FRANKLIN MUNICIPAL SECURITIES TRUST, N-30D, 1997-07-31

FRANKLIN MUNICIPAL SECURITIES TRUST
N-30D, 1997-07-31

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CONTENTS

Shareholder Letter ............................................. 1
Fund Reports
Franklin Arkansas
Municipal Bond Fund ............................................ 3
Franklin California High
Yield Municipal Fund ........................................... 10
Franklin Hawaii
Municipal Bond Fund ............................................ 22
Franklin Tennessee
Municipal Bond Fund ............................................ 28
Franklin Washington
Municipal Bond Fund ............................................ 34
Glossary of
Investment Terms............................................... 40
Bond Ratings ................................................... 42
Statement of Investments ....................................... 45
Financial Statements ........................................... 57
Notes to
Financial Statements........................................... 62
Report of
Independent Auditors ........................................... 70

SHAREHOLDER LETTER

Dear Shareholder:

It's a pleasure to bring you the Franklin Municipal Securities Trust's annual
report for the period ended May 31, 1997.

During the year under review, the U.S. economy continued its healthy expansion.
Although inflation remained under control, a growing sense of nervousness from
market participants and the Federal Reserve Board (the Fed) overshadowed the
stock market's meteoric rise over this fiscal year. In a move termed a
"pre-emptive strike" against potential inflationary pressures, the Fed raised
the federal funds rate (the rate banks charge each other for overnight loans)
from 5.25% to 5.50% in March. Since then, long-term interest rates have steadily
declined.

Many investors expected the Fed to raise short-term rates in May. Recent data,
however, showed the economy was not overheating and inflation remained mild.
Interest rates will no doubt continue to fluctuate as the Fed looks for signs of
increasing inflationary pressures and other indicators to determine if
additional action is necessary. While further Fed action could lead to some
volatility in the financial markets, we feel that -- over the long term --
municipal bonds will continue to offer an excellent investment alternative,
especially for investors whose financial plan requires a tax-free component.

We continue to stress a long-term investment perspective. The financial markets
always have been -- and probably always will be -- subject to daily fluctuation.
No one can predict the future performance of the securities markets, but history
has shown that, over the long term, stocks and bonds have delivered impressive
results when income is left to compound. We encourage you to review your
investment program periodically with your investment representative, and to
focus on your continuing long-term goals.

If you have any questions concerning the funds in the Franklin Municipal
Securities Trust, we welcome the opportunity to answer them. We appreciate your
support, welcome new shareholders, and look forward to serving your investment
needs in the years ahead.

Sincerely,

Charles B. Johnson
Chairman

Franklin Municipal Securities Trust

Tom Kenny
Director

Franklin Municipal Bond Department

FRANKLIN ARKANSAS
MUNICIPAL BOND FUND

Your Fund's Objective: Seeks to provide high, current income exempt from regular
federal and Arkansas state personal income taxes while seeking preservation of
capital by investing primarily in a portfolio of Arkansas municipal securities.1

1. The fund may invest as much as 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax. All or a significant portion of
the income on these obligations may be subject to such tax. Distributions of
capital gains and of ordinary income from accrued market discount, if any, are
generally taxable.

STATE UPDATE

Arkansas' economic base remains strong, with steady growth expected to outpace
the national average over the next several years. Unemployment is below 7% and
is expected to remain low throughout the end of the decade. But the economic
expansion is slowing and employment growth, which grew at an annualized rate of
9.3% between 1989 and 1993, averaged 1.6% for 1996.

Growth in other economic sectors has offset layoffs in the defense industry.
Manufacturing, service and trade, and food processing sectors are among the
largest emloyment segments of the state. Some of the state's largest employers
include Tyson Foods, Wal-Mart, and ConAgra. Overall employment growth is
primarily the result of the food processing industry. Employment in the
manufacturing industry has also increased as the state's position as a low-cost
manufacturing center with ample natural resources draws corporations to
Arkansas. Additionally, the Arkansas Development Finance Authority (ADFA) has
contributed to the increase in manufacturing by assisting in the development of
smaller manufacturing firms.2

2. Source: Standard & Poor's Creditweek Municipal, April 21, 1997.

GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT

PORTFOLIO NOTES

During the period, the municipal market experienced a tightening of yields
between higher- and lower-rated issues. Typically, lower-quality bonds pay
higher yields than higher-quality bonds to compensate investors for taking on
more credit risk. Over the reporting period, however, yields on higher-rated
issues were nearly as strong as those on bonds of lesser quality. Thus, our
value-oriented approach led us to invest a larger portion of the fund's assets
in higher-rated bonds. As of the close of the period, more than 40% of the
fund's total long-term investments were invested in AAA-rated issues.

We concentrated our purchases in "essential service" sectors such as: education,
utilities, housing and hospitals. We participated in issues offered by the
Sebastian County Community College district, Arkansas Water and Sewer
Department, Little Rock Health Facility, and Arkansas State Single Family
Housing District. Due to the relatively light supply of Arkansas municipal
bonds, we had the opportunity to purchase Puerto Rico municipal bonds, including
highway, electric authority, and Commonwealth general operations bonds. We
considered these securities to be good values for the fund especially since
income from Puerto Rico bonds is exempt from Arkansas state income tax.

As a result of the state's relatively low municipal issuance, Arkansas bonds
generally trade at lower yields than national levels. However, we maintain a
disciplined approach to purchasing current coupon bonds at a slight discount,
and we continue to look for Arkansas bonds offering good yields. The lack of
issuance, coupled with a strong demand from both retail and institutional
investors, should help the fund perform well over the next fiscal year.

This discussion reflects our strategies for the fund and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed in this report may change as new
circumstances arise. Although past performance of a specific investment or
sector cannot guarantee future performance, such information can help illustrate
how we analyze the securities we purchase for the fund.

Franklin Arkansas
Municipal Bond Fund
Portfolio Breakdown on 5/31/97

% of Total
Long-Term
Sector Investments

Utilities 29.6%
Hospitals 17.3%
Housing 14.9%
General Obligations 13.3%
Education 11.8%
Transportation 6.1%
Other Revenue 4.0%
Industrial 3.0%

For a complete list of portfolio holdings, please see page 45 of this report.

GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT

PERFORMANCE SUMMARY
We are pleased to report that the Franklin Arkansas Municipal Bond Fund's share
price, as measured by net asset value, increased 30.0 cents, from $10.21 on May
31, 1996, to $10.51 on May 31, 1997.

At the end of the reporting period, your fund's distribution rate was 5.36%,
based on an annualization of May's monthly dividend of 4.9 cents ($0.049) per
share and the maximum offering price of $10.98 on May 31, 1997. This double
tax-free rate is generally higher than the after-tax return on a comparable
taxable investment. For example, an investor in the maximum combined federal and
Arkansas state personal income tax bracket would need to earn 9.54% from a
taxable investment to match the fund's tax-free distribution rate.

The fund posted a cumulative total return of 8.90% for the 12-month period ended
May 31, 1997. Total return measures the change in value of an investment,
assuming reinvestment of dividends and capital gains at net asset value. This
calculation does not include the initial sales charge.

As illustrated by the chart on the following page, your fund's performance
outpaced the rate of of inflation, as measured by the Consumer Price Index, over
the reporting period -- maintaining your purchase power, a primary goal of any
investment. Although the fund's shares have underperformed the Lehman Brothers
Municipal Bond Index, unmanaged market indices have inherent performance
differentials in comparison with any fund. They do not pay management fees to
cover salaries of security analysts or portfolio managers, nor do they pay
commissions to buy and sell bonds. Unlike indices, mutual funds are never 100%
invested since they need to keep cash on hand to redeem shares or pay for
upcoming investments. The fund's performance figures also include the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as the fund's had been applied to this index, the index's performance would
have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest directly in an index.

Franklin Arkansas
Municipal Bond Fund
Dividend Distributions

6/1/96 - 5/31/97*

Dividend
Month per Share
June 4.9 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
December 4.9 cents
January 4.9 cents
February 4.9 cents
March 4.9 cents
April 4.9 cents
May 4.9 cents
Total 58.8 cents

*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions and total return calculations include all accrued income earned by
the fund during the reporting period. Dividends will vary based on the earnings
of the fund's portfolio, and past distributions are not predictive of future
trends. .

GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT

*Includes the initial sales charge, all fund expenses and account fees. It also
assumes that dividends and capital gains were reinvested at net asset value. The
Lehman Brothers Municipal Bond Index includes price appreciation or depreciation
and distributions as a percentage of the original investment.

Franklin Arkansas Municipal Bond Fund

Periods ended 5/31/97

Since
Inception
1-Year 3-Year (5/10/94)
Cumulative Total Return1 8.90% 22.05% 22.79%
Average Annual Total Return2 4.30% 5.32% 5.45%
Distribution Rate3 5.36%
Taxable Equivalent Distribution Rate4 9.54%
30-Day Standardized Yield5 5.41%
Taxable Equivalent Yield4 9.63%

1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the initial sales charge.

2. Average annual total returns measure the change in value of an investment
over the periods indicated and include the maximum 4.25% initial sales charge.
See Note below.

3. Based on an annualization of May's 4.9 cents per share monthly dividend and
the maximum offering price of $10.98 on May 31, 1997.

4. Taxable equivalent distribution rate and yield assume the 1997 maximum
combined federal and Arkansas state personal income tax bracket of 43.828%,
based on the federal income tax rate of 39.6%.

5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1997.

Note: All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares.

The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return to shareholders. Without this waiver, the fund's distribution rate
and yield would have been lower, and yield for the period would have been 4.75%.
The fee waiver may be discontinued at any time upon notice to the fund's Board
of Trustees.

Past performance is not predictive of future results.

FRANKLIN CALIFORNIA
HIGH YIELD MUNICIPAL FUND

Your Fund's Objective: Seeks to provide high, current income exempt from regular
federal and California state personal income taxes while seeking preservation of
capital by investing primarily in a portfolio of high-yielding, medium-, lower-,
and non-rated California municipal securities.1

STATE UPDATE

The California economy sustained its strong, consistent growth trend throughout
the reporting period. California's job creation rate exceeded national levels,
enabling it to restore the jobs lost during the recession earlier in the decade.
Furthermore, its economic base is now more diversified and significantly less
reliant on aerospace and defense-related manufacturing. California should reach
an important milestone during 1997 -- the first state to produce more than $1
trillion in gross state product.

While taxpayer initiatives may delay certain capital programs, they will not
reduce the need for essential general government projects or those that enhance
the quality of life. The impacts of anti-tax sentiment, including Proposition
218, which California voters passed last November, remain unclear. However, we
do expect this important measure to undergo much legal interpretation in the
years ahead.

Based in part on California's improving economic position, two of the three
major credit-rating agencies upgraded California's debt rating during 1996.
Standard & Poor's(R) Corporation, for example, raised its rating of the state's
general obligation debt, from A to A+, in July 1996.2 Some have viewed such
upward revisions as more of a correction than an upgrade, and the state's credit
characteristics never appeared to falter below the high "A" range. Future rating
changes appear contingent on the state's ability to exercise fiscal discipline
during a period of monetary excess.

2. See Bond Ratings, page 42, for ratings descriptions. This is not S&P's(R)
rating ofthe fund.

Looking forward, we expect the national economy should begin to slow during the
second half of 1997. Combined with continued low inflation, this trend should
bode well for the bond market. In California, with defense cutbacks largely
completed and the severe real estate declines essentially behind it, the picture
is bright. Coupled with the growing strength of the high-technology and
entertainment industries, as well as continued growth in trade with Pacific Rim
countries, we believe the economic expansion in California should continue.

PORTFOLIO NOTES
During the reporting period, the fund benefited from an improving economy and
bond market. The low supply of high-yield issues decreased their yields relative
to investment-grade issues so, in many instances, we found better values in
higher-rated bonds. The fund's total long-term investments in
below-investment-grade issues decreased slightly, from 18.4% on May 31, 1996, to
16.7% on May 31, 1997. Additionally, the tightened yield spreads led to
lower-rated securities outperforming their high-grade counterparts during the
period.

PROPOSITION 218

On November 6, 1996, California voters passed Proposition 218, a ballot
initiative that requires voter approval for all tax and fee increases. It also
curtails benefit assessments to fund certain property-related services. Although
its full impact on municipal credits remains unclear, the amendment has caused
some issuers to postpone the sales of new bonds until they can study the issue
further. So far, one major credit-rating agency downgraded a few California
credits on the rationale of diminished revenue-raising capabilities. It remains
to be seen whether other revisions will follow.

Franklin California
High Yield Municipal Fund
Portfolio Breakdown on 5/31/97

% of Total
Long-Term
Sector Investments
Transportation 16.6%
Certificates of Participation 14.7%
Tax Allocation Bonds 11.9%
Mello-Roos Bonds 11.1%
Utilities 9.4%
Housing 8.2%
Marks-Roos Bonds 6.2%
Hospitals 6.1%
Special Assessment Bonds 5.1%
Education 3.4%
Industrial Revenue Bonds 2.8%
Health Care1.6%
General Obligations 1.3%
Other Revenue 1.2%
Pre-Refunded 0.4%

For a complete list of portfolio holdings please see page 47 of this report.

We believe the trend of light supply and narrowed yield spreads should continue.
Fortunately, the large size of Franklin's Municipal Bond Department and its
experience in the California municipal market can provide us an advantage over
some other bond funds. For example, bond issuers who want to make their new
issues more marketable often consult Franklin. This enables us, in many cases,
to participate in the better, high-yield deals coming to market. In addition,
our extensive experience in analyzing California debt allows us to explore and
evaluate all types of municipal issues effectively.

One recent purchase for the fund included $10 million of a Granada Hills
Community Hospital issue. Granada Hills is one of the few, stand-alone,
acute-care hospitals in southern California's San Fernando Valley. It has a
favorable cash position and is due to receive $14 million from the federal
government by way of a Federal Emergency Management Agency (FEMA) grant. The
hospital will use the money to build an addition that may enable it to become
more competitive.

We also purchased $9 million of a Vallejo Certificate of Participation issue for
Marine World/Africa USA. The City of Vallejo has entered into a new management
agreement with Premier Parks, Inc. to run Marine World. Premier is a nationally
recognized operator of amusement and recreation parks throughout the country. It
entered into a long-term ground lease on land adjacent to Marine World and has
committed to invest $7 million toward the construction of a major attraction.
The certificates are secured by lease payments made by the City of Vallejo,
which enjoys sound financial operations, moderate debt levels and favorable
demographic trends.

This discussion reflects our strategies for the fund and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed above may change as new circumstances
arise. Although past performance of a specific investment or sector cannot
guarantee future performance, such information can help illustrate how we
analyze the securities we purchase for the fund.

GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT

GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT

PERFORMANCE SUMMARY

CLASS I

We are pleased to report that the Franklin California High Yield Municipal
Fund's Class I share price, as measured by net asset value, increased 29.0
cents, from $9.81 on May 31, 1996, to $10.10 on May 31, 1997.

At the end of the reporting period, your fund's distribution rate was 5.91%,
based on an annualization of May's monthly dividend of 5.2 cents ($0.052) per
share and the maximum offering price of $10.55 on May 31, 1997. This double
tax-free rate is generally higher than the after-tax return on a comparable
taxable investment. As the chart illustrates, an investor in the maximum
combined federal and California state personal income tax bracket would need to
earn 10.79% from a taxable investment to match the fund's tax-free distribution
rate.

The fund posted a cumulative total return of +9.64% for the 12-month period
ended May 31, 1997. Total return measures the change in value of an investment,
assuming reinvestment of dividends and capital gains at net asset value. This
calculation does not include the initial sales charge.

