FRANKLIN MUNICIPAL SECURITIES TRUST, N-30D, 1998-07-17

FRANKLIN MUNICIPAL SECURITIES TRUST
N-30D, 1998-07-17

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ANNUAL
REPORT

May 31, 1998

FRANKLIN MUNICIPAL SECURITIES TRUST

Contents

Shareholder Letter .................................................... 1
Fund Reports
Franklin Arkansas
Municipal Bond Fund ................................................ 4
Franklin California High
Yield Municipal Fund ............................................... 10
Franklin Hawaii
Municipal Bond Fund ................................................ 22
Franklin Tennessee
Municipal Bond Fund ................................................ 28
Franklin Washington
Municipal Bond Fund ................................................ 36
Bond Ratings .......................................................... 44
Financial Highlights &
Statement of Investments .............................................. 47
Financial Statements .................................................. 68
Notes to
Financial Statements .................................................. 73
Independent
Auditor's Report ...................................................... 78

SHAREHOLDER LETTER

Dear Shareholder:

It is a pleasure to bring you Franklin Municipal Securities Trust's annual
report for the period ended May 31, 1998.

During the year under review, the U.S. economy continued on its path of moderate
growth, modest inflation and relatively stable-to-lower interest rates. Economic
growth was solid, as measured by the 1998 first quarter, annualized Gross
Domestic Product (GDP) gain of 5.4%. The Consumer Price Index (CPI), a widely
used measure of inflation, continued to trend downward. The CPI's annualized
increase for May 1998 was a surprisingly low 2.2%, considering the U.S. economy
is in its seventh consecutive year of expansion.

After peaking in the second quarter of 1997, interest rates declined due to
benign inflation and the presumption that the Asian monetary crises would slow
the U.S. economy. The Asian crises also contributed to a flight to quality into
U.S. Treasury bonds and U.S. dollar-denominated assets. The 30-year Treasury
yield ended the reporting period at 5.81%, down from 6.92% on May 31, 1997.1 The
yield on the Bond Buyer 40 Index, a representative municipal bond index,
declined from 5.74% to 5.22%, for the same period.2 The overall interest rate
decline resulted in a healthy year for fixed-income securities in 1997, and the
downward trend continued to translate into bond market strength in 1998. Credit
rating upgrades substantially outpaced downgrades from national credit rating
agencies during the reporting period.

1. Source: Standard & Poor's(R) Micropal (Federal Reserve H15 Report).

2. Source: Standard & Poor's Micropal (Bond Buyer 40). Index is composed of 40
actively traded municipal bonds and does not represent the performance of any
Franklin Templeton fund. Investors cannot invest directly in this unmanaged
index.

Recent estimates for bond supply in 1998 are over $250 billion, with the
majority coming to market insured. Yield spreads between an insured and an
investment grade BBB bond ranged between approximately 25 to 35 basis points.
Increased competition among the various municipal insurers resulted in
aggressive pricing that narrowed the quality spreads. The issuance of AAA bonds
has escalated by 40% during the past ten years. Insurance generally increases a
municipal bond's quality and marketability. Low-cost insurance and falling
interest rates made it difficult to maintain the yields in the portfolios. We
anticipate that it will continue to be economical for issuers to purchase
insurance to enhance their credit quality. As insurance premiums remain
competitive, we expect that spreads will remain narrow.

The low interest-rate environment continued to increase the amount of
prerefunding activity in the market. The issuers who came to market in the
mid-1990s when rates were higher, recently found opportunities to refinance
their existing debt and save on interest costs.

Our investment philosophy remains disciplined and focused, as we strive to offer
our shareholders high, tax-free income and preservation of principal. Looking
forward, the recent economic environment should be beneficial for municipalities
and municipal bonds.

We encourage you to discuss your financial goals with an investment
representative. He or she can address concerns about volatility and help you
diversify your investments and stay focused on the long term. Mutual funds offer
a level of diversification that is almost impossible for individual investors to
achieve on their own. Municipal bonds continue to be an attractive investment
for diversifying a heavily weighted stock portfolio. As always, we appreciate
your support, welcome your questions and comments, and look forward to serving
your investment needs in the years ahead.

Sincerely,

Charles B. Johnson
Chairman
Franklin Municipal Securities Trust

Thomas J. Kenny
Director
Franklin Municipal Bond Department

FRANKLIN ARKANSAS
MUNICIPAL BOND FUND

GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 48 of
this report.

Your Fund's Objective: Franklin Arkansas Municipal Bond Fund 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 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 taxable.

State Update

Arkansas' strong financial performance is based on conservative fiscal
management, an increasingly diversified economy, and manageable future debt
plans. Manufacturing jobs from other states migrated to Arkansas over the last
decade, and construction and service industries increased to support these
manufacturing efforts. Regional employment and wealth in Arkansas' northwest
improved significantly with the expansion of companies such as Wal-Mart and
Tyson Foods. The employment growth experienced by the state since 1991 slowed,
but overall expansion continued. Arkansas' unemployment remained below the
national rate.

Arkansas manages its financial operations responsibly. The state's Revenue
Stabilization Act mandates financial balance, effectively limiting expenditures
to cash receipts and balances on hand. The state projects limited increases in
government spending over the next two years, and Arkansas' debt load remains
among the country's lowest. Despite economic progress, however, Arkansas has
underdeveloped infrastructure and low per capita personal income.

Portfolio Notes

GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT

During the reporting period, we focused on well-structured Arkansas municipal
bonds across most sectors. Arkansas bonds tend to trade at much higher prices
(lower yields) than most other states' bonds. This is due mainly to the demand
outweighing the supply of Arkansas bonds. Throughout 1997 and the first half of
1998, this relationship continued as the supply of Arkansas bonds stayed
relatively low. Municipal bond supply in Arkansas increased 5.8% from 1996 to
1997, and we expect 1998's supply to remain stable.

The fund's net assets increased 132% from May 31, 1997, to May 31, 1998, from
$13.0 million to $30.3 million.

Maintaining our disciplined approach to purchasing bonds, we looked for Arkansas
bonds offering attractive yields. We participated in issues offered by Little
River County's Georgia Pacific, Jefferson County's Entergy Arkansas Inc,
Conway's Sales & Use Tax Capital Improvement Bonds, and Arkansas State
Development Finance Authority for Home Mortgage revenue bonds. Going forward,
the fund will seek to invest in bonds that provide good call protection while
paying high, current income.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.

GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT

PERFORMANCE SUMMARY

Franklin Arkansas Municipal Bond Fund's share price, as measured by net asset
value, increased 48 cents, from $10.51 on May 31, 1997, to $10.99 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 58.5 cents ($0.585) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.

Based on an annualization of the current monthly per-share dividend of 4.8 cents
($0.048) and the maximum offering price of $11.48 on May 31, 1998, your fund's
distribution rate was 5.02%. 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 8.94% from a taxable investment to match the fund's
tax-free distribution rate.

The chart on page 8 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Arkansas municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Arkansas Municipal Bond 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 in it directly.

The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.

GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Arkansas Municipal Bond Fund

Periods ended 5/31/98

Since
Inception
1-Year 3-Year (5/10/94)
Cumulative Total Return1 10.31% 25.74% 35.49%
Average Annual Total Return2 5.59% 6.38% 6.64%

Distribution Rate3 5.02%
Taxable Equivalent Distribution Rate4 8.94%
30-Day Standardized Yield5 4.89%
Taxable Equivalent Yield4 8.71%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.25% initial
sales charge.
3. Distribution rate is based on an annualization of the current 4.8 cent per
share monthly dividend and the maximum offering price of $11.48 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Arkansas state personal income tax bracket of 43.8%, 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, 1998.
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
4.23%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, your investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.

FRANKLIN CALIFORNIA
HIGH YIELD MUNICIPAL FUND

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 52 of
this report.

Your Fund's Objective: Franklin California High Yield Municipal Fund 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

GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT

State Update

California's economy enjoyed the best year of this decade in 1997, with the
addition of approximately 400,000 new jobs and an increase in income levels.
Despite an unemployment rate of 5.8% that remained above the 4.6% national
average for February 1998,2 the state's job growth rate was 11U2 times the
national average rate of increase.3 Personal income rose 7.3% in the second
quarter 1997, placing it above the national rate of 5.7%.4

2. Source: The Wall Street Journal, March 25, 1998.
3. Source: Bureau of Labor Statistics.
4. Source: Fitch IBCA. February 17, 1998.

Downsizing in defense- and aerospace-related industries has all but ended, and
the construction, exports, tourism, computer services and entertainment sectors
have become the new engines of California's steady economic growth. Taking into
account California's robust economy, Standard & Poor's Corporation, a national
credit rating agency, gave the state's general obligation debt an A+ rating.5

5. Source: Standard & Poor's CreditWeek Municipal 2/23/98. These credit ratings
are not ratings for the fund.

The Asian crises have not affected the California municipal bond market to date.
The state made no specific cut-back in its growth estimates due to Asian
economic problems. During the year under review, growth in exports to Hong Kong,
Taiwan, and Mexico offset declines in exports to trading partners such as Japan,
Korea, Singapore and Malaysia.6 It is too early to estimate El Ni-o's effects on
California municipalities; however, rating agencies do not normally reduce
ratings because of natural disasters, and it does not appear that this affected
any of the portfolio's bonds.

6. Source: California Department of Finance. California Economic Indicators,
January/February 1998.

Despite an improving economic environment, structural restrictions including
strict property tax limits, two-thirds legislative requirement for budget
passage, and mandated spending on education continue to hamper state finance
flexibility. Renewed economic growth has overcome these impediments, however,
and the operating budget has been balanced for the past two years. Looking
forward, projected increases in employment and personal income and a recovery in
homebuilding bode well for California's continued economic growth.

Portfolio Notes

Nationwide, issuers took advantage of the lower interest-rate environment during
the first part of 1998. We saw a 51% increase in issuance versus the same period
last year. As a result, municipals cheapened considerably, and traded at or
above 90% of U.S. Treasuries. Market fluctuations over the 12-month reporting
period created purchase opportunities on downswings. The fund sought to take
advantage of the volatility and performed favorably over the reporting period.

Insurance dominated the market, with more than 70% of new California issues
coming to market insured. The higher penetration of insurance, along with a
limited supply of new, lower-rated issues led to a narrowing in yield spreads
between insured and lower grade issues. Consequently, the insured sector
generally represented the municipal bond market's greatest value, and the fund
concentrated its purchases in high grade issues. At the end of the reporting
period, 18.1% of the fund's total long-term assets are rated AA or better,
compared with 14.1% a year ago.

The fund's assets increased 102% during the fund's fiscal year, from $223.5
million to $452.4 million, leading to a more diversified and stable asset base.
The fund's performance is largely a result of Franklin's income-oriented
approach. The market seemed to be moving sideways over the course of the year,
but there were many periods of volatility that provided opportunities for the
fund. Using our disciplined approach to investing, the fund attempted to take
advantage of the market on the downswings, helping maximize its income-earning
potential.

Q. What is a "sideways market"?

A. A period in which prices trade within a narrow range, showing only small
changes up or down. It is also called "horizontal price movement."

Much of Franklin's strength in the high yield market lies in our research
capabilities. Our research analysts often work with issuers and underwriters in
structuring deals with attractive credit qualities. During the reporting period
we added over 60 new positions to the fund.

The market's fundamentals continue to look promising for municipal bonds. Such
securities remain one of the few investment options available for tax-conscious
investors. Going forward, we anticipate continued economic growth in California,
rather mild inflation and relatively stable interest rates. Under such
circumstances, we believe the fund is positioned for healthy performance during
the next year.

GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT

PERFORMANCE SUMMARY

Class I

Franklin California High Yield Municipal Fund - Class I share price, as measured
by net asset value, increased 55 cents, from $10.10 on May 31, 1997, to $10.65
on May 31, 1998. During the 12-month reporting period, the fund paid income
distributions totaling 61.8 cents ($0.618) per share. Distributions will vary
based on the earnings of the fund's portfolio, and past distributions are not
predictive of future trends.

Based on an annualization of the current monthly per-share dividend of 5.0 cents
($0.05) and the maximum offering price of $11.12 on May 31, 1998, your fund's
distribution rate was 5.40%. 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 California state personal income
tax bracket would need to earn 9.86% from a taxable investment to match the
fund's tax-free distribution rate.

The chart on page 16 compares your fund's Class I shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists
primarily of California municipal bonds. Of course, such a market index has
inherent performance differentials over any fund. It does not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as Franklin California High Yield Municipal 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 in it directly.

GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin California High Yield Municipal Fund - Class I
Periods ended 5/31/98

Since
Inception
1-Year 5-Year (5/3/93)
Cumulative Total Return1 11.78% 45.47% 45.04%
Average Annual Total Return2 7.01% 6.86% 6.69%

Distribution Rate3 5.40%
Taxable Equivalent
Distribution Rate4 9.86%
30-Day Standardized Yield5 5.24%
Taxable Equivalent Yield4 9.57%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 5.0 cent per
share monthly dividend and the maximum offering price of $11.12 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and California state personal income tax bracket of 45.2%,
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, 1998.
Note: Prior to July 1, 1994, Class I shares were offered at a higher initial
sales charge. Thus, actual total returns would have been lower. 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
4.94%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.

Class II

Franklin California High Yield Municipal Fund - Class II share price, as
measured by net asset value, increased 56 cents, from $10.12 on May 31, 1997, to
$10.68 on May 31, 1998. During the 12-month reporting period, the fund paid
income distributions totaling 56.56 cents ($0.5656) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.

Based on an annualization of the current monthly per-share dividend of 4.43
cents ($0.0443) and the maximum offering price of $10.79 on May 31, 1998, your
fund's distribution rate was 4.93%. 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 California state
personal income tax bracket would need to earn 9.00% from a taxable investment
to match the fund's tax-free distribution rate.

The chart on page 20 compares your fund's Class II shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists
primarily of California municipal bonds. Of course, such a market index has
inherent performance differentials over any fund. It does not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the sales
charges, all fund expenses and account fees. If operating expenses such as
Franklin California Municipal 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 in it directly.

GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin California High Yield Municipal Fund
Class II
Periods ended 5/31/98

Since
Inception
1-Year (5/1/96)
Cumulative Total Return1 11.30% 21.95%
Average Annual Total Return2 9.22% 9.47%
Distribution Rate3 4.93%
Taxable Equivalent Distribution Rate4 9.00%
30-Day Standardized Yield5 4.87%
Taxable Equivalent Yield4 8.89%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge applicable to shares redeemed
within 18 months of investment.
3. Distribution rate is based on an annualization of the current 4.43 cent per
share monthly dividend and the maximum offering price of $10.79 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and California state personal income tax bracket of 45.2%,
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, 1998.
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
4.56%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.

GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT

FRANKLIN HAWAII
MUNICIPAL BOND FUND

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 58 of
this report.

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

State Update

Hawaii's economy, highly dependent on the tourism industry, suffered the Asian
currency crises' ill effects. Historically, tourists from Japan fueled Hawaii's
economy with their high consumption of goods and services. However, the yen's
devaluation, combined with Asia's recent weak job and income growth, made many
consumers less likely to spend on luxuries such as vacations, and to spend less
when they do travel. During the fund's fiscal year, the inflow of travelers from
mainland U.S. did not fill the gap in the island's economy.

Tourism represents approximately 25% of Hawaii's gross state product, and
employs six out of ten workers in the state's economy. In conjunction with the
decline in the tourism sector, reduced Japanese investment led to a contraction
in the construction sector. The stagnant economy caused Hawaii to increase its
debt load, thereby limiting the state's budgetary flexibility. Hawaii has debt
levels six times the national average, and faced operating deficits in five of
the last six fiscal years. The credit rating of the state's general obligation
bonds has been downgraded from Aa3 to A1 by Moody's, and from AA to A+ by
Standard & Poor's, two national credit rating agencies.2 (For definitions of
bond ratings, please see p. 44.) Aware of its over-dependence on tourism, Hawaii
is attempting to diversify its economy by attracting other industries. Uniden, a
manufacturer of cordless telephones, and Square USA, a video game developer,
have opened research and development plants in the state.

2. Source: Moody's 4/9/98, Standard & Poor's 9/1/97. These credit ratings are
not ratings for the fund.

Portfolio Notes

Despite Hawaii's ailing economy, we believe a well-chosen portfolio of the
state's municipal bonds remains a strong source for tax-free income. The fund's
net assets rose 13% over the period, from $40.0 million on May 31, 1997, to
$45.2 million on May 31, 1998. Recent purchases for the fund include Honolulu
City and County General Obligation, Hawaii State General Obligation (FGIC
insured), and Hawaii State Department Budget and Finance Special Purpose Revenue
Wilcox Memorial Hospital Project. As always, we strive to keep the fund fully
invested to provide shareholders with a relatively high level of tax-free
income.

GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT

PERFORMANCE SUMMARY

Franklin Hawaii Municipal Bond Fund's share price, as measured by net asset
value, increased 37 cents, from $10.79 on May 31, 1997, to $11.16 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 59.7 cents ($0.597) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.

Based on an annualization of the current monthly per share dividend of 4.9 cents
($0.049) and the maximum offering price of $11.66 on May 31, 1998, your fund's
distribution rate was 5.04%. 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 Hawaii state personal income tax
bracket would need to earn 9.27% from a taxable investment to match the fund's
tax-free distribution rate.

The chart on page 26 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Hawaii municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Hawaii Municipal Bond 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 in it directly.

GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 18 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Hawaii Municipal Bond Fund
Periods ended 5/31/98

Since
Inception
1-Year 5-Year (2/26/92)
Cumulative Total Return1 9.10% 36.62% 57.72%
Average Annual Total Return2 4.46% 5.52% 6.81%

Distribution Rate3 5.04%
Taxable Equivalent Distribution Rate4 9.27%
30-Day Standardized Yield5 4.58%
Taxable Equivalent Yield4 8.43%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $11.66 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Hawaii state personal income tax bracket of 45.6%, 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, 1998.
Note: Prior to July 1, 1994, shares were offered at a higher initial sales
charge; thus actual total returns would be somewhat lower. 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 4.18%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.

FRANKLIN TENNESSEE
MUNICIPAL BOND FUND

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 61 of
this report.

Your Fund's Objective: Franklin Tennessee Municipal Bond Fund 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

GRAPHIC MATERIAL 19 OMITTED - SEE APPENDIX AT END OF DOCUMENT

State Update

Tennessee's economy experienced increased diversification and moderate growth,
as it benefited from gains in health care and distribution services. Nissan
Corp., Peterbilt Motors Company, and General Motors Corp.'s Saturn Division
expanded their auto manufacturing facilities, significantly augmenting the state
economy. The state's emphasis on educational system reform and transportation
infrastructure have supported economic development. Although Tennessee's
economic growth lags behind the nation, it can be characterized as still
developing and diversifying.

Tennessee's financial position remains sound. Moody's and Fitch, two national
credit rating agencies, gave their highest rating to Tennessee's current general
obligation debt, reflecting the state's strong fiscal position.2 The state has
responsible financial management policies. Its reserve fund stands at $101
million, and the proposed 1998-1999 budget increases the level to $127 million.
Tennessee's practice of drawing upon the fund during lean years and rebuilding
it as conditions improve lends credibility to such a rainy-day fund. Limited
borrowing and the practice of pay-as-you-go financing have served to reduce
Tennessee's debt ratios to levels well below the medians for the 50 states. The
state constitution requires a balanced budget, and Tennessee is a leader in the
development of financial standards. The constitution further mandates that the
state provide 1.5 times coverage of its debt service through taxes. As of May
1998, a substantial margin in excess of 1.5 times is available.3

2. Source: Moody's 5/12/98, Fitch Research 5/8/98. These credit ratings are not
ratings for the fund.

3. Source: Moody's 5/12/98.

Portfolio Notes

Insurance dominated the market, with more than 60% of new Tennessee issues
coming to market insured. The higher penetration of insurance, along with a
limited supply of new, lower-rated issues led to a narrowing in yield spreads
between insured and lower grade issues. Consequently, the insured sector
generally represented the municipal bond market's greatest value, and the fund
concentrated its purchases in high grade issues. At the end of the reporting
period, 56.5% of the fund's total long-term assets are rated AAA, compared with
51.7% a year ago.

The fund's assets increased 67% during the fund's fiscal year, from $26.7
million to $44.5 million, leading to a more diversified and stable asset base.
The fund's performance is largely a result of Franklin's income-oriented
approach. The market seemed to be moving sideways over the course of the year,
but there were many periods of volatility that provided opportunities for the
fund. Using our disciplined approach to investing, the fund attempted to take
advantage of the market on the downswings, helping maximize its income-earning
potential.

Q. What is a "sideways market"?

A. A period in which prices trade within a narrow range, showing only small
changes up or down. It is also called "horizontal price movement."

Purchases for the fund were concentrated in high-essential use, general
obligation and direct revenue utility issues. General obligation bonds make up
13.2% of the fund's total net assets, and utility issues 23.2% on May 31, 1998,
compared with 22.7% and 14.2% respectively, a year ago. We participated in
issues offered by Metropolitan Nashville Davidson Electric Utility and
Vanderbilt University.

The market fundamentals look promising for municipal bonds. Such securities
remain one of the few investment options available for tax-conscious investors.
Going forward, we anticipate continued economic growth in Tennessee, rather mild
inflation and relatively stable interest rates. Under such circumstances, we
believe the fund is positioned for healthy performance during the next year.

GRAPHIC MATERIAL 20 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 21 OMITTED - SEE APPENDIX AT END OF DOCUMENT

PERFORMANCE SUMMARY

Franklin Tennessee Municipal Bond Fund's share price, as measured by net asset
value, increased 56 cents, from $10.71 on May 31, 1997, to $11.27 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 57.3 cents ($0.573) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.

Based on an annualization of the current monthly per-share dividend of 4.7 cents
($0.047) and the maximum offering price of $11.77 on May 31, 1998, your fund's
distribution rate was 4.79%. 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 8.44% from a taxable investment to match the fund's
tax-free distribution rate.

The chart on page 34 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Tennessee municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Tennessee Municipal Bond 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 in it directly.

GRAPHIC MATERIAL 22 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 23 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Tennessee Municipal Bond Fund
Periods ended 5/31/98

Since
Inception
1-Year 3-Year (5/10/94)
Cumulative Total Return1 10.75% 26.12% 38.74%
Average Annual Total Return2 6.00% 6.48% 7.26%

Distribution Rate3 4.79%
Taxable Equivalent
Distribution Rate4 8.44%
30-Day Standardized Yield5 4.63%
Taxable Equivalent Yield4 8.15%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.25% initial
sales charge.
3. Distribution rate is based on an annualization of the current 4.7 cent per
share monthly dividend and the maximum offering price of $11.77 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Tennessee state personal income tax bracket of 43.2%, 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, 1998.
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
4.26%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.

FRANKLIN WASHINGTON
MUNICIPAL BOND FUND

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 65 of
this report.

Your Fund's Objective: Franklin Washington Municipal Bond Fund seeks to provide
high, current income exempt from regular federal income taxes while seeking
preservation of capital by investing primarily in a portfolio of Washington
municipal securities.1

GRAPHIC MATERIAL 24 OMITTED - SEE APPENDIX AT END OF DOCUMENT

State Update

The economic expansion that began for Washington in the early 1980s continued
unabated during the reporting period. The state enjoys an AA+ and Aa1 rating
from Standard & Poor's and Moody's respectively, two national credit rating
agencies.2 (For definitions of bond ratings, please see p. 44.) These ratings
reflect the state's strong growth, increasing economic diversification, and
sound financial policies. Washington is the only state in the Pacific Northwest
to maintain continuous economic growth over the past decade, with most occurring
in the Puget Sound area. Boeing Co. and Microsoft Corp. continued their
successes, providing above-average wages and stimulating spin-off companies. The
state's population growth was more than double the national rate between 1990
and 1996. A rise in the state's service sector employment offset an overall
manufacturing employment decline.

2.Source: Moody's 3/25/98, Standard & Poor's 8/25/97. These credit ratings are
not ratings for the fund.

Washington state experienced stronger than expected revenue income. Washington's
1995-97 fiscal biennium was $210 million higher than the original estimate. The
state's conservative fiscal practices more than counterbalanced above-average
debt levels. To date, the state has accommodated the parameters of Proposition
601, and the amount of debt is within constitutional and statutory limits.

The Asian financial crises are expected to have an adverse effect on the state's
economy in the near term, because a large percentage of the state's commodity
exports are to Asia. However, we expect that the long-term effect will be to
lower growth rates to more sustainable levels. The state attempted to quantify
this effect by providing projections for a future slowdown in employment growth.
The anticipated slowdown is not severe, and because it is anticipated, should
not generate an undue financial shock. We believe the state will continue to
outperform the nation.

Portfolio Notes

Washington state's robust economy and the nation's overall economic health
created excellent buying opportunities in the Washington municipal bond market.
The positive economic environment prompted us to add several new issues to the
fund, which helped increase our yield to shareholders. Recent purchases included
Washington Public Power System Supply, Bellingham Washington Housing Authority
Revenue Cascade Meadows Project (MBIA insured), and Washington State Health Care
Facility Authority Revenue-Swedish Health System (AMBAC insured). More than 52%
of the fund's total net assets are rated AAA, compared with 44.8% a year ago.
The fund's net assets grew 24% from $8.4 million on May 31, 1997, to $10.4
million on May 31, 1998.

The market's fundamentals look promising for municipal bonds. Such securities
remain one of the few investment options available for tax-conscious investors.
Going forward, we anticipate continued economic growth and diversification in
Washington, rather mild inflation and relatively stable interest rates. Under
such circumstances, we believe the fund is positioned to perform favorably
during the next year.

GRAPHIC MATERIAL 25 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 26 OMITTED - SEE APPENDIX AT END OF DOCUMENT

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 affect 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. Washington's current credit
rating indicates Standard & Poor's favorable opinion of the state's fiscal
situation under Proposition 601. Indeed the proposition's constraints on
spending should limit Washington's debt issuances and keep its debt level low,
strengthening its fiscal position.

PERFORMANCE SUMMARY

Franklin Washington Municipal Bond Fund's share price, as measured by net asset
value, increased 39 cents, from $10.09 on May 31, 1997, to $10.48 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 58.7 cents ($0.587) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.

Based on an annualization of the current monthly per-share dividend of 4.9 cents
($0.049) and the maximum offering price of $10.95 on May 31, 1998, your fund's
distribution rate was 5.37%. This tax-free rate is generally higher than the
after-tax return on a comparable taxable investment. For example, an investor in
the maximum federal income tax bracket would need to earn 8.89% from a taxable
investment to match the fund's tax-free distribution rate.

The chart on page 42 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Washington municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Washington Municipal Bond 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 in it directly.

GRAPHIC MATERIAL 27 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 28 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Washington Municipal Bond Fund
Periods ended 5/31/98

Since
Inception
1-Year 5-Year (5/3/93)
Cumulative Total Return1 9.87% 38.60% 38.46%
Average Annual Total Return2 5.18% 5.83% 5.72%

Distribution Rate3 5.37%
Taxable Equivalent
Distribution Rate4 8.89%
30-Day Standardized Yield5 4.88%
Taxable Equivalent Yield4 8.08%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $10.95 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
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, 1998.
Note: Prior to July 1, 1994, shares were offered at a higher initial sales
charge. Thus, actual total returns would be somewhat lower. 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 4.21%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.

MUNICIPAL BOND RATINGS

Moody's

Aaa: Best quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin, and principal is secure. Although the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.

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

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

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

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

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

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 likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

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

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

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights

Franklin Arkansas Municipal Bond Fund

Class I
------------------------------------------------
Year Ended May 31,
------------------------------------------------
1998 1997 1996 1995 1994+
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.51 $10.21 $10.32 $10.06 $10.00
------------------------------------------------
Income from investment operations:
Net investment income ................................ .56 .58 .55 .51 .01
Net realized and unrealized gains (losses) ........... .50 .31 (.08) .19 .05
------------------------------------------------
Total from investment operations ...................... 1.06 .89 .47 .70 .06
Less distributions from net investment income ......... (.58) (.59) (.58) (.44) --
------------------------------------------------
Net asset value, end of year .......................... $10.99 $10.51 $10.21 $10.32 $10.06
================================================
Total return* ......................................... 10.31% 8.90% 4.65% 7.27% .60%

Ratios/supplemental data
Net assets, end of year (000's) ....................... $30,377 $13,140 $8,166 $4,134 $2,213
Ratios to average net assets:
Expenses ............................................. .10% .10% .10% .10% .03%**
Expenses excluding waiver and payments by affiliate .. .83% .87% 1.04% 1.11% 1.20%**
Net investment income ................................ 5.30% 5.71% 5.69% 5.64% 2.00%**
Portfolio turnover rate ............................... 18.75% 6.61% 19.22% 77.63% --

</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
+For the period May 10, 1994 (effective date) to May 31, 1994.

See notes to financial statements.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998

PRINCIPAL
Franklin Arkansas Municipal Bond Fund AMOUNT VALUE
Long Term Investments 98.4%
<S> <C> <C>
Arkansas GO, Refunding, Waste Disposal and Pollution, Series B, 6.25%, 7/01/20 ...... $ 130,000 $ 137,836
Arkansas State College Savings, Series B, 5.20%, 6/01/15 ............................ 300,000 304,083
Arkansas State Development Finance Authority,
Drivers License Revenue, Police Headquarters, Wireless Data,
FGIC Insured, 5.40%, 6/01/18 .......................................................... 950,000 976,553
Arkansas State Development Finance Authority, HMR, Series B-1, 5.80%, 1/01/23 ....... 500,000 516,485
Arkansas State Development Finance Authority, SFMR, MBS Program,
Series B, 6.10%, 1/01/29 ............................................................ 1,000,000 1,051,680
Series D, 6.85%, 1/01/27 ............................................................ 110,000 120,305
Arkansas State Development Finance Authority,
Waste Water Systems Revenue, Revolving Loan Fund, Series A,
5.85%, 12/01/19 ....................................................................... 1,000,000 1,060,820
Arkansas State Student Loan Authority Revenue, Refunding,
Series B, 5.60%, 6/01/14 ............................................................ 325,000 333,216
Sub-Series B, 6.25%, 6/01/10 ........................................................ 500,000 540,840
Arkansas State Water Resources Development,
Series A, 5.70%, 7/01/26 ............................................................ 560,000 576,139
Series B, 5.75%, 7/01/25 ............................................................ 300,000 312,171
Blytheville Solid Waste Recycling and Sewage
Treatment Revenue, Nucor Corp. Project, 6.375%, 1/01/23 ............................... 100,000 107,623
Camden Environmental Improvement Revenue,
International Paper Co. Project, Series A, 7.625%, 11/01/18 ........................... 250,000 293,313
Conway Public Facilities Board, Capital Improvement Revenue,
Hendrix College Project, 6.00%, 10/01/26 ............................................... 500,000 523,275
Conway Sales & Use Tax Revenue, Capital Improvement,
Series A, FSA Insured, 5.35%, 12/01/17 ................................................ 2,055,000 2,119,794
Fort Smith Water and Sewer Revenue, Refunding and
Construction, MBIA Insured, 6.00%, 10/01/12 ........................................... 130,000 141,379
Fouke School District No. 15, Refunding and
Construction, MBIA Insured, Pre-Refunded, 6.60%, 4/01/19 .............................. 130,000 146,328
Greenland School District No. 95, Washington County,
Refunding and Construction, MBIA Insured, 6.50%, 5/01/13 .............................. 115,000 120,083
Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ........................... 125,000 137,398
Guam Power Authority Revenue, Series A, 5.25%, 10/01/23 ............................. 200,000 198,322
Gurdon PCR, Refunding, International Paper Co. Project,
Series A, 5.375%, 3/01/20 ............................................................. 2,160,000 2,177,582
Jefferson County PCR, Refunding,
Arkansas Power & Light Co., 6.30%, 6/01/18 .......................................... 400,000 431,516
Entergy Arkansas, Inc. Project, 5.60%, 10/01/17 ..................................... 2,150,000 2,181,498
Jonesboro City Water and Light Plant, Public Utilities System Revenue,
MBIA Insured, 5.40%, 11/15/13 ....................................................... 100,000 105,218
Refunding, AMBAC Insured, 5.25%, 12/01/13 ........................................... 200,000 205,076
Jonesboro Residential Housing and Health Care Facilities Board,
Hospital Revenue, Refunding, St. Bernard's Regional
Medical Center, Series B, AMBAC Insured, 5.90%, 7/01/16 ............................... 450,000 480,263
Little River County Revenue, Refunding, Georgia-Pacific Corp. Project,
5.60%,10/01/26 ........................................................................ 2,000,000 2,003,140
Little Rock Capital Improvement, Refunding, 6.30%, 2/01/09 .......................... 140,000 144,773
Little Rock Municipal Airport Revenue, Refunding, MBIA Insured,
6.00%, 11/01/14 ....................................................................... 130,000 136,973
Little Rock School District GO, Refunding, 6.25%, 12/01/07 .......................... 120,000 121,190
Little Rock School District, Refunding, FSA Insured, 5.60%, 1/01/20 ................. 100,000 101,889
Little Rock Waste Disposal Revenue, 5.80%, 5/01/16 .................................. 440,000 464,011
North Little Rock Health Facilities Board, Health Care Revenue,
Baptist Health Facility, Series A, MBIA Insured,
5.50%, 12/01/21 ....................................................................... 800,000 826,880
Paragould Hospital Revenue, 6.375%, 10/01/17 ........................................ 400,000 433,492
Pope County PCR, Refunding, Arkansas Power and
Light Co. Project, 6.30%, 11/01/20 .................................................... 500,000 522,975
Puerto Rico Commonwealth GO,
Custodial Receipts, AMBAC Insured, 5.40%, 7/01/25 ................................... 250,000 256,435
Pre-Refunded, 6.50%, 7/01/23 ........................................................ 250,000 284,908
Puerto Rico Commonwealth GO, Public Improvement, 5.75%, 7/01/17 ..................... 250,000 266,008
Puerto Rico Commonwealth Highway Authority Revenue,
Series Q, Pre-Refunded, 6.00%, 7/01/20 ................................................ $ 165,000 $ 171,912
Puerto Rico Commonwealth Highway and Transportation
Authority Revenue, Series Y, 5.50%, 7/01/26 ........................................... 350,000 358,967
Puerto Rico Electric Power Authority Revenue,
Series R, Pre-Refunded, 6.25%, 7/01/17 .............................................. 175,000 191,560
Series T, 5.50%, 7/01/20 ............................................................ 400,000 406,788
Series X, 5.50%, 7/01/25 ............................................................ 200,000 203,860
Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority,
Industrial Revenue, Teacher's Retirement System, Series B, 5.50%, 7/01/21 ............. 250,000 258,190
Puerto Rico SFMR, Bank and Financial Agency, Affordable
Housing Mortgage, Portfolio I, 6.25%, 4/01/29 ......................................... 175,000 186,330
Pulaski County Health Facilities Board Revenue,
b Catholic Health Initiatives, Series A, 5.00%, 12/01/28 .............................. 500,000 483,300
Refunding, Nazareth Sisters of Charity, St. Vincent's
Infirmary, MBIA Insured, 6.05%, 11/01/09 .............................................. 125,000 142,138
Pulaski County Public Facilities Board,
MFR, Refunding, South Oaks Apartments, Series A, 6.50%, 10/20/29 .................... 600,000 642,300
Refunding, Mortgage, College Projects, GNMA Secured, Series A, 5.55%, 6/20/27 ....... 1,300,000 1,306,019
Saline County Hospital Revenue, Refunding, Connie Lee Insured, 6.00%, 9/01/19 ....... 700,000 746,970
Saline County Retirement Housing and Healthcare
Facilities Board Revenue, Refunding, AMBAC Insured,
5.80%, 6/01/11 ........................................................................ 195,000 211,208
Sebastian County Community Junior College District,
Refunding and Improvement, AMBAC Insured, 5.60%, 4/01/17 .............................. 600,000 634,998
Texarkana Public Facilities Board, Waterworks
Facilities Revenue, Refunding, FGIC Insured, 5.40%, 9/01/15 ............................ 200,000 207,496
University of Arkansas Revenues,
Athletic Facilities, Pine Bluff Campus, 5.30%, 12/01/17 ............................. 340,000 344,094
Various Facilities, Fayetteville Campus, 5.25%, 11/01/17 ............................ 300,000 303,314
University of Central Arkansas Revenue, Athletic Facilities,
Series C, AMBAC Insured, 6.125%, 4/01/26 ............................................... 375,000 406,350
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 .......... 285,000 290,106
University of Southern Arkansas, Student Fees, MBIA Insured, 6.00%, 10/01/13 ........ 125,000 129,313
Virgin Islands Public Finance Authority Revenue, Refunding,
Senior Lien, Fund Loan Notes, Series A, 5.50%, 10/01/18 ............................... 1,400,000 1,426,263
-------------
Total Long Term Investments (Cost $ 28,764,222) ..................................... 29,912,946
-------------
a Short Term Investments 0.7%
Arkansas State Development Finance Authority, Higher Education,
Capital Asset, Series A, FGIC Insured, Weekly VRDN
and Put, 3.90%, 12/01/15 (Cost $ 200,000).............................................. 200,000 200,000
-------------
Total Investments (Cost $ 28,964,222) 99.1% ......................................... 30,112,946
Other Assets, less Liabilities 0.9% ................................................. 264,236
-------------
Net Assets 100.0% ................................................................... $30,377,182
=============

