Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Legg Mason Capital Management, Inc.
Baltimore, MD
Board of Trustees
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
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
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 o 539 o 0000
[RECYCLED LOGO] Printed on Recycled Paper
LMF-030
11/98
Semi-Annual Report
September 30, 1998
Legg Mason
Tax-Free
Income Fund
Maryland Tax-Free
Pennsylvania Tax-Free
Tax-Free
Intermediate-Term
[LEGG MASON LOGO]
How to Invest (SM)
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Tax-Free Income Fund's
semi-annual report for the six months ended September 30, 1998. This report
includes financial information for the three series of the Fund: Maryland
Tax-Free, Pennsylvania Tax-Free and Tax-Free Intermediate.
The following table summarizes key statistics for each Trust, as of September
30, 1998:
Average Net Asset Value
SEC Yield* Weighted Maturity Per Share
---------- ----------------- ---------------
Maryland Tax-Free 3.83% 16.05 years $16.64
Pennsylvania Tax-Free 3.85% 18.36 years 16.74
Tax-Free Intermediate 3.41% 7.98 years 15.86
Each of the Trusts seeks a high level of current income exempt from Federal
income tax. Maryland Tax-Free also seeks income which is exempt from Maryland
state and local income taxes. Pennsylvania Tax-Free also seeks income which is
exempt from Pennsylvania personal income tax. The Trusts purchase only
securities which have received investment grade ratings from Moody's Investors
Service or Standard & Poor's or which are judged by their investment adviser to
be of comparable quality. Moody's ratings of securities we currently own are:
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
-------- ------------ -----------------
Aaa 48.5% 80.1% 64.6%
Aa 32.2 17.5 25.7
A 14.2 -- 7.1
Baa 2.9 -- 1.4
Short-term securities 2.2 2.4 1.2
Net asset values per share for each of the Trusts rose moderately from their
March 31, 1998 levels in response to declines in interest rates. For the six
month period, total returns for Maryland Tax-Free, Pennsylvania Tax-Free and
Tax-Free Intermediate-Term (not annualized) were 4.17%, 4.22% and 3.79%,
respectively. (Total return measures investment performance in terms of
appreciation or depreciation in net asset value per share plus dividends and any
capital gain distributions. It assumes that dividends and distributions were
reinvested at the time they were paid. The initial sales charge for each Trust
is being waived through July 31, 1999 and no initial sales charges are reflected
in the total return calculations above.) Past performance does not guarantee
future results.
Normally, the average weighted maturity for Maryland Tax-Free and Pennsylvania
Tax-Free will be kept within a range of 12-24 years. Because of their relatively
long average weighted maturities, these Trusts offer potentially higher yields
than short-term and intermediate-term tax-free bond funds. However, their net
asset values per share typically will decline more when interest rates rise and
gain more when interest rates fall than net asset values per share of tax-free
bond funds with short-term and intermediate-term average weighted maturities.
Tax-Free Intermediate-Term's weighted average maturity is normally kept within
an intermediate-term maturity range of 2-10 years. We expect that, in most
market periods, the Intermediate Trust will offer greater price stability than
municipal bond funds with longer maturities while earning somewhat lower yields.
Some shareholders regularly add to their holdings by authorizing monthly
transfers from their bank checking or Legg Mason accounts. Your Financial
Advisor will be happy to help you make these arrangements if you would like to
purchase shares in this convenient way.
Sincerely,
/s/ John F. Curley, Jr.
_______________________
John F. Curley, Jr.
Chairman
November 6, 1998
- ---------
*SEC yields reported are for the 30 days ended September 30, 1998. If no fees
had been waived by the Adviser, the 30 day SEC yields for Maryland Tax-Free,
Pennsylvania Tax-Free and Tax-Free Intermediate would have been 3.61%, 3.55%
and 3.10%, respectively.
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
September 30, 1998 (Unaudited)
(Amounts in Thousands)
Maryland Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 95.7%
Annapolis (City of), Public Improvement, GO
(Pre-refunded 8/1/01) 6.50% 8/1/10 $ 350 $ 383(A)
Series 1998 5.50% 10/1/18 1,000 1,031
Annapolis (City of), Economic Development
Revenue (St. John's College Facility), Series 1998 5.50% 10/1/23 870 895
Anne Arundel County, Consolidated
Water and Sewer, GO 5% 9/1/16 1,000 1,023
Anne Arundel County, Consolidated
Water and Sewer, GO Refunding 5.30% 4/15/17 1,000 1,035
Anne Arundel County, PCR Refunding
(Baltimore Gas & Electric Project) 6% 4/1/24 4,500 4,869
Baltimore City Water Utility Project
(Water Projects) Series A Refunding
(MBIA insured) (Pre-refunded 7/1/00) 6.50% 7/1/20 1,250 1,311(A)
Baltimore County, Consolidated Public
Improvement, GO (Pre-refunded 7/1/02) 6.125% 7/1/09 2,000 2,202(A)
Baltimore County, Consolidated Public
Improvement, GO 4.75% 7/1/18 3,150 3,150
Baltimore County, Nursing Home (Stella Maris)
Series A (Pre-refunded 3/1/01) 7.25% 3/1/11 890 980(A)
Baltimore County, Pension Funding, GO Refunding 5% 8/1/09 2,500 2,693
Baltimore, Maryland Revenue Refunding Waste
Water Project Series A (FGIC insured) 5% 7/1/22 1,550 1,609
Baltimore, Maryland Revenue Refunding Waste
Water Project Series A (FGIC insured) 5.50% 7/1/26 1,000 1,062
Calvert County, Maryland PCR
(Baltimore Gas & Electric Project) Refunding 5.55% 7/15/14 750 797
Carroll County, Consolidated Public
Improvement, GO 5.375% 11/1/20 1,395 1,453
Carroll County, Consolidated Public
Improvement, GO 5.375% 11/1/25 1,855 1,927
Charles County, GO (Pre-refunded 6/1/01) 6.60% 6/1/06 1,000 1,093(A)
Frederick County, GO Series 1990
(Pre-refunded 8/1/03) 6.625% 8/1/20 250 285(A)
Frederick County, GO Public Facility 1991
(Pre-refunded 5/1/01) 6.50% 5/1/07 650 707(A)
Harford County, GO (Pre-refunded 12/1/00) 6.40% 12/1/10 500 538(A)
Harford County, GO 5% 3/1/12 1,000 1,043
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Howard County, Consolidated Public Improvement
