<PAGE>
Investment Manager Semi-Annual Report
Legg Mason Fund Adviser, Inc. September 30, 2000
Baltimore, MD
Investment Adviser
Legg Mason Trust, fsb Legg Mason
Baltimore, MD Tax-Free
Income Fund
Board of Trustees
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Nelson A. Diaz
Richard G. Gilmore Maryland Tax-Free
Arnold L. Lehman
Dr. Jill E. McGovern Pennsylvania Tax-Free
G. Peter O'Brien
T. A. Rodgers Tax-Free
Edward A. Taber, III Intermediate-Term
Transfer and Shareholder Servicing Agent
Boston Financial Data Services Primary Class
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
[LEGG
Counsel MASON
Kirkpatrick & Lockhart LLP FUNDS
Washington, D.C. LOGO]
The Art of Investing/SM/
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
[RECYCLED LOGO] Printed on Recycled Paper
LMF-030
11/00
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Tax-Free Income Fund's semi-
annual report for the six months ended September 30, 2000. This report includes
financial information for the Primary Class of the three series of the Fund:
Maryland Tax-Free, Pennsylvania Tax-Free and Tax-Free Intermediate.
The following table summarizes key statistics for each Fund, as of September
30, 2000:
Average Net Asset Value
SEC Yield* Weighted Maturity Per Share
---------- ----------------- ---------------
Maryland Tax-Free 4.37% 14.96 Years $15.52
Pennsylvania Tax-Free 4.35% 14.08 Years 15.66
Tax-Free Intermediate 4.02% 7.09 Years 15.20
Each of the Funds seeks a high level of current income exempt from federal
income tax. The Maryland and Pennsylvania Tax-Free Funds also seek income which
is exempt from state and local income taxes in each respective state. The Funds
purchase only securities which have received investment grade ratings from
Moody's Investors Service or Standard & Poor's, or which are judged by their
investment adviser to be of comparable quality. Moody's ratings of securities
currently owned by the Funds are:
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate
-------- ------------ ------------
Aaa 43.9% 72.1% 54.2%
Aa 33.9 19.8 30.6
A 14.2 4.7 12.0
Baa 3.9 -- 2.0
Short-term securities 4.1 3.4 1.2
For the twelve months ended September 30, 2000, total returns for Maryland
Tax-Free, Pennsylvania Tax-Free and Tax-Free Intermediate were +5.40%, +5.43%
and +4.83%, respectively. (Total return measures investment performance in terms
of appreciation or depreciation in net asset value per share plus dividends and
any capital gain distributions. It assumes that dividends and distributions were
reinvested at the time they were paid. The initial sales charge for each Fund is
being waived indefinitely, and no initial sales charges are reflected in these
total return calculations.) Of course, past performance does not guarantee
future results.
Normally, the weighted average maturity for Maryland Tax-Free and Pennsylvania
Tax-Free will be kept within a range of 12 to 24 years. Because of their
relatively long average weighted maturities, these Funds 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- and intermediate-term average
weighted maturities. Tax-Free Intermediate's weighted average maturity is
normally kept within an intermediate-term maturity range of 2 to 10 years. We
expect that,
----------
*SEC yields reported are for the 30 days ended September 30, 2000. 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 4.11%, 4.11%
and 3.64%, respectively.
<PAGE>
in most market periods, Tax-Free Intermediate will offer greater price stability
than municipal bond funds with longer maturities, while earning somewhat lower
yields.
Some shareholders regularly add to their holdings by authorizing monthly
transfers from their bank checking or Legg Mason accounts. Your Financial
Advisor will be happy to help you make these arrangements if you would like to
purchase additional shares in this convenient way.
Sincerely,
/s/ John F. Curley
------------------
John F. Curley, Jr.
Chairman
October 25, 2000
2
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
September 30, 2000 (Unaudited)
(Amounts in Thousands)
Maryland Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds -- 94.5%
Maryland -- 94.5%
Annapolis (City of), Economic Development
Revenue (St. John's College Facility)
Series 1998 5.500% 10/1/18 $ 1,000 $ 941
Series 1998 5.500% 10/1/23 870 794
Anne Arundel County (Baltimore Gas & Electric
Project), PCR Refunding 6.000% 4/1/24 4,500 4,538
Anne Arundel County, Consolidated Water and
Sewer, GO 5.000% 9/1/16 1,000 959
Anne Arundel County, Maryland GO 6.500% 5/15/06 1,000 1,094
Baltimore County, Consolidated Public
Improvement
GO 4.750% 7/1/18 3,150 2,858
GO (Pre-refunded 7/1/02) 6.125% 7/1/09 2,000 2,093/A/
Baltimore County, Nursing Home (Stella Maris),
Series A (Pre-refunded 3/1/01) 7.250% 3/1/11 890 917/A/
Baltimore, Maryland Consolidated Public
Improvement, Series D Refunding
(AMBAC insured) 6.000% 10/15/06 1,140 1,220
Baltimore, Maryland Revenue Refunding
Waste Water Project
Series A (FGIC insured) 5.000% 7/1/22 1,550 1,437
Series A (FGIC insured) 5.500% 7/1/26 1,000 984
Carroll County, Consolidated Public
Improvement, GO 5.375% 11/1/25 1,000 976
Charles County, GO (Pre-refunded 6/1/01) 6.600% 6/1/06 1,000 1,034/A/
Community Development Administration,
Maryland Department of Housing and
Community Development, Residential
Revenue Bonds
Series H AMT 6.000% 9/1/17 3,000 3,050
Series D AMT 5.375% 9/1/24 2,000 1,873
Frederick County, GO, Series 1990
(Pre-refunded 8/1/03) 6.625% 8/1/20 250 268/A/
Frederick County, Public Facility 1991 GO
(Pre-refunded 5/1/01) 6.500% 5/1/07 650 671/A/
Harford County, GO (Pre-refunded 12/1/00) 6.400% 12/1/10 500 512/A/
Harford County, Maryland
(Pre-refunded 3/1/06) 5.000% 3/1/12 315 325/A/
</TABLE>
3
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Maryland Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Howard County, Metropolitan District GO
Series B Refunding 6.000% 8/15/19 $ 1,500 $ 1,509
