<PAGE>
Investment Adviser
Legg Mason Trust, fsb
Baltimore, MD
Board of Directors
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, D.C.
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
An investment in the Fund is not insured by the Federal
Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
This report is not to be distributed unless preceded or
accompanied by a prospectus.
Legg Mason Wood Walker, Incorporated
---------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 . 539 . 0000
LMF-016
8/00
Semi-Annual Report
June 30, 2000
Legg Mason
Tax
Exempt
Trust, Inc.
[LEGG MASON FUNDS LOGO]
The Art of Investing/SM/
<PAGE>
To Our Shareholders,
On June 30, 2000, the Legg Mason Tax Exempt Trust had approximately $330
million invested in a diversified portfolio of high quality, short-term
municipal securities. As this letter is written, the Trust's 7-day yield is
3.43%, and its average weighted maturity is 15 days.
The Trust's income dividends continue to be exempt from federal income tax and
a portion may be exempt from state income taxes as well, depending upon your
state of residence. The Trust does not purchase investments whose income is
subject to the federal alternative minimum tax.
Many of our shareholders regularly add to their Fund holdings by authorizing
automatic, monthly transfers from their bank checking or Legg Mason accounts.
Your Legg Mason Financial Advisor will be happy to help you make these
arrangements if you would like to purchase additional shares in this convenient
way.
We appreciate your ownership of the Trust, and hope you will let us know
whenever you have questions or suggestions.
Sincerely,
/s/ John F. Curley
------------------
John F. Curley, Jr.
Chairman
August 3, 2000
<PAGE>
Statement of Net Assets
Legg Mason Tax Exempt Trust, Inc.
June 30, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona -- 0.6%
Salt River Project Agricultural Improvement and
Power District, Arizona Salt River Project Electric
System Revenue Bonds, TECP (P-1, A-1+) 4.20% 9/8/00 $ 1,939 $ 1,939
---------------------------------------------------------------------------------------------------------------------------------
Delaware -- 2.0%
University of Delaware Variable Rate Demand
Revenue Bonds, Series 1998 VRDN (AA/A-1+) 4.75% 7/5/00 6,500 6,500/A/
---------------------------------------------------------------------------------------------------------------------------------
Florida -- 5.7%
City of Gainesville Utilities System (P-1, A-1+)
Series C TECP 4.20% 8/8/00 4,000 4,000
Series C TECP 4.25% 8/16/00 3,000 3,000
Pinellas County, Florida Health Facilities Authority
(Bayfront Medical Center, Inc. Project)
Refunding Revenue Bonds, Series 1989 VRDN
(Aaa/VMIG, AAA/A-1) 4.70% 7/5/00 2,300 2,300/A/
Putnam County Development Authority PCR Bonds
(Seminole Electric Cooperative, Inc.) (Aa3, AA-/A-1+)
Series 1984 H-1 VRDN 4.85% 7/5/00 6,950 6,950/A/
Series 1984 H-2 VRDN 4.85% 7/5/00 2,550 2,550/A/
--------
18,800
---------------------------------------------------------------------------------------------------------------------------------
Hawaii -- 3.6%
City and County of Honolulu, Hawaii General
Obligation Bond (Aaa/VMIG1, AAA/A-1+)
Series 2000A VRDN 5.00% 7/5/00 6,000 6,000/A/
Series 2000B VRDN 5.00% 7/5/00 5,750 5,750/A/
--------
11,750
---------------------------------------------------------------------------------------------------------------------------------
Idaho -- 0.9%
State of Idaho Tax Anticipation Notes,
Series 2000 (MIG1, SP-1+) 5.38% 6/29/01 3,000 3,029
---------------------------------------------------------------------------------------------------------------------------------
Illinois -- 0.6%
Illinois Development Authority (Amoco),
