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 LLP
Washington, D.C.
Independent Accountants
Coopers & Lybrand L.L.P.
Baltimore, MD
The U.S. Government Money Market Portfolio
is neither insured nor guaranteed by the
U.S. Government. There can be no assurance
that the fund will always be able to
maintain a stable net asset value of
$1.00 per share.
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 o 539 o 0000
[RECYCLE LOGO] Printed on Recycled Paper
LMF-056
Annual Report
December 31, 1996
Legg Mason
Income
Trust, Inc.
U.S. Government Intermediate
Investment Grade
High Yield
U.S. Government Money Market
Putting Your Future First
[LEGG MASON LOGO]
FUNDS
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust's annual report,
combining reports for the Legg Mason U.S. Government Intermediate Portfolio,
Investment Grade Income Portfolio, High Yield Portfolio and the U.S. Government
Money Market Portfolio. If you own more than one portfolio of the Income Trust,
this combination will eliminate extra mailings to your home. If you own only one
portfolio, you may be interested in reviewing information on other portfolios of
Income Trust.
The following table summarizes key statistics for each portfolio, as of
December 31, 1996:
Net Asset Value
SEC Yield* Average Life Per Share
---------- ------------ ---------------
Government Intermediate 5.83% 6.7 years $10.31
Investment Grade 6.33% 10.9 years $10.22
High Yield 10.31% 5.4 years $15.37
Government Money Market 4.77% 42 days $ 1.00
Net asset values per share for Government Intermediate, Investment Grade and
High Yield rose from their June 30, 1996 levels, reflecting modest gains in the
value of our portfolio holdings. For the full year, total returns for the three
funds were 4.47%, 4.31% and 14.91%, respectively (total return measures
investment performance in terms of appreciation or depreciation in a portfolio's
net assets per share, plus dividends and any capital gain distributions).
Beginning on the following page, portfolio managers responsible for the Income
Trust portfolios discuss 1996 results and the investment outlook. The funds'
total returns in various periods since their inceptions (and performance
information for Navigator shares) are shown on pages 4 through 6.
For each of our funds, historical performance is not indicative of future
results, and principal value of our holdings will continue to fluctuate so that
shares, when redeemed, may be worth more or less than their original
cost.(dagger)
Many of our shareholders regularly add to their fund holdings by authorizing
automatic, monthly transfers from their bank checking or Legg Mason accounts.
Your Legg Mason Financial Advisor will be happy to help you make these
arrangements if you would like to purchase shares in this convenient way.
Sincerely,
/s/ John F. Curley, Jr.
-----------------------
John F. Curley, Jr.
Chairman
January 31, 1997
- -------
*SEC Yields reported for the U.S. Government Intermediate, Investment Grade and
High Yield Portfolios are for the 30 days ended December 31, 1996 and for the
U.S. Government Money Market Portfolio are for the 7 days ended December 31,
1996.
(dagger) The U.S. Government Money Market Portfolio attempts to stabilize the
value of its shares at $1.00 but there can be no assurance that the fund will
always be able to maintain a stable net asset value of $1.00.
<PAGE>
Portfolio Managers' Comments
Legg Mason Income Trust
Market Overview
Last year was a difficult one for the bond market as a whole. Despite
historically stable economic fundamentals, interest rates gyrated as the market
attempted to divine the inflationary implications of every nuance in the
economic statistics. Since the economy picked up steam following its 1995 slump,
Treasury yields rose on balance for the year, with the result that total returns
on bonds were hurt by declining prices.
Fortunately, there were several pockets of opportunity. Offsetting the
negative impact of rising rates was the generally strong performance of all
non-government sectors, areas which were emphasized by all three funds.
U.S. Government Intermediate-Term and Investment Grade Portfolios
Spreads on corporate issues and mortgages tightened last year, as reasonably
strong economic fundamentals bolstered the outlook for credit quality
improvements. Government Intermediate and Investment Grade benefitted from yield
curve strategies which correctly anticipated both the flattening of the curve in
the first half of the year and the steepening which occurred in the third
quarter.
Both funds produced returns exceeding those of their respective benchmarks
last year. Government Intermediate produced a total return of 4.5% for the year
versus the Salomon Brothers Medium Term Bond Index return of 4.1%. Investment
Grade generated a total return of 4.3%, versus the Salomon Brothers Broad
Investment Grade Index return of 3.6%.
High Yield Portfolio
The high-yield arena also saw a tightening of spreads as investors hungered
for yield against a global backdrop of generally low interest rates. High Yield
was the beneficiary of particularly strong performance in the single-B sector,
where performance tended to mirror activity in the equity market. Emerging
markets benefitted from the gradual but impressive return to economic and
political stability, led by Latin American countries such as Mexico, Brazil and
Argentina.
High Yield was the star performer for the year posting an impressive total
return of 14.9% versus the Lehman Brothers High Yield Index return of 11.3%.
Market Commentary
As we enter the seventh year of the current business cycle, the usual cast of
nefarious characters is conspicuously absent from the economic stage: rising
inflation, policy excesses, and volatility. For example, today's core rate of
inflation (2-2.5%) compares favorably to the low-inflation experience of the
1950s and 60s, and inflation has never been as stable in our economic history as
it has been for the past six years. This is a tribute to nine years of Fed
Chairman Greenspan's steady hand at the monetary helm, which has produced the
slowest rate of growth in the monetary aggregates in history.
For all the bond market's angst over the inflationary implications of growth,
the economy has grown at a moderate rate at best--averaging 2.5% per year since
1991. No other business cycle in modern times has exhibited growth rate
volatility as low as this one. There have been some ups and downs, but the
current growth rate is about average, and it's a mixed bag at that. Consumer
demand has weakened since last summer, with the housing and auto sectors just
about flat, while other areas, particularly construction and exports (driven,
most likely, by a gradual recovery of the emerging market economies), have
strengthened.
2
<PAGE>
In a typical business cycle, Washington would be spending and the Fed would
be printing too much by now. But thanks to Washington's new-found discipline and
high tax burdens, the federal budget deficit has contracted significantly, and
the Fed remains stingy with credit. So, unlike any other in modern memory, this
business cycle expansion has not been driven by stimulus measures. Instead, the
drivers have been the virtuous forces of disinflation restructuring and good,
old-fashioned productivity. That's why growth has not led to rising inflation,
because today's growth is the by-product of low-inflation fundamentals and is
thus consistent with a secular decline in interest rates.
Outlook
Going forward, we believe that these forces will remain favorable for the
bond market. Monetary policy appears reasonably tight, as suggested by the
strong dollar, falling gold price and stable industrial commodity prices. At the
moment, the bond market is swooning over signs of growth, and this will have the
effect of tightening monetary conditions further, thus ensuring that economic
growth does not overheat. Should monetary conditions prove troublesome, there is
a substantial cushion between short-term interest rates and inflation, giving
the Fed plenty of room to ease policy should the economy falter. As for fiscal
policy, the political climate in Washington is likely to remain conservative,
and the chances of meaningful entitlement reform, budget cutting, and tax reform
are significant and growing.
We thus have little reason to expect negative policy surprises on the horizon
and this in turn should keep economic and financial market volatility in check.
Sooner or later, as concerns over growth are replaced by the continuing reality
of low and stable inflation, interest rates should resume their secular
downtrend.
Strategy
Despite our bullish outlook for interest rates, the mortgage sector still
looks moderately attractive. Spreads are not particularly generous, but
declining volatility and an emphasis on discount coupons and commercial
mortgages in Government Intermediate should help to offset any rise in
prepayment risk. The investment-grade corporate sector remains marginally
attractive, as spreads hover near relatively low levels. However, for Investment
Grade's portfolio, we still find value in longer-dated issues, as well as in the
lower range of credit quality, and we think the new trust-preferred issues from
the banking sector are generally attractive.
The High Yield Portfolio is emphasizing high-coupon, single-B and select
double-B credits, looking for companies with improving financial trends that
would indicate higher credit quality and enhanced total returns. Sectors with
the most promise include broadcasting, cable, chemicals, capital goods, steel
and select consumer and industrials.
Western Asset Management Company
January 31, 1997
3
<PAGE>
Performance Information
Legg Mason Income Trust, Inc.
Performance Comparison of a $10,000 Investment as of December 31, 1996
The returns shown on these pages are based on historical results and
are not intended to indicate future performance. The investment return and
principal value of an investment in each of these funds will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Average annual returns tend to smooth out variations
in a fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The following graphs compare each Fund's total returns against that of
the most closely matched broad-based securities market index. The lines
illustrate the cumulative total return of an initial $10,000 investment
for the periods indicated. The line for each Legg Mason Fund represents
the total return after deducting all Fund investment management and other
administrative expenses and the transaction costs of buying and selling
securities. The line representing the securities market index does not
include any transaction costs associated with buying and selling
securities in the index or other administrative expenses.
The Government Intermediate and Investment Grade Portfolios each have
two classes of shares: Primary Class 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 and shareholder servicing expenses are determined separately for each
class and the Navigator Class does not incur Rule 12b-1 distribution fees.
The U.S. Government Money Market Portfolio is excluded from this
performance information because it does not have a variable share price.
