UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-2715
Exact name of registrant as specified in charter: Delaware Group State Tax-Free
Income Trust
Address of principal executive offices:
2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service:
David F. Connor, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: February 28
Date of reporting period: August 31, 2006
<page>
Item 1.
Semiannual Report Delaware
Tax-Free Pennsylvania Fund
August 31, 2006
Fixed income mutual fund
[DELAWARE INVESTMENTS LOGO] [LOGO] POWERED BY RESEARCH(R)
Table of contents
> Disclosure of Fund expenses .................................................1
> Sector allocation and credit rating breakdown ...............................2
> Statement of net assets .....................................................3
> Statement of operations .....................................................8
> Statements of changes in net assets .........................................9
> Financial highlights .......................................................10
> Notes to financial statements ..............................................13
> Other Fund information .....................................................16
> About the organization .....................................................18
Funds are not FDIC insured and are not guaranteed. It is possible to lose the
principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a series
of Delaware Management Business Trust, which is a registered investment advisor.
(C) 2006 Delaware Distributors, L.P.
Disclosure of Fund expenses
For the period March 1, 2006 to August 31, 2006
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period March 1, 2006 to August 31, 2006.
Actual Expenses
The first section of the table shown, "Actual Fund Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, together with the amount you
invested, to estimate the expenses that you paid over the period. Simply divide
your account value by $1,000 (for example, an $8,600 account value divided by
$1,000 = 8.6), then multiply the result by the number in the first section
under the heading entitled "Expenses Paid During Period" to estimate the
expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based
on the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual ending
account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions.
Delaware Tax-Free Pennsylvania Fund
Expense Analysis of an Investment of $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 3/1/06 to
3/1/06 8/31/06 Ratios 8/31/06*
________________________________________________________________________________
Actual Fund Return
Class A $1,000.00 $1,017.70 0.91% $4.63
Class B 1,000.00 1,013.80 1.68% 8.53
Class C 1,000.00 1,013.80 1.68% 8.53
________________________________________________________________________________
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,020.62 0.91% $4.63
Class B 1,000.00 1,016.74 1.68% 8.54
Class C 1,000.00 1,016.74 1.68% 8.54
________________________________________________________________________________
*"Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied by
the 184/365 (to reflect the one-half year period).
1
Sector allocation and credit rating breakdown
Delaware Tax-Free Pennsylvania Fund
As of August 31, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
Percentage
Sector of Net Assets
________________________________________________________________________________
Municipal Bonds 97.93%
Corporate-Backed Revenue Bonds 12.25%
Education Revenue Bonds 16.58%
Electric Revenue Bonds 0.35%
Escrowed to Maturity Bonds 7.12%
Health Care Revenue Bonds 14.35%
Housing Revenue Bonds 2.47%
Lease Revenue Bonds 4.57%
Local General Obligation Bonds 5.87%
Pre-Refunded Bonds 10.35%
Transportation Revenue Bonds 10.49%
Water & Sewer Revenue Bonds 13.53%
________________________________________________________________________________
Short-Term Investments 0.74%
________________________________________________________________________________
Total Market Value of Securities 98.67%
________________________________________________________________________________
Receivables and Other Assets Net of Liabilities 1.33%
________________________________________________________________________________
Total Net Assets 100.00%
________________________________________________________________________________
Credit Rating Breakdown
(as a % of fixed income investments)
________________________________________________________________________________
AAA 42.59%
AA 25.41%
A 13.44%
BBB 15.42%
BB 0.67%
NR 2.47%
________________________________________________________________________________
Total 100.00%
________________________________________________________________________________
2
Statement of net assets
Delaware Tax-Free Pennsylvania Fund
August 31, 2006 (Unaudited)
Principal Market
Amount Value
________________________________________________________________________________
Municipal Bonds - 97.93%
________________________________________________________________________________
Corporate-Backed Revenue Bonds - 12.25%
Allegheny County Industrial
Development Authority
Environmental Improvement
Revenue (USX Corp. Project)