Series 1998 A Refunding 4.750% 2/15/27 3,385 2,974
Howard County, Public Improvement GO,
Series B Refunding 0.000% 8/15/07 1,000 716/B/
Laurel (City of), Public Improvement GO Refunding
(Pre-refunded 7/1/01) (MBIA insured) 7.000% 7/1/09 250 259/A/
(Pre-refunded 7/1/01) (MBIA insured) 7.000% 7/1/11 1,000 1,039/A/
Maryland Community Development
Administration, Multi-Family Insured Mortgage
Series G 7.100% 5/15/23 150 154
Series B 5.800% 5/15/26 1,500 1,459
Maryland Community Development
Administration, Single Family
Second Series AMT 6.650% 4/1/04 1,000 1,019
Sixth Series AMT 7.125% 4/1/14 365 369
Third Series Non-AMT 7.250% 4/1/27 670 683
Maryland Health and Higher Educational Facilities
Authority, Anne Arundel Medical Center Issue,
Series 1998 (FSA insured) 5.125% 7/1/28 2,000 1,844
Maryland Health and Higher Educational Facilities
Authority, College of Notre Dame (MBIA insured) 5.300% 10/1/18 925 916
Maryland Health and Higher Educational Facilities
Authority, College of Notre Dame (MBIA insured) 4.650% 10/1/23 1,400 1,197
Maryland Health and Higher Educational Facilities
Authority, Francis Scott Key Medical Center
Refunding (FGIC insured) 5.000% 7/1/23 2,000 1,828
Refunding 5.625% 7/1/25 995 953
Maryland Health and Higher Educational Facilities
Authority, Greater Baltimore Medical Center
(Pre-refunded 7/1/01) 6.750% 7/1/19 1,000 1,037/A/
Maryland Health and Higher Educational Facilities
Authority, Howard County General Hospital 5.500% 7/1/21 2,825 2,815
Maryland Health and Higher Educational Facilities
Authority, Johns Hopkins Hospital, Series 1990 0.000% 7/1/19 4,000 1,364/B/
Maryland Health and Higher Educational Facilities
Authority, Johns Hopkins Medicine Refunding
(MBIA insured) 5.000% 7/1/29 2,000 1,811
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maryland Health and Higher Educational Facilities
Authority, Johns Hopkins University
Refunding (MBIA insured) 6.000% 7/1/08 $ 1,000 $ 1,084
Refunding (MBIA insured) 6.000% 7/1/10 500 546
Series 1997 Refunding 5.625% 7/1/17 1,000 1,011
Maryland Health and Higher Educational Facilities
Authority, Kennedy Institute
Series 1991 (Pre-refunded 7/1/01) 7.400% 7/1/11 630 656/A/
Series 1991 (Pre-refunded 7/1/01) 6.750% 7/1/22 1,000 1,017/A/
Maryland Health and Higher Educational Facilities
Authority, Kennedy Krieger Issue, Series 1997 5.125% 7/1/22 1,000 758
Maryland Health and Higher Educational Facilities
Authority, Loyola College Issue, Series 1999 5.000% 10/1/39 1,000 881
Maryland Health and Higher Educational Facilities
Authority, Maryland Institute, College of Art
Issue (FSA insured) 5.000% 6/1/29 2,000 1,808
Maryland Health and Higher Educational Facilities
Authority, Medlantic/Helix Issue Revenue Bonds,
Series 1998 B (AMBAC insured) 5.250% 8/15/38 2,900 2,596
Maryland Health and Higher Educational Facilities
Authority, Union Memorial Hospital
Series B (Pre-refunded 7/1/01) (MBIA insured) 6.750% 7/1/11 500 518/A/
Series B (MBIA insured) 6.750% 7/1/11 35 36
Series A (MBIA insured) 6.750% 7/1/11 65 68
Series B (Pre-refunded 7/1/01) (MBIA insured) 6.750% 7/1/21 1,300 1,348/A/
Series B (MBIA insured) 6.750% 7/1/21 210 218
Series A (MBIA insured) 6.750% 7/1/21 390 404
Maryland Health and Higher Educational Facilities
Authority, University of Maryland Medical System
Series 1993 Refunding (FGIC insured) 5.375% 7/1/13 2,000 2,014
Series 2000 6.750% 7/1/30 1,250 1,282
Maryland National Capital Park and Planning
Commission (Prince George's County), Series L2
(Pre-refunded 7/1/02) 6.000% 7/1/05 500 522/A/
Maryland Transportation Authority, Series 1985
Refunding 5.750% 7/1/15 5,250 5,296
Maryland Water Quality Financing Administration,
Revolving Loan Fund Revenue, Series 1993A
(Pre-refunded 9/1/03) 5.400% 9/1/12 1,500 1,537/A/
Mayor and City Council of Baltimore, Baltimore
City Water Projects Refunding (FGIC insured) 5.000% 7/1/24 5,600 5,161
</TABLE>
5
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Maryland Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mayor and City Council of Baltimore, Capital
Appreciation GO
Series 1993A (Pre-refunded 10/15/05) 0.000% 10/15/11 $ 1,060 $ 579/A,B/
Series A Unrefunded Balance (FGIC insured) 0.000% 10/15/11 940 505/B/
Mayor and City Council of Baltimore, Parking
Revenue, Series A (Pre-refunded 7/1/02)
(FGIC insured) 6.250% 7/1/21 500 524/A/
Montgomery County (Potomac Electric Project),
1994 Series, PCR Refunding 5.375% 2/15/24 1,000 952
Montgomery County, Consolidated Public
Improvement
GO Series A Refunding 5.800% 7/1/07 4,000 4,276
GO Series A Refunding 0.000% 7/1/10 3,000 1,844/B/
Montgomery County, Consolidated Public
Improvement GO, Series A 5.000% 5/1/18 3,000 2,848
Montgomery County, HOC Single Family,
Series A 6.800% 7/1/17 810 823
Montgomery County, Parking Revenue
(Silver Spring Parking Lot), 1992 Series A
Refunding (FGIC insured) 6.250% 6/1/07 2,000 2,088
Northeast Maryland Waste Disposal Authority,
Solid Waste Revenue (Montgomery County
Resource Recovery Project)
AMT Series 1993A 6.000% 7/1/07 1,000 1,057
AMT Series 1993A 6.300% 7/1/16 3,000 3,077
Port Facilities Revenue (Consolidated Coal
Sales Co. Project)
Series A 6.500% 10/1/11 5,000 5,258
Series B 6.500% 10/1/11 1,000 1,052
Prince George's County (Potomac Electric Project),
1993 Series PCR Refunding 6.375% 1/15/23 2,250 2,327
Prince George's County, Consolidated Public
Improvement
GO Refunding 6.700% 7/1/04 585 605
GO Refunding 6.750% 7/1/11 585 606
Prince George's County, Solid Waste Management
System Revenue, Series 1993 Refunding 5.250% 6/15/13 1,000 970
State of Maryland, GO 5.400% 6/1/07 2,000 2,070
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State of Maryland, GO, State and Local
Facilities Loan of 2000, First Series 5.500% 8/1/10 $ 2,000 $ 2,113
State of Maryland, GO, Third Series 6.700% 7/15/02 500 504
Talbot County, Bank Qualified, GO
(Pre-refunded 5/1/01) 6.700% 5/1/10 500 516/A/
(Pre-refunded 5/1/01) 6.700% 5/1/11 415 429/A/
University of Maryland Auxiliary Facilities and
