<PAGE>
Investment Adviser Quarterly Report
Legg Mason Funds Management, Inc. September 30, 2000
Baltimore, MD
Board of Directors
John F. Curley, Jr., Chairman
Nelson A. Diaz
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
G. Peter O'Brien Legg Mason
T. A. Rodgers Focus
Trust, Inc.
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Accountants [LEGG MASON FUNDS LOGO]
PricewaterhouseCoopers LLP
Baltimore, MD The Art of Investing/SM/
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-222
11/00
<PAGE>
To Our Shareholders,
We are pleased to provide you with the quarterly report for Legg Mason Focus
Trust, Inc. for the three months ended September 30, 2000.
On the following pages, Robert Hagstrom, the Fund's portfolio manager,
discusses the investment outlook and the Fund's performance.
We hope you will consider using the Fund for investments of additional funds
as they become available. Some shareholders regularly add to their investment in
the Legg Mason Funds by authorizing automatic, monthly transfers from their bank
checking or Legg Mason accounts. Your Financial Advisor will be happy to help
you make these arrangements if you would like to purchase additional shares in
this convenient manner.
Sincerely,
/s/ Edward A. Taber, III
------------------------
Edward A. Taber, III
President
October 20, 2000
<PAGE>
Portfolio Manager's Comments
Legg Mason Focus Trust, Inc.
Performance Analysis
Legg Mason Focus Trust's total return for the third quarter and year to date
are shown below with the total returns of the Fund's two comparable benchmark
indices: the Standard & Poor's 500 Index, an index of widely held common
stocks, and Lipper Analytical Services, Inc.'s ("Lipper's") index of Large-Cap
Core funds.
Third Year
Quarter to Date
----------------------------------------------------------
Focus Trust -2.13% -10.16%
S&P 500 Stock Composite Index -0.97% -1.39%
Lipper Large-Cap Core Funds -0.37% +1.51%
The Fund's average annual total returns for one, two, three, four, and five
years are shown below, as well as total return information for the same periods
for the S&P 500 Index and the Lipper index of Large-Cap Core funds.
<TABLE>
<CAPTION>
1 Year 2 Years 3 Years 4 Years 5 Years
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Focus Trust +6.79% +20.79% +17.82% +19.66% +18.82%
S&P 500 Stock Composite Index +13.28% +20.32% +16.44% +22.03% +21.69%
Lipper Large-Cap Core Funds +17.72% +21.31% +16.15% +20.64% +20.12%
</TABLE>
In our second quarter report to shareholders, we commented on our "bumpy" ride
this year and how concentrated funds such as Focus Trust typically bounce up and
down more so in price than other broadly based funds, including index funds. Our
above-average price volatility continued throughout the third quarter and I
would not be surprised if this volatility continued for the remainder of the
year. It is important that each and every shareholder recognize the inherent
volatility of owning a concentrated fund. Although we own outstanding
businesses, because we own larger stakes in these companies compared to other
funds, when our companies bounce in price so too will our Fund.
Repeating what I said earlier, because of our portfolio concentration, Focus
Trust has the tendency to bounce lower during market sell-offs and bounce higher
during market rallies. Remember our 41% return in 1998. I would also remind
shareholders that our current 9% relative underperformance to the S&P 500 Index
is not our worst relative performance. In the third and fourth quarter of 1998,
during the emerging market's financial crisis, Focus Trust dug a whole 12 points
behind the market before the Fund rallied in the fourth quarter.
In our last report, I also discussed the difference between price volatility
and economic volatility. Although price volatility is the customary method for
describing risk, we don't think about risk in this way. Instead we focus on the
economic risk of each of our companies. A quick glance at our portfolio holdings
will remind shareholders of how many high quality companies Focus Trust does
own.
2
<PAGE>
Market Review
There have been 145 central bank tightenings worldwide since the spring of
1999. Generally, a central bank will increase interest rates to slow economic
growth or to reduce inflation, or to increase the value of a currency relative
to other world currencies. Here in the United States, the concern is not the
value of the dollar, which is strong against all major currencies, but rather
the above-average economic growth of our Gross Domestic Product coupled with the
possibility of higher inflation. We can now say with confidence, the U.S.
