<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-022
REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED
JUNE 30, 1995
THE
LEGG MASON
INVESTMENT
GRADE
INCOME
PORTFOLIO
PUTTING YOUR FUTURE FIRST
(Legg Mason logo)
<PAGE>
TO OUR SHAREHOLDERS,
The Legg Mason Investment Grade Income Portfolio is a mutual fund
designed for investors who wish to earn a high level of current income
from a diversified portfolio consisting principally of investment
grade bonds and other debt securities. Investment grade securities
have received one of the four highest ratings from Moody's Investors
Service or Standard & Poor's Corporation, or are considered by the
fund's investment adviser to be of equivalent quality.
On June 30, 1995, the Legg Mason Investment Grade Income Portfolio
had a 30-day annualized yield of 6.52%, an average life of 10.8 years,
and net assets per share of $10.11. During the quarter and six months
ended June 30, the fund's total returns* (not annualized) were a very
attractive 6.3% and 12.7%, 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 12.9% -- also
attractive, but only slightly higher than the six-month return shown
above, reflecting the fact that the July-December 1994 period was one
of rising interest rates and falling fixed-income securities prices.
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.
INVESTMENT GRADE INCOME PORTFOLIO
JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 40.8%
Fixed-rate Securities -- 38.9%
FINANCE -- 5.2%
Discover Credit Corp.
8.92% 3/15/96 $ 1,000 $ 1,014
GATX Leasing Corporation
10% 1/1/96 1,000 1,014
Salomon Inc.
8.45% 2/17/97 1,000 1,025
Western Financial Savings Bank
F.S.B.
8.5% 7/1/03 1,000 985
4,038
FOOD AND BEVERAGE -- 2.3%
RJR Nabisco, Inc.
8.75% 8/15/05 640 657
Seagram (Jos. E.) & Son
9.65% 8/15/18 900 1,092
1,749
INDUSTRIAL -- 9.8%
Lockheed Corporation
7.875% 3/15/23 1,000 1,012
Nabisco, Inc.
6.85% 6/15/05 300 297
7.55% 6/15/15 500 496
SPX Corporation
11.75% 6/1/02 2,500 2,620
Westpoint Stevens Inc.
8.75% 12/15/01 1,000 985
WMX Technologies, Inc.
6.22% 4/30/04 2,000 2,118
7,528
MANUFACTURING -- 1.3%
Black and Decker Corporation
7% 2/1/06 1,000 967
MEDIA AND ENTERTAINMENT -- 4.1%
Columbia Pictures Entertainment
9.875% 2/1/98 250 269
News America Holdings Incorporated
8.875% 4/26/23 1,000 1,085
Time Warner Entertainment Company,
L.P.
8.375% 7/15/33 1,500 1,468
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C> <C>
MEDIA AND ENTERTAINMENT --continued
Time Warner Inc.
9.15% 2/1/23 $ 300 $ 311
3,133
MULTI-INDUSTRY -- 1.2%
Loews Corporation
7.625% 6/1/23 1,000 965
OIL AND GAS -- 6.6%
Coastal Corporation
11.75% 6/15/06 160 173
9.625% 5/15/12 1,185 1,347
Louis Dreyfus Natural Gas
Corporation
9.25% 6/15/04 1,000 1,052
Occidental Petroleum Corporation
9.625% 7/1/99 1,500 1,542
Phillips Petroleum Company
7.2% 11/1/23 1,000 935
5,049
TRANSPORTATION -- 4.2%
AMR Corporation
9% 8/1/12 510 539
Delta Air Lines, Inc.
7.79% 12/1/98 1,000 1,020
United Airlines, Inc.
11.21% 5/1/14 1,400 1,700
3,259
UTILITIES -- 4.2%
First PV Funding Corporation
10.15% 1/15/16 1,000 1,029
North Atlantic Energy Corporation
9.05% 6/1/02 1,415 1,418
System Energy Resources, Inc.