As illustrated by the chart on the next page, your fund's performance since 1995
has exceeded the rate of inflation, as measured by the Consumer Price Index,
maintaining your purchasing power -- a primary goal of any investment. Although
the fund's shares have slightly underperformed the Lehman Brothers Municipal
Bond Index, unmanaged market indices have inherent performance differentials in
comparison with any fund. They do not pay management fees to cover salaries of
security analysts or portfolio managers, nor do they pay commissions to buy and
sell bonds. Unlike indices, mutual funds are never 100% invested, since they
need to keep cash on hand to redeem shares or pay for upcoming investments. The
fund's performance figures also include the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to this index, the index's performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest directly in an index.

Franklin California
High Yield Municipal Fund
Class I

Dividend Distributions

6/1/96 - 5/31/97*
Dividend
Month per Share
June 5.5 cents
July 5.5 cents
August 5.5 cents
September 5.2 cents
October 5.2 cents
November 5.2 cents
December 5.2 cents
January 5.2 cents
February 5.2 cents
March 5.2 cents
April 5.2 cents
May 5.2 cents
Total 63.3 cents

*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions and total return calculations include all accrued income earned by
the fund during the reporting period. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.

GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin California High Yield Municipal Fund - Class I

Periods ended 5/31/97

Since
Inception
1-Year 3-Year (5/3/93)
Cumulative Total Return1 9.64% 26.22% 29.70%
Average Annual Total Return2 4.93% 6.52% 5.47%
Distribution Rate3 5.91%
Taxable Equivalent Distribution Rate4 10.79%
30-Day Standardized Yield5 5.93%
Equivalent Taxable Yield4 10.82%

1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.

2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.

3. Distribution rate is based on an annualization of May's 5.2 cents per share
monthly dividend and the maximum offering price of $10.55 on May 31, 1997.

4. Taxable equivalent distribution rate and yield assume the maximum combined
federal and California state personal income tax bracket of 45.217%, based on
the federal tax rate of 39.6%.

5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1997.

Note: Prior to July 1, 1994, Class I shares were offered at a higher initial
sales charge. Thus, actual total returns for purchasers of shares during that
period would have been somewhat lower than noted above. All total return
calculations assume reinvestment of dividends and capital gains, if any, at net
asset value. Your investment return and principal value will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.

The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return. Without this waiver, the fund's distribution rate and total return
would have been lower and yield for the period would have been 5.54%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.

Past performance is not predictive of future results.

GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT

CLASS II

We are pleased to report that the Franklin California High Yield Municipal
Fund's Class II share price, as measured by net asset value, increased 30.0
cents, from $9.82 on May 31, 1996, to $10.12 on May 31, 1997.

At the end of the reporting period, your fund's distribution rate was 5.56%,
based on an annualization of May's monthly dividend of 4.73 cents ($0.0473) per
share, plus an annual dividend adjustment of .07 cent, and the offering price of
$10.22 on May 31, 1997 (see table on page 19). This double tax-free rate is
generally higher than the after-tax return on a comparable taxable investment.
As the chart to the left illustrates, an investor in the maximum combined
federal and California state personal income tax bracket would need to earn
10.15% from a taxable investment to match the fund's tax-free distribution rate.

The fund posted a cumulative total return of +9.08% for the 12-month period
ended May 31, 1997. Total return measures the change in value of an investment
over the period indicated, assuming reinvestment of dividends and capital gains
at net asset value. This calculation does not include the sales charges.

As illustrated by the chart on the next page, your fund's performance since
inception has exceeded the rate of inflation, as measured by the Consumer Price
Index, maintaining your purchasing power -- a primary goal of any investment.
Although the fund's shares have slightly underperformed the Lehman Brothers
Municipal Bond Index, unmanaged market indices have inherent performance
differentials in comparison with any fund. They do not pay management fees to
cover salaries of security analysts or portfolio managers, nor do they pay
commissions to buy and sell bonds. Unlike indices, mutual funds are never 100%
invested since they need to keep cash on hand to redeem shares or pay for
upcoming investments. The fund's performance figures also include sales charges,
all fund expenses and account fees. If operating expenses such as the fund's had
been applied to this index, the index's performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest directly in an index.

Franklin California
High Yield Municipal Fund Class II
Dividend Distributions

6/1/96 - 5/31/97*

Dividend
Month per Share
June 5.03 cents
July 5.12 cents
August 5.12 cents
September 4.82 cents
October 4.66 cents
November 4.66 cents
December 4.66 cents
January 4.55 cents
February 4.55 cents
March 4.55 cents
April 4.73 cents
May 4.80 cents
Total 57.25 cents

Past performance is not predictive of future results.

GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT

*Includes the initial sales charge, as well as the contingent deferred sales
charge (CDSC), applicable to shares redeemed within the first 18 months of
investment, all fund expenses and account fees, and assumes reinvestment of
dividends and capital gains at net asset value. The Lehman Brothers Municipal
Bond Index includes price appreciation or depreciation and distributions as a
percentage of the original investment. The total value on May 31, 1997 reflects
the CDSC, assuming the account is liquidated on that date. Purchasers who remain
in the account for longer than 18 months will not be assessed a CDSC; thus
actual total return may be higher. Franklin California High Yield Municipal Fund
- - Class II

Periods ended 5/31/97

Since
Inception
1-Year (5/1/96)
Cumulative Total Return1 9.08% 9.52%
Average Annual Total Return2 6.99% 6.85%
Distribution Rate3 5.56%
Taxable Equivalent Distribution Rate4 10.15%
30-Day Standardized Yield5 5.58%
Taxable Equivalent Yield4 10.19%

1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.

2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and include the 1.0% initial sales
charge and 1.0% contingent deferred sales charge applicable to shares redeemed
within the first 18 months of purchase. See Note below.

3. Distribution rate is based on an annualization of May's 4.73 cents per share
monthly dividend, plus an annual dividend adjustment of .07 cent, and the
offering price of $10.22 on May 31, 1997.

4. Taxable equivalent distribution rate and yield assume the maximum combined
federal and California state personal income tax bracket of 45.217%, based on
the federal tax rate of 39.6%.

5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1997.

Note: All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.

The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return. Without this waiver, the fund's distribution rate and total return
would have been lower and yield for the period would have been 5.17%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.

FRANKLIN HAWAII
MUNICIPAL BOND FUND

Your Fund's Objective: Seeks to provide high, current income exempt from regular
federal and Hawaii state personal income taxes while seeking preservation of
income, through a portfolio consisting primarily of Hawaii municipal
securities.1

STATE UPDATE

Hawaii continues to maintain moderate economic growth, with a November 1996
unemployment rate of 5.8%, comparable to the national average. With little in
the way of a manufacturing sector, the state is heavily reliant on tourism.
California's strong expansion and the economic recovery of Pacific Rim countries
are prime catalysts for the current growth in Hawaii.2

2. Source: John Nuveen & Co. Inc., January 1997.

While the state's economic performance has been distinctly average, its debt
level greatly surpassed that of most other states. With over $1 billion in new
state debt authorized, Hawaii issued $638 million in bonds within the first
three months of 1997 alone, leading all other western states in new issues.3 As
a result, Standard & Poor's(R) lowered its rating of Hawaii's general obligation
debt from AA to A, on March 21, 1997.4 The rating agency also cited concern over
Hawaii's increasing labor costs with state employee unions, heavy dependence on
tourism, and ongoing litigation over the state's allocation of revenue derived
from ceded lands (areas of the state transferred to the U.S. from the Republic
of Hawaii, upon Hawaii's annexation).5

3. Source: The Bond Buyer, May 2, 1997.

4. This does not indicate Standard & Poor's rating of the fund.

5. Source: Standard & Poor's Creditwire, March 21, 1997.

Despite Standard & Poor's fiscal concerns, its current A rating reflects a
stable outlook for the state. Among the factors contributing to this stable
outlook is the revenue Hawaii enjoys from sales taxes. Responsible for roughly
50% of all tax revenues, Hawaii's sales tax revenue is the highest in the nation
on a per capita basis, a result of the state's high level of tourism, and
resulting visitor spending. Although Hawaii derives more revenue from sales
taxes than any other state on a per capita basis, its actual 4% sales tax rate
is far below the national average. Consequently, an increase in the sales tax
could represent a large, untapped source of income for the state.2

GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Hawaii
Municipal Bond Fund
Portfolio Breakdown on 5/31/97

% of Total
Long-Term
Sector Investments
Utilities 27.3%
Housing 19.0%
Transportation 18.1%
Hospitals 17.5%
General Obligation 6.9%
Pre-Refunded 6.6%
Other Revenue 3.5%
Industrial 1.1%

For a complete list of portfolio holdings, please see page 50.

PORTFOLIO NOTES

During the one-year reporting period, we concentrated on purchasing relatively
full coupon bonds for the fund. Our management style is to bring into the fund
as much coupon income as is possible while also meeting our other investment
objectives. Consequently, we tend to forgo deep discount and high premium bonds.
This strategy contributes to the fund's maintaining a comparatively stable share
value in markets that are continually adjusting. As always, we strive to keep
the fund fully invested at all times to provide shareholders with a relatively
high level of tax-free income.

PERFORMANCE SUMMARY

We are pleased to report that the Franklin Hawaii Municipal Bond Fund's share
price, as measured by net asset value, increased 25.0 cents, from $10.54 on May
31, 1996, to $10.79 on May 31, 1997.

At the end of the reporting period, your fund's distribution rate was 5.32%,
based on an annualization of May's monthly dividend of 5.0 cents ($0.05) per
share and the maximum offering price of $11.27 on May 31, 1997.

This tax-free rate is generally higher than the after-tax return on a comparable
taxable investment. As the chart to the right illustrates, an investor in the
maximum combined federal and Hawaii state personal income tax bracket would need
to earn 9.79% from a taxable investment to match the fund's tax-free
distribution rate.

The fund posted a cumulative total return of +8.23% for the 12-month period
ended May 31, 1997. Total return measures the change in value of an investment
over the periods indicated, assuming reinvestment of dividends and capital
gains. This calculation does not include the initial sales charge.

As illustrated by the chart on the next page, your fund's performance since
inception has exceeded the rate of inflation, as measured by the Consumer Price
Index, maintaining your purchasing power -- a primary goal of any investment.
Although the fund's shares have slightly underperformed the Lehman Brothers
Municipal Bond Index, unmanaged market indices have inherent performance
differentials in comparison with any fund. They do not pay management fees to
cover salaries of security analysts or portfolio managers, nor do they pay
commissions to buy and sell bonds. Unlike unmanaged indices, mutual funds are
never 100% invested since they need to keep cash on hand to redeem shares or pay
for upcoming investments. The fund's performance figures also include the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to this index, the index's
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest directly in an index.

GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Hawaii
Municipal Bond Fund
Dividend Distributions

6/1/96 - 5/31/97*

Month Dividend
per Share
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
November 5.0 cents
December 5.0 cents
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents

Total 60.0 cents

Past performance is not predictive of future results.

GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Periods ended 5/31/97

Since
Inception
1-Year 5-Year (2/26/92)
Cumulative Total Return1 8.23% 41.20% 44.52%
Average Annual Total Return2 3.61% 6.22% 6.38%
Distribution Rate3 5.32%
Taxable Equivalent Distribution Rate4 9.79%
30-Day Standardized Yield5 5.29%
Taxable Equivalent Yield4 9.73%

1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.

2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.

3. Distribution rate is based on an annualization of the current 5.0 cents per
share monthly dividend and the maximum offering price of $11.27 on May 31, 1997.

4. Taxable equivalent distribution rate and yield assume the maximum combined
federal and Hawaii state personal income tax bracket of 45.64%, based on the
federal tax rate of 39.6%.

5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1997.

Note: Prior to July 1, 1994, shares were offered at a higher initial sales
charge. Thus, actual total returns for purchasers of shares during that period
would have been somewhat lower than noted above. All total return calculations
assume reinvestment of dividends and capital gains, if any, at net asset value.
Your investment return and principal value will fluctuate with market
conditions, and you may have a gain or loss when you sell your shares.

The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return. Without this waiver, the fund's distribution rate and total return
would have been lower and yield for the period would have been 4.91%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.

FRANKLIN TENNESSEE
MUNICIPAL BOND FUND

Your Fund's Objective: Seeks to provide high, current income exempt from regular
federal and Tennessee state personal income taxes while seeking preservation of
capital by investing primarily in a portfolio of Tennessee municipal
securities.1

STATE UPDATE

Tennessee's economy expanded during the period with increased diversification in
its major economic and employment sectors. The state benefited particularly from
strong growth in health care, distribution services, and non-durable forms of
manufacturing. Furthermore, the growth of General Motors Corp.'s Saturn Division
and the Nissan Corp. represented significant additions to the state's economy.

Tennessee's financial position remains sound. A strong recovery from the
recession of the early 1990s increased the state's operating fund. State
operations rely heavily on sales and use taxes, which accounted for 57% of all
tax revenues; favorable economic growth in fiscal 1995 and 1996 increased these
revenues.2

2. Source: Standard & Poor's CreditWeek Municipal, April 14, 1997.

Although flat revenue growth and reduced expenditures are factored into the
fiscal 1998 budget, Tennessee is a fiscally conservative state that carries only
moderate debt. Based on Tennessee's above-average economic performance and
continued diversification, Standard & Poor's(R) holds a positive outlook for
Tennessee's municipal debt, which S&P(R) has rated AA+.3

3. This does not indicate S&P's rating of the fund.

PORTFOLIO NOTES

During the period, the municipal market experienced a tightening of yields
between higher- and lower-rated issues. Typically, lower-quality bonds pay
higher yields than higher-quality bonds to compensate investors for taking on
more credit risk. During the period, however, yields on higher-rated issues were
nearly as strong as those on bonds of lesser quality. Thus, our value-oriented
approach led us to invest a larger portion of the fund's assets in
higher-quality insured bonds. As of the close of the period, more than 50% of
the fund's total long-term investments were in AAA-rated issues, versus 40% one
year earlier.

Purchases made during the reporting period were also concentrated in "essential
purpose" holdings, including general obligation bonds and direct-revenue utility
issues. For example, general obligation bonds increased, from 15.0% to 22.7% of
total long-term investments, while direct-revenue utilities issues increased,
from 6.3% to 14.2%, during the year under review.

GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Tennessee
Municipal Bond Fund
Portfolio Breakdown on 5/31/97

% of Total
Long-Term
Sector Investments
General Obligation 22.7%
Housing 17.7%
Industrial 16.2%
Utilities 14.2%
Transportation 8.4%
Other Revenue 7.5%
Hospitals 7.2%
Education 3.1%
Pre-Refunded 2.1%
Certificates of Participation 0.9%

For a complete list of portfolio holdings, please see page 53 of this report.

The fund recently purchased Metropolitan-Nashville and Shelby County general
obligation debt, and participated in an insured, Nashville water-revenue issue.

Looking forward, we believe the supply of new Tennessee issues should remain
low, with demand staying constant. This may enhance these securities'
attractiveness, which should bode well for the fund's future performance. We
also expect the national economy should begin to slow during the second half of
1997, and combined with continued low inflation, this should be favorable for
the bond market.

This discussion reflects our strategies for the fund and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed above may change as new circumstances
arise. Although past performance of a specific investment or sector cannot
guarantee future performance, such information can help illustrate how we
analyze the securities we purchase for the fund.

PERFORMANCE SUMMARY

We are pleased to report that the Franklin Tennessee Municipal Bond Fund's share
price, as measured by net asset value, increased 31.0 cents, from $10.40 on May
31, 1996, to $10.71 on May 31, 1997.

At the end of the reporting period, your fund's distribution rate was 5.36%,
based on an annualization of May's monthly dividend of 5.0 cents ($0.05) per
share and the maximum offering price of $11.19 on May 31, 1997. This double
tax-free rate is generally higher than the after-tax return on a comparable
taxable investment. For example, an investor in the maximum combined federal and
Tennessee state personal income tax bracket would need to earn 9.44% from a
taxable investment to match the fund's tax-free distribution rate.

The fund posted a cumulative total return of +8.95% for the 12-month period
ended May 31, 1997. Total return measures the change in value of an investment,
assuming reinvestment of dividends and capital gains at net asset value. This
calculation does not include the initial sales charge.

