INVESTMENT MANAGER
Legg Mason Fund Adviser, Inc. REPORT TO SHAREHOLDERS
Baltimore, MD FOR THE YEAR ENDED
INVESTMENT ADVISER DECEMBER 31, 1995
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 THE
Richard G. Gilmore LEGG MASON
Charles F. Haugh INVESTMENT
Arnold L. Lehman GRADE
Dr. Jill E. McGovern INCOME
T. A. Rodgers PORTFOLIO
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, D.C.
INDEPENDENT ACCOUNTANTS PUTTING YOUR FUTURE FIRST
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
[RECYCLED LOGO] PRINTED ON RECYCLED PAPER [Legg Mason Funds Logo]
LMF-022
<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, which normally constitute at least 75% of the
fund's portfolio, 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 December 31, 1995, the fund had an annualized 30-day SEC
yield of 6.17%, an average life of 9.4 years and net assets per
share of $10.44. Over the twelve months through December 31, the
fund's total return was 20.1%, reflecting gains in the prices of
fixed income securities during the year. Total return in the prior
calendar year, when prices of fixed income securities generally
declined, was -4.8%. (Total return measures how well your
investment has performed in terms of appreciation or depreciation
in net asset value per share, capital gain distributions and
dividends. It assumes that capital gain distributions and dividends
were reinvested in the fund at the times they were paid.)
We hope you will consider using the Investment Grade Income
Portfolio for investment of additional funds as they become
available. You may add to your account by automatic transfer from
your bank account or Legg Mason money market fund (your Investment
Executive will be happy to supply an authorization form) or by
mailing a check for $100 or more (payable to "Legg Mason Investment
Grade Income Portfolio") to:
Legg Mason Investment Grade Income Portfolio
P.O. Box 1476
Baltimore, Maryland 21203-1476
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman
February 9, 1996
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
On the back of declining interest rates, and with most
investment strategies rewarded by favorable developments in the
market, the fund registered strong nominal and relative
performance in 1995, with a 20.1% total return relative to the
broad bond market's return of 18.5%.
Interest rates fell dramatically last year, reversing a good
portion of their dramatic rise the year before. Whereas the
Federal Reserve led the way to higher rates in 1994, it cut rates
only modestly in 1995. The major driver to lower rates was the
growing perception among market participants that the Fed's
monetary tightening had been sufficient to slow the pace of
economic growth, and that therefore inflation prospects were much
better than had been feared early in the year. Expectations swung
dramatically, as the market went into 1995 expecting the Fed to
raise the funds rate to 8% by the end of the year. Instead, the
Fed lowered the funds rate from 5.75% to 5.5%, and the market
expected further reductions to 4.75% by the end of the year. Thus,
forward short-term interest rates fell by more than 300 basis
points (100 basis points = 1%) over the course of the year, far
outpacing the 200 basis point decline in long-term interest rates.
Relative performance was dominated by the Adviser's decision
to hold a long duration position throughout the year, causing the
portfolio to benefit as interest rates declined. The portfolio's
duration was concentrated in the short- and intermediate sector of
the yield curve early in the year, a strategy that was rewarded as
the yield curve steepened rather dramatically in the first
quarter. Subsequently, the portfolio's barbell exposure to
maturities had little effect on performance for the balance of the
year, since the decline in rates through year end was fairly
uniform across the maturity spectrum.
By emphasizing the mortgage sector early in the year, the
portfolio benefited as mortgage yields narrowed relative to
Treasury yields. A move to underweight mortgages in the portfolio
beginning in the second quarter was also rewarded, as mortgage
spreads widened as interest rates continued to decline, sparking
prepayment fears and causing returns in the mortgage sector to lag
Treasury returns. In addition, the portfolio held an overweighting
to corporate securities at the lower end of the investment scale
for the balance of the year, and this proved quite beneficial as
corporate quality spreads in general narrowed over the course of
the year.
Western Asset Management Company
February 9, 1996
2
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON INCOME TRUST, INC.
INVESTMENT GRADE INCOME PORTFOLIO
<TABLE>
<CAPTION>
Performance Comparison of a $10,000 Investment as of December 31, 1995
Average Annual Total Return
1 Year 5 Years Life Of Fund*
20.14% 9.51% 9.10%
[GRAPH HERE]
Salomon Brothers
Investment Broad Investment-
Grade Income Grade Bond Index(1)
<S> <C> <C>
1986.5 10,000 10,000
1987 10,260 10,305
1988 11,045 11,127
1989 12,477 12,734
1990 13,200 13,892
1991 15,311 16,111
1992 16,349 17,334
1993 18,184 19,055
1994 17,307 18,512
1995 20,793 21,942
</TABLE>
*August 7, 1987 -- December 31, 1995
(1)The Salomon Brothers Broad Investment-Grade Bond Index is a market-weighted
index that contains approximately 4,700 individually priced investment
grade bonds rated BBB or better. The index includes U.S. Treasury/agency
issues, mortgage pass-through securities and corporate issues.