GO Series A (Pre-refunded 2/15/00) 6.50% 2/15/11 $ 700 $ 727(A)
GO Series A Refunding 5% 2/15/11 1,000 1,052
Howard County, Metropolitan District GO Refunding
1998 Series A 5.50% 2/15/27 1,000 1,053
1998 Series A 4.75% 2/15/27 2,335 2,302
Series B 6% 8/15/19 1,500 1,584
Howard County, GO Public Improvement Refunding
Series B 0% 8/15/07 1,000 704(B)
Laurel (City of), GO Public Improvement Refunding
(MBIA insured) (Pre-refunded 7/1/01) 7% 7/1/09 250 277(A)
(MBIA insured) (Pre-refunded 7/1/01) 7% 7/1/11 1,000 1,105(A)
Maryland Community Development Administration
Multi-Family Insured Mortgage Series B 5.80% 5/15/26 1,500 1,559
Multi-Family Insured Mortgage Series G 7.10% 5/15/23 150 158
Single Family AMT
Second Series 6.65% 4/1/04 1,000 1,057
Sixth Series 7.125% 4/1/14 365 382
Fifth Series 7.625% 4/1/29 1,720 1,769
Fourth Series 7.45% 4/1/32 925 976
Single Family Non-AMT Third Series 7.25% 4/1/27 670 708
Maryland Department of Transportation
Consolidated Transportation
Second Series (Pre-refunded 11/1/99) 6.60% 11/1/00 1,500 1,562(A)
Series 1991 (Pre-refunded 9/1/00) 6.25% 9/1/03 1,000 1,061(A)
Maryland Health and Higher Educational
Facilities Authority
Anne Arundel Medical Center Issue,
Series 1998 (FSA insured) 5.125% 7/1/28 4,000 4,044
Easton Memorial Hospital Series B
(MBIA insured) 6.50% 7/1/15 1,000 1,020
Francis Scott Key Medical Center (FGIC insured)
(Pre-refunded 7/1/00) 6.75% 7/1/23 1,500 1,608(A)
Francis Scott Key Medical Center Refunding
(FGIC insured) 5% 7/1/18 2,000 2,013
Francis Scott Key Medical Center Refunding
(FGIC insured) 5% 7/1/23 2,000 2,001
Francis Scott Key Medical Center Refunding 5.625% 7/1/25 1,000 1,051
Greater Baltimore Medical Center
(Pre-refunded 7/1/01) 6.75% 7/1/19 1,000 1,099(A)
Howard County General Hospital Refunding 5.50% 7/1/21 2,500 2,618
Johns Hopkins Hospital Series 1990 0% 7/1/19 4,000 1,483(B)
Johns Hopkins Hospital Series 1993 Refunding 5% 7/1/23 1,000 1,000
</TABLE>
3
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Maryland Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Maryland Health and Higher Educational
Facilities Authority--(Continued)
Johns Hopkins Medical Series 5% 7/1/29 $1,300 $ 1,306
Johns Hopkins University Refunding 6% 7/1/10 500 579
Johns Hopkins University Series 1997 Refunding 5.625% 7/1/17 1,000 1,079
Kennedy Institute Series 1991
(Pre-refunded 7/1/01) 7.40% 7/1/11 630 702(A)
Kennedy Institute Series 1991
(Pre-refunded 7/1/01) 6.75% 7/1/22 1,000 1,080(A)
Kennedy Krieger Issue, Refunding Series 1997 5.125% 7/1/22 1,000 1,000
Loyola College Series A Refunding
(MBIA insured) 5.375% 10/1/26 3,750 3,929
Maryland Institute, College of Art Issue
(FSA insured) 5% 6/1/29 2,000 2,010
Union Hospital of Cecil County Refunding 5.10% 7/1/22 2,000 1,997
Union Memorial Hospital Series A
(MBIA insured) 6.75% 7/1/21 390 426
Union Memorial Hospital Series A Refunding
(MBIA insured) 6.75% 7/1/11 65 71
Union Memorial Hospital Series B
(MBIA insured) (Pre-refunded 7/1/01) 6.75% 7/1/11 535 588(A)
Union Memorial Hospital Series B
(MBIA insured) (Pre-refunded 7/1/01) 6.75% 7/1/21 1,510 1,659(A)
University of Maryland Medical System
Series 1993 Refunding (FGIC insured) 5.375% 7/1/13 2,000 2,107
Upper Chesapeake Hospital Issue Series A
(FSA insured) 5.50% 1/1/20 1,250 1,317
Maryland National Capital Park and Planning
Commission (Prince George's County) Series L2
(Pre-refunded 7/1/02) 6% 7/1/05 500 548(A)
Maryland Stadium Authority Sports Facilities
Lease Revenue (AMBAC insured) 5.75% 3/1/18 1,000 1,087
Maryland Stadium Authority Sports Facilities
Lease Revenue AMT Series D 7.50% 12/15/10 4,000 4,243
Maryland Stadium Authority Sports Facilities
Lease Revenue AMT Series D 7.60% 12/15/19 2,255 2,396
Maryland Transportation Authority Series 1985
Refunding 5.75% 7/1/15 5,250 5,496
Maryland Water Quality Financing Administration,
Revolving Loan Fund Revenue Series 1993A 5.40% 9/1/12 1,500 1,559
Mayor and City Council of Baltimore (FGIC insured)
Baltimore City Parking Revenue
(Pre-refunded 7/1/02) 6.25% 7/1/21 500 553(A)
Baltimore City Water Projects Refunding 5% 7/1/24 5,600 5,815
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Mayor and City Council of Baltimore (FGIC insured) -- continued
Capital Appreciation GO Series A
(Pre-refunded 10/15/05) 0% 10/15/11 $1,060 $ 554(A,B)
Capital Appreciation GO Series A 0% 10/15/11 940 473(B)
Montgomery County, Consolidated Public
Improvement, GO Series A Refunding 5.80% 7/1/07 2,750 3,123
Montgomery County, Consolidated Public
Improvement, GO Series A Refunding 0% 7/1/10 3,000 1,822(B)
Montgomery County, HOC Single Family Series A 6.80% 7/1/17 910 960
Montgomery County, Parking Revenue Refunding
(Silver Spring Parking Lot) 1992 Series A
(FGIC insured) 6.25% 6/1/07 2,000 2,192
Montgomery County, PCR Refunding
(Potomac Electric Project) 1994 Series 5.375% 2/15/24 1,000 1,031
Morgan State University Academic and Auxiliary
Fees Revenue Series A (MBIA insured)
(Pre-refunded 7/1/00) 7% 7/1/20 1,000 1,076(A)
Northeast Maryland Waste Disposal Authority
Solid Waste Revenue (Montgomery County
Resource Recovery Project) AMT Series 1993A 6% 7/1/07 1,000 1,118
Northeast Maryland Waste Disposal Authority
Solid Waste Revenue (Montgomery County
Resource Recovery Project) AMT Series 1993A 6.30% 7/1/16 3,000 3,244
Port Facilities Revenue (Consolidated Coal Sales
Co. Project) Series A & B 6.50% 10/1/11 6,000 6,608
Prince George's County, Consolidated Public
Improvement, GO (Pre-refunded 2/1/99) 7.20% 2/1/08 500 511(A)
Prince George's County, Consolidated Public
Improvement, GO Refunding 6.70% 7/1/04 585 639
Prince George's County, Consolidated Public
Improvement, GO Refunding 6.75% 7/1/11 585 639
Prince George's County, PCR Refunding
(Potomac Electric Project) 1993 Series 6.375% 1/15/23 2,250 2,466
Prince George's County, Solid Waste
Management System Revenue
Series 1990 (Pre-refunded 6/30/00) 6.75% 6/30/02 250 268(A)
Series 1990 (Pre-refunded 6/30/00) 6.90% 6/30/06 750 806(A)
Series 1993 Refunding 5.25% 6/15/13 1,000 1,027
State of Maryland, GO 6.70% 7/15/02 500 528
State of Maryland, GO (Pre-refunded 3/1/00) 6.70% 3/1/04 1,500 1,586(A)
State of Maryland, GO 5.40% 6/1/07 2,000 2,162
State of Maryland, GO 5% 8/1/11 3,000 3,164
</TABLE>
5
