<PAGE>
Semi-Annual Report
June 30, 2000
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 semi-annual
report, combining reports for the Navigator Classes of the Legg Mason U.S.
Government Intermediate-Term Portfolio, Investment Grade Income Portfolio and
the High Yield Portfolio.
The following table summarizes key statistics for the Navigator Class of each
portfolio, as of June 30, 2000:
<TABLE>
<CAPTION>
Net Asset Value
SEC Yield/1/ Average Life Per Share
------------ ------------ ---------------
<S> <C> <C> <C>
Government Intermediate 6.38% 9.21 years $10.00
Investment Grade 7.33% 14.10 years $ 9.70
High Yield 10.74% 6.84 years $12.50
</TABLE>
Total returns/2/ for the Navigator Class of shares of the Government
Intermediate, Investment Grade and High Yield Portfolios for the six-month
period (not annualized) were +4.2%, +2.8% and -3.0%, respectively. On the
following pages, portfolio managers of each of these Funds comment on recent
results and the investment outlook.
For each of our Funds, historical performance is not indicative of future
results, and the principal value of our holdings will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Sincerely,
/s/ John F. Curley, Jr.
------------------------
John F. Curley, Jr.
Chairman
August 10, 2000
---------
/1/ SEC yields reported for the U.S. Government Intermediate, Investment Grade
and High Yield Portfolios are for the 30 days ended June 30, 2000.
/2/ Total return measures investment performance in terms of appreciation or
depreciation in 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.
<PAGE>
Portfolio Managers' Comments
Legg Mason Income Trust, Inc.
Market Overview
Although on balance interest rates were little changed, the second quarter
exhibited unusually high volatility as perceptions of the economy's strength
gyrated. Despite three tightenings totaling 100 basis points/1/ this year, the
market's fears of further tightening moves by the Federal Reserve have been
calmed by growing evidence of an economic slowdown. The reduced expectation for
additional tightening moves caused short-term rates to decline and the yield
curve to disinvert modestly during the second quarter. Outside of rising energy
prices, most commodity prices were mixed, with weaker lumber and industrial
metal prices pointing to moderating global growth conditions. Two factors caused
credit spreads to widen: tighter monetary policy increased credit risk and
rising surpluses raised buyback projections, which amplified the potential
scarcity value of Treasuries.
U.S. Government Intermediate and Investment Grade Portfolios
Both portfolios underperformed their respective benchmarks as spreads widened
on non-Treasury sectors during the second quarter, with investment grade
corporate securities being hit the hardest. Within the investment grade
spectrum, BBB rated securities underperformed higher rated corporates.
Fortunately, some of our diversified investment strategies did help mitigate the
detracting effects of the corporate bond exposure. The small allocation to
emerging markets was a positive contributor to performance. In addition, issue
selection within the mortgage allocation had a positive effect, as this exposure
was reduced early in the year and subsequently increased as mortgages became
more attractive on a relative value basis. Inflation-indexed bonds, which
continue to be overweighted, were also a positive contributor to performance as
real yields declined over the period. Both Funds benefited from a long duration
position as interest rates declined.
For the six months ended June 30, 2000, the U.S. Government Intermediate-Term
Portfolio returned +4.20%, which compares favorably to the Salomon Bros. Medium-
Term Treasury/Government-Sponsored Index total return of +3.43%. The Investment
Grade Income Portfolio underperformed the benchmark Salomon Bros. Broad
Investment Grade Index, with total returns of +2.81% and +3.92%, respectively,
for the same time period.
High Yield Portfolio
The High Yield Portfolio produced a net total return of -2.97% for the six
months ended June 30, 2000, compared to the Lehman Brothers High Yield Index
total return of -1.21% for the same time period. The portfolio underperformed
the index in the second quarter due to an overweighting of single B-rated bonds
and an emphasis on liquid, higher quality issues. These types of issues were
negatively impacted in price as investors generally sold these widely held
issues to raise liquidity. The portfolio's continued moderate overweights in
telecommunications and cable/media negatively impacted performance due to
concerns over continued capital access to the high yield market and more
aggressive capital expenditure plans than originally forecasted, resulting in
supply pressure in the primary market. The portfolio's overweights in basic
industry and energy credits positively contributed to performance. The
underweighting of sectors that underperformed, such as consumer cyclical,
retail, and health care,
---------
/1/ 100 basis points = 1%.
2
<PAGE>
Portfolio Managers' Comments -- Continued
Legg Mason Income Trust, Inc.
positively contributed to performance as these sectors are experiencing above-
average event risk and declining fundamentals.
Market Commentary and Outlook
Recent economic data indicate the U.S. economy is finally slowing in response
to tight monetary policy. Signs of weakness are emerging in key interest rate-
sensitive sectors such as housing and durable goods, as well as in earnings
disappointments for banks and consumer staples manufacturers. Moreover, softer
demand and tight labor markets are reflected in a noticeable deceleration in the
growth of private sector employment this year. With tight money limiting firms'
ability to pass along higher input prices, recent hikes in energy costs will act
like a tax on economic activity, accentuating the monetary slowdown already
underway.
Although many argue that these are temporary and weather-related changes,
signs of a slowdown are also validated by a substantial reduction in the growth
rate of M2, the monetary aggregate that best reflects and anticipates the
overall level of economic activity. With six- and twelve-month M2 growth rates
having fallen from the 8% - 10% levels of early last year to 5% in recent
months, it is likely that the trend in nominal GDP growth will moderate as the
year progresses. A near-term "soft-landing" scenario thus appears likely,
leaving the Fed on hold pending further indications of the economy's health.
Though the risks of a "hard landing" are not insignificant, we anticipate that a
strong dollar, low inflation, technology-driven productivity, and ongoing
investment in the U.S. economy will continue to provide a foundation for healthy
growth and minimal inflation pressures in the years to come. And of course,
since the slowdown is most likely monetary-induced, a hard landing could be
easily addressed by lower interest rates, much as occurred in response to the
global financial crisis experienced two years ago.
Strategy
Since low inflation fundamentals remain intact, we continue to favor a long
duration posture for both the U.S. Government Intermediate and Investment Grade
portfolios in anticipation of declining yields. With mounting signs of slowing
growth, we are putting greater emphasis on strategies which will benefit from a
steepening of the yield curve, since the Fed will not likely tighten by as much
as is currently anticipated, and may eventually revert to an easing mode should
economic momentum fall off too rapidly. Although credit spreads are unusually
wide, we remain somewhat cautious in our overweighting to corporate debt given
the potential volatility of spreads going forward, and the fact that slowdown
risks are mounting. Greater diversification and an emphasis on higher quality
credit sectors with attractive spreads can mitigate these problems, but not
entirely. Our mortgage exposure will likely remain cautiously overweight, with
attractive valuation offsetting the difficulties mortgages could face in a
volatile Treasury and yield curve environment. We plan to continue holding an
aggressive exposure to U.S. Treasury Inflation-Protected Securities ("TIPS")
since they offer attractive real yields and are an excellent hedge to our long
duration exposure. With U.S. yields still quite high relative to most non-dollar
markets, we see limited opportunities to diversify portfolio risk and benefit
from attractive and
3
<PAGE>
declining yields overseas. However, we believe a diversified exposure to liquid
emerging market debt securities from major sovereign issuers continues to offer
an attractive risk/reward profile.
