<PAGE>
Annual Report
March 31, 2000
Legg Mason
Tax-Free
Income Fund
Pennsylvania Tax-Free
Navigator Class
[LEGG MASON FUNDS LOGO]
The Art of Investing/SM/
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Tax-Free Income Fund's annual
report for the Navigator Class of the Pennsylvania Tax-Free Income Trust.
As of March 31, 2000, the Fund had an SEC yield* of 5.01% and an average
weighted maturity of 14.91 years.
The Fund seeks a high level of current income exempt from federal income tax
and from state and local income taxes in Pennsylvania. 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 its 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 72.2%
Aa 23.8
A 0.0
Baa 0.0
Short-term securities 4.0
</TABLE>
Sincerely,
/s/ John F. Curley
-----------------------
John F. Curley, Jr.
Chairman
May 5, 2000
--------------
*The SEC yield reported is for the 30 days ended March 31, 2000. If no fees had
been waived by the Adviser, the 30-day SECyield for Pennsylvania Tax-Free would
have been 4.66%.
<PAGE>
Portfolio Manager's Comments
Legg Mason Tax-Free Income Fund
Market Overview and Commentary
During the 12 months ended March 31, 2000, prices of municipal bonds declined,
and tax-free yields increased 65 basis points/1/ for 30-year bonds and almost
100 basis points for 5-year bonds. However, the path to these yield levels was
not a smooth one. During the last nine months of 1999, yields on long-term
municipal bonds rose almost a full percentage point. Tax-free rates climbed
steadily as brisk economic growth and heightened inflation fears caused the
Federal Reserve to tighten monetary policy in an attempt to slow the economy.
Faced with a stream of robust economic data, the Federal Reserve has been
active, interrupting its tightening pattern only long enough to ensure adequate
liquidity and financial tranquility over year-end. Since last June, the Fed has
tightened five times in 25 basis point steps, moving the Fed Funds Rate from
4.75% to 6.00% currently.
The trend of rising tax-free rates that persisted through most of 1999
reversed course early in the New Year. During the first quarter of 2000, the
municipal bond market posted strong total returns, and tax-free yields on long-
term bonds fell about 25 basis points. A classic combination of low supply and
increased demand drove municipal bond prices higher during this period.
Municipal bond issuance is currently trending 32% below last year's level,
largely as a result of the sharp drop in refunding activity. In addition, many
municipalities are flush with cash, a happy by-product of the country's long
economic expansion that has boosted tax receipts at the state and local level.
The healthy position of municipal balance sheets enables more governments to
finance projects on a pay-as-you-go basis rather than turning to the debt
markets for funding. While supply was falling, investor appetite for municipal
bonds intensified. The volatility of the stock market during the first quarter,
particularly the technology sector, made some investors queasy enough to seek
the relative calm of the municipal market.
Pennsylvania Tax-Free Income Trust
For the fiscal year ended March 31, 2000, the Fund's total return was -0.62%.
The average maturity of the Fund decreased to 14.91 years from 16.39 years over
the last 12 months.
Outlook
As a result of strong income growth and the surging net worth of many
households, the demand for municipal bonds by individuals has grown and is
expected to continue to grow in the coming year. There seems to have been a
modest reallocation out of equities into municipal bonds on the part of
investors over the past few months. This would likely accelerate in the face of
a steep and protracted sell-off in the stock market. We believe that municipal
issuance will increase modestly from its current depressed pace, but is likely
to remain well below last year's level. Compared to many other investment
sectors, the municipal bond market has been a sea of tranquility. We believe
that this relative stability will persist, despite the activities of the Fed,
given the positive outlook for supply and demand in the municipal market.
--------------
/1/100 basis points = 1%.
2
<PAGE>
Portfolio Manager's Comments -- Continued
Legg Mason Tax-Free Income Fund -- Continued
Strategy
We continue to add to positions in bonds that we believe have good performance
characteristics in both rising and falling markets, and we have worked to
improve call protection in the Fund. We continue to favor high quality bonds,
and, as a result, the average credit quality in the Fund is currently AA or
better. Our decision to maintain only moderate exposure to the health care
sector has helped the Fund's performance as the prices of hospital bonds have
suffered disproportionately over the last year. Due to the competitive and
financial challenges facing many of these issuers, the market has penalized the
entire health care sector, in some cases unfairly. We believe that certain
credits may present value due to the higher yields which health care bonds
currently offer, and we expect to be selectively adding to our positions in this
industry.
