Certified Semi-annual Shareholder Report for Management Investment Companies (n-csrs)

Semiannual Report

Municipal Bond Market Overview

For the six-month period ended August 31, 2012, the municipal bond market produced solid returns. During this period, the Barclays Municipal Bond Index, which tracks investment-grade municipal securities, returned +2.94%. ¹ In comparison, the Barclays U.S. Treasury Bond Index returned +2.70%. ¹ The tax-exempt nature of most municipal bond coupon payments included in the Barclays Municipal Bond Index further enhanced the relative strength of municipal bond performance for the six months under review.

In an August 1, 2012, news release, the Federal Open Market Committee (FOMC) cited continued elevated unemployment levels, slowing increases to consumer spending and sluggish home prices as reasons to maintain its commitment toward a highly accommodative monetary policy. Beyond keeping the federal funds target rate extremely low, the FOMC stated its intention to continue using unconventional monetary easing tools, commonly referred to as quantitative easing. The FOMC’s current quantitative easing program of buying long-term Treasury bonds and selling short-term Treasury bills and notes was originally scheduled to end in June 2012. However, the FOMC extended the program through the remainder of 2012, which benefited the U.S. Treasury market and the municipal bond market.

Federal Reserve Board Chairman Ben Bernanke spoke on August 31, 2012, about state and local government austerity measures as a headwind to the pace of economic growth, adding that state and local governments made real cuts to spending and employment. Spending cuts included reducing borrowing costs by issuing new debt at a lower rate and refinancing outstanding debt. New issuance increased during the first eight months of 2012 compared with the same period in 2011, albeit from levels that were the lowest for new municipal bond issuance in a decade. Almost half of municipalities’ primary market issuance was for the purpose of refinancing outstanding debt. Year-to-date in 2012, the dollar amount of bonds issued for refinancing doubled from the same period in 2011, but such bonds generally do not affect the total amount of outstanding municipal bonds. In contrast, bonds issued for new projects were more limited, resulting in low net supply of investment opportunities for municipal bond buyers. The scarcity of new bonds drove prices higher during the period.

1. Source: © 2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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The credit quality of outstanding municipal bonds, as assessed by independent credit rating agency Standard & Poor’s (S&P), increased slightly during the first six months of 2012, as S&P upgrades exceeded downgrades. For the same period, another independent credit rating agency, Moody’s Investors Service, announced more downgrades than upgrades. Many of the downgrades came on the heels of Moody’s massive upgrades in 2010, when it effected a wholesale shift in its municipal rating scale to fit its new global rating scale, which included corporate debt ratings. Subsequently, some of the issues that benefited from the 2010 rating upgrades were adjusted downward as Moody’s reviewed them using the new global rating scale criteria. In addition, the number of defaulted municipal issuers declined in the first half of 2012 compared with the same period in 2011. Despite general economic headwinds, the municipal bond market continued to provide investors with high-quality sources of fixed income opportunities.

At period-end, we maintained our positive view of the municipal bond market. We believe municipal bonds continue to be an attractive asset class among fixed income securities, and we intend to follow our solid discipline of investing to maximize income while seeking value in the municipal bond market.

The foregoing information reflects our analysis and opinions as of August 31, 2012, the end of the reporting period. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.

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Investment Strategy and

Manager’s Discussion

Investment Strategy

We use a consistent, disciplined strategy in an effort to maximize tax-exempt income for our shareholders by seeking to maintain exposure to higher coupon securities while balancing risk and return within each Fund’s range of allowable investments. We generally employ a buy-and-hold approach and invest in securities we believe should provide the most relative value in the market. We do not use leverage or exotic derivatives, nor do we use hedging techniques that could add volatility and contribute to underperformance in adverse markets.

Manager’s Discussion

Based on the combination of our value-oriented philosophy of investing primarily for income and a positive-sloping municipal yield curve, we favored the use of longer term bonds. Consistent with our strategy, we sought to purchase bonds from 15 to 30 years in maturity with good call features. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

We invite you to read your Fund report for more detailed performance and portfolio information. Thank you for your participation in Franklin Tax-Free Trust. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

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*Assumes shares were purchased and held for the entire accrual period, which may differ from the calendar month. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

**The June distribution reflects additional days in the accrual period.

same period. ² The Performance Summary beginning on page 11 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.45% based on an annualization of the 3.58 cent per share August dividend and the maximum offering price of $12.46 on August 31, 2012. An investor in the 2012 maximum combined effective federal and Alabama personal income tax bracket of 38.25% would need to earn a distribution rate of 5.59% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

State Update

Alabama’s economy benefited from increased U.S. manufacturing in 2011 and experienced the largest manufacturing gains in the past five years, largely due to the state’s low taxes, top-grade trade schools, right-to-work legislation that curbs labor unions, and other incentives for domestic and foreign companies. These advantages resulted in new factories built in the state that were expected

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

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to result in several thousand new jobs over the next few years. In addition, existing manufacturers planned to expand their production capacity with the expectation of thousands of new jobs and billions in capital investment. In the automotive industry, Toyota, Hyundai and Honda expanded production and added jobs. The state has also gained new foreign manufacturers, including French company Airbus and China-based Golden Dragon Precise Copper Tube, which should create more jobs.