The high yield sector remains vulnerable, however, to a number of factors that
could cause spread performance and returns to remain relatively weak. For
example, pent-up supply of new issues may limit near-term spread improvement. In
addition, mutual fund flow uncertainty (particularly if equity markets rebound)
and earnings surprises could also negatively impact the sector's tone. We remain
focused on long-term investing in fundamentally improving credit stories within
the high yield market despite the significant volatility in the higher credit
quality tier of the market. Sectors such as telecommunications and cable remain
overweighted, while we are biased towards higher quality issues within these
subsectors of the market. We also believe that High Yield is well positioned to
outperform relative to the benchmark given our expectation of a soft landing
scenario and current credit positioning. We are persistently seeking issuers
characterized by strong management teams, the ability and desire to deleverage
the balance sheet, above-average competitive business position, and attractive
market pricing relative to the perceived credit risks. At current spread levels,
we believe the high yield market represents significant long-term value. Over
the last two and a half years, the high yield market has experienced bear market
returns in the face of robust economic growth. The high yield market has
historically anticipated Federal Reserve policy changes and peak default rates.
Should we be nearing peaks in both Federal Reserve and default activity, the
market could show significant spread tightening and greater total returns over
the course of 2000 and into 2001.
Western Asset Management Company
August 7, 2000
4
<PAGE>
Performance Information
Legg Mason Income Trust, Inc.
Total Returns for One, Three and Five Years and Life of Class, as of
June 30, 2000
The returns shown 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 that 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
each have two classes of shares: Primary Class and Navigator Class.
Information about Primary Class, offered to retail investors, is contained in
a separate report to its shareholders.
The Funds' total returns as of June 30, 2000, were as follows:
<TABLE>
<CAPTION>
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Annual Total Return
Navigator Class:
One Year +5.60% +4.60% -2.58%
Three Years +5.35 +5.61 N/A
Five Years +5.76 N/A N/A
Life of Class* +6.89 +5.97 -.71
Cumulative Total Return
Navigator Class:
One Year +5.60% +4.60% -2.58%
Three Years +16.93 +17.78 N/A
Five Years +32.30 N/A N/A
Life of Class* +45.08 +30.09 -1.53
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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
5
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 2000 (Unaudited)
(Amounts in Thousands)
U.S. Government Intermediate-Term Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-Term Securities -- 94.4%
U.S. Government and Agency Obligations -- 29.8%
Fixed-Rate Securities -- 16.1%
Fannie Mae 7.250% 1/15/10 $ 5,630 $ 5,687
United States Treasury Bonds 8.000% 11/15/21 3,560 4,304
United States Treasury Notes 5.875% 11/15/04 32,100 31,633
United States Treasury Notes 6.500% 2/15/10 3,010 3,113
--------
44,737
--------
Indexed Securities -- 13.7%
United States Treasury
Inflation-Indexed Security 3.875% 4/15/29 38,049 37,895/F/
--------
Total U.S. Government and Agency Obligations (Identified Cost -- $81,005) 82,632
----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- 48.1%
Fixed-Rate Securities -- 48.1%
Fannie Mae 11.500% 4/1/04 86 87
Fannie Mae 8.500% 6/1/10 to 8/1/11 1,278 1,293
Fannie Mae 6.500% 11/1/10 to 8/1/29 35,426 33,803
Fannie Mae 12.500% 11/1/12 to 4/1/18 1,168 1,261
Fannie Mae 7.000% 1/1/13 to 8/1/29 29,023 28,121
Fannie Mae 9.500% 7/1/14 480 501
Fannie Mae 5.500% 7/1/15 92 85/E/
Fannie Mae 7.500% 7/1/15 2,100 2,071/E/
Fannie Mae 11.000% 12/1/15 370 396
Fannie Mae 9.000% 11/1/21 969 998
Fannie Mae 6.000% 11/1/27 to 4/1/29 3,282 3,004
Fannie Mae 7.500% 4/1/30 14,971 14,755
Freddie Mac 8.750% 8/1/01 to 10/1/01 53 53
Freddie Mac 9.000% 2/1/02 to 1/1/21 1,429 1,470
Freddie Mac 8.250% 2/1/08 152 154
Freddie Mac 8.500% 12/1/08 to 6/1/21 963 984
Freddie Mac 9.750% 11/1/09 to 11/1/14 229 236
Freddie Mac 6.500% 4/1/29 31,103 29,392
Government National Mortgage Association 9.000% 7/15/04 to 9/15/22 2,179 2,234
Government National Mortgage Association 6.000% 5/15/14 to 3/15/29 8,471 7,819
Government National Mortgage Association 6.500% 7/15/28 to 3/15/29 4,701 4,461
--------
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost -- $136,624) 133,178
----------------------------------------------------------------------------------------------------------------------------------
Yankee Bonds/A/ -- 7.9%
Banking and Finance -- 3.1%
Petrozuata Finance, Inc. 7.630% 4/1/09 3,910 3,297/B/
Petrozuata Finance, Inc. 8.220% 4/1/17 5,170 3,994/B/
The Bank of Tokyo-Mitsubishi, Ltd. 8.400% 4/15/10 1,390 1,404
--------
8,695
--------
</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>
Yankee Bonds -- Continued
Foreign Governments -- 4.4%
Argentine Republic 0.00% 10/15/01 $ 1,560 $ 1,381/D/
Argentine Republic 0.00% 10/15/03 4,610 3,238/D/
Argentine Republic 0.00% 10/15/04 1,800 1,089/D/
Republic of Poland 6.00% 10/27/14 2,086 1,864
Republic of Poland 6.00% 10/27/14 1,250 1,114
United Mexican States 11.500% 5/15/26 2,960 3,552
--------
12,238
--------
Oil and Gas -- 0.4%
Petroleos Mexicanos 9.030% 2/15/11 1,030 1,063/B/
--------
Total Yankee Bonds (Identified Cost -- $22,686) 21,996
----------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 6.1%
Auto Parts and Equipment -- 1.1%
TRW Inc. 7.203% 3/25/02 3,000 2,996/C/
--------
Banking and Finance -- 4.0%
Chase Manhattan Corporation 7.016% 8/1/28 440 415/C/
Crestar Capital Trust I 8.160% 12/15/26 10,000 9,109
Wells Fargo Bank NA 6.891% 5/2/05 1,500 1,498
--------
11,022
--------
Environmental Services -- 0.6%
Waste Management Inc. 7.000% 10/15/06 1,950 1,771
--------
Gas/Pipeline -- 0.4%
Enron Corp. 7.250% 9/10/01 1,000 1,000/B,C/
--------
Total Corporate Bonds and Notes (Identified Cost -- $18,582) 16,789
----------------------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities -- 2.0%
Fixed-Rate Securities -- 1.9%
Blackrock Capital Finance L.P. 7.220% 11/25/28 2,727 2,688
Green Tree Home Improvement Loan Trust 6.320% 8/15/08 2,554 2,541
--------
5,229
--------
Indexed Securities -- 0.1%
SLM Student Loan Trust 1998-2 6.524% 4/25/07 417 415/C/
--------
Total Asset-Backed Securities (Identified Cost -- $5,550) 5,644
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stocks -- 0.5%
Home Ownership Funding Corporation 13.331% 1 shs $ 378/B/
Home Ownership Funding Corporation II 13.338% 1 1,058/B/
--------
Total Preferred Stocks (Identified Cost -- $1,537) 1,436
--------
Total Long-Term Securities (Identified Cost -- $265,984) 261,675
----------------------------------------------------------------------------------------------------------------------------------
Short-Term Securities -- 6.0%
Corporate Bonds and Notes -- 2.0%
The Kroger Co. 6.000% 7/1/00 $ 5,500 5,499
--------
U.S. Government and Agency Obligations -- 0.4%
Freddie Mac 0.000% 11/9/00 1,000 976/D,H/
--------
U.S. Government Agency Mortgage-Backed Securities -- N.M.
Freddie Mac 8.750% 2/1/01 132 131
Freddie Mac 10.750% 7/1/00 N.M. N.M.
--------
131
--------
Repurchase Agreements -- 3.6%
Lehman Brothers, Inc.