As illustrated by the chart on the next page, your fund's performance since 1995
has exceeded the rate of inflation, as measured by the Consumer Price Index,
maintaining your purchasing power -- a primary goal of any investment. Although
the fund's shares have slightly unerperformed the Lehman Brothers Municipal Bond
Index, unmanaged market indices have inherent performance differentials in
comparison with any fund. They do not pay management fees to cover salaries of
security analysts or portfolio managers, nor do they pay commissions to buy and
sell bonds. Unlike indices, mutual funds are never 100% invested since they need
to keep cash on hand to redeem shares or pay for upcoming investments. The
fund's performance figures also include the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to this index, the index's performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest directly in an index.

GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Tennessee
Municipal Bond Fund
Dividend Distributions

6/1/96 - 5/31/97*

Dividend
Month per Share
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
November 5.0 cents
December 5.0 cents
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
Total 60.0 cents

Past performance is not predictive of future results.

GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Tennessee Municipal Bond Fund

Periods ended 5/31/97

Since

Inception

1-Year 3-Year (5/10/94)
Cumulative Total Return1 8.95% 23.74% 25.23%
Average Annual Total Return2 4.33% 5.81% 6.13%
Distribution Rate3 5.36%
Taxable Equivalent Distribution Rate4 9.44%
30-Day Standardized Yield5 5.18%
Taxable Equivalent Yield4 9.12%

1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.

2. Average annual total returns measure the change in value of an investment
over the periods indicated and include the maximum 4.25% initial sales charge.
See Note below.

3. Based on an annualization of May's 5.0 cents per share monthly dividend and
the maximum offering price of $11.19 on May 31, 1997.

4. Taxable equivalent distribution rate and yield assume the 1997 maximum
combined federal and Tennessee state personal income tax bracket of 43.224%,
based on the federal income tax rate of 39.6%.

5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1997.

The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return to shareholders. Without this waiver, the fund's distribution rate
and total return would have been lower, and yield for the period would have been
4.79%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.

FRANKLIN WASHINGTON
MUNICIPAL BOND FUND

Your Fund's Objective: Seeks to provide high, current income exempt from regular
federal income tax while seeking preservation of capital, through a portfolio
consisting primarily of Washington municipal securities.1

STATE UPDATE

Washington continued to enjoy a strong, AA credit rating from Standard &
Poor's(R).2 This rating reflects the state's increasingly diversified economy,
stronger-than-expected growth, and moderate debt burden. Ongoing increases in
state services, trade and construction, in addition to a strong national
economy, contributed to Washington's economic rebound.3 Most of the state's
growth has been localized in the Puget Sound area, prompted by favorable
developments in the software industry and a surge in aerospace employment by
industry giant Boeing Co.4

2. This does not indicate Standard & Poor's rating of the fund.

3. Source: Standard & Poor's CreditWeek Municipal, January 13, 1997.

4. Source: Federal Reserve Bank of San Francisco, January 1997.

Washington's stronger-than-expected economy allowed the state to post an
unemployment rate of just 6.0% for 1996, its lowest rate since 1990. In
addition, state growth is predicted to average 3.0% annually through 1999, up
from an annual 1.8% growth rate in 1995. State revenue was greater than
anticipated and the forecast for revenue received during the current biennial
period, ending June 30, 1997, has been increased by $66.2 million. At the same
time, state spending grew by a modest amount and remained within the spending
constraints of Proposition 601.

If Washington continues its current economic and fiscal trends, Standard &
Poor's expects to upgrade the state's already high, AA rating.3

WHAT IS PROPOSITION 601?

Proposition 601 is an initiative that seeks to contain Washington state
government spending. Approved by voters, it came into effect in 1995. Under
Proposition 601, the state's operating budget can increase at a rate no greater
than the sum of population growth and inflation. If state revenues exceed this
expenditure limit, the surplus will be deposited in an emergency reserve fund.
The proposition also mandates a two-thirds majority vote in both the state
Senate and House for the passage of any tax increase.

HOW MIGHT IT EFFECT THE MUNICIPAL BOND MARKET?

It is possible, under the constraints of Proposition 601, that Washington state
might not generate enough revenue to service all of its municipal debt. However,
the state remains well within its spending limits and maintains a $549 million
general fund balance, as of January 1997. Washington's current credit rating
indicates Standard & Poor's favorable opinion of the state's fiscal situation
under Proposition 601.2 Indeed the proposition's constraints on spending should
limit Washington's debt issuances and keep its debt level low, strengthening its
fiscal position.

GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Washington
Municipal Bond Fund
Portfolio Breakdown on 5/31/97

% of Total
Long-Term
Sector Investments
Utilities 34.4%
General Obligation 22.5%
Housing 14.9%
Education 11.7%
Industrial 10.1%
Transportation 2.5%
Pre-Refunded 1.4%
Certificates of Participation 1.3%
Hospitals 1.2%

For a complete list of portfolio holdings, please see page 55.

PORTFOLIO NOTES

During the one-year reporting period, Washington state benefited from the
nation's overall low inflation and strong economy. These factors have, in our
opinion, created excellent buying opportunities in the Washington municipal bond
market. We took advantage of these conditions to add several new issues to the
fund, which helped increase our yield to shareholders, without compromising our
high quality standards. During the period, we purchased securities issued by the
state government and several of its municipalities including Pierce, Snohomish,
and Grant counties. Looking ahead, we expect long-term bond rates to be
relatively stable.

PERFORMANCE SUMMARY
We are pleased to report that the Franklin Washington Municipal Bond Fund's
share price, as measured by net asset value, increased 29.0 cents, from $9.80 on
May 31, 1996, to $10.09 on May 31, 1997.

At the end of the reporting period, your fund's distribution rate was 5.46%,
based on an annualization of May's monthly dividend of 4.8 cents ($0.048) per
share and the maximum offering price of $10.54 on May 31, 1997.

This tax-free rate is generally higher than the after-tax return on a comparable
taxable investment. As the chart to the right illustrates, an investor in the
maximum federal income tax bracket would need to earn 9.04% from a taxable
investment to match the fund's tax-free distribution rate.

The fund posted a cumulative total return of +9.04% for the 12-month period
ended May 31, 1997. Total return measures the change in value of an investment
over the periods indicated, assuming reinvestment of dividends and capital
gains. This calculation does not include the initial sales charge.

As illustrated by the chart on the next page, your fund's performance since 1995
has exceeded the rate of inflation, as measured by the Consumer Price Index,
maintaining your purchasing power -- a primary goal of any investment. Although
the fund's shares have slightly underperformed the Lehman Brothers Municipal
Bond Index, unmanaged market indices have inherent performance differentials in
comparison with any fund. They do not pay management fees to cover salaries of
security analysts or portfolio managers, nor do they pay commissions to buy and
sell bonds. Unlike unmanaged indices, mutual funds are never 100% invested since
they need to keep cash on hand to redeem shares or pay for upcoming investments.
The fund's performance figures also include the maximum initial sales charge,
all fund expenses and account fees. If operating expenses such as the fund's had
been applied to this index, the index's performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest directly in an index.

GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Washington
Municipal Bond Fund
Dividend Distributions

6/1/96 - 5/31/97*

Dividend
Month per Share
June 4.8 cents
July 4.8 cents
August 4.8 cents
September 4.8 cents
October 4.8 cents
November 4.8 cents
December 4.8 cents
January 4.8 cents
February 4.8 cents
March 4.8 cents
April 4.8 cents
May 4.8 cents
Total 57.6 cents

Past performance is not predictive of future results.

GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Washington Municipal Bond Fund

Periods ended 5/31/97

Since
Inception
1-Year 3-Year (5/3/93)
Cumulative Total Return1 9.04% 25.88% 25.96%
Average Annual Total Return2 4.46% 6.44% 4.71%
Distribution Rate3 5.46%
Taxable Equivalent Distribution Rate4 9.04%
30-Day Standardized Yield5 5.48%
Taxable Equivalent Yield4 9.07%

1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.

2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.

3. Distribution rate is based on an annualization of the current 4.8 cents per
share monthly dividend and the maximum offering price of $10.54 on May 31, 1997.

4. Taxable equivalent distribution rate and yield assume the maximum federal
income tax bracket of 39.6%.

5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1997.

The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return. Without this waiver, the fund's distribution rate and total return
would have been lower and yield for the period would have been 4.77%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.

GLOSSARY OF INVESTMENT TERMS

AVERAGE ANNUAL TOTAL RETURN: the average annual change in value of an investment
over the periods indicated. Unless otherwise stated, figures shown in this
report include sales charges.

DISCOUNT: amount by which a bond sells below its face (par) value. For instance,
a bond with a $1,000 face value would sell for a $100 discount when it cost
$900.

CALL PROTECTION: the length of time during which a bond cannot be redeemed by
its issuer.

COUPON: a bond's interest rate that the issuer promises to pay to the holder
until the bond matures.

CUMULATIVE TOTAL RETURN: measures the change in value of an investment over the
periods indicated. Unless otherwise stated, figures shown in this report exclude
sales charges.

CURRENT COUPON BOND: a bond with a coupon rate that is within half a percentage
point of current, market interest rates. See also Full Coupon Bond.

FULL COUPON BOND: a bond with a coupon rate that is near or above current market
interest rates. See also Current Coupon Bond.

HIGH-GRADE BOND/HIGH-QUALITY BOND: a bond rated AAA or AA by Standard &
Poor's(R) or Aaa or Aa by Moody's Investors Service -- two national
credit-rating agencies.

INVESTMENT-GRADE BOND: a bond with a rating of AAA to BBB-, usually within the
top four rating categories assigned to bonds.

PREMIUM: amount by which a bond sells above its face (par) value. For instance,
a bond with a $1,000 face value would sell for a $100 premium when it cost
$1,100.

PRE-REFUNDED BOND: a bond that will be paid off at its first call date with
proceeds from the sale of a second bond carrying a lower interest rate. When a
bond is pre-refunded its premium rises, and then falls to par value as the
refunding date approaches.

PAR VALUE: the face value or amount at which a security will be redeemed at
maturity -- typically $1,000 for a bond.

YIELD SPREAD: the relative yield differential between lower- and higher-quality
issues. Normally, lower-quality issues provide higher yields to compensate
investors for added credit risk.

MUNICIPAL BOND RATINGS

MOODY'S

Aaa -- Best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt-edged." Interest payments are protected by an
exceptionally stable margin, and principal is secure. While the various
protective elements may change, such changes are most unlikely to impair the
fundamentally strong position of such issues.

Aa -- High quality by all standards. Together with the Aaa group, they comprise
what are generally known as high-grade bonds. Aa bonds are rated lower than Aaa
because margins of protection may not be as large, fluctuation of protective
elements may be of greater amplitude, or there may be other elements which make
the long-term risks appear larger.

A -- Possess many favorable investment attributes and are considered upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.

Baa -- Medium-grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or unreliable over any
great length of time.

Ba -- Contain speculative elements. Often the protection of interest and
principal payments may be very moderate and, thereby, not well-safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B -- Generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.

Caa -- Poor standing. Such issues may be in default, or elements of danger with
respect to principal or interest may be present.

Ca -- Obligations that are highly speculative. Such issues are often in default
or have other marked shortcomings.

C -- Lowest-rated class of bonds. Issues rated C can be regarded as having
extremely poor prospects of ever attaining any real investment standing.

S&P(R)

AAA -- The highest rating assigned by S&P to a debt obligation and indicates the
ultimate degree of protection as to principal and interest.

AA -- Also qualify as high-grade obligations, and, in the majority of instances,
differ from AAA issues only in a small degree.

A -- Generally regarded as upper-medium grade. They have considerable investment
strength, but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe.

BBB -- Regarded as having an adequate capacity to pay principal and interest.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for bonds
in the A category.

BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

C -- Reserved for income bonds on which no interest is being paid.

D -- Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments in Securities and Net Assets, May 31, 1997

FACE VALUE
AMOUNT Franklin Arkansas Municipal Bond Fund (NOTE1)
Long Term Investments 97.0%

<C> <S> <C>
$ 130,000 Arkansas GO, Refunding, Waste Disposal and Pollution, Series B, 6.25%, 07/01/20.. $ 135,896
Arkansas State Development Finance Authority, SFMR, MBS Program,
1,000,000 Series B, 6.10%, 01/01/29 ..................................................... 998,540
110,000 Series D, 6.85%, 01/01/27 ..................................................... 115,965
1,000,000 Arkansas State Development Finance Authority, Waste Water Systems
Revenue, Revolving Loan Fund, Series A, 5.85%,
12/01/19 ...................................................................... 1,013,620
500,000 Arkansas State Student Loan Authority Revenue, Refunding, Sub-Series B, 6.25%, 06/01/10 512,525
Arkansas State Water Resources Development,
560,000 Series A, 5.70%, 07/01/26 ..................................................... 564,379
300,000 Series B, 5.75%, 07/01/25 ..................................................... 304,431
100,000 Blytheville Solid Waste Recycling and Sewage Treatment Revenue,
Nucor Corp. Project, 6.375%, 01/01/23 .......................................... 103,913
250,000 Camden Environmental Improvement Revenue, International Paper Co.
Project, Series A, 7.625%, 11/01/18 ............................................ 281,705
500,000 Conway Public Facilities Board, Capital Improvement Revenue,
Hendrix College Project, 6.00%, 10/01/26 ....................................... 504,925
130,000 Fort Smith Water and Sewer Revenue, Refunding and Construction,
MBIA Insured, 6.00%, 10/01/12 ................................................... 136,815
130,000 Fouke School District No. 15, Refunding and Construction,
MBIA Insured, Pre-Refunded, 6.60%, 04/01/19 .................................... 143,629
115,000 Greenland School District No. 95, Washington County,
Refunding and Construction, MBIA Insured, 6.50%, 05/01/13 ...................... 119,451
125,000 Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ...................... 130,094
400,000 Jefferson County PCR, Refunding, Arkansas Power & Light Co., 6.30%, 06/01/18 ... 412,724
Jonesboro City Water and Light Plant, Public Utilities System Revenue,
100,000 MBIA Insured, 5.40%, 11/15/13 ................................................. 99,673
200,000 Refunding, AMBAC Insured, 5.25%, 12/01/13 ..................................... 196,750
450,000 Jonesboro Residential Housing and Health Care Facilities Board,
Hospital Revenue, Refunding, St. Bernard's Regional
Medical Center, Series B, AMBAC Insured, 5.90%, 07/01/16 ....................... 456,921
140,000 Little Rock Capital Improvement, Refunding, 6.30%, 02/01/09 .................... 143,835
130,000 Little Rock Municipal Airport Revenue, Refunding, MBIA Insured, 6.00%, 11/01/14 133,546
120,000 Little Rock School District GO, Refunding, 6.25%, 12/01/07 ..................... 120,787
100,000 Little Rock School District, Refunding, FSA Insured, 5.60%, 01/01/20 ........... 100,027
440,000 Little Rock Waste Disposal Revenue, 5.80%, 05/01/16 ............................ 446,094
300,000 North Little Rock Health Facilities Board, Health Care Revenue,
Baptist Health Facility, Series A, MBIA Insured, 5.50%, 12/01/21 .............. 295,632
400,000 Paragould Hospital Revenue, 6.375%, 10/01/17 ................................... 407,220
500,000 Pope County PCR, Refunding, Arkansas Power and Light Co. Project, 6.30%, 11/01/20 510,500
250,000 Puerto Rico Commonwealth GO, 6.50%, 07/01/23 ................................... 268,858
250,000 Puerto Rico Commonwealth GO, Public Improvement, 5.75%, 07/01/17 ............... 251,500
165,000 Puerto Rico Commonwealth Highway Authority Revenue, Series Q, 6.00%, 07/01/20 .. 166,322
350,000 Puerto Rico Commonwealth Highway & Transportation
Authority Revenue, Series Y, 5.50%, 07/01/26 ................................... 340,095
Puerto Rico Electric Power Authority Revenue,
175,000 Series R, 6.25%, 07/01/17 ..................................................... 181,974
200,000 Series X, 5.50%, 07/01/25 ..................................................... 191,990
175,000 Puerto Rico SFMR, Bank and Financial Agency,
Affordable Housing Mortgage, Portfolio I, 6.25%, 04/01/29 ...................... 178,453
125,000 Pulaski County Health Facilities Board Revenue, Refunding,
Nazareth Sisters of Charity, St. Vincent's Infirmary,
MBIA Insured, 6.05%, 11/01/09 .................................................. 133,673
600,000 Pulaski County Public Facilities Board, MFR, Refunding,
South Oaks Apartments, Series A, 6.50%, 10/20/29 ............................... 616,890
700,000 Saline County Hospital Revenue, Refunding, Connie Lee Insured, 6.00%, 09/01/19 . 711,158
195,000 Saline County Retirement Housing and Healthcare Facilities
Board Revenue, Refunding, AMBAC Insured, 5.80%, 06/01/11 ...................... 199,900
600,000 bSebastian County Community Junior College District, Refunding
& Improvement, AMBAC Insured, 5.60%, 04/01/17 .................................. 599,231