</TABLE>
See Glossary of Terms on page 67.

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

bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights

Franklin California High Yield Municipal Fund

Class I
------------------------------------------------
Year Ended May 31,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.10 $9.81 $9.93 $9.73 $9.97
------------------------------------------------
Income from investment operations:
Net investment income ................................ .62 .63 .64 .66 .53
Net realized and unrealized gains (losses) ........... .55 .29 (.10) .18 (.20)
------------------------------------------------
Total from investment operations ...................... 1.17 .92 .54 .84 .33
------------------------------------------------
Less distributions from:
Net investment income ................................ (.62) (.63)++ (.66) (.64) (.56)
Net realized gains ................................... -- -- -- -- (.01)
------------------------------------------------
Total distributions ................................... (.62) (.63) (.66) (.64) (.57)
------------------------------------------------
Net asset value, end of year .......................... $10.65 $10.10 $9.81 $9.93 $9.73
================================================
Total return* ......................................... 11.78% 9.64% 5.55% 9.08% 3.22%

Ratios/supplemental data
Net assets, end of year (000's) ....................... $412,211 $213,396 $118,313 $51,102 $31,938
Ratios to average net assets:
Expenses ............................................. .35% .34% .35% .20% .07%
Expenses excluding waiver and payments by affiliate .. .69% .75% .81% .88% .87%
Net investment income ................................ 5.81% 6.24% 6.49% 6.89% 6.14%
Portfolio turnover rate ............................... 37.75% 33.79% 28.02% 57.06% 40.74%

</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
++Includes distributions in excess of net investment income in the amount of
$.001.

Franklin California High Yield Municipal Fund (cont.)

Class II
------------------------
Year Ended May 31,
------------------------
1998 1997 1996
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $10.12 $ 9.82 $9.82
------------------------
Income from investment operations:
Net investment income .................................................... .56 .57 .05
Net realized and unrealized gains ........................................ .56 .30 --
------------------------
Total from investment operations .......................................... 1.12 .87 .05
Less distributions from net investment income ............................. (.56) (.57)++ (.05)
------------------------
Net asset value, end of year .............................................. $10.68 $10.12 $9.82
========================
Total return* ............................................................. 11.30% 9.08% .54%

Ratios/supplemental data
Net assets, end of year (000's) ........................................... $40,363 $10,624 $212
Ratios to average net assets:
Expenses ................................................................. .90% .90% .91%**
Expenses excluding waiver and payments by affiliate ...................... 1.24% 1.31% 1.81%**
Net investment income .................................................... 5.23% 5.68% 5.73%**
Portfolio turnover rate ................................................... 37.75% 33.79% 28.02%

</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
+For the period May 1, 1996 (effective date) to May 31, 1996.
++Includes distribution in excess of net investment income in the amount of
$.001.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998

PRINCIPAL
Franklin California High Yield Municipal Fund AMOUNT VALUE
a Long Term Investments 98.3%

<S> <C> <C>
ABAG Finance Authority For Nonprofit Corporations, COP, 6.15%, 1/01/22 .............. $ 1,490,000 $ 1,600,200
Adelanto Water Authority Revenue, Series A, 7.50%, 9/01/28
Parity Water Systems Acquisition Project ............................................ 3,445,000 3,521,961
Subordinated Lien, Water Systems Acquisition Project................................. 2,000,000 2,129,740
Alameda CFD No.2, Special Tax, 6.125%, 9/01/16 ...................................... 1,240,000 1,267,776
Alameda Public Financing Authority, Local Agency Revenue,
Refunding, Special Tax, Community Facility No. 1-A,
6.70%, 8/01/12 ...................................................................... 3,400,000 3,621,340
7.00%, 8/01/19 ...................................................................... 4,015,000 4,360,973
American Canyon Joint Powers Financing Authority, Lease Revenue,
Civic/Recreation Facilities, 6.40%, 6/01/22 ............................................ 1,000,000 1,058,880
Antioch 1915 Act, AD No. 27, Series D, 7.30%, 9/02/13 ............................... 460,000 474,435
Avenal Public Financing Authority Revenue, Refunding,
7.00%, 9/02/10 ...................................................................... 1,745,000 1,762,450
7.25%, 9/02/27 ...................................................................... 3,665,000 3,732,363
Beaumont Financing Authority, Local Agency Revenue,
Refunding, Sewer Enterprise Project, Series A,
6.75%, 9/01/25 ........................................................................ 5,000,000 5,165,800
Belmont RDA, Tax Allocation, Los Costanos Community
Development, Series A, 6.80%, 8/01/24 .................................................. 1,510,000 1,680,706
Benicia 1915 Act, Refunding, Fleetside Industrial Park
Assessment, 7.00%, 9/02/14 ............................................................ 455,000 469,346
Blythe RDA, Project No.1, Tax Allocation, Refunding, 5.80%, 5/01/28 ................. 1,000,000 1,030,300
Brea Olinda USD, CFD No. 95-1, Special Tax,
5.625%, 9/01/18 ..................................................................... 1,100,000 1,083,566
5.75%, 9/01/28 ...................................................................... 1,300,000 1,272,505
Brentwood 1915 Act, Capital Improvement Finance Program,
No. 94-1, Infrastructure Financing,
5.875%, 9/02/17 ..................................................................... 775,000 773,590
6.00%, 9/02/27 ...................................................................... 1,000,000 1,001,260
Calexico Special Financing Authority, Sales Tax Revenue, 7.40%,
1/01/99 ............................................................................. 10,000 10,090
1/01/00 ............................................................................. 125,000 127,664
1/01/01 ............................................................................. 165,000 169,795
1/01/02 ............................................................................. 175,000 181,293
1/01/03 ............................................................................. 220,000 228,947
1/01/04 ............................................................................. 235,000 245,190
1/01/05 ............................................................................. 285,000 297,603
1/01/06 ............................................................................. 340,000 354,753
1/01/18 ............................................................................. 7,680,000 7,967,078
California Educational Facilities Authority Revenue,
Pooled College and University Projects, Series B, 6.30%, 4/01/21 ................... 1,000,000 1,072,120
Student Loan Program, Series A, MBIA Insured, 6.00%, 3/01/16 ....................... 4,000,000 4,226,720
California Educational Facilities Authority Revenue,
Refunding, Los Angeles College of Chiropractic,
5.60%, 11/01/17 ....................................................................... 1,500,000 1,517,565
California Health Facilities Financing Authority Revenue,
Cedarknoll, Series B, CHFCLP Insured, Pre-Refunded, 7.50%, 8/01/20 .................. 1,800,000 1,941,390
Kaiser Permanente Medical Project, Series A, 5.55%, 8/15/25 ......................... 3,750,000 3,760,538
Refunding, Marshall Hospital, Series A, 5.25%, 11/01/18 ............................. 3,215,000 3,206,834
Refunding, Sacramento Medical, Series A, 5.25%, 5/01/21 ............................. 2,320,000 2,298,517
Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 ........................ 990,000 1,073,279
California HFA Revenue, Home Mortgage,
MFHR, Series B, AMBAC Insured, 6.15%, 8/01/22 ....................................... 5,000,000 5,314,000
Series B, 7.125%, 2/01/26 ........................................................... 875,000 939,103
California HFA Revenue, Home Mortgage, (cont.)
Series F-1, 7.00%, 8/01/26 .......................................................... $ 1,795,000 $ 1,932,820
Series H, 6.25%, 8/01/27 ............................................................ 2,485,000 2,670,431
Series R, MBIA Insured, 6.15%, 8/01/27 .............................................. 3,285,000 3,500,562
California PCFA Revenue, Series B,
Pacific Gas & Electric Co., 5.85%, 12/01/23 ........................................ 5,000,000 5,171,350
Southern California Edison Co., 6.40%, 12/01/24 .................................... 2,000,000 2,146,000
California PCFA, Solid Waste Disposal Revenue,
Browning-Ferris Industries, Inc., 6.75%, 9/01/19 ...................................... 1,000,000 1,127,850
California Special District Association Finance Corp.,
COP, Series V, 7.50%, 5/01/13 ......................................................... 55,000 58,967
California State GO,
FGIC Insured, 6.00%, 8/01/19 ........................................................ 30,000 32,279
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 .......................................... 1,470,000 1,639,241
Veterans Bonds, Series BD, BE, and BF, 6.40%, 2/01/22 ............................... 1,250,000 1,277,875
Veterans Bonds, Series BH, 5.50%, 12/01/18 .......................................... 5,000,000 5,087,750
California State HFA, Mortgage Revenue, Series L,
MBIA Insured, 6.40%, 8/01/27 .......................................................... 3,000,000 3,241,710
California Statewide CDA Revenue, COP,
Auxiliary Organization, California State University Foundation,
MBIA Insured, 5.20%, 6/01/24 .......................................................... 5,925,000 5,956,462
CHFCLP Insured, 7.25%, 12/01/22 ..................................................... 1,800,000 2,077,668
California Statewide CDA, Special Facilities Revenue,
United Air Lines, Inc., Los Angeles, 5.625%, 10/01/34 ................................. 26,955,000 27,233,715
Capistrano USD, CFD, Special Tax No. 92-1, 7.00%, 9/01/18 ........................... 1,000,000 1,060,340
Duarte RDA, Tax Allocation,
Rancho Duarte Phase I Project Area, 6.80%, 9/01/16 .................................. 825,000 876,224
Refunding, Davis Addition Project Area, 6.70%, 9/01/14 .............................. 2,615,000 2,778,202
Refunding, Davis Addition Project Area, 6.90%, 9/01/18 .............................. 4,120,000 4,364,522
El Cajon RDA, Tax Allocation, El Cajon Redevelopment
Project, Refunding, AMBAC Insured, 5.35%, 10/01/22 .................................... 1,000,000 1,006,680
Escondido GO, 1915 Act, Refunding, AD No. 86-1, Series R, 5.625%, 9/02/18 ........... 1,150,000 1,135,522
Fontana RDA, Tax Allocation, Refunding, Jurupa Hills
Redevelopment Project, Series A, 5.50%, 10/01/19 ...................................... 5,000,000 5,113,850
Fontana Special Tax, CFD No. 7, 6.125%, 9/01/28 ..................................... 1,280,000 1,258,227
Foothill/Eastern Transportation Corridor Agency,
Toll Road Revenue, Senior Lien, Series A,
6.50%, 1/01/32 ...................................................................... 5,500,000 6,014,085
6.00%, 1/01/34 ...................................................................... 8,235,000 8,732,559
Garden Grove Housing Authority, MFHR,
Set-Aside Tax Increment, Series C, 6.70%, 7/01/24 ...................................... 6,375,000 6,742,965
Gateway Improvement Authority Revenue,
Marin City CFD, Series A, 7.75%, 9/01/25 .............................................. 2,500,000 2,792,500
Granada Sanitation District, 1915 Act, Sewage Treatment Facilities,
Financing District, Series A,
7.125%, 9/02/16 ..................................................................... 965,000 995,176
7.25%, 9/02/22 ...................................................................... 975,000 1,005,479
Hawaiian Gardens RDA Project No. 1, Tax Allocation,
Refunding, 6.35%, 12/01/33 ............................................................ 4,000,000 4,220,640
Hesperia Public Financing Authority, Improvement Revenue,
Series B, 7.375%, 10/01/23 ............................................................ 1,930,000 2,028,449
Huntington Beach Public Financing Authority Revenue,
Huntington Beach Redevelopment Projects, Refunding,
7.00%, 8/01/24 ........................................................................ 1,000,000 1,044,490
Irvine 1915 Act, AD No. 94-15, 6.70%, 9/02/20 ....................................... 2,500,000 2,564,700
Irvine Meadows Mobile Home Park Revenue, Series A, 5.70%,
3/01/18 ............................................................................. 2,300,000 2,294,089
3/01/28 ............................................................................. 5,000,000 4,950,000
Irvine Ranch Water District, Joint Powers Agency,
Local Pool Revenue, Issue II, 8.25%, 8/15/23 .......................................... 2,000,000 2,016,340
Irwindale Public Finance Authority, Special Tax,
Refunding, CFD No. 1, 6.00%, 11/01/20 ................................................. 4,450,000 4,465,130
John C. Fremont Hospital District Revenue,
California Health Facilities, Insured, 6.75%, 6/01/13 ................................. 1,500,000 1,661,775
Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 9/02/24 ....................... 1,265,000 1,340,571
Lake Elsinore School Financing Authority Revenue,
Refunding, 6.125%, 9/01/19 ............................................................ $ 1,000,000 $ 1,048,350
Lancaster RDA, Tax Allocation, Refunding, Sub-Residential
Redevelopment Project, Subordinated Lien,
6.65%, 9/01/27 ........................................................................ 2,500,000 2,583,275
Lemon Grove School District COP, Vista La Mesa Elementary
School Construction, 6.40%, 9/01/26 ................................................... 2,000,000 2,088,460
Long Beach IDR, Refunding, California State University
Foundation, Series A, 5.25%
2/01/13 ............................................................................. 1,000,000 988,850
2/01/23 ............................................................................. 1,000,000 965,080
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ................................... 140,000 141,711
Los Angeles Harbor Development Revenue, Series B,
6.00%, 8/01/14 ...................................................................... 3,500,000 3,772,370
5.375%, 11/01/23 .................................................................... 2,465,000 2,487,358
Los Angeles MFR, Refunding, Series J-2, 8.50%, 1/01/24 .............................. 1,150,000 1,189,560
Los Angeles USD, COP, Multiple Properties Project,
Refunding, FSA Insured, 5.625% 11/01/13 ............................................... 2,500,000 2,505,175
Lynwood Public Financing Authority Revenue,
Water System Improvement Project, 6.50%, 6/01/21 ....................................... 1,175,000 1,261,797
Millbrae Elementary School District, COP,
Financing Project, Pre-Refunded, 6.90%, 3/01/22 ........................................ 1,480,000 1,647,788
Modesto Public Financing Authority, Lease Revenue,
John Thurman Field Renovation Project, 6.125%, 11/01/16 ............................... 1,750,000 1,852,778
Monrovia USD, COP, Financing Project, MBIA Insured, 5.30%, 4/01/26 .................. 1,100,000 1,109,834
National City Community Development Commission,
MFHR, Park Villas Apartments, Series A, GNMA Secured,
5.85%, 7/20/19 ........................................................................ 1,545,000 1,612,995
Newman RDA, Tax Allocation, Redevelopment
and Housing Project No.1, 5.375%, 8/01/27 ............................................. 1,285,000 1,247,170
Newport Mesa USD, Special Tax, CFD No. 90-1, 6.75%, 9/01/21 ......................... 2,000,000 2,065,200
Northern Mariana Islands Commonwealth Ports Authority, Series A, 3/15/28,
Airport Revenue, Senior Lien, 6.25%.................................................. 5,050,000 5,019,650
Seaport Revenue, 6.40%............................................................... 2,000,000 1,955,020
Oakland Revenue, Refunding, YMCA of the East Bay Project, 7.10%, 6/01/10 ............ 2,815,000 3,093,488
Orange County CFD, No. 86-2, Special Tax, Refunding,
Rancho Santa Margarita, Series A, 5.55%, 8/15/17 ....................................... 1,000,000 1,004,880
Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 ........................... 1,545,000 1,594,734
Oroville Hospital Revenue, Oroville Hospital,
Series A, CHFCLP Insured, 5.40%, 12/10/17 ............................................. 1,140,000 1,155,196
Palmdale Special Tax, CFD No. 93-1, Ritter Ranch Project, Series A, 8.50%, 9/01/17 .. 10,000,000 9,000,000
Paramount RDA, Tax Allocation, Refunding,
Redevelopment Project Area 1, MBIA Insured, 0.00%, 8/01/26 ............................. 14,050,000 3,229,252
Perris Public Financing Authority, Local Agency Revenue, Series B, 7.25%, 8/15/23 ... 500,000 527,730
Richmond Revenue, Refunding, YMCA of the East Bay Project, 7.25%, 6/01/17 ........... 3,100,000 3,363,283
Riverside County CFD, Refunding, Special Tax,
Senior Lien, No. 87-5, Series A, 7.00%, 9/01/13 ....................................... 7,335,000 7,793,438
Riverside County Public Financing Authority,
Tax Allocation Revenue, Redevelopment Projects, Series A,
5.50%, 10/01/22 ....................................................................... 2,710,000 2,756,775
Sacramento County 1915 Act, Refunding, Sunrise/U.S.
Corridor Assessment, 7.00%, 9/02/09 ................................................... 85,000 87,695
Sacramento County Special Tax, Refunding, CFD No.1,
5.60%, 12/01/12 ..................................................................... 1,515,000 1,509,046
5.70%, 12/01/20 ..................................................................... 2,410,000 2,376,935
6.30%, 9/01/21 ...................................................................... 1,575,000 1,641,843
Salinas COP, Capital Improvement Projects, Series A, 5.70%, 10/01/28 ................ 2,665,000 2,743,244
Salinas Valley Solid Waste Authority Revenue,
5.75%, 8/01/18 ...................................................................... 500,000 507,715
5.80%, 8/01/27 ...................................................................... 1,100,000 1,116,379
San Bernardino Associated Communities Financing Authority,
Health Care, COP, Refunding and Improvement,
Granada Hills, Series A, 6.90%, 5/01/27 ............................................... 10,000,000 11,023,900

