<PAGE>
-------------------------------------
Annual Report
December 31, 1999
Legg Mason
Income
Trust, Inc.
U.S. Government Intermediate
Investment Grade
High Yield
Navigator Class
[Legg Mason Funds Logo]
The Art of Investing/SM/
-------------------------------------
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust's annual report,
combining reports for the Navigator Classes of the Legg Mason U.S. Government
Intermediate-Term Portfolio, Investment Grade Income Portfolio and High Yield
Portfolio.
The following table summarizes key statistics for the Navigator shares of each
portfolio, as of December 31, 1999:
<TABLE>
<CAPTION>
Net Asset Value
SEC Yield/1/ Average Life Per Share
------------ ------------ ---------------
<S> <C> <C> <C>
Government Intermediate 6.02% 9.60 years $ 9.92
Investment Grade 7.12% 12.71 years $ 9.79
High Yield 9.28% 7.01 years $14.97
</TABLE>
In calendar 1999, total returns for the Navigator Class of shares of the
Government Intermediate, Investment Grade and High Yield Portfolios were +0.04%,
- -0.33% and +9.02%, respectively. (Total return measures investment performance
in terms of appreciation or depreciation in a portfolio's net asset value per
share, plus dividends and any capital gain distributions). Beginning on page 2,
portfolio managers responsible for the Income Trust discuss recent results and
the investment outlook. The Funds' total returns in various periods since their
inceptions are shown on subsequent pages of the 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 shares, when redeemed, may be worth more or less than their original cost.
We are pleased to report that Legg Mason has made a seamless transition into
the new century. Our critical internal and external systems are operating free
of Y2K disruptions. Internal and external operations, including the Fund's
custodian and transfer agency, are running smoothly, and Fund shareholders are
receiving uninterrupted account maintenance and transaction support.
Sincerely,
/s/ John F. Curley, Jr.
-----------------------
John F. Curley, Jr.
Chairman
February 2, 2000
- -----------
/1/SEC yields reported for the U.S. Government Intermediate, Investment Grade
and High Yield Portfolios are for the 30 days ended December 31, 1999.
<PAGE>
Portfolio Managers' Comments
Legg Mason Income Trust, Inc.
Market Overview
1999 proved to be the second-worst year in recorded history for the bond
market. Treasury yields rose by more this past year than they declined in the
prior year. Although corporate spreads narrowed in the second half, they still
ended up much wider than they were at the beginning of 1998, despite the fact
that the health of the economy and corporate earnings have exceeded even the
most optimistic of projections. Mortgage spreads also narrowed but remain
unusually wide, despite a measurable decrease in prepayment risk.
Not only were these developments contrary to what would normally be expected,
they were difficult to explain. Monetary tightening fears -- driven by the
Federal Reserve's insistence that "above-trend" economic growth must eventually
rekindle inflation pressures -- wider swap spreads, and Y2K-related hedging were
likely but not completely satisfying explanations. In what was probably an
unprecedented development, the Fed last year appeared much more concerned about
the prospects for future inflation than the market. For despite the drumbeat of
concerns about the inflationary potential of a strong economy, core inflation
fell last year to its lowest level in 34 years. Plus, the yield curve flattened
significantly, a sign that the Fed was not falling behind the inflation curve.
The dollar strengthened dramatically against the Euro and most other major
currencies, suggesting that dollars may actually be in short supply relative to
demand. Although the dollar fell significantly only against the Japanese yen,
the reality of Japanese deflation attests to overly tight Japanese monetary
policy, not weak U.S. monetary policy.
U.S. Government Intermediate and Investment Grade Portfolios
Despite the headwinds of rising interest rates, results for both Funds were
encouraging, since the negative impact of higher yields was more than offset by
gains from other strategies. A pronounced flattening of the yield curve
benefited the Funds' barbell exposure to interest rates. An overweight exposure
to corporate bonds and emerging market debt made a major contribution to returns
since spreads narrowed sharply toward the end of the year. Mortgage overexposure
was also rewarded, as reduced prepayment risk and declining volatility resulted
in tighter spreads. A moderate exposure to inflation-indexed bonds subtracted
from performance for the period, as real yields rose in line with the rise in
nominal yields.
Government Intermediate Navigator Class produced a total return of +0.04% for
the year, versus the Salomon Bros. Medium-Term Treasury/Government-Sponsored
Index return of +0.49%. Investment Grade Navigator Class generated a total
return of -0.33% versus the Salomon Bros. Broad Investment Grade Index return of
- -0.83%.
High Yield Portfolio
Although yields rose in 1999, the High Yield portfolio outperformed due to a
general narrowing of credit spreads and selecting issues and sectors that
outperformed on a relative basis. The Fund also emphasized large, liquid single
`B' issues while decreasing the amount of `CCC' rated issues, which contributed
significantly to performance as Y2K concerns increased demand for higher quality
credits. Throughout the year we favored the primary market for value while
opportunistically adding to secondary market positions that appeared cheap.
Performance was also driven by overweighting
2
<PAGE>
Portfolio Managers' Comments -- Continued
Legg Mason Income Trust, Inc.
telecommunication, media, cable and basic industrial sectors and avoiding the
lagging sectors such as consumer goods, retail/textile and finance.
For the year, High Yield Navigator Class posted a total return of +9.02%
versus the Lehman Brothers High Yield Index return of +2.39%
Market Commentary and Outlook
Despite the continued rise in interest rates, our outlook has not changed
materially. We continue with our long-held beliefs that inflation will remain
low thanks to restrictive monetary policy, and that low inflation is compatible
with and even conducive to healthy economic growth. Both nominal and real yields
thus appear very attractive at current levels. The Federal Reserve has left
itself plenty of room to ease policy should troubles develop.
We have already seen the impact of the announced U.S. Treasury buy-back
program on the U.S. yield curve. Given the size of this program, long-term
Treasury yields have declined significantly relative to short-term and
intermediate yields, creating the most dramatic inverted curve since 1983-84. At
that time, investors were purchasing long Treasuries to re-package them as
STRIPs. We expect continued future U.S. budget surpluses to impact the amount
and timing of Treasury financing going forward as well.
With the continued rise in real rates, inflation-indexed bonds offer
exceptional value as well as attractive hedging properties. Therefore, we remain
aggressively overweight in this sector. It is expected that the Treasury will
continue to issue both 10- and 30-year U.S. Treasury Inflation-Protected
Securities ("TIPS"). Corporate bond spreads continue to represent excellent
value, so we remain overweight to the sector, particularly to credits in the
lower end of the sector. Mortgage spreads, on the other hand, have declined
enough to warrant a less aggressive, yet overweight, position than in the past.
There are several trends and risks that may impact the High Yield market in
2000. The year commenced with pent-up supply and a growing calendar that has so
far been absorbed by CBO issuers and demand from high grade investors reaching
for additional yield. The risks include a potential disruption in the equity
markets and multiple tightenings by the Federal Reserve. However, we remain
constructive on high yield for the full year, assuming rational equity market
levels and modest economic growth expectations. Since spreads are historically
wide for smaller, less liquid high yield issues, we are selectively positioning
these types of credits that have visible fundamental tightening potential.
Conclusion
On balance over time, we expect that the portfolios will benefit handsomely
from a decline in interest rates to levels that are more commensurate with
today's benign inflation environment. In addition, we believe that today's
relatively wide spreads in corporate, emerging market and mortgage debt are
unlikely to persist, and that they also will return to levels more commensurate
with what appear to be reasonably healthy economic fundamentals.
Western Asset Management Company
February 2, 2000
3
<PAGE>
Performance Information
Legg Mason Income Trust, Inc.
Performance Comparison of a $50,000 Investment as of December 31, 1999
The returns shown on these pages are based on historical results and are
not intended to indicate future performance. Total return measures investment
performance in terms of appreciation or depreciation in a Fund's net asset
value per share, plus dividends and any capital gain distributions. It
assumes that dividends and distributions were reinvested at the time they
were paid. The investment return and principal value of an investment in each
of these Funds will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Average annual returns
tend to smooth out variations in a Fund's return, so they differ from actual
year-to-year results. No adjustment has been made for any income taxes
payable by shareholders.