U.S. Government Intermediate-Term Portfolio--Primary Class
Cumulative Average Annual
Total Return Total Return
- ----------------------------------------------------------------
One Year +4.47% +4.47%
Five Years +32.22 +5.74
Seven Years +64.88 +7.41
Life of Class(dagger) +102.34 +7.78
- ----------------------------------------------------------------
(dagger) Primary Class inception -- August 7, 1987
[Graph appears here--plot points are listed below]
Salomon Brothers
U.S. Government Medium-Term Treasury
Intermediate Government Sponsored
Primary Class Index(1)
1986.5 10,000 10,000
1987 10,222 10,305
1988 10,880 10,971
1989 12,272 12,362
1990 13,382 13,554
1991 15,304 15,471
1992 16,261 16,546
1993 17,342 17,904
1994 17,008 17,594
1995 19,368 20,126
1996 20,234 20,945
(1) The Salomon Brothers Medium-Term Treasury/Government-Sponsored Index is an
all-inclusive universe of institutionally traded U.S. Treasury and
Government-Sponsored securities. The index is market-capitalization weighted
and includes fixed-rate bonds with maturities between 1 and 10 years.
4
<PAGE>
Investment Grade Income Portfolio--Primary Class
Cumulative Average Annual
Total Return Total Return
- ---------------------------------------------------------------
One Year +4.31% +4.31%
Five Years +41.65 +7.21
Seven Years +73.84 +8.22
Life of Class(dagger) +116.89 +8.58
- ---------------------------------------------------------------
(dagger) Primary Class inception -- August 7, 1987
[Graph appears here--plot points are listed below]
Investment Salomon Brothers
Grade Income Broad Investment-
Primary Class Grade Bond Index(1)
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
1996 21,689 22,304
(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.
High Yield Portfolio
Cumulative Average Annual
Total Return Total Return
- ----------------------------------------------------------------
One Year +14.91% +14.91%
Life of Fund(dagger) +31.69 +9.89
- ----------------------------------------------------------------
(dagger) Fund inception--February 1, 1994
[Graph appears here--plot points are listed below]
High Yield Portfolio Lehman High Yield Index(1)
2/1/94 10,000 10,000
6/94 9,812 9,565
12/94 9,796 9,686
6/95 10,705 10,892
12/95 11,561 11,545
6/96 12,241 11,943
12/96 13,169 12,855
(1) The Lehman Brothers High Yield Index is comprised of approximately 760
publicly traded below-investment grade U.S. corporate bonds.
5
<PAGE>
Performance Information--Continued
U.S. Government Intermediate-Term Portfolio--Navigator Class
Cumulative Average Annual
Total Return Total Return
- ----------------------------------------------------------------
One Year +5.09% +5.09%
Life of Class(dagger) +20.88 +9.52
- ----------------------------------------------------------------
(dagger) Navigator Class inception -- December 1, 1994
[Graph appears here--plot points are listed below]
Salomon Brothers Medium-Term U.S. Government
Treasury/Government-sponsored Intermediate
Index(1) Navigator Class
12/01/94 10,000 10,000
12/94 9,827 10,050
3/95 10,236 10,454
6/95 10,712 11,385
9/95 10,874 11,160
12/95 11,241 11,502
3/96 11,168 11,431
6/96 11,240 11,527
9/96 11,433 11,720
12/96 11,699 12,088
(1) The Salomon Brothers Medium-Term Treasury/Government-Sponsored Index is an
all-inclusive universe of institutionally traded U.S. Treasury and
Government-Sponsored securities. The index is market-capitalization weighted
and includes fixed-rate bonds with maturities between 1 and 10 years.
Investment Grade Income Portfolio--Navigator Class
Cumulative Average Annual
Total Return Total Return
- -----------------------------------------------------------------
One Year +4.88% +4.88%
Life of Class(dagger) +6.38 +6.13
- -----------------------------------------------------------------
(dagger) Navigator Class inception -- December 1, 1995
[Graph appears here--plot points are listed below]
Salomon Brothers
Investment Grade Income Broad Investment-
Navigator Class Grade Bond Index(1)
12/01/95 10,000 10,000
12/95 10,142 10,000
3/96 10,000 9,961
6/96 10,042 10,010
9/96 10,269 10,197
12/96 10,638 10,505
(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.
6
<PAGE>
Statements of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1996
(Amounts in Thousands)
U.S. Government Intermediate-Term Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government and Agency Obligations -- 36.6%
Fixed-rate Securities -- 26.8%
Overseas Private Investment Corp. 6.93% 12/15/08 $ 15,000 $ 15,270
-------
Private Export Funding Corporation 7.03% 10/31/03 6,500 6,677
-------
Tennessee Valley Authority 6.235% 7/15/45 5,000 5,008
-------
United States Treasury Notes 5.125% 2/28/98 150 149
5.25% 7/31/98 1,500 1,488
6.125% 5/15/98 4,500 4,522
5.875% 8/15/98 6,625 6,628
6.875% 8/31/99 1,000 1,021
7.50% 10/31/99 5,000 5,186
7.125% 2/29/00 4,000 4,118
6.125% 9/30/00 6,000 5,996
6.875% 3/31/00 15,170 15,511
6.25% 4/30/01 5,000 5,011
7% 7/15/06 4,200 4,364
-------
53,994
-------
80,949
Stripped Securities(A) -- 9.8% -------
United States Treasury Notes 0% 5/15/98 1,000 926
0% 8/15/98 10,800 9,847
0% 2/15/99 6,000 5,304
0% 5/15/99 600 522
0% 8/15/99 3,600 3,085
0% 8/15/03 7,500 4,968
0% 5/15/04 7,500 4,713
-------
29,365
-------
Total U.S. Government and Agency Obligations (Identified Cost -- $109,227) 110,314
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- 37.4%
Fixed-rate Securities -- 31.4%
Federal Home Loan Mortgage Corporation 10.75% 7/1/00 9 10
8.75% 2/1/01 to 10/1/01 980 1,011
6.55% 11/13/01 15,000 14,895
8.25% 2/1/08 645 671
8.50% 12/1/08 318 331
9.75% 11/1/09 305 330
9.75% 11/1/14 236 255
8.50% 1/1/17 1,177 1,222
9% 1/1/17 105 110
9.30% 4/15/19 4,329 4,804
9% 5/1/20 to 1/1/21 3,737 3,979
8.50% 6/1/21 1,417 1,483
6.50% 2/1/26 to 8/1/26 5,533 5,292
-------
34,393
</TABLE>
7
<PAGE>
Statements of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Federal National Mortgage Association 11.50% 4/1/04 $ 2,960 $ 3,213
8.50% 6/1/10 to 8/1/11 4,277 4,444
6.50% 11/1/10 to 1/1/11 19,755 19,455
6.50% 7/1/13 7,295 7,074
9.50% 7/1/14 891 969
11% 12/1/15 957 1,065
9.50% 6/25/18 1,492 1,584
9% 11/1/21 2,864 3,049
6.50% 4/1/24 33 31
-------
40,884
-------
Government National Mortgage Association 9% 6/15/06 to 8/15/06 4,941 5,129
7.50% 3/15/17 29 29
9% 3/15/20 to 9/15/22 113 121
7.50% 12/15/22 198 199
8% 1/15/23 to 9/15/24 1,889 1,932
7.50% 1/15/23 to 9/15/25 3,444 3,458
7% 6/15/23 to 5/15/24 2,941 2,891
7.125% 4/20/25 1,429 1,462
8% 5/15/25 to 2/15/26 1,362 1,391
7% 11/15/25 to 3/15/26 3,139 3,072
-------
19,684
-------
94,961
-------
Stripped Securities(A) -- 0.5%
Federal National Mortgage Association 152% 11/25/20 148 1,475
-------
Variable-rate Securities(B) -- 5.5%
Federal National Mortgage Association 7.62% 5/25/22 4,640 4,658
Government National Mortgage
Association 6.50% 1/20/23 to 1/20/25 11,662 11,907
-------
16,565
-------
Total U.S. Government Agency
Mortgage-backed Securities (Identified Cost--$112,628) 113,001
-------
Asset-backed Securities -- 3.6%
AFC Home Equity Loan Trust 7.75% 11/30/06 1,921 1,940
ContiMortgage Home Equity Loan Trust 8.60% 2/15/10 1,598 1,613
Olympic Automobile Trust 7.875% 7/15/01 2,257 2,300
Wachovia Capital Trust I 7.64% 1/15/27 5,000 4,971(C)
-------
Total Asset-backed Securities (Identified Cost--$10,872) 10,824
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds and Notes -- 5.1%
Fixed-rate Securities -- 3.4%
Deutsche Bank Financial Inc. 6.70% 12/13/06 $ 3,000 $ 2,944
Ford Motor Credit Company 7.75% 10/1/99 2,150 2,221
General Motors Acceptance Corporation 7.20% 1/29/98 500 507
News America Holdings Incorporated 8.45% 8/1/34 2,300 2,501
Philip Morris Companies Inc. 9.25% 2/15/00 2,000 2,146
-------
10,319
-------
Variable-rate Securities(B) -- 1.7%
TCI Communications, Inc. 6.82% 9/15/10 5,000 4,975(D)
-------
Total Corporate Bonds and Notes (Identified Cost--$15,111) 15,294
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 7.6%
Fixed-rate Securities -- 2.6%
FBC Mortgage Securities Trust 9.50% 8/1/16 2,327 2,328
Metropolitan Asset Funding Inc. 6.85% 8/20/05 3,000 2,975
Resolution Trust Corporation 10% 5/25/22 2,612 2,635
-------
7,938
-------
Variable-rate Securities(B) -- 5.0%
Merrill Lynch Mortgage Investors, Inc. 6.69% 11/21/28 3,149 3,147
Resolution Trust Corporation 6.339% 5/25/19 2,006 1,994
Resolution Trust Corporation 8.765% 3/25/21 6,000 6,157
Resolution Trust Corporation 10.806% 1/25/25 972 997
Resolution Trust Corporation 7.981% 9/25/29 2,795 2,798
-------
15,093
-------
Total Mortgage-backed Securities (Identified Cost--$23,193) 23,031
- ---------------------------------------------------------------------------------------------------------------------------
Yankee Bonds(E)-- 1.7%
United Mexican States 7.563% 8/6/01 2,150 2,154(C)(F)
YPF Sociedad Anonima 7.50% 10/26/02 3,036 3,070
-------
Total Yankee Bonds (Identified Cost--$5,166) 5,224
- ---------------------------------------------------------------------------------------------------------------------------
Short-Term Investments -- 7.4%
U.S. Government Obligations -- 0.3%
United States Treasury Bills 5.35% 1/9/97 1,000 999(G)
-------
Corporate Bonds -- 0.3%
AT&T Capital Corporation 7.66% 1/30/97 750 751
-------
</TABLE>
9
<PAGE>
Statements of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio -- Continued
<TABLE>
<CAPTION>
Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement -- 6.8%
J.P. Morgan Securities, Inc.
