UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-5029
Name of Fund: Legg Mason Income Trust, Inc.
Fund Address: 100 Light Street
Baltimore, MD 21202
Name and address of agent for service:
Mark R. Fetting, President, Legg Mason Income Trust, Inc.
100 Light Street
Baltimore, MD 21202.
Registrant's telephone number, including area code: (410) 539-0000
Date of fiscal year end: December 31, 2003
Date of reporting period: June 30, 2003
Item 1 - Report to Shareholders
------------------------------------------------------
LEGG MASON
INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE
INVESTMENT GRADE
HIGH YIELD
SEMI-ANNUAL REPORT TO SHAREHOLDERS
JUNE 30, 2003
INSTITUTIONAL CLASS
------------------------------------------------------
[LEGG MASON FUNDS LOGO]
[THIS PAGE INTENTIONALLY LEFT BLANK]
Semi-Annual Report to Shareholders
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust's semi-annual
report, combining reports for the Institutional Classes of the Legg Mason U.S.
Government Intermediate-Term Portfolio, Investment Grade Income Portfolio, and
High Yield Portfolio.
The following table summarizes key statistics for the Institutional Class of
each portfolio, as of June 30, 2003:
<Table>
<Caption>
Net Asset Value
SEC Yield(A) Average Life Per Share
------------ ------------ ---------------
Government Intermediate 2.36% 4.48 years $10.80
Investment Grade 3.95% 10.69 years $11.13
High Yield 6.95% 6.24 years $ 8.82
</Table>
Total returns for the Institutional Class of shares of the Government
Intermediate, Investment Grade and High Yield Portfolios for the six-month
period (not annualized) were +2.53%, +9.51%, and +14.84%, respectively. (Total
return measures investment performance in terms of appreciation or depreciation
in a portfolio's net asset value per share, plus dividends and any capital gain
distributions.) The Funds' total returns in various periods since their
inceptions are shown on the following pages.
For each of our Funds, historical performance is not indicative of future
results, and the principal value of our holdings will continue to fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Sincerely,
/s/ JOHN F. CURLEY, JR. /S/ MARK R. FETTING
John F. Curley, Jr. Mark R. Fetting
Chairman President
July 24, 2003
- ---------------
(A) SEC yields reported for the U.S. Government Intermediate, Investment Grade
and High Yield Portfolios are for the 30 days ended June 30, 2003.
Performance Information
Legg Mason Income Trust, Inc.
Total Returns for One Year, Five Years and Life of Class, as of June 30, 2003
Total return measures investment performance in terms of appreciation or
depreciation in net asset value per share, plus dividends and any capital gain
distributions. It assumes that dividends and distributions were reinvested at
the time they were paid. The investment return and principal value of an
investment in each of these Funds will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Average
annual returns tend to smooth out variations in a fund's return, so that they
differ from actual year-to-year results. Performance would have been lower if
fees had not been waived in various periods.
The Government Intermediate, Investment Grade and High Yield Portfolios each
offer two classes of shares: Primary Class and Institutional Class. Information
about the Primary Class is contained in a separate report to its shareholders.
The table below does not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
Past performance does not predict future performance.
The Funds' total returns as of June 30, 2003, were as follows:
<Table>
<Caption>
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
- -------------------------------------------------------------------------------------
Average Annual Total Return
Institutional Class:
One Year +7.04% +17.99% +18.36%
Five Years +6.23% +8.01% -1.96%
Life of Class(A) +7.23% +8.08% -1.41%
Cumulative Total Return
Institutional Class:
One Year +7.04% +17.99% +18.36%
Five Years +35.31% +47.03% -9.43%
Life of Class(A) +81.92% +79.69% -7.04%
- -------------------------------------------------------------------------------------
</Table>
- ---------------
(A) Institutional Class inception dates are:
U.S. Government Intermediate-Term Portfolio -- December 1, 1994
Investment Grade Income Portfolio -- December 1, 1995
High Yield Portfolio -- May 5, 1998
2
Semi-Annual Report to Shareholders
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 2003 (Unaudited)
(Amounts in Thousands)
U.S. Government Intermediate-Term Portfolio
<Table>
<Caption>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------------
Long-Term Securities -- 101.2%
U.S. Government and Agency Obligations -- 34.4%
Fixed Rate Securities -- 34.4%
United States Treasury Notes 3.000% 11/15/07 $ 20,910 $ 21,568
United States Treasury Notes 2.625% 5/15/08 950 959
United States Treasury Notes 5.000% 8/15/11 1,880 2,109
United States Treasury Notes 4.875% 2/15/12 74,600 82,922
United States Treasury Bonds 5.750% 8/15/10 3,490 4,085
United States Treasury Bonds 8.000% 11/15/21 7,670 11,111
United States Treasury Bonds 5.250% 11/15/28 11,560 12,584
---------
Total U.S. Government and Agency
Obligations (Identified Cost -- $131,256) 135,338
- ----------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- 66.0%
Fixed Rate Securities -- 65.7%
Fannie Mae 8.500% 6/1/10 to 8/1/11 231 239
Fannie Mae 6.500% 11/1/10 to 10/1/32 22,257 23,271
Fannie Mae 7.000% 1/1/13 to 1/1/33 27,091 28,538
Fannie Mae 9.500% 7/1/14 206 230
Fannie Mae 11.000% 12/1/15 149 167
Fannie Mae 5.500% 9/1/17 7,264 7,546
Fannie Mae 12.500% 1/1/18 to 4/1/18 220 262
Fannie Mae 5.000% 7/1/18 100,000 103,281(A)
Fannie Mae 9.000% 11/1/21 358 397
Fannie Mae 6.000% 11/1/27 to 9/1/32 3,574 3,715
Freddie Mac 8.250% 2/1/08 53 55
Freddie Mac 8.500% 12/1/08 to 6/1/21 314 333
Freddie Mac 9.750% 11/1/09 to 11/1/14 93 103
Freddie Mac 9.000% 1/1/17 to 1/1/21 505 554
Freddie Mac 5.500% 3/1/17 to 8/1/17 7,658 7,943
Freddie Mac 4.500% 7/1/18 60,000 61,238(A)
Freddie Mac 7.000% 1/25/21 to 4/1/32 12,601 13,208
Freddie Mac 8.000% 2/1/31 1,037 1,110
Government National Mortgage Association 9.000% 7/15/04 to 9/15/22 904 976
Government National Mortgage Association 6.000% 5/15/14 to 11/15/32 3,114 3,269
Government National Mortgage Association 6.500% 10/15/31 to 6/15/32 2,229 2,340
---------
258,775
---------
</Table>
3
<Table>
<Caption>
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- Continued
Indexed Securities(B) -- 0.3%
Government National Mortgage Association 7.313% 6/16/26 $ 5,810 $ 660(C1)
Government National Mortgage Association 7.363% 8/16/26 5,255 623(C1)
---------
1,283
---------
Total U.S. Government Agency Mortgage-Backed
Securities (Identified Cost -- $259,299) 260,058
- ----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 0.2%
Banking and Finance -- 0.2%
Household Finance Corporation 8.000% 7/15/10 690 856
---------
Total Corporate Bonds and Notes (Identified
Cost -- $733) 856
- ----------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities -- 0.3%
Fixed Rate Securities -- 0.3%
Blackrock Capital Finance L.P. 1997-R3 7.220% 11/25/28 1,235 1,258(D)
---------
Total Mortgage-Backed Securities (Identified
Cost -- $1,173) 1,258
- ----------------------------------------------------------------------------------------------------------------
Preferred Stocks -- 0.3%
Home Ownership Funding Corporation 13.331% 5shs 285(D,E)
Home Ownership Funding Corporation II 13.338% 14 799(D,E)
---------
Total Preferred Stocks (Identified
Cost -- $1,537) 1,084
---------
Total Long-Term Securities (Identified
Cost -- $393,998) 398,594
- ----------------------------------------------------------------------------------------------------------------
Short-Term Securities -- 40.3%
U.S. Government and Agency Obligations -- 4.3%
Fannie Mae 0.000% 10/22/03 $ 1,900 1,893(F,G)
Federal Home Loan Bank 0.000% 7/9/03 3,800 3,799(F,G)
Freddie Mac 0.000% 7/1/03 1,400 1,400(F,G)
Freddie Mac 0.000% 7/30/03 9,700 9,692(F,G)
---------
16,784
---------
Options Purchased(H) -- N.M.
Eurodollar Futures Put, December 2003, Strike Price $98.50 250(I) 3
---------
Repurchase Agreements -- 36.0%
Deutsche Bank AG
1.2%, dated 6/30/03, to be repurchased at $25,000 on 7/1/03
(Collateral: $22,279 Fannie Mae notes, due 1/15/09,
value $25,536) 25,000 25,000
</Table>
4
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio -- Continued
<Table>
<Caption>
Par Value
- ----------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- Continued
Lehman Brothers, Inc.
1.15%, dated 6/30/03, to be repurchased at $50,000 on 7/1/03
(Collateral: $179,785 Federal Home Loan Bank zero coupon bonds,
due 9/24/21, value $51,000) $ 50,000 $ 50,000
Merrill Lynch Government Securities, Inc.
1.22%, dated 6/30/03, to be repurchased at $67,103 on 7/1/03
(Collateral: $165,425 Resolution Funding Corp. principal-only securities,
due 1/15/21, value $68,445) 67,103 67,103
---------
142,103
---------
Total Short-Term Securities (Identified Cost -- $158,894) 158,890
- ----------------------------------------------------------------------------------------------------------------
Total Investments -- 141.5% (Identified Cost -- $552,892) 557,484
Payable for Securities Purchased -- (41.9)% (164,973)
Other Assets Less Liabilities -- 0.4% 1,596
---------
NET ASSETS CONSIST OF:
Accumulated paid-in capital applicable to:
35,664 Primary Class shares outstanding $381,124
852 Institutional Class shares outstanding 8,788
Undistributed net investment income 178
Accumulated net realized gain/(loss) on investments, options and futures (841)
Unrealized appreciation/(depreciation) of investments, options and futures 4,858
--------
NET ASSETS -- 100.0% $ 394,107
=========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $10.79
=========
INSTITUTIONAL CLASS $10.80
=========
</Table>
5
<Table>
<Caption>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- -----------------------------------------------------------------------------------------
Futures Contracts Purchased(H)
Eurodollar Futures December 2003 100 $ 366
U.S. Treasury Note Futures September 2003 295 (545)
-----
$(179)
-----
Futures Contracts Written(H)
U.S. Treasury Bond Futures September 2003 148 $ 284
U.S. Treasury Note Futures September 2003 437 161
-----
$ 445
-----
- -----------------------------------------------------------------------------------------
</Table>
(A) When-issued security -- Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(B) Indexed security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate ("LIBOR"). The coupon rates are
the rates as of June 30, 2003.
(C) Stripped security -- Security with interest-only or principal-only payment
streams, denoted by a 1 or 2, respectively. For interest-only securities,
the amount shown as principal is the notional balance used to calculate the
amount of interest due.
(D) Rule 144a Security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 0.59% of net
assets.
(E) Stepped coupon security -- A security with a predetermined schedule of
interest or dividend rate changes.
(F) Zero coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
(G) Collateral to cover futures contracts.
(H) Options and futures are described in more detail in the notes to financial
statements.
(I) Par shown represents actual number of contracts.
N.M. -- Not meaningful.
See notes to financial statements.