San Bernardino County MFHR, Series A, 6.50%,
Meadowland Apartments Project, 3/01/10 ............................................. $ 7,250,000 $ 7,232,600
Park Heights Apartments, 8/01/05 ................................................... 2,520,000 2,513,952
San Bernardino Joint Powers Financing Authority, Lease Revenue,
Department of Transportation Lease, Series A,
5.50%, 12/01/20 ....................................................................... 4,000,000 4,095,000
San Diego County Educational Facilities Authority No. 1,
Lease Revenue, 6.50%, 8/15/15 .......................................................... 850,000 916,445
San Diego Special Tax, CFD No. 1, Series B, 7.10%, 9/01/20 .......................... 3,500,000 3,779,405
San Francisco City and County Airports Commission,
International Airport Revenue, Second Series,
Issue 8A, FGIC Insured, 6.25%, 5/01/20 .............................................. 1,570,000 1,694,375
Issue 16A, FSA Insured, 5.125%, 5/01/23 ............................................. 4,000,000 3,936,200
San Francisco City and County Redevelopment Financing Authority,
Tax Allocation Revenue, Redevelopment Projects,
Refunding, Series C, 5.30%, 8/01/25 ................................................. 1,635,000 1,636,324
Series A, 5.50%, 8/01/22 ............................................................ 1,180,000 1,187,717
San Francisco City and County Revenue,
Irwin Memorial Blood Centers, Series A, 6.80%, 12/01/21 ................................ 800,000 865,000
San Joaquin Area Flood Control Agency, 1915 Act,
Flood Protection & Restoration Assessment, FSA Insured,
6.00%, 9/02/14 ........................................................................ 970,000 1,002,117
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
Junior Lien, ETM, 0.00%, 1/01/28 .................................................... 19,150,000 4,134,868
Refunding, Series A, 5.50%, 1/15/28 ................................................. 20,710,000 20,857,662
Senior Lien, Pre-Refunded, 7.00%, 1/01/30 ........................................... 675,000 767,124
Senior Lien, Pre-Refunded, 6.75%, 1/01/32 ........................................... 3,450,000 3,885,218
San Jose Financing Authority Revenue, Convention Center Project,
Series C, 6.40%, 9/01/17 ............................................................... 5,000,000 5,333,850
San Jose RDA, Tax Allocation, Merged Area Redevelopment Project,
5.25%, 8/01/29 ........................................................................ 4,750,000 4,727,960
San Luis Obispo COP, Vista Hospital System, Inc., 8.375%, 7/01/29 ................... 6,660,000 7,196,863
San Marcos RDA, Tax Allocation, Affordable Housing Project,
Series A, 5.65%, 10/01/28 .............................................................. 3,000,000 3,019,680
San Mateo RDA, Tax Allocation, Merged Area, Series A,
5.50%, 8/01/17 ...................................................................... 1,330,000 1,365,631
5.50%, 8/01/22 ...................................................................... 4,820,000 4,904,109
San Ramon Public Financing Authority, Refunding,
Tax Allocation, 6.90%, 2/01/24 ........................................................ 1,500,000 1,632,270
Sand City RDA, Tax Allocation Revenue
Sand City Redevelopment Project, 6.00% 11/01/26 ....................................... 3,900,000 4,094,103
Santa Rosa 1915 Act, Fountain/Grove Parkway Extension Assessment,
7.625%, 9/02/19 ........................................................................ 1,500,000 1,547,580
Southern California Public Power Authority,
Southern Transmission Project Revenue, Sub-Crossover Refunding,
6.125%, 7/01/18 ....................................................................... 1,140,000 1,214,510
b Stockton CFD No. 1, Special Tax, Mello Roos, Weston Ranch, Series A,
5.45%, 9/01/08 ...................................................................... 1,775,000 1,762,469
5.80%, 9/01/14 ...................................................................... 4,000,000 3,982,920
6.00%, 9/01/18 ...................................................................... 1,000,000 1,000,640
6.00%, 9/01/24 ...................................................................... 1,100,000 1,098,427
Stockton Health Facilities Revenue, Refunding,
Dameron Hospital Association, Series A, 5.70%, 12/01/14 ............................... 2,300,000 2,376,429
Suisun City Public Financing Authority,
Tax Allocation Revenue, Redevelopment Project, 5.20%,
Escrow Term, Series A, 10/01/28 ..................................................... 3,500,000 3,447,710
Series A, 10/01/23 .................................................................. 275,000 272,302
Taft Public Financing Authority, Lease Revenue,
Community Correctional Facility Project, Series A, 6.05%, 1/01/17 ..................... 3,235,000 3,469,538
Tracy COP, I-205 Corridor Improvement Project,
Pre-Refunded, 7.00%, 10/01/27 ......................................................... 1,200,000 1,332,071
Union City CFD No. 1997-1, Special Tax,
5.70%, 9/01/18 ...................................................................... 1,000,000 1,005,440
5.80%, 9/01/28 ...................................................................... 2,180,000 2,187,761

University Revenues, Refunding, Multiple Purpose Projects,
Series E, MBIA Insured, 5.125%, 9/01/20 ................................................ $ 1,000,000 $ 997,940
Upland COP, Refunding, Mortgage Insured, 5.50%, 6/01/21 ............................. 2,000,000 2,041,600
Vallejo COP, Refunding, Marine World Foundation Project,
7.40%, 2/01/28 ......................................................................... 9,345,000 10,289,498
Victor Valley Union High School District COP,
Instructional Academy Project, MBIA Insured, 5.80%, 11/15/21 ........................... 1,000,000 1,065,470
Virgin Islands Public Financing Authority Revenue,
Refunding, Subordinated Lien Fund Loan Notes, Series E,
5.75%, 10/01/13 ..................................................................... 1,595,000 1,621,636
5.875%, 10/01/18 .................................................................... 1,665,000 1,700,747
b 6.00%, 10/01/22 ..................................................................... 2,650,000 2,721,814
Vista Mobile Home Park Revenue, Estrella De Oro Mobile Home,
Series A, 5.875%, 2/01/28 ............................................................. 1,685,000 1,661,090
West Sacramento Financing Authority, Lease Revenue,
City Administration Facilities Project, MBIA Insured,
5.30%, 9/01/30 ........................................................................ 1,020,000 1,031,974
Western Placer Waste Management Authority Revenue, 6.75%, 7/01/14 ................... 7,400,000 8,018,343
Westminster COP, Public Improvements Project, 6.00%, 6/01/22 ........................ 2,060,000 2,163,905
Winton Water and Sanitation District, COP, Refunding,
Wastewater System Improvement Project, MBIA Insured,
5.25%, 3/01/28 ........................................................................ 1,500,000 1,513,364
---------------
Total Long Term Investments (Cost $425,187,966) ..................................... 444,928,470
---------------
a Short Term Investments 1.3%
California Health Facilities Financing Authority Revenue,
Sutter Health, Series A, Daily VRDN and Put,
3.70%, 3/01/20 ........................................................................ 900,000 900,000
Irvine 1915 Act, AD, 3.70%,
No. 95-12, Series A, Daily VRDN and Put, 9/02/21 .................................... 2,800,000 2,800,000
No. 97-16, Northwest Irvine Project, Daily VRDN and Put, 9/02/22 .................... 200,000 200,000
Irvine Ranch Water District, DATES, Consolidated Bonds,
Series C, Daily VRDN and Put, 3.70%, 10/01/10 ......................................... 200,000 200,000
Newport Beach Hospital Revenue, Hoag Memorial Presbyterian Hospital,
Daily VRDN and Put, 3.90%, 10/01/22 .................................................... 1,700,000 1,700,000
---------------
Total Short Term Investments (Cost $5,800,000) ...................................... 5,800,000
---------------
Total Investments (Cost $430,987,966) 99.6% ......................................... 450,728,470
Other Assets, less Liabilities .4% .................................................. 1,845,219
---------------
Net Assets 100.0% ................................................................... $452,573,689
===============

</TABLE>
See Glossary of Terms on page 67.

bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
<TABLE>
<CAPTION>

Franklin Hawaii Municipal Bond Fund
Class I
-----------------------------------------------
Year Ended May 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.79 $10.54 $10.67 $10.36 $10.80
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .58 .60 .60 .60 .62
Net realized and unrealized gains (losses) ........... .38 .25 (.13) .31 (.46)
-----------------------------------------------
Total from investment operations ...................... .96 .85 .47 .91 .16
Less distributions from net investment income ......... (.59) (.60) (.60) (.60) (.60)
-----------------------------------------------
Net asset value, end of year .......................... $11.16 $10.79 $10.54 $10.67 $10.36
===============================================
Total return* ......................................... 9.10% 8.23% 4.49% 9.26% 1.35%

Ratios/supplemental data
Net assets, end of year (000's) ....................... $45,138 $40,003 $38,805 $36,827 $26,904
Ratios to average net assets:
Expenses ............................................. .40% .39% .35% .20% .05%
Expenses excluding waiver and payments by affiliate .. .81% .83% .84% .87% .92%
Net investment income ................................ 5.32% 5.59% 5.63% 6.02% 5.76%
Portfolio turnover rate ............................... 23.18% 13.40% 16.01% 22.88% 31.35%

See notes to financial statements.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998
<TABLE>
<CAPTION>

PRINCIPAL
Franklin Hawaii Municipal Bond Fund AMOUNT VALUE
<S> <C> <C>
Long Term Investments 98.3%
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 ..................................................................... $ 200,000 $ 219,836
6.70%, 10/01/23 ..................................................................... 1,000,000 1,091,970
Guam Government, Limited Obligation Highway, Refunding,
Series A, FSA Insured, 6.30%, 5/01/12 .................................................. 280,000 303,106
Guam Power Authority Revenue, Series A, 6.30%, 10/01/22 ................................ 300,000 318,501
Hawaii State Airport System Revenue,
Refunding, Third Series 1994, AMBAC Insured, 5.75%, 7/01/09 ......................... 300,000 317,649
Second Series 1990, FGIC Insured, 7.50%, 7/01/20 .................................... 60,000 64,660
Second Series 1991, 7.00%, 7/01/18 .................................................. 1,520,000 1,641,722
Second Series 1991, MBIA Insured, 6.75%, 7/01/21 .................................... 200,000 215,976
Second Series 1992, MBIA Insured, 6.90%, 7/01/12 .................................... 400,000 471,672
Hawaii State Department of Budget and Finance, Special Purpose Revenue,
Hawaii Electric Light Co. Project, Mortgage, 7.20%, 12/01/14 ........................ 100,000 106,086
Hawaiian Electric Co., Mortgage, Series A, MBIA Insured, 6.60%, 1/01/25 ............. 1,950,000 2,156,661
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ............. 500,000 524,965
Hawaiian Electric Co. and Subsidiaries, Mortgage, MBIA Insured, 6.55%, 12/01/22 ..... 3,425,000 3,730,236
Kapiolani Health Obligation, 6.25%, 7/01/21 ......................................... 1,100,000 1,193,665
Pali Momi Medical Center Project, Pre-Refunded, 7.65%, 7/01/19 ...................... 105,000 118,012
Queens Medical Center Project, FGIC Insured, Pre-Refunded, 6.20%, 7/01/22 ........... 500,000 548,505
Refunding, Kaiser Permanente, Series A, 6.25%, 3/01/21 .............................. 100,000 105,301
Refunding, Kapiolani Health Care System, 6.40%, 7/01/13 ............................. 600,000 648,534
Refunding, Kapiolani Health Care System, 6.00%, 7/01/19 ............................. 125,000 132,368
Refunding, Queens Health System, Series A, 6.05%, 7/01/16 ........................... 1,000,000 1,078,990
Refunding, Queens Health System, Series A, 6.00%, 7/01/20 ........................... 120,000 128,422
Refunding, Queens Health System, Series A, 5.75%, 7/01/26 ........................... 1,500,000 1,555,665
Refunding, Queens Medical Center Project, FGIC Insured, Pre-Refunded, 6.50%, 7/01/12 725,000 726,617
St. Francis Medical Centers, FSA Insured, 6.50%, 7/01/22 ............................ 1,100,000 1,191,278
Wilcox Memorial Hospital Projects, 5.25%, 7/01/13 ................................... 600,000 595,650
Wilcox Memorial Hospital Projects, 5.35%, 7/01/18 ................................... 2,040,000 2,020,090
Wilcox Memorial Hospital Projects, 5.50%, 7/01/28 ................................... 2,410,000 2,414,290
Hawaii State Department of Transportation, Special Facilities Revenue,
Refunding, Matson Terminals, Inc.,
5.75%, 3/01/13 ........................................................................ 75,000 78,224
Hawaii State GO,
Series BW, 6.375%, 3/01/11 .......................................................... 100,000 114,876
Series CA, 6.00%, 1/01/09 ........................................................... 100,000 111,440
Series CP, FGIC Insured, 5.00%, 10/01/16 ............................................ 900,000 889,299
Hawaii State Harbor, Capital Improvement Revenue,
Refunding, Series 1994, FGIC Insured, 6.25%, 7/01/15 ................................ 1,000,000 1,080,130
Refunding, Series 1994, FGIC Insured, 6.375%, 7/01/24 ............................... 500,000 540,565
Series 1990, MBIA Insured, 7.25%, 7/01/10 ........................................... 70,000 75,472
Series 1990, MBIA Insured, 7.00%, 7/01/17 ........................................... 80,000 85,346
Series 1992, FGIC Insured, 6.50%, 7/01/19 ........................................... 200,000 215,280
Hawaii State Housing Finance and Development Corp. Revenue,
Affordable Rental Housing Program, Series A,
6.00%, 7/01/15 ...................................................................... 1,000,000 1,051,340
6.05%, 7/01/22 ...................................................................... 750,000 788,423
6.10%, 7/01/30 ...................................................................... 250,000 262,780

Hawaii State Housing Finance and Development Corp., SFM Purchase Revenue, Series A,
7.10%, 7/01/24 ...................................................................... $ 465,000 $ 499,861
6.00%, 7/01/26 ...................................................................... 290,000 299,147
Honolulu City and County Go,
Refunding, Series 1992, 6.00%, 12/01/14 ............................................. 150,000 167,975
Series A, Pre-Refunded, 6.70%, 8/01/07 .............................................. 75,000 81,730
Series A, Pre-Refunded, 6.70%, 8/01/11 .............................................. 100,000 108,973
Series B, Pre-Refunded, 6.125%, 6/01/15 ............................................. 1,000,000 1,108,870
Series B, 5.00%, 11/01/17 ........................................................... 600,000 591,180
Honolulu City and County Water Supply Board, Water System Revenue, 5.80%, 7/01/21 ...... 1,785,000 1,879,891
Honolulu City and County MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 ........ 1,205,000 1,301,496
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 .................... 220,000 246,321
Maui County Board, Water Supply Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.70%, 12/01/11 ........................................... 100,000 109,766
Maui County GO,
Refunding, Series 1992, 6.05%, 9/01/07 .............................................. 50,000 52,151
Refunding, Series 1992, 6.10%, 9/01/08 .............................................. 300,000 314,007
Refunding, Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/11 ..................... 385,000 405,293
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/13 ................................ 150,000 157,907
Northern Mariana Islands Commonwealth Ports Authority,
Seaport Revenue, Series A, 6.40%, 3/15/28 .............................................. 1,000,000 977,510
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue,
Series A Pre-Refunded, 7.00%, 7/01/19 ................................................. 145,000 148,271
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series T, Pre-Refunded, 6.625%, 7/01/18 ............................................. 315,000 349,832
Series Y, 5.50%, 7/01/26 ............................................................ 800,000 820,495
Puerto Rico Electric Power Authority Revenue,
Series O, 7.125%, 7/01/14 ........................................................... 60,000 62,890
Series O, Pre-Refunded, 7.125%, 7/01/14 ............................................. 55,000 57,781
Series T, Pre-Refunded, 6.375%, 7/01/24 ............................................. 1,000,000 1,136,880
Puerto Rico Industrial, Medical and Environmental
Facilities Revenue PCFA, PepsiCo, Inc. Project, 6.25%, 11/15/13 ....................... 350,000 384,698
Puerto Rico PBA, Guaranteed, Public Education and
Health Facilities, Refunding, Series M, 5.75%, 7/01/15 ................................ 900,000 938,141
Puerto Rico Telephone Authority Revenue,
Refunding, Series L, 6.125%, 1/01/22 ................................................... 1,230,000 1,307,477
Virgin Islands Public Finance Authority Revenue,
Refunding, Senior Lien, Fund Loan Notes, Series A, 5.625%, 10/01/25 .................... 1,900,000 1,941,381
--------------
Total Long Term Investments (Cost $41,918,493) 98.3% ................................... 44,363,526
Other Assets, less Liabilities 1.7% .................................................... 774,615
--------------
Net Assets 100.0% ...................................................................... $45,138,141
==============
</TABLE>

See Glossary of Terms on page 67.

