Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Trustees
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore
Charles F. Haugh
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
Coopers & Lybrand L.L.P.
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
5/97
Annual Report
March 31, 1998
Legg Mason
Tax-Free
Income Fund
Maryland Tax-Free
Pennsylvania Tax-Free
Tax-Free
Intermediate-Term
The Art of Investing
[LEGG MASON LOGO]
FUNDS
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Tax-Free Income Fund's annual
report for its fiscal year ended March 31, 1998, combining reports for the Legg
Mason Maryland Tax-Free Income Trust, Pennsylvania Tax-Free Income Trust and the
Tax-Free Intermediate-Term Income Trust.
The following table summarizes key statistics for each Trust, as of March 31,
1998:
<TABLE>
<CAPTION>
Average Net Asset Value
SEC Yield* Weighted Maturity Per Share
---------- ----------------- ---------------
<S><C>
Maryland Tax-Free 4.63% 15.74 years $16.39
Pennsylvania Tax-Free 4.69% 16.97 years 16.48
Tax-Free Intermediate 4.01% 7.74 years 15.61
</TABLE>
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 each Trust's investment
adviser to be of comparable quality. Moody's ratings of securities we currently
own are:
<TABLE>
<CAPTON>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
-------- ------------ -----------------
<S><C>
Aaa 42.79% 66.50% 65.10%
Aa 35.70 20.40 25.04
A 13.60 7.10 7.24
Baa 3.47 -- 1.39
Short-term securities 4.44 6.00 1.23
</TABLE>
In response to declines in interest rates, net asset values per share for
each of the Trusts increased slightly from their September 30, 1997 levels. For
the full twelve month period, total returns for Maryland Tax-Free, Pennsylvania
Tax-Free and Tax-Free Intermediate-Term were 8.97%, 9.80% and 7.12%,
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 maximum sales charge for each Fund is
being waived through July 31, 1998 and no sales charge is reflected in the
Trust's total return calculations above.)
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-weighted average 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 Trust will offer greater
price stability than municipal bond funds with longer maturities while earning
somewhat lower yields.
Sincerely,
/s/ John F. Curley, Jr.
_______________________
John F. Curley, Jr.
Chairman
May 1, 1998
- ----------
*SEC yields reported are for the 30 days ended March 31, 1998. If no fees had
been waived by the Adviser, the 30 day SECyields for Maryland Tax-Free,
Pennsylvania Tax-Free and Tax-Free Intermediate would have been 4.41%, 4.39%
and 3.71%, respectively.
<PAGE>
Portfolio Manager's Comments
Legg Mason Tax-Free Income Fund
Market Overview
The year ended March 31, 1998 was a strong one for the municipal bond market.
Following the 25 basis point (100 basis points = 1%) increase in the Fed funds
rate in March 1997, municipal rates fell steadily throughout the year, reaching
a cyclical low in mid-January 1998. The rally was quite impressive in light of
the strength of the economy over the period. Fueled by lower mortgage rates, new
and existing home sales surged to levels not seen in over a decade. In addition,
high consumer confidence created by falling unemployment and lofty equity
returns has resulted in healthy sales in the retail and durable goods sectors.
Given that the economic expansion is entering its seventh year, such strong
indicators would normally raise inflation expectations at this stage. However,
higher worker productivity, falling oil prices, and intense international
competition stemming from the Asian crisis have acted to control inflation, with
consumer prices rising only 1.4% over the last 12 months. With the full impact
from Asia yet to be determined, it became obvious to the market that the chance
of the Fed raising interest rates to cool the domestic economy was low. With
this backdrop, municipal bonds rallied with the Treasury market until
mid-January. However, from that point on, municipal rates drifted slightly
higher. The low interest rate environment afforded municipalities the
opportunity to refund outstanding debt with new bonds paying lower coupons. The
increase in volume weighed down the market, and rates rose approximately 15
basis points over the balance of the quarter. The final result for the twelve
month period was a 60 basis point decline in long municipal bond yields.
Maryland Tax-Free Income Trust
For the fiscal year ended March 31, 1998, the Fund's total return was 8.97%.
The average maturity of the Fund decreased slightly to 15.74 years from 16.10
years over the last twelve months as we maintained caution in light of the
strong housing market and tight labor markets. The building volume of new issues
was also of concern, and we felt a conservative posture was appropriate.
Pennsylvania Tax-Free Income Trust
For the fiscal year ended March 31, 1998, the Fund's total return was 9.80%.
In light of the building supply of new issue bonds and the strength of housing
and labor markets, we gradually decreased the average maturity of the Fund to
16.97 years from 17.63 years over the past twelve months.
Tax-Free Intermediate-Term Trust
The Tax-Free Intermediate-Term Income Trust's total return was 7.12% for the
fiscal year ended March 31, 1998. The Fund's performance was attributable to our
conservative focus on tax-free income and high coupon bonds, combined with a
relatively short average maturity of 7.74 years. Given the strength of the
economy and the building supply of intermediate-term municipal bonds, we feel
this strategy is appropriate, and will move to extend the average maturity of
the Fund as the market adjusts to accommodate this increase in volume.
2
<PAGE>
Market Commentary
Following an extended period of little new issue supply, municipalities sold
new bonds at a torrid pace in the first quarter of 1998. Municipal bond issuance
of $68 billion was 70% higher than first quarter 1997. The majority of this
volume came in the last two months of the quarter, as January's low rates
spurred municipalities to refund outstanding debt. In addition, the continuing
economic expansion has strengthened municipal balance sheets, and allowed state
and local governments to pursue extensive capital projects, such as building new
roads and schools. Municipalities frequently finance large projects with debt,
and this borrowing greatly added to new issue volume during the first quarter.
It is important to note that refunding volume is highly interest rate
sensitive, while issuance for general municipal purposes is less dependent on
lower rates. The first quarter's rapid pace of issuance will probably slow
somewhat in the coming months. However, because capital project financing
represents a substantial portion of recent volume, we believe that a tremendous
amount of new bonds may continue to be sold. The heavy volume may continue to
weigh on the market until the supply can be absorbed. At the end of the first
quarter, 10- and 30-year Aaa municipals yielded 79% and 86% of comparable
maturity Treasuries, slightly higher than the twelve month averages of 76% and
83%, respectively.
Outlook
Looking forward, we believe inflation will remain benign. Several factors
have contributed to persistent low inflation: the strong dollar, increased
global competition, expanded capacity, productivity gains and falling import
prices. In the near term, we do not foresee a major change in any of these
factors. Furthermore, commodity prices will likely stabilize. The recent rise in
oil prices was temporary, and the increase in gold prices was due to purchases
by foreign central governments, a phenomenon which will probably not continue.
The bond market has been concerned that higher wage costs, the tight labor
market and slowing productivity growth might conspire to force companies to
raise prices. However, we think that diminished pricing power due to global
competition will result in narrower profit margins rather than higher prices. As
corporate profit growth slows, we expect business investment to decline and the
economy to slow slightly.