6.60%, dated 6/30/00, to be repurchased
at $4,966 on 7/3/00 (Collateral: $5,355
Fannie Mae Notes, 5.44%, due 12/11/03,
value $5,063) 4,964 4,964
Merrill Lynch Government Securities, Inc.
6.55%, dated 6/30/00, to be repurchased
at $5,002 on 7/3/00 (Collateral: $5,100
Federal Home Loan Bank Notes,
5.36%, due 9/28/05, value $5,105) 5,000 5,000
--------
9,964
--------
Total Short-Term Securities (Identified Cost -- $16,563) 16,570
----------------------------------------------------------------------------------------------------------------------------------
Total Investments -- 100.4% (Identified Cost -- $282,547) 278,245
Other Assets Less Liabilities -- (0.4)% (1,019)
--------
Net assets -- 100.0% $277,226
========
</TABLE>
8
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio -- Continued
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net assets consisting of:
Accumulated paid-in capital applicable to:
26,887 Primary Class shares outstanding $288,840
856 Navigator Class shares outstanding 8,744
Accumulated net realized gain/(loss) on investments, options and futures (15,684)
Unrealized appreciation/(depreciation) of investments, options and futures (4,674)
--------
Net assets -- 100.0% $277,226
========
Net asset value per share:
Primary Class $ 9.99
======
Navigator Class $10.00
======
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Futures Contracts Purchased/G/
U.S. Treasury Note Futures September 00 78 $ 39
-----
Futures Contracts Written/G/
U.S. Treasury Note Futures September 00 649 $(411)
-----
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Yankee Bond -- A dollar-denominated bond issued in the U.S. by foreign
entities.
/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. These securities represent
3.9% of net assets.
/C/ Indexed Security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate (LIBOR). Consumer Price Index
(CPI), or the One-Year Treasury Constant Maturity Rate.
/D/ Zero-coupon bond -- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
/E/ When-issued security -- A security purchased on a delayed delivery
basis. Final settlement amount and maturity date have not yet been
announced.
/F/ U.S. Treasury Inflation-Indexed Security -- U.S. Treasury security whose
principal value is adjusted daily in accordance with changes to the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
/G/ Options and futures are described in more detail in the notes to
financial statements.
/H/ Collateral to cover futures contracts written.
N.M. -- Not meaningful.
See notes to financial statements.
9
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 2000 (Unaudited)
(Amounts in Thousands)
Investment Grade Income Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-Term Securities -- 96.7%
Corporate Bonds and Notes -- 34.2%
Aerospace/Defense -- 3.4%
Lockheed Martin Corporation 9.000% 1/15/22 $ 3,500 $ 3,770
Raytheon Company 6.400% 12/15/18 3,000 2,466
--------
6,236
--------
Auto Parts and Equipment -- 0.6%
American Axle & Manufacturing
Holdings, Inc. 9.750% 3/1/09 70 67
J. L. French Automotive Casting 11.500% 6/1/09 100 91
Lear Corporation 7.960% 5/15/05 270 254
Lear Corporation 8.110% 5/15/09 740 674
--------
1,086
--------
Automotive -- 0.5%
Ford Motor Company 7.700% 5/15/97 1,000 929
--------
Banking and Finance -- 4.4%
Abbey National Capital Trust I 8.963% 12/29/49 360 359/G/
Associates Corporation of North America 8.150% 8/1/09 1,000 995
Dresdner Funding Trust I 8.151% 6/30/31 200 173/B/
General Motors Acceptance Corporation 7.750% 1/19/10 160 159
General Motors Acceptance Corporation 0.000% 6/15/15 2,700 810/D/
IBJ Preferred Capital Corp. LLC 8.790% 12/29/49 1,560 1,416/B,G/
KBC Bank Funding Trust III 9.860% 11/29/49 200 205/B,G/
SB Treasury Company LLC 9.400% 12/29/49 1,790 1,749/B,G/
Tokai Preferred Capital Company LLC 9.980% 12/29/49 480 466/B,G/
Transamerica Finance Corporation 5.750% 1/28/04 2,000 1,909
--------
8,241
--------
Building Materials -- 0.1%
American Standard Companies, Inc. 8.250% 6/1/09 37 36
American Standard Companies, Inc. 7.625% 2/15/10 25 23
Nortek, Inc. 8.875% 8/1/08 100 91
--------
150
--------
Cable -- 1.8%
Cablevision Systems Corporation 8.125% 8/15/09 230 223
Century Communications Corp. 8.875% 1/15/07 39 36
Charter Communication Holdings LLC 8.625% 4/1/09 75 66
NTL Communications Corp. 0.000% 10/1/08 50 33/G/
TCI Communications, Inc. 6.375% 5/1/03 240 233
</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>
Corporate Bonds and Notes -- Continued
Cable -- Continued
TCI Communications, Inc. 7.875% 2/15/26 $ 2,330 $ 2,273
TCI Communications, Inc. 7.125% 2/15/28 540 485
--------
3,349
--------
Chemicals -- 1.3%
Dow Chemical Company 7.375% 11/1/29 290 281
Lyondell Chemical Company 9.875% 5/1/07 30 30
Rohm and Haas Company 7.850% 7/15/29 2,000 2,027
--------
2,338
--------
Construction and Machinery -- 0.1%
Terex Corporation 8.875% 4/1/08 132 119
--------
Electric -- 2.4%
Calpine Corporation 7.750% 4/15/09 49 46
Cleveland Electric Illumination Co. 7.880% 11/1/17 850 800
CMS Energy Corporation 7.500% 1/15/09 100 90
Niagara Mohawk Power Corporation 7.250% 10/1/02 476 471
Niagara Mohawk Power Corporation 7.750% 10/1/08 1,010 984
Niagara Mohawk Power Corporation 0.000% 7/1/10 720 549/G/
North Atlantic Energy Service Corporation 9.050% 6/1/02 371 374
System Energy Resources, Inc. 7.430% 1/15/11 658 626
The AES Corporation 9.500% 6/1/09 500 492
--------
4,432
--------
Energy -- 1.0%
Edison Mission Energy 7.730% 6/15/09 2,000 1,948
--------
Entertainment -- 0.7%
The Walt Disney Company 5.620% 12/1/08 1,550 1,380
--------
Environmental Services -- 0.8%
Safety-Kleen Corp. 9.250% 5/15/09 122 3/K/
Waste Management Inc. 7.375% 5/15/29 1,700 1,395
--------
1,398
--------
Food, Beverage and Tobacco -- 4.3%
J. Seagram & Sons 6.400% 12/15/03 700 670
J. Seagram & Sons 6.800% 12/15/08 340 320
J. Seagram & Sons 7.500% 12/15/18 430 411
J. Seagram & Sons 7.600% 12/15/28 210 200
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- Continued
Food, Beverage and Tobacco -- Continued
Nabisco Incorporated 7.050% 7/15/07 $ 3,100 $ 2,823
R.J. Reynolds Tobacco Holdings, Inc. 7.750% 5/15/06 1,280 1,140
R.J. Reynolds Tobacco Holdings, Inc. 7.875% 5/15/09 860 742
The Pepsi Bottling Group Incorporated 7.000% 3/1/29 1,800 1,626
--------
7,932
--------
Gaming -- 0.1%
Horseshoe Gaming Holdings, Inc. 8.625% 5/15/09 69 66
International Game Technology 8.375% 5/15/09 70 66
--------
132
--------