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights

Franklin Tennessee Municipal Bond Fund
Class I
-----------------------------------------------
Year Ended May 31,
-----------------------------------------------
1998 1997 1996 1995 1994+
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)

Net asset value, beginning of year .................... $10.71 $10.40 $10.53 $10.11 $10.00
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .57 .58 .56 .52 .01
Net realized and unrealized gains (losses) ........... .56 .33 (.09) .35 .10
-----------------------------------------------
Total from investment operations ...................... 1.13 .91 .47 .87 .11
Less distributions from net investment income ......... (.57) (.60) (.60) (.45) --
-----------------------------------------------
Net asset value, end of year .......................... $11.27 $10.71 $10.40 $10.53 $10.11
===============================================
Total return* ......................................... 10.75% 8.95% 4.50% 8.97% 1.10%

Ratios/supplemental data
Net assets, end of year (000's) ....................... $44,526 $26,708 $13,956 $5,986 $2,224
Ratios to average net assets:
Expenses ............................................. .40% .40% .33% .10% .03%**
Expenses excluding waiver and payments by affiliate .. .81% .84% .91% .92% 1.05%**
Net investment income ................................. 5.12% 5.51% 5.67% 6.02% 1.89%**
Portfolio turnover rate ............................... 37.67% 27.60% 27.23% 24.71% 22.64%
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
+For the period May 10, 1994 (effective date) to May 31, 1994.

See notes to financial statements.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998

PRINCIPAL
Franklin Tennessee Municipal Bond Fund AMOUNT VALUE
<S> <C> <C>
a Long Term Investments 98.6%
Carroll County IDBR, Refunding, Henry I. Siegel Co., Inc. Project, 7.20%, 4/01/05 ... $ 500,000 $ 522,930
b Chattanooga Health, Educational and Housing Facilities
Board Revenue, Catholic Health Initiatives, Series A,
5.00%, 12/01/18 ....................................................................... 1,000,000 977,430
Cleveland Water and Sewer, FGIC Insured, 5.375%, 9/01/28 ............................ 1,000,000 1,011,890
Collierville Water and Sewer Systems, MBIA Insured, 5.625%, 11/01/21 ................ 500,000 517,745
Dickson Electric System Revenue, MBIA Insured, 5.50%, 9/01/16 ....................... 1,220,000 1,269,569
Eastside Utility District, Hamilton County Waterworks Revenue,
Refunding, MBIA Insured, 5.25%, 11/01/17 .............................................. 800,000 808,176
Franklin IDB, MFHR, Refunding, Landings Apartment Project,
Series A, FSA Insured, 6.00%, 10/01/26 ................................................ 1,000,000 1,053,410
Hamilton County IDB, MFHR, Patten Towers Apartments, Series B, 7.125%, 2/01/09 ...... 500,000 521,255
Hardeman County, FGIC Insured, 5.625%, 4/01/24 ...................................... 880,000 917,259
Hollow Rock-Bruceton Special School District, FSA Insured, 5.75%, 4/01/24 ........... 500,000 526,810
Humphreys County IDB, Solid Waste Disposal Revenue,
Du Pont (E.I.) De Nemours & Co. Project, 6.70%, 5/01/24 ................................ 800,000 885,536
Jackson GO, Refunding & Improvement, MBIA Insured, 5.125%, 3/01/16 .................. 1,000,000 1,007,270
Johnson City Health and Educational Facilities Board,
Mortgage Revenue, Pine Oaks Assisted Project, Series A,
GNMA Secured, 5.90%, 6/20/37 .......................................................... 1,400,000 1,450,428
Johnson City Public Improvement, FSA Insured, 5.90%, 6/01/12 ........................ 500,000 532,920
Johnson City Public Improvement, GO, Series B,
AMBAC Insured, Pre-Refunded, 6.70%, 5/01/20 ........................................... 100,000 115,945
Johnson City Solid Waste, AMBAC Insured, 5.80%, 5/01/09 ............................. 100,000 108,377
Knox-Chapman Utility District, Knox County Water and Sewer Revenue,
FSA Insured, 5.40%, 1/01/23 ......................................................... 660,000 672,210
Refunding, MBIA Insured, 6.10%, 1/01/19 ............................................. 100,000 108,338
Knox County First Utility District, Water and Sewer Revenue,
Refunding & Improvement, Series A, MBIA Insured,
5.625%, 12/01/19 ...................................................................... 1,000,000 1,049,170
Knox County Health, Educational and Housing Facilities Board,
Hospital Revenue, Refunding,
Ft. Sanders Alliance, MBIA Insured, 5.75%, 1/01/14 .................................. 1,250,000 1,357,638
Mercy Health Systems, Series B, AMBAC Insured, 5.875%, 9/01/15 ...................... 345,000 365,276
Knox County IDB, MFMR, Refunding, Waterford Apartments,
Series A, 5.95%, 3/01/28 .............................................................. 250,000 263,225
Loudon County IDB, Solid Waste Disposal Revenue,
Kimberly-Clark Corp. Project, 6.20%, 2/01/23 ........................................... 1,305,000 1,381,329
Macon County GO, FGIC Insured, 5.90%, 9/01/13 ....................................... 150,000 159,017
Maury County IDB, PCR, Multi-Modal, Refunding,
Saturn Corp. Project, 6.50%, 9/01/24 ................................................... 620,000 683,680
McKenzie High School District, FSA Insured, 5.75%, 4/01/22 .......................... 500,000 525,625
Memphis GO, 5.75%, 8/01/15 .......................................................... 500,000 522,175
Memphis Health, Educational and Housing Facilities Board,
Mortgage Revenue, Refunding,
Edgewater Territory, FHA/GNMA Secured, 7.375%, 1/20/27 .............................. 150,000 161,327
MF, River Trace II, Series A, 6.45%, 4/01/26 ........................................ 100,000 106,406
Memphis-Shelby County Airport Authority Revenue,
Refunding, MBIA Insured, 5.65%, 9/01/15 ................................................ 500,000 520,120
Memphis-Shelby County Airport Authority, Special Facilities
and Project Revenues, Refunding, Federal Express Corp.,
6.75%, 9/01/12 ........................................................................ 100,000 109,437
Metropolitan Government of Nashville and Davidson County, Electric Revenue, Series A,
Refunding, 6.00%, 5/15/17 ........................................................... 200,000 211,110
5.20%, 5/15/23 ...................................................................... 1,000,000 1,001,730
Metropolitan Government of Nashville and Davidson County,
Health and Educational Facilities Board, Refunding,
Dandridge Towers, Series 8-A, 6.375%, 1/01/11 ......................................... 500,000 529,155
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 ...... 150,000 174,891
b Multi-Modal Health, 5.50%, 5/01/23 .................................................. 995,000 1,018,154

Metropolitan Government of Nashville and Davidson County,
Health and Educational Facilities Board Revenue, (con.t)
Refunding, The Vanderbilt University, Series A, 5.375%, 7/01/18 ..................... $ 700,000 $ 716,107
Refunding, The Vanderbilt University, Series B, 5.00%, 10/01/28 ..................... 1,500,000 1,465,545
Metropolitan Government of Nashville and Davidson County,
Public Improvement, 5.875%, 5/15/26 ................................................... 1,000,000 1,059,490
Metropolitan Government of Nashville and Davidson County,
Sports Authority Revenue, Stadium Public Improvement
Project, AMBAC Insured, 5.875%, 7/01/21 ............................................... 1,775,000 1,887,784
Metropolitan Government of Nashville and Davidson County,
Water and Sewer Revenue, Refunding,
5.50%, 1/01/16 ...................................................................... 620,000 620,174
Series A, FGIC Insured, 5.00%, 1/01/19 .............................................. 400,000 395,924
Metropolitan Nashville Airport Authority Revenue,
Series C, FGIC Insured, 6.60%, 7/01/15 ................................................ 205,000 221,859
Milan Special School District, AMBAC Insured,
Pre-Refunded, 6.625%, 4/01/11 .......................................................... 180,000 205,168
Northern Mariana Islands Commonwealth Ports Authority,
Seaport Revenue, Port Saipan Harbor Improvement,
Series A, 6.85%, 10/01/25 ............................................................. 300,000 293,253
Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 6/01/09 ....................... 100,000 105,718
Puerto Rico Commonwealth GO, Pre-Refunded, 6.50%, 7/01/23 ........................... 100,000 113,963
Puerto Rico Commonwealth Highway and Transportation
Authority Revenue, Series Y, Pre-Refunded, 6.00%, 7/01/22 ............................. 500,000 564,615
Puerto Rico Commonwealth Public Improvement, 5.75%, 7/01/17 ......................... 750,000 798,023
Puerto Rico Electric Power Authority Revenue,
Series R, Pre-Refunded, 6.25%, 7/01/17 .............................................. 100,000 109,463
Series X, 5.50%, 7/01/25 ............................................................ 500,000 509,650
Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities, Financing
Authority, Hospital Revenue, Auxilio Mutuo Obligation Group,
Series A, MBIA Insured, 6.25%, 7/01/24 ................................................ 200,000 220,184
Puerto Rico Ports Authority Revenue, Special Facilities,
American Airlines, Series A, 6.25%, 6/01/26 ............................................ 600,000 652,860
Shelby County GO, Series B, Pre-Refunded, 6.00%, 3/01/16 ............................ 530,000 568,181
Shelby County Health, Educational and Housing Facilities Board,
Hospital Revenue,
5.00%, 4/01/18 ...................................................................... 1,000,000 983,860
MBIA Insured, 5.30%, 8/01/15 ........................................................ 500,000 509,245
South Fulton IDBR, Tyson Foods, Inc. Project, 6.40%, 10/01/20 ....................... 300,000 330,240
Sullivan County IDBR, Refunding, Brandymill, Series I-A,
GNMA Secured, 6.35%, 7/20/27 ........................................................... 350,000 379,628
Tennessee HDA, Home Ownership Program,
Issue 4A, 6.375%, 7/01/22 ........................................................... 800,000 856,752
Series 3, 5.85%, 7/01/23 ............................................................ 500,000 516,440
Tennessee HDA, Mortgage Finance,
Series A, 6.90%, 7/01/25 ............................................................ 200,000 217,922
Series B, 6.60%, 7/01/25 ............................................................ 215,000 230,966
Series B, MBIA Insured, 6.20%, 7/01/18 .............................................. 630,000 670,874
Tennessee Housing Development Agency
Homeownership, 5.375%, 7/01/23 ......................................................... 1,000,000 1,001,530
Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, 6.55%, 10/01/23 ............................. 100,000 107,792
Refunding, State Loan Program, Series A,
MBIA Insured, 5.125%, 3/01/22 ......................................................... 150,000 150,273
Tennessee State School Board Authority, Higher
Educational Facilities, Series A, 6.25%, 5/01/22 ...................................... 100,000 106,354
White House Utility District, Robertson and Sumner
Counties Waterworks System Revenue, Refunding, Series B,
FGIC Insured, 5.375%, 1/01/19 ......................................................... 1,890,000 1,925,663

Wilson County COP,
Educational Facilities, 6.125%, 6/30/10 ............................................. $ 220,000 $ 237,764
FSA Insured, 5.25%, 3/30/18 ......................................................... 1,000,000 1,010,460
b Virgin Islands Public Finance Authority Revenue,
Refunding, Senior Lien, Fund Loan Notes, Series A, 5.50%, 10/01/18 ..................... 1,000,000 1,018,760
---------------
Total Long Term Investments (Cost $41,736,665) ...................................... 43,909,447
---------------
a Short Term Investments 2.3%
Metropolitan Nashville Airport Authority Revenue,
Refunding & Improvement, FGIC Insured, Weekly VRDN and Put,
3.90%, 7/01/19 ........................................................................ 100,000 100,000
Puerto Rico Commonwealth Government Development Bank,
Refunding, MBIA Insured, Weekly VRDN and Put,
3.80%, 12/01/15 ....................................................................... 700,000 700,000
Sullivan County IDB, PCB, DATES, Refunding,
Mead Corp. Project, Daily VRDN and Put, 4.00%, 10/01/16 ............................... 100,000 100,000
Tennessee State GO, Series A, Weekly VRDN and Put, 3.90%, 7/02/01 ................... 100,000 100,000
---------------
Total Short Term Investments (Cost $1,000,000) ...................................... 1,000,000
---------------
Total Investments (Cost $42,736,665) 100.9% ......................................... 44,909,447
Other Assets, less Liabilities (.9)% ................................................ (383,610)
---------------
Net Assets 100.0% .................................................................. $44,525,837
===============
</TABLE>
See Glossary of Terms on page 67.

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights

Franklin Washington Municipal Bond Fund
Class I
-----------------------------------------------
Year Ended May 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.09 $ 9.80 $9.90 $9.55 $9.99
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .57 .58 .56 .56 .51
Net realized and unrealized gains (losses) ........... .41 .29 (.08) .36 (.46)
-----------------------------------------------
Total from investment operations ...................... .98 .87 .48 .92 .05
-----------------------------------------------
Less distributions from:
Net investment income ................................ (.59) (.58) (.58) (.57) (.47)
Net realized gains ................................... -- -- -- -- (.02)
-----------------------------------------------
Total distributions ................................... (.59) (.58) (.58) (.57) (.49)
-----------------------------------------------
Net asset value, end of year .......................... $10.48 $10.09 $9.80 $9.90 $9.55
===============================================
Total return* ......................................... 9.87% 9.04% 4.91% 10.10% 2.88%

Ratios/supplemental data
Net assets, end of year (000's) ....................... $10,376 $8,361 $7,718 $5,741 $4,272
Ratios to average net assets:
Expenses ............................................. .10% .10% .10% .10% .05%
Expenses excluding waiver and payments by affiliate .. .84% .90% .92% 1.05% .71%
Net investment income ................................ 5.54% 5.81% 5.81% 6.13% 5.59%
Portfolio turnover rate ............................... 6.94% 7.73% 19.13% 18.46% 39.52%

See notes to financial statements.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998