Tuition Revenue,
Series B (Pre-refunded 10/1/02) 6.375% 4/1/09 1,000 1,055/A/
Series A Refunding 5.125% 4/1/17 2,000 1,935
University System of Maryland Auxiliary Facility
and Tuition Revenue Bonds, 1999 Series A 4.500% 10/1/19 5,000 4,299
Washington County, Maryland (Water & Sewer
Project), GO Refunding (FGIC insured) 0.000% 1/1/17 385 154/B/
Washington Suburban Sanitary District 5.500% 6/1/13 1,000 1,019
Washington Suburban Sanitary District
(Pre-refunded 6/1/02) 6.100% 6/1/07 1,000 1,045/A/
First Series (Pre-refunded 6/1/01) 6.900% 6/1/13 400 414/A/
Refunding 5.250% 6/1/15 1,000 997
Refunding 5.250% 6/1/16 1,000 996
Refunding 5.750% 6/1/17 2,000 2,096
Refunding 6.000% 6/1/18 2,705 2,901
Refunding 6.000% 6/1/19 3,665 3,913
Worcester County Sanitary District, GO
(Pre-refunded 5/1/01) 6.750% 5/1/15 115 119/A/
--------
Total Municipal Bonds (Identified Cost -- $132,939) 135,217
------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations/C /-- 4.1%
District of Columbia -- 0.5%
District of Columbia Revenue
Multimodal Medlantic Series C 5.600% 10/2/00 800 800
--------
Florida -- 2.5%
Jacksonville, Florida Electric Authority Revenue,
Subordinated Electric Systems, Series C 5.600% 10/2/00 3,600 3,600
--------
Pennsylvania -- 0.5%
Pennsylvania Higher Educational Facilities
Authority, Revenue Refunding Bond (Carnegie
Mellon University), Series 1995 C 5.600% 10/2/00 200 200
The Hospitals and Higher Education Facilities
Authority of Philadelphia, Hospital Revenue Bond
(The Children's Hospital of Philadelphia Project),
Series 1996 A 5.600% 10/2/00 500 500
--------
700
--------
</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> <C> <C> <C>
Wisconsin -- 0.6%
Town of Carlton, Wisconsin, PCR Refunding Bond
(Wisconsin Power and Light Company Projects),
Series 1991 B 5.600% 10/2/00 $ 800 $ 800
--------
Total Variable Rate Demand Obligations
(Identified Cost -- $5,900) 5,900
------------------------------------------------------------------------------------------------------------
Total Investments -- 98.6% (Identified Cost -- $138,839) 141,117
Other Assets Less Liabilities -- 1.4% 1,957
--------
Net assets consisting of:
Accumulated paid-in capital applicable to
9,216 shares outstanding $141,640
Accumulated net realized gain/(loss) on investments (844)
Unrealized appreciation/(depreciation) of investments 2,278
--------
Net assets -- 100.0% $143,074
========
Net asset value and redemption price per share:/D/ $15.52
======
------------------------------------------------------------------------------------------------------------
</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, 2000, and the maturity
shown is the longer of the next interest readjustment 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 $15.96.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
8
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
September 30, 2000 (Unaudited)
(Amounts in Thousands)
Pennsylvania Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds -- 95.4%
Pennsylvania -- 95.4%
Allegheny County, Airport Revenue
1992-B AMT (FSA insured) 6.625% 1/1/22 $ 1,000 $ 1,033
Allegheny County, Baldwin-Whitehall School
District, GO Series 1992-A (Pre-refunded 8/15/02)
(FGIC insured) 6.600% 8/15/10 1,000 1,039/A/
Allegheny County, Pennsylvania Higher Education,
Duquesne University Project Refunding
(AMBAC insured) 5.125% 3/1/13 1,000 987
Allegheny County, West Jefferson Hills School
District, GO (Pre-refunded 2/1/01)
(FGIC insured) 7.100% 2/1/11 1,000 1,009/A/
Allegheny County Hospital Development Authority,
Children's Hospital Refunding (MBIA insured) 6.875% 7/1/14 1,000 1,019
Allegheny County Hospital Development Authority,
Health Center Revenue Bonds, Series 1997B
(MBIA insured) 6.000% 7/1/24 1,000 1,039
Beaver County, Ohio Edison Company
IDA PCR Refunding (FGIC insured) 7.000% 6/1/21 1,000 1,033
Bucks County, Council Rock School District, GO
(Pre-refunded 3/1/01) (FGIC insured) 6.750% 3/1/11 250 252/A/
Central Dauphin School District, Dauphin County,
Pennsylvania, GO Bonds, Series AA of 1998
(MBIA insured) 4.500% 12/1/18 2,250 1,919
Commonwealth of Pennsylvania, GO
First Series 6.125% 9/15/03 1,000 1,036
Second Series (Pre-refunded 11/1/01) 6.500% 11/1/09 1,000 1,037/A/
County of Chester, Pennsylvania, GO Bonds,
Series of 1998 5.000% 6/15/15 1,000 955
County of Delaware, Pennsylvania, GO Bonds,
Series of 1999 5.125% 10/1/16 1,000 959
Deer Lakes School District, Pennsylvania GO
(MBIA insured) 6.450% 1/15/19 1,750 1,827
Delaware County Authority, University Revenue,
Villanova University (Pre-refunded 8/1/01) 6.850% 8/1/11 500 510/A/
Delaware County
GO (Pre-refunded 11/15/02) 6.000% 11/15/22 1,000 1,030/A/
GO Refunding 6.000% 11/15/22 220 222
Delaware River Port Authority (FGIC insured) 5.500% 1/1/26 1,000 985
</TABLE>
9
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <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 $ 2,102/A/
Lower Bucks County Joint Municipal Authority,
Bucks County, Pennsylvania, Water & Sewer
Revenue Bonds, Series of 1998 (FSA insured) 5.000% 11/15/17 1,000 930
Montgomery County, Upper Gwynedd -
Towamencin Guaranteed Sewer Revenue,
Series 1991-A (MBIA insured) 6.750% 10/15/06 250 256
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% 5/15/21 250 250
Northampton County Higher Education Authority,
Lehigh University Revenue, Series 1996-B 5.250% 11/15/21 2,500 2,360
Pennsylvania Convention Center Authority
Revenue Bonds, 1989 Series A (FGIC insured) 6.000% 9/1/19 1,000 1,055
Pennsylvania Economic Development Revenue IDA
Series 1991-A (Pre-refunded 7/1/01) 7.000% 1/1/11 1,000 1,039/A/
Series 1994-A Refunding (AMBAC insured) 5.500% 1/1/14 1,525 1,530
Pennsylvania Higher Education, University of
Pittsburgh, Series 1997-A (FGIC insured) 5.125% 6/1/22 1,000 924
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue AMT, Series 1991-C
(AMBAC insured) 7.150% 9/1/21 1,000 1,066
Pennsylvania Higher Educational Facilities Authority,