The following graphs compare each Fund's total returns against that of the
most closely matched broad-based securities market index. The lines
illustrate the cumulative total return of an initial $50,000 investment for
the periods indicated. The line for each Fund represents the total return
after deducting all Fund investment management and other administrative
expenses and the transaction costs of buying and selling securities. The line
representing the securities market index does not include any transaction
costs associated with buying and selling securities in the index or other
administrative expenses.
The Government Intermediate, Investment Grade and High Yield Portfolios
each have two classes of shares: Primary Class and Navigator Class.
Information about the Primary Class, offered to retail investors, is
contained in a separate report to its shareholders.
U.S. Government Intermediate-Term Portfolio - Navigator Class
Cumulative Average Annual
Total Return Total Return
------------ --------------
One Year +0.04% +0.04%
Five Years +38.53 +6.74
Life of Class/+/ +39.23 +6.73
---------------------------------------------------------
/+/Inception Date -- December 1, 1994
[GRAPH APPEARS HERE]
Salomon Brothers
U.S. Government Medium-Term
Intermediate-- Treasury/Government-
Navigator Class Sponsored Index/(1)/
--------------- --------------------
12/1/94 50,000 50,000
12/94 50,251 50,183.39
3/95 52,270 52,270.35
6/95 54,831 54,705.53
9/95 55,798 55,527.31
12/95 57,512 57,401.86
3/96 57,156 57,030.43
6/96 57,633 57,397.22
9/96 58,602 58,383.82
12/96 60,439 59,738.38
3/97 60,684 59,758.11
6/97 60,883 61,397.03
9/97 60,390 62,979.08
12/97 62,041 64,390.51
3/98 65,900 65,392.2
6/98 67,224 66,591.22
9/98 69,468 69,665.95
12/98 69,589 69,866.75
3/99 69,395 69,690.55
6/99 68,697 69,514.24
9/99 69,426 70,241.66
12/99 69,615 70,211.02
/(1)/ The Salomon Brothers Medium-Term Treasury/Government-Sponsored Index is an
all-inclusive universe of institutionally traded U.S. Treasury and
government-sponsored securities. The Index is market-capitalization
weighted and includes fixed-rate bonds with maturities between 1 and 10
years.
4
<PAGE>
Performance Information -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Navigator Class
Cumulative Average Annual
Total Return Total Return
------------ --------------
One Year -0.33% -0.33%
Life of Class/+/ +26.54 +6.00
- -----------------------------------------
/+/Inception Date -- December 1, 1995
[GRAPH APPEARS HERE]
Salomon Brothers
Investment Grade -- Broad Investment-
Navigator Class Grade Bond Index/(2)/
------------------- ---------------------
12/1/95 50,000 50,000
12/95 50,711 50,690.69
3/96 49,996 49,804.88
6/96 50,211 50,049.47
9/96 51,347 50,984.74
12/96 53,188 52,524.6
3/97 53,009 52,253.45
6/97 55,226 54,135.9
9/97 57,335 55,935.91
12/97 59,012 57,586.61
3/98 59,980 58,514.56
6/98 61,110 59,867.54
9/98 62,590 62,350
12/98 63,481 62,604.66
3/99 62,691 62,315.92
6/99 62,183 61,737.54
9/99 62,727 62,183.46
12/99 63,270 62,083.98
/(2)/ The Salomon Brothers Broad Investment Grade Bond Index is a market-
weighted index that contains approximately 4,700 individually priced
investment grade bonds rated BBB or better. The Index includes U.S.
Treasury/agency issues, mortgage pass-through securities and corporate
issues.
High Yield Portfolio -- Navigator Class
Cumulative Average Annual
Total Return Total Return
------------ --------------
One Year +9.02%* +9.02%
Life of Class/+/ +1.48* +0.89
- --------------------------------------------------
* Reflects total return for a Navigator share held
from the beginning of each period shown through
January 28, 1999, converted to a Primary share
for the period January 29 through March 7, 1999,
and reconverted to a Navigator share for the
period March 8 through December 31, 1999.
- --------------------------------------------------
/+/Inception Date -- May 5, 1998
[GRAPH APPEARS HERE]
High Yield -- Lehman High
Navigator Class Yield Index/(3)/
5/5/98 50,000 50,000
6/98 51,321 50,355
9/98 46,508 48,065
12/98 46,545 49,085
3/99 51,763 49,995
6/99 50,539 50,165
9/99 47,059 49,450
12/99 50,740 50,260
/(3)/ The Lehman Brothers High Yield Index is comprised of approximately 760
publicly traded below-investment-grade U.S. corporate bonds. Index returns
are for the periods beginning April 30, 1998.
5
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1999
(Amounts in Thousands)
U.S. Government Intermediate-Term Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- 3.0%
Banking and Finance -- 3.0%
Crestar Capital Trust I 8.16% 12/15/26 $ 10,000 $ 9,349
--------
Total Corporate Bonds and Notes (Identified Cost -- $11,026) 9,349
---------------------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities -- 1.6%
Green Tree Financial Corporation 6.32% 8/15/08 4,323 4,310
SLM Student Loan Trust 1998-2 5.544% 4/25/07 470 468/A/
--------
Total Asset-Backed Securities (Identified Cost -- $4,789) 4,778
---------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 19.0%
Fixed-Rate Securities -- 7.6%
United States Treasury Bonds 6.125% 8/15/29 4,000 3,813
United States Treasury Notes 5.875% 11/15/04 20,000 19,609
--------
23,422
--------
Indexed Securities -- 11.4%
United States Treasury Inflation-
Indexed Security 3.875% 4/15/29 37,376 34,888/B/
--------
Total U.S. Government and Agency Obligations (Identified Cost -- $60,037) 58,310
---------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- 60.6%
Fixed-Rate Securities -- 58.3%
Fannie Mae 11.50% 4/1/04 342 345
Fannie Mae 6.625% 9/15/09 30,000 29,137
Fannie Mae 8.50% 6/1/10 to 8/1/11 1,570 1,607
Fannie Mae 5.50% 1/1/14 192 178/C/
Fannie Mae 9.50% 7/1/14 509 535
Fannie Mae 11.00% 12/1/15 422 454
Fannie Mae 12.50% 11/1/12 to 4/1/18 1,516 1,650
Fannie Mae 9.00% 11/1/21 1,119 1,166
Fannie Mae 6.00% 11/1/27 to 4/1/29 3,342 3,056
Fannie Mae 6.50% 11/1/10 to 8/1/29 37,228 35,474
Fannie Mae 7.00% 1/1/13 to 8/1/29 30,630 29,701
Freddie Mac 8.75% 2/1/01 to 10/1/01 242 245
Freddie Mac 8.25% 2/1/08 206 209
Freddie Mac 6.625% 9/15/09 27,600 26,815
Freddie Mac 9.75% 11/1/09 to 11/1/14 262 274
Freddie Mac 9.00% 2/1/02 to 1/1/21 1,645 1,709
Freddie Mac 8.50% 12/1/08 to 6/1/21 1,109 1,135
Freddie Mac 6.50% 4/1/29 32,092 30,257
Government National Mortgage Association 9.00% 7/15/04 to 9/15/22 2,452 2,534
Government National Mortgage Association 6.00% 5/15/14 to 3/15/29 8,687 7,924
Government National Mortgage Association 6.50% 7/15/28 to 3/15/29 4,863 4,563
--------
178,968
--------
</TABLE>
6
<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> <C> <C> <C>
Indexed Securities -- 2.3%
Government National Mortgage Association 6.125% 10/20/17 $ 436 $ 444/A/
Government National Mortgage Association 6.125% 12/20/21 1,559 1,586/A/
Government National Mortgage Association 6.375% 6/20/22 2,525 2,561/A/
Government National Mortgage Association 6.75% 7/20/22 1,854 1,873/A/
Government National Mortgage Association 6.75% 8/20/22 643 649/A/
--------
7,113
--------
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost -- $191,440) 186,081
---------------------------------------------------------------------------------------------------------------------------------
Yankee Bonds/D/ -- 3.0%
Corporate -- 2.1%
Petrozuata Finance, Inc. 7.63% 4/1/09 3,910 3,067/E/
Petrozuata Finance, Inc. 8.22% 4/1/17 5,000 3,488/E/
--------
6,555
--------
Foreign Governments -- 0.9%
Argentina Republic 0% 10/15/01 3,310 2,780/F/
--------
Total Yankee Bonds (Identified Cost -- $10,582) 9,335
---------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments -- 12.4%
Commercial Paper -- 1.5%
Houston Industrial Finance 6.30% 2/11/00 4,700 4,666
--------
Corporate Bonds and Notes -- 1.1%
US West Capital Funding Incorporated 6.20% 3/24/00 1,200 1,183
US West Capital Funding Incorporated 6.571% 6/15/00 2,200 2,199/A/
--------
3,382
--------
U. S. Government Agency -- 0.6%
Fannie Mae 0% 5/11/00 2,000 1,960/F,G/
--------
U. S. Government Agency Mortgage-Backed Securities -- N.M.
Freddie Mac 10.75% 7/1/00 2 2
--------
Options Purchased/H/ -- 0.1%
Lehman CMBS Investment Grade Index Call,
February 2000, Strike Price $100.00 166/I/ 207
--------
Repurchase Agreements -- 9.1%
Lehman Brothers, Inc.