In contemplating the Asian crisis, it is important to recognize that the
economic plight in Japan differs from that of the other Asian nations in both
its origin and its consequences for the US. Japan's economy has stagnated for
years despite repeated attempts to stimulate domestic demand. Japanese consumers
tend to save money received from tax cuts rather than spend it, and Japanese
interest rates are already extremely low, with the yield on the 10-year bond
below 2%. In addition, recent regulatory changes which make it easier for
Japanese citizens to invest overseas and which open Japanese financial markets
to foreign investment firms, may draw Japanese savings into higher yielding
foreign investments. The size of the Japanese GDP is second in the world only to
that of the US. Therefore, the repercussion of their economic distress on the
world economy may overshadow that of the other Asian countries combined. The
negative impact of a drop in US exports to Asia should be limited as these
exports comprise only slightly more than 2% of total US GDP. However, the impact
of the acceleration of imports from these same countries, spurred by sharp
currency devaluations versus the US dollar, is less clear and could be much
larger. Therefore, we feel that the contraction of the Asian economies will
contribute to
3
<PAGE>
Portfolio Manager's Comments--Continued
Legg Mason Tax-Free Income Fund
slowing in our own growth rate. At the same time, contracting profit margins
may cause domestic US corporations to scale back capital spending and hiring,
further restraining US economic growth.
Strategy
Because we believe rates will be trending lower longer term, we have been
focusing on bond structure-looking for bonds which will participate in market
rallies, but could outperform in a down market. We have been buying bonds with
good call protection, and noncallable bonds whenever possible. At the same time,
we are mindful of maintaining as high a level of distributed income on the Funds
as possible. We have avoided selling bonds from the Funds which have high
coupons and are selling at a significant premium to our purchase cost. Their
sale would create sizable taxable gains and their high level of distributed
tax-free income would be difficult to replace in the current rate environment.
Also, we have been building the cash position in the Funds coming into the
April tax payment season because we felt that strong equity markets would create
large capital gains tax liabilities for taxpayers which might be funded with
sales of municipal bonds. Over the last four years, non-withheld income tax
collections during the last half of April have been trending sharply higher.
Last year, the US Treasury collected about $122 billion in tax payments between
April 15 and 30. We believe that even more money will be taken out of the
municipal market as tax payments are processed this year. Generally, we have
felt that maintaining a comfortable cash position would be prudent during tax
season, allowing us to meet possible redemptions without selling bonds into a
weak market and also allowing us to take advantage of values which may be
created if prices do decline.
Victoria M. Schwatka
Jane E. Trust, CFA
April 29, 1998
4
<PAGE>
Performance Information
Legg Mason Tax-Free Income Fund
Performance Comparison of a $10,000 Investment as of March 31, 1998
The returns shown on these pages are based on historical results and
are not intended to indicate future performance. The investment return and
principal value of an investment in each of these Funds will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Average annual returns tend to smooth out variations
in a Fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The following graphs compare each Fund's total returns against that of
a closely matched broad-based securities market index. The lines
illustrate the cumulative total return of an initial $10,000 investment
for the periods indicated after subtracting each Fund's maximum sales load
and after deducting all Fund investment management and other
administrative expenses and the transaction costs of buying and selling
securities. The line representing the securities market index does not
include any transaction costs associated with buying and selling
securities in the index or other administrative expenses. Both the Legg
Mason Funds' results and the indices' results assume reinvestment of all
dividends and distributions.
Maryland Tax-Free Income Trust
----------------------------------------------
Cumulative Average Annual
Total Return* Total Return*
----------------------------------------------
One Year +5.97% +5.97%
Five Years +31.16 +5.57
Life of Fund+ +59.32 +6.96
----------------------------------------------
+ Fund inception -- May 1, 1991
* Includes maximum sales charge of 2.75%
----------------------------------------------
[PLOT POINTS APPEAR BELOW]
Maryland Tax-Free Lehman Brothers Municipal
Income Trust Bond Index(1)
----------------- -------------------------
Years ended March 31,
5/1/91+ 9722 10000
3/31/92 10503 10854
3/31/93 11813 12213
3/31/94 12227 12496
3/31/95 13034 13425
3/31/96 13960 14550
3/31/97 14620 15343
3/31/98 15932 16987
(1) The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment grade tax-exempt bond market.
+ Fund inception--May 1, 1991
5
<PAGE>
Performance Information--Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust
----------------------------------------------
Cumulative Average Annual
Total Return* Total Return*
----------------------------------------------
One Year +6.78% +6.78%
Five Years +32.19 +5.74
Life of Fund+ +59.25 +7.23
----------------------------------------------
+ Fund inception -- August 1, 1991
* Includes maximum sales charge of 2.75%
----------------------------------------------
[PLOT POINTS APPEAR BELOW]
Pennsylvania Tax-Free Lehman Brothers Municipal
Income Trust Bond Index(1)
--------------------- -------------------------
Years ended March 31,
8/1/91 9725 10000
3/31/92 10334 10640
3/31/93 11718 11972
3/31/94 12156 12249
3/31/95 13014 13160
3/31/96 13864 14263
3/31/97 14503 15040
3/31/98 15925 16651
(1) The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment grade tax-exempt bond market.
+ Fund inception--August 1, 1991
Tax-Free Intermediate-Term Income Trust
----------------------------------------------
Cumulative Average Annual
Total Return* Total Return*
----------------------------------------------
One Year +4.98% +4.98%
Five Years +27.34 +4.95
Life of Fund+ +32.88 +5.41
----------------------------------------------
+ Fund inception -- November 9, 1992
* Includes maximum sales charge of 2.00%
----------------------------------------------
[PLOT POINTS APPEAR BELOW]
Tax-Free Lehman Brothers 7-Year
Intermediate Trust Municipal Bond Index(1)
------------------ -----------------------
Years ended March 31,
11/9/92 9800 10000
3/31/93 10226 10559
3/31/94 10634 10874
3/31/95 11234 11564
3/31/96 11961 12497
3/31/97 12405 13073
3/31/98 13288 14253
(1) The Lehman Brothers 7-year Municipal Bond Index is a total return
performance benchmark for investment grade tax-exempt bonds with maturities
ranging from six to eight years.