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Maryland Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Talbot County, Bank Qualified, GO
(Pre-refunded 5/1/01) 6.70% 5/1/10 $ 500 $ 547(A)
Talbot County, Bank Qualified, GO
(Pre-refunded 5/1/01) 6.70% 5/1/11 415 454(A)
University of Maryland
(Auxiliary Facilities and Tuition Revenue)
Series A 5.60% 4/1/15 1,000 1,078
Series A Refunding 5.125% 4/1/17 2,000 2,069
Series B (Pre-refunded 10/1/02) 6.375% 4/1/09 1,000 1,113(A)
Washington County Maryland GO
(Water & Sewer Project) Refunding (FGIC insured) 0% 1/1/17 385 164(B)
Washington Suburban Sanitary District
(Pre-refunded 6/1/02) 6.10% 6/1/07 1,000 1,098(A)
Washington Suburban Sanitary District 5.50% 6/1/13 1,000 1,071
Washington Suburban Sanitary District
(Pre-refunded 6/1/01) 6.90% 6/1/13 400 440(A)
Washington Suburban Sanitary District Refunding 5% 6/1/10 1,000 1,070
Washington Suburban Sanitary District Refunding 5.25% 6/1/11 1,000 1,044
Washington Suburban Sanitary District Refunding 5.25% 6/1/15 1,000 1,032
Washington Suburban Sanitary District Refunding 5.25% 6/1/16 1,000 1,077
Washington Suburban Sanitary District Refunding 5.75% 6/1/17 2,000 2,275
Worcester County Sanitary District, GO
(Pre-refunded 5/1/01) 6.75% 5/1/15 115 126(A)
--------
Total Municipal Bonds (Identified Cost -- $145,427) 158,261
- -------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C) -- 2.2%
Carlton,Wisconsin PCR Refunding Bonds
(Wisconsin Power and Light Company Projects) 4.10% 10/1/98 1,600 1,600
Illinois Development Authority (Amoco Oil Project)
Series 1994 4.10% 10/1/98 900 900
Parish of East Baton Rouge, Louisiana
PCR bonds (Exxon Project) 1993 Series 4.10% 10/1/98 100 100
Southwest Higher Education Authority
Incorporated Texas Revenue (SMU University) 4.15% 10/1/98 600 600
The Hospitals and Higher Education Facilities
Authority of Philadephia, Hospital Revenue Bonds
(The Childrens Hospital of Philadelphia Project)
Series A of 1996 4.15% 10/1/98 400 400
--------
Total Variable Rate Demand Obligations
(Identified Cost-- $3,600) 3,600
- -------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S><C>
Total Investments-- 97.9% (Identified Cost-- $149,027) $161,861
--------
Other Assets Less Liabilities-- 2.1% 3,502
Net assets consisting of:
Accumulated paid-in capital applicable to
9,937 shares outstanding $152,309
Undistributed net realized gain on investments 220
Unrealized appreciation of investments 12,834
--------
Net assets-- 100.0% $165,363
========
Net asset value, redemption price and maximum offering price per share(D): $16.64
======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(A) Pre-refunded bond -- Bonds are referred to as pre-refunded when the issue
has been advance refunded by a subsequent issue. The original issue is
usually escrowed with U.S. Treasury securities in an amount sufficient to
pay the interest, principal and call premium, if any, to the earliest call
date. On the call date, the bond "matures." The pre-refunded date is used in
determining weighted average portfolio maturity.
(B) Zero-coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
(C) The rate shown is the rate as of September 30, 1998, and the maturity shown
is the longer of the next interest readjustment date or the date the
principal amount owed can be recovered through demand.
(D) Sales charges are being waived for the period November 3, 1997 to July 31,
1999.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
7
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
September 30, 1998 (Unaudited)
(Amounts in Thousands)
Pennsylvania Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 96.3%
Allegheny County, Airport Revenue
1992-B AMT (FSA insured) 6.625% 1/1/22 $1,000 $ 1,088
Allegheny County, Baldwin-Whitehall School
District, GO Series 1992-A (FGIC insured)
(Pre-refunded 8/15/02) 6.60% 8/15/10 1,000 1,104(A)
Allegheny County, West Jefferson Hills School
District, GO (FGIC insured) (Pre-refunded 2/1/01) 7.10% 2/1/11 1,000 1,077(A)
Allegheny County Hospital Development Authority,
Children's Hospital Refunding (MBIA insured) 6.875% 7/1/14 1,000 1,048
Allegheny County Hospital Development Authority,
Presbyterian University Health System, Inc.
Series 1992-B Refunding (MBIA insured) 6% 11/1/23 1,250 1,359
Beaver County, IDA PCR Ohio Edison Company
Refunding (FGIC insured) 7% 6/1/21 1,000 1,088
Berks County, PA GO Series 1995 Refunding
(FGIC insured) 5.85% 11/15/18 1,000 1,080
Bucks County, Council Rock School District, GO
(FGIC insured) (Pre-refunded 3/1/01) 6.75% 3/1/11 250 268(A)
Chester County Health and Education Facilities
Authority Jefferson Health SystemRevenue
Bonds Series 1997 B 5.375% 5/15/27 1,500 1,536
Commonwealth of Pennsylvania, GO
First Series 6.125% 9/15/03 1,000 1,088
Second Series (Pre-refunded 11/1/01) 6.50% 11/1/09 1,000 1,096(A)
Deer Lakes School District Pennsylvania GO
(MBIA insured) 6.45% 1/15/19 1,750 1,950
Delaware County, GO (Pre-refunded 11/15/02) 6% 11/15/22 780 847(A)
Delaware County, GO Refunding 6% 11/15/22 220 235
Delaware County Authority, University Revenue,
Villanova University (MBIA insured) 6.85% 8/1/11 500 539
Delaware County Authority, University Revenue,
Villanova University (MBIA insured) 5.50% 8/1/23 2,000 2,094
Delaware River Port Authority (FGIC insured) 5.50% 1/1/26 1,000 1,061
Erie County, Pennsylvania Sewer Authority,
Sewer Revenue Bonds Series 1997
(AMBAC insured) 5.625% 6/1/17 2,000 2,151
Lehigh County IDA PCR Refunding Bonds
Pennsylvania Power & Light Company Project
1994 Series A (MBIA insured) 5.50% 2/15/27 1,000 1,049
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Lower Merion School District
Montgomery County, Pennsylvania
GO Bonds, Series 1998 5% 5/15/23 $1,000 $ 1,000
Montgomery County, GO Series 1997 5.35% 9/15/17 1,000 1,035
Montgomery County, IDA PCR Philadelphia Electric
Company Series 1991-B Refunding (MBIA insured) 6.70% 12/1/21 1,500 1,634
Montgomery County, Upper Gwynedd-Towamencin
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.75% 10/15/06 250 271
Montgomery County Higher Education and Health
Authority, Saint Joseph's University Revenue
Series 1992 Refunding (Connie Lee insured) 6.25% 12/15/04 500 552
Montgomery Township Municipal Sewer Authority
