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
PricewaterhouseCoopers LLP
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 main-
tain 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
--------------------------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
LMF-056
Semi-Annual Report
June 30, 1998
Legg Mason
Income
Trust, Inc.
U.S. Government Intermediate
Investment Grade
High Yield
U.S. Government Money Market
The Art of Investing
[Legg Mason Funds Logo]
<PAGE>
To Our Shareholders,
We are pleased to provide you with this report covering operations of the
Legg Mason U.S. Government Intermediate Portfolio, Investment Grade Income
Portfolio, High Yield Portfolio and U.S. Government Money Market Portfolio for
the period ended June 30, 1998.
The following table summarizes key statistics for each Fund, as of June 30,
1998:
<TABLE>
<CAPTION>
Net Asset Value
SEC Yield* Average Life Per Share
---------- ------------ ---------------
<S><C>
Government Intermediate 5.25% 6.10 years $10.45
Investment Grade 5.43% 10.47 years $10.63
High Yield 7.59% 6.48 years $17.06
Government Money Market 4.84% 57 days $ 1.00
</TABLE>
Net asset values per share for Government Intermediate, Investment Grade and
High Yield rose from their December 31, 1997 levels, reflecting gains in the
value of our portfolio holdings. For the six months ended June 30, 1998 total
returns for the Primary Class of shares (excluding Government Money Market) of
those Funds were 3.12%, 3.27% and 8.68%, 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 Funds
discuss recent results and the investment outlook. The Funds' total returns in
various periods and since their inceptions (and performance information for
Navigator shares) are shown later in this report.
For each of our Funds, historical performance is not indicative of future
results, and the principal value of our holdings will continue to fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.(+)
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
__________________
John F. Curley, Jr.
Chairman
July 30, 1998
- ---------
*SEC yields reported for the U.S. Government Intermediate, Investment Grade and
High Yield Portfolios are for the 30 days ended June 30, 1998. U.S. Government
Money Market Portfolio's SEC Yield is for the 7 days ended June 30, 1998.
(+)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, Inc.
Market Overview
For most of the first half of this year, fixed-income markets were dominated
by events overseas. Following a first-quarter remission, the Asian flu
re-emerged, and the emerging markets quickly joined the list of victims. The US
launched a surprise bailout of the Japanese yen in an attempt to limit the
spread of the disease. Global economic tensions rose as the yen fell, commodity
prices fell, Asian economies plumbed the depths of recession, and emerging
market debt spreads widened to near-default levels. In typical
bad-news-is-good-news fashion, global turmoil and deflating commodity prices
helped US bond yields fall to historic lows, though short-term rates remained
significantly higher than inflation. Throughout the turmoil, the US economy
remained fairly healthy, and the Federal Reserve made it clear that they were
very unlikely to alter the stance of monetary policy.
U.S. Government Intermediate and Investment Grade Portfolios
Despite generally higher bond prices, results were mixed. On the positive
side, both Funds were well positioned for declining interest rates, with a
continued emphasis on longer maturities to lock in yields. However, since the
major impact of the Asian/emerging market distress was to reinforce the outlook
for slower economic growth, credit spreads in the corporate and emerging market
sectors rose as the general level of interest rates fell. Although this limited
price gains for the period (and even resulted in price declines for some
securities, particularly for Investment Grade's portfolio), it does mean that
the Funds' earning potential will be enhanced going forward. For example,
distressed prices for emerging market debt gave us an opportunity to
significantly increase exposure to that sector of the market during the latter
part of the period.
Both Funds benefited from a heavy emphasis on low-coupon mortgages, which
outperformed premium issues as prepayment risk rose. As before, both Funds were
negatively impacted by a moderate exposure to inflation-indexed bonds, since
real interest rates held fairly steady as nominal rates fell.
Government Intermediate produced a total return of 3.1% for the period versus
the Salomon Brothers Medium Term Treasury/Government Sponsored Index return of
3.4%. Investment Grade generated a total return of 3.3% versus the Salomon Bros.
Broad Investment Grade Index return of 4.0%.
High Yield Portfolio
Due to the general widening of credit spreads discussed above, the high-yield
area only marginally outperformed the investment grade sector of the bond
market. However, High Yield enjoyed very strong performance, thanks to an
emphasis on lower quality sectors, which generally outperformed higher quality
sectors, and to an overweighting to the cable and telecommunications sectors,
where performance was boosted by the AT&T/TCI merger announcement.
High Yield was again the star performer for the period, posting an impressive
total return of 8.7% versus the Lehman Brothers High Yield Index return of 4.5%
Market Commentary and Outlook
After many years of tight money, the Fed has succeeded in sharply reducing
the rate of inflation, but it has also set in motion two major and conflicting
forces: tight labor markets and the rising wages
2
<PAGE>
that accompany them are clashing with zero pricing power to gradually squeeze
corporate earnings. Low inflation has fueled investment-led growth and
technology-led productivity gains, making labor scarce as it becomes more
valuable. But a strong dollar and falling commodity prices place severe limits
on the pricing power of most businesses. This conflict eventually will be
resolved in the form of slower growth in corporate earnings, a moderation in the
pace of hiring, and finally, a moderation in the pace of overall growth.
Once the US economy begins to slow appreciably, the door will open to Fed
ease. This eventually will allow short-term rates to fall, but long-term rates
are likely to lag (note: although it typically provides short-term relief, Fed
easing eventually makes the bond market nervous), thus leading to a gradual
steepening of the yield curve over time. In the interim, the Fed's resolute
determination to fight even the hint of inflation will keep short rates on hold,
thus leaving open the possibility of an inversion of the curve as long rates
continue to track the downward trend of inflation.
Not to be overlooked amidst all the fuss over Asia are the opportunities
which are being created in the emerging market sector. Although a scenario in
which all emerging market countries default seems highly unlikely, today's 600
basis point(1) spread on emerging market debt implies a 30-40% probability that
such a catastrophe will actually happen! That's a big silver lining behind the
Asian cloud, since there are a number of emerging market countries that continue
to enjoy attractive fundamentals in spite of the Asian turmoil.
Strategy
Consistent with this view, we remain long our duration benchmarks, in
anticipation of further declines in interest rates, but with a degree of caution
which recognizes that with rates close to historically low levels, there is the
potential for disappointment should the Asian economies quickly recover their
footing. Yield curve exposure has been moderately barbelled, but we are looking
for opportunities to increase exposure to a steepening of the curve which would
likely follow on the heels of a potential Fed easing.
Corporate exposure is overweight, with holdings chosen for their attractive
yield and prospects for improving credit quality. Where possible, we have taken
advantage of the higher yields available in emerging market securities to
establish a substantial, though well-diversified exposure to that sector,
emphasizing sovereign issues of the major economies of Latin America and
Southeast Asia. We continue to maintain a moderate exposure to mortgage-backed
securities, since their yields are still quite attractive relative to their
excellent credit quality. As before, however, our emphasis is on discount
coupons and commercial mortgages in order to minimize the risk of more rapid
prepayments as interest rates decline. High Yield retains an emphasis on
single-B issues, and an overweighting in the cable and telecommunications
sectors.
Western Asset Management Company
July 30, 1998
- --------
(1) 100 basis points = 1%
3
<PAGE>
Performance Information
Legg Mason Income Trust, Inc.
Total Return for One, Five, Ten Years and Life of Funds as of June 30, 1998
The returns shown 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 Government Intermediate, Investment Grade and High Yield Portfolios
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.
