000 1,212,720 Series L, 9.50%, 12/01/02 ................................................. 45,000 45,140 Series L, 9.75%, 12/01/02 ................................................. 30,000 30,090 Series L, 9.50%, 12/01/14 ................................................. 1,025,000 923,207 Series L, 9.75%, 12/01/14 ................................................. 1,530,000 1,383,701 Series N, 10.75%, 10/01/02 ................................................ 380,000 381,360 Series N, 10.00%, 12/01/02 ................................................ 65,000 65,194 Series N, 10.00%, 12/01/14 ................................................ 1,405,000 1,277,482 Series S, 9.625%, 12/01/02 ................................................ 60,000 60,183 Series S, 9.625%, 12/01/14 ................................................ 1,280,000 1,163,725 Series T, 9.625%, 12/01/02 ................................................ 35,000 35,107 Series T, 9.625%, 12/01/14 ................................................ 910,000 827,336 St. Paul Port Authority Lease Revenue, Mears Park Center Project, 6.50%, 6/01/16 ................................................................... 4,695,000 4,699,742 6/01/26 ................................................................... 10,660,000 10,670,553 Victoria Private School Facility Revenue, Holy Family Catholic High School, Series A, 5.875%, 9/01/29 ................................................. 4,000,000 4,030,040 ------------- 106,596,624 ------------- MISSISSIPPI .7% Claiborne County PCR, Systems Energy Resources Inc., Refunding, 6.20%, 2/01/26 33,295,000 32,965,047 Corinth and Alcorn County Hospital Revenue, Magnolia Regional Health Center Project, Refunding, Series A, 5.50%, 10/01/21 ...................................... 4,000,000 3,552,640 Series B, 5.50%, 10/01/21 ................................................. 1,000,000 888,160 ------------- 37,405,847 ------------- MISSOURI 1.4% Lake of the Ozarks Community Bridge Corp. Bridge System Revenue, Pre-Refunded, 6.25%, 12/01/16 ............................................. 1,000,000 1,160,370 Pre-Refunded, 6.40%, 12/01/25 ............................................. 3,000,000 3,493,590 Refunding, 5.25%, 12/01/20 ................................................ 12,280,000 11,473,327 Refunding, 5.25%, 12/01/26 ................................................ 8,875,000 8,150,001 St. Louis County IDA, Industrial Revenue, Kiel Center, Refunding, 7.625%, 12/01/09 .......................................................... 8,000,000 8,275,920 7.75%, 12/01/13 ........................................................... 5,175,000 5,353,124 7.875%, 12/01/24 .......................................................... 6,000,000 6,207,000 St. Louis Municipal Finance Corp. Leasehold Revenue, City Justice Center, Refunding, Series A, AMBAC Insured, 5.95%, 2/15/16 ... 8,640,000 9,738,403 Refunding, Series A, 6.00%, 7/15/13 ....................................... 14,250,000 15,284,550 West Plains IDA, Hospital Revenue, Ozarks Medical Center, 6.30%, 11/15/11 ........................................................... 1,000,000 1,020,960 6.75%, 11/15/24 ........................................................... 1,870,000 1,881,949 Refunding, 5.50%, 11/15/12 ................................................ 500,000 480,045 ------------- 72,519,239 ------------- MONTANA .4% Montana State Board of Investments Resource Recovery Revenue, Yellowstone Energy Project, 7.00%, 12/31/19 .................................................. 20,750,000 19,351,243 ------------- NEBRASKA Scotts Bluff County Hospital Authority No. 1, Hospital Revenue, Regional West Medical Center, 6.375%, 12/15/08 .......................................................... 1,145,000 1,187,834 Pre-Refunded, 6.375%, 12/15/08 ............................................ 955,000 1,010,877 ------------- 2,198,711 -------------
107 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) NEVADA 3.4% Clark County ID, Special Assessment, Special ID No. 108, Summerlin, 6.625%, 2/01/17 $ 7,550,000 $ 7,847,621 Clark County IDR, Local ID No. 132, Summerlin, 6.875%, 2/01/21 .............................. 4,000,000 4,117,480 Southwest Gas Corp., Series A, 6.50%, 12/01/33 ............................ 13,775,000 13,818,391 Director of State Department of Business and Industry Revenue, Las Vegas Monorail Project, Second Tier, 7.25%, 1/01/23 ............................................................ 8,000,000 7,956,320 7.375%, 1/01/30 ........................................................... 9,000,000 8,919,810 7.375%, 1/01/40 ........................................................... 20,000,000 19,684,200 Henderson Local ID No. 2, Special Assessment, 9.50%, 8/01/11 .................. 3,360,000 3,476,894 Henderson Local ID No. T-1, Special Assessment, Series A, 8.50%, 8/01/13 ...... 20,020,000 21,371,350 Henderson Local ID No. T-4C, Green Valley, Refunding, Series A, 5.90%, 11/01/18 3,190,000 3,217,721 Henderson Local ID No. T-12, Special Assessment, Series A, 7.375%, 8/01/18 .... 46,905,000 49,925,213 Las Vegas Downtown RDA, Tax Increment Revenue, Fremont Street Project, Series A, 6.10%, 6/15/14 ............................................................ 3,500,000 3,576,475 Las Vegas IDR, Special Local ID No. 808, Summerlin, 6.75%, 6/01/21 ............ 8,440,000 8,624,161 Las Vegas Local Improvement Bond Special Assessment, ID No. 404, FSA Insured, 5.85%, 11/01/09 3,235,000 3,319,304 Las Vegas Special Assessment ID No. 505, Elkhorn Springs, 8.00%, 9/15/13 ...... 6,800,000 7,009,236 Nevada Housing Division Revenue, SF Program, FI/GML, Series A-1, 8.75%, 10/01/04 ....................................... 105,000 107,225 FI/GML, Series B-1, 7.90%, 10/01/05 ....................................... 350,000 356,360 FI/GML, Series C-1, 7.55%, 10/01/05 ....................................... 420,000 423,213 Series B-2, 9.65%, 10/01/02 ............................................... 20,000 20,128 Series C-1, 9.60%, 10/01/02 ............................................... 40,000 40,269 Washoe County Revenue, Reno-Sparks Convention Center Project, FSA Insured, 6.40%, 7/01/29 15,415,000 17,990,538 ------------- 181,801,909 ------------- NEW HAMPSHIRE .4% New Hampshire Higher Education and Health Facilities Authority Revenue, Hillcrest Terrace, 7.50%, 7/01/24 ......................................... 17,850,000 16,058,039 Littleton Hospital Association, Series B, 5.90%, 5/01/28 .................. 2,000,000 1,554,740 New Hampshire Catholic Charities, Refunding, Series A, 5.75%, 8/01/11 ..... 1,300,000 1,242,644 New Hampshire State Business Finance Authority PCR, United Illuminating Co., Refunding, Series A, 5.875%, 10/01/33 ..................................... 2,500,000 2,512,225 ------------- 21,367,648 ------------- NEW JERSEY 3.1% Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding, Series 1, 6.00%, 1/01/19 .................................................. 2,180,000 2,136,858 Series 1, 6.00%, 1/01/29 .................................................. 5,000,000 4,812,750 Series 2, 6.125%, 1/01/19 ................................................. 2,125,000 2,110,465 Series 2, 6.125%, 1/01/29 ................................................. 5,105,000 4,995,957 New Jersey EDA Revenue, First Mortgage, Keswick Pines, Refunding, 5.75%, 1/01/24 .................................. 1,500,000 1,348,710 Presbyterian, Series A, 6.25%, 11/01/20 ................................... 7,635,000 7,477,948 New Jersey EDA, Lease Revenue, International Center for Public Health Project, University of Medicine and Dentistry, AMBAC Insured, 6.00%, 6/01/32 ........................................................... 9,965,000 10,784,123 Special Facility Revenue, Continental Airlines Inc. Project, 6.625%, 9/15/12 18,500,000 16,760,815 Special Facility Revenue, Continental Airlines Inc. Project, 6.25%, 9/15/19 54,420,000 45,479,338 Special Facility Revenue, Continental Airlines Inc. Project, 6.40%, 9/15/23 73,030,000 61,381,715 New Jersey Health Care Facilities Financing Authority Revenue, Lutheran Home, Series A, 8.40%, 7/01/19 ................................... 2,100,000 2,108,715 Trinitas Hospital Obligation Group, Refunding, 7.50%, 7/01/30 ............. 5,000,000 5,339,550 ------------- 164,736,944 ------------- NEW MEXICO 3.7% Farmington PCR, Public Service Co. of New Mexico, San Juan Project, Refunding, Series A, 6.30%, 12/01/16 ............................................ 24,045,000 24,624,485 Public Service Co. of New Mexico, San Juan Project, Refunding, Series A, 6.40%, 8/15/23 ............................................. 58,250,000 58,460,865 Public Service Co. of New Mexico, San Juan Project, Refunding, Series D, 6.375%, 4/01/22 ............................................ 66,125,000 67,456,758
108 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) NEW MEXICO (CONT.) Farmington PCR, (cont.) Public Service Co. Project, Series A, 6.60%, 10/01/29 ..................... $ 6,000,000 $ 6,136,200 Tucson Electric Power Co., Series A, 6.95%, 10/01/20 ...................... 37,000,000 38,541,050 New Mexico Mortgage Finance Authority SFM Program Revenue, Series A, 9.10%, 9/01/03 .................................................. 255,000 258,453 Sub Series A, 9.55%, 9/01/02 .............................................. 105,000 105,687 Rio Rancho Water and Wastewater Revenue, Series A, FSA Insured, Pre-Refunded, 5.90%, 5/15/15 3,620,000 4,027,648 ------------- 199,611,146 ------------- NEW YORK 8.2% Corinth IDA, Environmental Improvement Revenue, International Paper Company Project, Refunding, Series A, 5.75%, 2/01/22 ....................................... 2,000,000 2,021,200 MTA Service Contract Revenue, Commuter Facilities, Refunding, Series 5, 6.50%, 7/01/16 .................. 3,860,000 3,954,609 Commuter Facilities, Refunding, Series N, 6.80%, 7/01/04 .................. 3,330,000 3,446,883 Commuter Facilities, Refunding, Series N, 6.90%, 7/01/05 .................. 3,050,000 3,158,001 Transit Facilities, Refunding, Series N, 6.80%, 7/01/04 ................... 2,330,000 2,411,783 Transit Facilities, Refunding, Series N, 6.90%, 7/01/05 ................... 2,470,000 2,557,463 Transit Facilities, Refunding, Series N, 7.125%, 7/01/09 .................. 7,830,000 8,112,898 MTA Transit Facilities Revenue, Series A, MBIA Insured, 5.875%, 7/01/27 ....... 22,700,000 24,152,119 New York City GO, Refunding, Series F, 6.00%, 8/01/11 ....................................... 10,000,000 10,947,300 Refunding, Series H, 6.25%, 8/01/15 ....................................... 25,000,000 27,036,500 Refunding, Series H, 6.125%, 8/01/25 ...................................... 5,600,000 5,916,008 Refunding, Series J, 6.00%, 8/01/21 ....................................... 10,000,000 10,520,300 Series A, 6.125%, 8/01/06 ................................................. 9,595,000 10,349,551 Series A, 6.25%, 8/01/08 .................................................. 10,000,000 10,873,500 Series A, 6.25%, 8/01/21 .................................................. 840,000 866,225 Series A, Pre-Refunded, 6.125%, 8/01/06 ................................... 595,000 661,158 Series A, Pre-Refunded, 6.25%, 8/01/21 .................................... 5,000 5,177 Series B, 7.00%, 2/01/18 .................................................. 3,255,000 3,314,957 Series B, 7.00%, 2/01/19 .................................................. 2,350,000 2,440,005 Series B, 7.00%, 2/01/20 .................................................. 3,305,000 3,354,575 Series B, 6.00%, 8/15/26 .................................................. 4,355,000 4,678,097 Series B, Pre-Refunded, 6.75%, 10/01/15 ................................... 100,000 104,674 Series B, Pre-Refunded, 6.00%, 8/15/26 .................................... 645,000 740,105 Series B, Sub Series B-1, Pre-Refunded, 7.00%, 8/15/16 .................... 17,070,000 19,289,271 Series B, Sub Series B-1, Pre-Refunded, 7.25%, 8/15/19 .................... 5,000,000 5,679,750 Series C, Sub Series C-1, Pre-Refunded, 7.00%, 8/01/16 .................... 55,000 57,118 Series C, Sub Series C-1, Pre-Refunded, 7.00%, 8/01/17 .................... 370,000 384,249 Series C, Sub Series C-1, Pre-Refunded, 7.50%, 8/01/21 .................... 435,000 452,631 Series D, 6.00%, 2/15/10 .................................................. 4,995,000 5,377,717 Series D, 7.625%, 2/01/14 ................................................. 40,000 40,754 Series D, 7.50%, 2/01/18 .................................................. 5,000 5,094 Series D, Pre-Refunded, 6.00%, 2/15/10 .................................... 3,160,000 3,506,178 Series E, 6.25%, 2/15/07 .................................................. 3,265,000 3,566,588 Series E, Pre-Refunded, 6.25%, 2/15/07 .................................... 5,000 5,591 Series F, 7.625%, 2/01/13 ................................................. 15,000 15,283 Series F, 7.625%, 2/01/15 ................................................. 5,000 5,094 Series F, 7.50%, 2/01/21 .................................................. 110,000 112,064 Series F, Pre-Refunded, 6.625%, 2/15/25 ................................... 8,625,000 9,735,210 Series G, 5.75%, 8/01/10 .................................................. 505,000 531,346 Series G, 6.125%, 10/15/11 ................................................ 20,480,000 22,486,016 Series G, 6.20%, 10/15/14 ................................................. 10,000,000 10,824,200 Series G, 7.50%, 2/01/22 .................................................. 10,000 10,188 Series I, 6.25%, 4/15/17 .................................................. 16,030,000 17,219,907 Series I, 6.25%, 4/15/27 .................................................. 6,765,000 7,169,276 Series I, Pre-Refunded, 6.25%, 4/15/17 .................................... 9,340,000 10,829,076 Series I, Pre-Refunded, 6.25%, 4/15/27 .................................... 16,155,000 18,730,592
109 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) NEW YORK (CONT.) New York City IDA, Civic Facility Revenue, Amboy Properties Corp. Project, Refunding, 6.75%, 6/01/20 $ 7,050,000 $ 7,049,013 IDR, La Guardia Association LP Project, Refunding, 6.00%, 11/01/28 ........ 7,500,000 6,028,650 New York State Dormitory Authority Revenue, City University System, Series 2, 6.00%, 7/01/26 .......................... 6,100,000 6,606,117 Mental Health Services Facilities, Series A, 6.00%, 8/15/17 ............... 11,240,000 12,186,071 State University Educational Facilities, Pre-Refunded, 6.00%, 5/15/18 ..... 5,000,000 5,735,000 New York State HFA, Service Contract Obligation Revenue, Series A, 6.00%, 3/15/26 4,975,000 5,401,606 New York State HFAR, Refunding, Series A, 5.90%, 11/01/05 12,515,000 13,844,468 New York State Medical Care Facilities Finance Agency Revenue, Hospital and Nursing, Series B, FHA Insured, 6.95%, 2/15/32 ... 3,305,000 3,411,983 New York State Mortgage Agency Revenue, Homeowners Mortgage, Series 59, 6.10%, 10/01/15 ................................................ 2,000,000 2,103,580 Series 59, 6.15%, 10/01/17 ................................................ 2,750,000 2,882,825 Series 61, 5.80%, 10/01/16 ................................................ 5,000,000 5,213,150 New York State Urban Development Corp. Revenue, Correctional Capital Facilities, Series 7, 5.70%, 1/01/27 .................................................. 4,750,000 4,942,613 Oneida County IDAR, Civic Facility, St. Elizabeth Medical, Series B, 6.00%, 12/01/19 1,000,000 918,160 Onondaga County IDA, Solid Waste Disposal Facility Revenue, Solvay Paperboard LLC Project, Refunding, 6.80%, 11/01/14 ........................................................... 5,000,000 5,242,400 7.00%, 11/01/30 ........................................................... 7,000,000 7,331,800 Port Authority of New York and New Jersey Special Obligation Revenue, 3rd Installment, 7.00%, 10/01/07 .......................................... 8,000,000 8,814,320 4th Installment, Special Project, 6.75%, 10/01/11 ......................... 925,000 991,008 5th Installment, 6.75%, 10/01/19 .......................................... 17,500,000 18,232,025 Continental Airlines Inc., Eastern Project, La Guardia, 9.00%, 12/01/10 ... 10,000,000 10,047,700 Continental Airlines Inc., Eastern Project, La Guardia, 9.125%, 12/01/15 .. 27,650,000 27,781,614 Ulster County IDA, Civic Facility Revenue, Benedictine Hospital Project, Series A, 6.40%, 6/01/14 ............................................................ 725,000 667,732 6.45%, 6/01/24 ............................................................ 1,950,000 1,710,813 Utica IDA, Civic Facility Revenue, Utica College Civic Facility, 6.75%, 12/01/21 ........................................................... 1,250,000 1,264,988 6.85%, 12/01/31 ........................................................... 2,000,000 2,023,840 Warren and Washington Counties IDAR, Adirondack Resource Recovery Project, Refunding, Series A, 7.90%, 12/15/07 ................................................. 975,000 977,711 ------------- 439,065,468 ------------- NORTH CAROLINA 1.6% North Carolina Eastern Municipal Power Agency Power System Revenue, Refunding, Series A, 5.75%, 1/01/26 ....................................... 37,500,000 37,160,250 Refunding, Series B, 5.75%, 1/01/24 ....................................... 35,750,000 35,820,070 Refunding, Series D, 6.75%, 1/01/26 ....................................... 5,000,000 5,398,700 Series D, 6.70%, 1/01/19 .................................................. 2,000,000 2,161,140 North Carolina HFA, SF, Series II, GNMA Secured, 6.20%, 3/01/16 ................................................................... 2,450,000 2,578,527 9/01/17 ................................................................... 1,610,000 1,684,350 ------------- 84,803,037 ------------- NORTH DAKOTA .5% Mercer County PCR, Basin Electric Power Corp., Refunding, Second Series, AMBAC Insured, 6.05%, 1/01/19 ................................................... 24,655,000 26,519,904 ------------- OHIO 2.7% Dayton Special Facilities Revenue, Emery Air Freight Corp., Emery Worldwide Air Inc., Refunding, Series C, 6.05%, 10/01/09 ................................................. 14,250,000 12,678,510 Series E, 6.05%, 10/01/09 ................................................. 5,250,000 4,671,030 Series F, 6.05%, 10/01/09 ................................................. 1,000,000 889,720 Franklin County Health Care Facilities Revenue, Ohio Presbyterian, Series A, 7.125%, 7/01/29 .............................. 1,000,000 1,042,870 Presbyterian Retirement Services, Refunding, 5.50%, 7/01/17 ............... 3,100,000 2,838,298 Presbyterian Retirement Services, Refunding, 5.50%, 7/01/21 ............... 4,700,000 4,148,925 Presbyterian Retirement Services, Series A, 6.625%, 7/01/13 ............... 1,000,000 1,012,870
110 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) OHIO (CONT.) Lucas County Health Facilities Revenue, Presbyterian Retirement Services, Refunding, Series A, 6.625%, 7/01/14 ........................................................... $ 1,000,000 $ 1,005,340 6.75%, 7/01/20 ............................................................ 2,000,000 1,991,420 Montgomery County Health Systems Revenue, Series B-1, Pre-Refunded, 8.10%, 7/01/18 .................................. 6,300,000 7,553,301 Series B-2, Pre-Refunded, 8.10%, 7/01/18 .................................. 6,500,000 7,807,915 St. Leonard, Series B, Pre-Refunded, 8.10%, 7/01/18 ....................... 9,600,000 11,522,696 Ohio State Air Quality Development Authority Revenue, Dayton Power and Light Co. Project, Refunding, 6.10%, 9/01/30 ............. 17,900,000 18,165,994 PCR, Cleveland Electric, Refunding, Series B, 6.00%, 8/01/20 .............. 8,000,000 8,162,160 aOhio State Solid Waste Revenue, Republic Engineered Steels Inc., 9.00%, 6/01/21 16,650,000 832,500 Ohio State Water Development Authority PCR, Facilities Revenue, Cleveland Electric, Refunding, Series A, 8.00%, 10/01/23 ...................................... 27,700,000 29,633,737 Toledo-Lucas County Port Authority Airport Revenue, Burlington Air Express, Project 1, 7.00%, 4/01/04 ............................................................ 2,460,000 2,487,109 7.25%, 4/01/09 ............................................................ 5,385,000 5,488,661 7.375%, 4/01/14 ........................................................... 8,200,000 8,364,656 7.50%, 4/01/19 ............................................................ 14,365,000 14,133,436 Willoughby IDR, Presbyterian Retirement Services, Refunding, Series A, 6.875%, 7/01/16 1,500,000 1,507,920 ------------- 145,939,068 ------------- OKLAHOMA .2% Oklahoma Development Finance Authority Revenue, Comache County Hospital Project, Series B, 6.60%, 7/01/31 .................................................. 5,000,000 4,873,000 Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding, 6.00%, 8/15/14 ................................................. 4,000,000 3,883,960 ------------- 8,756,960 ------------- OREGON 2.1% Klamath Falls Electric Revenue, Klamath Cogen, senior lien, Refunding, 5.75%, 1/01/13 ............................................................ 13,000,000 13,481,130 5.875%, 1/01/16 ........................................................... 19,400,000 19,779,076 6.00%, 1/01/25 ............................................................ 61,060,000 61,804,321 Oregon State Department of Administrative Services COP, Series A, AMBAC Insured, 6.00%, 5/01/26 ............................................................ 9,400,000 10,835,756 Oregon State Health Housing Educational and Cultural Facilities Authority Revenue, Linfield College Project, Series A, 6.75%, 10/01/25 ....................... 5,220,000 5,471,186 ------------- 111,371,469 ------------- PENNSYLVANIA 5.9% Allegheny County Hospital Development Authority Revenue, Health System, Series A, MBIA Insured, 6.50%, 11/15/30 ................................... 10,000,000 11,297,800 Series B, 8.65%, 11/15/05 ................................................. 2,000,000 2,032,220 Series B, 9.25%, 11/15/15 ................................................. 25,000,000 26,500,250 Series B, 9.25%, 11/15/22 ................................................. 25,000,000 26,500,250 Series B, 9.25%, 11/15/30 ................................................. 8,000,000 8,480,000 Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding, 6.10%, 7/15/20 ............................................................ 5,500,000 5,539,270 Series A, 6.70%, 12/01/20 ................................................. 9,400,000 9,741,314 Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 .. 4,000,000 4,306,840 Chartiers Valley Industrial and Commercial Development Authority Revenue, Asbury Health Center Project, Refunding, 7.40%, 12/01/15 ......................... 5,250,000 5,330,535 Delaware County IDAR, Resource Recovery Facility, Refunding, Series A, 6.10%, 1/01/04 ............................................................ 1,310,000 1,350,348 6.10%, 1/01/06 ............................................................ 2,140,000 2,242,014 6.50%, 1/01/08 ............................................................ 425,000 456,378 6.10%, 7/01/13 ............................................................ 20,500,000 21,337,630 6.20%, 7/01/19 ............................................................ 6,500,000 6,764,550 Lancaster IDAR, Garden Spot Village Project, Series A, 7.625%, 5/01/31 ........ 1,650,000 1,715,225 Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding, Series A, MBIA Insured, 6.15%, 8/01/29 .................................... 4,000,000 4,394,880 Montgomery County Higher Education and Health Authority Revenue, First Mortgage, Holy Redeemer Long Term Care, Series A, Pre-Refunded, 8.20%, 6/01/06 ............................................................ 1,120,000 1,145,715 8.00%, 6/01/22 ............................................................ 3,500,000 3,589,460