+ Fund inception--November 9, 1992
6
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 1998
(Amounts in Thousands)
Maryland Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 94.1%
Annapolis (City of), Public Improvement, GO 6.50% 8/1/10 $ 350 $ 379
Anne Arundel County, Consolidated
Water and Sewer, GO 5% 9/1/16 1,000 993
Anne Arundel County, Consolidated
Water and Sewer, GO Refunding 5.30% 4/15/17 1,000 1,017
Anne Arundel County, PCR Refunding
(Baltimore Gas & Electric Project) 6% 4/1/24 4,500 4,757
Baltimore City Water Utility Refunding
(MBIA insured) (Pre-refunded 7/1/00) 6.50% 7/1/20 1,250 1,319(A)
Baltimore County, Consolidated Public
Improvement, GO 6.125% 7/1/09 2,000 2,187
Baltimore County, Nursing Home (Stella Maris)
Series A (Pre-refunded 3/1/01) 7.25% 3/1/11 890 983(A)
Baltimore County, Pension Funding, GO
(Pre-refunded 7/1/98) 6.70% 7/1/09 1,000 1,027(A)
Baltimore County, Pension Funding, GO
(Pre-refunded 7/1/98) 6.70% 7/1/11 2,250 2,311(A)
Baltimore County, Pension Funding, GO Refunding 5% 8/1/09 2,500 2,601
Baltimore, Maryland Revenue Refunding Waste
Water Project Series A (FGIC insured) 5% 7/1/22 1,550 1,550
Baltimore, Maryland Revenue Refunding Waste
Water Project Series A (FGIC insured) 5.50% 7/1/26 1,000 1,031
Calvert County, Maryland PCR
(Baltimore Gas & Electric Project) Refunding 5.55% 7/15/14 750 773
Carroll County, Consolidated Public
Improvement, GO 5.375% 11/1/20 1,395 1,415
Carroll County, Consolidated Public
Improvement, GO 5.375% 11/1/25 1,855 1,879
Charles County, GO (Pre-refunded 6/1/01) 6.60% 6/1/06 1,000 1,092(A)
Frederick County, GO Series 1990
(Pre-refunded 8/1/03) 6.625% 8/1/20 250 283(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% 12/1/10 500 540(A)
Harford County, GO 5% 3/1/12 1,000 1,008
</TABLE>
7
<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>
Howard County, Consolidated Public Improvement
GO Series A (Pre-refunded 2/15/00) 6.50% 2/15/11 $ 700 $ 733(A)
Howard County, Consolidated Public Improvement
GO Series A 5.50% 2/15/27 1,000 1,030
Howard County, GO Metropolitan District
Project and Refunding Bonds, 1998 Series A 4.75% 2/15/27 250 236
Howard County, GOMetropolitan District Refunding
Series B 6% 8/15/19 1,500 1,574
Howard County, GO Public Improvement Refunding
Series B 0% 8/15/07 1,000 658(B)
Laurel (City of), GO Public Improvement and
Refunding (MBIA insured)
(Pre-refunded 7/1/01) 7% 7/1/09 250 276(A)
Laurel (City of), GO Public Improvement and
Refunding (MBIA insured)
(Pre-refunded 7/1/01) 7% 7/1/11 1,000 1,105(A)
Maryland Community Development Administration
Single Family AMT
Second Series 6.65% 4/1/04 1,000 1,052
Sixth Series 7.125% 4/1/14 365 381
Fifth Series 7.625% 4/1/29 1,720 1,779
Fourth Series 7.45% 4/1/32 925 976
Single Family Non-AMT Third Series 7.25% 4/1/27 670 708
Multi-Family Insured Mortgage Series G 7.10% 5/15/23 150 158
Multi-Family Insured Mortgage Series B 5.80% 5/15/26 1,500 1,544
Maryland Department of Transportation
Consolidated Transportation
Second Series 6.60% 11/1/00 1,500 1,573
Series 1991 6.25% 9/1/03 1,000 1,060
Maryland Health and Higher Educational
Facilities Authority
Easton Memorial Hospital (MBIA insured)
Series B 6.50% 7/1/15 1,000 1,029
Francis Scott Key Medical Center Refunding
(FGIC insured) 5% 7/1/18 2,000 1,953
Francis Scott Key Medical Center Refunding
(FGIC insured) 5% 7/1/23 2,000 1,947
Francis Scott Key Medical Center (FGIC insured)
(Pre-refunded 7/1/00) 6.75% 7/1/23 1,500 1,618(A)
Francis Scott Key Medical Center Refunding 5.625% 7/1/25 1,000 1,030
Greater Baltimore Medical Center Refunding
(FGIC insured) 5% 7/1/19 2,000 1,951
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Health and Higher Educational
Facilities Authority--(Continued)
Greater Baltimore Medical Center
(Pre-refunded 7/1/01) 6.75% 7/1/19 $ 1,000 $ 1,098(A)
Howard County General Hospital Refunding 5.50% 7/1/21 2,500 2,531
Johns Hopkins University Series 1997 Refunding 5.625% 7/1/17 1,000 1,049
Johns Hopkins Hospital Series 1990 0% 7/1/19 4,000 1,330(B)
Johns Hopkins University Refunding 6% 7/1/10 500 562
Johns Hopkins University Series 1988 Refunding 7.50% 7/1/20 3,000 3,084
Johns Hopkins Hospital Series 1993 Refunding 5% 7/1/23 1,000 975
Kennedy Institute Series 1991 7.40% 7/1/11 630 702
Kennedy Institute Series 1991 6.75% 7/1/22 1,000 1,078
Kennedy Krieger Issue, Refunding Series 1997 5.125% 7/1/22 1,000 973
Loyola College Series A Refunding
(MBIA insured) 5.375% 10/1/26 3,750 3,809
Union Memorial Hospital Series A Refunding
(MBIA insured) 6.75% 7/1/11 100 109
Union Memorial Hospital Series B
(MBIA insured) 6.75% 7/1/11 500 548
Union Memorial Hospital Series A
(MBIA insured) 6.75% 7/1/21 600 655
Union Memorial Hospital Series B
(MBIA insured) 6.75% 7/1/21 1,300 1,426
University of Maryland Medical System
Series 1993 Refunding (FGIC insured) 5.375% 7/1/13 2,000 2,049
Maryland National Capital Park and Planning
Commission (Prince George's County) Series L2
(Pre-refunded 7/1/02) 6% 7/1/05 500 544(A)
Maryland Stadium Authority Sports Facilities
Lease Revenue AMT Series D 7.50% 12/15/10 4,000 4,285
Maryland Stadium Authority Sports Facilities
Lease Revenue AMT Series D 7.60% 12/15/19 2,255 2,422
Maryland Stadium Authority Sports Facilities
Lease Revenue (AMBACinsured) 5.75% 3/1/18 1,000 1,051
Maryland Transportation Authority Series 1985
Refunding 5.75% 7/1/15 5,250 5,443
Maryland Water Quality Financing Administration,
Revolving Loan Fund Revenue Series 1993A 5.40% 9/1/12 1,500 1,536
Mayor and City Council of Baltimore (FGIC insured)
Baltimore City GOSeries A Refunding 0% 10/15/11 2,000 970(B)
Baltimore City Parking Revenue 6.25% 7/1/21 500 549
Baltimore City Water Projects Refunding 5% 7/1/24 5,600 5,583
Montgomery County, Consolidated Public