The Funds' total returns as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Average Annual Total Return
Primary Class:
One Year +7.65% +10.04% +17.72%
Five Years +5.60 +6.93 N/A
Ten Years +7.67 +8.64 N/A
Life of Class(A) +7.64 +8.65 +12.14
Navigator Class:
One Year +8.35% +10.66% N/A
Life of Class(B) +8.62 +8.24 N/A
Cumulative Total Return
Primary Class:
One Year +7.65% +10.04% +17.72%
Five Years +31.35 +39.82 N/A
Ten Years +109.30 +129.05 N/A
Life of Class(A) +123.17 +147.08 +65.81
Navigator Class:
One Year +8.35% +10.66% N/A
Life of Class(B) +34.45 +22.22 +2.64
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Primary Class inception dates are:
U.S. Government Intermediate-Term Portfolio -- August 7, 1987
Investment Grade Income Portfolio -- August 7, 1987
High Yield Portfolio -- February 1, 1994
(B) Navigator Class inception dates are:
U.S. Government Intermediate-Term Portfolio -- December 1, 1994
Investment Grade Income Portfolio -- December 1, 1995
High Yield Portfolio -- May 5, 1998
4
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1998 (Unaudited)
(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 -- 39.2%
Fixed-rate Securities -- 30.0%
Fannie Mae 5.75% 6/15/05 $ 8,000 $ 8,000
Federal Farm Credit Bank 6.66% 12/26/06 5,850 6,163
Overseas Private Investment Corporation 6.93% 12/15/08 15,000 15,792
Private Export Funding Corporation 5.82% 6/15/03 5,000 5,000(G)
Private Export Funding Corporation 7.03% 10/31/03 4,000 4,237
Tennessee Valley Authority 6.235% 7/15/45 5,000 5,181
United States Treasury Notes 7.125% 2/29/00 4,000 4,100
United States Treasury Notes 6% 8/15/00 7,440 7,511
United States Treasury Notes 6.25% 4/30/01 5,000 5,093
United States Treasury Notes 5.75% 4/30/03 22,200 22,418
United States Treasury Notes 7.875% 11/15/04 4,500 5,054
United States Treasury Notes 7% 7/15/06 7,600 8,299
United States Treasury Notes 6.50% 10/15/06 3,090 3,281
--------
100,129
--------
Inflation-indexed Securities -- 9.0%
United States Treasury Inflation -
Indexed Security 3.625% 7/15/02 to 4/15/28 11,968 11,831(E)
United States Treasury Inflation -
Indexed Security 3.375% 1/15/07 18,851 18,256(E)
--------
30,087
--------
Stripped Securities(D) -- 0.2%
United States Treasury Bonds 0% 5/15/99 600 572(2)
--------
Total U.S. Government and Agency Obligations (Identified Cost-- $128,853) 130,788
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 37.8%
Fixed-rate Securities -- 33.2%
Fannie Mae 11.50% 4/1/04 1,517 1,583
Fannie Mae 7.23% 3/30/06 8,000 8,089
Fannie Mae 8.50% 6/1/10 to 8/1/11 2,672 2,759
Fannie Mae 6.50% 11/1/10 to 7/1/13 22,015 22,192
Fannie Mae 9.50% 7/1/14 to 6/25/18 1,679 1,802
Fannie Mae 11% 12/1/15 670 739
Fannie Mae 8.50% 6/1/21 863 902
Fannie Mae 9% 11/1/21 1,915 2,040
Fannie Mae 6.50% 4/1/24 27 27
Fannie Mae 7% 12/1/26 to 2/1/27 1,757 1,769
Fannie Mae 6% 11/1/27 10 10
Fannie Mae 6% 4/1/28 3,200 3,115(A)
Fannie Mae 6.50% 7/1/28 4,240 4,245(A)
Federal Agricultural Mortgage Corporation 7.92% 1/25/12 1,461 1,538
Freddie Mac 10.75% 7/1/00 2 2
</TABLE>
5
<PAGE>
Statement 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>
U.S. Government Agency Mortgage-backed Securities -- Continued
Fixed-rate Securities -- Continued
Freddie Mac 8.75% 2/1/01 to 10/1/01 $ 473 $ 486
Freddie Mac 9% 2/1/02 235 239
Freddie Mac 7.10% 4/10/07 5,000 5,434
Freddie Mac 8.25% 2/1/08 413 427
Freddie Mac 8.50% 12/1/08 234 244
Freddie Mac 9.75% 11/1/09 245 262
Freddie Mac 9.75% 11/1/14 172 184
Freddie Mac 8.50% 1/1/17 727 753
Freddie Mac 9% 1/1/17 to 9/1/20 1,709 1,810
Freddie Mac 9.30% 4/15/19 3,105 3,299
Freddie Mac 9% 1/1/21 979 1,046
Government National Mortgage Association 9% 7/15/04 to 8/15/06 3,543 3,716
Government National Mortgage Association 7.50% 3/15/17 23 24
Government National Mortgage Association 9% 3/15/20 to 9/15/22 73 77
Government National Mortgage Association 7.50% 12/15/22 to 3/15/23 267 276
Government National Mortgage Association 7.50% 2/15/28 to 3/15/28 29,561 29,677
Government National Mortgage Association 6.50% 4/1/28 12,030 12,004(A)
--------
110,770
--------
Stripped Securities(D) -- 0.4%
Fannie Mae 152% 11/25/20 156 1,511(1)
--------
Variable-rate Securities(C) -- 2.3%
Fannie Mae 7.678% 5/25/22 3,170 3,237
Government National Mortgage Association 7% 10/20/17 605 622
Government National Mortgage Association 7% 7/20/22 to 8/20/22 3,706 3,792
--------
7,651
Indexed Securities(F) -- 1.9%
Government National Mortgage Association 7% 12/20/21 2,270 2,326
Government National Mortgage Association 7.375% 6/20/22 3,835 3,924
--------
6,250
--------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost-- $124,735) 126,182
- ---------------------------------------------------------------------------------------------------------------------------
Asset-backed Securities -- 0.3%
AFC Home Equity Loan Trust 7.75% 11/30/06 1,062 1,082
--------
Total Asset-backed Securities (Identified Cost-- $1,074) 1,082
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Corporate Bonds and Notes -- 12.2%
Fixed-rate Securities -- 11.7%
Columbia/HCA Healthcare Corp. 8.85% 1/1/07 $ 5,000 $ 5,354
Donaldson Lufkin & Jenrette 6.50% 6/1/08 6,000 6,000
NationsBank Corp. 6.375% 5/15/05 5,000 5,061
News America Holdings Incorporated 7.43% 10/1/26 2,300 2,450
Philip Morris Companies, Inc. 9.25% 2/15/00 2,000 2,092
Postal Square L.P. 6.50% 6/15/22 4,950 5,054
TCI Communications Incorporated 8% 8/1/05 5,000 5,460
Time Warner, Inc. 7.25% 10/15/17 4,500 4,693
Union Pacific Corp. 7.25% 11/1/08 3,000 3,134
--------
39,298
--------
Variable-rate Securities(C) -- 0.5%
NationsBank Capital Trust III 6.206% 1/15/27 1,600 1,584
--------
Total Corporate Bonds and Notes (Identified Cost-- $40,318) 40,882
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 2.8%
Fixed-rate Securities -- 1.2%
Metropolitan Asset Funding, Inc. 6.85% 8/20/05 3,000 3,004
Resolution Trust Corporation 10% 5/25/22 1,007 1,011
--------
4,015
--------
Variable-rate Securities(C) -- 1.6%
Resolution Trust Corporation 8.74% 3/25/21 3,146 3,216
Resolution Trust Corporation 8.013% 9/25/29 1,997 2,040
--------
5,256
--------
Total Mortgage-backed Securities (Identified Cost-- $9,285) 9,271
- ---------------------------------------------------------------------------------------------------------------------------
Yankee Bonds(B) -- 5.5%
Cable & Wireless Communications 6.375% 3/6/03 3,850 3,853
Credit Suisse 6.50% 5/1/08 1,570 1,572
Petroliam Nasional Berhad 6.625% 10/18/01 1,290 1,194(G)
Petroliam Nasional Berhad 7.125% 8/15/05 800 696(G)
Petroliam Nasional Berhad 7.125% 10/18/06 450 385(G)
Petroliam Nasional Berhad 7.625% 10/15/26 570 448(G)
Petrozuata Finance 7.63% 4/1/09 3,910 4,043(G)
Province of Quebec 7% 1/30/07 700 740
YPF Sociedad Anonima 7% 10/26/02 2,840 2,852
YPF Sociedad Anonima 7.50% 10/26/02 2,371 2,399
--------
Total Yankee Bonds (Identified Cost-- $18,265) 18,182
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Statement 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>
Common Stock -- 0.9%
Blackrock 2001 Term Trust Inc. 343 shs $ 3,023
--------
Total Common Stock (Identified Cost-- $2,997) 3,023
- ---------------------------------------------------------------------------------------------------------------------------
Short-term Investments -- 5.8%
U.S. Government Obligation -- 0.3%
United States Treasury Bill 5.12% 9/3/98 $ 1,000 991(I)
--------
Repurchase Agreements -- 5.5%
J.P. Morgan Securities, Inc.
5.70%, dated 6/30/98, to be repurchased at $18,451 on 7/1/98
(Collateral: $18,450 Fannie Mae Medium-term Notes,
6.89% due 9/4/07, value $19,229) 18,448 18,448
--------
Total Short-term Investments (Identified Cost-- $19,439) 19,439
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 104.5% (Identified Cost-- $344,966) 348,849
Other Assets Less Liabilities-- (4.5%) (14,962)
--------
Net assets consisting of:
Accumulated paid-in-capital applicable to:
31,197 Primary Shares outstanding $331,337
769 Navigator Shares outstanding 7,893
Accumulated net realized loss on investments, options and futures (9,088)
Unrealized appreciation of investments 3,745
--------
Net assets-- 100.0% $333,887
========
Net asset value per share:
Primary Class $10.45
======
Navigator Class $10.45
======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Futures Contracts Purchased(H)
Eurodollar Future December 98 55 $ 12
=====
Futures Contracts Written(H)
U.S. Treasury Note Future September 98 200 $(127)
U.S. Treasury Note Future September 98 43 (22)
U.S. Treasury Note Future September 98 4 (1)
=====
(150)
=====
</TABLE>
- --------------------------------------------------------------------------------
(A) When-issued security -- Security purchased on a delayed-delivery basis.
Final settlement amount and maturity date have not yet been announced.
(B) Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(C) The coupon rates shown on variable-rate securities are the rates at June
30, 1998. These rates vary with the weighted average coupon of the
underlying loans.
(D) Stripped Security -- Securities with interest-only or principal-only
payment streams as denoted by superscript 1 or 2, respectively.
(E) United States Treasury Inflation-indexed Security -- U.S. Treasury
security whose principal value is adjusted daily in accordance with
changes in the Consumer Price Index. Interest is calculated on the basis
of the current adjusted principal value.
(F) Indexed security -- The rate of interest
earned on these securities is tied to the London Interbank Offered Rate
(LIBOR), the One Year Treasury Constant Maturity Rate or a similar index.
The coupon rate is the rate as of June 30, 1998.
(G) 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.
(H) Options and futures are described in more detail in the notes to financial
statements.
(I) Collateral to cover futures contracts written.
See notes to financial statements.