111 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) PENNSYLVANIA (CONT.) Montgomery County IDAR, Resource Recovery, 7.50%, 1/01/12 ..................... $ 10,000,000 $ 10,159,100 Pennsylvania Convention Center Authority Revenue, Refunding, Series A, 6.25%, 9/01/04 ............................................................ 3,125,000 3,280,781 6.60%, 9/01/09 ............................................................ 16,000,000 17,009,920 6.70%, 9/01/14 ............................................................ 20,760,000 22,069,126 6.75%, 9/01/19 ............................................................ 15,800,000 16,753,214 Pennsylvania EDA, Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%, 12/01/15 .......................................................... 10,000,000 10,462,000 Pennsylvania State Higher Educational Facilities Authority Health Services Revenue, Allegheny Delaware Valley Obligation Group, Series A, MBIA Insured, 5.875%, 11/15/16 ..................................... 13,000,000 13,850,460 Philadelphia Gas Works Revenue, 14th Series A, Pre-Refunded, 6.375%, 7/01/26 .............................. 885,000 956,765 Refunding, 14th Series, 6.375%, 7/01/26 ................................... 1,965,000 1,974,963 Philadelphia GO, Refunding, Series B, 6.00%, 5/15/05 .......................... 3,080,000 3,257,439 Philadelphia IDA, Health Care Facility Revenue, Pauls Run, Series A, 5.85%, 5/15/13 ............................................................ 2,200,000 2,085,600 5.75%, 5/15/18 ............................................................ 1,500,000 1,358,925 Philadelphia Municipal Authority Revenue, Lease, Refunding, Series D, 6.30%, 7/15/17 ....................................... 3,500,000 3,561,250 Sub Series D, 6.25%, 7/15/13 .............................................. 3,000,000 3,067,500 Philadelphia Water and Sewer Revenue, Series 10, ETM, 7.35%, 9/01/04 .......... 12,640,000 13,700,117 Sayre Health Care Facilities Authority Revenue, Guthrie Health, Series A, 5.75%, 12/01/21 3,000,000 2,985,690 Schuylkill County IDA, Resource Recovery Revenue, Schuylkill Energy Resources Inc., 6.50%, 1/01/10 ............................................................ 24,800,000 25,249,128 South Fork Municipal Authority Hospital Revenue, Conemaugh Valley Memorial Hospital Project, Series A, MBIA Insured, 5.75%, 7/01/16 .................................... 8,130,000 8,685,198 South Wayne County Water and Sewer Authority Revenue, Refunding, 8.20%, 4/15/13 7,390,000 7,555,758 Washington County IDA, PCR, West Pennsylvania Power Co., Series G, AMBAC Insured, 6.05%, 4/01/14 ............................................................ 5,025,000 5,462,276 ------------- 316,209,889 ------------- RHODE ISLAND .3% Rhode Island Housing and Mortgage Finance Corp. Revenue, Homeownership Opportunity, Series 17-A, 6.25%, 4/01/17 ............................................... 5,000,000 5,208,600 Rhode Island State Health and Educational Building Corp. Revenue, Hospital Financing Lifespan Obligation Group, MBIA Insured, 5.75%, 5/15/23 3,500,000 3,689,105 Landmark Medical Center, Asset Guaranteed, 5.875%, 10/01/19 ............... 6,000,000 6,221,580 West Warwick GO, Series A, 7.00%, 8/15/02 ............................................................ 35,000 35,000 7.30%, 7/15/08 ............................................................ 690,000 759,469 ------------- 15,913,754 ------------- SOUTH CAROLINA .6% Charleston County Hospital Facilities First Mortgage Revenue, Sandpiper Village Inc., 8.00%, 11/01/13 ..................................................... 3,120,000 3,119,470 Piedmont Municipal Power Agency Electric Revenue, Refunding, 6.60%, 1/01/21 ............................................................ 3,660,000 3,666,954 Series A, 6.55%, 1/01/16 .................................................. 4,110,000 4,117,932 South Carolina Jobs EDA, Health Facilities Revenue, 1st Mortgage Lutheran Homes, Refunding, 5.65%, 5/01/18 ............................................................ 1,200,000 1,114,644 5.70%, 5/01/26 ............................................................ 2,000,000 1,801,660 South Carolina Jobs EDA Revenue, Myrtle Beach Convention, Series A, 6.625%, 4/01/36 11,400,000 11,657,868 Tobacco Settlement Revenue Management Authority, Tobacco Settlement Revenue, Series B, 6.375%, 5/15/30 ........................................................... 6,750,000 7,091,415 ------------- 32,569,943 ------------- SOUTH DAKOTA .1% South Dakota HDA Revenue, Homeownership Mortgage, Series A, 6.125%, 5/01/17 ... 3,310,000 3,451,569 South Dakota Health and Educational Facilities Authority Revenue, Prairie Lakes Health Care, Pre-Refunded, 7.25%, 4/01/22 .............................................. 2,480,000 2,672,051 Refunding, 7.25%, 4/01/22 ................................................. 1,020,000 1,051,375 ------------- 7,174,995 -------------
112 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) TENNESSEE Tennessee HDA Revenue, Mortgage Finance, Series A, 6.90%, 7/01/25 ............. $ 165,000 $ 172,717 ------------- TEXAS 2.0% Alliance Airport Authority Special Facilities Revenue, American Airlines Inc. Project, 7.50%, 12/01/29 .................................................. 10,000,000 8,637,900 Austin Convention Enterprises Inc. Convention Center Revenue, First Tier, Series A, 6.70%, 1/01/32 .................................................. 10,000,000 10,300,500 Bexar County Health Facilities Development Corp. Revenue, Incarnate Word Health Services, Refunding, FSA Insured, ETM, 6.00%, 11/15/15 ............................................................. 8,750,000 9,542,575 Coppell Special Assessment, Gateway Project, 8.70%, 3/01/12 ................... 3,810,000 3,941,026 Decatur Hospital Authority Hospital Revenue, Series A, 5.75%, 9/01/29 ......... 4,960,000 4,416,930 El Paso Health Facilities Development Corp. Revenue, Senior Care Facilities, Bienvivir Senior Health, 7.00%, 8/15/12 ............................................................ 1,030,000 1,035,995 7.50%, 8/15/18 ............................................................ 2,300,000 2,308,602 Georgetown Health Facilities Development Corp. Revenue, Georgetown Healthcare System, Refunding, 6.25%, 8/15/29 ......................................... 10,975,000 9,254,559 Nueces River Authority Environmental Improvement Revenue, Asarco Inc. Project, Refunding, 5.60%, 1/01/27 ............................................................ 8,640,000 2,764,800 Series A, 5.60%, 4/01/18 .................................................. 4,500,000 1,440,000 Sabine River Authority PCR, Southwestern Electric Power Co., Refunding, MBIA Insured, 6.10%, 4/01/18 ................................................... 7,000,000 7,671,790 Sam Rayburn Municipal Power Agency Supply System Revenue, Refunding, Series A, 6.50%, 10/01/08 ................................................. 755,000 765,623 Series A, 6.75%, 10/01/14 ................................................. 12,990,000 13,169,002 Series A, 6.25%, 10/01/17 ................................................. 4,795,000 4,789,965 Series B, 5.75%, 10/01/08 ................................................. 1,180,000 1,184,331 Series B, 6.125%, 10/01/13 ................................................ 5,340,000 5,285,265 Series B, 5.50%, 10/01/20 ................................................. 11,255,000 10,510,032 Texas State GO, Veterans Housing Assistance Fund I, Refunding, 6.15%, 12/01/25 7,430,000 7,678,905 Texas Water Development Board Revenue, State Revolving Fund, 6.00%, 7/15/13 ... 4,000,000 4,138,480 ------------- 108,836,280 ------------- U.S. TERRITORIES 4.1% District of Columbia GO, Refunding, Series A, 5.875%, 6/01/05 ...................................... 2,355,000 2,519,497 Refunding, Series A, 6.00%, 6/01/07 ....................................... 8,930,000 9,669,493 Series A, ETM, 5.875%, 6/01/05 ............................................ 5,445,000 5,968,591 Series A, ETM, 6.00%, 6/01/07 ............................................. 2,845,000 3,205,774 Series A, Pre-Refunded, 6.375%, 6/01/11 ................................... 22,770,000 26,188,005 Series A, Pre-Refunded, 6.375%, 6/01/16 ................................... 27,230,000 31,317,495 Series E, FSA Insured, 6.00%, 6/01/11 ..................................... 5,000,000 5,339,650 District of Columbia Hospital Revenue, Medlantic Healthcare Group, Refunding, Series A, MBIA Insured, ETM, 5.875%, 8/15/19 8,850,000 9,629,862 Washington Hospital Center Corp., Series A, Pre-Refunded, 7.00%, 8/15/05 .. 1,135,000 1,174,373 Washington Hospital Center Corp., Series A, Pre-Refunded, 7.125%, 8/15/19 . 4,500,000 4,703,130 District of Columbia Revenue, Carnegie Endowment Revenue, 5.75%, 11/15/26 ............................... 5,410,000 5,566,728 Methodist Home Issue, 6.00%, 1/01/29 ...................................... 4,750,000 4,106,565 District of Columbia Tobacco Settlement Financing Corp. Revenue, Asset Backed Bonds, 6.50%, 5/15/33 ..................................................... 26,000,000 28,487,420 Northern Mariana Islands Commonwealth Ports Authority Airport Revenue, senior lien, Series A, 6.25%, 3/15/28 .................................................. 14,415,000 14,053,328 Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.60%, 3/15/28 ............................................................ 8,740,000 8,685,987 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.75%, 7/01/08 .................................................. 700,000 702,730 Virgin Islands PFAR, Matching Fund Loan Notes, Series A, Pre-Refunded, 7.25%, 10/01/18 ......... 14,000,000 14,755,300 sub. lien, Fund Loan Notes, Refunding, Series E, 5.75%, 10/01/13 .......... 15,000,000 15,242,550 sub. lien, Fund Loan Notes, Refunding, Series E, 5.875%, 10/01/18 ......... 7,000,000 7,072,380 sub. lien, Fund Loan Notes, Refunding, Series E, 6.00%, 10/01/22 .......... 14,500,000 14,605,415 Virgin Islands Water and Power Authority Water System Revenue, Series B, Pre-Refunded, 7.60%, 1/01/12 ............................................................ 4,000,000 4,160,320 ------------- 217,154,593 -------------
113 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) UTAH .1% Box Elder County PCR, Nucor Corp. Project, 6.90%, 5/15/17 ..................... $ 2,000,000 $ 2,050,120 Carbon County Solid Waste Disposal Revenue, Laidlaw Environmental Services, Refunding, Series A, 7.45%, 7/01/17 ....................................... 2,500,000 2,606,775 aTooele County PCR, Laidlaw Environmental, Refunding, Series A, 7.55%, 7/01/27 . 3,500,000 70,000 Utah State HFA, SFM, Series A-2, 9.625%, 7/01/02 ............................................... 5,000 5,014 Series A-2, 9.45%, 7/01/03 ................................................ 5,000 5,016 Series B-2, 9.45%, 7/01/03 ................................................ 5,000 5,026 Series C-2, 9.05%, 7/01/03 ................................................ 15,000 15,212 Series D-2, 9.00%, 7/01/03 ................................................ 35,000 35,489 Series E-1, 8.70%, 7/01/03 ................................................ 55,000 55,744 Sub Series B-2, 8.70%, 7/01/04 ............................................ 140,000 142,692 Sub Series D, 8.45%, 7/01/04 .............................................. 60,000 60,187 -------------- 5,051,275 -------------- VERMONT .3% Vermont Educational and Health Buildings Financing Agency Revenue, Fletcher Allen Health, Series A, AMBAC Insured, 6.00%,12/01/23 ............................................................... 15,000,000 16,225,050 -------------- VIRGINIA .5% Virginia Beach Development Authority Residential Care Facility Mortgage Revenue, Westminster Canterbury Project, Series A, 7.125%, 11/01/23 .......................................................... 5,000,000 5,436,500 7.25%, 11/01/32 ........................................................... 9,000,000 9,825,030 Virginia State HDA, Commonwealth Mortgage, Series D, Sub Series D-3, 6.125%, 1/01/19 9,715,000 10,086,113 -------------- 25,347,643 -------------- WEST VIRGINIA .2% bWest Virginia State Hospital Finance Authority Hospital Revenue, Logan General Hospital Project, Refunding and Improvement, 7.25%, 7/01/20 ............... 15,000,000 9,124,050 West Virginia State Water Development Authority Revenue, Solid Waste Management, Series C, 8.125%, 8/01/15 ................................................. 2,135,000 2,164,826 -------------- 11,288,876 -------------- WISCONSIN .4% Kaukauna Environmental Improvement Revenue, International Paper Co. Project, Series A, 6.70%, 5/01/24 .................................................. 4,100,000 4,345,959 Wisconsin Housing and EDA, Homeownership Revenue, Series C, 6.15%, 9/01/17 .... 2,275,000 2,365,841 Wisconsin State Health and Educational Facilities Authority Revenue, Franciscan Skemp Medical Center Inc. Project, 6.25%, 11/15/20 ............. 9,510,000 10,044,272 New Castle Place Project, Series A, 7.00%, 12/01/31 ....................... 2,500,000 2,459,700 -------------- 19,215,772 -------------- WYOMING .2% Sweetwater County PCR, Idaho Power Co. Project, Refunding, Series A, 6.05%, 7/15/26 10,500,000 10,868,235 Wyoming CDA, Housing Revenue, Series 1, 6.15%, 6/01/17 ........................ 1,000,000 1,039,242 -------------- 11,907,477 -------------- TOTAL BONDS ................................................................... 4,758,327,994 -------------- ZERO COUPON BONDS 7.1% CALIFORNIA 5.7% Foothill/Eastern Corridor Agency Toll Road Revenue, Capital Appreciation, Refunding, 1/15/22 .................................. 49,115,000 15,224,668 Capital Appreciation, Refunding, 1/15/31 .................................. 4,000,000 702,200 Capital Appreciation, Refunding, 1/15/34 .................................. 4,500,000 659,295 Capital Appreciation, Refunding, 1/15/36 .................................. 4,000,000 519,480 Convertible Capital Appreciation, Refunding, 1/15/23 ...................... 35,000,000 23,327,850 San Francisco City and County RDA, Lease Revenue, George R. Moscone Center, 7/01/09 ................................................................... 3,750,000 2,795,925 7/01/10 ................................................................... 4,500,000 3,184,065 7/01/12 ................................................................... 4,500,000 2,857,005 7/01/13 ................................................................... 4,250,000 2,533,978 7/01/14 ................................................................... 2,250,000 1,258,673
114 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) ZERO COUPON BONDS (CONT.) CALIFORNIA (CONT.) San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, junior lien, ETM, 1/01/04 ................................................. $ 7,400,000 $ 7,117,172 junior lien, ETM, 1/01/05 ................................................. 8,000,000 7,433,360 junior lien, ETM, 1/01/06 ................................................. 9,000,000 8,049,960 junior lien, ETM, 1/01/07 ................................................. 9,400,000 8,042,734 junior lien, ETM, 1/01/08 ................................................. 10,400,000 8,487,960 junior lien, ETM, 1/01/09 ................................................. 21,900,000 17,008,197 junior lien, ETM, 1/01/10 ................................................. 15,000,000 11,012,400 junior lien, ETM, 1/01/12 ................................................. 30,100,000 19,742,891 junior lien, ETM, 1/01/24 ................................................. 52,700,000 17,190,213 junior lien, ETM, 1/01/25 ................................................. 45,200,000 13,944,200 junior lien, ETM, 1/01/26 ................................................. 131,900,000 38,646,700 junior lien, ETM, 1/01/27 ................................................. 139,100,000 38,616,942 senior lien, Refunding, Series A, 1/15/16 ................................. 22,500,000 15,614,100 senior lien, Refunding, Series A, 1/15/17 ................................. 20,000,000 13,867,000 senior lien, Refunding, Series A, 1/15/23 ................................. 20,000,000 13,571,800 senior lien, Refunding, Series A, 1/15/24 ................................. 20,000,000 13,534,000 -------------- 304,942,768 -------------- ILLINOIS .1% Robbins Resource Recovery Revenue, Restructuring Project, Series D, 10/15/09 .. 22,651,189 6,840,659 -------------- KENTUCKY .4% Kentucky Economic Development Finance Authority Revenue, Norton Healthcare Inc., Series C, MBIA Insured, zero cpn. to 10/01/05, 6.10% thereafter, 10/01/22 ................................................ 15,975,000 13,629,710 6.15% thereafter, 10/01/27 ................................................ 10,000,000 8,525,200 -------------- 22,154,910 -------------- NEW YORK .3% MAC for City of Troy Revenue, Capital Appreciation, Series C, MBIA Insured, 7/15/21 ................................................................... 428,010 161,741 1/15/22 ................................................................... 649,658 238,022 Westchester Tobacco Asset Securitization Corp. Revenue, Capital Appreciation, zero cpn. to 7/15/02, 6.75% thereafter, 7/15/29 ........................... 15,000,000 15,649,200 -------------- 16,048,963 -------------- OHIO .2% Akron COP, Akron Municipal Baseball Stadium Project, Capital Appreciation, zero cpn. to 12/01/01, 6.30% thereafter, 12/01/05 ................................................ 1,700,000 1,862,860 6.40% thereafter, 12/01/06 ................................................ 1,685,000 1,870,148 6.50% thereafter, 12/01/07 ................................................ 1,750,000 1,918,648 6.90% thereafter, 12/01/16 ................................................ 2,500,000 2,739,750 -------------- 8,391,406 -------------- SOUTH CAROLINA .1% Connector 2000 Association Inc. Toll Road Revenue, Series B, 1/01/30 ................................................................... 750,000 79,748 1/01/33 ................................................................... 20,750,000 1,732,625 -------------- 1,812,373 -------------- TENNESSEE .3% Johnson City Health and Educational Facilities Board Hospital Revenue, Refunding, First Mortgage Mountain States Health, Series A, MBIA Insured, 7/01/27 ................................................................... 19,365,000 4,747,136 7/01/28 ................................................................... 19,400,000 4,487,220 7/01/29 ................................................................... 19,365,000 4,214,405 7/01/30 ................................................................... 19,370,000 3,975,693 -------------- 17,424,454 -------------- TOTAL ZERO COUPON BONDS ....................................................... 377,615,533 -------------- TOTAL LONG TERM INVESTMENTS (COST $5,153,975,585) ............................. 5,135,943,527 --------------
115 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- cSHORT TERM INVESTMENTS 2.0% CALIFORNIA .3% California HFAR, MFH, Series D, Daily VRDN and Put, 1.40%, 2/01/31 ............ $1,600,000 $ 1,600,000 Irvine 1915 Act, Special Assessment, AD No. 00-18, Series A, Daily VRDN and Put, 1.30%, 9/02/26 ................ 4,400,000 4,400,000 AD No. 97-16, Daily VRDN and Put, 1.30%, 9/02/22 .......................... 6,800,000 6,800,000 Orange County Sanitation Districts COP, Refunding, Series A, Daily VRDN and Put, 1.30%, 8/01/29 .............................. 3,500,000 3,500,000 Series B, Daily VRDN and Put, 1.30%, 8/01/30 .............................. 2,000,000 2,000,000 ----------- 18,300,000 ----------- FLORIDA .1% Orange County School Board COP, Series B, Daily VRDN and Put, 1.25%, 8/01/25 .. 3,300,000 3,300,000 ----------- GEORGIA .2% Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 1.25%, 11/01/41 ........................................................... 9,900,000 9,900,000 ----------- MASSACHUSETTS .2% Massachusetts Health and Educational Facilities Authority Revenue, Massachusetts Institute of Technology, Series J-1, Weekly VRDN and Put, .90%, 7/01/31 ... 9,400,000 9,400,000 Massachusetts State Health and Educational Facilities Authority Revenue, Capital Assets Program, Series D, MBIA Insured, Daily VRDN and Put, 1.30%, 1/01/35 2,500,000 2,500,000 ----------- 11,900,000 ----------- MICHIGAN Eastern Michigan University Revenue, Refunding, FGIC Insured, Daily VRDN and Put, 1.35%, 6/01/27 ....................................................... 1,500,000 1,500,000 ----------- MISSISSIPPI .2% Jackson County PCR, Chevron USA Inc. Project, Daily VRDN and Put, 1.25%, 12/01/16 8,070,000 8,070,000 ----------- MISSOURI .1% Missouri State Health and Educational Facilities Authority Educational Facilities Revenue, Saint Louis University, Series B, Daily VRDN and Put, 1.35%, 10/01/24 7,055,000 7,055,000 ----------- NEW JERSEY .1% New Jersey EDA, EDR, Stolthaven Project, Refunding, Series A, Daily VRDN and Put, 1.25%, 1/15/18 ............................................................ 700,000 700,000 New Jersey EDA Revenue, El Dorado Terminals, Refunding, Series A, Daily VRDN and Put, 1.60%, 12/01/21 ...................................................... 2,800,000 2,800,000 ----------- 3,500,000 ----------- NEW MEXICO .1% Farmington PCR, Arizona Public Service Co., Refunding, Series B, Daily VRDN and Put, 1.30%, 9/01/24 ....................................................... 6,160,000 6,160,000 ----------- NEW YORK .6% New York City GO, Daily VRDN and Put, 1.30%, 8/01/17 ........................................ 2,800,000 2,800,000 Series H, Sub Series H-3, Daily VRDN and Put, 1.25%, 8/01/23 .............. 100,000 100,000 Sub Series A-7, Daily VRDN and Put, 1.30%, 8/01/21 ........................ 3,200,000 3,200,000 New York City Municipal Water Finance Authority Water and Sewer System Revenue, Series C, FGIC Insured, Daily VRDN and Put, 1.30%, 6/15/23 ................ 1,900,000 1,900,000 Series F-1, Daily VRDN and Put, 1.25%, 6/15/33 ............................ 3,300,000 3,300,000 Series G, FGIC Insured, Daily VRDN and Put, 1.25%, 6/15/24 ................ 7,800,000 7,800,000 New York City Transitional Finance Authority Revenue, Future Tax Secured, Sub Series B-1, Daily VRDN and Put, 1.30%, 11/01/27 7,300,000 7,300,000 New York State Job Development Authority Revenue, State Guaranteed, Registered Bond Purchase Agreement, Series A-1 to A-21, Daily VRDN and Put, 1.30%, 3/01/03 780,000 780,000 New York State Job Development Authority Revenue, State Guaranteed, Series B-1 Through B-9, Daily VRDN and Put, 1.30%, 3/01/03 3,835,000 3,835,000 Port Authority of New York and New Jersey Special Obligation Revenue, Versatile Structure, Series 2, Daily VRDN and Put, 1.40%, 5/01/19 ................... 700,000 700,000 ----------- 31,715,000 ----------- OREGON .1% Port of Portland PCR, Reynolds Metals, Daily VRDN and Put, 1.35%, 12/01/09 .... 3,000,000 3,000,000 ----------- PENNSYLVANIA Emmaus General Authority Revenue, FSA Insured, Weekly VRDN and Put, 1.20%, 12/01/28 500,000 500,000 -----------
116 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------- cSHORT TERM INVESTMENTS (CONT.) U.S. TERRITORIES Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ........ $ 1,700,000 $ 1,700,000 -------------- WYOMING Uinta County PCR, Chevron USA Inc. Project, Refunding, Daily VRDN and Put, 1.25%, 8/15/20 1,500,000 1,500,000 -------------- TOTAL SHORT TERM INVESTMENTS (COST $108,100,000) .............................. 108,100,000 -------------- TOTAL INVESTMENTS (COST $5,262,075,585) 98.2% ................................. 5,244,043,527 OTHER ASSETS, LESS LIABILITIES 1.8% ........................................... 97,274,953 -------------- NET ASSETS 100.0% ............................................................. $5,341,318,480 ==============
See glossary of terms on page 137. a See Note 6 regarding defaulted securities. b The bond pays interest based upon the issuer's ability to pay, which may be less than the stated interest rate. 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. See notes to financial statements. 117 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------- CLASS A 2002 2001 2000C 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $11.70 $10.99 $11.96 $11.92 $11.61 ------------------------------------------------- Income from investment operations: Net investment incomea ................................................. .57 .59 .60 .61 .63 Net realized and unrealized gains (losses) ............................. .15 .71 (.96) .05 .32 ------------------------------------------------- Total from investment operations ........................................ .72 1.30 (.36) .66 .95 ------------------------------------------------- Less distributions from net investment income ........................... (.57) (.59) (.61)d (.62) (.64) ------------------------------------------------- Net asset value, end of year ............................................ $11.85 $11.70 $10.99 $11.96 $11.92 ================================================= Total returnb ........................................................... 6.35% 12.16% (3.08)% 5.63% 8.37% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $731,972 $654,709 $617,407 $681,818 $636,929 Ratios to average net assets: Expenses ............................................................... .65% .67% .65% .65% .66% Net investment income .................................................. 4.86% 5.24% 5.23% 5.06% 5.34% Portfolio turnover rate ................................................. 6.11% 20.19% 21.21% 5.43% 12.77% CLASS B -------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $11.74 $11.00 $10.89 ----------------------------- Income from investment operations: Net investment incomea ................................................. .51 .54 .06 Net realized and unrealized gains ...................................... .16 .73 .10 ----------------------------- Total from investment operations ........................................ .67 1.27 .16 ----------------------------- Less distributions from net investment income ........................... (.51) (.53) (.05) Net asset value, end of year ............................................ $11.90 $11.74 $11.00 ============================= Total returnb ........................................................... 5.82% 11.81% 1.44% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $36,461 $9,798 $226 Ratios to average net assets: Expenses ............................................................... 1.20% 1.21% 1.20%e Net investment income .................................................. 4.31% 4.64% 4.66%e Portfolio turnover rate ................................................. 6.11% 20.19% 21.21%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c For the period February 1, 2000 (effective date) to February 29, 2000 for Class B. d The fund made a capital gain distribution of $.003. e Annualized 118 FRANKLIN TAX-FREE TRUST Financial Highlights (CONTINUED) FRANKLIN NEW JERSEY TAX-FREE INCOME FUND (CONT.)