In the real estate market, building permits issued for single- and multi-family dwellings increased along with personal income and the state’s housing price index, and its home foreclosure rate remained well below the national average. The financial activities, manufacturing, and leisure and hospitality sectors led job gains. Despite these positive trends, the government sector experienced job losses during the period, and the information sector as well as the mining and logging sector also contracted. The state’s unemployment rate increased from 7.5% at the beginning of the period to 8.5% at period-end, which was higher than the 8.1% national average. ³

Alabama has two major operating funds, the Education Trust Fund, the main source of dollars for public schools and colleges, and the General Fund that is a major source of funding for Medicaid, prisons and other noneducation government programs. During fiscal year 2012 both funds continued to shrink as growth in appropriations and obligations outpaced revenue growth, representing a challenge as the budget called for increased spending in fiscal year 2012. In addition to a one-time borrowing from the Alabama Trust Fund that relied on natural gas royalties, and use of the state’s remaining federal stimulus dollars, in March 2012 Governor Bentley ordered general fund spending reductions to address the shortfall. The state’s fiscal year 2013 budget approved in May 2012 planned lower spending through modest decreases in public education and corrections while allowing a small increase in Medicaid funding. The budget was balanced assuming September voter approval of a state constitutional amendment that would allow general fund borrowing from the Alabama Trust Fund. Lawsuits have been filed to challenge the budget because it relies on the pending September vote.

The state’s net-tax supported debt was 2.5% of personal income and $839 per capita, compared with the national medians of 2.8% and $1,117. ⁴ Independent credit rating agency Standard Poor’s (S&P) affirmed its AA rating and stable

3. Source: Bureau of Labor Statistics.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

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outlook for the state’s general obligation debt. ⁵ The rating and outlook reflected S&P’s expectation of continued expansion in the manufacturing sector and appropriate policy responses to potential revenue shortfalls. However, a continuation of declining revenue trends could be detrimental to the state’s finances.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

Thank you for your continued participation in Franklin Alabama Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

5. This does not indicate S&P’s rating of the Fund.

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Performance Summary as of 8/31/12

Franklin Alabama Tax-Free Income Fund

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.

Performance Summary (continued)

Endnotes

All investments involve risks, including possible loss of principal. Because municipal bonds are sensitive to interest rate movements, the Fund’s yield and share price will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. Since the Fund concentrates its investments in a single state, it is subject to greater risk of adverse economic and regulatory changes in that state than a geographically diversified fund. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. The Fund’s prospectus also includes a description of the main investment risks.


Class C:	Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Class C) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and Alabama personal income tax rate of 38.25%, based on the federal income tax rate of 35.00%.

6. The 30-day standardized yield for the 30 days ended 8/31/12 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate (which reflects the Fund’s past dividends paid to shareholders) or the income reported in the Fund’s financial statements.

7. Figures are as stated in the Fund’s prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.

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Your Fund’s Expenses

Franklin Alabama Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.

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Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.

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**The June distribution reflects additional days in the accrual period.

same period. ² The Performance Summary beginning on page 19 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.61% based on an annualization of the 3.77 cent per share August dividend and the maximum offering price of $12.54 on August 31, 2012. An investor in the 2012 maximum federal income tax bracket of 35.00% would need to earn a distribution rate of 5.55% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class B and C shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

State Update

Florida’s service-based economy continued to recover modestly during the six-month reporting period albeit at a slower pace than the nation’s. The state’s housing market showed signs of improvement, with home prices stabilizing particularly in Tampa and Miami. However, a large excess housing inventory

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

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remained and the state’s foreclosure rate ranked among the nation’s highest. As a result, new home construction activities remained near historical lows and construction employment continued to decline. The other services sector also experienced job losses, while mining and logging was relatively flat. Most other sectors contributed to job growth, led by professional and business services. At period-end, Florida’s unemployment rate was 8.8%, compared to the 8.1% national average. ³

The state closed its fiscal year 2012 (ended June 30) with a sizable fund balance and total reserves, according to preliminary results. With recurring revenues exceeding recurring appropriations, Florida’s fiscal year 2012 budget was structurally balanced. In contrast, the enacted fiscal year 2013 budget was not structurally balanced, with recurring appropriations exceeding recurring revenues. The state bridged the budget gap through the use of trust fund transfers and spending cuts primarily in higher education, health and human services, and public safety. Spending for K-12 education increased, however, as the state essentially restored the cuts made in fiscal year 2012. Since budget enactment, the state revised the recurring revenues slightly higher to reflect better-than-expected 2012 revenue performance while taking into account near-term economic challenges. As a result, the projected fiscal year 2013 structural imbalance narrowed and the estimated fund balance increased slightly.

Florida’s net tax-supported debt was 3.0% of personal income and $1,167 per capita, compared with the national medians of 2.8% and $1,117. ⁴ Independent credit rating agency Standard & Poor’s (S&P) assigned Florida’s general obligation bonds its highest rating of AAA with a stable outlook. ⁵ The rating and outlook reflected S&P’s view of the state’s significant progress in restoring structural budget balance in response to economic challenges and budgetary pressures, strong reserves that can help offset weak economic growth, moderately high but manageable debt burden, and good income levels.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

3. Source: Bureau of Labor Statistics.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

5. This does not indicate S&P’s rating of the Fund.

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Thank you for your continued participation in Franklin Florida Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

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Performance Summary as of 8/31/12

Franklin Florida Tax-Free Income Fund

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Performance Summary (continued)

Performance

C u m u lative total ret u r n excl u des sales charges. Average a nnu al total ret u r n s i n cl u de maxim u m sales charges. Class A: 4.25% maxim u m i n itial sales charge; Class B: co n ti n ge n t deferred sales charge (CDSC) decli n i n g from 4% to 1% over six years, a n d elimi n ated thereafter; Class C: 1% CDSC i n first year o n ly.

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Performance Summary (continued)

Endnotes

Class B:

Class C:

These shares have higher annual fees and expenses than Class A shares.

Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Classes B and C) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the 2012 maximum federal income tax rate of 35.00%.

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Your Fund’s Expenses

Franklin Florida Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

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Your Fund’s Expenses (continued)

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Franklin Georgia Tax-Free Income Fund

Your Fund’s Goal and Main Investments: Franklin Georgia Tax-Free Income Fund

seeks to provide as high a level of income exempt from federal and Georgia personal income taxes as is consistent with prudent investment management and preservation of capital by investing at least 80% of its total assets in securities that pay interest free from such taxes. ¹

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.

Performance Overview

The Fund’s Class A share price, as measured by net asset value, increased from $12.49 on February 29, 2012, to $12.76 on August 31, 2012. The Fund’s Class A shares paid dividends totaling 22.20 cents per share for the

1. For investors subject to alternative minimum tax, a small portion of Fund dividends may be taxable. Distributions of capital gains are generally taxable. To avoid imposition of 28% backup withholding on all Fund distributions and redemption proceeds, U.S. investors must be properly certified on Form W-9 and non-U.S. investors on Form W-8BEN.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 99.

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**The June distribution reflects additional days in the accrual period.

same period. ² The Performance Summary beginning on page 28 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.35% based on an annualization of the 3.72 cent per share August dividend and the maximum offering price of $13.33 on August 31, 2012. An investor in the 2012 maximum combined effective federal and Georgia personal income tax bracket of 38.90% would need to earn a distribution rate of 5.48% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

State Update

Georgia’s economic recovery lagged the nation’s during the reporting period, with continued high unemployment despite job growth in many sectors and generally improving personal income. Although Georgia lost many manufacturing jobs during the Great Recession, the state benefited from rising U.S. manufacturing in 2011 due in part to its friendly business environment, solid

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

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infrastructure, quality workforce and Quick Start training program, resulting in new and expanded manufacturing facilities. In the auto industry, Toyota and Tenneco announced expansions that would add hundreds of new jobs. In other industries, Caterpillar, Baxter International, Great Dane and Starbucks have plans for new plants with the potential for considerable job creation.

Although the state’s foreclosure rate remained among the nation’s highest, the state’s housing market showed signs of improvement with an increase in the number of single- and multi-family building permits and home prices rising at a faster rate than the national average. Nevertheless, the construction sector continued to shed jobs during the period, while most other sectors added jobs, led by professional and business services; manufacturing; and trade, transportation and utilities. The state’s unemployment rate improved from the high levels reached after the Great Recession to 9.2% at period-end, which was higher than the 8.1% national average. ³

The state historically has a good budget management framework and strong financial management practices. The executive branch has broad authority to adjust appropriations and has a history of making politically challenging revenue and expenditure decisions to maintain budget balance during the fiscal year. Georgia’s fiscal year 2012 budget was structurally balanced without the use of nonrecurring revenues and with recurring revenues used to cover recurring expenditures. Although all budget areas increased except for education and debt service, total spending was only slightly more than in fiscal year 2011. The state’s fiscal year 2013 budget forecast moderate revenue growth and was larger than the fiscal year 2012 budget. Most additional funding was appropriated for student enrollment growth, filling Medicaid shortfalls and the state health benefit plan, and making required retirement plan payments. To remain balanced, the budget included base spending reductions by most agencies as well as consolidation of some agencies.

Georgia’s net tax-supported debt was 3.1% of personal income and $1,099 per capita, compared with the national medians of 2.8% and $1,117. ⁴ Independent credit rating agency Standard & Poor’s (S&P) assigned Georgia’s general obligation debt its highest rating of AAA with a stable outlook. ⁵ The rating and outlook reflected S&P’s view of the state’s well-diversified economy that remained well positioned to recover in the medium term despite losses in the

3. Source: Bureau of Labor Statistics.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

5. This does not indicate S&P’s rating of the Fund.

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housing sector, a history of restoring fiscal balance by making difficult decisions, and a revenue shortfall reserve that is being gradually replenished.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

Thank you for your continued participation in Franklin Georgia Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

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Performance Summary (continued)

Endnotes


Class C:	Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Class C) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and Georgia personal income tax rate of 38.90%, based on the federal income tax rate of 35.00%.

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Your Fund’s Expenses

Franklin Georgia Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

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Your Fund’s Expenses (continued)

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same period. ² The Performance Summary beginning on page 35 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.54%. An investor in the 2012 maximum combined effective federal and Kentucky personal income tax bracket of 38.90% would need to earn a distribution rate of 5.79% from a taxable investment to match the Fund’s Class A tax-free distribution rate. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

Commonwealth Update

Kentucky’s economic recovery, formerly lagging that of the nation, more recently continued at a comparable pace. The commonwealth’s significant coal production boosted its revenues, although clean energy regulations, western U.S. coal sources and the natural gas boom contributed to decreased coal production and related layoffs. Kentucky’s economic base has diversified in recent years but has remained reliant on the recovering manufacturing sector. In the auto industry, Ford, Toyota and several automotive-related manufacturers planned expansions that should create new jobs. In other industries, General Electric and New York Blower announced additional investments expected to produce jobs.

In the housing market, the state’s home foreclosure rate remained well below the national average. Despite increases in home prices, personal income, and single- and multi-family building permits in the state, the construction industry experienced substantial job losses, with smaller losses for the mining and logging sector. Nevertheless, the information, manufacturing, and professional and business services sectors led job growth. Kentucky’s unemployment rate declined from 8.7% at the start of the period to 8.5% at period-end, which was higher than the 8.1% national average. ³

The commonwealth’s enacted fiscal 2011–2012 biennial budget relied on several one-time measures, some spending cuts and projected revenue growth to achieve balance. General fund revenues in the first half of fiscal year 2012 were ahead of budget forecasts, reflecting strong sales and corporate tax receipts. The commonwealth’s recently adopted fiscal 2013–2014 biennial budget

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

3. Source: Bureau of Labor Statistics.

Semiannual Report | 33

moved closer to structural balance as it reduced reliance on one-time measures to fund recurring expenses. It also included a modest revenue growth forecast and spending reductions to most state agencies. Key areas exempted fully or partially from general fund spending cuts included certain education, health care and public safety programs, as well as debt service payments.