Improvement, GO Series A Refunding 5.80% 7/1/07 2,750 3,044
</TABLE>
9
<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>
Montgomery County, Consolidated Public
Improvement, GO Series A Refunding 0% 7/1/10 $ 3,000 $ 1,690(B)
Montgomery County, HOC Single Family Series A 6.80% 7/1/17 945 995
Montgomery County, Parking Revenue Refunding
(Silver Spring Parking Lot) 1992 Series A
(FGIC insured) 6.25% 6/1/07 2,000 2,179
Montgomery County, PCR Refunding
(Potomac Electric Project) 1994 Series 5.375% 2/15/24 1,000 1,015
Morgan State University Academic and Auxiliary
Fees Revenue Series A (MBIA insured)
(Pre-refunded 7/1/00) 7% 7/1/20 1,000 1,083(A)
Northeast Maryland Waste Disposal Authority
Solid Waste Revenue (Montgomery County
Resource Recovery Project) AMT Series 1993A 6% 7/1/07 1,000 1,093
Northeast Maryland Waste Disposal Authority
Solid Waste Revenue (Montgomery County
Resource Recovery Project) AMT Series 1993A 6.30% 7/1/16 3,000 3,207
Port Facilities Revenue (Consolidated Coal Sales
Co. Project) Series A & B 6.50% 10/1/11 6,000 6,574
Prince George's County, Consolidated Public
Improvement, GORefunding 6.70% 7/1/04 585 638
Prince George's County, Consolidated Public
Improvement, GO (Pre-refunded 2/1/99) 7.20% 2/1/08 500 519(A)
Prince George's County, Consolidated Public
Improvement, GO Refunding 6.75% 7/1/11 585 638
Prince George's County, PCR Refunding
(Potomac Electric Project) 1993 Series 6.375% 1/15/23 2,250 2,420
Prince George's County, Solid Waste
Management System Revenue
Series 1990 (Pre-refunded 6/30/00) 6.75% 6/30/02 250 270(A)
Series 1990 (Pre-refunded 6/30/00) 6.90% 6/30/06 750 811(A)
Series 1993 Refunding 5.25% 6/15/13 1,000 1,000
State of Maryland, GO 6.70% 7/15/02 500 531
State of Maryland, GO (Pre-refunded 3/1/00) 6.70% 3/1/04 1,500 1,599(A)
State of Maryland, GO 5.40% 6/1/07 2,000 2,124
State of Maryland, GO 5% 8/1/11 3,000 3,063
Talbot County, Bank Qualified, GO 6.70% 5/1/10 500 542
Talbot County, Bank Qualified, GO 6.70% 5/1/11 415 449
</TABLE>
10
<PAGE>
<TABLE>
<CAPTON>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
University of Maryland
(Auxiliary Facilities and Tuition Revenue)
Series B 6.375% 4/1/09 $ 1,000 $ 1,107
Series A 5.60% 4/1/15 1,000 1,052
Series A Refunding 5.125% 4/1/17 2,000 2,033
Washington County Maryland GO
Water &Sewer Project Refunding (FGICinsured) 0% 1/1/17 385 149(B)
Washington Suburban Sanitary District 6.10% 6/1/07 1,000 1,090
Washington Suburban Sanitary DistrictRefunding 5% 6/1/10 1,000 1,032
Washington Suburban Sanitary District Refunding 5.25% 6/1/11 1,000 1,018
Washington Suburban Sanitary District 5.50% 6/1/13 1,000 1,041
Washington Suburban Sanitary District
(Pre-refunded 6/1/01) 6.90% 6/1/13 400 440(A)
Washington Suburban Sanitary District Refunding 5.25% 6/1/15 1,000 1,004
Washington Suburban Sanitary District Refunding 5.25% 6/1/16 1,000 1,037
Washington Suburban Sanitary District Refunding 5.75% 6/1/17 2,000 2,196
Worcester County Sanitary District, GO
(Pre-refunded 5/1/01) 6.75% 5/1/15 115 126(A)
--------
Total Municipal Bonds (Identified Cost-- $135,174) 145,393
- --------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C) -- 6.4%
Allegheny County, PA Hospital Development Authority
(Presbyterian Hospital) Series B 3.70% 4/1/98 100 100
Harris County, TX HealthFacilities Development
Corporation Hospital Revenue Bonds
(The Methodist Hospital) Series 1994 & 1997 3.80% 4/1/98 2,900 2,900
Harris County, TX Industrial Development
Corporation PCR Bonds (Exxon Project)
1984 - A Series 3.75% 4/1/98 600 600
Lincoln County, WY PCRBonds
(Exxon Project)Series B & D 3.85% 4/1/98 900 900
Parish of East Baton Rouge State of Louisiana
PCR Bonds (Exxon Project) 1993 Series 3.85% 4/1/98 500 500
Port St. Helens, Oregon PCRBonds
(Portland General Electric Company Project)
1985 Series B 3.75% 4/1/98 400 400
</TABLE>
11
<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>
Rockport (City of), IN PCR Refunding Bonds
(AEP Generating Company Project) Series 1995-A 3.80% 4/1/98 $ 300 $ 300
Sublette County Wyoming PCR Bonds
(Exxon Project) Series 1984 3.75% 4/1/98 900 900
The Hospitals and Higher Education Facilities
Authority of Philadelphia Hospital Revenue
Bonds (The Children's Hospital of Philadelphia
Project) Series A of 1996 3.75% 4/1/98 3,300 3,300
--------
Total Variable Rate Demand Obligations
(Identified Cost-- $9,900) 9,900
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 100.5% (Identified Cost-- $145,074) 155,293
Other Assets Less Liabilities-- (0.5)% (825)
--------
Net assets consisting of:
Accumulated paid-in capital applicable to
9,427 shares outstanding $143,942
Undistributed net realized gain on investments 307
Unrealized appreciation of investments 10,219
--------
Net assets-- 100.0% $154,468
========
Net asset value and redemption price per share $16.39
======
Maximum offering price per share $16.39(D)
======
- ---------------------------------------------------------------------------------------------------------------------------
</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 March 31, 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, 1998.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
12
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 1998
(Amounts in Thousands)
Pennsylvania Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 92.9%
Allegheny County, Airport Revenue
1992-B AMT (FSA insured) 6.625% 1/1/22 $ 1,000 $ 1,086
Allegheny County, Baldwin-Whitehall School
District, GO Series 1992-A (FGIC insured)
(Pre-refunded 8/15/02) 6.60% 8/15/10 1,000 1,099A
Allegheny County Hospital Development Authority,
Children's Hospital Refunding (MBIA insured) 6.875% 7/1/14 1,000 1,052
Allegheny County Hospital Development Authority,
Presbyterian University Health System, Inc.