Temple University Revenue First Series
(Pre-refunded 4/1/01) (MBIA insured) 6.500% 4/1/21 250 258/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 1,517
Series 1998 4.625% 7/15/30 2,000 1,626
Pennsylvania Housing Finance Agency, Rental
Housing
Series 1993-C (Fannie Mae insured) 5.800% 7/1/22 1,000 979
Series 1992-C (Fannie Mae insured) 6.500% 7/1/23 750 775
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania Housing Finance Agency, Single
Family Mortgage
Series 1991-32 Refunding 7.150% 4/1/15 $ 435 $ 448
Series 1992-33 6.900% 4/1/17 230 239
Pennsylvania Intergovernmental Co-op Authority
(Pre-refunded 6/15/03) (MBIA insured) 5.600% 6/15/15 1,000 1,027/A/
(Pre-refunded 6/15/03) (MBIA insured) 5.600% 6/15/16 2,000 2,054/A/
Pennsylvania Intergovernmental Co-op Authority,
Special Tax Revenue Refunding (FGIC insured) 4.750% 6/15/23 1,550 1,332
Pennsylvania State University, Series A Refunding 5.100% 3/1/18 1,500 1,404
Pennsylvania Turnpike Commission, Oil
Franchise Tax Subordinated Revenue Bonds,
Series B of 1998 (AMBAC insured) 4.750% 12/1/27 2,000 1,707
Pennsylvania Turnpike Commission, Revenue
Series N 5.500% 12/1/17 1,000 987
Philadelphia Gas Works, Series B (MBIA insured) 7.000% 5/15/20 500 575
Philadelphia Hospitals and Higher Education
Facilities Authority, Hospital Revenue Refunding,
Children's Hospital, Series 1993-A 5.000% 2/15/21 1,000 850
Philadelphia Municipal Authority, Justice Lease
Revenue
Series 1991-B (Pre-refunded 11/15/01)
(FGIC insured) 7.000% 11/15/04 500 524/A/
Series 1991-B (Pre-refunded 11/15/01)
(FGIC insured) 7.100% 11/15/05 500 524/A/
Philadelphia Water and Wastewater Revenue
Bonds, Series 1995 6.250% 8/1/11 2,000 2,204
Pittsburgh (City of), Pennsylvania, GO
(AMBAC insured) 5.250% 9/1/18 2,000 1,915
Port Authority of Allegheny County (Pennsylvania),
Special Revenue Transportation Bonds,
Series of 1999 (MBIA insured) 6.375% 3/1/14 1,000 1,086
Sayre, Pennsylvania Healthcare Revenue Volunteer
Hospital Authority, Guthrie Healthcare System
(AMBAC insured) 7.200% 12/1/20 500 522
Schuylkill County, Pennsylvania, Charity Obligated
Group IDA, Series A 5.000% 11/1/28 500 428
Somerset County General Authority,
Commonwealth Lease Revenue (Pre-refunded
10/15/01) (FGIC insured) 7.000% 10/15/13 500 513/A/
</TABLE>
11
<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>
Swarthmore Borough Authority, Swarthmore
College Refunding Revenue
Series 1992 (Pre-refunded 9/15/02) 6.000% 9/15/12 $ 180 $ 189/A/
Unrefunded Balance 6.000% 9/15/12 820 853
Series 1992 (Pre-refunded 9/15/02) 6.000% 9/15/20 370 387/A/
Unrefunded Balance 6.000% 9/15/20 1,630 1,657
University of Pittsburgh
1997-B Refunding (MBIA insured) 5.000% 6/1/21 2,000 1,820
Series 1992-A (MBIA insured) 6.125% 6/1/21 350 356
Series 1992-A (Pre-refunded 6/1/02)
(MBIA insured) 6.125% 6/1/21 650 679/A/
Upper St. Clair Township School District,
Allegheny County, Pennsylvania GO Bonds,
Series of 1997 5.200% 7/15/27 1,150 1,063
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 1,050/A/
Westmoreland County
GO (AMBAC insured) 0.000% 8/1/13 2,000 1,008/B/
GO (AMBAC insured) 0.000% 8/1/14 2,475 1,166/B/
--------
Total Municipal Bonds (Identified Cost -- $62,394) 63,651
------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations/C/ -- 3.3%
Pennsylvania -- 3.3%
Pennsylvania Higher Educational Facilities Authority
Revenue Refunding (Carnegie Mellon University),
Series 1995 A 5.600% 10/2/00 200 200
Pennsylvania Higher Educational Facilities Authority,
Carnegie Mellon University, Series 1995 D 5.600% 10/2/00 1,400 1,400
The Hospitals and Higher Education Facilities
Authority of Philadelphia, Hospital Revenue Bond
(The Children's Hospital of Philadelphia Project),
Series 1992 B 5.600% 10/2/00 600 600
--------
Total Variable Rate Demand Obligations
(Identified Cost -- $2,200) 2,200
------------------------------------------------------------------------------------------------------------
Total Investments -- 98.7% (Identified Cost -- $64,594) 65,851
Other Assets Less Liabilities -- 1.3% 849
--------
Net assets -- 100.0% $ 66,700
========
</TABLE>
12
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------
<S> <C>
Net assets consisting of:
Accumulated paid-in capital applicable to:
4,256 Primary Class shares outstanding $ 66,373
4 Navigator Class shares outstanding 72
Accumulated net realized gain/(loss) on investments (1,002)
Unrealized appreciation/(depreciation) of investments 1,257
--------
Net assets -- 100.0% $ 66,700
========
Net asset value and redemption price per share:/D/
Primary Class $15.66
======
Navigator Class $15.65
======
------------------------------------------------------------------------------------------------------------
</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, 2000, and the maturity
shown is the longer of the next interest readjustment 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 $16.10.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
13
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
September 30, 2000 (Unaudited)
(Amounts in Thousands)
Tax-Free Intermediate-Term Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds -- 97.5%
Arizona -- 3.9%
Salt River Project Agricultural Improvement
and Power District, Electric System Refunding
Revenue, 1993 Series A 5.300% 1/1/03 $ 1,000 $ 1,017
Scottsdale Street and Highway User Revenue
Refunding, Series 1993 5.000% 7/1/02 1,000 1,009
--------
2,026
--------
Connecticut -- 2.0%
State of Connecticut Special Tax Obligation,
Transportation Infrastructure, 1990 Series A
(Pre-refunded 6/1/01) 7.100% 6/1/04 1,000 1,028/A/
--------
Florida -- 6.1%
Northwest Florida Water Management District,
Land Acquisition Revenue Refunding,
Series 1992 (FGIC insured) 5.500% 4/1/02 1,000 1,015
Seminole County, Florida Water & Sewer Revenue
Refunding (MBIA insured) 6.000% 10/1/12 1,000 1,088
State Board of Education Capital Outlay,
Series 1996 A 5.600% 1/1/08 1,000 1,039
