<PAGE>
DEAR SHAREHOLDER:
We are pleased to enclose the annual report on the operations of Montana Tax-
Free Fund, Inc. for the year ended December 31, 1996. The municipal bond
portfolio and related financial statements are presented within for your review.
Municipal bond prices began the year with a slight upward bias and then declined
in the February-March-April time frame. Federal Reserve monetary policy became
less accommodative in response to the growth picture in the American economy.
Bond prices then moved higher during the second half of 1996 except for late
December, when a correction took place.
Shares in the Fund increased during the period from $10.04 to $10.07. During
part of the year the Fund utilized a partial hedge to maintain share price
stability. Futures contracts in U.S. Treasury Bonds and Municipal Bonds were
employed. Hedging provided share price stability as interest rates increased
and bond prices declined.
The adviser has invested primarily in high-grade Montana tax-exempt bonds (see
next page). Management intends to maintain the portfolio quality while
diversifying throughout the State. The adviser has been able to select suitable
investments from numerous offerings in both the primary and secondary municipal
bond markets. Reasonable income and preservation of capital remain as the chief
objectives of the Fund.
We invite your personal calls and visits.
Sincerely,
Robert E. Walstad
President
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1996
<TABLE>
<CAPTION>
NAME OF ISSUER (UNAUDITED)
Percentages represent the market value of RATING COUPON PRINCIPAL
each investment category to total net assets MOODY'S/S&P RATE MATURITY AMOUNT MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONTANA MUNICIPAL BONDS (96.8%)
ENERGY (5.9%)
Anaconda-Deer River Cty. (Arco) Solid Waste Rev. A/A+ 6.375% 10/01/16 $1,500,000 $ 1,555,995
MT (Broadwater Power) Coal Severance Tax Ref. A1/AA- 6.875 12/01/17 445,000 482,656
---------------
$ 2,038,651
---------------
HEALTH CARE (14.2%)
MT St. Hlth. Fac. Auth. (Mission Ridge) Rev. NR/NR 6.300% 08/15/26 $ 500,000 $ 500,205
MT St. Hlth. Fac. Auth. (MT Devl. Ctr.) Rev. A/NR 6.300 06/01/14 500,000 527,655
MT St. Hlth. Fac. Auth. (MT Devl. Ctr.) Rev. A/NR 6.400 06/01/19 930,000 981,541
MT Hlth. Fac. Auth. (Missoula Comm. Med. Ctr.) Rev. NR/BBB- 6.375 06/01/18 1,330,000 1,335,919
MT Hlth. Fac. Auth. (Master Loan Pgm.) Rev. A/NR 6.400 10/01/14 450,000 485,478
MT Hlth. Fac. Auth. (Northern Montana Care Ctr.) Rev. Baa/NR 6.350 09/01/15 1,000,000 1,012,640
MT Hlth. Fac. Auth. (Bozeman Deaconess) Rev. NR/A 5.750 06/01/08 100,000 104,045
----------------
$ 4,947,483
----------------
HOUSING (22.4%)
MT Board of Housing, Single Family Program Aa/A+ 6.250% 12/01/17 $2,880,000 $ 2,949,264
MT Board of Housing, Single Family Program Aa/AA+ 6.350 06/01/27 1,445,000 1,474,391
MT Board of Housing, Single Family Program Aa/AA+ 6.550 12/01/25 90,000 92,110
MT Board of Housing, Single Family Program Aa/AA+ 6.400 12/01/35 500,000 510,870
MT Board of Housing, Single Family Program Aa/AA+ 6.400 12/01/27 310,000 315,453
MT Board of Housing, Multifamily Mtg. Program Aa/NR 6.150 11/01/26 450,000 451,876
MT Board of Housing, Single Family Program Aa/AA 6.500 12/01/32 150,000 155,331
MT Board of Housing, Single Family Program Aa/AA+ 6.100 12/01/24 680,000 677,001
MT Board of Housing, Single Family Program Aa/AA+ 6.300 06/01/08 225,000 233,050
MT Board of Housing, Single Family Program Aa/AA+ 6.750 12/01/14 215,000 226,808
MT Board of Housing, Single Family Program Aa/AA+ 6.900 06/01/25 90,000 93,712
MT Board of Housing, Single Family Program Aa/AA+ 6.700 12/01/26 580,000 606,251
