FRANKLIN TAX FREE TRUST, 497, 1996-01-11

FRANKLIN TAX FREE TRUST
497, 1996-01-11

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FRANKLIN
TAX-FREE TRUST

PROSPECTUS May 1, 1995
as amended January 3, 1996

777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
================================================================================

Franklin Tax-Free Trust (the "Trust") is an open-end management investment
company consisting of 27 separate series. As of May 1, 1995, most of the series
offer two classes of shares to their investors. This Prospectus relates to the
ten series listed below, nine of which, as noted, are currently offering two
classes of shares:

CLASS I

Franklin Alabama Tax-Free Income Fund, Class I
Franklin Florida Tax-Free Income Fund, Class I
Franklin Georgia Tax-Free Income Fund, Class I
Franklin Kentucky Tax-Free Income Fund, Class I
Franklin Louisiana Tax-Free Income Fund, Class I
Franklin Maryland Tax-Free Income Fund, Class I
Franklin Missouri Tax-Free Income Fund, Class I
Franklin North Carolina Tax-Free Income Fund, Class I
Franklin Texas Tax-Free Income Fund, Class I
Franklin Virginia Tax-Free Income Fund, Class I

CLASS II

Franklin Alabama Tax-Free Income Fund, Class II
Franklin Florida Tax-Free Income Fund, Class II
Franklin Georgia Tax-Free Income Fund, Class II
Franklin Louisiana Tax-Free Income Fund, Class II
Franklin Maryland Tax-Free Income Fund, Class II
Franklin Missouri Tax-Free Income Fund, Class II
Franklin North Carolina Tax-Free Income Fund, Class II
Franklin Texas Tax-Free Income Fund, Class II
Franklin Virginia Tax-Free Income Fund, Class II

Each Fund may, separately or collectively, be referred to as a "Fund," the
"Funds," or individually by the state included in its name. Each Fund may also
be referred to as Class I or Class II shares, as required within the context of
the discussion. The Kentucky Fund will be included in all discussions pertaining
to Class I in this Prospectus. Investors can choose between Class I shares, if
available for the series, which generally bear a higher front-end sales charge
and lower ongoing Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and Class II
shares, which generally have a lower front-end sales charge and higher ongoing
Rule 12b-1 fees. Investors should consider the differences between the two
classes, including the impact of sales charges and distribution fees, in
choosing the more suitable class given their anticipated investment amount and
time horizon. See "How to Buy Shares of a Fund - Differences Between Class I and
Class II."

Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. Each Fund also seeks to provide a maximum
level of income which is exempt from the personal income taxes, if any, for
resident shareholders of the named state. The states of Florida and Texas
currently impose no state personal income taxes.

Each Fund invests primarily in municipal securities issued by its respective
state and its political subdivisions, agencies and instrumentalities.

This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and each of the ten Funds that a prospective
investor should know before investing. After reading the Prospectus, it should
be retained for future reference; it contains information about the purchase and
sale of shares and other items which a prospective investor will find useful to
have.

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.

A Statement of Additional Information ("SAI") concerning the Trust and the Funds
described in this Prospectus, dated May 1, 1995, as may be amended from time to
time, provides a further discussion of certain areas in this Prospectus and
other matters which may be of interest to some investors. It has been filed with
the Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. A copy is available without charge from the Trust or the Trust's
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address or telephone number shown above.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.

Contents Page

Expense Table............................................ 3
Financial Highlights..................................... 5
About the Trust.......................................... 8
Investment Objective and
Policies of Each Fund................................... 8
Management of the Funds.................................. 14
Distributions to Shareholders............................ 17
Taxation of the Funds
and Their Shareholders.................................. 18
How to Buy Shares of a Fund.............................. 20
Other Programs and Privileges
Available to a Fund's Shareholders...................... 27
Exchange Privilege....................................... 29
How to Sell Shares of a Fund............................. 32

Telephone Transactions................................... 35
Valuation of a Fund's Shares............................. 36
How to Get Information
Regarding an Investment in a Fund....................... 37
Performance.............................................. 38
General Information...................................... 39
Account Registrations.................................... 41
Important Notice Regarding
Taxpayer IRS Certifications............................. 42
Portfolio Operations..................................... 42
Appendix A
Description of State Tax Treatment...................... 43
Appendix B
Special Factors Affecting Each Fund..................... 48

Expense Table
- --------------------------------------------------------------------------------

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in a Fund. The figures for both classes of shares
are based on the aggregate operating expenses of the Class I shares (before fee
waivers and expense reductions) for the fiscal year ended February 28, 1995.
<TABLE>
<CAPTION>

North
Alabama Florida Georgia Kentucky Louisiana Maryland Missouri Carolina Texas Virginia
Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund
Class I Class I Class I Class I Class I Class I Class I Class I Class I Class I
----- ----- ----- ------ ------ ------ ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..... 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
*Deferred Sales Charge................... NONE NONE NONE NONE NONE NONE NONE NONE NONE NONE
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees.......................... 0.57% 0.47% 0.61% 0.63%++ 0.61% 0.58% 0.56% 0.56% 0.59% 0.55%
**12b-1 Fees............................. 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07%
Other Expenses:
Shareholder Servicing Costs............ 0.02% 0.02% 0.02% 0.02% 0.02% 0.03% 0.02% 0.02% 0.02% 0.02%
Reports to Shareholders................ 0.03% 0.02% 0.03% 0.03% 0.02% 0.03% 0.03% 0.02% 0.02% 0.03%
Other.................................. 0.04% 0.02% 0.04% 0.06% 0.04% 0.03% 0.03% 0.04% 0.04% 0.03%
----- ----- ----- ------ ------ ------ ----- ----- ---- -----
Total other expenses..................... 0.09% 0.06% 0.09% 0.11% 0.08% 0.09% 0.08% 0.08% 0.08% 0.08%
----- ----- ----- ------ ------ ------ ----- ----- ---- -----
**Total Fund Operating Expenses.......... 0.73% 0.60% 0.77% 0.81%++ 0.76% 0.74% 0.71% 0.71% 0.74% 0.70%
----- ----- ----- ------ ------ ------ ----- ----- ---- -----
</TABLE>

*Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1%, which has not been
reflected in the Example below, is generally imposed on certain redemptions
within a "contingency period" of 12 months of the calendar month of such
investments. See "How to Sell Shares of a Fund - Contingent Deferred Sales
Charge."

**Rule 12b-1 fees for Class I shares reflect an annualized rate. Actual Rule
12b-1 fees incurred by Class I shares of each Fund for the ten-month period
ended February 28, 1995, were 0.06%. Rule 12b-1 fees for Class II shares reflect
the maximum amount allowed pursuant to such class' plan of distribution. Class
I's plan was effective May 1, 1994, and Class II's plan was effective May 1,
1995. Consistent with National Association of Securities Dealers, Inc.'s rules,
it is possible that the combination of front-end sales charges and Rule 12b-1
fees could cause long-term shareholders to pay more than the economic equivalent
of the maximum front-end sales charges permitted under those same rules.

++Represents the amounts that would have been payable to the investment manager,
absent a fee reduction by the investment manager. The investment manager,
however, has voluntarily agreed to limit its management fees and assume
responsibility for making payments to offset certain operating expenses
otherwise payable by the Franklin Kentucky Tax-Free Income Fund. With this
reduction, management fees and total operating expenses represented 0.12% and
0.29%, respectively. This arrangement may be terminated at any time.

North
Alabama Florida Georgia Louisiana Maryland Missouri Carolina Texas Virginia
Fund Fund Fund Fund Fund Fund Fund Fund Fund
Class II Class II Class II Class II Class II Class II Class II Class II Class II
----- ----- ----- ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
+Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
++Deferred Sales Charge............................ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees.................................... 0.57% 0.47% 0.61% 0.61% 0.58% 0.56% 0.56% 0.59% 0.55%
**Maximum 12b-1 Fees............................... 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses:
Shareholder Servicing Costs...................... 0.02% 0.02% 0.02% 0.02% 0.03% 0.02% 0.02% 0.02% 0.02%
Reports to Shareholders.......................... 0.03% 0.02% 0.03% 0.02% 0.03% 0.03% 0.02% 0.02% 0.03%
Other............................................ 0.04% 0.02% 0.04% 0.04% 0.03% 0.03% 0.04% 0.04% 0.03%
----- ----- ----- ------ ------ ----- ----- ----- -----
+++Total Other Expenses............................ 0.09% 0.06% 0.09% 0.08% 0.09% 0.08% 0.08% 0.08% 0.08%
----- ----- ----- ------ ------ ----- ----- ----- -----
**Total Fund Operating Expenses.................... 1.31% 1.18% 1.35% 1.34% 1.32% 1.29% 1.29% 1.32% 1.28%
----- ----- ----- ------ ------ ----- ----- ----- -----
</TABLE>

+Although Class II shares have a lower front-end sales charge than Class I
shares, over time the higher Rule 12b-1 fees for Class II shares may cause
shareholders to pay more for Class II shares than for Class I shares. Given the
maximum front-end sales charge and the rate of Rule 12b-1 fees of each class, it
is estimated that this will take less than six years for shareholders who
maintain total shares valued at less than $100,000 in the Franklin Templeton
Funds. Shareholders with larger investments in the Franklin Templeton Funds will
reach the crossover point more quickly.

++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month following such investments are subject to a 1% contingent
deferred sales charge. See "How to Sell Shares of a Fund - Contingent Deferred
Sales Charge."

+++These figures are estimates based on actual expenses incurred by Class I
shares for the fiscal year ended February 28, 1995.

Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in a Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.

Example

As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in a Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
<TABLE>
<CAPTION>

Name of Fund One Year Three Years Five Years Ten Years
------------------------------------------------ ------ ------- ------ ------
<S> <C> <C> <C> <C>
Alabama Fund, Class I................................................ $50 $65 $81 $129
Alabama Fund, Class II............................................... $33 $51 $81 $166
Florida Fund, Class I................................................ $48 $61 $75 $114
Florida Fund, Class II............................................... $32 $47 $74 $152
Georgia Fund, Class I................................................ $50 $66 $83 $134
Georgia Fund, Class II............................................... $33 $52 $83 $171

Name of Fund One Year Three Years Five Years Ten Years
------------------------------------------------ ------ ------- ------ ------
Kentucky Fund, Class I............................................... $50 $67 $86 $138
Louisiana Fund, Class I.............................................. $50 $66 $83 $133
Louisiana Fund, Class II............................................. $33 $52 $83 $170
Maryland Fund, Class I............................................... $50 $65 $82 $130
Maryland Fund, Class II.............................................. $33 $52 $82 $168
Missouri Fund, Class I............................................... $49 $64 $80 $127
Missouri Fund, Class II.............................................. $33 $51 $80 $164
North Carolina Fund, Class I......................................... $49 $64 $80 $127
North Carolina Fund, Class II........................................ $33 $50 $80 $164
Texas Fund, Class I.................................................. $50 $65 $82 $130
Texas Fund, Class II................................................. $33 $52 $82 $168
Virgina Fund, Class I................................................ $49 $64 $80 $126
Virginia Fund, Class II.............................................. $33 $50 $79 $163
</TABLE>

THE EXAMPLES ARE BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES (BEFORE FEE
WAIVERS OR EXPENSE REDUCTIONS, IF ANY) SHOWN ABOVE AND SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN
THOSE SHOWN. The operating expenses are borne by each Fund and only indirectly
by shareholders as a result of their investment in a Fund. In addition, federal
securities regulations require the example to assume an annual return of 5%, but
a Fund's actual return may be more or less than 5%.

Financial Highlights
- --------------------------------------------------------------------------------

Set forth below is a table containing the financial highlights for a Class I
share of each Fund from its effective date of registration, as indicated below,
through the fiscal year ended February 28, 1995. The information for each of the
five fiscal years in the period ended February 28, 1995 has been audited by
Coopers & Lybrand, L.L.P., independent auditors, whose audit report appears in
the financial statements in the Trust's Annual Report to Shareholders dated
February 28, 1995. The remaining figures, which are also audited, are not
covered by the auditors' current report. Information regarding Class II shares
of each Fund will be included in this table after such shares have been offered
to the public for a reasonable period of time. See also "General Information -
Reports to Shareholders."
<TABLE>
<CAPTION>

Per Share Operating Performance Ratios/Supplemental Data

Distri- Distri-
Net Asset Net Net Realized butions butions Net Asset Net Assets Ratio of Ratio of
Period Value Invest-& Unrealized Total From From Net From Total Value at End Expenses Net Income Portfolio
Ended Beginning ment Gains(Losses)Investment InvestmentCapital Distri- at End Total of Period to Average to Average Turnover
Feb.28of Period Income on SecuritiesOperations Income Gains butions of Period Return+ (in 000's)Net Assets**Net Assets Rate
- ------------------------------------------------------------------------------------------------------------------------------------

Franklin Alabama Tax-Free Income Fund:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19881 $10.00 $0.44 $0.210 $0.650 $(0.110) $ -- $(0.110) $10.54 11.26%* $ 2,472 --% 5.64%* 54.25%
1989 10.54 0.79 0.005 0.795 (0.723) (0.022) (0.745) 10.59 7.59 6,079 -- 7.33 12.70
1990 10.59 0.75 0.168 0.918 (0.768) -- (0.768) 10.74 8.61 21,685 0.42 6.69 4.97
1991 10.74 0.71 0.068 0.778 (0.768) -- (0.768) 10.75 7.27 50,182 0.70 6.45 28.36
1992 10.75 0.66 0.346 1.006 (0.756) -- (0.756) 11.00 9.51 96,254 0.71 6.21 1.21
1993 11.00 0.68 0.714 1.394 (0.684) -- (0.684) 11.71 12.84 144,480 0.68 6.04 11.27
1994 11.71 0.66 0.094 0.754 (0.664) -- (0.664) 11.80 6.35 178,414 0.64 5.62 14.87
1995 11.80 0.66 (0.500) 0.160 (0.650) -- (0.650) 11.31 1.54 170,051 0.72 5.88 19.85