6.80%, dated 12/31/96, to be repurchased at $20,646 on 1/2/97
(Collateral: $15,440 Federal National Mortgage Association,
Medium-term Notes, 5.47% to 6.5%, due 6/26/97 to 10/29/97,
value $21,208; Student Loan Marketing Association,
Floating-rate Notes, 0%, due 2/14/97, value $5,724) $ 20,638 $ 20,638
----------
Option Purchased -- N.M.
Eurodollar Future Call, March 97, Strike Price $94.25 156(H) 27
----------
Total Short-term Investments (Identified Cost -- $22,475) 22,415
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments--99.4% (Identified Cost -- $298,672) 300,103
Other Assets Less Liabilities -- 0.6% 1,825
----------
Net assets consisting of:
Accumulated paid-in capital applicable to:
28,511 Primary Class shares outstanding $303,572
784 Navigator Class shares outstanding 8,076
Accumulated net realized loss on investments, options and futures (11,250)
Unrealized appreciation of investments, options and futures 1,530
--------
Net assets-- 100.0% $301,928
---------
Net asset value per share:
Primary Class $10.31
---------
Navigator Class $10.31
---------
</TABLE>
<TABLE>
<CAPTION>
Net
Expiration Actual Appreciation
Date Contracts (Depreciation)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Options Written (I)
Eurodollar Future Call, Strike Price $94.75 March 97 156 $16
===
Futures Contracts Written(I)
U.S. Treasury Note Future March 97 50 $83
===
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Stripped Security -- Security with interest-only or principal-only payment
streams.
(B) The coupon rates shown on variable rate securities are the rates at December
31, 1996. 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 investors.
(D) The interest rate on this security is fixed at 6.82% until 9/15/98,
thereafter, the coupon will be determined by auction.
(E) Yankee Bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(F) Indexed Security -- The rate of interest earned on this security is tied to
the London Interbank Offered Rate (LIBOR). The coupon rate shown is the rate
as of December 31, 1996.
(G) Collateral to cover futures contracts and options written.
(H) This represents the actual number of contracts.
(I) Options and Futures are described in more detail in the notes to financial
statements.
N.M. Not meaningful
See notes to financial statements.
10
<PAGE>
Statements of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1996
(Amounts in Thousands)
Investment Grade Income Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds and Notes -- 32.0%
Finance -- 5.7%
Associates Corporation, North America 8.15% 8/1/09 $ 1,000 $ 1,079
Deutsche Bank Financial Inc. 6.70% 12/13/06 1,860 1,825
General Motors Acceptance Corp. 0% 6/15/15 2,700 706(A)
JPM Capital Trust I 7.54% 1/15/27 650 635
Western Financial Savings Bank F.S.B. 8.50% 7/1/03 1,000 1,009
-------
5,254
-------
Food and Beverage -- 1.4%
RJR Nabisco, Inc. 8.75% 4/15/04 200 202
RJR Nabisco, Inc. 8.75% 7/15/07 1,110 1,108
-------
1,310
-------
Industrial -- 10.9%
Kmart Corporation 7.95% 2/1/23 2,000 1,635
Loews Corporation 7.63% 6/1/23 2,000 1,962
Millenium America, Inc. 7.63% 11/15/26 650 629
SPX Corporation 11.75% 6/1/02 2,500 2,794
TCI Communications Incorporated 8.75% 8/1/15 1,530 1,511
Tele-Communications Inc. 9.25% 1/15/23 500 486
Westpoint Stevens Inc. 8.75% 12/15/01 1,000 1,027
-------
10,044
-------
Media and Entertainment -- 3.7%
News America Holdings Incorporated 8.875% 4/26/23 1,000 1,068
News America Holdings Incorporated 8.25% 10/17/2096 700 690
Time Warner Entertainment Company, L.P. 8.375% 7/15/33 700 703
Time Warner Incorporated 8.18% 8/15/07 900 924
-------
3,385
-------
Oil and Gas -- 1.2%
Louis Dreyfus Natural Gas Corporation 9.25% 6/15/04 1,000 1,080
-------
Transportation -- 1.1%
Delta Air Lines, Inc. 7.79% 12/1/98 l,000 1,021
-------
Utilities -- 8.0%
Connecticut Light and Power Company 7.875% 6/1/01 1,750 1,787
First PV Funding Corporation 10.15% 1/15/16 487 517
Gulf States Utilities Corp. 8.25% 4/1/04 1,800 1,902
Niagara Mohawk Power Corporation 7.75% 5/15/06 1,200 1,118
North Atlantic Energy Corporation 9.05% 6/1/02 1,330 1,328
System Energy Resources, Inc. 7.43% 1/15/11 765 742
-------
7,394
-------
Total Corporate Bonds and Notes (Identified Cost -- $28,978) 29,488
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Statements of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Asset-backed Securities -- 6.6%
Advanta Home Equity Loan Trust 5.95% 3/25/09 $ 1,055 $ 1,004
Chevy Chase Home Loan Trust 7.15% 5/15/15 1,600 1,615
ContiMortgage Home Equity Loan Trust 8.60% 2/15/10 799 807
Green Tree Financial Corp. 7.85% 7/15/04 1,688 1,713
Olympic Automobile Receivables Trust 7.875% 7/15/01 903 920
-------
Total Asset-backed Securities (Identified Cost -- $6,064) 6,059
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 11.4%
Fixed-rate Securities -- 8.5%
Asset Securitization Corporation 6.88% 11/13/26 1,900 1,908
Asset Securitization Corporation 6.92% 2/14/29 1,184 1,183
Merrill Lynch Mortgage Investors, Inc. 6.96% 11/21/28 1,600 1,586
Nomura Asset Securities Corporation 7.12% 4/13/36 680 687
Oakdale 94-1 Class A 7.95% 5/1/01 1,000 1,037(B)
PSB Financial Corporation II 11.05% 12/1/15 823 884
Resolution Trust Corporation 10% 5/25/22 551 556
-------
7,841
-------
Variable-rate Securities(C) -- 2.2%
Resolution Trust Corporation 10.806% 1/25/25 486 498
Resolution Trust Corporation 6.76% 4/25/28 1,159 1,132(B)
Resolution Trust Corporation 8.29% 9/25/29 368 377
-------
2,007
-------
Indexed Security -- 0.7%
Resolution Trust Corporation 6.339% 5/25/19 686 681(D)
-------
Total Mortgage-backed Securities (Identified Cost -- $10,578) 10,529
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 12.5%
Resolution Funding Corp. 0% 10/15/20 3,400 650(A)
-------
United States Treasury Bonds 0% 8/15/20 13,870 2,762(A)
United States Treasury Bonds 6% 2/15/26 4,570 4,160
-------
6,922
-------
United States Treasury Notes 5.875% 4/30/98 1,000 1,002
United States Treasury Notes 6.125% 9/30/00 1,000 999
United States Treasury Notes 6.25% 4/30/01 1,000 1,002
United States Treasury Notes 6.25% 2/15/03 140 140
United States Treasury Notes 7% 7/15/06 750 779
-------
3,922
-------
Total U.S. Government and Agency Obligations (Identified Cost-- $11,302) 11,494
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Agency Mortgage-backed Securities -- 29.2%
Fixed-rate Securities -- 27.8%
Federal Home Loan Mortgage Corporation 8.75% 10/1/01 $ 46 $ 48
Federal Home Loan Mortgage Corporation 8.50% 2/1/04 310 319
Federal Home Loan Mortgage Corporation 6% 2/1/14 2,218 2,099
Federal Home Loan Mortgage Corporation 6.50% 9/15/15 196 197
Federal Home Loan Mortgage Corporation 7% 8/1/24 to 5/1/26 10,461 10,304
Federal Home Loan Mortgage Corporation 6.50% 2/1/26 to 3/1/26 1,552 1,485
Federal Home Loan Mortgage Corporation 8% 7/1/26 1,243 1,267
-------
15,719
-------
Federal National Mortgage Association 8% 4/25/06 1,000 1,028
Federal National Mortgage Association 9.15% 9/25/18 231 236
Federal National Mortgage Association 6% 9/1/25 998 933
-------
2,197
-------
Government National Mortgage Association 9% 7/15/16 to 6/15/17 1,482 1,590
Government National Mortgage Association 8% 12/15/26 2,626 2,679
Government National Mortgage Association 8% 1/1/27 3,400 3,468(E)
-------
7,737
-------
Variable-rate Securities(C) -- 1.4%
Federal Home Loan Mortgage Corporation 7.791% 9/1/24 1,237 1,291
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost -- $26,617) 26,944
- ---------------------------------------------------------------------------------------------------------------------------
Yankee Bonds(F) -- 2.6%
Province de Quebec 5.67% 2/27/26 1,075 1,061(G)
YPF Sociedad Anonima 7.50% 10/26/02 1,301 1,316
-------
Total Yankee Bonds (Identified Cost -- $2,372) 2,377
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock -- 2.0%
News Corp. Limited 5% 11/12/16 1,200 shs 740(B)
Time Warner Incorporated 10.25% 7/1/16 1 1,130(B)
-------
Total Preferred Stock (Identified Cost -- $1,804) 1,870
- ---------------------------------------------------------------------------------------------------------------------------
Warrants(H) -- 0.4%
News Corp. Limited (Identified Cost -- $443) 1/1/06 12 wts 388(B)
- ---------------------------------------------------------------------------------------------------------------------------
Short-Term Investments -- 3.3%
Corporate Bonds -- 1.1%
Salomon Inc. 8.45% 2/17/97 $ 1,000 1,003
-------
U. S. Government Obligations -- 1.1%
United States Treasury Bills 5.35% 1/9/97 1,000 999(I)
-------
Repurchase Agreement -- 1.1%
J.P. Morgan Securities, Inc.