PRINCIPAL
Franklin Washington Municipal Bond Fund AMOUNT VALUE
<S> <C> <C>
Long Term Investments 96.7%
Aberdeen GO, Series A, MBIA Insured, 5.80%, 12/01/12 ................................ $100,000 $104,582
Bellevue Water and Sewer Revenue, Refunding, 5.875%, 7/01/10 ........................ 100,000 106,471
Bellingham Housing Authority Revenue,................................................ 200,000 231,078
Cascade Meadows Project, 7.10%, 11/01/23
Refunding, Pacific Rim & Cascade Meadows Projects,
MBIA Insured, Pre-Refunded, 5.20%, 11/01/27 ............................................ 200,000 199,392
Clark County School District No. 114, Evergreen School,
Refunding, AMBAC Insured, 5.95%, 12/01/12 .............................................. 100,000 107,819
Clark County Sewer Revenue, MBIA Insured, 5.70%, 12/01/16 ........................... 200,000 209,310
Conservation and Renewable Energy System Revenue,
Washington Conservation Project, 6.50%, 10/01/14 ....................................... 400,000 433,704
Douglas County PUD No. 1, Electric Systems Revenue,
MBIA Insured, 6.00%, 1/01/15 .......................................................... 100,000 108,455
Federal Way GO, Refunding, 5.85%, 12/01/21 .......................................... 100,000 102,735
Grant County PUD No. 002, Wanapum Hydroelectric Revenue,
Second Series A, 6.375%, 1/01/23 ...................................................... 250,000 264,888
Grant County PUD No. 2, Priest Rapids Hydroelectric Revenue,
Second Series B, MBIA Insured, 5.875%, 1/01/26 ......................................... 100,000 104,729
King County GO, Sewer District, 5.875%, 1/01/15 ..................................... 100,000 106,430
King County Housing Authority Revenue, Woodridge Park Project,
6.25%, 5/01/15 ........................................................................ 175,000 184,609
King County School District No. 400, Mercer Island, 5.90%, 12/01/15 ................. 100,000 106,548
King County School District No. 412, Shoreline, 6.10%, 6/01/13 ...................... 100,000 108,139
King County School District No. 415, Kent, FSA Insured, 5.875%, 6/01/16 ............. 200,000 213,724
Lewis County PUD No. 001, Cowlitz Falls Hydroelectric Project Revenue,
6.00%, 10/01/24 ....................................................................... 200,000 205,674
Pierce County EDC Revenue, Solid Waste, Occidental Petroleum Corp.,
5.80%, 9/01/29 ........................................................................ 375,000 377,381
Pierce County Sewer Revenue, 5.70%, 2/01/17 ......................................... 100,000 104,525
Pilchuck Development Public Corp., Special Facilities
Airport Revenue, Tramco, Inc. Project, B.F. Goodrich, 6.00%, 8/01/23 .................. 800,000 827,640
Port of Seattle Revenue, Series B, 6.00%, 11/01/17 .................................. 200,000 206,144
SeaTac GO, MBIA Insured, 6.50%, 12/01/13 ............................................ 450,000 496,949
Seattle Housing Authority, Low Income Housing Assistance Revenue,
Kin On Project, GNMA Secured, 7.40%, 11/20/36 ......................................... 99,000 112,469
Seattle Municipality Metropolitan Sewer Revenue,
Refunding, Series V, 6.20%, 1/01/32 ................................................... 200,000 210,158
Snohomish County GO, MBIA Insured, 5.90%, 12/01/15 .................................. 100,000 105,903
Snohomish County Housing Authority Revenue, Pooled, 6.30%, 4/01/16 .................. 200,000 211,740
Snohomish County PUD No. 1,
Electric and Generation Systems Revenue, Refunding,
FGIC Insured, 6.00%, 1/01/18 .......................................................... 200,000 211,864
Water Revenue, 5.85%, 11/01/17 ...................................................... 100,000 100,842
Spokane County GO, Refunding, 6.00%, 12/01/14 ....................................... 130,000 141,154
Spokane County Water District No. 3 Revenue,
Refunding, 5.90%, 1/01/14 .............................................................. 100,000 102,049
Stevens County Public Corp., PCR, Refunding,
Water Power Co. Project, 6.00%, 12/01/23 ............................................... 300,000 313,224
Sunnyside GO, MBIA Insured, 6.10%, 12/01/14 ......................................... 100,000 107,815
Tacoma Electric Systems Revenue, Refunding,
FGIC Insured, 6.25%, 1/01/15 ........................................................... 200,000 216,694
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ................................. 300,000 311,505
Tacoma Refuse Utility Revenue, AMBAC Insured,
Pre-Refunded, 7.00%, 12/01/19 ......................................................... 100,000 116,986
Tacoma Water Revenue, FGIC Insured, 5.25%, 12/01/16 ................................. 100,000 101,902
University of Washington, Alumni Association,
Lease Revenue, Medical Center Roosevelt II, FSA Insured,
6.30%, 8/15/14 ........................................................................ 500,000 550,835
Washington State COP, Office Building Project,
Series A, MBIA Insured, 6.00%, 4/01/12 ................................................ 100,000 105,014
Washington State Health Care Facilities Authority Revenue,
Multicare Medical Center, FGIC Insured, 5.75%, 8/15/22 .............................. 100,000 103,248
Swedish Health Services, AMBAC Insured, 5.50%, 11/15/28 ............................. 500,000 508,100
Washington State Higher Education Facilities Authority Revenue,
Refunding, Pacific Lutheran University Project,
Connie Lee Insured, 5.70%, 11/01/26 ................................................... 200,000 210,580

Washington State Housing Finance Commission, GNMA/FNMA Secured,
Series 1A-1, 6.25%, 6/01/16 ......................................................... $100,000 $ 107,538
SF Program, Series 1A-3, 6.15%, 12/01/15 ............................................ 200,000 213,538
SF Program, Series 2N, 6.05%, 12/01/16 .............................................. 100,000 105,846
SF Program, Series 3A, 5.75%, 12/01/28 .............................................. 200,000 205,412
Washington State Housing Finance, SFMR, MBS Program, Series A, 7.05%, 7/01/22 ....... 75,000 81,698
Washington State Motor Vehicle Fuel Tax, Series D, 6.00%, 9/01/20 ................... 240,000 257,882
Washington State Public Power Supply System Revenue,
Nuclear Project No. 1, Refunding, Series B, 5.125%, 7/01/17 ........................... 200,000 197,000
Whatcom County School District No. 501, Bellingham, 6.05%, 12/01/13 ................. 100,000 107,076
--------------
Total Long Term Investments (Cost $9,455,289) ....................................... 10,028,998
--------------
a Short Term Investments .9%
Puerto Rico Commonwealth Government Development Bank,
Refunding, MBIA Insured, Weekly VRDN and Put, 3.80%,
12/01/15 (Cost $100,000) .............................................................. 100,000
--------------
Total Investments (Cost $9,555,289) 97.6% ........................................... 10,128,998
Other Assets, less Liabilities 2.4% ................................................. 247,161
--------------
Net Assets 100.0% ................................................................... $10,376,159
==============

</TABLE>
See Glossary of Terms on page 67.

FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998 (cont.)

Glossary of Terms:
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
DATES -Demand Adjustable Tax-Exempt Securities
EDC -Economic Development Co.
ETM -Escrow to Maturity
FGIC -Financial Guaranty Insurance Corp.
FHA -Federal Housing Authority/Agency
FNMA -Federal National Mortgage Association
FSA -Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA -Government National Mortgage Association
GO -General Obligation
HDA -Housing Development Authority/Agency
HFA -Housing Finance Authority/Agency
HMR -Home Mortgage Revenue
IDB -Industrial Development Board
IDBR -Industrial Development Board Revenue
IDR -Industrial Development Revenue
MBIA -Municipal Bond Investors Assurance Corp.
MBS -Mortgage Backed Securities
MFHR -Multi-Family Housing Revenue
MFMR -Multi-Family Mortgage Revenue
MFR -Multi-Family Revenue
PBA -Public Building Authority
PCFA -Pollution Control Financing Authority
PCR -Pollution Control Revenue
PUD -Public Utility District
RDA -Redevelopment Agency
SF -Single Family
SFM -Single Family Mortgage
SFMR -Single Family Mortgage Revenue
USD -Unified School District

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements

Statements of Assets and Liabilities
May 31, 1998

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:
Cost .............................. $28,964,222 $430,987,966 $41,918,493 $42,736,665 $ 9,555,289
===================================================================
Value ............................. 30,112,946 450,728,470 44,363,526 44,909,447 10,128,998
Cash ............................... 127,743 1,324,358 41,328 1,263,580 52,413
Receivables:
Investment securities sold ........ 30,000 -- -- 600,903 --
Capital shares sold ............... 152,352 2,834,381 19,158 158,724 --
Interest .......................... 476,703 8,049,323 911,355 694,439 199,503
Affiliates ........................ 15,732 -- -- -- 9,242
-------------------------------------------------------------------
Total assets .................. 30,915,476 462,936,532 45,335,367 47,627,093 10,390,156
-------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ... 482,015 8,844,968 -- 2,958,932 --
Capital shares redeemed ........... -- 207,752 48,113 3,000 --
Affiliates ........................ -- 386,920 23,373 1,954 --
Shareholders ...................... 18,758 368,681 69,508 81,272 1,626
Distributions to shareholders ...... 37,521 528,687 51,001 51,413 12,371
Other liabilities .................. -- 25,835 5,231 4,685 --
-------------------------------------------------------------------
Total liabilities ............. 538,294 10,362,843 197,226 3,101,256 13,997
-------------------------------------------------------------------
Net assets, at value ......... $30,377,182 $452,573,689 $45,138,141 $44,525,837 $10,376,159
===================================================================
Net assets consist of:
Undistributed net investment
income ............................. $ 43,656 $-- $ 114,350 $ 34,304 $ 33,989
Accumulated distributions in excess
of net investment income ........... -- (6,110) -- -- --
Net unrealized appreciation ........ 1,148,724 19,740,504 2,445,033 2,172,782 573,709
Accumulated net realized gain (loss) (29,535) (2,280,993) (545,809) 135,848 (126,686)
Capital shares ..................... 29,214,337 435,120,288 43,124,567 42,182,903 9,895,147
-------------------------------------------------------------------
Net assets, at value .......... $30,377,182 $452,573,689 $45,138,141 $44,525,837 $10,376,159
===================================================================

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

See notes to financial statements.

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)

Statements of Operations
for the year ended May 31, 1998

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>
Investment income:
Interest ........................... $1,164,643 $20,243,392 $2,466,298 $2,007,687 $529,641
-------------------------------------------------------------------
Expenses:
Management fees (Note 3) ........... 134,808 1,729,049 269,392 227,268 58,648
Distribution fees (Note 3)
Class I ........................... 22,637 310,913 44,292 37,949 10,263
Class II .......................... -- 150,863 -- -- --
Transfer agent fees (Note 3) ....... 7,015 93,561 17,684 10,574 3,387
Custodian fees ..................... 228 3,726 472 414 97
Reports to shareholders ............ 3,363 43,068 8,058 5,541 1,719
Registration and filing fees ....... 5,693 38,148 1,746 7,128 2,186
Professional fees .................. 1,575 24,602 2,634 2,863 559
Other .............................. 2,685 11,157 3,503 4,234 2,334
-------------------------------------------------------------------
Total expenses ................ 178,004 2,405,087 347,781 295,971 79,193
Expenses waived/paid by affiliate
(Note 3) ........................... (156,504) (1,121,780) (175,429) (150,761) (69,815)
-------------------------------------------------------------------
Net expenses ................ 21,500 1,283,307 172,352 145,210 9,378
-------------------------------------------------------------------
Net investment income ...... 1,143,143 18,960,085 2,293,946 1,862,477 520,263
-------------------------------------------------------------------
Realized and unrealized gains:
Net realized gain (loss) from investments 5,532 (116,948) 246,873 201,405 2,260
Net unrealized appreciation on investments 834,896 15,006,888 1,170,843 1,488,290 345,821
-------------------------------------------------------------------
Net realized and unrealized gain .... 840,428 14,889,940 1,417,716 1,689,695 348,081
-------------------------------------------------------------------
Net increase in net assets resulting
from operations .................... $1,983,571 $33,850,025 $3,711,662 $3,552,172 $868,344
===================================================================

</TABLE>

See notes to financial statements.

FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)

Statements of Changes in Net Assets
for the years ended May 31, 1998 and 1997

Franklin Arkansas Franklin California High Franklin Hawaii
Municipal Bond Fund Yield Municipal Fund Municipal Bond Fund
----------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .... $ 1,143,143 $ 588,356 $ 18,960,085 $ 10,701,441 $ 2,293,946 $ 2,197,925
Net realized gain (loss)
from investments .......... 5,532 4,094 (116,948) (119,287) 246,873 51,434
Net unrealized appreciation
on investments ............ 834,896 272,692 15,006,888 4,691,793 1,170,843 857,481
----------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations ................ 1,983,571 865,142 33,850,025 15,273,947 3,711,662 3,106,840
Distributions to shareholders
from:
Net investment income:
Class I ............... (1,144,675) (580,057) (17,741,641) (10,372,492) (2,307,589) (2,194,657)
Class II .............. -- -- (1,199,464) (347,490) -- --
In excess of net
investment income:
Class I .............. -- -- -- (24,277) -- --
Class II ............. -- -- -- (813) -- --
----------------------------------------------------------------------------------------
Total distributions to
shareholders .............. (1,144,675) (580,057) (18,941,105) (10,745,072) (2,307,589) (2,194,657)
Capital share transactions:
(Note 2)
Class I ................ 16,397,936 4,689,718 184,852,793 90,671,188 3,731,394 285,742
Class II ............... -- -- 28,791,162 10,295,368 -- --
----------------------------------------------------------------------------------------
Total capital share
transactions .............. 16,397,936 4,689,718 213,643,955 100,966,556 3,731,394 285,742
Net increase in
net assets ................ 17,236,832 4,974,803 228,552,875 105,495,431 5,135,467 1,197,925
Net assets:
Beginning of year ......... 13,140,350 8,165,547 224,020,814 118,525,383 40,002,674 38,804,749
----------------------------------------------------------------------------------------
End of year ............... $30,377,182 $13,140,350 $452,573,689 $224,020,814 $45,138,141 $40,002,674
========================================================================================

Undistributed net investment income
(accumulated distributions in excess of net
investment income) included in net assets
End of year .............. $ 43,656 $ 45,188 $ (6,110) $ (25,090) $ 114,350 $ 127,993
========================================================================================

Franklin Tennessee Franklin Washington
Municipal Bond Fund Municipal Bond Fund
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,862,477 $ 1,061,715 $ 520,263 $ 464,255
Net realized gain (loss) from investments 201,405 (277) 2,260 (4,404)
Net unrealized appreciation on investments 1,488,290 561,758 345,821 228,610
-------------------------------------------------------------------
Net increase in net assets resulting
from operations 3,552,172 1,623,196 868,344 688,461
Distributions to shareholders from net
investment income (1,851,295) (1,084,118) (526,988) (460,520)
Capital share transactions (Note 2) 16,116,499 12,213,104 1,674,114 414,786
-------------------------------------------------------------------
Net increase in net assets 17,817,376 12,752,182 2,015,470 642,727
Net assets:
Beginning of year 26,708,461 13,956,279 8,360,689 7,717,962
-------------------------------------------------------------------
End of year $44,525,837 $26,708,461 $10,376,159 $8,360,689
===================================================================
Undistributed net investment income included
in net assets
End of year $ 34,304 $ 23,122 $ 33,989 $ 40,714
===================================================================

</TABLE>

See notes to financial statements.

FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company, consisting of five separate series (the Funds). The Funds and their
investment objective are to provide tax-free income.

The following summarizes the Funds' significant accounting policies.

a. Security Valuation

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

b. Income Taxes

No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.

c. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Dividends from net investment
income are normally declared daily and distributed monthly to shareholders.
Other distributions are recorded on the ex-dividend date.

Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.

Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.

d. Accounting Estimates

The preparation of financial statements in accordance with 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. SHARES OF BENEFICIAL INTEREST

The Franklin California High Yield Municipal Fund offers two classes of shares:
Class I and Class II. The shares have the same rights except for their initial
sales load, distribution fees, voting rights on matters affecting a single class
and the exchange privilege of each class.

2. SHARES OF BENEFICIAL INTEREST (cont.)

At May 31, 1998, there were an unlimited number of shares authorized (no par
value). Transactions in the Fund's shares were as follows:

Franklin Arkansas Franklin California
Municipal Bond Fund High Yield Municipal Fund
----------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares:
1998
Shares sold .......................................... 1,545,732 $16,752,477 22,284,623 $234,404,399
Shares issued in reinvestment of distributions ....... 57,600 625,362 663,035 6,974,790
Shares redeemed ...................................... (90,387) (979,903) (5,372,964) (56,526,396)
--------------------------------------------------
Net increase .......................................... 1,512,945 $16,397,936 17,574,694 $184,852,793
==================================================
1997
Shares sold .......................................... 470,751 $ 4,901,027 11,958,887 $119,678,964
Shares issues in reinvestment of distributions ....... 36,550 380,970 372,489 3,734,093
Shares redeemed ...................................... (57,166) (592,279) (3,267,236) (32,741,869)
--------------------------------------------------
Net increase .......................................... 450,135 $ 4,689,718 9,064,140 $ 90,671,188
==================================================
Class II Shares:
1998
Shares sold .......................................... 2,979,250 $ 31,420,783
Shares issued in reinvestment of distributions ....... 51,598 545,089
Shares redeemed ...................................... (300,304) (3,174,710)
------------------------
Net increase .......................................... 2,730,544 $ 28,791,162
========================
1997
Shares sold .......................................... 1,204,172 $ 12,057,953
Shares issues in reinvestment of distributions ....... 19,594 197,069
Shares redeemed ...................................... (195,499) (1,959,654)
------------------------
Net increase .......................................... 1,028,267 $ 10,295,368
========================

Franklin Hawaii Franklin Tennessee
Municipal Bond Fund Municipal Bond Fund
----------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares:
1998
Shares sold .......................................... 779,362 $8,639,651 1,961,959 $21,692,685
Shares issued in reinvestment of distributions ....... 74,894 830,944 103,474 1,149,741
Shares redeemed ...................................... (517,067) (5,739,201) (609,509) (6,725,927)
--------------------------------------------------
Net increase .......................................... 337,189 $3,731,394 1,455,924 $16,116,499
==================================================
1997
Shares sold .......................................... 790,934 $8,525,981 1,355,345 $14,372,546
Shares issues in reinvestment of distributions ....... 80,695 866,517 64,058 680,991
Shares redeemed ...................................... (847,717) (9,106,756) (267,495) (2,840,433)
--------------------------------------------------
Net increase .......................................... 23,912 $ 285,742 1,151,908 $12,213,104
==================================================

2. SHARES OF BENEFICIAL INTEREST (cont.)

Franklin Washington
Municipal Bond Fund
----------------------
Shares Amount
----------------------
<S> <C> <C>
Class I Shares:
1998

Shares sold .......................................... 187,538 $1,946,679
Shares issued in reinvestment of distributions ....... 35,472 368,307
Shares redeemed ...................................... (61,822) (640,872)
----------------------
Net increase .......................................... 161,188 $1,674,114
======================
1997
Shares sold .......................................... 103,811 $1,037,350
Shares issues in reinvestment of distributions ....... 32,188 322,025
Shares redeemed ...................................... (94,809) (944,589)
----------------------
Net increase .......................................... 41,190 $ 414,786
======================

</TABLE>
3. TRANSACTIONS WITH AFFILIATES

Certain officers and trustees of the Trust are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.