Series 1992-B Refunding (MBIA insured) 6% 11/1/23 1,250 1,344
Allegheny County, West Jefferson Hills School
District, GO (FGIC insured) (Pre-refunded 2/1/01) 7.10% 2/1/11 1,000 1,081(A)
Beaver County, IDA PCR Ohio Edison Company
Refunding (FGIC insured) 7% 6/1/21 1,000 1,087
Berks County, PA GO Series 1995 Refunding
(FGIC insured) 5.85% 11/15/18 1,000 1,053
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 1,492
Commonwealth of Pennsylvania, GO
First Series 6.125% 9/15/03 1,000 1,082
Second Series (Pre-refunded 11/1/01) 6.50% 11/1/09 1,000 1,092(A)
Dauphin County Hospital Authority, Polyclinic
Medical Center (MBIA insured)
(Pre-refunded 8/15/99) 6.90% 8/15/11 500 521(A)
Deer Lakes School District Pennsylvania GO
(MBIA insured) 6.45% 1/15/19 1,750 1,944
Delaware County Authority, University Revenue,
Villanova University (MBIA insured) 6.85% 8/1/11 500 538
Delaware County Authority, University Revenue,
Villanova University (MBIA insured) 5.50% 8/1/23 2,000 2,046
Delaware County, GO (Pre-refunded 11/15/02) 6% 11/15/22 780 839(A)
Delaware County, GO Refunding 6% 11/15/22 220 232
Delaware River Port Authority (FGIC insured) 5.50% 1/1/26 1,000 1,030
Erie County, Pennsylvania Sewer Authority,
Sewer Revenue Bonds Series 1997
(AMBAC insured) 5.625% 6/1/17 2,000 2,086
</TABLE>
13
<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>
Lehigh County IDA PCR Refunding Bonds
Pennsylvania Power & Light Company Project
1994 Series A (MBIA insured) 5.50% 2/15/27 $ 1,000 $ 1,024
Montgomery County, GO Series 1997 5.35% 9/15/17 1,000 1,019
Montgomery County Higher Education and Health
Authority, Saint Joseph's University Revenue
Series 1992 Refunding (Connie Lee insured) 6.25% 12/15/04 500 548
Montgomery County, IDA PCR Philadelphia Electric
Company Series 1991-B Refunding (MBIA insured) 6.70% 12/1/21 1,500 1,633
Montgomery County, Upper Gwynedd-Towamencin
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.75% 10/15/06 250 271
Montgomery Township Municipal Sewer Authority
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.70% 5/15/21 250 262
Northampton County Higher Education Authority,
College Revenue Bonds Series 1997
(Lafayette College Project) 5% 11/1/27 1,000 960
Pennsylvania Higher Education,
University of Pittsburgh Series 1997-A
(FGIC insured) 5.125% 6/1/22 1,000 982
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue Series 1991-C AMT
(AMBAC insured) 7.15% 9/1/21 1,000 1,087
Pennsylvania Higher Educational Facilities Authority,
Allegheny General Hospital Series 1991-A 7.25% 9/1/17 500 551
Pennsylvania Higher Educational Facilities Authority,
Bryn Mawr College Revenue Bonds (MBIA insured) 5.625% 12/1/27 500 522
Pennsylvania Higher Educational Facilities Authority,
University Revenue, University of Pennsylvania
Series 1996-A Refunding 5.75% 1/1/22 1,000 1,049
Pennsylvania Higher Educational Facilities Authority,
Temple University Revenue First Series
(MBIA insured) 6.50% 4/1/21 250 269
Pennsylvania Higher Educational Facilities Authority,
University Revenue Series H (AMBAC insured) 5.375% 6/15/18 1,000 1,008
Pennsylvania Housing Finance Agency,
Rental Housing
Series 1992-C (Fannie Mae insured) 6.50% 7/1/23 750 802
Series 1993-C Refunding 5.80% 7/1/22 1,000 1,033
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Pennsylvania Housing Finance Agency, Single
Family Mortgage
Series 1991-32 Refunding 7.15% 4/1/15 $ 435 $ 463
Series 1992-33 6.90% 4/1/17 370 394
Pennsylvania IDA Economic Development Revenue
Series 1991-A (Pre-refunded 7/1/01) 7% 1/1/11 1,000 1,102(A)
Series 1994-A Refunding (AMBAC insured) 5.50% 1/1/14 2,250 2,301
Pennsylvania Infrastructure Investment Authority
Revenue Series 1990-A 7.15% 9/1/10 500 530
Pennsylvania Intergovernmental Co-op Authority
(MBIA insured) 5.60% 6/15/15 1,000 1,028
Pennsylvania Intergovernmental Co-op Authority
(MBIA insured) 5.60% 6/15/16 2,000 2,051
Pennsylvania State University (Pre-refunded 7/1/99) 6.75% 7/1/14 2,000 2,111(A)
Pennsylvania State University Refunding 5.50% 8/15/16 1,000 1,017
Pennsylvania State University Series A Refunding 5.10% 3/1/18 1,500 1,493
Pennsylvania Turnpike Commission Revenue
Series N 5.50% 12/1/17 1,000 1,008
Series N (FGIC insured) 5.50% 12/1/19 1,000 1,013
Philadelphia Gas Works Series B (MBIA insured) 7% 5/15/20 500 608
Philadelphia Hospitals and Higher Education
Facilities Authority, Hospital Revenue Refunding
Children's Hospital Series 1993-A 5% 2/15/21 1,000 963
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B (FGIC insured)
(Pre-refunded 11/15/01) 7% 11/15/04 500 557(A)
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B (FGIC insured)
(Pre-refunded 11/15/01) 7.10% 11/15/05 500 558(A)
Philadelphia Water and Wastewater Revenue
(MBIA insured) 5.60% 8/1/18 2,000 2,057
Sayre, PA Healthcare Revenue Volunteer Hospital
Authority, Guthrie Healthcare System
(AMBAC insured) 7.20% 12/1/20 500 552
Somerset County General Authority, Commonwealth
Lease Revenue (FGIC insured)
(Pre-refunded 10/15/01) 7% 10/15/13 500 547(A)
Swarthmore Borough Authority, Swarthmore College
Refunding Revenue Series 1992 6% 9/15/12 1,000 1,077
</TABLE>
15
<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>
Swarthmore Borough Authority, Swarthmore College
Refunding Revenue Series 1992 6% 9/15/20 $ 2,000 $ 2,148
University of Pittsburgh Series 1997-B Refunding
(MBIA insured) 5% 6/1/21 1,000 967
University of Pittsburgh Series 1992-A
(MBIA insured) (Pre-refunded 6/1/02) 6.125% 6/1/21 650 710(A)
University of Pittsburgh Series 1992-A
(MBIA insured) 6.125% 6/1/21 350 377
Valley View, PA School District GO
Series A Refunding 5% 11/15/21 1,300 1,256
Washington County Hospital Authority, Hospital
Refunding Revenue, Shadyside Hospital Project
Series 1992 (AMBAC insured) 6% 12/15/18 1,000 1,076
Westmoreland County GO (AMBAC insured) 0% 8/1/13 2,000 923(B)
Westmoreland County GO (AMBAC insured) 0% 8/1/14 1,000 437(B)
-------
Total Municipal Bonds (Identified Cost-- $59,108) 63,316
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C) -- 5.9%
Allegheny County Hospital Development Authority
Presbyterian University Health System, Inc.