Jane E. Trust, CFA
Portfolio Manager
May 1, 2000
3
<PAGE>
Performance Information
Legg Mason Tax-Free Income Fund
Performance Comparison of a $50,000 Investment as of March 31, 2000
The returns shown on this page are based on historical results and are not
intended to indicate future performance. The investment return and principal
value of an investment in the Fund 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
that they differ from actual year-to-year results. No adjustment has been
made for any income taxes payable by shareholders.
The Pennsylvania Tax-Free Income Trust has two classes of shares: Primary
Class and Navigator Class. Information about the Primary Class, offered to
retail investors, is contained in a separate report to its shareholders.
The following graph compares the 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 $50,000 investment for the periods
indicated after deducting all Fund investment management and other
administrative expenses and the transaction costs of buying and selling
portfolio 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 Fund's
results and the index's results assume reinvestment of all dividends and
distributions.
Pennsylvania Tax-Free Income Trust -- Navigator Class
Cumulative Average Annual
Total Return Total Return
--------------------------------------------------
One Year -0.62% -0.62%
Life of Fund+ +5.71 +2.73
--------------------------------------------------
(dagger) Inception date -- March 10, 1998
--------------------------------------------------
[GRAPH APPEARS HERE]
Pennsylvania Tax-Free Lehman Brothers Municipal
Income Trust Bond Index/1/
--------------------- -------------------------
2/28/98 $50,000 $50,000
3/31/98 $50,274 $50,045
6/30/98 $51,053 $50,805
9/30/98 $52,460 $52,365
12/31/98 $52,722 $52,680
3/31/99 $53,185 $53,145
6/31/99 $52,319 $52,210
9/31/99 $51,684 $52,000
12/31/99 $51,102 $51,595
3/31/2000 $52,855 $53,105
/1/ The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment grade tax-exempt bond market. Index
returns are for the periods beginning February 28, 1998.
(dagger) Fund inception--March 10, 1998.
4
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 2000
(Amounts in Thousands)
Pennsylvania Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds-- 95.0%
Allegheny County, Airport Revenue 1992-B AMT
(FSA insured) 6.625% 1/1/22 $1,000 $ 1,023
Allegheny County, Baldwin-Whitehall School District,
GO Series 1992-A (Pre-refunded 8/15/02)
(FGIC insured) 6.600% 8/15/10 1,000 1,043/A/
Allegheny County, Pennsylvania Higher Education,
Duquesne University Project Refunding
(AMBAC insured) 5.125% 3/1/13 1,000 974
Allegheny County, West Jefferson Hills School
District, GO (Pre-refunded 2/1/01) (FGIC insured) 7.100% 2/1/11 1,000 1,024/A/
Allegheny County Hospital Development Authority,
Children's Hospital Refunding (MBIA insured) 6.875% 7/1/14 1,000 1,005
Beaver County, Ohio Edison Company IDA PCR
Refunding (FGIC insured) 7.000% 6/1/21 1,000 1,042
Berks County, Pennsylvania, GO Series 1995
Refunding (FGIC insured) 5.850% 11/15/18 1,000 1,009
Bucks County, Council Rock School District, GO
(Pre-refunded 3/1/01) (FGIC insured) 6.750% 3/1/11 250 256/A/
Central Dauphin School District, Dauphin County,
Pennsylvania, GO Bonds, Series AA of 1998
(MBIA insured) 4.500% 12/1/18 2,250 1,903
Chester County Health and Education Facilities
Authority, Jefferson Health System Revenue
Bonds, Series 1997 B 5.375% 5/15/27 1,500 1,269
Commonwealth of Pennsylvania, GO
First Series 6.125% 9/15/03 1,000 1,038
Second Series (Pre-refunded 11/1/01) 6.500% 11/1/09 1,000 1,044/A/
County of Chester, Pennsylvania, GO Bonds,
Series of 1998 5.000% 6/15/15 1,000 941
County of Delaware, Pennsylvania GO Bonds,
Series of 1999 5.125% 10/1/16 1,000 947
Deer Lakes School District, Pennsylvania GO
(MBIA insured) 6.450% 1/15/19 1,750 1,831
Delaware County Authority, University Revenue,
Villanova University (Pre-refunded 8/1/01)
(MBIA insured) 6.850% 8/1/11 500 515/A/
Delaware County, GO (Pre-refunded 11/15/02) 6.000% 11/15/22 1,000 1,031/A/
Delaware County, GO Refunding 6.000% 11/15/22 220 221
Delaware River Port Authority (FGIC insured) 5.500% 1/1/26 1,000 964
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Erie County, Pennsylvania Sewer Authority, Sewer
Revenue Bonds Series 1997 (Pre-refunded 6/1/07)