3.75%, dated 12/31/99, to be repurchased at
$2,833 on 1/3/00 (Collateral: $3,145 Freddie Mac notes,
6.35%, due 2/10/14, value $2,889) 2,832 2,832
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Par/Shares Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements -- Continued
Merrill Lynch Government Securities, Inc.
4.10%, dated 12/31/99, to be repurchased at $25,009 on 1/3/00
(Collateral: $25,500 Freddie Mac medium-term notes,
6.71%, due 3/6/09, value $26,047) $ 25,000 $ 25,000
--------
27,832
--------
Total Short-Term Investments (Identified Cost -- $38,009) 38,049
---------------------------------------------------------------------------------------------------------------------------------
Total Investments -- 99.6% (Identified Cost -- $315,883) 305,902
Other Assets Less Liabilities -- 0.4% 1,381
--------
Net assets consisting of:
Accumulated paid-in-capital applicable to:
30,060 Primary Class shares outstanding $320,371
915 Navigator Class shares outstanding 9,326
Accumulated net realized gain/(loss) on investments, options and futures (13,788)
Unrealized appreciation/(depreciation) of investments, options and futures (8,626)
--------
NET ASSETS -- 100.0% $307,283
========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $9.92
=====
NAVIGATOR CLASS $9.92
=====
</TABLE>
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options Written/H/
Lehman CMBS Investment Grade Index Put, Strike Price $100.00 February 00 16,600 $ 166
------
Futures Contracts Written/H/
U.S. Treasury Bond Futures March 00 14 $ 46
U.S. Treasury Note Futures March 00 60 123
U.S. Treasury Note Futures March 00 711 1,020
------
$1,189
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Indexed Securities -- The rate of interest 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
December 31, 1999.
/B/ 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.
/C/ When-issued security -- Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
/D/ Yankee Bonds -- Dollar-denominated bonds issued in the U.S. by foreign
entities.
/E/ 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. These securities represent 2.1%
of net assets.
/F/ 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.
/G/ Collateral to cover futures contracts.
/H/ Options and futures are described in more detail in the notes to
financial statements.
/I/ This represents the actual number of contracts.
N.M. - Not meaningful.
See notes to financial statements.
8
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1999
(Amounts in Thousands)
Investment Grade Income Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- 34.5%
Aerospace/Defense -- 3.4%
Lockheed Martin Corporation 9.00% 1/15/22 $ 3,500 $ 3,689
Raytheon Company 6.40% 12/15/18 3,000 2,499
--------
6,188
--------
Automotive -- 1.1%
American Axle & Manufacturing Holdings, Inc. 9.75% 3/1/09 70 71
Ford Motor Company 7.70% 5/15/97 1,000 959
J. L. French Automotive Castings 11.50% 6/1/09 100 103/A/
Lear Corporation 7.96% 5/15/05 270 260/A/
Lear Corporation 8.11% 5/15/09 740 696/A/
--------
2,089
--------
Banking and Finance -- 4.4%
Associates Corporation, North America 8.15% 8/1/09 1,000 1,038
Dresdner Funding Trust I 8.151% 6/30/31 200 188/A/
General Motors Acceptance Corporation 0% 6/15/15 2,700 780/B/
IBJ Preferred Capital Corp. LLC 8.79% 12/29/49 1,560 1,474/A/
KBC Bank Funding Trust III 9.86% 11/29/49 200 207
SB Treasury Company LLC 9.40% 12/29/49 1,790 1,773/A/
Socgen Real Estate Co. LLC 7.64% 12/29/49 180 163/A/
Tokai Preferred Capital Company LLC 9.98% 12/29/49 480 475/A/
Transamerica Finance Corporation 7.25% 8/15/02 2,000 1,996
--------
8,094
--------
Building Materials -- 0.1%
American Standard Companies, Inc. 7.625% 2/15/10 25 23
American Standard Companies, Inc. 8.25% 6/1/09 37 36
Nortek Inc. 8.875% 8/1/08 100 95
--------
154
--------
Cable -- 2.2%
Century Communications Corp. 8.875% 1/15/07 39 38
Charter Communication Holdings LLC 8.625% 4/1/09 75 70
Cablevision Systems Corporation 8.125% 8/15/09 230 226
NTL Communications Corporation 0% 10/1/08 50 35/C/
TCI Communications, Inc. 6.375% 5/1/03 240 235
TCI Communications, Inc. 7.125% 2/15/28 540 497
TCI Communications, Inc. 7.875% 2/15/26 2,950 2,966
--------
4,067
--------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chemicals -- 1.2%
Dow Chemical Company 7.375% 11/1/29 $ 290 $ 277
Lyondell Chemical Company 9.875% 5/1/07 30 31
Rohm & Haas Company 7.85% 7/15/29 2,000 2,016
--------
2,324
--------
Construction and Machinery -- 0.1%
Terex Corporation 8.875% 4/1/08 132 125
--------
Diversified Services -- 1.0%
Loews Corporation 7.625% 6/1/23 2,000 1,834
--------
Electric -- 5.6%
Calpine Corporation 7.75% 4/15/09 49 46
Cleveland Electric Illumination Co. 7.88% 11/1/17 850 806/A/
CMS Energy Corporation 7.50% 1/15/09 100 90
Connecticut Light and Power Company 7.875% 6/1/01 1,750 1,767
Edison Mission Energy 7.73% 6/15/09 2,000 1,979/A/
Gulf States Utilities Corp. 8.25% 4/1/04 1,800 1,848
Niagara Mohawk Power Corporation 0% 7/1/10 720 537/C/
Niagara Mohawk Power Corporation 7.25% 10/1/02 476 475
Niagara Mohawk Power Corporation 7.75% 10/1/08 1,010 1,008
North Atlantic Energy Service Corporation 9.05% 6/1/02 564 572
System Energy Resources, Inc. 7.43% 1/15/11 684 662
The AES Corporation 9.50% 6/1/09 500 507
--------
10,297
--------
Entertainment -- 0.7%
Walt Disney Company 5.62% 12/1/08 1,550 1,370
--------
Environmental Services -- 0.8%
Safety-Kleen Corp. 9.25% 5/15/09 122 118
Waste Management, Inc. 7.375% 5/15/29 1,700 1,338/A/
--------
1,456
--------
Food, Beverage and Tobacco -- 2.8%
J. Seagram & Sons 6.40% 12/15/03 700 675
J. Seagram & Sons 6.80% 12/15/08 340 319
J. Seagram & Sons 7.50% 12/15/18 430 407
J. Seagram & Sons 7.60% 12/15/28 210 198
R.J. Reynolds Tobacco Holdings Co. 7.75% 5/15/06 1,280 1,131
R.J. Reynolds Tobacco Holdings Co. 7.875% 5/15/09 860 730
The Pepsi Bottling Group Incorporated 7.00% 3/1/29 1,800 1,628
--------
5,088
--------
</TABLE>
10
<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> <C> <C> <C>
Gaming -- 0.1%
Horseshoe Gaming Holdings, Inc. 8.625% 5/15/09 $ 69 $ 66
International Game Technology 8.375% 5/15/09 70 68
--------
134
--------
Gas and Pipeline Utilities -- 3.7%
CMS Panhandle Holding Company 6.125% 3/15/04 400 379
Conoco Inc. 6.95% 4/15/29 1,800 1,623
The Williams Companies, Inc. 7.625% 7/15/19 2,000 1,922