6.80%, dated 12/31/96, to be repurchased at $1,022 on 1/2/97
(Collateral: $1,065 Federal National Mortgage Association,
Medium-term Notes, 6.86% due 6/13/25, value $1,054) 1,022 1,022
------
</TABLE>
13
<PAGE>
Statements of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Option Purchased -- N.M.
Eurodollar Future Call, March 97, Strike Price $94.25 55(J) $ 10
----------
Total Short-term Investments (Identified Cost-- $3,054) 3,034
----------
Total Investments-- 100.0% (Identified Cost-- $91,212) 92,183
Other Assets Less Liabilities-- (N.M.) (12)
----------
Net assets consisting of:
Accumulated paid-in capital applicable to:
8,992 Primary Class shares outstanding $92,922
24 Navigator Class shares outstanding 247
Undistributed net investment income 43
Accumulated net realized loss on investments, options and futures (1,962)
Unrealized appreciation of investments, options and futures 921
-------
Net assets-- 100.0% $92,171
========
Net asset value per share:
Primary Class $10.22
========
Navigator Class $10.22
========
</TABLE>
<TABLE>
<CAPTION>
Net
Expiration Actual Appreciation
Date Contracts (Depreciation)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Options Written(K)
Treasury Note Call, Strike Price $116.00 February 97 35 $ 31
Eurodollar Future Call, Strike Price $94.75 March 97 55 6
------
$ 37
======
Futures Contracts Purchased(K)
Treasury Note Future March 97 38 $ (17)
Treasury Note Future March 97 91 (134)
------
$(151)
======
Futures Contracts Written(K)
Treasury Bond Future March 97 37 $ 64
======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Zero-coupon bond -- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
(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 investors.
(C) The coupon rates shown on variable rate securities are the rates at
December 31, 1996. These rates vary with the weighted average coupon of
the underlying loans.
(D) Indexed Security -- The rate of interest earned on this security is tied to
the Cost of Funds Index (COFI). The coupon rate shown is the rate at
December 31, 1996.
(E) When-issued Security -- Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(F) Yankee Bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(G) The rate of interest earned on this security is fixed at 5.67% until
February 2001 and 7.14% thereafter.
(H) Non-income producing
(I) Collateral to cover futures contracts and options written.
(J) This represents the actual number of contracts.
(K) Options and Futures are described in more detail in the notes to
financial statements.
N.M. Not meaningful
See notes to financial statements.
14
<PAGE>
Statements of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1996
(Amounts in Thousands)
High Yield Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds and Notes -- 75.4%
Builders/Building Materials -- 2.7%
Fortress Group Inc. 13.75% 5/15/03 $ 5,000 $ 5,325
Miles Homes Services, Inc. 12% 4/1/01 1,000 880
--------
6,205
Cable and Media -- 4.4%
Busse Broadcasting Corporation 11.625% 10/15/00 2,000 2,073
CSWireless Systems, Inc. 0% 3/1/06 1,500 654(A,B,C)
Granite Broadcasting Corporation 9.375% 12/1/05 2,000 1,920
Park Broadcasting Incorporated 11.75% 5/15/04 2,500 2,937
Park Newspapers 11.875% 5/15/04 1,500 1,763
Young Broadcasting Corporation 10.125% 2/15/05 1,000 1,025
--------
10,372
Chemicals -- 2.2% --------
Harris Chemical North America, Inc. 10.75% 10/15/03 2,000 2,070
Rexene Corporation 11.75% 12/1/04 2,750 3,087
--------
5,157
--------
Consumer Products -- 0.6%
Revlon Worldwide Corporation 0% 3/15/98 1,750 1,505(D)
--------
Food Services -- 2.1%
Di Giorgio Corporation 12% 2/15/03 2,800 2,842
TLC Beatrice International Holdings, Inc. 11.50% 10/1/05 1,000 1,063
White Rose Foods Incorporated 0% 11/1/98 1,250 1,054(D)
--------
4,959
--------
Forest Products -- 0.8%
American Pad and Paper Co. 13% 11/15/05 1,723 1,999
--------
Gaming -- 3.6%
Aztar Corporation 11% 10/1/02 2,000 1,935
Casino America, Inc. 12.50% 8/1/03 1,000 948
Trump Atlantic City Associates 11.25% 5/1/06 2,750 2,722
Trump's Castle Funding, Inc. 11.75% 11/15/03 2,000 1,760
Trump Hotels &Casino Resorts, Inc. 15.50% 6/15/05 1,000 1,140
--------
8,505
Gas and Pipeline Utilities -- 3.9%
Abraxas Petroleum Corporation 11.50% 11/1/04 2,500 2,647(B,C)
Parker Drilling Company 9.75% 11/15/06 2,500 2,637(B,C)
TransTexas Gas Corporation 11.50% 6/15/02 3,500 3,780
--------
9,064
--------
</TABLE>
15
<PAGE>
Statements of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Hotels and Restaurants -- 0.7%
John Q Hammons Hotels, L.P. 9.75% 10/1/05 $ 1,500 $ 1,526
--------
Industrials -- 11.5%
Allied Waste of North America 10.25% 12/1/06 2,000 2,100(B,C)
Clark Materials 10.75% 11/15/06 1,750 1,820(B,C)
Haynes International, Inc. 11.625% 9/1/04 3,000 3,165
Norcal Waste Systems, Inc. 13% 11/15/05 1,500 1,658(E)
NL Industries, Inc. 11.75% 10/15/03 2,000 2,120
NL Industries, Inc. 0% 10/15/05 2,000 1,720(A)
Pierce Leahy Corp. 11.125% 7/15/06 1,000 1,093
Remington Arms, Inc. 10% 12/3/03 3,000 2,527(B,C)
Sabreliner Corp. 12.50% 4/15/03 3,000 2,929(B,C)
Sea Containers Ltd. 9.50% 7/1/03 1,000 1,017
Sea Containers Ltd. 12.50% 12/1/04 2,000 2,190
Statia Terminals International 11.75% 11/15/03 3,000 3,082(B,C)
Tokeim Corp. 11.50% 8/1/06 1,500 1,614(B,C)
--------
27,035
--------
Leisure and Entertainment -- 6.6%
AMF Group Inc. 10.875% 3/15/06 2,000 2,120
Boomtown, Inc. 11.50% 11/1/03 4,000 4,211
GP Golf Palm Desert LLC 13.50% 2/16/98 1,900 1,995(B,C)
Manning Real Estate Associates LLC 15% 2/28/01 1,000 990(B,C)
Maritime Gaming L.P. 15% 2/28/01 1,500 1,485(B,C)
Players International, Inc. 10.875% 4/15/05 1,500 1,485
Stuart Entertainment, Inc. 12.50% 11/15/04 2,000 2,042
Sullivan Broadcasting 10.25% 12/15/05 1,000 1,024
--------
15,352
--------
Medical Products and Supplies -- 1.4%
Dade International Incorporated 11.125% 5/1/06 2,000 2,193
Unilab Corporation 11% 4/1/06 1,250 981
--------
3,174
--------
Metals and Mining -- 2.0%
Florida Steel Corporation 11.50% 12/15/00 1,000 1,035
Gulf States Steel 13.50% 4/15/03 2,750 2,613
NS Group, Inc. 13.50% 7/15/03 1,000 1,005
--------
4,653
--------
Publishing -- 3.2%
Affiliated Newspapers Investments, Inc. 13.25% 7/1/06 4,500 3,713
Garden State Newspapers, Inc. 12% 7/1/04 2,500 2,725
Marvel Holdings, Inc. 0% 4/15/98 1,000 150(D)
Marvel III Holdings, Inc. 9.125% 2/15/98 2,000 370
Marvel Parent Holdings, Inc. 0% 4/15/98 3,450 448
--------
7,406
--------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Retail Sales -- 4.1%
Cort Furniture Rental Corporation 12% 9/1/00 $ 1,400 $ 1,554
Duane Reade Corp. 12% 9/15/02 4,000 4,070
Duane Reade Holdings Corp. 0% 9/15/04 1,500 893(A)
General Host Corporation 11.50% 2/15/02 750 701
Michaels Stores Incorporated 10.875% 6/15/06 2,315 2,295
-------
9,513
-------
Services -- 1.8%
Ryder Trucks, Inc. 10% 12/1/06 2,000 2,060(B,C)
SCInternational Services, Inc. 13% 10/1/05 2,000 2,220
-------
4,280
-------
Supermarkets -- 3.8%
Big V Supermarkets Incorporated 11% 2/15/04 1,000 955
Farm Fresh Holdings Corporation 12.25% 10/1/00 1,500 1,140
Pathmark Stores Incorporated 12.625% 6/15/02 250 259
Ralphs Grocery Co. 11% 6/15/05 2,000 2,100
Ralphs Grocery Co. 13.75% 6/15/05 1,000 1,060
Smiths Food & Drug 11.25% 5/15/07 3,000 3,315
-------
8,829
-------
Telecommunications -- 14.2%