5.50% 12/1/29 $13,000,000 $13,417,300
Beaver County Industrial
Development Authority Pollution
Control Revenue (Atlantic
Richfield Co. Project)
5.95% 7/1/21 5,100,000 5,210,517
Bucks County Industrial
Development Authority
Environmental Improvement
Revenue (USX Corp. Project)
5.40% 11/1/17 2,250,000 2,407,320
Carbon County Industrial
Development Authority Resource
Recovery Revenue (Panther Creek
Partners Project)
6.65% 5/1/10 (AMT) 6,760,000 7,138,830
Dauphin County Industrial
Development Authority Water
Revenue (Dauphin Consolidated
Water Supply Project) Series B
6.70% 6/1/17 1,750,000 2,114,560
Delaware County Industrial
Development Authority Water
Facilities Revenue
(Aqua Income Project) Series C
5.00% 2/1/35 (FGIC) (AMT) 7,670,000 7,927,789
(Philadelphia Suburban Water
Project) 6.00% 6/1/29
(FGIC) (AMT) 3,000,000 3,198,540
Indiana County Industrial
Development Authority Pollution
Control Revenue (PSE&G Power
Project) 5.85% 6/1/27 (AMT) 3,000,000 3,163,770
Luzerne County Industrial
Development Authority Water
Facilities Revenue (American
Water Co. Project) Series A
5.10% 9/1/34 (AMBAC) (AMT) 15,000,000 15,602,100
Pennsylvania Economic Development
Financing Authority Solid Waste
Disposal Revenue (Proctor &
Gamble Paper Project)
5.375% 3/1/31 (AMT) 10,000,000 11,298,900
__________
71,479,626
__________
Education Revenue Bonds - 16.58%
Allegheny County Higher Education
Building Authority Revenue
(Carnegie Mellon University
Project) 5.25% 3/1/32 1,900,000 1,997,546
Allegheny County Higher Education
Building Authority Revenue
(Chatham College Project)
Series A 5.85% 3/1/22 650,000 687,635
Series A 5.95% 3/1/32 1,000,000 1,051,810
Series B 5.75% 11/15/35 4,000,000 4,223,480
Delaware County Authority College
Revenue
(Eastern College Project) Series B
5.50% 10/1/19 4,175,000 4,281,087
5.50% 10/1/24 2,850,000 2,915,037
(Haverford College Project)
5.75% 11/15/29 1,875,000 2,026,444
Erie Higher Education Building
Authority College Revenue
(Mercyhurst College Project)
Series B 5.00% 3/15/23 750,000 761,273
Lancaster Higher Education
Authority College Revenue
(Franklin & Marshall College)
5.00% 4/15/23 6,390,000 6,741,706
Lehigh County General Purpose
Authority Revenue
(Desales University Project)
5.125% 12/15/23 (RADIAN) 5,000,000 5,201,100
Lycoming County Authority College
Revenue (Pennsylvania College of
Technology Project)
5.375% 7/1/30 (AMBAC) 5,000,000 5,276,850
Pennsylvania Economic Development
Financing Authority School
Revenue (Germantown Friends
School Project) 5.35% 8/15/31 2,820,000 2,947,887
Pennsylvania State Higher
Educational Facilities Authority
College & University Revenue
(Drexel University Project) Series A
5.20% 5/1/29 1,500,000 1,563,360
5.20% 5/1/32 1,000,000 1,040,490
(Lafayette College Project)
6.00% 5/1/30 2,500,000 2,684,675
(Philadelphia University Project) 1,665,000 1,689,276
5.00% 6/1/35
6.00% 6/1/29 (RADIAN) 1,800,000 1,925,694
(Thomas Jefferson University
Project) 5.00% 1/1/29 5,000,000 5,170,950
(Trustees University) Series C
5.00% 7/15/38 6,000,000 6,277,500
(Ursinus College)
5.125% 1/1/33 (RADIAN) 2,000,000 2,072,120
(Widener University)
5.00% 7/15/39 7,915,000 8,051,849
(continues) 3
Statement of net assets
Delaware Tax-Free Pennsylvania Fund
Principal Market
Amount Value
________________________________________________________________________________
Municipal Bonds (continued)
________________________________________________________________________________
Education Revenue Bonds (continued)
Pennsylvania State Public School
Building Authority Revenue
(Lehigh Career & Technical
Institute Project)
5.125% 10/1/28 (FGIC) $ 2,800,000 $ 2,943,892
Pennsylvania State University
5.00% 9/1/29 2,500,000 2,636,150
Philadelphia Hospitals & Higher
Educational Facilities Authority
Revenue (Chestnut Hill College
Project) 6.00% 10/1/29 4,360,000 4,450,470
Philadelphia Redevelopment
Authority Revenue (Beech Student
Housing Complex Project)
5.50% 7/1/35 (ACA) 1,500,000 1,566,285
5.625% 7/1/28 (ACA) 1,000,000 1,062,320
Swarthmore Borough Authority
College Revenue (Swarthmore
College Project) 5.00% 9/15/31 15,000,000 15,467,399
___________
96,714,285
___________
Electric Revenue Bonds - 0.35%
^ Philadelphia Gas Works Revenue
Capital Appreciation Series C
6.884% 1/1/12 (AMBAC) 2,500,000 2,037,775
___________
2,037,775
___________
Escrowed to Maturity Bonds - 7.12%
Delaware County Authority
Health Facilities Revenue (Mercy
Health Corp. Project)
6.00% 12/15/26 3,500,000 3,593,975
Pennsylvania State Higher
Educational Facilities Authority
College & University Revenue
(University of the Arts Project)
5.20% 3/15/25 (RADIAN) 4,490,000 4,964,907
Philadelphia Authority for Industrial
Development Commercial
Revenue (Girard Estates Facilities
Leasing Project) 5.00% 5/15/27 4,500,000 4,533,210
Philadelphia Hospitals & Higher
Education Facilities Authority
Revenue (Presbyterian Medical
Center Project) 6.65% 12/1/19 13,000,000 15,790,450
Pittsburgh Water & Sewer Authority
Revenue (Crossover Refunding
Projects) 7.25% 9/1/14 (FGIC) 7,665,000 8,714,415
Southcentral General Authority
Revenue Refunding (Wellspan
Health Obligated Project)
5.625% 5/15/26 3,610,000 3,914,937
___________
41,511,894
___________
Health Care Revenue Bonds - 14.35%