Series 1990-A, B, C & D (MBIA insured) 3.70% 4/2/98 2,400 2,400
Pennsylvania Higher Educational Facilities Authority
Carnegie Mellon University Series 1995 A & B 3.35% 4/1/98 1,600 1,600
-------
Total Variable Rate Demand Obligations
(Identified Cost-- $4,000) 4,000
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 98.8% (Identified Cost-- $63,108) 67,316
Other Assets Less Liabilities-- 1.2% 822
-------
Net assets-- 100.0% $68,138
=======
</TABLE>
16
<PAGE>
<TABLE>
<S><C>
- ---------------------------------------------------------------------------------------------------------------------------
Net assets consisting of:
Accumulated paid-in capital applicable to:
4,128 Primary shares outstanding $63,752
5 Navigator shares outstanding 90
Undistributed net realized gain on investments 88
Unrealized appreciation of investments 4,208
-------
Net assets-- 100.0% $68,138
=======
Net asset value, redemption price and maximum offering price per share:
Primary Class $16.48(D)
======
Navigator Class $16.48(D)
======
- ---------------------------------------------------------------------------------------------------------------------------
</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 March 31, 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, 1998.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
17
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 1998
(Amounts in Thousands)
Tax-Free Intermediate-Term Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 97.6%
Arizona -- 4.4%
Arizona Transportation Board Subordinated
Highway Revenue Series 1992 A 6% 7/1/00 $ 500 $ 523
Salt River Project Agricultural Improvement
and Power District, Electric System
Refunding Revenue 1993 Series A 5.30% 1/1/03 1,000 1,049
Scottsdale Street and Highway User
Revenue Refunding Series 1993 5% 7/1/02 1,000 1,034
------
2,606
------
Connecticut -- 1.9%
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 -- 6.4%
Jacksonville Florida Electric Authority Revenue
Refunding (St. John's River Issue) Series 2-13 5.10% 10/1/10 500 514
Northwest Florida Water Management District
Land Acquisition Revenue Refunding
Series 1992 (FGIC insured) 5.50% 4/1/02 1,000 1,052
Seminole County, FL Water & Sewer Revenue
Refunding 6% 10/1/12 1,000 1,128
State Board of Education Capital Outlay
Series 1996 A 5.60% 1/1/08 1,000 1,071
------
3,765
------
Georgia -- 3.1%
State of Georgia GO Bonds
Series 1997 C 6.25% 8/1/10 1,000 1,153
State of Georgia GO Bonds
Series 1997 C 2.25% 8/1/17 1,000 659
------
1,812
------
Illinois -- 3.9%
Illinois Regional Transportation Authority,
Refunding (MBIA insured) 5.40% 6/1/15 1,000 1,016
State of Illinois Sales Tax Revenue Series O 5.90% 6/15/01 1,220 1,288
------
2,304
------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Kentucky -- 1.8%
Turnpike Authority of Kentucky, Economic
Development Road Revenue Refunding
(Revitalization Projects)
Series 1993 (AMBAC insured) 5.30% 7/1/04 $ 1,000 $ 1,056
-------
Louisiana -- 1.8%
City of New Orleans Audubon Park Commission
Aquarium Refunding Series 1993 (FGIC insured) 6% 10/1/08 1,000 1,095
-------
Maine -- 1.8%
Maine Municipal Bond Bank GORefunding 1993
Series A 5.20% 11/1/05 1,000 1,050
-------
Maryland -- 22.2%
Baltimore City, Maryland GO(MBIAinsured) 7% 10/15/10 1,000 1,219
Baltimore County, GO Pension Funding 6.70% 7/1/16 1,000 1,027
Cecil County, GO Consolidated Public Improvement
and Refunding 1993 (FGIC insured) 6.50% 12/1/99 850 887
Maryland Department of Transportation Consolidated
Transportation Refunding Series 1991 6% 9/1/00 1,000 1,048
Maryland Health and Higher Educational Facilities
Authority Refunding Revenue Johns Hopkins
University Issue Series 1988 7.50% 7/1/20 1,300 1,337
Maryland Health and Higher Educational Facilities
Authority Refunding Revenue Kennedy Krieger
Issue 5.20% 7/1/09 400 409
Maryland Health and Higher Educational Facilities
Authority Refunding Revenue Kennedy Krieger
Issue 5.25% 7/1/10 400 407
Maryland State &Local Facilities Loan GO
Second Series 5% 8/1/11 1,000 1,021
Maryland Transportation Authority, Transportation
Facilities Projects Revenue Series 1992 5.70% 7/1/05 1,000 1,082
Mayor and City Council of Baltimore
GO Consolidated Public Improvement
Refunding 1995 Series A (FGIC insured) 0% 10/15/06 750 508(B)
Project and Refunding Revenue (Water Projects)
Series 1990-A (MBIA insured)
(Pre-refunded 7/1/00) 6.50% 7/1/20 1,000 1,055(A)
</TABLE>
19
<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>
Maryland -- continued
Montgomery County, GO Consolidated Public
Improvement
Series B 6.80% 11/1/99 $ 1,000 $ 1,047
Series B (Pre-refunded 11/1/99) 6.80% 11/1/07 1,000 1,066(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 1,046
-------
13,159
-------
Michigan -- 1.9%
Williamston Michigan Community School
GO (MBIA insured) 6.25% 5/1/09 1,000 1,139
-------
Nebraska -- 1.8%
Nebraska Public Power District 5.70% 1/1/04 1,000 1,066
-------
Nevada -- 2.9%
Clark County, Nevada GO 5.50% 6/1/11 1,155 1,218
State of Nevada GO LT (Nevada Municipal
Bond Bank Refunding Project No. 4)
Series 1989 B 6.70% 2/1/01 500 528
-------
1,746
-------
New Hampshire -- 1.8%
New Hampshire Municipal Bond Bank GO
Refunding 1991 Series H 5.70% 2/15/01 1,000 1,045
-------
New Jersey -- 3.6%
New Jersey Turnpike Authority, Turnpike
Revenue Series 1991 C Refunding
(AMBAC insured) 6.40% 1/1/07 2,000 2,142
-------
Ohio -- 3.5%
Franklin County, Ohio GO LT Refunding 5.50% 12/1/11 2,000 2,099
-------
Pennsylvania -- 1.7%
Pennsylvania Intergovernmental Cooperation
Authority Special Tax Revenue
(City of Philadelphia Refunding
Program) Series 1992 (FGIC insured) 5.75% 6/15/99 1,000 1,024
-------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
South Carolina -- 3.7%
Berkeley County Water and Sewer Revenue
Refunding and Improvement (MBIA insured) 6.50% 6/1/06 $ 1,000 $ 1,085
South Carolina Public Service Authority Revenue,
Series B Refunding 6.70% 7/1/02 1,000 1,092
-------
2,177
-------
Tennessee -- 3.5%
Metropolitan Government Nashville and
Davidson County Tennessee Water & Sewer
Refunding (MBIA insured) 5.50% 1/1/13 1,000 1,048
State of Tennessee GO, 1994 Series A Refunding 5.25% 3/1/02 1,000 1,043
-------
2,091
-------
Texas -- 8.8%
City of Austin Combined Utility Systems Revenue
Refunding Series 1992 A (MBIA insured) 6% 11/15/04 1,000 1,086
City of Houston GO
Revenue Refunding Series C (MBIAinsured) 5.625% 4/1/10 1,000 1,053
City of Houston Water and Sewer System
Junior Lien Revenue Refunding Series 1992 C
(MBIA insured) 5.40% 12/1/01 1,000 1,043
Texas Public Finance Authority, GO Refunding
(Superconducting Super Collider Project)
Series 1992 C (FGIC insured) 0% 4/1/02 1,000 842(B)
United Independent School District (Webb County,
Texas) Unlimited Tax School Building Bonds,
Series 1995 (PSFG insured) 7.10% 8/15/06 1,000 1,182
-------
5,206
-------
Vermont -- 2.5%
State of Vermont, GO 1990 Series A
(Pre-refunded 2/1/00) 6.75% 2/1/03 1,400 1,497(A)
-------
Virginia -- 12.6%
Commonwealth of Virginia Transportation Board,
Transportation Contract Revenue Refunding
Series 1992 (Route 28 Project) 5.75% 4/1/00 1,000 1,036
Series 1992 (Route 28 Project) 6% 4/1/06 1,000 1,079
Fairfax County Public Improvement
Series 1992 C Refunding 5.50% 10/1/03 2,000 2,058
Series 1994 A 7.25% 6/1/01 1,000 1,095
</TABLE>
21
<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>
Virginia -- continued
Henrico County GO Public Improvement Refunding
Series 1993 5.25% 1/15/09 $ 1,100 $ 1,146
Virginia Public Building Authority State Building
Revenue Refunding Series 1992 B 5.625% 8/1/02 1,000 1,058
-------
7,472
-------
Washington -- 2.0%
Washington State Motor Vehicle Fuel Tax Revenue
Series D 6.50% 1/1/07 1,045 1,196
-------
Total Municipal Bonds (Identified Cost-- $55,814) 57,844
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C)-- 1.2%
Carlton Wisconsin PCR
Power & Light Company Series D 3.80% 4/1/98 375 375
Jackson County, Mississippi Port Facilities
Revenue Adjusted Refund Chevron
USAInc. Project 3.75% 4/1/98 300 300
-------
Total Variable Rate Demand Obligations
(Identified Cost-- $675) 675