Per Share Operating Performance Ratios/Supplemental Data

Franklin Florida Tax-Free Income Fund:
19881 $10.00 $0.46 $0.333 $0.793 $(0.183) $ -- $(0.183) $10.61 14.36%*$ 2,411 -- % 6.22%* 40.02%
1989 10.61 0.81 (0.041) 0.769 (0.781) (0.008) (0.789) 10.59 7.28 33,752 0.24 6.42 8.64
1990 10.59 0.73 0.226 0.956 (0.816) -- (0.816) 10.73 8.98 302,488 0.66 6.40 8.50
1991 10.73 0.73 0.091 0.821 (0.801) -- (0.801) 10.75 7.69 605,720 0.57 6.76 10.80
1992 10.75 0.71 0.348 1.058 (0.768) -- (0.768) 11.04 10.02 886,110 0.54 6.60 16.69
1993 11.04 0.71 0.647 1.357 (0.717) -- (0.717) 11.68 12.45 1,164,827 0.54 6.30 11.72
1994 11.68 0.70 0.086 0.786 (0.696) -- (0.696) 11.77 6.65 1,361,583 0.52 5.90 11.99
1995 11.77 0.69 (0.436) 0.254 (0.674) -- (0.674) 11.35 2.36 1,265,018 0.59 6.16 14.34
Franklin Georgia Tax-Free Income Fund:
19881 10.00 0.44 0.230 0.670 (0.120) -- (0.120) 10.55 11.46* 1,780 -- 5.98* 22.93
1989 10.55 0.80 (0.034) 0.766 (0.720) (0.006) (0.726) 10.59 7.32 5,640 -- 7.31 12.23
1990 10.59 0.79 0.264 1.054 (0.744) -- (0.744) 10.90 9.94 13,877 0.09 7.07 14.43
1991 10.90 0.72 0.098 0.818 (0.778) -- (0.778) 10.94 7.53 32,011 0.56 6.53 1.20
1992 10.94 0.65 0.349 0.999 (0.759) -- (0.759) 11.18 9.32 68,546 0.72 6.11 6.18
1993 11.18 0.68 0.658 1.338 (0.668) -- (0.668) 11.85 12.09 91,017 0.71 5.91 17.10
1994 11.85 0.66 0.154 0.814 (0.664) -- (0.664) 12.00 6.77 120,882 0.69 5.48 16.75
1995 12.00 0.66 (0.458) 0.202 (0.662) -- (.662) 11.54 1.87 116,771 0.76 5.76 36.17
FRANKLIN KENTUCKY TAX-FREE INCOME FUND:
19923 10.00 0.15 0.164 0.314 (0.014) -- (0.014) 10.30 8.37* 3,032 -- 3.52* 53.90
1993 10.30 0.57 0.832 1.402 (0.652) -- (0.652) 11.05 13.81 11,678 -- 6.11 18.41
1994 11.05 0.63 0.164 0.794 (0.664) -- (0.664) 11.18 7.07 28,057 -- 5.73 13.22
1995 11.18 0.61 (0.625) (0.015) (0.625) -- (0.625) 10.54 0.11 32,831 0.29 5.94 32.92
Franklin Louisiana Tax-Free Income Fund:
19881 10.00 0.46 0.136 0.596 (0.186) -- (0.186) 10.41 10.22* 1,247 -- 6.21* 18.12
1989 10.41 0.78 (0.028) 0.752 (0.772) -- (0.772) 10.39 7.27 4,257 -- 7.33 5.91
1990 10.39 0.78 0.202 0.982 (0.792) -- (0.792) 10.58 9.41 17,696 0.04 7.10 16.65
1991 10.58 0.71 0.182 0.892 (0.792) -- (0.792) 10.68 8.50 35,862 0.56 6.60 0.76
1992 10.68 0.67 0.326 0.996 (0.776) -- (0.776) 10.90 9.49 72,923 0.70 6.33 10.51
1993 10.90 0.69 0.668 1.358 (0.688) -- (0.688) 11.57 12.61 95,368 0.70 6.18 23.37
1994 11.57 0.67 (0.005) 0.665 (0.675) -- (0.675) 11.56 5.63 115,971 0.68 5.70 17.63
1995 11.56 0.66 (0.549) 0.111 (0.641) -- (0.641) 11.03 1.14 104,980 0.75 5.98 32.28
Franklin Maryland Tax-Free Income Fund:
19892 10.00 0.18 (0.054) 0.126 (0.056) -- (0.056) 10.07 2.98* 3,313 -- 4.26* 11.78
1990 10.07 0.72 0.192 0.912 (0.672) -- (0.672) 10.31 9.01 14,004 0.07 6.84 6.03
1991 10.31 0.68 0.096 0.776 (0.716) -- (0.716) 10.37 7.57 33,421 0.54 6.50 12.14
1992 10.37 0.64 0.300 0.940 (0.710) -- (0.710) 10.60 9.21 71,538 0.71 6.15 16.65
1993 10.60 0.65 0.672 1.322 (0.652) -- (0.652) 11.27 12.64 115,873 0.71 6.00 14.73
1994 11.27 0.64 0.092 0.732 (0.642) -- (0.642) 11.36 6.40 156,683 0.66 5.58 18.38
1995 11.36 0.63 (0.453) 0.177 (0.617) -- (0.617) 10.92 1.78 153,145 0.73 5.86 20.30
Franklin Missouri Tax-Free Income Fund:
19881 10.00 0.46 0.058 0.518 (0.168) -- (0.168) 10.35 8.26* 2,060 -- 6.27* 28.32
1989 10.35 0.78 0.017 0.797 (0.707) -- (0.707) 10.44 7.74 7,996 -- 7.30 7.15
1990 10.44 0.74 0.198 0.938 (0.738) -- (0.738) 10.64 8.94 28,479 0.40 6.66 8.69
1991 10.64 0.69 0.154 0.844 (0.744) -- (0.744) 10.74 7.96 55,560 0.72 6.42 40.08
1992 10.74 0.65 0.409 1.059 (0.729) -- (0.729) 11.07 10.04 110,940 0.71 6.21 16.40
1993 11.07 0.68 0.676 1.356 (0.676) -- (0.676) 11.75 12.40 164,122 0.67 6.03 10.28
1994 11.75 0.66 0.206 0.866 (0.676) -- (0.676) 11.94 7.29 228,149 0.64 5.55 11.02
1995 11.94 0.65 (0.501) 0.149 (0.649) -- (0.649) 11.44 1.44 227,442 0.70 5.75 19.84

Per Share Operating Performance Ratios/Supplemental Data

Franklin North Carolina Tax-Free Income Fund:
19881 $10.00 $0.43 $0.206 $0.636 $(0.176) $-- $(0.176) $10.46 2.28%* $ 1,650 --% 5.89%* 10.34%
1989 10.46 0.77 0.056 0.826 (0.715) (0.021) (0.736) 10.55 7.98 10,346 -- 7.09 12.35
1990 10.55 0.74 0.221 0.961 (0.720) (0.001) (0.721) 10.79 9.06 24,746 0.50 6.68 11.80
1991 10.79 0.70 0.124 0.824 (0.742) (0.012) (0.754) 10.86 7.66 50,328 0.74 6.37 7.99
1992 10.86 0.64 0.352 0.992 (0.732) -- (0.732) 11.12 9.28 106,960 0.71 6.03 3.16
1993 11.12 0.67 0.754 1.424 (0.664) -- (0.664) 11.88 12.97 156,517 0.67 5.86 8.48
1994 11.88 0.65 0.054 0.704 (0.664) -- (0.664) 11.92 5.81 215,540 0.63 5.44 3.86
1995 11.92 0.65 (0.550) 0.10 (0.650) -- (0.650) 11.37 1.06 216,263 0.70 5.75 25.05
Franklin Texas Tax-Free Income Fund:
19881 10.00 0.50 0.255 0.755 (0.195) -- (0.195) 10.56 12.72* 1,141 -- 6.61* 41.50
1989 10.56 0.78 0.044 0.824 (0.794) -- (0.794) 10.59 7.88 2,356 -- 7.65 6.95
1990 10.59 0.84 0.114 0.954 (0.804) -- (0.804) 10.74 8.95 6,094 -- 7.26 3.53
1991 10.74 0.73 0.104 0.834 (0.804) -- (0.804) 10.77 7.81 29,036 0.40 6.46 0.55
1992 10.77 0.67 0.370 1.040 (0.780) -- (0.780) 11.03 9.84 123,722 0.70 6.14 6.44
1993 11.03 0.69 0.661 1.351 (0.691) -- (0.691) 11.69 12.41 139,389 0.66 6.15 12.33
1994 11.69 0.69 0.032 0.722 (0.692) -- (0.692) 11.72 6.09 148,684 0.65 5.85 20.18
1995 11.72 0.68 (0.487) 0.193 (0.663) -- (.663) 11.25 1.80 130,684 0.73 6.05 6.36
FRANKLIN VIRGINIA TAX-FREE INCOME FUND:
19881 10.00 0.44 0.199 0.639 (0.189) -- (0.189) 10.45 11.90* 2,621 -- 5.48* 65.51
1989 10.45 0.77 (0.034) 0.736 (0.756) -- (0.756) 10.43 7.09 13,885 0.16 6.89 3.92
1990 10.43 0.73 0.226 0.956 (0.756) -- (0.756) 10.63 9.12 38,572 0.60 6.55 1.06
1991 10.63 0.69 0.136 0.826 (0.756) -- (0.756) 10.70 7.82 82,662 0.72 6.38 2.56
1992 10.70 0.66 0.362 1.022 (0.742) -- (0.742) 10.98 9.71 152,615 0.68 6.17 4.33
1993 10.98 0.67 0.704 1.374 (0.664) -- (0.664) 11.69 12.67 211,171 0.65 5.98 5.74
1994 11.69 0.67 0.136 0.806 (0.676) -- (0.676) 11.82 6.80 260,913 0.62 5.65 6.86
1995 11.82 0.66 (0.499) 0.161 (0.651) -- (0.651) 11.33 1.56 255,965 0.69 5.86 21.73

</TABLE>

*Annualized.

1For the period September 1, 1987 (effective date of registration) to February
29, 1988.

2For the period October 3, 1988 (effective date of registration) to February 28,
1989.

3For the period September 10, 1991 (effective date of registration) to February
29, 1992.

+Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the maximum offering price and of capital gains, if
any, at net asset value. Effective May 1, 1994, with the implementation of a
Rule 12b-1 distribution plan, the Funds' sales charges on reinvested dividends
were eliminated.

**During the periods indicated below, Franklin Advisers, Inc., the investment
manager, reduced its management fees and reimbursed other expenses incurred by
the Funds. Had such action not been taken, the ratio of operating expenses to
average net assets would have been as follows:

Ratio of
expenses
to average
net assets
- -------------------------------------------------------------------------------

Franklin Alabama Tax-Free Income Fund:

19881............................... 0.86%*
1989................................ 0.74
1990................................ 0.72
1991................................ 0.72

Franklin Florida Tax-Free Income Fund:

19881............................... 0.88*
1989................................ 0.74
1990................................ 0.66

Franklin Georgia Tax-Free Income Fund:

19881............................... 0.87*
1989................................ 0.76
1990................................ 0.74
1991................................ 0.74

Ratio of
expenses
to average
net assets

Franklin Kentucky Tax-Free Income Fund:

19923............................... 0.82%*
1993................................ 0.81
1994................................ 0.71
1995................................ 0.81

Franklin Louisiana Tax-Free Income Fund:

19881............................... 0.88*
1989................................ 0.73
1990................................ 0.70
1991................................ 0.72

Franklin Maryland Tax-Free Income Fund:

19892............................... 0.65*
1990................................ 0.73
1991................................ 0.73

Franklin Missouri Tax-Free Income Fund:

19881............................... 0.87*
1989................................ 0.77
1990................................ 0.72

Ratio of
expenses
to average
net assets

Franklin North Carolina Tax-Free Income Fund:

19881............................... 0.87%*
1989................................ 0.74
1990................................ 0.71

Franklin Texas Tax-Free Income Fund:

19881............................... 0.89*
1989................................ 0.76
1990................................ 0.71
1991................................ 0.75

Franklin Virginia Tax-Free Income Fund:

19881............................... 0.87*
1989................................ 0.75
1990................................ 0.72

About the Trust

The Trust is an open-end management investment company, or mutual fund,
organized as a Massachusetts business trust in September 1984 and registered
with the SEC under the Investment Company Act of 1940 (the "1940 Act"). The
Trust currently consists of 27 separate series, most of which offer two classes
of shares, as listed under the section "General Information." Each Fund is a
separate series of the Trust's shares and maintains a totally separate
investment portfolio. This Prospectus relates only to the ten series shown on
the cover, of which only the Maryland Fund is non-diversified.

Shares of each Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see
"Valuation of a Fund's Shares"), plus a variable sales charge not exceeding
4.25% of the offering price depending upon the amount invested. The current
public offering price of the Class II shares is equal to the net asset value,
plus a sales charge of 1.0% of the amount invested. (See "How to Buy Shares of a
Fund.")

Investment Objective
and Policies of Each Fund
- --------------------------------------------------------------------------------

Each Fund seeks to maximize income exempt from federal income taxes and from the
personal income taxes, if any, for resident shareholders of the named state to
the extent consistent with prudent investing and the preservation of
shareholders' capital. Each Fund's objective is a fundamental policy and may not
be changed without shareholder approval. There is, of course, no assurance that
each Fund's objective will be achieved.

Each Fund will invest primarily in municipal securities of its respective state
and its municipalities, other political subdivisions and public authorities, the
interest on which is exempt from federal income taxes and the personal income
taxes, if any, of its respective state.

Each Fund will attempt to invest 100% and, as a matter of fundamental policy,
will invest at least 80% of the value of its net assets in securities the
interest on which is exempt from federal income taxes, including the individual
alternative minimum tax, and from the personal income taxes, if any, of its
respective state. Thus it is possible, although not anticipated, that up to 20%
of a Fund's net assets could be in municipal securities from another state
and/or in taxable obligations, including municipal obligations such as "private
activity bonds" the interest on which may be subject to the alternative minimum
tax. To the extent that a state requires that a Fund consist of a specified
amount of obligations of such state or of the United States government, or its
agencies, instrumentalities, commissions, possessions or territories which are
exempt from taxation under the laws of such state in order for any portion of
the distributions from such Fund to be exempt from income taxation, a Fund will
attempt to invest at least the minimum of such amount in such securities. See
"Taxation of the Funds and Their Shareholders" for additional information.

