<PAGE>
Semi-Annual Report
September 30, 1999
Legg Mason
Tax-Free
Income Fund
Pennsylvania Tax-Free
Navigator Class
[LEGG MASON FUNDS LOGO]
The Art of Investing/SM/
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Tax-Free Income Fund's semi-
annual report for the Navigator Class of Pennsylvania Tax-Free Income Fund.
The following table summarizes key statistics for the Navigator Class shares
of the Fund, as of September 30, 1999:
<TABLE>
<CAPTION>
Average Net Asset Value
SEC Yield* Weighted Maturity Per Share
----------- ----------------- ---------------
<S> <C> <C> <C>
Pennsylvania Tax-Free 4.72% 15.38 Years $15.64
</TABLE>
The Fund seeks a high level of current income exempt from federal income tax
and Pennsylvania personal income tax. The Fund purchases only securities which
have received investment grade ratings from Moody's Investors Service or
Standard & Poor's, or which are judged by the investment adviser to be of
comparable quality. Moody's ratings of securities currently owned by the Fund
are:
<TABLE>
<CAPTION>
Pennsylvania
Tax-Free
-------------
<S> <C>
Aaa 70.9%
Aa 22.1
A 1.4
Baa --
Short-term securities 5.6
</TABLE>
In common with most other bond funds, net asset values per share of the Fund
have declined over the past year in response to rising interest rates. For the
six months ended September 30, 1999, the Fund's total return was -2.82%. (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. Past performance does not guarantee future results.
Normally, the average weighted maturity for the Fund will be kept within a
range of 12 to 24 years. Because of the relatively long average weighted
maturities, the Fund offers potentially higher yields than short-term and
intermediate-term tax-free bond funds. However, the 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-
and intermediate-term average weighted maturities.
With less than three months to go until the end of the century, attention
continues to focus on the Year 2000 issue. As you know, the Year 2000 issue is a
computer programming problem that affects the ability of computers to correctly
process dates of January 1, 2000, and beyond. We believe the Year 2000 date
change will have no adverse impact on Legg Mason's ability to service its
clients. We are on target to complete this important project. Industry-wide
testing sponsored by the Securities Industry Association ("SIA") was conducted
in March and April of 1999, with Legg Mason, its brokerage subsidiaries and
primary vendors actively participating and achieving positive results.
- ---------
*The SEC yield reported is for the 30 days ended September 30, 1999. If no fees
had been waived by the Adviser, the 30-day SECyield would have been 4.37%.
<PAGE>
Legg Mason's Year 2000 Project has four phases. The Inventory Phase and the
Assessment Phase are already complete. The Remediation Phase and the Testing
Phase are currently underway and on target. Renovation and replacement of
existing internal systems, where necessary, is also complete, and all of our
critical vendors have certified their Year 2000 compliance. Most noncritical
vendors have also certified their Year 2000 compliance, and we expect the
remaining vendors to certify their compliance shortly. Although individual
customer testing will not be available, we have successfully tested models
representing all forms of accounts maintained at Legg Mason, including the
Fund's shareholder accounts.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman
October 27, 1999
2
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
September 30, 1999 (Unaudited)
(Amounts in Thousands)
Pennsylvania Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds -- 93.2%
Allegheny County Hospital Development Authority,
Children's Hospital Refunding
(MBIA insured) 6.875% 7/1/14 $ 1,000 $ 1,018
Allegheny County Hospital Development Authority,
Presbyterian University Health System, Inc.