YEAR ENDED FEBRUARY 28, ---------------------------------------------------------------------------------------------------------------------------- CLASS C 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................................ $11.77 $11.05 $12.03 $11.98 $11.66 ------------------------------------------------ Income from investment operations: Net investment incomea ................................................... .51 .53 .54 .54 .56 Net realized and unrealized gains (losses) ............................... .16 .72 (.98) .06 .33 ------------------------------------------------ Total from investment operations .......................................... .67 1.25 (.44) .60 .89 ------------------------------------------------ Less distributions from net investment income ............................. (.51) (.53) (.54)c (.55) (.57) ------------------------------------------------ Net asset value, end of year .............................................. $11.93 $11.77 $11.05 $12.03 $11.98 ================================================ Total returnb ............................................................. 5.81% 11.59% (3.69)% 5.09% 7.84% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................... $74,104 $53,381 $46,403 $48,715 $28,139 Ratios to average net assets: Expenses ................................................................. 1.20% 1.21% 1.20% 1.21% 1.21% Net investment income .................................................... 4.31% 4.69% 4.67% 4.50% 4.77% Portfolio turnover rate ................................................... 6.11% 20.19% 21.21% 5.43% 12.77%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c The fund made a capital gain distribution of $.003. See notes to financial statements. 119 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 98.8% BONDS 98.8% Aberdeen Township GO, Refunding, FGIC Insured, 5.70%, 2/01/22 ................. $ 4,100,000 $ 4,321,892 Allamuchy Town Board of Education COP, MBIA Insured, 6.00%, 11/01/14 .......... 1,000,000 1,097,710 Atlantic County Improvement Authority Luxury Tax Revenue, Convention Center Project, MBIA Insured, ETM, 7.40%, 7/01/16 .................. 9,500,000 11,962,780 Atlantic County Utilities Authority, Solid Waste Revenue, 7.00%, 3/01/08 ............................................................ 2,000,000 1,998,040 7.125%, 3/01/16 ........................................................... 6,600,000 6,600,726 Bergen County Utility Authority Solid Waste System Revenue, Series A, FGIC Insured, 6.25%, 6/15/11 ............................................................ 1,325,000 1,367,307 Branchburg Township Board of Education GO, FGIC Insured, 5.00%, 7/15/26 ................................................................... 1,230,000 1,234,490 7/15/27 ................................................................... 1,300,000 1,303,783 7/15/28 ................................................................... 1,365,000 1,367,948 7/15/29 ................................................................... 1,440,000 1,442,045 Camden County Improvement Authority Health System Revenue, Catholic Health East, Series B, AMBAC Insured, 5.00%, 11/15/28 .................................. 11,600,000 11,531,444 Cape May County IPC, Financing Authority Revenue, Atlantic City Electric Co., Refunding, Series A, MBIA Insured, 6.80%, 3/01/21 ......................... 5,400,000 6,759,180 Carteret Board of Education COP, MBIA Insured, 5.75%, 1/15/30 ............................................................ 1,155,000 1,223,099 Pre-Refunded, 6.25%, 4/15/19 .............................................. 2,750,000 3,082,228 Church Street Corp. Keansburg Elderly Housing Mortgage Revenue, Refunding, 5.625%, 3/01/11 1,890,000 1,957,076 Delaware River and Bay Development Authority Revenue, FGIC Insured, 5.25%, 1/01/26 .............................................. 9,000,000 9,066,600 Series A, AMBAC Insured, 5.75%, 1/01/29 ................................... 4,000,000 4,253,840 Delaware River Port Authority Pennsylvania and New Jersey Delaware River Bridges Revenue, FSA Insured, 5.75%, 1/01/22 ................................................................... 8,500,000 9,100,865 1/01/26 ................................................................... 10,000,000 10,720,500 East Orange GO, Water Utility, AMBAC Insured, 5.70%, 6/15/23 ................................................................... 1,200,000 1,263,420 6/15/24 ................................................................... 1,385,000 1,457,436 6/15/25 ................................................................... 1,465,000 1,535,935 Egg Harbor Township School District, Refunding, FGIC Insured, 5.125%, 7/15/24 . 4,870,000 4,930,242 Freehold Township Board Education GO, MBIA Insured, 5.00%, 2/15/30 ............ 1,500,000 1,501,020 Gloucester County Improvement Authority Solid Waste Resource Recovery Revenue, Waste Management Inc., Refunding, Project Series A, 6.85%, 12/01/29 ......................................... 1,375,000 1,539,258 Project Series B, 7.00%, 12/01/29 ......................................... 1,250,000 1,390,038 Hammonton School District GO, FGIC Insured, 5.00%, 8/01/26 ................................................................... 1,155,000 1,159,597 8/01/27 ................................................................... 1,215,000 1,218,852 Higher Education Student Assistance Authority Student Loan Revenue, Series A, MBIA Insured, 6.15%, 6/01/19 .............................................. 2,500,000 2,676,025 Highland Park School District GO, Refunding, MBIA Insured, 5.125%, 2/15/25 .... 7,120,000 7,172,332 Hoboken New Jersey Parking Authority Parking Revenue, 5.30%, 5/01/27 .......... 3,600,000 3,669,624 Hudson County Improvement Authority Solid Waste Systems Revenue, Koppers Site Project, Series A, 6.125%, 1/01/29 ........................................ 6,510,000 6,249,014 Jersey City GO, FSA Insured, 5.00%, 3/01/21 ............................................... 1,500,000 1,509,810 Series A, FSA Insured, 5.625%, 3/01/20 .................................... 1,000,000 1,065,160 Lafayette Yard Community Development Revenue, Hotel/Conference Center Project-Trenton Guaranteed, FGIC Insured, 5.00%, 4/01/25 .............................................. 1,750,000 1,755,005 MBIA Insured, 6.00%, 4/01/29 .............................................. 1,750,000 2,017,785 MBIA Insured, 5.80%, 4/01/35 .............................................. 2,520,000 2,870,960 Middlesex County COP, MBIA Insured, 5.00%, 8/01/31 ............................................................ 3,250,000 3,230,013 Pre-Refunded, 6.125%, 2/15/19 ............................................. 1,300,000 1,408,264 Middlesex County Improvement Authority Revenue, Administration Building Residential Project, FNMA Insured, 5.25%, 7/01/21 ............................................................ 750,000 758,205 5.35%, 7/01/34 ............................................................ 1,575,000 1,586,372 Middletown Township GO, Board of Education, MBIA Insured, 5.85%, 8/01/24 .............................................. 4,295,000 4,828,525 MBIA Insured, 5.85%, 8/01/25 .............................................. 4,300,000 4,834,146 Refunding, FSA Insured, 5.00%, 8/01/22 .................................... 2,500,000 2,513,525
120 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Monroe Township Municipal Utilities Authority Middlesex County Revenue, Refunding, FGIC Insured, 5.00%, 2/01/26 ................................... $ 1,000,000 $ 1,002,090 Montgomery Township School District GO, Refunding, MBIA Insured, 5.00%, 8/01/25 2,370,000 2,382,182 New Jersey EDA, EDR, School Revenue, Blair Academy, 1995 Project, Series N, 6.90%, 12/01/11 2,980,000 3,050,775 Heating and Cooling Revenue, Trigen-Trenton Project, Series A, 6.20%, 12/01/10 6,370,000 6,539,824 Heating and Cooling Revenue, Trigen-Trenton Project, Series B, 6.10%, 12/01/04 1,930,000 1,976,590 Heating and Cooling Revenue, Trigen-Trenton Project, Series B, 6.20%, 12/01/07 2,720,000 2,798,064 Lease Revenue, International Center for Public Health Project, University of Medicine and Dentistry, AMBAC Insured, 6.00%, 6/01/32 ......................... 5,000,000 5,411,000 Market Transition Facilities Revenue, senior lien, Series A, MBIA Insured, 5.875%, 7/01/11 3,000,000 3,304,470 Natural Gas Facilities Revenue, New Jersey Natural Gas Co. Project, Series A, AMBAC Insured, 6.25%, 8/01/24 ........................................ 8,200,000 8,995,154 PCR, Jersey Central Power and Light, 7.10%, 7/01/15 550,000 568,370 School Revenue, Blair Academy, 1995 Project, Series A, 5.85%, 9/01/16 ..... 1,640,000 1,711,274 State Lease Revenue, Liberty State Park Lease Rental, Refunding, AMBAC Insured, 5.75%, 3/15/20 .............................................. 4,605,000 4,886,550 Terminal Revenue, GATX Terminals Corp. Project, 6.65%, 9/01/22 ............ 7,440,000 7,671,161 Water Facilities Revenue, Hackensack Water Co. Project, Refunding, Series A, MBIA Insured, 5.80%, 3/01/24 ......................................... 1,000,000 1,050,790 Water Facilities Revenue, Middlesex Water Co. Project, 7.25%, 7/01/21 ..... 6,000,000 6,120,000 New Jersey EDA Revenue, Hillcrest Health Services System Project, Refunding, AMBAC Insured, 5.375%, 1/01/16 2,500,000 2,620,900 Jewish Community Housing Corp. Metropolitan Project, 5.90%, 12/01/31 ...... 5,110,000 5,321,758 School Facilities Construction, Series A, AMBAC Insured, 5.00%, 6/15/21 ... 20,000,000 20,116,600 Transportation Project, sub. leased, Series A, FSA Insured, 5.25%, 5/01/17 5,000,000 5,165,150 Transportation Project, sub. leased, Series A, FSA Insured, 5.00%, 5/01/18 2,000,000 2,026,280 New Jersey Health Care Facilities Financing Authority Revenue, Atlantic City Medical Center, Series C, 6.80%, 7/01/11 .................... 2,500,000 2,573,075 Atlantic Health Systems, Series A, AMBAC Insured, 5.00%, 7/01/27 .......... 7,500,000 7,467,450 Berkeley Heights Convalescent Hospital, AMBAC Insured, 5.00%, 7/01/26 ..... 6,000,000 5,982,840 Burdette Tomlin Memorial Hospital, 5.50%, 7/01/29 ......................... 5,725,000 5,766,335 Cathedral Health Services, Refunding, MBIA Insured, 5.25%, 8/01/21 ........ 5,000,000 5,087,100 Christian Health Care Center, Refunding, Series A, 5.50%, 7/01/18 ......... 1,200,000 1,088,004 East Orange General Hospital, Series B, 7.75%, 7/01/20 .................... 4,970,000 4,722,941 FHA Jersey City Medical Center, AMBAC Insured, 5.00%, 8/01/31 ............. 10,370,000 10,306,225 Franciscan St. Mary's Hospital, ETM, 5.875%, 7/01/12 ...................... 4,600,000 5,038,058 Hackensack University Medical Center, 6.00%, 1/01/34 ...................... 10,000,000 10,309,600 Holy Name Hospital, 6.00%, 7/01/25 ........................................ 3,000,000 3,022,650 Holy Name Hospital, AMBAC Insured, 5.25%, 7/01/20 ......................... 3,000,000 3,056,340 Jersey Shore Medical Center, Refunding, AMBAC Insured, 5.875%, 7/01/24 .... 975,000 1,013,337 JFK Medical Center/Hartwyck, Refunding, MBIA Insured, 5.00%, 7/01/25 ...... 7,855,000 7,843,689 Medical Center at Princeton Obligation Group, AMBAC Insured, 5.00%, 7/01/28 7,000,000 6,958,910 Meridian Health Systems Obligation Group, FSA Insured, 5.375%, 7/01/24 .... 6,500,000 6,650,475 Meridian Health Systems Obligation Group, FSA Insured, 5.25%, 7/01/29 ..... 20,000,000 20,186,400 Monmouth Medical Center, Series C, FSA Insured, Pre-Refunded, 6.25%, 7/01/16 4,900,000 5,438,657 Monmouth Medical Center, Series C, FSA Insured, Pre-Refunded, 6.25%, 7/01/24 8,250,000 9,156,923 Newton Memorial Hospital, FSA Insured, 5.00%, 7/01/26 ..................... 1,500,000 1,493,625 Pascack Valley Hospital Association, 5.125%, 7/01/28 ...................... 6,000,000 4,405,380 Robert Wood Johnson University Hospital, 5.75%, 7/01/25 ................... 5,000,000 5,214,300 Southern Ocean County Hospital, FSA Insured, 5.00%, 7/01/27 ............... 2,000,000 1,991,320 St. Barnabas Health, Refunding, Series B, MBIA Insured, 5.00%, 7/01/24 .... 8,000,000 7,999,440 St. Joseph's Hospital and Medical Center, Refunding, Connie Lee Insured, 5.75%, 7/01/16 1,000,000 1,069,110 St. Joseph's Hospital and Medical Center, Refunding, Connie Lee Insured, 6.00%, 7/01/26 1,000,000 1,083,800 St. Peters University Hospital, Series A, 6.875%, 7/01/30 ................. 1,500,000 1,587,855 New Jersey State Building Authority Revenue, Refunding, 5.00%, 6/15/15 ........ 5,000,000 5,150,250 New Jersey State Educational Facilities Authority Revenue, Bloomfield College, Series A, 6.85%, 7/01/30 .............................. 1,400,000 1,474,158 Capital Improvement Funding Project, Series A, FSA Insured, 5.00%, 9/01/20 8,000,000 8,071,520 FGIC Insured, 5.50%, 7/01/30 .............................................. 6,615,000 6,837,396 Montclair State University, Series F, FGIC Insured, 5.00%, 7/01/31 ........ 5,000,000 4,992,000 New Jersey Institute of Technology, Refunding, Series A, MBIA Insured, 6.00%, 7/01/24 1,455,000 1,580,668
121 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) New Jersey State Educational Facilities Authority Revenue, (cont.) New Jersey Institute of Technology, Series A, MBIA Insured, 6.00%, 7/01/15 $ 4,000,000 $ 4,374,000 New Jersey Institute of Technology, Series G, MBIA Insured, 4.75%, 7/01/31 2,000,000 1,905,640 Ramapo College, Series D, 5.00%, 7/01/25 .................................. 1,000,000 1,002,890 Ramapo College, Series D, 5.00%, 7/01/31 .................................. 1,500,000 1,497,600 Rider College, Series D, AMBAC Insured, 6.20%, 7/01/17 .................... 3,000,000 3,101,040 Rowan College, Series E, AMBAC Insured, 6.00%, 7/01/26 .................... 9,810,000 11,080,493 Rowan University, Series C, FGIC Insured, 5.00%, 7/01/31 .................. 2,000,000 1,996,800 Seton Hall University Project, Series G, AMBAC Insured, 5.00%, 7/01/26 .... 1,870,000 1,874,021 Stevens Institute of Technology, Series I, 5.00%, 7/01/18 ................. 1,100,000 1,097,492 Stevens Institute of Technology, Series I, 5.00%, 7/01/28 ................. 1,575,000 1,521,230 University of Medical Dentistry, Series C, AMBAC Insured, 5.125%, 12/01/29 2,700,000 2,714,337 New Jersey State Highway Authority Garden State Parkway General Revenue, 6.20%, 1/01/10 5,000,000 5,725,050 New Jersey State Housing and Mortgage Finance Agency MFHR, a GO, Series D, FSA Insured, 5.50%, 5/01/22 ................................. 1,000,000 1,003,680 Refunding, Series A, AMBAC Insured, 6.00%, 11/01/14 ....................... 5,000,000 5,276,100 Refunding, Series A, AMBAC Insured, 6.05%, 11/01/20 ....................... 12,070,000 12,571,991 Series A1, FSA Insured, 6.35%, 11/01/31 ................................... 2,000,000 2,116,640 Series B, FSA Insured, 6.25%, 11/01/26 .................................... 2,000,000 2,117,100 Series E1, FSA Insured, 5.70%, 5/01/20 .................................... 6,000,000 6,301,860 Series E1, FSA Insured, 5.75%, 5/01/25 .................................... 2,830,000 2,948,436 New Jersey State Housing and Mortgage Finance Agency Revenue, Home Buyer, Series CC, MBIA Insured, 5.875%, 10/01/31 ..................... 5,000,000 5,147,200 Home Buyer, Series J, MBIA Insured, 6.20%, 10/01/25 ....................... 4,815,000 4,969,850 Home Buyer, Series N, MBIA Insured, 6.35%, 10/01/27 ....................... 3,960,000 4,111,312 Home Buyer, Series U, MBIA Insured, 5.85%, 4/01/29 ........................ 12,000,000 12,346,440 Section 8, Refunding, Series 1, 6.70%, 11/01/28 ........................... 165,000 170,490 Section 8, Refunding, Series A, 6.95%, 11/01/13 ........................... 12,400,000 12,684,084 SFMR, Home Buyer, Series Z, MBIA Insured, 5.70%, 10/01/17 ................. 6,325,000 6,580,783 New Jersey State Sports and Exposition Authority Convention Center Luxury Tax, Series A, MBIA Insured, Pre-Refunded, 6.60%, 7/01/15 ................................ 8,000,000 8,295,520 New Jersey State Transportation Corp. COP, Federal Transportation Administration Grants, Series A, AMBAC Insured, 6.125%, 9/15/15 .......................... 2,000,000 2,262,780 New Jersey State Transportation Trust Fund Authority Revenue, Transportation System, Refunding, Series B, MBIA Insured, 5.00%, 12/15/21 ........................ 10,000,000 10,060,800 Series A, FSA Insured, 4.75%, 6/15/16 ..................................... 2,345,000 2,357,475 New Jersey State Turnpike Authority, Turnpike Revenue, Series A, MBIA Insured, 5.60%, 1/01/22 ............................................................ 7,500,000 7,886,925 5.50%, 1/01/25 ............................................................ 16,300,000 16,938,634 Newark Board of Education GO, MBIA Insured, 5.875%, 12/15/14 .................. 1,000,000 1,088,810 North Brunswick Township Board of Education GO, Refunding, FGIC Insured, 5.00%, 2/01/15 2,000,000 2,052,320 North Hudson Sewer Authority New Jersey Sewer Revenue, Series C, MBIA Insured, 5.00%, 8/01/22 ................................................................... 1,000,000 1,003,680 8/01/31 ................................................................... 1,000,000 996,900 North Plainfield Board of Education GO, FSA Insured, 4.875%, 8/15/25 .......... 1,020,000 1,003,864 Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.60%, 3/15/28 ............................................................ 1,935,000 1,923,042 Passaic Valley Sewer Commissioners GO, Sewer System, Refunding, Series E, AMBAC Insured, 5.75%, 12/01/22 .................................................. 8,925,000 9,549,929 Passaic Valley Sewer Commissioners Sewer System Revenue, Refunding, Series D, AMBAC Insured, 5.80%, 12/01/18 ............................................ 7,400,000 7,758,160 Port Authority of New York and New Jersey Revenue, 120th Series, MBIA Insured, 5.50%, 10/15/35 ............................... 5,000,000 5,099,300 121st Series, MBIA Insured, 5.375%, 10/15/35 .............................. 3,000,000 3,055,110 123rd Series, 5.00%, 1/15/36 .............................................. 10,000,000 9,728,900 Consolidated 72nd Series, 7.35%, 10/01/27 ................................. 7,000,000 7,267,890 Consolidated 84th Series, 6.00%, 1/15/28 .................................. 1,125,000 1,163,711 Consolidated 94th Series, 6.00%, 12/01/16 ................................. 2,000,000 2,138,880 Consolidated 94th Series, 6.00%, 6/01/17 .................................. 5,000,000 5,340,450 Consolidated 109th Series, FSA Insured, 5.375%, 7/15/27 ................... 2,500,000 2,539,225 Delta Air Lines Special Project, Series 1, 6.95%, 6/01/08 ................. 5,000,000 4,999,950
122 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Port Authority of New York and New Jersey Special Obligation Revenue, 4th Installment, Special Project, 6.75%, 10/01/11 ......................... $ 2,500,000 $ 2,678,400 John F. Kennedy International Air Terminal, MBIA Insured, 5.75%, 12/01/22 . 8,000,000 8,338,720 Puerto Rico Commonwealth GO, Pre-Refunded, 6.45%, 7/01/17 .............................................. 3,000,000 3,349,440 Public Improvement, Refunding, FSA Insured, 5.125%, 7/01/30 ............... 15,755,000 15,922,633 Public Improvement, Series A, 5.125%, 7/01/31 ............................. 5,000,000 4,928,700 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series B, 6.00%, 7/01/39 .................................................. 10,000,000 11,692,000 Series D, 5.375%, 7/01/36 ................................................. 5,000,000 5,052,900 Series D, 5.25%, 7/01/38 .................................................. 5,000,000 5,003,550 Puerto Rico Commonwealth Infrastructure Financing Authority Special Obligation Bonds, Series A, 5.50%, 10/01/32 ................................................. 1,000,000 1,057,900 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.90%, 7/01/07 ............................................................ 120,000 120,492 7.75%, 7/01/08 ............................................................ 1,350,000 1,355,265 7.50%, 7/01/09 ............................................................ 100,000 100,360 AMBAC Insured, 5.00%, 7/01/28 ............................................. 20,000,000 19,969,600 Puerto Rico Commonwealth Urban Renewal and Housing Corp. Commonwealth Appropriation, Refunding, 7.875%, 10/01/04 ............................................... 605,000 609,060 Puerto Rico Electric Power Authority Power Revenue, Series DD, MBIA Insured, 5.00%, 7/01/28 ................................... 5,000,000 4,992,400 Series II, 5.25%, 7/01/31 ................................................. 13,000,000 13,010,010 Series T, 6.00%, 7/01/16 .................................................. 11,535,000 12,198,493 Series X, 6.00%, 7/01/15 .................................................. 2,000,000 2,260,640 Series X, Pre-Refunded, 6.125%, 7/01/21 ................................... 5,000,000 5,680,050 Puerto Rico HFC Revenue, MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ................................ 3,715,000 3,720,350 Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 .... 125,000 148,636 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Revenue, University Plaza Project, Series A, MBIA Insured, 5.00%, 7/01/33 1,000,000 995,220 Puerto Rico PBA Revenue, Government Facilities, Series B, AMBAC Insured, 5.00%, 7/01/27 ............ 2,000,000 1,999,860 Guaranteed, Government Facilities, Series D, 5.375%, 7/01/33 .............. 10,000,000 10,105,800 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series A, MBIA Insured, 5.00%, 8/01/29 .............................................. 5,000,000 4,984,950 Rutgers State University Revenue, Series A, 6.50%, 5/01/18 .................... 4,250,000 4,369,085 Salem County IPC, Financing Authority Revenue, Public Services, Electric and Gas Co., Refunding, Series D, MBIA Insured, 6.55%, 10/01/29 ........................ 5,000,000 5,563,150 South Brunswick Township Board of Education GO, Refunding, Series AA, FGIC Insured, 5.50%, 8/01/24 ............................................................ 1,720,000 1,763,482 South Jersey Transportation Authority Transportation Systems Revenue, AMBAC Insured, 5.00%, 11/01/29 ........................................................... 12,000,000 11,999,160 Union County Utilities Authority Solid Waste Revenue, sub. leased, Ogden Martin, Series A, AMBAC Insured, 5.35%, 6/01/23 ................................... 2,785,000 2,827,388 University of Medicine and Dentistry COP, Series A, MBIA Insured, 5.00%, 9/01/22 1,700,000 1,703,774 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/15 .................................................................. 2,500,000 2,610,100 10/01/18 .................................................................. 3,045,000 3,120,090 10/01/22 .................................................................. 2,000,000 2,012,120 West Orange County Board of Education COP, MBIA Insured, 5.625%, 10/01/29 ..... 2,000,000 2,105,880 Woodbridge Township GO, FGIC Insured, 5.00%, 7/15/24 .......................... 1,220,000 1,226,264 ------------- TOTAL BONDS ................................................................... 832,195,665 ------------- ZERO COUPON BONDS Middlesex County COP, MBIA Insured, 6/15/24 ................................... 1,000,000 317,280 ------------- TOTAL LONG TERM INVESTMENTS (COST $792,044,022) ............................... 832,512,945 -------------