Allegheny County Hospital
Development Authority Revenue
(Ohio Valley General Hospital
Project) Series A 5.125% 4/1/35 1,750,000 1,783,758
Berks County Municipal Authority
Revenue (Health Care Reading
Hospital Pooled Financing Project)
5.00% 3/1/28 11,750,000 11,985,587
Chester County Health &
Educational Facilities Authority
Revenue (Jefferson Health
Systems Project) Series B
5.375% 5/15/27 14,270,000 14,695,388
Delaware County Industrial
Development Authority Revenue
(Main Line Care Institute Project)
9.00% 8/1/31 1,782,389 1,490,737
Lancaster County Hospital Authority
Revenue
(General Hospital Project)
5.50% 3/15/26 3,000,000 3,200,640
(Willow Valley Retirement Project)
5.875% 6/1/31 2,100,000 2,218,944
Monroe County Hospital Authority
Revenue (Pocono Medical Center
Project) 6.00% 1/1/43 6,710,000 7,172,386
Montgomery County Higher
Education & Health Authority
Revenue
(Abington Memorial Hospital)
Series A 5.125% 6/1/32 6,500,000 6,705,140
(Catholic Health East) Series C
5.50% 11/15/24 1,150,000 1,239,953
Montgomery County Industrial
Development Authority Revenue
(Foulkeways at Gwynedd Project)
Series A
5.00% 12/1/24 1,000,000 1,021,610
5.00% 12/1/30 1,500,000 1,521,870
Mount Lebanon Hospital Authority
Revenue (St. Clair Memorial
Hospital Project) Series A
5.625% 7/1/32 4,500,000 4,767,570
Pennsylvania Economic Development
Financing Authority Revenue
(Dr. Gertrude A. Barber Center,
Inc. Project)
5.90% 12/1/30 (RADIAN) 2,250,000 2,414,048
Pennsylvania State Higher
Educational Facilities Authority
Revenue (UPMC Health Systems
Project) Series A 6.00% 1/15/31 10,000,000 10,901,600
Philadelphia Authority for Industrial
Development Revenue
(Germantown Senior Living
Presbyterian Homes Project)
Series A 5.625% 7/1/35 2,295,000 2,327,107
St. Mary Hospital Authority Health
System Revenue (Catholic Health
East) Series B 5.375% 11/15/34 9,750,000 10,280,010
___________
83,726,348
___________
4
Principal Market
Amount Value
________________________________________________________________________________
Municipal Bonds (continued)
________________________________________________________________________________
Housing Revenue Bonds - 2.47%
Allegheny County Residential
Finance Authority Single Family
Mortgage Revenue
Series II-2 5.90% 11/1/32
(GNMA) (AMT) $ 890,000 $ 923,891
Series KK-2 5.40% 5/1/26
(GNMA) (AMT) 2,540,000 2,618,791
Pennsylvania Housing Finance
Agency Single Family Mortgage
Series 66A 5.65% 4/1/29 (AMT) 415,000 421,213
Series 72A 5.35% 10/1/31 (AMT) 5,190,000 5,307,813
Series 94A 5.15% 10/1/37 (AMT) 5,000,000 5,132,950
___________
14,404,658
___________
Lease Revenue Bonds - 4.57%
Allegheny County Industrial
Development Authority Lease
Revenue (Residential Resource
Inc. Project)
5.10% 9/1/26 1,370,000 1,393,633
5.125% 9/1/31 1,515,000 1,537,271
Pennsylvania State Public School
Building Authority Revenue
(Lehigh Career & Technical
Institute Project)
5.25% 10/1/32 (FGIC) 2,140,000 2,266,110
Philadelphia Authority for Industrial
Development Lease Revenue
Series B 5.25% 10/1/30 (FSA) 4,510,000 4,750,609
Puerto Rico Public Buildings
Authority Revenue (Government
Facilities) Series I 5.25% 7/1/33 16,000,000 16,713,919
___________
26,661,542
___________
Local General Obligation Bonds - 5.87%
Abington School District Series A
5.00% 4/1/29 (FSA) 3,085,000 3,254,181
Allegheny County Redevelopment
Authority Tax Increment Revenue
(Waterfront Project) Series B
6.00% 12/15/10 600,000 625,836
6.40% 12/15/18 1,500,000 1,629,330
Bucks County Industrial
Development Authority Multi-
Family County-Guaranteed (New
Hope Manor Project) Series A
5.40% 3/1/22 (AMT) 1,265,000 1,308,984
5.50% 3/1/41 (AMT) 5,340,000 5,489,039
Canon McMillan School District
Series B 5.25% 12/1/34 (FGIC) 3,580,000 3,821,006
Catasauqua Area School District
5.00% 2/15/31 (FSA) 1,000,000 1,053,500
5.00% 2/15/36 (FSA) 6,825,000 7,168,502
Greater Johnstown School District
Series C 5.125% 8/1/25 (MBIA) 7,490,000 7,840,008
Lancaster County Series A
5.00% 11/1/27 (FGIC) 2,000,000 2,076,260
___________
34,266,646
___________
$ Pre-Refunded Bonds - 10.35%
Erie Water Authority Revenue
Series A 5.125% 12/1/25-11 (MBIA) 4,000,000 4,284,880
Harrisburg Authority Office &
Parking Revenue Series A
6.00% 5/1/19-08 7,500,000 7,794,675
Indiana County Industrial
Development Authority Revenue
(Student Co-op Association, Inc.
Project) Series A
5.875% 11/1/24-06 (AMBAC) 1,000,000 1,003,830
5.875% 11/1/29-06 (AMBAC) 1,000,000 1,003,830
Lancaster Industrial Development
Authority Revenue (Garden Spot
Village Project) Series A
7.625% 5/1/31-10 1,650,000 1,885,191
McGuffey School District
5.125% 8/1/31-11 (FGIC) 2,000,000 2,136,720
Norwin School District
6.00% 4/1/30-10 (FGIC) 2,000,000 2,159,600
Pennsylvania State Higher Education
Assistance Agency Capital
Acquisition
5.875% 12/15/30-10 (MBIA) 7,385,000 8,045,810
Pennsylvania State Higher Educational
Facilities Authority Revenue
(Drexel University Project)
6.00% 5/1/29-09 3,000,000 3,182,520
(Ursinus College Project)
5.90% 1/1/27-07 1,000,000 1,027,480
Pennsylvania State Turnpike
Commission Registration Series F
5.00% 7/15/31-11 (AMBAC) 1,000,000 1,069,720
5.00% 7/15/41-11 (AMBAC) 1,600,000 1,711,552
Philadelphia Authority for Industrial