The fund has two classes of shares: Primary and Navigator Class. The
Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees are determined separately for each class and the
Navigator Class does not have Rule 12b-1 distribution fees.
Total return for Navigator shares for the period December 1, 1995
(inception of class) to December 31, 1995 was 1.42%.
The returns shown above are based on historical results and are not
intended to indicate future performance. The investment return and
principal value of an investment in the fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. No adjustment has been made for any income taxes payable
by shareholders.
3
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON INCOME TRUST, INC.
INVESTMENT GRADE INCOME PORTFOLIO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
CORPORATE BONDS AND NOTES -- 33.4%
Fixed-rate Securities -- 33.4%
FINANCE -- 2.4%
Salomon Inc.
<S> <C> <C>
8.45% 2/17/97 $1,000 $1,025
Western Financial
Savings Bank F.S.B.
8.50% 7/1/03 1,000 1,032
2,057
FOOD AND BEVERAGE -- 2.9%
RJR Nabisco, Incorporated
8.75% 8/15/05 200 205
8.75% 7/15/07 1,110 1,132
Seagram (Jos. E.) & Son
9.65% 8/15/18 900 1,166
2,503
INDUSTRIAL -- 8.8%
General Motors Corporation
7.40% 9/1/25 900 960
ITT Corporation (New)
6.75% 11/15/05 440 442
7.375% 11/15/15 610 617
Nabisco Incorporated
7.55% 6/15/15 500 520
SPX Corporation
11.75% 6/1/02 2,500 2,650
TCI Communications Incorporated
8.75% 8/1/15 1,190 1,319
Westpoint Stevens Inc.
8.75% 12/15/01 1,000 1,000
7,508
MANUFACTURING -- 1.2%
Black and Decker Corporation
7.00% 2/1/06 1,000 1,027
MEDIA AND ENTERTAINMENT -- 3.5%
Columbia Pictures Entertainment
9.875% 2/1/98 250 269
News America Holdings Incorporated
8.875% 4/26/23 1,000 1,156
Time Warner Entertainment
Company, L.P.
8.375% 7/15/33 1,500 1,601
3,026
</TABLE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C> <C>
MULTI-INDUSTRY -- 1.2%
Loews Corporation
7.625% 6/1/23 $1,000 $1,032
OIL AND GAS -- 4.4%
Coastal Corporation
11.75% 6/15/06 160 170
Louis Dreyfus Natural Gas
Corporation
9.25% 6/15/04 1,000 1,070
Occidental Petroleum Corporation
9.625% 7/1/99 1,500 1,525
Phillips Petroleum Company
7.20% 11/1/23 1,000 1,006
3,771
TRANSPORTATION -- 3.9%
Delta Air Lines, Inc.
7.79% 12/1/98 1,000 1,038
United Airlines, Inc.
11.21% 5/1/14 1,750 2,316
3,354
UTILITIES -- 5.1%
First PV Funding Corporation
10.15% 1/15/16 1,000 1,023
Niagara Mohawk Power Corporation
7.75% 5/15/06 1,200 1,150
North Atlantic Energy Corporation
9.05% 6/1/02 1,415 1,449
System Energy Resources, Inc.
