<PAGE>
INVESTMENT MANAGER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
INVESTMENT ADVISER
Western Asset Management Company
Pasadena, CA
BOARD OF DIRECTORS
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., Vice Chairman
Edward A. Taber, III, President
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart
Washington, D.C.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR ACCOMPANIED BY A
PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(recycle logo) PRINTED ON RECYCLED PAPER
LMF-026
REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED
JUNE 30, 1995
THE
LEGG MASON
U.S.
GOVERNMENT
INTERMEDIATE
PORTFOLIO
PUTTING YOUR FUTURE FIRST
(Legg Mason logo)
<PAGE>
TO OUR SHAREHOLDERS,
On June 30, 1995, the Legg Mason U.S. Government Intermediate-Term
Portfolio had a 30-day annualized yield of 5.9%, an average life of
5.6 years, and net assets per share of $10.29. During the quarter and
six months ended June 30, the fund's total returns* (not annualized)
were a very attractive 4.8% and 8.8%, respectively, as the value of
our portfolio holdings rose in response to declining interest rates.
Our total return in the twelve months through June 30 was 9.0% -- also
attractive, but only slightly higher than the six-month return shown
above because the July-December 1994 period was one of generally
rising interest rates and falling fixed-income securities prices.
We believe that the U.S. Government Intermediate-Term Portfolio's
emphasis on portfolio quality and intermediate-term maturities
continues to be a sensible investment combination for many investors.
Many fund shareholders regularly add to their fund holdings by
authorizing automatic, monthly transfers from their bank checking
accounts or Legg Mason money market funds. Your Investment Executive
will be happy to help you make these arrangements if you would like to
purchase fund shares in this convenient way.
Sincerely,
(signature)
John F. Curley, Jr.
Chairman
August 7, 1995
* Total return measures investment performance in terms of
appreciation or depreciation in the fund's net asset value per
share, plus capital gain distributions and dividends. It assumes
that capital gain distributions and dividends were reinvested in the
fund at the times they were paid.
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 55.5%
Fixed-rate Securities -- 47.3%
Federal Home Loan Bank
4.9% 2/23/98 $15,600 $ 15,106
7.87% 4/19/00 5,550 5,623
20,729
Federal Home Loan Mortgage
Corporation
6.775% 5/28/98 15,000 15,056
Guaranteed Export Trust 1995-A
6.28% 6/15/04 19,000 18,986
Student Loan Marketing
Association
8.52% 12/13/99 9,000 9,088
United States Treasury Bonds
8.875% 8/15/17 8,000 9,960
11.625% 11/15/04 8,500 11,685
21,645
United States Treasury Notes
5.875% 6/30/00 27,000 26,882
7.375% 5/15/96 4 4
26,886
Indexed Security(A) -- 8.2%
Federal Home Loan Bank
4.307% 10/22/96
Indexed to COFI 20,000 19,544
Total U.S. Government and Agency
Obligations
(Identified Cost -- $129,135) 131,934
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 21.0%
Fixed-rate Securities -- 20.5%
Federal Home Loan Mortgage
Corporation
9% 8/1/96 325 332
7.88% 12/20/96 10,000 10,255
10.75% 7/1/00 19 21
8.75% 2/1/01 1,291 1,328
8.75% 8/1/01 269 275
8.75% 10/1/01 176 180
9% 1/1/17 142 149
9% 5/1/20 594 623
9% 9/1/20 2,408 2,528
9% 1/1/21 2,045 2,130
8.5% 6/1/21 2,044 2,108
19,929
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
Federal National Mortgage
Association
3%(F) 7/13/98 $15,000 $ 14,965
9.5% 7/1/14 1,184 1,256
6.5% 4/1/24 35 33
9% 4/1/25 4,275 4,453
20,707
Government National Mortgage
Association
7% 4/20/25 2,000 2,034
7% 5/20/25 3,000 3,051
6.5% 9/1/25 3,000 3,032
8,117
Stripped Mortgage-backed Security(B) -- 0.5%
Federal National Mortgage Association
152% 11/25/20
Interest-only 135 1,282
Total U.S. Government Agency
Mortgage-backed Securities
(Identified Cost -- $48,804) 50,035
ASSET-BACKED SECURITIES -- 4.1%
AFC Home Equity Loan Trust
7.75% 12/15/06 3,232 3,288
8% 12/25/24 2,698 2,757
6,045
Chemical Grantor Trust 1989-B
8.9% 12/15/96 535 545
ContiMortgage Home Equity Loan
Trust
8.6% 6/15/25 3,000 3,085
Total Asset-backed Securities
(Identified Cost -- $9,540) 9,675
CORPORATE BONDS AND NOTES -- 9.2%
Fixed-rate Securities -- 8.4%
Lehman Brothers Holdings Inc.