123 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- bSHORT TERM INVESTMENTS .7% New Jersey EDA, EDR, Stolthaven Project, Refunding, Series A, Daily VRDN and Put, 1.25%, 1/15/18 ....................................................... $ 395,000 $ 395,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .............................. 4,300,000 4,300,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put,1.00%, 7/01/28 ............... 100,000 100,000 Union County IPC, Financing Authority Revenue, Exxon Project, Refunding, Daily VRDN and Put, 1.05%, 10/01/24 ............................................. 800,000 800,000 ------------- TOTAL SHORT TERM INVESTMENTS (COST $5,595,000) ................................ 5,595,000 ------------- TOTAL INVESTMENTS (COST $797,639,022) 99.5% ................................... 838,107,945 OTHER ASSETS, LESS LIABILITIES .5% ............................................ 4,429,470 ------------- NET ASSETS 100.0% ............................................................. $ 842,537,415 =============
See glossary of terms on page 137. a Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. b Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 124 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN OREGON TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------- CLASS A 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $11.42 $10.81 $11.83 $11.86 $11.55 ------------------------------------------------- Income from investment operations: Net investment incomea ................................................. .55 .58 .58 .59 .62 Net realized and unrealized gains (losses) ............................. .11 .61 (1.02) (.01) .31 ------------------------------------------------- Total from investment operations ........................................ .66 1.19 (.44) .58 .93 ------------------------------------------------- Less distributions from net investment income ........................... (.56) (.58) (.58) (.61) (.62) ------------------------------------------------- Net asset value, end of year ............................................ $11.52 $11.42 $10.81 $11.83 $11.86 ================================================= Total returnb ........................................................... 5.95% 11.25% (3.76)% 5.12% 8.21% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $513,733 $457,613 $432,675 $483,664 $427,022 Ratios to average net assets: Expenses ............................................................... .67% .67% .66% .67% .67% Net investment income .................................................. 4.79% 5.20% 5.16% 5.00% 5.33% Portfolio turnover rate ................................................. 19.36% 16.22% 24.58% 10.65% 12.18% CLASS C ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $11.50 $10.88 $11.90 $11.92 $11.61 ------------------------------------------------- Income from investment operations: Net investment incomea ................................................. .49 .52 .52 .53 .56 Net realized and unrealized gains (losses) ............................. .12 .62 (1.02) .31 ------------------------------------------------- Total from investment operations ........................................ .61 1.14 (.50) .53 .87 ------------------------------------------------- Less distributions from net investment income ........................... (.50) (.52) (.52) (.55) (.56) ------------------------------------------------- Net asset value, end of year ............................................ $11.61 $11.50 $10.88 $11.90 $11.92 ================================================= Total returnb ........................................................... 5.50% 10.58% (4.36)% 4.59% 7.66% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $56,449 $38,733 $34,071 $32,962 $15,946 Ratios to average net assets: Expenses ............................................................... 1.22% 1.22% 1.21% 1.23% 1.22% Net investment income .................................................. 4.24% 4.65% 4.62% 4.44% 4.74% Portfolio turnover rate ................................................. 19.36% 16.22% 24.58% 10.65% 12.18%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. See notes to financial statements. 125 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 97.7% BONDS 95.5% Bay Area Health District Hospital Facility Authority, Health Facilities Revenue, Evergreen Court Project, 7.25%, 10/01/14 .................................. $ 2,000,000 $ 2,048,400 Bend Sewer Revenue, AMBAC Insured, 5.375%, 10/01/20 ........................... 1,550,000 1,600,964 Benton County Hospital Facilities Authority Revenue, Samaritan Health Services Project, Refunding, 5.20%, 10/01/17 ........................................................... 4,000,000 3,999,840 5.125%, 10/01/28 .......................................................... 4,500,000 4,247,595 Clackamas County GO, School District No. 86, 5.25%, 6/15/20 ................... 3,000,000 3,066,240 Clackamas County Health Facilities Authority Hospital Revenue, Adventist Health, Refunding, Series A, MBIA Insured, 6.35%, 3/01/09 ......................... 4,945,000 5,054,482 Clackamas County Hospital Facilities Authority Revenue, Gross Willamette Falls, Refunding, 5.75%, 4/01/15 ......................... 2,250,000 2,253,128 Jennings Lodge Project, 7.50%, 10/20/31 ................................... 2,990,000 3,011,259 Kaiser Permanente, Series A, 6.50%, 4/01/11 ............................... 1,635,000 1,657,367 Kaiser Permanente, Series A, 5.375%, 4/01/14 .............................. 2,500,000 2,598,550 Sisters of Providence Project, 8.125%, 10/01/07 ........................... 90,000 90,392 Willamette Falls Hospital Project, 6.00%, 4/01/19 ......................... 1,000,000 1,004,800 Willamette View Inc. Project, Refunding, 6.10%, 11/01/12 .................. 500,000 511,600 Willamette View Inc. Project, Refunding, 6.30%, 11/01/21 .................. 1,500,000 1,521,645 Clackamas County School District No.108 GO, FSA Insured, 5.00%, 6/15/25 ....... 5,000,000 4,979,200 Curry County School District No. 17C Brookings Harbor GO, 5.375%, 12/15/20 .... 2,750,000 2,836,130 Deschutes County Administrative School District No. 1 GO, Series A, FSA Insured, 5.125%, 6/15/21 ........................................................... 3,500,000 3,544,870 Deschutes County Hospital Facilities Authority Hospital Revenue, St. Charles Medical Center, 6.00%, 1/01/13 ............................................ 3,000,000 3,115,950 Douglas County Hospital Facilities Authority Revenue, Catholic Health Facilities, Series B, MBIA Insured, 6.00%, 11/15/15 ................................... 1,950,000 2,133,027 Eugene Electric Utility Revenue, Refunding, Series B, FSA Insured, 5.00%, 8/01/26 4,945,000 4,910,286 Eugene Public Safety Facilities GO, FGIC Insured, 5.70%, 6/01/16 .............. 500,000 530,805 Eugene Trojan Nuclear Project Revenue, Refunding, 5.90%, 9/01/09 .............. 660,000 668,382 Gresham Stormwater Revenue, FGIC Insured, 5.30%, 5/01/21 ...................... 1,190,000 1,220,286 Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ........................................................... 750,000 778,995 6.70%, 10/01/23 ........................................................... 1,900,000 1,962,377 Guam Power Authority Revenue, Series A, Pre-Refunded, 6.30%, 10/01/12 ......... 825,000 864,559 Hillsboro Hospital Facility Authority Revenue, Hospital Tuality Healthcare Project, Asset Guaranteed, 5.375%, 10/01/26 .................................................................. 2,000,000 2,031,440 10/01/31 .................................................................. 2,000,000 2,022,180 Jackson County School District No. 4 GO, Phoenix-Talent District, FSA Insured, 5.00%, 6/15/20 2,000,000 2,004,260 Jackson County School District No. 9 Eagle Point GO, 5.00%, 6/15/20 ................................................................... 1,680,000 1,687,308 6/15/21 ................................................................... 1,500,000 1,503,195 Klamath Falls Intercommunity Hospital Revenue, Merle West Medical Center Project, 7.00%, 6/01/02 ............................................................ 415,000 418,511 7.25%, 6/01/06 ............................................................ 2,310,000 2,348,600 Lane County PCR, Weyerhaeuser Co. Project, Refunding, 6.50%, 7/01/09 .......... 11,575,000 12,009,757 Lebanon Wastewater Revenue, Refunding, 5.875%, 6/01/20 ........................ 2,425,000 2,442,824 Linn County Community School District No. 9 GO, MBIA Insured, 5.375%, 6/15/30 . 5,000,000 5,517,150 Linn County School District No. 55 GO, Sweet Home, FSA Insured, 5.00%, 6/15/29 1,000,000 988,180 Marion County Housing Authority Revenue, Elliott Residence Project, GNMA Secured, 7.50%, 10/20/25 ........................................................... 1,200,000 1,321,428 Medford Hospital Facilities Authority Revenue, Asante Health System, Series A, MBIA Insured, 5.00%, 8/15/18 ................................................................... 8,000,000 8,059,120 8/15/24 ................................................................... 5,300,000 5,264,490 Multnomah County COP, Series A, 4.75%, 8/01/16 ................................ 1,000,000 1,007,410 Multnomah County Educational Facilities Revenue, University of Portland Project, 6.00%, 4/01/25 ............................................................ 2,000,000 2,061,760 Multnomah County School District No. 40 GO, FSA Insured, 5.00%, 12/01/20 ...... 3,490,000 3,506,927 Multnomah-Clackamas Counties Centennial School District No. 28-302 GO, FGIC Insured, 5.00%, 6/15/21 ............................................................ 5,000,000 5,018,050 Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.60%, 3/15/28 ............................................................ 3,345,000 3,324,328 Northern Wasco County Peoples Utilities District Hydroelectric Revenue, McNary Dam Fishway Project, 5.20%, 12/01/24 ...................................... 5,000,000 5,013,050 Oak Lodge Water District GO, AMBAC Insured, 7.40%, 12/01/08 ........................................................... 215,000 241,312 7.50%, 12/01/09 ........................................................... 215,000 241,875 Ontario Catholic Health Revenue, Dominican Sisters Holy Rosary, 6.10%, 11/15/17 1,500,000 1,545,930
126 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Oregon Board Higher Education GO, Refunding, 5.00%, 8/01/31 ................... $ 2,000,000 $ 1,972,600 Oregon City Sewer Revenue, Pre-Refunded, 6.875%, 10/01/19 ..................... 4,000,000 4,579,200 Oregon State Department of Administrative Services COP, Refunding, Series A, AMBAC Insured, 5.00%, 5/01/24 ........................ 10,000,000 9,986,000 Refunding, Series B, AMBAC Insured, 5.00%, 5/01/26 ........................ 7,500,000 7,447,500 Series A, AMBAC Insured, 6.00%, 5/01/26 ................................... 2,000,000 2,305,480 Oregon State Department of General Services COP, Refunding, Series D, MBIA Insured, 5.80%, 3/01/15 ......................... 1,000,000 1,031,140 Series G, AMBAC Insured, 6.25%, 9/01/15 ................................... 750,000 775,485 Oregon State Department of Transportation Revenue, Regional Light Rail Federal Westside Project, MBIA Insured, 6.10%, 6/01/07 ............................................................ 2,000,000 2,185,720 6.20%, 6/01/08 ............................................................ 2,500,000 2,735,825 6.25%, 6/01/09 ............................................................ 1,750,000 1,921,010 Oregon State EDR, Georgia Pacific Corp. Project, Series CLVII, 6.35%, 8/01/25 . 14,000,000 13,519,940 Oregon State GO, Board of Higher Education, Baccalaureate, Series A, 5.00%, 8/01/27 ........ 6,000,000 5,940,120 Board of Higher Education, Series A, 5.65%, 8/01/27 ....................... 4,440,000 4,626,125 Board of Higher Education, Series C, 5.65%, 8/01/27 ....................... 1,460,000 1,521,203 Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/15 .......... 910,000 963,827 Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/21 .......... 455,000 477,923 Elderly and Disabled Housing Authority, Series A, 5.375%, 8/01/28 ......... 1,950,000 1,969,461 Elderly and Disabled Housing Authority, Series B, 6.10%, 8/01/17 .......... 1,410,000 1,473,337 Elderly and Disabled Housing Authority, Series B, 6.25%, 8/01/23 .......... 2,015,000 2,196,914 Elderly and Disabled Housing Authority, Series B, 6.375%, 8/01/24 ......... 2,155,000 2,236,761 Elderly and Disabled Housing Authority, Series C, 6.50%, 8/01/22 .......... 6,000,000 6,230,640 State Board of Higher Education, Series A, 5.60%, 8/01/25 ................. 8,000,000 8,339,040 State Board of Higher Education, Series A, 5.50%, 8/01/29 ................. 2,000,000 2,063,600 Veteran's Welfare, Series 75, 5.85%, 10/01/15 ............................. 650,000 680,414 Veteran's Welfare, Series 75, 5.875%, 10/01/18 ............................ 370,000 384,286 Veteran's Welfare, Series 75, 6.00%, 4/01/27 .............................. 1,935,000 2,003,286 Veteran's Welfare, Series 76A, 6.05%, 10/01/28 ............................ 2,435,000 2,632,844 Veteran's Welfare, Series 77, 5.30%, 10/01/29 ............................. 3,745,000 3,791,438 Veteran's Welfare, Series 80A, 5.70%, 10/01/32 ............................ 6,000,000 6,268,380 Oregon State Health, Housing, Educational and Cultural Facilities Authority Revenue, Lewis and Clark College Project, Series A, MBIA Insured, 6.125%, 10/01/24 . 10,500,000 11,486,895 Peacehealth, AMBAC Insured, 5.00%, 11/15/26 ............................... 8,000,000 7,898,800 Reed College Project, Series A, 5.75%, 7/01/32 ............................ 10,735,000 11,182,005 Oregon State Housing and Community Services Department HFR, Multi-Unit, Series A, FHA Insured, 6.80%, 7/01/13 ..................................... 6,710,000 6,870,705 Series C, FHA Insured, 6.85%, 7/01/22 ..................................... 180,000 182,646 Oregon State Housing and Community Services Department MFR, Housing, Series A, 6.15%, 7/01/21 910,000 958,494 Oregon State Housing and Community Services Department Mortgage Revenue, SFM Program, Series A, 6.35%, 7/01/14 .................................................. 2,240,000 2,342,256 Series A, 6.40%, 7/01/18 .................................................. 890,000 927,798 Series A, 6.45%, 7/01/26 .................................................. 2,185,000 2,266,195 Series B, 6.875%, 7/01/28 ................................................. 7,855,000 8,046,505 Series C, 6.20%, 7/01/15 .................................................. 1,605,000 1,670,324 Series C, 6.40%, 7/01/26 .................................................. 715,000 741,276 Series D, 6.80%, 7/01/27 .................................................. 1,750,000 1,772,663 Series H, FHA Insured, 5.75%, 7/01/30 ..................................... 4,975,000 5,119,623 Oregon State Housing and Community Services Department, MFHR, Series B, 6.00%, 7/01/31 5,000,000 5,175,950 Polk Marion and Benton Counties GO, School District No. 13J, FSA Insured, 5.80%, 6/15/20 1,985,000 2,135,959 Port Astoria PCR, James River Project, Refunding, 6.55%, 2/01/15 .............. 945,000 946,408 Port of Portland Airport Revenue, Portland International Airport, Refunding, Series D, FGIC Insured, 5.00%, 7/01/23 .................................................. 3,000,000 2,870,850 Port of Portland International Airport Revenue, Portland International Airport, Series A, AMBAC Insured, 5.50%, 7/01/24 ................................... 22,000,000 22,439,553 Series 7B, MBIA Insured, Pre-Refunded, 7.10%, 7/01/21 ..................... 2,800,000 3,343,088
127 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Port of Portland International Airport Revenue, Portland International Airport, (cont.) Series 12C, FGIC Insured, 5.00%, 7/01/18 .................................. $ 1,500,000 $ 1,488,330 Series 12C, FGIC Insured, 5.00%, 7/01/28 .................................. 1,500,000 1,412,100 Port of Portland International Airport Special Obligation Revenue, Delta Airlines Inc. Project, 6.20%, 9/1/22 ............................................... 4,000,000 3,368,400 Port St. Helens PCR, Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/27 ................... 7,750,000 7,223,310 Portland General Electric Co. Project, Series A, 5.25%, 8/01/14 ........... 3,600,000 2,978,208 Portland Community College District GO, Series B, 5.00%, 6/01/20 ................................................................... 7,185,000 7,221,428 6/01/21 ................................................................... 6,290,000 6,303,335 Portland GO, Central City Streetcar Project, Series A, 4.75%, 4/01/21 ......... 3,600,000 3,455,856 Portland Housing Authority MFR, Berry Ridge Project, 6.30%, 5/01/29 ....................................... 1,500,000 1,548,345 Housing-Lovejoy Station Apartments Project, MBIA Insured, 6.00%, 7/01/33 .. 2,000,000 2,071,280 Portland Housing Authority Revenue, 7.10%, 7/01/15 ............................ 1,000,000 1,031,260 Portland Hydroelectric Power Revenue, Bull Run Project, Series C, 7.00%, 10/01/16 635,000 636,975 Portland MFHR, Civic Stadium Housing Project, Series A, 6.00%, 3/01/17 ........ 1,000,000 1,037,680 Portland MFR, Housing Garden Park Estates Project, Series A, GNMA Secured, 5.875%, 3/20/37 3,200,000 3,248,384 Portland Revenue, Limited Tax, Series A, 5.00%, 4/01/18 ............................................................ 1,000,000 1,007,770 5.00%, 6/01/24 ............................................................ 10,000,000 9,985,900 MBIA Insured, 5.125%, 6/01/30 ............................................. 6,315,000 6,341,965 Portland Sewer System Revenue, Series A, Pre-Refunded, 6.25%, 6/01/15 ......... 9,100,000 9,980,789 Portland Urban Renewal and Redevelopment Tax Allocation, Convention Center, Series A, AMBAC Insured, 5.50%, 6/15/20 ................................... 3,000,000 3,132,660 Downtown Waterfront, Refunding, Series L, 6.40%, 6/01/08 .................. 3,045,000 3,067,655 Downtown Waterfront, Series L, Pre-Refunded, 6.40%, 6/01/08 ............... 2,510,000 2,540,045 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured, Pre-Refunded, 9.00%, 7/01/09 .............................................. 65,000 75,717 Puerto Rico Commonwealth GO, Pre-Refunded, 6.45%, 7/01/17 .............................................. 1,000,000 1,116,480 Public Improvement, Series A, 5.125%, 7/01/31 ............................. 15,000,000 14,786,100 Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y, 5.50%, 7/01/26 ................................................................... 4,275,000 4,356,824 7/01/36 ................................................................... 13,000,000 13,469,300 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series D, 7.75%, 7/01/08 ......................................... 10,000,000 10,105,800 Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A, 7.75%, 7/01/08 .................................................. 280,000 281,092 Puerto Rico Electric Power Authority Power Revenue, Series II, 5.25%, 7/01/31 ............................................................ 12,000,000 12,009,240 FSA Insured, 5.125%, 7/01/26 .............................................. 9,150,000 9,255,225 Puerto Rico Electric Power Authority Revenue, Series X, 6.00%, 7/01/15 ........ 2,500,000 2,825,800 Puerto Rico HFC Revenue, Sixth Portfolio, Section 8, FHA Insured, Pre-Refunded, 7.75%, 12/01/26 395,000 469,691 Puerto Rico PBA Revenue, Public Education and Health Facilities, Refunding, Series M, 5.75%, 7/01/15 .................................................. 2,500,000 2,623,400 Puerto Rico Public Finance Corp. Revenue, Commonwealth Appropriation, Series E, 5.50%, 8/01/29 ............................................................ 5,000,000 5,106,950 Salem Educational Facilities Revenue, Willamette University, Refunding, 6.10%, 4/01/14 1,000,000 1,042,010 Salem-Keizer GO, School District No. 24J, 5.00%, 6/01/19 ...................... 9,500,000 9,562,320 Tri-County Metropolitan Transportation District Revenue, Limited Obligation, Airport Light Rail, Series 1, 5.65%, 6/01/29 .............................. 14,080,000 14,538,867 Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/15 .................................................................. 1,635,000 1,707,005 10/01/18 .................................................................. 2,400,000 2,459,184 Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%, 7/01/18 ................................................................... 2,500,000 2,470,225 7/01/21 ................................................................... 1,400,000 1,333,220 Washington County Clean Water Services Sewer Revenue, senior lien, FGIC Insured, 5.00%, 10/01/19 ........................................................... 3,905,000 3,946,315 Washington County GO, 5.00%, 6/01/26 .......................................... 10,000,000 9,874,700 Washington County School District No. 88 GO, J Sherwood, FSA Insured, 6.10%, 6/01/12 190,000 205,717 Washington County Unified Sewer Agency Revenue, senior lien, Series A, AMBAC Insured, 6.20%, 10/01/10 ............................................ 470,000 510,599 AMBAC Insured, Pre-Refunded, 6.125%, 10/01/12 ............................. 1,000,000 1,096,820 Pre-Refunded, 6.20%, 10/01/10 ............................................. 3,530,000 3,878,376
128 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Washington Multnomah and Yamhill Counties School District No. 1 J Hillsboro GO, FSA Insured, 5.60%, 4/01/20 ............................................... $ 1,000,000 $ 1,052,290 Western Lane Hospital District Hospital Facilities Authority Revenue, Sisters of St. Joseph of Peace Health and Hospital Services, Refunding, MBIA Insured, 5.875%, 8/01/12 ........................................................... 4,400,000 4,749,668 ------------ TOTAL BONDS 544,418,316 ------------ ZERO COUPON BONDS 2.2% Linn County Community School District No. 9 GO, Lebanon, FGIC Insured, zero cpn. to 12/15/03, 5.55% thereafter, 6/15/21 ................................................. 1,155,000 1,081,646 5.60% thereafter, 6/15/30 ................................................. 7,495,000 6,961,881 Oregon Health Sciences University Revenue, Capital Appreciation, Refunding, Series A, MBIA Insured, 7/01/21 ........................................... 11,480,000 4,185,952 Portland GO, Limited Tax, Series B, 6/01/21 ................................... 1,000,000 366,220 ------------ TOTAL ZERO COUPON BONDS 12,595,699 ------------ TOTAL LONG TERM INVESTMENTS (COST $539,355,705) 557,014,015 ------------ aSHORT TERM INVESTMENTS 1.1% Multnomah County Higher Educational Revenue, Concordia University Portland Project, Daily VRDN and Put, 1.35%, 12/01/29 .............................. 4,040,000 4,040,000 Port of Portland PCR, Reynolds Metals, Daily VRDN and Put, 1.35%, 12/01/09 .... 360,000 360,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .............................. 1,000,000 1,000,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ..... 1,000,000 1,000,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $6,400,000) ................................ 6,400,000 ------------ TOTAL INVESTMENTS (COST $545,755,705) 98.8% ................................... 563,414,015 OTHER ASSETS, LESS LIABILITIES 1.2% ........................................... 6,767,923 ------------ NET ASSETS 100.0% ............................................................. $570,181,938 ------------