Series 1994 VRDN (Aa/VMIG1, AA+/A-1+) 4.55% 7/3/00 1,900 1,900/A/
---------------------------------------------------------------------------------------------------------------------------------
Indiana -- 2.9%
City of Rockport, PCR Refunding Bonds
(American Electric Power Generating Company
Project), Series 1995 A VRDN (AAA/A-1+c) 4.60% 7/3/00 2,700 2,700/A/
City of Sullivan, Indiana Floating/Fixed Rate PCR
Bonds (A-1/P-1, AA-/A-1+)
Series L4, VRDN 4.40% 7/12/00 1,400 1,400/A/
Series L4, VRDN 4.20% 9/8/00 2,700 2,700/A/
Series L4, VRDN 4.25% 9/11/00 2,765 2,765/A/
--------
9,565
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kentucky -- 1.8%
Kentucky Economic Development Finance Authority
Hospital Revenue Bonds, Baptist Healthcare
(Aaa/VMIG1, AAA/A-1+)
Series C VRDN 4.60% 7/3/00 $ 800 $ 800/A/
Series B VRDN 4.85% 7/5/00 5,000 5,000/A/
--------
5,800
---------------------------------------------------------------------------------------------------------------------------------
Louisiana -- 0.7%
Parish of the Ascension PCR Refunding
(Shell Oil Company Project) (AAA/A-1+)
Series 1993 VRDN 4.55% 7/3/00 1,500 1,500/A/
Series 1993 VRDN 4.55% 7/3/00 1,000 1,000/A/
--------
2,500
---------------------------------------------------------------------------------------------------------------------------------
Maryland -- 23.4%
Baltimore County, Maryland, PCR Revenue
Refunding Bonds (Baltimore Gas & Electric),
Series 1985 (A-1/VMIG1, A/A-1) 4.10% 8/9/00 1,600 1,600
Baltimore County, Maryland, Revenue Bonds,
Oak Crest Village Incorporated Project A VRDN
(Aa3/VMIG1) 4.75% 7/6/00 14,000 14,000/A/
Baltimore County, Maryland, Revenue Bonds
(The Sheppard and Enoch Pratt Hospital Facility),
Series 1992 VRDN (Aa3/VMIG1) 4.75% 7/5/00 2,600 2,600/A/
Maryland Health and Higher Educational Facilities
Authority (Johns Hopkins University), (P-1, A-1+)
Series C 4.05% 8/11/00 4,800 4,800
Series A 4.20% 9/6/00 5,000 5,000
Series C 4.35% 9/15/00 1,000 1,000
Maryland Health and Higher Educational Facilities
Authority (Pooled Loan Program Issue)
(Aa2/VMIG1)
Series 1985 A VRDN 4.80% 7/5/00 5,000 5,000/A/
Series 1985 B VRDN 4.80% 7/5/00 3,400 3,400/A/
Maryland State Transportation Authority,
Transportation Facilities Projects Revenue Bonds,
Series 1992 (Aa2/VMIG1) 5.20% 7/1/00 3,500 3,500
Maryland Strategic Economic Development
Corporation, Erickson Foundation Incorporated
Project VRDN (Aa2/VMIG1) 4.90% 7/6/00 11,400 11,400/A/
Montgomery County, Maryland General Obligation
Commercial Paper BANS (P-1, A-1+)
Series 1995 4.05% 8/10/00 6,000 6,000
Series 1995 4.15% 8/17/00 5,000 5,000
Series 1995 4.15% 8/18/00 6,500 6,500
</TABLE>
3
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax Exempt Trust, Inc.
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maryland -- Continued
State of Maryland General Obligation Bonds,
State and Local Facilities Loan of 1990,
Third Series (#Aaa, AAA) 6.75% 7/15/00 $ 1,500 $ 1,517
University System of Maryland Auxiliary Facility and
Tuition Revenue Bonds Refunding, Series B
(Aa3, AA+) 5.00% 10/1/00 5,895 5,914
--------
77,231
---------------------------------------------------------------------------------------------------------------------------------
Michigan -- 1.5%
Michigan State Housing Development Authority
Rental Housing Revenue Bonds, Series 1997 B
VRDN (Aaa/VMIG1, AAA/A-1+) 4.85% 7/5/00 5,000 5,000/A/
---------------------------------------------------------------------------------------------------------------------------------
Minnesota -- 1.7%
Rochester, Minnesota Health Care Facilities Revenue
Bonds (Mayo Medical Center), Series C
(AA+/A-1+) 4.45% 8/1/00 5,500 5,500
---------------------------------------------------------------------------------------------------------------------------------