--------
3,142
--------
Georgia -- 2.1%
State of Georgia GO Bonds, Series 1997 C 6.250% 8/1/10 1,000 1,112
--------
Illinois -- 2.4%
State of Illinois Sales Tax Revenue, Series O 5.900% 6/15/01 1,220 1,233
--------
Kentucky -- 2.0%
Turnpike Authority of Kentucky, Economic
Development Road Revenue Refunding
(Revitalization Projects), Series 1993
(AMBAC insured) 5.300% 7/1/04 1,000 1,024
--------
Louisiana -- 4.0%
City of New Orleans, Audubon Park Commission
Aquarium Refunding, Series 1993
(FGIC insured) 6.000% 10/1/08 1,000 1,049
City of New Orleans, Louisiana GO
Refunding Bonds, Series 1998 (FGIC insured) 5.500% 12/1/10 1,000 1,039
--------
2,088
--------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maine -- 2.0%
Maine Municipal Bond Bank GO Refunding,
1993 Series A 5.200% 11/1/05 $ 1,000 $ 1,022
--------
Maryland -- 11.0%
Maryland Health and Higher Educational Facilities
Authority Refunding Revenue
Kennedy Kreiger Issue 5.200% 7/1/09 400 376
Kennedy Kreiger Issue 5.250% 7/1/10 400 372
Maryland Health and Higher Educational Facilities
Authority, University of Maryland Medical
System, Series 2000 6.125% 7/1/07 250 254
Maryland Transportation Authority, Transportation
Facilities Projects Refunding Revenue, Series 1992 5.700% 7/1/05 1,000 1,046
Mayor and City Council of Baltimore GO,
Consolidated Public Improvement Refunding,
1995 Series A (FGIC insured) 0.000% 10/15/06 750 551/B/
Northeast Maryland Waste Disposal Authority
Solid Waste Revenue (Montgomery County
Resource Recovery Project), AMT Series 1993 A 5.600% 7/1/02 1,000 1,016
State of Maryland GO, State and Local Facilities
Loan of 2000, First Series 5.500% 8/1/10 2,000 2,113
--------
5,728
--------
Massachusetts -- 2.1%
Massachusetts State GO, Series A Refunding
(AMBAC insured) 5.750% 8/1/10 1,000 1,067
--------
Michigan -- 4.2%
Williamston Michigan Community School GO
(MBIA insured) 6.250% 5/1/09 2,000 2,184
--------
Nebraska -- 2.0%
Nebraska Public Power District 5.700% 1/1/04 1,000 1,032
--------
Nevada -- 1.0%
State of Nevada GO LT (Nevada Municipal Bond
Bank Refunding Project No. 4) Series 1989 B 6.700% 2/1/01 500 503
--------
</TABLE>
15
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Hampshire -- 1.9%
New Hampshire Municipal Bond Bank GO
Refunding, 1991 Series H 5.700% 2/15/01 $ 1,000 $ 1,005
--------
Pennsylvania -- 3.8%
City of Philadelphia, Pennsylvania Water and
Wastewater Revenue Bonds, Series 1993
(AMBAC insured) 5.625% 6/15/08 1,000 1,048
The Pennsylvania State University Bonds,
Series A 5.000% 8/15/16 1,000 941
--------
1,989
--------
Rhode Island -- 3.3%
Rhode Island Health and Educational Building
Corporation, Higher Education Facilities
Revenue Bonds, Brown University Issue,
Series 1998 5.000% 9/1/16 1,805 1,703
--------
South Carolina -- 4.0%
Berkeley County Water and Sewer Revenue
Refunding and Improvement (MBIA insured) 6.500% 6/1/06 1,000 1,033
South Carolina Public Service Authority Revenue,
Series B Refunding 6.700% 7/1/02 1,000 1,035
--------
2,068
--------
Tennessee -- 1.9%
State of Tennessee GO, 1994 Series A Refunding 5.250% 3/1/02 1,000 1,010
--------
Texas -- 17.2%
City of Austin Combined Utility Systems
Revenue Refunding, Series 1992 A
(MBIA insured) 6.000% 11/15/04 1,000 1,045
City of Houston, GO Revenue Refunding,
Series C 5.625% 4/1/10 1,000 1,025
City of Houston Water and Sewer System Junior
Lien Revenue Refunding, Series 1992 C
(MBIA insured) 5.400% 12/1/01 1,000 1,011
Harris County, Texas Permanent Improvement
Refunding, Series 1996 0.000% 10/1/17 1,000 380/B/
Manor, Texas Independent School District
Refunding 5.000% 8/1/17 1,000 933
State of Texas Water Development Bonds,
Series 1997E and Series 1997F 5.000% 8/1/20 1,000 916
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Texas -- Continued
Tarrant County, Texas Health Facilities Development
Corporation, Harris Methodist Health System
Revenue Bonds
Series 1987A (FGIC insured) 5.000% 9/1/15 $ 250 $ 240
Series 1997B (FGIC insured) 5.000% 9/1/15 395 379
Texas Public Finance Authority, GO Refunding
Series B 5.125% 10/1/15 1,000 963
Texas Public Finance Authority, GO Refunding
(Superconducting Super Collider Project),
Series 1992 C (FGIC insured) 0.000% 4/1/02 1,000 932/B/
United Independent School District
(Webb County, Texas) Unlimited Tax School
Building Bonds, Series 1995 (PSF guaranteed) 7.100% 8/15/06 1,000 1,119
--------
8,943
--------
Virginia -- 14.0%
Commonwealth of Virginia Transportation Board,
Transportation Contract Revenue Refunding,
Series 1992 (Route 28 Project) 6.000% 4/1/06 1,000 1,037
Fairfax County Public Improvement, Series 1992 C
Refunding 5.500% 10/1/03 2,000 2,017
Henrico County GO Public Improvement Refunding,
Series 1993 5.250% 1/15/09 1,100 1,120
Metro Washington DC Airport Authority Revenue
Refunding, Series A (FGIC insured) AMT 5.250% 10/1/12 1,000 996
Virginia Resources Authority, Clean Water State
Revolving Fund Revenue Bonds, Series 1999 5.750% 10/1/13 1,000 1,049
Virginia State Public Building Authority, Revenue
Refunding, Series 1992 B 5.625% 8/1/02 1,000 1,020
--------
7,239
--------
Washington -- 6.6%
King County, Washington Sewer Revenue
Second Series (FGIC Insured) 6.000% 1/1/10 1,115 1,198
State of Washington, Various Purpose GO Bonds,
Series 2000B 6.000% 1/1/11 1,000 1,073
Washington State Motor Vehicle Fuel Tax Revenue,
Series D 6.500% 1/1/07 1,045 1,142
--------
3,413
--------
Total Municipal Bonds (Identified Cost -- $49,724) 50,559
------------------------------------------------------------------------------------------------------------
</TABLE>
17
<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> <C> <C> <C>
Variable Rate Demand Obligations/C/ -- 1.2%
District of Columbia -- 0.8%
District of Columbia Multimodal Revenue Bonds,
Medlantic/Helix Issue, Series 1998A 5.600% 10/2/00 $ 400 $ 400
--------
Texas -- 0.4%
Texas State Water Development Authority,
Series A 5.600% 10/2/00 200 200
--------