6
Semi-Annual Report to Shareholders
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 2003 (Unaudited)
(Amounts in Thousands)
Investment Grade Income Portfolio
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Long-Term Securities -- 96.1%
Corporate Bonds and Notes -- 68.0%
Aerospace/Defense -- 1.4%
General Dynamics Corporation 3.000% 5/15/08 $ 525 $ 528
Lockheed Martin Corporation 8.500% 12/1/29 1,200 1,631
Raytheon Company 5.375% 4/1/13 500 529
Raytheon Company 6.400% 12/15/18 840 945
United Technologies Corporation 7.500% 9/15/29 1,750 2,268
--------
5,901
--------
Auto Parts and Equipment -- 0.1%
American Axle & Manufacturing Inc. 9.750% 3/1/09 50 54
Lear Corporation 7.960% 5/15/05 231 246
--------
300
--------
Automotive -- 1.1%
Ford Motor Company 7.450% 7/16/31 1,000 916
Ford Motor Company 8.900% 1/15/32 370 376
Ford Motor Company 7.700% 5/15/97 630 566
General Motors Corporation 7.125% 7/15/13 370 367
General Motors Corporation 8.250% 7/15/23 650 645
General Motors Corporation 8.375% 7/15/33 1,560 1,539
--------
4,409
--------
Banking and Finance -- 6.7%
Boeing Capital Corporation 6.500% 2/15/12 1,000 1,128
Boeing Capital Corporation 5.800% 1/15/13 1,500 1,621
Capital One Bank 6.875% 2/1/06 150 161
Countrywide Home Loans, Inc. 3.250% 5/21/08 1,200 1,206
Ford Motor Credit Company 7.600% 8/1/05 250 268
Ford Motor Credit Company 6.500% 1/25/07 4,800 5,050
Ford Motor Credit Company 5.800% 1/12/09 2,500 2,485
Ford Motor Credit Company 7.250% 10/25/11 1,000 1,028
General Motors Acceptance Corporation 6.125% 2/1/07 2,000 2,090
General Motors Acceptance Corporation 7.250% 3/2/11 160 164
General Motors Acceptance Corporation 7.000% 2/1/12 1,250 1,258
General Motors Acceptance Corporation 0.000% 6/15/15 2,700 1,142(A)
Household Finance Corporation 7.000% 5/15/12 2,727 3,228
John Deere Capital Corporation 4.500% 8/22/07 495 527
MBNA America Bank 7.750% 9/15/05 1,200 1,338(B)
National Rural Utilities Cooperative Finance
Corporation 7.250% 3/1/12 1,700 2,035
Sears Roebuck Acceptance Corp. 6.875% 10/15/17 1,500 1,708
Sears Roebuck Acceptance Corp. 6.500% 12/1/28 220 229
</Table>
7
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Banking and Finance -- Continued
Sears Roebuck Acceptance Corp. 7.000% 6/1/32 $ 470 $ 526
Toyota Motor Credit Corporation 2.800% 1/18/06 1,000 1,025
--------
28,217
--------
Banks -- 4.9%
Bank of America Corporation 3.875% 1/15/08 1,500 1,573
Bank of America Corporation 7.400% 1/15/11 2,000 2,457
Bank of America Corporation 6.250% 4/15/12 1,720 1,993
Bank of America Corporation 4.875% 1/15/13 470 496
Bank One Corporation 5.250% 1/30/13 3,300 3,560
Dresdner Funding Trust I 8.151% 6/30/31 10 11(B)
FleetBoston Financial Corporation 7.250% 9/15/05 1,600 1,786
The Sanwa Bank, Ltd., New York 7.400% 6/15/11 500 561
UBS Preferred Funding Trust I 8.622% 10/29/49 400 511(C)
US Bank NA 6.375% 8/1/11 1,000 1,167
Wachovia Bank NA 7.800% 8/18/10 800 993
Wachovia Corporation 4.950% 11/1/06 2,400 2,613
Washington Mutual Bank 5.500% 1/15/13 1,000 1,090
Washington Mutual, Inc. 5.625% 1/15/07 1,600 1,763
--------
20,574
--------
Building Materials -- N.M.
American Standard, Inc. 8.250% 6/1/09 37 43
American Standard, Inc. 7.625% 2/15/10 5 5
Nortek Holdings, Inc. 8.875% 8/1/08 100 105
--------
153
--------
Cable -- 0.6%
Comcast Cable Communications, Inc. 6.750% 1/30/11 1,250 1,435
Comcast Corporation 5.850% 1/15/10 800 880
Tele-Communications, Inc. 7.125% 2/15/28 180 198
--------
2,513
--------
Casino Resorts -- 0.1%
Harrah's Operating Company, Inc. 7.875% 12/15/05 500 544
--------
Chemicals -- 0.8%
Rohm and Haas Company 6.950% 7/15/04 1,170 1,231
Rohm and Haas Company 7.400% 7/15/09 1,000 1,223
The Dow Chemical Company 6.000% 10/1/12 750 816
--------
3,270
--------
</Table>
8
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Computer Services and Systems -- 1.0%
Compaq Computer Corporation 7.650% 8/1/05 $ 1,500 $ 1,657
Hewlett-Packard Company 6.500% 7/1/12 700 814
International Business Machines Corporation 4.750% 11/29/12 1,750 1,839
--------
4,310
--------
Consumer Products -- 0.4%
Kimberly-Clark Corporation 4.500% 7/30/05 500 529(B)
The Procter & Gamble Company 4.300% 8/15/08 1,000 1,077
--------
1,606
--------
Diversified Financial Services -- 8.3%
Associates Corporation of North America 8.150% 8/1/09 775 939
Capital One Financial Corporation 7.125% 8/1/08 340 363
CIT Group Inc. 4.000% 5/8/08 1,000 1,018
Citigroup Inc. 5.800% 3/15/04 1,000 1,032
Citigroup Inc. 5.000% 3/6/07 4,800 5,223
Citigroup Inc. 6.000% 2/21/12 1,210 1,376
Citigroup Inc. 5.625% 8/27/12 390 430
Citigroup Inc. 5.875% 2/22/33 1,200 1,262
FDA Queens LP 6.990% 6/15/17 1,734 2,044(B)
General Electric Capital Corporation 6.800% 11/1/05 1,970 2,194
General Electric Capital Corporation 5.000% 6/15/07 3,000 3,267
General Electric Capital Corporation 3.500% 5/1/08 2,640 2,703
General Electric Capital Corporation 5.875% 2/15/12 1,600 1,790
General Electric Capital Corporation 6.750% 3/15/32 980 1,146
IBJ Preferred Capital Corp. LLC 8.790% 12/29/49 1,520 1,528(B,C)
SB Treasury Company LLC 9.400% 12/29/49 840 924(B,C)
Transamerica Finance Corporation 5.750% 1/28/04 2,000 2,048
U.S. Bancorp 3.125% 3/15/08 1,650 1,665
Wells Fargo & Company 5.125% 2/15/07 2,600 2,844
Wells Fargo & Company 6.375% 8/1/11 800 934
--------
34,730
--------
Diversified Services -- 0.5%
Loews Corporation 7.625% 6/1/23 1,000 1,038
Loews Corporation 7.000% 10/15/23 1,000 1,021
--------
2,059
--------
Drug and Grocery Store Chains -- 0.7%
Fred Meyer, Inc. 7.375% 3/1/05 1,000 1,080
Safeway Inc. 5.800% 8/15/12 750 804
The Kroger Co. 5.500% 2/1/13 1,000 1,056
--------
2,940
--------
</Table>
9
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Electric -- 2.1%
AEP Texas Central Company 5.500% 2/15/13 $ 1,060 $ 1,131(B)
American Electric Power Company, Inc. 5.250% 6/1/15 350 353
CenterPoint Energy Houston Electric LLC 6.950% 3/15/33 1,010 1,158(B)
Commonwealth Edison Company 6.150% 3/15/12 560 642
Niagara Mohawk Power Corporation 7.750% 10/1/08 1,010 1,210
Niagara Mohawk Power Corporation 0.000% 7/1/10 720 755(C)
Oncor Electric Delivery Company 7.000% 9/1/22 500 558
System Energy Resources, Inc. 7.430% 1/15/11 490 511
The Cleveland Electric Illuminating Company 7.880% 11/1/17 850 1,068
The Detroit Edison Company 5.200% 10/15/12 1,260 1,358
--------
8,744
--------
Electrical Equipment -- 0.2%
Emerson Electric Co. 6.000% 8/15/32 900 990
--------
Energy -- 4.2%
Alabama Power Company 3.125% 5/1/08 920 931
American Electric Power Company, Inc. 6.125% 5/15/06 965 1,058
Calpine Corporation 7.750% 4/15/09 49 36
Calpine Corporation 8.500% 2/15/11 1,120 840
Dominion Resources, Inc. 5.125% 12/15/09 490 528
Dominion Resources, Inc. 5.700% 9/17/12 2,280 2,502
DTE Energy Company 6.375% 4/15/33 350 365
Duke Energy Corporation 5.625% 11/30/12 270 290
Entergy Gulf States, Inc. 8.250% 4/1/04 1,800 1,886
Exelon Corporation 6.750% 5/1/11 2,000 2,314
FirstEnergy Corp. 5.500% 11/15/06 2,000 2,144
FirstEnergy Corp. 6.450% 11/15/11 480 527
FirstEnergy Corp. 7.375% 11/15/31 990 1,109
MidAmerican Energy Holdings Company 5.875% 10/1/12 750 823
TXU Corp. 6.375% 6/15/06 100 106
TXU Energy Co. 7.000% 3/15/13 930 1,029(B)
Xcel Energy, Inc. 7.000% 12/1/10 900 1,029
--------
17,517
--------
Entertainment -- 0.3%
The Walt Disney Company 6.375% 3/1/12 1,250 1,425
--------
</Table>
10
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Environmental Services -- 1.3%
Republic Services, Inc. 6.750% 8/15/11 $ 2,340 $ 2,712
Safety-Kleen Corp. 9.250% 5/15/09 119 7(D)
Waste Management, Inc. 6.375% 11/15/12 230 262
Waste Management, Inc. 7.375% 5/15/29 1,700 2,007
Waste Management, Inc. 7.750% 5/15/32 420 526
--------
5,514
--------
Food, Beverage and Tobacco -- 5.7%
Altria Group, Inc. 7.750% 1/15/27 1,165 1,249
Anheuser-Busch Companies, Inc. 4.375% 1/15/13 800 829
Anheuser-Busch Companies, Inc. 6.500% 2/1/43 1,800 2,112
Archer-Daniels-Midland Company 7.000% 2/1/31 2,500 3,021
Campbell Soup Company 5.500% 3/15/07 2,000 2,204
Campbell Soup Company 5.000% 12/3/12 800 855
Kellogg Company 6.000% 4/1/06 1,000 1,103
Kellogg Company 6.600% 4/1/11 800 938
Kellogg Company 7.450% 4/1/31 1,000 1,269
Kraft Foods Inc. 5.250% 6/1/07 750 813
Kraft Foods Inc. 6.500% 11/1/31 1,250 1,380
Nabisco Incorporated 7.050% 7/15/07 3,100 3,543
R.J. Reynolds Tobacco Holdings, Inc. 7.750% 5/15/06 1,280 1,317
R.J. Reynolds Tobacco Holdings, Inc. 7.875% 5/15/09 860 858
The Pepsi Bottling Group, Inc. 7.000% 3/1/29 1,800 2,192
--------
23,683
--------
Gaming -- N.M.
