Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Western Asset Management Company
Pasadena, CA
Board of Directors
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., Vice Chairman
Edward A. Taber, III, President
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, D.C.
Independent Accountants
Coopers & Lybrand L.L.P.
Baltimore, MD
The U.S. Government Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government. There can be no assurance that the fund will
always be able to maintain a stable net asset value of $1.00 per share.
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Wood Walker, Incorporated
-------------------------------------------
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
LMF-025
Semi-Annual Report
June 30, 1997
LEGG MASON
INCOME
TRUST, INC.
U.S. Government Intermediate
Investment Grade
High Yield
U.S. Goverment Money Market
Putting Your Future First
[LEGG MASON LOGO]
FUNDS
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust's semi-annual
report, including reports for the Legg Mason U.S. Government Intermediate
Portfolio, Investment Grade Income Portfolio, High Yield Portfolio and the U.S.
Government Money Market Portfolio.
The following table summarizes key statistics for each portfolio, as of June
30, 1997:
Net Asset Value
SEC Yield* Average Life Per Share
---------- ------------ ---------------
Government Intermediate 5.63% 6.9 years $10.25
Investment Grade 5.90% 12.9 years $10.25
High Yield 8.43% 5.9 years $15.83
Government Money Market 4.80% 67 days $ 1.00
In the six months through June 30, total returns for the Government
Intermediate, Investment Grade and High Yield Portfolios (not annualized) were
2.45%, 3.52% and 6.96%, respectively. Total return measures investment
performance in terms of appreciation or depreciation in a portfolio's net assets
per share, plus dividends and any capital gain distributions. Beginning on the
following page, the portfolio managers responsible for the Income Trust
portfolios discuss the investment outlook. The Funds' total returns in various
periods since their inceptions (and performance information for Navigator
shares) are shown on page 4.
For each of our funds, historical performance is not indicative of future
results, and principal value of our holdings will continue to fluctuate so that
shares, when redeemed, may be worth more or less than their original cost.
Many of our shareholders regularly add to their fund holdings by authorizing
automatic, monthly transfers from their bank checking or Legg Mason accounts.
Your Legg Mason Financial Advisor will be happy to help you make these
arrangements if you would like to purchase shares in this convenient way.
Sincerely,
/s/John F. Curley, Jr.
----------------------
John F. Curley, Jr.
Chairman
August 13, 1997
- ------------
*The SEC Yield reported for the U.S. Government Intermediate, Investment Grade
and High Yield Portfolios is for the 30 days ended June 30, 1997 and for the
U.S. Government Money Market Portfolio is for the 7 days ended June 30, 1997.
<PAGE>
Portfolio Managers' Comments
Legg Mason Income Trust, Inc.
For the past three years, a growth paradigm has best described the bond
market's roller coaster ride, with interest rates rising as the economy gains
strength and falling on signs of weakness. Underlying the ups and downs is a
feedback effect: a stronger economy causes interest rates to rise, then higher
rates dampen demand and cause the economy to soften; a softer economy leads
rates back down, and lower rates then stimulate demand and cause the economy to
strengthen, etc. Apparently, since the ups and downs have become more muted of
late, the market has come to understand this. For example, even as the economy
weakened and yields fell in the second quarter, expectations of a rebound in the
economy and in yields quickly surfaced, limiting the current drop in rates from
their highs.
The problem with this paradigm, however, is that growth is not necessarily
the cause of inflation, which is what ultimately determines the level of
interest rates. We have long felt that much of the economy's strength in this
business cycle was due to the beneficial side-effects of disinflation, because
in the absence of pricing power, economic agents have a strong incentive to work
more productively. The evidence to date bears this out, as productivity gains
have been the hallmark of the expansion, and inflation has fallen dramatically.
Currently, we are seeing the most benign inflation the economy has had since
the mid-'50s and '60s, when bond yields were 4% and mortgages were 5%.
Year-to-date through May, the Consumer Price Index ("CPI") is up at a 1.5%
annual pace, and the Producer Price Index ("PPI") is falling at a 3.9% pace; at
the end of last year, these indices were registering +3.3% and +2.8%,
respectively. Not only is measured inflation falling, but lots of prices are
actually falling: gold has fallen to its lowest level in 12 years, the Journal
of Commerce Index is near a 3-year low, the Goldman Sachs Index has been falling
steadily since January, and the Commodities Research Bureau ("CRB") Index is at
a 2-year low. Moreover, since the dollar is up 10% against most major currencies
over the past year, the price of everything outside our borders has dropped 10%.
Finally, key money supply measures have registered a substantial slowdown from
the first quarter, rounding out a picture of generally tight monetary
conditions.
Against this super-disinflationary (and almost deflationary) backdrop, the
Fed tightened monetary policy earlier this year, and the bond market has
effectively tightened things even more. With inflation collapsing and interest
rates unchanged to higher on the year, real interest rates have risen
significantly: based on the CPI, which almost certainly overstates inflation,
real bond yields have gone from 3.5% to 5%. High real interest rates should help
keep the economy from "overheating," and create a bias toward lower, rather than
higher, inflation.
Just as predictability is soon arbitraged away by an efficient market,
paradigms don't last forever, so the bond market may be due for a paradigm shift
at some point. If nothing else, the growth paradigm is simply inadequate to
explain how the economy can grow "above trend" for years, yet still experience
declining inflation. Occam's Razor suggests that the simplest explanation is
probably the best: monetary policy is tight, inflation expectations are falling,
and this is good for growth. If it occurs, the shift to a new paradigm--which
would place more emphasis on monetary and price indicators and less on
growth--likely would be accompanied by further declines in interest rates as the
reality of low inflation sets in and fears of growth subside. But as with any
paradigm shift, many players could be caught off guard. This increases the
chances of a deflationary shock, which could result in unexpectedly slow growth
as earnings are squeezed and confidence erodes.
2
<PAGE>
This view of the world leads to the conclusion that interest rates are still
attractive relative to inflation, but it does not suggest an obvious direction
for the shape of the yield curve. Stronger-than-expected growth would almost
certainly result in a flatter curve, but high real rates mitigate against that.
Weaker-than-expected growth would lead to a much steeper yield curve, but the
salutary effects of lower interest rates mitigate against that. Regardless of
the paradigm, low and stable inflation should keep interest rate volatility in
check, thus offsetting to a degree the narrowness of mortgage spreads. Barring a
deflationary shock, a disinflating and growing economy should be supportive of
corporate spreads, but rising deflationary risks and narrow spreads argue for
moving up the quality scale.
Western Asset Management Company
August 13, 1997
------------------------------------
Note to Shareholders of the High Yield Portfolio:
For your information, in recent years high yield bonds distributed to mutual
funds and other institutional investors pursuant to Rule 144A of the Securities
Act of 1933 have become a large and important part of the high yield bond
market. Formerly, the High Yield Portfolio's holdings of these bonds, along with
holdings of certain other securities, were limited to a maximum of 25% of the
Portfolio's holdings because of concerns regarding market liquidity of these
securities. At its most recent meeting, the Portfolio's Board of Directors voted
to remove this limitation with respect to Rule 144A securities based on
assurances from the Portfolio's investment advisor that market liquidity of Rule
144A securities is now generally comparable to that of other high yield
securities available in the marketplace.
3
<PAGE>
Performance Information Legg Mason
Income Trust, Inc.
Total Return for One and Five Years and Life of Funds as of June 30, 1997
The returns shown are based on historical results and are not intended
to indicate future performance. The investment return and principal value
of an investment in each of these funds will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Average annual returns tend to smooth out variations in a
fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The Government Intermediate and Investment Grade Portfolios each have
two classes of shares: Primary Class and Navigator Class. The Navigator
Class, offered only to certain institutional investors, pays fund expenses
similar to those paid by the Primary Class, except that transfer agency
fees and shareholder servicing expenses are determined separately for each
class and the Navigator Class does not incur Rule 12b-1 distribution fees.
The U.S. Government Money Market Portfolio is excluded from this
performance information because it does not have a variable share price.