Each Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB),
or in securities which are not rated, provided that, in the opinion of the
Funds' investment manager, such securities are comparable in quality to those
within the four highest ratings. These are considered to be "investment grade"
securities, although bonds rated in the fourth highest ratings level (Baa by
Moody's) are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and to
have some speculative characteristics. A description of the ratings is contained
in Appendix A to the SAI.

The investment manager considers the terms of an offering and various other
factors in order to determine whether securities are consistent with a Fund's
investment objective and policies and thereafter to determine the issuer's
comparative credit rating. In making such determinations, the investment manager
typically (i) interviews representatives of the issuer at its offices, tours and
inspects the physical facilities of the issuer in an effort to evaluate the
issuer and its operations, (ii) performs analysis of the issuer's financial and
credit position, including comparisons of all appropriate ratios, and (iii)
compares other similar securities offerings to the issuer's proposed offering.

For temporary defensive purposes only, when the investment manager believes that
market conditions, such as rising interest rates or other adverse factors, would
cause serious erosion of portfolio value, (i) each Fund may invest more than 20%
of its assets (which could be up to 100%) in fixed- income obligations, the
interest on which is subject to regular federal income tax, and (ii) a Fund may
invest more than 20% of the value of its net assets (which could be up to 100%)
in instruments the interest on which is exempt from federal income taxes but not
that state's personal income taxes. Such temporary investments will be limited
to obligations issued or guaranteed by the full faith and credit of the U.S.
government or in the highest quality commercial paper rated A-1 by S&P or P-1 by
Moody's. To the extent that a Fund is restricted in its ability to take
advantage of defensive steps when necessary, such Fund's portfolio and the value
of its shares may be subject to greater risk than those of the other Funds which
retain this flexibility.

A Fund may (i) borrow from banks for temporary or emergency purposes up to 5% of
its total assets and pledge up to 5% of its total assets in connection therewith
and (ii) lend up to 10% of its portfolio securities to qualified securities
dealers, although each Fund currently intends to limit its lending of securities
to no more than 5% of its total assets. A complete description of each Fund's
investment restrictions is included under "Investment Restrictions" in the SAI.

As a condition of doing business in the State of Texas, the Texas Fund will
limit its investments in securities that are not readily marketable to 15% of
average net assets at the time of purchase and lend portfolio securities only if
the securities loaned are "marked to market" daily.

It is the policy of each Fund that illiquid securities (including securities
with legal or contractual restrictions on resale, or other instruments which are
not readily marketable or have no readily ascertainable market value) may not
constitute, at the time of the purchase, more than 10% of the value of the total
net assets of a Fund.

Municipal Securities

The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of states, territories and possessions of the U.S. and
the District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security generally is
rendered to the issuer by the issuer's counsel at the time of issuance of the
security.

Municipal securities are used to raise money for various public purposes such as
constructing public facilities and making loans to public institutions. Certain
types of municipal bonds are issued to provide funding for privately operated
facilities. Further information on the maturity and funding classifications of
municipal securities is included in the SAI.

The Trust has no restrictions on the maturities of municipal securities in which
the Funds may invest. Each Fund will seek to invest in municipal securities of
such maturities that, in the judgment of a Fund and its investment manager, will
provide a high level of current income consistent with prudent investment. The
investment manager will also consider current market conditions.

It is possible that any Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In such circumstances, economic, business, political, or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or declining
markets or needs for the projects) might also affect other bonds in the same
segment, thereby potentially increasing market risk.

Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation, and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to make timely payment of principal and
interest on its obligations.

The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase liability under, the federal and state
alternative minimum taxes, depending on the shareholder's tax situation. In
addition, all distributions derived from interest exempt from regular federal
income tax may subject a corporate shareholder to, or increase liability under,
the federal alternative minimum tax, because such distributions are included in
the corporation's "adjusted current earnings." In states with a corporate
franchise tax, distributions of a Fund may also be fully taxable to a corporate
shareholder under the state franchise tax system.

Consistent with each Fund's investment objective, a Fund may acquire private
activity bonds if, in the investment manager's opinion, such bonds represent the
most attractive investment opportunity then available to a Fund. For the fiscal
year ended February 28, 1995, the portfolios of the Funds derived the following
percentages of their income from bonds, the interest on which constitutes a
preference item subject to the federal alternative minimum tax for certain
investors:

Fund Percentage

- ----------------------------------- -------

Alabama Fund...................................... 5.03%
Florida Fund...................................... 12.78%
Georgia Fund...................................... 9.95%
Kentucky Fund..................................... 12.42%
Louisiana Fund.................................... 12.24%
Maryland Fund..................................... 10.55%
Missouri Fund..................................... 6.38%
North Carolina Fund............................... 7.54%
Texas Fund........................................ 15.92%
Virginia Fund..................................... 6.68%

Each Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at rates that are not fixed, but that vary with
changes in prevailing market rates on predesignated dates. The Funds may also
invest in variable or floating rate demand notes ("VRDNs"), which carry a demand
feature that permits a Fund to tender the obligation back to the issuer or a
third party at par value plus accrued interest prior to maturity, according to
the terms of the obligations, which amount may be more or less than the amount a
Fund paid for such obligation. Frequently, VRDNs are secured by letters of
credit or other credit support arrangements. Because of the demand feature, the
prices of VRDNs may be higher and the yields lower than they otherwise would be
for obligations without a demand feature. A Fund will limit its purchase of
municipal securities that are floating rate and variable rate obligations to
those meeting the quality standards set forth in this Prospectus. Although it is
not a put option in the usual sense, such a demand feature is sometimes known as
a "put." Except for the Maryland Fund, with respect to 75% of the total value of
a Fund's assets, no more than 5% of such value may be in securities underlying
"puts" from the same institution, except that each such Fund may invest up to
10% of its asset value in unconditional "puts" (exercisable even in the event of
a default in the payment of principal or interest on the underlying security)
and other securities issued by the same institution.

Each Fund may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price. Although
the Funds will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, they may sell such securities
before the settlement date if it is deemed advisable. When a Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent a Fund engages in "when- issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for that Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.

Each Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call-protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for 5 to 10 years, after which time such bonds may be called away.
An issuer may generally be expected to call its bonds, or a portion of them,
during periods of declining interest rates, when borrowings may be replaced at
lower rates than those obtained in prior years. If the proceeds of a bond called
under such circumstances are reinvested, the result may be a lower overall yield
due to lower current interest rates. If the purchase price of such bonds
included a premium related to the appreciated value of the bonds, some or all of
that premium may not be recovered by bondholders, such as the Funds, depending
on the price at which such bonds were redeemed.

Each Fund may also invest in municipal lease obligations primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance state and local government needs, function much
like installment purchase agreements. For example, a COP may be created when
long-term lease revenue bonds are issued by a governmental corporation to pay
for the acquisition of property or facilities which are then leased to a
municipality. The payments made by the municipality under the lease are used to
repay interest and principal on the bonds issued to purchase the property. Once
these lease payments are completed, the municipality gains ownership of the
property for a nominal sum. This lease format is generally not subject to
constitutional limitations on the issuance of state debt, and COPs enable a
governmental issuer to increase government liabilities beyond constitutional
debt limits.

A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction contains a "nonappropriation" or "abatement"
clause. A nonappropriation clause provides that, while the municipality will use
its best efforts to make lease payments, the municipality may terminate the
lease without penalty if the municipality's appropriating body does not allocate
the necessary funds. Local administrations, being faced with increasingly tight
budgets, therefore, have more discretion to curtail payments under COPs than
they do to curtail payments on traditionally funded debt obligations. If the
government lessee does not appropriate sufficient monies to make lease payments,
the lessor or its agent is typically entitled to repossess the property. In most
cases, however, the private sector value of the property may be less than the
amount the government lessee was paying.

While the risk of nonappropriation is inherent to COP financing, the Funds
believe that this risk is mitigated by their policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P, or Fitch, or in
unrated COPs believed by the investment manager to be of comparable quality.
Criteria considered by the rating agencies and the investment manager in
assessing such risk include the issuing municipality's credit rating, the
essentiality of the leased property to the municipality and the term of the
lease compared to the useful life of the leased property. The Board of Trustees
reviews the COPs held in each Fund's portfolio to assure that they constitute
liquid investments based on various factors reviewed by the investment manager
and monitored by the trustees. Such factors include (a) the credit quality of
such securities and the extent to which they are rated or, if unrated, comply
with existing criteria and procedures followed to ensure that they are of
comparable quality to the ratings required for each Fund's investment, including
an assessment of the likelihood that the leases will not be cancelled; (b) the
size of the municipal securities market, both in general and with respect to
COPs; and (c) the extent to which the type of COPs held by each Fund trade on
the same basis and with the same degree of dealer participation as other
municipal bonds of comparable credit rating or quality. While there is no limit
as to the amount of assets which each Fund may invest in COPs, as of February
28, 1995, the following Funds held more than five percent of the total face
amount of the securities in their portfolios in COPs and other municipal leases:
(a) Kentucky, 19.0%; (b) Maryland, 5.1%; (c) Missouri, 28.0%; and (c) North
Carolina, 12.8%.

Investment Risk Considerations

While an investment in any of the Funds is not without risk, certain policies
are followed in managing the Funds which may help to reduce such risk. There are
two categories of risks to which a Fund is subject: credit risk and market risk.
Credit risk is a function of the ability of an issuer of a municipal security to
maintain timely interest payments and to pay the principal of a security upon
maturity. It is generally reflected in a security's underlying credit rating and
its stated interest rate (normally the coupon rate). A change in the credit risk
associated with a municipal security may cause a corresponding change in the
security's price. Except for the Trust's Maryland Fund, which is a
non-diversified fund under the 1940 Act, the Trust attempts to minimize the
impact of individual credit risks by diversifying each Fund's portfolio
investments.

Market risk is the risk of price fluctuation of a municipal security caused by
changes in general economic and interest rate conditions generally affecting the
market as a whole. A municipal security's maturity length also affects its
price. As with other debt instruments, the price of the debt securities in which
a Fund invests are likely to decrease in times of rising interest rates.
Conversely, when rates fall, the value of a Fund's debt investments may rise.
Price changes of debt securities held by a Fund have a direct impact on the net
asset value per share of that Fund. Since each Fund generally will invest
primarily in the securities of its respective state, there are certain specific
factors and considerations concerning each state which may affect the credit and
market risk of the municipal securities which each Fund purchases. These factors
are described in Appendix B to this Prospectus and in greater detail in the SAI.

As a fundamental policy, with respect to 75% of its net assets, each Fund,
except as stated below, will not purchase a security if, as a result of the
investment, more than 5% of its assets would be in the securities of any single
issuer (with the exception of obligations of the U.S. government). For this
purpose, each political subdivision, agency, or instrumentality and each
multi-state agency of which a state is a member, and each public authority which
issues private activity bonds on behalf of a private entity, will be regarded as
a separate issuer for determining the diversification of each Fund's portfolio.
A bond for which the payments of principal and interest are secured by an escrow
account of securities backed by the full faith and credit of the U.S. government
("defeased") as described in the SAI, in general, will not be treated as an
obligation of the original municipality for purposes of determining issuer
diversification.

The Maryland Fund is non-diversified under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of assets that may be invested at any time in the securities of any
one issuer. To the extent the Maryland Fund is not fully diversified under the
1940 Act, it may be more susceptible to adverse economic, political or
regulatory developments affecting a single issuer than would be the case if the
Maryland Fund were more broadly diversified. The Maryland Fund, however, intends
to comply with the diversification and other requirements of the Code,
applicable to "regulated investment companies" so that it will not be subject to
federal income tax on its income and distributions to shareholders will be free
from regular federal income tax to the extent they are derived from interest on
municipal securities. For this reason the Maryland Fund has adopted an
investment restriction, which may not be changed without the approval of
shareholders, prohibiting it from purchasing a security if, as a result, more
than 25% of the Maryland Fund's total assets would be invested in the securities
of a single issuer or, with respect to 50% of its total assets, more than 5% of
such assets would be invested in the securities of a single issuer.

A Fund's investment in zero coupon and delayed interest bonds may cause such
Fund to recognize income and make distributions to shareholders prior to the
receipt of cash payments. Zero-coupon securities make no periodic interest
payments but instead are sold at a deep discount from their face value. The
buyer receives a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date.

Because zero-coupon securities bear no interest, the value of such securities is
generally more volatile than other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, zeroes fall more dramatically than
bonds paying interest on a current basis when interest rates rise. When interest
rates fall, zero-coupon securities rise more rapidly in value, because the bonds
reflect a fixed rate of return.

In order to generate cash to satisfy distribution requirements, a Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.

How Shareholders Participate
in the Results of a Fund's Activities

The assets of each Fund are invested in portfolio securities. If the securities
owned by a Fund increase in value, the value of the shares of such Fund which
the shareholder owns will increase. If the securities owned by a Fund decrease
in value, the value of the shareholder's shares in such Fund will also decline.
In this way, shareholders participate in any change in the value of the
securities owned by a Fund.

In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of a Fund's shares will fluctuate with movements in the broader bond markets. In
particular, changes in interest rates will affect the value of a Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. History reflects both increases and
decreases in the prevailing rate of interest and these may reoccur unpredictably
in the future.

Management of the Funds
- --------------------------------------------------------------------------------

The Board of Trustees (the "Board") has the primary responsibility for the
overall management of the Trust and for electing the officers of the Trust who
are responsible for administering its day-to-day operations.

The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Funds and will take appropriate action to resolve such
conflicts if any should later arise.

In developing the multiclass structure, the Funds have retained the authority to
establish additional classes of shares. It is the Funds' present intention to
offer only two classes of shares, but new classes may be offered in the future,
including the addition of Class II shares to the Fund not currently offering
them.