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 98.8% (Identified Cost-- $56,489) 58,519
Other Assets Less Liabilities--1.2% 736
-------
Net assets consisting of:
Accumulated paid-in capital applicable to
3,796 shares outstanding $57,295
Accumulated net realized loss on investments (70)
Unrealized appreciation of investments 2,030
-------
Net assets-- 100.0% $59,255
=======
Net asset value and redemption price per share $15.61
======
Maximum offering price per share $15.61(D)
======
- ---------------------------------------------------------------------------------------------------------------------------
</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 March 31, 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, 1998.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
22
<PAGE>
Sector Diversification
Legg Mason Tax-Free Income Fund
March 31, 1998
(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 7.9 $ 12,133 21.9 $14,958 5.6 $ 3,335
Escrowed -- -- 2.9 1,968 -- --
General Obligation--Local 17.1 26,459 1.9 1,285 30.7 18,182
General Obligation--School -- -- 2.9 1,944 -- --
General Obligation--State 3.7 5,718 1.6 1,082 10.7 6,335
Health Care & Hospital Revenue 14.1 21,829 11.1 7,547 -- --
Housing Revenue 4.9 7,592 4.0 2,692 -- --
Lease Revenue 5.0 7,758 -- -- 1.8 1,058
Other -- -- -- -- 3.9 2,312
Other Special Taxes -- -- 4.5 3,079 -- --
Parking Revenue 1.8 2,728 -- -- -- --
Port Facilities Revenue 4.3 6,574 -- -- -- --
Pre-refunded Bonds 10.0 15,408 19.5 13,353 10.0 5,911
Small Business Administration
Revenue -- -- 3.3 2,301 -- --
Solid Waste Revenue 3.4 5,301 -- -- -- --
Student Loan Revenue -- -- 1.6 1,087 -- --
Transportation Revenue 5.2 8,076 6.1 4,137 16.9 10,016
Utility 5.3 8,192 7.0 4,763 7.2 4,293
Water and Sewer Revenue 11.4 17,625 4.6 3,120 10.8 6,402
Short-Term Investments 6.4 9,900 5.9 4,000 1.2 675
Other Assets Less Liabilities (0.5) (825) 1.2 822 1.2 736
----- -------- ----- ------- ----- -------
100.0 $154,468 100.0 $68,138 100.0 $59,255
===== ======== ===== ======= ===== =======
------------------------------------------
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
23
<PAGE>
Statements of Operations
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
</TABLE>
<TABLE>
<CAPTION>
Year Ended 3/31/98
------------------------------------------------------
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Investment Income:
Interest $ 8,515 $3,782 $2,936
------- ------ ------
Expenses:
Investment advisory fee 827 365 320
Distribution and service fees 376 166 146
Transfer agent and shareholder servicing expense 46 20 16
Audit and legal fees 30 20 30
Custodian fees 87 64 62
Organization expense -- -- 8
Registration fees 3 4 22
Reports to shareholders 11 13 5
Trustees' fees 6 6 6
Other expenses 8 5 5
------- ------ ------
1,394 663 620
Less: fees waived (336) (195) (209)
compensating balance credits (6) (4) (4)
------- ------ ------
Total expenses, net of waivers and compensating
balance credits 1,052 464 407
------- ------ ------
Net Investment Income 7,463 3,318 2,529
------- ------ ------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on investments 957 213 140
Change in unrealized appreciation (depreciation) of investments 4,439 2,681 1,295
------- ------ ------
Net Realized and Unrealized Gain (Loss) on Investments 5,396 2,894 1,435
- ----------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting from Operations $12,859 $6,212 $3,964
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
24
<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
------------------------------------------------------------------
Years Ended Years Ended Years Ended
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Change in Net Assets:
Net investment income $ 7,463 $ 7,702 $ 3,318 $ 3,457 $ 2,529 $ 2,530
Net realized gain (loss) on investments 957 482 213 (20) 140 18
Change in unrealized appreciation
(depreciation) of investments 4,439 (1,253) 2,681 (422) 1,295 (462)
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 12,859 6,931 6,212 3,015 3,964 2,086
Distributions to shareholders:
From net investment income:
Primary Class (7,463) (7,702) (3,318) (3,457) (2,529) (2,530)
Navigator Class N/A N/A Nil N/A N/A N/A
From net realized gain on investments:
Primary Class (1,004) (672) (103) (778) -- --
Navigator Class N/A N/A -- N/A N/A N/A
Change in net assets from Fund share transactions:
Primary Class 4,102 772 382 820 3,084 (4,862)
Navigator Class N/A N/A 90 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets 8,494 (671) 3,263 (400) 4,519 (5,306)
Net Assets:
Beginning of year 145,974 146,645 64,875 65,275 54,736 60,042
- ---------------------------------------------------------------------------------------------------------------------------
End of year $154,468 $145,974 $68,138 $64,875 $59,255 $54,736
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
25
<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 Net of Net
Value, Investment and Unrealized From Net Realized Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Gain on Total
of Year (Loss) Investments Operations Income Investments Investments Distributions
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free Income Trust
-- Primary Class
Years Ended Mar. 31,
1998 $15.91 $.81(D) $ .59 $1.40 $(.81) $(.11) $ -- $ (.92)
1997 16.07 .83(D) (.09) .74 (.83) (.07) -- (.90)
1996 15.87 .86(D) .25 1.11 (.86) (.05) -- (.91)
1995 15.69 .83(D) .18 1.01 (.83) -- -- (.83)
1994 15.97 .84(D) (.27) .57 (.84) - (.01) (.85)
Pennsylvania Tax-Free Income Trust
-- Primary Class
Years Ended Mar. 31,
1998 $15.80 $.81(E) $ .71 $1.52 $(.81) $(.03) $ -- $ (.84)
1997 16.10 .83(E) (.11) .72 (.83) (.19) -- (1.02)
1996 16.02 .89(E) .15 1.04 (.89) (.07) -- (.96)
1995 15.80 .85(E) .22 1.07 (.85) -- -- (.85)
1994 16.03 .86(E) (.23) .63 (.86) -- -- (.86)
-- Navigator Class
Year Ended Mar. 31,
1998(H) $16.44 $.05(F) $ .04 $ .09 $(.05) $ -- $ -- $ (.05)
Tax-Free Intermediate-Term Income Trust
-- Primary Class
Years Ended Mar. 31,
1998 $15.22 $.67(G) $ .39 $1.06 $(.67) $ -- $ -- $ (.67)
1997 15.34 .68(G) (.12) .56 (.68) -- -- (.68)
1996 15.06 .68(G) .28 .96 (.68) -- -- (.68)
1995 14.96 .72(G) .10 .82 (.72) -- -- (.72)
1994 15.06 .70(G) (.09) .61 (.70) (.01) -- (.71)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Net
Net Asset Total Net Investment Net Assets,
Value, Expenses Expenses Income Portfolio End of
End of Total to Average to Average to Average Turnover Year
Year Return(A) Net Assets(B) Net Assets(C) Net Assets Rate (in thousands)
- -----------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free Income Trust
-- Primary Class
Years Ended Mar. 31,
1998 $16.39 8.97% .70%(D) .70%(D) 4.97%(D) 18.9% $154,468
1997 15.91 4.73% .67%(D) .66%(D) 5.18%(D) 6.0% 145,974
1996 16.07 7.11% .59%(D) .58%(D) 5.29%(D) 14.1% 146,645
1995 15.87 6.60% -- .54%(D) 5.32%(D) 9.5% 142,314
1994 15.69 3.51% -- .46%(D) 5.10%(D) 6.6% 145,578
Pennsylvania Tax-Free Income Trust
-- Primary Class
Years Ended Mar. 31,
1998 $16.48 9.80% .71%(E) .70%(E) 5.00%(E) 14.1% $68,048
1997 15.80 4.61% .67%(E) .66%(E) 5.20%(E) 13.6% 64,875
1996 16.10 6.52% .54%(E) .53%(E) 5.42%(E) 17.2% 65,275
1995 16.02 7.03% -- .49%(E) 5.42%(E) 2.1% 63,929
1994 15.80 3.81% -- .40%(E) 5.16%(E) -- 62,904
-- Navigator Class
Year Ended Mar. 31,
1998(H) $16.48 .55%(I) .45%(F,J) .45%(F,J) 4.82%(F,J) 14.1% $ 90
Tax-Free Intermediate-Term Income Trust
-- Primary Class
Years Ended Mar. 31,
1998 $15.61 7.12% .71%(G) .70%(G) 4.34%(G) 9.0% $59,255
1997 15.22 3.71% .67%(G) .66%(G) 4.43%(G) 8.9% 54,736
1996 15.34 6.47% .57%(G) .56%(G) 4.41%(G) -- 60,042
1995 15.06 5.65% -- .34%(G) 4.83%(G) 24.8% 48,837
1994 14.96 3.99% -- .30%(G) 4.44%(G) 6.6% 54,032
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(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, 1998. 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: 1998, .93%; 1997, .96%; 1996, .95%; 1995, .94%; 1994, .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, 1998. 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: 1998, 1.00%; 1997, 1.04%;
1996, 1.02%; 1995, 1.01%; 1994, 1.03%.