Kentucky’s net tax-supported debt was 6.1% of personal income and $2,035 per capita, compared with the national medians of 2.8% and $1,117. ⁴ Independent credit rating agency Moody’s Investors Service downgraded Kentucky to an issuer rating of Aa1 with a negative outlook. ⁵ The rating reflected Moody’s view of the commonwealth’s reliance on appropriation-backed debt, revenue stabilization and active financial control practices. The negative outlook reflected Moody’s assessment of the commonwealth’s significant fiscal stress, large and growing unfunded pension liability, and reliance on one-time budget balancing solutions. Additionally, in Moody’s view, the commonwealth’s economy remains vulnerable primarily due to its relatively higher exposure to a weakened manufacturing sector.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

Thank you for your continued participation in Franklin Kentucky Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

5. This does not indicate Moody’s rating of the Fund.

34 | Semiannual Report

Performance Summary as of 8/31/12

Franklin Kentucky Tax-Free Income Fund

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.

Semiannual Report | 35

Performance Summary (continued)

Endnotes

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the 3.65 cent per share August dividend and the maximum offering price of $12.38 per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and Kentucky personal income tax rate of 38.90%, based on the federal income tax rate of 35.00%.

36 | Semiannual Report

Your Fund’s Expenses

Franklin Kentucky Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Semiannual Report | 37

Your Fund’s Expenses (continued)

38 | Semiannual Report

Franklin Louisiana Tax-Free Income Fund

Your Fund’s Goal and Main Investments: Franklin Louisiana Tax-Free Income Fund seeks to provide as high a level of income exempt from federal and Louisiana personal income taxes as is consistent with prudent investment management and preservation of capital by investing at least 80% of its total assets in securities that pay interest free from such taxes. ¹

Performance Overview

The Fund’s Class A share price, as measured by net asset value, increased from $11.88 on February 29, 2012, to $12.05 on August 31, 2012. The Fund’s Class A shares paid dividends totaling 22.45 cents per share for the

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 111.

Semiannual Report | 39

**The June distribution reflects additional days in the accrual period.

same period. ² 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 3.51% based on an annualization of the 3.68 cent per share August dividend and the maximum offering price of $12.58 on August 31, 2012. An investor in the 2012 maximum combined effective federal and Louisiana personal income tax bracket of 38.90% would need to earn a distribution rate of 5.74% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

State Update

Louisiana’s commodity-based economy continued to perform better than the national average as several sectors regained all the jobs lost during the recession. The state’s unemployment rate has been below the national average since the recovery from Hurricane Katrina’s effects. The construction sector experienced

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

40 | Semiannual Report

job losses during the period as new home construction remained near record lows, and the professional and business services sector also declined. Most other employment sectors gained jobs, led by mining and logging, other services, and leisure and hospitality. At period-end, Louisiana’s unemployment rate was 7.4%, compared to the 8.1% national average. ³ Although the state’s income per capita continued to lag the national average, it has improved significantly from the 2000 level as the state continued to recruit higher-paying industries by offering many incentives and tax advantages.

The state has strong financial management practices that include revenue estimating conferences at least four times a year, monthly revenue monitoring and reporting, and flexibility to make midyear financial adjustments, primarily through expenditure reductions, in an effort to maintain budget balance. Louisiana lowered its revenue forecasts twice in fiscal year 2012, with the April downward revision serving as the basis for the fiscal year 2013 budget. The enacted budget was only slightly higher than the fiscal year 2012 budget and closed the gap identified in January through departmental spending reductions, job cuts and nonrecurring resources.

Louisiana’s net tax-supported debt was 3.7% of personal income and $1,398 per capita, compared with the national medians of 2.8% and $1,117. ⁴ Independent credit rating agency Standard & Poor’s (S&P) assigned Louisiana’s general obligation debt an AA rating with a stable outlook. ⁵ The rating and outlook reflected S&P’s view of the state’s improving economy, strong governmental framework that limits budgeted expenses to current revenues and reserves, timely revenue and expenditure adjustments to address structural budget imbalances, financial flexibility and healthy liquidity position. According to S&P, these strengths were somewhat tempered by the state’s recent general fund deficits, low general fund operating reserves, and below-average pension and other post-employment benefits funding ratios.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

3. Source: Bureau of Labor Statistics.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

5. This does not indicate S&P’s rating of the Fund.

Thank you for your continued participation in Franklin Louisiana Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

42 | Semiannual Report

Semiannual Report | 43

Performance Summary (continued)

Endnotes


Class C:	Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Class C) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and Louisiana personal income tax rate of 38.90%, based on the federal income tax rate of 35.00%.