The Funds' total returns as of June 30, 1997 were as follows:
<TABLE>
<CAPTION>
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
- --------------------------------------------------------------------------------------------
<S><C>
Average Annual Total Return
Primary Class:
One Year +7.04% +9.33% +15.07%
Five Years +5.71 +7.34 N/A
Life of Class (dagger) +7.64 +8.51 +10.55
Navigator Class:
One Year +7.65% +9.99% N/A
Life of Class (double dagger) +8.72 +6.69 N/A
Cumulative Total Return
Primary Class:
One Year +7.04% +9.33% +15.07%
Five Years +31.98 +42.49 N/A
Life of Class (dagger) +107.30 +124.53 +40.85
Navigator Class:
One Year +7.65% +9.99% N/A
Life of Class (double dagger) +24.08 +10.45 N/A
- --------------------------------------------------------------------------------------------
</TABLE>
(dagger) Primary Class inception dates are:
U.S. Government Intermediate-Term Portfolio -- August 7, 1987
Investment Grade Income Portfolio -- August 7, 1987
High Yield Portfolio -- February 1, 1994
(dagger)(dagger) Navigator Class inception dates are:
U.S. Government Intermediate-Term Portfolio -- December 1, 1994
Investment Grade Income Portfolio -- December 1, 1995
4
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1997 (Unaudited)
(Amounts in Thousands)
U.S. Government Intermediate-Term Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
--------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government and Agency Obligations -- 30.4%
Fixed-rate Securities -- 21.0%
Federal Farm Credit Bank 6.66% 12/26/06 $ 5,850 $ 5,755
Overseas Private Investment Corporation 6.93% 12/15/08 15,000 15,027
Private Export Funding Corporation 7.03% 10/31/03 6,500 6,624
Tennessee Valley Authority 6.235% 7/15/45 5,000 4,986
United States Treasury Bonds 6.25% 6/30/02 2,980 2,962
United States Treasury Bonds 6.625% 2/15/27 3,200 3,131
United States Treasury Notes 0% 5/15/99 600 537(A)
United States Treasury Notes 0% 8/15/99 3,600 3,169(A)
United States Treasury Notes 6.875% 8/31/99 1,000 1,015
United States Treasury Notes 7.125% 2/29/00 4,000 4,088
United States Treasury Notes 6.25% 4/30/01 5,000 4,986
United States Treasury Notes 6.625% 5/15/07 9,000 9,075
-------
61,355
-------
Inflation-indexed Securities -- 9.4%
United States Treasury Inflation-Indexed Security 3.375% 1/15/07 28,160 27,482(E)
-------
Total U.S. Government and Agency Obligations (Identified Cost-- $88,860) 88,837
--------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 47.7%
Fixed-rate Securities -- 37.7%
Federal Home Loan Mortgage Corporation 10.75% 7/1/00 6 7
Federal Home Loan Mortgage Corporation 8.75% 2/1/01 to 10/1/01 855 885
Federal Home Loan Mortgage Corporation 6.55% 11/13/01 15,000 14,843
Federal Home Loan Mortgage Corporation 9% 2/1/02 399 412
Federal Home Loan Mortgage Corporation 7.10% 4/10/07 5,000 5,100
Federal Home Loan Mortgage Corporation 8.25% 2/1/08 589 614
Federal Home Loan Mortgage Corporation 8.50% 12/1/08 274 284
Federal Home Loan Mortgage Corporation 9.75% 11/1/09 293 313
Federal Home Loan Mortgage Corporation 9.75% 11/1/14 225 240
Federal Home Loan Mortgage Corporation 8.50% 1/1/17 1,033 1,072
Federal Home Loan Mortgage Corporation 9% 1/1/17 to 9/1/20 2,166 2,297
Federal Home Loan Mortgage Corporation 9.30% 4/15/19 3,947 4,162
Federal Home Loan Mortgage Corporation 9% 1/1/21 1,334 1,428
Federal Home Loan Mortgage Corporation 8.50% 6/1/21 1,257 1,315
Federal Home Loan Mortgage Corporation 6.50% 2/1/26 to 8/1/26 5,460 5,236
Federal National Mortgage Association 11.50% 4/1/04 2,459 2,609
Federal National Mortgage Association 7.55% 3/27/07 15,000 15,103
Federal National Mortgage Association 8.50% 6/1/10 to 8/1/11 3,777 3,902
Federal National Mortgage Association 6.50% 11/1/10 to 7/1/13 25,527 25,013
Federal National Mortgage Association 9.50% 7/1/14 795 855
Federal National Mortgage Association 11% 12/1/15 876 960
Federal National Mortgage Association 9.50% 6/25/18 1,358 1,447
</TABLE>
5
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio--Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government Agency Mortgage-backed Securities -- Continued
Fixed-rate Securities -- Continued
Federal National Mortgage Association 9% 11/1/21 $ 2,533 $ 2,695
Federal National Mortgage Association 6.50% 4/1/24 31 30
Federal National Mortgage Association 7% 12/1/26 to 2/1/27 1,960 1,920
Government National Mortgage Association 9% 7/15/04 to 8/15/06 4,613 4,817
Government National Mortgage Association 7.50% 3/15/17 27 28
Government National Mortgage Association 9% 3/15/20 to 9/15/22 99 105
Government National Mortgage Association 7.50% 12/15/22 to 9/15/25 3,553 3,577
Government National Mortgage Association 8% 1/15/23 to 2/15/26 3,150 3,227
Government National Mortgage Association 7% 6/15/23 to 3/15/26 5,821 5,727
--------
110,223
--------
Indexed Securities(F) -- 8.0%
Government National Mortgage Association 6.875% 12/20/21 2,857 2,936
Government National Mortgage Association 7.125% 4/20/22 to 4/20/25 9,135 9,422
Government National Mortgage Association 7% 1/20/23 to 1/20/25 10,742 11,032
--------
23,390
--------
Stripped Securities(D) -- 0.5%
Federal National Mortgage Association 152% 11/25/20 148 1,477(1)
--------
Variable-rate Securities(C) -- 1.5%
Federal National Mortgage Association 7.629% 5/25/22 4,165 4,243
--------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost-- $138,930) 139,333
---------------------------------------------------------------------------------------------------------------------
Asset-backed Securities -- 3.2%
Fixed-rate Securities -- 0.8%
AFC Home Equity Loan Trust 7.75% 12/15/06 1,612 1,633
ContiMortgage Home Equity Loan Trust 8.60% 2/15/10 702 704
--------
2,337
--------
Indexed Securities(F) -- 2.4%
First USA Credit Card Master Trust 5.868% 2/10/06 7,000 7,018
--------
Total Asset-backed Securities (Identified Cost-- $9,348) 9,355
---------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
---------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds and Notes -- 5.7%
Fixed-rate Securities -- 4.0%
Deutsche Bank Financial Inc. 6.70% 12/13/06 $ 3,000 $ 2,925
Ford Motor Credit Company 7.75% 10/1/99 2,150 2,206
Philip Morris Companies Inc. 9.25% 2/15/00 2,000 2,119
Time Warner, Inc. 7.75% 6/15/05 4,500 4,573
-------
11,823
-------
Indexed Securities(F) -- 1.7%
BankAmerica Capital III 6.386% 1/15/27 5,000 4,908
-------
Total Corporate Bonds and Notes (Identified Cost-- $16,612) 16,731
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 5.6%
Fixed-rate Securities -- 2.8%
Merrill Lynch Mortgage Investors, Inc. 6.69% 11/21/28 3,085 3,082
Metropolitan Asset Funding, Inc. 6.85% 8/20/05 3,000 2,976
Resolution Trust Corporation 10% 5/25/22 2,084 2,110
-------
8,168
-------
Variable-rate Securities(C) -- 2.8%
Resolution Trust Corporation 8.756% 3/25/21 5,681 5,775
Resolution Trust Corporation 7.971% 9/25/29 2,530 2,548
-------
8,323
-------
Total Mortgage-backed Securities (Identified Cost-- $16,663) 16,491
- ---------------------------------------------------------------------------------------------------------------------------
Yankee Bonds(B) -- 5.0%
Fixed-rate Securities -- 4.3%
Petrozuata Finance 7.63% 4/1/09 3,000 2,995(G)
Province of Quebec 7% 1/30/07 5,700 5,648
YPF Sociedad Anonima 7% 10/26/02 963 961
YPF Sociedad Anonima 7.50% 10/26/02 2,825 2,861
-------
12,465
-------
Indexed Securities(F) -- 0.7%
United Mexican States 7.875% 8/6/01 2,150 2,157(G)
-------
Total Yankee Bonds (Identified Cost-- $14,564) 14,622
- ---------------------------------------------------------------------------------------------------------------------------
Short-term Investments -- 1.7%
Corporate -- 0.2%
General Motors Acceptance Corporation 7.20% 1/29/98 500 503
-------
</TABLE>
7
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio--Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. Government Obligations -- 1.2%
United States Treasury Bills 5.16% 8/21/97 $ 1,000 $ 993(H)
United States Treasury Notes 0% 5/15/98 1,000 952(A)
United States Treasury Notes 6.125% 5/15/98 1,500 1,504
--------
3,449
--------
Repurchase Agreement -- 0.3%
J.P. Morgan Securities, Inc.
6.05%, dated 6/30/97, to be repurchased at $1,009 on 7/1/97
(Collateral: $1,005 Federal National Mortgage Association
Medium-term Notes, 7.49%, due 5/22/07, value $1,044) 1,009 1,009
--------
Options Purchased(I) -- N.M.
Eurodollar Future Put, September 97, Strike Price $94.00 91(J) 9
--------
Total Short-term Investments (Identified Cost-- $4,978) 4,970
- ---------------------------------------------------------------------------------------------------------------------
Total Investments-- 99.3% (Identified Cost-- $289,955) 290,339
Other Assets Less Liabilities-- 0.7% 2,047
--------
Net Assets Consisting Of:
Accumulated paid-in-capital applicable to:
27,834 Primary Class shares outstanding $296,700
704 Navigator Class shares outstanding 7,230
Accumulated net realized loss on investments, options and futures (11,978)
Unrealized appreciation of investments 434
--------
Net Assets-- 100.0% $292,386
========
Net Asset Value Per Share:
Primary Class $10.25
======
Navigator Class $10.25
======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Actual Appreciation/
Expiration Date Contracts (Depreciation)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Futures Contracts Purchased(I)
U.S. Treasury Note Future September 97 75 $(45)
====
Futures Contracts Written(I)
U.S. Treasury Note Future September 97 207 $ 95
====
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Zero-coupon Bond -- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
(B) Yankee Bonds -- Dollar denominated bonds issued in the U.S. by foreign
entities.
(C) The coupon rates shown on variable rate securities are the rates at
June 30, 1997. These rates vary with the weighted average coupon of the
underlying loans.