Federal Reserve's six interest rate increases solved one of their major
concerns -- slow the economy. Unfortunately, inflation concerns have not yet
been alleviated. The persistently tight labor markets suggest higher wage
demands are possible and the rise in oil prices all but guarantees that higher
prices for many goods and services will be passed through to the consumer in the
months ahead. For these two reasons alone, the Federal Reserve at its last
meeting, although confronted with persuasive evidence of slower economic growth,
was unwilling to "stand-down" from its inflation watch.
For stock investors, higher interest rates are almost always a short-term
negative. Whether higher interest rates become a longer-term negative remains to
be seen. In the short run, higher interest rates slow economic growth and reduce
earnings for corporations. Lower corporate profits translate into lower prices
for common stocks. Higher interest rates also reduce the current valuation of
common stocks. Higher interest rates mean the future cash profits of companies
will be discounted at higher rates, thus causing valuations to decline. It is a
one-two punch: lower profits and higher discount rates cause stocks to go lower.
The question of whether the past year's rise in interest rates will be long-
term negative or positive rests largely upon whether the economy will sink into
a recession or merely slow a bit before lifting again, setting the stage for
better profit growth. The latter description is called an economic "soft
landing." If the economy achieves a soft-landing, then the Federal Reserve's six
interest rate increases will be viewed positively. If by raising interest rates
the Fed ensured economic growth for a much longer period going forward, they
will have acted successfully. If, however, the interest rate increases cause a
deep slowdown in corporate profits and in effect cause an economic "hard
landing," the Federal Reserve's actions will be viewed negatively.
This brief lesson naturally begs the next question: What is the future
direction of the economy? Suffice it to say, we possess no mystical insights.
However, we will point out that our economy today is much more
technology/information driven (read: better inventory controls). With
information instantaneously delivered to manufacturers, distributors, retailers,
consumers and policy makers, the possibility exists for a better management of a
slowdown as compared to earlier economic periods when participants received
important information on a time-delayed basis. Instantaneous information allows
for instantaneous adjustments that should help prevent the worst of possible
outcomes.
Despite the price volatility of many stocks in our portfolio, clients should
take solace in recognizing we together own a high quality portfolio of
businesses. Based on our conservative estimate of what we believe these
companies will earn over the next five to ten years, even discounted at higher
interest rates, this suggests that current prices offer a wide margin of safety
between what the stock market currently says our companies are worth and what
our valuation models suggest they are worth.
3
<PAGE>
Portfolio Manager's Comments -- Continued
We cannot predict with certainty when the share price of Focus Trust will
begin to outperform the S&P 500 Index. However, we do know our businesses
possess economic returns (measured by return on invested capital and growth of
cash earnings) that exceed what we expect the benchmark S&P 500 to earn over the
next several years. Thus, over the long term, we should expect price
appreciation commensurate with our economic return. Of course, the market is
never so obliging to march lockstep with a company's economic return. But that
is perfectly fine with us. This periodic mispricing gives us excellent
opportunities to purchase great companies at outstanding prices.
In order to generate excess returns (an investment return above the market
return) you have to be able to take advantage of the market's periodic
mispricing. Often that requires an investor to buy when others are selling (fear
in the market) or delay purchases when others are buying (greed in the market).
It is our belief that fear has taken hold of this market, and wise investors
will be those who have the courage to purchase shares of outstanding companies
at bargain prices.
During this period, I am reminded of Warren Buffett's famous observation: "The
most common cause of low prices is pessimism -- sometimes pervasive, some times
specific to a company or industry. We want to do business in this environment,
not because we like pessimism but because we like the prices it produces. It's
optimism that is the enemy of the rational buyer."
Valuable advice for Focus Trust shareholders!
As always we appreciate your support and welcome any questions you may have.
Robert G. Hagstrom, CFA
Portfolio Manager
October 19, 2000
DJIA 10142.98
4
<PAGE>
Performance Information
Legg Mason Focus Trust, Inc.