----------------
$ 7,786,117
----------------
POLLUTION CONTROL (5.2%)
Forsyth, MT (Montana Power) PCR Baa1/BBB+ 6.125% 05/01/23 $1,220,000 $ 1,255,783
Forsyth, MT (Montana Power) PCR Baa1/BBB+ 5.900 12/01/23 300,000 301,629
Lewis & Clark Co. (Asarco Inc.) PCR Baa/BBB 6.750 12/01/06 235,000 237,989
----------------
$ 1,795,401
-----------------
REAL ESTATE (2.0%)
Billings Tax Increment Urban Renewal Ref. Baa/NR 7.100% 03/01/08 $ 650,000 $ 703,592
----------------
STATE EDUCATION (2.3%)
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500% 12/01/12 $ 250,000 $ 261,382
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/14 500,000 524,595
----------------
$ 785,977
----------------
UTILITIES (3.4%)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Lewis & Clark Co. Solid Waste Fac. Rev. A/ NR 6.100% 10/01/14 $ 250,000 $ 262,545
Lewistown, MT Water System Rev. NR/NR 5.700 07/01/15 435,000 446,797
Lewistown, MT Water System Rev. NR/NR 5.700 07/01/16 460,000 472,305
---------------
$ 1,181,647
---------------
INSURED/GUARANTEED (41.5%)
Forsyth, MT (Puget Sound Pwr. & Lt.) PCR (AMBAC) Aaa/AAA 7.050% 08/01/21 $ 750,000 $ 844,702
Forsyth, MT (Puget Sound Pwr. & Lt.) PCR (AMBAC) Aaa/AAA 6.800 03/01/22 565,000 624,692
Forsyth, MT (Puget Sound Pwr. & Lt.) PCR (MBIA) Aaa/AAA 5.875 04/01/20 540,000 547,447
Forsyth, MT (Montana Power) PCR (AMBAC) Aaa/AAA 5.900 12/01/23 225,000 229,916
Forsyth, MT (Montana Power) PCR (MBIA) Aaa/AAA 6.125 05/01/23 1,420,000 1,485,050
Forsyth, MT (Montana Power) PCR Ref. (AMBAC) Aaa/AAA 6.125 05/01/23 3,500,000 3,660,335
*Great Falls, Water & Sewerage Rev. (FGIC) Aaa/AAA 6.400 08/01/12 300,000 326,412
MT State University Rev. Aaa/AAA 5.250 11/15/13 1,165,000 1,159,513
MT State University Rev. Aaa/AAA 5.375 11/15/21 1,000,000 996,700
MT Hlth. Fac. Auth. (St. Pat's) Rev. (AMBAC) Aaa/AAA 6.625 09/01/12 195,000 212,800
MT Hlth. Fac. Auth. (Holy Rosary) Rev. (MBIA) Aaa/AAA 5.250 07/01/20 250,000 239,150
MT Hlth. Fac. Auth. (Deaconess Clinic) Rev. (AMBAC) Aaa/AAA 5.250 02/15/20 1,700,000 1,627,172
MT Board of Investments (Workers Comp.) (MBIA) Aaa/AAA 6.875 06/01/11 200,000 220,806
MT Board of Investments (Workers Comp.)(ESCRWD) Aaa/AAA 6.875 06/01/20 145,000 160,231
MT Board of Investments (Workers Comp.)(ESCRWD) Aaa/AAA 6.875 06/01/20 355,000 392,289
Phillips Cty., MT (Malta) ESD #14 G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/15 145,000 145,235
Phillips Cty., MT (Malta) ESD #14 G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/16 155,000 155,076
Phillips Cty., MT (Malta) HSD #A G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/15 290,000 290,470
Phillips Cty., MT (Malta) ESD #14 G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/17 165,000 165,259
*Richland Cty. (Mon.-Dak. Utilities) PCR (FGIC) Aaa/AAA 6.650 06/01/22 300,000 328,398
Richland Cty. (Mon.-Dak. Utilities) PCR (FGIC) Aaa/AAA 6.650 06/01/22 300,000 328,398
Silver Bow, (Butte-Silver Bow)Water System Rev. (FGIC) Aaa/AAA 6.500 11/01/14 275,000 300,316
---------------
$14,440,367
---------------
TOTAL MONTANA MUNICIPAL BONDS (COST: $32,951,366)
$33,679,235
---------------
SHORT-TERM SECURITIES (7.8%)
Federated Tax-Free Trust (COST: $2,710,642) $ 2,710,642
TOTAL INVESTMENTS IN SECURITIES (COST: $35,662,008) $36,389,877
================
</TABLE>
*Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS December 31, 1996
STATEMENT OF ASSETS AND LIABILITIES December 31, 1996
- -----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost:$35,662,008) $ 36,389,877
Cash 895
Accrued dividends receivable 5,462
Accrued interest receivable 369,603
Receivable for fund shares sold 162,097