See glossary of terms on page 137. 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. See notes to financial statements. 129 FRANKLIN TAX-FREE TRUST Financial Highlights FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS A 2002 2001 2000C 1999 1998 --------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $10.12 $ 9.55 $10.52 $10.56 $10.39 ------------------------------------------------ Income from investment operations: Net investment incomea ................................................. .52 .53 .53 .55 .58 Net realized and unrealized gains (losses) ............................. .17 .56 (.97) (.02) .32 ------------------------------------------------ Total from investment operations ........................................ .69 1.09 (.44) .53 .90 ------------------------------------------------ Less distributions from: Net investment income .................................................. (.52) (.52) (.53) (.56) (.59) Net realized gains ..................................................... -- -- --d (.01) (.14) ------------------------------------------------ Total distributions ..................................................... (.52) (.52) (.53) (.57) (.73) ------------------------------------------------ Net asset value, end of year ............................................ $10.29 $10.12 $ 9.55 $10.52 $10.56 ================================================ Total returnb ........................................................... 7.01% 11.73% (4.24)% 5.11% 8.90% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $676,684 $649,603 $639,004 $758,942 $713,141 Ratios to average net assets: Expenses ............................................................... .67% .67% .66% .65% .65% Net investment income .................................................. 5.07% 5.40% 5.32% 5.17% 5.49% Portfolio turnover rate ................................................. 11.23% 7.56% 24.21% 11.11% 12.74% CLASS B --------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $10.13 $ 9.55 $9.47 ----------------------------- Income from investment operations: Net investment incomea ................................................. .46 .48 .04 Net realized and unrealized gains ...................................... .18 .57 .08 ----------------------------- Total from investment operations ........................................ .64 1.05 .12 ----------------------------- Less distributions from net investment income ........................... (.46) (.47) (.04) ----------------------------- Net asset value, end of year ............................................ $10.31 $10.13 $9.55 ============================= Total returnb ........................................................... 6.50% 11.23% 1.27% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $16,408 $3,205 $186 Ratios to average net assets: Expenses ............................................................... 1.22% 1.22% 1.21%e Net investment income .................................................. 4.50% 4.85% 5.06%e Portfolio turnover rate ................................................. 11.23% 7.56% 24.21%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c For the period February 1, 2000 (effective date) to February 29, 2000 for Class B. d The fund made a capital gain distribution of $.0002. e Annualized 130 FRANKLIN TAX-FREE TRUST Financial Highlights (CONTINUED) FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND (CONT.)
YEAR ENDED FEBRUARY 28, ------------------------------------------------ CLASS C 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................................... $10.18 $ 9.60 $10.57 $10.61 $10.43 ------------------------------------------------ Income from investment operations: Net investment incomea .................................................. .46 .48 .48 .49 .52 Net realized and unrealized gains (losses) .............................. .17 .57 (.97) (.03) .33 ------------------------------------------------ Total from investment operations ......................................... .63 1.05 (.49) .46 .85 ------------------------------------------------ Less distributions from: Net investment income ................................................... (.46) (.47) (.48) (.49) (.53) Net realized gains ...................................................... -- -- --c (.01) (.14) ------------------------------------------------ Total distributions ...................................................... (.46) (.47) (.48) (.50) (.67) ------------------------------------------------ Net asset value, end of year ............................................. $10.35 $10.18 $ 9.60 $10.57 $10.61 ================================================ Total returnb ............................................................ 6.38% 11.18% (4.76)% 4.50% 8.35% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .......................................... $55,692 $43,907 $40,973 $41,917 $25,899 Ratios to average net assets: Expenses ................................................................ 1.22% 1.22% 1.21% 1.21% 1.21% Net investment income ................................................... 4.52% 4.85% 4.77% 4.61% 4.89% Portfolio turnover rate .................................................. 11.23% 7.56% 24.21% 11.11% 12.74%
a Based on average shares outstanding effective year ended February 29, 2000. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c The fund made a capital gain distribution of $.0002. See notes to financial statements. 131 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002
PRINCIPAL FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 98.7% BONDS 97.9% Allegheny County Airport Authority Airport Revenue, Pittsburgh International Airport, Refunding, 5.75%, 1/01/18 ........................................ $ 1,000,000 $ 1,050,710 Allegheny County Airport Revenue, Pittsburgh International Airport, Refunding, Series B, MBIA Insured, 5.00%, 1/01/19 .................................... 6,000,000 6,027,120 Allegheny County COP, AMBAC Insured, 5.00%, 12/01/28 .......................... 4,000,000 3,935,920 Allegheny County Higher Education Building Authority Revenue, Duquesne University Project, AMBAC Insured, 5.00%, 3/01/21 .................................... 1,000,000 1,003,070 Allegheny County Hospital Development Authority Revenue, Allegheny General Hospital Project, Series A, MBIA Insured, Pre-Refunded, 6.25%, 9/01/20 ......................................................... 10,000,000 11,132,500 Allegheny Hospital, South Hills Health System, Series A, MBIA Insured, 5.875%, 5/01/26 1,700,000 1,795,896 Health Center, Canterbury Place, AMBAC Insured, 5.375%, 12/01/21 .......... 4,500,000 4,597,200 Health System, Series A, MBIA Insured, 6.50%, 11/15/30 .................... 10,000,000 11,297,800 University of Pittsburgh Health Center, Refunding, Series A, MBIA Insured, 5.625%, 4/01/27 ........................................................ 10,450,000 10,822,020 Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding, 6.10%, 1/15/18 ........... 2,000,000 2,017,640 Environmental Improvement, USX Corp., Refunding, 5.50%, 12/01/29 .......... 10,000,000 9,378,500 Environmental Improvement, USX Corp., Refunding, 5.60%, 9/01/30 ........... 7,530,000 7,160,427 Kaufmann Medical Project, Refunding, Series A, MBIA Insured, 6.80%, 3/01/15 1,000,000 1,029,490 Allegheny County Port Authority Special Revenue, Transportation, FGIC Insured, 5.00%, 3/01/25 .............................. 6,000,000 5,943,300 Transportation, FGIC Insured, 5.00%, 3/01/29 .............................. 11,500,000 11,299,210 Transportation Project, MBIA Insured, 6.125%, 3/01/29 ..................... 15,000,000 17,308,050 Allegheny County RDA, Tax Increment Revenue, Robinson Mall Project, Series A, 7.00%, 11/01/17 ................................................. 8,500,000 8,902,900 Series B, 6.875%, 11/01/17 ................................................ 2,600,000 2,723,005 Allegheny County RDAR, Home Improvement Loan, Refunding, Series A, 5.90%, 2/01/11 1,555,000 1,614,416 Allegheny County Residential Finance Authority Mortgage Revenue, Ladies Grand Army Republic Health Facilities Project, Series G, FHA Insured, 6.35%, 10/01/36 ........................................................ 1,890,000 1,954,335 Lexington Home, Series E, 7.125%, 2/01/27 ................................. 3,505,000 3,510,643 MFMR, Series D, FHA Insured, 7.50%, 6/01/33 ............................... 1,400,000 1,414,798 SF, Series FF-2, GNMA Secured, 6.00%, 11/01/31 ............................ 4,990,000 5,159,560 SF, Series II-2, GNMA Secured, 5.90%, 11/01/32 ............................ 1,345,000 1,384,341 SFM, Series DD-1, GNMA Secured, 5.35%, 11/01/19 ........................... 560,000 570,052 SFM, Series DD-2, GNMA Secured, 5.40%, 11/01/29 ........................... 1,940,000 1,954,531 SFMR, Series T, GNMA Secured, 6.95%, 5/01/17 .............................. 810,000 831,214 Armstrong County GO, MBIA Insured, 5.40%, 6/01/31 ............................. 2,500,000 2,563,750 Beaver County Hospital Authority Revenue, Beaver County Medical Center Inc., AMBAC Insured, Pre-Refunded, 6.625%, 7/01/10 ............................. 5,000,000 5,185,300 Bensalem Township GO, Refunding, FGIC Insured, 5.75%, 12/01/16 ................ 3,000,000 3,274,710 Berks County Municipal Authority Revenue, FGIC Insured, Pre-Refunded, 7.00%, 5/15/18 4,000,000 4,411,680 Berwick Area School District GO, Series A, 5.00%, 10/01/25 .................... 1,000,000 991,750 Bradford County IDA, Solid Waste Disposal Revenue, International Paper Co. Projects, Series A, 6.60%, 3/01/19 .................................................. 2,500,000 2,585,550 Bucks County IDAR, AMBAC Insured, 5.125%, 9/15/31 ............................. 3,675,000 3,672,170 Butler County IDA, PCR, Witco Corp. Project, Refunding, 5.85%, 12/01/23 ....... 2,000,000 1,648,520 Cambria County IDA, PCR, Pennsylvania Electric Co. Project, Refunding, Series A, MBIA Insured, 5.80%, 11/01/20 ............................................. 5,000,000 5,301,500 Carbon County IDAR, Panther Creek Partner Project, Refunding, 6.65%, 5/01/10 .. 4,000,000 4,306,840 Chartiers Valley Industrial and Commercial Development Authority First Mortgage Revenue, Asbury Place Project, Pre-Refunded, 6.50%, 2/01/36 ............... 4,250,000 4,805,008 Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding, 5.40%, 7/01/07 ............................................................ 1,000,000 967,180 5.55%, 7/01/09 ............................................................ 2,365,000 2,263,329 5.60%, 7/01/10 ............................................................ 600,000 566,754 5.75%, 7/01/12 ............................................................ 1,795,000 1,672,994 5.75%, 7/01/17 ............................................................ 700,000 624,519 5.625%, 7/01/21 ........................................................... 1,500,000 1,281,750 Council Rock School District GO, Series A, MBIA Insured, 5.00%, 11/15/22 ...... 5,180,000 5,183,574 Cumberland County Municipal Authority College Revenue, Dickinson College Series A, AMBAC Insured, 5.50%, 11/01/30 ............................................ 1,200,000 1,245,924 Dauphin County General Authority Health System Revenue, Pinnacle Health System Project, Refunding, MBIA Insured, 5.50%, 5/15/17 .......................... 2,000,000 2,079,180 Dauphin County General Authority Hospital Revenue, Hapsco-Western Hospital Project, Refunding, Series A, MBIA Insured, 6.50%, 7/01/12 .................................... 4,500,000 4,652,865 Series B, MBIA Insured, ETM, 6.25%, 7/01/16 ............................... 5,000,000 5,783,400 Dauphin County General Authority Revenue, Sub. Series 3, AMBAC Insured, 4.75%, 6/01/26 1,000,000 1,069,460
132 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Deer Lakes School District GO, Series A, FSA Insured, 5.00%, 1/15/23 .......... $ 1,000,000 $ 998,650 Delaware County Authority College Revenue, Cabrini College, Asset Guaranteed, 5.875%, 7/01/29 ........................ 6,385,000 6,659,938 Eastern College, Series C, 5.625%, 10/01/28 ............................... 2,210,000 2,128,849 Haverford College, 5.75%, 11/15/29 ........................................ 3,500,000 3,708,285 Haverford College, 6.00%, 11/15/30 ........................................ 1,750,000 1,907,990 Delaware County Authority Healthcare Revenue, Mercy Health Corp. Southeastern, Series B, Pre-Refunded, 6.00%, 11/15/07 ................................... 6,780,000 7,286,737 Delaware County Authority Revenue, Dunwoody Village Project, 6.25%, 4/01/30 .................................. 1,800,000 1,846,872 Health Facilities, Mercy Health Corp. Project, ETM, 6.00%, 12/15/26 ....... 10,800,000 11,859,264 Delaware County IDAR, Philadelphia Suburban Water Co. Project, FGIC Insured, 6.00%, 6/01/29 2,000,000 2,160,600 Delaware County University Authority Revenue, Villanova University, Series A, MBIA Insured, 5.00%, 12/01/28 ............................................. 3,000,000 2,951,940 Delaware Valley Regional Finance Authority Local Government Revenue, Series B, AMBAC Insured, 5.60%, 7/01/17 ............................................. 5,000,000 5,533,450 Erie County Hospital Authority Revenue, Nursing Home, Sarah A. Reed Retirement Center, Refunding, 5.625%, 7/01/14 . 3,660,000 3,347,436 St. Vincent Health Center Project, Series A, MBIA Insured, 6.375%, 7/01/22 7,000,000 7,234,990 Erie County IDA, Environmental Improvement Revenue, International Paper Co. Project, Refunding, Series B, 6.00%, 9/01/16 ....................................... 600,000 631,836 Erie GO, Series E, FGIC Insured, 5.25%, 11/15/25 .............................. 5,000,000 5,060,250 Erie School District GO, AMBAC Insured, 5.80%, 9/01/29 ........................ 3,000,000 3,415,530 Erie-Western Pennsylvania Port Authority General Revenue, 6.875%, 6/15/16 ..... 920,000 975,246 Greater Johnstown School District GO, Series C, MBIA Insured, 5.125%, 8/01/25 . 3,635,000 3,627,439 Hazleton Area School District GO, Series B, FGIC Insured, 5.00%, 3/01/23 ...... 4,455,000 4,449,209 Hazleton Health Services Authority Hospital Revenue, Hazleton General Hospital, 5.50%, 7/01/27 2,475,000 2,167,927 Jeannette County Municipal Authority Sewer Revenue, Pre-Refunded, 7.00%, 7/01/17 1,250,000 1,272,513 Lancaster County Hospital Authority Revenue, Health Center, Masonic Homes Project, Refunding, AMBAC Insured, 5.00%, 11/15/20 .......... 1,600,000 1,599,888 Willow Valley Retirement Project, 5.875%, 6/01/21 ......................... 1,000,000 1,003,200 Latrobe IDAR, Saint Vincent College Project, 5.70%, 5/01/31 ................... 1,500,000 1,510,950 Lebanon County Good Samaritan Hospital Authority Revenue, Good Samaritan Hospital Project, Refunding, 6.00%, 11/15/18 ....................................... 2,500,000 2,425,450 Lehigh County General Purpose Authority Revenue, Good Shepard Rehabilitation Hospital, Refunding, AMBAC Insured, 5.25%, 11/15/27 5,000,000 5,012,150 Lehigh Valley Hospital, Health Network, Series A, MBIA Insured, 5.00%, 7/01/28 4,000,000 3,896,880 Lehigh Valley Hospital, Health Network, Series B, FSA Insured, 5.25%, 7/01/19 2,750,000 2,811,078 Lehigh Valley Hospital, Refunding, Series A, MBIA Insured, 5.875%, 7/01/15 1,000,000 1,070,400 Muhlenburg Hospital Center, Series A, Pre-Refunded, 6.60%, 7/15/22 ........ 5,800,000 6,376,810 Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding, Series A, MBIA Insured, 6.40%, 11/01/21 ................................... 5,000,000 5,245,500 Series A, MBIA Insured, 6.15%, 8/01/29 .................................... 5,550,000 6,097,896 Series B, MBIA Insured, 6.40%, 9/01/29 .................................... 10,000,000 11,056,500 Luzerne County IDA, Exempt Facility Revenue, Gas and Water Co. Project, Refunding, Series A, AMBAC Insured, 7.00%, 12/01/17 ........................................................... 5,000,000 5,602,700 6.05%, 1/01/19 ............................................................ 4,750,000 4,864,808 Lycoming County Authority College Revenue, Pennsylvania College of Technology, Refunding, AMBAC Insured, 5.35%, 7/01/26 .................................. 2,400,000 2,447,136 Mercer County GO, FGIC Insured, 5.00%, 10/01/31 ............................... 2,000,000 1,960,580 Mercer County IDA Water Facilities Revenue, MBIA Insured, 6.00%, 7/01/30 ...... 5,000,000 5,347,850 Montgomery County GO, 5.00%, 9/15/22 .......................................... 3,335,000 3,357,578 Montgomery County Higher Education and Health Authority Revenue, Faulkeways At Gwynedd Project, 6.75%, 11/15/24 ............................ 400,000 417,024 Faulkeways At Gwynedd Project, 6.75%, 11/15/30 ............................ 1,000,000 1,043,240 St. Joseph's University, Refunding, Connie Lee Insured, 6.50%, 12/15/22 ... 1,750,000 1,845,288 Montgomery County IDA, Retirement Community Revenue, Act Retirement-Life Communities, 5.25%, 11/15/28 .......................... 5,000,000 4,609,400 Adult Community Total Services, Refunding, Series A, 5.875%, 11/15/22 ..... 4,850,000 4,901,604 Adult Community Total Services, Series B, 5.75%, 11/15/17 ................. 3,000,000 3,042,930 Montgomery County IDAR, Resource Recovery, 7.50%, 1/01/12 ..................... 10,000,000 10,159,100 Mount Pleasant Business District Authority Hospital Revenue, Frick Hospital, Refunding, 5.70%, 12/01/13 ........................................................... 1,205,000 1,207,121 5.75%, 12/01/17 ........................................................... 500,000 486,835 5.75%, 12/01/27 ........................................................... 1,600,000 1,500,016
133 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Muhlenberg School District GO, FGIC Insured, 6.00%, 9/01/23 ................... $ 4,000,000 $ 4,436,400 Neshaminy School District GO, FGIC Insured, Pre-Refunded, 7.00%, 2/15/14 ...... 1,000,000 1,113,610 New Wilmington Municipal Authority College Revenue, Westminster College, 5.35%, 3/01/28 2,250,000 2,097,810 North Hampton County IDAR, PCR, Metropolitan Edison Co., Refunding, Series A, MBIA Insured, 6.10%, 7/15/21 .............................................. 6,100,000 6,678,463 Northeastern Hospital and Educational Authority College Revenue, Kings College Project, Refunding, Series B, 6.00%, 7/15/11 ................................................................... 1,000,000 1,032,970 7/15/18 ................................................................... 1,000,000 1,008,060 Northeastern Pennsylvania Hospital and Educational Authority Revenue, Wilkes University, Refunding, 6.125%, 10/01/11 ................................... 5,000,000 5,004,500 Norwin School District GO, FGIC Insured, 6.00%, 4/01/30 .............................................. 5,000,000 5,732,150 Series A, MBIA Insured, 5.00%, 4/01/30 .................................... 1,000,000 980,730 Series B, MBIA Insured, 5.00%, 4/01/31 .................................... 6,390,000 6,246,097 Pennsylvania Convention Center Authority Revenue, Refunding, Series A, 6.60%, 9/01/09 5,000,000 5,315,600 Pennsylvania EDA, Financing Authority Revenue, MacMillan, LP Project, Pre-Refunded, 7.60%, 12/01/20 3,000,000 3,541,650 Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%, 12/01/15 5,000,000 5,231,000 Pennsylvania HFA, SFMR, Refunding, Series 54-A, 6.15%, 10/01/22 ............... 1,295,000 1,343,006 Pennsylvania HFAR, Rental Housing, Refunding, FNMA Insured, 5.75%, 7/01/14 ................... 10,000,000 10,297,100 SF, 5.25%, 4/01/21 ........................................................ 7,000,000 7,009,730 SFM, Series 34-A, 6.85%, 4/01/16 .......................................... 3,000,000 3,008,910 SFM, Series 34-B, 7.00%, 4/01/24 .......................................... 3,115,000 3,161,351 SFM, Series 38, 6.125%, 10/01/24 .......................................... 2,950,000 3,029,267 SFM, Series 67A, 5.85%, 10/01/18 .......................................... 5,000,000 5,172,100 Pennsylvania Intergovernmental Cooperative Authority Special Tax Revenue, Philadelphia Funding Program, FGIC Insured, Pre-Refunded, 7.00%, 6/15/14 ............................................................ 6,000,000 6,799,740 Pennsylvania State Financial Authority Revenue, Municipal Capital Improvements Program, Refunding, 6.60%, 11/01/09 ....................................... 12,565,000 13,479,858 Pennsylvania State Higher Educational Facilities Authority College and University Revenues, Allegheny College, Series B, 6.125%, 11/01/13 .......................................................... 90,000 93,358 Pre-Refunded, 6.125%, 11/01/13 ............................................ 910,000 991,554 Pennsylvania State Higher Educational Facilities Authority Health Services Revenue, Allegheny Delaware Valley Obligation Group, Refunding, Series A, MBIA Insured, 5.875%, 11/15/21 .......................................................... 17,000,000 17,885,360 University of Pennsylvania Health Services, Refunding, Series A, 5.75%, 1/01/22 10,000,000 10,062,900 Pennsylvania State Higher Educational Facilities Authority Revenue, Bryn Mawr College, AMBAC Insured, 5.125%, 12/01/29 ........................ 1,500,000 1,500,405 Drexel University, Refunding, 6.375%, 5/01/17 ............................. 5,220,000 5,405,571 Drexel University, Refunding, MBIA Insured, 5.75%, 5/01/22 ................ 4,000,000 4,260,600 Philadelphia College of Textiles and Science, 6.75%, 4/01/20 .............. 3,040,000 3,144,363 State System of Higher Education, Series N, MBIA Insured, 5.80%, 6/15/24 .. 4,000,000 4,174,680 State System of Higher Education, Series R, FSA Insured, 5.00%, 6/15/24 ... 3,140,000 3,127,220 Temple University, 7.40%, 10/01/10 ........................................ 30,000 30,105 Temple University, First Series, MBIA Insured, 5.00%, 7/15/31 ............. 3,000,000 2,936,520 Pennsylvania State Higher Educational Facilities Authority, College and University Revenues, Marywood University Project, MBIA Insured, 5.65%, 6/01/25 ....... 2,500,000 2,630,825 Pennsylvania State IDA, Economic Revenue, AMBAC Insured, 6.00%, 1/01/12 ....... 4,250,000 4,586,473 Pennsylvania State Public School Building Authority Revenue, Lehigh Career and Technical Institution, MBIA Insured, 5.00%, 10/01/31 .................................................................. 1,000,000 980,290 10/01/21 .................................................................. 2,395,000 2,402,137 Pennsylvania State Turnpike Oil Commission Franchise Tax Revenue, Series R, AMBAC Insured, 5.00%, 12/01/30 ............................................ 7,750,000 7,598,798 Philadelphia Airport Revenue, Philadelphia Airport System, Series A, AMBAC Insured, 6.10%, 6/15/25 ............................................................ 5,000,000 5,381,350 Philadelphia Authority for IDR, Series A, AMBAC Insured, 5.25%, 7/01/31 ....... 2,000,000 2,016,840 Philadelphia Authority for Industrial Development Lease Revenue, Series B, FSA Insured, 5.125%, 10/01/26 ............................................. 2,000,000 1,990,240 Philadelphia Gas Works Revenue, 12th Series B, MBIA Insured, ETM, 7.00%, 5/15/20 .......................... 1,000,000 1,222,090 14th Series A, Pre-Refunded, 6.375%, 7/01/26 .............................. 3,360,000 3,632,462 Refunding, 14th Series, 6.375%, 7/01/26 ................................... 6,740,000 6,774,172