Franklin Advisers, Inc. ("Advisers" or "Manager") serves as each Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (115 separate series) with aggregate assets of over $77 billion,
approximately $41.4 billion of which are in the municipal securities market.

Pursuant to the management agreement, the Manager supervises and implements each
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct each Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Trust are prohibited from investing in securities held by the
Funds or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.

The management fees which Class I of each Fund was obligated to pay to the
Manager, as well as the fees actually paid, during the fiscal year ended
February 28, 1995 (as a percentage of average net assets) were as follows:

Contractual Management
Management Fees Paid by
Fund Fees the Fund
- ------------------------- -------- --------
Alabama Fund....................... 0.57% 0.57%
Florida Fund....................... 0.47% 0.47%
Georgia Fund....................... 0.61% 0.61%
Kentucky Fund...................... 0.63%* 0.12%*
Louisiana Fund..................... 0.61% 0.61%
Maryland Fund...................... 0.58% 0.58%
Missouri Fund...................... 0.56% 0.56%
North Carolina Fund................ 0.56% 0.56%
Texas Fund......................... 0.59% 0.59%
Virginia Fund...................... 0.55% 0.55%

During the fiscal year ended February 28, 1995, total operating expenses borne
by Class I shares of each Fund, including fees paid to the Manager and Investor
Services, were as follows:

Total
Operating
Fund Expenses
- ----------------------------------- -------
Alabama Fund...................................... 0.72%
Florida Fund...................................... 0.59%
Georgia Fund...................................... 0.76%
Kentucky Fund..................................... 0.29%*
Louisiana Fund.................................... 0.75%
Maryland Fund..................................... 0.73%
Missouri Fund..................................... 0.70%
North Carolina Fund............................... 0.70%
Texas Fund........................................ 0.73%
Virginia Fund..................................... 0.69%

*During the fiscal year ended February 28, 1995, management fees totaling 0.63%
of the average net assets of the Class I shares of the Kentucky Fund would have
accrued to Advisers. Total operating expenses, including management fees, would
have represented 0.80% of the average net assets of such Fund. Pursuant to an
agreement by Advisers to limit its fees, Class I shares of the Kentucky Fund
paid management fees totaling 0.12% of the average net assets of such Fund and
operating expenses totaling 0.29%.

It is not anticipated that any of the Funds will incur a significant amount of
brokerage expenses because municipal securities are generally traded in
principal transactions that involve the receipt by the broker of a spread
between the bid and ask prices for the securities and not the receipt of
commissions. In the event that a Fund does participate in transactions involving
brokerage commissions, it is the Manager's responsibility to select brokers
through whom such transactions will be effected. The Manager would try to obtain
the best execution on all such transactions. If it is felt that more than one
broker would be able to provide the best execution, the Manager will consider
the furnishing of quotations and of other market services, research, statistical
and other data for the Manager and its affiliates, as well as the sale of shares
of the Trust, as factors in selecting a broker. Further information is included
under "The Trust's Policies Regarding Brokers Used on Portfolio Transactions" in
the SAI.

Shareholder accounting and many of the clerical functions for each Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.

Plans of Distribution

A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares.

The maximum amount which each Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.10% per annum of Class I's
average daily net assets payable on a quarterly basis. All expenses of
distribution in excess of 0.10% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.

Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Funds. In addition, the Class II Plan provides for
an additional payment by each Fund of up to 0.15% per annum of Class II's
average daily net assets as a servicing fee, payable quarterly. This fee will be
used to pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.

Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.50% per annum of Class
II's average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.

Both Plans cover any payments to or by the Funds, Advisers, Distributors, or
other parties on behalf of the Funds, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Funds within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Funds. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Trust's Underwriter" in the
SAI.

Distributions to Shareholders
- -------------------------------------------------------------------------------

There are two types of distributions which a Fund may make to its shareholders:

1. Income dividends. Each Fund receives income in the form of dividends and
other income derived from its investments. This income, less the expenses
incurred in the operation of such Fund, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.

2. Capital gain distributions. Each Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by a Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made twice each year. One distribution may be made in December to reflect any
net short-term and net long-term capital gains realized by such Fund as of
October 31 of such year. Any net short-term and net long-term capital gains
realized by a Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. These distributions, when made, will
generally be fully taxable to such Fund's shareholders. Each Fund may make only
one distribution derived from net short-term and net long-term capital gains in
any year or adjust the timing of its distributions for operational or other
reasons.

Distributions To Each Class of Shares

According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.

Distribution Date

Although subject to change by the Board of Trustees without prior notice to or
approval by shareholders, each Fund's current policy is to declare income
dividends daily and pay them monthly on or about the last business day of that
month. Daily allocation of net investment income will begin on the day after a
Fund receives the investor's money or settlement of a wire order trade and will
continue to accrue through the day of receipt of the redemption request or the
settlement of a wire order trade. The amount of income dividend payments by each
Fund is dependent upon the amount of net income received from such Fund's
portfolio holdings, is not guaranteed and is subject to the discretion of the
Trust's Board of Trustees. The Funds do not pay "interest" or guarantee any
fixed rate of return on an investment in their shares.

Distribution Options

Distributions from the Funds may be taken in any of these ways:

1. Purchase additional shares of a Fund - The shareholder may purchase
additional shares of the same class of the Funds (without a sales charge or
imposition of a contingent deferred sales charge) by reinvesting capital gain
distributions, or both dividend and capital gain distributions. Class II
shareholders, may also reinvest distributions in Class I shares of the Fund.
This is a convenient way to accumulate additional shares and maintain or
increase the shareholder's earnings base.

2. Purchase shares of other Franklin Templeton Funds - Distributions may be
directed to purchase the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a contingent deferred sales charge).
Class II shareholders may also direct distributions to purchase Class I shares
of another Franklin Templeton Fund. Many shareholders find this a convenient way
to diversify their investments.

3. Receive distributions in cash - Dividends, or both dividend and capital gain
distributions may be received by the shareholder in cash. The shareholder may
have the money sent directly to the address of record, to another person, or to
a checking account. If the money is to be sent to a checking account, please see
"Electronic Fund Transfers" under "Other Programs and Privileges Available to a
Fund's Shareholders."

To select one of these options, sections 6 and 7 of the Shareholder Application
included with this Prospectus must be completed, or the investment
representative may be notified of the option preferred. If no option is
selected, dividend and capital gain distributions will be automatically
reinvested in the same class of the Fund. The distribution option selected may
be changed at any time by notifying the Funds by mail or by telephone. Please
allow at least seven days prior to the reinvestment date for a Fund to process
the new option.

Taxation of the Funds
and Their Shareholders
- --------------------------------------------------------------------------------

The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Funds and their shareholders is included in the section
entitled, "Additional Information Regarding Taxation" in the SAI.

Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its net income
and meeting certain other requirements relating to the sources of its income and
diversification of its assets, a Fund will not be liable for federal income or
excise taxes.

By meeting certain requirements of the Code, each Fund continues to qualify to
pay exempt-interest dividends to its shareholders. Such exempt-interest
dividends are derived from interest income exempt from regular federal income
tax and are not subject to regular federal income tax for each Fund's
shareholders. In addition, to the extent that exempt-interest dividends are
derived from interest on obligations of the state or its political subdivisions,
of the state of residence of the shareholder, from interest on direct
obligations of the federal government, or from interest on obligations of Puerto
Rico, the U.S. Virgin Islands or Guam, they may be exempt from personal income
tax in such state. More information on the state taxation of interest from
federal and municipal obligations is included in the section on "State Income
Taxes" below and in "Appendix A - Description of State Tax Treatment."

To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions) from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.

From time to time, a Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount and such market discount
exceeds a de minimis amount. For such obligations purchased after April 30,
1993, a portion of the gain on sale or disposition (not to exceed the accrued
portion of market discount as of the time of sale or disposition) is treated as
ordinary income rather than capital gain. Any distribution by a Fund of such
ordinary income to its shareholders will be subject to regular federal and state
income taxes in the hands of Fund shareholders. In any fiscal year, a Fund may
elect not to distribute to its shareholders its taxable ordinary income and,
instead, to pay federal income or excise taxes on this income at the Fund level.
The amount of such distributions, if any, is expected to be small.

Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated, for tax purposes, as
if paid by a Fund and received by the shareholder on December 31 of the calendar
year in which they are declared.

Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned shares of a Fund and regardless of
whether such distributions are received in cash or in additional shares.

Redemptions and exchanges of a Fund's shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
such Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares and will be disallowed to the extent of exempt-interest dividends
paid with respect to such shares.

Each Fund will inform its shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income or a tax
preference item under the federal alternative minimum tax. Shareholders who have
not held shares of a Fund for a full calendar year may have designated as
tax-exempt or as tax preference income a percentage of income which is not equal
to the actual amount of tax-exempt or tax preference income earned during the
period of their investment in a Fund.

Exempt-interest dividends of any Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to regular federal income tax. Shareholders
are required to disclose the receipt of tax-exempt interest dividends on their
federal income tax returns.

Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry a Fund's shares may not be fully deductible for federal income
tax purposes.

Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes on distributions received by them from a Fund
and the application of foreign tax laws to these distributions.

State Income Taxes

The exemption of interest on tax-exempt municipal securities for federal income
tax purposes does not necessarily result in exemption from the income, corporate
or personal property taxes of any state or city when such income is distributed
to shareholders of a mutual fund. Appendix A to this Prospectus discusses the
tax treatment of the Funds with respect to distributions from each respective
Fund to investors in such states. Generally, individual shareholders of the
Funds are afforded tax-exempt treatment at the state level for distributions
derived from municipal securities of their state of residency.

Pursuant to federal law, interest received directly from U.S. government
obligations and from obligations of the U.S. territories is generally exempt
from taxation by all states and their municipal subdivisions. Each state's
treatment of dividends paid from the interest earned on direct federal and U.S.
territorial obligations is discussed in "Appendix A - Description of State Tax
Treatment."

Shareholders should consult their tax advisors with respect to the applicability
of other state and local intangible property or income taxes to their shares in
a Fund and to distributions and redemption proceeds received from such Fund.

Additional information on tax matters relating to a Fund and its shareholders is
included under the caption "Additional Information Regarding Taxation" in the
SAI.

How to Buy Shares of a Fund
- -------------------------------------------------------------------------------

Shares of the Funds are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Funds'
shares. The use of the term "securities dealer" shall include other financial
institutions which, either directly or through affiliates, have an agreement
with Distributors to handle customer orders and accounts with the Funds. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. Sales of the shares of the Funds may be restricted to
residents of their respective states. The minimum initial investment is $100 and
subsequent investments must be $25 or more. These minimums may be waived when
the shares are purchased through plans established by the Franklin Templeton
Group. The Funds and Distributors reserve the right to refuse any order for the
purchase of shares.

Differences Between Class I and Class II

Class I and Class II shares differ in the amount of their front-end sales
charges and Rule 12b-1 fees, as well as the circumstances under which the
contingent deferred sales charge applies. Generally, Class I shares have higher
front-end sales charges than Class II shares and comparatively lower Rule 12b-1
fees. Voting rights of each class will be the same on matters affecting each
Fund as a whole, but each class will vote separately on matters affecting only
shareholders of that class. See "General Information - Organization and Voting
Rights."

Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charge or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares are subject to Rule 12b-1 fees of
up to a maximum of 0.10% per annum of the average daily net assets of the class.
See "Management of the Fund" and "How To Sell Shares of a Fund" for more
information.

Class II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 0.65% per annum
of the average daily net assets of Class II shares, 0.50% of which will be
retained by Distributors during the first year of investment.

Deciding Which Class to Purchase

Shareholders should carefully evaluate the anticipated investment amount and
time horizon prior to determining which class of shares to purchase. Generally,
if a shareholder expects to invest less than $100,000 in the Franklin Templeton
Funds and to make substantial redemptions within approximately six years or less
of investment, the shareholder should consider purchasing Class II shares.
However, the higher annual Rule 12b-1 fees on Class II shares will result in
higher operating expenses (which will accumulate over time to outweigh the
difference in front-end sales charges) and lower income dividends for Class II
shares. For this reason, Class I shares may be more attractive to a shareholder
who plans to invest in the Fund over the long-term, even if no sales charge
reductions are available.

If an investor qualifies to purchase Class I shares at reduced sales charges,
serious consideration should be given to purchasing Class I shares, especially
if the shares will be held approximately six years or more. If the investor
qualifies to purchase Class I shares at reduced sales charges but intends to
hold the shares less than approximately six years, the investor should evaluate
whether it is more economical to purchase Class I shares through a Letter of
Intent or under Rights of Accumulation or other means, rather than purchasing
Class II shares. Investments of $1 million or more in a single payment or
investors who qualify to purchase Class I shares at net asset value may not
purchase Class II shares. See "Purchases at Net Asset Value" below for a
discussion of when to purchase shares at net asset value.

Each class represents the same interest in the investment portfolio of a Fund
and has the same rights, except that each class has a different front-end sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.

Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to the investor. Such purchases,
however, may be subject to a contingent deferred sales charge. An investor may
exceed $1 million in Class II shares by cumulative purchases over a period of
time. If the investor intends to make investments exceeding $1 million, however,
consideration should be given to purchasing Class I shares through a Letter of
Intent instead of purchasing Class II shares.

Each class has a separate schedule for compensating securities dealers for
selling shares of the Funds. Investors should take all of the factors regarding
an investment in each class into account before deciding which class of shares
to purchase. There are no conversion features attached to either class of
shares.

Purchase Price of Fund Shares

When placing purchase orders, the investor should clearly indicate which class
of shares to purchase. A purchase order that fails to specify a class will
automatically be invested in Class I shares.

Shares of both classes of the Funds are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund
to be purchased or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check).

Class I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "Valuation of a Fund's Shares."

Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
<TABLE>
<CAPTION>

- ---------------------------------------------------------------------------------------------------
Class I Shares - Total Sales Charge
- ---------------------------------------------------------------------------------------------------
As a Dealer Concession
Size of Transaction As a Percentage Percentage of Net as a Percentage of
at Offering Price of Offering Price Amount Invested Offering Price*,***
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
- ---------------------------------------------------------------------------------------------------
</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.