Nebraska -- 1.4%
Omaha Public Power District TECP (P-1, A-1+) 4.25% 9/7/00 4,500 4,500
---------------------------------------------------------------------------------------------------------------------------------
North Carolina -- 4.2%
City of Winston-Salem, North Carolina Water and
Sewer Revenue Bonds, Series 1994 VRDN
(Aa/VMIG1, AA+/A-1+) 4.75% 7/5/00 13,900 13,900/A/
---------------------------------------------------------------------------------------------------------------------------------
Ohio -- 1.9%
County of Cuyahoga, Ohio, Hospital Revenue
Refunding Bonds (The Cleveland Clinic Foundation),
Series 1997 VRDN (Aaa/VMIG1, AAA/A-1+) 4.80% 7/5/00 6,200 6,200/A/
---------------------------------------------------------------------------------------------------------------------------------
Oregon -- 0.3%
State of Oregon Health, Housing, Educational and
Cultural Facilities Authority (Lewis and Clark
College), Series 2000A (Aa3/VMIG1) 4.55% 8/9/00 1,000 1,000
---------------------------------------------------------------------------------------------------------------------------------
Pennsylvania -- 5.5%
Allegheny County, Pennsylvania, Hospital
Development Authority Revenue Bond
(Presbyterian University Hospital),
Series B2 VRDN (Aaa/VMIG1, AAA/A-1) 4.85% 7/6/00 3,200 3,200/A/
Delaware County, Pennsylvania, IDA
Refunding Resources Recovery Facility,
Series G VRDN (Aaa/P-1, AAA/A-1+) 4.70% 7/5/00 5,800 5,800/A/
Lackawanna County, Pennsylvania, IDA (National
Book Company Inc. Project) VRDN (A/A-1) 4.75% 7/5/00 1,025 1,025/A/
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania -- Continued
Northampton County, Pennsylvania, Higher
Education Authority Revenue Bond,
Lehigh University, Series 2000 VRDN
(Aa3/VMIG1, AA-/A-1) 4.75% 7/6/00 $ 7,000 $ 7,000/A/
Pennsylvania State Higher Educational Facilities
Authority Revenue Bond, Carnegie Mellon
University Series 1995 B VRDN(AA-/A-1+) 4.50% 7/3/00 500 500/A/
Philadelphia, Pennsylvania, Hospitals and Higher
Education Facilities Authority Hospital Revenue,
Children's Hospital Project, Series 1996 A VRDN
(Aa3/VMIG1, AA/A-1+) 4.50% 7/3/00 500 500/A/
--------
18,025
---------------------------------------------------------------------------------------------------------------------------------
South Carolina -- 1.8%
Berkeley County, South Carolina (Amoco Chemical
Company Project) Pollution Control Revenue
Refunding Bonds, Series 1994 VRDN
(Aa1/VMIG1, AA+/A-1+) 4.55% 7/3/00 1,000 1,000/A/
South Carolina State Public Service Authority
Revenue TECP (P-1, A-1+) 4.15% 9/12/00 5,000 5,000
--------
6,000
---------------------------------------------------------------------------------------------------------------------------------
Texas -- 19.9%
Capital Industrial Development Corporation
PCR Bonds (Motorola, Inc. Project),
Series 1984 VRDN (A+, A-1+) 4.60% 7/5/00 3,700 3,700/A/
Dallas, Texas Area Rapid Transit North Central
Light Rail Notes, Series 2000
(Aa1/VMIG1, AA/A-1+) 4.75% 7/5/00 16,000 16,000
Harris County, Texas General Obligation
Commercial Paper Notes (P-1, A-1+, F-1+)
Series D 4.40% 7/11/00 1,229 1,229
Series C 4.20% 8/14/00 5,000 5,000
Series C 4.15% 9/11/00 3,450 3,450
Series D 4.15% 9/12/00 2,000 2,000
Series D 4.35% 9/12/00 3,100 3,100
Harris County, Texas, Health Facilities Development
Corporation Hospital Revenue Bonds (The
Methodist Hospital), Series 1994 VRDN (AA, A-1+) 4.55% 7/3/00 100 100/A/
Harris County, Texas, Health Facilities Development
Corporation Hospital Revenue Bonds
(The Memorial Hospital), Series 1997 B VRDN
(Aaa/VMIG1, AAA/A-1+) 4.70% 7/5/00 16,000 16,000/A/
</TABLE>
5
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax Exempt Trust, Inc.