Gas and Pipeline Utilities -- 2.8%
CMS Panhandle Holding Company 6.125% 3/15/04 400 375
The Williams Companies, Inc. 7.625% 7/15/19 2,000 1,910
Union Oil Company of California 7.350% 6/15/09 3,000 2,906
--------
5,191
--------
Insurance (Life/Health) -- 1.1%
Conseco, Inc. 8.500% 10/15/02 1,280 928
Conseco, Inc. 8.750% 2/9/04 1,470 1,022
--------
1,950
--------
Insurance (Multi-Line) -- 0.9%
Loews Corporation 7.625% 6/1/23 1,000 885
Loews Corporation 7.000% 10/15/23 1,000 822
--------
1,707
--------
Insurance (Property/Casualty) -- 1.2%
Ace Capital Trust II 9.700% 4/1/30 2,100 2,209
--------
Media -- 1.1%
EchoStar Communications Corporation 9.375% 2/1/09 62 60
News America Holdings Incorporated 7.750% 2/1/24 80 74
News America Holdings Incorporated 8.250% 10/17/96 200 183
News America Incorporated 8.875% 4/26/23 500 516
News America Incorporated 7.625% 11/30/28 1,410 1,263
--------
2,096
--------
Real Estate -- 0.1%
Socgen Real Estate Co. LLC 7.640% 12/29/49 180 165/B,G/
--------
</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>
Corporate Bonds and Notes -- Continued
Retail -- 0.9%
Kmart Corporation 7.950% 2/1/23 $ 2,000 $ 1,557
Wal-Mart Stores, Inc. 7.550% 2/15/30 200 205
--------
1,762
--------
Telecommunications -- 3.3%
Adelphia Business Solutions Inc. 12.000% 11/1/07 41 38
AT&T Corp. 6.000% 3/15/09 1,860 1,654
AT&T Corp. 9.650% 3/31/27 1,650 1,823
GTE Corporation 6.940% 4/15/28 1,700 1,505
McLeodUSA Incorporated 8.125% 2/15/09 60 54
NEXTLINK Communications, Inc. 10.750% 6/1/09 136 135
Sprint Capital Corporation 6.900% 5/1/19 1,080 960
--------
6,169
--------
Transportation -- 0.3%
Consolidated Rail Corporation 7.875% 5/15/43 600 547
--------
Utilities -- 1.0%
Gulf States Utilities Corp. 8.250% 4/1/04 1,800 1,816
--------
Total Corporate Bonds and Notes (Identified Cost -- $66,322) 63,282
-------------------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities -- 1.9%
Fixed-Rate Securities -- 0.3%
ANRC Auto Owner Trust 6.540% 11/15/02 221 221
Green Tree Financial Corporation 7.850% 7/15/04 291 291
--------
512
--------
Indexed Securities -- 1.6%
SLM Student Loan Trust 1997-2 5.225% 10/25/05 154 153/C/
World Omni Automobile Lease Securitization 6.773% 2/15/02 2,800 2,801/C/
--------
2,954
--------
Total Asset-Backed Securities (Identified Cost -- $3,468) 3,466
-------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities -- 3.3%
Fixed-Rate Securities -- 3.1%
Asset Securitization Corporation 6.920% 2/14/29 1,095 1,066
CAPCO America Securitization Corporation 6.260% 9/15/08 800 735
Nomura Asset Securities Corporation 6.590% 3/15/30 2,000 1,904
Nomura Asset Securities Corporation 7.120% 4/13/36 680 670
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities -- Continued
Fixed-Rate Securities -- Continued
Oakdale Mall Trust 94-1 Class A 7.950% 5/1/06 $ 1,000 $ 992/B/
PSB Financial Corporation II 11.050% 12/1/15 271 273
--------
5,640
--------
Variable-Rate Securities -- 0.2%
Resolution Trust Corporation 6.955% 4/25/28 239 237/B,I/
Resolution Trust Corporation 7.732% 9/25/29 164 164/I/
--------
401
--------
Total Mortgage-Backed Securities (Identified Cost -- $6,234) 6,041
-------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 10.4%
Fixed-Rate Securities -- 3.5%
Fannie Mae 7.125% 2/15/05 860 863
Fannie Mae 5.750% 2/15/08 240 221
Fannie Mae 6.000% 5/15/08 220 205
Fannie Mae 7.250% 1/15/10 2,710 2,737
Freddie Mac 6.750% 9/15/29 310 297
Tennessee Valley Authority 6.750% 11/1/25 310 300
United States Treasury Bonds 8.000% 11/15/21 820 991
United States Treasury Bonds 6.125% 8/15/29 700 707
United States Treasury Notes 6.000% 8/15/09 30 30
United States Treasury Notes 6.500% 2/15/10 190 196
--------
6,547
--------
Indexed Securities -- 6.9%
United States Treasury Inflation-Indexed
Security 3.625% 1/15/08 4,408 4,274/F/
United States Treasury Inflation-Indexed
Security 3.625% 4/15/28 5,991 5,710/F/
United States Treasury Inflation-Indexed
Security 3.875% 4/15/29 2,812 2,801/F/
--------
12,785
--------
Total U.S. Government and Agency Obligations (Identified Cost -- $19,663) 19,332
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<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 -- 25.2%
Fixed-Rate Securities -- 25.0%
Fannie Mae 8.000% 4/25/06 to 3/1/10 $ 685 $ 691
Fannie Mae 6.000% 9/1/25 to 4/1/29 1,965 1,805
Fannie Mae 6.500% 8/1/28 to 4/1/29 14,651 13,828
Fannie Mae 7.000% 7/1/30 300 289/E/
Freddie Mac 8.750% 10/1/01 to 10/1/08 237 241
Freddie Mac 8.500% 2/1/04 to 11/1/09 225 228
Freddie Mac 6.000% 2/1/14 1,816 1,740
Freddie Mac 7.500% 6/1/24 to 9/1/24 1,127 1,118
Freddie Mac 7.000% 8/1/24 to 4/1/29 5,303 5,155
Freddie Mac 8.000% 7/1/26 560 564
Government National Mortgage Association 6.000% 4/15/14 to 3/15/29 3,070 2,947
Government National Mortgage Association 9.000% 7/15/16 to 6/15/17 562 587
Government National Mortgage Association 7.000% 2/15/23 to 10/15/28 6,740 6,573
Government National Mortgage Association 7.500% 2/15/23 to 3/15/29 6,521 6,487
Government National Mortgage Association 8.000% 12/15/26 919 929
Government National Mortgage Association 7.000% 7/1/30 1,400 1,361/E/
Government National Mortgage Association 7.500% 7/1/30 1,800 1,787/E/
--------
46,330
--------
Indexed Securities -- 0.2%
Freddie Mac 7.357% 9/1/24 403 414/C/
--------
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost -- $48,168) 46,744
-------------------------------------------------------------------------------------------------------------------------------
Yankee Bonds/A/ -- 21.6%
Banking and Finance -- 4.8%
Korea Development Bank 6.750% 12/1/05 1,020 963
PDVSA Finance Limited 1999-I 9.750% 2/15/10 4,000 3,820
PDVSA Finance Limited 1999-K 9.950% 2/15/20 800 736
Royal Bank of Scotland Group plc 8.817% 3/31/49 1,500 1,547
The Bank of Tokyo-Mitsubishi, Ltd. 8.400% 4/15/10 1,860 1,878
--------
8,944
--------
Chemicals -- 0.1%
Avecia Group PLC 11.000% 7/1/09 129 127
--------
Diversified Services -- 0.3%
Rothmans Nederland Holdings B V 6.875% 5/6/08 700 610
--------
Food, Beverage and Tobacco -- 0.9%
Imperial Tobacco Overseas BV 7.125% 4/1/09 1,820 1,614
--------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Bonds -- Continued
Foreign Governments -- 6.6%
Argentine Republic 7.375% 3/31/05 $ 768 $ 696/C/
Argentine Republic 11.375% 3/15/10 930 847
Argentine Republic 11.750% 6/15/15 90 82
Argentine Republic 12.000% 2/1/20 260 243
Province of Manitoba 9.500% 9/15/18 1,080 1,297
Republic of Colombia 9.750% 4/23/09 360 317