Total Variable Rate Demand Obligations (Identified Cost -- $600) 600
------------------------------------------------------------------------------------------------------------
Total Investments -- 98.7% (Identified Cost -- $50,324) 51,159
Other Assets Less Liabilities -- 1.3% 666
Net assets consisting of:
Accumulated paid-in capital applicable to
3,410 shares outstanding $ 51,701
Accumulated net realized gain/(loss) on investments (711)
Unrealized appreciation/(depreciation) of investments 835
--------
Net assets -- 100.0% $ 51,825
========
Net asset value and redemption price per share:/D/ $15.20
======
------------------------------------------------------------------------------------------------------------
</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, 2000, and the maturity
shown is the longer of the next interest readjustment 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 $15.51.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
18
<PAGE>
Sector Diversification
Legg Mason Tax-Free Income Fund
September 30, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
------------------- ------------------- -------------------
% of Market % of Market % of Market
Net Assets Value Net Assets Value Net Assets Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Education Revenue 10.8 $ 15,411 21.0 $14,030 5.1 $ 2,644
Escrowed 2.0 2,816 8.4 5,631 1.2 619
General Obligation--Local 16.2 23,144 6.1 4,050 18.7 9,710
General Obligation--School -- -- 4.5 2,982 8.2 4,236
General Obligation--State 3.3 4,687 1.5 1,036 21.9 11,368
Health Care and Hospital Revenue 10.4 14,921 5.8 3,858 1.9 1,001
Housing Revenue 6.6 9,430 3.7 2,441 -- --
Lease Revenue -- -- -- -- 2.0 1,021
Other -- -- 5.9 3,929 2.4 1,233
Parking Revenue 1.4 2,088 -- -- -- --
Port Facilities Revenue 4.4 6,311 -- -- -- --
Pre-Refunded Bonds 13.0 18,689 22.8 15,223 2.0 1,028
Small Business Administration
Revenue -- -- -- -- -- --
Solid Waste Revenue 3.6 5,104 -- -- 1.9 1,016
Student Loan Revenue -- -- -- -- -- --
Transportation Revenue 3.7 5,296 8.7 5,798 9.9 5,113
Utility 5.5 7,817 1.5 1,033 8.0 4,128
Water and Sewer Revenue 13.6 19,503 5.5 3,640 14.3 7,442
Short-Term Investments 4.1 5,900 3.3 2,200 1.2 600
Other Assets Less Liabilities 1.4 1,957 1.3 849 1.3 666
----- -------- ----- ------- ----- -------
100.0 $143,074 100.0 $66,700 100.0 $51,825
===== ======== ===== ======= ===== =======
</TABLE>
------------------------------------------------
Guide to Investment Abbreviations
Legg Mason Tax-Free Income Fund
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
Connie Lee Connie Lee Insurance Company
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
GO General Obligation
HOC Housing Opportunities Commission
IDA Industrial Development Authority
LT Limited Tax
MBIA Municipal Bond Insurance Association
PCR Pollution Control Revenue
PSF Permanent School Fund
19
<PAGE>
Statements of Operations
Legg Mason Tax-Free Income Fund
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 9/30/00
----------------------------------------------------
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest $4,073 $1,943 $1,405
------ ------ ------
Expenses:
Investment advisory fee 391 185 148
Distribution and service
fees 178 84 67
Transfer agent and
shareholder servicing
expense 22 10 9
Audit and legal fees 26 16 16
Custodian fee 40 41 32
Registration fees 5 1 9
Reports to shareholders 15 8 5
Trustees' fees 4 4 4
Other expenses 2 N.M. 1
------ ------ ------
683 349 291
Less: Fees waived (185) (134) (102)
Compensating
balance credits N.M. N.M. (1)
------ ------ ------
Total expenses, net of
waivers and
compensating
balance credits 498 215 188
------ ------ ------
Net Investment Income 3,575 1,728 1,217
------ ------ ------
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on investments 94 (214) (116)
Change in unrealized appreciation/(depreciation) of
investments 870 558 476
------ ------ ------
Net Realized and Unrealized Gain/(Loss) on Investments 964 344 360
------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $4,539 $2,072 $1,577
------------------------------------------------------------------------------------------------------------
</TABLE>
N.M. -- Not meaningful.
See notes to financial statements.
20
<PAGE>
Statements of Changes in Net Assets
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
-------------------------------------------------------------------------------
Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended
9/30/00 3/31/00 9/30/00 3/31/00 9/30/00 3/31/00
--------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Change in Net Assets:
Net investment income $ 3,575 $ 7,649 $ 1,728 $ 3,675 $ 1,217 $ 2,675
Net realized gain/(loss)
on investments 94 (938) (214) (788) (116) (554)
Change in unrealized appreciation/
(depreciation) of investments 870 (8,593) 558 (3,707) 476 (1,924)
--------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations 4,539 (1,882) 2,072 (820) 1,577 197
Distributions to shareholders:
From net investment income:
Primary Class (3,575) (7,649) (1,726) (3,670) (1,217) (2,675)
Navigator Class N/A N/A (2) (5) N/A N/A
From net realized gain on
investments:
Primary Class -- (587) -- (79) -- --
Navigator Class N/A N/A -- N.M. N/A N/A
Change in net assets from Fund share
transactions:
Primary Class 157 (14,387) (2,905) (1,331) (4,176) (5,383)
Navigator Class N/A N/A -- (204) N/A N/A
--------------------------------------------------------------------------------------------------------------
Change in net assets 1,121 (24,505) (2,561) (6,109) (3,816) (7,861)
Net Assets:
Beginning of period 141,953 166,458 69,261 75,370 55,641 63,502
--------------------------------------------------------------------------------------------------------------
End of period $143,074 $141,953 $66,700 $69,261 $51,825 $55,641
--------------------------------------------------------------------------------------------------------------
</TABLE>
N/A -- Not applicable.