The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:

Annualized
Fee Rate Month-End 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

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

Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Funds, through 5/31/98, as noted in the the Statements of
Operations.

The Franklin Hawaii Municipal Bond Fund reimburses Distributors up to 0.10% per
year of its average daily net assets, the Franklin Arkansas Municipal Bond,
Franklin Tennessee Municipal Bond and Franklin Washington Municipal Bond Funds
reimburse Distributors up to 0.15% per year of the Funds' average daily net
assets, and the Franklin California High Yield Municipal Fund reimburses
Distributors up to 0.15% and 0.65% per year of the average daily net assets of
Class I and Class II, respectively, for costs in marketing the Funds' shares.

3. TRANSACTIONS WITH AFFILIATES (cont.)

Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:

<S> <C> <C> <C> <C> <C>
Net commissions received (paid) .................. $1,553 $(595,523) $17,991 $27,859 $2,028
Contingent deferred sales charges ................ $-- $ 4,213 $-- $-- $--

4. INCOME TAXES

At May 31, 1998, the Funds had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:

Franklin Franklin Franklin Franklin
Arkansas California Hawaii Washington
Municipal High Yield Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund
--------------------------------------------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in: 2003 $29,535 $1,431,250 $474,475 $ 82,647
2004 .......................... -- 4,508 64,421 39,744
2005 .......................... -- 390,400 -- --
2006 .......................... -- -- -- --
--------------------------------------------
$29,535 $1,826,158 $538,896 $122,391
============================================

</TABLE>
At May 31, 1998 the Franklin California High Yield Municipal Fund and the
Franklin Washington Municipal Bond Fund have deferred capital losses occurring
subsequent to October 31, 1997 of $454,835 and $4,295, respectively. For tax
purposes, such losses will be reflected in the year ending May 31, 1999.

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

At May 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:

Unrealized depreciation ..................... (984) (1,077,732) (6,231) -- (4,288)
-------------------------------------------------------------
Net unrealized appreciation ................. $ 1,148,724 $ 19,740,504 $ 2,438,120 $ 2,172,782 $ 573,709
=============================================================

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended May 31, 1998 were as follows:

</TABLE>
6. CREDIT RISK

The Funds have investments in excess of 10% of their total net assets in their
respective states. Such concentration may subject the Funds more significantly
to economic changes occurring within those states.

FRANKLIN MUNICIPAL SECURITIES TRUST
Independent Auditor's Report

To the Shareholders and Board of Directors
Of the 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 as of May 31, 1998, 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, 1998, by correspondence with the custodian and brokers. 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 Franklin Municipal Securities Trust as of May 31, 1998,
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 their
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Francisco, California

June 26, 1998

FRANKLIN MUNICIPAL SECURITIES TRUST
Tax Information

Under Section 852(b)(5)(A) of the Internal Revenue Code, the Trust hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended May 31, 1998.

Franklin Municipal Securities Trust
Annual Report
May 31, 1998.

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 Franklin
Arkansas Municipal Bond Fund based on total long-term investments as of
5/31/98.

AAA 43.8%
AA 10.5%
A 18.7%
BBB 27.0%

GRAPHIC MATERIAL (2)

This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Arkansas Municipal
Bond Fund.

Utilities 20.5%
Industrial 15.3%
Hospitals 11.1%
Education 8.8%
Housing 8.4%
General Obligation 7.8%
Sales Tax 7.1%
Prerefunded 2.7%
Transportation 2.1%
Other Revenue 16.2%

GRAPHIC MATERIAL (3)

This chart shows in bar format the comparison between Franklin Arkansas
Municipal Bond Fund's Class I distribution rate of 5.02% and the taxable
equivalent rate of 8.94% on 5/31/98.

GRAPHIC MATERIAL (4)

This chart shows the dividend distributions for Franklin Arkansas Municipal
Bond Fund's Class I from 6/1/97 to 5/31/98.

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 4.8 cents
April 4.8 cents
May 4.8 cents
Total 58.5 cents

GRAPHIC MATERIAL (5)

The following line graph compares the performance of the Franklin Arkansas
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
5/10/94 to 5/31/98.

- -------------------------------------------------------
Date Franklin Arkansas Lehman CPI
Municipal Brothers
Bond Fund-Class I Municipal Bond
Index
- -------------------------------------------------------
5/10/94 $9,579 $10,000 $10,000
5/31/94 $9,636 0.59% $10,059 0.05% $10,005
6/30/94 $9,550 -0.61% $9,998 0.34% $10,039
7/31/94 $9,722 1.83% $10,181 0.27% $10,066
8/31/94 $9,741 0.35% $10,216 0.40% $10,106
9/30/94 $9,565 -1.47% $10,066 0.27% $10,133
10/31/94 $9,271 -1.78% $9,887 0.07% $10,141
11/30/94 $8,978 -1.81% $9,708 0.13% $10,154
12/31/94 $9,268 2.20% $9,921 0.00% $10,154
1/31/95 $9,608 2.86% $10,205 0.40% $10,194
2/28/95 $9,930 2.91% $10,502 0.40% $10,235
3/31/95 $10,017 1.15% $10,623 0.33% $10,269
4/30/95 $10,045 0.12% $10,636 0.33% $10,303
5/31/95 $10,322 3.19% $10,975 0.20% $10,323
6/30/95 $10,219 -0.87% $10,879 0.20% $10,344
7/31/95 $10,268 0.95% $10,983 0.00% $10,344
8/31/95 $10,388 1.27% $11,122 0.26% $10,371
9/30/95 $10,487 0.63% $11,192 0.20% $10,392
10/31/95 $10,648 1.45% $11,355 0.33% $10,426
11/30/95 $10,830 1.66% $11,543 -0.07% $10,419
12/31/95 $10,952 0.96% $11,654 -0.07% $10,411
1/31/96 $11,002 0.76% $11,743 0.59% $10,473
2/29/96 $10,907 -0.68% $11,663 0.32% $10,506
3/31/96 $10,781 -1.28% $11,513 0.52% $10,561
4/30/96 $10,759 -0.28% $11,481 0.39% $10,602
5/31/96 $10,800 -0.04% $11,477 0.19% $10,622
6/30/96 $10,947 1.09% $11,602 0.06% $10,629
7/31/96 $11,042 0.91% $11,707 0.19% $10,649
8/31/96 $11,030 -0.02% $11,705 0.19% $10,669
9/30/96 $11,211 1.40% $11,869 0.32% $10,703
10/31/96 $11,351 1.13% $12,003 0.32% $10,737
11/30/96 $11,534 1.83% $12,223 0.19% $10,758
12/31/96 $11,489 -0.42% $12,171 0.00% $10,758
1/31/97 $11,499 0.19% $12,194 0.32% $10,792
2/28/97 $11,619 0.92% $12,307 0.31% $10,826
3/31/97 $11,474 -1.33% $12,143 0.25% $10,853
4/30/97 $11,584 0.84% $12,245 0.12% $10,866
5/31/97 $11,761 1.51% $12,430 -0.06% $10,859
6/30/97 $11,883 1.07% $12,563 0.12% $10,872
7/31/97 $12,219 2.77% $12,911 0.12% $10,885
8/31/97 $12,105 -0.94% $12,789 0.19% $10,906
9/30/97 $12,274 1.19% $12,942 0.25% $10,933
10/31/97 $12,353 0.64% $13,024 0.25% $10,961
11/30/97 $12,455 0.59% $13,101 -0.06% $10,954
12/31/97 $12,649 1.46% $13,293 -0.12% $10,941
1/31/98 $12,763 1.03% $13,429 0.19% $10,962
2/28/98 $12,762 0.03% $13,433 0.19% $10,983
3/31/98 $12,795 0.09% $13,446 0.19% $11,003
4/30/98 $12,780 -0.45% $13,385 0.18% $11,023
5/31/98 $12,9781.55% 1.58% $13,597 0.18% $11,043

Total 29.78% 35.97% 10.43%
Return
- -------------------------------------------------------

GRAPHIC MATERIAL (6)

This chart shows in pie format the credit quality breakdown of the Franklin
California Municipal Fund based on total long-term investments as of 5/31/98.

AAA 12.8%
AA 5.3%
A 16.8%
BBB 45.6%
Below Investment Grade 19.5%

GRAPHIC MATERIAL (7)

This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin California Municipal
Fund.

Transportation 20.8%
Tax Allocation Bonds 14.7%
Mello-Roos Bonds 11.6%
Certificates of Participation 7.5%
Hospitals 7.3%
Utilities 7.2%
Housing 6.8%
Special Assessment Bonds 5.0%
Education 4.3%
Prerefunded 3.6%
Marks-Roos Bonds 2.6%
Industrial Revenue Bonds 1.5%
General Obligation 1.4%
Health Care 1.3%
Other Revenue 4.4%

GRAPHIC MATERIAL (8)

This chart shows in bar format the comparison between Franklin California
Municipal Fund's Class I distribution rate of 5.40% and the taxable
equivalent rate of 9.86% on 5/31/98.

GRAPHIC MATERIAL (9)

This chart shows the dividend distributions for Franklin California Municipal
Fund's Class I from 6/1/97 to 5/31/98.

June 5.2 cents
July 5.2 cents
August 5.2 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 5.0 cents
April 5.0 cents
May 5.0 cents
Total 61.8 cents

GRAPHIC MATERIAL (10)

The following line graph compares the performance of the Franklin California
Municipal Fund's Class I shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
5/3/93 to 5/31/98.

- ------------------------------------------------------
Date Franklin California Lehman CPI
High Yield Brothers
Municipal Fund-Class I Municipal
Bond
Index
- ------------------------------------------------------
5/3/93 $9,579 $10,000 $10,000
5/31/93 $9,550 0.56% $10,056 0.14% $10,014
6/30/93 $9,713 1.67% $10,224 0.14% $10,028
7/31/93 $9,703 0.13% $10,237 0.00% $10,028
8/31/93 $9,909 2.08% $10,450 0.28% $10,056
9/30/93 $10,059 1.14% $10,569 0.21% $10,077
10/31/93 $10,092 0.19% $10,589 0.41% $10,119
11/30/93 $10,039 -0.88% $10,496 0.07% $10,126
12/31/93 $10,223 2.11% $10,718 0.00% $10,126
1/31/94 $10,346 1.14% $10,840 0.27% $10,153
2/28/94 $10,183 -2.59% $10,559 0.34% $10,187
3/31/94 $9,726 -4.07% $10,129 0.34% $10,222
4/30/94 $9,759 0.85% $10,215 0.14% $10,236
5/31/94 $9,843 0.87% $10,304 0.07% $10,244
6/30/94 $9,744 -0.61% $10,241 0.34% $10,278
7/31/94 $9,931 1.83% $10,429 0.27% $10,306
8/31/94 $10,006 0.35% $10,465 0.40% $10,347
9/30/94 $9,906 -1.47% $10,312 0.27% $10,375
10/31/94 $9,763 -1.78% $10,128 0.07% $10,383
11/30/94 $9,538 -1.81% $9,945 0.13% $10,396
12/31/94 $9,604 2.20% $10,163 0.00% $10,396
1/31/95 $9,892 2.86% $10,454 0.40% $10,438
2/28/95 $10,181 2.91% $10,758 0.40% $10,479
3/31/95 $10,397 1.15% $10,882 0.33% $10,514
4/30/95 $10,453 0.12% $10,895 0.33% $10,549
5/31/95 $10,736 3.19% $11,243 0.20% $10,570
6/30/95 $10,631 -0.87% $11,145 0.20% $10,591
7/31/95 $10,678 0.95% $11,251 0.00% $10,591
8/31/95 $10,793 1.27% $11,394 0.26% $10,618
9/30/95 $10,898 0.63% $11,465 0.20% $10,640
10/31/95 $11,069 1.45% $11,632 0.33% $10,675
11/30/95 $11,264 1.66% $11,825-0.07% $10,667
12/31/95 $11,427 0.96% $11,938-0.07% $10,660
1/31/96 $11,489 0.76% $12,029 0.59% $10,723
2/29/96 $11,403 -0.68% $11,947 0.32% $10,757
3/31/96 $11,296 -1.28% $11,794 0.52% $10,813
4/30/96 $11,279 -0.28% $11,761 0.39% $10,855
5/31/96 $11,330 -0.04% $11,757 0.19% $10,876
6/30/96 $11,509 1.09% $11,885 0.06% $10,882
7/31/96 $11,585 0.91% $11,993 0.19% $10,903
8/31/96 $11,602 -0.02% $11,990 0.19% $10,924
9/30/96 $11,792 1.40% $12,158 0.32% $10,959
10/31/96 $11,936 1.13% $12,296 0.32% $10,994
11/30/96 $12,153 1.83% $12,521 0.19% $11,015
12/31/96 $12,131 -0.42% $12,468 0.00% $11,015
1/31/97 $12,134 0.19% $12,492 0.32% $11,050
2/28/97 $12,257 0.92% $12,607 0.31% $11,084
3/31/97 $12,137 -1.33% $12,439 0.25% $11,112
4/30/97 $12,262 0.84% $12,544 0.12% $11,125
5/31/97 $12,424 1.51% $12,733-0.06% $11,119
6/30/97 $12,598 1.07% $12,869 0.12% $11,132
7/31/97 $12,947 2.77% $13,226 0.12% $11,145
8/31/97 $12,887 -0.94% $13,101 0.19% $11,166
9/30/97 $13,127 1.19% $13,257 0.25% $11,194
10/31/97 $13,231 0.64% $13,342 0.25% $11,222
11/30/97 $13,347 0.59% $13,421-0.06% $11,216
12/31/97 $13,553 1.46% $13,617-0.12% $11,202
1/31/98 $13,670 1.03% $13,757 0.19% $11,223
2/28/98 $13,685 0.03% $13,761 0.19% $11,245
3/31/98 $13,685 0.09% $13,774 0.19% $11,266
4/30/98 $13,672 -0.45% $13,712 0.18% $11,286
5/31/98 $13,893 1.62% 1.58% $13,928 0.18% $11,307

Total 38.93% 39.28% 13.07%
Return
- ------------------------------------------------------

GRAPHIC MATERIAL (11)

This chart shows in bar format the comparison between Franklin California
Municipal Fund's Class II distribution rate of 4.93% and the taxable
equivalent rate of 9.00% on 5/31/98.

GRAPHIC MATERIAL (12)

This chart shows the dividend distributions for Franklin California Municipal
Fund's Class II from 6/1/97 to 5/31/98.

June 4.73 cents
July 4.73 cents
August 4.73 cents
September 4.70 cents
October 4.70 cents
November 4.70 cents
December 4.70 cents
January 4.97 cents
February 4.97 cents
March 4.77 cents
April 4.43 cents
May 4.43 cents
Total 56.56 cents

GRAPHIC MATERIAL (13)

The following line graph compares the performance of the Franklin California
Municipal Fund's Class II shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment
from 5/1/96 to 5/31/98.

- -----------------------------------------------------------------
Date Franklin California Lehman Brothers CPI
High Yield Municipal Bond
Municipal Fund-Class II Index
- -----------------------------------------------------------------
5/1/96 $9,899 $10,000 $10,000
5/31/96 $9,937 -0.04% $9,996 0.19% $10,019
6/28/96 $10,080 1.09% $10,105 0.06% $10,025
7/31/96 $10,152 0.91% $10,197 0.19% $10,044
8/30/96 $10,153 -0.02% $10,195 0.19% $10,063
9/30/96 $10,316 1.40% $10,338 0.32% $10,095
10/31/96 $10,436 1.13% $10,454 0.32% $10,128
11/29/96 $10,620 1.83% $10,646 0.19% $10,147
12/31/96 $10,606 -0.42% $10,601 0.00% $10,147
1/31/97 $10,601 0.19% $10,621 0.32% $10,179
2/28/97 $10,701 0.92% $10,719 0.31% $10,211
3/31/97 $10,601 -1.33% $10,576 0.25% $10,236
4/30/97 $10,694 0.84% $10,665 0.12% $10,249
5/31/97 $10,841 1.51% $10,826 -0.06% $10,243
6/30/97 $10,977 1.07% $10,942 0.12% $10,255
7/31/97 $11,287 2.77% $11,245 0.12% $10,267
8/31/97 $11,230 -0.94% $11,139 0.19% $10,287
9/30/97 $11,433 1.19% $11,272 0.25% $10,312
10/31/97 $11,518 0.64% $11,344 0.25% $10,338
11/30/97 $11,624 0.59% $11,411 -0.06% $10,332
12/31/97 $11,786 1.46% $11,578 -0.12% $10,320
1/31/98 $11,896 1.03% $11,697 0.19% $10,339
2/28/98 $11,896 0.03% $11,700 0.19% $10,359
3/31/98 $11,893 0.09% $11,711 0.19% $10,379
4/30/98 $11,875 -0.45% $11,658 0.18% $10,397
5/31/98 $12,072 1.65% 1.58% $11,842 0.18% $10,416

Total 20.72% 18.42% 4.16%
Return
- -----------------------------------------------------------------

GRAPHIC MATERIAL (14)

This chart shows in pie format the credit quality breakdown of the Franklin
Hawaii Municipal Bond Fund based on total long-term investments as of 5/31/98.

AAA 44.7%
AA 16.5%
A 22.1%
BBB 16.7%

GRAPHIC MATERIAL (15)

This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Hawaii Municipal Bond
Fund.