A+ Network, Inc. 11.875% 11/1/05 2,000 2,045
Arch Communications Group, Inc. 0% 3/15/08 2,500 1,425(A)
Brooks Fiber Properties, Inc. 11.875% 11/1/06 5,000 3,350(A,B,C)
Charter Communications International, Inc. 11.25% 3/15/06 1,250 1,306
Communications &Power Industries, Inc. 12% 8/1/05 500 538
Galaxy Telecom L.P. 12.375% 10/1/05 1,750 1,864
MFS Communications Company, Inc. 8.875% 1/15/06 1,000 728(A)
Mobile Telecommunication Technologies
Corporation 13.50% 12/15/02 2,250 2,250
Nextel Communications, Inc. 9.75% 8/15/04 4,000 2,730(A)
Nextlink Communications 12.50% 4/15/06 1,750 1,837
Peoples Telephone Company, Inc. 12.25% 7/15/02 4,125 4,331
Phonetel Technologies, Inc. 12% 12/15/06 3,500 3,605
Poland Communications 9.875% 11/1/03 3,500 3,516(B,C)
Sprint Spectrum, L.P. 11% 8/15/06 2,500 2,706
Wireless One Incorporated 13% 10/15/03 1,250 1,213
-------
33,444
-------
</TABLE>
17
<PAGE>
Statements of Net Assets--Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio--Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Textiles and Apparel -- 5.8%
Apparel Ventures, Inc. 12.25% 12/31/00 $ 2,250 $ 2,206
Casablanca Incorporated 14% 9/1/01 2,000 2,250(B,C)
Collins & Aikman Corporation 11.50% 4/15/06 1,500 1,635
National Fiberstock Corporation 11.625% 6/15/02 1,500 1,588
Pour Le Bebe, Incorporated 13% 8/9/01 2,750 3,135(B,C)
Pour Le Bebe, Incorporated 15% 4/30/97 2,600 2,795(B,C)
------------
13,609
------------
Total Corporate Bonds and Notes (Identified Cost-- $169,576) 176,587
- ---------------------------------------------------------------------------------------------------------------------------
Yankee Bonds(F)-- 15.1%
Cable and Media -- 2.6%
Fundy Cable Ltd. 11% 11/15/05 500 516
Newsquest Capital PLC 11% 5/1/06 1,750 1,820(B,C)
Le Groupe Videotron Ltee 10.625% 2/15/05 1,500 1,650
Rogers Cablesystems Limited 10% 3/15/05 2,000 2,130
------------
6,116
------------
Forest and Paper Products -- 0.5%
Grupo Industrial Durango, S.A. 12.625% 8/1/03 1,000 1,059
------------
Industrials -- 5.1%
FSW International, Inc. 12.50% 11/1/06 3,000 3,165(B,C)
Multicanal Participacoes SA 12.625% 6/18/04 2,000 2,158
Net Sat Services LTD 12.75% 8/5/04 2,000 2,085(B,C)
Polysindo Eka Perkasa 13% 6/15/01 1,250 1,372
Tevecap SA 12.625% 11/26/04 3,000 3,161(B,C)
------------
11,941
------------
Metals and Mining -- 1.8%
Algoma Steel, Inc. 12.375% 7/15/05 2,000 2,160
Royal Oak Mines 11% 8/15/06 2,000 2,092
------------
4,252
------------
Real Estate -- 0.9%
Trizec Finance Ltd. 10.875% 10/15/05 2,000 2,220
------------
Services -- 3.3%
GPA Group PLC 0% 1/1/99 10,000 4,650(A)
Intertek Finance PLC 10.25% 11/1/06 3,000 3,079(B,C)
------------
7,729
------------
Telecommunications -- 0.9%
Comtel Brasileira, Ltd. 10.75% 9/26/04 2,000 2,051(B,C)
------------
Total Yankee Bonds (Identified Cost-- $32,551) 35,368
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stock -- 1.3%
Industrial -- 0.3%
Ladish Company Inc. 305 shs $ 610(G)
------------
Medical Supplies & Services -- 0.6%
Unigene Labs, Inc. 500 1,406(G)
------------
Metals and Mining -- 0.1%
Algoma Steel, Inc. 44 223(G)
------------
Other -- 0.3%
Steinway Musical Instruments, Inc. 50 844(G)
------------
Total Common Stock (Identified Cost-- $2,588) 3,083
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock -- 3.2%
Cable/Media -- 2.7%
Cablevision Systems Corporation 1 41(H)
Chancellor Broadcasting 30 3,308(B,C)
Paxson Communications Corp. 30 3,030(H)
-----------
6,379
-----------
Retail -- 0.2%
Prime Retail Series B Convertible 20 435
-----------
Services -- 0.3%
La Petite Holdings Corporation 18 729(G)
-----------
Total Preferred Stock (Identified Cost-- $7,033) 7,543
- ---------------------------------------------------------------------------------------------------------------------------
Warrants(G) -- 0.2%
Affiliated Newspapers Investments, Inc. 2 wts 90(C)
Apparel Ventures Inc. 3 0(C)
Cort Business Services 25 105
County Seat Stores, Inc. 1 1(C)
Gulf State Steel, Inc. 2 75(C)
Harcor Energy, Inc. 33 115(C)
NS Group, Inc. 1 1
Unigene Labs, Inc. - Class C 125 0
Unigene Labs, Inc. - Class D 125 0
Wireless One Incorporated 4 34(C)
-----------
Total Warrants (Identified Cost-- $75) 421
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Statements of Net Assets--Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio--Continued
<TABLE>
<CAPTION>
Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement -- 2.5%
J.P. Morgan Securities, Inc.
6.80%, dated 12/31/96, to be repurchased at $5,731 on
1/2/97 (Collateral: $5,995 Federal National Mortgage
Association, Medium-term Notes, 5.82% due 11/4/03, value $5,930)
(Identified Cost-- $5,729) $ 5,729 $ 5,729
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments -- 97.7% (Identified Cost -- $217,552) 228,731
Other Assets Less Liabilities -- 2.3% 5,377
----------
Net assets consisting of:
Accumulated paid-in capital applicable to 15,231 shares outstanding $225,076
Accumulated net realized loss on investments (2,147)
Unrealized appreciation of investments 11,179
---------
Net assets-- 100.0% $234,108
=========
Net asset value per share $15.37
========
</TABLE>
- --------------------------------------------------------------------------------
(A) Stepped coupon bond -- A bond which amortizes to par by a specified
date at which time it begins to accrue interest.
(B) Private Placement
(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 investors.
(D) Zero-coupon bond --- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
(E) Coupon increases 0.25% each coupon date (semi-annually) until November
15, 2005, thereafter remains fixed at 13.5% until maturity.
(F) Yankee Bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(G) Non-income producing
(H) Payment-in-kind ("PIK") -- A bond or preferred stock in which interest
during the initial few years is paid in additional PIK bonds or
preferred stock rather than in cash.
See notes to financial statements.
20
<PAGE>
Statements of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1996
(Amounts in Thousands)
U.S. Government Money Market Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government and Agency Obligations -- 85.0%
Federal Farm Credit Bank 5.18 to 5.56% 1/2/97 to 7/1/97 $ 93,000 $ 92,692
Federal Home Loan Bank 5.34 to 5.87% 2/13/97 to 6/10/97 30,000 29,861
Federal Home Loan Mortgage Corporation 5.22 to 5.45% 1/2/97 to 2/20/97 117,406 117,214
Federal National Mortgage Association 5.35 to 5.38% 2/18/97 to 3/14/97 25,000 24,788
United States Treasury Bills 5.080% 4/17/97 5,000 4,925
United States Treasury Notes 6.625% 3/31/97 7,000 7,014
----------
Total U.S. Government and Agency Obligations 276,494
- ---------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 14.2%
J.P. Morgan Securities, Inc.
6.80%, dated 12/31/96, to be repurchased
at $46,202 on 1/2/97 (Collateral: $46,137 Tennessee
Valley Authority, Bonds, 8.25% and 6.875% due 4/15/42
and 12/15/43, value $47,825) 46,185
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments, at amortized cost and value -- 99.2% 322,679
Other Assets Less Liabilities -- 0.8% 2,531
==========
Net assets applicable to 325,229 shares outstanding -- 100.0% $325,210
==========
Net asset value per share $1.00
======
</TABLE>
See notes to financial statements.