N.M. -- Not meaningful.
See notes to financial statements.
21
<PAGE>
Financial Highlights
Legg Mason Tax-Free Income Fund
Contained below is per share operating performance data for a Primary 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 Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income/ Gain/(Loss) Investment Investment Gain on Total End of
of Period (Loss) Investments Operations Income Investments Distributions Period
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maryland Tax-Free Income Trust
Six Months Ended
Sept. 30, 2000* $15.42 $.39/D/ $ .10 $ .49 $(.39) $ -- $ (.39) $15.52
Years Ended Mar. 31,
2000 16.39 .77/D/ (.91) (.14) (.77) (.06) (.83) 15.42
1999 16.39 .78/D/ .05 .83 (.78) (.05) (.83) 16.39
1998 15.91 .81/D/ .59 1.40 (.81) (.11) (.92) 16.39
1997 16.07 .83/D/ (.09) .74 (.83) (.07) (.90) 15.91
1996 15.87 .86/D/ .25 1.11 (.86) (.05) (.91) 16.07
Pennsylvania Tax-Free Income Trust
Six Months Ended
Sept. 30, 2000* $15.57 $.40/E/ $ .09 $ .49 $(.40) $ -- $ (.40) $15.66
Years Ended Mar. 31,
2000 16.53 .79/E/ (.94) (.15) (.79) (.02) (.81) 15.57
1999 16.48 .80/E/ .10 .90 (.80) (.05) (.85) 16.53
1998 15.80 .81/E/ .71 1.52 (.81) (.03) (.84) 16.48
1997 16.10 .83/E/ (.11) .72 (.83) (.19) (1.02) 15.80
1996 16.02 .89/E/ .15 1.04 (.89) (.07) (.96) 16.10
Tax-Free Intermediate-Term Income Trust
Six Months Ended
Sept. 30, 2000* $15.09 $.35/F/ $ .11 $ .46 $(.35) $ -- $ (.35) $15.20
Years Ended Mar. 31,
2000 15.68 .67/F/ (.59) .08 (.67) -- (.67) 15.09
1999 15.61 .67/F/ .08 .75 (.67) (.01) (.68) 15.68
1998 15.22 .67/F/ .39 1.06 (.67) -- (.67) 15.61
1997 15.34 .68/F/ (.12) .56 (.68) -- (.68) 15.22
1996 15.06 .68/F/ .28 .96 (.68) -- (.68) 15.34
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------------------------------------------------
Net
Total Net Investment Net Assets,
Expenses Expenses Income Portfolio End of
Total to Average to Average to Average Turnover Period
Return/A/ Net Assets/B/ Net Assets/C/ Net Assets Rate (in thousands)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maryland Tax-Free Income Trust
Six Months Ended
Sept. 30, 2000* 3.21%/G/ .70%/D,H/ .70%/D,H/ 5.03%/D,H/ 9.0%/H/ $143,074
Years Ended Mar. 31,
2000 (.79)% .70%/D/ .70%/D/ 4.94%/D/ 23.0% 141,953
1999 5.16% .70%/D/ .70%/D/ 4.71%/D/ 12.9% 166,458
1998 8.97% .70%/D/ .70%/D/ 4.97%/D/ 18.9% 154,468
1997 4.73% .67%/D/ .66%/D/ 5.18%/D/ 6.0% 145,974
1996 7.11% .59%/D/ .58%/D/ 5.29%/D/ 14.1% 146,645
Pennsylvania Tax-Free Income Trust
Six Months Ended
Sept. 30, 2000* 3.20%/G/ .64%/E,H/ .64%/E,H/ 5.15%/E,H/ 13.1%/H/ $ 66,633
Years Ended Mar. 31,
2000 (.84)% .66%/E/ .66%/E/ 5.03%/E/ 28.6% 69,195
1999 5.54% .70%/E/ .70%/E/ 4.82%/E/ 10.6% 75,093
1998 9.80% .71%/E/ .70%/E/ 5.00%/E/ 14.1% 68,048
1997 4.61% .67%/E/ .66%/E/ 5.20%/E/ 13.6% 64,875
1996 6.52% .54%/E/ .53%/E/ 5.42%/E/ 17.2% 65,275
Tax-Free Intermediate-Term Income Trust
Six Months Ended
Sept. 30, 2000* 3.04%/G/ .70%/F,H/ .70%/F,H/ 4.54%/F,H/ 14.1%/H/ $ 51,825
Years Ended Mar. 31,
2000 .58% .70%/F/ .70%/F/ 4.40%/F/ 35.6% 55,641
1999 4.82% .70%/F/ .70%/F/ 4.24%/F/ 17.9% 63,502
1998 7.12% .71%/F/ .70%/F/ 4.34%/F/ 9.0% 59,255
1997 3.71% .67%/F/ .66%/F/ 4.43%/F/ 8.9% 54,736
1996 6.47% .57%/F/ .56%/F/ 4.41%/F/ -- 60,042
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Excluding sales charge. Sales charges are being waived for the period
November 3, 1997 through July 31, 2001.
/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 the voluntary expense waivers described below.
/D/Net of fees waived by the Adviser in excess of voluntary expense
limitations as follows: 0.55% until July 31, 1995; 0.60% until September
30, 1996; 0.65% until December 31, 1996; and 0.70% through July 31, 2001.
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, 2000, 0.96%; and for the
years ended March 31, 2000, 0.96%; 1999, 0.94%; 1998, 0.93%; 1997, 0.96%;
and 1996, 0.95%.
/E/Net of fees waived by the Adviser in excess of voluntary expense
limitations as follows: 0.50% until July 31, 1995; 0.55% until September
30, 1996; 0.65% until December 31, 1996; and 0.70% through July 31, 2001.
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, 2000, 1.04%; and for the
years ended March 31, 2000, 1.02%; 1999, 1.00%; 1998, 1.00%; 1997, 1.04%;
and 1996, 1.02%.
/F/Net of fees waived by the Adviser in excess of voluntary expense
limitations as follows: 0.35% until July 31, 1995; 0.65% until December
31, 1996; and 0.70% through July 31, 2001. 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, 2000, 1.08%; and for the years ended March 31, 2000, 1.02%;
1999, 1.03%; 1998, 1.06%; 1997, 1.11%; and 1996, 1.10%.
/G/Not annualized.
/H/Annualized.
*Unaudited.
See notes to financial statements.
22
<PAGE>
Notes to Financial Statements
Legg Mason Tax-Free Income Fund
(Amounts in Thousands) (Unaudited)
----------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Tax-Free Income Fund ("Trust"), consisting of the Maryland
Tax-Free Income Trust ("Maryland Tax-Free"), the Pennsylvania Tax-Free Income
Trust ("Pennsylvania Tax-Free") and the Tax-Free Intermediate-Term Income
Trust ("Tax-Free Intermediate") (each a "Fund"), is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. All series of the Trust are non-diversified.