Horseshoe Gaming Holding Corp. 8.625% 5/15/09 69 73
International Game Technology 8.375% 5/15/09 70 86
--------
159
--------
Gas and Pipeline Utilities -- 1.1%
Dynegy Holdings Inc. 8.750% 2/15/12 1,690 1,572
Tennessee Gas Pipeline Company 8.375% 6/15/32 1,000 1,087
The Williams Companies, Inc. 7.625% 7/15/19 2,000 1,940
--------
4,599
--------
Health Care -- 0.6%
Bristol-Myers Squibb Company 4.750% 10/1/06 300 323
Tenet Healthcare Corporation 7.375% 2/1/13 2,310 2,229
--------
2,552
--------
</Table>
11
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Insurance -- 0.2%
Ace Capital Trust II 9.700% 4/1/30 $ 50 $ 67
Provident Companies, Inc. 7.000% 7/15/18 590 590
--------
657
--------
Investment Banking/Brokerage -- 4.7%
Credit Suisse First Boston USA 4.625% 1/15/08 1,500 1,602
J.P. Morgan Chase & Co. 5.350% 3/1/07 400 438
J.P. Morgan Chase & Co. 6.625% 3/15/12 2,750 3,172
J.P. Morgan Chase & Co. 5.750% 1/2/13 1,100 1,203
Lehman Brothers Holdings Inc. 6.250% 5/15/06 2,000 2,234
Lehman Brothers Holdings Inc. 6.625% 1/18/12 800 938
Merrill Lynch & Co., Inc. 6.000% 2/17/09 800 899
Morgan Stanley 5.800% 4/1/07 2,600 2,872
Morgan Stanley 7.250% 4/1/32 1,200 1,471
The Bear Stearns Companies Inc. 4.000% 1/31/08 1,600 1,674
The Goldman Sachs Group, Inc. 6.600% 1/15/12 1,550 1,801
The Goldman Sachs Group, Inc. 6.125% 2/15/33 1,300 1,394
--------
19,698
--------
Machinery -- 0.3%
Caterpillar Inc. 6.550% 5/1/11 1,070 1,265
Terex Corporation 8.875% 4/1/08 66 69
--------
1,334
--------
Manufacturing (Diversified) -- 0.1%
The Gillette Company 2.875% 3/15/08 410 412
--------
Media -- 3.0%
AOL Time Warner Inc. 6.150% 5/1/07 1,600 1,800
AOL Time Warner Inc. 6.875% 5/1/12 800 913
AOL Time Warner Inc. 7.700% 5/1/32 2,020 2,358
Clear Channel Communications, Inc. 4.400% 5/15/11 1,210 1,214
Liberty Media Corporation 8.500% 7/15/29 840 994
Liberty Media Corporation 8.250% 2/1/30 420 485
News America Holdings Incorporated 8.875% 4/26/23 500 639
News America Holdings Incorporated 7.750% 2/1/24 80 93
News America Holdings Incorporated 8.250% 10/17/96 200 234
News America Incorporated 7.625% 11/30/28 1,410 1,662
News America Incorporated 6.550% 3/15/33 110 117(B)
</Table>
12
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Media -- Continued
Time Warner Entertainment Company, L.P. 8.375% 7/15/33 $ 460 $ 595
Viacom Inc. 5.625% 8/15/12 1,250 1,389
--------
12,493
--------
Medical Care Facilities -- 0.4%
HCA Inc. 6.300% 10/1/12 1,790 1,830
--------
Metals and Mining -- 0.5%
Alcoa Inc. 5.375% 1/15/13 1,800 1,953
--------
Oil and Gas -- 2.7%
Apache Corporation 6.250% 4/15/12 1,010 1,176
ConocoPhillips 4.750% 10/15/12 2,170 2,293
Devon Energy Corporation 7.950% 4/15/32 80 103
El Paso Corporation 7.800% 8/1/31 1,660 1,399
El Paso Corporation 7.750% 1/15/32 340 286
Ocean Energy Inc. 4.375% 10/1/07 965 1,015
Union Oil Company of California 7.350% 6/15/09 3,000 3,584
XTO Energy, Inc. 6.250% 4/15/13 1,250 1,328(B)
--------
11,184
--------
Paper and Forest Products -- 1.0%
MeadWestvaco Corporation 6.850% 4/1/12 1,130 1,304
Weyerhaeuser Company 6.125% 3/15/07 750 829
Weyerhaeuser Company 6.750% 3/15/12 1,070 1,215
Weyerhaeuser Company 7.375% 3/15/32 720 828
--------
4,176
--------
Pharmaceuticals -- 0.5%
Bristol-Myers Squibb Company 5.750% 10/1/11 1,810 2,014
--------
Retail -- 0.4%
Target Corporation 5.875% 3/1/12 1,240 1,401
Wal-Mart Stores, Inc. 7.550% 2/15/30 200 264
--------
1,665
--------
Special Purpose -- 7.8%
Anadarko Finance Company 6.750% 5/1/11 970 1,137
Anadarko Finance Company 7.500% 5/1/31 710 892
BAE Systems Holdings Inc. 6.400% 12/15/11 1,560 1,745
ChevronTexaco Capital Company 3.500% 9/17/07 1,000 1,039
</Table>
13
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Special Purpose -- Continued
Conoco Funding Company 5.450% 10/15/06 $ 1,250 $ 1,380
Conoco Funding Company 6.350% 10/15/11 640 748
Conoco Funding Company 7.250% 10/15/31 1,500 1,884
DaimlerChrysler NA Holding Corp. 6.400% 5/15/06 800 874
DaimlerChrysler NA Holding Corp. 4.050% 6/4/08 730 723
DaimlerChrysler NA Holding Corp. 7.300% 1/15/12 1,025 1,156
DaimlerChrysler NA Holding Corp. 8.500% 1/18/31 1,800 2,120
Devon Financing Corporation ULC 6.875% 9/30/11 140 164
Devon Financing Corporation ULC 7.875% 9/30/31 1,000 1,270
Duke Capital Corporation 6.250% 2/15/13 340 361
Gemstone Investors Limited 7.710% 10/31/04 440 438(B)
H.J. Heinz Finance Company 6.000% 3/15/12 800 911
H.J. Heinz Finance Company 6.750% 3/15/32 800 954
Sprint Capital Corporation 6.000% 1/15/07 700 752
Sprint Capital Corporation 8.375% 3/15/12 2,750 3,293
Sprint Capital Corporation 6.900% 5/1/19 720 754
Sprint Capital Corporation 8.750% 3/15/32 700 838
TCI Communications Financing III 9.650% 3/31/27 1,650 1,963
Unilever Capital Corporation 7.125% 11/1/10 480 582
Verizon Global Funding Corp. 6.125% 6/15/07 2,600 2,927
Verizon Global Funding Corp. 6.875% 6/15/12 1,000 1,181
Verizon Global Funding Corp. 7.375% 9/1/12 1,300 1,585
Verizon Wireless Capital LLC 5.375% 12/15/06 800 879
--------
32,550
--------
Telecommunications -- 1.9%
AT&T Corp. 7.800% 11/15/11 800 914
AT&T Corp. 8.500% 11/15/31 640 726
BellSouth Corporation 6.000% 10/15/11 800 914
Citizens Communications Company 8.500% 5/15/06 1,000 1,160
EchoStar DBS Corporation 9.375% 2/1/09 29 31
GTE Corporation 6.940% 4/15/28 1,700 1,930
SBC Communications Inc. 5.875% 8/15/12 2,020 2,277
--------
7,952
--------
Telecommunications (Cellular/Wireless) -- 0.9%
AT&T Wireless Services Inc. 7.500% 5/1/07 1,500 1,729
Cingular Wireless LLC 5.625% 12/15/06 800 877
Motorola, Inc. 7.625% 11/15/10 850 999
--------
3,605
--------
</Table>
14
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Transportation -- 1.5%
Burlington Northern Railroad Company 6.960% 3/22/09 $ 296 $ 327
Burlington Northern Railroad Company 7.330% 6/23/10 216 246
Consolidated Rail Corporation 7.875% 5/15/43 600 751
Continental Airlines, Inc. 7.256% 3/15/20 630 623
Delta Air Lines, Inc. 7.570% 11/18/10 400 411
Delta Air Lines, Inc. 7.111% 9/18/11 230 233
Delta Air Lines, Inc. 6.718% 1/2/23 792 859
Norfolk Southern Railway Company 7.000% 6/15/05 475 521
Northwest Airlines Corporation 7.575% 9/1/20 206 210
Union Pacific Corporation 6.500% 4/15/12 1,750 2,024
United Airlines, Inc. 7.783% 1/1/14 245 196
--------
6,401
--------
Total Corporate Bonds and Notes
(Identified Cost -- $263,213) 284,633
- -----------------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 9.0%
Fixed Rate Securities -- 9.0%
Fannie Mae 2.250% 5/15/06 22,460 22,760
Fannie Mae 6.000% 5/15/08 8,900 10,278
Fannie Mae 5.375% 11/15/11 300 337
Freddie Mac 6.750% 9/15/29 9 11
Freddie Mac 6.250% 7/15/32 1,300 1,530
Tennessee Valley Authority 5.375% 11/13/08 150 169
Tennessee Valley Authority 6.750% 11/1/25 210 259
United States Treasury Notes 2.625% 5/15/08 775 782
United States Treasury Notes 3.875% 2/15/13 785 808
United States Treasury Bonds 5.750% 8/15/10 30 35
United States Treasury Bonds 5.375% 2/15/31 720 811
--------
Total U.S. Government and Agency Obligations (Identified
Cost -- $37,165) 37,780
- -----------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- 0.1%
Fixed Rate Securities -- N.M.
Fannie Mae 8.000% 4/25/06 73 76
--------
Indexed Securities(E) -- 0.1%
Freddie Mac 4.115% 9/1/24 162 168
--------
Total U.S. Government Agency Mortgage-Backed Securities
(Identified Cost -- $237) 244
- -----------------------------------------------------------------------------------------------------------------
</Table>
15
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Yankee Bonds(F) -- 19.0%
Banks -- 2.4%
ABN Amro Bank NV 4.650% 6/4/18 $ 1,530 $ 1,509
Inter-American Development Bank 4.000% 1/18/05 2,450 2,552
Korea Development Bank 6.750% 12/1/05 4,020 4,406
Royal Bank of Scotland Group plc 8.817% 3/31/49 1,500 1,679
--------
10,146
--------
Chemicals -- N.M.
Avecia Group PLC 11.000% 7/1/09 71 64
--------
Electric -- 1.2%
Hydro-Quebec 7.50% 4/1/16 3,625 4,783
--------
Foreign Governments -- 6.7%
Federative Republic of Brazil 2.188% 4/15/09 176 148(E)
Federative Republic of Brazil 14.500% 10/15/09 580 671
Federative Republic of Brazil 12.000% 4/15/10 580 604
Federative Republic of Brazil 2.188% 4/15/12 430 323(E)
Federative Republic of Brazil 2.188% 4/15/12 660 495(E)
Federative Republic of Brazil 8.000% 4/15/14 3,029 2,643
Federative Republic of Brazil 11.000% 8/17/40 410 374
Italian Republic 3.625% 9/14/07 1,700 1,781
Province of Manitoba 9.500% 9/15/18 1,080 1,697
Province of Nova Scotia 5.750% 2/27/12 1,500 1,712
Province of Ontario 3.500% 9/17/07 1,000 1,040
Province of Ontario 5.125% 7/17/12 900 996
Quebec Province 7.500% 9/15/29 1,440 1,919
Republic of Colombia 10.500% 7/9/10 180 207
Republic of Colombia 11.750% 2/25/20 640 797
Republic of Panama 9.625% 2/8/11 120 139
Republic of Panama 9.375% 7/23/12 750 870
Republic of Panama 5.000% 7/17/14 77 69(C)
Republic of Panama 10.750% 5/15/20 180 224
Republic of Peru 5.000% 3/7/17 1,296 1,069(C)
Republic of Peru 5.000% 3/7/17 269 229(B,C)
Republic of the Philippines 9.875% 1/15/19 870 960
Republic of the Philippines 10.625% 3/16/25 50 58
Russian Federation 8.250% 3/31/10 80 92
Russian Federation 5.000% 3/31/30 1,190 1,168(C)
</Table>
16
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Yankee Bonds -- Continued
Foreign Governments -- Continued
United Mexican States 8.375% 1/14/11 $ 1,620 $ 1,941
United Mexican States 11.500% 5/15/26 3,920 5,845
--------
28,071
--------
Insurance -- 0.2%
XL Capital plc 6.500% 1/15/12 700 801
--------
Manufacturing (Diversified) -- 1.0%
Tyco International Group SA 6.375% 6/15/05 1,000 1,042
Tyco International Group SA 6.375% 10/15/11 250 264
Tyco International Group SA 7.000% 6/15/28 554 559
Tyco International Group SA 6.875% 1/15/29 2,366 2,390
--------
4,255
--------
Oil and Gas -- 1.2%
Anderson Exploration Ltd. 6.750% 3/15/11 450 521
Petroliam Nasional Berhad 7.625% 10/15/26 610 701(B)
YPF Sociedad Anonima 10.000% 11/2/28 3,500 3,955
--------
5,177
--------
Special Purpose -- 3.6%
Deutsche Telekom International Finance BV 8.750% 6/15/30 1,400 1,784
Deutsche Telekom International Finance BV 9.250% 6/1/32 670 926
Diageo Capital Plc 3.500% 11/19/07 630 648
Diageo Capital Plc 3.375% 3/20/08 120 123
General Motors Nova Scotia Finance Company 6.850% 10/15/08 1,160 1,218
HSBC Capital Funding LP 4.610% 12/29/49 760 748(E)
HSBC Holdings plc 5.250% 12/12/12 700 746
PDVSA Finance Ltd. 8.500% 11/16/12 1,750 1,601
PDVSA Finance Ltd. 1998-1 7.400% 8/15/16 200 163
PDVSA Finance Ltd. 1999-I 9.750% 2/15/10 4,000 3,940
PDVSA Finance Ltd. 1999-K 9.950% 2/15/20 800 747
Petronas Capital Ltd. 7.875% 5/22/22 770 913(B)
Redwood Capital II Ltd. 4.290% 1/28/04 200 200(B,E)
Telefonica Europe BV 8.250% 9/15/30 800 1,047
--------
14,804
--------
Telecommunications -- 1.7%
British Telecommunications plc 8.375% 12/15/10 900 1,138
British Telecommunications plc 8.875% 12/15/30 420 573
France Telecom SA 9.250% 3/1/11 3,000 3,776
France Telecom SA 10.000% 3/1/31 340 470
</Table>
17
<Table>
<Caption>
Rate Maturity Date Par Value
- -----------------------------------------------------------------------------------------------------------------
Yankee Bonds -- Continued
Telecommunications -- Continued
Koninklijke KPN NV 8.000% 10/1/10 $ 990 $ 1,226
--------
7,183
--------
Telecommunications (Cellular Wireless) -- 0.3%
Vodafone Group plc 7.625% 2/15/05 1,000 1,095
--------
Transportation -- 0.7%
C P Railway Limited 7.125% 10/15/31 2,500 3,064
--------
Total Yankee Bonds
(Identified Cost -- $71,721) 79,443
--------
Total Long-Term Securities
(Identified Cost -- $372,336) 402,100
- -----------------------------------------------------------------------------------------------------------------
Short-Term Securities -- 2.7%
U.S. Government and Agency Obligations -- 0.4%
Fannie Mae 0.000% 10/22/03 500 498(A,G)
Federal Home Loan Bank 0.000% 7/1/03 300 300(A,G)
Freddie Mac 0.000% 7/1/03 100 100(A,G)
Freddie Mac 0.000% 7/30/03 800 799(A,G)
--------
1,697
--------
Repurchase Agreements -- 2.3%
Lehman Brothers, Inc.