(AMBAC insured) 5.625% 6/1/17 $2,000 $ 2,077/A/
Lehigh County, Pennsylvania, Power & Light
Company Project IDA PCR 1994, Series A
Refunding (MBIA insured) 5.500% 2/15/27 1,000 937
Lower Bucks County Joint Municipal Authority,
Bucks County, Pennsylvania, Water & Sewer
Revenue Bonds, Series of 1998 (FSA insured) 5.000% 11/15/17 1,000 921
Montgomery County, Upper Gwynedd-Towamencin
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.750% 10/15/06 250 258
Montgomery County Higher Education and Health
Authority, Saint Joseph's University Revenue
Series 1992 Refunding (Connie Lee insured) 6.250% 12/15/04 500 526
Montgomery Township Municipal Sewer Authority,
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.700% 5/15/21 250 251
Northampton County Higher Education Authority,
Lehigh University Revenue Series 1996-B 5.250% 11/15/21 2,500 2,332
Pennsylvania Convention Center Authority
Revenue Bonds, 1989 Series A (FGIC insured) 6.000% 9/1/19 1,000 1,045
Pennsylvania Economic Development Revenue IDA
Series 1991-A (Pre-refunded 7/1/01) 7.000% 1/1/11 1,000 1,050/A/
Series 1994-A Refunding (AMBAC insured) 5.500% 1/1/14 1,525 1,526
Pennsylvania Higher Education, University of
Pittsburgh Series 1997-A (FGIC insured) 5.125% 6/1/22 1,000 908
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue AMT Series 1991-C
(AMBAC insured) 7.150% 9/1/21 1,000 1,085
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) 6.500% 4/1/21 250 260/A/
Pennsylvania Higher Educational Facilities Authority
(Commonwealth of Pennsylvania), The Trustees
of the University of Pennsylvania, Revenue Bonds
Series 1998 4.500% 7/15/16 1,750 1,509
Series 1998 4.625% 7/15/30 2,000 1,623
</TABLE>
6
<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> <C> <C> <C>
Pennsylvania Housing Finance Agency, Rental
Housing Series 1992-C (FNMA insured) 6.500% 7/1/23 $ 750 $ 757
Pennsylvania Housing Finance Agency, Rental
Housing Series 1993-C (FNMA insured) 5.800% 7/1/22 1,000 955
Pennsylvania Housing Finance Agency, Single
Family Mortgage Series 1991-32 Refunding 7.150% 4/1/15 435 447
Pennsylvania Housing Finance Agency, Single
Family Mortgage Series 1992-33 6.900% 4/1/17 250 256
Pennsylvania Intergovernmental Co-op Authority
(Pre-refunded 6/15/03) (MBIA insured) 5.600% 6/15/15 1,000 1,024/A/
Pennsylvania Intergovernmental Co-op Authority
(Pre-refunded 6/15/03) (MBIA insured) 5.600% 6/15/16 2,000 2,048/A/
Pennsylvania Intergovernmental Co-op Authority,
Special Tax Revenue Refunding (FGIC insured) 4.750% 6/15/23 1,550 1,317
Pennsylvania State University, Series A Refunding 5.100% 3/1/18 1,500 1,394
Pennsylvania Turnpike Commission, Oil Franchise
Tax Subordinated Revenue Bonds, Series B of 1998
(AMBAC insured) 4.750% 12/1/27 2,000 1,680
Pennsylvania Turnpike Commission,
Revenue Series N 5.500% 12/1/17 1,000 977
Philadelphia Gas Works Series B (MBIA insured) 7.000% 5/15/20 500 572
Philadelphia Hospitals and Higher Education
Facilities Authority, Hospital Revenue Refunding
Children's Hospital Series 1993 A 5.000% 2/15/21 1,000 842
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B
Pre-refunded 11/15/01 (FGIC insured) 7.000% 11/15/04 500 528/A/
Pre-refunded 11/15/01 (FGIC insured) 7.100% 11/15/05 500 529/A/
Philadelphia Water and Wastewater Refunding,
Series 1998 (AMBAC insured) 5.250% 12/15/12 1,000 1,002
Philadelphia Water and Wastewater Revenue
(MBIA insured) 5.600% 8/1/18 2,000 1,982
Pittsburgh (City of), Pennsylvania, GO
(AMBAC insured) 5.250% 9/1/18 2,000 1,900
Port Authority of Allegheny County (Pennsylvania),
Special Revenue Transportation Bonds Series of
1999 (MBIA insured) 6.375% 3/1/14 1,000 1,078
Sayre, Pennsylvania Healthcare Revenue Volunteer
Hospital Authority, Guthrie Healthcare System
(AMBAC insured) 7.200% 12/1/20 500 527
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Schuylkill County, Pennsylvania, Charity
Obligation Group IDA, Series A 5.000% 11/1/28 $ 500 $ 417
Somerset County General Authority, Commonwealth
Lease Revenue (Pre-refunded 10/15/01)
(FGIC insured) 7.000% 10/15/13 500 518/A/
Swarthmore Borough Authority, Swarthmore
College Refunding Revenue Series 1992
Pre-refunded 9/15/02 6.000% 9/15/12 180 189/A/
Pre-refunded 9/15/02 6.000% 9/15/20 370 388/A/
Unrefunded balance 6.000% 9/15/12 820 847
Unrefunded balance 6.000% 9/15/20 1,630 1,647