21
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 12/31/96
------------------------------------------------------------------
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $15,921 $ 6,263 $17,338 $17,816
Dividends -- 76 150 --
-------- ------- ------ --------
Total income 15,921 6,339 17,488 17,816
-------- ------- ------ --------
Expenses:
Management fee 1,271 520 1,093 1,659
Distribution and service fees 1,135 432 841 --
Transfer agent and shareholder servicing expense 180 84 100 274
Audit and legal fees 112 33 37 54
Custodian fee 90 109 84 82
Directors' fees 8 8 8 8
Registration fees 17 25 50 63
Reports to shareholders 48 21 33 41
Other expenses 18 7 22 15
-------- ------- ------ --------
2,879 1,239 2,268 2,196
Less fees waived (626) (401) -- --
-------- ------- ------ --------
Total expenses, net of waivers 2,253 838 2,268 2,196
-------- ------- ------ --------
Net Investment Income 13,668 5,501 15,220 15,620
-------- ------- ------ --------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on:
Investments (161) (88) (348) 42
Options (140) 18 -- --
Futures 352 640 -- --
-------- ------- ------ --------
51 570 (348) 42
-------- ------- ------ --------
Change in unrealized appreciation (depreciation)
of investments, options and futures (4,190) (2,320) 8,599 --
-------- ------- ------ --------
Net Realized and Unrealized Gain (Loss)
on Investments (4,139) (1,750) 8,251 42
- ------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting
from Operations $ 9,529 $ 3,751 $23,471 $15,662
======= ======= ======= =========
</TABLE>
See notes to financial statements.
22
<PAGE>
Statements of Changes in Net Assets
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
------------------- ------------------ ---------------- ----------------
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Change in Net Assets:
Net investment income $ 13,668 $ 13,089 $ 5,501 $ 4,900 $ 15,220 $ 6,980 $ 15,620 $ 14,029
Net realized gain (loss)
on investments,
options and futures 51 5,579 570 969 (348) (628) 42 65
Change in unrealized
appreciation (depreciation)
of investments,
options and futures (4,190) 11,818 (2,320) 7,813 8,599 5,683 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations 9,529 30,486 3,751 13,682 23,471 12,035 15,662 14,094
Distributions to shareholders:
From net investment income:
Primary Class (13,083) (12,882) (5,484) (4,899) (15,325) (6,993) (15,620) (14,029)
Navigator Class (253) (207) (17) (1) -- -- -- --
In excess of net investment
income:
Primary (323)
Navigator (9)
Contributions from Manager -- -- -- -- -- -- -- 170
Change in net assets from
Fund share transactions:
Primary Class 65,943 (16,511) 8,039 10,657 117,545 49,951 8,522 101,835
Navigator Class 4,054 (95) -- 247 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets 65,858 791 6,289 19,686 125,691 54,993 8,564 102,070
Net Assets:
Beginning of year 236,070 235,279 85,882 66,196 108,417 53,424 316,646 214,576
- ---------------------------------------------------------------------------------------------------------------------------
End of year $301,928 $236,070 $92,171 $85,882 $234,108 $108,417 $325,210 $316,646
- ---------------------------------------------------------------------------------------------------------------------------
Undistributed net
investment income $ -- $ -- $ 43 $ 53 $ -- $ 8 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
See notes to financial statements.
<PAGE>
Financial Highlights
Legg Mason Income Trust, Inc.
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>
Investment Operations Distributions From:
------------------------------------ --------------------------------------------
Net Realized
and Unrealized In Excess
Net Asset Net Gain (Loss) on Total In Excess Net of Net
Value, Investment Investments, From Net of Net Realized Realized
Beginning Income Options, Investment Investment Investment Gain on Gain on Total
of Year (Loss) and Futures Operations Income Income Investments Investments Distributions
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government
Intermediate-Term
Portfolio
--Primary Class
Years Ended Dec. 31,
1996 $10.47 $ .61(A) $ (.16) $ .45 $ (.60) $(.01) $-- $-- $ (.61)
1995 9.72 .57(A) .75 1.32 (.57) -- -- -- (.57)
1994 10.43 .51(A) (.71) (.20) (.51) -- -- -- (.51)
1993 10.70 .53(A) .17 .70 (.53) -- (.39) (.05) (.97)
1992 10.77 .60(A) .05 .65 (.60) -- (.12) -- (.72)
--Navigator Class
Years Ended Dec. 31,
1996 $10.47 $ .67(B) $ (.16) $ .51 $ (.66) $(.01) $-- $-- $ (.67)
1995 9.72 .62(B) .75 1.37 (.62) -- -- -- (.62)
Dec. 1(C)-31, 1994 9.72 .05(B) -- 0.05 (.05) -- -- -- (.05)
Investment Grade
Income Portfolio
--Primary Class
Years Ended Dec. 31,
1996 $10.44 $.64(F) $ (.22) $ .42 $ (.64) $-- $-- $-- $ (.64)
1995 9.27 .65(F) 1.17 1.82 (.65) -- -- -- (.65)
1994 10.40 .60(F) (1.09) (.49) (.60) -- (.04) -- (.64)
1993 10.71 .62(F) .33 .95 (.62) -- (.63) (.01) (1.26)
1992 10.71 .66(F) .25 .91 (.66) -- (.25) -- (.91)
--Navigator Class
Years Ended Dec. 31,
1996 $10.44 $ .70(G) $ (.22) $ .48 $ (.70) $-- $-- $-- $ (.70)
Dec. 1(C)-31, 1995 10.32 .03(G) .12 .15 (.03) -- -- -- (.03)
High Yield Portfolio
Years Ended
Dec. 31,
1996 $14.62 $1.33 $ .76 $2.09 $(1.34) $-- $-- $-- $(1.34)
1995 13.57 1.29 1.05 2.34 (1.29) -- -- -- (1.29)
Feb. 1(H)-Dec. 31,
1994 15.00 1.02 (1.44) (.42) (1.01) -- -- -- (1.01)
U.S. Government Money
Market Portfolio
Years Ended
Dec. 31,
1996 $ 1.00 $ .05 $ Nil $ .05 $ (.05) $-- $-- $-- $ (.05)
1995 1.00 .05 Nil .05 (.05) -- -- -- (.05)
1994 1.00 .04 (Nil) .04 (.04) -- -- -- (.04)
1993 1.00 .03 -- .03 (.03) -- -- -- (.03)
1992 1.00 .03 -- .03 (.03) -- -- -- (.03)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------------------
Net
Net Asset Investment Net Assets
Value Expenses Income (Loss) Portfolio End of
End of Total to Average to Average Turnover Year
Year Return Net Assets Net Assets Rate (in thousands)
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government
Intermediate-Term
Portfolio
--Primary Class
Years Ended Dec. 31,
1996 $10.31 4.47% .98%(A) 5.91%(A) 354% $293,846
1995 10.47 13.88% .93%(A) 5.59%(A) 290% 231,886
1994 9.72 (1.93)% .90%(A) 5.11%(A) 316% 231,255
1993 10.43 6.64% .90%(A) 4.84%(A) 490% 299,529
1992 10.70 6.26% .87%(A) 5.54%(A) 513% 307,320
--Navigator Class
Years Ended Dec. 31,
1996 $10.31 5.09% .42%(B) 6.47%(B) 354% $ 8,082
1995 10.47 14.45% .44%(B) 6.08%(B) 290% 4,184
Dec. 1(C)-31, 1994 9.72 .50%(D) .40%(B,E) 6.44%(B,E) 316%(E) 4,024
Investment Grade
Income Portfolio
--Primary Class
Years Ended Dec. 31,
1996 $10.22 4.31% .97%(F) 6.42%(F) 383% $ 91,928
1995 10.44 20.14% .88%(F) 6.49%(F) 221% 85,633
1994 9.27 (4.82)% .85%(F) 6.09%(F) 200% 66,196
1993 10.40 11.22% .85%(F) 5.62%(F) 348% 68,781
1992 10.71 6.77% .85%(F) 6.11%(F) 317% 48,033
--Navigator Class
Years Ended Dec. 31,
1996 $10.22 4.88% .41%(G) 6.99%(G) 383% $ 243
Dec. 1(C)-31, 1995 10.44 1.42%(D) .40%(G,E) 6.73%(G,E) 221%(E) 249
High Yield Portfolio
Years Ended
Dec. 31,
1996 $15.37 14.91% 1.35% 9.05% 77% $234,108
1995 14.62 18.01% 1.47% 9.28% 47% 108,417
Feb. 1(H)-Dec. 31,
1994 13.57 (2.90)%(D) 1.6%(E) 8.4%(E) 67%(E) 53,424
U.S. Government Money
Market Portfolio
Years Ended
Dec. 31,
1996 $ 1.00 4.81% .66% 4.71% -- $325,210
1995 1.00 5.31% .67% 5.17% -- 316,646
1994 1.00 3.66% .69% 3.66% -- 214,576
1993 1.00 2.80% .71% 2.76% -- 172,533
1992 1.00 3.49% .73% 3.45% -- 170,910
</TABLE>
(A) Net of fees waived by the manager for expenses in excess of voluntary
limitations of: 0.85% until August 31, 1992; 0.9% until April 30,
1995; 0.95% until April 30, 1996; and 1.00% until December 31, 1996.