9
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1998 (Unaudited)
(Amounts in Thousands)
Investment Grade Income Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Corporate Bonds and Notes -- 18.4%
Finance -- 3.9%
Associates Corporation, North America 8.15% 8/1/09 $ 1,000 $ 1,148
Donaldson Lufkin & Jenrette 6.50% 6/1/08 500 500
General Motors Acceptance Corporation 0% 6/15/15 2,700 879(A)
IBJ Preferred Capital Company LLC 8.79% 12/29/49 1,430 1,306(B)
SB Treasury Company LLC 9.40% 12/29/49 1,390 1,381(B)
Socgen Real Estate Company LLC 7.64% 12/29/49 180 181(B)
Tokai Preferred Cap Company LLC 9.98% 12/29/49 210 193(B)
--------
5,588
--------
Food and Beverage -- 0.9%
RJR Nabisco, Inc. 8.75% 4/15/04 200 208
RJR Nabisco, Inc. 8.75% 7/15/07 1,110 1,152
--------
1,360
--------
Industrial -- 5.6%
Keystone Owner Trust 6.62% 11/25/08 739 739
Kmart Corporation 7.95% 2/1/23 2,000 2,015
Loews Corporation 7.625% 6/1/23 2,000 2,033
Philip Morris Companies, Inc. 7% 7/15/05 390 399
TCI Communications Incorporated 9.65% 3/31/27 1,650 2,021
Tele Communications Incorporated 9.25% 1/15/23 200 233
Worldcom Inc. 9.375% 1/15/04 610 641
--------
8,081
--------
Media and Entertainment -- 1.0%
News America Holdings Incorporated 8.75% 4/26/23 1,000 1,192
News America Holdings Incorporated 8.25% 10/17/96 200 227
--------
1,419
--------
Oil and Gas -- 0.8%
Louis Dreyfus Natural Gas Corporation 9.25% 6/15/04 1,000 1,095
--------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Utilities -- 6.2%
Cleveland Electric Ilumination Co. 7.88% 11/1/17 $ 850 $ 928(B)
Connecticut Light and Power Company 7.875% 6/1/01 1,750 1,791
First PV Funding Corporation 10.15% 1/15/16 196 209
Gulf States Utilities Corp. 8.25% 4/1/04 1,800 1,936
Niagara Mohawk Power Corporation 7.25% 10/1/02 630 630
Niagara Mohawk Power Corporation 7.75% 5/15/06 1,200 1,284
Niagara Mohawk Power Corporation 7.75% 10/1/08 530 543
North Atlantic Energy Corporation 9.05% 6/1/02 756 777
System Energy Resources, Inc. 7.43% 1/15/11 719 722
--------
8,820
--------
Total Corporate Bonds and Notes (Identified Cost-- $24,731) 26,363
- ---------------------------------------------------------------------------------------------------------------------------
Asset-backed Securities -- 2.2%
Advanta Home Equity Loan Trust 5.95% 3/25/09 708 694
Chevy Chase Home Loan Trust 7.15% 5/15/15 1,193 1,223
Green Tree Financial Corp. 7.85% 7/15/04 1,177 1,186
--------
Total Asset-backed Securities (Identified Cost-- $3,066) 3,103
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 5.9%
Fixed-rate Securities -- 5.2%
Asset Securitization Corporation 6.92% 2/14/29 1,151 1,195
Merrill Lynch Mortgage Investors, Inc. 6.96% 11/21/28 2,900 3,016
Nomura Asset Securities Corporation 8.15% 3/4/20 600 659
Nomura Asset Securities Corporation 7.12% 4/13/36 680 719
Oakdale Mall Trust 94-1 Class A 7.95% 5/1/01 1,000 1,043(B)
PSB Financial Corporation II 11.05% 12/1/15 521 556
Resolution Trust Corporation 10% 5/25/22 213 213
--------
7,401
--------
Variable-rate Securities(C) -- 0.7%
Resolution Trust Corporation 6.804% 4/25/28 684 684(B)
Resolution Trust Corporation 8.204% 9/25/29 269 278
--------
962
--------
Total Mortgage-backed Securities (Identified Cost-- $8,184) 8,363
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government and Agency Obligations -- 39.8%
Fixed-rate Securities -- 29.8%
Resolution Funding Corporation 0% 10/15/20 $ 3,400 $ 926(A)
United States Treasury Bonds 6.375% 8/15/27 13,870 15,231
United States Treasury Notes 5.50% 2/29/00 1,500 1,500
United States Treasury Notes 5.75% 11/30/02 200 202
United States Treasury Notes 5.625% 12/31/02 6,100 6,127
United States Treasury Notes 5.50% 2/28/03 4,420 4,417
United States Treasury Notes 5.75% 4/30/03 14,060 14,198
--------
42,601
--------
Indexed Securities -- 10.0%
United States Treasury Inflation-
Indexed Security 3.625% 7/15/02 335 331(G)
United States Treasury Inflation-
Indexed Security 3.375% 1/15/07 10,831 10,489(G)
United States Treasury Inflation-
Indexed Security 3.625% 1/15/08 3,360 3,321(G)
United States Treasury Inflation-
Indexed Security 3.625% 4/15/28 141 139(G)
--------
14,280
--------
Total U.S. Government and Agency Obligations (Identified Cost-- $56,394) 56,881
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 22.5%
Fixed-rate Securities -- 19.6%
Fannie Mae 5.75% 6/15/05 1,000 1,000
Fannie Mae 8% 4/25/06 to 3/1/10 1,409 1,462
Fannie Mae 9.15% 9/25/18 53 54
Fannie Mae 6% 9/1/25 to 11/1/27 1,039 1,016
Fannie Mae 6% 12/1/27 2,970 2,908(E)
Fannie Mae 6.50% 5/1/28 180 179(E)
Freddie Mac 8.75% 10/1/01 28 29
Freddie Mac 8.50% 2/1/04 191 195
Freddie Mac 8.75% 1/1/08 to 10/1/08 509 530
Freddie Mac 8.50% 11/1/09 289 301
Freddie Mac 6% 2/1/14 2,046 2,015
Freddie Mac 7% 8/1/24 to 5/1/26 9,157 9,300
Freddie Mac 8% 7/1/26 991 1,025
Government National Mortgage Association 9% 7/15/16 to 6/15/17 1,137 1,223
Government National Mortgage Association 7% 1/15/24 732 744
Government National Mortgage Association 8% 12/15/26 2,024 2,098
Government National Mortgage Association 6.50% 5/1/28 2,000 1,996(E)
Government National Mortgage Association 7% 5/1/28 400 406(E)
Government National Mortgage Association 7.50% 5/1/28 1,500 1,542(E)
--------
28,023
--------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Indexed Securities(D) -- 0.3%
Government National Mortgage Association 7% 10/20/22 $ 491 $ 503
--------
503
--------
Variable-rate Securities(C) -- 2.6%
Freddie Mac 7.734% 9/1/24 782 810
Sallie Mae 5.787% 4/25/06 2,912 2,911
--------
3,721
--------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost-- $31,510) 32,247
- ---------------------------------------------------------------------------------------------------------------------------
Yankee Bonds(F) -- 8.0%
Fixed-rate Securities -- 6.2%
Petroleos Mexicanos 8.85% 9/15/07 1,300 1,248(B)
Petroliam Nasional Berhad 7.125% 8/15/05 to 10/18/06 490 421(B)
Petroliam Nasional Berhad 7.625% 10/15/26 700 550(B)
Republic of Brazil 8% 4/15/14 1,578 1,161(H)
Republic of Korea 8.875% 4/15/08 2,220 2,008
Russian Ministry of Finance 12.75% 6/24/28 370 330B
Tata Electric Company 8.50% 8/19/17 2,000 1,680B
United Mexican States 11.50% 5/15/26 300 347
YPF Sociedad Anonima 7.50% 10/26/02 1,019 1,031
--------
8,776
--------
Indexed Securities(D) -- 1.8%
Republic of Argentina 6.625% 3/31/05 1,140 1,011
Republic of Argentina 6.625% 3/31/05 399 352
Republic of Brazil 6.875% 1/1/01 1,348 1,280
--------
2,643
--------
Total Yankee Bonds (Identified Cost-- $12,202) 11,419
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock and Equity Interests -- 0.9%
Blackrock 2001 Term Trust Inc. 85 shs 749
News America Inc. 7.125% 4/8/28 500 500
Time Warner Incorporated 10.25% 2/1/23 7 8(B)
--------
Total Common Stock and Equity Interests (Identified Cost-- $1,252) 1,257
- ---------------------------------------------------------------------------------------------------------------------------
Short-term Investments -- 4.2%
Corporate Notes -- 1.5%
Delta Airlines, Inc. 7.79% 12/1/98 $ 1,000 1,008
Ford Motor Company 7.70% 5/15/99 1,000 1,142
--------
2,150
--------
U.S. Government Obligations -- 0.7%
United States Treasury Bills 5.12% 9/3/98 1,000 991(I)
--------
</TABLE>
13
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Repurchase Agreements-- 2.0%
Merrill Lynch Securities Corp.
5.70%, dated 6/30/98, to be repurchased at $2,852 on 7/1/98
(Collateral: $2,865 Fannie Mae Medium-term Notes,
6.375% due 10/13/00, value $2,951) $ 2,852 $ 2,852
--------
Options Purchased(K) -- N.M.