7.43% 1/15/11 788 785
4,407
Total Corporate Bonds and Notes
(Identified Cost -- $27,009) 28,685
ASSET-BACKED SECURITIES -- 5.0%
Advanta Home Equity Loan Trust
5.95% 3/25/09 1,355 1,319
ContiMortgage Home Equity
Loan Trust
8.60% 6/15/25 1,500 1,539
Olympic Automobile Receivable Trust
7.875% 7/15/01 1,423 1,460
Total Asset-backed Securities
(Identified Cost -- $4,294) 4,318
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
MORTGAGE-BACKED SECURITIES -- 6.5%
Fixed-rate Securities -- 2.2%
Resolution Trust Corporation
10.00% 5/25/22 $ 786 $ 794
PSB Financial Corporation II
11.05% 12/1/15 1,057 1,135
1,929
Variable-rate SecuritiesG -- 4.3%
Resolution Trust Corporation
6.19% 5/25/19 786 765
11.00% 1/25/25 957 994
6.77% 4/25/28B 1,554 1,531
8.21% 9/25/29 433 435
3,725
Total Mortgage-backed Securities
(Identified Cost -- $5,727) 5,654
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 29.4%
Federal National Mortgage Association
6.30% 6/15/98 1,000 1,000
0%C 11/1/01 600 574
1,574
Guaranteed Export Trust-PDVSA 1995-A
6.28% 6/15/04 1,000 1,017
Tennessee Valley Authority
6.75% 11/1/25 500 526
United States Treasury Bonds
11.625% 11/15/04 2,000 2,831D
12.00% 8/15/13 2,170 3,344
0%E 5/15/17 3,520 940
0%E 8/15/20 700 152
7.50% 11/15/24 970 1,166
8,433
United States Treasury Notes
6.00% 8/31/97 600 608
5.625% 10/31/97 500 504
7.125% 9/30/99 1,100 1,166
7.75% 12/31/99 2,000 2,170
5.625% 11/30/00 7,380 7,447
6.50% 8/15/05 280 298
5.875% 11/15/05 1,480 1,513
13,706
Total U.S. Government and Agency
Obligations
(Identified Cost -- $23,991) 25,256
</TABLE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 14.5%
Fixed-rate Securities -- 12.6%
Federal Home Loan Mortgage
Corporation
8.75% 10/1/01 $ 71 $ 74
5.50% 11/25/05 1,491 1,436
6.50% 9/15/15 315 317
7.00% 1/1/99 2,500 2,523
7.50% 1/1/99 1,600 1,640
5,990
Federal National Mortgage
Association
6.50% 5/25/03 1,200 1,212
8.00% 4/25/06 1,000 1,054
9.15% 9/25/18 409 421
2,687
Government National Mortgage
Association
9.00% 7/15/16 333 356
9.00% 8/15/16 347 370
9.00% 10/15/16 317 338
9.00% 11/15/16 340 363
9.00% 12/15/16 334 357
9.00% 6/15/17 335 358
2,142
Variable-rate SecurityG -- 1.9%
Federal Home Loan Mortgage
Corporation
7.628% 9/1/24 1,601 1,652
Total U.S. Government Agency
Mortgage-backed Securities
(Identified Cost -- $12,253) 12,471
YANKEE BONDS E -- 5.7%
Hydro-Quebec
8.05% 7/7/24 1,200 1,370
Province de Quebec
7.125% 2/9/24 2,000 2,011
YPF Sociedad Anonima
7.50% 10/26/02 1,473 1,491
Total Yankee Bonds
(Identified Cost -- $4,779) 4,872
</TABLE>
5
<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 -- 8.6%
Corporate Bonds and Notes -- 4.1%
Fixed-rate Securities -- 2.3%
Discover Credit Corp.
8.92% 3/15/96 $1,000 $1,003
GATX Leasing Corporation
10.00% 1/1/96 1,000 1,000
2,003
Indexed SecurityA -- 1.8%
Caterpillar Financial Services
Corporation
5.67% 2/26/96F 1,500 1,499
Asset-backed Securities -- 2.0%
First USA Credit Card Master Trust
6.24% 1/15/96F 900 901
MBNA Master Credit Card Trust
6.21% 1/15/96F 800 800
1,701
U.S. Government Obligation -- 1.2%
United States Treasury Bill
5.395% 1/18/96 1,000 997
Repurchase Agreement -- 1.3%
Merrill Lynch Government Securities, Inc.
5.75% dated 12/29/95, to be
repurchased at $1,086 on 1/2/96
(Collateral: $1,020 Federal
National Mortgage Association,
7.70% due 8/10/04, value $1,138) 1,085 1,085
Actual
Contracts
Options Purchased -- N.M.
Eurodollar Future Put
March 96 Strike Price $94.25 80 3
Eurodollar Future Call
March 96 Strike Price $94.50 45 19
22
Total Short-term Investments
(Identified Cost -- $7,306) 7,307
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
Total Investments -- 103.1%
(Identified Cost -- $85,359) $88,563
Other Assets Less Liabilities --
(3.1%) (2,681)
NET ASSETS CONSISTING OF:
Accumulated paid-in capital
applicable to:
8,201 Primary Class shares
outstanding $84,883
24 Navigator Class shares
outstanding 247
Undistributed net investment
income 53
Accumulated realized loss on
investments, options and futures (2,542)
Unrealized appreciation of
investments, options and futures 3,241
NET ASSETS -- 100.0% $85,882
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $10.44
NAVIGATOR CLASS $10.44
</TABLE>
<TABLE>
<CAPTION>
Net
Actual Appreciation
Contracts (Depreciation)
<S> <C> <C>
Futures Contracts PurchasedH
Ten-year Treasury Note
Futures March 96 42 $ 51
Futures Contracts SoldH
Treasury Bond
Futures March 96 9 (14)
$ 37
</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 DECEMBER 31, 1995.