8.75% 3/15/05 3,000 3,230
7.375% 5/15/07 500 506
3,736
Philip Morris Companies Inc.
9.25% 2/15/00 2,000 2,187
Salomon Inc.
7.87% 12/30/96 4,000 4,063
WMX Technologies, Inc.
6.22% 4/30/04 9,500 10,058
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
Indexed Security(A) -- 0.8%
Ford Motor Credit Company
5.3% 3/18/99
Indexed to two-year CMT $2,000 $ 1,928
Total Corporate Bonds and Notes
(Identified Cost -- $21,085) 21,972
MORTGAGE-BACKED SECURITIES -- 8.3%
Fixed-rate Security -- 2.1%
Resolution Trust Corporation
10% 5/25/22 4,811 4,975
Variable-rate Securities(C) -- 6.2%
Resolution Trust Corporation
7.408% 5/25/19 2,506 2,404
8.773% 3/25/21 6,000 6,163
11.094% 1/25/25 2,133 2,209
7.834% 9/25/29 3,766 3,852
14,628
Total Mortgage-backed Securities
(Identified Cost -- $19,611) 19,603
YANKEE BOND(D) -- 1.8%
Hydro-Quebec
8.05% 7/7/24
(Identified Cost -- $4,406) 4,000 4,372
SHORT-TERM INVESTMENTS -- 0.9%
U.S. Government
Obligation -- 0.4%
United States Treasury Bill
5.51% 7/20/95 1,000 997(E)
</TABLE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
Repurchase Agreement -- 0.5%
Salomon Brothers, Inc.
6.05% dated 6/30/95, to be
repurchased at $1,087 on
7/3/95 (Collateral: $1,086
United States Treasury Notes,
6.75% due 5/31/97, value
$1,110) $ 1,086 $ 1,086
Option Purchased -- N.M.
Eurodollar Future Puts
Sept. 95 Strike Price $93.5 16(G) 1
Total Short-term Investments
(Identified Cost -- $2,092) 2,084
Total Investments -- 100.8%
(Identified Cost -- $234,673) 239,675
Other Assets Less Liabilities -- (0.8%) (2,010)
NET ASSETS CONSISTING OF:
Accumulated paid-in capital
applicable to:
22,783 Primary Class shares
outstanding $242,044
315 Navigator Class shares
outstanding 3,060
Accumulated net realized loss on
investments, options and
futures (12,054)
Unrealized appreciation of
investments, options and
futures 4,615
NET ASSETS -- 100.0% $237,665
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $10.29
NAVIGATOR CLASS $10.29
</TABLE>
3
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON INCOME TRUST , INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Net
Appreciation
(Amount in Thousands) (Depreciation)
<S> <C> <C>
Option Written
Seven-Year Constant
Maturity Treasury Calls
May 97 Strike Price
$7.30 9,500(G) $ 462
Futures Contracts Purchased
Treasury Bond Futures
Sept. 95 90(G) 860
Futures Contracts Sold
Treasury Note Futures
Sept. 95 200(G) (788)
$ 72
</TABLE>
(A) INDEXED SECURITY -- THE RATE OF INTEREST EARNED ON SUCH A SECURITY IS
TIED TO AN INDEX SUCH AS COST OF FUNDS INDEX (COFI) OR CONSTANT
MATURITY TREASURY INDEX (CMT). THE COUPON RATE SHOWN IS THE RATE AT
JUNE 30, 1995.
(B) STRIPPED SECURITY -- SECURITY WITH INTEREST-ONLY OR PRINCIPAL-ONLY
PAYMENT STREAMS. FOR INTEREST-ONLY SECURITIES, THE AMOUNT SHOWN AS
PRINCIPAL IS THE NOTIONAL BALANCE USED TO CALCULATE THE AMOUNT OF
INTEREST DUE.
(C) THE COUPON RATES SHOWN ON VARIABLE RATE SECURITIES ARE THE RATES AT
JUNE 30, 1995. THESE RATES VARY WITH THE WEIGHTED AVERAGE COUPON OF THE
UNDERLYING LOANS.
(D) YANKEE BOND -- DOLLAR-DENOMINATED BOND ISSUED IN THE U.S. BY FOREIGN
ENTITIES.
(E) COLLATERAL TO COVER OPTION WRITTEN AND FUTURES CONTRACTS SOLD.
(F) THE INTEREST RATE ON THIS SECURITY IS FIXED AT 3% UNTIL JANUARY 13,
1996, THEREAFTER 7% UNTIL MATURITY.
(G) ACTUAL NUMBER OF CONTRACTS.
N.M. NOT MEANINGFUL.