Series 1992-B Refunding (MBIA insured) 6.00% 11/1/23 1,250 1,258
Allegheny County Pennsylvania Higher Education
Duquesne University Project Refunding
(AMBAC insured) 5.125% 3/1/13 1,000 972
Allegheny County, Airport Revenue 1992-B AMT
(FSA insured) 6.625% 1/1/22 1,000 1,054
Allegheny County, Baldwin-Whitehall School
District, GO, Series 1992-A (Pre-refunded 8/15/02)
(FGIC insured) 6.60% 8/15/10 1,000 1,063/A/
Allegheny County, West Jefferson Hills School
District, GO (Pre-refunded 2/1/01)
(FGIC insured) 7.10% 2/1/11 1,000 1,038/A/
Beaver County, Ohio Edison Company
IDA PCR Refunding (FGIC insured) 7.00% 6/1/21 1,000 1,055
Berks County, Pennsylvania, GO, Series 1995
Refunding (FGIC insured) 5.85% 11/15/18 1,000 1,007
Bucks County, Council Rock School District, GO
(Pre-refunded 3/1/01) (FGIC insured) 6.75% 3/1/11 250 259/A/
Chester County Health and Education Facilities
Authority, Jefferson Health System Revenue Bonds,
Series 1997 B 5.375% 5/15/27 1,500 1,344
Commonwealth of Pennsylvania, GO
First Series 6.125% 9/15/03 1,000 1,053
Second Series (Pre-refunded 11/1/01) 6.50% 11/1/09 1,000 1,060/A/
Deer Lakes School District, Pennsylvania, GO
(MBIA insured) 6.45% 1/15/19 1,750 1,877
Delaware County Authority, University Revenue,
Villanova University (Pre-refunded 8/1/01)
(MBIA insured) 6.85% 8/1/11 500 524/A/
Delaware County, GO (Pre-refunded 11/15/02) 6.00% 11/15/22 1,000 1,048/A/
Delaware County, GO Refunding 6.00% 11/15/22 220 225
Delaware River Port Authority (FGIC insured) 5.50% 1/1/26 1,000 973
Erie County, Pennsylvania, Sewer Authority,
Sewer Revenue Bonds, Series 1997
(Pre-refunded 6/1/07) (AMBAC insured) 5.625% 6/1/17 2,000 2,106/A/
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lehigh County, Pennsylvania, Power & Light
Company Project IDA PCR 1994, Series A
Refunding (MBIA insured) 5.50% 2/15/27 $ 1,000 $ 945
Montgomery County Higher Education and
Health Authority, Saint Joseph's University
Revenue, Series 1992 Refunding
(Connie Lee insured) 6.25% 12/15/04 500 533
Montgomery County, GO, Series 1997 5.35% 9/15/17 1,000 972
Montgomery County, Philadelphia Electric
Company IDA PCR, Series 1991-B, Refunding
(MBIA insured) 6.70% 12/1/21 1,500 1,591
Montgomery County, Upper Gwynedd-Towamencin
Guaranteed Sewer Revenue, Series 1991-A
(MBIA insured) 6.75% 10/15/06 250 262
Montgomery Township Municipal Sewer Authority,
Guaranteed Sewer Revenue, Series 1991-A
(MBIA insured) 6.70% 5/15/21 250 254
Northampton County Higher Education Authority,
Lehigh University Revenue, Series 1996-B
(MBIA insured) 5.25% 11/15/21 2,500 2,303
Penn Cambria, Pennsylvania School District,
GO (FGIC insured) 4.75% 8/15/15 1,000 892
Pennsylvania Economic Development Revenue IDA
Series 1991-A (Pre-refunded 7/1/01) 7.00% 1/1/11 1,000 1,066/A/
Series 1994-A Refunding (AMBAC insured) 5.50% 1/1/14 2,525 2,498
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue AMT, Series 1991-C
(AMBAC insured) 7.15% 9/1/21 1,000 1,097
Pennsylvania Higher Educational Facilities Authority,
Drexel University Revenue Bonds, Series 1998
(MBIA insured) 4.625% 7/15/30 2,000 1,597
Pennsylvania Higher Educational Facilities Authority,
University of Pennsylvania Revenue Bonds,
Series 1998 4.50% 7/15/16 1,750 1,486
Pennsylvania Higher Educational Facilities Authority,
Bryn Mawr College Revenue Bonds (MBIA insured) 5.625% 12/1/27 500 486
Pennsylvania Higher Educational Facilities Authority,
Temple University Revenue, First Series
(Pre-refunded 4/1/01) (MBIA insured) 6.50% 4/1/21 250 263/A/
Pennsylvania Higher Educational Facilities Authority,
University Revenue, Series H (AMBAC insured) 5.375% 6/15/18 1,000 960
</TABLE>
4
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
<TABLE>
<CAPTION>
Pennsylvania Tax-Free Income Trust -- Continued
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania Higher Educational Facilities Authority,
University Revenue, University of Pennsylvania,
Series 1996-A Refunding 5.75% 1/1/22 $ 1,000 $ 932
Pennsylvania Higher Education, University
of Pittsburgh, Series 1997-A (FGIC insured) 5.125% 6/1/22 1,000 910
Pennsylvania Housing Finance Agency,
Rental Housing, Series 1992-C
(Fannie Mae insured) 6.50% 7/1/23 750 786
Pennsylvania Housing Finance Agency,
Rental Housing, Series 1993-C