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.70% 5/15/21 250 261
Northampton County Higher Education Authority,
College Revenue Bonds Series 1997
(Lafayette College Project) (MBIA insured) 5% 11/1/27 1,000 1,001
Pennsylvania Higher Education,
University of Pittsburgh Series 1997-A
(FGIC insured) 5.125% 6/1/22 1,000 1,009
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue Series 1991-C AMT
(AMBAC insured) 7.15% 9/1/21 1,000 1,082
Pennsylvania Higher Educational Facilities Authority,
Bryn Mawr College Revenue Bonds (MBIA insured) 5.625% 12/1/27 500 541
Pennsylvania Higher Educational Facilities Authority,
Drexel University Revenue Bonds, Series 1998
(MBIA insured) 4.80% 5/1/28 2,000 1,961
Pennsylvania Higher Educational Facilities Authority,
Temple University Revenue (MBIA insured)
First Series 6.50% 4/1/21 250 272
First Series (Pre-refunded 4/1/01) 5% 4/1/29 1,000 1,000(A)
Pennsylvania Higher Educational Facilities Authority,
University Revenue, University of Pennsylvania
Series 1996-A Refunding 5.75% 1/1/22 1,000 1,077
Pennsylvania Higher Educational Facilities Authority,
University Revenue, Series H (AMBAC insured) 5.375% 6/15/18 1,000 1,028
</TABLE>
9
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Pennsylvania Housing Finance Agency,
Rental Housing (Fannie Mae insured)
Series 1992-C 6.50% 7/1/23 $ 750 $ 804
Series 1993-C 5.80% 7/1/22 1,000 1,045
Pennsylvania Housing Finance Agency, Single
Family Mortgage
Series 1991-32 Refunding 7.15% 4/1/15 435 463
Series 1992-33 6.90% 4/1/17 370 363
Pennsylvania IDA Economic Development Revenue
Series 1991-A (Pre-refunded 7/1/01) 7% 1/1/11 1,000 1,105(A)
Series 1994-A Refunding (AMBAC insured) 5.50% 1/1/14 2,250 2,367
Pennsylvania Infrastructure Investment Authority
Revenue Series 1990-A (Pre-refunded 9/1/99) 7.15% 9/1/10 500 527(A)
Pennsylvania Intergovernmental Co-op Authority
(MBIA insured) 5.60% 6/15/15 1,000 1,055
Pennsylvania Intergovernmental Co-op Authority
(MBIA insured) 5.60% 6/15/16 2,000 2,086
Pennsylvania State University Refunding 5.50% 8/15/16 1,000 1,033
Pennsylvania State University Series A Refunding 5.10% 3/1/18 1,500 1,507
Pennsylvania Turnpike Commission Oil
Franchise Tax Subordinated Revenue Bonds
Series B of 1998 (AMBAC insured) 4.75% 12/1/17 2,000 1,949
Pennsylvania Turnpike Commission Revenue
Series N 5.50% 12/1/17 1,000 1,023
Series N (FGIC insured) 5.50% 12/1/19 1,000 1,026
Philadelphia Gas Works Series B (MBIA insured) 7% 5/15/20 500 619
Philadelphia Hospitals and Higher Education
Facilities Authority, Hospital Revenue Refunding
Children's Hospital Series 1993-A 5% 2/15/21 1,000 985
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B
(FGIC insured) (Pre-refunded 11/15/01) 7% 11/15/04 500 558(A)
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B
(FGIC insured) (Pre-refunded 11/15/01) 7.10% 11/15/05 500 559(A)
Philadelphia Water and Wastewater Revenue
(MBIA insured) 5.60% 8/1/18 2,000 2,127
Sayre, PA Healthcare Revenue Volunteer Hospital
Authority, Guthrie Healthcare System
(AMBAC insured) 7.20% 12/1/20 500 552
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Somerset County General Authority, Commonwealth
Lease Revenue (FGIC insured)
(Pre-refunded 10/15/01) 7% 10/15/13 $ 500 $ 548(A)
Swarthmore Borough Authority, Swarthmore College
Refunding Revenue Series 1992
(Pre-refunded 9/15/02) 6% 9/15/20 180 198(A)
Unrefunded balance 6% 9/15/20 820 894
Swarthmore Borough Authority, Swarthmore College
Refunding Revenue Series 1992
(Pre-refunded 9/15/02) 6% 9/15/20 370 407(A)
Unrefunded balance 6% 9/15/20 1,630 1,776
University of Pittsburgh Series 1992-A
(MBIA insured) (Pre-refunded 6/1/02) 6.125% 6/1/21 650 714(A)
University of Pittsburgh Series 1992-A
(MBIA insured) 6.125% 6/1/21 350 381
University of Pittsburgh Series 1997-B Refunding
(MBIA insured) 5% 6/1/21 1,000 1,001
Valley View, PA School District GO
Series A Refunding (FGIC insured) 5% 11/15/21 1,300 1,301
Washington County Hospital Authority, Hospital
Refunding Revenue, Shadyside Hospital Project
Series 1992 (AMBAC insured) 6% 12/15/18 1,000 1,089
Westmoreland County GO (AMBAC insured) 0% 8/1/13 2,000 1,008(B)
Westmoreland County GO (AMBAC insured) 0% 8/1/14 2,475 1,182(B)
Wissahickon Pennsylvania School District GO 4.85% 5/15/13 1,000 1,017
-------
Total Municipal Bonds (Identified Cost -- $63,464) 68,751
- -------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C) -- 2.4%
Allegheny County Hospital Development Authority
Presbyterian Hospital Series B & D 4.05% 10/1/98 1,100 1,100
Pennsylvania Higher Educational Facilities Authority
Carnegie Mellon University Series 1995 B 4.15% 10/1/98 600 600
-------
Total Variable Rate Demand Obligations
(Identified Cost-- $1,700) 1,700
- -------------------------------------------------------------------------------------------------------
Total Investments -- 98.7% (Identified Cost -- $65,164) 70,451
Other Assets Less Liabilities-- 1.3% 900
-------
Net assets-- 100.0% $71,351
=======
</TABLE>
11
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust -- Continued
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S><C>
Net assets consisting of:
Accumulated paid-in capital applicable to:
4,244 Primary shares outstanding $65,668
17 Navigator shares outstanding 283
Undistributed net realized gain on investments 113
Unrealized appreciation of investments 5,287
-------
Net assets-- 100.0% $71,351
=======
Net asset value, redemption price and maximum offering price per share(D):
Primary Class $16.74
======
Navigator Class $16.74
======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(A) Pre-refunded bond -- Bonds are referred to as pre-refunded when the issue
has been advance refunded by a subsequent issue. The original issue is
usually escrowed with U.S. Treasury securities in an amount sufficient to
pay the interest, principal and call premium, if any, to the earliest call
date. On the call date, the bond "matures." The pre-refunded date is used in
determining weighted average portfolio maturity.
(B) Zero-coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
(C) The rate shown is the rate as of September 30, 1998, and the maturity shown
is the longer of the next interest readjustment date or the date the
principal amount owed can be recovered through demand.