Development Revenues (Stapeley
Hall Germantown Continuing
Care Community Project)
6.60% 1/1/16-07 5,250,000 5,348,018
Southcentral General Authority
Revenue (Welllspan Health
Obligated Project)
5.625% 5/15/26-11 16,390,000 17,911,483
West Cornwall Township Municipal
Authority College Revenue
(Elizabethtown College Project)
6.00% 12/15/27-11 1,615,000 1,789,145
___________
60,354,454
___________
(continues) 5
Statement of net assets
Delaware Tax-Free Pennsylvania Fund
Principal Market
Amount Value
________________________________________________________________________________
Municipal Bonds (continued)
________________________________________________________________________________
Transportation Revenue Bonds - 10.49%
Allegheny County Airport Revenue
(Pittsburgh International Airport
Project) Series A
5.75% 1/1/14 (MBIA) (AMT) $ 6,910,000 $ 7,650,752
Delaware River Port Authority
(Pennsylvania & New Jersey Port
District Project) Series B
5.70% 1/1/21 (FSA) 8,560,000 9,087,638
Delaware River Toll Bridge
5.00% 7/1/28 3,000,000 3,111,330
Erie, Western Pennsylvania Port
Authority General Revenue
6.25% 6/15/10 (AMT) 1,115,000 1,144,481
Lehigh Northampton Airport
Authority Revenue (Lehigh Valley
Airport Project) Series A
6.00% 5/15/25 (MBIA) (AMT) 1,525,000 1,631,415
6.00% 5/15/30 (MBIA) (AMT) 2,700,000 2,888,406
Pennsylvania Economic Development
Financing Authority Exempt
Facilities Revenue (Amtrak Project)
Series A 6.375% 11/1/41 (AMT) 5,000,000 5,365,450
Pennsylvania Economic Development
Financing Authority Revenue
(30th Street Station Garage
Project) 5.875% 6/1/33
(ACA) (AMT) 4,500,000 4,845,240
Pennsylvania State Turnpike
Commission Revenue
Series A 5.00% 12/1/34 (AMBAC) 8,000,000 8,376,480
Series R 5.00% 12/1/30 (AMBAC) 2,500,000 2,604,300
Philadelphia Authority for Industrial
Development Revenue (Sub-Air
Cargo Project) Series A
7.50% 1/1/25 (AMT) 2,500,000 2,743,225
Puerto Rico Commonwealth Highway &
Transportation Authority Revenue
Series G 5.00% 7/1/33 3,000,000 3,059,790
Series G 5.00% 7/1/42 5,000,000 5,078,300
Series J 5.00% 7/1/34 3,550,000 3,627,071
____________
61,213,878
____________
Water & Sewer Revenue Bonds - 13.53%
Allegheny County Sanitation
Authority Sewer Revenue Series A
5.00% 12/1/30 (MBIA) 2,500,000 2,623,475
& First Albany Corp. Municipal Trusts
Inverse Floater
5.43% 12/15/14 (AMBAC) 46,500,000 52,753,785
Philadelphia Water & Waste Revenue
Series A 5.00% 7/1/35 (FSA) 7,130,000 7,458,479
Pittsburgh Water & Sewer Authority
Revenue First Lien
5.00% 9/1/29 (MBIA) 2,210,000 2,325,296
5.125% 12/1/31 (AMBAC) 10,000,000 10,509,200
Westmoreland County Municipal
Authority Service Revenue
5.25% 8/15/28 (FSA) 3,000,000 3,231,870
____________
78,902,105
____________
Total Municipal Bonds (cost $530,321,082) 571,273,211
____________
_______________________________________________________________________________
Short-Term Investments - 0.74%
_______________________________________________________________________________
~ Variable Rate Demand Notes - 0.74%
Allegheny County Higher Education
Building Authority University
Revenue 3.50% 12/1/33 1,000,000 1,000,000
Allegheny County Hospital
Development Authority Revenue
(Pittsburgh Children)
Series A 3.43% 6/1/09 1,000,000 1,000,000
Lackawanna County Series B
3.43% 10/15/29 (FSA) 500,000 500,000
Philadelphia Authority for Industrial
Development Revenue (Inglis
House Project) 3.43% 5/1/17 800,000 800,000
Westmoreland County Industrial
Development Authority Revenue
(Health Systems Excela Project)
Series B 3.40% 7/1/27
(LOC - Wachovia Bank N.A.) 1,000,000 1,000,000
____________
Total Short-Term Investments
(cost $4,300,000) 4,300,000
____________
Total Market Value of Securities - 98.67%
(cost $534,621,082) 575,573,211
Receivables and Other Assets
Net of Liabilities - 1.33% 7,762,740
____________
Net Assets Applicable to 72,165,069
Shares Outstanding - 100.00% $583,335,951
____________
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class A ($560,930,646 / 69,393,284 Shares) $8.08
_____
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class B ($14,095,303 / 1,743,905 Shares) $8.08
_____
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class C ($8,310,002 / 1,027,880 Shares) $8.08
_____
Components of Net Assets at August 31, 2006:
Shares of beneficial interest
(unlimited authorization - no par) $565,813,731
Accumulated net realized loss on investments (23,429,909)
Net unrealized appreciation of investments 40,952,129
____________
Total net assets $583,335,951
____________
6
________________________________________________________________________________
________________________________________________________________________________
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of August 31, 2006. See Note
7 in "Notes to Financial Statements."
^ Zero coupon security. The rate shown is the yield at the time of purchase.
$ Pre-Refunded Bonds. Municipals that are generally backed or secured by U.S.
Treasury bonds. For Pre-Refunded Bonds, the stated maturity is followed by
the year in which the bond is pre-refunded. See Note 7 in "Notes to
Financial Statements."
~ Variable rate security. The interest rate shown is the rate as of August
31, 2006.