Union Oil Company of California 7.35% 6/15/09 3,000 2,919
--------
6,843
--------
Media -- 0.9%
AMFM Inc. 8.00% 11/1/08 63 63
EchoStar Communications Corporation 9.375% 2/1/09 62 62
News America Holdings Incorporated 8.25% 10/17/96 200 185
News America Holdings Incorporated 8.875% 4/26/23 500 527
News America Incorporated 7.625% 11/30/28 1,000 932
--------
1,769
--------
Retail -- 1.0%
Kmart Corporation 7.95% 2/1/23 2,000 1,820
--------
Telecommunications -- 3.4%
AT&T Corporation 9.65% 3/31/27 1,650 1,814
GTE Corporation 6.94% 4/15/28 1,700 1,540
Hyperion Telecommunications Inc. 12.00% 11/1/07 41 44
Lucent Technologies Incorporated 5.50% 11/15/08 1,860 1,647
McLeodUSA Incorporated 8.125% 2/15/09 60 56
NEXTLINK Communications Inc. 10.75% 6/1/09 136 140
Sprint Capital Corp. 6.90% 5/1/19 1,080 982
--------
6,223
--------
Transportation -- 2.0%
Consolidated Rail Corporation 7.875% 5/15/43 600 584
Norfolk Southern Corporation 7.70% 5/15/17 3,100 3,028
--------
3,612
--------
Total Corporate Bonds and Notes (Identified Cost -- $66,287) 63,487
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities -- 2.2%
Fixed-Rate Securities -- 0.6%
ANRC Auto Owner Trust 6.54% 11/15/02 $ 280 $ 280
Green Tree Financial Corporation 7.85% 7/15/04 801 799
--------
1,079
--------
Indexed Securities -- 1.6%
World Omni Automobile Lease Securitization 6.7125% 2/15/02 2,800 2,801/D/
SLM Student Loan Trust 1997-2 5.404% 10/25/05 182 181/D/
--------
2,982
--------
Total Asset-Backed Securities (Identified Cost -- $4,069) 4,061
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities -- 4.5%
Fixed-Rate Securities -- 4.2%
Asset Securitization Corporation 6.92% 2/14/29 1,108 1,078
CAPCO America Securitization Corporation 6.26% 9/15/08 800 737
Commercial Mortgage Asset Trust 6.64% 9/17/10 500 468
Nationslink Funding Corporation 5.805% 2/10/01 989 983
Nomura Asset Securities Corporation 8.15% 3/4/20 600 615
Nomura Asset Securities Corporation 6.59% 3/15/30 2,000 1,883
Nomura Asset Securities Corporation 7.12% 4/13/36 680 666
Oakdale Mall Trust 94-1 Class A 7.95% 5/1/06 1,000 1,003/A/
PSB Financial Corporation II 11.05% 12/1/15 322 340
--------
7,773
--------
Variable-Rate Securities/E/ -- 0.3%
Resolution Trust Corporation 6.896% 4/25/28 319 317/A/
Resolution Trust Corporation 7.712% 9/25/29 178 180
--------
497
--------
Total Mortgage-Backed Securities (Identified Cost -- $8,517) 8,270
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 7.4%
Fixed-Rate Securities -- 0.9%
United States Treasury Bonds 8.00% 11/15/21 1,370 1,555
--------
Indexed Securities/F/ -- 6.5%
United States Treasury Inflation-
Indexed Security 3.625% 1/15/08 to 4/15/28 10,217 9,381
United States Treasury Inflation-
Indexed Security 3.875% 4/15/29 2,763 2,578
--------
11,959
--------
Total U.S. Government and Agency Obligations (Identified Cost -- $14,464) 13,514
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<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> <C> <C> <C>
U.S. Government Agency Mortgage-Backed Securities -- 28.6%
Fixed-Rate Securities -- 27.0%
Fannie Mae 8.00% 4/25/06 to 3/1/10 $ 825 $ 835
Fannie Mae 6.00% 9/1/25 to 4/1/29 2,052 1,889
Fannie Mae 6.50% 8/1/28 to 4/1/29 15,240 14,358
Freddie Mac 8.75% 10/1/01 to 10/1/08 294 300
Freddie Mac 8.50% 2/1/04 to 11/1/09 276 281
Freddie Mac 6.00% 2/1/14 1,865 1,734
Freddie Mac 7.50% 6/1/24 to 9/1/24 1,240 1,232
Freddie Mac 8.00% 7/1/26 620 627
Freddie Mac 7.00% 8/1/24 to 4/1/29 7,568 7,353
Freddie Mac 6.50% 1/1/30 3,200 3,017/G/
Freddie Mac 7.00% 1/1/30 1,300 1,258/G/
Government National Mortgage Association 9.00% 7/15/16 to 6/15/17 673 709
Government National Mortgage Association 7.00% 2/15/23 to 8/15/25 6,794 6,607
Government National Mortgage Association 8.00% 12/15/26 996 1,006
Government National Mortgage Association 7.50% 2/15/23 to 7/15/28 5,542 5,498
Government National Mortgage Association 6.00% 4/15/14 to 3/15/29 3,262 3,008
--------
49,712
--------
Indexed Securities/D/ -- 1.3%
Government National Mortgage Association 6.125% 10/20/22 323 328
Government National Mortgage Association 6.375% 6/20/23 2,113 2,139
--------
2,467
--------
Variable-Rate Securities/E/ -- 0.3%
Freddie Mac 6.917% 9/1/24 441 452
--------
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost -- $54,429) 52,631
- ---------------------------------------------------------------------------------------------------------------------------------
Yankee Bonds/H/ -- 20.5%
Corporate -- 15.6%
Imperial Tobacco Group plc 7.125% 4/1/09 1,820 1,636
Korea Development Bank 6.75% 12/1/05 1,020 961
PDVSA Finance LTD 1999-I 9.75% 2/15/10 4,000 3,763/A/
PDVSA Finance LTD 1999-K 9.95% 2/15/20 800 732/A/
Petroleos Mexicanos 9.50% 9/15/27 1,340 1,343
Petroliam Nasional Berhad 7.625% 10/15/26 450 400
Pohang Iron & Steel Company Ltd. 7.375% 5/15/05 3,000 2,899
Rothmans Nederland Holdings BV 6.875% 5/6/08 700 631
Royal Sun Alliance Insurance Group PLC 8.95% 10/15/29 2,750 2,749/A/
Sanwa Finance Aruba AEC 8.35% 7/15/09 1,860 1,874
Tata Electric Company 8.50% 8/19/17 2,000 1,722/A/
Telefonica de Argentina 11.875% 11/1/04 4,000 4,080
Teleglobe Canada Inc 7.20% 7/20/09 2,000 1,879
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Bonds -- Continued
Worldwide Fiber Inc. 12.00% 8/1/09 $ 80 $ 83
YPF Sociedad Anonima 7.50% 10/26/02 703 693/A/
YPF Sociedad Anonima 9.125% 2/24/09 3,000 3,121
ZSC Specialty Chemicals PLC 11.00% 7/1/09 129 134/A/
--------
28,700
--------
Foreign Governments -- 4.9%
Province of Manitoba 9.50% 9/15/18 1,080 1,299
Republic of Argentina 11.75% 4/7/09 1,025 1,025
Republic of Argentina 11.375% 1/30/17 730 725
Republic of Argentina 9.75% 9/19/27 341 306
Republic of Colombia 9.75% 4/23/09 460 441
Republic of Panama 6.50% 7/17/16 507 399/I/
Republic of Panama 9.375% 4/1/29 200 191
Republic of Peru 4.50% 3/7/17 750 519/A/
Republic of Philippines 9.875% 1/15/19 360 354
Republic of Philippines 9.50% 10/21/24 550 557
United Mexican States 10.375% 2/17/09 410 438
United Mexican States 11.50% 5/15/26 2,280 2,707
--------
8,961
--------
Total Yankee Bonds (Identified Cost -- $37,988) 37,661
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stocks and Equity Interests -- 0.3%
News Corporation Limited (Identified Cost -- $650) 10 shs 591
- ---------------------------------------------------------------------------------------------------------------------------------
Warrants -- N.M.