1.15%, dated 6/30/03, to be repurchased at $3,800 on 7/1/03 (Collateral: $13,660
Federal Home Loan Bank zero coupon bonds, due 9/24/21, value $3,876) 3,800 3,800
Merrill Lynch Government Securities, Inc.
1.22%, dated 6/30/03, to be repurchased at $5,700 on 7/1/03 (Collateral: $14,050
Resolution Funding Corp. principal-only securities, due 1/15/21, value $5,813) 5,700 5,700
--------
9,500
--------
Total Short-Term Securities (Identified Cost -- $11,197) 11,197
- -----------------------------------------------------------------------------------------------------------------
Total Investments -- 98.8% (Identified Cost -- $383,533) 413,297
Other Assets Less Liabilities -- 1.2% 5,139
--------
NET ASSETS -- 100.0% $418,436
========
</Table>
18
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Accumulated paid-in capital applicable to:
37,256 Primary Class shares outstanding $385,085
360 Institutional Class shares outstanding 3,684
Undistributed net investment income 99
Accumulated net realized gain/(loss) on investments, options and futures (211)
Unrealized appreciation/(depreciation) of investments, options and futures 29,779
--------
NET ASSETS $418,436
========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $11.12
========
INSTITUTIONAL CLASS $11.13
========
</Table>
<Table>
<Caption>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- ----------------------------------------------------------------------
Futures Contracts Written(H)
U.S. Treasury Note Futures September 2003 13 $16
U.S. Treasury Bond Futures September 2003 19 (1)
---
$15
---
- ----------------------------------------------------------------------
</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. These securities represent 3.3% of net
assets.
(C) Stepped coupon security -- A security with a predetermined schedule of
interest or dividend rate changes.
(D) Bond is in default at June 30, 2003.
(E) Indexed security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate ("LIBOR") or the one-year Treasury
Bill rate. The coupon rates are the rates as of June 30, 2003.
(F) Yankee Bond -- A dollar-denominated bond issued in the U.S. by foreign
entities.
(G) Collateral to cover futures contracts.
(H) Futures are described in more detail in the notes to financial statements.
See notes to financial statements.
19
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 2003 (Unaudited)
(Amounts in Thousands)
High Yield Portfolio
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Long-Term Securities -- 98.8%
Corporate Bonds and Notes -- 85.6%
Advertising -- 0.5%
Vertis Inc. 9.750% 4/1/09 $ 490 $ 510(A)
Vertis Inc. 10.875% 6/15/09 490 490
---------
1,000
---------
Aerospace/Defense -- 0.5%
Esterline Technologies Corporation 7.750% 6/15/13 1,063 1,090(A)
---------
Animal Hospitals -- 0.4%
Vicar Operating, Inc. 9.875% 12/1/09 765 838
---------
Apparel -- 1.5%
Oxford Industries, Inc. 8.875% 6/1/11 1,001 1,051(A)
Russell Corporation 9.250% 5/1/10 958 1,044
The William Carter Company 10.875% 8/15/11 1,125 1,271
---------
3,366
---------
Auto Parts and Equipment -- 2.2%
American Axle & Manufacturing Inc. 9.750% 3/1/09 1,131 1,216
Cummins Inc. 9.500% 12/1/10 962 1,092(A)
Cummins Inc. 7.125% 3/1/28 561 502
Lear Corporation 7.960% 5/15/05 410 437
Lear Corporation 8.110% 5/15/09 533 610
TRW Automotive 9.375% 2/15/13 383 416(A)
TRW Automotive 11.000% 2/15/13 504 549(A)
---------
4,822
---------
Automotive -- 0.7%
Asbury Automotive Group Inc. 9.000% 6/15/12 1,576 1,521
---------
Building Materials -- 2.3%
American Standard, Inc. 7.375% 4/15/05 1,505 1,595
American Standard, Inc. 7.375% 2/1/08 56 62
American Standard, Inc. 8.250% 6/1/09 29 33
American Standard, Inc. 7.625% 2/15/10 56 64
Collins & Aikman Floor Cover 9.750% 2/15/10 1,205 1,260
Nortek Holdings, Inc. 9.125% 9/1/07 700 732
Nortek Holdings, Inc. 8.875% 8/1/08 993 1,036
Nortek Holdings, Inc. 9.875% 6/15/11 251 264
---------
5,046
---------
</Table>
20
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Cable -- 1.6%
Charter Communications Holdings LLC 0.000% 1/15/12 $1,693 $ 781(B)
CSC Holdings Inc. 7.875% 12/15/07 299 306
CSC Holdings Inc. 7.625% 4/1/11 566 571
Insight Communications Company, Inc. 0.000% 2/15/11 1,352 1,122(B)
LodgeNet Entertainment Corporation 9.500% 6/15/13 842 863
---------
3,643
---------
Casino Resorts -- 2.8%
Harrah's Operating Company, Inc. 7.875% 12/15/05 962 1,046
ITT Corporation 6.750% 11/15/05 280 292
Mandalay Resort Group 9.500% 8/1/08 172 197
Mandalay Resort Group 7.000% 11/15/36 205 211
MGM MIRAGE 9.750% 6/1/07 674 765
MGM MIRAGE 8.500% 9/15/10 173 203
MGM MIRAGE 8.375% 2/1/11 116 132
Mirage Resorts, Incorporated 7.250% 10/15/06 465 498
Park Place Entertainment Corporation 7.875% 12/15/05 959 1,022
Station Casinos, Inc. 9.875% 7/1/10 846 931
Wynn Las Vegas LLC 12.000% 11/1/10 729 806
---------
6,103
---------
Chemicals -- 4.7%
Ethyl Corporation 8.875% 5/1/10 640 653(A)
FMC Corporation 10.250% 11/1/09 524 589
Georgia Gulf Corporation 10.375% 11/1/07 971 1,032
Huntsman International Holdings LLC 0.000% 12/31/09 3,966 1,547(C)
Huntsman International LLC 9.875% 3/1/09 712 741
Huntsman International LLC 10.125% 7/1/09 617 592
IMC Global Inc. 6.550% 1/15/05 324 337
IMC Global Inc. 10.875% 6/1/08 684 711
IMC Global Inc. 11.250% 6/1/11 281 292
Kaiser Aluminum & Chemical 12.750% 2/1/49 2,500 156(D)
Lyondell Chemical Company 9.625% 5/1/07 913 895
Lyondell Chemical Company 9.500% 12/15/08 573 544
MacDermid, Incorporated 9.125% 7/15/11 967 1,081
Millennium America Inc. 7.000% 11/15/06 96 97
Millennium America Inc. 9.250% 6/15/08 1,042 1,120
---------
10,387
---------
Coal -- 0.4%
Peabody Energy Corporation 6.875% 3/15/13 919 963(A)
---------
</Table>
21
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Commercial Services and Supplies -- 0.4%
Weight Watchers International, Inc. 13.000% 10/1/09 $ 807 $ 928
---------
Computer Services and Systems -- 0.9%
Unisys Corporation 7.250% 1/15/05 1,500 1,562
Unisys Corporation 6.875% 3/15/10 450 468
---------
2,030
---------
Containers and Packaging -- 2.0%
Ball Corporation 7.750% 8/1/06 250 274
Ball Corporation 6.875% 12/15/12 557 590
Graphic Packaging Corporation 8.625% 2/15/12 315 321
Packaging Corp. of America 9.625% 4/1/09 178 196
Riverwood International Corporation 10.625% 8/1/07 95 98
Riverwood International Corporation 10.875% 4/1/08 2,306 2,364
Smurfit-Stone Container Corporation 8.250% 10/1/12 548 588(A)
---------
4,431
---------
Electric -- 4.7%
Orion Power Holdings, Inc. 12.000% 5/1/10 2,488 2,887
Southern California Edison Company 8.000% 2/15/07 874 958(A)
The AES Corporation 10.000% 12/12/05 1,081 1,122(A)
The AES Corporation 8.500% 11/1/07 1,258 1,195
The AES Corporation 8.750% 6/15/08 619 613
The AES Corporation 9.500% 6/1/09 684 691
The AES Corporation 9.375% 9/15/10 9 9
The AES Corporation 8.875% 2/15/11 14 14
The AES Corporation 9.000% 5/15/15 2,677 2,797(A)
---------
10,286
---------
Electronics -- 1.0%
Fairchild Semiconductor International, Inc. 10.375% 10/1/07 649 683
L-3 Communications Corp. 7.625% 6/15/12 1,315 1,446
---------
2,129
---------
Energy -- 3.0%
Calpine Corporation 7.750% 4/15/09 27 20
Calpine Corporation 8.625% 8/15/10 2,725 2,044
Calpine Corporation 8.500% 2/15/11 1,104 828
CMS Energy Corporation 6.750% 1/15/04 262 264
CMS Energy Corporation 7.625% 11/15/04 645 655
Illinois Power Corporation 11.500% 12/15/10 268 306(A)
</Table>
22
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Energy -- Continued
PG&E Corporation 6.875% 7/15/08 $1,850 $ 1,850(A)
Reliant Resources, Inc. 9.250% 7/15/10 558 561(A)
---------
6,528
---------
Entertainment -- 0.2%
Speedway Motorsports, Inc. 6.750% 6/1/13 483 500
---------
Environmental Services -- 1.4%
Allied Waste North America Incorporated 7.625% 1/1/06 69 72
Allied Waste North America Incorporated 8.875% 4/1/08 146 158
Allied Waste North America Incorporated 8.500% 12/1/08 2,284 2,455
Allied Waste North America Incorporated 7.875% 4/15/13 81 85
Safety-Kleen Corp. 9.250% 5/15/09 3,894 214(D)
---------
2,984
---------
Food, Beverage and Tobacco -- 2.1%
Cott Beverages Incorporated 8.000% 12/15/11 885 956
DIMON Incorporated 9.625% 10/15/11 1,171 1,288
DIMON Incorporated 7.750% 6/1/13 102 105(A)
Merisant Co. 9.500% 7/15/13 770 797(A)
R.J. Reynolds Tobacco Holdings, Inc. 7.750% 5/15/06 481 495
Smithfield Foods, Inc. 8.000% 10/15/09 250 270
Smithfield Foods, Inc. 7.750% 5/15/13 759 814(A)
---------
4,725
---------
Gaming -- 2.6%
Argosy Gaming Company 9.000% 9/1/11 1,082 1,169
Boyd Gaming Corporation 9.250% 10/1/03 111 112
Boyd Gaming Corporation 7.750% 12/15/12 1,584 1,681
Horseshoe Gaming Holding Corp. 8.625% 5/15/09 1,636 1,734
Mohegan Tribal Gaming Authority 8.750% 1/1/09 992 1,069(A)
---------
5,765
---------
Gas and Pipeline Utilities -- 6.7%
ANR Pipeline, Inc. 8.875% 3/15/10 362 396
ANR Pipeline, Inc. 9.625% 11/1/21 367 433
Dynegy Holdings Inc. 8.125% 3/15/05 680 661(A)
Dynegy Holdings Inc. 7.450% 7/15/06 486 463
Dynegy Holdings Inc. 8.750% 2/15/12 673 626
Ferrellgas Partners LP 8.750% 6/15/12 70 76
GulfTerra Energy Partners, L.P. 10.625% 12/1/12 606 700
Northwest Pipelines Corporation 8.125% 3/1/10 254 273
Plains Exploration & Production Company 7.750% 10/15/12 801 897
</Table>
23
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Gas and Pipeline Utilities -- Continued
SEMCO Energy, Inc. 7.125% 5/15/08 $ 260 $ 272(A)
SEMCO Energy, Inc. 7.750% 5/15/13 283 301(A)
Southern Natural Gas Company 8.875% 3/15/10 768 837(A)
Southern Natural Gas Company 8.000% 3/1/32 2,090 2,260
The Williams Companies, Inc. 9.250% 3/15/04 2,054 2,105(A)
The Williams Companies, Inc. 8.625% 6/1/10 762 796
The Williams Companies, Inc. 8.125% 3/15/12 1,238 1,269
The Williams Companies, Inc. 7.500% 1/15/31 334 316
The Williams Companies, Inc. 8.750% 3/15/32 852 886
Transcontinental Gas Pipeline Corporation 7.000% 8/15/11 352 361