(Fannie Mae insured) 5.80% 7/1/22 1,000 990
Pennsylvania Housing Finance Agency,
Single Family Mortgage, Series 1991-32, Refunding 7.15% 4/1/15 435 451
Pennsylvania Housing Finance Agency,
Single Family Mortgage, Series 1992-33 6.90% 4/1/17 280 290
Pennsylvania Intergovernmental Co-op Authority,
Special Tax Revenue Refunding (FGIC insured) 4.75% 6/15/23 1,550 1,306
Pennsylvania Intergovernmental Co-op Authority
(Pre-refunded 6/15/03) (MBIA insured) 5.60% 6/15/15 1,000 1,040/A/
Pennsylvania Intergovernmental Co-op Authority
(Pre-refunded 6/15/03) (MBIA insured) 5.60% 6/15/16 2,000 2,081/A/
Pennsylvania State University Refunding 5.50% 8/15/16 1,000 986
Pennsylvania State University, Series A, Refunding 5.10% 3/1/18 1,500 1,380
Pennsylvania Turnpike Commission, Oil Franchise
Tax Subordinated Revenue Bonds, Series B of 1998
(AMBAC insured) 4.75% 12/1/27 2,000 1,664
Pennsylvania Turnpike Commission Revenue, Series N 5.50% 12/1/17 1,000 966
Philadelphia Gas Works, Series B (MBIA insured) 7.00% 5/15/20 500 570
Philadelphia Hospitals and Higher Education
Facilities Authority, Hospital Revenue Refunding,
Children's Hospital, Series 1993 A 5.00% 2/15/21 1,000 878
Philadelphia Municipal Authority,
Justice Lease Revenue, Series 1991-B
(Pre-refunded 11/15/01) (FGIC insured) 7.00% 11/15/04 500 538/A/
(Pre-refunded 11/15/01) (FGIC insured) 7.10% 11/15/05 500 539/A/
Philadelphia Water and Wastewater Refunding,
Series 1998 (AMBAC insured) 5.25% 12/15/12 1,000 997
Philadelphia Water and Wastewater Revenue
(MBIA insured) 5.60% 8/1/18 2,000 1,961
Pittsburgh (City of), Pennsylvania, GO
(AMBAC insured) 5.25% 9/1/18 2,000 1,885
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sayre, PA, Health Care Revenue
Volunteer Hospital Authority, Guthrie
Healthcare System (AMBAC insured) 7.20% 12/1/20 $ 500 $ 534
Schuylkill County, Pennsylvania, Charity
Obligation Group IDA, Series A 5.00% 11/1/28 500 430
Somerset County General Authority,
Commonwealth Lease Revenue
(Pre-refunded 10/15/01) (FGIC insured) 7.00% 10/15/13 500 528/A/
Swarthmore Borough Authority, Swarthmore
College Refunding Revenue, Series 1992
(Pre-refunded 9/15/02) 6.00% 9/15/12 180 192/A/
(Pre-refunded 9/15/02) 6.00% 9/15/20 370 394/A/
Unrefunded balance 6.00% 9/15/12 820 854
Unrefunded balance 6.00% 9/15/20 1,630 1,647
Union County, Pennsylvania, Higher Educational
Facilities Financing Authority, University Revenue
Bonds (Bucknell University), Series of 1998
(MBIA insured) 4.50% 4/1/18 1,000 848
University of Pittsburgh 1997-B Refunding
(MBIA insured) 5.00% 6/1/21 1,000 894
University of Pittsburgh, Series 1992-A
(MBIA insured) 6.125% 6/1/21 350 357
University of Pittsburgh, Series 1992-A
(Pre-refunded 6/1/02) (MBIA insured) 6.125% 6/1/21 650 691/A/
Upper St. Clair Township School District
Allegheny County, PA, GO Bonds, Series of 1997 5.20% 7/15/27 1,150 1,048
Washington County Hospital Authority, Hospital
Refunding Revenue, Shadyside Hospital Project,
Series 1992
Refunding (Pre-refunded 12/15/02)
(AMBAC insured) 6.00% 12/15/18 1,000 1,067/A/
Westmoreland County, GO (AMBAC insured) 0% 8/1/13 2,000 927/B/
Westmoreland County, GO (AMBAC insured) 0% 8/1/14 2,475 1,075/B/
-------
Total Municipal Bonds (Identified Cost -- $68,013) 68,775
- ------------------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations/C/ - 5.6%
Allegheny County Hospital Development Authority
(Presbyterian Hospital), Series B2 3.85% 10/7/99 400 400
Allegheny County Hospital Development Authority
(Presbyterian Hospital), Series D 3.85% 10/7/99 800 800
</TABLE>
6
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Par Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allegheny County Hospital Development Authority
(Presbyterian Hospital), Series C 3.85% 10/7/99 $ 100 $ 100
Pennsylvania Higher Educational Facilities Authority,
Carnegie Mellon University, Series 1995-C 3.90% 10/1/99 500 500
Pennsylvania Higher Educational Facilities Authority,
Carnegie Mellon University, Series 1995 D 3.90% 10/1/99 300 300
Pennsylvania Higher Educational Facilities Authority,
Carnegie Mellon University, Series 1995-A 3.90% 10/1/99 750 750
Philadelphia, Pennsylvania, Hospitals and Higher
Education Children's Hospital Project, Series A 3.90% 10/1/99 1,000 1,000