44 | Semiannual Report

Your Fund’s Expenses

Franklin Louisiana Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Semiannual Report | 45

Your Fund’s Expenses (continued)

46 | Semiannual Report

Semiannual Report | 47

**The June distribution reflects additional days in the accrual period.

same period. ² The Performance Summary beginning on page 51 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.58% based on an annualization of the 3.75 cent per share August dividend and the maximum offering price of $12.56 on August 31, 2012. An investor in the 2012 maximum combined effective federal and Maryland state and local personal income tax bracket of 40.82% would need to earn a distribution rate of 6.05% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C and Advisor shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

State Update

Maryland’s broad-based economy has historically grown at a healthy pace. The state’s population growth rate was in line with the national average, while its age-dependency ratio was relatively low and its per-capita gross product above average. Additionally, the state’s unemployment rate has been historically lower than the national average. At period-end, the professional and business services sector experienced some job growth and most other sectors declined, led by mining, logging and construction; financial activities; and information. Despite

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

48 | Semiannual Report

recent increases, at period-end Maryland’s 7.1% unemployment rate was significantly lower than the 8.1% national average. ³ The state benefited from employment shifts resulting from the 2005 federal military base closure and realignment process, as well as the National Agency’s continued expansion at Fort Meade, gaining predominantly high education and high technology jobs that had a proportionally greater impact on income growth. With the federal government’s significant presence in Maryland making the state’s economy susceptible to federal austerity measures, state officials began to incorporate possible effects on revenue forecasts.

The state closed fiscal year 2012 (ended June 30) with general and reserve fund balances that were higher than originally budgeted, due to better-than-forecast revenues that more than offset the increase of expenditures over the original budget. The enacted fiscal year 2013 budget narrowed the state’s structural budget imbalance, which officials projected would continue through fiscal year 2017. State officials bridged the fiscal year 2013 budget gap through a combination of recurring and nonrecurring measures that included personal tax increases, fund transfers, Medicaid cost containment and a phased-in shift of teacher retirement costs from the state to local school districts. The enacted budget increased the reserve fund balance while decreasing the general fund balance from year-ago levels. Although the projected combined balance is slightly lower than that of fiscal year 2012, as a percentage of expenditures it is at a level considered to be good by independent credit rating agency Standard & Poor’s (S&P).

Maryland’s net tax-supported debt was 3.6% of personal income and $1,742 per capita, compared with the national medians of 2.8% and $1,117. ⁴ S&P assigned Maryland’s general obligation bonds its highest rating of AAA with a stable outlook. ⁵ The rating and outlook reflected S&P’s view of the state’s strong economy, high wealth and income levels, historically prudent fiscal management, and a moderate debt burden enhanced by a well-defined debt-affordability model and maintenance of debt ratios within reasonable limits.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

3. Source: Bureau of Labor Statistics.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

5. This does not indicate S&P’s rating of the Fund.

Thank you for your continued participation in Franklin Maryland Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

50 | Semiannual Report

Performance Summary as of 8/31/12

Franklin Maryland Tax-Free Income Fund

Semiannual Report | 51

52 | Semiannual Report

Performance Summary (continued)

Endnotes


Class C:	Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

Advisor Class:	Shares are available to certain eligible investors as described in the prospectus.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Classes C and Advisor) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and Maryland state and local personal income tax rate of 40.82%, based on the federal income tax rate of 35.00%.

8. Effective 7/1/09, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 7/1/09, a restated figure is used based upon the Fund’s Class A performance, excluding the effect of Class A’s maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 7/1/09, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 7/1/09 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +28.65% and +8.28%.

Semiannual Report | 53

Your Fund’s Expenses

Franklin Maryland Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

54 | Semiannual Report

Your Fund’s Expenses (continued)

Semiannual Report | 55

Franklin Missouri Tax-Free Income Fund

Your Fund’s Goal and Main Investments: Franklin Missouri Tax-Free Income Fund seeks to provide as high a level of income exempt from federal and Missouri personal income taxes as is consistent with prudent investment management and preservation of capital by investing at least 80% of its total assets in securities that pay interest free from such taxes. ¹

Performance Overview

The Fund’s Class A share price, as measured by net asset value, increased from $12.61 on February 29, 2012, to $12.76 on August 31, 2012. The Fund’s Class A shares paid dividends totaling 23.31 cents per share for the same period. ² The Performance Summary beginning on page 60 shows that

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 125.

56 | Semiannual Report

**The June distribution reflects additional days in the accrual period.

at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.41% based on an annualization of the 3.79 cent per share August dividend and the maximum offering price of $13.33 on August 31, 2012. An investor in the 2012 maximum combined effective federal and Missouri personal income tax bracket of 38.90% would need to earn a distribution rate of 5.58% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C and Advisor shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

State Update

Missouri’s broad, diverse economy grew at a slower pace than the nation’s as the state experienced slower recovery in job and income growth. Although the state’s population growth rate for the past five years was below the national average, Missouri was among the few Midwestern states with a positive net-migration trend in the same period, reflecting the state’s diverse economic base. Despite a long-term downtrend, manufacturing has been supporting job growth recently, driven largely by the automotive industry. The professional and business services sector and government sector also contributed to job growth. Most other sectors lost jobs, led by construction; information; and

Semiannual Report | 57

trade, transportation and utilities. At period-end, Missouri’s unemployment rate was 7.2%, which was significantly lower than the 8.1% national average. ³

The state’s financial position remained sound despite declining reserves in recent fiscal years. For fiscal year 2012 (ended June 30), the state generated better-than-expected revenues that offset higher-than-expected spending on disaster recovery efforts. Although the general fund liquidity decreased from the fiscal year 2011 level, the budget reserve fund remained fully funded. The enacted fiscal year 2013 budget bridged a gap caused by the loss of federal stimulus funds through a combination of Medicaid reforms, staffing and program cuts, savings from debt refundings, and a revenue growth projection that was in line with the actual revenue growth rate in fiscal year 2012. With a decreased use of nonrecurring funds to balance the fiscal year 2013 budget, the state moved closer to structural balance.