(D) Stripped Securities - Securities with interest-only or principal-only
payment streams as denoted by superscript 1 or 2, respectively.
(E) United States Treasury Inflation-Indexed Security -- U.S. Treasury
security whose principal value is adjusted daily in accordance with
changes in the Consumer Price Index. Interest is calculated on the basis
of the current adjusted principal value.
(F) Indexed Securities -- The rate of interest earned on these securities
is tied to the London Interbank Offered Rate (LIBOR), the One Year
Treasury Constant Maturity Rate or a similar Index. The coupon rate is the
rate as of June 30, 1997.
(G) Rule 144a Security -- A security purchased pursuant to Rule 144a under
the Securities Act of 1933 which may not be resold subject to that rule
except to qualified institutional buyers.
(H) Collateral to cover futures sold.
(I) Options and futures are described in more detail in the notes to
financial statements.
(J) This represents the actual number of contracts.
N.M. Not Meaningful
See notes to financial statements.
9
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1997 (Unaudited)
(Amounts in Thousands)
Investment Grade Income Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Corporate Bonds and Notes -- 25.9%
Finance -- 4.9%
Associates Corporation, North America 8.15% 8/1/09 $ 1,000 $ 1,065
Deutsche Bank Financial Inc. 6.70% 12/13/06 1,860 1,814
General Motors Acceptance Corp. 0% 6/15/15 2,700 764(A)
J.P. Morgan Capital Trust 7.95% 2/1/27 180 180
Western Financial Savings Bank F.S.B. 8.50% 7/1/03 1,000 1,000
-------
4,823
-------
Food and Beverage -- 1.3%
RJR Nabisco, Inc. 8.75% 4/15/04 200 203
RJR Nabisco, Inc. 8.75% 7/15/07 1,110 1,124
-------
1,327
-------
Industrial -- 8.9%
Ford Motor Company 7.70% 5/15/97 1,000 1,008
K Mart Corporation 7.95% 2/1/23 2,000 1,810
Loews Corporation 7.625% 6/1/23 2,000 1,903
MFS Communications 0% 1/15/04 700 652(K)
TCI Communications Incorporated 8.75% 8/1/15 530 556
TCI Communications Incorporated 9.65% 3/31/27 1,650 1,744
Tele Communications Incorporated 9.25% 1/15/23 200 208
Westpoint Stevens Inc. 8.75% 12/15/01 1,000 1,030
-------
8,911
-------
Media and Entertainment -- 1.8%
News America Holdings Incorporated 8.875% 4/26/23 1,000 1,073
News America Holdings Incorporated 8.25% 10/17/2096 700 693
-------
1,766
-------
Oil and Gas -- 1.1%
Louis Dreyfus Natural Gas Corporation 9.25% 6/15/04 1,000 1,080
-------
Transportation -- 1.0%
Delta Airlines, Inc. 7.79% 12/1/98 1,000 1,020
-------
Utilities -- 6.9%
Connecticut Light and Power Company 7.875% 6/1/01 1,750 1,760
Gulf States Utilities Corp. 8.25% 4/1/04 1,800 1,891
First PV Funding Corporation 10.15% 1/15/16 487 513
Niagara Mohawk Power Corporation 7.75% 5/15/06 1,200 1,186
North Atlantic Energy Corporation 9.05% 6/1/02 811 821
System Energy Resources, Inc. 7.43% 1/15/11 765 742
-------
6,913
-------
Total Corporate Bonds and Notes (Identified Cost-- $25,290) 25,840
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Asset-backed Securities -- 4.4%
Advanta Home Equity Loan Trust 5.95% 3/25/09 $ 949 $ 908
Chevy Chase Home Loan Trust 7.15% 5/15/15 1,600 1,604
ContiMortgage Home Equity Loan Trust 8.60% 2/15/10 351 352
Green Tree Financial Corp. 7.85% 7/15/04 1,485 1,500
---------
Total Asset-backed Securities (Identified Cost-- $4,374) 4,364
--------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 11.2%
Fixed-rate Securities -- 9.9%
Asset Securitization Corporation 6.88% 11/13/26 1,900 1,899
Asset Securitization Corporation 7.49% 4/14/27 1,800 1,852
Asset Securitization Corporation 6.92% 2/14/29 1,173 1,171
First Union-Lehman Brothers Commercial Mortgage 7.38% 4/18/07 400 409
Merrill Lynch Mortgage Investors, Inc. 6.96% 11/21/28 1,600 1,590
Nomura Asset Securities Corporation 7.12% 4/13/36 680 684
Oakdale Mall Trust 94-1 Class A 7.95% 5/1/06 1,000 1,032(B)
PSB Financial Corporation II 11.05% 12/1/15 714 764
Resolution Trust Corporation 10% 5/25/22 440 445
---------
9,846
---------
Variable-rate Securities(C) -- 1.3%
Resolution Trust Corporation 6.751% 4/25/28 996 980(B)
Resolution Trust Corporation 8.30% 9/25/29 346 349
---------
1,329
---------
Total Mortgage-backed Securities (Identified Cost-- $11,191) 11,175
--------------------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 25.6%
Fixed-rate Securities -- 19.2%
Resolution Funding Corporation 0% 10/15/20 3,400 659(A)
United States Treasury Bonds 6% 2/15/26 4,570 4,090
United States Treasury Bonds 6.50% 11/15/26 60 58
United States Treasury Bonds 6.625% 2/15/27 9,860 9,647
United States Treasury Notes 6% 6/30/99 700 699
United States Treasury Notes 5.625% 11/30/00 600 588
United States Treasury Notes 6.25% 4/30/01 1,000 997
United States Treasury Notes 7.25% 8/15/04 2,300 2,398
---------
19,136
---------
Inflation-indexed Securities -- 6.4%
United States Treasury Inflation-Indexed Security 3.375% 1/15/07 6,502 6,345(G)
---------
Total U.S. Government and Agency Obligations (Identified Cost-- $25,374) 25,481
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Agency Mortgage-backed Securities -- 30.4%
Fixed-rate Securities -- 24.9%
Federal Home Loan Mortgage Corporation 8.75% 10/1/01 $ 42 $ 44
Federal Home Loan Mortgage Corporation 8.50% 2/1/04 269 276
Federal Home Loan Mortgage Corporation 6% 2/1/14 2,133 2,015
Federal Home Loan Mortgage Corporation 6.50% 9/15/15 119 119
Federal Home Loan Mortgage Corporation 7% 8/1/24 to 5/1/26 10,046 9,906
Federal Home Loan Mortgage Corporation 6.50% 2/1/26 to 3/1/26 1,519 1,456
Federal Home Loan Mortgage Corporation 8% 7/1/26 1,210 1,240
Federal National Mortgage Association 8% 4/25/06 1,000 1,023
Federal National Mortgage Association 9.15% 9/25/18 179 183
Federal National Mortgage Association 6% 9/1/25 987 924
Government National Mortgage Association 9% 7/15/16 to 6/15/17 1,427 1,533
Government National Mortgage Association 8% 12/15/26 2,589 2,648
Government National Mortgage Association 8% 5/1/27 3,400 3,479(E)
---------
24,846
---------
Indexed Securities(D) -- 2.1%
Government National Mortgage Association 6.875% 10/20/22 632 650
Government National Mortgage Association 7.125% 8/20/23 1,437 1,480
---------
2,130
---------
Variable-rate Securities(C) -- 3.4%
Federal Home Loan Mortgage Corporation 7.925% 9/1/24 1,105 1,161
Student Loan Marketing Association 5.55% 10/25/05 2,200 2,198
---------
3,359
---------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost-- $29,979) 30,335
--------------------------------------------------------------------------------------------------------------------
Yankee Bonds(F) -- 3.3%
Fixed-rate Securities -- 2.6%
Republic of Argentina Global Bond 11.375% 1/30/17 400 446
United Mexican States 11.50% 5/15/26 800 914
YPF Sociedad Anonima 7.50% 10/26/02 1,211 1,226
---------
2,586
---------
Indexed Securities(D) -- 0.7%
Republic of Argentina Floating Rate Bond 6.75% 3/31/05 776 728
---------
Total Yankee Bonds (Identified Cost-- $3,273) 3,314
--------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Preferred Stock -- 1.4%
News Corp. Limited 5% 11/12/16 300 shs $ 199(B)
Time Warner Incorporated 10.25% 7/1/16 1 1,202(B)
------
Total Preferred Stock (Identified Cost-- $1,291) 1,401
--------------------------------------------------------------------------------------------------------------------
Warrants(H)-- 0.1%
News Corp. Limited (Identified Cost-- $111) 3 wts 104(B)
--------------------------------------------------------------------------------------------------------------------
Short-term Investments -- 3.2%
U.S. Government Obligations -- 1.0%
United States Treasury Bills 5.16% 8/21/97 $ 1,000 993(I)
------
Repurchase Agreement-- 2.1%
J.P. Morgan Securities, Inc.