7.43% 1/15/11 800 774
3,221
Indexed Security (A) -- 1.9%
Caterpillar Financial Services
Corporation
6.065% 11/24/98 1,500 1,477
Total Corporate Bonds and Notes
(Identified Cost -- $30,782) 31,386
<CAPTION>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C> <C>
ASSET-BACKED SECURITIES -- 3.9%
ADVANTA Home Equity Loan Trust
5.95% 3/25/09 $ 1,503 $ 1,442
ContiMortgage Home Equity
Loan Trust
8.6% 6/15/25 1,500 1,543
Total Asset-backed Securities
(Identified Cost -- $2,980) 2,985
MORTGAGE-BACKED SECURITIES -- 7.6%
Fixed-rate Securities -- 2.2%
Resolution Trust Corporation
7.85% 9/25/21 359 358
10% 5/25/22 1,016 1,051
7.75% 5/25/24 288 288
1,697
Variable-rate Securities(B) -- 5.4%
Resolution Trust Corporation
7.408% 5/25/19 877 841
6.763% 12/30/22 1,780 1,728(C)
11.094% 1/25/25 1,067 1,105
8.135% 9/25/29 477 481
4,155
Total Mortgage-backed Securities
(Identified Cost -- $5,959) 5,852
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 35.4%
Federal National Mortgage Association
6.3% 6/15/98 1,000 1,001
0%(D) 11/1/01 600 552
1,553
Guaranteed Export Trust 1995-A
6.28% 6/15/04 1,000 999
United States Treasury Bonds
11.625% 11/15/04 2,000 2,750(E)
12% 8/15/13 2,170 3,201
7.5% 11/15/24 970 1,073
7.625% 2/15/25 3,500 3,953
10,977
United States Treasury Notes
6.125% 5/15/98 6,600 6,643
6.75% 4/30/00 1,000 1,030
</TABLE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C> <C>
United States Treasury
Notes -- Continued
6.25% 5/31/00 $1,360 $ 1,375
5.875% 6/30/00 4,000 3,983
7.5% 2/15/05 600 653
13,684
Total U.S. Government and Agency
Obligations
(Identified Cost -- $26,496) 27,213
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 6.5%
Fixed-rate Securities -- 4.1%
Federal Home Loan Mortgage
Corporation
8.75% 10/1/01 75 77
6.5% 9/15/15 315 314
391
Federal National Mortgage
Association
6.5% 5/25/03 1,200 1,194
8% 4/25/06 1,000 1,042
9.15% 9/25/18 508 526
2,762
Variable-rate Security(B) -- 2.4%
Federal Home Loan Mortgage
Corporation
6.662% 9/1/24 1,828 1,863
Total U.S. Government Agency
Mortgage-backed Securities
(Identified Cost -- $4,933) 5,016
YANKEE BONDS(F) -- 4.1%
Hydro-Quebec
8.05% 7/7/24 1,200 1,312
Province de Quebec
7.125% 2/9/24 2,000 1,859
Total Yankee Bonds
(Identified Cost -- $3,311) 3,171
</TABLE>
3
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON INCOME TRUST, INC.
INVESTMENT GRADE INCOME PORTFOLIO
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 2.0%
U.S. Government Obligation -- 1.3%
United States Treasury Bill
5.51% 7/20/95 $ 1,000 $ 997
Repurchase Agreement -- 0.7%
Salomon Brothers, Inc.
6.05% dated 6/30/95, to be
repurchased at $515 on 7/3/95
(Collateral: $468 United States
Treasury Notes, 8.875% due 2/15/99,
value $531) 515 515
Total Short-term Investments
(Identified Cost -- $1,515) 1,512
Total Investments -- 100.3%
(Identified Cost -- $75,976) 77,135
Other Assets Less
Liabilities -- (0.3%) (250)
NET ASSETS CONSISTING OF:
Accumulated paid-in capital
applicable to 7,603 shares
outstanding 78,784
Undistributed net investment
income 82
Accumulated net realized loss
on investments, options and
futures (3,042)
Unrealized appreciation of
investments, options and futures 1,061
NET ASSETS -- 100.0% $76,885
NET ASSET VALUE PER SHARE $ 10.11
</TABLE>
<TABLE>
<CAPTION>
Net
Appreciation
(Amounts in Thousands) (Depreciation)
<S> <C> <C>
Option Written
Seven-year Constant Maturity
Treasury Calls
May 97 Strike Price $7.30 2,000(G) $ 97
Futures Contracts Purchased
Five-year Treasury Note
Futures Sept. 95 30(G) 286
Ten-year Treasury Note
Futures Sept. 95 42(G) (12)
Futures Contracts Sold
Five-year Treasury Note
Futures Sept. 95 70(G) (275)
$ (1)
</TABLE>
(A) INDEXED SECURITY -- THE RATE OF INTEREST EARNED ON THIS SECURITY IS TIED TO
THE CONSTANT MATURITY TREASURY INDEX (CMT). THE COUPON RATE SHOWN IS THE
RATE AT JUNE 30, 1995.
(B) THE COUPON RATES SHOWN ON FLOATING OR ADJUSTABLE RATE SECURITIES ARE THE
RATES AT JUNE 30, 1995. THESE RATES VARY WITH THE WEIGHTED AVERAGE COUPON
OF THE UNDERLYING LOANS.
(C) RULE 144A SECURITY -- A SECURITY PURCHASED PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT OF 1933 WHICH MAY NOT BE RESOLD SUBJECT TO THAT RULE EXCEPT
TO QUALIFIED INSTITUTIONAL BUYERS.
(D) ZERO-COUPON BOND -- A BOND WITH NO PERIODIC INTEREST PAYMENTS WHICH IS SOLD
AT SUCH A DISCOUNT SO AS TO PRODUCE A CURRENT YIELD-TO-MATURITY. THIS
PARTICULAR ZERO-COUPON BOND IS CALLABLE ON NOVEMBER 1, 1996. IF NOT CALLED,
INTEREST WILL ACCRUE AT 7.99% UNTIL MATURITY.
(E) COLLATERAL TO COVER OPTION WRITTEN AND FUTURES CONTRACTS SOLD.
(F) YANKEE BOND -- DOLLAR-DENOMINATED BOND ISSUED IN THE U.S. BY FOREIGN
ENTITIES.