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Texas -- Continued
San Antonio, Texas Water Systems, Series 1995
(P-1, A-1) 4.30% 9/13/00 $10,000 $ 10,000
State of Texas TRANS, Series A (MIG1, SP-1+) 4.50% 8/31/00 5,000 5,006
--------
65,585
---------------------------------------------------------------------------------------------------------------------------------
Utah -- 5.8%
Emery County PCR Refunding Bonds
(PacifiCorp Project), Series 1994 VRDN
(Aaa/VMIG1, AAA/A-1+c) 4.60% 7/3/00 1,300 1,300/A/
Intermountain Power Agency, Series 85F
(Aaa/VMIG1, AAA/A-1+) 4.20% 8/8/00 1,800 1,800
State of Utah Adjustable Rate General Obligation
Highway Bonds (Aaa/VMIG1, AAA/A-1+)
Series A VRDN 4.75% 7/5/00 9,500 9,500/A/
Series B VRDN 4.75% 7/5/00 6,500 6,500/A/
--------
19,100
---------------------------------------------------------------------------------------------------------------------------------
Washington -- 5.9%
State of Washington Adjustable Rate General
Obligation, Series 1996 B VRDN
(Aa1/VMIG1, AA+/A-1+) 4.75% 7/5/00 10,000 10,000/A/
Washington State Housing Finance Committee,
Series 1988 B VRDN (AAA/A-1+) 4.80% 7/5/00 9,495 9,495/A/
--------
19,495
---------------------------------------------------------------------------------------------------------------------------------
Wisconsin -- 7.1%
City of Oak Creek, Wisconsin PCR (Wisconsin
Electric Power Company Project)
Series 1986 VRDN (Aa3/P-1) 4.80% 7/6/00 5,900 5,900/A/
State of Wisconsin General Obligation Extendable
Commercial Notes TECP (P-1, A-1+, F-1+) 4.35% 9/12/00 5,000 5,000
Town of Carlton, Wisconsin
PCR Refunding Bonds (Wisconsin Power and Light
Company Projects) (Aa2/P-1, AA/A-1+)
Series 1991 B VRDN 4.60% 7/3/00 7,600 7,600/A/
Series 1991 C VRDN 4.60% 7/3/00 1,000 1,000/A/
Series 1991 D VRDN 4.60% 7/3/00 875 875/A/
Wisconsin State Transportation Revenue (P-1, A-1+) 4.35% 8/9/00 3,085 3,085
--------
23,460
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wyoming -- 0.3%
Converse County PCR Refunding Bonds
(PacifiCorp Project), Series 1994 VRDN
(AAA/VMIG1, AAA, A-1+c) 4.55% 7/3/00 $ 900 $ 900/A/
---------------------------------------------------------------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value -- 99.5% 327,679/B/
Other Assets Less Liabilities -- 0.5% 1,516
--------
Net assets applicable to 329,216 shares outstanding -- 100.0% $329,195
========
Net asset value per share $1.00
=====
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/The rate shown is the rate as of June 30, 2000, and the maturity shown is
the longer of the next interest adjustment date or the date the principal
amount owed can be recovered through demand.
/B/Also represents cost for federal income tax purposes.
A guide to abbreviations appears on the next page.
See notes to financial statements.
7
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
(Unaudited)
Investment Abbreviations:
BANS Bond Anticipation Notes
GO General Obligation
IDA Industrial Development Authority
PCR Pollution Control Revenue
TANS Tax Anticipation Notes
TECP Tax-Exempt Commercial Paper
TRANS Tax and Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
Municipal Note, Commercial Paper and Bond Ratings:
Municipal Notes
MIG1 and MIG2: Moody's Investors Service, Inc. ratings for state and
municipal notes and other short-term obligations are designated Moody's
Investment Grade (MIG). Notes bearing the designation MIG1 are judged to be
of the best quality and notes bearing the designation MIG2 are judged to be
of high quality (VMIG1 and VMIG2 are ratings for variable rate obligations).
SP-1 and SP-2: The two highest municipal note ratings assigned by Standard
& Poor's. A plus (+) sign may be added to the SP-1 rating to indicate that an
issue possesses very strong credit characteristics.
F-1 and F-2: The two highest municipal note ratings assigned by Fitch
IBCA, Inc. A plus (+) sign may be added to an F-1 rating to denote any
exceptionally strong credit feature.
Commercial Paper
P-1 and P-2: Prime 1 and Prime 2 are the two highest commercial paper
ratings assigned by Moody's Investors Service, Inc.
A-1 and A-2: The two highest commercial paper ratings assigned by Standard
& Poor's. A plus (+) sign designates issues possessing very strong credit
characteristics.
F-1 and F-2: The two highest commercial paper ratings assigned by Fitch
IBCA, Inc. A plus (+) sign may be added to an F-1 rating to denote any
exceptionally strong credit feature.
Municipal Bonds
Aaa, Aa, A and Baa: Investment grade bond ratings assigned by Moody's
Investors Service, Inc. A numeric modifier (1, 2 and 3) may be added to the
ratings to indicate high, medium and low relative credit strength,
respectively, within a particular rating category. The letter "c" added to a
rating indicates that the holder's option to tender the security for purchase
may be canceled under certain prestated conditions enumerated in the tender
option documents. A pound (#) sign denotes a prerefunded security. The
maturity date shown is the prerefunded date.