134 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) BONDS (CONT.) Philadelphia Hospitals and Higher Educational Facilities Authority Revenue, Children's Hospital, Refunding, Series A, 5.00%, 2/15/21 .................. $ 2,465,000 $ 2,374,337 Children's Seashore House, Series A, 7.00%, 8/15/17 ....................... 1,000,000 1,029,520 Children's Seashore House, Series B, 7.00%, 8/15/22 ....................... 2,600,000 2,674,880 Frankford Hospital, Series A, ETM, 6.00%, 6/01/14 ......................... 2,500,000 2,650,000 Temple University Hospital, 5.875%, 11/15/23 .............................. 5,000,000 4,733,050 Philadelphia Municipal Authority Revenue, Lease, Refunding, Series D, 6.30%, 7/15/17 2,000,000 2,035,000 Philadelphia Parking Authority Parking Revenue, Airport, FSA Insured, 5.25%, 9/01/22 ................................................................... 3,250,000 3,310,775 9/01/29 ................................................................... 13,000,000 13,067,470 Philadelphia RDA, Home Improvement Loan Revenue, Series B, FHA Insured, 6.10%, 6/01/17 600,000 623,424 Philadelphia School District GO, Series B, AMBAC Insured, 5.375%, 4/01/19 .................................. 1,000,000 1,021,970 Series C, MBIA Insured, 5.75%, 3/01/29 .................................... 8,000,000 8,504,800 Philadelphia Water and Sewer Revenue, Series 10, ETM, 7.35%, 9/01/04 .......... 6,030,000 6,535,736 Philadelphia Water and Wastewater Revenue, Refunding, 5.75%, 6/15/13 ................................................. 6,015,000 6,178,548 Series A, FGIC Insured, 5.00%, 11/01/31 ................................... 5,000,000 4,878,850 Pittsburgh Public Parking Authority Parking Revenue, AMBAC Insured, 6.00%, 12/01/24 2,000,000 2,190,040 Pittsburgh Urban RDA, Mortgage Revenue, Series C, GNMA Secured, 5.70%, 4/01/30 .................. 1,525,000 1,556,461 Mortgage Revenue, Series D, 6.25%, 10/01/17 ............................... 1,695,000 1,776,699 Tax Allocation, 6.10%, 5/01/19 ............................................ 1,000,000 1,060,700 Pittsburgh Water and Sewer System Authority Revenue, Refunding, FGIC Insured, ETM, 7.25%, 9/01/14 ............................................................ 1,250,000 1,530,750 Plum Boro School District GO, FGIC Insured, 5.25%, 9/15/30 .................... 8,870,000 8,916,035 Sayre Health Care Facilities Authority Revenue, Guthrie Health, Series A, 5.875%, 12/01/31 2,500,000 2,494,500 Schuylkill County IDA, Resource Recovery Revenue, Schuylkill Energy Resources Inc., 6.50%, 1/01/10 ...................................................... 13,990,000 14,243,359 Seneca Valley School District GO, MBIA Insured, 5.375%, 1/01/21 ............... 2,000,000 2,065,340 South Fork Municipal Authority Hospital Revenue, Conemaugh Valley Memorial Hospital Project, Series A, MBIA Insured, 5.75%, 7/01/26 ............................................................ 10,000,000 10,512,000 Southcentral General Authority Revenue, Wellspan Health Obligated, Refunding, MBIA Insured, 5.25%, 5/15/31 .............................................. 10,000,000 10,077,800 Southeastern Pennsylvania Transportation Authority Special Revenue, FGIC Insured, 5.375%, 3/01/22 .................................................. 3,000,000 3,072,750 State Public School Building Authority School Revenue, Northwestern School District Project, Series E, FGIC Insured, 5.75%, 1/15/19 ........................... 3,000,000 3,199,020 State Turnpike Commision Revenue, AMBAC Insured, 5.00%, 7/15/31 ............... 5,000,000 4,886,800 University of Pittsburgh Revenue, Higher Education, Refunding, Series B, MBIA Insured, 5.00%, 6/01/21 ................................................... 10,000,000 10,035,400 Upper St. Clair Township School District GO, aFSA Insured, 5.00%, 7/15/28 ............................................... 1,000,000 984,100 Refunding, 5.20%, 7/15/27 ................................................. 5,000,000 5,041,500 Washington County Authority Revenue, Capital Projects and Equipment Program, Refunding, AMBAC Insured, 6.15%, 12/01/29 ................................. 5,000,000 5,899,400 aWashington County GO, Series A, AMBAC Insured, 5.125%, 9/01/27 ................ 5,000,000 4,968,300 Wilkes Barre Area School District GO, FGIC Insured, Pre-Refunded, 6.375%, 4/01/15 2,000,000 2,207,660 ------------ TOTAL BONDS ................................................................... 732,966,607 ------------ ZERO COUPON BONDS .8% Pennsylvania HFA, SFMR, Series 63A, 4/01/1930 ..................................................... 11,000,000 2,179,760 Series 64, 4/01/30 ........................................................ 6,000,000 3,844,140 ------------ TOTAL ZERO COUPON BONDS ....................................................... 6,023,900 ------------ TOTAL LONG TERM INVESTMENTS (COST $703,921,641) ............................... 738,990,507 ------------
135 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.)
PRINCIPAL FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------- bSHORT TERM INVESTMENTS .6% Emmaus General Authority Revenue, FSA Insured, Weekly VRDN and Put, 1.20%, 12/01/28 $ 1,600,000 $ 1,600,000 Erie County Hospital Authority Revenue, Hamot Health Foundation, Refunding, AMBAC Insured, Daily VRDN and Put, 1.30%, 5/15/20 ......................... 500,000 500,000 New Castle Area Hospital Authority Revenue, Jameson Memorial Hospital, FSA Insured, Weekly VRDN and Put, 1.15%, 7/01/26 ....................................... 800,000 800,000 Pennsylvania State Higher Educational Facilities Authority College and University Revenues, College of Optometry, Refunding, Weekly VRDN and Put, 1.12%, 3/01/26 545,000 545,000 Puerto Rico Commonwealth Government Development Bank Revenue, Refunding, MBIA Insured, Weekly VRDN and Put, .95%, 12/01/15 .............................. 200,000 200,000 Puerto Rico Commonwealth Highway and Transportation Authority Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 1.00%, 7/01/28 ..... 600,000 600,000 ------------ TOTAL SHORT TERM INVESTMENTS (COST $4,245,000) ................................ 4,245,000 ------------ TOTAL INVESTMENTS (COST $708,166,641) 99.3% ................................... 743,235,507 OTHER ASSETS, LESS LIABILITIES .7% ............................................ 5,548,365 ------------ NET ASSETS 100.0% ............................................................. $748,783,872 ============
See glossary of terms on page 137. a Sufficient collateral has been segregated for securities traded on a when-issued or delayed delivery basis. b Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. See notes to financial statements. 136 FRANKLIN TAX-FREE TRUST STATEMENT OF INVESTMENTS, FEBRUARY 28, 2002 (CONT.) GLOSSARY OF TERMS -------------------------------------------------------------------------------- 1915 ACT - Improvement Bond Act of 1915 ABAG - The Association of Bay Area Governments ACES - Adjustable Convertible Exempt Securities AD - Assessment District AMBAC - American Municipal Bond Assurance Corp. CDA - Community Development Authority/Agency CDD - Community Development District CFD - Community Facilities District 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 FI/GML - Federally Insured or Guaranteed Mortgage Loans FNMA - Federal National Mortgage Association FSA - Financial Security Assistance 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. HFR - Housing Finance Revenue ID - Improvement District IDA - Industrial Development Authority/Agency IDAR - Industrial Development Authority/Agency Revenue IDBR - Industrial Development Board Revenue IDR - Industrial Development Revenue IPC - Industrial Pollution Control ISD - Independent School District LLC - Limited Liability Corp. LP - Limited Partnership MBIA - Municipal Bond Investors Assurance Corp. MF - Multi-Family MFH - Multi-Family Housing MFHR - Multi-Family Housing Revenue MFMR - Multi-Family Mortgage Revenue MFR - Multi-Family Revenue MTA - Metropolitan Transit Authority PBA - Public Building Authority PCFA - Pollution Control Financing Authority PCR - Pollution Control Revenue PFA - Public Financing Authority PFAR - Public Financing Authority Revenue RDA - Redevelopment Authority/Agency RDAR - Redevelopment Authority/Agency Revenue SF - Single Family SFM - Single Family Mortgage SFMR - Single Family Mortgage Revenue SFR - Single Family Revenue USD - Unified School District 137 FRANKLIN TAX-FREE TRUST Financial Statements STATEMENTS OF ASSETS AND LIABILITIES FEBRUARY 28, 2002
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 ...................................................... $920,758,727 $325,717,822 $296,362,941 $244,076,217 ========================================================= Value ..................................................... 923,717,906 339,697,264 303,755,358 255,821,712 Cash ..................................................... 1,481,396 973,737 243,387 272,020 Receivables: Investment securities sold ................................ -- 87,746 2,102,132 -- Capital shares sold ....................................... 1,862,651 1,627,292 658,798 2,244,878 Interest .................................................. 11,298,929 5,519,830 3,785,420 3,084,081 --------------------------------------------------------- Total assets .............................................. 938,360,882 347,905,869 310,545,095 261,422,691 --------------------------------------------------------- Liabilities: Payables: Investment securities purchased ........................... 14,986,819 2,958,124 4,985,333 3,511,406 Capital shares redeemed ................................... 767,205 565,507 406,973 233,793 Affiliates ................................................ 464,503 199,836 181,404 154,429 Shareholders .............................................. 383,714 121,530 143,399 113,010 Distributions to shareholders ............................ 1,239,397 446,103 336,132 329,468 Other liabilities ........................................ 69,262 32,972 24,173 27,791 --------------------------------------------------------- Total liabilities ......................................... 17,910,900 4,324,072 6,077,414 4,369,897 --------------------------------------------------------- Net assets, at value ..................................... $920,449,982 $343,581,797 $304,467,681 $257,052,794 ========================================================= Net assets consist of: Undistributed net investment income ...................... $ (840,563) $ (187,832) $ (73,671) $ (176,384) Net unrealized appreciation .............................. 2,959,179 13,979,442 7,392,417 11,745,495 Accumulated net realized gain (loss) ..................... (214,686) (2,999,107) (6,117,440) (366,782) Capital shares ........................................... 918,546,052 332,789,294 303,266,375 245,850,465 --------------------------------------------------------- Net assets, at value ...................................... $920,449,982 $343,581,797 $304,467,681 $257,052,794 ========================================================= CLASS A: Net assets, at value ..................................... $877,126,023 $309,108,977 $266,100,062 $239,081,417 ========================================================= Shares outstanding ....................................... 81,487,547 26,222,149 24,461,737 20,473,180 ========================================================= Net asset value per sharea ............................... $10.76 $11.79 $10.88 $11.68 ========================================================= Maximum offering price per share (net asset value per share (DIVIDE) 95.75%) ..................................... $11.24 $12.31 $11.36 $12.20 ========================================================= CLASS B: Net assets, at value ..................................... $ 11,798,304 -- -- -- ========================================================= Shares outstanding ....................................... 1,091,701 -- -- -- ========================================================= Net asset value and maximum offering price per sharea .... $10.81 -- -- -- ========================================================= CLASS C: Net assets, at value ..................................... $ 31,525,655 $ 34,472,820 $ 38,367,619 $ 17,971,377 ========================================================= Shares outstanding ....................................... 2,906,253 2,907,395 3,513,895 1,535,381 ========================================================= Net asset value per sharea ............................... $10.85 $11.86 $10.92 $11.70 ========================================================= Maximum offering price per share (net asset value per share (DIVIDE) 99%) ................................. $10.96 $11.98 $11.03 $11.82 =========================================================
a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. See notes to financial statements. 138 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONT.) FEBRUARY 28, 2002
FRANKLIN FEDERAL FRANKLIN FRANKLIN FRANKLIN INTERMEDIATE-TERM HIGH YIELD NEW JERSEY OREGON TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ---------------------------------------------------------- Assets: Investments in securities: Cost ................................................... $233,726,948 $5,262,075,585 $797,639,022 $545,755,705 ========================================================== Value .................................................. 239,468,465 5,244,043,527 838,107,945 563,414,015 Cash .................................................... 21,844 371,547 95,721 562,584 Receivables: Investment securities sold ............................... -- 17,475,267 105,992 -- Capital shares sold ...................................... 5,027,139 7,030,442 2,022,711 943,832 Interest ................................................. 3,137,404 92,647,297 11,250,286 7,021,104 ---------------------------------------------------------- Total assets ............................................. 247,654,852 5,361,568,080 851,582,655 571,941,535 ========================================================== Liabilities: Payables: Investment securities purchased .......................... 6,392,000 -- 6,017,500 -- Capital shares redeemed .................................. 659,030 6,634,901 1,078,130 626,153 Affiliates ............................................... 133,840 2,861,517 467,120 313,391 Shareholders ............................................. 23,539 3,294,040 481,274 149,251 Distributions to shareholders ........................... 268,189 7,092,000 939,285 627,428 Other liabilities ....................................... 21,158 367,142 61,931 43,374 ---------------------------------------------------------- Total liabilities ........................................ 7,497,756 20,249,600 9,045,240 1,759,597 ---------------------------------------------------------- Net assets, at value .................................... $240,157,096 $5,341,318,480 $842,537,415 $570,181,938 ========================================================== Net assets consist of: Undistributed net investment income ..................... $ 89,404 $ 5,996,663 $ (394,528) $ 243,494 Net unrealized appreciation (depreciation) .............. 5,741,517 (18,032,058) 40,468,923 17,658,310 Accumulated net realized loss ........................... (3,252,004) (191,944,405) (2,873,294) (5,309,946) Capital shares .......................................... 237,578,179 5,545,298,280 805,336,314 557,590,080 ---------------------------------------------------------- Net assets, at value ..................................... $240,157,096 $5,341,318,480 $842,537,415 $570,181,938 ========================================================== CLASS A: Net assets, at value .................................... $240,157,096 $4,660,764,026 $731,972,316 $513,732,534 ========================================================== Shares outstanding ...................................... 21,553,514 440,385,822 61,752,556 44,603,220 ========================================================== Net asset value per sharea .............................. $11.14 $10.58 $11.85 $11.52 ========================================================== Maximum offering price per share (net asset value per share (DIVIDE) 95.75%) .............................. $11.40 b $11.05 $12.38 $12.03 ========================================================== CLASS B: Net assets, at value .................................... -- $ 175,654,761 $ 36,460,932 -- ========================================================== Shares outstanding ...................................... -- 16,515,483 3,063,084 -- ========================================================== Net asset value and maximum offering price per sharea ... -- $10.64 $11.90 -- ========================================================== CLASS C: Net assets, at value .................................... -- $ 504,899,693 $ 74,104,167 $ 56,449,404 ========================================================== Shares outstanding ...................................... -- 47,317,012 6,212,890 4,863,752 ========================================================== Net asset value per sharea .............................. -- $10.67 $11.93 $11.61 ========================================================== Maximum offering price per share (net asset value per share (DIVIDE) 99%) ................................. -- $10.78 $12.05 $11.73 ==========================================================
a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. b The maximum offering price for the Franklin Federal Intermediate-Term Tax-Free Income Fund is calculated at $11.14 (DIVIDE) 97.75%. See notes to financial statements. 139 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONT.) FEBRUARY 28, 2002
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND -------------- Assets: Investments in securities: Cost ................................................................................................. $708,166,641 ============ Value ................................................................................................ 743,235,507 Cash .................................................................................................. 39,413 Receivables: Capital shares sold ................................................................................. 1,625,215 Interest ............................................................................................ 12,255,445 ------------ Total assets ........................................................................................... 757,155,580 ------------ Liabilities: Payables: Investment securities purchased ........................................................................ 5,937,659 Capital shares redeemed ................................................................................ 459,390 Affiliates ............................................................................................. 413,857 Shareholders ........................................................................................... 515,599 Distributions to shareholders ......................................................................... 979,157 Other liabilities ..................................................................................... 66,046 ------------ Total liabilities ...................................................................................... 8,371,708 ------------ Net assets, at value .................................................................................. $748,783,872 ============ Net assets consist of: Undistributed net investment income ................................................................... $ (444,796) Net unrealized appreciation ........................................................................... 35,068,866 Accumulated net realized loss ......................................................................... (10,661,179) Capital shares ........................................................................................ 724,820,981 ------------ Net assets, at value ................................................................................... $748,783,872 ============ CLASS A: Net assets, at value .................................................................................. $676,683,946 ============ Shares outstanding .................................................................................... 65,779,206 ============ Net asset value per sharea ............................................................................ $10.29 ============ Maximum offering price per share (net asset value per share (DIVIDE) 95.75%) .......................... $10.75 ============ CLASS B: Net assets, at value .................................................................................. $ 16,408,066 ============ Shares outstanding .................................................................................... 1,591,666 ============ Net asset value and maximum offering price per sharea ................................................. $10.31 ============ CLASS C: Net assets, at value .................................................................................. $ 55,691,860 ============ Shares outstanding .................................................................................... 5,382,007 ============ Net asset value per sharea ............................................................................ $10.35 ============ Maximum offering price per share (net asset value per share (DIVIDE) 99%) ............................. $10.45 ============
a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. See notes to financial statements. 140 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 2002
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 .................................................. $51,997,797 $18,432,662 $15,891,171 $13,042,004 --------------------------------------------------------- Expenses: Management fees (Note 3) .................................. 4,322,070 1,725,363 1,533,804 1,298,927 Distribution fees (Note 3) Class A .................................................. 866,988 297,602 242,775 216,340 Class B .................................................. 51,727 -- -- -- Class C .................................................. 176,618 179,413 211,886 89,553 Transfer agent fees (Note 3) .............................. 360,306 166,493 128,578 145,921 Custodian fees ............................................ 9,130 3,262 2,886 2,336 Reports to shareholders ................................... 43,559 20,757 17,459 21,142 Registration and filing fees .............................. 27,053 6,678 5,520 31,005 Professional fees ......................................... 36,520 16,803 13,954 14,769 Trustees' fees and expenses ............................... 9,433 3,424 2,944 2,428 Other ..................................................... 46,070 21,101 15,828 11,411 --------------------------------------------------------- Total expenses ............................................. 5,949,474 2,440,896 2,175,634 1,833,832 --------------------------------------------------------- Net investment income ..................................... 46,048,323 15,991,766 13,715,537 11,208,172 --------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from investments ................. 2,929,249 1,094,857 318,683 (140,724) Net unrealized appreciation (depreciation) on investments . (7,910,386) 3,137,278 6,218,371 3,045,790 --------------------------------------------------------- Net realized and unrealized gain (loss) .................... (4,981,137) 4,232,135 6,537,054 2,905,066 --------------------------------------------------------- Net increase in net assets resulting from operations ....... $41,067,186 $20,223,901 $20,252,591 $14,113,238 =========================================================
See notes to financial statements. 141 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF OPERATIONS (CONT.) FOR THE YEAR ENDED FEBRUARY 28, 2002