Republic of Colombia 11.750% 2/25/20 190 155
Republic of Panama 7.063% 7/17/16 951 782/C,L/
Republic of Peru 4.500% 3/7/17 750 500/B,G/
Republic of Poland 6.000% 10/27/14 870 777/G/
Republic of the Philippines 9.875% 1/15/19 680 552
Republic of the Philippines 9.500% 10/21/24 550 513
Republic of the Philippines 10.625% 3/16/25 400 340
United Mexican States 10.375% 2/17/09 1,150 1,225
United Mexican States 11.500% 5/15/26 3,230 3,876
--------
12,202
--------
Oil and Gas -- 2.5%
Petroliam Nasional Berhad 7.625% 10/15/26 450 390/B/
YPF Sociedad Anonima 7.500% 10/26/02 589 592
YPF Sociedad Anonima 10.000% 11/2/28 3,500 3,760
--------
4,742
--------
Steel (Producers) -- 1.6%
Pohang Iron & Steel Company Ltd. 7.375% 5/15/05 3,000 2,894
--------
Telecommunications -- 3.9%
360networks Inc. 12.000% 8/1/09 80 76
Deutsche Telekom International Finance BV 8.250% 6/15/30 3,000 2,998
Telefonica de Argentina S A 11.875% 11/1/04 4,000 4,200
--------
7,274
--------
Utilities -- 0.9%
Tata Electric Company 8.500% 8/19/17 2,000 1,639/B/
--------
Total Yankee Bonds (Identified Cost -- $40,683) 40,046
-------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks -- 0.1%
News Corporation Finance Trust 5.000% 3 shs 169
--------
Total Preferred Stocks (Identified Cost -- $182) 169
--------
Total Long-Term Securities (Identified Cost -- $184,720) 179,080
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<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>
Short-Term Securities -- 6.1%
Corporate Bonds and Notes -- 0.9%
Connecticut Light and Power Company 7.875% 6/1/01 $ 1,750 $ 1,756
--------
Mortgage-Backed Securities -- 0.3%
Nationslink Funding Corporation 5.805% 2/10/01 677 671
--------
U.S. Government and Agency Obligations -- 0.3%
Freddie Mac 0.000% 11/9/00 500 488/D,J/
--------
Repurchase Agreements -- 4.6%
Lehman Brothers, Inc.
6.60%, dated 6/30/00, to be repurchased at
$4,462 on 7/3/00 (Collateral: $4,575 Freddie
Mac Notes, 6.92%, due 9/15/05, value $4,549) 4,460 4,460
Merrill Lynch Government Securities, Inc.
6.55%, dated 6/30/00, to be repurchased at
$4,002 on 7/3/00 (Collateral: $4,080 Federal
Home Loan Bank Notes, 5.36%, due 9/28/05,
value $4,084) 4,000 4,000
--------
8,460
--------
Total Short-Term Securities (Identified Cost -- $11,377) 11,375
-------------------------------------------------------------------------------------------------------------------------------
Total Investments -- 102.8% (Identified Cost -- $196,097) 190,455
Other Assets Less Liabilities -- (2.8)% (5,223)
--------
Net assets consisting of:
Accumulated paid-in capital applicable to:
19,054 Primary Class shares outstanding $198,002
45 Navigator Class shares outstanding 453
Undistributed net investment income 90
Accumulated net realized gain/(loss) on investments,
options and futures (7,509)
Unrealized appreciation/(depreciation) of investments,
options and futures (5,804)
--------
Net assets -- 100.0% $185,232
========
Net asset value per share:
Primary Class $9.70
=====
Navigator Class $9.70
=====
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Futures Contracts Purchased/H/
U.S. Treasury Bond Futures September 00 1 $ 1
-----
Futures Contracts Written/H/
U.S. Treasury Note Futures September 00 219 $(148)
U.S. Treasury Note Futures September 00 17 (15)
-----
$(163)
-----
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Yankee Bond -- A dollar-denominated bond issued in the U.S. by foreign
entities.
/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. These securities represent 4.3%
of net assets.
/C/ Indexed Security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate (LIBOR), Consumer Price Index
(CPI),or the One-Year Treasury Constant Maturity Rate.
/D/ Zero-coupon bond -- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
/E/ When-issued security -- Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
/F/ U.S. 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/ Stepped-coupon security -- A security with a predetermined schedule of
interest or dividend rate changes.
/H/ Options and futures are described in more detail in the notes to
financial statements.
/I/ The coupon rates shown on variable rate securities are the rates at June
30, 2000. These rates vary with the weighted average coupon of the
underlying loans.
/J/ Collateral to cover futures contracts written.
/K/ Bond is in default at June 30, 2000.
/L/ 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.
See notes to financial statements.
18
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 2000 (Unaudited)
(Amounts in Thousands)
High Yield Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-Term Securities -- 94.6%
Corporate Bonds and Notes -- 74.8%
Auto Parts and Equipment -- 3.3%
American Axle & Manufacturing Holdings, Inc. 9.750% 3/1/09 $ 4,500 $ 4,286
J. L. French Automotive Casting 11.500% 6/1/09 2,400 2,196
Tenneco Automotive Inc. 11.625% 10/15/09 4,290 3,808/B/
--------
10,290
--------
Automotive -- 1.5%
Cambridge Industries Incorporated 10.250% 7/15/07 1,500 383
Federal Mogul Corporation 7.500% 1/15/09 4,000 2,747
Hayes Lemmerz International Inc. 8.250% 12/15/08 2,000 1,700
--------
4,830
--------
Banking and Finance -- 1.3%
Orion Power Holdings Inc. 12.000% 5/1/10 4,000 4,060/B/
--------
Building Materials -- 2.0%
American Standard Companies, Inc. 7.625% 2/15/10 4,000 3,660
Nortek, Inc. 8.875% 8/1/08 2,790 2,539
--------
6,199
--------
Cable -- 7.5%
Adelphia Communications Corporation 7.750% 1/15/09 4,000 3,380
Adelphia Communications Corporation 7.875% 5/1/09 1,993 1,684
Charter Communication Holdings LLC 8.625% 4/1/09 2,631 2,325
Classic Cable Incorporated 9.375% 8/1/09 500 436
Classic Cable Incorporated 10.500% 3/1/10 3,000 2,760
Mediacom LLC 7.875% 2/15/11 4,000 3,520
NTL Communications Corp. 0.000% 10/1/08 8,000 5,240/G/
NTL Incorporated 0.000% 4/1/08 2,000 1,250/F,G/
UnitedGlobalCom Inc. 0.000% 2/15/08 4,300 3,032/F,G/
--------
23,627
--------
Chemicals -- 3.0%
Georgia Gulf Corporation 10.375% 11/1/07 2,500 2,613
Huntsman ICI Holdings LLC 9.500% 7/1/07 1,250 1,144/B/
Huntsman ICI Holdings LLC 0.000% 12/31/09 8,750 2,887/D/
Lyondell Chemical Company 9.625% 5/1/07 250 247
Lyondell Chemical Company 9.875% 5/1/07 2,625 2,599
--------
9,490
--------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- Continued
Construction and Machinery -- 3.9%
Better Minerals and Aggregates Co. 13.000% 9/15/09 $ 4,000 3,930/B/
Terex Corporation 8.875% 4/1/08 3,000 2,715