Variation margin on futures 235,921
---------------
Total Assets $ 37,163,855
---------------
LIABILITIES
Dividends payable $ 145,059
Accrued expenses 31,750
Security purchases payable 2,181,572
Payable for fund shares redeemed 2,500
---------------
Total Liabilities $ 2,360,881
---------------
NET ASSETS $ 34,802,974
===============
Net asset value per share, 3,456,719 shares outstanding $ 10.07
===============
STATEMENT OF OPERATIONS for the year ended December 31, 1996
- ------------------------------------------------------------
INVESTMENT INCOME
Interest $ 1,627,655
Dividends 59,306
---------------
Total Investment Income $ 1,686,961
---------------
EXPENSES
Investment advisory fees $ 177,513
Distribution (12b-1 fees) 88,756
Custodian fees 4,630
Transfer agent fees 40,932
Accounting service fees 38,781
Audit and legal fees 4,600
Insurance 2,987
Directors fees 1,907
Printing and postage 9,006
</TABLE>
<PAGE>
<TABLE>
<S> <C>
License, fees, and registrations 10,720
Amortization of organization costs 905
---------------
Total expenses $ 380,737
Less expenses waived or absorbed
by the Fund's manager 98,321
---------------
Total Net Expenses $ 282,416
---------------
NET INVESTMENT INCOME $ 1,404,545
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 54,462
Futures transactions 605,104
Net change in unrealized
appreciation (depreciation) of:
Investments (400,116)
Futures (40,068)
---------------
Net Realized And Unrealized Gain
(Loss) on Investments and Futures $ 219,382
---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,623,927
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS December 31, 1996
STATEMENT OF CHANGES IN NET ASSETS for the years ended December 31, 1996 and
-----------------------------------------
1995
----
<TABLE>
<CAPTION>
For The Year Ended For the Year Ended
December 31, 1996 December 31, 1995
-------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 1,404,545 $ 910,650
Net realized gain (loss) on investment and futures transactions 659,566 (714,078)
Net unrealized appreciation (depreciation) on investments and futures (440,184) 1,845,230
-----------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
From Operations $ 1,623,927 $ 2,041,802
------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (1,404,545) $ (910,650)
Distributions in excess of net investment income (88,756) (42,685)
Distributions from net realized gain on investment
and futures transactions 0 0
------------------------------------------------
Total Dividends and Distributions $ (1,493,301) $ (953,335)
------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 10,721,943 $ 10,719,956
Proceeds from reinvested dividends 948,882 603,502
Cost of shares redeemed (1,053,866) (312,363)
------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting From Capital $ 10,616,959 $ 11,011,095
Share Transactions
-----------------------------------------------
TOTAL INCREASE IN NET ASSETS $ 10,747,585 $ 12,099,562
NET ASSETS, BEGINNING OF PERIOD 24,055,389 11,955,827
-----------------------------------------------
NET ASSETS, END OF PERIOD $ 34,802,974 $ 24,055,389
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1996
Note 1. ORGANIZATION
Montana Tax-Free Fund, Inc. (the Fund) is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund incorporated under the laws of the State of
North Dakota on April 15, 1993 and commenced operations on August 12,
1993. The Fund's objective is to provide as high a level of current
income exempt from federal and Montana income taxes as is consistent
with preservation of capital. The Fund will seek to achieve this by
investing primarily in a portfolio of Montana tax-exempt securities.