$ 375,000 University of Central Arkansas Revenue, Athletic Facilities,
Series C, AMBAC Insured, 6.125%, 04/01/26 ...................................... $ 386,482
125,000 University of Southern Arkansas, Student Fees, MBIA Insured, 6.00%, 10/01/13 ... 128,044
-------------
Total Long Term Investments (Cost $12,430,339)............................ 12,744,167
-------------
aShort Term Investments 3.0%
100,000 Arkansas State Development Finance Authority, Higher Education,
Capital Asset, Series 1985-A, FGIC Insured,
Weekly VRDN and Put, 3.85%, 12/01/15 ........................................... 100,000
300,000 Puerto Rico Commonwealth Government Development Bank,
Refunding, Weekly VRDN and Put, 3.55%, 12/01/15 ................................ 300,000
-------------
Total Short Term Investments (Cost $400,000).............................. 400,000
-------------
Total Investments (Cost $12,830,339) 100.0% ......................... 13,144,167
Liabilities in Excess of Other Assets ................................ (3,817)
-------------
Net Assets 100.0% ................................................... $13,140,350
=============
At May 31, 1997, the net unrealized appreciation based on the cost
of investments for income tax purposes of $12,830,339 was as
follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ..................................... $ 316,691
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value............................... (2,863)
-------------
Net unrealized appreciation .................................................. $ 313,828
=============

</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assistance
GO - General Obligation
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
MFR - Multi-Family Revenue
PCR - Pollution Control Revenue
SFMR - Single Family Mortgage Revenue

aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest upon
short notice prior to specified dates. The interest rate may change on specified
dates in relationship with changes in a designated rate (such as the prime
interest rate or U.S. Treasury bills rate).

bSee Note 1(f) regarding securities purchased on a when-issued basis.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments in Securities and Net Assets, May 31, 1997

FACE VALUE
AMOUNT Franklin California High Yield Municipal Fund (NOTE1)
Investments 98.0%

<C> <S> <C>
$1,515,000 ABAG Finance Authority For Nonprofit Corporations, COP, 6.15%, 01/01/22 ........ $ 1,526,135
2,000,000 Adelanto Water Authority Revenue, Water Systems Acquisition
Project, Series A, 7.50%, 09/01/28 ............................................. 2,029,960
Alameda Public Financing Authority, Local Agency Revenue,
Refunding, Special Tax, Community Facility No. 1-A,
3,400,000 6.70%, 08/01/12 ............................................................... 3,434,170
4,015,000 7.00%, 08/01/19 ............................................................... 4,117,583
1,000,000 American Canyon Joint Powers Financing Authority, Lease Revenue,
Civic/Recreation Facilities, 6.40%, 06/01/22 ................................... 1,021,130
470,000 Antioch 1915 Act, AD No. 27, Series D, 7.30%, 09/02/13 ......................... 482,098
5,000,000 Beaumont Financing Authority, Local Agency Revenue, Refunding, Sewer
Enterprise Project, Series A, 6.75%, 09/01/25 ................................. 4,918,750
1,510,000 Belmont RDA, Tax Allocation, Los Costanos Community
Development, Series A, 6.80%, 08/01/24 ......................................... 1,603,831
565,000 Benicia 1915 Act, Refunding, Fleetside Industrial Park Assessment, 7.00%, 09/02/14 581,933
Calexico Special Financing Authority, Sales Tax Revenue,
10,000 7.40%, 01/01/99 ............................................................... 10,153
125,000 7.40%, 01/01/00 ............................................................... 127,294
165,000 7.40%, 01/01/01 ............................................................... 168,290
175,000 7.40%, 01/01/02 ............................................................... 178,644
220,000 7.40%, 01/01/03 ............................................................... 224,391
235,000 7.40%, 01/01/04 ............................................................... 239,124
285,000 7.40%, 01/01/05 ............................................................... 288,922
340,000 7.40%, 01/01/06 ............................................................... 342,968
7,680,000 7.40%, 01/01/18 ............................................................... 7,698,586
California Educational Facilities Authority Revenue,
1,000,000 Pooled College and University Projects, Series B, 6.30%, 04/01/21 ............. 1,010,520
4,000,000 Student Loan Program, Series A, MBIA Insured, 6.00%, 03/01/16 ................. 4,039,840
California Health Facilities Financing Authority Revenue,
1,800,000 Cedarknoll, Series B, CHFCLP Insured, 7.50%, 08/01/20 ......................... 1,938,636
990,000 Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 .................. 1,012,196
California HFA Revenue, Home Mortgage,
5,000,000 MFHR, Series B, AMBAC Insured, 6.15%, 08/01/22 ................................ 5,051,750
1,045,000 Series B, 7.125%, 02/01/26 .................................................... 1,089,653
1,795,000 Series F-1, 7.00%, 08/01/26 ................................................... 1,858,417
2,500,000 Series H, 6.25%, 08/01/27 ..................................................... 2,531,775
3,285,000 Series R, MBIA Insured, 6.15%, 08/01/27 ....................................... 3,315,452
2,000,000 California PCFA Revenue, Southern California Edison Co., Series B, 6.40%, 12/01/24 2,051,320
1,000,000 California PCFA, Solid Waste Disposal Revenue, Browning-Ferris Industries,
Inc., 6.75%, 09/01/19 1,078,110
75,000 California Special District Association Finance Corp., COP, Series V, 7.50%, 05/01/13 78,075
California State GO,
1,500,000 FGIC Insured, 6.00%, 08/01/19 ................................................. 1,539,150
1,250,000 Veterans Bonds, Series BD, BE, and BF, 6.40%, 02/01/22 ........................ 1,290,738
3,000,000 California State HFA Mortgage Revenue, Series L, MBIA Insured, 6.40%, 08/01/27 . 3,086,430
1,800,000 California Statewide CDA Revenue, COP, CHFCLP Insured, 7.25%, 12/01/22 ......... 2,002,320
1,000,000 Capistrano USD, CFD, Special Tax No. 92-1, 7.00%, 09/01/18 ..................... 1,011,680
Duarte RDA, Tax Allocation,
825,000 Rancho Duarte Phase I Project Area, 6.80%, 09/01/16 ........................... 826,914
2,615,000 Refunding, Davis Addition Project Area, 6.70%, 09/01/14 ....................... 2,621,119
4,120,000 Refunding, Davis Addition Project Area, 6.90%, 09/01/18 ....................... 4,129,847

Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, Senior Lien, Series A,
5,500,000 6.50%, 01/01/32 ............................................................... $ 5,722,090
8,235,000 6.00%, 01/01/34 ............................................................... 8,240,435
6,375,000 Garden Grove Housing Authority, MFHR, Set-Aside Tax Increment, Series C, 6.70%, 07/01/24 6,419,115
2,500,000 Gateway Improvement Authority Revenue, Marin City CFD, Series A, 7.75%, 09/01/25 2,605,350
Granada Sanitation District, 1915 Act, Sewage Treatment Facilities,
Financing District, Series A,
1,000,000 7.125%, 09/02/16 .............................................................. 1,022,540
1,000,000 7.25%, 09/02/22 ............................................................... 1,025,660
4,000,000 Hawaiian Gardens RDA Project No. 1, Tax Allocation, Refunding, 6.35%, 12/01/33 . 4,012,080
1,930,000 Hesperia Public Financing Authority, Improvement Revenue, Series B, 7.375%, 10/01/23 1,954,144
1,000,000 Huntington Beach Public Financing Authority Revenue,
Huntington Beach Redevelopment Projects, Refunding, 7.00%, 08/01/24 ........... 1,006,000
2,500,000 Irvine 1915 Act, AD No. 94-15, 6.70%, 09/02/20 ................................. 2,501,050
Irvine Ranch Water District, Joint Powers Agency, Local Pool Revenue,
1,000,000 Issue I, 7.875%, 02/15/23 ..................................................... 1,023,640
2,000,000 Issue II, 8.25%, 08/15/23 ..................................................... 2,089,100
1,500,000 John C. Fremont Hospital Revenue, CHFCLP Insured, 6.75%, 06/01/13 .............. 1,608,510
1,265,000 Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 09/02/24 ................. 1,304,683
1,000,000 Lake Elsinore School Financing Authority Revenue, Refunding, 6.125%, 09/01/19 .. 989,700
2,000,000 Lemon Grove School District COP, Vista La Mesa
Elementary School Construction, 6.40%, 09/01/26 ................................ 2,003,180
140,000 Long Beach Special Tax, CFD No. 2, 7.50%, 09/01/11 ............................. 141,406
1,350,000 Los Angeles County Transportation Commission, Sales Tax Revenue,
Series A, 6.25%, 07/01/16 ...................................................... 1,350,311
3,500,000 Los Angeles Harbor Development Revenue, Series B, 6.00%, 08/01/14 .............. 3,602,970
1,150,000 Los Angeles MFR, Refunding, Series J-2, 8.50%, 01/01/24 ........................ 1,153,220
1,175,000 Lynwood Public Financing Authority Revenue, Water
System Improvement Project, 6.50%, 06/01/21 .................................... 1,193,083
1,480,000 Millbrae Elementary School District, COP, Financing Project, 6.90%, 03/01/22 ... 1,557,064
1,800,000 Modesto Public Financing Authority, Lease Revenue,
John Thurman Field Renovation Project, 6.125%, 11/01/16 ........................ 1,790,766
2,000,000 Newport Mesa USD, Special Tax, CFD No. 90-1, 6.75%, 09/01/21 ................... 2,023,260
2,815,000 Oakland Revenue, Refunding, YMCA of the East Bay Project, 7.10%, 06/01/10 ...... 2,952,935
1,591,000 Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 09/02/19 ..................... 1,635,437
10,000,000 Palmdale Special Tax, CFD No. 93-1, Ritter Ranch Project, Series A, 8.50%, 09/01/17 9,580,300
500,000 Perris Public Financing Authority, Local Agency Revenue, Series B, 7.25%, 08/15/23 502,580
745,000 Richmond Joint Powers Financing Authority, 1915 Act,
ID Nos. 851 and 853, Series B, Pre-Refunded, 8.50%, 09/02/19 .................. 775,664
3,100,000 Richmond Revenue, Refunding, YMCA of the East Bay Project, 7.25%, 06/01/17 ..... 3,189,807
7,335,000 Riverside County CFD, Refunding, Special Tax, Senior Lien,
No. 87-5, Series A, 7.00%, 09/01/13 ............................................ 7,415,905
85,000 Sacramento County 1915 Act, Refunding, Sunrise/U.S. Corridor
Assessment, 7.00%, 09/02/09 .................................................... 87,576
10,000,000 San Bernardino Associated Communities Financing Authority,
Health Care, COP, Refunding and Improvement,
Granada Hills, Series A, 6.90%, 05/01/27 ....................................... 9,936,500
1,710,000 San Buenaventura COP, Capital Improvement Projects, 6.85%, 08/01/16 ............ 1,746,611
850,000 San Diego County Educational Facilities Authority No. 1, Lease Revenue, 6.50%, 08/15/15 872,355
3,500,000 San Diego Special Tax, CFD No. 1, Series B, 7.10%, 09/01/20 .................... 3,568,285
1,570,000 San Francisco City and County Airports Commission,..............................
International Airport Revenue, Second Series, Issue 8A,
FGIC Insured, 6.25%, 05/01/20 .................................................. 1,620,224
800,000 San Francisco City and County Revenue, Irwin Memorial Blood Centers,
Series A, 6.80%, 12/01/21 ...................................................... 842,320
1,000,000 San Joaquin Area Flood Control Agency, 1915 Act, Flood Protection
& Restoration Assessment, FSA Insured, 6.00%, 09/02/14 ........................ 1,013,740

San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
$18,150,000 Junior Lien, (original accretion rate 7.30%), 0.00%, 01/01/28 ................. $ 2,093,603
750,000 Senior Lien, 7.00%, 01/01/30 .................................................. 799,875
3,450,000 Senior Lien, 6.75%, 01/01/32 .................................................. 3,628,986
5,000,000 San Jose Financing Authority Revenue, Convention Center Project
Refunding, Series C, 6.40%, 09/01/17 ........................................... 5,165,200
1,500,000 San Ramon Public Financing Authority, Refunding, Tax Allocation, 6.90%, 02/01/24
1,568,100
3,900,000 Sand City RDA, Tax Allocation Revenue, Sand City Redevelopment
Project, 6.00% 11/01/26 ........................................................ 3,831,555
1,500,000 Santa Rosa 1915 Act, Fountain Grove Parkway Extension Assessment, 7.625%, 09/02/19
1,545,285
1,140,000 Southern California Public Power Authority, Southern Transmission
Project Revenue, Sub-Crossover Refunding, 6.125%, 07/01/18 .................... 1,157,225
3,235,000 Taft Public Financing Authority, Lease Revenue, Community Correctional
Facility Project, Series A, 6.05%, 01/01/17 ................................... 3,242,796
1,200,000 Tracy COP, I-205 Corridor Improvement Project, 7.00%, 10/01/27 ................. 1,248,816
9,345,000 Vallejo COP, Refunding, Marine World Foundation Project, 7.40%, 02/01/28 ....... 9,482,091
1,000,000 bVictor Valley Union High School District COP, Instructional Academy Project,
MBIA Insured, 5.80%, 11/15/21................................................... 1,000,000
2,250,000 West Covina COP, Refunding, Civic Center Complex, 6.875%, 09/01/14 ............. 2,311,357
7,400,000 Western Placer Waste Management Authority Revenue, 6.75%, 07/01/14 ............. 7,709,985
2,060,000 Westminster COP, Public Improvements Project, 6.00%, 06/01/22 .................. 2,061,401
-------------
Total Investments (Cost $214,750,159) 98.0%.......................... 219,483,775
Other Assets and Liabilities, Net 2.0% .............................. 4,537,039
-------------
Net Assets 100.0% ................................................... $224,020,814
=============
At May 31, 1997, the net unrealized appreciation based on the cost
of investment for income tax purposes of $214,750,159 was as
follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ..................................... $ 5,154,548
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ..................................... (420,932)
-------------
Net unrealized appreciation................................................... $ 4,733,616
=============

</TABLE>
PORTFOLIO ABBREVIATIONS:
1915 Act- Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Authority/Agency
CFD - Community Facilities District
CHFCLP - California Health Facilities Construction Loan Program
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assistance

GO - General Obligation
HFA - Housing Finance Agency
HMR - Home Mortgage Revenue
ID - Improvement District
MBIA - Municipal Bond Investors Assurance Corp.
MFHR - Multi-Family Housing Revenue
MFR - Multi-Family Revenue
RDA - Redevelopment Agency
USD - Unified School District

bSee Note 1(f) regarding securities purchased on a when-issued basis.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments in Securities and Net Assets, May 31, 1997