Summary of Abbreviations:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
Net Asset Value and Offering Price Per Share -
Delaware Tax-Free Pennsylvania Fund
Net asset value Class A (A) $8.08
Sales charge (4.50% of offering price) (B) 0.38
_____
Offering price $8.46
_____
(A) Net asset value per share, as illustrated, is the amount which would be
paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
7
Statement of operations
Delaware Tax-Free Pennsylvania Fund
Six Months Ended August 31, 2006 (Unaudited)
Investment Income:
Interest $15,089,555
___________
Expenses:
Management fees $1,595,934
Distribution expenses - Class A 763,803
Distribution expenses - Class B 78,642
Distribution expenses - Class C 40,592
Dividend disbursing and transfer agent fees and expenses 172,953
Accounting and administration expenses 117,592
Legal and professional fees 59,709
Trustees' fees 16,582
Reports and statements to shareholders 14,542
Registration fees 11,245
Insurance fees 9,462
Custodian fees 5,177
Pricing fees 1,918
Other 10,226 2,898,377
__________
Less waived disribution expenses - Class A (120,948)
Less expenses absorbed or waived (23,862)
Less expense paid indirectly (2,897)
___________
Total operating expenses 2,750,670
___________
Net Investment Income 12,338,885
___________
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments 260,434
Net change in unrealized appreciation/depreciation of investments (2,484,034)
___________
Net Realized and Unrealized Loss on Investments (2,223,600)
___________
Net Increase in Net Assets Resulting from Operations $10,115,285
___________
See accompanying notes
8
Statements of changes in net assets
Delaware Tax-Free Pennsylvania Fund
Six Months Year
Ended Ended
8/31/06 2/28/06
(Unaudited)
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 12,338,885 $ 25,984,710
Net realized gain on investments 260,434 2,019,077
Net change in unrealized appreciation/depreciation of investments (2,484,034) (4,373,724)
____________ ____________
Net increase in net assets resulting from operations 10,115,285 23,630,063
____________ ____________
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (11,926,869) (25,027,299)
Class B (271,769) (694,972)
Class C (140,247) (262,439)
____________ ____________
(12,338,885) (25,984,710)
____________ ____________
Capital Share Transactions:
Proceeds from shares sold:
Class A 16,026,420 16,672,721
Class B 110,504 889,307
Class C 452,446 1,745,792
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 7,048,279 14,709,393
Class B 153,733 373,907
Class C 108,417 193,099
____________ ____________
23,899,799 34,584,219
____________ ____________
Cost of shares repurchased:
Class A (30,372,476) (57,983,544)
Class B (3,832,899) (6,658,177)
Class C (176,204) (810,262)
____________ ____________
(34,381,579) (65,451,983)
____________ ____________
Decrease in net assets derived from capital share transactions (10,481,780) (30,867,764)
____________ ____________
Net Decrease in Net Assets (12,705,380) (33,222,411)
Net Assets:
Beginning of period 596,041,331 629,263,742
____________ ____________
End of period (there was no undistributed net investment income at either period end) $583,335,951 $596,041,331
____________ ____________
See accompanying notes
9
Financial highlights
Delaware Tax-Free Pennsylvania Fund Class A
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Six Months Year Ended
Ended _______________________________________________________
8/31/06 (1)
(Unaudited) 2/28/06 2/28/05 2/29/04 2/28/03 2/28/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $8.110 $8.140 $8.250 $8.140 $7.950 $7.820
Income (loss) from investment operations:
Net investment income 0.171 0.347 0.365 0.365 0.374 0.387
Net realized and unrealized gain (loss) on investments (0.030) (0.030) (0.110) 0.110 0.189 0.130
______ ______ ______ ______ ______ ______
Total from investment operations 0.141 0.317 0.255 0.475 0.563 0.517
______ ______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.171) (0.347) (0.365) (0.365) (0.373) (0.387)
______ ______ ______ ______ ______ ______
Total dividends and distributions (0.171) (0.347) (0.365) (0.365) (0.373) (0.387)
______ ______ ______ ______ ______ ______
Net asset value, end of period $8.080 $8.110 $8.140 $8.250 $8.140 $7.950
______ ______ ______ ______ ______ ______
Total return (2) 1.77% 3.97% 3.23% 6.00% 7.29% 6.78%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $560,931 $570,329 $599,172 $638,325 $669,042 $682,030
Ratio of expenses to average net assets 0.91% 0.91% 0.89% 0.90% 0.92% 0.89%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 0.96% 0.95% 0.93% 0.94% 0.92% 0.89%
Ratio of net investment income to average net assets 4.22% 4.27% 4.54% 4.47% 4.69% 4.92%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.17% 4.23% 4.50% 4.43% 4.69% 4.92%
Portfolio turnover 10% 13% 11% 12% 18% 38%
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return
reflects waivers and payment of fees by the manager and distributor, as applicable. Performance would have been lower had the
expense limitation not been in effect.
See accompanying notes
10
Delaware Tax-Free Pennsylvania Fund Class B
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Six Months Year Ended
Ended _______________________________________________________
8/31/06 (1)
(Unaudited) 2/28/06 2/28/05 2/29/04 2/28/03 2/28/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $8.110 $8.140 $8.250 $8.140 $7.950 $7.820
Income (loss) from investment operations:
Net investment income 0.139 0.285 0.303 0.301 0.312 0.324
Net realized and unrealized gain (loss) on investments (0.030) (0.030) (0.110) 0.110 0.189 0.130
______ ______ ______ ______ ______ ______
Total from investment operations 0.109 0.255 0.193 0.411 0.501 0.454
______ ______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.139) (0.285) (0.303) (0.301) (0.311) (0.324)
______ ______ ______ ______ ______ ______
Total dividends and distributions (0.139) (0.285) (0.303) (0.301) (0.311) (0.324)
______ ______ ______ ______ ______ ______
Net asset value, end of period $8.080 $8.110 $8.140 $8.250 $8.140 $7.950
______ ______ ______ ______ ______ ______
Total return (2) 1.38% 3.17% 2.44% 5.17% 6.46% 5.93%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $14,095 $17,762 $23,235 $29,589 $34,914 $37,533
Ratio of expenses to average net assets 1.68% 1.68% 1.67% 1.68% 1.70% 1.69%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.69% 1.68% 1.67% 1.68% 1.70% 1.69%
Ratio of net investment income to average net assets 3.45% 3.50% 3.76% 3.69% 3.91% 4.12%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.44% 3.50% 3.76% 3.69% 3.91% 4.12%
Portfolio turnover 10% 13% 11% 12% 18% 38%
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return
reflects waivers and payment of fees by the manager, as applicable. Performance would have been lower had the expense
limitation not been in effect.
See accompanying notes
(continues) 11
Financial highlights
Delaware Tax-Free Pennsylvania Fund Class C
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Six Months Year Ended
Ended _______________________________________________________
8/31/06 (1)
(Unaudited) 2/28/06 2/28/05 2/29/04 2/28/03 2/28/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $8.110 $8.140 $8.250 $8.140 $7.950 $7.820
Income (loss) from investment operations:
Net investment income 0.139 0.284 0.302 0.301 0.312 0.324
Net realized and unrealized gain (loss) on investments (0.030) (0.030) (0.110) 0.110 0.189 0.130
______ ______ ______ ______ ______ ______
Total from investment operations 0.109 0.254 0.192 0.411 0.501 0.454
______ ______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.139) (0.284) (0.302) (0.301) (0.311) (0.324)
______ ______ ______ ______ ______ ______
Total dividends and distributions (0.139) (0.284) (0.302) (0.301) (0.311) (0.324)
______ ______ ______ ______ ______ ______
Net asset value, end of period $8.080 $8.110 $8.140 $8.250 $8.140 $7.950
______ ______ ______ ______ ______ ______
Total return (2) 1.38% 3.17% 2.43% 5.17% 6.46% 5.93%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $8,310 $7,950 $6,857 $6,070 $5,197 $4,512
Ratio of expenses to average net assets 1.68% 1.68% 1.67% 1.68% 1.70% 1.69%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.69% 1.68% 1.67% 1.68% 1.70% 1.69%
Ratio of net investment income to average net assets 3.45% 3.50% 3.76% 3.69% 3.91% 4.12%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.44% 3.50% 3.76% 3.69% 3.91% 4.12%
Portfolio turnover 10% 13% 11% 12% 18% 38%
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return
reflects waivers and payment of fees by the manager, as applicable. Performance would have been lower had the expense
limitation not been in effect.