**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.

***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. A securities dealer who receives 90% or more of the
sales commission may be deemed to be an underwriter under the Securities Act of
1933, as amended.

No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period.
See "How to Sell Shares of a Fund Contingent Deferred Sales Charge."

The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates and (c) the U.S. registered mutual funds in the
Templeton Group of Funds except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). Franklin Funds and Templeton Funds are collectively
referred to as the "Franklin Templeton Fund(s)." Sales charge reductions based
upon aggregate holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to Distributors that the
investment qualifies for a discount.

Other Payments to Securities Dealers. Distributors, or one of its affiliates,
may make payments, out of its own resources, of up to 1% of the amount purchased
to securities dealers who initiate and are responsible for purchases made at net
asset value by certain trust companies and trust departments of banks. See
"Description of Special Net Asset Value Purchases" and the SAI.

Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase,
as indicated in the table below.
<TABLE>
<CAPTION>

Class II Shares - Total Sales Charge

As a Dealer Concession
Size of Transaction As a Percentage Percentage of Net as a Percentage of
at Offering Price of Offering Price Amount Invested Offering Price*
- -------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Any amount (less than $1 million) 1.00% 1.01% 1.00%
- -------------------------------------------------------------------------------------------------------

</TABLE>

*Distributors, or one of its affiliates, may make additional payments to
securities dealers, from its own resources, of up to 1% of the amount invested.
During the first year following a purchase of Class II shares, Distributors will
keep a portion of the Rule 12b-1 fees assessed to those shares to partially
recoup fees Distributors pays to securities dealers.

Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How to Sell Shares of a Fund -
Contingent Deferred Sales Charge."

Either Distributors, or one of its affiliates, out of its own resources, may
also provide additional compensation to securities dealers in connection with
sales of shares of the Franklin Templeton Funds. Compensation may include
financial assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Funds' shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by a Fund or its
shareholders.

Additional terms concerning the offering of a Fund's shares are included in the
SAI.

Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the SAI.

Quantity Discounts in Sales Charges -
Class I Shares Only

Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
the investor or the securities dealer should notify Distributors at the time of
each purchase of shares which qualifies for the reduction. In determining
whether a purchase qualifies for a discount, an investment in any of the
Franklin Templeton Investments may be combined with those of the investor's
spouse, children under the age of 21 and grandchildren under the age of 21. The
value of Class II shares owned by the investor may also be included for this
purpose.

In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:

1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.

2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of Class I shares by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor (i) expresses an intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge, (ii) grants to Distributors a security interest in
the reserved shares discussed below, and (iii) irrevocably appoints Distributors
as attorney-in-fact with full power of substitution to surrender for redemption
any or all shares for the purpose of paying any additional sales charge due. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.

An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in Class I shares
registered in the investor's name, to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The reserved
shares will be included in the total shares owned as reflected on periodic
statements; income and capital gain distributions on the reserved shares will be
paid as directed by the investor. The reserved shares will not be available for
liquidation by the investor until the Letter of Intent has been completed or the
higher sales charge paid. For more information, see "Additional Information
Regarding Purchases" in the SAI.

Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.

Group Purchases of Class I Shares

An individual who is a member of a qualified group may also purchase Class I
shares of a Fund at the reduced sales charge applicable to the group as a whole.
The sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the members of the group, plus the amount of the
current purchase. For example, if members of the group had previously invested
and still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.50%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.

A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Funds or Distributors and the members, agree to include
sales and other materials related to the Funds in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Funds.

If an investor selects a payroll deduction plan, subsequent investments to a
Fund will be automatic and will continue until such time as the investor
notifies such Fund and the investor's employer to discontinue further
investments. Due to the varying procedures used to prepare, process and forward
the payroll deduction information to the Funds, there may be a delay between the
time of the payroll deduction and the time the money reaches the Funds. The
investment in a Fund will be made at the offering price per share determined on
the day that both the check and payroll deduction data are received in required
form by such Fund.

Purchases at Net Asset Value

Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Trust, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including any subsequent payments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) registered securities dealers and
their affiliates, for their investment account only; and (5) current employees
of securities dealers and their affiliates and by their family members, in
accordance with the internal policies and procedures of the employing securities
dealer and affiliate.

For either Class I or Class II, the same class of shares of a Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of a Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Shares that were no longer subject to a
contingent deferred sales charge will be reinvested at net asset value and will
not be subject to a new contingent deferred sales charge. Shares of a Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of a Fund
must be received by such Fund or the Funds' Shareholder Services Agent within
365 days after the redemption. The 365 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.

For either Class I or Class II, the same class of shares of a Fund or of another
of the Franklin Templeton Funds may be purchased at net asset value and without
a contingent deferred sales charge by persons who have received dividends and
capital gains distributions in cash from investments in that class of shares of
a Fund within 365 days of the payment date of such distribution. Class II
shareholders may also direct such distributions for investment at net asset
value in a Class I Franklin Templeton Fund. To exercise this privilege, a
written request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distribution Options" under "Distributions to
Shareholders."

Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Funds.

Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker-dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).

Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that a Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF A FUND CONSTITUTE A LEGAL INVESTMENT FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into a
Fund should consult with expert counsel to determine the effect, if any, of
various payments made by such Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
Department for additional information.

Description of Special Net Asset Value Purchases

Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to
amount of purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in a Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.

Refer to the SAI for further information regarding net asset value purchases of
Class I shares.

Purchasing Class I and Class II Shares

When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares. Purchases of $1 million or
more in a single payment will be invested in Class I shares. There are no
conversion features attached to either class of shares.

Investors who qualify to purchase Class I shares at net asset value should
purchase Class I rather than Class II shares. See the section "Purchases at Net
Asset Value" and "Description of Special Net Asset Value Purchases" above for a
discussion of when shares may be purchased at net asset value.

General

Securities laws of states in which each Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling a Fund's shares may be required to register as dealers
pursuant to state law.

Other Programs and Privileges
Available to a Fund's Shareholders
- --------------------------------------------------------------------------------

Certain of the programs and privileges described in this section may not be
available directly from a Fund to shareholders whose shares are held, of record,
by a financial institution or in a "street name" account or networked account
through the National Securities Clearing Corporation ("NSCC") (see the section
captioned "Account Registrations" in this Prospectus).

Share Certificates

Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Funds,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.

Confirmations

A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.

Automatic Investment Plan

The Automatic Investment Plan offers a convenient way to invest in the Funds.
Under the plan, shareholders can arrange to have money transferred automatically
from their checking account to a Fund each month to purchase additional shares.
Shareholders interested in this program, should refer to the Automatic
Investment Plan Application at the back of this Prospectus for the requirements
of the program or contact their investment representative. Of course, the market
value of the Fund's shares may fluctuate and a systematic investment plan such
as this will not assure a profit or protect against a loss. Shareholders may
terminate the program at any time by notifying Investor Services by mail or by
phone.

Systematic Withdrawal Plan

The Systematic Withdrawal Plan allows a shareholder to receive regular payments
from the account on a monthly, quarterly, semiannual or annual basis. To
establish a Systematic Withdrawal Plan, the value of the account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. Please keep in mind that $50 is merely the minimum amount and is not a
recommended amount.

To establish a Systematic Withdrawal Plan, please complete the Systematic
Withdrawal Plan section of the Shareholder Application included with this
Prospectus and indicate how payments are to be received. Shareholders may choose
to receive payments in any of the following ways:

1. Purchase shares of other Franklin Templeton Funds - Payments may be directed
to purchase the same class of shares of another Franklin Templeton Fund.

2. Receive payments in cash - Shareholders may choose to receive payments in
cash and have the money sent directly to them, to another person, or to a
checking account. For money to be sent to a checking account, please see
"Electronic Fund Transfers" below.

There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once the plan is established, any distributions paid by a Fund
will be automatically reinvested in the shareholder's account. Payments under
the plan will be made from the redemption of an equivalent amount of shares in
the shareholder's account, generally on the first business day of the month in
which a payment is scheduled. Payments will generally be received by the
shareholder within three to five days after the shares are redeemed.

Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in an account if payments exceed distributions received from a Fund. This
is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of a shareholder's account, the account will be closed
and the remaining balance in the account will be sent to the shareholder.
Redemptions under a Systematic Withdrawal Plan are considered a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the actual yield or income, part of the payment may be a return of the
shareholder's investment.

While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. Shareholders should ordinarily not make additional investments in the
Funds of less than $5,000 or three times the amount of annual withdrawals under
the plan because of the sales charge on additional purchases. Shares redeemed
under the plan may also be subject to a contingent deferred sales charge. Please
see "Contingent Deferred Sales Charge" under "How To Sell Shares of a Fund."

A Systematic Withdrawal Plan may be terminated, the amount and schedule of
withdrawal payments changed, or a payment suspended by notifying Investor
Services in writing at least seven business days prior to the end of the month
preceding a scheduled payment. A Fund may also terminate a Systematic Withdrawal
Plan by notifying the shareholder in writing and will automatically terminate a
Systematic Withdrawal Plan if all shares in the account are withdrawn or if the
Fund receives notification of the shareholder's death or incapacity.

Electronic Fund Transfers

Distributions from the Funds or payments under a Systematic Withdrawal Plan may
be sent directly to a checking account. If the checking account is maintained at
a bank that is a member of the Automated Clearing House, the payments may be
made automatically by electronic funds transfer. If the shareholder chooses this
option, at least fifteen days should be allowed for initial processing. Any
payments made during that time will be sent to the address of record on the
shareholder's account.

Exchange Privilege
- --------------------------------------------------------------------------------

The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, a Fund's shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, however, may not offer Class II shares. Class I shares may be exchanged
for Class I shares of any Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within the contingency period, a contingent
deferred sales charge will be imposed. Investors should review the prospectus of
the fund they wish to exchange from and the fund they wish to exchange into for
all specific requirements or limitations on exercising the exchange privilege,
for example, limitations on a fund's sale of its shares, minimum holding periods
for exchanges at net asset value or applicable sales charges.

Exchanges may be made in any of the following ways:

By Mail

Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.

By Telephone

Shareholders, or their investment representative of record, if any, may exchange
shares of a Fund by telephone by calling Investor Services at 1-800/632-2301 or
the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If
the shareholder does not wish this privilege extended to a particular account,
such Fund or Investor Services should be notified.

The telephone exchange privilege allows a shareholder to effect exchanges from a
Fund into an identically registered account of the same class of shares in one
of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Funds and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."

During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.

Exchanges Through Securities Dealers

As is the case with all purchases and redemptions of a Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.

Additional Information Regarding Exchanges

Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value. Exchanges of Class I shares of a Fund which were purchased with a lower
sales charge into a fund which has a higher sales charge will be charged the
difference in sales charges, unless the shares were held in such Fund for at
least six months prior to executing the exchange.

When an investor requests the exchange of the total value of a Fund account,
declared but unpaid income dividends and capital gain distributions will be
transferred to the account in the fund being exchanged into and will be invested
at net asset value. Because the exchange is considered a redemption and purchase
of shares, the shareholder may realize a gain or loss for federal income tax
purposes. Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an exchange is
included in the tax section in this Prospectus and in the SAI.

If a substantial portion of a Fund's shareholders should, within a short period,
elect to redeem their shares of a Fund pursuant to the exchange privilege, such
Fund might have to liquidate portfolio securities it might otherwise hold and
incur the additional costs related to such transactions. On the other hand,
increased use of the exchange privilege may result in periodic large inflows of
money. If this should occur, it is the general policy of the Funds to initially
invest this money in short-term, tax-exempt municipal securities unless it is
felt that attractive investment opportunities consistent with the Funds'
investment objectives exist immediately. Subsequently, this money will be
withdrawn from such short-term, tax-exempt municipal securities and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.

The Exchange Privilege may be modified or discontinued by a Fund at any time
upon 60 days' written notice to shareholders.

Exchanges of Class I Shares

The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton money market fund.
If a Class I account has shares subject to a contingent deferred sales charge,
Class I shares will be exchanged into the new account on a "first-in, first-out"
basis. See also "How to Sell Shares of a Fund - Contingent Deferred Sales
Charge."

Exchanges of Class II Shares

When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if a
shareholder has $1,000 in free shares, $2,000 in matured shares, and $3,000 in
CDSC liable shares, and the shareholder exchanges $3,000 into a new fund, $500
will be exchanged from free shares, $1,000 from matured shares, and $1,500 from
CDSC liable shares. Similarly, if CDSC liable shares have been purchased at
different periods, a proportionate amount will be taken from shares held for
each period. If, for example, a shareholder holds $1,000 in shares bought 3
months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into the new fund, $500 from each of these shares
will be deemed exchanged into the new fund.

The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age for
purposes of calculating the contingent deferred sales charge, because they
continue to be subject to 12b-1 fees. The contingent deferred sales charge will
be assessed if CDSC liable shares are redeemed. Class I shares may be exchanged
for shares of any of the money market funds in the Franklin Templeton Funds
except Money Fund II. Draft writing privileges and direct purchases are allowed
on these other money market funds as described in their respective prospectuses.

To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a contingent deferred sales charge. The proportional method is
believed by management to more closely meet and reflect the expectations of
Class II shareholders in the event shares are redeemed during the contingency
period. For federal income tax purposes, the cost basis of shares redeemed or
exchanged is determined under the Code without regard to the method of
transferring shares chosen by a Fund.

Transfers

Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.

Conversion Rights

It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell his or her Class II shares and
use the proceeds to purchase Class I shares, subject to all applicable sales
charges.

Timing Accounts

"Timing Accounts" are not permitted to purchase shares of the Funds or to
exchange into the Funds. This policy does not affect any other types of
investor. "Timing Accounts" generally include market timing or allocation
services; accounts administered so as to redeem or purchase shares based upon
certain predetermined market indicators; or any person whose transactions seem
to follow a timing pattern.

How to Sell Shares of a Fund
- --------------------------------------------------------------------------------

A shareholder may at any time liquidate shares owned and receive from such Fund
the value of the shares. Shares may be redeemed in any of the following ways.