(B) Net of fees waived by the manager for expenses in excess of voluntary
limitations of: 0.4% until April 30, 1995; 0.45% until April 30,
1996; and 0.50% until December 31, 1996.
(C) Commencement of sale of Navigator Shares.
(D) Not annualized
(E) Annualized
(F) Net of fees waived and reimbursements made by the manager for
expenses in excess of voluntary limitations as follows: 0.85% until
April 30, 1995; 0.9% until April 30, 1996; and 1.0% until December
31, 1996.
(G) Net of fees waived by the manager for expenses in excess of voluntary
expense limitations of 0.4% until April 30, 1996 and 0.5% until
December 31, 1996.
(H) Commencement of operations.
See notes to financial statements.
24
<PAGE>
Notes to Financial Statements
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
1. Significant Accounting Policies:
The Legg Mason Income Trust, Inc. ("Trust"), consisting of the U.S.
Government Intermediate-Term Portfolio ("Government Intermediate"), the
Investment Grade Income Portfolio ("Investment Grade"), the High Yield
Portfolio ("High Yield"), and the U.S. Government Money Market Portfolio
("Government Money Market") (each separately referred to as a "Fund" and
collectively as the "Funds") is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified investment company.
The Government Intermediate and the Investment Grade Portfolios
consist of two classes of shares: the Primary Class, offered since 1987,
and the Navigator Class, offered to certain institutional investors since
December 1, 1994 and December 1, 1995, respectively. The income and
expenses of each of these Funds are allocated proportionately to the two
classes of shares except for Rule 12b-1 distribution fees, which are
charged only on Primary shares, and transfer agent and shareholder
servicing expenses, which are determined separately for each class.
Security Valuation
Portfolio securities in Government Intermediate, Investment Grade and
High Yield are valued using market quotations obtained from an independent
pricing service. When market quotations are not readily available,
securities are valued based on prices received from recognized
broker-dealers in the same or similar securities. Portfolio securities
with 60 days or less remaining to maturity are valued under the amortized
cost method, which approximates current market value.
The investments of Government Money Market are valued on the basis of
amortized cost so long as the Fund's Board of Directors determines that
this method constitutes fair value. Under this method, securities are
valued at cost when purchased and, thereafter, a constant proportionate
accretion or amortization of any discount or premium is recorded until
maturity of the security.
Investment Income and Dividends to Shareholders
Income and expenses are recorded on the accrual basis. Bond premiums
are amortized for financial reporting and federal income tax purposes.
Bond discounts, other than original issue and zero-coupon bonds, are not
amortized. Dividends are declared daily and paid monthly for each Fund
except High Yield which declares and pays dividends monthly. For
Government Intermediate and Investment Grade, dividends are determined
separately for each class. Dividends payable are recorded on the
ex-dividend date. At December 31, 1996, dividends payable of $149 were
accrued for Government Intermediate, $29 for Investment Grade, $158 for
High Yield and $17 for Government Money Market.
Investment Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes. At
December 31, 1996 receivables for securities sold and not yet delivered
and payables for securities purchased and not yet received for each of the
Funds were as follows:
Payable for
Receivable for Securities
Securities Sold Purchased
- -----------------------------------------------------------------
Government Intermediate $ -- $ --
Investment Grade 2,361 3,479
High Yield -- --
Government Money Market -- 10,000
Options and Futures
Upon the purchase of a put option or a call option by a Fund, the
premium paid is recorded as an investment, the value of which is
marked-to-market daily. When a purchased option expires, the Fund will
realize a loss in the amount of the cost of the option. When a Fund enters
into a closing sale transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds from the closing sale transaction
are greater or less than the cost of the option. When a
25
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
Fund exercises a put option, it will realize a gain or loss from the sale
of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When a Fund exercises a call
option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
When a Fund writes a call option or a put option, an amount equal to
the premium received by the Fund is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Fund
realizes a gain equal to the amount of the premium received. When a Fund
enters into a closing purchase transaction, the Fund realizes a gain (or
loss if the cost of the closing purchase price exceeds the premium
received when the option was sold) without regard to any unrealized gain
or loss on the underlying security, and the liability related to the
option is eliminated. When a written call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received.
When a written put option is exercised, the amount of the premium
originally received will reduce the cost of the security that the Fund
purchased upon exercise.
Upon entering into a futures contract, the Fund is required to
deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by
the Fund each day, depending on the daily fluctuation of the value of the
contract. The daily changes in contract value are recorded as unrealized
gains or losses and the Fund recognizes a realized gain or loss when the
contract is closed. Futures contracts are valued at the settlement price
established by the board of trade or exchange on which they are traded.
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. The Funds' investment adviser,
acting under the supervision of the Board of Directors, reviews the value
of the collateral and the creditworthiness of those banks and dealers with
which the Funds enter into repurchase agreements to evaluate potential
risks.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Funds intend to continue to qualify as regulated investment companies and
distribute all of their taxable income to their shareholders.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Investment Transactions:
For the year ended December 31, 1996 investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds from Sales
-------------------- --------------------
U.S. Gov't. U.S. Gov't.
Securities Other Securities Other
- --------------------------------------------------------------------------------
Government Intermediate $788,801 $ 66,979 $748,435 $ 59,623
Investment Grade 214,424 139,525 226,738 121,376
High Yield -- 238,247 -- 125,607
26
<PAGE>
At December 31, 1996, cost, aggregate gross unrealized appreciation
and gross unrealized depreciation based on the cost of securities for
federal income tax purposes for each Fund were as follows:
Cost Appreciation (Depreciation)
- -----------------------------------------------------------------------------
Government Intermediate $298,751 $ 2,549 $(1,197)
Investment Grade 91,260 1,542 (619)
High Yield 217,575 15,655 (4,499)
Government Money Market 322,679 -- --
Unused capital loss carryforwards for federal income tax purposes at
December 31, 1996 were as follows: Government Intermediate, $11,132 which
expire through 2003; Investment Grade, $1,970 which expire through 2002;
High Yield, $1,981 which expire through 2004; Government Money Market, $20
which expire through 2002.
3. Options and Futures:
As part of their investment program, Government Intermediate and
Investment Grade may utilize options and futures.
The risk associated with purchasing options is limited to the premium
originally paid. Options written by a Fund involve, to varying degrees,
risk of loss in excess of the option value reflected in the Statements of
Net Assets. The risk in writing a covered call option is that the Fund may
forego the opportunity of profit if the market price of the underlying
security increases and the option is exercised. The risk in writing a
covered put option is that the Fund may incur a loss if the market price
of the underlying security decreases and the option is exercised. In
addition, there is the risk a Fund may not be able to enter into a closing
transaction because of an illiquid secondary market or, for
over-the-counter options, because of the counterparty's inability to
perform. Call and put options written by the Funds and related premiums
received during the year were as follows:
Calls Puts
------------------ ------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- --------------------------------------------------------------------------------
Options outstanding December 31, 1995 -- $ -- -- $ --
Options written 820 295 19,495 224
Options closed (664) (273) (19,495) (224)
- --------------------------------------------------------------------------------
Options outstanding December 31, 1996 156 $ 22 -- $ --
================================================================================
Calls Puts
------------------ ------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------
Options outstanding December 31, 1995 -- $ -- -- $ --
Options written 7,635 559 16,097 216
Options closed (664) (437) (9,297) (186)
Options expired (6,843) (44) (6,800) (30)
Options exercised (38) (20)
- -------------------------------------------------------------------------------
Options outstanding December 31, 1996 90 $ 58 -- $ --
================================================================================
The Funds enter into futures contracts as a hedge against anticipated
changes in interest rates. There are several risks in connection with the
use of futures contracts as a hedging device. Futures contracts involve,
to varying degrees, risk of loss in excess of amounts reflected in the
financial statements. The change in the value of futures contracts
primarily corresponds with the value of their underlying instruments,
which may not correlate with the change in the value of the hedged
instruments. In addition, there is the risk that a Fund may not be able to
enter into a closing transaction because of an illiquid secondary market.
27
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
The open futures positions and related appreciation or depreciation
at December 31, 1996 are described at the end of U.S. Government
Intermediate's and Investment Grade's respective "Statement of Net
Assets."
4. Transactions with Affiliates:
Each 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 Funds. Under this agreement, the Manager provides
the Funds with management and administrative services for which each Fund
pays a fee at annual rates based on its average daily net assets as
follows: Government Intermediate, .55%; Investment Grade, .60%; High
Yield, .65%; Government Money Market, .50%.
The agreement with the Manager provides that expense waivers and
reimbursements be made to Government Intermediate for expenses which in
any month are in excess of 1.00% of average daily net assets until
December 31, 1997 or when Government Intermediate reaches net assets of
$400,000, whichever occurs first. If Government Intermediate's assets
total $400,000 before December 31, 1997, the Manager has agreed not to
increase this "cap" by more than 10 basis points. The Manager has also
agreed to expense waivers and to make reimbursements to Investment Grade
for expenses which in any month are in excess of 1.00% of daily net assets
until December 31, 1997 or when Investment Grade reaches net assets of
$100,000, whichever occurs first. For the year ended December 31, 1996,
management fees of $626 and $401, respectively were waived. At December
31, 1996 amounts due to the Manager were as follows: Government
Intermediate, $117; Investment Grade, $19; High Yield, $125; and
Government Money Market, $142.
Western Asset Management Company ("Adviser"), a corporate affiliate
of the Manager and Legg Mason, serves as investment adviser to each Fund.