University of Pittsburgh 1997-B Refunding
(MBIA insured) 5.000% 6/1/21 1,000 896
University of Pittsburgh Series 1992-A (MBIA insured) 6.125% 6/1/21 350 355
University of Pittsburgh Series 1992-A
(Pre-refunded 6/1/02) (MBIA insured) 6.125% 6/1/21 650 680/A/
Upper St. Clair Township School District, Allegheny
County, Pennsylvania GO Bonds, Series of 1997 5.200% 7/15/27 1,150 1,047
Washington County Hospital Authority, Hospital
Refunding Revenue, Shadyside Hospital Project,
Series 1992 (Pre-refunded 12/15/02)
(AMBAC insured) 6.000% 12/15/18 1,000 1,049/A/
Westmoreland County GO (AMBAC insured) 0.000% 8/1/13 2,000 961/B/
Westmoreland County GO (AMBAC insured) 0.000% 8/1/14 2,475 1,115/B/
-------
Total Municipal Bonds (Identified Cost-- $65,099) 65,798
---------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations/C/ -- 1.0%
Pennsylvania Higher Educational Facilities Authority,
Carnegie Mellon University Series 1995 D 3.950% 4/3/00 700 700
-------
Total Variable Rate Demand Obligations (Identified Cost -- $700) 700
---------------------------------------------------------------------------------------------------------------------
Total Investments -- 96.0% (Identified Cost -- $65,799) 66,498
Other Assets Less Liabilities -- 4.0% 2,763
-------
Net assets-- 100.0% $69,261
=======
</TABLE>
8
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
<S> <C>
Net assets consisting of:
Accumulated paid-in capital applicable to:
4,444 Primary Class shares outstanding $69,278
4 Navigator Class shares outstanding 72
Accumulated net realized gain/(loss) on investments (788)
Unrealized appreciation/(depreciation) of investments 699
-------
Net assets-- 100.0% $69,261
=======
Net asset value and redemption price per share:/D/
Primary Class $15.57
======
Navigator Class $15.57
======
---------------------------------------------------------------------------------------------------------------------
</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 March 31, 2000, 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 have been waived since November 3, 1997. If the sales
charges were in effect, the maximum offering price per share would
have been $16.01.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
9
<PAGE>
Sector Diversification
Legg Mason Tax-Free Income Fund
March 31, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Pennsylvania
Tax-Free
Income Trust
--------------------------------
% of Market
Net Assets Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Education Revenue 19.5 $13,496
Escrowed 8.0 5,524
General Obligation--Local 7.2 5,019
General Obligation--School 4.3 2,951
General Obligation--State 1.5 1,038
Health Care and Hospital Revenue 5.9 4,060
Housing Revenue 3.5 2,416
Lease Revenue -- --
Other 1.9 1,318
Parking Revenue -- --
Port Facilities Revenue -- --
Pre-Refunded Bonds 22.0 15,252
Small Business Administration Revenue 2.2 1,526
Solid Waste Revenue -- --
Student Loan Revenue 1.5 1,085
Transportation Revenue 8.3 5,722
Utility 2.8 1,979
Water and Sewer Revenue 6.4 4,412
Short-Term Investments 1.0 700
Other Assets Less Liabilities 4.0 2,763
----- -------
100.0 $69,261
===== =======
</TABLE>
----------------------------------------------
Guide to Investment Abbreviations
Legg Mason Tax-Free Income Fund
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
Connie Lee Connie Lee Insurance Company
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
10
<PAGE>
Statement of Operations
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 3/31/00
------------------
Pennsylvania
Tax-Free
Income Trust
--------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $ 4,157
-------
Expenses:
Investment advisory fee 402
Distribution and service fees 182
Transfer agent and shareholder servicing expense 23
Audit and legal fees 30
Custodian fee 87
Registration fees 3
Reports to shareholders 9
Trustees' fees 6
Other expenses 5
-------
747
Less: Fees waived (264)
Compensating balance credits (1)
-------
Total expenses, net of waivers and compensating balance credits 482
-------
Net Investment Income 3,675
-------
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on investments (788)
Change in unrealized appreciation/(depreciation) of investments (3,707)
-------
Net Realized and Unrealized Gain/(Loss) on Investments (4,495)