FACE VALUE
AMOUNT Franklin Hawaii Municipal Bond Fund (NOTE1)
Investments 97.9%
<C> <S> <C>
Guam Airport Authority Revenue, Series B,
$ 200,000 6.60%, 10/01/10 ............................................................... $ 208,150
1,000,000 6.70%, 10/01/23 ............................................................... 1,039,260
280,000 Guam Government, Limited Obligation Highway, Refunding,
Series A, FSA Insured, 6.30%, 05/01/12 ......................................... 296,668
300,000 Guam Power Authority Revenue, Series A, 6.30%, 10/01/22 ........................ 304,176
Hawaii State Airport System Revenue,
300,000 Refunding, Third Series 1994, AMBAC Insured, 5.75%, 07/01/09 .................. 306,792
60,000 Second Series 1990, FGIC Insured, 7.50%, 07/01/20 ............................. 65,434
1,520,000 Second Series 1991, 7.00%, 07/01/18 ........................................... 1,630,534
200,000 Second Series 1991, MBIA Insured, 6.75%, 07/01/21 ............................. 212,210
400,000 Second Series 1992, MBIA Insured, 6.90%, 07/01/12 ............................. 453,324
Hawaii State Department of Budget and Finance, Special Purpose Revenue,
100,000 Hawaii Electric Light Co. Project, Mortgage, 7.20%, 12/01/14 .................. 106,341
1,950,000 Hawaiian Electric Co., Mortgage, Series A, MBIA Insured, 6.60%, 01/01/25 ...... 2,087,982
500,000 Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ....... 500,615
3,425,000 Hawaiian Electric Co. and Subsidiaries, Mortgage, MBIA Insured, 6.55%, 12/01/22 3,594,092
1,100,000 Kapiolani Health Obligation, 6.25%, 07/01/21 .................................. 1,124,629
105,000 Pali Momi Medical Center Project, Pre-Refunded, 7.65%, 07/01/19 ............... 119,231
500,000 Queens Medical Center Project, FGIC Insured, Pre-Refunded, 6.20%, 07/01/22 .... 545,425
25,000 Refunding, Hawaii Electric Co., 6.875%, 04/01/12 .............................. 25,634
100,000 Refunding, Kaiser Permanente, Series A, 6.25%, 03/01/21 ....................... 103,291
600,000 Refunding, Kapiolani Health Care System, 6.40%, 07/01/13 ...................... 620,178
125,000 Refunding, Kapiolani Health Care System, 6.00%, 07/01/19 ...................... 125,468
1,000,000 Refunding, Queens Health System, Series A, 6.05%, 07/01/16 .................... 1,030,880
120,000 Refunding, Queens Health System, Series A, 6.00%, 07/01/20 .................... 122,722
1,500,000 Refunding, Queens Health System, Series A, 5.75%, 07/01/26 .................... 1,491,525
725,000 Refunding, Queens Medical Center Project, FGIC Insured,
Pre-Refunded, 6.50%, 07/01/12 .................................................. 744,010
1,100,000 Refunding, Wahiawa General Hospital Project, 7.50%, 07/01/12 .................. 1,169,597
1,100,000 St. Francis Medical Centers, FSA Insured, 6.50%, 07/01/22 ..................... 1,155,154
75,000 Hawaii State Department of Transportation, Special Facilities Revenue,
Refunding, Matson Terminals, Inc., 5.75%, 03/01/13 ............................ 75,085
Hawaii State GO,
100,000 Series BT, Pre-Refunded, 6.125%, 02/01/11 ..................................... 106,337
100,000 Series BW, 6.375%, 03/01/11 ................................................... 109,874
100,000 Series CA, 6.00%, 01/01/09 .................................................... 106,887
Hawaii State Harbor Capital Improvement Revenue,
1,000,000 Refunding, Series 1994, FGIC Insured, 6.25%, 07/01/15 ......................... 1,036,340
500,000 Refunding, Series 1994, FGIC Insured, 6.375%, 07/01/24 ........................ 517,185
70,000 Series 1990, MBIA Insured, 7.25%, 07/01/10 .................................... 75,887
80,000 Series 1990, MBIA Insured, 7.00%, 07/01/17 .................................... 85,878
200,000 Series 1992, FGIC Insured, 6.50%, 07/01/19 .................................... 210,384
Hawaii State Housing Finance and Development Corp. Revenue,
Affordable Rental Housing Program, Series A,
1,000,000 6.00%, 07/01/15 ............................................................... 1,004,440
750,000 6.05%, 07/01/22 ............................................................... 753,323
250,000 6.10%, 07/01/30 ............................................................... 251,105

Hawaii State Housing Finance and Development Corp., SFM Purchase Revenue,
$ 465,000 Series A, 7.10%, 07/01/24 ..................................................... $ 486,599
290,000 Series A, 6.00%, 07/01/26 ..................................................... 289,191
3,470,000 Series B, 5.85%, 07/01/17 ..................................................... 3,477,044
Honolulu City and County,
150,000 Refunding, Series 1992, 6.00%, 12/01/14 ....................................... 158,357
85,000 Series A, 6.30%, 03/01/08 ..................................................... 90,393
100,000 Series A, 6.30%, 03/01/11 ..................................................... 105,019
75,000 Series A, Pre-Refunded, 6.70%, 08/01/07 ....................................... 82,020
100,000 Series A, Pre-Refunded, 6.70%, 08/01/11 ....................................... 109,360
1,000,000 Series B, 6.125%, 06/01/14 .................................................... 1,039,760
1,785,000 Water Supply Board, Water System Revenue, 5.80%, 07/01/21 ..................... 1,795,032
1,205,000 Honolulu City and County MFHR, Waipahu Towers Project, Series A, 6.90%, 06/20/35 1,268,238
220,000 Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 08/01/10 ........... 234,480
100,000 Maui County Board, Water Supply Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.70%, 12/01/11 .................................... 109,975
Maui County GO,
50,000 Refunding, Series 1992, 6.05%, 09/01/07 ....................................... 52,158
300,000 Refunding, Series 1992, 6.10%, 09/01/08 ....................................... 313,389
385,000 Refunding, Series A, FGIC Insured, 5.75%, 01/01/11 ............................ 392,319
150,000 Series A, FGIC Insured, 5.75%, 01/01/13 ....................................... 152,130
1,000,000 Northern Mariana Islands Commonwealth Ports Authority,
Seaport Revenue, Port Saipan Harbor Improvement, Series A, 6.85%, 10/01/25 .... 1,022,130
145,000 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue,
Series A, Pre-Refunded, 7.00%, 07/01/19 ........................................ 152,415
315,000 Puerto Rico Commonwealth Highway and Transportation Authority
Revenue, Series T, Pre-Refunded, 6.625%, 07/01/18 ............................. 349,127
Puerto Rico Electric Power Authority Revenue,
60,000 Series O, 7.125%, 07/01/14 .................................................... 63,781
55,000 Series O, Pre-Refunded, 7.125%, 07/01/14 ...................................... 58,999
1,000,000 Series T, 6.375%, 07/01/24 .................................................... 1,062,530
350,000 Puerto Rico Industrial Medical and Environmental Facilities Revenue PCFA,
PepsiCo, Inc. Project, 6.25%, 11/15/13 ......................................... 373,954
Puerto Rico PBA, Guaranteed, Public Education and Health Facilities,
900,000 Refunding, Series M, 5.75%, 07/01/15 .......................................... 901,098
215,000 Series L, Pre-Refunded, 6.875%, 07/01/21 ...................................... 240,710
1,230,000 Puerto Rico Telephone Authority Revenue, Refunding, Series L, 6.125%, 01/01/22 . 1,252,188
-------------
Total Investments (Cost $37,874,253) 97.9%........................... 39,148,443
Other Assets and Liabilities, Net 2.1%............................... 854,231
-------------
Net Assets 100.0% ................................................... $40,002,674
=============
At May 31, 1997, the net unrealized appreciation based on the cost
of investments for income tax purposes of $37,881,166 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost ............................ $ 1,274,451
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value ............................... (7,174)
-------------
Net unrealized appreciation .................................................. $ 1,267,277
=============

</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assistance
GO - General Obligation
MBIA - Municipal Bond Investors Assurance Corp.
MFHR - Multi-Family Housing Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
SFM - Single Family Mortgage

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments in Securities and Net Assets, May 31, 1997 (continued)

FACE VALUE
AMOUNT Franklin Tennessee Municipal Bond Fund (NOTE1)
aLong Term Investments (cont.)

<C> <S> <C>
$ 500,000 Carroll County IDBR, Refunding, Henry I. Siegel Co., Inc. Project, 7.20%, 04/01/05 $ 512,065
500,000 Clarksville Water, Sewer and Gas Revenue, MBIA Insured, 5.25%, 02/01/18 ........ 478,105
500,000 Collierville Water and Sewer Systems, MBIA Insured, 5.625%, 11/01/21 ........... 491,180
675,000 Dickson Electric System Revenue, MBIA Insured, 5.50%, 09/01/16 ................. 666,259
1,000,000 Franklin IDB, MFHR, Refunding, Landings Apartment Project, Series A,
FSA Insured, 6.00%, 10/01/26 ................................................... 999,890
500,000 Hamilton County IDB, MFHR, Patten Towers Apartments, Series B, 7.125%, 02/01/09 498,560
880,000 Hardeman County, FGIC Insured, 5.625%, 04/01/24 ................................ 870,901
500,000 Hollow Rock-Bruceton Special School District, FSA Insured, 5.75%, 04/01/24 ..... 502,350
800,000 Humphreys County IDB, Solid Waste Disposal Revenue, Du Pont (E.I.)
De Nemours & Co. Project, 6.70%, 05/01/24 ...................................... 859,760
500,000 Johnson City Public Improvement, FSA Insured, 5.90%, 06/01/12 .................. 518,135
100,000 Johnson City Public Improvement, GO, Series B, AMBAC Insured,
Pre-Refunded, 6.70%, 05/01/20 .................................................. 113,016
100,000 Johnson City Solid Waste, AMBAC Insured, 5.80%, 05/01/09 ....................... 103,724
100,000 Knox-Chapman Utility District, Knox County Water and Sewer Revenue,
Refunding, MBIA Insured, 6.10%, 01/01/19 ....................................... 103,294
1,000,000 Knox County First Utility District, Water and Sewer Revenue, Refunding
and Improvement, Series A, MBIA Insured, 5.625%, 12/01/19 ...................... 1,001,320
Knox County Health, Educational and Housing Facilities Board, Hospital Revenue, Refunding,
1,250,000 Ft. Sanders Alliance, MBIA Insured, 5.75%, 01/01/14 ........................... 1,282,263
345,000 Mercy Health Systems, Series B, AMBAC Insured, 5.875%, 09/01/15 ............... 349,796
250,000 Knox County IDB, MFMR, Refunding, Waterford Apartments, Series A, 5.95%, 03/01/28 251,305
145,000 Knox County Public Improvement, Pre-Refunded, 6.875%, 04/01/14 ................. 159,751
1,305,000 Loudon County IDB, Solid Waste Disposal Revenue, Kimberly-Clark Corp.
Project, 6.20%, 02/01/23 ....................................................... 1,330,317
150,000 Macon County GO, FGIC Insured, 5.90%, 09/01/13 ................................. 153,197
620,000 Maury County IDB, PCR, Multi-Modal, Refunding, Saturn Corp. Project, 6.50%, 09/01/24 653,356
500,000 McKenzie High School District, FSA Insured, 5.75%, 04/01/22 .................... 503,155
500,000 Memphis GO, 5.75%, 08/01/15 .................................................... 507,060
Memphis Health, Educational and Housing Facilities Board, Mortgage Revenue, Refunding,
150,000 Edgewater Territory, FHA/GNMA Insured, 7.375%, 01/20/27 ....................... 159,351
100,000 MF, River Trace II, Series A, 6.45%, 04/01/26 ................................. 102,165
500,000 Memphis-Shelby County Airport Authority Revenue, Refunding,
MBIA Insured, 5.65%, 09/01/15 .................................................. 502,890
100,000 Memphis-Shelby County Airport Authority, Special Facilities
and Project Revenues, Refunding, Federal Express Corp., 6.75%, 09/01/12 ....... 106,147
200,000 Metropolitan Government of Nashville and Davidson County, Electric Revenue,
Refunding, Series A, 6.00%, 05/15/17 ........................................... 204,658
Metropolitan Government of Nashville and Davidson County,
350,000 GO, 6.125%, 05/15/19 .......................................................... 362,681
1,000,000 Public Improvement, 5.875%, 05/15/26 .......................................... 1,014,880
500,000 Metropolitan Government of Nashville and Davidson County,
Health and Educational Facilities Board, Refunding,
Dandridge Towers, Series 8-A, 6.375%, 01/01/11 ................................. 504,365
150,000 Metropolitan Government of Nashville and Davidson County, Health
and Educational Facilities Board Revenue, Meharry Medical College Project,
AMBAC Insured, Pre-Refunded, 6.875%, 12/01/24 .................................. 171,699
1,775,000 Metropolitan Government of Nashville and Davidson County,
Sports Authority Revenue, Stadium Public Improvement
Project, AMBAC Insured, 5.875%, 07/01/21 ....................................... 1,798,696
205,000 Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 07/01/15 219,592
180,000 Milan Special School District, AMBAC Insured, 6.625%, 04/01/11 ................. 194,611
300,000 Northern Mariana Islands Commonwealth Ports Authority, Seaport Revenue,
Port Saipan Harbor Improvement, Series A, 6.85%, 10/01/25 ..................... 306,639
100,000 Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 06/01/09 ................. 103,824
185,000 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue,
Series A, Pre-Refunded, 7.00%, 07/01/19 ........................................ 194,461
100,000 Puerto Rico Commonwealth GO, 6.50%, 07/01/23 ................................... 107,543
$ 500,000 Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series Y, 6.00%, 07/01/22 ...................................................... $ 512,165
750,000 Puerto Rico Commonwealth GO, Public Improvement, 5.75%, 07/01/17 ............... 754,500
Puerto Rico Electric Power Authority Revenue,
100,000 Series R, 6.25%, 07/01/17 ..................................................... 103,985
500,000 Series X, 5.50%, 07/01/25 ..................................................... 479,975
200,000 Puerto Rico Industrial, Tourist, Educational, Medical and Environmental
Control Facilities, Financing Authority, Hospital Revenue, Auxilio Mutuo
Obligation Group, Series A, MBIA Insured, 6.25%, 07/01/24 ...................... 211,192
600,000 Puerto Rico Ports Authority Revenue, Special Facilities,
American Airlines, Series A, 6.25%, 06/01/26 ................................... 610,974
530,000 Shelby County GO, Series B, 6.00%, 03/01/16 .................................... 544,973
250,000 Shelby County Schools, Series A, 5.80%, 04/01/19 ............................... 252,983
300,000 South Fulton IDBR, Tyson Foods, Inc. Project, 6.40%, 10/01/20 .................. 307,941
350,000 Sullivan County IDBR, Refunding, Brandymill, Series I-A, GNMA Secured, 6.35%, 07/20/27 364,865
800,000 Tennessee HDA, Home Ownership Program, Issue 4A, 6.375%, 07/01/22 .............. 815,536
Tennessee HDA, Mortgage Finance,
200,000 Series A, 6.90%, 07/01/25 ..................................................... 211,154
300,000 Series B, 6.60%, 07/01/25 ..................................................... 310,527
630,000 Series B, MBIA Insured, 6.20%, 07/01/18 ....................................... 641,767
100,000 Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, 6.55%, 10/01/23 ........................ 103,728
100,000 Tennessee State School Board Authority, Higher Educational Facilities,
Series A, 6.25%, 05/01/22 ...................................................... 102,242
220,000 Wilson County COP, Educational Facilities, 6.125%, 06/30/10 .................... 229,386
-------------
Total Long Term Investments (Cost $24,836,362)............................ 25,520,854
-------------
aShort Term Investments 1.1%
300,000 Bradley County IDBR, Refunding, Olin Corp. Project, Series C, Daily
VRDN and Put, 4.00%, 11/01/17 (Cost $300,000) .................................. 300,000
-------------
Total Investments (Cost $25,136,362) 96.7%........................... 25,820,854
Other Assets and Liabilities, Net 3.3% .............................. 887,607
-------------
Net Assets 100.0% ................................................... $26,708,461
=============
At May 31, 1997, the net unrealized appreciation based on the cost
of investments for income tax purposes of $25,136,362 was as
follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost...................................... $ 686,713
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ..................................... (2,221)
-------------
Net unrealized appreciation .................................................. $ 684,492
=============