Shares of the Fund are offered with no initial sales charge. Shares may
be subject to a contingent deferred sales charge, if those shares are
redeemed within five years of purchase.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITY VALUATION - Investments in securities traded on
national securities exchanges are valued at the last reported sales
price at the close of each business day. Securities for which market
quotations are not readily available are valued at fair value as
determined in good faith by the portfolio management team. The Fund
follows industry practice and records security transactions on the trade
date.
The Fund concentrates its investments in a single state. This
concentration may result in the Fund investing a relatively high
percentage of its assets in a limited number of issuers.
FEDERAL AND STATE INCOME TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies, and to distribute all of its net
investment income and any net realized gain on investments, to its
shareholders. Therefore, no provision for income taxes is required.
DISTRIBUTIONS TO SHAREHOLDERS -Dividends from net investment income,
declared daily and payable monthly, are reinvested in additional shares
of the Fund at net asset value or payable in cash. Capital gains, when
available, are distributed along with the last income dividend of the
calendar year.
INVESTMENT INCOME - Dividend income is recognized on the ex-dividend
date and interest income is recognized daily on an accrual basis.
Premiums and discounts on securities purchased are amortized using the
effective interest method over the life of the respective securities,
unless callable, in which case they are amortized to the earliest call
date.
FUTURES CONTRACTS - The Fund may purchase and sell financial futures
contracts to hedge against changes in the values of tax-exempt municipal
securities the Fund owns or expects to purchase.
<PAGE>
A futures contract is an agreement between two parties to buy or sell
units of a particular index or a certain amount of U.S. Government or
municipal securities at a set price on a future date. Upon entering into
a futures contract, the Fund is required to deposit with a broker an
amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded.
Subsequent payments ("variation margin") are made or received by the
Fund, dependent on the fluctuations in the value of the underlying
index, and are recorded for financial reporting purposes as unrealized
gains or losses by the Fund. When entering into a closing transaction,
the Fund will realize, for book purposes, a gain or loss equal to the
difference between the value of the futures contracts sold and the
futures contracts to buy. Unrealized appreciation (depreciation) related
to open futures contracts is required to be treated as realized gain
(loss) for Federal income tax purposes.
Certain risks may arise upon entering into futures contracts. These
risks may include changes in the value of the futures contracts that may
not directly correlate with changes in the value of the underlying
securities.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 3. CAPITAL SHARE TRANSACTIONS
As of December 31, 1996, there were 200,000,000 shares of $.001 par
authorized; 3,456,719 and 2,395,706 were outstanding at December 31,
1996 and December 31, 1995, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
For The Year Ended For the Year Ended For The Year Ended For the Year Ended
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,071,978 1,093,033 $10,721,943 $10,719,956
Shares issued on reinvestment
of dividends 94,940 61,616 948,882 603,502
Shares redeemed (105,905) (31,894) (1,053,866) (312,363)
-------------------------------------------------------------------------------------
Net increase 1,061,013 1,122,755 $10,616,959 $11,011,095
=====================================================================================
</TABLE>
<PAGE>
Note 4. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
ND Money Management, Inc., the Fund's investment adviser, ND Capital,
Inc., the Fund's underwriter, and ND Resources, Inc., the Fund's
transfer and accounting services agent, are subsidiaries of ND Holdings,
Inc., the Fund's sponsor.