Republic of Argentina (Identified Cost -- $18) 1 wt 1
- ---------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments -- 2.9%
Corporate Bonds and Notes -- 1.2%
TRW Incorporated 6.22% 2/15/00 $ 1,000 992
US West Capital Funding Incorporated 6.571% 6/15/00 1,100 1,100/A,D/
--------
2,092
--------
U.S. Government Agency -- 0.5%
Fannie Mae 0% 5/11/00 1,000 980/B,J/
--------
Options Purchased/K/ -- N.M.
Lehman CMBS Investment Grade Index Call,
February 2000, Strike Price $100.00 46/L/ 57
--------
</TABLE>
14
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Par/Shares Value
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements -- 1.2%
Lehman Brothers, Inc.
3.75%, dated 12/31/99, to be repurchased at $1,102 on
1/3/00 (Collateral: $1,115 Fannie Mae floating-rate notes,
6.75%, due 11/15/09, value $1,124) $ 1,102 $ 1,102
Merrill Lynch Government Securities, Inc.
4.10%, dated 12/31/99, to be repurchased at $1,000 on
1/3/00 (Collateral: $1,065 Fannie Mae medium-term notes,
6.375%, due 6/15/09, value $1,023) 1,000 1,000
--------
2,102
--------
Total Short-Term Investments (Identified Cost -- $5,220) 5,231
--------------------------------------------------------------------------------------------------------------------------------
Total Investments -- 100.9% (Identified Cost -- $191,642) 185,447
Other Assets Less Liabilities -- (0.9)% (1,594)
--------
Net assets consisting of:
Accumulated paid in capital applicable to:
18,766 Primary Class shares outstanding $195,216
24 Navigator Class shares outstanding 252
Undistributed net investment income 90
Accumulated net realized gain/(loss) on investments, options and futures (5,838)
Unrealized appreciation/(depreciation) of investments, options and futures (5,867)
--------
Net assets -- 100.0% $183,853
========
Net asset value per share:
Primary Class $9.78
=====
Navigator Class $9.79
=====
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options Written/K/
Lehman CMBS Investment Grade Index Put, Strike Price $100.00 February 00 4,600 $ 46
----
Futures Contracts Purchased/K/
U.S. Treasury Bond Futures March 00 6 $(32)
----
Futures Contracts Written/K/
U.S. Treasury Note Futures March 00 30 $ 66
U.S. Treasury Note Futures March 00 169 248
----
$314
----
</TABLE>
- ------------------------------------------------------------------------------
/A/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. These securities represent 11.9% of net
assets.
/B/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.
/C/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.
/D/Indexed Securities -- The rate of interest 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
December 31, 1999.
/E/The coupon rates shown on variable rate securities are the rates at
December 31, 1999. These rates vary with the weighted average coupon of
the underlying loans.
/F/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.
/G/When-issued security -- Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
/H/Yankee Bonds -- Dollar-denominated bonds issued in the U.S. by foreign
entities.
/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/Collateral to cover futures contracts.
/K/Options and futures are described in more detail in the notes to
financial statements.
/L/This represents the actual number of contracts.
N.M. - Not meaningful.
See notes to financial statements.
16
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
High Yield Portfolio
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- 75.1%
Automotive -- 4.6%
American Axle & Manufacturing Incorporated 9.75% 3/1/09 $ 4,500 $ 4,545
Cambridge Industries Incorporated 10.25% 7/15/07 1,500 615
Federal Mogul Corporation 7.50% 1/15/09 4,000 3,627
Hayes Lemmerz International Inc. 8.25% 12/15/08 2,000 1,840
J.L. French Automotive Castings 11.50% 6/1/09 2,400 2,466
Tenneco Automotive Inc. 11.625% 10/15/09 4,040 4,121/A/
--------
17,214
--------
Building Materials -- 2.5%
American Architectural Products Corp. 11.75% 12/1/07 4,500 1,305
American Standard Companies, Inc. 7.625% 2/15/10 4,000 3,710
Falcon Building Products, Inc. 0% 6/15/07 2,500 1,862/B/
Nortek Inc. 8.875% 8/1/08 2,790 2,657
--------
9,534
--------
Cable -- 8.0%
Adelphia Communications Corporation 7.75% 1/15/09 4,000 3,620
Adelphia Communications Corporation 7.875% 5/1/09 3,629 3,266
Charter Communication Holdings LLC 8.625% 4/1/09 3,571 3,326
CSC Holdings Inc. 8.125% 7/15/09 4,500 4,556
Insight Midwest L.P. 9.75% 10/1/09 2,000 2,075/A/
Mediacom, LLC 7.875% 2/15/11 4,000 3,540
NTL Incorporated 0% 4/1/08 2,000 1,395/B/
NTL Communications Corporation 0% 10/1/08 8,000 5,600/B/
UnitedGlobalCom Inc. 0% 2/15/08 4,300 2,720/B/
--------
30,098
--------
Chemicals -- 3.5%
Georgia Gulf Corporation 10.375% 11/1/07 2,500 2,612/A/
Huntsman Corporation 9.50% 7/1/07 4,000 3,820/A/
Huntsman ICI Chemicals LLC 0% 12/31/09 8,750 2,680/A,C/
Lyondell Chemical Company 9.625% 5/1/07 250 256
Lyondell Chemical Company 9.875% 5/1/07 3,625 3,761
--------
13,129
--------
Construction and Machinery -- 3.8%
Better Minerals and Aggregates Co. 13.00% 9/15/09 4,000 4,040/A/
Chatwins Group, Inc. 13.00% 5/1/03 1,500 1,444
Terex Corporation 8.875% 4/1/08 3,000 2,850
Woods Equipment Company 12.00% 7/15/09 6,500 5,980
--------
14,314
--------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer Products -- 1.9%
Decora Industries Incorporated 11.00% 5/1/05 $ 2,500 $ 2,012
United Industries Corporation 9.875% 4/1/09 500 458
Weight Watchers International Inc. 13.00% 10/1/09 4,500 4,573/A/
--------
7,043
--------
Electric -- 4.2%
Calpine Corporation 7.75% 4/15/09 4,000 3,800
CMS Energy Corporation 6.75% 1/15/04 1,000 930
CMS Energy Corporation 7.50% 1/15/09 5,250 4,747
The AES Corporation 9.50% 6/1/09 6,250 6,336
--------
15,813
--------
Energy -- 2.7%
Forest Oil Corporation 10.50% 1/15/06 1,250 1,269
Ocean Energy Incorporated 8.375% 7/1/08 4,000 3,860
P&L Coal Holdings Corp. 9.625% 5/15/08 4,084 4,043
Plains Resources Incorporated 10.25% 3/15/06 1,000 975
--------
10,147
--------
Entertainment -- 1.2%
AMC Entertainment Incorporated 9.50% 2/1/11 2,000 1,765
Booth Creek Ski Holdings Incorporated 12.50% 3/15/07 3,750 2,700
--------
4,465
--------
Environmental Services -- 1.9%
Allied Waste North America Incorporated 7.875% 1/1/09 4,500 3,993
Allied Waste North America Incorporated 10.00% 8/1/09 1,250 1,125/A/