By Mail

Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from such
Fund the value of the class of shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated will receive the price calculated on the following business day. The
net asset value per share of each series and each class is determined as of the
scheduled close of the New York Stock Exchange ("Exchange"), (generally 1:00
p.m. Pacific time) each day that the Exchange is open for trading. Shareholders
are requested to provide a telephone number(s) where they may be reached during
business hours, or in the evening if preferred. Investor Services' ability to
contact a shareholder promptly when necessary will speed the processing of the
redemption.

To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:

(1) the proceeds of the redemption are over $50,000;

(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;

(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;

(4) share certificates, if the redemption proceeds are in excess of $50,000; or

(5) a Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to a Fund, (c) a Fund has been
notified of an adverse claim, (d) the instructions received by a Fund are
given by an agent, not the actual registered owner, (e) a Fund determines
that joint owners who are married to each other are separated or may be the
subject of divorce proceedings, or (f) the authority of a representative of
a corporation, partnership, association, or other entity has not been
established to the satisfaction of a Fund.

Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.

Share Certificates - Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by the share
certificate and a share assignment form signed by the registered shareholders
exactly as the account is registered, with the signature(s) guaranteed as
referenced above. Shareholders are advised, for their own protection, to send
the share certificate and assignment form in separate envelopes if they are
being mailed in for redemption.

Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:

Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.

Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.

Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.

Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.

Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.

Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.

By Telephone

Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of a Fund by telephone. Information may also be obtained by
writing to the Funds or Investor Services at the address shown on the cover or
by calling 1-800/632-2301. The Funds and Investor Services will employ
reasonable procedures to confirm that instructions given by telephone are
genuine. Shareholders, however, bear the risk of loss in certain cases as
described under "Telephone Transactions - Verification Procedures."

For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with a Fund
or Investor Services may be made for up to $50,000 per day per Fund account.
Telephone redemption requests received before the scheduled close of the
Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, and government entities which qualify to purchase shares at net
asset value pursuant to the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an Institutional Telephone
Privileges Agreement which is available from the Franklin Templeton
Institutional Services Department by telephoning 1-800/321-8563.

Through Securities Dealers

The Funds will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to a Fund, rather than on the day a Fund
receives the shareholder's written request in proper form. These documents, as
described in the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. After receipt of a repurchase
order from the dealer, a Fund will still require a signed letter of instruction
and all other documents set forth above. A shareholder's letter should reference
a Fund and the class, the account number, the fact that the repurchase was
ordered by a dealer and the dealer's name. Details of the dealer-ordered trade,
such as trade date, confirmation number, and the amount of shares or dollars,
will help speed processing of the redemption. The seven-day period within which
the proceeds of the shareholder's redemption will be sent will begin when a Fund
receives all documents required to complete ("settle") the repurchase in proper
form. The redemption proceeds will not earn dividends or interest during the
time between receipt of the dealer's repurchase order and the date the
redemption is processed upon receipt of all documents necessary to settle the
repurchase. Thus, it is in a shareholder's best interest to have the required
documentation completed and forwarded to a Fund as soon as possible. The
shareholder's dealer may charge a fee for handling the order. The SAI contains
more information on the redemption of shares.

Contingent Deferred Sales Charge

In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.

In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.

The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; redemptions initiated by the Fund
due to an account falling below the minimum specified account size; redemptions
following the death of the shareholder or beneficial owner; and redemptions
through a Systematic Withdrawal Plan set up for shares prior to February 1,
1995, and for Systematic Withdrawal Plans set up thereafter, redemptions of up
to 1% monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually). For example, if a Class I account maintained an annual balance of
$1,000,000, only $120,000 could be withdrawn through a once-yearly Systematic
Withdrawal Plan free of charge. Any amount over that $120,000 would be assessed
a 1% contingent deferred sales charge. Likewise, if a Class II account
maintained an annual balance of $10,000, only $1,200 could be withdrawn through
a once-yearly Systematic Withdrawal Plan free of charge.

All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.

Unless otherwise specified, requests for redemptions for a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.

Additional Information Regarding Redemptions

A Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by a Fund.

Other

For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.

Telephone Transactions
- --------------------------------------------------------------------------------

Shareholders of a Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.

All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option, (iii) transfer shares of a Fund in one account to another
identically registered account in that Fund, (iv) request the issuance of
certificates (to be sent to the address of record only), and (v) exchange shares
of a Fund as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Agreement as described under "How to Sell
Shares of a Fund - Redemptions By Telephone" will be able to redeem shares of a
Fund.

Verification Procedures

The Funds and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as a Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction. A
Fund and Investor Services may be liable for any losses due to unauthorized or
fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where a Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.

General

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to a
Fund as detailed elsewhere in this Prospectus.

Neither the Funds nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.

The telephone transaction privilege may be modified or discontinued by a Fund at
any time upon 60 days' written notice to shareholders.

Valuation of a Fund's Shares
- --------------------------------------------------------------------------------

The net asset value per share of each class of a Fund is determined separately
as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time)
each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and "ask"
(offering price, which includes the maximum front-end sales charge of each class
of shares of a Fund).

The net asset value per share for each class of a Fund is determined by
deducting the aggregate gross value of all liabilities of each class from the
aggregate gross value of all assets of each class and then dividing the
difference by the number of shares of the respective class of a Fund outstanding
at the time. For the purpose of determining the aggregate net assets of each
class of a Fund, cash and receivables are valued at their realizable amounts.
Interest is recorded as accrued. Portfolio securities for which market
quotations are readily available are valued within the range of the most recent
bid and ask prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market as determined by the Manager. Municipal securities
generally trade in the over-the-counter market rather than on a securities
exchange. Other securities for which market quotations are readily available are
valued at the current market price, which may be obtained from a pricing
service, based on a variety of factors, including recent trades, institutional
size trading in similar types of securities (considering yield, risk and
maturity) and/or developments related to specific issues. Securities and other
assets for which market prices are not readily available are valued at fair
value as determined following procedures approved by the Board of Trustees. With
the approval of trustees, a Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.

Each of the Fund's classes will bear, pro rata, all of the common expenses of
that Fund, except that the Class I and Class II shares will bear the Rule 12b-1
expenses payable under their respective plans. The net asset value of all
outstanding shares of each class of such Fund will be computed on a pro rata
basis for each outstanding share based on the proportionate participation in the
Fund represented by the value of shares of such classes. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of a Fund may vary.

How to Get Information
Regarding an Investment in a Fund
- --------------------------------------------------------------------------------

Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.

From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features.

By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to a Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account; and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.

Franklin Class I and Class II share codes for the Funds, which will be needed to
access system information, are:

FUND CODE FUND NAME
--------- ----------------------------------
164 ALABAMA FUND, CLASS I
264 ALABAMA FUND, CLASS II
165 FLORIDA FUND, CLASS I
265 FLORIDA FUND, CLASS II
128 GEORGIA FUND, CLASS I
228 GEORGIA FUND, CLASS II
172 KENTUCKY FUND, CLASS I
168 LOUISIANA FUND, CLASS I
268 LOUISIANA FUND, CLASS II
160 MISSOURI FUND, CLASS I
260 MISSOURI FUND, CLASS II
170 NORTH CAROLINA FUND, CLASS I
270 NORTH CAROLINA FUND, CLASS II
162 TEXAS FUND, CLASS I
262 TEXAS FUND, CLASS II
163 VIRGINIA FUND, CLASS I
263 VIRGINIA FUND, CLASS II

The system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.

To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:

Hours of Operation (Pacific Time)
Department Name Telephone No. (Monday through Friday)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.

In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in all of Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.

Performance
- --------------------------------------------------------------------------------

Advertisements, sales literature and communications to shareholders may contain
various measures of a class' performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution rate
and taxable equivalent distribution rate. They may occasionally cite statistics
to reflect a Fund's volatility or risk.

Average annual total return figures, as prescribed by the SEC, represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five-,
and ten-year periods, or portion thereof, to the extent applicable, through the
end of the most recent calendar quarter, assuming reinvestment of all
distributions. Each Fund may also furnish total return quotations for each class
for other periods or based on investments at various sales charge levels or at
net asset value. For such purposes, total return equals the total of all income
and capital gain paid to shareholders, assuming reinvestment of all
distributions, plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.

Current yield for each class reflects the income per share earned by a fund's
portfolio investments; it is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result. Tax equivalent yield demonstrates the yield from a
taxable investment necessary to produce an after-tax yield equivalent to that of
a fund which invests in tax-exempt obligations. It is computed for each class by
dividing that class' tax-exempt portion of a fund's yield (calculated as
indicated) by one minus a stated income tax rate and adding the product to the
taxable portion (if any) of a fund's yield.

Yield and tax equivalent yield for each class, which are calculated according to
a formula prescribed by the SEC (see the SAI), are not indicative of the
dividends or distributions which were or will be paid to a Fund's shareholders.
Dividends or distributions paid to shareholders of a class are reflected in the
current distribution rate or taxable equivalent distribution rate, which may be
quoted to shareholders. The current distribution rate is computed by dividing
the total amount of dividends per share paid by a class during the past 12
months by a current maximum offering price for that class of shares. A taxable
equivalent distribution rate demonstrates the taxable distribution rate
necessary to produce an after tax distribution rate equivalent to a Fund's
distribution rate (calculated as indicated above). Under certain circumstances,
such as when there has been a change in the amount of dividend payout or a
fundamental change in investment policies, it might be appropriate to annualize
the dividends paid during the period such policies were in effect, rather than
using the dividends during the past 12 months. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as
short-term capital gain, and is calculated over a different period of time.

In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future period.

Because Class II shares were not offered prior to May 1, 1995, no performance
data is available for these shares. After a sufficient period of time has
passed, Class II performance data will be available.

General Information
- --------------------------------------------------------------------------------

Reports to Shareholders

The Trust's fiscal year ends February 28. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this Prospectus.

Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and the SAI.

Organization and Voting Rights

The Trust was organized as a Massachusetts business trust on September 18, 1984.
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
Additional series or classes may be added in the future by the Board.

Following is a list of the 27 series currently authorized by the Board of
Trustees:

Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Federal Intermediate-Term
Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin Massachusetts Insured
Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured
Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund

Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees,
the holders of more than 50% of the shares voting can elect all of the trustees,
if they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders meetings. The Trust may,
however, hold a special shareholders meeting of a series for such purposes as
changing fundamental investment restrictions for the series, approving a new
management agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by the trustees in
their discretion or by shareholders holding at least ten percent of the
outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees such as that provided in Section 16(c) of the 1940 Act.

Shares of each class of a Fund represent proportionate interests in the assets
of such Fund and have the same voting and other rights and preferences as the
other classes and series of the Trust for matters that affect the Trust as a
whole. For matters that only affect a certain class of a Fund's shares, however,
only shareholders of that class will be entitled to vote. Therefore each class
of shares of a Fund will vote separately on matters (1) affecting only that
class of such Fund, (2) expressly required to be voted on separately by state
business trust law, or (3) required to be voted on separately by the 1940 Act,
or the rules adopted thereunder. For instance, if a change to the Rule 12b-1
plan relating to Class I shares of a Fund requires shareholder approval, only
shareholders of Class I of that Fund may vote on the change to the Rule 12b-1
plan affecting that class. Similarly, if a change to the Rule 12b-1 plan
relating to Class II shares requires approval, only shareholders of Class II of
such Fund may vote on changes to such plan. On the other hand, if there is a
proposed change to the investment objective of a Fund, this affects all
shareholders of that Fund, regardless of which class of shares they hold and,
therefore, each share has the same voting rights.

Redemptions by a Fund

Each Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.

Other Information

Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Funds nor their affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).

"Cash" payments to or from a Fund may be made by check, draft or wire. The Funds
have no facility to receive, or pay out, cash in the form of currency.

Account Registrations
- --------------------------------------------------------------------------------

An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.

Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.

A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.

Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean as "joint tenants with rights of survivorship" and not as
"tenants in common."

Except as indicated, a shareholder may transfer an account in a Fund carried in
"street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, a Fund will not process the transfer
and will so inform the shareholder's delivering securities dealer. To effect the
transfer, a shareholder should instruct the securities dealer to transfer the
account to a receiving securities dealer and sign any documents required by the
securities dealer to evidence consent to the transfer. Under current procedures,
the account transfer may be processed by the delivering securities dealer and a
Fund after such Fund receives authorization in proper form from the
shareholder's delivering securities dealer. Account transfers may be effected
electronically through the services of the NSCC.

Each Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by a Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.

Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.

Important Notice Regarding
Taxpayer IRS Certifications
- --------------------------------------------------------------------------------

Pursuant to the Code and U.S. Treasury regulations, a Fund may be required to
report to the IRS any taxable dividend, capital gain distribution or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies a Fund that the number furnished by the shareholder is incorrect
or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.

Each Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide a Fund with a certified TIN
within 60 days after opening the account.

Portfolio Operations
- --------------------------------------------------------------------------------

The team responsible for the day-to-day management of the Funds' portfolios is:

Thomas Kenny
Senior Vice President
Franklin Advisers, Inc.

Mr. Kenny is responsible for portfolio recommendations and decisions of all 27
Funds of the Tax-Free Trust since August, 1994. He is Senior Vice President of
the investment manager and is director of Franklin's municipal bond department.
He joined Franklin in 1986. He received a Bachelor of Arts degree in Business
and Economics from the University of California at Santa Barbara and a Master of
Science degree in Finance from Golden Gate University. He is a member of several
municipal securities industry related committees and associations.

John Pomeroy
Portfolio Manager
Franklin Advisers, Inc.

Mr. Pomeroy has been responsible for portfolio recommendations and decisions for
the Alabama Fund, Florida Fund, Georgia Fund, Maryland Fund, and North Carolina
Fund since their inception. He joined Advisers in 1986. He received a Bachelor
of Arts degree in Business Administration from San Francisco State University in
1986 and is a member of industry related committees and associations.

Stella Wong
Portfolio Manager
Franklin Advisers, Inc.

Ms. Wong has been responsible for portfolio recommendations and decisions for
the Alabama Fund, Georgia Fund, Louisiana Fund, Maryland Fund, North Carolina
Fund, Texas Fund and Virginia Fund since their inception. She holds a Bachelor
of Science degree in Business Administration from San Francisco State University
and a Master's degree in Financial Planning from Golden Gate University, and is
a member of several industry related committees and associations. She joined
Advisers in 1986.