See accompanying notes
12
Notes to financial statements
Delaware Tax-Free Pennsylvania Fund
August 31, 2006 (Unaudited)
Delaware Group State Tax-Free Income Trust (the "Trust") is organized as a
Delaware statutory trust and offers one series: Delaware Tax-Free Pennsylvania
Fund (the "Fund"). The Trust is an open-end investment company. The Fund is
considered non-diversified under the Investment Company Act of 1940, as
amended, and offers Class A, Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 4.50%. Class A share purchases of
$1,000,000 or more will incur a contingent deferred sales charge of up to 1% if
redeemed during the first two years, provided that, a financial advisor was
paid commission on the purchase of those shares. Class B shares are sold with a
contingent deferred sales charge that declines from 4% to zero depending upon
the period of time the shares are held. Class B shares will automatically
convert to Class A shares on a quarterly basis approximately eight years after
purchase. Class C shares are sold with a contingent deferred sales charge of
1%, if redeemed during the first 12 months.
The investment objective of the Fund is to seek a high level of current
interest income exempt from federal income tax and certain Pennsylvania state
and local taxes, consistent with the preservation of capital.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally
accepted accounting principles and are consistently followed by the Fund.
Security Valuation - Long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Fund's Board of
Trustees. In determining whether market quotations are readily available or
fair valuation will be used, various factors will be taken into consideration,
such as market closures, aftermarket trading or significant events after local
market trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes - The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented, and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Although the Fund's tax
positions are currently being evaluated, managment does not expect the adoption
of FIN 48 to have a material impact on the Fund's financial statements.
Class Accounting - Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund on the basis of
daily net assets of each class. Distribution expenses relating to a specific
class are charged directly to that class.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of 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.
Other - Expenses directly attributable to a Fund are charged directly to that
Fund. Other expenses common to various funds within the Delaware Investments
(R) Family of Funds are generally allocated amongst such funds on the basis
of average net assets. Management fees and some other expenses are paid
monthly. Security transactions are recorded on the date the securities are
purchased or sold (trade date) for financial reporting purposes. Costs used in
calculating realized gains and losses on the sale of investment securities are
those of the specific securities sold. Interest income is recorded on the
accrual basis. Discounts and premiums are amortized to interest income over the
lives of the respective securities. The Fund declares dividends daily from net
investment income and pays such dividends monthly and declares and pays
distributions from net realized gain on investments, if any, annually.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense
paid under the above arrangement is included in custodian fees on the Statement
of Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management
Business Trust and the investment manager, an annual fee which is calculated
daily at the rate of 0.55% on the first $500 million of average daily net
assets of the Fund, 0.50% on the next $500 million, 0.45% on the next $1.5
billion, and 0.425% on average daily net assets in excess of $2.5 billion.
Effective July 1, 2006, DMC has contractually agreed to waive that portion, if
any, of its management fee and reimburse the Fund to the extent necessary to
ensure that annual operating expenses, exclusive of taxes, interest, brokerage
commissions, distribution fees, certain insurance costs and extraordinary
expenses, do not exceed 0.67% of average daily net assets of the Fund through
June 30, 2007. Prior to July 1, 2006, no expense waiver was in effect.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Fund pays
DSC a monthly fee computed at the annual rate of 0.04% of the Fund's average
daily net assets for accounting and administration services. The Fund pays DSC
a monthly fee based on the number of shareholder accounts for dividend
disbursing and transfer agent services.
(continues) 13
Notes to financial statements
Delaware Tax-Free Pennsylvania Fund
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates (continued)
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily
net assets of the Class A shares and 1.00% of the average daily net assets of
the Class B and C shares.
The Board of Trustees has adopted a formula for calculating 12b-1 plan fees for
the Fund's Class A shares that went into effect on June 1, 1992. The total 12b-1
fees to be paid by Class A shareholders of the Fund will be the sum of 0.10% of
the average daily net assets representing shares that were acquired prior to
June 1, 1992 and 0.30% of the average daily net assets representing shares that
were acquired on or after June 1, 1992. All Class A shareholders will bear 12b-1
fees at the same rate, the blended rate based upon the allocation of the 0.10%
and 0.30% rates described above. DDLP has contracted to waive distribution and
service fees through June 30, 2007 in order to prevent distribution and service
fees of Class A shares from exceeding 0.25% of average daily net assets. This
contractual waiver is applied to the shares of the Fund that were acquired on or
after June 1, 1992 in calculating the applicable 12b-1 fee rate.
At August 31, 2006, the Fund had liabilities payable to affiliates as follows:
Investment management fees payable to DMC $255,732
Dividend disbursing, transfer agent,
accounting and administration fees and
other expenses payable to DSC 49,103
Distribution fees payable to DDLP 127,885
Other expenses payable to DMC and affiliates* 26,419
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Fund and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services, including internal legal services provided to the Fund
by DMC employees. For the six months ended August 31, 2006, the Fund was
charged $12,788 for internal legal services provided by DMC.
For the six months ended August 31, 2006, DDLP earned $21,158 for commissions
on sales of the Fund's Class A shares. For the six months ended August 31,
2006, DDLP received gross contingent deferred sales charge commissions of
$7,388, $9,077 and $498 on redemption of the Fund's Class A, Class B and Class
C shares, respectively, and these commissions were entirely used to offset
up-front commissions previously paid by DDLP to broker-dealers on sales of
those shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. Investments
For the six months ended August 31, 2006, the Fund made purchases of
$28,000,900 and sales of $30,159,109 of investment securities other than
short-term investments.