6.05%, dated 6/30/97, to be repurchased at $2,079 on 7/1/97
(Collateral: $2,070 Federal National Mortgage Association
Medium-term Notes, 7.49%, due 5/22/07, value $2,149) 2,079 2,079
------
Options Purchased(L) -- 0.1%
Eurodollar Future Call, September 97, Strike Price $93.75 37(J) 34
Eurodollar Future Put, September 97, Strike Price $94.00 31(J) 3
Eurodollar Future Call, December 97, Strike Price $94.00 133(J) 35
------
72
------
Total Short-term Investments (Identified Cost-- $3,131) 3,144
--------------------------------------------------------------------------------------------------------------------------
Total Investments-- 105.5% (Identified Cost-- $104,014) 105,158
Other Assets Less Liabilities-- (5.5%) (5,443)
------
Net Assets Consisting Of:
Accumulated paid in capital applicable to:
9,706 Primary Class shares outstanding $100,198
24 Navigator Class shares outstanding 247
Undistributed net investment income 43
Accumulated net realized loss on investments, options and futures (1,930)
Unrealized appreciation of investments, options and futures 1,157
--------
Net Assets-- 100.0% $99,715
=======
Net Asset Value Per Share:
Primary Class $10.25
=======
Navigator Class $10.25
=======
</TABLE>
13
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Futures Contracts Purchased(L)
U.S. Treasury Note Future September 97 80 $(39)
U.S. Treasury Note Future September 97 46 (28)
----
$(67)
====
Futures Contracts Written(L)
U.S. Treasury Bond Future September 97 78 $ 80
====
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(A) Zero-coupon bond -- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
(B) Rule 144a security -- A security purchased pursuant to Rule 144a under
the Securities Act of 1933 which may not be resold subject to that
rule except to qualified institutional buyers.
(C) The coupon rates shown on variable-rate securities are the rates at
June 30, 1997. These rates vary with the weighted average coupon of
the underlying loans.
(D) Indexed Security -- The rate of interest earned on these securities is
tied to the London Interbank Offered Rate (LIBOR), the Cost of Funds
Index (COFI), the One Year Treasury Constant Maturity Rate or a
similar Index. The coupon rates shown are the rates at June 30, 1997.
(E) When-issued Security -- Security purchased on a delayed delivery
basis. Final settlement amount and maturity date have not yet been
announced.
(F) Yankee Bond -- Dollar denominated bond issued in the U.S. by foreign
entities.
(G) United States Treasury Inflation-Indexed Security -- U.S. Treasury
security whose principal value is adjusted daily in accordance with
changes in the Consumer Price Index. Interest is calculated on the
basis of the current adjusted principal value.
(H) Non-income producing.
(I) Collateral to cover futures contracts sold.
(J) This represents the actual number of contracts.
(K) Step-up coupon bond -- The coupon on this security is 0% until July
15, 1997, at which time it will begin accruing interest at 9.375% of
accreted value until maturity.
(L) Options and Futures are described in more detail in the notes to
financial statements.
See notes to financial statements.
14
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1997 (Unaudited)
(Amounts in Thousands)
High Yield Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
---------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds and Notes -- 67.8%
Builders and Building Materials -- 3.5%
Fortress Group Inc. 13.75% 5/12/03 $ 5,000 $ 5,319
Degeorge Home Alliance 12% 4/1/01 3,500 3,036
Reliant Building Products 10.875% 5/1/04 2,000 2,047(D)
-------
10,402
-------
Cable and Media -- 1.7%
CS Wireless Systems, Inc. 0% 3/1/06 500 125(F)
Granite Broadcasting Corporation 9.375% 12/1/05 2,000 1,900
STC Broadcasting, Inc. 11% 3/15/07 2,000 2,132(D)
Young Broadcasting Corporation 10.125% 2/15/05 1,000 1,040
-------
5,197
-------
Chemicals -- 0.7%
Harris Chemical North America, Inc. 10.75% 10/15/03 2,000 2,060
-------
Computers -- 2.0%
Computervision Corporation 11.375% 8/15/99 3,000 2,962
Verio, Inc. 13.50% 6/15/04 3,000 3,045(D)
-------
6,007
-------
Financial -- 2.4%
Chatwins Group, Inc. 13% 5/1/03 3,000 3,180
Cityscape Financial Corp. 12.75% 6/1/04 4,000 3,960(D)
-------
7,140
-------
Food Services -- 0.4%
TLC Beatrice International Holdings 11.50% 10/1/05 1,000 1,130
-------
Forest Products and Paper -- 0.7%
American Pad and Paper Company 13% 11/15/05 1,723 1,981
-------
Gaming -- 4.3%
Aztar Corporation 11% 10/1/02 2,000 2,070
Boomtown Inc. 11.50% 11/1/03 4,000 4,310
Manning Real Estate Associates 15% 2/28/01 1,087 1,000(C,I)
Maritime Gaming 15% 2/28/01 1,630 1,500(C,I)
Trump Atlantic City Associates 11.25% 5/1/06 2,750 2,688
Trump Hotels & Casino Resorts, Inc. 15.50% 6/15/05 1,000 1,160
-------
12,728
-------
Gas and Pipeline Utilities -- 5.3%
Abraxas Petroleum Corporation 11.50% 11/1/04 2,500 2,713
Harcor Energy, Inc. 14.875% 7/15/02 2,000 2,368
Magnum Hunter Resources, Inc. 10% 6/1/07 2,000 2,020(D)
</TABLE>
15
<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>
Gas and Pipeline Utilities -- Continued
Snyder Oil Corp. 8.75% 6/15/07 $ 3,000 $ 3,007
Texas Petrochemicals 11.25% 7/1/06 2,500 2,703(D)
Transamerican Energy 11.50% 6/15/02 3,000 2,910(D)
-------
15,721
-------
Industrial -- 13.8%
W.R. Carpenter North America 10.625% 6/15/07 2,000 2,028(D)
EV International, Inc. 11% 3/15/07 2,000 2,125(D)
Haynes International, Inc. 11.625% 9/1/04 3,000 3,300
Neenah Corp. 11.125% 5/1/07 2,000 2,147(D)
Neenah Corp., Series C 11.125% 5/1/07 2,000 2,147(D)
NL Industries, Inc. 11.75% 10/15/03 2,000 2,170
NL Industries, Inc. 0% 10/15/05 2,000 1,870(F)
Norcal Waste Systems, Inc. 13.25% 11/15/05 1,500 1,680(G)
Penda Industries, Inc. 10.75% 3/1/04 4,500 4,596
Sabreliner Corp. 12.50% 4/15/03 3,000 3,131
Sea Containers Ltd., Sr. Nt. 9.50% 7/1/03 1,000 1,010
Sea Containers Ltd., Sr. Deb., Series "A" 12.50% 12/1/04 1,000 1,130
Sea Containers Ltd., Sr. Deb., Series "B" 12.50% 12/1/04 1,000 1,107
Statia Terminals International 11.75% 11/15/03 3,000 3,225
Standard Pacific Corp. 8.50% 6/15/07 3,000 2,977
Unisys Corp. 11.75% 10/15/04 3,000 3,278
Urohealth Systems, Inc. 12.50% 4/1/04 3,000 3,128(D)
-------
41,049
-------
Leisure and Entertainment -- 1.8%
Coleman Company, Inc. 0% 5/15/01 1,000 603(D,E)
GP Golf Palm Desert LLC 13.50% 2/16/98 1,900 1,952(C)
Stuart Entertainment, Inc. 12.50% 11/15/04 2,000 1,915
Sullivan Broadcasting 10.25% 12/15/05 1,000 1,029
-------
5,499
-------
Metals and Mining -- 2.7%
Gulf States Steel, Inc. 13.50% 4/15/03 4,000 4,000
Sheffield Steel Corp. 12% 11/1/01 4,000 3,945
-------
7,945
-------
Publishing and Advertising -- 3.3%
Affiliated Newspapers Investments, Inc. 13.25% 7/1/06 4,500 4,005
Garden States Newspapers, Inc. 12% 7/1/04 2,500 2,725
Outdoor Systems 8.875% 6/15/07 3,000 2,985(D)
-------
9,715
-------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
---------------------------------------------------------------------------------------------------------------------
<S> <C>
Retail Sales -- 2.9%
Cort Furniture Rental Corp. 12% 9/1/00 $ 1,400 $ 1,558
Duane Reade Corp. 12% 9/15/02 1,000 1,051
Duane Reade Holdings Corp. 0% 9/15/04 3,500 2,748(F)
General Host Company 11.50% 2/15/02 750 731
KMC Enterprises, Inc. 12% 4/1/07 2,500 2,506(C)
-------
8,594
-------
Services -- 2.5%
Ryder Trucks, Inc. 10% 12/1/06 2,000 2,032
Residential Reinsurance Ltd. 11.463% 12/15/08 3,000 3,000
SC International Services, Inc. 13% 10/1/05 2,000 2,260
-------
7,292
-------
Supermarkets -- 5.0%
Big V Supermarkets, Incorporated 11% 2/15/04 4,500 4,607
Food 4 Less Supermarket, Inc. 0% 7/15/05 6,000 4,530(F)
Ralphs Grocery Co. 11% 6/15/05 2,000 2,162