Philadelphia, Pennsylvania, Hospitals and Higher
Education Children's Hospital of Philadelphia
Project 3.90% 10/1/99 300 300
-------
Total Variable Rate Demand Obligations
(Identified Cost - $4,150) 4,150
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments -- 98.8% (Identified Cost -- $72,163) 72,925
Other Assets Less Liabilities -- 1.2% 916
-------
Net assets consisting of:
Accumulated paid-in capital applicable to:
4,716 Primary shares outstanding $73,453
4 Navigator shares outstanding 72
Accumulated net realized gain/(loss) on investments (446)
Unrealized appreciation/(depreciation) of investments 762
-------
Net assets -- 100.0% $73,841
=======
Net asset value, redemption price and maximum offering price per share:/D/
Primary Class $15.64
=======
Navigator Class $15.64
=======
- ------------------------------------------------------------------------------------------------------------------------------------
</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 that 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, 1999, and the maturity shown
is the longer of the next interest readjustment date or the date the
original principal amount owed can be recovered through demand.
/D/ Sales charges are being waived for the period November 1, 1997 to July 31,
2000. If the sales charge were in effect, the maximum offering price at
September 30, 1999, would have been $16.08. The Navigator Class has no sales
charge.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
7
<PAGE>
Sector Diversification
Legg Mason Tax-Free Income Fund
September 30, 1999 (Unaudited)
(Amounts in Thousands)
Pennsylvania Tax-Free
Income Trust
---------------------
% of Market
Net Assets Value
- --------------------------------------------------------------------
Education Revenue 22.0 $16,212
Escrowed 6.0 4,449
General Obligation--Local 5.5 4,090
General Obligation--School 2.6 1,940
General Obligation--State 1.4 1,053
Health Care and Hospital Revenue 8.7 6,396
Housing Revenue 3.4 2,516
Other 1.8 1,306
Pre-Refunded Bonds 21.0 15,497
Small Business Administration Revenue 3.4 2,498
Student Loan Revenue 1.5 1,097
Transportation Revenue 6.3 4,657
Utility 4.9 3,591
Water and Sewer Revenue 4.7 3,473
Short-Term Investments 5.6 4,150
Other Assets Less Liabilities 1.2 916
----- -------
100.0 $73,841
===== =======
_________________________________________________________________
Guide to Investment Abbreviations
Legg Mason Tax-Free Income Fund
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
CONNIE LEE Connie Lee Insurance Company
FNMA Fannie Mae
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
8
<PAGE>
Statements of Operations
Legg Mason Tax-Free Income Fund
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 9/30/99
-------------------------
Pennsylvania
Tax-Free
Income Trust
--------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $2,093
-------
Expenses:
Investment advisory fee 208
Distribution and service fees 94
Transfer agent and shareholder servicing expense 12
Audit and legal fees 18
Custodian fee 41
Registration fees 1
Reports to shareholders 4
Trustees' fees 2
Other expenses 1
-------
381
Less: Fees waived (132)
Compensating balance credits --
-------
Total expenses, net of waivers and compensating
balance credits 249
-------
Net Investment Income 1,844
-------
Net Realized and Unrealized Gain/(Loss) on Investments
Realized gain/(loss) on investments (436)
Change in unrealized appreciation/(depreciation) of investments (3,643)
-------
Net Realized and Unrealized Gain/(Loss) on Investments (4,079)
--------------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $(2,235)
--------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
9
<PAGE>
Statements of Changes in Net Assets
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Pennsylvania
Tax-Free
Income Trust
-----------------------
Six Months Year
Ended Ended
9/30/99 3/31/99
----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Change in Net Assets:
Net investment income $ 1,844 $ 3,426
Net realized gain/(loss) on investments (436) 171
Change in unrealized appreciation/(depreciation) of investments (3,643) 198
----------------------------------------------------------------------------------------------------