Missouri’s net tax-supported debt was 2.0% of personal income and $741 per capita, compared with the national medians of 2.8% and $1,117. ⁴ Independent credit rating agency Moody’s Investors Service assigned Missouri’s general obligation bonds a rating of Aaa with a stable outlook. ⁵ The rating and outlook reflected Moody’s view of the state’s historically excellent financial performance, healthy reserve levels that provide the state with short-term liquidity, strong fiscal management controls that include constitutional executive powers to counter revenue shortfalls with expenditure reductions, and moderate debt burden. Moody’s observed that Missouri faces challenges posed by a constitutional amendment that limits its ability to increase revenues and a slow economic recovery that makes it vulnerable to manufacturing job losses, which could further slow economic growth.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

3. Source: Bureau of Labor Statistics.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

5. This does not indicate Moody’s rating of the Fund.

58 | Semiannual Report

Thank you for your continued participation in Franklin Missouri Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

Semiannual Report | 59

Performance Summary as of 8/31/12

Franklin Missouri Tax-Free Income Fund

60 | Semiannual Report

Semiannual Report | 61

Performance Summary (continued)

Endnotes


Class C:	Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

Advisor Class:	Shares are available to certain eligible investors as described in the prospectus.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Classes C and Advisor) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and Missouri personal income tax rate of 38.90%, based on the federal income tax rate of 35.00%.

62 | Semiannual Report

Your Fund’s Expenses

Franklin Missouri Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Semiannual Report | 63

Your Fund’s Expenses (continued)

64 | Semiannual Report

Franklin North Carolina Tax-Free Income Fund

Your Fund’s Goal and Main Investments: Franklin North Carolina Tax-Free Income Fund seeks to provide as high a level of income exempt from federal and North Carolina personal income taxes as is consistent with prudent investment management and preservation of capital by investing at least 80% of its total assets in securities that pay interest free from such taxes. ¹

Performance Overview

The Fund’s Class A share price, as measured by net asset value, increased from $12.79 on February 29, 2012, to $12.96 on August 31, 2012. The Fund’s Class A shares paid dividends totaling 24.02 cents per share for the

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 134.

Semiannual Report | 65

**The June distribution reflects additional days in the accrual period.

same period. ² The Performance Summary beginning on page 69 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.46% based on an annualization of the 3.90 cent per share August dividend and the maximum offering price of $13.54 on August 31, 2012. An investor in the 2012 maximum combined effective federal and North Carolina personal income tax bracket of 40.04% would need to earn a distribution rate of 5.77% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C and Advisor shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

State Update

North Carolina’s diverse economy expanded during the period, but job growth remained modest and the unemployment rate elevated. Despite recent signs of improvement the housing market was relatively weak, continuing to be a drag on the state’s economy as it contributed to job losses in the construction sector.

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

66 | Semiannual Report

The government sector and mining and logging sector also lost jobs. Most other sectors added jobs, led by information and financial activities. At period-end, the state’s unemployment rate was 9.7%, which was considerably higher than the 8.1% national rate. ³

The state’s enacted fiscal 2012–2013 biennial budget had a huge projected budget gap primarily due to the end of federal stimulus programs and the expiration of the state’s temporary tax increase. State officials bridged the gap largely through spending reductions, primarily in education and health and human services. Although the projected revenue growth rate for the biennium was significantly higher than in recent years, it was below the historical average during the state’s economic expansion periods. The state’s cautious economic and revenue growth projections resulted in better-than-expected general fund revenues for fiscal year 2012 (ended June 30). However, the recent economic slowdown caused tax collections to weaken, making the state miss its revenue target for the first two months of fiscal year 2013. Because fiscal year 2013 revenue projections were significantly lower than the actual long-term average growth rate and corporate income and non-withholding personal income tax collections would not come in until the second half of the fiscal year, the state believed it had an improved chance of meeting the full fiscal year revenue projections.

North Carolina’s net tax-supported debt was 2.3% of personal income and $815 per capita, compared with the national medians of 2.8% and $1,117. ⁴ Independent credit rating agency Standard & Poor’s (S&P) assigned North Carolina’s general obligation debt its highest rating of AAA with a stable outlook. ⁵ The rating and outlook reflected S&P’s view of the state’s diverse economic base, historically healthy financial position, moderate debt burden, and prudent fiscal management that included proactive responses to budget shortfalls and surpluses to retain structural balance.

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

3. Source: Bureau of Labor Statistics.

4. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

5. This does not indicate S&P’s rating of the Fund.

Semiannual Report | 67

Thank you for your continued participation in Franklin North Carolina Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

68 | Semiannual Report

Performance Summary as of 8/31/12

Franklin North Carolina Tax-Free Income Fund

Semiannual Report | 69

70 | Semiannual Report

Performance Summary (continued)

Endnotes


Class C:	Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

Advisor Class:	Shares are available to certain eligible investors as described in the prospectus.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Classes C and Advisor) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and North Carolina personal income tax rate of 40.04%, based on the federal income tax rate of 35.00%.

Semiannual Report | 71

Your Fund’s Expenses

Franklin North Carolina Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

72 | Semiannual Report

Your Fund’s Expenses (continued)

Semiannual Report | 73

74 | Semiannual Report

**The June distribution reflects additional days in the accrual period.

same period. ² The Performance Summary beginning on page 78 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.40% based on an annualization of the 3.63 cent per share August dividend and the maximum offering price of $12.80 on August 31, 2012. An investor in the 2012 maximum combined effective federal and Virginia personal income tax bracket of 38.74% would need to earn a distribution rate of 5.55% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C and Advisor shares’ performance, please see the Performance Summary. The reduction in dividend distributions from the start to the end of the period under review reflected generally declining interest rates. Additionally, investor demand was strong for municipal bonds in an environment of limited tax-exempt supply. These factors resulted in reduced income for the portfolio and caused dividends to decline overall.