At August 31, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At August 31, 2006, the cost of investments was $539,316,892
At August 31, 2006, net unrealized appreciation was $36,256,319, of which
$36,450,849 related to unrealized appreciation of investments and $194,530
related to unrealized depreciation of investments.
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the six
months ended August 31, 2006 and the year ended February 28, 2006 was as
follows:
Six Months Year
Ended Ended
8/31/06* 2/28/06
___________ ___________
Tax-exempt income $12,338,885 $25,984,710
* Tax information for the six months ended August 31, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of August 31, 2006, the
estimated components of net assets on a tax basis were as follows:
Shares of beneficial interest $565,813,731
Six month period realized gains 260,434
Capital loss carryforwards (18,994,533)
Unrealized appreciation of investments 36,256,319
____________
Net assets $583,335,951
____________
The difference between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at February 28, 2006 will expire as follows: $9,193,068 expires in
2008, $8,323,306 expires in 2009, $1,161,652 expires in 2010 and $316,507
expires in 2014.
For the six months ended August 31, 2006, the Fund had capital gains of
$260,434 which may reduce the capital loss carryforwards.
14
5. Capital Shares
Transactions in capital shares were as follows:
Six Months Year
Ended Ended
8/31/06 2/28/06
Shares sold:
Class A 2,004,047 2,053,783
Class B 13,795 109,469
Class C 56,493 214,354
Shares issued upon reinvestment of
dividends and distributions:
Class A 880,246 1,808,881
Class B 19,202 45,977
Class C 13,541 23,752
__________ __________
2,987,324 4,256,216
__________ __________
Shares repurchased:
Class A (3,793,942) (7,136,054)
Class B (478,746) (819,201)
Class C (22,062) (100,096)
__________ __________
(4,294,750) (8,055,351)
__________ __________
Net decrease (1,307,426) (3,799,135)
__________ __________
For the six months ended August 31, 2006 and the year ended February 28, 2006,
255,959 Class B shares were converted to 255,959 Class A shares valued at
$2,049,010 and 522,668 Class B shares were converted to 522,449 Class A shares
valued at $4,249,239, respectively. The respective amounts are included in Class
B redemptions and Class A subscriptions in the table above and the Statements of
Changes in Net Assets.
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments(R)
Family of Funds (the "Participants"), participates in a $225,000,000 revolving
line of credit facility to be used for temporary or emergency purposes as an
additional source of liquidity to fund redemptions of investor shares. The
Participants are charged an annual commitment fee, which is allocated across the
Participants on the basis of each Participant's allocation of the entire
facility. The Participants may borrow up to a maximum of one third of their net
assets under the agreement. The Fund had no amounts outstanding as of August 31,
2006, or at any time during the period then ended.
7. Credit and Market Risk
The Fund concentrates its investments in securities issued by Pennsylvania
municipalities. The value of these investments may be adversely affected by new
legislation within Pennsylvania, regional or local economic conditions, and
differing levels of supply and demand for municipal bonds. Many municipalities
insure repayment for their obligations. Although bond insurance reduces the risk
of loss due to default by an issuer, such bonds remain subject to the risk that
market value may fluctuate for other reasons and there is no assurance that the
insurance company will meet its obligations. These securities have been
identified in the Statement of Net Assets.
The Fund may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are identified on the Statement of Net Assets.
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased
bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding". "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates.
Bonds are considered "pre-refunded" when the refunding issue's proceeds are
escrowed only until a permitted call date or dates on the refunded issue with
the refunded issue being redeemed at the time, including any required premium.
Bonds become "defeased" when the rights and interests of the bondholders and of
their lien on the pledged revenues or other security under the terms of the bond
contract are substituted with an alternative source of revenues (the escrow
securities) sufficient to meet payments of principal and interest to maturity or
to the first call dates. Escrowed secured bonds will often receive a rating of
AAA from Moody's Investor's Service, Inc., Standard & Poor's Ratings Group, and/
or Fitch Ratings due to the strong credit quality of the escrow securities and
the irrevocable nature of the escrow deposit agreement.
The Fund may invest up to 10% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Fund's Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Fund's limitation on investments in illiquid assets. At
August 31, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Fund's Liquidity Procedures.
8. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
15
Other Fund information
Delaware Tax-Free Pennsylvania Fund
Board Consideration of Delaware Tax-Free Pennsylvania Fund Investment Advisory
Agreement
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the Delaware
Tax-Free Pennsylvania Fund (the "Fund"). In making its decision, the Board
considered information furnished throughout the year at regular Board meetings,
as well as information prepared specifically in connection with the Annual
Meeting. Information furnished and discussed throughout the year included
reports detailing Fund performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Fund, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Fund's investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Fund policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Fund, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Fund and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
Nature, Extent and Quality Of Service. Consideration was given to the services
provided by Delaware Investments to the Fund and its shareholders. In reviewing
the nature, extent and quality of services, the Board emphasized reports
furnished to it throughout the year at regular Board meetings covering matters
such as the relative performance of the Fund, compliance of portfolio managers
with the investment policies, strategies and restrictions for the Fund, the
compliance of management personnel with the Code of Ethics adopted throughout
the Delaware Investments Family of Funds complex, the adherence to fair value
pricing procedures as established by the Board and the accuracy of net asset
value calculations. The Board noted that it was pleased with the current
staffing of the Fund's investment advisor and management's efforts to strengthen
and deepen portfolio management teams during the past year, the emphasis on
research and the compensation system for advisory personnel. Favorable
consideration was given to DMC's efforts to maintain, and in some instances
increase, financial and human resources committed to fund matters. Other factors
taken into account by the Board were Delaware Investments' preparedness for, and
response to, legal and regulatory matters. The Board also considered the
transfer agent and shareholder services provided to Fund shareholders by
Delaware Investments' affiliate, Delaware Service Company, Inc. ("DSC"), noting
DSC's commitment to maintain a high level of service in keeping with its past
receipt of the DALBAR Pyramid Award, and the continuing expenditures by Delaware
Investments to improve the delivery of shareholder services. Additionally, the
Board noted the extent of benefits provided to Fund shareholders for being part
of the Delaware Investments Family of Funds, including the privilege to exchange
investments between the same class of shares of funds without a sales charge,
the ability to reinvest Fund dividends into other funds and the privilege to
combine holdings in other funds to obtain a reduced sales charge. The Board was
satisfied with the nature, extent and quality of the overall services provided
by Delaware Investments.