(D) Sales charges are being waived for the period November 3, 1997 to July 31,
1999. Sales charges do not apply to Navigator Class shares.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
12
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
September 30, 1998 (Unaudited)
(Amounts in Thousands)
Tax-Free Intermediate-Term Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 97.0%
Alaska -- 2.9%
Anchorage GO Series A (AMBAC insured) 5.30% 8/1/10 $1,075 $ 1,145
North Slope Borough, GO, Capital Appreciation
Series 1998 A (MBIA insured) 0% 6/30/09 1,000 625(B)
--------
1,770
--------
Arizona -- 4.2%
Arizona Transportation Board Subordinated
Highway Revenue Series 1992 A 6% 7/1/00 500 520
Salt River Project Agricultural Improvement
and Power District, Electric System
Refunding Revenue 1993 Series A 5.30% 1/1/03 1,000 1,060
Scottsdale Street and Highway User
Revenue Refunding Series 1993 5% 7/1/02 1,000 1,044
--------
2,624
--------
Connecticut -- 1.8%
State of Connecticut Special Tax Obligation,
Transportation Infrastructure 1990 Series A
(Pre-refunded 6/1/01) 7.10% 6/1/04 1,000 1,097(A)
--------
Florida -- 6.2%
Jacksonville Florida Electric Authority Revenue
Refunding (St. John's River Issue) Series 2-13 5.10% 10/1/10 500 527
Northwest Florida Water Management District
Land Acquisition Revenue Refunding
Series 1992 (FGIC insured) 5.50% 4/1/02 1,000 1,059
Seminole County, FL Water & Sewer Revenue
Refunding (MBIA insured) 6% 10/1/12 1,000 1,166
State Board of Education Capital Outlay
Series 1996 A 5.60% 1/1/08 1,000 1,091
--------
3,843
--------
Georgia -- 3.0%
State of Georgia GO Bonds
Series 1997 C 6.25% 8/1/10 1,000 1,188
State of Georgia GO Bonds
Series 1997 C 2.25% 8/1/17 1,000 700
--------
1,888
--------
Illinois -- 3.8%
Illinois Regional Transportation Authority,
Refunding (MBIA insured) 5.40% 6/1/15 1,000 1,052
State of Illinois Sales Tax Revenue Series O 5.90% 6/15/01 1,220 1,289
--------
2,341
--------
</TABLE>
13
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Kentucky -- 1.7%
Turnpike Authority of Kentucky, Economic
Development Road Revenue Refunding
(Revitalization Projects)
Series 1993 (AMBAC insured) 5.30% 7/1/04 $1,000 $ 1,074
--------
Louisiana -- 1.8%
City of New Orleans Audubon Park Commission
Aquarium Refunding Series 1993 (FGIC insured) 6% 10/1/08 1,000 1,105
--------
Maine -- 1.7%
Maine Municipal Bond Bank GO Refunding 1993
Series A Refunding 5.20% 11/1/05 1,000 1,070
--------
Maryland -- 14.3%
Baltimore City, Maryland GO (MBIA insured) 7% 10/15/10 1,000 1,257
Cecil County, GO Consolidated Public Improvement
and Refunding 1993 (FGIC insured) 6.50% 12/1/99 850 881
Maryland Department of Transportation Consolidated
Transportation Refunding Series 1991 6% 9/1/00 1,000 1,045
Maryland Health and Higher Educational Facilities
Authority Refunding Revenue Kennedy Krieger
Issue 5.20% 7/1/09 400 421
Maryland Health and Higher Educational Facilities
Authority Refunding Revenue Kennedy Krieger
Issue 5.25% 7/1/10 400 419
Maryland State &Local Facilities Loan GO
Second Series 5% 8/1/11 1,000 1,055
Maryland Transportation Authority, Transportation
Facilities Projects Revenue Series 1992 5.70% 7/1/05 1,000 1,106
Mayor and City Council of Baltimore
GO Consolidated Public Improvement
Refunding 1995 Series A (FGIC insured) 0% 10/15/06 750 522(B)
Montgomery County, GO Consolidated Public
Improvement Series B (Pre-refunded 11/1/99) 6.80% 11/1/07 1,000 1,056(A)
Northeast Maryland Waste Disposal Authority Solid
Waste Revenue (Montgomery County Resource
Recovery Project) Series 1993 A, AMT 5.60% 7/1/02 1,000 1,057
--------
8,819
--------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Michigan -- 1.9%
Williamston Michigan Community School
GO (MBIA insured) 6.25% 5/1/09 $1,000 $ 1,172
--------
Nebraska -- 1.7%
Nebraska Public Power District 5.70% 1/1/04 1,000 1,078
--------
Nevada -- 2.9%
Clark County, Nevada GO (FGIC insured) 5.50% 6/1/11 1,155 1,258
State of Nevada GO LT (Nevada Municipal
Bond Bank Refunding Project No. 4)
Series 1989 B 6.70% 2/1/01 500 523
--------
1,781
--------
New Hampshire -- 1.7%
New Hampshire Municipal Bond Bank GO
Refunding 1991 Series H 5.70% 2/15/01 1,000 1,045
--------
New Jersey -- 3.5%
New Jersey Turnpike Authority, Turnpike
Revenue Series 1991 C Refunding
(AMBAC insured) 6.40% 1/1/07 2,000 2,135
--------
North Carolina -- 1.7%
Charlotte Water and Sewer GO 4.75% 2/1/13 1,000 1,024
--------
Ohio -- 3.5%
Franklin County, Ohio GO LT Refunding 5.50% 12/1/11 2,000 2,153
--------
Pennsylvania -- 2.6%
Lower Merion School District
Montgomery County, Pennsylvania
GO Bonds Series of 1998 5% 5/15/08 500 536
Northampton County Pennsylvania Higher
Education, Lehigh University, Series 1998 5.25% 11/15/09 1,000 1,092
--------
1,628
--------
South Carolina -- 3.5%
Berkeley County Water and Sewer Revenue
Refunding and Improvement (MBIA insured) 6.50% 6/1/06 1,000 1,086
South Carolina Public Service Authority Revenue,
Series B Refunding 6.70% 7/1/02 1,000 1,093
--------
2,179
--------
</TABLE>
15
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Tennessee -- 3.5%
Metropolitan Government Nashville and
Davidson County Tennessee Water & Sewer
Refunding (MBIA insured) 5.50% 1/1/13 $1,000 $ 1,085
State of Tennessee GO, 1994 Series A Refunding 5.25% 3/1/02 1,000 1,050
--------
2,135
--------
Texas -- 12.6%
City of Austin Combined Utility Systems Revenue
Refunding Series 1992 A (MBIA insured) 6% 11/15/04 1,000 1,094
City of Houston GO
Revenue Refunding Series C 5.625% 4/1/10 1,000 1,077
City of Houston Water and Sewer System
Junior Lien Revenue Refunding Series 1992 C
(MBIA insured) 5.40% 12/1/01 1,000 1,050
Dallas, Texas, GO 4.50% 2/15/13 2,000 1,987
Irving Texas Independent School District
(PSFG insured) 0% 2/15/17 1,190 490(B)
Texas Public Finance Authority, GO Refunding
(Superconducting Super Collider Project)
Series 1992 C (FGIC insured) 0% 4/1/02 1,000 875(B)
United Independent School District (Webb County,
Texas) Unlimited Tax School Building Bonds,
Series 1995 (PSFG insured) 7.10% 8/15/06 1,000 1,202
--------
7,775
--------
Vermont -- 2.4%
State of Vermont, GO 1990 Series A
(Pre-refunded 2/1/00) 6.75% 2/1/03 1,400 1,484(A)
--------
Virginia -- 12.1%
Commonwealth of Virginia Transportation Board,
Transportation Contract Revenue Refunding
Series 1992 (Route 28 Project) 5.75% 4/1/00 1,000 1,031
Series 1992 (Route 28 Project) 6% 4/1/06 1,000 1,084
Fairfax County Public Improvement
Series 1992 C Refunding 5.50% 10/1/03 2,000 2,054
Henrico County GO Public Improvement Refunding
Series 1993 5.25% 1/15/09 1,100 1,168
Virginia State Public Building Authority
Building Revenue 5.20% 8/1/14 1,000 1,043
Revenue Refunding Series 1992 B 5.625% 8/1/02 1,000 1,066
--------
7,446
--------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------
<S><C>
Washington -- 2.0%
Washington State Motor Vehicle Fuel Tax Revenue
Series D 6.50% 1/1/07 $ 1,045 $ 1,223
-------
Total Municipal Bonds (Identified Cost -- $56,964) 59,889
- ----------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C)-- 1.9%
Carlton, Wisconsin PCR Refunding Bonds
(Wisconsin Power and Light Company Projects)
Series B & D 4.10% 10/1/98 575 575
Harris County, Texas Health Facilities Development
Corp. Hospital Revenue Bonds
(The Methodist Hospital) Series 1994 4.20% 10/1/98 400 400
Lincoln County, Wyoming PCRBonds
(Exxon Project) Series C 4.10% 10/1/98 200 200
-------
Total Variable Rate Demand Obligations
(Identified Cost--$1,175) 1,175
- ----------------------------------------------------------------------------------------------------------
Total Investments -- 98.9% (Identified Cost -- $58,139) $61,064
Other Assets Less Liabilities--1.1% 684
-------
Net assets consisting of:
Accumulated paid-in capital applicable to
3,894 shares outstanding $58,821
Undistributed net realized gain on investments 2
Unrealized appreciation of investments 2,925
-------
Net assets-- 100.0% $61,748
=======
Net asset value, redemption price and maximum offering price per share(D): $15.86
======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(A) Pre-refunded bond -- Bonds are referred to as pre-refunded when the issue
has been advance refunded by a subsequent issue. The original issue is
usually escrowed with U.S. Treasury securities in an amount sufficient to
pay the interest, principal and call premium, if any, to the earliest call
date. On the call date, the bond "matures." The pre-refunded date is used in
determining weighted average portfolio maturity.