The Fund has engaged ND Money Management, Inc., to provide investment
advisory and management services to the Fund. The Investment Advisory
Agreement provides for fees to be computed at an annual rate of 0.60% of
the Fund's average daily net assets. The Fund has recognized $170,943 of
investment advisory fees for the year ended December 31, 1996. The Fund
has a payable to ND Money Management, Inc. of $17,629 at December 31,
1996 for investment advisory fees. Certain officers and directors of the
Fund are also officers and directors of the investment adviser.
The Fund has adopted a distribution plan (the Plan), pursuant to Rule
12b-1 under the 1940 Act, whereby the Fund shall pay at the annual rate
of 0.75% of the average daily net assets of the Fund to ND Capital, Inc.
(Capital), its principal underwriter, for expenses incurred in the
distribution of the Fund's shares. Pursuant to the Plan, Capital is
entitled to reimbursement each month for its actual expenses incurred in
the distribution and promotion of the Fund's shares, including the
printing of prospectuses and reports used for sales purposes, expenses
of preparation and printing of sales literature and other such
distribution related expenses, including any distribution or service
fees paid to securities dealers who have executed a dealer sales
agreement with Capital. Capital will be reimbursed at a rate not to
exceed 0.75% of the average daily net assets of the Fund for the prior
month. The Fund has recognized $88,756 of 12b-1 fee expenses for the
year ended December 31, 1996. The Fund has a payable to ND Capital, Inc.
of $8,814 at December 31, 1996 for 12b-1 fees. In addition, the Fund has
engaged ND Capital as agent for the purchase of certain investment
securities. For the year ended December 31, 1996 commissions earned by
ND Capital, Inc. totaled $15,825 and are included in the cost basis of
the securities acquired.
ND Resources, Inc., (the transfer agent), provides shareholder services
for a monthly fee equal to an annual rate of 0.16% of the Fund's first
$10 million of net assets, 0.13% of the Fund's net assets on the next
$15 million, 0.11% of the Fund's net assets on the next $15 million,
0.10% of the Fund's net assets on the next $10 million, and 0.09% of the
Fund's net assets in excess of $50 million. The Fund has recognized
$40,932 of transfer agency fees for the year ended December 31, 1996. ND
Resources, Inc. also acts as the Fund's accounting services agent for a
monthly fee equal to the sum of a fixed fee of $2,000, and a variable
fee equal to 0.05% of the Fund's average daily net assets on an annual
basis for the Fund's first $50 million and at a lower rate on the
average daily net assets in excess of $50 million. The Fund has
recognized $38,781 of accounting service fees for the year ended
December 31, 1996.
<PAGE>
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment
securities (excluding short-term securities) aggregated $13,491,631, and
$1,976,406, respectively, for the year ended December 31, 1996.
Note 6. INVESTMENT IN SECURITIES
At December 31, 1996, the aggregate cost of securities for federal
income tax purposes was $35,662,008, and the net unrealized appreciation
of investments based on the cost was $727,869, which is comprised of
$849,215 aggregate gross unrealized appreciation and $121,346 aggregate
gross unrealized depreciation.