Eurodollar Future Call, October 98, Strike Price $94.50 37(J) 1
U.S. Treasury Note Future Call, August 98, Strike Price $110.50 22(J) 4
U.S. Treasury Note Future Call, September 98, Strike Price $110.50 37(J) 6
--------
11
--------
Total Short-term Investments (Identified Cost-- $5,886) 6,004
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 101.9% (Identified Cost-- $143,225) 145,637
Other Assets Less Liabilities-- (1.9%) (2,674)
--------
Net assets consisting of:
Accumulated paid in capital applicable to:
13,424 Primary Shares outstanding $139,525
24 Navigator Shares outstanding 247
Undistributed net investment income 72
Undistributed net realized gain on investments, options and futures 690
Unrealized appreciation of investments, options and futures 2,429
--------
Net assets-- 100.0% $142,963
========
Net asset value per share:
Primary Class $10.63
======
Navigator Class $10.63
======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Options Written(K)
U.S. Treasury Bond Future Put, Strike Price $121.00 July 98 12 $ 2
U.S. Treasury Bond Future Call, Strike Price $124.00 August 98 24 (10)
U.S. Treasury Bond Future Call, Strike Price $125.00 August 98 14 1
U.S. Treasury Bond Future Call, Strike Price $128.00 November 98 21 (5)
----
$(12)
----
Futures Contracts Purchased(K)
U.S. Treasury Note Future September 98 15 $ 28
----
Futures Contracts Written(K)
U.S. Treasury Bond Future September 98 5 $ (3)
U.S. Treasury Bond Future September 98 57 4
----
$ 1
----
</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 buyers.
(C) The coupon rates shown on variable-rate securities are the rates at
June 30, 1998. These rates vary with the weighted average coupon of
the underlying loans.
(D) Indexed security -- The rate of interest earned on these securities is
tied to the London Interbank Offered Rate (LIBOR), the Cost of Funds
Index (COFI), the One Year Treasury Constant Maturity Rate or a
similar index. The coupon rate shown is the rate at June 30, 1998.
(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) United States Treasury Inflation-indexed Security -- U.S. Treasury
security whose principal value is adjusted daily in accordance with
changes in the Consumer Price Index. Interest is calculated on the
basis of the current adjusted principal value.
(H) Front Loaded Interest Reduction Bond (FLIRB) -- Security pays a
portion of the coupon in cash and a portion is capitalized as an
increase in par value.
(I) Collateral to cover futures contracts 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.
15
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1998 (Unaudited)
(Amounts in Thousands)
High Yield Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Corporate Bonds and Notes -- 62.2%
Broadcasting -- 0.7%
Sullivan Broadcasting 10.25% 12/15/05 $ 1,000 $ 1,113
Teligent, Inc. 0% 3/1/08 5,000 2,763(D,F)
--------
3,876
--------
Builders and Building Materials -- 2.7%
American Architectual Products Corp. 11.75% 12/1/07 5,500 5,871
DeGeorge Home Alliance 12% 4/1/01 3,500 3,264
Fortress Group, Inc. 13.75% 5/15/03 5,000 5,713
--------
14,848
--------
Cable and Media -- 1.9%
Advanced Radio Telecom Corp. 14% 2/15/07 2,000 2,090
Brill Media Company LLC 7.50% 12/15/07 3,000 2,835(D,F)
Lin Holdings 0% 3/1/08 4,000 2,680(D,F)
Young America Corp. 11.625% 2/15/06 3,000 3,023(C,D)
--------
10,628
--------
Computers -- 1.2%
Cooperative Computing 9% 2/1/08 2,500 2,359(D)
Verio, Inc. 13.50% 6/15/04 3,000 4,403(D)
--------
6,762
--------
Financial -- 3.3%
Blue Green Corp. 10.50% 4/1/08 3,000 2,996(D)
Chatwins Group, Inc. 13% 5/1/03 3,000 3,255
IBJ Preferred Capital Company LLC 8.79% 12/29/49 6,500 5,935(C,D,F)
SB Treasury Company LLC 9.40% 12/29/49 6,000 5,963(C,D)
--------
18,149
--------
Food Services -- 2.0%
American Restaurant Group, Inc. 11.50% 2/15/03 4,000 3,920(C,D,G)
International Fast Foods Corporation 11% 10/31/07 6,884 5,421(C,D,G)
Mrs. Fields Original Cookies 10.125% 12/1/04 2,000 1,995
--------
11,336
--------
Forest Products and Paper -- 0.3%
American Pad and Paper Company 13% 11/15/05 1,723 1,732
--------
Gaming -- 1.3%
Hollywood Park, Inc. 9.50% 8/1/07 3,000 3,150(D)
Trump Atlantic City Associates 11.25% 5/1/06 2,750 2,674
Trump Hotels & Casino Resorts, Inc. 15.50% 6/15/05 1,000 1,125
--------
6,949
--------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Gas and Pipeline Utilities -- 2.5%
Grant Geophysical, Inc. 9.75% 2/15/08 $ 2,500 $ 2,484(D)
High Voltage Energy Corp. 10.50% 8/15/04 5,000 5,200
Queen Sand Resources, Inc. 12.50% 5/15/05 6,000 6,000(C,D)
--------
13,684
--------
Industrial -- 5.5%
AMSC Acquisition 12.25% 4/1/08 2,000 1,988(D)
Diva Systems Corp. 0% 3/1/08 3,750 1,763(C,D,F)
Falcon Holdings Group L.P. 11% 9/15/03 3,693 3,942(G)
Geneva Steel, Inc. 9.50% 1/15/04 4,000 3,600
Imagyn Medical Technologies, Inc. 12.50% 4/1/04 3,000 1,748(D)
Norcal Waste Systems, Inc. 13.50% 11/15/05 1,500 1,755
NSM Steel Ltd. 12.25% 2/1/08 5,000 4,688(C,D)
Sabreliner Corp. 12.50% 4/15/03 3,000 3,143
Therma-Wave, Inc. 10.625% 5/15/04 4,000 3,925
United Auto Group, Inc. 11% 7/15/07 4,000 4,030(D)
--------
30,582
--------
Leisure and Entertainment -- 1.3%
Booth Creek Ski Holdings, Inc. 12.50% 3/15/07 1,500 1,650(C,D)
Booth Creek Ski Holdings, Inc. 12.50% 3/15/07 5,250 5,775
--------
7,425
--------
Manufacturing -- 2.1%
Decora Industries 11% 5/1/05 3,000 3,038(C,D)
FWT, Inc. 9.875% 11/15/07 2,300 2,214
Thermadyne Holdings Corporation 0% 6/1/08 7,500 4,069(C,D,F)
Zilog, Inc. 9.50% 3/1/05 3,000 2,475(C,D)
--------
11,796
--------
Metals and Mining -- 0.7%
Gulf States Steel Acquisition Company 13.50% 4/15/03 4,000 3,920
--------
Retail -- 1.5%
Relax the Back Corporation 11% 5/22/03 4,000 4,080(C,D)
Relax the Back Corporation 13% 5/22/03 4,000 4,080(C,D)
--------
8,160
--------
Services -- 9.8%
ATC Group Services, Inc. 12% 1/15/08 4,000 3,900
California Recreation LLC 9% 7/8/07 6,258 6,305(C,D)
</TABLE>
17
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Services -- continued
Charter Communications International, Inc. 11.25% 3/15/06 $ 1,250 $ 1,378(I)
COMFORCE Corporation 12% 12/1/07 3,200 3,464
Convergent Communications 13% 4/1/08 3,000 2,910
Facilicom Finance Corporation 10.50% 1/15/08 4,000 4,025(D)
Fred Meyer, Inc. 7.45% 3/1/08 5,000 5,020(D)
Global Crossing Holdings 9.625% 5/15/08 5,000 5,213(C,D)
InterAmericas Communications Corporation 14% 10/27/07 2,500 2,559(D)
Intermedia Communications, Inc. 0% 7/15/07 5,000 3,650(D,F)
Iridium LLC Capital Corp. 11.25% 7/15/05 5,000 5,013
Level 3 Communications 9.125% 5/1/08 3,000 2,918(C,D)
Ryder Trucks, Inc. 10% 12/1/06 2,000 2,305
United States Filter Corporation 6.50% 5/15/03 5,500 5,466(C,D)
--------
54,126
--------
Shipping -- 3.6%
Global Ocean Carriers, Ltd. 10.25% 7/15/07 5,000 4,625(D)
Golden Ocean Group, Ltd. 10% 8/31/01 9,750 8,190(D)
Sea Containers, Ltd. 7.875% 2/15/08 3,000 2,985
Sea Containers, Ltd., Sr. Nt. 9.50% 7/1/03 1,000 1,033
Statia Terminals International 11.75% 11/15/03 3,000 3,173
--------
20,006
--------
Supermarkets -- 1.5%
Big V Supermarkets, Incorporated 11% 2/15/04 4,500 4,703
Pathmark Stores, Inc. 12.625% 6/15/02 3,500 3,535
--------
8,238
--------
Telecommunications -- 16.3%
A+ Network, Inc. 11.875% 11/1/05 2,000 2,130
Advanstar Communications 9.25% 5/1/08 2,000 2,005(C,D)
Cellular Communications International, Inc. 0% 4/1/05 ECU 3,250 2,348(C,D,F,J)
Covad Communications Group, Inc. 0% 3/15/08 $ 5,750 3,105(D,F)
FirstWorld Communications, Inc. 0% 4/15/08 4,000 2,013(C,D,F)
Globalstar L.P. 11.375% 2/15/04 3,000 2,936
HighwayMaster Communications 13.75% 9/15/05 4,000 3,270
International Wireless Communications
Holdings, Inc. 0% 8/15/01 5,000 1,325(E)