(B) Zero-coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
(C) The rate shown is the rate as of September 30, 1998, and the maturity shown
is the longer of the next interest readjustment date or the date the
principal amount owed can be recovered through demand.
(D) Sales charges are being waived for the period August 1, 1995 to July 31,
1999.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
17
<PAGE>
Sector Diversification
Legg Mason Tax-Free Income Fund
September 30, 1998 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
------------------ ------------------ ------------------
% of Market % of Market % of Market
Net Assets Value Net Assets Value Net Assets Value
- -------------------------------------------------------------------------------------------
<S><C>
Education Revenue 8.0 $ 13,203 21.5 $15,333 5.9 $ 3,670
Escrowed -- -- 3.9 2,810 -- --
General Obligation--Local 18.6 30,726 5.1 3,616 28.2 17,402
General Obligation--School -- -- 2.7 1,951 -- --
General Obligation--State 3.5 5,855 1.5 1,088 12.4 7,653
Health Care & Hospital Revenue 17.0 28,063 12.1 8,648 -- --
Housing Revenue 4.6 7,569 3.8 2,676 -- --
Lease Revenue 4.7 7,726 -- -- 1.7 1,066
Other -- -- -- -- 2.1 1,288
Other Special Taxes -- -- 4.4 3,141 -- --
Parking Revenue 1.6 2,744 -- -- -- --
Port Facilities Revenue 4.0 6,609 -- -- -- --
Pre-refunded Bonds 9.7 16,094 13.7 9,752 7.9 4,860
Small Business Administration
Revenue -- -- 3.3 2,366 -- --
Solid Waste Revenue 3.3 5,389 -- -- -- --
Student Loan Revenue -- -- 1.5 1,081 -- --
Transportation Revenue 4.9 8,119 8.6 6,147 18.0 11,136
Utility 5.0 8,365 6.7 4,806 7.0 4,324
Water and Sewer Revenue 10.8 17,799 7.5 5,336 13.8 8,490
Short-Term Investments 2.2 3,600 2.4 1,700 1.9 1,175
Other Assets Less Liabilities 2.1 3,502 1.3 900 1.1 684
----- -------- ----- ------- ----- -------
100.0 $165,363 100.0 $71,351 100.0 $61,748
===== ======== ===== ======= ===== =======
</TABLE>
Guide to Investment Abbreviations
Legg Mason Tax-Free Income Fund
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
CONNIE LEE Connie Lee Insurance Company
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
GO General Obligation
HOC Housing Opportunities Commission
IDA Industrial Development Authority
LT Limited Tax
MBIA Municipal Bond Insurance Association
PCR Pollution Control Revenue
PSFG Permanent School Fund Guaranty
18
<PAGE>
Statements of Operations
Legg Mason Tax-Free Income Fund
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 9/30/98
------------------------------------------
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
- --------------------------------------------------------------------------------------------------
<S><C>
Investment Income:
Interest $4,317 $1,931 $1,483
------ ------ ------
Expenses:
Investment advisory fee 435 190 164
Distribution and service fees 198 86 74
Transfer agent and shareholder servicing expense 21 11 8
Audit and legal fees 17 12 13
Custodian fee 44 35 31
Registration fees 3 3 6
Reports to shareholders 6 4 2
Trustees' fees 3 3 3
Other expenses 3 2 1
------ ------ ------
730 346 302
Less: fees waived (172) (104) (93)
compensating balance credits (4) (2) (1)
------ ------ ------
Total expenses, net of waivers and compensating
balance credits 554 240 208
------ ------ ------
Net Investment Income 3,763 1,691 1,275
------ ------ ------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on investments 225 113 72
Change in unrealized appreciation
(depreciation) of investments 2,615 1,079 895
------ ------ ------
Net Realized and Unrealized Gain (Loss)
on Investments 2,840 1,192 967
- --------------------------------------------------------------------------------------------------
Change in Net Assets Resulting from
Operations $6,603 $2,883 $2,242
- --------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
19
<PAGE>
Statements of Changes in Net Assets
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
---------------------------------------------------------------------
Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended
9/30/98 3/31/98 9/30/98 3/31/98 9/30/98 3/31/98
- -----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S><C>
Change in Net Assets:
Net investment income $ 3,763 $ 7,463 $ 1,691 $ 3,318 $ 1,275 $ 2,529
Net realized gain (loss) on investments 225 957 113 213 72 140
Change in unrealized appreciation
(depreciation) of investments 2,615 4,439 1,079 2,681 895 1,295
- -----------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations 6,603 12,859 2,883 6,212 2,242 3,964
Distributions to shareholders:
From net investment income:
Primary Class (3,763) (7,463) (1,686) (3,318) (1,275) (2,529)
Navigator Class N/A N/A (5) Nil N/A N/A
From net realized gain on investments:
Primary Class (312) (1,004) (88) (103) -- --
Navigator Class N/A N/A Nil -- N/A N/A
Change in net assets from Fund share
transactions:
Primary Class 8,367 4,102 1,916 382 1,526 3,084
Navigator Class N/A N/A 193 90 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Change in net assets 10,895 8,494 3,213 3,263 2,493 4,519
Net Assets:
Beginning of period 154,468 145,974 68,138 64,875 59,255 54,736
- -----------------------------------------------------------------------------------------------------------------
End of period $165,363 $154,468 $71,351 $68,138 $61,748 $59,255
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
20
<PAGE>
Financial Highlights
Legg Mason Tax-Free Income Fund
Contained below is per share operating performance data for a share of
beneficial interest 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>
Investment Operations Distributions
-------------------------------------- ---------------------------------------------------
From In Excess
Net Asset Net Net Realized Total From Net of Net Net Asset
Value, Investment and Unrealized From Net Realized Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Gain on Total End of
of Period (Loss) Investments Operations Income Investments Investments Distributions Period
---------------------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free Income Trust
-- Primary Class
Six Months Ended
Sept. 30, 1998* $16.39 $.39(D) $ .28 $ .67 $(.39) $(.03) $ -- $ (.42) $16.64
Years Ended Mar. 31,
1998 15.91 .81(D) .59 1.40 (.81) (.11) -- (.92) 16.39