Commonwealth Update

During the six months under review, despite challenges to the U.S. economic recovery, Virginia’s strong and broad-based economy generated healthy revenue growth in fiscal year 2012 above forecasts, and the unemployment rate remained well below the national average. Higher revenues reflected growth in individual income tax receipts following an upswing in revenue collections

2. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

Semiannual Report | 75

during fiscal year 2011, and some surplus revenues were expected to be deposited into Virginia’s Revenue Stabilization Fund (emergency reserves) for fiscal year 2013. These revenue growth trends were expected to continue in fiscal years 2013 and 2014.

The commonwealth’s unemployment rate stood at 5.9% in August 2012, which was lower than the 8.1% national average. ³ The financial activities and other services sectors grew the most for the six months under review, while the information, construction and government sectors had losses. Consistent with relatively low unemployment, Virginia’s home prices and personal income rose along with single- and multi-family building permits and foreclosures remained well below the national average. Virginia’s economy grew at a faster pace for the past 15 years than the national average. ⁴

Independent credit rating agency Moody’s Investors Service acknowledged Virginia’s structurally balanced budgets for fiscal years 2012 and 2013 along with rebuilding of emergency reserves since the end of fiscal year 2011. To support increased reserves, the commonwealth raised the level of required funding received from annual income and sales tax revenues. Because Virginia has a number of employers related to the military and reliant on federal funding, the governor proposed increasing emergency reserves in fiscal year 2014 and created the Federal Action Contingency Trust Fund, designed to augment programs directly affected by federal budget cuts. The commonwealth’s retirement plans are moderately funded and, to reduce retirement plan obligations, Virginia began requiring salary deferrals by new state employees to a new hybrid pension/401(k)-style retirement plan while limiting benefits, including cost of living adjustments.

The state’s debt burden was moderate, with net tax-supported debt of 2.6% of personal income and $1,169 per capita, compared with the 2.8% and $1,117 national medians. ⁵ Independent credit rating agency Standard & Poor’s maintained its top, AAA rating for Virginia with a stable outlook, classifying the commonwealth’s strong management practices. ⁶ Moody’s also maintained its Aaa rating based on Virginia’s conservative fiscal management, diverse local economy and low debt burden, but included a negative outlook due to Virginia’s indirect linkage to the weakened credit profile of the U.S. government based on its dependence on federal employment and spending. ⁶

3. Source: Bureau of Labor Statistics.

4. Source: Standard & Poor’s, “Virginia; Appropriations; General Obligation; Miscellaneous Tax; Moral Obligation,” 2/15/12.

5. Source: Moody’s Investors Service, “Median Report: 2012 State Debt Medians Report,” 5/22/12.

6. This does not indicate a rating of the Fund.

76 | Semiannual Report

Manager’s Discussion

We used various investment strategies during the six months under review as we sought to maximize tax-free income for shareholders. Please read the discussion on page 6 for details.

Thank you for your continued participation in Franklin Virginia Tax-Free Income Fund. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.

The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2012, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

Semiannual Report | 77

Performance Summary as of 8/31/12

Franklin Virginia Tax-Free Income Fund

78 | Semiannual Report

Semiannual Report | 79

Performance Summary (continued)

Endnotes


Class C:	Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares.

Advisor Class:	Shares are available to certain eligible investors as described in the prospectus.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized.

3. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.

4. Distribution rate is based on an annualization of the respective class’s August dividend and the maximum offering price (NAV for Classes C and Advisor) per share on 8/31/12.

5. Taxable equivalent distribution rate and yield assume the published rates as of 6/27/12 for the maximum combined effective federal and Virginia personal income tax rate of 38.74%, based on the federal income tax rate of 35.00%.

80 | Semiannual Report

Your Fund’s Expenses

Franklin Virginia Tax-Free Income Fund

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Semiannual Report | 81

Your Fund’s Expenses (continued)

82 | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 83

84 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | 85

86 | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 87

88 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 89

90 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

92 | Semiannual Report

Semiannual Report | 93

94 | Semiannual Report

Semiannual Report | 95

See Abbreviations on page 175.

^a Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. The coupon rate shown represents the rate at period end.

96 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 97

98 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | 99

100 | Semiannual Report

Semiannual Report | 101

102 | Semiannual Report

Semiannual Report | 103

Franklin Tax-Free Trust

Statement of Investments, August 31, 2012 (unaudited) (continued)

See Abbreviations on page 175.

104 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 105

106 | Semiannual Report

Semiannual Report | 107

See Abbreviations on page 175.

108 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 109

110 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

See Abbreviations on page 175.

^a Security purchased on a when-issued basis. See Note 1(b).

^b Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest at specified dates. The coupon rate shown represents the rate at period end.

114 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 115

116 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 117

120 | Semiannual Report

See Abbreviations on page 175.

^a Security purchased on a when-issued basis. See Note 1(b).

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 121

122 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 123

124 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | 125

Semiannual Report | 129

130 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 131

132 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 133

134 | Semiannual Report

Semiannual Report | 135

136 | Semiannual Report

Semiannual Report | 137

138 | Semiannual Report

Semiannual Report | 139

140 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 141

142 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 143

144 | Semiannual Report

Semiannual Report | 145

Semiannual Report | 147

See Abbreviations on page 175.