Investment Performance. The Board considered the investment performance of DMC
and the Fund. The Board was pleased with DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Fund in view of
its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Fund showed the investment
performance of its Class A shares in comparison to a group of similar funds as
selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest performance is ranked
last. The highest/best performing 25% of funds in the Performance Universe make
up the first quartile; the next 25% - the second quartile; the next 25% - the
third quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Fund was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Fund's performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Fund and the
Board's view of such performance.
16
Other Fund information
Board Consideration of Delaware Tax-Free Pennsylvania Fund Investment Advisory
Agreement (continued)
The Performance Universe for the Fund consisted of the Fund and all retail and
institutional Pennsylvania municipal debt funds as selected by Lipper. The
Lipper report comparison showed that the Fund's total return for the one, three
and five year periods was in the first quartile of such Performance Universe.
The report further showed that the Fund's total return for the 10 year period
was in the second quartile. The Board was satisfied with such performance.
Comparative Expenses. The Board considered expense data for the Delaware
Investments Family of Funds. Management provided the Board with information on
pricing levels and fee structures for the Fund. The Board focused particularly
on the comparative analysis of the management fees and total expense ratios of
the Fund and the management fees and expense ratios of a group of similar funds
as selected by Lipper (the "Expense Group"). In reviewing comparative costs, the
Fund's contractual management fee and the actual management fee incurred by the
Fund were compared with the contractual management fees (assuming all funds in
the Expense Group were similar in size to the Fund) and actual management fees
(as reported by each fund) of other funds within the Expense Group, taking into
effect any applicable breakpoints and fee waivers. The Fund's total expenses
were also compared with those of its Expense Group. The Lipper total expenses,
for comparative consistency, were shown by Lipper for Class A shares and
compared total expenses including 12b-1 and non-12b-1 service fees. The Board
also considered fees paid to Delaware Investments for non-management services.
The Board noted its objective to limit the Fund's total expense ratio to an
acceptable range as compared to the median of the Expense Group. The following
paragraph summarizes the expense results for the Fund and the Board's view of
such expenses.
The expense comparisons for the Fund showed that its actual management fee and
total expenses were in the quartile with the second highest expenses of its
Expense Group. The Board noted that the Fund's total expenses were not in line
with the Board's objective. In evaluating the total expenses, the Board
considered recent initiatives implemented by management, such as the outsourcing
of certain transfer agency services, creating an opportunity for a reduction in
expenses. The Board was satisfied with management's efforts to improve the
Fund's total expense ratio and bring it in line with the Board's objective.
Management Profitability. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Fund.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationships with the Fund and the Delaware Investments Family of Funds
required negotiation of reduction of fees.
Economies of Scale. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Fund's assets increase and the extent to
which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Fund's management contract fell within the standard
structure. The Board also noted that the Fund's assets exceeded the first
breakpoint level. The Board believed that, given the extent to which economics
of scale might be realized by the advisor and its affiliates, the schedule of
fees under the Investment Advisory Agreement provides a sharing of benefits with
the Fund and its shareholders.
17
About the organization
This semiannual report is for the information of Delaware Tax-Free Pennsylvania
Fund shareholders, but it may be used with prospective investors when preceded
or accompanied by a current prospectus for Delaware Tax-Free Pennsylvania Fund
and the Delaware Investments(R) Performance Update for the most recently
completed calendar quarter. The prospectus sets forth details about charges,
expenses, investment objectives, and operating policies of the Fund. You should
read the prospectus carefully before you invest. The figures in this report
represent past results that are not a guarantee of future results. The return
and principal value of an investment in the Fund will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost.
Board of trustees
Patrick P. Coyne
Chairman, President,
and Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
Thomas L. Bennett
Private Investor
Rosemont, PA
John A. Fry
President
Franklin & Marshall College
Lancaster, PA
Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY
Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA
Ann R. Leven
Owner - ARL Associates,
Strategic Financial Planning
Consulting Firm
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN
J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ
Affiliated officers
Michael P. Bishof
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA
David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA
David P. O'Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA
John J. O'Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA
Contact information
Investment manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA
National distributor
Delaware Distributors, L.P.
Philadelphia, PA
Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094
For shareholders
800 523-1918
For securities dealers and financial
institutions representatives only
800 362-7500
Web site
www.delawareinvestments.com
Delaware Investments is the marketing name of Delaware Management Holdings,
Inc. and its subsidiaries.
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and
procedures that the Fund uses to determine how to vote proxies (if any) relating
to portfolio securities are available without charge (i) upon request, by
calling 800 523-1918; (ii) on the Fund's Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C.; information on the
operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended June 30 is
available without charge (i) through the Fund's Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
18
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Register for Account Access today! Please visit us at
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Please call our Shareholder Service Center at 800 523-1918 Monday through Friday
from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any questions.
[DELAWARE INVESTMENTS LOGO]
(908) Printed in the USA
SA-007 [8/06] CGI 10/06 MF-06-09-022 PO11255
<page>
Item 2. Code of Ethics
Not applicable.
Item 3. Audit Committee Financial Expert
Not applicable.
Item 4. Principal Accountant Fees and Services
Not applicable.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this Form
N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or
<page>
statements filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.
There were no significant changes in the registrant's internal control over
financial reporting that occurred during the second fiscal quarter of the period
covered by the report to stockholders included herein (i.e., the registrant's
second fiscal quarter) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 are furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf, by the undersigned, thereunto duly authorized.
Name of Registrant: Delaware Group State Tax Free Income Trust
PATRICK P. COYNE
________________________________
By: Patrick P. Coyne
_________________________
Title: Chief Executive Officer
Date: November 6, 2006
<page>
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
PATRICK P. COYNE
________________________________
By: Patrick P. Coyne
_________________________
Title: Chief Executive Officer
Date: November 6, 2006
RICHARD SALUS
________________________________
By: Richard Salus
_________________________
Title: Chief Financial Officer
Date: November 6, 2006