Transcontinental Gas Pipeline Corporation 8.875% 7/15/12 729 824
---------
14,752
---------
Health Care -- 1.7%
Extendicare Health Services Inc. 9.350% 12/15/07 1,403 1,336
Tenet Healthcare Corporation 5.375% 11/15/06 102 98
Tenet Healthcare Corporation 5.000% 7/1/07 555 519
Tenet Healthcare Corporation 6.375% 12/1/11 181 167
Tenet Healthcare Corporation 7.375% 2/1/13 1,632 1,575
---------
3,695
---------
Homebuilding -- 0.9%
D.R. Horton, Inc. 7.500% 12/1/07 5 5
Schuler Homes, Inc. 9.375% 7/15/09 265 299
Schuler Homes, Inc. 10.500% 7/15/11 640 736
The Ryland Group, Inc. 8.000% 8/15/06 710 778
The Ryland Group, Inc. 5.375% 6/1/08 249 257
---------
2,075
---------
Insurance -- 1.0%
Willis Corroon Corporation 9.000% 2/1/09 2,029 2,151
---------
Lodging/Hotels -- 2.2%
Extended Stay America, Inc. 9.150% 3/15/08 629 657
Extended Stay America, Inc. 9.875% 6/15/11 600 645
Felcor Lodging LP 1.000% 9/15/08 408 421
Felcor Suites LP 7.375% 10/1/04 476 482
Hilton Hotels Corporation 7.950% 4/15/07 133 143
Hilton Hotels Corporation 7.625% 5/15/08 510 548
Host Marriott Corporation 7.875% 8/1/05 992 1,009
</Table>
24
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Lodging/Hotels -- Continued
Host Marriott Corporation 8.450% 12/1/08 $ 120 $ 124
Starwood Hotels & Resorts Worldwide, Inc. 7.375% 5/1/07 720 758
---------
4,787
---------
Machinery -- 3.0%
AGCO Corporation 9.500% 5/1/08 973 1,051
Grant Prideco, Inc. 9.000% 12/15/09 657 729
Joy Global Inc. 8.750% 3/15/12 855 936
NMHG Holdings Co. 10.000% 5/15/09 1,141 1,255
Terex Corporation 10.375% 4/1/11 935 1,033
Terex Corporation 9.250% 7/15/11 1,500 1,613
---------
6,617
---------
Manufacturing (Diversified) -- 2.0%
Atrium Companies, Inc. 10.500% 5/1/09 1,170 1,252
Hexcel Corporation 9.875% 10/1/08 956 1,052(A)
Interface, Inc. 7.300% 4/1/08 553 464
Interface, Inc. 10.375% 2/1/10 753 723
Jacuzzi Brands Incorporated 9.625% 7/1/10 1,020 1,026(A)
---------
4,517
---------
Media -- 2.2%
American Media Operations, Inc. 10.250% 5/1/09 974 1,052
Brill Media Company, LLC 12.000% 12/15/07 3,000 1,635(D)
Emmis Communications Corporation 8.125% 3/15/09 737 772
Garden State Newspapers, Inc. 8.750% 10/1/09 477 493
Paxson Communications Corporation 10.750% 7/15/08 645 693
Paxson Communications Corporation 0.000% 1/15/09 25 21(B)
Sinclair Broadcast Group, Inc. 8.750% 12/15/11 270 296
---------
4,962
---------
Medical Care Facilities -- 1.5%
Extendicare Health Services, Inc. 9.500% 7/1/10 260 273
HCA Inc. 6.870% 9/15/03 506 510
HCA Inc. 6.910% 6/15/05 49 52
HCA Inc. 8.750% 9/1/10 136 159
HCA Inc. 6.300% 10/1/12 324 331
Health Care REIT, Inc. 8.000% 9/12/12 811 872
Triad Hospitals, Inc. 8.750% 5/1/09 975 1,037
---------
3,234
---------
Medical Products -- 1.3%
ALARIS Medical Systems Inc 7.250% 7/1/11 457 463
ALARIS Medical Systems Inc. 11.625% 12/1/06 550 668
</Table>
25
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Medical Products -- Continued
Fisher Scientific International Inc. 8.125% 5/1/12 $ 129 $ 138(A)
Fresenius Medical Care Capital Trust II 7.875% 2/1/08 1,550 1,631(E)
---------
2,900
---------
Medical Services -- 0.4%
AmeriPath, Inc. 10.500% 4/1/13 913 979
---------
Office Equipment and Supplies -- 0.2%
Xerox Corporation 5.500% 11/15/03 500 502
---------
Oil and Gas -- 4.5%
Amerigas Partners LP 8.875% 5/20/11 696 759
Chesapeake Energy Corporation 8.375% 11/1/08 140 152
Chesapeake Energy Corporation 9.000% 8/15/12 683 761
El Paso CGP Co. 7.750% 6/15/10 1,250 1,166
El Paso Corporation 6.950% 12/15/07 458 428
El Paso Corporation 7.875% 6/15/12 670 620(A)
El Paso Corporation 7.750% 1/15/32 250 211
El Paso Energy Partners 8.500% 6/1/11 258 276
Frontier Escrow Corporation 8.000% 4/15/13 1,061 1,109(A)
Magnum Hunter Resources, Inc. 10.000% 6/1/07 142 147
Ocean Energy, Inc. 8.375% 7/1/08 35 36
Parker & Parsley Petroleum Company 8.875% 4/15/05 63 69
Pioneer Natural Resources Company 9.625% 4/1/10 570 707
Pioneer Natural Resources Company 7.500% 4/15/12 48 55
The Houston Exploration Company 7.000% 6/15/13 1,069 1,104(A)
Vintage Petroleum, Inc. 7.875% 5/15/11 592 635
Vintage Petroleum, Inc. 8.250% 5/1/12 160 176
Westport Resources Corporation 8.250% 11/1/11 544 595
Westport Resources Corporation 8.250% 11/1/11 324 355(A)
XTO Energy, Inc. 6.250% 4/15/13 583 619(A)
---------
9,980
---------
Paper and Forest Products -- 1.8%
Georgia-Pacific Corp. 7.500% 5/15/06 170 174
Georgia-Pacific Corp. 8.875% 2/1/10 13 14(A)
Georgia-Pacific Corp. 8.125% 5/15/11 1,864 1,915
Georgia-Pacific Corp. 9.500% 12/1/11 1,062 1,170
Georgia-Pacific Corp. 7.700% 6/15/15 9 9
Georgia-Pacific Corp. 8.250% 3/1/23 201 183
</Table>
26
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Paper and Forest Products -- Continued
Georgia-Pacific Corp. 7.750% 11/15/29 $ 6 $ 6
Georgia-Pacific Corp. 8.875% 5/15/31 489 479
---------
3,950
---------
Pharmaceuticals -- 0.1%
AmerisourceBergen Corporation 8.125% 9/1/08 250 275(A)
---------
Publishing -- 0.9%
Dex Media East LLC 9.875% 11/15/09 706 787
Dex Media East LLC 12.125% 11/15/12 286 338
Hollinger International Publishing 9.000% 12/15/10 780 835
---------
1,960
---------
Real Estate -- 0.4%
Ventas Realty, Limited Partnership 8.750% 5/1/09 575 621
Ventas Realty, Limited Partnership 9.000% 5/1/12 318 347
---------
968
---------
Rental and Lease Services (Commercial) -- 0.5%
Universal Compression, Inc. 7.250% 5/15/10 1,165 1,206
---------
Restaurants -- 0.3%
Yum! Brands, Inc. 7.450% 5/15/05 583 627
Yum! Brands, Inc. 8.500% 4/15/06 75 84
---------
711
---------
Retail -- 1.9%
Backsaver Acquisition Corp. 9.250% 5/31/08 1,195 260(F,G,H)
Dillard's, Inc. 6.425% 8/1/04 415 417
J.C. Penney Company, Inc. 7.400% 4/1/37 1,807 1,884
Relax The Back Acquisition Corp. 9.250% 5/31/08 512 111(F,G,H)
Rent-A-Center 7.500% 5/1/10 452 475(A)
The Gap, Inc. 9.900% 12/15/05 196 220
The Gap, Inc. 6.900% 9/15/07 693 747
---------
4,114
---------
Retail (Food Chains) -- 0.4%
Domino's Inc. 8.250% 7/1/11 767 792(A)
---------
</Table>
27
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Retailers -- 0.2%
Hollywood Entertainment Corporation 9.625% 3/15/11 $ 411 $ 450
---------
Special Purpose -- 5.3%
American Tower Escrow Corporation 0.000% 8/1/08 1,081 697(C)
Charter Communications Holdings, LLC 0.000% 5/15/11 3,541 1,788(B)
El Paso Production Holding Company 7.750% 6/1/13 1,105 1,102(A)
Equistar Chemicals Funding Corp. 10.625% 5/1/11 566 580(A)
H & E Equipment Services LLC 11.125% 6/15/12 1,894 1,667
Midland Funding II 11.750% 7/23/05 483 522
Moore North America Finance 7.875% 1/15/11 350 365(A)
Qwest Capital Funding, Inc. 7.000% 8/3/09 1,411 1,161
Qwest Capital Funding, Inc. 7.250% 2/15/11 815 668
Qwest Capital Funding, Inc. 6.875% 7/15/28 1,423 1,017
Toll Corp. 8.125% 2/1/09 451 480
Toll Corp. 8.000% 5/1/09 169 181
Toll Corp. 8.250% 2/1/11 165 184
UCAR Finance Inc. 10.250% 2/15/12 1,435 1,407
---------
11,819
---------
Steel (Producers) -- 0.7%
AK Steel Corporation 7.875% 2/15/09 1,689 1,436
---------
Storage Facilities -- 0.4%
Mobile Mini, Inc. 9.500% 7/1/13 920 952(A)
---------
Technology Services -- 0.4%
SPX Corporation 7.500% 1/1/13 842 911
---------
Telecommunications -- 5.7%
EchoStar DBS Corporation 10.375% 10/1/07 715 792
EchoStar DBS Corporation 9.125% 1/15/09 1,855 2,073
FairPoint Communications, Inc. 11.875% 3/1/10 680 789(A)
Insight Midwest, L.P. 9.750% 10/1/09 849 898
Insight Midwest, L.P. 10.500% 11/1/10 4 4
PanAmSat Corporation 6.375% 1/15/08 651 661
PanAmSat Corporation 8.500% 2/1/12 1,359 1,471
Qwest Communications International Inc. 7.500% 11/1/08 608 562
Qwest Corporation 6.875% 9/15/33 2,110 1,941
Qwest Services Corporation 13.500% 12/15/10 2,099 2,372(A)
</Table>
28
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Telecommunications -- Continued
WorldCom, Inc. - WorldCom Group 8.250% 5/15/31 $2,350 $ 693(D)
WorldCom, Inc. - WorldCom Group 7.875% 5/15/49 736 221(D)
---------
12,477
---------
Telecommunications (Cellular/Wireless) -- 1.3%
Centennial Cellular Communications 10.125% 6/15/13 163 161
Nextel Communications, Inc. 9.750% 10/31/07 1,250 1,294(B)
Nextel Communications, Inc. 9.375% 11/15/09 537 576
Nextel Communications, Inc. 5.250% 1/15/10 789 742(K)
---------
2,773
---------
Transportation -- 1.5%
Avis Group Holdings, Inc. 11.000% 5/1/09 669 749
Kansas City Southern Railway 9.500% 10/1/08 1,444 1,605
Offshore Logistics, Inc. 6.125% 6/15/13 480 481
Oshkosh Truck Corporation 8.750% 3/1/08 440 457
---------
3,292
---------
Water Utilities -- 0.3%
National Waterworks, Inc. 10.500% 12/1/12 667 738
---------
Total Corporate Bonds and Notes (Identified
Cost -- $186,937) 189,060
- -------------------------------------------------------------------------------------------------------------------
Yankee Bonds(I) -- 11.4%
Cable -- 0.6%
British Sky Broadcasting Group plc 7.300% 10/15/06 353 395
British Sky Broadcasting Group plc 8.200% 7/15/09 38 45
Rogers Communications, Inc. 8.875% 7/15/07 918 946
---------
1,386
---------
Chemicals -- 0.8%
Avecia Group PLC 11.000% 7/1/09 665 602
Rhodia SA 8.875% 6/1/11 1,085 1,123(A)
---------
1,725
---------
Containers and Packaging -- 0.5%
Norampac Inc. 6.750% 6/1/13 1,125 1,181(A)
---------
Electronics -- 0.7%
Flextronics International Ltd. 9.875% 7/1/10 797 872
Flextronics International Ltd. 6.500% 5/15/13 647 623(A)
---------
1,495
---------
</Table>
29
<Table>
<Caption>
Rate Maturity Date Par Value
- -------------------------------------------------------------------------------------------------------------------
Yankee Bonds -- Continued
Entertainment -- 0.3%
Alliance Atlantis Communications Inc. 13.000% 12/15/09 $ 499 $ 569
---------
Manufacturing (Diversified) -- 1.4%
Tyco International Group SA 6.750% 2/15/11 151 160
Tyco International Group SA 6.375% 10/15/11 1,653 1,744
Tyco International Group SA 6.875% 1/15/29 1,083 1,094
---------
2,998
---------