Change in net assets resulting from operations (2,235) 3,795
Distributions to shareholders:
From net investment income:
Primary Class (1,842) (3,413)
Navigator Class (3) (13)
From net realized gain on investments:
Primary Class (79) (189)
Navigator Class -- (1)
Change in net assets from Fund share transactions:
Primary Class 2,834 6,867
Navigator Class (204) 186
----------------------------------------------------------------------------------------------------
Change in net assets (1,529) 7,232
Net Assets:
Beginning of period 75,370 68,138
----------------------------------------------------------------------------------------------------
End of period $ 73,841 $ 75,370
----------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
10
<PAGE>
Financial Highlights
Legg Mason Tax-Free Income Fund
Contained below is per share operating performance data for a Navigator Class
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
Net Asset Net Net Realized Total From Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Period (Loss) Investments Operations Income Investments Distributions
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free Income Trust
Six Months Ended
Sept. 30, 1999* $16.53 $.41/C/ $(.87) $(.46) $(.41) $(.02) $(.43)
Years Ended Mar. 31,
1999 16.48 .84/C/ .10 .94 (.84) (.05) (.89)
1998/F/ 16.44 .05/C/ .04 .09 (.05) -- (.05)
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
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 Period
Period Return Net Assets/A/ Net Assets/B/ Net Assets Rate (in thousands)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free Income Trust
Six Months Ended
Sept. 30, 1999* $15.64 (2.82)%/D/ .44%/C,E/ .44%/C,E/ 5.01%/C,E/ 30.9%/E/ $ 66
Years Ended Mar. 31,
1999 16.53 5.79% .46%/C/ .45%/C/ 5.04%/C/ 10.6% 277
1998/F/ 16.48 .55%/D/ .45%/C,E/ .45%/C,E/ 4.82%/C,E/ 14.1%/E/ 90
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Pursuant to Securities and Exchange Commission regulations, this ratio
reflects total expenses before compensating balance credits.
/B/This ratio reflects total expenses reduced by the impact of compensating
balance credits and voluntary expense waivers described below.
/C/Net of fees waived by the Adviser in excess of voluntary expense limitations
as follows: 0.45% until July 31, 2000. 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, 1999, 0.79%; and for the years ended March 31, 1999, 0.75%; and 1998,
0.75%.
/D/Not annualized.
/E/Annualized.
/F/For the period March 10, 1998 (commencement of sale of Navigator Class) to
March 31, 1998.
* Unaudited.
See notes to financial statements.
11
<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 to retail investors since August 1, 1991, and Navigator Class,
offered since March 10, 1998.Information about the Primary Class is contained
in a separate report to its shareholders. The Navigator Classes of Maryland
Tax-Free and Tax-Free Intermediate have 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.
Pennsylvania Tax-Free follows an investment policy of investing primarily
in municipal obligations of the Commonwealth of Pennsylvania. Economic
changes affecting Pennsylvania and certain of its public bodies and
municipalities may affect the ability of issuers within the state to pay
interest on, or repay principal of, municipal obligations held by the Fund.
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 for financial reporting and income tax purposes. Dividend
income and distributions to shareholders are allocated at the class level and
are recorded on the ex-dividend date. Dividends from net investment income
will be declared daily and paid monthly. When available, net capital gain
distributions, which are calculated at the Fund level, are declared and paid
after the end of the tax year in which the gain is realized. Distributions
are determined in accordance with federal income tax regulations, which may
differ from those determined in accordance with generally accepted accounting
principles; accordingly, periodic reclassifications are made within the
Funds' capital accounts to reflect income and gains available for
distribution under federal income tax regulations. At September 30, 1999,
accrued dividends payable for Pennsylvania Tax-Free were $155.