MGC Communications, Inc. 13% 10/1/04 4,000 4,400
Mobile Telecommunications Technologies
Corporation 13.50% 12/15/02 2,250 2,576
NTL Incorporated 0% 4/01/08 8,500 5,546(D,F)
Nextel Communications, Inc. 0% 8/15/04 4,000 3,890(F)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Telecommunications -- continued
Nextlink Communications LLC 12.50% 4/15/06 $ 1,750 $ 1,968
Omnipoint Corporation 11.625% 8/15/06 4,000 4,239
Park-N-View 13% 5/15/08 3,000 3,040(C,D)
Peoples Telephone Company, Inc. 12.25% 7/15/02 4,125 4,351
Phonetel Technologies, Inc. 12% 12/15/06 3,500 3,526
Price Communications 9.125% 12/15/06 5,000 5,000(C,D)
Primus Telecommunications Group 11.75 8/1/04 3,000 3,270(D)
SBA Communications Corporation 0% 3/1/08 5,000 3,312(D,F,G)
Source Media, Inc. 12% 11/1/04 3,000 3,134(G)
Star Choice Communications, Inc. 13% 12/15/05 4,000 4,209
Triton Communications 0% 5/1/08 10,000 5,849(C,D,F)
Winstar Communications, Inc. 0% 10/15/05 6,500 10,090(D,F)
Winstar Equipment II Corp. 12.50% 3/15/04 2,500 2,887(D)
--------
90,419
--------
Textiles and Apparel -- 1.7%
Apparel Ventures, Inc. 12.25% 12/31/00 2,250 2,284
Pacific Apparel 9.50% 3/31/08 4,000 4,040(C,D)
Pour le bebe, Incorporated 0% 12/31/98 3,461 3,076
--------
9,400
--------
Transportation -- 2.3%
MTL, Inc. 10% 6/15/06 3,500 3,465(C,D)
Trans World Airlines, Inc. 12% 4/1/02 2,500 2,666
Trans World Airlines, Inc. 11.50% 12/15/04 5,000 5,331
Trans World Airlines, Inc. 11.375% 3/1/06 1,000 1,066
--------
12,528
--------
Total Corporate Bonds and Notes (Identified Cost-- $333,309) 344,564
- ---------------------------------------------------------------------------------------------------------------------------
Foreign Bonds -- 1.8%
Entertainment -- 1.0%
V2 Music Holdings PLC 14% 4/15/08 GBP 6,000 5,435(C,D,J)
--------
Industrial -- .8%
Texon International PLC 10% 2/1/08 DEM 7,500 4,278(J)
--------
Total Foreign Bonds (Identified Cost-- $8,600) 9,713
- ---------------------------------------------------------------------------------------------------------------------------
Yankee Bonds(A) -- 10.8%
Cable and Media -- 0.4%
Rogers Cablesystems Limited 10% 3/15/05 2,000 2,220
--------
</TABLE>
19
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Entertainment -- 1.0%
Livent, Inc. 9.375% 10/15/04 $ 2,000 $ 1,975(C,D)
V2 Music Holdings PLC 12% 4/15/08 7,000 3,798(C,D)
--------
5,773
--------
Financial -- .6%
Netia Holdings BV 10.25% 11/1/07 2,000 2,008
PTC International Finance BV 0% 7/1/07 1,700 1,186(D,F)
--------
3,194
--------
Foreign Government -- 1.0%
Republic of Brazil 6.813% 1/1/01 1,120 1,064(H)
Republic of Brazil C Bond 8% 4/15/14 5,801 4,267(I)
--------
5,331
--------
Gas and Pipeline Utilities -- 0.7%
Northern Offshore ASA 10% 5/15/05 4,000 3,970(C,D)
--------
Industrial -- 3.1%
Cathay International Inc. 13% 4/15/08 6,450 5,829(C,D)
Multicanal Participacoes SA 12.625% 6/18/04 2,000 2,000
Petroliam Nasional Berhad 7.125% 10/18/06 7,800 6,672(D)
Tevecap SA 12.625% 11/26/04 3,000 2,610
--------
17,111
--------
Real Estate -- 0.3%
Trizec Finance Corporation Ltd. 10.875% 10/15/05 1,340 1,467
--------
Services -- 0.8%
ESAT Holdings Ltd 0% 12/1/07 6,000 4,410(F)
--------
Shipping -- 0.2%
Pegasus Shipping Hellas 11.875% 11/15/04 1,000 1,010
--------
Supermarkets -- 1.2%
Disco S.A. 9.875% 5/15/08 7,000 6,545(C,D)
--------
Telecommunications -- 0.6%
Globo Communicacoes e Participacoes S.A. 10.625% 12/5/08 1,500 1,495
Tricom SA 11.375% 8/1/04 2,000 2,011
--------
3,506
--------
Transportation -- 0.9%
Canadian Airlines Corporation 10% 5/1/05 5,000 5,069(C,D)
--------
Total Yankee Bonds (Identified Cost-- $61,375) 59,606
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Preferred Stocks -- 11.2%
Cable and Media -- 5.6%
CSC Holdings Inc. 11.125% 1 shs $ 61(G)
Capstar Broadcasting Partner 11.25% 39 4,597
Mentus Media Corporation 12% 8 8,320
Paxson Communications Corp. 13.25% 3 3,411
Paxson Communications Corp. 13.25% 4 4,000(B)
Pegasus Communications Corp. 12.75% 1 609(G)
Pegasus Communications Corp. 12.75% 4 4,705(G)
SFX Broadcasting, Inc. 12.65% 11 1,246(G)
Spanish Broadcasting System 14.25% 4 4,250(C,D,G)
--------
31,199
--------
Gaming -- 0.3%
Fitzgeralds Gaming Corporation 15% 50 1,600(D,G)
--------
Gas and Pipeline -- 0.8%
High Voltage Energy Corporation 14.25% 4 4,170(C,D,G)
--------
Industrial -- 0.7%
Geneva Steel 14% 10 1,563
Morris Material Holding 12% 2 2,308(C,D,G)
--------
3,871
--------
Publishing -- N.M.
Liberty Group Publishing 14.75% 4 95
--------
Retail -- 0.8%
Horizon Group 8.50% 1 4
Prime Retail Convertible Series B 8.50% 20 410
Relax the Back Corporation 10% 1,702 4,213
--------
4,627
--------
Services -- 0.1%
La Petite Academy Holdings Corporation 12.125% 796 854(B)
--------
Telecommunications -- 2.9%
E. Spire Communications 14.75% 4 5,200(C,D)
IXC Communications, Inc. 12.50% 0 133(D,G)
Intermedia Communications, Inc. 0% 4 4,272(C,D,F,G)
Nextlink Communications 14% 48 2,946(D,G)
Source Media, Inc. 13.50% 107 3,233(C,D,G)
--------
15,784
--------
Total Preferred Stocks (Identified Cost-- $56,668) 62,200
- ---------------------------------------------------------------------------------------------------------------------------
21
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
</TABLE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Common Stocks -- 3.7%
Medical Supplies and Services -- 0.5%
Interferon Sciences, Inc. 65 shs $ 75
Unigene Labs, Inc. 1,180 2,323
--------
2,398
--------
Metals and Mining -- N.M.
Algoma Steel, Inc. 44 141
--------
Telecommunications -- 3.2%
CS Wireless Systems, Inc. 0 0
Global Telesystems Group, Inc. 10 17,626
Nextel Communications, Inc. 6 154
--------
17,780
--------
Total Common Stocks (Identified Cost-- $4,654) 20,319
- ---------------------------------------------------------------------------------------------------------------------------
Warrants(B) -- 1.0%
Advanced Radio Telecom Corp. 30 wts 570
Apparel Ventures Inc. 3 0
Cort Furniture Business Services Corp. 25 80
County Seat Stores, Inc. 1 0(D)
Global Telesystems Group, Inc. 5 0
Globalstar Telecommunications 3 270(D)
Golden Ocean Group Ltd. 7 0
Gulf States Steel, Inc. 2 18
Harcor Energy, Inc. 33 13
Highway Master Communications 2 50
International Wireless Communications Holdings, Inc. 5 33
MGC Communications, Inc. 4 0
NS Group, Inc. 1 6
Primus Telecommunication Group 3 0
Relax the Back Corporation 654 7
Source Media, Inc. 56 643
Spanish Broadcasting System 14 2,903(D)
Star Choice Communications, Inc. 93 718
Unigene Labs, Inc. - Class C 125 0
Unigene Labs, Inc. - Class D 125 0
Urohealth Systems 3 0
Wireless One, Inc. 4 0
--------
Total Warrants (Identified Cost-- $3,345) 5,311
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Repurchase Agreements -- 9.4%
J.P. Morgan Securities, Inc.
5.70%, dated 6/30/98, to be repurchased at $52,231 on 7/1/98
(Collateral: $34,395 Financing Corporation Bonds,
10% due 8/3/18, value $54,723)
(Identified Cost-- $52,223) $ 52,223 $ 52,223
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 100.1% (Identified Cost-- $520,174) 553,936
Other Assets Less Liabilities-- (0.1)% (519)
--------
Net assets consisting of:
Accumulated paid-in capital applicable to:
32,422 Primary Shares outstanding $506,731
23 Navigator Shares outstanding 393
Undistributed net investment income 1,939
Undistributed net realized gain on investments 10,542
Unrealized appreciation of investments 33,812
--------
Net Assets -- 100.0% $553,417
========
Net asset value per share:
Primary Class $17.06
======
Navigator Class $16.99
======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(B) Non-income producing
(C) Private placement
(D) 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.