Media -- 0.7%
Shaw Communications Inc. 8.250% 4/11/10 250 278
Vivendi Universal SA 9.250% 4/15/10 1,156 1,315(A)
---------
1,593
---------
Office Equipment and Supplies -- 1.1%
Xerox Capital Europe Plc 5.875% 5/15/04 2,353 2,365
---------
Paper and Forest Products -- 1.2%
Abitibi-Consolidated Inc. 8.550% 8/1/10 203 228
Abitibi-Consolidated Inc. 6.000% 6/20/13 783 745
Cascades Inc. 7.250% 2/15/13 1,016 1,068(A)
Norske Skog Canada Limited 8.625% 6/15/11 764 798
---------
2,839
---------
Pharmaceuticals -- 0.5%
Biovail Corporation 7.875% 4/1/10 1,024 1,085
---------
Publishing -- 0.3%
Sun Media Corporation 7.625% 2/15/13 501 534
---------
Services -- 0.4%
Compagnie Generale de Geophysique SA 10.625% 11/15/07 828 849
---------
Special Purpose -- 1.5%
Calpine Canada Energy Finance 8.500% 5/1/08 1,443 1,125
MDP Acquisitions PLC 9.675% 10/1/12 1,189 1,314
Yell Finance BV 10.750% 8/1/11 785 905
---------
3,344
---------
</Table>
30
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<Table>
<Caption>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------------------------
Yankee Bonds -- Continued
Steel (Producers) -- 0.4%
IPSCO, Inc. 8.750% 6/1/13 $ 765 $ 780
---------
Telecommunications -- 0.1%
Nortel Networks Corporation 4.250% 9/1/08 296 249
---------
Telecommunications (Cellular/Wireless) -- 0.2%
Rogers Wireless Communications Inc. 9.625% 5/1/11 438 504
---------
Transportation -- 0.7%
Teekay Shipping Corporation 8.875% 7/15/11 1,455 1,595
---------
Total Yankee Bonds (Identified Cost -- $23,892) 25,091
- -------------------------------------------------------------------------------------------------------------------
Common Stocks -- N.M.
Engineering and Construction -- N.M.
Washington Group International, Inc. 4shs 90(J)
---------
Food -- N.M.
International Fast Food Corporation 40 0(J)
---------
Total Common Stocks (Identified Cost -- $2,844) 90
- -------------------------------------------------------------------------------------------------------------------
Preferred Stocks -- 1.8%
Cable -- 0.8%
Cablevision Systems New York Group 11.125% 11 1,162
Cablevision Systems New York Group 11.750% 5 530
---------
1,692
---------
Diversified Financial Services -- 0.4%
Sinclair Capital Corporation 11.625% 9 954
---------
Industrial Conglomerates -- N.M.
High Voltage Engineering Corporation 12.500% 0.5 5(G)
---------
Media -- 0.6%
Paxson Communications Corporation 13.250% 0.1 1,248(G)
---------
</Table>
31
<Table>
<Caption>
Rate Shares/Par Value
- --------------------------------------------------------------------------------------------------------------
Preferred Stocks -- Continued
Telecommunications -- N.M.
Intermedia Communications, Inc. 13.500% 1shs $ 4(G)
IXC Communications, Inc. 12.500% 0.003 1
---------
5
---------
Total Preferred Stocks (Identified Cost -- $4,279) 3,904
- --------------------------------------------------------------------------------------------------------------
Warrants -- N.M.
American Tower Corporation 1wts 85(A,J)
Horizon PCS, Inc. 2 0.1(A,J)
Next Generation Network, Inc. 16 0.1(J)
Washington Group International, Series A 3 8(J)
Washington Group International, Series B 3 6(J)
Washington Group International, Series C 2 4(J)
---------
Total Warrants (Identified Cost -- $310) 103
---------
Total Long-Term Securities (Identified Cost --$218,262) 218,248
- --------------------------------------------------------------------------------------------------------------
Short-Term Securities -- 1.3%
Repurchase Agreements -- 1.3%
Lehman Brothers, Inc.
1.15%, dated 6/30/03, to be repurchased at $1,756 on 7/1/03 (Collateral:
$1,770 Federal Home Loan Bank bonds, 5.27%, due 4/2/18, value $1,791) $1,756 1,756
Merrill Lynch Government Securities, Inc.
1.22%, dated 6/30/03, to be repurchased at $1,000 on 7/1/03 (Collateral:
$2,395 Resolution Funding Corp. principal-only security, due 7/15/20, value
$1,021) 1,000 1,000
---------
Total Short-Term Securities (Identified Cost -- $2,756) 2,756
- --------------------------------------------------------------------------------------------------------------
Total Investments -- 100.1% (Identified Cost -- $221,018) 221,004
Other Assets Less Liabilities -- (0.1)% (165)
---------
NET ASSETS -- 100.0% $220,839
=========
</Table>
32
Semi-Annual Report to Shareholders
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Accumulated paid-in capital applicable to:
24,475 Primary Class shares outstanding $375,854
580 Institutional Class shares outstanding 5,390
Undistributed net investment income 807
Accumulated net realized gain/(loss) on investments, options and futures (161,198)
Unrealized appreciation/(depreciation) of investments, options and futures (14)
---------
NET ASSETS $220,839
=========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $8.81
=========
INSTITUTIONAL CLASS $8.82
=========
- --------------------------------------------------------------------------------------------------------------
</Table>
(A) Rule 144a Security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 18.4% of net
assets.
(B) Stepped coupon security -- A security with a predetermined schedule of
interest or dividend rate changes.
(C) Zero coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
(D) Bond is in default at June 30, 2003.
(E) Unit -- A security which consists of a bond and warrants to purchase the
stock of the issuer.
(F) Private placement.
(G) Pay-in-Kind ("PIK") security -- A bond in which interest during the initial
few years is paid in additional PIK securities rather than in cash.
(H) Illiquid security valued at fair value under procedures adopted by the Board
of Directors.
(I) Yankee Bond -- A dollar-denominated bond issued in the U.S. by foreign
entities.
(J) Non-income producing.
(K) Convertible security -- Security may be converted into the issuer's common
stock.
N.M. -- Not meaningful.
See notes to financial statements.
33
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
<Table>
<Caption>
Six Months Ended 6/30/03
---------------------------------------------------------
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------
Investment Income:
Interest $ 7,070 $10,761 $ 8,659
Dividends 120 -- 224
------- ------- -------
Total income 7,190 10,761 8,883
------- ------- -------
Expenses:
Management fee 1,079 1,126 622
Distribution and service fees(A) 957 930 468
Audit and legal fees 34 37 35
Custodian fee 104 121 91
Directors' fees and expenses 11 19 6
Registration fees 16 22 15
Reports to shareholders 16 18 23
Transfer agent and shareholder servicing expense:
Primary Class 113 150 86
Institutional Class 1 1 2
Other expenses 7 7 6
------- ------- -------
2,338 2,431 1,354
Less fees waived (402) (562) --
------- ------- -------
Total expenses, net of waivers 1,936 1,869 1,354
------- ------- -------
NET INVESTMENT INCOME 5,254 8,892 7,529
------- ------- -------
Net Realized and Unrealized Gain/(Loss) on
Investments:
Realized gain/(loss) on:
Investments 11,735 2,188 (854)
Options 149 -- --
Futures (3,103) 924 --
------- ------- -------
8,781 3,112 (854)
------- ------- -------
Change in unrealized appreciation/(depreciation) of
investments, options and futures (5,364) 21,768 19,720
------- ------- -------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS 3,417 24,880 18,866
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,671 $33,772 $26,395
- -----------------------------------------------------------------------------------------------------------------
</Table>
(A) See Note 1 to the financial statements.
N/A -- Not applicable.
See notes to financial statements.
34
Semi-Annual Report to Shareholders
Statements of Changes in Net Assets
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<Table>
<Caption>
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
---------------------------------------------------------------------------------------
Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended
6/30/03 12/31/02 6/30/03 12/31/02 6/30/03 12/31/02
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
Change in Net Assets:
Net investment income $ 5,254 $ 13,614 $ 8,892 $ 15,507 $ 7,529 $ 16,637
Net realized gain/(loss) on
investments, options and futures 8,781 4,950 3,112 4,513 (854) (35,418)
Change in unrealized appreciation/
(depreciation) of investments,
options and futures (5,364) 7,494 21,768 6,234 19,720 8,382
- ----------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from
operations 8,671 26,058 33,772 26,254 26,395 (10,399)
Distributions to shareholders:
From net investment income:
Primary Class (5,060) (13,280) (8,804) (15,366) (6,698) (16,509)
Institutional Class (154) (374) (88) (142) (159) (204)
Change in net assets from Fund
share transactions:
Primary Class 1,733 67,093 55,005 68,814 34,463 (10,226)
Institutional Class (361) 1,963 952 1,317 1,959 1,672
- ----------------------------------------------------------------------------------------------------------------------------
Change in net assets 4,829 81,460 80,837 80,877 55,960 (35,666)
Net Assets:
Beginning of period 389,278 307,818 337,599 256,722 164,879 200,545
- ----------------------------------------------------------------------------------------------------------------------------
End of period $394,107 $389,278 $418,436 $337,599 $220,839 $164,879
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income $ 178 $ 6 $ 99 $ 99 $ 807 $ 135
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
N/A -- Not applicable.
See notes to financial statements.
35
Financial Highlights
Legg Mason Income Trust, Inc.
Contained below is per share operating performance data for an Institutional
Class share of common stock outstanding, total investment return, ratios to
average net assets and other supplemental data. This information has been
derived from information provided in the financial statements.