</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FSA - Financial Security Assistance
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MF - Multi-Family
MFHR - Mutli-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
PCR - Pollution Control Revenue

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments in Securities and Net Assets, May 31, 1997

FACE VALUE
AMOUNT Franklin Washington Municipal Bond Fund (NOTE1)
aLong Term Investments 95.2%

<C> <S> <C>
$ 100,000 Aberdeen GO, Series A, MBIA Insured, 5.80%, 12/01/12 ........................... $ 100,967
100,000 Bellevue Water and Sewer Revenue, Refunding, 5.875%, 07/01/10 .................. 103,113
200,000 Bellingham Housing Authority Revenue, Cascade Meadows Project, 7.10%, 11/01/23 . 209,098
100,000 Clark County School District No. 114, Evergreen School, Refunding,
AMBAC Insured, 5.95%, 12/01/12 ................................................. 103,913
200,000 Clark County Sewer Revenue, MBIA Insured, 5.70%, 12/01/16 ...................... 200,724
400,000 Conservation and Renewable Energy System Revenue,
Washington Conservation Project, 6.50%, 10/01/14 ............................... 419,320
100,000 Douglas County PUD No. 1, Electric Systems Revenue, MBIA Insured, 6.00%, 01/01/15 103,829
100,000 Federal Way GO, Refunding, 5.85%, 12/01/21 ..................................... 100,052
250,000 Grant County PUD No. 002, Wanapum Hydroelectric Revenue,
Second Series A, 6.375%, 01/01/23 .............................................. 257,475
100,000 Grant County PUD No. 2, Priest Rapids Hydroelectric Revenue,
Second Series B, MBIA Insured, 5.875%, 01/01/26 ................................ 99,514
100,000 King County GO, Sewer District, 5.875%, 01/01/15 ............................... 102,462
175,000 King County Housing Authority Revenue, Woodridge Park Project, 6.25%, 05/01/15 . 178,260
100,000 King County School District No. 400, Mercer Island, 5.90%, 12/01/15 ............ 102,450
100,000 King County School District No. 412, Shoreline, 6.10%, 06/01/13 ................ 104,165
200,000 King County School District No. 415, Kent, FSA Insured, 5.875%, 06/01/16 ....... 203,418
200,000 Lewis County PUD No. 001, Cowlitz Falls Hydroelectric Project Revenue, 6.00%, 10/01/24 202,252
175,000 Pierce County EDC Revenue, Solid Waste, Occidental Petroleum Corp., 5.80%, 09/01/29 165,965
225,000 Pierce County Sewer Revenue, 5.70%, 02/01/17 ................................... 224,953
650,000 Pilchuck Development Public Corp., Special Facilities Airport Revenue,
Tramco, Inc. Project, B.F. Goodrich, 6.00%, 08/01/23 .......................... 636,500
200,000 Port Chelan County GO, MBIA Insured, 6.25%, 12/01/15 ........................... 209,238
200,000 Port of Seattle Revenue, Series B, 6.00%, 11/01/17 ............................. 200,352
450,000 SeaTac GO, MBIA Insured, 6.50%, 12/01/13 ....................................... 482,400
100,000 Seattle Housing Authority, Low Income Housing Assistance
Revenue, Kin On Project, 7.40%, 11/20/36 ....................................... 110,406
200,000 Seattle Municipality Metropolitan Sewer Revenue, Refunding, Series V, 6.20%, 01/01/32 202,892
100,000 Snohomish County GO, MBIA Insured, 5.90%, 12/01/15 ............................. 102,120
200,000 Snohomish County Housing Authority Revenue, Pooled, 6.30%, 04/01/16 ............ 203,358
200,000 Snohomish County PUD No. 1, Electric and Generation Systems Revenue,
Refunding, FGIC Insured, 6.00%, 01/01/18 ....................................... 204,254
100,000 Snohomish County PUD No. 1, Water Revenue, 5.85%, 11/01/17 ..................... 99,757
130,000 Spokane County GO, Refunding, 6.00%, 12/01/14 .................................. 134,755
100,000 Spokane County Water District No. 3 Revenue, Refunding, 5.90%, 01/01/14 ........ 100,441
300,000 Stevens County Public Corp., PCR, Refunding, Water Power Co. Project, 6.00%, 12/01/23 300,984
100,000 Sunnyside GO, MBIA Insured, 6.10%, 12/01/14 .................................... 104,641
200,000 Tacoma Electric Systems Revenue, Refunding, FGIC Insured, 6.25%, 01/01/15 ...... 209,160
100,000 Tacoma Refuse Utility Revenue, AMBAC Insured, Pre-Refunded, 7.00%, 12/01/19 .... 114,903
500,000 University of Washington, Alumni Association, Lease Revenue,
Roosevelt University Medical Center, FSA Insured, 6.30%, 08/15/14 ............. 528,420
100,000 Washington State COP, Office Building Project, Series A, MBIA Insured, 6.00%, 04/01/12 102,304
100,000 Washington State Health Care Facilities Authority Revenue,
Multicare Medical Center, FGIC Insured, 5.75%, 08/15/22 ........................ 99,332
Washington State Housing Finance Commission,
100,000 Series 1A-1, 6.25%, 06/01/16 .................................................. 101,028
200,000 SF Program, Series 1A-3, 6.15%, 12/01/15 ...................................... 203,192
100,000 SF Program, Series 2N, 6.05%, 12/01/16 ........................................ 101,018
75,000 Washington State Housing Finance, SFMR, MBS Program, Series A, 7.05%, 07/01/22 . 79,493
240,000 Washington State Motor Vehicle Fuel Tax, Series D, 6.00%, 09/01/20 ............. 247,361
100,000 Whatcom County School District No. 501, Bellingham, 6.05%, 12/01/13 ............ 102,734
-------------
Total Long Term Investments (Cost $7,735,085) ............................ 7,962,973
-------------
aShort Term Investments 2.4%....................................................
$ 200,000 Washington State Health Care Facilities Authority Revenue,
Sisters of Providence, Series E, Daily VRDN and Put, 4.00%, 10/01/05 (Cost $200,000) $ 200,000
-------------
Total Investments (Cost $7,935,085) 97.6%............................ 8,162,973
Other Assets and Liabilities, Net 2.4%............................... 197,716
-------------
Net Assets 100.0% ................................................... $8,360,689
=============
At May 31, 1997, the net unrealized appreciation based on the cost
of investments for income tax purposes of $7,935,085 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost............................. $ 249,392
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value ............................ (21,504)
-------------
Net unrealized appreciation .................................................. $ 227,888
=============

</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificate of Participation
EDC - Economic Development Corp.
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assistance
GO - General Obligation
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
PCR - Pollution Control Revenue
PUD - Public Utility District
SF - Single Family
SFMR - Single Family Mortgage Revenue

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements

Statements of Assets and Liabilities
May 31, 1997
<TABLE>
<CAPTION>

Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
At identified cost $12,830,339 $214,750,159 $37,874,253 $25,136,362 $7,935,085
====================================================================
At value 13,144,167 219,483,775 39,148,443 25,820,854 8,162,973
Cash 279,016 47,117 61,586 454,846 32,677
Receivables:
Interest 213,672 4,592,036 958,822 453,039 168,103
Investment securities sold -- 324,743 -- -- --
Capital shares sold 117,005 1,326,969 1,047 71,361 --
From affiliates 12,531 -- -- -- 13,223
--------------------------------------------------------------------
Total assets 13,766,391 225,774,640 40,169,898 26,800,100 8,376,976
--------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased on a
when-issued basis (Note 1) 597,933 1,002,578 -- -- --
Capital shares repurchased -- 31,171 22,103 -- --
Distributions to shareholders 20,762 352,984 57,574 41,933 12,343
Management fees -- 29,611 6,368 4,378 --
Distribution fees 712 36,187 3,058 1,750 492
Shareholder servicing costs -- 5,271 1,344 621 --
Other payables to shareholders 6,634 267,020 59,854 22,748 3,452
Accrued expenses and other liabilities -- 29,004 16,923 20,209 --
--------------------------------------------------------------------
Total liabilities 626,041 1,753,826 167,224 91,639 16,287
--------------------------------------------------------------------
Net assets, at value $13,140,350 $224,020,814 $40,002,674 $26,708,461 $8,360,689
====================================================================
Net assets consist of:
Undistributed net investment income 45,188 -- 127,993 23,122 40,714
Accumulated distributions in excess of net
investment income -- (25,090) -- -- --
Net unrealized appreciation on investments 313,828 4,733,616 1,274,190 684,492 227,888
Net realized loss (35,067) (2,164,045) (792,682) (65,557) (128,946)
Class I capital shares 12,816,401 210,968,768 39,393,173 26,066,404 8,221,033
Class II capital shares -- 10,507,565 -- -- --
--------------------------------------------------------------------
Net assets, at value $13,140,350 $224,020,814 $40,002,674 $26,708,461 $8,360,689
====================================================================

Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
====================================================================
Class I shares:
Net assets, at value $13,140,350 $213,396,321 $40,002,674 $26,708,461 $8,360,689
====================================================================
Shares outstanding 1,250,114 21,123,177 3,706,117 2,493,560 828,587
====================================================================
Net asset value per share* $10.51 $10.10 $10.79 $10.71 $10.09
====================================================================
Maximum offering price per share
(100/95.75 of net asset value per share) $10.98 $10.55 $11.27 $11.19 $10.54
====================================================================
Class II shares:
Net assets, at value -- $ 10,624,493 -- -- --
====================================================================
Shares outstanding -- 1,049,884 -- -- --
====================================================================
Net asset value per share* -- $10.12 -- -- --
====================================================================
Maximum offering price per share
(100/99 of net asset value per share) -- $10.22 -- -- --
====================================================================

*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

Statements of Operations
for the year ended May 31, 1997

<S> <C> <C> <C> <C> <C>
Investment income:
Interest $599,177 $11,320,366 $2,351,642 $1,138,753 $472,175
--------------------------------------------------------------------
Expenses:
Management fees (Note 5) 64,438 985,277 245,890 120,438 49,976
Distribution fees- Class I (Note 5) 7,463 149,428 36,345 15,404 5,170
Distribution fees- Class II (Note 5) -- 40,586 -- -- --
Shareholder servicing costs (Note 5) 3,140 46,308 13,049 5,367 2,318
Pricing service fees 4,272 10,606 8,334 6,252 6,144
Reports to shareholders 2,747 42,056 9,417 4,297 2,520
Registration and filing fees 2,700 6,210 5,057 1,640 2,700
Professional fees 2,424 17,640 5,907 3,192 2,128
Custodian fees 108 1,753 388 199 79
Other 2,529 26,425 2,922 4,423 1,151
Management fees waived by manager (Note 5) (64,438) (707,364) (173,592) (84,174) (49,976)
Other expenses assumed by manager (Note 5) (14,562) -- -- -- (14,290)
--------------------------------------------------------------------
Total expenses 10,821 618,925 153,717 77,038 7,920
--------------------------------------------------------------------
Net investment income 588,356 10,701,441 2,197,925 1,061,715 464,255
--------------------------------------------------------------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) 4,094 (119,287) 51,434 (277) (4,404)
Net unrealized appreciation 272,692 4,691,793 857,481 561,758 228,610
--------------------------------------------------------------------
Net realized and unrealized gain on investments 276,786 4,572,506 908,915 561,481 224,206
--------------------------------------------------------------------
Net increase in net assets
resulting from operations $865,142 $15,273,947 $3,106,840 $1,623,196 $688,461
====================================================================

Statements of Changes in Net Assets
for the years ended May 31, 1997 and 1996

Franklin Arkansas Franklin California High Franklin Hawaii
Municipal Bond Fund Yield Municipal Fund Municipal Bond Fund
------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 588,356 $ 340,476 $ 10,701,441 $ 4,922,744 $ 2,197,925 $ 2,156,740
Net realized gain (loss) from
security transactions 4,094 (2,503) (119,287) (275,621) 51,434 (122,116)
Net unrealized appreciation
(depreciation) on
investments 272,692 (96,898) 4,691,793 (1,356,026) 857,481 (371,355)
------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations 865,142 241,075 15,273,947 3,291,097 3,106,840 1,663,269
Distributions to shareholders:
From undistributed net
investment income:
Class I (580,057) (335,368) (10,363,742) (5,000,226) (2,194,657) (2,147,284)
Class II -- -- (348,303) (536) -- --
In excess of net investment
income Class I -- -- (33,027) -- -- --
Increase in net assets from capital
share transactions (Note 2) 4,689,718 4,126,099 100,966,556 69,133,506 285,742 2,461,396
------------------------------------------------------------------------------
Net increase in
net assets 4,974,803 4,031,806 105,495,431 67,423,841 1,197,925 1,977,381
Net assets:
Beginning of year 8,165,547 4,133,741 118,525,383 51,101,542 38,804,749 36,827,368
------------------------------------------------------------------------------
End of year $13,140,350 $8,165,547 $224,020,814 $118,525,383 $40,002,674 $38,804,749
==============================================================================
Undistributed net investment income
(accumulated distributions in excess of net
investment income) included in net assets:
Beginning of year $ 36,889 $ 31,781 $ 18,541 $ 96,559 $ 124,725 $ 115,269
==============================================================================
End of year $ 45,188 $ 36,889 $ (25,090) $ 18,541 $ 127,993 $ 124,725
==============================================================================

Franklin Tennessee Franklin Washington
Municipal Bond Fund Municipal Bond Fund
----------------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,061,715 $ 531,567 $ 464,255 $ 360,705
Net realized loss from security transactions (277) (60,537) (4,404) (39,744)
Net unrealized appreciation (depreciation)
on investments 561,758 (131,830) 228,610 (33,367)
----------------------------------------------------------
Net increase in net assets resulting
from operations 1,623,196 339,200 688,461 287,594
Distributions to shareholders from undistributed
net investment income:
Class I (1,084,118) (528,162) (460,520) (360,198)
Increase in net assets from capital share transactions
(Note 2) 12,213,104 8,159,263 414,786 2,049,769
----------------------------------------------------------
Net increase in net assets 12,752,182 7,970,301 642,727 1,977,165
Net assets:
Beginning of year 13,956,279 5,985,978 7,717,962 5,740,797
----------------------------------------------------------
End of year $26,708,461 $13,956,279 $8,360,689 $7,717,962
==========================================================
Undistributed net investment income included in net assets:
Beginning of year $ 45,525 $ 42,120 $ 36,979 $ 36,472
==========================================================
End of year $ 23,122 $ 45,525 $ 40,714 $ 36,979
==========================================================

</TABLE>
The accompanying notes are an integral part of these financial statements.

Notes to Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin Municipal Securities Trust (the Trust) is an open-end, non-diversified
management investment company (mutual fund), registered under the Investment
Company Act of 1940, as amended. The Trust consist of five separate
non-diversified Funds (the Funds): the Franklin Arkansas Municipal Bond Fund
(the Arkansas Fund), the Franklin California High Yield Municipal Fund (the
California Fund), the Franklin Hawaii Municipal Bond Fund (the Hawaii Fund), the
Franklin Tennessee Municipal Bond Fund (the Tennessee Fund), and the Franklin
Washington Municipal Bond Fund (the Washington Fund). Each of the Funds issues a
separate series of the Trust's shares and maintains a totally separate
investment portfolio. Each Fund seeks to provide tax-free income.