148 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 151

152 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 153

154 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 155

156 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 157

158 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 159

Franklin Tax-Free Trust

Notes to Financial Statements (unaudited)

1. O RGANIZATION AND S IGNIFICANT A CCOUNTING P OLICIES

Franklin Tax-Free Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-four separate funds, nine of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.

The following summarizes the Funds’ significant accounting policies.

a. Financial Instrument Valuation

The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds’ pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value.

160 | Semiannual Report

Franklin Tax-Free Trust

Notes to Financial Statements (unaudited) (continued)

1.	O RGANIZATION AND S IGNIFICANT A CCOUNTING P OLICIES (continued)
a.	Financial Instrument Valuation (continued)

The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

b. Securities Purchased on a When-Issued Basis

The Funds purchase securities on a when-issued basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.

c. Income Taxes

It is each fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each fund intends to distribute to shareholders substantially all of its income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.

Each fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of August 31, 2012, and for all open tax years, each fund has determined that no liability for unrecognized tax benefits is required in each fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

d. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are

Semiannual Report | 161

Franklin Tax-Free Trust

Notes to Financial Statements (unaudited) (continued)

1.	O RGANIZATION AND S IGNIFICANT A CCOUNTING P OLICIES (continued)
d.	Security Transactions, Investment Income, Expenses and Distributions (continued)

included in interest income. Dividends from net investment income are normally declared daily; these dividends may be reinvested or paid monthly to shareholders. Distributions from realized capital gains and other distributions, if any, are recorded on the ex-dividend date. Distributions to shareholders are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

e. Insurance

The scheduled payments of interest and principal for each insured municipal security in the Trust are insured by either a new issue insurance policy or a secondary insurance policy. Some municipal securities in the Funds are secured by collateral guaranteed by an agency of the U.S. government. Depending on the type of coverage, premiums for insurance are either added to the cost basis of the security or paid by a third party.

Insurance companies typically insure municipal bonds that tend to be of very high quality, with the majority of underlying municipal bonds rated A or better. However, an event involving an insurer could have an adverse effect on the value of the securities insured by that insurance company. There is no guarantee the insurer will be able to fulfill its obligations under the terms of the policy.

f. Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

162 | Semiannual Report

Franklin Tax-Free Trust

Notes to Financial Statements (unaudited) (continued)

1.	O RGANIZATION AND S IGNIFICANT A CCOUNTING P OLICIES (continued)
g.	Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. S HARES OF B ENEFICIAL I NTEREST

At August 31, 2012, there were an unlimited number of shares authorized (without par value).

Transactions in the Funds’ shares were as follows:

Semiannual Report | 163

164 | Semiannual Report

Semiannual Report | 165

166 | Semiannual Report

Semiannual Report | 167

Franklin Tax-Free Trust

Notes to Financial Statements (unaudited) (continued)

3. T RANSACTIONS WITH A FFILIATES

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:

b. Administrative Fees

Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds.

c. Distribution Fees

The Board has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds’ Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of the Funds’ shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods.

In addition, under the funds’ Class B and C compensation distribution plans, the funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund’s shares up to the maximum annual plan rate for each class.

168 | Semiannual Report

Semiannual Report | 169

Semiannual Report | 171

Franklin Tax-Free Trust

Notes to Financial Statements (unaudited) (continued)

4. I NCOME T AXES (continued)

At August 31, 2012, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of bond discounts and wash sales.

5. I NVESTMENT T RANSACTIONS

Purchases and sales of investments (excluding short term securities) for the period ended August 31, 2012, were as follows:

6. C ONCENTRATION OF R ISK

Each of the Funds invests a large percentage of its total assets in obligations of issuers within its respective state, U.S. territories, and the District of Columbia. Such concentration may subject the Funds to risks associated with industrial or regional matters, and economic, political or legal developments occurring within those states, U.S. territories and the District of Columbia. In addition, investments in these securities are sensitive to interest rate changes and credit risk of the issuer and may subject the funds to increased market volatility. The market for these investments may be limited, which may make them difficult to buy or sell.

7. C REDIT F ACILITY

The Funds, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matures on January 18, 2013. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.

Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the period ended August 31, 2012, the Funds did not use the Global Credit Facility.

Semiannual Report | 173

Franklin Tax-Free Trust

Notes to Financial Statements (unaudited) (continued)

8. F AIR V ALUE M EASUREMENTS

The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ financial instruments and are summarized in the following fair value hierarchy:

Level 1 – quoted prices in active markets for identical financial instruments
Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of financial instruments)

The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.

For movements between the levels within the fair value hierarchy, the Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

At August 31, 2012, all of the Funds’ investments in financial instruments carried at fair value were valued using Level 2 inputs.

9. S UBSEQUENT E VENTS

The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.

174 | Semiannual Report

Semiannual Report | 175

Franklin Tax-Free Trust

Shareholder Information

Proxy Voting Policies and Procedures

The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.

Quarterly Statement of Investments

The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.

176 | Semiannual Report

Item 2. Code of Ethics.

(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.

(c)	N/A
(d)	N/A
(f)	Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.

Item 3. Audit Committee Financial Expert.

(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.

(2) The audit committee financial expert is John B. Wilson, and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases.

Item 4. Principal Account Fees and Services.

Item 5. Audit Committee of Listed Registrants.

Item 6. Schedule of Investments.

N-A

N/A

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A

Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.

Item 11. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures . The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls . There have been no significant changes in the Registrant’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.

Item 12. Exhibits.

(a)(1) Code of Ethics

(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FRANKLIN TAX-FREE TRUST

By /s/LAURA F. FERGERSON
Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date October 26, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By /s/LAURA F. FERGERSON
Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date October 26, 2012

By /s/GASTON GARDEY
Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date October 26, 2012

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