Each Fund consists of two classes of shares: Primary Class, offered since
May 1, 1991, for Maryland Tax-Free; since August 1, 1991, for Pennsylvania
Tax-Free; and since November 9, 1992, for Tax-Free Intermediate; and
Navigator Class, offered to certain institutional investors since March 10,
1998, for Pennsylvania Tax-Free. The Navigator Classes of Maryland Tax-Free
and Tax-Free Intermediate have not commenced operations. Information about
the Navigator Class is contained in a separate report to its shareholders.
The income and expenses of a Fund are allocated proportionately to the two
classes of shares except for Rule 12b-1 distribution fees, which are charged
only on Primary Class shares, and transfer agent and shareholder servicing
expenses, which are determined separately for each class.
Security Valuation
Portfolio securities are valued based upon market quotations obtained from
an independent pricing service. When market quotations are not readily
available, securities are valued based on prices received from recognized
broker-dealers in the same or similar securities. Fixed income securities
with 60 days or less remaining to maturity are valued using the amortized
cost method, which approximates current market value.
Maryland Tax-Free and Pennsylvania Tax-Free each follow an investment
policy of investing primarily in municipal obligations of one state. Economic
changes affecting either of those states and certain of its public bodies and
municipalities may affect the ability of issuers within that state to pay
interest on, 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 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 Funds' capital accounts to reflect
income and gains available for distribution under federal income tax
regulations. At September 30, 2000, accrued dividends payable were as
follows: Maryland Tax-Free, $256; Pennsylvania Tax-Free, $124; and Tax-Free
Intermediate, $86.
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.
23
<PAGE>
Notes to Financial Statements -- Continued
----------------------------------------------------------------------------
At September 30, 2000, receivables for securities sold and payables for
securities purchased for each Fund were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
-----------------------------------------------------------------
Maryland Tax-Free $ -- $ --
Pennsylvania Tax-Free 20 5
Tax-Free Intermediate -- --
Federal Income Taxes
No provision for federal income or excise taxes is required since each
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
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, 2000, investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds From Sales
-----------------------------------------------------------------
Maryland Tax-Free $6,121 $9,581
Pennsylvania Tax-Free 4,162 6,728
Tax-Free Intermediate 3,622 6,302
At September 30, 2000, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for each Fund were as follows:
Net Appreciation/
Cost Appreciation Depreciation (Depreciation)
---------------------------------------------------------------------------
Maryland Tax-Free $138,839 $4,724 $(2,446) $2,278
Pennsylvania Tax-Free 64,594 1,888 (631) 1,257
Tax-Free Intermediate 50,324 921 (86) 835
24
<PAGE>
-----------------------------------------------------------------------------
3. Transactions With Affiliates:
Each Fund has a management agreement with Legg Mason Fund Adviser, Inc.
("LMFA"). Pursuant to their respective agreements, LMFA provides the Funds
with management and administrative 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.
LMFA 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 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 each Fund:
<TABLE>
<CAPTION>
Six Months
Ended At
September 30, 2000 September 30, 2000
------------------ ------------------
Advisory Expense Expense Limitation Advisory Advisory
Fund Fee Limitation Expiration Date Fees Waived Fees Payable
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maryland Tax-Free 0.55% 0.70% July 31, 2001, or until $185 $34
net assets reach
$200 million
Pennsylvania Tax-Free 0.55% 0.70% July 31, 2001, or until 134 8
net assets reach
$125 million
Tax-Free Intermediate 0.55% 0.70% July 31, 2001, or until 102 7
net assets reach
$100 million
</TABLE>
Legg Mason Trust, fsb ("Adviser") serves as investment adviser to each
Fund. The Adviser is responsible for the actual investment activity of each
Fund. LMFA pays the Adviser a fee, computed daily and payable monthly at an
annual rate of 0.50% of each Fund's average daily net assets.
Prior to August 1, 2000, Legg Mason Capital Management, Inc. served as
investment adviser to the Funds, under compensation arrangements
substantially similar to those with the current adviser. For its services
during the fiscal years ended March 31, 1996 through 2000, and for the four
months ended August 1, 2000, the Funds paid the adviser fees as shown in the
table above, net of any waivers.
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, 2000
------------------------
Distribution Service Distribution and Service
Fund Fee Fee Fees Payable
---------------------------------------------------------------------------
Maryland Tax-Free 0.125% 0.125% $29
Pennsylvania Tax-Free 0.125% 0.125% 14
Tax-Free Intermediate 0.125% 0.125% 11
25
<PAGE>
Notes to Financial Statements -- Continued
-----------------------------------------------------------------------------
Legg Mason also has an agreement with the Funds' transfer agent to assist
it with some of its duties.
For this assistance, the transfer agent paid Legg Mason the following
amounts for the six months ended September 30, 2000: Maryland Tax-Free, $6;
Pennsylvania Tax-Free, $3; and Tax-Free Intermediate, $2.
LMFA, the Adviser and Legg Mason are corporate affiliates and wholly owned
subsidiaries of Legg Mason, Inc.
4. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate 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 Credit Agreement bear
interest at prevailing short-term interest rates. For the six months ended
September 30, 2000, the Funds had no borrowings under the Credit
Agreement.
5. Fund Share Transactions:
At September 30, 2000, 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> <C> <C> <C> <C> <C> <C> <C>
Maryland Tax-Free
-- Primary Class
Six Months Ended Sept. 30, 2000 459 $ 7,075 173 $2,664 (622) $ (9,582) 10 $ 157
Year Ended March 31, 2000 1,161 18,376 398 6,220 (2,507) (38,983) (948) (14,387)
Pennsylvania Tax-Free
-- Primary Class
Six Months Ended Sept. 30, 2000 153 $ 2,384 79 $1,238 (420) $ (6,527) (188) $ (2,905)
Year Ended March 31, 2000 758 12,022 174 2,731 (1,030) (16,084) (98) (1,331)
-- Navigator Class
Six Months Ended Sept. 30, 2000 -- $ -- -- $ -- -- $ -- -- $ --
Year Ended March 31, 2000 -- -- -- -- (13) (204) (13) (204)
Tax-Free Intermediate
-- Primary Class
Six Months Ended Sept. 30, 2000 143 $ 2,158 60 $ 910 (481) $ (7,244) (278) $ (4,176)
Year Ended March 31, 2000 790 12,095 131 1,996 (1,282) (19,474) (361) (5,383)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
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. Balanced Trust
Special Investment Trust, Inc. Financial Services Fund
Total Return Trust, Inc. Opportunity Trust
American Leading Companies
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.
[LEGG
MASON
FUNDS
LOGO]
The Art of Investing/SM/