The Adviser is responsible for the actual investment activity of each
Fund. The Manager pays the Adviser a fee, computed daily and payable
monthly, at an annual rate of up to: 40% of the Management fee for
Investment Grade; 77% for High Yield; and 30% for Government Money Market.
For U.S. Government Intermediate the Manager pays the Adviser a fee,
computed daily and payable monthly, of 0.20% of its average daily net
assets, not to exceed the fee received by the Manager.
For the year ended December 31, 1995 Legg Mason contributed $170 to
offset a portion of Government Money Market's net realized losses.
Legg Mason, as distributor of the Funds, receives from Government
Intermediate, Investment Grade, and High Yield an annual distribution fee
of 0.25% and an annual service fee of 0.25% of the average daily net
assets of Primary shares, calculated daily and payable monthly. At
December 31, 1996, distribution and service fees due to the distributor
were as follows: Government Intermediate, $105; Investment Grade, $39; and
High Yield, $96. Effective January 10, 1997, Government Money Market will
begin compensating Legg Mason for distribution costs and services at an
annual rate equal to 0.10% of its average daily net assets. Although Legg
Mason has agreed to limit such fees paid by the Fund to 0.10% for the next
two years, Government Money Market may pay Legg Mason a fee for its
distribution services in an amount not to exceed an annual rate of 0.20%
of the Fund's average daily net assets.
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was
paid the following amounts by the transfer agent for the year ended
December 31, 1996: Government Intermediate, $46; Investment Grade, $20;
High Yield, $29; and Government Money Market, $85.
5. Line of Credit:
In November 1995, the Funds, except for Government Money Market, but
including certain other Legg Mason Funds, entered into a $75 million line
of credit ("Credit Agreement") to be utilized as an emergency source of
cash in the event of unanticipated, large redemption requests by
shareholders. Pursuant to the Credit Agreement, each participating Fund is
liable only for principal and interest payments related to borrowings made
by that Fund. Borrowings under the line of credit bear interest at
prevailing short-term interest rates. For the year ended December 31,
1996, the Funds had no borrowings under the line of credit.
28
<PAGE>
6. Acquisition of Bartlett Fixed Income Fund and Bartlett Short Term Bond Fund:
On December 20, 1996, Government Intermediate acquired all the net
assets of the Bartlett Fixed Income Fund ("Fixed Income") and the Bartlett
Short Term Bond Fund ("Short Term") pursuant to a plan of reorganization
approved by Fixed Income and Short Term shareholders on December 6, 1996.
The acquisition was accomplished by a tax-free exchange of 7,763 shares of
Government Intermediate (valued at $80,196) for the 6,733 shares of Fixed
Income and the 1,359 shares of Short Term outstanding on December 20,
1996. The net assets of Fixed Income ($66,916, including $436 of
unrealized appreciation and $2,730 of accumulated net realized losses) and
Short Term ($13,280, including $9 of unrealized appreciation and $400 of
accumulated net realized losses) were combined with those of Government
Intermediate. The aggregate net assets of Government Intermediate
immediately before the acquisition were $223,282 and were $303,478
immediately following the acquisition.
7. Fund Share Transactions:
At December 31, 1996 there were 1,000,000 shares authorized at $.001
par value for all portfolios of the Trust. Share transactions were as
follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
------------------- ---------------- ------------------ ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Government Intermediate
- --Primary Class
Year Ended December 31, 1996 12,900(A) $ 132,962(A) 1,168 $11,976 (7,697) $ (78,995) 6,371 $ 65,943
Year Ended December 31, 1995 4,951 50,397 1,135 11,583 (7,735) (78,491) (1,649) (16,511)
- --Navigator Class
Year Ended December 31, 1996 795(B) 8,281(B) 25 256 (435) (4,483) 385 4,054
Year Ended December 31, 1995 133 1,366 20 203 (168) (1,644) (15) (75)
Investment Grade
- --Primary Class
Year Ended December 31, 1996 3,465 35,043 471 4,758 (3,144) (31,762) 792 8,039
Year Ended December 31, 1995 2,728 27,180 422 4,218 (2,090) (20,741) 1,060 10,657
- --Navigator Class
Year Ended December 31, 1996 -- -- -- -- -- -- -- --
Dec. 1, 1995 to Dec. 31, 1995 24 247 -- -- -- -- 24 247
High Yield
Year Ended December 31, 1996 11,299 170,050 846 12,709 (4,331) (65,214) 7,814 117,545
Year Ended December 31, 1995 4,821 69,103 413 5,894 (1,755) (25,046) 3,479 49,951
Government Money Market
Year Ended December 31, 1996 1,245,629 1,245,629 14,984 14,984 (1,252,091) (1,252,091) 8,522 8,522
Year Ended December 31, 1995 1,165,303 1,165,303 13,455 13,455 (1,076,923) (1,076,923) 101,835 101,835
</TABLE>
(A) Includes 6,202 shares valued at $64,070 and 1,272 shares valued at
$13,140 issued in connection with the acquisition of Fixed Income and
Short Term, respectively, as described in footnote 6.
(B) Includes 275 shares valued at $2,846 and 14 shares valued at $140 issued
in connection with the acquisition of Fixed Income and Short Term,
respectively, as described in footnote 6.
29
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of Legg Mason Income Trust, Inc.:
We have audited the accompanying statements of net assets of Legg Mason U.S.
Government Intermediate-Term Portfolio, Investment Grade Income Portfolio, High
Yield Portfolio and U.S. Government Money Market Portfolio ("the Funds") as of
December 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian 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 financial highlights referred to
above present fairly, in all material respects, the financial position of Legg
Mason U.S. Government Intermediate-Term Portfolio, Investment Grade Income
Portfolio, High Yield Portfolio and U.S. Government Money Market Portfolio as of
December 31, 1996, and the results of their operations, their changes in net
assets and their financial highlights for each of the periods indicated therein,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 5, 1997
30
<PAGE>
Legg Mason Family of Funds
Equity Funds
Legg Mason Balanced Trust
Growth and Income--An equity mutual fund which seeks long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk.
Legg Mason Total Return Trust
Growth and Income--An equity mutual fund with investment objectives of capital
appreciation and current income.
Legg Mason American Leading Companies Trust
Growth--A large capitalization equity mutual fund which seeks long-term capital
appreciation and current income consistent with prudent investment management.
Legg Mason Value Trust
Growth--An equity mutual fund which seeks long-term growth of capital using the
"Value Approach" to investing.
Legg Mason Special Investment Trust
Aggressive Growth--An equity mutual fund which seeks capital appreciation. It
invests principally in securities of companies that are involved in
restructurings or other special situations, or are out of favor with, or not
closely followed by the market.
Global Funds
Legg Mason Emerging Markets Trust
Aggressive Growth--A mutual fund which is designed for investors seeking
long-term growth possibilities available in emerging markets.(dagger)
Legg Mason International Equity Trust
Aggressive Growth--A diversified, professionally managed portfolio seeking
maximum long-term total return by investing primarily in common stocks of
companies located outside the United States.(dagger)
Legg Mason Global Government Trust
Growth and Income--A global bond fund which seeks to provide a competitive total
return by investing primarily in a global portfolio of high quality debt
securities of U.S. and foreign governments, their agencies and
instrumentalities, denominated in various currencies.(dagger)
Taxable Bond Funds
Legg Mason U.S. Government Intermediate-Term Portfolio
Conservative Income--A mutual fund which seeks to achieve high current income
consistent with prudent investment risk and liquidity needs.
Legg Mason Investment Grade Income Portfolio
Income--A mutual fund which seeks to provide investors with a high level of
current income through a diversified portfolio of debt instruments.
Legg Mason High Yield Portfolio
Growth and Income--A fund which seeks to provide high current income, and as a
secondary objective, seeks capital appreciation. Under normal circumstances, the
Fund will invest a majority of its total assets in high yield fixed income
securities commonly known as "junk" bonds. The Fund may invest up to 25% of
total assets in foreign securities.
Tax-Free Bond Funds
Legg Mason Tax-Free
Intermediate-Term Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax consistent with prudent investment risk.(double dagger)
Legg Mason Maryland Tax-Free Income Trust
Tax-Free Income--A fund whose objective is a high level of current income exempt
from federal, Maryland state, and local income taxes.(double dagger)
Legg Mason Pennsylvania Tax-Free Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax and Pennsylvania personal income tax.(double dagger)
Money Market Funds
Legg Mason U.S. Government Money Market Portfolio
A professionally managed portfolio seeking high current income consistent with
liquidity and conservation of principal.*
Legg Mason Cash Reserve Trust
A diversified management investment company investing in money market
instruments to achieve stability of principal and current income consistent with
stability of principal.*
Legg Mason Tax Exempt Trust
A money market fund seeking to produce high current income exempt from federal
income tax, to preserve capital and to maintain liquidity.*
(dagger) Investment in foreign securities involves increased risks, such
as currency rate fluctuations, foreign taxation and political
changes.
(double dagger) Income produced from the tax-free funds may be subject to state
and local taxes. Long-term capital gain distributions generally
are taxable. A portion of each Fund's dividends may be subject
to the federal alternative minimum tax.
* An investment in any of these Funds is neither insured nor guaranteed by the
U.S. Government and there can be no guarantee that these Funds will maintain
a stable $1 share price.
For a prospectus containing more complete information, including charges and
expenses on any of the Legg Mason funds, call 1-800-577-8589. Please read it
carefully before investing or sending money.
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