FRANKLIN FEDERAL FRANKLIN FRANKLIN FRANKLIN INTERMEDIATE-TERM HIGH YIELD NEW JERSEY OREGON TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------ Investment income: Interest ................................................. $ 10,050,111 $342,442,304 $42,945,698 $28,979,162 ------------------------------------------------------------ Expenses: Management fees (Note 3) ................................. 1,100,091 24,294,884 3,778,568 2,656,447 Distribution fees (Note 3) Class A ................................................. 191,198 4,332,422 684,623 483,559 Class B ................................................. -- 1,014,536 142,771 -- Class C ................................................. -- 3,261,118 403,198 300,713 Transfer agent fees (Note 3) ............................. 88,838 2,949,901 408,300 252,023 Custodian fees ........................................... 1,851 52,240 7,883 5,325 Reports to shareholders .................................. 11,637 347,118 48,063 30,871 Registration and filing fees ............................. 33,222 161,701 12,730 8,086 Professional fees ........................................ 11,534 337,429 18,907 17,222 Trustees' fees and expenses .............................. 1,960 56,857 8,108 5,621 Other .................................................... 24,346 212,970 32,782 27,787 ------------------------------------------------------------ Total expenses ............................................ 1,464,677 37,021,176 5,545,933 3,787,654 ------------------------------------------------------------ Net investment income .................................... 8,585,434 305,421,128 37,399,765 25,191,508 ------------------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from investments ................ (371,378) (50,087,267) 546,610 (307,447) Net unrealized appreciation on investments ............... 3,920,836 82,393,329 9,991,013 5,536,334 ------------------------------------------------------------ Net realized and unrealized gain .......................... 3,549,458 32,306,062 10,537,623 5,228,887 ------------------------------------------------------------ Net increase in net assets resulting from operations ...... $12,134,892 $337,727,190 $47,937,388 $30,420,395 ============================================================
See notes to financial statements. 142 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF OPERATIONS (CONT.) FOR THE YEAR ENDED FEBRUARY 28, 2002
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND -------------- Investment income: Interest ................................................................................. $41,283,534 ------------ Expenses: Management fees (Note 3) ................................................................. 3,498,055 Distribution fees (Note 3) Class A ................................................................................. 655,450 Class B ................................................................................. 60,457 Class C ................................................................................. 314,603 Transfer agent fees (Note 3) ............................................................. 456,090 Custodian fees ........................................................................... 7,182 Reports to shareholders .................................................................. 54,160 Registration and filing fees ............................................................. 9,890 Professional fees ........................................................................ 18,440 Trustees' fees and expenses .............................................................. 7,588 Other .................................................................................... 31,582 ------------ Total expenses ............................................................................ 5,113,497 Net investment income .................................................................... 36,170,037 Realized and unrealized gains (losses): Net realized loss from investments ....................................................... (4,757,147) Net unrealized appreciation on investments ............................................... 16,547,921 ------------ Net realized and unrealized gain .......................................................... 11,790,774 ------------ Net increase in net assets resulting from operations ...................................... $47,960,811 ============
See notes to financial statements. 143 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN ARIZONA FRANKLIN COLORADO TAX-FREE INCOME FUND TAX-FREE INCOME FUND ----------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................. $ 46,048,323 $ 42,149,589 $ 15,991,766 $ 15,292,386 Net realized gain (loss) from investments .............. 2,929,249 2,141,560 1,094,857 (549,675) Net unrealized appreciation (depreciation) on investments (7,910,386) 35,499,786 3,137,278 19,530,558 ------------------------------------------------------------ Net increase in net assets resulting from operations .. 41,067,186 79,790,935 20,223,901 34,273,269 Distributions to shareholders from: Net investment income: Class A ............................................... (44,982,672) (40,704,612) (14,941,969) (14,150,483) Class B ............................................... (359,348) (75,641) -- -- Class C ............................................... (1,242,977) (1,089,106) (1,222,198) (1,019,905) ------------------------------------------------------------ Total distributions to shareholders ................... (46,584,997) (41,869,359) (16,164,167) (15,170,388) Capital share transactions: (Note 2) Class A ............................................... 104,852,002 (15,462,902) 20,212,397 2,940,996 Class B ............................................... 8,163,486 3,456,679 -- -- Class C ............................................... 7,858,916 57,358 10,691,256 1,447,188 ------------------------------------------------------------ Total capital share transactions ...................... 120,874,404 (11,948,865) 30,903,653 4,388,184 Net increase in net assets ............................. 115,356,593 25,972,711 34,963,387 23,491,065 Net assets: Beginning of year ..................................... 805,093,389 779,120,678 308,618,410 285,127,345 ------------------------------------------------------------ End of year ........................................... $920,449,982 $805,093,389 $343,581,797 $308,618,410 ============================================================ Undistributed net investment income included in net assets: End of year ........................................... $ (840,563) $ (504,833) $ (187,832) $ (38,322) ============================================================
See notes to financial statements. 144 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN CONNECTICUT FRANKLIN DOUBLE TAX-FREE INCOME FUND TAX-FREE INCOME FUND ----------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ................................... $ 13,715,537 $ 12,519,374 $ 11,208,172 $ 10,698,906 Net realized gain (loss) from investments ............... 318,683 383,058 (140,724) (139,675) Net unrealized appreciation on investments .............. 6,218,371 12,199,874 3,045,790 11,162,877 ------------------------------------------------------------ Net increase in net assets resulting from operations .... 20,252,591 25,102,306 14,113,238 21,722,108 Distributions to shareholders from: Net investment income: Class A ................................................ (12,362,963) (11,258,813) (10,881,961) (10,287,781) Class C ................................................ (1,423,127) (1,152,694) (604,604) (385,812) Net realized gains: Class A ................................................ -- -- (42,713) -- Class C ................................................ -- -- (2,863) -- ------------------------------------------------------------ Total distributions to shareholders .................... (13,786,090) (12,411,507) (11,532,141) (10,673,593) Capital share transactions: (Note 2) Class A ................................................ 31,547,052 9,686,300 30,982,504 (83,932) Class C ................................................ 10,354,338 970,047 7,398,238 2,699,093 ------------------------------------------------------------ Total capital share transactions ....................... 41,901,390 10,656,347 38,380,742 2,615,161 Net increase in net assets .............................. 48,367,891 23,347,146 40,961,839 13,663,676 Net assets: Beginning of year ...................................... 256,099,790 232,752,644 216,090,955 202,427,279 ------------------------------------------------------------ End of year ............................................ $304,467,681 $256,099,790 $257,052,794 $216,090,955 ============================================================ Undistributed net investment income included in net assets: End of year ............................................ $ (73,671) $ (22,841) $ (176,384) $ 60,216 ============================================================
See notes to financial statements. 145 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN FEDERAL INTERMEDIATE-TERM FRANKLIN HIGH YIELD TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------------- 2002 2001 2002 2001 ------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................. $ 8,585,434 $ 7,983,836 $ 305,421,128 $ 321,925,555 Net realized loss from investments ..................... (371,378) (438,186) (50,087,267) (71,138,043) Net unrealized appreciation on investments ............. 3,920,836 6,792,162 82,393,329 120,040,463 ------------------------------------------------------------- Net increase in net assets resulting from operations ... 12,134,892 14,337,812 337,727,190 370,827,975 Distributions to shareholders from: Net investment income: Class A ............................................... (8,800,379) (7,870,607) (260,952,260) (289,442,771) Class B ............................................... -- -- (7,798,003) (6,065,522) Class C ............................................... -- -- (25,112,554) (27,230,848) ------------------------------------------------------------- Total distributions to shareholders ................... (8,800,379) (7,870,607) (293,862,817) (322,739,141) Capital share transactions: (Note 2) Class A ............................................... 72,372,212 (12,924,037) (87,042,329) (350,070,405) Class B ............................................... -- -- 38,482,114 42,948,087 Class C ............................................... -- -- (789,183) (44,516,122) ------------------------------------------------------------- Total capital share transactions ...................... 72,372,212 (12,924,037) (49,349,398) (351,638,440) Net increase (decrease) in net assets .................. 75,706,725 (6,456,832) (5,485,025) (303,549,606) Net assets: Beginning of year ..................................... 164,450,371 170,907,203 5,346,803,505 5,650,353,111 ------------------------------------------------------------- End of year ........................................... $240,157,096 $164,450,371 $5,341,318,480 $5,346,803,505 ============================================================= Undistributed net investment income included in net assets: End of year ........................................... $ 89,404 $ 282,177 $ 5,996,663$ (6,499,273) =============================================================
See notes to financial statements. 146 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN NEW JERSEY FRANKLIN OREGON TAX-FREE INCOME FUND TAX-FREE INCOME FUND ------------------------------------------------------------ 2002 2001 2002 2001 ------------------------------------------------------------ Increase (decrease) in net assets: Operations: Net investment income .................................. $ 37,399,765 $ 34,955,681 $ 25,191,508 $ 24,475,241 Net realized gain (loss) from investments .............. 546,610 272,086 (307,447) (1,303,082) Net unrealized appreciation on investments ............. 9,991,013 41,499,539 5,536,334 27,260,451 ------------------------------------------------------------ Net increase in net assets resulting from operations ... 47,937,388 76,727,306 30,420,395 50,432,610 Distributions to shareholders from: Net investment income: Class A ............................................... (33,931,929) (32,594,666) (23,792,006) (22,797,605) Class B ............................................... (928,569) (137,932) -- -- Class C ............................................... (2,672,026) (2,208,455) (1,991,373) (1,632,699) ------------------------------------------------------------ Total distributions to shareholders ................... (37,532,524) (34,941,053) (25,783,379) (24,430,304) Capital share transactions: (Note 2) Class A ............................................... 68,062,649 (1,354,828) 51,945,704 881,831 Class B ............................................... 26,325,341 9,366,853 -- -- Class C ............................................... 19,856,241 4,053,430 17,253,736 2,715,432 ------------------------------------------------------------ Total capital share transactions ...................... 114,244,231 12,065,455 69,199,440 3,597,263 Net increase in net assets ............................. 124,649,095 53,851,708 73,836,456 29,599,569 Net assets: Beginning of year ..................................... 717,888,320 664,036,612 496,345,482 466,745,913 ------------------------------------------------------------ End of year ........................................... $842,537,415 $717,888,320 $570,181,938 $496,345,482 ============================================================ Undistributed net investment income included in net assets: End of year ........................................... $ (394,528) $ (328,233) $ 243,494 $ 739,475 ============================================================
See notes to financial statements. 147 FRANKLIN TAX-FREE TRUST Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED FEBRUARY 28, 2002 AND 2001
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND -------------------------- 2002 2001 -------------------------- Increase (decrease) in net assets: Operations: Net investment income ................................................................... $ 36,170,037 $ 36,670,398 Net realized gain (loss) from investments ............................................... (4,757,147) 66,676 Net unrealized appreciation on investments .............................................. 16,547,921 38,865,119 --------------------------- Net increase in net assets resulting from operations ................................... 47,960,811 75,602,193 Distributions to shareholders from: Net investment income: Class A ................................................................................ (33,871,246) (34,044,664) Class B ................................................................................ (412,060) (64,843) Class C ................................................................................ (2,193,000) (1,957,944) --------------------------- Total distributions to shareholders ..................................................... (36,476,306) (36,067,451) Capital share transactions: (Note 2) Class A ................................................................................ 16,547,808 (26,482,682) Class B ................................................................................ 13,031,051 2,954,263 Class C ................................................................................ 11,005,006 545,902 --------------------------- Total capital share transactions ....................................................... 40,583,865 (22,982,517) Net increase in net assets .............................................................. 52,068,370 16,552,225 Net assets: Beginning of year ...................................................................... 696,715,502 680,163,277 --------------------------- End of year ............................................................................ $748,783,872 $696,715,502 =========================== Undistributed net investment income included in net assets: End of year ............................................................................ $ (444,796) $ (239,665) ===========================
See notes to financial statements. 148 FRANKLIN TAX-FREE TRUST Notes to Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Tax-Free Trust (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twenty-five separate series. All Funds included in this report (the Funds) are diversified except the Franklin Connecticut Tax-Free Income Fund and the Franklin Federal Intermediate-Term Tax-Free Income Fund. The investment objective of the Funds included in this report is to provide tax-free income. Effective December 1, 2001, the Franklin Puerto Rico Tax-Free Income Fund was renamed the Franklin Double Tax-Free Income Fund. The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Tax-free bonds generally trade in the over-the-counter market and are valued within the range of the latest quoted bid and asked prices. In the absence of a sale or reported bid and asked prices, information with respect to bond and note transactions, quotations from bond dealers, market transactions in comparable securities, and various relationships between securities are used to determine the value of the security. The Trust may utilize a pricing service, bank or broker/dealer experienced in such matters to perform any of the pricing functions under procedures approved by the Board of Trustees. Securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Trustees. B. INCOME TAXES No provision has been made for income taxes because each fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its income. C. 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. Bond discount and premium are amortized on a yield to maturity basis. Dividends from net investment income are normally declared daily and distributed monthly to shareholders. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets. Other expenses are charged to each fund on a specific identification basis. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. D. 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 expense during the reporting period. Actual results could differ from those estimates. E. AUDIT GUIDE In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide requires the Funds to amortize all premium and discount on fixed-income securities. Such amortization is included in net investment income but did not impact the net assets or the distributions of the Funds. Prior to March 1, 2001, de minimus market discount on fixed-income securities was included in realized gains and losses. The cumulative effect 149 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.) E. AUDIT GUIDE (CONT.) of this accounting change resulted in an increase in the recorded cost of investments and a corresponding decrease in net unrealized appreciation as listed below:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL ARIZONA COLORADO CONNECTICUT DOUBLE INTERMEDIATE- TAX-FREE TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------ Increase in cost of investments ............................. $190,525 $31,925 $22,680 $47,224 $24,749 FRANKLIN FRANKLIN FRANKLIN FRANKLIN HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------ Increase in cost of investments ....................................... $1,204,463 $70,066 $102,855 $132,006
The effect of this change for the year ended February 28, 2002, was as listed below:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL ARIZONA COLORADO CONNECTICUT DOUBLE INTERMEDIATE- TAX-FREE TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------ Increase in net investment income .......................... $36,865 $26,623 $6,159 $7,626 $5,218 Decrease in net unrealized gains ........................... (23,658) (17,589) (3,202) (3,024) (2,641) Decrease in net realized gains ............................. (13,207) (9,034) (2,957) (4,602) (2,577) FRANKLIN FRANKLIN FRANKLIN FRANKLIN HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ----------------------------------------------- Increase in net investment income ..................................... $405,344 $25,393 $17,284 $35,223 Decrease in net unrealized gains ...................................... (223,433) (21,792) (10,319) (4,355) Decrease in net realized gains ........................................ (181,911) (3,601) (6,965) (30,868)
The per share effect of this change for the year ended February 28, 2002, was less than $.005 for each Fund. The statements of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in accounting policy. 2. SHARES OF BENEFICIAL INTEREST The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A CLASS A & CLASS C CLASS A, CLASS B & CLASS C ------------------------------------------------------------------------------------------------------------------------------------ Franklin Federal Intermediate-Term Franklin Colorado Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin High Yield Tax-Free Income Fund Franklin Double Tax-Free Income Fund Franklin New Jersey Tax-Free Income Fund Franklin Oregon Tax-Free Income Fund Franklin Pennsylvania Tax-Free Income Fund
150 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.) At February 28, 2002, there were an unlimited number of shares authorized (no par value). Transactions in the Funds' shares were as follows:
FRANKLIN ARIZONA FRANKLIN COLORADO FRANKLIN CONNECTICUT TAX-FREE INCOME FUND TAX-FREE INCOME FUND TAX-FREE INCOME FUND ---------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold ............................ 11,522,182 $ 124,654,327 4,226,426 $49,692,342 5,216,313 $56,163,993 Shares issued on merger ................ 6,843,792 74,255,143 -- -- -- -- Shares issued in reinvestment of distributions ...................... 1,721,265 18,623,583 589,646 6,925,925 542,225 5,835,516 Shares redeemed ........................ (10,420,121) (112,681,051) (3,096,545) (36,405,870) (2,832,558) (30,452,457) ---------------------------------------------------------------------------------- Net increase ............................ 9,667,118 $ 104,852,002 1,719,527 $20,212,397 2,925,980 $31,547,052 ================================================================================== Year ended February 28, 2001 Shares sold ............................ 7,527,201 $ 80,032,483 3,183,683 $35,970,814 3,824,889 $39,918,414 Shares issued in reinvestment of distributions ...................... 1,614,808 17,126,150 596,990 6,727,179 505,968 5,249,018 Shares redeemed ........................ (10,658,130) (112,621,535) (3,542,366) (39,756,997) (3,436,555) (35,481,132) ---------------------------------------------------------------------------------- Net increase (decrease) ................. (1,516,121) $ (15,462,902) 238,307 $ 2,940,996 894,302 $ 9,686,300 ================================================================================== CLASS B SHARES: Year ended February 28, 2002 Shares sold ............................ 829,150 $ 9,001,642 Shares issued in reinvestment of distributions ...................... 20,128 218,462 Shares redeemed ........................ (98,275) (1,056,618) --------------------------- Net increase ............................ 751,003 $ 8,163,486 =========================== Year ended February 28, 2001 Shares sold ............................ 328,027 $ 3,503,258 Shares issued in reinvestment of distributions ...................... 3,775 40,593 Shares redeemed ........................ (8,127) (87,172) --------------------------- Net increase ............................ 323,675 $ 3,456,679 =========================== CLASS C SHARES: Year ended February 28, 2002 Shares sold ............................ 1,048,325 $ 11,419,282 1,099,594 $13,004,893 1,180,687 $12,767,178 Shares issued in reinvestment of distributions ...................... 61,578 670,926 73,056 863,200 89,133 963,044 Shares redeemed ........................ (390,066) (4,231,292) (269,086) (3,176,837) (312,191) (3,375,884) ---------------------------------------------------------------------------------- Net increase ............................ 719,837 $ 7,858,916 903,564 $10,691,256 957,629 $10,354,338 ================================================================================== Year ended February 28, 2001 Shares sold ............................ 405,387 $ 4,347,395 378,118 $ 4,263,403 696,495 $ 7,332,104 Shares issued in reinvestment of distributions ...................... 57,573 615,004 65,954 747,526 72,733 757,040 Shares redeemed ........................ (460,128) (4,905,041) (316,347) (3,563,741) (689,526) (7,119,097) ---------------------------------------------------------------------------------- Net increase ............................ 2,832 $ 57,358 127,725 $ 1,447,188 79,702 $ 970,047 ==================================================================================
151 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.)