<PAGE>
FINANCIAL HIGHLIGHTS Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period Since
Inception
(August 12, 1993)
For The Year Ended For The Year Ended For The Year Ended through
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.04 $ 9.39 $ 10.07 $10.00
-------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income $ .48 $ .51 $ .50 $ .19
Net realized and unrealized gain
(loss) on investment and futures
transactions .06 .67 (.66) .09
-------------------------------------------------------------------------------------------
Total From Investment Operations $ .54 $ 1.18 $ (.16) $ .28
-------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income $ (.48) $ (.51) $ (.50) $ (.19)
Distributions in excess of net
investment income (.03) (.02) (.02) (.01)
Distributions from realized gains .00 .00 .00 (.01)
-------------------------------------------------------------------------------------------
Total Distributions $ (.51) $ (.53) $ (.52) $ (.21)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.07 $ 10.04 $ 9.39 $10.07
===========================================================================================
TOTAL RETURN 5.52%(A) 12.85%(A) (1.70)%(A) 7.00%(A)(B)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $34,803 $24,055 $11,956 $5,235
Ratio of net expenses (after
expense assumption)
to average net assets 0.96%(C) 0.66%(C) 0.46%(C) 0.12%(B)(C)
Ratio of net investment income to
average net assets 4.76% 5.11% 5.06% 4.84%(B)
Portfolio turnover rate 7.12% 7.39% 12.46% 26.05%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B) Ratio was annualized.
(C) During the periods indicated above, ND Holdings, Inc. assumed expenses of
$98,321, $99,757, $87,483, and $21,944. If the expenses had not been
assumed, the annualized ratio of total expenses to average net assets would
have been 1.29%, 1.22%, 1.46% and 1.71%, respectively.
<PAGE>
GRAPH APPEARS HERE
Comparison of change in value of $10,000 investment in Montana Tax-Free Fund
and Lehman Bros. Municipal Bond Index (Unaudited)
<TABLE>
<CAPTION>
Montana Tax-Free Fund Montana Tax-Free Fund Lehman Bros
w/o CDSC w/ max applicable CDSC Municipal Bond Index
-------------------------------------------------------------------
<S> <C> <C> <C>
8/12/1993 $10,000 $10,000 $10,000
1993 $10,268 $ 9,868 $10,363
1994 $10,093 $ 9,718 $ 9,828
1995 $11,390 $11,090 $11,544
1996 $12,019 $11,819 $12,055
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
Montana Tax Free Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Montana
Tax Free Fund, Inc. (the Fund), including the schedule of investments, as of
December 31, 1996, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the three periods then
ended and for the period from inception (August 12, 1993) through December 31,
1993. These financial statements and financial highlights are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Montana Tax Free Fund, Inc. as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets, and financial
highlights for each of the respective periods stated in the first paragraph, in
conformity with generally accepted accounting principles.
BRADY, MARTZ & ASSOCIATES, P.C.
February 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 35,662,008
<INVESTMENTS-AT-VALUE> 36,389,877
<RECEIVABLES> 537,162
<ASSETS-OTHER> 236,816
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 37,163,855
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,360,881
<TOTAL-LIABILITIES> 2,360,881
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 3,456,719
<SHARES-COMMON-PRIOR> 2,395,706
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (113,123)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 727,869
<NET-ASSETS> 34,802,974
<DIVIDEND-INCOME> 59,306
<INTEREST-INCOME> 1,627,655
<OTHER-INCOME> 0
<EXPENSES-NET> 282,416
<NET-INVESTMENT-INCOME> 1,404,545
<REALIZED-GAINS-CURRENT> 659,566
<APPREC-INCREASE-CURRENT> (440,184)
<NET-CHANGE-FROM-OPS> 1,623,927
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,404,545
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 88,756
<NUMBER-OF-SHARES-SOLD> 1,071,978
<NUMBER-OF-SHARES-REDEEMED> 105,905
<SHARES-REINVESTED> 94,940
<NET-CHANGE-IN-ASSETS> 10,747,585
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 177,513
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 380,737
<AVERAGE-NET-ASSETS> 29,485,700
<PER-SHARE-NAV-BEGIN> 10.04
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .03
<PER-SHARE-NAV-END> 10.07
<EXPENSE-RATIO> .96<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of net expenses (after expense assumption) to average net assets.
</FN>
</TABLE>