Woods Equipment Company 12.000% 7/15/09 6,500 5,826
--------
12,471
--------
Consumer Products -- 1.7%
Decora IndustriesIncorporated 11.000% 5/1/05 2,500 962
United Industries Corporation 9.875% 4/1/09 500 278
Weight Watchers International Incorporated 13.000% 10/1/09 4,050 4,151/B/
--------
5,391
--------
Electric -- 4.5%
Calpine Corporation 7.750% 4/15/09 4,000 3,790
CMS Energy Corporation 6.750% 1/15/04 1,000 927
CMS Energy Corporation 7.500% 1/15/09 5,250 4,703
The AES Corporation 9.500% 6/1/09 4,750 4,679
--------
14,099
--------
Energy -- 2.8%
Ocean Energy Incorporated 8.375% 7/1/08 4,000 3,880
P&L Coal Holdings Corp. 9.625% 5/15/08 4,334 4,041
Plains Resources Incorporated 10.250% 3/15/06 1,000 993
--------
8,914
--------
Engineering and Construction -- 1.3%
Morrison Knudsen Corporation 11.000% 7/1/10 4,000 3,970/B/
--------
Entertainment -- 0.9%
Booth Creek Ski Holdings Incorporated 12.500% 3/15/07 3,750 2,719
--------
Environmental Services -- 1.6%
Allied Waste North America Incorporated 7.875% 1/1/09 4,500 3,859
Allied Waste North America Incorporated 10.000% 8/1/09 1,250 1,050/B/
Safety-Kleen Corp. 9.250% 5/15/09 4,500 129/E/
--------
5,038
--------
Financial Services -- 2.6%
Sovereign Bancorp, Inc. 10.500% 11/15/06 4,325 4,325
Willis Corroon Corporation 9.000% 2/1/09 4,750 4,014
--------
8,339
--------
</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>
Corporate Bonds and Notes -- Continued
Food -- 0.6%
International Fast Foods Corporation 11.000% 10/31/07 $ 6,884 $ 1,996/B,F,H/
--------
Gaming -- 2.6%
Harrahs Operating Co. Inc. 7.875% 12/15/05 750 705
International Game Technology 8.375% 5/15/09 1,700 1,606/B/
Isle of Capri Casinos Inc. 8.750% 4/15/09 1,000 923
Mohegan Tribal Gaming Authority 8.750% 1/1/09 2,000 1,910
Pinnacle Entertainment, Inc. 9.250% 2/15/07 2,000 2,000
Pinnacle Entertainment, Inc. 9.500% 8/1/07 1,000 995
--------
8,139
--------
Gas and Pipeline Utilities -- 0.9%
Pioneer Natural Resources Company 9.625% 4/1/10 2,750 2,832
--------
Homebuilding -- 0.8%
Fortress Group 13.750% 5/15/03 4,250 2,417
--------
Industrial -- 1.0%
Holley Performance Products 12.250% 9/15/07 4,500 3,262/B/
--------
Industrial Services -- 1.4%
Blount International Inc. 13.000% 8/1/09 4,500 4,590/B/
--------
Lodging/Hotels -- 1.2%
HMH Properties, Inc. 8.450% 12/1/08 4,000 3,725
--------
Media -- 4.3%
Brill Media Company, LLC 12.000% 12/15/07 3,000 1,800/G/
Echostar Communications Corporation 9.375% 2/1/09 4,500 4,342
Mentus Media Corporation 12.000% 2/1/03 7,129 3,564/F/
Source Media, Inc. 12.000% 11/1/04 2,500 1,516/F/
TV Guide Incorporated 8.125% 3/1/09 2,500 2,469
--------
13,691
--------
Packaging -- 0.5%
Packaging Corporation of America 9.625% 4/1/09 1,500 1,496
--------
Retail -- 2.4%
Pour Le Bebe, Inc. 20.000% 6/30/99 3,461 505/E,J,I/
Pour Le Bebe, Inc. 13.000% 8/9/01 1,964 286/E,J,I/
Relax the Back Corporation 11.000% 5/22/03 4,000 3,400/I,J/
Relax the Back Corporation 13.000% 5/22/03 4,832 3,382/F,I,J/
--------
7,573
--------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- Continued
Steel (Producers) -- 0.8%
Alaska Steel Corporation 7.875% 2/15/09 $ 2,850 $ 2,544
--------
Supermarkets -- 0.7%
Big V Supermarkets, Incorporated 11.000% 2/15/04 2,500 2,138
--------
Telecommunications -- 17.4%
Adelphia Business Solutions Inc. 12.000% 11/1/07 3,500 3,255
Airgate PCS Inc. 0.000% 10/1/09 5,696 3,289/G/
Alamosa Holdings Incorporated 0.000% 2/15/10 5,000 2,625/G/
Crown Castle International Corp. 10.750% 8/1/11 1,000 1,010
Focal Communications Corporation 0.000% 2/15/08 1,500 1,020/D/
Focal Communications Corporation 11.875% 1/15/10 2,000 2,015
Hermes Europe RailTel 10.375% 1/15/09 4,000 3,360
Intermedia Communications, Inc. 0.000% 7/15/07 4,250 3,315/G/
Level 3 Communications, Inc. 0.000% 12/1/08 1,500 919/G/
Level 3 Communications, Inc. 0.000% 3/15/10 3,000 1,642/B,G/
McLeodUSA Incorporated 8.375% 3/15/08 1,500 1,365
Metricom Finance Incorporated 13.000% 2/15/10 2,250 1,553
Metromedia Fiber Network Inc. 10.000% 12/15/09 1,000 990
Nextel Communications 9.375% 11/15/09 3,500 3,360/B/
NEXTLINK Communications, Inc. 10.750% 6/1/09 4,000 3,960
Orion Network Systems Inc. 11.250% 1/15/07 4,750 2,898
Primus Telecommunications
Group, Incorporated 12.750% 10/15/09 4,500 3,623/B/
PSINet Inc. 10.500% 12/1/06 500 462
PSINet Inc. 11.000% 8/1/09 4,000 3,720
Verio Inc. 10.375% 4/1/05 2,000 2,130/B/
Verio Inc. 10.625% 11/15/09 2,000 2,227
VoiceStream Wireless Corporation 10.375% 11/15/09 975 1,004
Williams Communications Group, Inc. 10.875% 10/1/09 3,000 2,940
Winstar Communications Incorporated 0.000% 4/15/10 3,741 1,721/G/
Winstar Communications Incorporated 12.750% 4/15/10 509 475
--------
54,878
--------
Textiles -- 0.8%
Westpoint Stevens Incorporated 7.875% 6/15/05 3,000 2,505
--------
Transportation -- 1.5%
Avis Group Holdings, Inc. 11.000% 5/1/09 4,500 4,714
--------
Total Corporate Bonds and Notes (Identified Cost -- $275,652) 235,937
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<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/A/-- 12.0%
Airlines -- 0.2%
Canadian Airlines Corporation 12.250% 8/1/06 $ 5,350 $ 776/E/
--------
Cable -- 3.6%
Callahan Nordrhein Westfalen 0.000% 7/15/10 3,500 1,616/B,G/
Rogers Cablesystems Limited 10.000% 12/1/07 1,000 1,022
Rogers Communications, Inc. 8.875% 7/15/07 2,500 2,450
Telewest PLC 0.000% 10/1/07 2,500 2,381/G/
United Pan-Europe
Communications N.V. 10.875% 8/1/09 3,750 3,281
United Pan-Europe
Communications N.V. 0.000% 2/1/10 1,500 705/G/
--------
11,455
--------
Chemicals -- 1.5%
Avecia Group PLC 11.000% 7/1/09 4,750 4,679
--------
Electronics -- 0.4%
Flextronics International Ltd. 9.875% 7/1/10 1,100 1,108/B/
--------
Entertainment -- 1.4%
V2 Music Holdings PLC 0.000% 4/15/08 7,000 1,934/B,G/
V2 Music Holdings PLC 0.000% 4/15/08 6,000 2,496/B,G,K/
--------
4,430
--------
Real Estate Investment Trusts -- 0.8%
Trizec Finance Corporation Ltd. 10.875% 10/15/05 2,340 2,422
--------
Telecommunications -- 4.1%
Global Crossing Holdings Limited 9.500% 11/15/09 3,250 3,136/B/
Grupo Iusacell S.A. de C.V. 14.250% 12/1/06 3,500 3,666
Rogers Cantel Mobile Communications Inc. 8.300% 10/1/07 4,500 4,399
RSL Communications PLC 12.875% 3/1/10 2,500 1,888
--------
13,089
--------
Total Yankee Bonds (Identified Cost -- $48,775) 37,959
-------------------------------------------------------------------------------------------------------------------------------
Common Stocks/L/ -- 2.3%
Food -- N.M.