Total Returns for One, Three and Five Years and Life of Fund as of September 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 this Fund 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 Fund's total returns as of September 30, 2000, are as follows:
Average Annual Total Return:
One Year +6.79%
Three Years +17.82
Five Years +18.82
Life of Fund (Inception April 17, 1995) +18.78
Cumulative Total Return:
One Year +6.79%
Three Years +63.55
Five Years +136.80
Life of Fund (Inception April 17, 1995) +155.98
------------------------------------
<TABLE>
<CAPTION>
Selected Portfolio Performance(dagger)
Strong performers for the 3rd quarter 2000* Weak performers for the 3rd quarter 2000*
------------------------------------------------ ----------------------------------------------
<S> <C>
1. Harley-Davidson, Inc. +24.4% 1. WorldCom, Inc. -33.8%
2. Berkshire Hathaway Inc. -- Class A +19.7% 2. Eastman Kodak Company -31.3%
3. American Express Company +16.6% 3. Unisys Corporation -22.7%
4. The Home Depot, Inc. +6.3% 4. Nokia Oyj -20.3%
5. Amazon.com, Inc. +5.9% 5. America International Group, Inc. -18.6%
</TABLE>
(dagger)Individual stock performance is measured by the change in the stock's
price; reinvestment of dividends is not included.
*Securities held for the entire period.
<TABLE>
<CAPTION>
Portfolio Changes
Securities added during the 3rd quarter 2000 Securities sold during the 3rd quarter 2000
------------------------------------------------ ----------------------------------------------
<S> <C>
None None
</TABLE>
5
<PAGE>
Portfolio of Investments
Legg Mason Focus Trust, Inc.
September 30, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Shares/Par Value
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock and Equity Interests -- 95.5%
Communications Services -- 4.1%
Telephone -- 4.1%
WorldCom, Inc. 285 $ 8,648/A/
--------
Consumer Cyclicals -- 25.3%
Leisure Time (Products) -- 10.0%
Harley-Davidson, Inc. 150 7,181
International Speedway Corporation 362 14,118
--------
21,299
--------
Retail (Building Supplies) -- 2.7%
The Home Depot, Inc. 108 5,731
--------
Retail (General Merchandise) -- 6.1%
Wal-Mart Stores, Inc. 273 13,138
--------
Retail (Home Shopping) -- 3.7%
Amazon.com, Inc. 206 7,918/A/
--------
Services (Advertising/Marketing) -- 2.8%
WPP Group plc 100 5,931
--------
Consumer Staples -- 11.4%
Personal Care -- 6.0%
Avon Products, Inc. 315 12,876
--------
Restaurants -- 5.4%
McDonald's Corporation 379 11,450
--------
Financials -- 31.6%
Financial (Diversified) -- 16.0%
American Express Company 270 16,403
Citigroup Inc. 327 17,660
--------
34,063
--------
Insurance (Multi-Line) -- 8.0%
American International Group, Inc. 179 17,152
--------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financials -- continued
Insurance (Property/Casualty) -- 7.6%
Berkshire Hathaway Inc. - Class A .25 $ 16,100/A/
--------
Technology -- 23.1%
Communications Equipment -- 1.1%
Nokia Oyj 63 2,488
--------
Computers (Hardware) -- 12.0%
Gateway, Inc. 343 16,021/A/
International Business Machines Corporation 85 9,529
--------
25,550
--------
Computers (Software/Services) -- 7.5%
America Online, Inc. 210 11,288/A/
Unisys Corporation 415 4,665/A/
--------
15,953
--------
Photography/Imaging -- 2.5%
Eastman Kodak Company 130 5,314
--------
Total Common Stock and Equity Interests (Identified Cost -- $187,589) 203,611
----------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 4.7%
Goldman, Sachs & Company
6.60%, dated 9/29/00, to be repurchased at $4,987 on 10/2/00
(Collateral: $5,497 Fannie Mae mortgage-backed securities, 6%,
due 1/1/29, value $5,163) $4,984 4,984
Morgan Stanley Dean Witter
6.58%, dated 9/29/00, to be repurchased at $4,987 on 10/2/00
(Collateral: $5,060 Ginnie Mae mortgage-backed securities, 7.50%,
due 3/15/23, value $5,106) 4,985 4,985
--------
Total Repurchase Agreements (Identified Cost -- $9,969) 9,969
----------------------------------------------------------------------------------------------------------------------
Total Investments -- 100.2% (Identified Cost -- $197,558) 213,580
Other Assets Less Liabilities -- (0.2)% (406)
--------
Net assets -- 100.0% $213,174
========
Net asset value per share:
Primary Class $23.44
======
----------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Non-income producing.
7