(E) 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.
(F) Stepped coupon security -- A bond or preferred stock which amortizes
to par by a specified date at which time it begins to accrue interest
or pay dividends.
(G) Payment-in-kind ("PIK") security -- A bond or preferred stock in which
interest during the initial years is paid in additional PIK bonds or
preferred stock rather than in cash.
(H) Indexed security -- The rate of interest on this type of security is
tied to the London Interbank Offer Rate (LIBOR). The coupon rate shown
is the rate as of June 30, 1998.
(I) Front Loaded Interest Reduction Bond (FLIRB) -- Security pays a
portion of the coupon in cash and a portion is capitalized as an
increase in par value.
(J) ECU -- European Currency Units, will convert to Euro on January 1,
1999.
GBP -- British Pounds
DEM -- German Deutschmarks
N.M. Not meaningful
See notes to financial statements.
23
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1998 (Unaudited)
(Amounts in Thousands)
U.S. Government Money Market Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government and Agency Obligations -- 80.1%
Fannie Mae 5.31 to 5.71% 7/6/98 to 3/8/99 $ 76,790 $ 76,239
Federal Farm Credit Bank 5.43 to 5.70% 7/1/98 to 10/1/98 31,000 30,983
Federal Home Loan Bank 5.435 to 5.72% 7/7/98 to 5/5/99 33,000 32,993
Freddie Mac 5.40 to 5.505% 7/9/98 to 3/12/99 100,000 99,789
Sallie Mae 5.40 to 5.60% 8/11/98 to 2/10/99 30,425 30,407
United States Treasury Notes 6.875% 7/31/99 5,000 5,069
--------
Total U.S. Government and Agency Obligations (Identified Cost-- $275,480) 275,480
- ---------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 19.4%
J.P. Morgan Securities, Inc.
5.70%, dated 6/30/98, to be repurchased at $66,806 on 7/1/98
(Collateral: $67,960 Fannie Mae Medium-term Notes,
5.74% due 12/23/99, value $68,206)
(Identified Cost--$66,795) 66,795 66,795
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments, at amortized cost and value-- 99.5% 342,275
Other Assets Less Liabilities-- 0.5% 1,545
--------
Net assets applicable to 343,810 shares outstanding-- 100.0% $343,820
========
Net asset value per share $1.00
=====
</TABLE>
See notes to financial statements.
24
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 6/30/98
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Investment Income:
Interest $10,226 $4,361 $18,475 $9,495
Dividends -- 67 2,753 --
------- ------ ------- ------
Total income 10,226 4,428 21,228 9,495
------- ------ ------- ------
Expenses:
Management fee 873 393 1,446 845
Distribution and service fees 773 327 1,106 169
Transfer agent and shareholder servicing expense 78 53 117 137
Audit and legal fees 31 19 33 21
Custodian fee 73 60 72 41
Directors' fees 6 3 6 6
Registration fees 18 12 60 26
Reports to shareholders 19 22 20 15
Other expenses 12 2 21 7
------- ------ ------- ------
1,883 891 2,881 1,267
Less fees waived (318) (236) -- --
------- ------ ------- ------
Total expenses, net of waivers 1,565 655 2,881 1,267
------- ------ ------- ------
Net Investment Income 8,661 3,773 18,347 8,228
------- ------ ------- ------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on:
Investments 1,905 1,420 10,199 6
Options 349 201 -- --
Futures (13) (408) -- --
------- ------ ------- ------
2,241 1,213 10,199 6
------- ------ ------- ------
Change in unrealized appreciation (depreciation)
of investments, options and futures (770) (787) 8,431 --
------- ------ ------- ------
Net Realized and Unrealized Gain (Loss)
on Investments 1,471 426 18,630 6
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting
from Operations $10,132 $4,199 $36,977 $8,234
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
25
<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
------------------- ------------------ ------------------- ---------------------
Six Months Year Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended Ended Ended
6/30/98 12/31/97 6/30/98 12/31/97 6/30/98 12/31/97 6/30/98 12/31/97
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S><C>
Change in Net Assets:
Net investment income $ 8,661 $ 17,534 $ 3,773 $ 6,380 $ 18,347 $ 26,378 $ 8,228 $ 15,916
Net realized gain (loss)
on investments,
options and futures 2,241 (465) 1,213 1,468 10,199 4,465 6 23
Change in unrealized
appreciation (depreciation)
of investments,
options and futures (770) 2,985 (787) 2,295 8,431 14,202 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations 10,132 20,054 4,199 10,143 36,977 45,045 8,234 15,939
Distributions to shareholders:
From net investment income:
Primary Class (8,421) (16,688) (3,765) (6,363) (16,605) (26,212) (8,228) (15,916)
Navigator Class (240) (460) (8) (17) (1) -- -- --
From net realized gain
on investments -- -- -- -- -- (1,943) -- --
In excess of net investment
income:
Primary Class -- (376) -- -- -- -- -- --
Navigator Class -- (10) -- -- -- -- -- --
Change in net assets from
Fund share transactions:
Primary Class 23,467 4,674 20,185 26,418 150,510 131,145 19,118 (537)
Navigator Class 83 (256) -- -- 393 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets 25,021 6,938 20,611 30,181 171,274 148,035 19,124 (514)
Net Assets:
Beginning of period 308,866 301,928 122,352 92,171 382,143 234,108 324,696 325,210
- ---------------------------------------------------------------------------------------------------------------------------
End of period $333,887 $308,866 $142,963 $122,352 $553,417 $382,143 $343,820 $324,696
- ---------------------------------------------------------------------------------------------------------------------------
Undistributed net
investment income $ -- $ -- $ 72 $ 72 $ 1,939 $ 198 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
26
<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
of Period (Loss) and Futures Operations Income Income Investments Investments
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government Intermediate-Term Portfolio
--Primary Class
Six Months Ended
June 30, 1998* $10.40 $ .26(A) $ .05 $ .31 $ (.26) $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 10.31 .60(A) .09 .69 (.59) (.01) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1996 10.47 .61(A) (.16) .45 (.60) (.01) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1995 9.72 .57(A) .75 1.32 (.57) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1994 10.43 .51(A) (.71) (.20) (.51) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1993 10.70 .53(A) .17 .70 (.53) -- (.39) (.05)
--Navigator Class
Six Months Ended
June 30, 1998* $10.40 $ .28(B) $ .05 $ .33 $ (.28) $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 10.31 .65(B) .09 .74 (.64) (.01) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1996 10.47 .67(B) (.16) .51 (.66) (.01) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1995 9.72 .62(B) .75 1.37 (.62) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1994(E) 9.72 .05(B) -- .05 (.05) -- -- --
Investment Grade Income Portfolio
--Primary Class
Six Months Ended
June 30, 1998* $10.59 $ .28(C) $ .04 $ .32 $ (.28) $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 10.22 .65(C) .37 1.02 (.65) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1996 10.44 .64(C) (.22) .42 (.64) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1995 9.27 .65(C) 1.17 1.82 (.65) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1994 10.40 .60(C) (1.09) (.49) (.60) -- (.04) --
- -----------------------------------------------------------------------------------------------------------------------------------
1993 10.71 .62(C) .33 .95 (.62) -- (.63) (.01)
--Navigator Class
Six Months Ended
June 30, 1998* $10.59 $ .30(D) $ .04 $ .34 $ (.30)
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 10.22 .71(D) .37 1.08 (.71) $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
1996 10.44 .70(D) (.22) .48 (.70) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1995(F) 10.32 .03(D) .12 .15 (.03) -- -- --
High Yield Portfolio
--Primary Class
Six Months Ended
June 30, 1998* $16.29 $ .67 $ .72 $1.39 $ (.62) $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 15.37 1.35 .99 2.34 (1.34) -- (.08) --
- -----------------------------------------------------------------------------------------------------------------------------------
1996 14.62 1.33 .76 2.09 (1.34) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1995 13.57 1.29 1.05 2.34 (1.29) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1994(G) 15.00 1.02 (1.44) (.42) (1.01) -- -- --
--Navigator Class
June 30, 1998(J,*) $16.85 $ .48 $ .11 $ .59 $ (.45) $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income (Loss) Portfolio End of
Total End of Total to Average to Average Turnover Period
Distributions Period Return Net Assets Net Assets Rate (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government Intermediate-Term Portfolio
--Primary Class
Six Months Ended
June 30, 1998* $ (.26) $10.45 3.12%(H) 1.00%(A,I) 5.44%(I) 352%(A,I) $325,850
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 (.60) 10.40 6.95% 1.00%(A) 5.84%(A) 252% 300,952
- ---------------------------------------------------------------------------------------------------------------------------------
1996 (.61) 10.31 4.47% .98%(A) 5.91%(A) 354% 293,846
- ---------------------------------------------------------------------------------------------------------------------------------
1995 (.57) 10.47 13.88% .93%(A) 5.59%(A) 290% 231,886
- ---------------------------------------------------------------------------------------------------------------------------------
1994 (.51) 9.72 (1.93)% .90%(A) 5.11%(A) 316% 231,255
- ---------------------------------------------------------------------------------------------------------------------------------
1993 (.97) 10.43 6.64% .90%(A) 4.84%(A) 490% 299,529
--Navigator Class
Six Months Ended
June 30, 1998* $ (.28) $10.45 3.52%(H) .45%(B,I) 5.99%(B,I) 352%(I) $ 8,037
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 (.65) 10.40 7.45% .45%(B) 6.40%(B) 252% 7,914
- ---------------------------------------------------------------------------------------------------------------------------------
1996 (.67) 10.31 5.09% .42%(B) 6.47%(B) 354% 8,082
- ---------------------------------------------------------------------------------------------------------------------------------