--------------------------------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $ (820)
--------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
11
<PAGE>
Statements of Changes in Net Assets
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Pennsylvania
Tax-Free
Income Trust
-------------------------
Years Ended
3/31/00 3/31/99
----------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Net Assets:
Net investment income $ 3,675 $ 3,426
Net realized gain/(loss) on investments (788) 171
Change in unrealized appreciation/(depreciation) of investments (3,707) 198
----------------------------------------------------------------------------------------------
Change in net assets resulting from operations (820) 3,795
Distributions to shareholders:
From net investment income:
Primary Class (3,670) (3,413)
Navigator Class (5) (13)
From net realized gain on investments:
Primary Class (79) (189)
Navigator Class N.M. (1)
Change in net assets from Fund share transactions:
Primary Class (1,331) 6,867
Navigator Class (204) 186
----------------------------------------------------------------------------------------------
Change in net assets (6,109) 7,232
Net Assets:
Beginning of year 75,370 68,138
----------------------------------------------------------------------------------------------
End of year $69,261 $75,370
----------------------------------------------------------------------------------------------
</TABLE>
N.M. - Not meaningful.
See notes to financial statements.
12
<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 Realized Total From Net
Value, Net and Unrealized From Net Realized
Beginning Investment Gain/(Loss) on Investment Investment Gain on Total
of Year Income Investments Operations Income Investments Distributions
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free Income Trust
Years Ended Mar. 31,
2000 $16.53 $.82/C/ $(.94) $(.12) $(.82) $(.02) $(.84)
1999 16.48 .84/C/ .10 .94 (.84) (.05) (.89)
1998/D/ 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 Year
Year 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
Years Ended Mar. 31,
2000 $15.57 (.62)% .45%/C/ .45%/C/ 5.13%/C/ 28.6% $ 66
1999 16.53 5.79% .46%/C/ .45%/C/ 5.04%/C/ 10.6% 277
1998/D/ 16.48 .55%/E/ .45%/C,F/ .45%/C,F/ 4.82%/C,F/ 14.1%/F/ 90
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ This ratio reflects total expenses before compensating balance credits,
but net of the voluntary expense waivers described below.
/B/ This ratio reflects expenses net of compensating balance credits and
voluntary expense waivers described below.
/C/ Net of fees waived by the Adviser in excess of a voluntary expense
limitation of 0.45%. 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 years ended March 31, 2000, 0.81%;
1999, 0.75%; and for the period ended March 31, 1998, 0.75%.
/D/ For the period March 10, 1998 (commencement of sale of Navigator Class
shares) to March 31,1998.
/E/ Not annualized.
/F/ Annualized.
See notes to financial statements.
13
<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, 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 Classes of
Maryland Tax-Free and Tax-Free Intermediate have not commenced operations.
Information about the Primary Class is contained in a separate report to its
shareholders.The income and expenses of each 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 Pennsylvania. Economic changes affecting
Pennsylvania and certain of its public bodies and municipalities may affect
the ability of issuers within Pennsylvania 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 federal 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 Fund's capital accounts to reflect
income and gains available for distribution under federal income tax
regulations. At March 31, 2000, accrued dividends payable for Pennsylvania
Tax-Free were $151.
14
<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 March 31,
2000, receivables for securities sold and payables for securities purchased
for Pennsylvania Tax-Free were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
-------------------------------------
$2,015 $ --
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. At
March 31, 2000, Pennsylvania Tax-Free had a capital loss carryforward for
federal income tax purposes of $354, expiring in 2008.