Safety-Kleen Corp. 9.25% 5/15/09 2,100 2,032
--------
7,150
--------
Financial Services -- 2.5%
Sovereign Bancorp, Inc. 10.50% 11/15/06 5,325 5,432
Willis Corroon Corporation 9.00% 2/1/09 4,750 3,966
--------
9,398
--------
Food -- 0.8%
International Fast Foods Corporation 11.00% 10/31/07 6,884 3,098/A,D,E/
--------
</TABLE>
18
<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> <C> <C> <C>
Gaming -- 2.4%
Harrahs Entertainment Inc. 7.875% 12/15/05 $ 1,500 $ 1,444
Hollywood Park Inc. 9.25% 2/15/07 2,000 1,985
Hollywood Park Inc. 9.50% 8/1/07 1,000 995/A/
International Game Technology 8.375% 5/15/09 1,700 1,645
Isle of Capri Casinos Inc. 8.75% 4/15/09 1,000 922
Manning Real Estate Associates LLC 15.00% 2/28/01 767 0/D,F,G,H/
Maritime Gaming L P 15.00% 2/28/01 1,151 0/D,F,G,H/
Mohegan Tribal Gaming Authority 8.75% 1/1/09 2,000 1,995
--------
8,986
--------
Home Construction -- 0.6%
Fortress Group 13.75% 5/15/03 4,250 2,125
--------
Industrial -- 2.9%
Blount International Inc. 13.00% 8/1/09 4,500 4,770/A/
Holley Performance Products 12.25% 9/15/07 4,500 4,297/A/
United Rentals Incorporated 9.25% 1/15/09 2,000 1,930
--------
10,997
--------
Lodging -- 1.5%
HMH Properties Incorporated 8.45% 12/1/08 6,000 5,580
--------
Media -- 4.8%
Brill Media Company, LLC 12.00% 12/15/07 3,000 1,740/B/
Chancellor Media Corporation 8.00% 11/1/08 2,250 2,250
Diva Systems Corporation 0% 3/1/08 2,750 1,004/B/
EchoStar Communications Corporation 9.375% 2/1/09 4,500 4,511
Garden State Newspaper 8.625% 7/1/11 2,000 1,822
Mentus Media Corporation 12.00% 2/1/03 6,726 673/D/
Source Media Inc. 12.00% 11/1/04 2,500 1,487/D/
TV Guide Incorporated 8.125% 3/1/09 4,500 4,489
--------
17,976
--------
Metals -- 0.7%
AK Steel Corporation 7.875% 2/15/09 2,850 2,715
--------
Packaging -- 0.8%
Packaging Corporation of America 9.625% 4/1/09 3,000 3,094
--------
Retail -- 2.0%
Pour Le Bebe, Inc. 20.00% 6/30/99 3,461 563/G,H/
Pour Le Bebe, Inc. 13.00% 8/9/01 1,964 245/G,H/
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail -- Continued
Relax the Back Corporation 11.00% 5/22/03 $ 4,000 $ 3,400/F,H/
Relax the Back Corporation 13.00% 5/22/03 4,537 3,403/D,F,H/
--------
7,611
--------
Supermarkets -- 0.6%
Big V Supermarkets, Incorporated 11.00% 2/15/04 2,500 2,425
--------
Technology -- 0.6%
COMFORCE Corporation 12.00% 12/1/07 3,200 2,112
--------
Telecommunications -- 18.6%
Adelphia Business Solutions, Inc. 12.00% 11/1/07 4,500 4,747
AirGate PCS, Inc. 0% 10/1/09 4,276 2,395/B/
Focal Communications Corporation 0% 2/15/08 1,500 983/B/
Global Crossing Limited 9.50% 11/15/09 3,000 2,985/A/
Hermes Europe RailTel 10.375% 1/15/09 4,000 3,960
Intermedia Communications, Inc. 0% 7/15/07 6,750 4,961/B/
Level 3 Communications Incorporated 0% 12/1/08 2,250 1,361/B/
McLeodUSA Incorporated 8.375% 3/15/08 1,500 1,425
McLeodUSA Incorporated 8.125% 2/15/09 1,000 938
Metromedia Fiber Network, Inc. 10.00% 12/15/09 3,750 3,863
Nextel Communications, Inc. 9.375% 11/15/09 4,500 4,432/A/
NEXTLINK Communications Inc. 10.75% 6/1/09 4,000 4,120
Omnipoint Corporation 11.50% 9/15/09 2,000 2,160/A/
Orion Network Systems, Inc. 11.25% 1/15/07 6,000 4,530
Primus Telephone Group, Incorporated 12.75% 10/15/09 4,500 4,669/A/
PSINet Inc. 10.00% 2/15/05 4,000 3,970
PSINet Inc. 10.50% 12/1/06 500 506/A/
US Unwired Inc. 0% 11/1/09 2,489 1,469/A,B/
Verio Inc. 10.375% 4/1/05 2,000 2,020
Verio Inc. 10.625% 11/15/09 2,000 2,060/A/
VoiceStream Wireless Corporation 10.375% 11/15/09 2,150 2,214/A/
VoiceStream Wireless Corporation 0% 11/15/09 1,590 962/A,B/
Williams Communications Group, Inc. 10.875% 10/1/09 6,000 6,277
Winstar Equipment II Corp. 12.50% 3/15/04 2,500 2,688
--------
69,695
--------
Textiles -- 0.7%
Westpoint Stevens Incorporated 7.875% 6/15/05 3,000 2,730
--------
Transportation -- 1.3%
Avis RentACar Incorporated 11.00% 5/1/09 4,500 4,748
--------
Total Corporate Bonds and Notes (Identified Cost -- $315,628) 282,197
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<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> <C> <C> <C>
Yankee Bonds/I/ -- 9.0%
Airlines -- 0.8%
Canadian Airlines Corporation 12.25% 8/1/06 $ 5,350 $ 3,050
--------
Cable -- 1.6%
Rogers Cablesystems Limited 10.00% 12/1/07 1,000 1,062
Rogers Communications, Inc. 8.875% 7/15/07 2,500 2,519
Telewest PLC 0% 10/1/07 2,500 2,331/F/
--------
5,912
--------
Chemicals -- 1.3%
ZSC Specialty Chemicals PLC 11.00% 7/1/09 4,750 4,952
--------
Entertainment -- 0.9%
V2 Music Holdings PLC 0% 4/15/08 7,000 1,409/A,B/
V2 Music Holdings PLC 0% 4/15/08 6,000/J/ 1,950/A,B/
--------
3,359
--------
Finance -- 0.4%
Petrozuata Finance Inc. 8.22% 4/1/17 2,000 1,395
--------
Media -- 1.0%
United Pan Europe Communications N.V. 10.875% 8/1/09 3,500 3,587
--------
Real Estate Investment Trusts -- 0.6%
Trizec Finance Corporation Ltd. 10.875% 10/15/05 2,340 2,358
--------
Telecommunications -- 2.4%
Nuevo Grupo Isuacell S.A. de C.V. 14.25% 12/1/06 3,500 3,631/A/
PTC International Finance 0% 7/1/07 1,700 1,131/B/
Rogers Cantel Mobile Communications Inc. 8.30% 10/1/07 4,500 4,477
--------
9,239
--------
Total Yankee Bonds (Identified Cost -- $41,717) 33,852
-------------------------------------------------------------------------------------------------------------------------------
Common Stocks -- 2.5%
Food -- N.M.
International Fast Foods Corporation 51 shs 36/K/
--------
Pharmaceuticals -- 0.1%
Unigene Labs, Inc. 516 294/K/
--------
Telecommunications -- 2.4%
Global Crossing Limited 185 9,255/K/
--------
Total Common Stocks (Identified Cost -- $2,074) 9,585
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Rate Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stock -- 4.9%
Cable -- 1.2%
News Corporation Limited 5.00% 75 shs $ 4,430
--------
Construction and Machinery -- 0.5%
Clark Material Handling Company 12.00% 7 1,582
Morris Material Handling 12.00% 3 316
--------
1,898
--------
Industrial -- 0.9%
High Voltage Engineering Corporation 14.25% 5 3,478/A,D/
--------
Media -- 2.3%
Paxson Communications Corporation 12.25% 2 1,903
Paxson Communications Corporation 13.25% 1 5,471
Source Media, Inc. 13.50% 120 1,204/A,D/
--------
8,578
--------
Retail -- N.M.
Relax the Back Corporation 10.00% 1,702 0/D,H/
--------
Technology -- N.M.
Viasystems Group Inc. 10.75% N.M. 1/D/
--------
Telecommunications -- N.M.