1995 (.62) 10.47 14.45% .44%(B) 6.08%(B) 290% 4,184
- ---------------------------------------------------------------------------------------------------------------------------------
1994(E) (.05) 9.72 .50%(H) .40%(B,I) 6.44%(B,I) 316%(I) 4,024
Investment Grade Income Portfolio
--Primary Class
Six Months Ended
June 30, 1998* $ (.28) $10.63 3.27%(H) 1.00%(C,I) 5.76%(C,I) 354%(I) $142,710
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 (.65) 10.59 10.31% 1.00%(C) 6.28%(C) 259% 122,100
- ---------------------------------------------------------------------------------------------------------------------------------
1996 (.64) 10.22 4.31% .97%(C) 6.42%(C) 383% 91,928
- ---------------------------------------------------------------------------------------------------------------------------------
1995 (.65) 10.44 20.14% .88%(C) 6.49%(C) 221% 85,633
- ---------------------------------------------------------------------------------------------------------------------------------
1994 (.64) 9.27 (4.82)% .85%(C) 6.09%(C) 200% 66,196
- ---------------------------------------------------------------------------------------------------------------------------------
1993 (1.26) 10.40 11.22% .85%(C) 5.62%(C) 348% 68,781
--Navigator Class
Six Months Ended
June 30, 1998* $ (.30) $10.63 3.56%(H) .45%(D,I) 6.31%(D,I) 354%(I) $ 253
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 (.71) 10.59 10.95% .43%(D) 6.87%(D) 259% 252
- ---------------------------------------------------------------------------------------------------------------------------------
1996 (.70) 10.22 4.88% .41%(D) 6.99%(D) 383% 243
- ---------------------------------------------------------------------------------------------------------------------------------
1995(F) (.03) 10.44 1.42%(H) .40%(D,I) 6.73%(D,I) 221%(I) 249
High Yield Portfolio
--Primary Class
Six Months Ended
June 30, 1998* $ (.62) $17.06 8.68%(H) 1.30%(I) 8.24%(I) 107%(I) $553,021
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 (1.42) 16.29 15.86% 1.30% 8.60% 116% 382,143
- ---------------------------------------------------------------------------------------------------------------------------------
1996 (1.34) 15.37 14.91% 1.35% 9.05% 77% 234,108
- ---------------------------------------------------------------------------------------------------------------------------------
1995 (1.29) 14.62 18.01% 1.47% 9.28% 47% 108,417
- ---------------------------------------------------------------------------------------------------------------------------------
1994(G) (1.01) 13.57 (2.90)%(H) 1.60%(I) 8.40%(I) 67%(I) 53,424
--Navigator Class
June 30, 1998(J,*) $ (.45) $16.99 2.64%(H) .68%(I) 9.45%(I) 107%(I) $ 396
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Financial Highlights--Continued
Legg Mason Income Trust, Inc.
<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
of Period (Loss) and Futures Operations Income Income Investments Investments
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government Money Market Portfolio
Six Months Ended
June 30, 1998* $ 1.00 $ .02 $ -- $ .02 $ (.02) $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 1.00 .05 $ Nil .05 (.05) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1.00 .05 Nil .05 (.05) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1.00 .05 Nil .05 (.05) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1994 1.00 .04 (Nil) .04 (.04) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1993 1.00 .03 -- .03 (.03) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income (Loss) Portfolio End of
Total End of Total to Average to Average Turnover Period
Distributions Period Return Net Assets Net Assets Rate (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government Money Market Portfolio
Six Months Ended
June 30, 1998* $ (.02) $ 1.00 4.92%(I) .75%(I) 4.87%(I) -- $343,820
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31,
1997 (.05) 1.00 4.86% .75% 4.77% -- 324,696
- ---------------------------------------------------------------------------------------------------------------------------------
1996 (.05) 1.00 4.81% .66% 4.71% -- 325,210
- ---------------------------------------------------------------------------------------------------------------------------------
1995 (.05) 1.00 5.31% .67% 5.17% -- 316,646
- ---------------------------------------------------------------------------------------------------------------------------------
1994 (.04) 1.00 3.66% .69% 3.66% -- 214,576
- ---------------------------------------------------------------------------------------------------------------------------------
1993 (.03) 1.00 2.80% .71% 2.76% -- 172,533
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Net of fees waived by LMFA for expenses in excess of voluntary expense
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, 1998. If no fees
had been waived by LMFA, the annualized ratio of expenses to average daily
net assets for each period would have been as follows: 1998, 1.20%; 1997,
1.21%; 1996, 1.26%; 1995, 1.24%; 1994, 1.19%; and 1993, 1.17%.
(B) Net of fees waived by LMFA for expenses in excess of voluntary limitations
of: 0.4% until April 30, 1995; 0.45% until April 30, 1996; and 0.50% until
May 1, 1999. If no fees had been waived by LMFA, the annualized ratio of
expenses to average daily net assets for each period would have been as
follows: 1998, .65%; 1997, .66%; 1996, .69%; 1995, .74%; and 1994, .66%.
(C) Net of fees waived by LMFA for expenses in excess of voluntary expense
limitations of: 0.85% until April 30, 1995; 0.9% until April 30, 1996; and
1.00% until May 1, 1999 . If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for each period would have
been as follows: 1998, 1.35%; 1997, 1.39%; 1996, 1.43%; 1995, 1.38%; 1994,
1.40%; and 1993, 1.45%.
(D) Net of fees waived by LMFA for expenses in excess of voluntary limitations
of: 0.4% until April 30, 1996 and 0.50% until May 1, 1999. If no fees had
been waived by LMFA, the annualized ratio of expenses to average daily net
assets for each period would have been as follows: 1998, .80%; 1997, .82%;
1996, .88%; and 1995, .82%.
(E) For the period December 1, 1994 (commencement of sale of Navigator Shares)
to December 31, 1994.
(F) For the period December 1, 1995 (commencement of sale of Navigator Shares)
to December 31, 1995.
(G) For the period February 1, 1994 (commencement of operations) to December 31,
1994.
(H) Not annualized
(I) Annualized
(J) For the period May 5, 1998 (commencement of sale of Navigator Shares) to
June 30, 1998.
* Unaudited
See notes to financial statements.
28
<PAGE>
Notes to Financial Statements
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
1. Significant Accounting Policies:
The Legg Mason Income Trust, Inc. ("Corporation"), 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 a "Fund"), is registered under the
Investment Company Act of 1940, as amended, as an open-end, diversified
investment company.
The Government Intermediate, Investment Grade and High Yield
Portfolios consist of two classes of shares: Primary Class, offered since
1987, and Navigator Class, offered to certain institutional investors
since December 1, 1994, December 1, 1995, and May 5, 1998, respectively.
The income and expenses of each of these Funds are allocated
proportionately to the two classes of shares based on daily net assets,
except for Rule 12b-1 distribution fees, which are charged only on Primary
Class 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. Fixed income securities
with 60 days or less remaining to maturity are valued using 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 Distributions to Shareholders
Interest 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. Dividend
income and distributions to shareholders are allocated at the class level
and are recorded on the ex-dividend date. When available, net capital gain
distributions, which are calculated at a composite level, are declared and
paid after the end of the tax year in which the gain is realized. At June
30, 1998, accrued dividends payable were as follows: Government
Intermediate, $762; Investment Grade, $356; High Yield, $0; and Government
Money Market, $663. There were no capital gain distributions payable at
June 30, 1998.
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
June 30, 1998, receivables for securities sold but not yet delivered and
payables for securities purchased but not yet received for each Fund were
as follows:
<TABLE>
<CAPTION>
Receivable for Payable for
Securities Sold Securities Purchased
- --------------------------------------------------------------------------------
<S><C>
Government Intermediate $14,093 $31,451
Investment Grade 4,825 9,549
High Yield 1,197 12,153
Government Money Market -- 5,212
</TABLE>
29
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Income Trust, Inc.
Federal Income Taxes
No provision for federal income or excise taxes is required since
each Fund intends to continue to qualify as a regulated investment company
and distribute all of its taxable income to its 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 six months ended June 30, 1998, investment transactions
(excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds from Sales
----------------------------------- -----------------------------------
U.S. Gov't. Securities Other U.S. Gov't. Securities Other
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Government Intermediate $505,404 $ 64,657 $512,975 $ 20,170
Investment Grade 228,775 16,794 209,374 15,853
High Yield -- 356,305 -- 230,802
</TABLE>
At June 30, 1998, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for each Fund were as follows:
<TABLE>
<CAPTION>
Cost Appreciation (Depreciation)
- -----------------------------------------------------------------------------------
<S><C>
Government Intermediate $344,966 $ 4,660 $ (777)
Investment Grade 143,225 3,591 (1,179)
High Yield 520,174 43,891 (10,129)
Government Money Market 342,275 -- --
</TABLE>
Unused capital loss carryforwards for federal income tax purposes at
June 30, 1998 were as follows: Government Intermediate, $11,085 which
expire through 2003 and Investment Grade, $471 which expire through 2002.