<Table>
<Caption>
Investment Operations
------------------------------------------------
Net Asset Net Net Realized and
Value, Investment Unrealized Gain/(Loss) Total From
Beginning Income/ on Investments, Investment
of Year (Loss) Options and Futures Operations
- ------------------------------------------------------------------------------------------
U.S. Government
Intermediate-Term
Portfolio
Six Months Ended
June 30, 2003(A) $10.70 $ .16(B) $ .10 $ .26
Years Ended Dec. 31,
2002 10.32 .46(B) .38 .84
2001 10.27 .58(B) .05 .63
2000 9.92 .67(B) .35 1.02
1999 10.51 .59(B) (.59) --
1998 10.40 .61(B) .11 .72
Investment Grade Income
Portfolio
Six Months Ended
June 30, 2003(A) $10.43 $ .26(E) $ .69 $ .95
Years Ended Dec. 31,
2002 10.11 .59(E) .31 .90
2001 9.97 .66(E) .14 .80
2000 9.79 .71(E) .19 .90
1999 10.52 .66(E) (.70) (.04)
1998 10.59 .66(E) .12 .78
High Yield Portfolio
Six Months Ended
June 30, 2003(A) $ 7.96 $ .34 $ .82 $1.16
Years Ended Dec. 31,
2002 9.20 .78 (1.24) (.46)
2001 10.18 1.01 (1.00) .01
2000 14.97 1.41 (3.47) (2.06)
Period From Mar. 8 to Dec. 31,
1999 15.98 .89 (.92) (.03)
Period Ended Jan. 28,
1999 14.67 .08 .72 .80
Period Ended Dec. 31,
1998(F) 16.85 .86 (1.98) (1.12)
- ------------------------------------------------------------------------------------------
</Table>
(A) Unaudited.
(B) Net of fees waived by LMFA for expenses in excess of a voluntary expense
limitation of 0.50% until April 30, 2004. If no fees had been waived by
LMFA, the annualized ratio of expenses to average daily net assets would
have been as follows: for the six months ended June 30, 2003, 0.68%; for the
years ended December 31, 2002, 0.66%; 2001, 0.63%; 2000, 0.65%; 1999, 0.66%;
and 1998, 0.65%.
(C) Not annualized.
(D) Annualized.
(E) Net of fees waived by LMFA for expenses in excess of a voluntary expense
limitation of 0.50% until April 30, 2004. If no fees had been waived by
LMFA, the annualized ratio of expenses to average daily net assets would
have been as follows: for the six months ended June 30, 2003, 0.79%; for the
years ended December 31, 2002, 0.78%; 2001, 0.74%; 2000, 0.79%; 1999, 0.77%;
and 1998, 0.80%.
(F) For the period May 5, 1998 (commencement of operations) to December 31,
1998.
See notes to financial statements.
36
Semi-Annual Report to Shareholders
Financial Highlights -- Continued
<Table>
<Caption>
Distributions
- ---------------------------------------------------------
From Net Net Asset
From Net Realized Value,
Investment Tax Return Gain on Total End of
Income of Capital Investments Distributions Year
- ---------------------------------------------------------------------
$ (.16) $ -- $ -- $ (.16) $10.80
(.46) -- -- (.46) 10.70
(.58) -- -- (.58) 10.32
(.67) -- -- (.67) 10.27
(.59) -- -- (.59) 9.92
(.60) (.01) -- (.61) 10.51
$ (.25) $ -- $ -- $ (.25) $11.13
(.58) -- -- (.58) 10.43
(.66) -- -- (.66) 10.11
(.72) -- -- (.72) 9.97
(.66) -- (.03) (.69) 9.79
(.66) -- (.19) (.85) 10.52
$ (.30) $ -- $ -- $ (.30) $ 8.82
(.78) -- -- (.78) 7.96
(.99) -- -- (.99) 9.20
(1.34) -- (1.39) (2.73) 10.18
(.98) -- -- (.98) 14.97
(.04) -- -- (.04) 15.43
(1.05) -- (.01) (1.06) 14.67
- ---------------------------------------------------------------------
<Caption>
Ratios/Supplemental Data
- -----------------------------------------------------------------------
Expenses Net Investment
to Average Income/(Loss) Portfolio Net Assets,
Total Net to Average Turnover End of Year
Return Assets Net Assets Rate (in thousands)
- -----------------------------------------------------------------------
2.53%(C) .47%(B,D) 3.19%(B,D) 575%(D) $9,200
8.35% .47%(B) 4.38%(B) 204% 9,485
6.30% .46%(B) 5.63%(B) 535% 7,221
10.64% .46%(B) 6.66%(B) 248% 6,723
.04% .47%(B) 5.84%(B) 979% 9,076
7.16% .46%(B) 5.85%(B) 356% 7,340
9.51%(C) .49%(E,D) 5.25%(E,D) 93%(D) $4,006
9.38% .48%(E) 5.85%(E) 131% 2,836
8.16% .47%(E) 6.50%(E) 131% 1,424
9.63% .48%(E) 7.32%(E) 94% 839
(.33)% .46%(E) 6.59%(E) 145% 238
7.57% .45%(E) 6.24%(E) 279% 255
14.97%(C) .89%(D) 8.36%(D) 114%(D) $5,118
(5.00)% .82% 9.63% 97% 2,704
(.06)% .97% 10.20% 130% 1,331
(15.99)% 1.03% 10.98% 45% 673
(.20)%(C) .82%(D) 7.19%(D) 78%(D) 673
5.47%(C) .81%(D) 7.17%(D) 116%(D) --
(6.91)%(C) .79%(D) 8.68%(D) 107%(D) 65
- ---
</Table>
37
Notes to Financial Statements
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Income Trust, Inc. ("Corporation"), consisting of the U.S.
Government Intermediate-Term Portfolio ("Government Intermediate"), the
Investment Grade Income Portfolio ("Investment Grade"), the High Yield Portfolio
("High Yield"), and the U.S. Government Money Market Portfolio ("Government
Money Market") (each a "Fund"), is registered under the Investment Company Act
of 1940, as amended, as an open-end, diversified investment company.
The Government Intermediate, Investment Grade and High Yield Portfolios offer
two classes of shares: Primary Class and Institutional Class. Information about
the Primary Class is contained in a separate report to its shareholders. The
income and expenses of each of these Funds are allocated proportionately to the
two classes of shares based on daily net assets, except for Rule 12b-1
distribution fees, which are charged only on Primary Class shares, and transfer
agent and shareholder servicing expenses, which are determined separately for
each class.
Preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America 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. The following is a summary of significant accounting policies
followed by the Funds in the preparation of their financial statements:
Security Valuation
Securities owned by Government Intermediate, Investment Grade and High Yield
for which market quotations are readily available are valued at current market
value. Securities for which market quotations are not readily available are fair
valued by the Board of Directors and management. In determining fair value, the
Board of Directors and management consider all relevant qualitative and
quantitative information available. These factors are subject to change over
time and are reviewed periodically. The values assigned to fair value
investments are based on available information and do not necessarily represent
amounts that might ultimately be realized, since such amounts depend on future
developments inherent in long-term investments. Further, because of the inherent
uncertainty of valuation, those estimated values may differ significantly from
the values that would have been used had a ready market for the investments
existed, and the differences could be material. At June 30, 2003, $406 or 0.18%
of the High Yield Portfolio's net assets were fair valued in accordance with the
procedures adopted by the Board of Directors.
With respect to High Yield, where a security is traded on more than one
market, which may include foreign markets, the securities are generally valued
on the market considered by the Fund's adviser to be the primary market. The
Fund will value its foreign securities in U.S. dollars on the basis of the
then-prevailing exchange rates.
Legg Mason Fund Adviser, Inc. ("LMFA") has determined that the prices for
several bonds in High Yield were incorrect during the period from January 3,
1995 through December 11, 1998. Had correct prices for these bonds been used
during this period, the annual total return as of December 31, 1998, would have
been 0.54%.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis for
both financial reporting and federal income tax purposes. At June 30, 2003,
receivables for securities sold and payables for securities purchased for each
Fund were as follows:
<Table>
<Caption>
Receivable for Payable for
Securities Sold Securities Purchased
- ----------------------------------------------------------------------------
Government Intermediate $ -- $164,973
Investment Grade 2,116 2,658
High Yield 605 4,539
</Table>
38
Semi-Annual Report to Shareholders
Notes to Financial Statements -- Continued
- --------------------------------------------------------------------------------
For the six months ended June 30, 2003, 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
- ----------------------------------------------------------------------------------------------
Government Intermediate $1,147,248 $ -- $1,055,716 $ 16,661
Investment Grade 139,077 111,318 110,426 54,449
High Yield 1,705 146,776 1,711 103,367
</Table>
Repurchase Agreements
The Funds may engage in repurchase agreement transactions. Under the terms of
a typical repurchase agreement, a fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and a fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during a fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the fund's holding
period. The value of the collateral is at all times at least equal to the total
amount of the repurchase obligation, including interest. In the event of
counterparty default, a fund has the right to use the collateral to satisfy the
terms of the repurchase agreement. However, there could be potential loss to the
fund in the event the fund is delayed or prevented from exercising its right to
dispose of the collateral securities, including the risk of a possible decline
in the value of the collateral securities during the period while the fund seeks
to assert its rights. The Funds' investment adviser reviews the value of the
collateral and the creditworthiness of those banks and dealers with which the
Funds enter into repurchase agreements to evaluate potential risks.
Investment Income and Distributions to Shareholders
Dividend income and distributions to shareholders are allocated at the class
level and are recorded on the ex-dividend date. Dividends from net investment
income are declared daily and paid monthly for each Fund except High Yield,
which declares and pays dividends monthly. Net capital gain distributions, which
are calculated at the fund level, are declared and paid after the end of the tax
year in which the gain is realized. Distributions are determined in accordance
with federal income tax regulations, which may differ from those determined in
accordance with accounting principles generally accepted in the United States of
America; accordingly, periodic reclassifications are made within the Funds'
capital accounts to reflect income and gains available for distribution under
federal income tax regulations. At June 30, 2003, accrued dividends payable were
as follows: Government Intermediate, $392; Investment Grade, $704; and High
Yield, $0. There were no capital gain distributions payable at June 30, 2003.
2. Federal Income Taxes:
No provision for federal income or excise taxes is required since each Fund
intends to continue to qualify as a regulated investment company and distribute
substantially all of its taxable income and capital gains to its shareholders.
Because federal income tax regulations differ from accounting principles
generally accepted in the United States of America; income and capital gains
distributions determined in accordance with tax regulations may differ from net
investment income and realized gains recognized for financial reporting
purposes. Accordingly, the character of distributions and composition of net
assets for tax purposes differ from those reflected in the accompanying
financial statements.
39
- --------------------------------------------------------------------------------
The Funds intend to retain realized capital gains that may be offset against
available capital loss carryforwards for federal income tax purposes. Unused
capital loss carryforwards for federal income tax purposes for Government
Intermediate, Investment Grade and High Yield at June 30, 2003, were:
<Table>
<Caption>
Expiration Government Investment High
Dec. 31, Intermediate Grade Yield
- --------------------------------------------------------------------------------------
2003 $ 699 $ -- $ --
2007 4,880 403 --
2008 4,924 2,050 38,887
2009 -- -- 83,723
2010 -- -- 32,610
</Table>
3. Financial Instruments:
Options and Futures
As part of their investment programs, Government Intermediate, Investment
Grade and High Yield may utilize options and futures. Options may be written
(sold) or purchased by these Funds. When a Fund purchases a put or call option,
the premium paid is recorded as an investment and its value is marked-to-market
daily. When a Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability and its value is
marked-to-market daily.
When options, whether written or purchased, expire, are exercised or are
closed (by entering into a closing purchase or sale transaction), the Fund
realizes a gain or loss as described in the chart below:
<Table>
<Caption>
PURCHASED OPTION: IMPACT ON THE FUND:
The option expires Realize a loss in the amount of the cost of the option.
- --------------------------------------------------------------------------------------------------------
The option is closed through a closing Realize a gain or loss depending on whether the proceeds
sale transaction from the closing sale transaction are greater or less than
the cost of the option.
- --------------------------------------------------------------------------------------------------------
The Fund exercises a call option The cost of the security purchased through the exercise of
the option will be increased by the premium originally paid
to purchase the option.