AAA, AA, A and BBB: Investment grade bond ratings assigned by Standard &
Poor's. A plus (+) or minus (-) sign may be added to the ratings to indicate
relative credit strength within a particular rating category.
AAA, AA, A and BBB: Investment grade bond ratings assigned by Fitch IBCA,
Inc. A plus (+) or minus (-) sign may be added to the ratings to denote
relative status within major rating categories.
The Moody's, Standard & Poor's or Fitch IBCA ratings indicated are
believed to be the most recent ratings available at June 30, 2000. These
ratings are not audited by the Fund's independent accountants.
Maturity Schedule of the Portfolio:
June 30, 2000
-------------------------------------------------------
Percentage of
Maturity Period Amount/Par Portfolio
-------------------------------------------------------
(000) (cum)
1-7 days $215,845 65.9% 65.9%
8-30 days 4,129 1.3 67.2
31-45 days 32,785 10.0 77.2
46-90 days 65,954 20.1 97.3
Over 90 days 8,895 2.7 100.0
-------- ----- -----
$327,608 100.0%
======== =====
Average Weighted Maturity: 27 days
8
<PAGE>
Statement of Operations
Legg Mason Tax Exempt Trust, Inc.
For the Six Months Ended June 30, 2000 (Unaudited)
(Amounts in Thousands)
-----------------------------------------------------------------------------
Investment Income:
Interest $6,870
Expenses:
Management fee $ 871
Distribution and service fees 174
Transfer agent and shareholder servicing expense 50
Custodian fees 43
Registration fees 44
Legal and audit fees 24
Reports to shareholders 12
Directors' fees 5
Other expenses 3
------
1,226
Less compensating balance credits (6)
------
Total expenses, net of compensating balance credits 1,220
------
Net Investment Income $5,650
======
See notes to financial statements.
9
<PAGE>
Statement of Changes in Net Assets
Legg Mason Tax Exempt Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
For the Six For the
Months Ended Year Ended
June 30, 2000 December 31, 1999
------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Change in Net Assets:
Net investment income $ 5,650 $ 8,397
-------- --------
Increase in net assets resulting from operations 5,650 8,397
Distributions to shareholders from net investment income (5,650) (8,397)
Change in net assets from Fund share transactions (45,658) 44,719
-------- --------
Change in net assets (45,658) 44,719
Net Assets:
Beginning of period 374,853 330,134
------------------------------------------------------------------------------------------------------
End of period $329,195 $374,853
======== ========
</TABLE>
See notes to financial statements.
10
<PAGE>
Financial Highlights
Legg Mason Tax Exempt Trust, Inc.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------
Investment Net
Net Asset Operations Distributions Net Investment Net Assets
Value, From Net From Net Net Asset Expenses Income End of
Beginning Investment Investment Value, End Total to Average to Average Period
of Period Income Income of Period Return Net Assets/A/ Net Assets (in thousands)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 2000* $1.00 $.0162 $(.0162) $1.00 3.30%/B/ .70%/B/ 3.24%/B/ $329,195
Years Ended Dec. 31,
1999 1.00 .0252 (.0252) 1.00 2.56% .70% 2.52% 374,853
1998 1.00 .0271 (.0271) 1.00 2.75% .71% 2.71% 330,134
1997 1.00 .0292 (.0292) 1.00 2.95% .72% 2.92% 307,371
1996 1.00 .0282 (.0282) 1.00 2.85% .64% 2.82% 278,492
1995 1.00 .0313 (.0313) 1.00 3.17% .65% 3.14% 224,656
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/This ratio reflects expenses net of compensating balance credits.
/B/Annualized.
* Unaudited.
See notes to financial statements.
11
<PAGE>
Notes to Financial Statements
Legg Mason Tax Exempt Trust, Inc.
(Amounts in Thousands) (Unaudited)
-----------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Tax Exempt Trust, Inc. ("Fund"), is registered under the
Investment Company Act of 1940, as amended, as an open-end, diversified
investment company.
Security Valuation
Portfolio securities are valued under the amortized cost method, which
approximates current market value. Under this method, securities are valued
at cost when purchased and, thereafter, a constant proportionate amortization
of any discount or premium is recorded until maturity of the security.