Andrew Jennings, Sr.
Vice President and Portfolio Manager
Franklin Advisers, Inc.

Mr. Jennings has been responsible for portfolio recommendations and decisions of
the Louisiana Fund since joining Advisers in 1990. He attended Villanova
University in Philadelphia, has been in the securities industry for over 33
years and is a member of several municipal securities industry related
committees and associations. From 1985 to 1990 Mr. Jennings was First Vice
President and Manager of the Municipal Institutional Bond Department at Dean
Witter Reynolds, Inc.

Don Duerson
Vice President and Portfolio Manager
Franklin Advisers, Inc.

Mr. Duerson has been responsible for portfolio recommendations and decisions of
the Missouri Fund, Texas Fund and Virginia Fund since their inception. He joined
Advisers in 1986. He has a Bachelor of Science degree in Business and Public
Administration from the University of Arizona, has experience in the securities
industry dating back to 1977 and is a member of industry related committees and
associations.

Sheila Amoroso
Portfolio Manager
Franklin Advisers, Inc.

Ms. Amoroso has been responsible for portfolio recommendations and decisions of
the Florida Fund, Kentucky Fund, and Missouri Fund since their inception. She
joined Franklin in 1986. She holds a bachelor of science degree from San
Francisco State University and is a member of municipal securities industry
related committees and associations.

Bernie Schroer
Vice President and Portfolio Manager
Franklin Advisers, Inc.

Mr. Schroer has been responsible for portfolio recommendations and decisions of
the Kentucky Fund since its inception. He joined Advisers in 1987. From 1974 to
1984, he was the manager of trading at Kidder Peabody. He has a degree in
Finance from Santa Clara University and is currently a member of municipal
securities industry related committees and associations.

Appendix A
Description of State Tax Treatment
- --------------------------------------------------------------------------------

The following information on the state income tax treatment of dividends from
the Funds is based upon correspondence and sources believed to be reliable.
Except where otherwise noted, the information pertains to individual state
income taxation only. Investors may be subject to local taxes on dividends or
the value of their shares. Corporations, trusts, estates and other entities may
be subject to other taxes and should consult with their tax advisors or their
state department of revenue. For some investors, a portion of the dividend
income may be subject to the federal and/or state alternative minimum tax.

Alabama

Section 40-18-14(2)f of the Alabama Code provides that interest on obligations
of the state of Alabama and any county, municipality or other political
subdivision thereof is exempt from personal income tax. Section 40-18-14(2)d
provides similar tax-exempt treatment for interest on exempt obligations of the
U.S. government or its possessions (including Puerto Rico, Guam and the Virgin
Islands). In addition, Regulation Section 810-3-14-.02(4)(b)2 and an
administrative ruling of the Alabama Department of Revenue, dated March 1, 1990,
extend the exemption for obligations of the U.S. government or its possessions
to distributions from a regulated investment company, such as the Alabama Fund,
to the extent that they are paid out of interest earned on such exempt
obligations. The March 1, 1990 ruling also indicates that the exemption would
apply to Alabama municipal obligations. Tax-exempt treatment is generally not
available for distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase agreements
collateralized by U.S. government obligations, or for obligations of other
states and their political subdivisions. To the extent such investments are made
by a Fund, such as for temporary or defensive purposes, such distributions will
generally be taxable on a pro rata basis.

Any distributions of net short-term and net long-term capital gains earned by
the Fund are fully includable in each individual shareholder's Alabama taxable
income and are currently taxed at ordinary income tax rates.

Florida

Florida does not have a personal income tax but does have an intangible personal
property tax for residents. According to Florida Statute Section 199.185 and
Technical Assistance Advisement No. 90(C)2-003, issued by the Florida Department
of Revenue on August 8, 1990 (as subsequently revised), shares in regulated
investment companies organized as business trusts, such as the Florida Fund,
will not be subject to Florida's intangible property tax to the extent that the
Fund is invested in obligations of the U.S. government, its agencies,
instrumentalities and territories (including Puerto Rico, Guam and the Virgin
Islands) at the close of business on the last business day of the calendar year.
If the Fund invests all of the remaining portion of its net asset value in
exempt obligations of the state of Florida or its municipalities or political
subdivisions on such date, then that remaining portion of the net asset value of
the Fund (and corresponding value of Fund shares) will also be exempt from
Florida's intangibles tax. If the Fund invests, such as for temporary or
defensive purposes, any of the remaining portion of its portfolio in any asset
which is taxable under Florida's intangible tax law, including investments in
indirect federal obligations (GNMAs, FNMAs, etc.), in repurchase agreements
collateralized by U.S. government securities or in any obligations of other
states, then that remaining portion of the net asset value of the Fund (and the
corresponding value of Fund shares) will be taxable under Florida's intangible
property tax.

Georgia

Under Section 48-7-27(b)(1)(A) of the Georgia Code, interest on obligations of
the state of Georgia and its political subdivisions, which is not otherwise
included in federal adjusted gross income, is exempt from the state's individual
income tax. Likewise, under Section 48-7-27(b)(2) interest on exempt obligations
of the U.S. government, its territories and possessions (including Puerto Rico,
Guam and the Virgin Islands), or of any authority, commission, or
instrumentality of the U.S. government is also exempt from the state's
individual income tax. Since distributions from the Georgia Fund attributable to
interest on obligations of the state of Georgia and its political subdivisions
is excluded from federal adjusted gross income, they will likewise be excluded
from the Georgia individual income tax.

Under the administrative authority of the Georgia Department of Revenue, the
exempt treatment for interest derived from such exempt obligations is also
extended to distributions of regulated investment companies, such as the Georgia
Fund. Tax-exempt treatment is generally not available for distributions
attributable to income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S. government
obligations, or for obligations of other states and their political
subdivisions. To the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will generally be taxable on
a pro rata basis.

The state of Georgia also imposes an intangible property tax on the fair market
value of intangible assets owned by residents on January 1 of each year. The
Georgia Department of Revenue has recently announced that it will provide an
exemption from intangible property taxation to mutual fund shareholders to the
extent that the portfolio of the fund consists of U.S. government obligations,
where such fund is formed as a business trust. At this time, the Georgia
Department of Revenue has not issued any guidance on whether it will provide an
exemption for obligations issued by the state of Georgia or any of its political
subdivisions. Therefore, under current law, shares of a mutual fund investing in
obligations issued by the state of Georgia or any of its political subdivisions,
such as the Georgia Fund, appear to remain subject to intangibles taxation.

Any distributions of net short-term and net long-term capital gains earned by
the Fund are fully included in each individual shareholder's Georgia taxable
income as dividend income and long-term capital gain, respectively, and are
currently taxed at ordinary income tax rates.

Kentucky

Pursuant to Kentucky Revised Statute 141.010(10)(a) and (12)(a), interest earned
on exempt obligations of the U.S. government, its agencies and
instrumentalities, or its territories (including Puerto Rico, Guam and the
Virgin Islands) and obligations issued by the Commonwealth of Kentucky or its
political subdivisions will be exempt from Kentucky's personal income tax. Under
Kentucky Income Tax Revenue Policy 42P161 (as revised December 1, 1990),
dividends from regulated investment companies, such as the Kentucky Fund, which
are derived from such exempt obligations, will also be exempt from state income
tax. Tax-exempt treatment is generally not available for distributions
attributable to income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S. government
obligations, or for obligations of other states and their political
subdivisions. To the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will generally be taxable on
a pro rata basis.

Kentucky Revenue Circular 40C003 states that Section 170 of the Kentucky
Constitution exempts from intangible property taxation obligations of Kentucky,
and its counties, municipalities, and taxing and school districts. The Revenue
Circular further states that though neither the Kentucky Constitution nor the
Kentucky Revised Statutes contain specific language to exempt federal
obligations from the intangible property tax, the courts of Kentucky have
recognized the power of the U.S. Congress to declare that obligations of federal
instrumentalities are exempt from state taxation. According to a Kentucky
Revenue Cabinet Tax Alert dated July 1988, shares of a regulated investment
company, such as the Kentucky Fund, will not be subject to the intangibles tax
to the extent that the value of the shares is attributable to such exempt
obligations.

Any distributions of net short-term and net long-term capital gains earned by
the Fund are includable in each shareholder's Kentucky adjusted gross income and
are taxed at ordinary income tax rates. Kentucky Revenue Circular 40C003 also
states that gain on the sale of some U.S. government and Kentucky obligations
may be exempt from state income tax, but the availability of the exemption
depends upon the specific legislation authorizing the bonds.

Louisiana

Under Section 293 of Louisiana's individual income tax law, interest earned on
obligations of the state of Louisiana or its political subdivisions is exempt
from individual and corporate income tax. Under Section 293, interest earned on
qualifying obligations of the U.S. government or its agencies and possessions
(including Puerto Rico, Guam and the Virgin Islands) is also exempt from
individual and corporate income tax. Under Section 293, distributions from a
regulated investment company, such as the Louisiana Fund, will also be exempt
from individual and corporate income tax to the extent that they are derived
from interest earned on such exempt obligations. Tax-exempt treatment is
generally not available for distributions attributable to income earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for obligations of
other states and their political subdivisions. To the extent such investments
are made by the Fund, such as for temporary or defensive purposes, such
distributions will generally be taxable on a pro rata basis.

Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Louisiana taxable income and are
currently taxed at ordinary income tax rates.

Maryland

Since distributions from the Maryland Fund attributable to interest on
obligations of the state of Maryland and its political subdivisions is excluded
from federal taxable income, they will likewise be exempt from Maryland's
personal income tax. Under Section 10-207 of the Tax General Article, interest
on exempt obligations of the U.S. government and any authority, commission,
instrumentality, possession or territory of the U.S. (including Puerto Rico,
Guam and the Virgin Islands) is also exempt from Maryland's personal income tax.
Under Section 10-207(c-1) and Administrative Release No. 11, this exemption is
extended to distributions from a regulated investment company, such as the
Maryland Fund, to the extent such distributions are paid out of interest earned
on exempt obligations of the U.S. government or its agencies and possessions
(including Puerto Rico, Guam and the U.S. Virgin Islands). Tax-exempt treatment
is generally not available for distributions attributable to income earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for obligations of
other states and their political subdivisions. To the extent such investments
are made by the Fund, such as for temporary or defensive purposes, such
distributions will generally be taxable on a pro rata basis.

Any distributions of capital gains by the Fund derived from gain realized from
the sale or exchange of obligations issued by the state of Maryland or its
subdivisions may also be tax-exempt to the Fund's shareholders. Distributions of
all net short-term capital gain and net long-term capital gain earned by the
Fund on non-Maryland obligations are includable in each shareholder's Maryland
adjusted gross income and are taxed at ordinary income tax rates.

Missouri

Under Section 143.121 of the Revised Statutes of Missouri, interest earned on
exempt obligations of the U.S. government, its authorities, commissions,
instrumentalities, possessions or territories (including Puerto Rico, Guam and
the Virgin Islands), or the State of Missouri, its political subdivisions or
authorities are exempt from Missouri personal income tax. Under Missouri's
income tax regulations (Title 12, Section 10-2.155), a regulated investment
company, such as the Missouri Fund, may pass the tax-exempt character of such
interest through to its shareholders. Tax-exempt treatment is generally not
available for distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase agreements
collateralized by U.S. government obligations, or for obligations of other
states and their political subdivisions. To the extent such investments are made
by the Fund, such as for temporary or defensive purposes, such distributions
will generally be taxable on a pro rata basis.

Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Missouri taxable income and are
currently taxed at ordinary income tax rates.

North Carolina

Section 105-134.6(b) of the North Carolina General Statutes provides that
interest on obligations of the U.S. government, its possessions, or its
territories (including Puerto Rico, Guam and the Virgin Islands) and obligations
of the state of North Carolina or its political subdivisions are exempt from
state income tax. Pursuant to a North Carolina Department of Revenue Information
Release dated October 4, 1990, dividends received from a regulated investment
company, such as the North Carolina Fund, are exempt from personal income tax to
the extent that the distributions are derived from interest on such exempt
obligations. Tax-exempt treatment is generally not available for distributions
attributable to income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S. government
obligations, or for obligations of other states and their political
subdivisions. To the extent such investments are made by the Fund, such as for
temporary or defensive purposes, such distributions will generally be taxable on
a pro rata basis.

Pursuant to an administrative Revenue Memorandum, distributions attributable to
net realized long-term capital gains earned by the Fund on the sale or exchange
of certain obligations of the state of North Carolina or its political
subdivisions may also be tax-exempt to the Fund's shareholders. Distributions of
all net short-term capital gain and of net long-term capital gain earned by the
Fund on other North Carolina obligations and on non-North Carolina obligations
are includable in each shareholder's North Carolina taxable income and are
currently taxed at ordinary income rates.

Under Section 105-203 of the North Carolina General Statutes, units of ownership
in the North Carolina Fund will not be subject to the intangibles personal
property tax as long as the Fund, on December 31 of each year, is composed
entirely of obligations of the U.S. government and North Carolina or its
political subdivisions, or provided that at least 80% of the fair market value
of the assets of the Fund were invested in obligations of North Carolina or its
political subdivisions. For all years in which this requirement is met, the Fund
will file with the state of North Carolina a certification in order for
shareholders to qualify for this exemption.

Under Section 17.08.0605 of the North Carolina Administrative Code, in any case
in which a fund does not meet the above requirement that its investments consist
entirely of U.S. government or North Carolina obligations, for intangibles
property tax purposes, the state will allow shareholders to reduce the value of
their investment in such fund in direct proportion to the percentage of the
fund's investment in exempt U.S. government or North Carolina obligations.

Texas

Texas does not presently impose any income tax on individuals, trusts, or
estates.