International Fast Foods Corporation 51 shs 21/B/
--------
Pharmaceuticals -- 0.4%
Unigene Labs, Inc. 500 1,437/B/
--------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks -- Continued
Telecommunications -- 1.9%
Global Crossing Limited 185 shs 4,871/B/
McLeodUSA Incorporated 18 378
Pegasus Communications Corporation 14 676
--------
5,925
--------
Total Common Stocks (Identified Cost -- $2,036) 7,383
-------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks -- 5.3%
Cable -- 0.6%
News Corporation Finance Trust 5.000% 29 1,752
--------
Industrial -- 1.1%
High Voltage Engineering Corporation 12.500% 5 3,568/B,F/
IXC Communications Incorporated 12.500% N.M. 3/B,F/
--------
3,571
--------
Media -- 2.7%
Paxson Communications Corporation 12.500% 2 1,984
Paxson Communications Corporation 13.250% 1 5,686
Source Media, Inc. 13.500% 129 820/B,F/
--------
8,490
--------
Retail -- N.M.
Relax the Back Corporation 10.000% 1,702 0/F,J/
--------
Telecommunications -- 0.9%
PSINet Inc. 7.000% 80 2,730
--------
Total Preferred Stocks (Identified Cost -- $25,325) 16,543
-------------------------------------------------------------------------------------------------------------------------------
Warrants/L/ -- 0.2%
Firstworld Communications Incorporated 4 wts 280/B/
Global Telesystems Holdings Ltd. 10 0/B/
Metricom Incorporated 4 85
MMH Holdings Incorporated N.M. 0/B/
Next Generation Network Incorporated 16 0
Primus Telecommunications Group 3 93/B/
Relax the Back Corporation 1,307 0/J/
Star Choice Communications 20 133/B/
V2 Music Holdings PLC 7 0/B/
V2 Music Holdings PLC 6 0/B/
--------
Total Warrants (Identified Cost -- $1,230) 591
--------
Total Long-Term Securities (Identified Cost -- $353,018) 298,413
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Par/Shares Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Securities -- 4.1%
Repurchase Agreements -- 4.1%
Lehman Brothers, Inc.
6.60%, dated 6/30/00, to be repurchased at $5,079
on 7/3/00 (Collateral: $5,325 Fannie Mae Notes,
5.67%, due 10/6/03, value $ 5,180) $ 5,076 $ 5,076
Merrill Lynch Government Securities, Inc.
6.55%, dated 6/30/00, to be repurchased at $8,004
on 7/3/00 (Collateral: $8,160 Freddie Mac Notes,
6.94%, due 1/14/10, value $ 8,160) 8,000 8,000
--------
Total Short-Term Securities (Identified Cost -- $13,076) 13,076
-------------------------------------------------------------------------------------------------------------------------------
Total Investments -- 98.7% (Identified Cost -- $366,094) 311,489
Other Assets Less Liabilities -- 1.3% 4,128
--------
Net assets consisting of:
Accumulated paid-in capital applicable to:
25,188 PrimaryClass shares outstanding $389,253
52 Navigator Class shares outstanding 807
Undistributed net investment income 632
Accumulated net realized gain/(loss) on investments, options and futures (20,470)
Unrealized appreciation/(depreciation) of investments, options and futures (54,605)
--------
Net assets -- 100.0% $315,617
========
Net asset value per share:
Primary Class $12.50
======
Navigator Class $12.50
======
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Yankee Bond -- A dollar-denominated bond issued in the U.S. by
foreign entities.
/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. These securities represent
20.9% of net assets.
/C/ Indexed Security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate (LIBOR). Consumer Price Index
(CPI), or the One-Year Treasury Constant Maturity Rate.
/D/ Zero-coupon bond -- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
/E/ Bond is in default at June 30, 2000.
/F/ Pay-in-Kind ("PIK") Security -- A bond in which interest during the
initial few years is paid in additional PIKbonds rather than in cash.
/G/ Stepped-coupon security -- A security with a predetermined schedule of
interest or dividend rate changes.
/H/ Convertible bond -- Bond may be converted into common stock of the
company.
/I/ Private placement.
/J/ Illiquid security valued at fair value under procedures adopted by the
Board of Directors.
/K/ Denominated in British pounds.
/L/ Non-income producing.
N.M. -- Not meaningful.
See notes to financial statements.
25
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 6/30/00
--------------------------------------------------------
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest $ 10,227 $ 7,185 $ 16,509
Dividends 63 25 1,641
-------- -------- ---------
Total income 10,290 7,210 18,150
-------- -------- ---------
Expenses:
Management fee 794 548 1,136
Distribution and service fees 700 456 872
Transfer agent and shareholder servicing expense 65 54 75
Audit and legal fees 25 19 92
Custodian fee 77 84 62
Directors' fees 5 4 5
Registration fees 21 16 26
Reports to shareholders 12 11 12
Other expenses 9 3 7
-------- -------- ---------
1,708 1,195 2,287
Less fees waived (289) (283) --
-------- -------- ---------
Total expenses, net of waivers 1,419 912 2,287
-------- -------- ---------
Net Investment Income 8,871 6,298 15,863
-------- -------- ---------
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments (2,441) (1,784) (20,405)
Options (3) (1) --
Futures 548 114 --
-------- -------- ---------
(1,896) (1,671) (20,405)
-------- -------- ---------
Change in unrealized appreciation/(depreciation)
of investments, options and futures 3,952 63 (6,914)
-------- -------- ---------
Net Realized and Unrealized Gain/(Loss)
on Investments 2,056 (1,608) (27,319)
-------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting
From Operations $ 10,927 $ 4,690 $ (11,456)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
26
<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
--------------------- ----------------------- -----------------------
Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended
6/30/00 12/31/99 6/30/00 12/31/99 6/30/00 12/31/99
---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Change in Net Assets:
Net investment income $ 8,871 $ 18,043 $ 6,298 $ 11,129 $ 15,863 $ 28,018
Net realized gain/(loss) on investments,
options and futures (1,896) (7,667) (1,671) (5,681) (20,405) 70,521
Change in unrealized appreciation/(depreciation)
of investments, options and futures 3,952 (12,058) 63 (6,779) (6,914) (59,732)
---------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 10,927 (1,682) 4,690 (1,331) (11,456) 38,807
Distributions to shareholders:
From net investment income:
Primary Class (8,581) (17,554) (6,289) (11,113) (14,512) (28,724)
Navigator Class (290) (489) (9) (16) (29) (43)
From net realized gain on investments -- -- -- (569) (31,987) --
Change in net assets from Fund share
transactions:
Primary Class (31,531) (35,260) 2,786 27,497 (2,262) (68,840)
Navigator Class (582) 2,199 201 1 94 622
---------------------------------------------------------------------------------------------------------------------------
Change in net assets (30,057) (52,786) 1,379 14,469 (60,152) (58,178)
Net Assets:
Beginning of period 307,283 360,069 183,853 169,384 375,769 433,947
---------------------------------------------------------------------------------------------------------------------------
End of period $277,226 $ 307,283 $185,232 $ 183,853 $315,617 $ 375,769
---------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income $ -- $ -- $ 90 $ 90 $ 632 $ (690)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
27
<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) Total From In Excess Net
Value, Investment Investments, From Net of Net Realized
Beginning Income/ Options Investment Investment Investment Gain on
of Period (Loss) and Futures Operations Income Income Investments
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Intermediate-Term Portfolio
Six Months Ended
June 30, 2000* $ 9.92 $.33 $ .08 $ .41 $ (.33) $ -- $ --
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
Six Months Ended
June 30, 2000* $ 9.79 $.35 $ (.09) $ .26 $ (.35) $ -- $ --
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
Six Months Ended
June 30, 2000* $14.97 $.70 $(1.13) $ (.43) $ (.65) $ -- $(1.39)
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)
----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Distributions Ratio/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> <C> <C> <C> <C> <C> <C>
U.S. Government
Intermediate-Term Portfolio
Six Months Ended
June 30, 2000* $ (.33) $10.00 4.20%/D/ .46%/E/ 6.66%/E/ 362%/E/ $8,559
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
Six Months Ended
June 30, 2000* $ (.35) $ 9.70 2.81%/D/ .47%/E/ 7.41%/E/ 104%/E/ $ 437
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
Six Months Ended
June 30, 2000* $ (2.04) $12.50 (2.97)%/D/ .79%/E/ 9.66%/E/ 38%/E/ $ 651
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: 2000, .66%; 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: 2000, .78%; 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.