IXC Communications Incorporated 14.00% N.M. 3/A,D/
--------
Total Preferred Stock (Identified Cost -- $33,026) 18,388
-------------------------------------------------------------------------------------------------------------------------------
Warrants/K/ -- 0.5%
Diva Systems Corporation 8 wts 66
Firstworld Communications Incorporated 4 0
Global Telesystems Holdings Ltd. 10 0
Mentus Media Corporation 16 0
MMH Holdings Incorporated N.M. 0
Pegasus Communications Corporation 4 266
Primus Telecommunications Group 3 60
Relax the Back Corporation 654 0/H/
Relax the Back Corporation 653 0/H/
Source Media Incorporated 56 1,034
Splitrock Services Incorporated 2 222
Star Choice Communications 93 366
Unigene Labs, Inc. -- C 125 0
Unigene Labs, Inc. -- D 125 0
</TABLE>
22
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Warrants/K/ -- Continued
V2 Music Holdings PLC 7 wts $ 0
V2 Music Holdings PLC 6 0
--------
Total Warrants (Identified Cost -- $869) 2,014
-------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 6.3%
Lehman Brothers, Inc.
3.75%, dated 12/31/99, to be repurchased at $3,525 on 1/3/00
(Collateral: $3,595 Sallie Mae floating-rate notes,
6.093%, due 2/17/00, value $3,670) $ 3,524 3,524
Merrill Lynch Government Securities, Inc.
4.10%, dated 12/31/99, to be repurchased at $20,007 on 1/3/00
(Collateral: $21,705 Fannie Mae medium-term notes,
7.125%, due 12/3/12, value $20,523) 20,000 20,000
--------
Total Repurchase Agreements (Identified Cost -- $23,524) 23,524
-------------------------------------------------------------------------------------------------------------------------------
Total Investments -- 98.3% (Identified Cost -- $416,838) 369,560
Other Assets Less Liabilities -- 1.7% 6,209
--------
Net assets consisting of:
Accumulated paid-in capital applicable to:
25,063 Primary Class shares outstanding $391,515
45 Navigator Class shares outstanding 713
Under/(over) distributed net investment income (690)
Accumulated net realized gain/(loss) on investments 31,922
Unrealized appreciation/(depreciation) of investments (47,691)
--------
Net assets -- 100.0% $375,769
========
Net asset value per share:
Primary Class $14.97
======
Navigator Class $14.97
======
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Rule 144a Security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional investors. These securities represent 18.5% of
net assets.
/B/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.
/C/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.
/D/Payment-in-kind ("PIK") security -- A bond or preferred stock in which
interest or dividends during the initial few years is paid in additional
bonds or preferred stock rather than in cash.
/E/Convertible bond -- Bond may be converted into common stock of the company.
/F/Private placement.
/G/Bond is in default as of December 31, 1999.
/H/Illiquid security valued at fair value under procedures adopted by the Board
of Directors.
/I/Yankee Bonds -- Dollar-denominated bonds issued in the U.S. by foreign
entities.
/J/Bond is denominated in British pounds.
/K/Non-income producing.
N.M. - Not meaningful.
See notes to financial statements.
23
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 12/31/99
------------------------------------------------------------
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest $ 21,376 $ 12,926 $ 29,946
Dividends 31 32 3,710
--------- --------- ---------
Total income 21,407 12,958 33,656
--------- --------- ---------
Expenses:
Management fee 1,875 1,098 2,799
Distribution and service fees 1,663 914 2,150
Transfer agent and shareholder servicing expense 141 109 216
Audit and legal fees 58 35 172
Custodian fee 164 161 150
Directors' fees 10 5 10
Registration fees 42 51 80
Reports to shareholders 29 18 58
Other expenses 30 5 3
--------- --------- ---------
4,012 2,396 5,638
Less fees waived (648) (567) --
--------- --------- ---------
Total expenses, net of waivers 3,364 1,829 5,638
--------- --------- ---------
NET INVESTMENT INCOME 18,043 11,129 28,018
--------- --------- ---------
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments (9,068) (4,803) 70,521
Options 210 249 --
Futures 1,191 (1,127) --
--------- --------- ---------
(7,667) (5,681) 70,521
--------- --------- ---------
Change in unrealized appreciation/(depreciation)
of investments, options and futures (12,058) (6,779) (59,732)
--------- --------- ---------
NET REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS (19,725) (12,460) 10,789
----------------------------------------------------------------------------------------------------------------------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS $ (1,682) $ (1,331) $ 38,807
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
24
<PAGE>
Statements of Changes in Net Assets
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
---------------------- ---------------------- -----------------------
Years Ended Years Ended Years Ended
12/31/99 12/31/98 12/31/99 12/31/98 12/31/99 12/31/98
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in Net Assets:
Net investment income $ 18,043 $ 17,751 $ 11,129 $ 8,128 $ 28,018 $ 38,145
Net realized gain/(loss) on investments,
options and futures (7,667) 4,714 (5,681) 3,805 70,521 (38,643)
Change in unrealized appreciation/(depreciation)
of investments, options and futures (12,058) (1,083) (6,779) (2,304) (59,732) (13,340)
------------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations (1,682) 21,382 (1,331) 9,629 38,807 (13,838)
Distributions to shareholders:
From net investment income:
Primary Class (17,554) (16,959) (11,113) (8,112) (28,724) (38,214)
Navigator Class (489) (462) (16) (16) (43) (10)
From net realized gain on investments -- -- (569) (2,851) -- (359)
In excess of net investment income:
Primary Class -- (323) -- -- -- --
Navigator Class -- (7) -- -- -- --
Change in net assets from Fund share transactions:
Primary Class (35,260) 48,243 27,497 48,378 (68,840) 104,134
Navigator Class 2,199 (671) 1 4 622 91
------------------------------------------------------------------------------------------------------------------------------
Change in net assets (52,786) 51,203 14,469 47,032 (58,178) 51,804
Net Assets:
Beginning of year 360,069 308,866 169,384 122,352 433,947 382,143
------------------------------------------------------------------------------------------------------------------------------
End of year $ 307,283 $ 360,069 $ 183,853 $ 169,384 $ 375,769 $ 433,947
------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income $ -- $ -- $ 90 $ 72 $ (690) $ 59
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
25
<PAGE>
Financial Highlights
Legg Mason Income Trust, Inc.
Contained below is per share operating performance data for a Navigator Class
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
---------------------------------------- ------------------------------------------
Net Realized
and Unrealized From
Net Asset Net Gain (loss) on Total From In Excess Net
Value, Investment Investments, From Net of Net Realized
Beginning Income Options Investment Investment Investment Gain on
of Year (Loss) and Futures Operations Income Income Investments
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Intermediate-Term Portfolio
Years Ended Dec. 31,
1999 $10.51 .59/A/ $ (.59) $ -- $ (.59) $ -- $ --
1998 10.40 .61/A/ .11 .72 (.60) (.01) --
1997 10.31 .65/A/ .09 .74 (.64) (.01) --
1996 10.47 .67/A/ (.16) .51 (.66) (.01) --
1995 9.72 .62/A/ .75 1.37 (.62) -- --
Investment Grade Income Portfolio
Years Ended Dec. 31,
1999 $10.52 .66/B/ $ (.70) $ (.04) $ (.66) $ -- $(.03)
1998 10.59 .66/B/ .12 .78 (.66) -- (.19)
1997 10.22 .71/B/ .37 1.08 (.71) -- --
1996 10.44 .70/B/ (.22) .48 (.70) -- --
1995/C/ 10.32 .03/B/ .12 .15 (.03) -- --
High Yield Portfolio
Period From March 8
to Dec. 31, 1999 $15.98 $.89 $ (.92) $ (.03) $ (.98) $ -- $ --
Period Ended
January 28, 1999 $14.67 $.08 $ .72 $ .80 $ (.04) $ -- $ --
Period Ended
Dec. 31, 1998/F/ $16.85 $.86 $(1.98) $(1.12) $(1.05) $ -- $(.01)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Distributions Ratios/Supplemental
------------- ---------------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income (loss) Portfolio End of
Total End of Total to Average to Average Turnover Year
Distributions Year Return Net Assets Net Assets Rate (in thousands)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Intermediate-Term Portfolio
Years Ended Dec. 31,
1999 $ (.59) $ 9.92 .04% .47%/A/ 5.84%/A/ 979% $9,076
1998 (.61) 10.51 7.16% .46%/A/ 5.85%/A/ 356% 7,340
1997 (.65) 10.40 7.45% .45%/A/ 6.40%/A/ 252% 7,914
1996 (.67) 10.31 5.09% .42%/A/ 6.47%/A/ 354% 8,082
1995 (.62) 10.47 14.45% .44%/A/ 6.08%/A/ 290% 4,184
Investment Grade Income Portfolio
Years Ended Dec. 31,
1999 $ (.69) $ 9.79 (.33)% .46%/B/ 6.59%/B/ 145% $ 238
1998 (.85) 10.52 7.57% .45%/B/ 6.24%/B/ 279% 255
1997 (.71) 10.59 10.95% .43%/B/ 6.87%/B/ 259% 252
1996 (.70) 10.22 4.88% .41%/B/ 6.99%/B/ 383% 243
1995/C/ (.03) 10.44 1.42%/D/ .40%/B,E/ 6.73%/B,E/ 221%/E/ 249
High Yield Portfolio
Period From March 8
to Dec. 31, 1999 $ (.98) $14.97 (.20)%/D/ .82%/E/ 7.19%/E/ 78%/E/ $ 673
Period Ended
January 28, 1999 $ (.04) $15.43 5.47%/D/ .81%/E/ 7.17%/E/ 116%/E/ $ 0
Period Ended
Dec. 31, 1998/F/ $(1.06) $14.67 (6.91)%/D/ .79%/E/ 8.68%/E/ 107%/E/ $ 65
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ 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: 1999, .66%; 1998, .65%; 1997, .66%; 1996,
.69%; and 1995, .74%.