(F) Net of fees waived by the Adviser in excess of voluntary expense
limitations as follows: 0.45% until July 31, 1998. 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 .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,
1998. 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: 1998, 1.06%; 1997, 1.11%; 1996, 1.10%; 1995, 1.04%;
1994, 1.14%.
(H) For the period March 10, 1998 (commencement of sale of Navigator
Class) to March 31, 1998.
(I) Not annualized
(J) Annualized
See notes to financial statements.
26
<PAGE>
Notes to Financial Statements
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
- -------------------------------------------------------------------------------
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, each
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 the 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. 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. Capital
gain distributions are declared and paid after the end of the tax year in
which the gain is realized. Distributions payable are recorded on the
ex-dividend date. At March 31, 1998, dividends payable of $296 were
accrued for Maryland Tax-Free, $134 for Pennsylvania Tax-Free and $102 for
Tax-Free Intermediate.
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.
Receivable for Payable for
Securities Sold Securities Purchased
----------------------------------------------------------------------
Maryland Tax-Free $-- $3,174
Pennsylvania Tax-Free 20 --
Tax-Free Intermediate-Term -- --
27
<PAGE>
Notes to Financial Statements--Continued
- -------------------------------------------------------------------------------
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Funds intend to continue to qualify as regulated investment companies and
distribute all of their taxable income to their shareholders. At March 31,
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 year ended March 31, 1998, investment transactions (excluding
short-term investments) were as follows:
Purchases Proceeds from Sales
-----------------------------------------------------------------------
Maryland Tax-Free $27,638 $29,299
Pennsylvania Tax-Free 8,992 11,060
Tax-Free Intermediate-Term 9,024 5,025
At March 31, 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:
Cost Appreciation (Depreciation)
-----------------------------------------------------------------------
Maryland Tax-Free $145,074 $10,243 $(24)
Pennsylvania Tax-Free 63,108 4,214 (6)
Tax-Free Intermediate-Term 56,489 2,096 (66)
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 advisers,
acting under the supervision of their Board of Trustees, review 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.
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.
28
<PAGE>
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, 0.55% until July 31,
1995; 0.60% until March 31, 1996; 0.65% until December 31, 1996 and 0.70%
through July 31, 1998, or until the Fund's net assets reach $200 million,
whichever occurs first; for Pennsylvania Tax-Free Primary shares, 0.50%
until July 31, 1995; 0.55% through March 31, 1996; 0.65% until December
31, 1996 and 0.70% through July 31, 1998; for Pennsylvania Tax-Free
Navigator shares, 0.45% until July 31, 1998, or until the Fund's net
assets reach $125 million, whichever occurs first; for Tax-Free
Intermediate, 0.35% until July 31, 1995; 0.65% until December 31, 1996 and
0.70% through July 31, 1998, or until the Fund's net assets reach $100
million, whichever occurs first. For the year ended March 31, 1998,
advisory fees of $336, $195, and $209, were waived and $44, $11, and $13
were due to the Adviser by Maryland Tax-Free, Pennsylvania Tax-Free and
Tax-Free Intermediate-Term, 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 March 31, 1998,
distribution and service fees due to the distributor were as follows:
Maryland Tax-Free, $33; Pennsylvania Tax-Free, $14; and Tax-Free
Intermediate, $13.
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 year ended March
31, 1998: Maryland Tax-Free, $17; Pennsylvania Tax-Free, $8; and Tax-Free
Intermediate, $6.
The Adviser, LMFA and Legg Mason are 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 year
ended March 31, 1998, the Funds had no borrowings under the line of
credit.
29
<PAGE>
Notes to Financial Statements--Continued
- -------------------------------------------------------------------------------
6. Fund Share Transactions:
At March 31, 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
Year Ended March 31, 1998 1,148 $18,744 390 $6,342 (1,288) $(20,984) 250 $ 4,102
Year Ended March 31, 1997 881 14,121 394 6,311 (1,225) (19,660) 50 772
Pennsylvania Tax-Free
-- Primary Class
Year Ended March 31, 1998 503 $ 8,232 148 $2,413 (630) $(10,263) 21 $ 382
Year Ended March 31, 1997 418 6,655 192 3,059 (557) (8,894) 53 820
-- Navigator Class
Year Ended March 31, 1998A 5 $ 90 -- $ -- -- $ -- 5 $ 90
Tax-Free Intermediate
-- Primary Class
Year Ended March 31, 1998 955 $14,796 124 $1,926 (879) $(13,638) 200 $ 3,084
Year Ended March 31, 1997 858 13,139 128 1,969 (1,304) (19,970) (318) (4,862)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) For the period March 10, 1998 (commencement of sale of Navigator
Class) to March 31, 1998.
30
<PAGE>
Report of Independent Accountants
To the Shareholders and Trustees of Legg Mason Tax-Free Income Fund:
We have audited the accompanying statements of net assets of the Legg Mason
Maryland Tax-Free Income Trust, Legg Mason Pennsylvania Tax-Free Income Trust
and Legg Mason Tax-Free Intermediate-Term Income Trust ("the Funds") as of March
31, 1998, and the related statements of operations, the statements of changes in
net assets and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Funds' 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 at March
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 the
Legg Mason Maryland Tax-Free Income Trust, Legg Mason Pennsylvania Tax-Free
Income Trust and Legg Mason Tax-Free Intermediate-Term Income Trust as of March
31, 1998, and the results of their operations, the changes in their net assets,
and their financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
April 24, 1998
31