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 year ended March 31, 2000, investment transactions (excluding
short-term investments) for Pennsylvania Tax-Free were as follows:
Purchases Proceeds From Sales
---------------------------------
$19,652 $20,520
At March 31, 2000, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for Pennsylvania Tax-Free were as follows:
Net Appreciation/
Cost Appreciation Depreciation (Depreciation)
---------------------------------------------------------
$65,799 $1,794 $(1,095) $699
15
<PAGE>
---------------------------------------------------------------------------
3. Transactions With Affiliates:
The Fund has an investment advisory and management agreement with Legg
Mason Capital Management, Inc. ("Adviser"). Pursuant to its agreement, the
Adviser provides the Fund with investment advisory and management services
for which the Fund pays a fee, computed daily and payable monthly, at an
annual rate of 0.55% 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 expenses (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during that month certain annual rates. 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
Fund:
<TABLE>
<CAPTION>
Year Ended
March 31, 2000 At March 31, 2000
-------------- -----------------
Advisory Advisory
Advisory Expense Expense Limitation Fees Fees
Fee Limitation Expiration Date Waived Payable
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.55% 0.45% July 31, 2000, or until N.M. N.M.
net assets reach
$125 million
</TABLE>
------------
N.M. - Not meaningful.
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 Fund. Legg Mason receives
an annual distribution fee and an annual service fee, based on the Fund's
Primary Class's average daily net assets, computed daily and payable monthly
as follows:
At March 31, 2000
------------------------
Distribution Service Distribution and Service
Fee Fee Fees Payable
---------------------------------------------------------
0.125% 0.125% $15
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 $8 for the year ended March 31, 2000.
The Adviser, LMFA and Legg Mason are corporate affiliates and wholly owned
subsidiaries of Legg Mason, Inc.
4. 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
16
<PAGE>
Notes to Financial Statements--Continued
-----------------------------------------------------------------------------
Credit Agreement bear interest at prevailing short-term interest rates. For
the year ended March 31, 2000, the Fund had no borrowings under the Credit
Agreement.
5. Fund Share Transactions:
At March 31, 2000, 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
Year Ended March 31, 2000 758 $12,022 174 $2,731 (1,030) $(16,084) (98) $(1,331)
Year Ended March 31, 1999 938 15,546 157 2,609 (681) (11,288) 414 6,867
-- Navigator Class
Year Ended March 31, 2000 -- $ -- -- $ -- (13) $ (204) (13) $ (204)
Year Ended March 31, 1999 23 373 -- 4 (11) (191) 12 186
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Report of Independent Accountants
To the Board of Trustees of Legg Mason Tax-Free Income Fund and the
Shareholders of Maryland Tax-Free Income Trust, Pennsylvania Tax-Free Income
Trust, and Tax-Fre e Intermediate-Term Income Trust:
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of Maryland Tax-Free Income Trust, Pennsylvania Tax-Free Income Trust and
Tax-Free Intermediate-Term Income Trust (comprising Legg Mason Tax-Free
Income Fund, hereafter referred to as the "Funds") at March 31, 2000, and the
results of each of their operations, the changes in each of their net assets
and the financial highlights for each of the fiscal periods presented, in
conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at March
31, 2000 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
May 5, 2000
18
<PAGE>
[LEGG MASON FUNDS LOGO]
The Art of Investing/SM/
Legg Mason offers a wide range of mutual funds to meet investors' varying
financial needs and investment goals. The funds are listed below:
Equity Funds: Specialty Funds:
Value Trust, Inc. Market Neutral Trust
Special Investment Trust, Inc. Balanced Trust
Total Return Trust, Inc. Financial Services Fund
American Leading Companies Opportunity Trust
Trust
Classic Valuation Fund
Focus Trust, Inc.
U.S. Small-Capitalization
Value Trust
Global Funds: Taxable Bond Funds:
Global Income Trust U.S. Government Intermediate-Term
Europe Fund Portfolio
International Equity Trust Investment Grade Income Portfolio
Emerging Markets Trust High Yield Portfolio
Tax-Free Bond Funds: Money Market Funds:
Tax-Free Intermediate-Term U.S. Government Money Market
Income Trust Portfolio
Maryland Tax-Free Income Trust Cash Reserve Trust
Pennsylvania Tax-Free Income Trust Tax Exempt Trust, Inc.
For information on the specific risks, charges, and expenses associated with any
Legg Mason fund, please consult a Legg Mason Financial Advisor for a prospectus.
Read it carefully before investing or sending money.
<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
Nelson A. Diaz
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 o 539 o 0000
[RECYCLE LOGO] Printed on Recycled Paper
LMF-030
5/00