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
STATEMENT OF OPERATIONS
LESS MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 7,563
EXPENSES:
Management fee $ 640
Distribution and service fees 574
Transfer agent and shareholder servicing expense 74
Custodian fee 39
Legal and audit fees 37
Reports to shareholders 22
Registration fees 15
Directors' fees 4
Other expenses 12
1,417
Less fees waived (358)
Total expenses, net of waivers 1,059
NET INVESTMENT INCOME 6,504
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments, options and futures 2,126
Change in unrealized appreciation of investments, options and futures 11,158
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 13,284
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $19,788
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
<TABLE>
<CAPTION>
For the Six
Months Ended For the
June 30, Year Ended
(Amounts in Thousands) 1995 December 31, 1994
(Unaudited)
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 6,504 $ 13,938
Net realized gain (loss) on investments, options and futures 2,126 (12,981)
Change in unrealized appreciation of investments, options and futures 11,158 (6,568)
Change in net assets resulting from operations 19,788 (5,611)
Distributions to shareholders from net investment income:
Primary Class (6,404) (13,918)
Navigator Class (100) (20)
Change in net assets from Fund share transactions:
Primary Class (9,934) (48,725)
Navigator Class (964) 4,024
Change in net assets 2,386 (64,250)
NET ASSETS:
Beginning of period 235,279 299,529
End of period $237,665 $ 235,279
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Navigator
Class Primary Class
For the Six For the Six
Months Ended Months Ended
June 30, June 30, For the Years Ended December 31,
1995 1995 1994 1993 1992 1991 1990
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 9.72 $ 9.72 $10.43 $10.70 $10.77 $10.29 $10.20
Net investment income 0.31(A) 0.28(B) 0.51(B) 0.53(B) 0.60(B) 0.72(B) 0.78(B)
Net realized and unrealized
gain (loss) on investments 0.57 0.57 (0.71) 0.17 0.05 0.70 0.09
Total from investment
operations 0.73 0.85 (0.20) 0.70 0.65 1.42 0.87
Distributions to shareholders:
Net investment income (0.31) (0.28) (0.51) (0.53) (0.60) (0.72) (0.78)
Net realized gain -- -- -- (0.39) (0.12) (0.22) --
In excess of net realized
gain on investments -- -- -- (0.05) -- -- --
Total distributions (0.31) (0.28) (0.51) (0.97) (0.72) (0.94) (0.78)
Net asset value, end of period $10.29 $10.29 $ 9.72 $10.43 $10.70 $10.77 $10.29
Total return 9.11%(C) 8.82%(C) (1.93)% 6.6% 6.3% 14.4% 9.1%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.4%(A,D) 0.9%(B,D) 0.9%(B) 0.9%(B) 0.9%(B) 0.8%(B) 0.6%(B)
Net investment income 6.1%(A,D) 5.6%(B,D) 5.1%(B) 4.8%(B) 5.5%(B) 6.7%(B) 7.7%(B)
Portfolio turnover rate 269.3%(D) 269.3%(D) 315.7% 490.2% 512.6% 642.8% 67.0%
Net assets, end of period (in
thousands) $3,245 $234,420 $231,255 $299,529 $307,320 $211,627 $74,423
</TABLE>
(A) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY LIMITATION AS FOLLOWS: 0.4% UNTIL APRIL 30, 1995; AND
0.45% UNTIL OCTOBER 31, 1995.
(B) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY LIMITATIONS AS FOLLOWS: 0.5% UNTIL MARCH 31, 1990;
0.6% UNTIL DECEMBER 31, 1990; 0.75% UNTIL APRIL 30, 1991; 0.8% UNTIL
DECEMBER 31, 1991; 0.85% UNTIL AUGUST 31, 1992; 0.9% UNTIL APRIL 30,
1995; AND 0.95% UNTIL OCTOBER 31, 1995.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
(Amounts in Thousands) (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Income Trust, Inc. ("Trust"), consisting of the U.S.
Government Intermediate-Term Portfolio ("Fund"), Investment Grade Income
Portfolio, U.S. Government Money Market Portfolio and the High Yield
Portfolio is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company. The financial
statements of the other portfolios of the Trust are included in separate
reports to shareholders.
The U.S. Government Intermediate-Term Portfolio consists of two
classes of shares: the Primary Class, offered since 1987, and the
Navigator Class, offered to certain institutional investors since December
1, 1994. Expenses of the Fund are allocated proportionately to the two
classes of shares except for 12b-1 distribution fees, which are charged
only on the Primary shares, and transfer agent and shareholder servicing
expenses which are determined separately for each class.
Security Valuation
Portfolio securities are valued based upon market quotations. When
market quotations are not readily available, securities are valued based
on prices received from recognized broker-dealers in the same or similar
securities. The amortized cost method of valuation is used for debt
obligations with 60 days or less remaining to maturity.