Hospitals 24.9%
Utilities 22.6%
Transportation 18.5%
Prerefunded 11.4%
Housing 9.5%
General Obligation 7.7%
Industrial 1.0%
Other Revenue 4.4%

GRAPHIC MATERIAL (16)

This chart shows in bar format the comparison between Franklin Hawaii
Municipal Bond Fund's Class I distribution rate of 5.04% and the taxable
equivalent rate of 9.27% on 5/31/98.

GRAPHIC MATERIAL (17)

This chart shows the dividend distributions for Franklin Hawaii Municipal
Bond Fund from 6/1/97 to 5/31/98.

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 4.9 cents
April 4.9 cents
May 4.9 cents
Total 59.7 cents

GRAPHIC MATERIAL (18)

The following line graph compares the performance of the Franklin Hawaii
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
2/26/92 to 5/31/98.

- --------------------------------------------------------------------------------
Date Franklin Hawaii Municipal Bond Lehman Brothers CPI
Fund-Class I Municipal
Bond Index
- --------------------------------------------------------------------------------
2/26/92 $9,579 $10,000 $10,000
2/29/92 $9,579 0.00% $10,000 0.04% $10,004
3/31/92 $9,579 0.04% $10,004 0.51% $10,055
4/30/92 $9,684 0.89% $10,093 0.14% $10,069
5/31/92 $9,804 1.18% $10,212 0.14% $10,083
6/30/92 $9,924 1.68% $10,384 0.36% $10,119
7/31/92 $10,326 3.00% $10,696 0.21% $10,140
8/31/92 $10,166 -0.98% $10,591 0.28% $10,169
9/30/92 $10,171 0.65% $10,660 0.28% $10,197
10/31/92 $10,008 -0.98% $10,555 0.35% $10,233
11/30/92 $10,280 1.79% $10,744 0.14% $10,247
12/31/92 $10,453 1.02% $10,854 -0.07% $10,240
1/31/93 $10,596 1.16% $10,980 0.49% $10,290
2/28/93 $10,940 3.62% $11,377 0.35% $10,326
3/31/93 $10,923 -1.06% $11,256 0.35% $10,363
4/30/93 $10,996 1.01% $11,370 0.28% $10,392
5/31/93 $11,058 0.56% $11,434 0.14% $10,406
6/30/93 $11,273 1.67% $11,625 0.14% $10,421
7/31/93 $11,293 0.13% $11,640 0.00% $10,421
8/31/93 $11,531 2.08% $11,882 0.28% $10,450
9/30/93 $11,718 1.14% $12,017 0.21% $10,472
10/31/93 $11,760 0.19% $12,040 0.41% $10,515
11/30/93 $11,603 -0.88% $11,934 0.07% $10,522
12/31/93 $11,897 2.11% $12,186 0.00% $10,522
1/31/94 $12,035 1.14% $12,325 0.27% $10,550
2/28/94 $11,674 -2.59% $12,006 0.34% $10,586
3/31/94 $11,011 -4.07% $11,517 0.34% $10,622
4/30/94 $11,086 0.85% $11,615 0.14% $10,637
5/31/94 $11,205 0.87% $11,716 0.07% $10,645
6/30/94 $11,128 -0.61% $11,645 0.34% $10,681
7/31/94 $11,346 1.83% $11,858 0.27% $10,710
8/31/94 $11,390 0.35% $11,899 0.40% $10,753
9/30/94 $11,192 -1.47% $11,724 0.27% $10,782
10/31/94 $10,882 -1.78% $11,516 0.07% $10,789
11/30/94 $10,629 -1.81% $11,307 0.13% $10,803
12/31/94 $10,930 2.20% $11,556 0.00% $10,803
1/31/95 $11,278 2.86% $11,886 0.40% $10,846
2/28/95 $11,672 2.91% $12,232 0.40% $10,890
3/31/95 $11,785 1.15% $12,373 0.33% $10,926
4/30/95 $11,830 0.12% $12,388 0.33% $10,962
5/31/95 $12,241 3.19% $12,783 0.20% $10,984
6/30/95 $12,069 -0.87% $12,672 0.20% $11,006
7/31/95 $12,196 0.95% $12,792 0.00% $11,006
8/31/95 $12,336 1.27% $12,955 0.26% $11,034
9/30/95 $12,405 0.63% $13,036 0.20% $11,056
10/31/95 $12,593 1.45% $13,225 0.33% $11,093
11/30/95 $12,840 1.66% $13,445 -0.07% $11,085
12/31/95 $13,030 0.96% $13,574 -0.07% $11,077
1/31/96 $13,089 0.76% $13,677 0.59% $11,143
2/29/96 $12,982 -0.68% $13,584 0.32% $11,178
3/31/96 $12,838 -1.28% $13,410 0.52% $11,236
4/30/96 $12,802 -0.28% $13,373 0.39% $11,280
5/31/96 $12,789 -0.04% $13,367 0.19% $11,302
6/30/96 $12,948 1.09% $13,513 0.06% $11,308
7/31/96 $13,070 0.91% $13,636 0.19% $11,330
8/31/96 $13,106 -0.02% $13,633 0.19% $11,351
9/30/96 $13,291 1.40% $13,824 0.32% $11,388
10/31/96 $13,440 1.13% $13,980 0.32% $11,424
11/30/96 $13,651 1.83% $14,236 0.19% $11,446
12/31/96 $13,614 -0.42% $14,176 0.00% $11,446
1/31/97 $13,614 0.19% $14,203 0.32% $11,483
2/28/97 $13,727 0.92% $14,334 0.31% $11,518
3/31/97 $13,536 -1.33% $14,143 0.25% $11,547
4/30/97 $13,664 0.84% $14,262 0.12% $11,561
5/31/97 $13,843 1.51% $14,477 -0.06% $11,554
6/30/97 $14,009 1.07% $14,632 0.12% $11,568
7/31/97 $14,345 2.77% $15,038 0.12% $11,582
8/31/97 $14,267 -0.94% $14,896 0.19% $11,604
9/30/97 $14,436 1.19% $15,074 0.25% $11,633
10/31/97 $14,502 0.64% $15,170 0.25% $11,662
11/30/97 $14,633 0.59% $15,260 -0.06% $11,655
12/31/97 $14,818 1.46% $15,482 -0.12% $11,641
1/31/98 $14,950 1.03% $15,642 0.19% $11,663
2/28/98 $14,963 0.03% $15,647 0.19% $11,685
3/31/98 $14,975 0.09% $15,661 0.19% $11,707
4/30/98 $14,893 -0.45% $15,590 0.18% $11,728
5/31/98 $15,107 1.44% 1.58% $15,836 0.18% $11,749

Total Return 51.07% 58.36% 17.49%
- --------------------------------------------------------------------------------

GRAPHIC MATERIAL (19)

This chart shows in pie format the credit quality breakdown of the Franklin
Tennessee Municipal Bond Fund based on total long-term investments as of
5/31/98.

AAA 56.5%
AA 28.1%
A 7.1%
BBB 8.3%

GRAPHIC MATERIAL (20)

This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Tennessee Municipal
Bond Fund.

Utilities 23.2%
Hospitals 15.6%
Housing 14.0%
General Obligation 13.2%
Industrial 9.8%
Education 6.4%
Prerefunded 4.2%
Transportation 3.9%
Certificates of Participation 2.8%
Other Revenue 6.9%

GRAPHIC MATERIAL (21)

This chart shows in bar format the comparison between Franklin Tennessee
Municipal Bond Fund's distribution rate of 4.79% and the taxable equivalent
rate of 8.44% on 5/31/98.

GRAPHIC MATERIAL (22)

This chart shows the dividend distributions for Franklin Tennessee Municipal
Bond Fund from 6/1/97 to 5/31/98.

June 5.0 cents
July 5.0 cents
August 5.0 cents
September 4.7 cents
October 4.7 cents
November 4.7 cents
December 4.7 cents
January 4.7 cents
February 4.7 cents
March 4.7 cents
April 4.7 cents
May 4.7 cents
Total 57.3 cents

GRAPHIC MATERIAL (23)

The following line graph compares the performance of the Franklin Tennessee
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
6/1/97 to 5/31/98.

- --------------------------------------------------------------------
Date Franklin Tennessee Lehman Brothers CPI
Municipal Bond Municipal Bond
Fund-Class I Index
- --------------------------------------------------------------------
5/10/94 $9,579 $10,000 $10,000
5/31/94 $9,693 0.59% $10,059 0.05% $10,005
6/30/94 $9,579 -0.61% $9,998 0.34% $10,039
7/31/94 $9,799 1.83% $10,181 0.27% $10,066
8/31/94 $9,818 0.35% $10,216 0.40% $10,106
9/30/94 $9,644 -1.47% $10,066 0.27% $10,133
10/31/94 $9,381 -1.78% $9,887 0.07% $10,141
11/30/94 $9,148 -1.81% $9,708 0.13% $10,154
12/31/94 $9,448 2.20% $9,921 0.00% $10,154
1/31/95 $9,799 2.86% $10,205 0.40% $10,194
2/28/95 $10,103 2.91% $10,502 0.40% $10,235
3/31/95 $10,201 1.15% $10,623 0.33% $10,269
4/30/95 $10,219 0.12% $10,636 0.33% $10,303
5/31/95 $10,537 3.19% $10,975 0.20% $10,323
6/30/95 $10,436 -0.87% $10,879 0.20% $10,344
7/31/95 $10,485 0.95% $10,983 0.00% $10,344
8/31/95 $10,637 1.27% $11,122 0.26% $10,371
9/30/95 $10,706 0.63% $11,192 0.20% $10,392
10/31/95 $10,858 1.45% $11,355 0.33% $10,426
11/30/95 $11,063 1.66% $11,543 -0.07% $10,419
12/31/95 $11,187 0.96% $11,654 -0.07% $10,411
1/31/96 $11,250 0.76% $11,743 0.59% $10,473
2/29/96 $11,135 -0.68% $11,663 0.32% $10,506
3/31/96 $11,010 -1.28% $11,513 0.52% $10,561
4/30/96 $10,989 -0.28% $11,481 0.39% $10,602
5/31/96 $11,010 -0.04% $11,477 0.19% $10,622
6/30/96 $11,148 1.09% $11,602 0.06% $10,629
7/31/96 $11,254 0.91% $11,707 0.19% $10,649
8/31/96 $11,264 -0.02% $11,705 0.19% $10,669
9/30/96 $11,458 1.40% $11,869 0.32% $10,703
10/31/96 $11,577 1.13% $12,003 0.32% $10,737
11/30/96 $11,783 1.83% $12,223 0.19% $10,758
12/31/96 $11,729 -0.42% $12,171 0.00% $10,758
1/31/97 $11,740 0.19% $12,194 0.32% $10,792
2/28/97 $11,860 0.92% $12,307 0.31% $10,826
3/31/97 $11,705 -1.33% $12,143 0.25% $10,853
4/30/97 $11,817 0.84% $12,245 0.12% $10,866
5/31/97 $11,995 1.51% $12,430 -0.06% $10,859
6/30/97 $12,129 1.07% $12,563 0.12% $10,872
7/31/97 $12,512 2.77% $12,911 0.12% $10,885
8/31/97 $12,365 -0.94% $12,789 0.19% $10,906
9/30/97 $12,543 1.19% $12,942 0.25% $10,933
10/31/97 $12,620 0.64% $13,024 0.25% $10,961
11/30/97 $12,754 0.59% $13,101 -0.06% $10,954
12/31/97 $12,981 1.46% $13,293 -0.12% $10,941
1/31/98 $13,116 1.03% $13,429 0.19% $10,962
2/28/98 $13,112 0.03% $13,433 0.19% $10,983
3/31/98 $13,120 0.09% $13,446 0.19% $11,003
4/30/98 $13,058 -0.45% $13,385 0.18% $11,023
5/31/98 $13,289 1.77% 1.58% $13,597 0.18% $11,043

Total 32.89% 35.97% 10.43%
Return
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GRAPHIC MATERIAL (24)

This chart shows in pie format the credit quality breakdown of the Franklin
Washington Municipal Bond Fund based on total long-term investments as of
5/31/98.

AAA 52.4%
AA 27.3%
A 5.2%
BBB 15.1%

GRAPHIC MATERIAL (25)

This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Washington Municipal
Bond Fund.

Utilities 29.7%
General Obligation 19.5%
Housing 14.2%
Industrial 12.0%
Education 11.9%
Hospitals 6.1%
Prerefunded 3.5%
Transportation 2.1%
Certificates of Participation 1.0%

GRAPHIC MATERIAL (26)

This chart shows in bar format the comparison between Franklin Washington
Municipal Bond Fund's distribution rate of 5.37% and the taxable equivalent
rate of 8.89% on 5/31/98.

GRAPHIC MATERIAL (27)

This chart shows the dividend distributions for Franklin Washington Municipal
Bond Fund from 6/1/97 to 5/31/98.

June 4.8 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 58.7 cents

GRAPHIC MATERIAL (28)

The following line graph compares the performance of the Franklin Washington
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/88 to 5/31/98.

- -----------------------------------------------------------------------------
Date Franklin Washington Lehman Brothers CPI
Municipal Bond Fund- Municipal Bond
Class I Index
- -----------------------------------------------------------------------------
5/3/93 $9,579 $10,000 $10,000
5/31/93 $9,569 0.56% $10,056 0.14% $10,014
6/30/93 $9,770 1.67% $10,224 0.14% $10,028
7/31/93 $9,761 0.13% $10,237 0.00% $10,028
8/31/93 $9,968 2.08% $10,450 0.28% $10,056
9/30/93 $10,098 1.14% $10,569 0.21% $10,077
10/31/93 $10,172 0.19% $10,589 0.41% $10,119
11/30/93 $9,974 -0.88% $10,496 0.07% $10,126
12/31/93 $10,237 2.11% $10,718 0.00% $10,126
1/31/94 $10,361 1.14% $10,840 0.27% $10,153
2/28/94 $10,061 -2.59% $10,559 0.34% $10,187
3/31/94 $9,373 -4.07% $10,129 0.34% $10,222
4/30/94 $9,448 0.85% $10,215 0.14% $10,236
5/31/94 $9,584 0.87% $10,304 0.07% $10,244
6/30/94 $9,489 -0.61% $10,241 0.34% $10,278
7/31/94 $9,748 1.83% $10,429 0.27% $10,306
8/31/94 $9,764 0.35% $10,465 0.40% $10,347
9/30/94 $9,527 -1.47% $10,312 0.27% $10,375
10/31/94 $9,287 -1.78% $10,128 0.07% $10,383
11/30/94 $9,049 -1.81% $9,945 0.13% $10,396
12/31/94 $9,304 2.20% $10,163 0.00% $10,396
1/31/95 $9,666 2.86% $10,454 0.40% $10,438
2/28/95 $10,008 2.91% $10,758 0.40% $10,479
3/31/95 $10,132 1.15% $10,882 0.33% $10,514
4/30/95 $10,129 0.12% $10,895 0.33% $10,549
5/31/95 $10,552 3.19% $11,243 0.20% $10,570
6/30/95 $10,400 -0.87% $11,145 0.20% $10,591
7/31/95 $10,462 0.95% $11,251 0.00% $10,591
8/31/95 $10,633 1.27% $11,394 0.26% $10,618
9/30/95 $10,718 0.63% $11,465 0.20% $10,640
10/31/95 $10,922 1.45% $11,632 0.33% $10,675
11/30/95 $11,150 1.66% $11,825 -0.07% $10,667
12/31/95 $11,302 0.96% $11,938 -0.07% $10,660
1/31/96 $11,344 0.76% $12,029 0.59% $10,723
2/29/96 $11,253 -0.68% $11,947 0.32% $10,757
3/31/96 $11,106 -1.28% $11,794 0.52% $10,813
4/30/96 $11,070 -0.28% $11,761 0.39% $10,855
5/31/96 $11,067 -0.04% $11,757 0.19% $10,876
6/30/96 $11,224 1.09% $11,885 0.06% $10,882
7/31/96 $11,313 0.91% $11,993 0.19% $10,903
8/31/96 $11,332 -0.02% $11,990 0.19% $10,924
9/30/96 $11,525 1.40% $12,158 0.32% $10,959
10/31/96 $11,650 1.13% $12,296 0.32% $10,994
11/30/96 $11,845 1.83% $12,521 0.19% $11,015
12/31/96 $11,808 -0.42% $12,468 0.00% $11,015
1/31/97 $11,805 0.19% $12,492 0.32% $11,050
2/28/97 $11,920 0.92% $12,607 0.31% $11,084
3/31/97 $11,776 -1.33% $12,439 0.25% $11,112
4/30/97 $11,904 0.84% $12,544 0.12% $11,125
5/31/97 $12,069 1.51% $12,733 -0.06% $11,119
6/30/97 $12,209 1.07% $12,869 0.12% $11,132
7/31/97 $12,533 2.77% $13,226 0.12% $11,145
8/31/97 $12,435 -0.94% $13,101 0.19% $11,166
9/30/97 $12,579 1.19% $13,257 0.25% $11,194
10/31/97 $12,652 0.64% $13,342 0.25% $11,222
11/30/97 $12,749 0.59% $13,421 -0.06% $11,216
12/31/97 $12,944 1.46% $13,617 -0.12% $11,202
1/31/98 $13,042 1.03% $13,757 0.19% $11,223
2/28/98 $13,053 0.03% $13,761 0.19% $11,245
3/31/98 $13,101 0.09% $13,774 0.19% $11,266
4/30/98 $13,075 -0.45% $13,712 0.18% $11,286
5/31/98 $13,263 1.44% 1.58% $13,928 0.18% $11,307

Total 32.63% 39.28% 13.07%
Return
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