Virginia

Section 58.1-322 of the Code of Virginia provides that interest on obligations
of the state of Virginia, its political subdivisions, and instrumentalities or
direct obligations of the U.S. government or its authority, commission,
instrumentality or territories (including Puerto Rico, Guam and the Virgin
Islands) is exempt from personal income tax. Under Virginia Regulation Section
630-2-322, distributions from a regulated investment company, such as the
Virginia Fund, will also be exempt from personal income tax if the Fund invests
in such exempt obligations. Tax-exempt treatment is generally not available for
distributions attributable to income earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.), for repurchase agreements collateralized by
U.S. government obligations, or for obligations of other states and their
political subdivisions. To the extent such investments are made by the Fund,
such as for temporary or defensive purposes, such distributions will generally
be taxable on a pro rata basis.

Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Virginia taxable income and are
currently taxed at ordinary income tax rates.

Appendix B
Special Factors Affecting Each Fund
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The following information is a brief summary of factors affecting each of the
individual Funds and does not purport to be a complete description of such
factors. The information is based primarily upon information derived from public
documents relating to securities offerings of issuers of such states, from
independent municipal credit reports and historically reliable sources, but has
not been independently verified by the Trust. The market value of the shares of
any Fund may fluctuate due to factors such as changes in interest rates, matters
affecting a particular state, or for other reasons. Additional information
regarding each state is included in the SAI.

Alabama

Over the past decade, Alabama's economic base has diversified somewhat from its
concentration in the early 1980s in the manufacturing, construction and
agricultural sectors. This diversification has been fueled by the growth in high
tech firms located in the Huntsville area and health care and business services
firms located in the Birmingham area. Government employment also has surged,
primarily in higher education. State unemployment has remained near 7%, slightly
higher than the national average.

Although Alabama's economy faltered somewhat during the spring and summer of
1993, it generally has outperformed the national and east south central region
economies over the past three years. Alabama has instituted various programs,
including infrastructure improvements, worker training and tax incentives, to
lure new and expanding industries to the state, such as Mercedes-Benz's new
sport utility vehicle assembly plant near Birmingham, that have resulted in
Alabama investing over $1 billion annually.

The state's strengths include a diversifying economic base; an expanding service
sector; and a low cost structure that is attractive for new business investment.
The state, together with other east south central states, is positioned for
economic expansion, with continued gains in services and trade as well as gains
in manufacturing, especially the wood and paper products industry that benefits
from Alabama's abundant supply of lumber and timber. Weaknesses may show in the
state's apparel, textile and transportation equipment industries, which are
vulnerable to significant employment reductions as a result of the North
American Free Trade Agreement, as Mexico and Canada offer lower-cost business
environments. Cutbacks in the national defense budget will continue to lead to
job losses with the closure or downsizing of some of the state's military
installations.

Florida

Florida's economy is experiencing slow but steady economic growth driven by one
the nation's fastest growing populations. Florida has an estimated population of
nearly 14 million, an increase of over 38% from 1980 levels, and ranks as the
fourth most populous state in the nation. While high population growth has
strengthened the state's economy, such growth, along with the state's large and
growing elderly population, has put pressure on government funding for health
and human services, corrections, education and transportation.

The state's economy centers on a growing trade and services sector, although
agriculture and tourism remain important influences. Tourism has stabilized from
the effects of the early 1990s recession. Since that recession, Florida has
outperformed the nation and the east south central region in employment and
personal income growth. By 1994 personal income had climbed to match the
national average.

In November 1994 Florida voters adopted a proposal to cap the amount of taxes
and other revenues that can be raised by the state in any fiscal year without a
two-thirds vote of each house of the legislature to raise the cap. However, the
measure exempts revenues that are pledged to pay bonds and Medicaid and proceeds
from the state lottery. Consequently, the measure does not appear to repesent
any major impediment for state financing needs.

Georgia

Once dependent upon agriculture, Georgia's economy now has diversified into the
manufacturing (textiles, food products, paper products, electronic equipment and
aircraft), trade and services sectors. Atlanta has become the focus of economic
growth in the state and is the trade, service and transportation center for the
southeast region. Manufacturing predominates throughout the rest of the state.

The state's economy has grown rapidly since the recession of the early 1990s,
with steady gains in employment and personal income relative to the national
figures. In 1994, Georgia ranked 29th in personal income per capita, at 93% of
the national average, considerably above the 1969 level of 83%.

In 1992, the services sector accounted for approximately 23% of employment, with
trade (22%), government (17%), and the manufacturing (16%) sectors accounting
for most of the rest. Job growth has centered mainly in the wholesale and retail
trade while manufacturing has grown only slightly. In mid-1994, Georgia's
unemployment rate was 4.9% versus the 5.9% national average.

In March 1989, the U.S. Supreme Court ruled the imposition of state income taxes
on federal retirement benefits unconstitutional when state and local retiree's
benefits are exempted from state income taxes. After this decision, several
lawsuits were filed in Georgia, with the plaintiffs seeking state income tax
refunds retroactive to 1980. The maximum potential liability is estimated at
$591 million. However, under the state's three-year statute of limitations, the
maximum liability is estimated at $104 million.

Kentucky

Since the early 1990s recession, Kentucky's economy has shown moderate growth.
Kentucky's low costs of living and low cost of doing business, combined with the
commonwealth's aggressive business recruitment and business incentive programs,
have enabled the commonwealth to add a number of high profile corporate
expansions and relocations over the past several years.

Kentucky's economic makeup mirrors national averages in terms of employment and
income by source. Kentucky's personal income level, however, still is only
approximately four-fifths of the national average. Despite the impact of early
1990s recession on Kentucky's export-oriented industries, the state's job and
wealth base continues to grow and, to a limited extent, diversify.

Over the longer term, however, dramatic improvements are needed in Kentucky's
educational system for it to remain economically competitive. The state, through
an education reform statute passed in 1990, has made education its primary
economic development initiative. Success at this task, however, will not be
easy. Rural poverty and illiteracy, which permeate the state's eastern and
western regions, mean that the initiative will likely take years, if not
decades, to noticeably take effect.

Most economic development in Kentucky has occurred in the region of the state
bounded by Cincinnati on the north, Louisville on the west, and Lexington on the
east. Because of air access provided to the region by Delta Air Lines Inc.'s hub
airport operations in northern Kentucky, an excellent highway network connecting
the region with most major U.S. markets, and good higher education systems in
the three metropolitan areas, Kentucky's "Golden Triangle" has experienced
strong economic growth. The remainder of the commonwealth, however, has not
prospered nearly as much.

Louisiana

With its energy-oriented economy, Louisiana's efforts at diversification have
been slow, and the state has experienced the effects of reduced domestic oil
production in recent years. Louisiana is dependent on both production of oil and
natural gas, as well as petrochemicals. As the state's energy sector has shrunk,
services have replaced energy as the leading employment sector.

Decreased population and labor force, combined with a modest amount of job
growth in recent years, has permitted Louisiana to experience a modest recovery
from the depths of its energy-related downturn. Following losses in both
population and labor force from 1987-1990, modest labor force growth occurred in
1991, with an increase of 3.1% over the prior year. Since then employment has
remained level. Louisiana's population reached its peak of 4.5 million in 1986,
after which it began to decline, reaching 4.2 million only four years later.

Legalized gambling, both in New Orleans and on riverboats, is seen by the state
as a potential source of economic rejuvenation in the tourism industry. The
state also has realized that sectors beyond tourism and energy need development
in the long run for the state to become insulated from their cyclical nature.

Unemployment in 1994 was 7.8%, above the national average. Recent years have
seen the mining industry experience sharp employment declines, although this
sector still employs some 46,000 people. The service sector has shown the most
growth in recent years and by 1994 constituted approximately 25% of the
employment base. Some manufacturing growth continues to take place, mostly in
the defense and textile industires.

Louisiana's economic recovery is held back by an undereducated work force, low
income and limited wealth, and an economy that largely exports raw materials and
imports finished goods. Per capita personal income reached its peak at 98.3% of
national levels in 1981 (during the oil boom years) but by 1994 had slipped to
only 79% of the national average.

The state constitution is a major obstacle to achieving financial stability. It
limits revenue raising capacity and has prevented the state from replacing the
revenues once generated by the energy sector. It also limits spending
flexibility and requires a large share of revenues to go to constitutionally
protected functions, primarily education and transportation.

Maryland

Maryland's economic base is well diversified. Services, trade, finance and
government are the leading sectors of employment and income. Compared to
national averages, manufacturing as a source of employment plays a less
significant role (8.5%), and it is the state's most volatile sector. Government
employment (19.9%) and income is much larger for Maryland than the nation,
primarily because of the state's close proximity to Washington, D.C.

Maryland still is recovering slowly from the early 1990s recession, which was
particularly severe in the mid-atlantic region and which significantly affected
Maryland's construction, real estate, retail trade, and some services. The state
unemployment rate remains below the national average, but employment growth has
been relatively slow, averaging only 0.5% annually since the end of 1991. The
state expects only gradual jobs growth averaging about 2% annually through 1996.

Maryland's 1993 $23,920 per capita income remains high at approximately 115% of
the national average. Maryland's total personal income has grown annually over
the past few years, but at substantially slower rates than in prior years,
primarly due to declining federal defense spending and corporate restructurings.

Missouri

Because Missouri is a manufacturing, financial and agricultural state, its
diverse economy mirrors and is closely linked to the national economy. While
both of the state's two largest manufacturing industries, motor vehicles and
defense-related products, experienced significant layoffs in the early 1990s,
both have recovered and stabilized. Motor vehicles are even poised for
expansion, for automakers have announced plans for the construction or expansion
of several Missouri auto plants.

The construction sector, buoyed by flood damage reconstruction, and the tourism
sector grew in 1994, helping Missouri's unemployment rate drop below 4% for the
first time since 1979. Employment is expected to be stable through 1996.
However, the defense industry remains vulnerable to military cost cutting and
base closures.

During the 1980s, Missouri's per capita personal income grew at a compound
annual growth rate of 6.5%, the same rate as the U.S. Per capita income grew
5.5% from 1991 to 1992, lagging the nation's rate of 6.2% and rose 4.0% in 1993.
The state expects personal income to grow 6.0% in fiscal 1995 and 5.5% in fiscal
1996.

North Carolina

North Carolina ranks among the top ten states in terms of economic growth, as
measured by job and personal income growth. North Carolina's unemployment rate
fell to near 4% at the end of fiscal 1994, over 1.5% below the national rate.
Job gains were strongest in durable goods manufacturing, services, government
and finance. The state expects future job growth will be strongest in durable
manufacturing, services and retail trade. Aggregate personal income rose 5.6% in
fiscal 1994, and North Carolina is predicting a 4.5% increase for fiscal 1995,
although wealth levels remain below the national rate.

Diversification into finance, services, trade, research and high technology
manufacturing is reducing the state's historical dependence on agriculture,
textiles, and furniture manufacturing. Tobacco remains the primary agricultural
commodity, but the industry faces some uncertainty following significant press
and congressional scruitiny and talks of additional cigarette taxes.

Population growth in the state has been strong, perhaps partly reflecting its
attraction to retirees. Continued corporate relocation to the state, especially
in the Research Triangle Area near Raleigh/Durham, will be key to employment
growth through the 1990s.

Texas

Since the oil price crash in the mid-1980s, the Texas economy has stabilized and
diversified away from energy-related industries and now more closely resembles
the national economy. As a result, Texas was impacted more by the early 1990s
national recession than by the early 1980s recession, when the energy sector
provided insulation from national trends. Despite this adversity, the state's
economy still outperformed the national economy since the latest recession.

By the end of calendar 1993, services accounted for nearly 26% of employment,
trade accounted for 24% of jobs and total manufacturing exceeded 13%. Much of
the new growth in the 1990s has been in high-technology and related industries.
Construction experienced a near-banner year in 1994.

With a population of 18 million, Texas places second among states, up 20% from
the 1980 census. Good employment prospects make the state a popular destination.
The population is projected to increase 1.4% annually from 1995 through 2000.
The state anticipates that personal income will increase 6.4% annually through
1996.

The devaluation of the Mexican peso in December 1994 could have a negative
short-term impact on the Texas economy. State analysts indicate that a
significant slowdown in Mexican exports due to the devaluation could reduce
state economic growth by 0.5% in 1995. Retail sales along the Texas/Mexico
border also could be adversely affected.

Virginia

The Commonwealth's economy remains strong and diversified despite the recent
economic slowdown and some future uncertainties due to expected defense-related
cutbacks. Due to Virginia's diverse economic base, however, the unemployment
rate has remained relatively low (5.1% for the last quarter in 1993). During
fiscal 1994, the commonwealth's recovery gained momentum with employment growth
occurring in business services, retail trade and construction.

The commonwealth is made up of a variety of local economies, with the northern
Virginia area comprising the largest. In terms of population and building
activity, northern Virginia has been the fastest-growing area in the
commonwealth. Growth has been spurred by employment opportunities provided for
both civilian and military personnel in, and directly related to, the federal
government. The prospect of a lower defense budget and fewer defense contracts
could lead to some structural changes in two of Virginia's major local economies
(northern Virginia and Norfolk/Newport News) where defense and a substantial
military presence have played an important role. However, the commonwealth
continues to enjoy such advantages as its strategic mid-Atlantic location, port
facilities, proximity of its largest local economy to Washington, D.C., and a
major international airport in the northern Virginia area.

The employment base, consisting primarily of trade, government, and services
sectors, showed substantial growth during the 1980s, primarily in the services
and trade sectors. Direct defense jobs, including civilian, consituted
approximately 14% of employment in 1991. Because of the impact of federal
defense cutbacks, the commonwealth is actively seeking economic diversification,
especially in high technology, trade and tourism. As the mix shifts away from
defense-related manufacturing, however, slower annual personal income growth
should be expected.

In March 1989, the U.S. Supreme Court ruled the imposition of state income taxes
on federal retirement benefits unconstitutional when state and local retiree's
benefits are exempted from state income taxes. After this decision, several
lawsuits were filed in Virginia, with the plaintiffs seeking state income tax
refunds. The maximum potential liability was estimated in February 1992 at $705
million. Pending further litigation, Virginia passed a $340 million settlement
for retirees' claims, to be paid out over five years. The settlement will be
void if total claims rejecting the settlement offer exceed $20 million.