Investment Income and Dividends to Shareholders
Income and expenses are recorded on the accrual basis. Dividends are
declared daily and paid monthly. Dividends payable are recorded on the
dividend record date. Bond premiums are amortized for financial reporting
and tax purposes. Bond discounts, other than original issue and
zero-coupon bonds, are not amortized. At June 30, 1995, the amount of
income distribution payable was $594.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis. At June 30, 1995, $3,030 was payable for investments purchased but
not yet received.
Options and Futures
The current market value of a traded option is the last sale price or,
in the absence of a sale, the mean between the closing bid and asked
price. Futures contracts are marked to market daily using the closing
price on the principal exchange where the contracts are traded. Payments
(variation margin) are made or received daily in relation to market
fluctuations.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the six months ended June 30, 1995
(excluding short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $ 295,322
Proceeds from sales 294,907
</TABLE>
At June 30, 1995, the cost of securities for federal income tax
purposes was $234,678. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $5,505
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $508. The Fund has unused
capital loss carryforwards for federal income tax purposes of $12,729
which expire in 2002.
8
<PAGE>
(Amounts in Thousands)
3. OPTIONS AND FUTURES:
As part of the Fund's investment program, the Fund may utilize options
and futures. The nature and risk of these financial instruments and the
reasons for using them are set forth more fully in the Fund's Prospectus
and Statement of Additional Information.
A call option written gives the option holder the right to purchase
the underlying security at a specified price until a specified date. A put
option written gives the option holder the right to sell the underlying
security at a specified price until a specified date. Risks arise from the
possible illiquidity of the options market and from movements in security
values. There were no call or put options written, closed, expired or
exercised by the Fund during the six months ended June 30, 1995.
The written option outstanding and the open long and short futures and
related appreciation or depreciation at June 30, 1995 are described at the
end of the "Statement of Net Assets," page 4.
The Fund enters into futures contracts as a hedge against anticipated
changes in interest rates. Risks arise from the possible illiquidity of
the futures market and from the possibility that a change in the value of
a contract may not correlate with changes in interest rates.
4. REALIZED GAIN:
The components of net realized gain on investments, options and
futures for the six months ended June 30, 1995 were as follows:
<TABLE>
<CAPTION>
Amount
<S> <C>
Investments $2,066
Options 154
Futures (94)
Net realized gain $2,126
</TABLE>
5. FUND SHARE TRANSACTIONS:
At June 30, 1995 there were 1,000,000 shares authorized at $.001 par
value for all portfolios of the Trust (including the Fund). Transactions
in Fund shares were as follows:
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
June 30, 1995 December 31, 1994
Primary Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 2,590 $ 25,991 8,767 $ 88,640
Reinvestment of
distributions 524 5,259 1,207 12,041
Repurchased (4,121) (41,184) (14,902) (149,406)
Net change (1,007) $ (9,934) (4,928) $ (48,725)
</TABLE>
<TABLE>
<CAPTION>
December 1,
1994(|)
For the Six to
Months Ended December 31,
June 30, 1995 1994
Navigator Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 28 $ 284 419 $4,071
Reinvestment of
distributions 9 90 2 20
Repurchased (136) (1,338) (7) (67)
Net change (99) $ (964) 414 $4,024
<CAPTION>
</TABLE>
(|)COMMENCEMENT OF NAVIGATOR CLASS.
6. TRANSACTIONS WITH AFFILIATES:
The Fund has a management agreement with Legg Mason Fund Adviser, Inc.
("Manager"), a corporate affiliate of Legg Mason Wood Walker, Incorporated
("Legg Mason"), a member of the New York Stock Exchange and the
distributor for the Fund. Under this agreement, the Manager provides the
Fund with management and administrative services for which the Fund pays a
fee at an annual rate of 0.55% of average daily net assets of the Fund.
The agreement with the Manager provides that expense reimbursements be
made to the Fund for expenses which in any month are in excess of annual
rates, based on average daily net assets, of 0.95% until October 31, 1995
or when the Fund reaches net assets of $400,000, whichever occurs first.
For the six months ended June 30, 1995, management fees of $358 were
waived. At June 30, 1995, $52 was due to the Adviser.
Western Asset Management Company ("Adviser"), a corporate affiliate of
the Manager and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund. The
Manager pays
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
(Amounts in Thousands) (Unaudited)
the Adviser a fee for its services at an annual rate equal to 40% of the
fee received by the Manager.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.25% of the average daily net assets of Primary
shares, calculated daily and payable monthly. At June 30, 1995,
distribution and service fees of $99 were due to the distributor. Legg
Mason also has an agreement with the Fund's transfer agent to assist with
certain of its duties. For this assistance, Legg Mason was paid $27 by the
transfer agent for the six months ended June 30, 1995.
10