Investment Income and Dividends to Shareholders
Income and expenses are recorded on the accrual basis. Dividends are
declared daily and paid monthly. Net investment income for dividend purposes
consists of interest accrued plus original issue discount earned, less
amortization of market premium and accrued expenses. At June 30, 2000,
dividends payable of $518 were accrued. Distributions are determined in
accordance with federal income tax regulations, which may differ from those
determined in accordance with generally accepted accounting principles;
accordingly, periodic reclassifications are made within the Fund's capital
accounts to reflect income and gains available for distribution under federal
income tax regulations.
Security Transactions
Security transactions are accounted for on the trade date and the cost of
investments sold is determined by use of the specific identification method
for both financial reporting and income tax purposes. At June 30, 2000, $100
was receivable for investments sold and $3,029 was payable for securities
purchased.
Compensating Balance Credits
The Fund has an arrangement with its custodian bank, whereby a portion of
the custodian's fees is paid indirectly by credits earned on the Fund's cash
on deposit with the bank. This deposit arrangement is an alternative to
purchasing overnight investments.
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and
distribute substantially all of its taxable income to its shareholders. The
Fund has unused capital loss carryforwards for federal income tax purposes of
$12 which expire in 2001 and $8 in 2002.
Use of Estimates
Preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
12
<PAGE>
-----------------------------------------------------------------------------
2. Transactions With Affiliates:
The Fund has an investment advisory and management agreement with Legg
Mason Trust, fsb ("Adviser"). Pursuant to its agreement, the Adviser provides
the Fund with investment advisory and management services for which the Fund
pays a fee, computed daily and payable monthly, at an annual rate of 0.50% of
the Fund's average daily net assets. Advisory fees of $140 were payable to
the Adviser at June 30, 2000.
Legg Mason Fund Adviser, Inc. ("LMFA") serves as administrator to the Fund
pursuant to a sub-administration agreement with the Adviser. The Adviser (not
the Fund) pays LMFA a fee, computed daily and payable monthly, at an annual
rate of 0.05% of the Fund's average daily net assets.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the New
York Stock Exchange, serves as distributor of the Fund. The Fund pays Legg
Mason a Rule 12b-1 service fee at an annual rate equal to 0.10% of its
average daily net assets for services provided to shareholders. Legg Mason
has agreed to limit such fees paid by the Fund to 0.10% indefinitely. Service
fees of $28 were payable to Legg Mason at June 30, 2000.
Legg Mason also has an agreement with the Fund's transfer agent to assist
with certain of its duties. For this assistance, the transfer agent paid Legg
Mason $18 for the six months ended June 30, 2000.
The Adviser, LMFA and Legg Mason are wholly owned subsidiaries of Legg
Mason, Inc.
3. Fund Share Transactions:
The Fund is authorized to issue 2,000,000 shares of common stock with a
par value of $.001 per share. At June 30, 2000, net assets consisted of paid-
in capital of $329,216 and an accumulated net realized loss of $21. Since the
Fund has sold and redeemed shares at a constant net asset value of $1.00 per
share, the number of shares represented by such sales and redemptions is the
same as the amounts shown below for such transactions:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Six Months Ended June 30, 2000 $ 709,167 $4,911 $ (759,736) $(45,658)
Year Ended December 31, 1999 1,188,864 8,062 (1,152,207) 44,719
</TABLE>
13
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
[LEGG MASON FUNDS LOGO]
The Art of Investing/SM/
Legg Mason offers a wide range of mutual funds to meet investors' varying
financial needs and investment goals. The funds are listed below:
Equity Funds: Specialty Funds:
Value Trust, Inc. Market Neutral Trust
Special Investment Trust, Inc. Balanced Trust
Total Return Trust, Inc. Financial Services Fund
American Leading Companies Opportunity Trust
Trust
Classic Valuation Fund
Focus Trust, Inc.
U.S. Small-Capitalization
Value Trust
Global Funds: Taxable Bond Funds:
Global Income Trust U.S. Government Intermediate-Term
Europe Fund Portfolio
International Equity Trust Investment Grade Income Portfolio
Emerging Markets Trust High Yield Portfolio
Tax-Free Bond Funds: Money Market Funds:
Tax-Free Intermediate-Term U.S. Government Money Market
Income Trust Portfolio
Maryland Tax-Free Income Trust Cash Reserve Trust
Pennsylvania Tax-Free Income Trust Tax Exempt Trust, Inc.
For information on the specific risks, charges, and expenses associated with any
Legg Mason fund, please consult a Legg Mason Financial Advisor for a prospectus.
Read it carefully before investing or sending money.