Smith's Food & Drug 11.25% 5/15/07 3,000 3,510
-------
14,809
-------
Telecommunications -- 9.9%
A+ Network, Inc. 11.875% 11/1/05 2,000 1,990
Advanced Radio Telecom Corp. 14% 2/15/07 2,000 2,000
Charter Communications International, Inc. 11.25% 3/15/06 1,250 1,350
Galaxy Telecom L.P. 12.375% 10/1/05 1,750 1,864
Globalstar L.P. 11.375% 2/15/04 3,000 3,007(D)
Global Telesystems Holdings Ltd. 12% 6/30/04 3,750 3,750(C)
Mobile Telecommunications Technologies
Corporation 13.50% 12/15/02 2,250 2,408
Nextel Communications, Inc. 0% 8/15/04 4,000 3,060(F)
Nextlink Communications 12.50% 4/15/06 1,750 1,879
Peoples Telephone Company, Inc. 12.25% 7/15/02 4,125 4,434
Phonetel Technologies, Inc. 12% 12/15/06 3,500 3,592
-------
29,334
-------
Textiles and Apparel -- 4.2%
Apparel Ventures, Inc. 12.25% 12/31/00 2,250 2,197
Casablanca Incorporated 14% 9/1/01 2,000 2,250(C)
Collins & Aikman Products Corporation 11.50% 4/15/06 1,500 1,688
National Fiberstock Corporation 11.625% 6/15/02 3,000 3,131
Pour le bebe, Incorporated 13% 8/9/01 2,750 3,121(C)
-------
12,387
-------
</TABLE>
17
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Transportation -- 0.7%
Greyhound Lines, Inc. 11.50% 4/15/07 $ 2,000 $ 2,133(D)
-------
Total Corporate Bonds and Notes (Identified Cost-- $190,908) 201,123
--------------------------------------------------------------------------------------------------------------------
Yankee Bonds(A) -- 7.4%
Cable and Media -- 1.7%
Newquest Capital PLC 11% 5/1/06 1,750 1,844
Rogers Cablesystems Limited 10% 3/15/05 2,000 2,160
TV Azteca SA De Cv 10.50% 2/15/07 1,000 1,030
-------
5,034
-------
Financial -- 0.3%
PTC International Finance BV 0% 7/1/07 1,700 1,007(D,F)
-------
Industrials -- 4.2%
FSW International, Inc. 12.50% 11/1/06 3,000 3,090
Geberit International 10.125% 4/15/07 4,000 2,488(D)
Multicanal Participacoes SA 12.625% 6/18/04 2,000 2,254
PT Polysindo EKA 13% 6/15/01 1,250 1,417
Tevecap SA 12.625% 11/26/04 3,000 3,124
-------
12,373
-------
Metals and Mining -- 0.7%
Algoma Steel, Inc. 12.375% 7/15/05 2,000 2,210
-------
Real Estate -- 0.5%
Trizec Corporation Ltd. 10.875% 10/15/05 1,340 1,481
-------
Total Yankee Bonds (Identified Cost-- $20,801) 22,105
--------------------------------------------------------------------------------------------------------------------
Preferred Stocks -- 13.0%
Cable and Media -- 4.3%
Cablevision Systems Corporation 11.25% 1 shs 45(H)
Capstar Broadcasting Partner 11.25% 35 3,557(D)
Chancellor Broadcasting 12.25% 30 3,608(H)
Granite Broadcasting Corp. 12.75% 1 106(H)
SFX Broadcasting, Inc. 12.65% 21 2,372(H)
Spanish Broadcasting System 14.25% 4 3,159(D,H)
-------
12,847
-------
Retail Sales -- 0.2%
Prime Retail Series B Convertible 8.50% 20 478
-------
Services -- 3.5%
GPA Group PLC 8% 41 4,320(C)
GPA Group PLC 0% 10,000 5,250(C,F)
La Petite Holdings Corporation 12.125% 18 810(B)
-------
10,380
-------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Rate Par/Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Telecommunications -- 5.0%
Global Telesystems Holdings Ltd. 14% 5 shs $ 5,263
Intermedia Communications, Inc. 13.50% 3 3,173(H)
Nextlink Communications 14% 41 2,205(H)
Pegasus Media Communications 12.75% 4 4,045(H)
-------
14,686
-------
Total Preferred Stocks (Identified Cost-- $35,563) 38,391
--------------------------------------------------------------------------------------------------------------------
Common Stocks -- 2.3%
Industrials -- 0.2%
Ladish Company, Inc. 305 686(B)
-------
Medical Supplies/Services -- 1.9%
Unigene Labs, Inc. 1,180 5,605(B)
-------
Metals/Mining -- 0.1%
Algoma Steel, Inc. 44 262(B)
-------
Telecommunications -- 0.1%
CS Wireless Systems, Inc. 1 0(B)
GT Parent Holdings LDC 4 375
-------
375
-------
Total Common Stocks (Identified Cost-- $4,679) 6,928
--------------------------------------------------------------------------------------------------------------------
Warrants(B) -- 0.2%
Affiliated Newspapers Investments, Inc. 2 77
Cort Furniture Business Services Corp. 25 84
Gulf States Steel, Inc. 2 70
Harcor Energy, Inc. 33 132
NS Group, Inc. 1 1
Spanish Broadcasting System 4 368(D)
-------
Total Warrants (Identified Cost-- $103) 732
--------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Par/Shares Value
---------------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement -- 9.1%
J.P. Morgan Securities, Inc.
6.05%, dated 6/30/97, to be repurchased at $26,951 on 7/1/97
(Collateral: $27,795 Federal National Mortgage Association
Mortgage-backed securities, 6.48%, due 6/28/04, value $27,646)
(Identified Cost-- $26,946) $ 26,946 $ 26,946
--------------------------------------------------------------------------------------------------------------------
Total Investments-- 99.8% (Identified Cost-- $279,000) 296,225
Other Assets Less Liabilities-- 0.2% 588
--------
Net Assets Consisting Of:
Accumulated paid-in capital applicable to
18,755 shares outstanding $280,103
Undistributed net investment income 1,273
Accumulated net realized loss on investments (1,788)
Unrealized appreciation of investments 17,225
--------
Net Assets-- 100.0% $296,813
========
Net Asset Value Per Share $15.83
======
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Yankee Bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(B) Non-income producing
(C) Private placement
(D) Rule 144a Security -- A security purchased pursuant to Rule 144a under
the Securities Act of 1933 which may not be resold subject to that rule
except to qualified institutional investors.
(E) Zero-coupon Bond -- A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
(F) Stepped coupon security -- A bond or preferred stock which amortizes to
par by a specified date at which time it begins to accrue interest or
pay dividends.
(G) Coupon increases .25% (semi-annually) until November 15, 1997,
thereafter remains fixed at 13.5% until maturity.
(H) Payment-in-kind ("PIK") security -- A bond or preferred stock in which
interest during the initial years is paid in additional PIK bonds or
preferred stock rather than in cash.
(I) Issuer is in bankruptcy and/or is in default on interest or principal
payments.
See notes to financial statements.
20
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1997 (Unaudited)
(Amounts in Thousands)
U.S. Government Money Market Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government and Agency Obligations -- 90.0%
Federal Farm Credit Bank 5.27 to 5.90% 7/1/97 to 4/1/98 $114,000 $113,990
Federal Home Loan Bank 5.48 to 5.73% 7/3/97 to 1/27/98 20,000 19,995
Federal Home Loan Mortgage Corporation 5.42 to 5.72% 7/14/97 to 3/17/98 64,000 63,590
Federal National Mortgage Association 5.35 to 6.08% 7/17/97 to 5/6/98 97,000 96,710
Student Loan Marketing Association 5.535% 2/25/98 5,000 4,995
--------
Total U.S. Government and Agency Obligations (Identified Cost-- $299,280) 299,280
---------------------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 10.3%
J.P. Morgan Securities, Inc.
6.05%, dated 6/30/97, to be repurchased at $34,333 on 7/1/97
(Collateral: $16,190 Federal Home Loan Mortgage Corporation Notes,
7.125%, due 7/21/99, value $17,509; and $17,937 Federal Home Loan Bank
Notes, 5.71%, due 1/21/98, value $18,838)
(Identified Cost-- $34,327) 34,327 34,327
--------------------------------------------------------------------------------------------------------------------
Total Investments, at amortized cost and value-- 100.3% 333,607
Other Assets Less Liabilities-- (0.3)% (876)
--------
Net Assets Applicable to 332,748 Shares Outstanding-- 100.0% $332,731
========
Net Asset Value Per Share $1.00
=====
</TABLE>
See notes to financial statements.