/B/ 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:
1999, .77%; 1998, .80%; 1997, .82%; 1996, .88%; and 1995, .82%.
/C/ For the period December 1, 1995 (commencement of sale of Navigator Class
shares) to December 31, 1995.
/D/ Not annualized.
/E/ Annualized.
/F/ For the period May 5, 1998 (commencement of sale of Navigator Class
shares) to December 31, 1998.
See notes to financial statements.
26
<PAGE>
Notes to Financial Statements
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
----------------------------------------------------------------------------
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. Information about the
Navigator Class is contained in a separate report to its shareholders. 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
Securities owned by Government Intermediate, Investment Grade and High
Yield for which market quotations are readily available are valued at current
market value. In determining fair value, the Board and management consider
all relevant qualitative and quantitative information available. These
factors are subject to change over time and are reviewed periodically. The
values assigned to fair value investments are based on available information
and do not necessarily represent amounts that might ultimately be realized,
since such amounts depend on future developments inherent in long-term
investments. Further, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have
been used had a ready market of the investments existed, and the differences
could be material. At December 31, 1999, $7,611 or 2.0% of the High Yield
Portfolio's net assets were valued by management in accordance with the
procedures adopted by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost by each Fund.
With respect to High Yield, where a security is traded on more than one
market, which may include foreign markets, the securities are generally
valued on the market considered by the Fund's adviser to be the primary
market. The Fund will value its foreign securities in U.S. dollars on the
basis of the then-prevailing exchange rates.
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 for financial reporting and federal income tax purposes.
Dividend income and distributions to shareholders are allocated at the class
level and are recorded on the ex-dividend date. Dividends from net investment
income will be declared daily and paid monthly for each Fund except High
Yield, which will declare and pay dividends monthly. Net capital gain
distributions, which are calculated at
27
<PAGE>
----------------------------------------------------------------------------
a Fund level, are declared and paid after the end of the tax year in which
the gain is realized. Distributions are determined in accordance with federal
income tax regulations, which may differ from those determined in accordance
with generally accepted accounting principles; accordingly, periodic
reclassifications are made within the Funds' capital accounts to reflect
income and gains available for distribution under federal income tax
regulations. At December 31, 1999, accrued dividends payable were as follows:
Government Intermediate, $84; Investment Grade, $47; High Yield, $0; and
Government Money Market, $27. There were no capital gain distributions
payable at December 31, 1999.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis
for both financial reporting and federal income tax purposes. At December 31,
1999, receivables for securities sold and payables for securities purchased
for each Fund were as follows:
<TABLE>
<CAPTION>
Receivable for Payable for
Securities Sold Securities Purchased
-------------------------------------------------------------------
<S> <C> <C>
Government Intermediate $ -- $ 180
Investment Grade 185 4,354
High Yield -- --
</TABLE>
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 substantially all of its taxable income to its shareholders.
Use of Estimates
Preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
2. Investment Transactions:
For the year ended December 31, 1999, 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> <C> <C> <C>
Government Intermediate $2,983,134 $ 65,955 $3,012,263 $105,755
Investment Grade 188,488 102,773 220,261 40,924
High Yield -- 335,516 2,810 405,101
</TABLE>
28
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
----------------------------------------------------------------------------
At December 31, 1999, 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>
Net Appreciation/
Cost Appreciation Depreciation (Depreciation)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Intermediate $316,294 $ 250 $(10,642) $(10,392)
Investment Grade 191,765 1,320 (7,638) (6,318)
High Yield 416,883 15,413 (62,736) (47,323)
</TABLE>
Unused capital loss carryforwards for federal income tax purposes at
December 31, 1999, were as follows: Government Intermediate, $4,791 which
expires 2002, $699 which expires 2003, and $4,880 which expires 2007;
Investment Grade, $5,433 which expires 2007; and Government Money Market, $2
which expires 2006. High Yield has 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 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.
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>
<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 a Realize a gain or loss depending on whether the proceeds from the
closing sale transaction closing sale 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.
------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------------------
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 a Realize a gain or loss without regard to any unrealized gain or loss
closing purchase transaction on the 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
by the option purchaser proceeds of that 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
by the option purchaser of the security that the Fund purchased when the option was exercised.
------------------------------------------------------------------------------------------------------------
</TABLE>
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 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.
Activity in call and put options during the period was as follows:
<TABLE>
<CAPTION>
Calls Puts
---------------------------------------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1998 -- $ -- 182 $ 127
Options written 1,311 785 17,263 568
Options closed (1,250) (759) (701) (450)
Options expired (61) (26) (68) (26)
Options exercised -- -- (76) (53)
- ------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1999 -- $ -- 16,600 $ 166
- ------------------------------------------------------------------------------------------------
<CAPTION>
Calls Puts
---------------------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1998 17 $ 16 48 $ 76
Options written 3,360 451 4,816 194
Options closed (463) (350) (201) (204)
Options expired (874) (55) (21) (6)
Options exercised (2,040) (62) (42) (14)
- ------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1999 -- $ -- 4,600 $ 46
- ------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
----------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit
with the broker cash or cash equivalents in an amount 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 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
December 31, 1999, are listed at the end of U.S. Government Intermediate's
and Investment Grade's respective statements 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
forward 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.
At December 31, 1999, High Yield had no open forward currency exchange
contracts.
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
31
<PAGE>
which each Fund pays a fee, computed daily and payable monthly, at annual
rates of each Fund's average daily net assets listed below.
LMFA has voluntarily agreed to waive its fees in any month (exclusive of
taxes, interest, brokerage and extraordinary expenses) as shown in the
following chart:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 At December 31, 1999
----------------- --------------------
Management Management
Management Expense Expense Limitation Fees Fees
Fund Fee Limitation Expiration Date Waived Payable
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Intermediate May 1, 2000, or until net $648 $ 96
Primary 0.55% 1.00% assets reach $400 million
Navigator 0.55% 0.50%
Investment Grade May 1, 2000, or until net 567 45
Primary 0.60% 1.00% assets reach $250 million
Navigator 0.60% 0.50%
High Yield -- -- 211
Primary 0.65% None
Navigator 0.65% None
</TABLE>
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: 40% of the management fee received by LMFA 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
an annual distribution fee and an annual service fee based on each Fund's
Primary Class's average daily net assets, computed daily and payable monthly
as follows:
<TABLE>
<CAPTION>
At December 31, 1999
------------------------
Distribution Service Distribution and Service
Fee Fee Fees Payable
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Intermediate 0.25% 0.25% $129
Investment Grade 0.25% 0.25% 78
High Yield 0.25% 0.25% 162
</TABLE>
32
<PAGE>
Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Western Asset Management Company
Pasadena, CA
Board of Directors
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., Vice Chairman
Edward A.Taber, III, President
Richard G. Gilmore
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
This report is not to be distributed unless preceded or
accompanied by a prospectus.
Legg Mason Wood Walker, Incorporated
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100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 . 539 . 0000
LMF-056
2/00