* 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 to retail investors
since 1987, and Navigator Class, offered to certain institutional investors
since December 1, 1994, December 1, 1995, and May 5, 1998, respectively.
Information about Primary 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 of Directors 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 June 30, 2000,
$7,573, or 2.4%, 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.
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 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
29
<PAGE>
----------------------------------------------------------------------------
income tax regulations. At June 30, 2000, accrued dividends payable were as
follows: Government Intermediate, $670; Investment Grade, $510; and High
Yield, $0. There were no capital gain distributions payable at June 30, 2000.
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 June 30,
2000, 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 $ -- $2,148
Investment Grade 796 8,047
High Yield 2,595 5,942
</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 six months ended June 30, 2000, 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 $426,318 $42,220 $458,080 $17,408
Investment Grade 55,294 39,112 56,871 36,369
High Yield 2,083 59,314 2,083 80,119
</TABLE>
At June 30, 2000, 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 $282,547 $2,642 $ (6,944) $ (4,302)
Investment Grade 196,097 1,448 (7,090) (5,642)
High Yield 366,094 9,370 (63,975) (54,605)
</TABLE>
30
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
-----------------------------------------------------------------------------
Unused capital loss carryforwards for federal income tax purposes at June
30, 2000, were as follows: Government Intermediate, $4,791 which expires in
2002, $699 which expires in 2003, and $4,880 which expires in 2007; and
Investment Grade, $5,433 which expires in 2007. 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>
<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 a Realize a gain or loss depending on whether the proceeds from the closing sale
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 a Realize a gain or loss without regard to any unrealized gain or loss on the
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>
31
<PAGE>
-----------------------------------------------------------------------------
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, 1999 -- $ -- $16,600 $ 166
Options written -- -- -- --
Options closed -- -- -- --
Options expired -- -- (16,600) (166)
Options exercised -- -- -- --
-----------------------------------------------------------------------------------------------------
Options outstanding, June 30, 2000 -- $ -- -- $ --
=====================================================================================================
<CAPTION>
Calls Puts
------------------------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1999 -- $ -- $4,600 $ 46
Options written -- -- -- --
Options closed -- -- -- --
Options expired -- -- (4,600) (46)
Options exercised -- -- -- --
-----------------------------------------------------------------------------------------------------
Options outstanding, June 30, 2000 -- $ -- -- $ --
=====================================================================================================
</TABLE>
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
June 30, 2000, are listed at the end of Government Intermediate's and
Investment Grade's respective statements of net assets.
32
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
-----------------------------------------------------------------------------
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.
At June 30, 2000, 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 which each Fund pays a fee,
computed daily and payable monthly, at annual rates of each Fund's average
daily net assets.
LMFA has agreed to waive its fees to the extent each Fund's expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) exceed
during any month certain annual rates. The following chart shows annual rates
of management fees; expense limits and their expiration dates; management
fees waived; and management fees payable for each Fund:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 At June 30, 2000
---------------- ----------------
Management Management
Management Expense Expense Limitation Fees Fee
Fund Fee Limitation Expiration Date Waived Payable
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Intermediate April 30, 2001, or until net $289 $ 36
Primary 0.55% 1.00% assets reach $400 million
Navigator 0.55% 0.50%
Investment Grade April 30, 2001, or until net 283 43
Primary 0.60% 1.00% assets reach $250 million
Navigator 0.60% 0.50%
High Yield -- -- 170
Primary 0.65% None
Navigator 0.65% None
</TABLE>
33
<PAGE>
-----------------------------------------------------------------------------
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; and 77% for High Yield. For Government Intermediate, LMFA
pays the Adviser a fee, computed daily and payable monthly, at 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 June 30, 2000
------------------------
Distribution Service Distribution and Service
Fund Fee Fee Fees Payable
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Intermediate 0.25% 0.25% $111
Investment Grade 0.25% 0.25% 75
High Yield 0.25% 0.25% 131
</TABLE>
Legg Mason also has an agreement with the Funds' transfer agent to assist
it with some of its duties. For this assistance, the transfer agent paid Legg
Mason the following amounts for the six months ended June 30, 2000:
Government Intermediate, $18; Investment Grade, $14; and High Yield, $23.
LMFA, the Adviser and Legg Mason are corporate affiliates and wholly owned
subsidiaries of Legg Mason, Inc.
7. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in a
$200 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 Credit Agreement bear
interest at prevailing short-term interest rates. For the six months ended
June 30, 2000, the Funds had no borrowings under the Credit Agreement.
34
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
-----------------------------------------------------------------------------
8. Fund Share Transactions:
At June 30, 2000, 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> <C> <C> <C> <C> <C> <C> <C>
Government Intermediate
--Primary Class
Six Months Ended June 30, 2000 2,409 $ 23,890 703 $ 6,979 (6,285) $ (62,400) (3,173) $(31,531)
Year Ended December 31, 1999 10,086 103,037 1,525 15,471 (15,101) (153,768) (3,490) (35,260)
--Navigator Class
Six Months Ended June 30, 2000 98 $ 979 22 $ 217 (179) $ (1,778) (59) $ (582)
Year Ended December 31, 1999 397 4,058 40 404 (220) (2,263) 217 2,199
Investment Grade
--Primary Class
Six Months Ended June 30, 2000 2,848 $ 27,686 537 $ 5,198 (3,097) $ (30,098) 288 $ 2,786
Year Ended December 31, 1999 7,566 76,474 1,062 10,617 (5,942) (59,594) 2,686 27,497
--Navigator Class
Six Months Ended June 30, 2000 21 $ 201 N.M. $ -- -- $ -- 21 $ 201
Year Ended December 31, 1999 -- -- N.M. 1 -- -- N.M. 1
High Yield
--Primary Class
Six Months Ended June 30, 2000 2,157 $ 31,122 3,069 $39,738 (5,101) $ (73,122) 125 $ (2,262)
Year Ended December 31, 1999 9,203 142,978 1,504 23,201 (15,121) (235,019) (4,414) (68,840)
--Navigator Class
Six Months Ended June 30, 2000 -- $ -- 7 $ 94 -- -- 7 $ 94
Year Ended December 31, 1999 42 648 3 42 (4) (68) 41 622
</TABLE>
35
<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
-------------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 . 539 . 0000
LMF-056
8/00