(G) ACTUAL NUMBER OF CONTRACTS.
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON INCOME TRUST , INC.
INVESTMENT GRADE INCOME PORTFOLIO
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 2,669
EXPENSES:
Management fee $ 211
Distribution and service fees 176
Transfer agent and shareholder servicing expense 37
Custodian fee 34
Legal and audit fees 14
Registration fees 11
Reports to shareholders 9
Directors' fees 4
Other expenses 2
498
Less fees waived (192)
Total expenses, net of waivers 306
NET INVESTMENT INCOME 2,363
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments, options and futures 498
Change in unrealized appreciation of investments, options and futures 5,633
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 6,131
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,494
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON INCOME TRUST , INC.
INVESTMENT GRADE INCOME 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 $ 2,363 $ 4,128
Net realized gain (loss) on investments, options and futures 498 (3,131)
Change in unrealized appreciation of investments, options and futures 5,633 (4,483)
Change in net assets resulting from operations 8,494 (3,486)
Distributions to shareholders from:
Net investment income (2,363) (4,128)
Net realized gain on investments -- (287)
Increase in net assets from Fund share transactions 4,558 5,316
Increase in net assets 10,689 (2,585)
NET ASSETS:
Beginning of period 66,196 68,781
End of period (including undistributed net investment income
of $82 at the end of both periods) $ 76,885 $66,196
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON INCOME TRUST , INC.
INVESTMENT GRADE INCOME 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>
For the Six
Months Ended For the Years Ended December 31,
June 30, 1995 1994 1993 1992 1991 1990
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PEFORMANCE:
Net asset value, beginning of
period $9.27 $10.40 $10.71 $10.71 $9.97 $10.29
Net investment income(A) 0.32 0.60 0.62 0.66 0.76 0.84
Net realized and unrealized gain
(loss) on investments 0.84 (1.09) 0.33 0.25 0.77 (0.28)
Total from investment operations 1.16 (0.49) 0.95 0.91 1.53 0.56
Distributions to shareholders:
Net investment income (0.32) (0.60) (0.62) (0.66) (0.76) (0.84)
Net realized gain on
investments -- (0.04) (0.63) (0.25) (0.03) (0.04)
In excess of net realized gain
on investments -- -- (0.01) -- -- --
Total distributions (0.32) (0.64) (1.26) (0.91) (0.79) (0.88)
Net asset value, end of period $10.11 $9.27 $10.40 $10.71 $10.71 $9.97
Total return 12.7%(B) (4.8)% 11.2% 6.8% 16.0% 5.8%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(A) 0.87%(C) 0.85% 0.85% 0.85% 0.71% 0.50%
Net investment income(A) 6.7%(C) 6.1% 5.6% 6.1% 7.3% 8.3%
Portfolio turnover rate 174.2%(C) 200.1% 348.2% 316.7% 212.5% 54.9%
Net assets, end of period
(in thousands) $76,885 $66,196 $68,781 $48,033 $36,498 $22,994
</TABLE>
(A) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.5% UNTIL DECEMBER
31, 1990; 0.65% UNTIL APRIL 30, 1991; 0.7% UNTIL OCTOBER 31, 1991; 0.8%
UNTIL DECEMBER 31, 1991; 0.85% UNTIL APRIL 30, 1995; AND 0.9% UNTIL
OCTOBER 31, 1995.
(B) NOT ANNUALIZED.
(C) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON INCOME TRUST , INC.
INVESTMENT GRADE INCOME PORTFOLIO
(Amounts in Thousands) (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Income Trust, Inc. ("Trust"), consisting of the
Investment Grade Income Portfolio ("Fund"), the U.S. Government
Intermediate-Term 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.
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 $203.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis.
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 $ 59,120
Proceeds from sales 57,114
</TABLE>
At June 30, 1995, the cost of securities for federal income tax
purposes was $76,068. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $1,811
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $744. The Fund has unused
capital loss carryforwards for federal income tax purposes of $3,077 which
expire in 2002.
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
8
<PAGE>
(Amounts in Thousands)
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
positions and related appreciation or depreciation at June 30, 1995 are
described at the end of the "Statement of Net Assets", page 4.
The Fund has entered 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 $(211)
Options 54
Futures 655
Net realized gain $ 498
</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 Months
Ended June 30, For the Year Ended
1995 December 31, 1994
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 1,334 $ 12,987 3,164 $ 31,206
Reinvestment of
distributions 191 1,859 390 3,768
Repurchased (1,063) (10,288) (3,024) (29,658)
Net increase 462 $ 4,558 530 $ 5,316
</TABLE>
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 0.6% 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 0.9% until October 31, 1995 or when
the Fund reaches net assets of $100,000, whichever occurs first. For the
six months ended June 30, 1995, management fees of $192 were waived. At
June 30, 1995, $6 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 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% and an annual service fee of 0.25% of the Fund's
average daily net assets, calculated daily and payable monthly. At June
30, 1995, distribution and service fees of $31 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 $11 by the transfer agent for the six months ended June 30,
1995.
9