1997 16.07 .83(D) (.09) .74 (.83) (.07) -- (.90) 15.91
1996 15.87 .86(D) .25 1.11 (.86) (.05) -- (.91) 16.07
1995 15.69 .83(D) .18 1.01 (.83) -- -- (.83) 15.87
1994 15.97 .84(D) (.27) .57 (.84) -- (.01) (.85) 15.69
Pennsylvania Tax-Free Income Trust
-- Primary Class
Six Months Ended
Sept. 30, 1998* $16.48 $.40(E) $ .28 $ .68 $(.40) $(.02) $ -- $ (.42) $16.74
Years Ended Mar. 31,
1998 15.80 .81(E) .71 1.52 (.81) (.03) -- (.84) 16.48
1997 16.10 .83(E) (.11) .72 (.83) (.19) -- (1.02) 15.80
1996 16.02 .89(E) .15 1.04 (.89) (.07) -- (.96) 16.10
1995 15.80 .85(E) .22 1.07 (.85) -- -- (.85) 16.02
1994 16.03 .86(E) (.23) .63 (.86) -- -- (.86) 15.80
-- Navigator Class
Six Months Ended
Sept. 30, 1998* $16.48 $.42(F) $ .28 $ .70 $(.42) $(.02) $ -- $ (.44) $16.74
Year Ended Mar. 31,
1998(H) 16.44 .05(F) .04 .09 (.05) -- -- (.05) 16.48
Tax-Free Intermediate-Term Income Trust
-- Primary Class
Six Months Ended
Sept. 30, 1998* $15.61 $.33(G) $ .25 $ .58 $(.33) $ -- $ -- $ (.33) $15.86
Years Ended Mar. 31,
1998 15.22 .67(G) .39 1.06 (.67) -- -- (.67) 15.61
1997 15.34 .68(G) (.12) .56 (.68) -- -- (.68) 15.22
1996 15.06 .68(G) .28 .96 (.68) -- -- (.68) 15.34
1995 14.96 .72(G) .10 .82 (.72) -- -- (.72) 15.06
1994 15.06 .70(G) (.09) .61 (.70) (.01) -- (.71) 14.96
<CAPTION>
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net
Total Net Investment Net Assets,
Expenses Expenses Income Portfolio End of
Total to Average to Average to Average Turnover Period
Return(A) Net Assets(B) Net Assets(C) Net Assets Rate (in thousands)
--------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free Income Trust
-- Primary Class
Six Months Ended
Sept. 30, 1998 4.17%(I) .70%(D,J) .70%(D,J) 4.76%(D,J) 12.3%(J) $165,363
Years Ended Mar. 31,
1998 8.97% .70%(D) .70%(D) 4.97%(D) 18.9% 154,468
1997 4.73% .67%(D) .66%(D) 5.18%(D) 6.0% 145,974
1996 7.11% .59%(D) .58%(D) 5.29%(D) 14.1% 146,645
1995 6.60% -- .54%(D) 5.32%(D) 9.5% 142,314
1994 3.51% -- .46%(D) 5.10%(D) 6.6% 145,578
Pennsylvania Tax-Free Income Trust
-- Primary Class
Six Months Ended
Sept. 30, 1998* 4.22%(I) .70%(E,J) .70%(E,J) 4.89%(E,J) 18.5%(J) $ 71,063
Years Ended Mar. 31,
1998 9.80% .71%(E) .70%(E) 5.00%(E) 14.1% 68,048
1997 4.61% .67%(E) .66%(E) 5.20%(E) 13.6% 64,875
1996 6.52% .54%(E) .53%(E) 5.42%(E) 17.2% 65,275
1995 7.03% -- .49%(E) 5.42%(E) 2.1% 63,929
1994 3.81% -- .40%(E) 5.16%(E) -- 62,904
-- Navigator Class
Six Months Ended
Sept. 30, 1998* 4.35%(I) .45%(F,J) .45%(F,J) 5.11%(F,J) 18.5%(J) $ 288
Year Ended Mar. 31,
1998(H) .55%(I) .45%(F,J) .45%(F,J) 4.82%(F,J) 14.1%(J) 90
Tax-Free Intermediate-Term Income Trust
-- Primary Class
Six Months Ended
Sept. 30, 1998* 3.79%(I) .70%(G,J) .70%(G,J) 4.27%(G,J) 22.5%(J) $ 61,748
Years Ended Mar. 31,
1998 7.12% .71%(G) .70%(G) 4.34%(G) 9.0% 59,255
1997 3.71% .67%(G) .66%(G) 4.43%(G) 8.9% 54,736
1996 6.47% .57%(G) .56%(G) 4.41%(G) -- 60,042
1995 5.65% -- .34%(G) 4.83%(G) 24.8% 48,837
1994 3.99% -- .30%(G) 4.44%(G) 6.6% 54,032
</TABLE>
21
<PAGE>
Financial Highlights--Continued
Legg Mason Tax-Free Income Fund
- --------------------------------------------------------------------------------
(A) Excluding sales charge.
(B) Pursuant to Securities and Exchange Commission regulations effective
December 31, 1995, this ratio reflects total expenses before compensating
balance credits. Previously, credits were included in the ratio.
(C) This ratio reflects total expenses reduced by the impact of compensating
balance credits and voluntary expense waivers described below.
(D) Net of fees waived by the Adviser in excess of voluntary expense limitations
as follows: 0.45% until December 31, 1993; 0.50% until June 30, 1994; 0.55%
until July 31, 1995; 0.60% until March 31, 1996; 0.65% until December 31,
1996 and 0.70% through July 31, 1999. If no fees had been waived by the
Adviser, the annualized ratio of expenses to average daily net assets for
each period would have been as follows: for the six months ended September
30, 1998, 0.92%, and for the years ended March 31, 1998, 0.93%; 1997, 0.96%;
1996, 0.95%; 1995, 0.94%; and 1994, 0.94%.
(E) Net of fees waived by the Adviser in excess of voluntary expense limitations
as follows: 0.35% until July 31, 1993; 0.40% until December 31, 1993; 0.45%
until June 30, 1994; 0.50% until July 31, 1995; 0.55% until March 31, 1996;
0.65% until December 31, 1996 and 0.70% through July 31, 1999. If no fees
had been waived by the Adviser, the annualized ratio of expenses to average
daily net assets for each period would have been as follows: for the six
months ended September 30, 1998, 1.00%, and for the years ended March 31,
1998, 1.00%; 1997, 1.04%; 1996, 1.02%; 1995, 1.01%; and 1994, 1.03%.
(F) Net of fees waived by the Adviser in excess of voluntary expense limitations
as follows: 0.45% until July 31, 1999. If no fees had been waived by the
Adviser, the annualized ratio of expenses to average daily net assets for
the period would have been as follows: for the six months ended September
30, 1998, 0.75%, and for the year ended March 31, 1998, 0.75%.
(G) Net of fees waived by the Adviser in excess of voluntary expense limitations
as follows: 0.30% until June 30, 1994; 0.35% until July 31, 1995; 0.65%
until December 31, 1996 and 0.70% through July 31, 1999. If no fees had been
waived by the Adviser, the annualized ratio of expenses to average daily net
assets for each period would have been as follows: for the six months ended
September 30, 1998, 1.01%, and for the years ended March 31, 1998, 1.06%;
1997, 1.11%; 1996, 1.10%; 1995, 1.04%; and 1994, 1.14%.
(H) For the period March 10, 1998 (commencement of sale of Navigator Class
shares) to March 31, 1998.
(I) Not annualized
(J) Annualized
* Unaudited
See notes to financial statements.
22
<PAGE>
Notes to Financial Statements
Legg Mason Tax-Free Income Fund
(Amounts in Thousands) (Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Tax-Free Income Fund ("Trust"), consisting of the Maryland
Tax-Free Income Trust ("Maryland Tax-Free"), the Pennsylvania Tax-Free
Income Trust ("Pennsylvania Tax-Free") and the Tax-Free Intermediate-Term
Income Trust ("Tax-Free Intermediate") (each a "Fund"), is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company. All series of the Trust are non-diversified.