The California Fund offers two classes of shares, Class I and Class II. Class I
shares are sold with a higher front-end sales charge than Class II shares. Each
class of shares may be subject to a contingent deferred sales charge and has the
same rights, except with respect to the effect of the respective sales charges,
the distribution fees borne by each class, voting rights on matters affecting a
single class and the exchange privilege of each class. The offering of Class II
shares began May 1, 1996, at which time all previously outstanding shares became
Class I shares.

The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.

a. Security Valuation:

Tax-free bonds generally trade in the over-the-counter market rather than on a
national securities exchange. In the absence of a sale or reported bid and asked
prices, information with respect to bond and note transactions, quotations from
bond dealers, market transactions in comparable securities, and various
relationships between securities are used to determine the value of the
security. The Trust may utilize a pricing service, bank or broker/dealer
experienced in such matters to perform any of the pricing functions, under
procedures approved by the Board of Trustees (the Board). Securities for which
market quotations are not available are valued in accordance with procedures
established by the Board.

b. Municipal Bonds or Notes with "Puts":

The Funds have purchased municipal bonds or notes with the right to resell the
bonds or notes to the seller at an agreed upon price or yield on a specified
date or within a specified period (which will be prior to the maturity date of
the bonds or notes). Such a right to resell is commonly known as a "put".

c. Income Taxes:

The Funds intend to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to shareholders which will be sufficient to relieve the
Funds from income and excise taxes. Each Fund is treated as a separate entity in
the determination of compliance with the Internal Revenue Code.

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

d. Security Transactions:

Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.

e. Investment Income, Expenses and Distributions:

Distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued

daily. Original issue discount and premium are amortized as required by the
Internal Revenue Code. For the California Fund, realized and unrealized gains or
losses and net investment income, other than class specific expenses, are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class. The Funds normally declare dividends from their net
investment income daily and distribute monthly. Daily allocations of net
investment income will commence on the day following the receipt of an
investor's funds. Dividends are normally declared each day the New York Stock
Exchange is open for business and are equal to an amount per day set from time
to time by the Board, and are payable to shareholders of record at the beginning
of business on the ex-dividend date. Once each month, dividends are reinvested
in additional shares of the Funds, or paid in cash as requested by the
shareholders.

Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatment of wash sale transactions.

f. Securities Purchased on a When-Issued Basis or Delayed Delivery Basis:

The Funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. These
securities are identified on the accompanying Statement of Investments in
Securities and Net Assets. The Funds have set aside sufficient investment
securities as collateral for these purchase commitments.

g. Expense Allocation:

Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.

h. Accounting Estimates:

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

2. TRUST SHARES

At May 31, 1997, there was an unlimited number of no par value shares of
beneficial interest authorized. Transactions in each of the Fund's shares for
the years ended May 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>

Franklin Arkansas Franklin California Franklin Hawaii
Municipal Bond Fund High Yield Municipal Fund Municipal Bond Fund
-------------------------------------------------------------------------
Class I Shares: Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Shares sold 470,751 $4,901,027 11,958,887 $119,678,964 790,934 $8,525,981
Shares issued in
reinvestment of distributions 36,550 380,970 372,489 3,734,093 80,695 866,517
Shares redeemed (57,166) (592,279) (3,267,236) (32,741,869) (847,717)(9,106,756)
-------------------------------------------------------------------------
Net increase 450,135 $4,689,718 9,064,140 $ 90,671,188 23,912 $ 285,742
=========================================================================
1996
Shares sold 405,209 $4,184,101 8,327,567 $ 82,955,751 593,700 $6,341,723
Shares issued in
reinvestment of distributions 24,410 252,441 188,536 1,872,314 89,821 959,122
Shares redeemed (30,209) (310,443) (1,602,938) (15,906,756) (454,099)(4,839,449)
-------------------------------------------------------------------------
Net increase 399,410 $4,126,099 6,913,165 $ 68,921,309 229,422 $2,461,396
=========================================================================

Franklin Tennessee Franklin Washington
Municipal Bond Fund Municipal Bond Fund
--------------------------------------------
Shares Amount Shares Amount
--------------------------------------------
<S> <C> <C> <C> <C>
1997
Shares sold 1,355,345 $14,372,546 103,811 $1,037,350
Shares issued in reinvestment of distributions 64,058 680,991 32,188 322,025
Shares redeemed (267,495) (2,840,433) (94,809) (944,589)
--------------------------------------------
Net increase 1,151,908 $12,213,104 41,190 $ 414,786
============================================
1996
Shares sold 800,118 $ 8,440,943 230,239 $2,275,967
Shares issued in reinvestment of distributions 32,775 345,901 26,993 268,155
Shares redeemed (59,708) (627,581) (49,709) (494,353)
--------------------------------------------
Net increase 773,185 $ 8,159,263 207,523 $2,049,769
============================================

Franklin California High
Yield Municipal Fund
-------------------------
Class II Shares: Shares Amount
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997
Shares sold 1,204,172 $12,057,953
Shares issued in reinvestment of distributions 19,594 197,069
Shares redeemed (195,499) (1,959,654)
-------------------------
Net increase 1,028,267 $10,295,368
=========================
1996*
Shares sold 21,567 $ 211,700
Shares issued in reinvestment of distributions 50 497
-------------------------
Net increase 21,617 $ 212,197
=========================
*For the period May 1, 1996 (effective date) to May 31, 1996.

3. DISTRIBUTIONSANDCAPITAL LOSS CARRYOVERS

At May 31, 1997, for tax purposes, the Funds had capital loss carryovers as
follows:

</TABLE>
From November 1, 1996 through May 31, 1997, the Hawaii Fund and Washington Fund
incurred $5,364 and $4,404, respectively, of net realized capital losses. As
permitted by tax regulations, the Funds intend to elect to defer these losses
and treat them as having arisen in the year ending May 31, 1998.

For income tax purposes, the aggregate cost of securities is higher (and
unrealized appreciation is lower) than for financial reporting purposes at May
31,1997 by $6,913 in the Hawaii Fund.

4. PURCHASES AND SALES OF SECURITIES

Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the year ended May 31, 1997 were as follows:

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

a. Management Agreement:

Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers)
provides investment advice, administrative services, office space and facilities
to each Fund, and receives fees computed monthly based on the average daily net
assets of each Fund as follows:

Annualized Fee Rate Net Assets
- ------------------------------------------------------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% In excess of $250 million

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)

a. Management Agreement: (cont.)

Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Funds, as noted in the Statements of Operations for the year
ended May 31, 1997.

Under an agreement with Advisers, Franklin Templeton Services, Inc. (FT
Services) provides administrative services and facilities for the Funds. The fee
is paid by Advisers and computed monthly based on average daily net assets. It
is not a separate expense of the Funds.

b. Shareholder Services Agreement:

Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Funds pay costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Funds for
the year ended May 31, 1997 aggregated $70,182, of which $63,007 was paid to
Investor Services.

c. Distribution Plans and Underwriting Agreement:

Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the Hawaii Fund reimburses Franklin/Templeton
Distributors, Inc. (Distributors), in an amount up to a maximum of 0.10% per
annum of the Fund's average daily net assets, the Arkansas, Tennessee and
Washington Funds reimburse Distributors up to a maximum of 0.15% per annum of
the Funds' average daily net assets, and the California Fund reimburses
Distributors up to a maximum of 0.15% per annum for Class I and 0.65% per annum
for Class II, of the average daily net assets of such class of the Fund, for
costs incurred in the promotion, offering and marketing of the Funds' shares.
The Plans do not permit nor require payments of excess costs after termination.
Fees incurred by the Funds under the Plans aggregated $254,396 for the year
ended May 31, 1997.

In its capacity as underwriter for the shares of the Funds, Distributors
receives commissions on sales of the Funds' shares of beneficial interest.
Commissions are deducted from the gross proceeds received from the sale of the
shares of the Funds, and as such are not expenses of the Funds. Distributors may
also make payments, out of its own resources, to dealers for certain sales of
the Funds' shares. Commissions received by Distributors, the amounts paid to
other dealers, and any applicable contingent deferred sales charges (CDSC) for
the year ended May 31, 1997, were as follows:

d. Other Affiliates and Related Party Transactions:

Certain officers and trustees of the Trust are also officers and/or directors of
Distributors, Advisers, FT Services, and Investor Services, all wholly-owned
subsidiaries of Franklin Resources, Inc. (Resources).

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)

d. Other Affiliates and Related Party Transactions (cont.):

At May 31, 1997, Resources owned 21%, 10% and 33% of the Arkansas Fund,
Tennessee Fund and Washington Fund, respectively.

6. CREDIT RISK

All of the Funds' investments are in the securities of issuers in their
respective states and U.S. territories and possessions. Such concentration may
subject the Funds more significantly to economic changes occurring within those
states and U.S. territories and possessions.

The California Fund has 16.7% of its portfolio invested in lower rated and
comparable quality unrated high yield securities. Investments in high yield
securities are accompanied by a greater degree of credit risk and such lower
rated securities tend to be more sensitive to economic conditions than higher
rated securities. The risk of loss due to default by the issuer may be
significantly greater for the holders of high yield securities, because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.

7. FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout the
period by Fund are as follows:

Per Share Operating Performance Ratios/Supplemental Data
Ratio
Net Realized Total Distri- Distri- Net Net Ratio of of Net
Net Asset Net & Unreal- From butions butions Asset Assets Expenses Investment
Year Value at Invest- ized Gain Invest- From Net From Total Value at at End of to Average Income to Portfolio
Ended Beginning ment (Loss) on ment Investment Capital Distri- End of Total Period Net Assets Average Turnover
May 31 of Period Income Securities OperationsIncome Gains butions Period Return+ (in 000's) (See Note 5)++Net Assets Rate
Franklin Arkansas Municipal Bond Fund
Class I Shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19941 $10.00 $.01 $.05 $ .06 -- -- -- $10.06 .60% $ 2,213 .03%* 2.00%* --%
1995 10.06 .51 .19 .70 (.44) -- (.44) 10.32 7.27 4,134 .10 5.64 77.63
1996 10.32 .55 (.08) .47 (.58) -- (.58) 10.21 4.65 8,166 .10 5.69 19.22
1997 10.21 .58 .31 .89 (.59) -- (.59) 10.51 8.90 13,140 .10 5.71 6.61
Franklin California High Yield Municipal Fund
Class I Shares:
19932 10.00 .03 (.06) (.03) -- -- -- 9.97 (3.60)* 2,245 -- 3.85* 8.89
1994 9.97 .53 (.20) .33 (.56) (.01) (.57) 9.73 3.22 31,938 .07 6.14 40.74
1995 9.73 .66 .18 .84 (.64) -- (.64) 9.93 9.08 51,102 .20 6.89 57.06
1996 9.93 .64 (.10) .54 (.66) -- (.66) 9.81 5.55 118,313 .35 6.49 28.02
1997 9.81 .63 .29 .92 (.63)** -- (.63) 10.10 9.64 213,396 .34 6.24 33.79
Class II Shares:
19963 9.82 .05 -- .05 (.05) -- (.05) 9.82 .54 212 .91* 5.73* 28.02
1997 9.82 .58 .29 .87 (.57) -- (.57) 10.12 9.08 10,624 .90 5.68 33.79

7. FINANCIAL HIGHLIGHTS (cont.)
Per Share Operating Performance Ratios/Supplemental Data
Ratio
Net Realized Total Distri- Distri- Net Net Ratio of of Net
Net Asset Net & Unreal- From butions butions Asset Assets Expenses Investment
Year Value at Invest- ized Gain Invest- From Net From Total Value at at End of to Average Income to Portfolio
Ended Beginning ment (Loss) on ment Investment Capital Distri- End of Total Period Net Assets Average Turnover
May 31 of Period Income Securities OperationsIncome Gains butions Period Return+ (in 000's) (See Note 5)++Net Assets Rate
Rate
Franklin Hawaii Municipal Bond Fund
Class I Shares:
1993 $10.18 $.63 $.63 $1.26 (.64) -- (.64) $10.80 12.77% $ 18,657 --% 5.95% 48.70%
1994 10.80 .62 (.46) .16 (.60) -- (.60) 10.36 1.35 26,904 .05 5.76 31.35
1995 10.36 .60 .31 .91 (.60) -- (.60) 10.67 9.26 36,827 .20 6.02 22.88
1996 10.67 .60 (.13) .47 (.60) -- (.60) 10.54 4.49 38,805 .35 5.63 16.01
1997 10.54 .60 .25 .85 (.60) -- (.60) 10.79 8.23 40,003 .39 5.59 13.40
Franklin Tennessee Municipal Bond Fund
Class I Shares:
19941 10.00 .01 .10 .11 -- -- -- 10.11 1.10 2,224 .03* 1.89* 22.64
1995 10.11 .52 .35 .87 (.45) -- (.45) 10.53 8.97 5,986 .10 6.02 24.71
1996 10.53 .56 (.09) .47 (.60) -- (.60) 10.40 4.50 13,956 .33 5.67 27.23
1997 10.40 .58 .33 .91 (.60) -- (.60) 10.71 8.95 26,708 .40 5.51 27.60
Franklin Washington Municipal Bond Fund
Class I Shares:
19932 10.00 .03 (.04) (.01) -- -- -- 9.99 (1.20)* 2,198 -- 3.44* --
1994 9.99 .51 (.46) .05 (.47) (.02) (.49) 9.55 2.88 4,272 .05 5.59 39.52
1995 9.55 .56 .36 .92 (.57) -- (.57) 9.90 10.10 5,741 .10 6.13 18.46
1996 9.90 .56 (.08) .48 (.58) -- (.58) 9.80 4.91 7,718 .10 5.81 19.13
1997 9.80 .58 .29 .87 (.58) -- (.58) 10.09 9.04 8,361 .10 5.81 7.73

</TABLE>
*Annualized

**Includes distributions in excess of net investment income in the amount of
$.002.

1For the period May 10, 1994 (effective date) to May 31, 1994.

2For the period May 3, 1993 (effective date) to May 31, 1993.

3For the period May 1, 1996 (effective date) to May 31, 1996

+Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge or contingent
deferred sales charge, and assumes reinvestment of dividends and capital gains
at net asset value. Prior to May 1, 1994, dividends were reinvested at the
maximum offering price, and capital gains at net asset value. Effective May 1,
1994, with the implementation of the Rule 12b-1 distribution plan for Class I
shares, the sales charge on reinvested dividends was eliminated.

++During the periods indicated, Advisers agreed in advance to waive a portion of
its management fees and to make payments of other expenses incurred by the
Funds. Had such action not been taken, the ratios of expenses to average net
assets would have been as follows:

Ratio of
Expenses
to Average
Net Assets
Franklin Arkansas Municipal Bond Fund
Class I:
19941 1.20%*
1995 1.11
1996 1.04
1997 .87
Franklin California High Yield Municipal Fund
Class I:
19932 1.42*
1994 .87
1995 .88
1996 .81
1997 .75
Class II:
19963 1.81*
1997 1.31

Ratio of
Expenses
to Average
Net Assets
Franklin Hawaii Municipal Bond Fund
Class I:
1993 1.06
1994 .92
1995 .87
1996 .84
1997 .83
Franklin Tennessee Municipal Bond Fund
Class I:
19941 1.05*
1995 .92
1996 .91
1997 .84
Franklin Washington Municipal Bond Fund
Class I:
19932 1.44*
1994 .71
1995 1.05
1996 .92
1997 .90

The Funds hereby designate 100% of the distributions paid from net investment
income for the taxable year ended May 31, 1997, as exempt-interest dividends per
Section 852(b)(5) of the Internal Revenue Code.

FRANKLIN MUNICIPAL SECURITIES TRUST
Report of Independent Auditors

To the Shareholders and Board of Trustees

of Franklin Municipal Securities Trust:

We have audited the accompanying statements of assets and liabilities of the
Funds comprising the Franklin Municipal Securities Trust, including each Fund's
statement of investments in securities and net assets, as of May 31, 1997, and
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds comprising the Franklin Municipal Securities Trust as of May 31,
1997, the results of their operations for the year then ended, the changes in
their net assets for each of the two years in the period then ended, and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Francisco, California

July 2, 1997

Franklin Municipal Securities Trust Annual Report May 31, 1997.

APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304(a) OF REGULATION S-T)

GRAPHIC MATERIAL (1)

This chart shows in pie format the Credit Quality Breakdown of the fund's
securities on May 31, 1997, based on total long-term investments.

Credit Quality Breakdown on May 31, 1997

AAA 45.1%
AA 17.8%
A 21.8%
BBB 15.3%

GRAPHIC MATERIAL (2)

This bar chart shows the comparison between the fund's distribution rate of
5.36% and the taxable equivalent distribution rate of 9.54%.

GRAPHIC MATERIAL (3)

The following line graph hypothetically compares the performance of the
Franklin Arkansas Municipal Bond Fund to that of the Lehman Brothers
Municipal Bond Index and the Consumer Price Index (CPI), based on a $10,000
investment from 5/10/94 to 5/31/97.

Period Ending Fund Index Index

5/10/94 9,579 10,000 10,000
5/31/94 9,636 10,059 10,005
6/30/94 9,550 9,998 10,039
7/31/94 9,722 10,181 10,066
8/31/94 9,741 10,216 10,106
9/30/94 9,565 10,066 10,133
10/31/94 9,271 9,887 10,141
11/30/94 8,978 9,708 10,154
12/31/94 9,268 9,921 10,154
1/31/95 9,608 10,205 10,194
2/28/95 9,930 10,502 10,235
3/31/95 10,017 10,623 10,269
4/30/95 10,045 10,636 10,303
5/31/95 10,322 10,975 10,323
6/30/95 10,219 10,879 10,344
7/31/95 10,268 10,983 10,344
8/31/95 10,388 11,122 10,371
9/30/95 10,487 11,192 10,392
10/31/95 10,648 11,355 10,426
11/30/95 10,830 11,543 10,419
12/31/95 10,952 11,654 10,411
1/31/96 11,002 11,743 10,473
2/29/96 10,907 11,663 10,506
3/31/96 10,781 11,513 10,561
4/30/96 10,759 11,481 10,602
5/31/96 10,800 11,477 10,622
6/30/96 10,947 11,602 10,629
7/31/96 11,042 11,707 10,649
8/31/96 11,030 11,705 10,669
9/30/96 11,211 11,869 10,703
10/31/96 11,351 12,003 10,737
11/30/96 11,534 12,223 10,758
12/31/96 11,489 12,171 10,758
1/31/97 11,499 12,194 10,792
2/28/97 11,619 12,307 10,826
3/31/97 11,474 12,143 10,853
4/31/97 11,584 12,245 10,867
5/31/97 11,761 12,429 10,861

17.61% 24.29% 8.61%

GRAPHIC MATERIAL (4)

This chart shows in pie format the credit quality breakdown of the fund's
securities on 5/31/97, based on total long-term investments.

Credit Quality Breakdown on 5/31/97

AAA 9.4%
AA 4.7%
A 19.0%
BBB 50.2%
Below Investment Grade 16.7%

GRAPHIC MATERIAL (5)

This bar chart shows the comparison between the fund's Class I shares
distribution rate of 5.91% and the taxable equivalent distribution rate of
10.79%.

GRAPHIC MATERIAL (6)

The following line graph hypothetically compares the performance of the
Franklin California High Yield Municipal Fund's Class I shares to that of the
Lehman Brothers Municipal Bond Index and the Consumer Price Index (CPI),
based on a $10,000 investment from 5/3/93 to 5/31/97.

Period Ending Fund Index Index

5/3/93 $9,579 10,000 10,000
5/31/93 9,550 10,051 10,013
6/30/93 9,713 10,218 10,027
7/31/93 9,703 10,232 10,027
8/31/93 9,909 10,445 10,055
9/30/93 10,059 10,564 10,076
10/31/93 10,092 10,584 10,117
11/30/93 10,039 10,491 10,125
12/31/93 10,223 10,712 10,125
1/31/94 10,346 10,834 10,152
2/28/94 10,183 10,553 10,187
3/31/94 9,726 10,124 10,221
4/30/94 9,759 10,210 10,236
5/31/94 9,843 10,299 10,243
6/30/94 9,744 10,236 10,278
7/31/94 9,931 10,423 10,306
8/31/94 10,006 10,460 10,347
9/30/94 9,906 10,306 10,375
10/31/94 9,763 10,123 10,382
11/30/94 9,538 9,939 10,395
12/31/94 9,604 10,158 10,395
1/31/95 9,892 10,448 10,437
2/28/95 10,181 10,753 10,479
3/31/95 10,397 10,876 10,513
4/30/95 10,453 10,889 10,548
5/31/95 10,736 11,237 10,569
6/30/95 10,631 11,139 10,590
7/31/95 10,678 11,245 10,590
8/31/95 10,793 11,387 10,618
9/30/95 10,898 11,459 10,639
10/31/95 11,069 11,625 10,674
11/30/95 11,264 11,818 10,667
12/31/95 11,427 11,932 10,659
1/31/96 11,489 12,023 10,722
2/29/96 11,403 11,941 10,756
3/31/96 11,296 11,788 10,812
4/30/96 11,279 11,755 10,855
5/31/96 11,330 11,750 10,875
6/30/96 11,509 11,878 10,882
7/31/96 11,585 11,986 10,902
8/31/96 11,602 11,984 10,923
9/30/96 11,792 12,152 10,958
10/31/96 11,936 12,289 10,993
11/30/96 12,153 12,514 11,014
12/31/96 12,131 12,461 11,014
1/31/97 12,134 12,485 11,049
2/28/97 12,257 12,600 11,083
3/31/97 12,137 12,433 11,111
4/30/97 12,262 12,537 11,126
5/31/97 12,424 12,725 11,119

24.24% 27.25% 11.19%

GRAPHIC MATERIAL (7)

This bar chart shows the comparison between the fund's Class II shares
distribution rate of 5.56% and the taxable equivalent distribution rate of
10.15%.

GRAPHIC MATERIAL (8)

The following line graph hypothetically compares the performance of the
Franklin California High Yield Municipal Fund's Class II shares to that of
the Lehman Brothers Municipal Bond Index and the Consumer Price Index (CPI),
based on a $10,000 investment from 5/1/96 to 5/31/97.

Period Ending Fund Index Index

5/1/96 9,899 10,000 10,000
5/31/96 9,937 9,996 10,019
6/30/96 10,079 10,105 10,025
7/31/96 10,151 10,197 10,044
8/31/96 10,152 10,195 10,063
9/30/96 10,315 10,338 10,095
10/31/96 10,435 10,454 10,128
11/30/96 10,619 10,646 10,147
12/31/96 10,605 10,601 10,147
1/31/97 10,601 10,621 10,179
2/28/97 10,702 10,719 10,211
3/31/97 10,601 10,576 10,236
4/30/97 10,694 10,665 10,250
5/31/97 10,742 10,825 10,244

GRAPHIC MATERIAL (9)

This chart shows in pie format the credit quality breakdown of the fund's
securities on 5/31/97, based on total long-term investments.

Credit Quality Breakdown on 5/31/97

AAA 38.6%
AA 26.2%
A 22.8%
BBB 12.4%

GRAPHIC MATERIAL (10)

This bar chart shows the comparison between the fund's distribution rate of
5.32% and the taxable equivalent distribution rate of 9.79%.

GRAPHIC MATERIAL (11)

The following line graph hypothetically compares the performance of the
Franklin Hawaii Municipal Bond Fund's shares to that of the Lehman Brothers
Municipal Bond Index and the Consumer Price Index (CPI), based on a $10,000
investment from 2/26/92 to 5/31/97.

Period Ending Fund Index Index

2/26/92 9,579 10,000 10,000
2/29/92 9,579 10,000 10,004
3/31/92 9,579 10,004 10,055
4/30/92 9,684 10,093 10,069
5/31/92 9,804 10,212 10,083
6/30/92 9,924 10,384 10,119
7/31/92 10,326 10,695 10,141
8/31/92 10,166 10,590 10,169
9/30/92 10,171 10,659 10,198
10/31/92 10,008 10,555 10,233
11/30/92 10,280 10,744 10,248
12/31/92 10,453 10,853 10,240
1/31/93 10,596 10,979 10,291
2/28/93 10,940 11,377 10,327
3/31/93 10,923 11,256 10,363
4/30/93 10,996 11,370 10,392
5/31/93 11,058 11,433 10,406
6/30/93 11,273 11,624 10,421
7/31/93 11,293 11,639 10,421
8/31/93 11,531 11,882 10,450
9/30/93 11,718 12,017 10,472
10/31/93 11,760 12,040 10,515
11/30/93 11,603 11,934 10,522
12/31/93 11,897 12,186 10,522
1/31/94 12,035 12,325 10,551
2/28/94 11,674 12,005 10,587
3/31/94 11,011 11,517 10,623
4/30/94 11,086 11,615 10,637
5/31/94 11,205 11,716 10,645
6/30/94 11,128 11,644 10,681
7/31/94 11,346 11,857 10,710
8/31/94 11,390 11,899 10,753
9/30/94 11,192 11,724 10,782
10/31/94 10,882 11,515 10,789
11/30/94 10,629 11,307 10,803
12/31/94 10,930 11,556 10,803
1/31/95 11,278 11,886 10,847
2/28/95 11,672 12,232 10,890
3/31/95 11,785 12,373 10,926
4/30/95 11,830 12,387 10,962
5/31/95 12,241 12,783 10,984
6/30/95 12,069 12,671 11,006
7/31/95 12,196 12,792 11,006
8/31/95 12,336 12,954 11,035
9/30/95 12,405 13,036 11,057
10/31/95 12,593 13,225 11,093
11/30/95 12,840 13,444 11,085
12/31/95 13,030 13,573 11,078
1/31/96 13,089 13,677 11,143
2/29/96 12,982 13,584 11,179
3/31/96 12,838 13,410 11,237
4/30/96 12,802 13,372 11,281
5/31/96 12,789 13,367 11,302
6/30/96 12,948 13,513 11,309
7/31/96 13,070 13,636 11,330
8/31/96 13,106 13,633 11,352
9/30/96 13,291 13,824 11,388
10/31/96 13,440 13,980 11,425
11/30/96 13,651 14,236 11,446
12/31/96 13,614 14,176 11,446
1/31/97 13,614 14,203 11,483
2/28/97 13,727 14,334 11,518
3/31/97 13,536 14,143 11,547
4/30/97 13,664 14,262 11,562
5/31/97 13,843 14,476 11,555

38.43% 44.76% 15.55%

GRAPHIC MATERIAL (12)

This chart shows in pie format the credit quality breakdown of the fund's
securities on 5/31/97, based on total long-term investments.

Credit Quality Breakdown on 5/31/97

AAA 51.7%
AA 23.5%
A 14.5%
BBB 10.3%

GRAPHIC MATERIAL (13)

This bar chart shows the comparison between the fund's distribution rate of
5.36% and the taxable equivalent distribution rate of 9.44%.

GRAPHIC MATERIAL (14)

The following line graph hypothetically compares the performance of the
Franklin Tennessee Municipal Bond Fund's shares to that of the Lehman
Brothers Municipal Bond Index and the Consumer Price Index (CPI), based on a
$10,000 investment from 5/10/94 to 5/31/97.

Period Ending Fund Index Index

5/10/94 9,579 10,000 10,000
5/31/94 9,693 10,059 10,005
6/30/94 9,579 9,998 10,039
7/31/94 9,799 10,181 10,066
8/31/94 9,818 10,216 10,106
9/30/94 9,644 10,066 10,133
10/31/94 9,381 9,887 10,141
11/30/94 9,148 9,708 10,154
12/31/94 9,448 9,921 10,154
1/31/95 9,799 10,205 10,194
2/28/95 10,103 10,502 10,235
3/31/95 10,201 10,623 10,269
4/30/95 10,219 10,636 10,303
5/31/95 10,537 10,975 10,323
6/30/95 10,436 10,879 10,344
7/31/95 10,485 10,983 10,344
8/31/95 10,637 11,122 10,371
9/30/95 10,706 11,192 10,391
10/31/95 10,858 11,355 10,426
11/30/95 11,063 11,543 10,419
12/31/95 11,187 11,654 10,411
1/31/96 11,250 11,743 10,473
2/29/96 11,135 11,663 10,506
3/31/96 11,010 11,513 10,561
4/30/96 10,989 11,481 10,602
5/31/96 11,010 11,477 10,622
6/30/96 11,148 11,602 10,629
7/31/96 11,254 11,707 10,649
8/31/96 11,264 11,705 10,669
9/30/96 11,458 11,869 10,703
10/31/96 11,577 12,003 10,737
11/30/96 11,783 12,223 10,758
12/31/96 11,729 12,171 10,758
1/31/97 11,740 12,194 10,792
2/28/97 11,860 12,307 10,826
3/31/97 11,705 12,143 10,853
4/30/97 11,817 12,245 10,867
5/31/97 11,995 12,429 10,861

Total Return 19.95% 24.29% 8.61%

GRAPHIC MATERIAL (15)

This chart shows in pie format the credit quality breakdown of the fund's
securities on 5/31/97, based on total long-term investments.

Credit Quality Breakdown on 5/31/97

AAA 44.8%
AA 27.6%
A 13.7%
BBB 13.9%

GRAPHIC MATERIAL (16)

This bar chart shows the comparison between the fund's distribution rate of
5.46% and the taxable equivalent distribution rate of 9.04%.

GRAPHIC MATERIAL (17)

The following line graph hypothetically compares the performance of the
Franklin Washington Municipal Bond Fund's shares to that of the Lehman
Brothers Municipal Bond Index and the Consumer Price Index (CPI), based on a
$10,000 investment from 5/3/93 to 5/31/97.

Period Ending Fund Index Index

5/3/93 9,579 10,000 10,000
5/31/93 9,569 10,051 10,013
6/30/93 9,770 10,218 10,027
7/31/93 9,761 10,232 10,027
8/31/93 9,968 10,445 10,055
9/30/93 10,098 10,564 10,076
10/31/93 10,172 10,584 10,117
11/30/93 9,974 10,491 10,125
12/31/93 10,237 10,712 10,125
1/31/94 10,361 10,834 10,152
2/28/94 10,061 10,553 10,187
3/31/94 9,373 10,124 10,221
4/30/94 9,448 10,210 10,236
5/31/94 9,584 10,299 10,243
6/30/94 9,489 10,236 10,278
7/31/94 9,748 10,423 10,306
8/31/94 9,764 10,460 10,347
9/30/94 9,527 10,306 10,375
10/31/94 9,287 10,123 10,382
11/30/94 9,049 9,939 10,395
12/31/94 9,304 10,158 10,395
1/31/95 9,666 10,448 10,437
2/28/95 10,008 10,753 10,479
3/31/95 10,132 10,876 10,513
4/30/95 10,129 10,889 10,548
5/31/95 10,552 11,237 10,569
6/30/95 10,400 11,139 10,590
7/31/95 10,462 11,245 10,590
8/31/95 10,633 11,387 10,618
9/30/95 10,718 11,459 10,639
10/31/95 10,922 11,625 10,674
11/30/95 11,150 11,818 10,667
12/31/95 11,302 11,932 10,659
1/31/96 11,344 12,023 10,722
2/29/96 11,253 11,941 10,756
3/31/96 11,106 11,788 10,812
4/30/96 11,070 11,755 10,855
5/31/96 11,067 11,750 10,875
6/30/96 11,224 11,878 10,882
7/31/96 11,313 11,986 10,902
8/31/96 11,332 11,984 10,923
9/30/96 11,525 12,152 10,958
10/31/96 11,650 12,289 10,993
11/30/96 11,845 12,514 11,014
12/31/96 11,808 12,461 11,014
1/31/97 11,805 12,485 11,049
2/28/97 11,920 12,600 11,083
3/31/97 11,776 12,433 11,111
4/30/97 11,904 12,537 11,126
5/31/97 12,065 12,725 11,119

20.65% 27.25% 11.19%