21
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 6/30/97
-----------------------------------------------------------------
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $10,272 $3,302 $12,906 $8,883
Dividends -- 201 329 --
------- ------ ------- ------
Total income 10,272 3,503 13,235 8,883
------- ------ ------- ------
Expenses:
Management fee 807 282 860 814
Distribution and service fees 716 235 655 155
Transfer agent and shareholder servicing expense 109 43 93 151
Audit and legal fees 35 16 28 26
Custodian fee 78 55 55 42
Director's fees 4 3 3 5
Registration fees 14 15 40 23
Reports to shareholders 21 12 19 21
Other expenses 7 4 13 7
------- ------ ------- ------
1,791 665 1,766 1,244
Less fees waived (344) (195) -- --
------- ------ ------- ------
Total expenses, net of waivers 1,447 470 1,766 1,244
------- ------ ------- ------
Net Investment Income 8,825 3,033 11,469 7,639
------- ------ ------- ------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on:
Investments (879) 120 359 2
Options (167) 110 -- --
Futures 318 (198) -- --
------- ------ ------- ------
(728) 32 359 2
------- ------ ------- ------
Change in unrealized appreciation (depreciation)
of investments, options and futures (1,096) 236 6,046 --
------- ------ ------- ------
Net Realized and Unrealized Gain (Loss)
on Investments (1,824) 268 6,405 2
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting
from Operations $ 7,001 $3,301 $17,874 $7,641
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
22
<PAGE>
Statements of Changes in Net Assets
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
------------------- ------------------- ------------------- ---------------------
Six Months Year Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended Ended Ended
6/30/97 12/31/96 6/30/97 12/31/96 6/30/97 12/31/96 6/30/97 12/31/96
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C>
Change in Net Assets:
Net investment income $ 8,825 $ 13,668 $ 3,033 $ 5,501 $ 11,469 $ 15,220 $ 7,639 $ 15,620
Net realized gain (loss)
on investments,
options, and futures (728) 51 32 570 359 (348) 2 42
Change in unrealized
appreciation (depreciation)
of investments,
options, and futures (1,096) (4,190) 236 (2,320) 6,046 8,599 -- --
--------------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations 7,001 9,529 3,301 3,751 17,874 23,471 7,641 15,662
Distributions to shareholders:
From net investment income:
Primary Class (8,593) (13,083) (3,024) (5,484) (10,196) (15,325) (7,639) (15,620)
Navigator Class (232) (253) (9) (17) -- -- -- --
In excess of net investment
income:
Primary Class -- (323) -- -- -- -- -- --
Navigator Class -- (9) -- -- -- -- -- --
Change in net assets from
Fund share transactions:
Primary Class (6,872) 65,943 7,276 8,039 55,027 117,545 7,519 8,522
Navigator Class (846) 4,054 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------
Change in net assets (9,542) 65,858 7,544 6,289 62,705 125,691 7,521 8,564
Net Assets:
Beginning of period 301,928 236,070 92,171 85,882 234,108 108,417 325,210 316,646
--------------------------------------------------------------------------------------------------------------------
End of period $292,386 $301,928 $99,715 $92,171 $296,813 $234,108 $332,731 $325,210
--------------------------------------------------------------------------------------------------------------------
Undistributed net
investment income $ -- $ -- $ 43 $ 43 $ 1,273 $ -- $ -- $ --
--------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
23
<PAGE>
Financial Highlights
Legg Mason Income Trust, Inc.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
------------------------------------- -----------------------------------------------
Net Realized
and Unrealized In Excess
Net Asset Net Gain (Loss) on Total In Excess Net of Net
Value, Investment Investments, From Net of Net Realized Realized
Beginning Income Options Investment Investment Investment Gain on Gain on
of Period (Loss) and Futures Operations Income Income Investments Investments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Intermediate-Term Portfolio
--Primary Class
Six Months Ended
June 30, 1997* $10.31 $ .28(A) $ (.06) $ .22 $ (.28) $ -- $ -- $ --
Years Ended Dec. 31,
1996 10.47 .61(A) (.16) .45 (.60) (.01) -- --
1995 9.72 .57(A) .75 1.32 (.57) -- -- --
1994 10.43 .51(A) (.71) (.20) (.51) -- -- --
1993 10.70 .53(A) .17 .70 (.53) -- (.39) (.05)
1992 10.77 .60(A) .05 .65 (.60) -- (.12) --
--Navigator Class
Six Months Ended
June 30, 1997* $10.31 $ .30(B) $ (.06) $ .24 $ (.30) $ -- $ -- $ --
Years Ended Dec. 31,
1996 10.47 .67(B) (.16) .51 (.66) (.01) -- --
1995 9.72 .62(B) .75 1.37 (.62) -- -- --
1994(E) 9.72 .05(B) -- .05 (.05) -- -- --
Investment Grade Income Portfolio
--Primary Class
Six Months Ended
June 30, 1997* $10.22 $ .30(C) $ .03 $ .33 $ (.30) $ -- $ -- $ --
Years Ended Dec. 31,
1996 10.44 .64(C) (.22) .42 (.64) -- -- --
1995 9.27 .65(C) 1.17 1.82 (.65) -- -- --
1994 10.40 .60(C) (1.09) (.49) (.60) -- (.04) --
1993 10.71 .62(C) .33 .95 (.62) -- (.63) (.01)
1992 10.71 .66(C) .25 .91 (.66) -- (.25) --
--Navigator Class
Six Months Ended
June 30, 1997* $10.22 $ .33(D) $ .03 $ .36 $ (.33) $ -- $ -- $ --
Years Ended Dec. 31,
1996 10.44 .70(D) (.22) .48 (.70) -- -- --
1995(F) 10.32 .03(D) .12 .15 (.03) -- -- --
High Yield Portfolio
Six Months Ended
June 30, 1997* $15.37 $ .66 $ .39 $1.05 $ (.59) $ -- $ -- $ --
Years Ended Dec. 31,
1996 14.62 1.33 .76 2.09 (1.34) -- -- --
1995 13.57 1.29 1.05 2.34 (1.29) -- -- --
1994(G) 15.00 1.02 (1.44) (.42) (1.01) -- -- --
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income (loss) Portfolio End of
Total End of Total to Average to Average Turnover Period
Distributions Period Return Net Assets Net Assets Rate (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Intermediate-Term Portfolio
--Primary Class
Six Months Ended
June 30, 1997* $ (.28) $10.25 2.45%(H) 1.00%(A,I) 6.00%(A,I) 234%(I) $285,171
Years Ended Dec. 31,
1996 (.61) 10.31 4.47% .98%(A) 5.91%(A) 354% 293,846
1995 (.57) 10.47 13.88% .93%(A) 5.59%(A) 290% 231,886
1994 (.51) 9.72 (1.93)% .90%(A) 5.11%(A) 316% 231,255
1993 (.97) 10.43 6.64% .90%(A) 4.84%(A) 490% 299,529
1992 (.72) 10.70 6.26% .87%(A) 5.54%(A) 513% 307,320
--Navigator Class
Six Months Ended
June 30, 1997* $ (.30) $10.25 2.65%(H) .44%(B,I) 6.55%(B,I) 234%(I) $ 7,215
Years Ended Dec. 31,
1996 (.67) 10.31 5.09% .42%(B) 6.47%(B) 354% 8,082
1995 (.62) 10.47 14.45% .44%(B) 6.08%(B) 290% 4,184
1994(E) (.05) 9.72 .50%(H) .40%(B,I) 6.44%(B,I) 316%(I) 4,024
Investment Grade Income Portfolio
--Primary Class
Six Months Ended
June 30, 1997* $ (.30) $10.25 3.52%(H) 1.00%(C,I) 6.44%(C,I) 262%(I) $ 99,471
Years Ended Dec. 31,
1996 (.64) 10.22 4.31% .97%(C) 6.42%(C) 383% 91,928
1995 (.65) 10.44 20.14% .88%(C) 6.49%(C) 221% 85,633
1994 (.64) 9.27 (4.82)% .85%(C) 6.09%(C) 200% 66,196
1993 (1.26) 10.40 11.22% .85%(C) 5.62%(C) 348% 68,781
1992 (.91) 10.71 6.77% .85%(C) 6.11%(C) 317% 48,033
--Navigator Class
Six Months Ended
June 30, 1997* $ (.33) $10.25 3.83%(H) .43%(D,I) 7.03%(D,I) 262%(I) $ 244
Years Ended Dec. 31,
1996 (.70) 10.22 4.88% .41%(D) 6.99%(D) 383% 243
1995(F) (.03) 10.44 1.42%(H) .40%(D,I) 6.73%(D,I) 221%(I) 249
High Yield Portfolio
Six Months Ended
June 30, 1997* $ (.59) $15.83 6.96%(H) 1.34%(I) 8.67%(I) 146%(I) $296,813
Years Ended Dec. 31,
1996 (1.34) 15.37 14.91% 1.35% 9.05% 77% 234,108
1995 (1.29) 14.62 18.01% 1.47% 9.28% 47% 108,417
1994(G) (1.01) 13.57 (2.90)%(H) 1.60%(I) 8.40%(I) 67%(I) 53,424
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
------------------------------------- -----------------------------------------------
Net Realized
and Unrealized In Excess
Net Asset Net Gain (Loss) on Total In Excess Net of Net
Value, Investment Investments, From Net of Net Realized Realized
Beginning Income Options Investment Investment Investment Gain on Gain on
of Period (Loss) and Futures Operations Income Income Investments Investments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Money Market Portfolio
Six Months Ended
June 30, 1997* $ 1.00 $ .02 $ Nil $ .02 $ (.02) $ -- $ -- $ --
Years Ended Dec. 31,
1996 1.00 .05 Nil .05 (.05) -- -- --
1995 1.00 .05 Nil .05 (.05) -- -- --
1994 1.00 .04 (Nil) .04 (.04) -- -- --
1993 1.00 .03 -- .03 (.03) -- -- --
1992 1.00 .03 -- .03 (.03) -- -- --
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income (loss) Portfolio End of
Total End of Total to Average to Average Turnover Period
Distributions Period Return Net Assets Net Assets Rate (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Money Market Portfolio
Six Months Ended
June 30, 1997* $ (.02) $ 1.00 4.74%(I) .76%(I) 4.69%(I) -- $332,731
Years Ended Dec. 31,
1996 (.05) 1.00 4.81% .66% 4.71% -- 325,210
1995 (.05) 1.00 5.31% .67% 5.17% -- 316,646
1994 (.04) 1.00 3.66% .69% 3.66% -- 214,576
1993 (.03) 1.00 2.80% .71% 2.76% -- 172,533
1992 (.03) 1.00 3.49% .73% 3.45% -- 170,910
</TABLE>
- --------------
(A) Net of fees waived by the manager for expenses in excess of voluntary
expense limitations of: 0.85% until August 31, 1992; 0.9% until April 30,
1995; 0.95% until April 30, 1996; and 1.00% until December 31, 1997.