B 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.
C ZERO-COUPON BOND -- A BOND WITH NO PERIODIC INTEREST PAYMENTS WHICH IS
SOLD AT A DISCOUNT TO PRODUCE A CURRENT YIELD-TO-MATURITY. THIS FNMA
SECURITY IS A ZERO-COUPON BOND CALLABLE ON NOVEMBER 1, 1996. IF NOT
CALLED, INTEREST WILL ACCRUE AT 7.99% FROM NOVEMBER 1, 1996 UNTIL
MATURITY.
D COLLATERAL TO COVER WRITTEN OPTIONS AND FUTURES CONTRACTS SOLD.
E YANKEE BOND -- DOLLAR-DENOMINATED BOND ISSUED IN THE U.S. BY FOREIGN
ENTITIES.
F THE MATURITY DATE SHOWN IS THE NEXT SCHEDULED INTEREST RATE ADJUSTMENT
DATE, AND THE COUPON RATE SHOWN IS THE RATE AT DECEMBER 31, 1995.
G THE COUPON RATES SHOWN ON VARIABLE RATE SECURITIES ARE THE RATES AT
DECEMBER 31, 1995. THESE RATES VARY WITH THE WEIGHTED AVERAGE COUPON OF
THE UNDERLYING LOANS.
H OPTIONS AND FUTURES ARE DESCRIBED IN DETAIL IN NOTE 3 TO THE FINANCIAL
STATEMENTS.
N.M. NOT MEANINGFUL.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON INCOME TRUST, INC.
INVESTMENT GRADE INCOME PORTFOLIO
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 5,566
EXPENSES:
Management fee $ 453
Distribution and service fees 377
Custodian fee 68
Transfer agent and shareholder servicing expense 67
Legal and audit fees 25
Registration fees 19
Reports to shareholders 18
Directors' fees 8
Other expenses 5
1,040
Less fees waived (374)
Total expenses, net of waivers 666
NET INVESTMENT INCOME 4,900
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments, options and futures 969
Unrealized appreciation of investments, options and futures 7,813
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 8,782
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $13,682
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON INCOME TRUST, INC.
INVESTMENT GRADE INCOME PORTFOLIO
<TABLE>
<CAPTION>
For the Years Ended December 31,
(Amounts in Thousands) 1995 1994
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 4,900 $ 4,128
Net realized gain (loss) on investments, options and futures 969 (3,131)
Change in unrealized appreciation of investments, options and futures 7,813 (4,483)
Increase in net assets resulting from operations 13,682 (3,486)
Distributions to shareholders from:
Net investment income
Primary Class (4,899) (4,128)
Navigator Class (1) --
Net realized gain on investments
Primary Class -- (287)
Navigator Class -- --
Increase in net assets from Fund share transactions:
Primary Class 10,657 5,316
Navigator Class 247 --
Change in net assets 19,686 (2,585)
NET ASSETS:
Beginning of year 66,196 68,781
End of year (including undistributed net investment income
of $53 and $82, respectively) $85,882 $66,196
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<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>
Navigator
Class Primary Class
For the Years Ended December 31,
1995A 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PEFORMANCE:
Net asset value, beginning of
period $10.32 $9.27 $10.40 $10.71 $10.71 $ 9.97
Net investment income 0.03B 0.65C 0.60C 0.62C 0.66C 0.76C
Net realized and unrealized gain
(loss) on investments, options
and futures 0.12 1.17 (1.09) 0.33 0.25 0.77
Total from investment operations 0.15 1.82 (0.49) 0.95 0.91 1.53
Distributions to shareholders
from:
Net investment income (0.03) (0.65) (0.60) (0.62) (0.66) (0.76)
Net realized gain on
investments -- -- (0.04) (0.63) (0.25) (0.03)
In excess of net realized gain
on investments -- -- -- (0.01) -- --
Total distributions (0.03) (0.65) (0.64) (1.26) (0.91) (0.79)
Net asset value, end of period $10.44 $10.44 $ 9.27 $10.40 $10.71 $10.71
Total return 1.42%D 20.1% (4.8)% 11.2% 6.8% 16.0%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.40%B,E 0.88%C 0.85%C 0.85%C 0.85%C 0.71%C
Net investment income 6.7%B,E 6.5%C 6.1%C 5.6%C 6.1%C 7.3%C
Portfolio turnover rate 221.1% 221.1% 200.1% 348.2% 316.7% 212.5%
Net assets, end of period
(in thousands) $249 $85,633 $66,196 $68,781 $48,033 $36,498
</TABLE>
A FOR THE PERIOD DECEMBER 1, 1995 (COMMENCEMENT OF SALE OF NAVIGATOR CLASS)
TO DECEMBER 31, 1995.
B NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR THE
EXPENSES IN EXCESS OF VOLUNTARY EXPENSE LIMITATION OF 0.4% UNTIL APRIL
31, 1996.
C NET OF FEES WAIVED AND REIMBURSMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 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 APRIL 30, 1996.
D NOT ANNUALIZED.
E ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON INCOME TRUST, INC.
INVESTMENT GRADE INCOME PORTFOLIO
(Amounts in Thousands)
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, the 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 Investment Grade Income 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, 1995. 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 December 31, 1995, dividends payable of $31 were
accrued.
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 year ended December 31, 1995
(excluding short-term securities) were as follows:
Purchases $168,218
Proceeds from sales 157,822
Purchases and sales of U.S. Government securities aggregated
$142,648 and $128,177, respectively, for the year ended December
31, 1995, which are included in the above totals.
At December 31, 1995, the cost of securities for federal
income tax purposes was $85,359. Aggregate gross unrealized
appreciation for all securities in which there was an excess of
value over tax cost was $3,379 and aggregate gross unrealized
depreciation for all securities in which there was an excess of
tax cost over value was $175. The Fund has unused capital loss
carryforwards for federal income tax purposes of $2,495 which
expire in 2002.
10
<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 written call option gives an option holder the right to
purchase the underlying security at a specified price until a
specified date. A written put option gives an 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. Call and put
options written by the Fund and related premiums received during
the year were as follows:
Calls Puts
Actual Actual
Contracts Premiums Contracts Premiums
Options outstanding
December 31, 1995 2,000 $ 49 -- $ --
Options written 5,366 199 5,189 87
Options closed (7,341) (238) (5,189) (87)
Options expired -- -- -- --
Options exercised (25) (10) -- --
Options outstanding
December 31, 1995 -- $ -- -- $ --
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.
The open long and short futures positions and related
appreciation or depreciation at December 31, 1995 are described at
the end of the "Statement of Net Assets", page 6.
4. REALIZED GAIN:
The components of net realized gain on investments, options
and futures for the year ended December 31, 1995 were as follows:
Amount
Investments $235
Options 33
Futures 701
Net realized gain $969
5. FUND SHARE TRANSACTIONS:
At December 31, 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:
For the Years Ended December 31,
1995 1994
Primary Class Shares Amount Shares Amount
Sold 2,728 $ 27,180 3,164 $ 31,206
Reinvestment of
distributions 422 4,218 390 3,768
Repurchased (2,090) (20,741) (3,024) (29,658)
Net increase 1,060 $ 10,657 530 $ 5,316
December 1, 1995(dagger)
to
December 31, 1995
Navigator Class Shares Amount
Sold 24 $247
Reinvestment of distributions -- --
Repurchased -- --
Net increase 24 $247
(dagger) Commencement of operations.
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
April 30, 1996 or when the Fund reaches net assets of $100,000,
whichever occurs first. For the year ended December 31, 1995,
management fees of $374 were waived. At December 31, 1995, $11 was
due to the Manager.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
LEGG MASON INCOME TRUST, INC.
INVESTMENT GRADE INCOME PORTFOLIO
(Amounts in Thousands)
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 December 31, 1995, distribution and service fees of
$36 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 $22 by the
transfer agent for the year ended December 31, 1995.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF LEGG MASON INCOME TRUST, INC.:
We have audited the accompanying statement of net assets of
the Legg Mason Investment Grade Income Portfolio (one of the
portfolios comprising the Legg Mason Income Trust, Inc.) as of
December 31, 1995, and the related statement of operations for the
year then ended, the statement of changes in net assets for each
of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned as of December 31, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial
highlights referred to above present fairly, in all material
respects, the financial position of Legg Mason Investment Grade
Income Portfolio of Legg Mason Income Trust, Inc. as of December
31, 1995, and the results of its operations, changes in its net
assets, and financial highlights for each of the respective
periods stated in the first paragraph, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 1, 1996
13