High Yield and Government Money Market have no capital loss carryforwards.
3. 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 Funds' 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.
4. Options and Futures:
As part of their investment programs, Government Intermediate and
Investment Grade may utilize options and futures. Options may be written
(sold) or purchased by these Funds. When a Fund purchases a put or call
option, the premium paid is recorded as an investment and its value is
marked-to-market daily. When a Fund writes a call or put option, an amount
equal to the premium received by the Fund is recorded as a liability and
its value is marked-to-market daily.
30
<PAGE>
When options, whether written or purchased, expire, are exercised or
are closed (by entering into a closing purchase or sale transaction), the
Fund realizes a gain or loss as described in the chart below.
<TABLE>
<CAPTION>
<S><C>
PURCHASED OPTION: IMPACT ON THE FUND:
The option expires Realize a loss in the amount of the cost of the option.
The option is closed through Realize a gain or loss depending on whether the proceeds from the closing sale
a closing sale transaction transaction are greater or less than the cost of the option.
The Fund exercises a call option The cost of the security purchased through the exercise of the option will be
increased by the premium originally paid to purchase the option.
The Fund exercises a put option Realize a gain or loss from the sale of the underlying security. The proceeds of that
sale will be reduced by the premium originally paid to purchase the put option.
WRITTEN OPTION: IMPACT ON THE FUND:
The option expires Realize a gain equal to the amount of the premium received.
The option is closed through Realize a gain or loss without regard to any unrealized gain or loss on the
a closing purchase transaction underlying security and eliminate the option liability. The Fund will realize a
loss in this transaction if the cost of the closing purchase exceeds the premium
received when the option was written.
A written call option is exercised Realize a gain or loss from the sale of the underlying security. The proceeds of that
by the option purchaser sale will be increased by the premium originally received when the option was
written.
A written put option is exercised The amount of the premium originally received will reduce the cost of the security
by the option purchaser that the Fund purchased when the option was exercised.
</TABLE>
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 in 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 daily at the settlement
price established by the board of trade or exchange on which they are
traded.
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 Statement of
Net Assets. The risk in writing a covered call option is that a 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 a 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.
31
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Income Trust, Inc.
Call and put options written by the Funds and related premiums
received during the period were as follows:
<TABLE>
<CAPTION>
Calls Puts
- ------------------------------------------------------------------------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- ------------------------------------------------------------------------------------
<S><C>
Options outstanding December 31, 1997 60 $ 7 -- $ --
Options written 763 309 560 291
Options closed (673) (266) (491) (284)
Options exercised (150) (50) (69) (7)
- ------------------------------------------------------------------------------------
Options outstanding June 30, 1998 -- $-- -- $ --
- ------------------------------------------------------------------------------------
<CAPTION>
Calls Puts
- ------------------------------------------------------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- ------------------------------------------------------------------------------------
<S><C>
Options outstanding December 31, 1997 -- $ -- 22 $ 19
Options written 367 214 171 97
Options closed (308) (168) (89) (64)
Options expired -- -- (92) (48)
Options exercised -- -- -- --
- ------------------------------------------------------------------------------------
Options outstanding June 30, 1998 59 $ 46 12 $ 4
- ------------------------------------------------------------------------------------
</TABLE>
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 the 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.
The open futures positions and related appreciation or depreciation
at June 30, 1998 are described at the end of U.S. Government
Intermediate's and Investment Grade's respective "Statement of Net
Assets."
5. Financial Instruments:
Forward Currency Exchange Contracts
As part of its investment program, High Yield may utilize forward
currency exchange contracts. The nature and risks of these financial
instruments and the reasons for using them are set forth more fully in the
Corporation's Prospectus and Statement of Additional Information.
Forward foreign currency contracts are marked-to-market daily using
foreign currency exchange rates supplied by an independent pricing
service. The change in a contract's market value is recorded by High Yield
as an unrealized gain or loss. When the contract is closed or delivery is
taken, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value
at the time it was closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's securities, but it
does establish a rate of exchange that can be achieved in the future.
These forward foreign currency contracts involve market risk in excess of
amounts reflected in the Financial Statements. Although forward foreign
currency contracts used for hedging purposes limit the risk of loss due to
a decline in the value of the hedged currency, they also limit any
potential gain that might result should the value of the currency
increase. In addition, the Fund could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their
contracts. The Fund's adviser will enter into forward foreign currency
contracts only with parties approved by the Board of Directors because
there is a risk of loss to the Fund if the counterparties do not complete
the transaction.
32
<PAGE>
At June 30, 1998, open forward currency exchange contracts in High
Yield were as follows:
<TABLE>
<CAPTION> Contract to
Settlement --------------------------------------------- Unrealized
Date Receive Deliver Gain
- -------------------------------------------------------------------------------------
<S><C>
7/6/98 USD 7,500 DEM 4,233 $50
</TABLE>
6. Transactions with Affiliates:
Each Fund has a management agreement with Legg Mason Fund Adviser,
Inc. ("LMFA"). Pursuant to their respective agreements, LMFA provides the
Funds with management and administrative services for which each Fund pays
a fee, computed daily and payable monthly at annual rates of each Fund's
average daily net assets as follows: Government Intermediate, .55%;
Investment Grade, .60%; High Yield, .65%; and Government Money Market,
.50%.
LMFA has agreed to waive its fees to the extent expenses (exclusive
of taxes, interest, brokerage and extraordinary expenses) exceed during
any month annual rates based on certain Funds' average daily net assets.
As described, fees will be waived for those expenses in excess of 1.00%
for Primary Shares and 0.50% for Navigator Shares for such month, until
the earlier of May 1, 1999, or, with respect to Government Intermediate,
until the Fund's net assets reach $400 million, and with respect to
Investment Grade, until the Fund's net assets reach $150 million. For the
six months ended June 30, 1998, management fees of $318 and $236,
respectively, were waived for Government Intermediate and Investment
Grade. No fee waivers were necessary for High Yield or Government Money
Market. At June 30, 1998, amounts due to LMFA were as follows: Government
Intermediate, $92; Investment Grade, $28; High Yield, $270; and Government
Money Market, $142.
Western Asset Management Company ("Adviser") serves as investment
adviser to the Funds. The Adviser is responsible for the actual investment
activity of each Fund. LMFA 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, LMFA 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 LMFA.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the
New York Stock Exchange, serves as distributor of the Funds. Legg Mason
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, computed daily and payable
monthly. Government Money Market pays Legg Mason for distribution costs
and services at an annual rate equal to 0.10% of its average net assets.
Legg Mason has agreed that it will not request payment of more than 0.10%
annually from Government Money Market until January 10, 1999. If this
voluntary limit is not extended beyond January 10, 1999, the Fund may pay
Legg Mason a fee for its distribution services in an amount not to exceed
an annual rate of 0.20% of its average daily net assets. At June 30, 1998,
distribution and service fees due to Legg Mason were as follows:
Government Intermediate, $133; Investment Grade, $58; High Yield, $208;
and Government Money Market, $28.
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 six months ended
June 30, 1998: Government Intermediate, $26; Investment Grade, $16; High
Yield, $30; and Government Money Market, $42.
The Adviser, LMFA and Legg Mason are corporate affiliates and are
wholly owned subsidiaries of Legg Mason, Inc.
7. Line of Credit:
The Funds, except for Government Money Market, but including certain
other Legg Mason Funds, participate in a $150 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 six months ended June 30, 1998, the
Funds had no borrowings under the line of credit.
33
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Income Trust, Inc.
8. Fund Share Transactions:
At June 30, 1998, there were 1,000,000 shares authorized at $.001 par
value for all portfolios of the Corporation. 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
Six Months Ended June 30, 1998 5,806 $ 60,601 646 $ 6,746 (4,206) $ (43,880) 2,246 $ 23,467
Year Ended December 31, 1997 7,011 72,238 1,458 15,020 (8,029) (82,584) 440 4,674
--Navigator Class
Six Months Ended June 30, 1998 147 1,534 20 209 (159) (1,660) 8 83
Year Ended December 31, 1997 444 4,554 44 454 (511) (5,264) (23) (256)
Investment Grade
--Primary Class
Six Months Ended June 30, 1998 3,644 38,720 288 3,066 (2,034) (21,601) 1,898 20,185
Year Ended December 31, 1997 4,258 44,149 547 5,662 (2,271) (23,393) 2,534 26,418
--Navigator Class
Six Months Ended June 30, 1998 -- -- -- -- -- -- -- --
Year Ended December 31, 1997 -- -- -- -- -- -- -- --
High Yield
--Primary Class
Six Months Ended June 30, 1998 13,789 231,293 797 13,307 (5,621) (94,090) 8,965 150,510
Year Ended December 31, 1997 15,869 253,216 1,464 23,407 (9,107) (145,478) 8,226 131,145
--Navigator Class
Six Months Ended June 30, 1998 23 393 -- -- -- -- 23 393
Year Ended December 31, 1997 -- -- -- -- -- -- -- --
Government Money Market
Six Months Ended June 30, 1998 747,320 747,320 7,273 7,273 (735,475) (735,475) 19,118 19,118
Year Ended December 31, 1997 1,269,493 1,269,493 15,246 15,246 (1,285,276) (1,285,276) (537) (537)
</TABLE>
34
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