(B) Net of fees waived by the manager for expenses in excess of voluntary
limitations of: 0.4% until April 30, 1995; 0.45% until April 30, 1996;
and 0.50% until December 31, 1997.
(C) Net of fees waived and reimbursements made by the manager for expenses in
excess of voluntary expense limitations of: 0.85% until April 30, 1995;
0.9% until April 30, 1996; and 1.00% until December 31, 1997.
(D) Net of fees waived by the manager for expenses in excess of voluntary
limitations of: 0.4% until April 30, 1996; 0.50% until December 31, 1997.
(E) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to December 31, 1994.
(F) For the period December 1, 1995 (commencement of sale of Navigator
Shares) to December 31, 1995.
(G) For the period February 1, 1994 (commencement of operations) to December
31, 1994.
(H) Not annualized
(I) Annualized
* Unaudited
See notes to financial statements.
-----------------------------------------------------------
Notes to Financial Statements
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Income Trust, Inc. ("Trust"), consisting of the U.S.
Government Intermediate-Term Portfolio ("Government Intermediate"), the
Investment Grade Income Portfolio ("Investment Grade"), the High Yield
Portfolio ("High Yield"), and the U.S. Government Money Market Portfolio
("Government Money Market") (each separately referred to as a "Fund" and
collectively as the "Funds"), is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified investment company.
The Government Intermediate and the Investment Grade Portfolios
consist of two classes of shares: the Primary Class, offered since 1987,
and the Navigator Class, offered to certain institutional investors since
December 1, 1994 and December 1, 1995, respectively. The income and
expenses of each of these Funds are allocated proportionately to the two
classes of shares based on daily net assets, except for Rule 12b-1
distribution fees, which are charged only on Primary shares, and transfer
agent and shareholder servicing expenses, which are determined separately
for each class.
25
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
Security Valuation
Portfolio securities in Government Intermediate, Investment Grade and
High Yield are valued using market quotations obtained from an independent
pricing service. When market quotations are not readily available,
securities are valued based on prices received from recognized
broker-dealers in the same or similar securities. Fixed income securities
with 60 days or less remaining to maturity are valued using the amortized
cost method, which approximates current market value.
The investments of Government Money Market are valued on the basis of
amortized cost so long as the Fund's Board of Directors determines that
this method constitutes fair value. Under this method, securities are
valued at cost when purchased and, thereafter, a constant proportionate
accretion or amortization of any discount or premium is recorded until
maturity of the security.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue discounts, are not
amortized. Dividends are declared daily and paid monthly for each Fund
except High Yield which declares and pays dividends monthly. Dividend
income and distributions to shareholders are allocated at the class level
and are recorded on the ex-dividend date. When available, net capital gain
distributions, which are calculated at a composite level, are declared and
paid after the end of the tax year in which the gain is realized. At June
30, 1997, accrued dividends payable were as follows: Government
Intermediate, $690; Investment Grade, $277; High Yield, $0; and Government
Money Market, $607. There were no capital gain distributions payable at
June 30, 1997.
Investment Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes. At
June 30, 1997 receivables for securities sold and not yet delivered and
payables for securities purchased and not yet received for each Fund were
as follows:
Receivable for Payable for
Securities Sold Securities Purchased
- --------------------------------------------------------------------------------
Government Intermediate $ -- $ --
Investment Grade 712 7,137
High Yield -- 7,000
Government Money Market -- --
Options and Futures
Upon the purchase of a put option or a call option by a fund, the
premium paid is recorded as an investment, the value of which is
marked-to-market daily. When a purchased option expires, the fund will
realize a loss in the amount of the cost of the option. When a fund enters
into a closing sale transaction, the fund will realize a gain or loss
depending on whether the sales proceeds from the closing sale transaction
are greater or less than the cost of the option. When a fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When a fund exercises a call option, the cost of the
security which the fund purchases upon exercise will be increased by the
premium originally paid.
When a fund writes a call option or a put option, an amount equal to
the premium received by the fund is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the fund
realizes a gain equal to the amount of the premium received. When a fund
enters into a closing purchase transaction, the fund realizes a gain (or
loss if the cost of the closing purchase transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain
or loss on the underlying security, and the liability related to the
option is eliminated. When a written call option is exercised, the fund
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received.
When a written put option is exercised, the amount of the premium
originally received will reduce the cost of the security that the fund
purchased upon exercise.
26
<PAGE>
Upon entering into a futures contract, the fund is required to
deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by
the fund each day, depending on the daily fluctuation in the value of the
contract. The daily changes in contract value are recorded as unrealized
gains or losses and the fund recognizes a realized gain or loss when the
contract is closed. Futures contracts are valued daily at the settlement
price established by the board of trade or exchange on which they are
traded.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. Government or its agencies and such collateral is in
the possession of the Funds' custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Funds' investment adviser,
acting under the supervision of the Board of Directors, reviews the value
of the collateral and the creditworthiness of those banks and dealers with
which the Funds enter into repurchase agreements to evaluate potential
risks.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Funds intend to continue to qualify as regulated investment companies and
distribute all of their taxable income to their shareholders.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Investment Transactions:
For the six months ended June 30, 1997 investment transactions
(excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds from Sales
----------------------------------- --------------------------------------
U.S. Gov't. Securities Other U.S. Gov't. Securities Other
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Government Intermediate $295,110 $ 45,748 $285,211 $ 44,252
Investment Grade 92,881 42,131 78,735 44,847
High Yield -- 221,485 -- 182,880
</TABLE>
At June 30, 1997, 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:
Cost Appreciation (Depreciation)
- --------------------------------------------------------------------------------
Government Intermediate $289,955 $ 1,575 $(1,191)
Investment Grade 104,014 1,699 (555)
High Yield 279,000 18,260 (1,035)
Government Money Market 333,607 -- --
Unused capital loss carryforwards for federal income tax purposes at
June 30, 1997 were as follows: Government Intermediate, $11,132 which
expire through 2003; Investment Grade, $1,970 which expire through 2002;
High Yield, $1,981 which expire through 2004; Government Money Market, $20
which expire through 2002.
27
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
3. Options and Futures:
As part of their investment program, Government Intermediate and
Investment Grade may utilize options and futures.
The risk associated with purchasing options is limited to the premium
originally paid. Options written by a fund involve, to varying degrees,
risk of loss in excess of the option value reflected in the Statement of
Net Assets. The risk in writing a covered call option is that a fund may
forego the opportunity of profit if the market price of the underlying
security increases and the option is exercised. The risk in writing a
covered put option is that a fund may incur a loss if the market price of
the underlying security decreases and the option is exercised. In
addition, there is the risk a fund may not be able to enter into a closing
transaction because of an illiquid secondary market or, for
over-the-counter options, because of the counterparty's inability to
perform. Call and put options written by the Funds and related premiums
received during the year were as follows:
<TABLE>
<CAPTION>
Calls Puts
-----------------------------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------------
<S> <C>
Options outstanding December 31, 1996 156 $ 22 -- $ --
Options written 165 64 3,404 73
Options closed (321) (86) (504) (59)
Options exercised -- -- (2,900) (14)
- -------------------------------------------------------------------------------------
Options outstanding June 30, 1997 -- $ -- -- $ --
=====================================================================================
<CAPTION>
Calls Puts
-----------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------------
<S> <C>
Options outstanding December 31, 1996 90 $ 58 -- $ --
Options written 366 196 4,343 107
Options closed (401) (220) (113) (16)
Options expired -- -- (1,660) (41)
Options exercised (55) (34) (2,570) (50)
- -------------------------------------------------------------------------------------
Options outstanding June 30, 1997 -- $ -- -- $ --
=====================================================================================
</TABLE>
The Funds enter into futures contracts as a hedge against anticipated
changes in interest rates. There are several risks in connection with the
use of futures contracts as a hedging device. Futures contracts involve,
to varying degrees, risk of loss in excess of the amounts reflected in the
financial statements. The change in the value of futures contracts
primarily corresponds with the value of their underlying instruments,
which may not correlate with the change in the value of the hedged
instruments. In addition, there is the risk that a fund may not be able to
enter into a closing transaction because of an illiquid secondary market.
The open futures positions and related appreciation or depreciation
at June 30, 1997 are described at the end of U.S. Government
Intermediate's and Investment Grade's respective "Statement of Net
Assets."
4. 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.
28
<PAGE>
--------------------------------------------------------------------------
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, 1997, open forward currency exchange contracts in High
Yield were as follows:
<TABLE>
<CAPTION>
Contract to
Settlement ----------------------------------------- Unrealized
Date Receive Deliver Gain/(Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
10/17/97 USD 2,313 DEM 4,000 N.M.
</TABLE>
N.M.--Not meaningful
5. Transactions with Affiliates:
Each Fund has a management agreement with Legg Mason Fund Adviser,
Inc. ("Manager"), a corporate affiliate of Legg Mason Wood Walker,
Incorporated ("Legg Mason"), a member of the New York Stock Exchange and
the distributor for the Funds. Pursuant to their respective agreements,
the Manager provides the Funds with management and administrative services
for which each Fund pays a fee, computed daily and payable monthly at
annual rates of each Fund's average daily net assets as follows:
Government Intermediate, .55%; Investment Grade, .60%; High Yield, .65%;
and Government Money Market, .50%.