12
<PAGE>
Notes to Financial Statements--Continued
---------------------------------------------------------------------------
Security 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, 1999, receivables for securities sold and payables for securities
purchased for the Fund were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
-------------------------------------------------------------
Pennsylvania Tax-Free $40 $ --
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and
distribute substantially all of its taxable income to its shareholders.
Use of Estimates
Preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
Other
Compensating balance credits reflect credits earned on daily, uninvested
cash balances at the custodian, and are used to reduce each Fund's expenses.
2. Investment Transactions:
For the six months ended September 30, 1999, investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds From Sales
-------------------------------------------------------------
Pennsylvania Tax-Free $12,715 $10,943
At September 30, 1999, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for the Fund were as follows:
Net Appreciation/
Cost Appreciation Depreciation (Depreciation)
-----------------------------------------------------------------------------
Pennsylvania Tax-Free $72,163 $2,060 $(1,298) $762
13
<PAGE>
----------------------------------------------------------------------------
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 Fund's 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 Fund's 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
Fund enters into repurchase agreements to evaluate potential risks.
4. Transactions With Affiliates:
The Fund has an investment advisory and management agreement with Legg
Mason Capital Management, Inc. ("Adviser"). Pursuant to the agreement, the
Adviser provides the Fund with investment advisory and management services
for which the Fund pays a fee, computed daily and payable monthly, at an
annual rate of 0.55% of the Fund's average daily net assets.
The Adviser has agreed to waive its fees in any month to the extent the
Fund's Navigator Class expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during that month certain annual rates of that
Class's average net assets. The following chart shows the annual rate of
management fees; expense limits and their expiration dates; total management
fees waived; and management fees payable for the Navigator Class of the Fund:
<TABLE>
<CAPTION>
Six Months
Ended At
September 30, 1999 September 30, 1999
-----------------------------------------
Advisory Expense Expense Limitation Advisory Advisory
Fund Fee Limitation Expiration Date Fees Waived Fees Payable
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free 0.55% 0.45% July 31, 2000, or until $132 $7
net assets reach
$125 million
</TABLE>
Legg Mason Fund Adviser, Inc. ("LMFA") serves as administrator to the 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
the Fund's average daily net assets.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the New
York Stock Exchange, serves as distributor of the Funds. Legg Mason receives
an annual distribution fee and an annual service fee, based on each Fund's
Primary Class's average daily net assets, computed daily and payable monthly
as follows:
At September 30, 1999
------------------------
Distribution Service Distribution and Service
Fund Fee Fee Fees Payable
----------------------------------------------------------------------------
Pennsylvania Tax-Free 0.125% 0.125% $15
14
<PAGE>
Notes to Financial Statements--Continued
-----------------------------------------------------------------------------
Legg Mason also has an agreement with the Fund's transfer agent to assist
it with some of its duties. For this assistance, the transfer agent paid Legg
Mason $2 for the six months ended September 30, 1999.
The Adviser, LMFA and Legg Mason are corporate affiliates and wholly owned
subsidiaries of Legg Mason, Inc.
5. Line of Credit:
The Fund, along with certain other Legg Mason Funds, participates in a
$200 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, 1999, the Fund had no borrowings under the line of credit.
6. Fund Share Transactions:
At September 30, 1999, there were unlimited shares authorized at $.001 par
value for the Navigator Class of Pennsylvania Tax-Free. Share transactions
were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
--------------- --------------------- ------------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free
-- Primary Class
Six Months Ended Sept. 30, 1999 529 $ 8,506 88 $1,412 (443) $ (7,084) 174 $2,834
Year Ended March 31, 1999 938 15,546 157 2,609 (681) (11,288) 414 6,867
-- Navigator Class
Six Months Ended Sept. 30, 1999 -- $ -- -- $ -- (13) $ (204) (13) $ (204)
Year Ended March 31, 1999 23 373 N.M. 4 (11) (191) 12 186
---------------------------------------------------------------------------------------------------------------------------------
N.M. - Not meaningful.
</TABLE>
15
<PAGE>
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
G. Peter O'Brien
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 . 539 . 0000
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LMF-030
11/99