Pennsylvania Tax-Free consists of two classes of shares: Primary Class,
offered since August 1, 1991, and Navigator Class, offered to certain
institutional investors since March 10, 1998.The Navigator Class of Maryland
Tax-Free and Tax-Free Intermediate has not commenced operations. The income
and expenses of a Fund are allocated proportionately to the two classes of
shares except for Rule 12b-1 distribution fees, which are charged only on
Primary Class shares, and transfer agent and shareholder servicing expenses,
which are determined separately for each class.
Security Valuation
Portfolio securities are valued based upon market quotations obtained
from an independent pricing service. When market quotations are not readily
available, securities are valued based on prices received from recognized
broker-dealers in the same or similar securities. Fixed income securities
with 60 days or less remaining to maturity are valued using the amortized
cost method, which approximates current market value.
Maryland Tax-Free and Pennsylvania Tax-Free each follow an investment
policy of investing primarily in municipal obligations of one state.
Economic changes affecting either of those states and certain of its public
bodies and municipalities may affect the ability of issuers within that
state to pay interest, or repay principal of, municipal obligations held by
either of those Funds.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized. Dividends are declared daily and paid monthly. Dividend
income and distributions to shareholders are allocated at the class level
and are recorded on the ex-dividend date. When available, net capital gain
distributions which are calculated at a composite level, are declared and
paid after the end of the tax year in which the gain is realized. At
September 30, 1998, accrued dividends payable were as follows: Maryland
Tax-Free, $318; Pennsylvania Tax-Free, $140; and Tax-Free Intermediate,
$108.
Investment Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis
for both financial reporting and federal income tax purposes. At September
30, 1998, receivables for securities sold but not yet delivered and payables
for securities purchased but not yet received for each Fund were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
------------------------------------------------------------
Maryland Tax-Free $-- $ --
Pennsylvania Tax-Free 30 --
Tax-Free Intermediate -- 485
23
<PAGE>
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
Federal Income Taxes
No provision for federal income or excise taxes is required since each
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders. At September 30,
1998, Tax-Free Intermediate had capital loss carryforwards for federal
income tax purposes of $3 and $67 expiring in 2003 and 2004, respectively.
Use of Estimates
The 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.
2. Investment Transactions:
For the six months ended September 30, 1998, investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds from Sales
-----------------------------------------------------------
Maryland Tax-Free $19,220 $9,283
Pennsylvania Tax-Free 10,304 6,117
Tax-Free Intermediate 7,703 6,542
At September 30, 1998, cost, aggregate gross unrealized appreciation and
gross unrealized depreciation based on the cost of securities for federal
income tax purposes for each Fund were as follows:
Net
Appreciation/
Cost Appreciation (Depreciation) (Depreciation)
----------------------------------------------------------------------------
Maryland Tax-Free $149,027 $12,838 $ (4) $12,834
Pennsylvania Tax-Free 65,164 5,287 -- 5,287
Tax-Free Intermediate 58,139 2,986 (61) 2,925
3. Repurchase Agreements:
All repurchase agreements are fully collateralized by obligations issued
by the U.S. Government or its agencies and such collateral is in the
possession of the Funds' custodian. The value of such collateral includes
accrued interest. Risks arise from the possible delay in recovery or
potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Funds' investment adviser, acting
under the supervision of the Board of Trustees, reviews the value of the
collateral and the creditworthiness of those banks and dealers with which
the Funds enter into repurchase agreements to evaluate potential risks.
24
<PAGE>
- --------------------------------------------------------------------------------
4. Transactions with Affiliates:
Each Fund has an investment advisory and management agreement with Legg
Mason Capital Management, Inc. ("Adviser"). Pursuant to their respective
agreements, the Adviser provides the Funds with investment advisory and
management services for which each Fund pays a fee, computed daily and
payable monthly, at an annual rate of 0.55% of each Fund's average daily net
assets.
The Adviser has agreed to waive its fees in any month to the extent a
Fund's expenses (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during that month annual rates of each Fund's average daily
net assets as follows: for Maryland Tax-Free, 0.70% through July 31, 1999,
or until the Fund's net assets reach $200 million, whichever occurs first;
for Pennsylvania Tax-Free Primary shares, 0.70% through July 31, 1999; for
Pennsylvania Tax-Free Navigator shares, 0.45% through July 31, 1999, or
until the Fund's net assets reach $125 million, whichever occurs first; for
Tax-Free Intermediate, 0.70% through July 31, 1999, or until the Fund's net
assets reach $100 million, whichever occurs first. For the six months ended
September 30, 1998, advisory fees of $172, $104 and $93, were waived and
$44, $14 and $12 were due to the Adviser by Maryland Tax-Free, Pennsylvania
Tax-Free and Tax-Free Intermediate, respectively.
Legg Mason Fund Adviser, Inc. ("LMFA") serves as administrator to each
Fund pursuant to an administration agreement with the Adviser. The Adviser
pays LMFA a fee, computed daily and payable monthly, at an annual rate of
0.05% of each 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 Funds. Legg Mason receives
an annual distribution fee and an annual service fee, computed daily and
payable monthly, from each of the Funds at an annual rate of 0.125% for
each, of average daily net assets. At September 30, 1998, distribution and
service fees due to Legg Mason were as follows: Maryland Tax-Free, $33;
Pennsylvania Tax-Free, $14; and Tax-Free Intermediate, $12.
Legg Mason also has an agreement with the Funds' transfer agent to assist
it with some of its duties. For this assistance, Legg Mason was paid the
following amounts by the transfer agent for the six months ended September
30, 1998: Maryland Tax-Free, $9; Pennsylvania Tax-Free, $3; and Tax-Free
Intermediate, $3.
The Adviser, LMFA and Legg Mason are corporate affiliates and wholly
owned subsidiaries of Legg Mason, Inc.
5. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in a
$150 million line of credit ("Credit Agreement") to be utilized as an
emergency source of cash in the event of unanticipated, large redemption
requests by shareholders. Pursuant to the Credit Agreement, each
participating Fund is liable only for principal and interest payments
related to borrowings made by that Fund. Borrowings under the line of credit
bear interest at prevailing short-term interest rates. For the six months
ended September 30, 1998, the Funds had no borrowings under the line of
credit.
25
<PAGE>
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
6. Fund Share Transactions:
At September 30, 1998, there were unlimited shares authorized at $.001
par value for all Funds of the Trust. Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
-------------- ---------------- ----------------- --------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free
-- Primary Class
Six Months Ended Sept. 30, 1998 972 $15,935 184 $3,022 (646) $(10,590) 510 $8,367
Year Ended March 31, 1998 1,148 18,744 390 6,342 (1,288) (20,984) 250 4,102
Pennsylvania Tax-Free
-- Primary Class
Six Months Ended Sept. 30, 1998 299 $ 4,938 77 $1,274 (260) $ (4,296) 116 $1,916
Year Ended March 31, 1997 503 8,232 148 2,413 (630) (10,263) 21 382
-- Navigator Class
Six Months Ended Sept. 30, 1998 12 $ 203 1 $ 4 (1) $ (14) 12 $ 193
Year Ended March 31, 1998(A) 5 90 -- -- -- -- 5 90
Tax-Free Intermediate
-- Primary Class
Six Months Ended Sept. 30, 1998 512 $ 7,994 61 $ 947 (475) $ (7,415) 98 $1,526
Year Ended March 31, 1998 955 14,796 124 1,926 (879) (13,638) 200 3,084
-------------------------------------------------------------------------------------------------------
</TABLE>
(A) For the period March 10, 1998 (commencement of sale of Navigator Class)
to March 31, 1998.
26
<PAGE>
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