The Manager has agreed to waive fees to the extent the expenses
attributable to Primary Shares and Navigator Shares respectively
(exclusive of taxes, interest, brokerage and extraordinary expenses)
exceed during any month annual rates based on each respective class'
average daily net assets of 1.00% for Primary Shares and 0.50% for
Navigator Shares for such month, until the earlier of December 31, 1997,
or, with respect to Government Intermediate, until each respective class'
net assets reach $400 million, and with respect to Investment Grade, until
each respective class' net assets reach $150 million. If Government
Intermediate's assets total $400,000 before December 31, 1997, the Manager
has agreed not to increase this "cap" by more than 10 basis points. For
the six months ended June 30, 1997, management fees of $344 and $195,
respectively were waived for Government Intermediate and Investment Grade.
At June 30, 1997 amounts due to the Manager were as follows: Government
Intermediate, $69; Investment Grade, $17; High Yield, $156; and Government
Money Market, $137.
Western Asset Management Company ("Adviser"), a wholly owned
subsidiary of Legg Mason, Inc., and a corporate affiliate of the Manager
and Legg Mason, serves as investment adviser to the Funds. The Adviser is
responsible for the actual investment activity of each Fund. The Manager
pays the Adviser a fee, computed daily and payable monthly, at an annual
rate of up to: 40% of the Management fee for Investment Grade; 77% for
High Yield; and 30% for Government Money Market. For U.S. Government
Intermediate the Manager pays the Adviser a fee, computed daily and
payable monthly, of 0.20% of its average daily net assets, not to exceed
the fee received by the Manager.
Legg Mason, as distributor of the Funds, receives from Government
Intermediate, Investment Grade, and High Yield an annual distribution fee
of 0.25% and an annual service fee of 0.25% of the average daily net
assets of Primary shares, computed daily and payable monthly. Effective
January 10, 1997, Government Money Market began compensating Legg Mason
for distribution costs and services at an annual rate equal to 0.10% of
its average daily net assets. Although Legg Mason has agreed to limit such
fees paid by the Fund to 0.10% for the next two years, Government Money
Market may pay Legg Mason a fee for its distribution services in an amount
not to exceed an annual rate of 0.20% of the Fund's average daily net
assets. At June 30, 1997, distribution and service fees due to the
distributor were as follows: Government Intermediate, $117; Investment
Grade, $41; High Yield, $114; and Government Money Market, $28.
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was
paid the following amounts by the transfer agent for the six months ended
June 30, 1997: Government Intermediate, $22; Investment Grade, $8; High
Yield, $20; and Government Money Market, $41.
29
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
6. Line of Credit:
The Funds, except for Government Money Market, but including certain
other Legg Mason Funds, participate in a $75 million line of credit
("Credit Agreement") to be utilized as an emergency source of cash in the
event of unanticipated, large redemption requests by shareholders.
Pursuant to the Credit Agreement, each participating Fund is liable only
for principal and interest payments related to borrowings made by that
Fund. Borrowings under the line of credit bear interest at prevailing
short-term interest rates. For the six months ended June 30, 1997, the
Funds had no borrowings under the line of credit.
7. Acquisition of Bartlett Fixed Income Fund and Bartlett Short Term Bond Fund:
On December 20, 1996, Government Intermediate acquired all the net
assets of the Bartlett Fixed Income Fund ("Fixed Income") and the Bartlett
Short Term Bond Fund ("Short Term") pursuant to a plan of reorganization
approved by Fixed Income and Short Term shareholders on December 6, 1996.
The acquisition was accomplished by a tax-free exchange of 7,763 shares of
Government Intermediate (valued at $80,196) for the 6,733 shares of Fixed
Income and the 1,359 shares of Short Term outstanding on December 20,
1996. The net assets of Fixed Income ($66,916, including $436 of
unrealized appreciation and $2,730 of accumulated net realized losses) and
Short Term ($13,280, including $9 of unrealized appreciation and $400 of
accumulated net realized losses) were combined with those of Government
Intermediate. The aggregate net assets of Government Intermediate
immediately before the acquisition were $223,282 and were $303,478
immediately following the acquisition.
8. Fund Share Transactions:
At June 30, 1997, there were 1,000,000 shares authorized at $.001 par
value for all portfolios of the Trust. Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
----------------- ---------------- ----------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Government Intermediate
--Primary Class
Six Months Ended June 30, 1997 2,828 $ 28,984 683 $ 7,003 (4,188) $(42,859) (677) $ (6,872)
Year Ended December 31, 1996 12,900(A) 132,962(A) 1,168 11,976 (7,697) (78,995) 6,371 65,943
--Navigator Class
Six Months Ended June 30, 1997 361 3,692 20 203 (461) (4,741) (80) (846)
Year Ended December 31, 1996 795(B) 8,281(B) 25 256 (435) (4,483) 385 4,054
Investment Grade
--Primary Class
Six Months Ended June 30, 1997 1,680 17,079 241 2,455 (1,207) (12,258) 714 7,276
Year Ended December 31, 1996 3,465 35,043 471 4,758 (3,144) (31,762) 792 8,039
--Navigator Class
Six Months Ended June 30, 1997 -- -- -- -- -- -- -- --
Year Ended December 31, 1996 -- -- -- -- -- -- -- --
High Yield
Six Months Ended June 30, 1997 6,767 105,509 541 8,425 (3,784) (58,907) 3,524 55,027
Year Ended December 31, 1996 11,299 170,050 846 12,709 (4,331) (65,214) 7,814 117,545
Government Money Market
Six Months Ended June 30, 1997 654,623 654,623 6,722 6,722 (653,826) (653,826) 7,519 7,519
Year Ended December 31, 1996 1,245,629 1,245,629 14,984 14,984 (1,252,091) (1,252,091) 8,522 8,522
</TABLE>
(A) Includes 6,202 shares valued at $64,070 and 1,272 shares valued at
$13,140 issued in connection with the acquisition of Fixed Income and
Short Term, respectively, as described in footnote 6.
(B) Includes 275 shares valued at $2,846 and 14 shares valued at $140 issued
in connection with the acquisition of Fixed Income and Short Term,
respectively, as described in footnote 6.
30
<PAGE>
Legg Mason Family of Funds
Equity Funds
Legg Mason Balanced Trust
Growth and Income--An equity mutual fund which seeks long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk.
Legg Mason Total Return Trust
Growth and Income--An equity mutual fund with investment objectives of capital
appreciation and current income.
Legg Mason American Leading Companies Trust
Growth--A large capitalization equity mutual fund which seeks long-term capital
appreciation and current income consistent with prudent investment management.
Legg Mason Value Trust
Growth--An equity mutual fund which seeks long-term growth of capital using the
"Value Approach" to investing.
Legg Mason Special Investment Trust
Aggressive Growth--An equity mutual fund which seeks capital appreciation.
It invests principally in securities of companies that are involved in
restructurings or other special situations, or are out of favor with, or not
closely followed by the market.
Global Funds*
Legg Mason Emerging Markets Trust
Aggressive Growth--A mutual fund which is designed for investors seeking
long-term growth possibilities available in emerging markets.
Legg Mason International Equity Trust
Aggressive Growth--A diversified, professionally managed portfolio seeking
maximum long-term total return by investing primarily in common stocks of
companies located outside the United States.
Legg Mason Global Government Trust
Growth and Income--A global bond fund which seeks to provide a competitive total
return by investing primarily in a global portfolio of high quality debt
securities of U.S. and foreign governments, their agencies and
instrumentalities, denominated in various currencies.
Taxable Bond Funds
Legg Mason U.S. Government Intermediate-Term Portfolio
Conservative Income--A mutual fund which seeks to achieve high current income
consistent with prudent investment risk and liquidity needs.
Legg Mason Investment Grade Income Portfolio
Income--A mutual fund which seeks to provide investors with a high level of
current income through a diversified portfolio of debt instruments.
Legg Mason High Yield Portfolio
Growth and Income--A fund which seeks to provide high current income, and as a
secondary objective, seeks capital appreciation. Under normal circumstances, the
Fund will invest a majority of its total assets in high yield fixed income
securities commonly known as "junk" bonds. The Fund may invest up to 25% of
total assets in foreign securities.
Tax-Free Bond Funds(dagger)
Legg Mason Tax-Free Intermediate-Term Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax consistent with prudent investment risk.
Legg Mason Maryland Tax-Free Income Trust
Tax-Free Income--A fund whose objective is a high level of current income exempt
from federal, Maryland state, and local income taxes.
Legg Mason Pennsylvania Tax-Free Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax and Pennsylvania personal income tax.
Money Market Funds(dagger dagger)
Legg Mason U.S. Government Money Market Portfolio
A professionally managed portfolio seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Cash Reserve Trust
A diversified management investment company investing in money market
instruments to achieve stability of principal and current income consistent with
stability of principal.
Legg Mason Tax Exempt Trust
A money market fund seeking to produce high current income exempt from federal
income tax, to preserve capital and to maintain liquidity.
* Investment in foreign securities involves increased risks, such
as currency rate fluctuations, foreign taxation and political
changes.
(dagger) Income produced from the tax-free funds may be subject to state
and local taxes. Long-term capital gain distributions generally
are taxable. A portion of each Fund's dividends may be subject
to the federal alternative minimum tax.
(dagger dagger) An investment in any of these Funds is neither insured nor
guaranteed by the U.S. Government and there can be no guarantee
that these Funds will maintain a stable $1 share price.
For a prospectus containing more complete information, including charges and
expenses on any of the Legg Mason funds, call 1-800-577-8589. Please read the
prospectus carefully before investing or sending money.
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