FRANKLIN DOUBLE FRANKLIN FEDERAL INTERMEDIATE-TERM FRANKLIN HIGH YIELD TAX-FREE INCOME FUND TAX-FREE INCOME FUND TAX-FREE INCOME FUND ---------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold ............................ 3,767,198 $43,726,173 11,031,519 $122,123,367 38,995,695 $ 413,257,839 Shares issued in reinvestment of distributions ...................... 466,622 5,421,128 515,892 5,709,842 10,612,610 112,337,566 Shares redeemed ........................ (1,562,179) (18,164,797) (5,022,152) (55,460,997) (57,880,662) (612,637,734) ---------------------------------------------------------------------------------- Net increase (decrease) ................. 2,671,641 $30,982,504 6,525,259 $ 72,372,212 (8,272,357) $ (87,042,329) ================================================================================== Year ended February 28, 2001 Shares sold ............................ 1,369,813 $15,488,426 5,966,287 $ 64,048,461 46,343,985 $ 485,372,175 Shares issued in reinvestment of distributions ...................... 450,519 5,075,650 488,178 5,227,269 11,997,770 125,547,131 Shares redeemed ........................ (1,837,352) (20,648,008) (7,666,285) (82,199,767) (91,809,307) (960,989,711) ---------------------------------------------------------------------------------- Net decrease ............................ (17,020) $ (83,932) (1,211,820) $(12,924,037) (33,467,552) $(350,070,405) ================================================================================== CLASS B SHARES: Year ended February 28, 2002 Shares sold ............................ 4,676,189 $ 49,770,706 Shares issued in reinvestment of distributions ...................... 396,053 4,212,825 Shares redeemed ........................ (1,458,386) (15,501,417) ----------------------------- Net increase ............................ 3,613,856 $ 38,482,114 ============================= Year ended February 28, 2001 Shares sold ............................ 5,098,135 $ 53,586,334 Shares issued in reinvestment of distributions ...................... 319,738 3,360,493 Shares redeemed ........................ (1,330,823) (13,998,740) ----------------------------- Net increase ............................ 4,087,050 $ 42,948,087 ============================= CLASS C SHARES: Year ended February 28, 2002 Shares sold ............................ 738,166 $ 8,585,123 5,906,497 $ 63,076,177 Shares issued in reinvestment of distributions ...................... 24,482 285,153 1,282,978 13,691,123 Shares redeemed ........................ (126,833) (1,472,038) (7,271,547) (77,556,483) ----------------------- --------------------------- Net increase (decrease) ................. 635,815 $ 7,398,238 (82,072) $ (789,183) ======================= =========================== Year ended February 28, 2001 Shares sold ............................ 342,715 $ 3,893,122 5,760,257 $ 60,685,209 Shares issued in reinvestment of distributions ...................... 16,247 183,564 1,474,200 15,542,377 Shares redeemed ........................ (122,115) (1,377,593) (11,454,406) (120,743,708) ----------------------- --------------------------- Net increase (decrease) ................. 236,847 $ 2,699,093 (4,219,949) $ (44,516,122) ======================= ===========================
152 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONT.)
FRANKLIN NEW JERSEY FRANKLIN OREGON FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND TAX-FREE INCOME FUND TAX-FREE INCOME FUND --------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------------------------- CLASS A SHARES: Year ended February 28, 2002 Shares sold ......................... 11,191,277 $131,567,180 7,343,013 $84,325,958 6,475,484 $ 66,044,386 Shares issued in reinvestment of distributions ................... 1,486,063 17,474,911 1,141,895 13,084,489 1,539,459 15,706,816 Shares redeemed ..................... (6,893,677) (80,979,442) (3,967,662) (45,464,743) (6,396,104) (65,203,394) ---------------------------------------------------------------------------------- Net increase ......................... 5,783,663 $ 68,062,649 4,517,246 $51,945,704 1,618,839 $ 16,547,808 ================================================================================== Year ended February 28, 2001 Shares sold ......................... 6,412,289 $ 73,019,081 4,320,605 $48,148,831 5,253,762 $52,030,371 Shares issued in reinvestment of distributions ................... 1,488,583 16,862,770 1,134,129 12,625,252 1,583,237 15,606,091 Shares redeemed ..................... (8,104,008) (91,236,679) (5,409,392) (59,892,252) (9,560,492) (94,119,144) ---------------------------------------------------------------------------------- Net increase (decrease) .............. (203,136) $ (1,354,828) 45,342 $ 881,831 (2,723,493) $(26,482,682) ================================================================================== CLASS B SHARES: Year ended February 28, 2002 Shares sold ......................... 2,268,561 $ 26,802,715 1,334,282 $ 13,635,536 Shares issued in reinvestment of distributions ................... 48,889 577,654 23,998 245,788 Shares redeemed ..................... (89,318) (1,055,028) (82,879) (850,273) -------------------------- ------------------------ Net increase ......................... 2,228,132 $ 26,325,341 1,275,401 $ 13,031,051 ========================== ======================== Year ended February 28, 2001 Shares sold ......................... 835,287 $ 9,604,966 301,859 $ 3,005,049 Shares issued in reinvestment of distributions ................... 7,447 85,859 4,158 41,367 Shares redeemed ..................... (28,354) (323,972) (9,227) (92,153) -------------------------- ------------------------ Net increase ......................... 814,380 $ 9,366,853 296,790 $ 2,954,263 ========================== ======================== CLASS C SHARES: Year ended February 28, 2002 Shares sold ......................... 2,199,873 $ 26,063,315 1,875,047 $21,653,587 1,463,721 $ 15,057,364 Shares issued in reinvestment of distributions ................... 142,186 1,682,291 108,537 1,253,278 133,059 1,365,892 Shares redeemed ..................... (666,317) (7,889,365) (488,765) (5,653,129) (527,875) (5,418,250) ---------------------------------------------------------------------------------- Net increase ......................... 1,675,742 $ 19,856,241 1,494,819 $17,253,736 1,068,905 $ 11,005,006 ================================================================================== Year ended February 28, 2001 Shares sold ......................... 1,152,704 $ 13,232,538 783,513 $ 8,795,992 727,229 $ 7,233,031 Shares issued in reinvestment of distributions ................... 113,593 1,294,434 93,188 1,044,764 124,551 1,234,633 Shares redeemed ..................... (928,034) (10,473,542) (639,452) (7,125,324) (804,898) (7,921,762) ---------------------------------------------------------------------------------- Net increase ......................... 338,263 $ 4,053,430 237,249 $ 2,715,432 46,882 $ 545,902 ==================================================================================
3. TRANSACTIONS WITH AFFILIATES Certain officers and trustees of the Trust are also officers and/or directors of Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc. (Distributors), Franklin/Templeton Investor Services, LLC (Investor Services), and Franklin Templeton Services, LLC (FT Services), the Funds' investment manager, principal underwriter, transfer agent, and administrative manager, respectively. The Funds pay an investment management fee to Advisers based on the net assets of the Funds as follows: ANNUALIZED FEE RATE MONTH-END NET ASSETS ------------------------------------------------------------------------- .625% First $100 million .500% Over $100 million, up to and including $250 million .450% In excess of $250 million 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. 153 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONT.) The Funds reimburse Distributors up to .10%, .65%, and .65% per year of their average daily net assets of Class A, Class B, and Class C, respectively, for costs incurred in marketing the Funds' shares. Distributors paid net commissions on sales of the Funds' shares, and received contingent deferred sales charges for the year as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL ARIZONA COLORADO CONNECTICUT DOUBLE INTERMEDIATE- TAX-FREE TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------ Net commissions paid ....................................... $366,734 $122,988 $189,032 $71,838 $237,813 Contingent deferred sales charges .......................... $ 15,873 $ 18,369 $ 18,470 $ 8,386 $ 7,246 FRANKLIN FRANKLIN FRANKLIN FRANKLIN HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------ Net commissions paid ................................................ $2,133,384 $1,135,945 $191,213 $471,754 Contingent deferred sales charges ................................... $ 317,803 $ 69,961 $ 32,892 $ 24,460
The Funds paid transfer agent fees of $4,956,450 of which $3,597,728 was paid to Investor Services. 4. INCOME TAXES At February 28, 2002, the Funds had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL ARIZONA COLORADO CONNECTICUT INTERMEDIATE- TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------- Capital loss carryovers expiring in: 2003 ........................................................ $ -- $ -- $2,858,603 $ -- 2004 ........................................................ -- -- 46,957 920,152 2005 ........................................................ -- -- 322,502 99,478 2006 ........................................................ -- -- -- 95,778 2008 ........................................................ -- 1,416,851 2,457,013 314,284 2009 ........................................................ 210,904 1,524,288 427,481 1,207,419 2010 ........................................................ -- -- -- 614,893 ------------------------------------------------- $210,904 $2,941,139 $6,112,556 $3,252,004 ================================================= FRANKLIN FRANKLIN FRANKLIN FRANKLIN HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------- Capital loss carryovers expiring in: 2003 ........................................................ $ -- $ -- $ 36,444 $ -- 2004 ........................................................ -- -- -- -- 2005 ........................................................ -- -- 67,453 -- 2006 ........................................................ -- -- -- -- 2007 ........................................................ 37,171,665 -- -- -- 2008 ........................................................ 73,985,675 2,363,091 2,380,039 2,254,355 2009 ........................................................ -- 510,203 966,007 3,680,545 2010 ........................................................ 63,519,381 -- 1,860,003 4,726,279 --------------------------------------------------- $174,676,721 $2,873,294 $5,309,946 $10,661,179 ===================================================
154 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 4. INCOME TAXES (CONT.) At February 28, 2002, the Franklin Arizona Tax-Free Income Fund had tax basis capital losses of $210,904, all of which is from the merged Franklin Arizona Insured Tax-Free Income Fund, which may be carried over to offset future capital gains, subject to certain limitations. At February 28, 2002, the following funds had deferred capital losses occurring subsequent to October 31, 2001. For tax purposes, such losses will be reflected in the year ending February 28, 2003. FRANKLIN COLORADO FRANKLIN DOUBLE FRANKLIN HIGH YIELD TAX-FREE INCOME FUND TAX-FREE INCOME FUND TAX-FREE INCOME FUND ---------------------------------------------------------------- $57,968 $351,466 $16,477,462 Distributions of income to shareholders may not equal net investment income due to differing treatments of dividend distributions for book and tax purposes. Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, non-deductible merger expenses and bond discounts. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sales, bond workout expenditures and bond discounts. For the Funds, the tax characters of distributions paid during the year ended February 28, 2002, were the same for financial statement and tax purposes. At February 28, 2002, the cost of investments, net unrealized appreciation (depreciation), undistributed tax-exempt income and undistributed long term capital gains for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL ARIZONA COLORADO CONNECTICUT DOUBLE INTERMEDIATE- TAX-FREE TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND -------------------------------------------------------------------------- Investments at cost ............................... $920,537,419 $325,668,308 $296,341,944 $244,041,286 $233,699,558 ========================================================================== Unrealized appreciation ........................... $ 41,046,545 $ 16,654,739 $ 10,563,731 $ 12,946,156 $ 8,189,882 Unrealized depreciation ........................... (37,866,058) (2,625,783) (3,150,317) (1,165,730) (2,420,975) -------------------------------------------------------------------------- Net unrealized appreciation ....................... $ 3,180,487 $ 14,028,956 $ 7,413,414 $ 11,780,426 $ 5,768,907 ========================================================================== Undistributed tax-exempt income ................... $ 173,744 $ 208,757 $ 236,579 $ 102,836 $ 330,203 Undistributed long-term capital gains ............. -- -- -- -- -- -------------------------------------------------------------------------- Distributable earnings ............................ $ 173,744 $ 208,757 $ 236,579 $ 102,836 $ 330,203 ========================================================================== FRANKLIN FRANKLIN FRANKLIN FRANKLIN HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND ------------------------------------------------------------- Investments at cost ........................................... $5,261,437,916 $797,547,164 $545,642,531 $708,030,280 ============================================================= Unrealized appreciation ....................................... $ 299,396,756 $ 42,509,889 $ 20,243,273 $ 39,004,764 Unrealized depreciation ....................................... (316,791,145) (1,949,108) (2,471,789) (3,799,537) ============================================================= Net unrealized appreciation (depreciation) .................... $ (17,394,389) $ 40,560,781 $ 17,771,484 $ 35,205,227 ============================================================= Undistributed tax-exempt income ............................... $ 19,738,412 $ 452,899 $ 757,748 $ 398,001 Undistributed long-term capital gains ......................... -- -- -- -- ============================================================= Distributable earnings ........................................ $ 19,738,412 $ 452,899 $ 757,748 $ 398,001 =============================================================
155 FRANKLIN TAX-FREE TRUST Notes to Financial Statements (CONTINUED) 5. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended February 28, 2002 were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL ARIZONA COLORADO CONNECTICUT DOUBLE INTERMEDIATE- TAX-FREE TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------------------------------------------------------- Purchases ..................................... $372,401,967 $93,232,004 $87,917,711 $114,032,867 $80,384,061 Sales ......................................... $244,598,295 $66,484,904 $42,871,699 $ 76,538,975 $13,888,223 FRANKLIN FRANKLIN FRANKLIN FRANKLIN HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA TAX-FREE TAX-FREE TAX-FREE TAX-FREE INCOME FUND INCOME FUND INCOME FUND INCOME FUND --------------------------------------------------------------------------------------------------------------------- Purchases .................................................. $530,651,387 $169,092,171 $166,676,253 $120,967,726 Sales ...................................................... $658,770,740 $ 46,702,903 $101,040,347 $ 79,688,944
6. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Federal Intermediate-Term Tax-Free Income Fund and the Franklin High Yield Tax-Free Income Fund have 2.4% and 38.0%, respectively, of their portfolios invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. At February 28, 2002, the Franklin Federal Intermediate-Term Tax-Free Income Fund and the Franklin High Yield Tax-Free Income Fund held defaulted securities with a value aggregating $105,980 and $45,673,412 representing .04% and .86%, respectively, of the funds' net assets. For information as to specific securities, see the accompanying Statements of Investments. For financial reporting purposes, the funds discontinue accruing income on defaulted bonds and provide an estimate for losses on interest receivable. 7. MERGER On March 8, 2001, the Franklin Arizona Tax-Free Income Fund acquired the net assets of Franklin Arizona Insured Tax-Free Income Fund pursuant to a plan of reorganization approved by Franklin Arizona Insured Tax-Free Income Fund's shareholders. The merger was accomplished by a tax-free exchange of 6,843,792 Class A shares of the Franklin Arizona Tax-Free Income Fund (valued at $10.85) for the net assets of the Franklin Arizona Insured Tax-Free Income Fund which aggregated $74,255,143, including $3,467,723 of unrealized appreciation. The merger was accounted for as a pooling-of-interests without restatement for financial reporting purposes. The combined net assets of the Franklin Arizona Tax-Free Income Fund immediately after the merger were $880,243,633. 156 FRANKLIN TAX-FREE TRUST Independent Auditors' Report 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 each of the funds included in this report constituting a part of the Franklin Tax-Free Trust (hereafter referred to as the "Trust") at February 28, 2002, 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 each of their 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 Trusts' 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 auditing standards generally accepted in the United States of America, which 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, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California April 8, 2002 157 FRANKLIN TAX-FREE TRUST Tax Designation Under Section 852(b)(3)(c) of the Internal Revenue Code, the Franklin Double Tax-Free Income Fund hereby designates $44,747 as a capital gain dividend for the fiscal year ended February 28, 2002. Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby designate 100% of the distributions paid from net investment income as exempt-interest dividends for the fiscal year ended February 28, 2002. 158 BOARD MEMBERS AND OFFICERS The name, age and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ FRANK H. ABBOTT, III (80) Trustee Since 1984 108 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Abbott Corporation (an investment company); and FORMERLY, Director, MotherLode Gold Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing) (until 1996). ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (69) Trustee Since 1984 139 Director, RBC Holdings, Inc. (bank holding company) One Franklin Parkway and Bar-S Foods (meat packing company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (69) Trustee Since 1989 140 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Member of the law firm of Pitney, Hardin, Kipp & Szuch. ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (50) Trustee Since 1998 85 Director, Amerada Hess Corporation (exploration One Franklin Parkway and refining of oil and gas); Hercules San Mateo, CA 94403-1906 Incorporated (chemicals, fibers and resins); Beverly Enterprises, Inc. (health care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Digex Incorporated (web hosting provider); and Canadian National Railway (railroad). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993), General Counsel to the United States Treasury Department (1989-1990), and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (72) Trustee Since 1984 108 Director, The California Center for Land One Franklin Parkway Recycling (redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (73) Trustee Since 1992 139 Director, Martek Biosciences Corporation; One Franklin Parkway WorldCom, Inc. (communications services); San Mateo, CA 94403-1906 MedImmune, Inc. (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman and Director, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until 1992); and President, National Association of Securities Dealers, Inc. (until 1987). ------------------------------------------------------------------------------------------------------------------------------------
159 INTERESTED BOARD MEMBERS AND OFFICERS NUMBER OF
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD -------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON (69) Chairman Since 1984 139 None One Franklin Parkway of the Board San Mateo, CA 94403-1906 and Trustee PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. -------------------------------------------------------------------------------------------------------- **RUPERT H. JOHNSON, JR. (61) President Since 1984 120 None One Franklin Parkway and Trustee San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. -------------------------------------------------------------------------------------------------------- SHEILA AMOROSO (42) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. -------------------------------------------------------------------------------------------------------- HARMON E. BURNS (56) Vice President Since 1986 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments. -------------------------------------------------------------------------------------------------------- RAFAEL R. COSTAS, JR. (37) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. -------------------------------------------------------------------------------------------------------- MARTIN L. FLANAGAN (41) Vice President Since 1995 Not Applicable None One Franklin Parkway and Chief San Mateo, CA 94403-1906 Financial Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Member - Office of the President, Chief Financial Officer and Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; Executive Vice President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee, as the case may be, of 52 of the investment companies in Franklin Templeton Investments. -------------------------------------------------------------------------------------------------------- DAVID P. GOSS (54) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and Director, Property Resources, Inc. and Franklin Properties, Inc.; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). --------------------------------------------------------------------------------------------------------
160
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD -------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (54) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and Deputy General Counsel, Franklin Resources, Inc.; and Senior Vice President, Templeton Worldwide, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). -------------------------------------------------------------------------------------------------------- EDWARD V. MCVEY (64) Vice President Since 1985 Not Applicable None 26335 Carmel Rancho Blvd. Carmel, CA 93923 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Distributors, Inc.; Executive Vice President, Templeton/Franklin Investment Services, Inc.; and officer of 29 of the investment companies in Franklin Templeton Investments. -------------------------------------------------------------------------------------------------------- KIMBERLEY MONASTERIO (38) Treasurer Since 2000 Not Applicable None One Franklin Parkway and Principal San Mateo, CA 94403-1906 Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; and officer of 34 of the investment companies in Franklin Templeton Investments. -------------------------------------------------------------------------------------------------------- MURRAY L. SIMPSON (64) Vice President Since 2000 Not Applicable None One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000) and Director, Templeton Asset Management Ltd. (until 1999). -------------------------------------------------------------------------------------------------------- THOMAS WALSH (40) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments. --------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the registered investment companies comprising the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson and Rupert H. Johnson, Jr. are considered interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Trust's adviser and distributor. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. -------------------------------------------------------------------------------- The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders may call 1-800/DIAL-BEN (1-800/342-5236) to request the SAI. -------------------------------------------------------------------------------- 161 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. LITERATURE REQUEST For a brochure and prospectus, which contain more complete information, including charges and expenses, call Franklin Templeton at 1-800/DIAL BEN(REGISTRATION MARK) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. 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 determined by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS GLOBAL GROWTH Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Franklin Global Health Care Fund Mutual Discovery Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton International (Ex EM) Fund Templeton Latin America Fund Templeton Pacific Growth Fund Templeton World Fund GLOBAL GROWTH & INCOME Franklin Global Communications Fund Mutual European Fund Templeton Global Bond Fund GLOBAL INCOME Franklin Templeton Hard Currency Fund GROWTH Franklin Aggressive Growth Fund Franklin Biotechnology Discovery Fund(1) Franklin Blue Chip Fund Franklin California Growth Fund Franklin DynaTech Fund Franklin Gold and Precious Metals Fund Franklin Growth Fund Franklin Large Cap Growth Fund Franklin Small Cap Growth Fund II(2) Franklin Small-Mid Cap Growth Fund(3) Franklin Technology Fund GROWTH & INCOME Franklin Balance Sheet Investment Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Growth and Income Fund Franklin Income Fund Franklin Large Cap Value Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Rising Dividends Fund Franklin Small Cap Value Fund(4) Franklin Utilities Fund Mutual Beacon Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund FUND ALLOCATOR SERIES Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(5) Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust(6) Franklin Short-Intermediate U.S. Government Securities Fund(5) Franklin Strategic Income Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(5) Franklin Federal Money Fund(5) Franklin Money Fund(5) TAX-FREE INCOME(7) Double Tax-Free Income Fund(8) Federal Intermediate-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund Tax-Exempt Money Fund(5) STATE-SPECIFIC TAX-FREE INCOME(7) Alabama Arizona California(9) Colorado Connecticut Florida(9) Georgia Kentucky Louisiana Maryland Massachusetts(10) Michigan(10) Minnesota(10) Missouri New Jersey New York(9) North Carolina Ohio(10) Oregon Pennsylvania Tennessee Texas Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(11) 1. On 9/1/01, the fund reopened to new investors. The fund will close again when assets reach $2 billion. 2. The fund is closed to most new investors, with the exception of retirement plan accounts and wrap program accounts. Existing shareholders can continue adding to their account. 3. Formerly Franklin Small Cap Growth Fund I. Effective 9/1/01, the fund's name changed and its investment criteria expanded. 4. Formerly Franklin Value Fund. Effective 11/1/01, the fund's name changed. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. 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. 7. For investors subject to federal or state alternative minimum tax, all or a portion of the dividend income may be subject to such tax, depending on the fund. Distributions of capital gains and ordinary income from accrued market discount, if any, are generally taxable. 8. Formerly Franklin Puerto Rico Tax-Free Income Fund. Effective 12/1/01, the fund's name changed. Its investment goal and strategy remained the same. The fund continues to invest in municipal bonds issued by U.S. territories, including Puerto Rico. 9. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and intermediate-term and money market portfolios (CA and NY). 10. Portfolio of insured municipal securities. 11. The funds of the Franklin Templeton Variable Insurance Products Trust are generally only available as investment options in variable annuity or variable life insurance contracts. 02/02 [GRAPHIC OMITTED] PRESORTED STANDARD FRANKLIN TEMPLETON INVESTMENTS LOGO US POSTAGE One Franklin Parkway PAID San Mateo, CA 94403-1906 BELL CA PERMIT NO. 75 ANNUAL REPORT FRANKLIN TAX-FREE TRUST INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin/Templeton Distributors, Inc. 1-800/DIAL BEN(REGISTRATION MARK) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 This report must be preceded or accompanied by the current Franklin Tax-Free Trust prospectus, which contains more complete information including charges and expenses. 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 A2002 04/02 PRINTED ON RECYCLED PAPER