- --------------------------------------------------------------------------------------------------------
The Fund exercises a put option Realize a gain or loss from the sale of the underlying
security. The proceeds of that sale will be reduced by the
premium originally paid to purchase the put option.
- --------------------------------------------------------------------------------------------------------
</Table>
40
Semi-Annual Report to Shareholders
Notes to Financial Statements -- Continued
- --------------------------------------------------------------------------------
<Table>
<Caption>
WRITTEN OPTION:
IMPACT ON THE FUND:
The option expires Realize a gain equal to the amount of the premium received.
- --------------------------------------------------------------------------------------------------------
The option is closed through a closing Realize a gain or loss without regard to any unrealized gain
purchase transaction or loss on the underlying security and eliminate the option
liability. The Fund will realize a loss in this transaction
if the cost of the closing purchase exceeds the premium
received when the option was written.
- --------------------------------------------------------------------------------------------------------
A written call option is exercised by the Realize a gain or loss from the sale of the underlying
option purchaser security. The proceeds of that sale will be increased by the
premium originally received when the option was written.
- --------------------------------------------------------------------------------------------------------
A written put option is exercised by the The amount of the premium originally received will reduce
option purchaser the cost of the security that the Fund purchased when the
option was exercised.
- --------------------------------------------------------------------------------------------------------
</Table>
The risk associated with purchasing options is limited to the premium
originally paid. Options written by a Fund involve, to varying degrees, risk of
loss in excess of the option value reflected in the statement of net assets. The
risk in writing a covered call option is that a Fund may forgo the opportunity
of profit if the market price of the underlying security increases and the
option is exercised. The risk in writing a put option is that a Fund may incur a
loss if the market price of the underlying security decreases and the option is
exercised. In addition, there is the risk a Fund may not be able to enter into a
closing transaction because of an illiquid secondary market or, for over-the-
counter options, because of the counterparty's inability to perform.
Activity in call and put options during the period for Government Intermediate
and Investment Grade was as follows:
<Table>
<Caption>
Calls Puts
-------------------------------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- -----------------------------------------------------------------------------------
Options outstanding, December 31, 2002 50 $ 48 50 $ 40
Options written -- -- 200 39
Options closed -- -- (150) (27)
Options expired (50) (48) (100) (52)
Options exercised -- -- -- --
- -----------------------------------------------------------------------------------
Options outstanding, June 30, 2003 -- $ -- -- $ --
===================================================================================
</Table>
<Table>
<Caption>
Calls Puts
-------------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- -----------------------------------------------------------------------------------
Options outstanding, December 31, 2002 -- $ -- -- $ --
Options written 17,480 107 -- --
Options closed -- -- -- --
Options expired (17,480) (107) -- --
Options exercised -- -- -- --
- -----------------------------------------------------------------------------------
Options outstanding, June 30, 2003 -- $ -- -- $ --
===================================================================================
</Table>
41
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit with
the broker cash or cash equivalents in an amount equal to a certain percentage
of the contract amount. This is known as the "initial margin." Subsequent
payments ("variation margin") are made or received by the Fund each day,
depending on the daily fluctuation in the value of the contract. The daily
changes in contract value are recorded as unrealized gains or losses and the
Fund recognizes a realized gain or loss when the contract is closed. Futures
contracts are valued daily at the settlement price established by the board of
trade or exchange on which they are traded.
The Funds enter into futures contracts as a hedge against anticipated changes
in interest rates. There are several risks in connection with the use of futures
contracts as a hedging device. Futures contracts involve, to varying degrees,
risk of loss in excess of the amounts reflected in the financial statements. The
change in the value of futures contracts primarily corresponds with the value of
their underlying instruments, which may not correlate with the change in the
value of the hedged instruments. In addition, there is the risk that a Fund may
not be able to enter into a closing transaction because of an illiquid secondary
market.
The open futures positions and related appreciation or depreciation at June
30, 2003, are listed at the end of Government Intermediate's and Investment
Grade's respective statements of net assets.
Forward Currency Exchange Contracts
As part of its investment program, High Yield may utilize forward currency
exchange contracts. The nature and risks of these financial instruments and the
reasons for using them are set forth more fully in the Corporation's prospectus
and statement of additional information.
Forward foreign currency contracts are marked-to-market daily using forward
foreign currency exchange rates supplied by an independent pricing service. The
change in a contract's market value is recorded by High Yield as an unrealized
gain or loss. When the contract is closed or delivery is taken, the Fund records
a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations
in the underlying prices of the Fund's securities, but it does establish a rate
of exchange that can be achieved in the future. These forward foreign currency
contracts involve market risk in excess of amounts reflected in the financial
statements. Although forward foreign currency contracts used for hedging
purposes limit the risk of loss due to a decline in the value of the hedged
currency, they also limit any potential gain that might result should the value
of the currency increase. In addition, the Fund could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their contracts.
The Fund's adviser will enter into forward foreign currency contracts only with
parties approved by the Board of Directors because there is a risk of loss to
the Fund if the counterparties do not complete the transaction.
At June 30, 2003, High Yield had no open forward currency exchange contracts.
4. Transactions With Affiliates:
Each Fund has a management agreement with LMFA. Pursuant to their respective
agreements, LMFA provides the Funds with management and administrative services
for which each Fund pays a fee, computed daily and payable monthly, at annual
rates of each Fund's average daily net assets. LMFA has voluntarily agreed to
waive its fees to the extent each Fund's expenses (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during any month certain annual
rates. These voluntary expense limitations for Government Intermediate and
Investment Grade are due to expire on April 30, 2004, or when net assets reach
$500 million. High Yield has no expense
42
Semi-Annual Report to Shareholders
Notes to Financial Statements -- Continued
- --------------------------------------------------------------------------------
limitation. The following chart shows annual rates of management fees, expense
limits, management fees waived, and management fees payable for each Fund:
<Table>
<Caption>
Six Months Ended At June 30,
June 30, 2003 2003
---------------- -----------
Management Management
Management Expense Fees Fees
Fund Fee Limitation Waived Payable
- -----------------------------------------------------------------------------------
Government Intermediate $402 $109
-- Primary 0.55% 1.00%
-- Institutional 0.55% 0.50%
Investment Grade 562 110
-- Primary 0.60% 1.00%
-- Institutional 0.60% 0.50%
High Yield -- 117
-- Primary 0.65% None
-- Institutional 0.65% None
</Table>
Western Asset Management Company ("Adviser") serves as investment adviser to
the Funds. The Adviser is responsible for the actual investment activity of each
Fund. LMFA pays the Adviser a fee, computed daily and payable monthly, at an
annual rate of: 40% of the management fee received by LMFA for Investment Grade
and 77% for High Yield. For Government Intermediate, LMFA pays the Adviser a
fee, computed daily and payable monthly, of 0.20% of its average daily net
assets, not to exceed the fee received by LMFA.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the New York
Stock Exchange, serves as distributor of the Funds. Legg Mason receives an
annual distribution fee and an annual service fee based on each Fund's Primary
Class's average daily net assets, computed daily and payable monthly as follows:
<Table>
<Caption>
At June 30, 2003
------------------------
Distribution Service Distribution and Service
Fee Fee Fees Payable
- ---------------------------------------------------------------------------------------------
Government Intermediate 0.25% 0.25% $161
Investment Grade 0.25% 0.25% 171
High Yield 0.25% 0.25% 88
</Table>
LM Fund Services, Inc., a registered transfer agent, has an agreement with the
Funds' transfer agent to assist it with some of its duties. For this assistance,
the transfer agent paid LM Fund Services, Inc. the following amounts for the six
months ended June 30, 2003: Government Intermediate, $33; Investment Grade, $37;
and High Yield, $30.
LMFA, the Adviser, Legg Mason and LM Fund Services, Inc. are corporate
affiliates and wholly owned subsidiaries of Legg Mason, Inc.
5. Line of Credit:
The Funds, except for Government Money Market, but including certain other
Legg Mason Funds, participate in a $300 million line of credit ("Credit
Agreement") to be used for temporary or emergency purposes. Pursuant to the
Credit Agreement, each participating Fund is liable only for principal and
interest payments related to borrowings made by that Fund. Borrowings under the
Credit Agreement bear interest at a rate equal to the federal funds rate plus
the federal funds rate margin. For the six months ended June 30, 2003, the Funds
had no borrowings under the Credit Agreement.
43
- --------------------------------------------------------------------------------
6. Fund Share Transactions:
At June 30, 2003, there were 1,000,000 shares authorized, in the aggregate, at
$.001 par value for all active classes of each portfolio of the Corporation.
Share transactions were as follows:
<Table>
<Caption>
Reinvestment
Sold of Distributions
----------------- ----------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------
Government Intermediate
- -- Primary Class
Six Months Ended June 30, 2003 7,315 $ 78,535 382 $ 4,109
Year Ended Dec. 31, 2002 19,141 200,888 1,104 11,577
- -- Institutional Class
Six Months Ended June 30, 2003 273 $ 2,945 13 $ 139
Year Ended Dec. 31, 2002 525 5,520 35 365
Investment Grade
- -- Primary Class
Six Months Ended June 30, 2003 9,254 $ 99,233 662 $ 7,124
Year Ended Dec. 31, 2002 13,866 139,370 1,351 13,611
- -- Institutional Class
Six Months Ended June 30, 2003 162 $ 1,753 7 $ 80
Year Ended Dec. 31, 2002 248 2,494 14 142
High Yield
- -- Primary Class
Six Months Ended June 30, 2003 7,397 $ 62,395 617 $ 5,192
Year Ended Dec. 31, 2002 7,016 59,520 1,548 12,937
- -- Institutional Class
Six Months Ended June 30, 2003 591 $ 4,951 18 $ 157
Year Ended Dec. 31, 2002 539 4,580 24 199
</Table>
44
Semi-Annual Report to Shareholders
Notes to Financial Statements -- Continued
- --------------------------------------------------------------------------------
<Table>
<Caption>
Repurchased Net Change
------------------- -----------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------
Government Intermediate
- -- Primary Class
Six Months Ended June 30, 2003 (7,534) $ (80,911) 163 $ 1,733
Year Ended Dec. 31, 2002 (13,879) (145,372) 6,366 67,093
- -- Institutional Class
Six Months Ended June 30, 2003 (320) $ (3,445) (34) $ (361)
Year Ended Dec. 31, 2002 (374) (3,922) 186 1,963
Investment Grade
- -- Primary Class
Six Months Ended June 30, 2003 (4,780) $ (51,352) 5,136 $ 55,005
Year Ended Dec. 31, 2002 (8,370) (84,167) 6,847 68,814
- -- Institutional Class
Six Months Ended June 30, 2003 (81) $ (881) 88 $ 952
Year Ended Dec. 31, 2002 (131) (1,319) 131 1,317
High Yield
- -- Primary Class
Six Months Ended June 30, 2003 (3,908) $ (33,124) 4,106 $ 34,463
Year Ended Dec. 31, 2002 (9,809) (82,683) (1,245) (10,226)
- -- Institutional Class
Six Months Ended June 30, 2003 (369) $ (3,149) 240 $ 1,959
Year Ended Dec. 31, 2002 (368) (3,107) 195 1,672
</Table>
45
[THIS PAGE INTENTIONALLY LEFT BLANK]
Legg Mason offers a wide range of mutual funds to meet investors' varying
financial needs and investment goals. The funds are listed below:
<Table>
<Caption>
EQUITY FUNDS: SPECIALTY FUNDS:
Value Trust Balanced Trust
Special Investment Trust Financial Services Fund
American Leading Companies Trust Opportunity Trust
Classic Valuation Fund
Focus Trust
U.S. Small-Capitalization Value Trust
</Table>
<Table>
<Caption>
GLOBAL FUNDS: TAXABLE BOND FUNDS:
Global Income Trust U.S. Government Intermediate-Term Portfolio
International Equity Trust Investment Grade Income Portfolio
Emerging Markets Trust High Yield Portfolio
</Table>
<Table>
<Caption>
TAX-FREE BOND FUNDS: MONEY MARKET FUNDS:
Tax-Free Intermediate-Term Income Trust U.S. Government Money Market Portfolio
Maryland Tax-Free Income Trust Cash Reserve Trust
Pennsylvania Tax-Free Income Trust Tax Exempt Trust
</Table>
For information on the specific risks, charges, and expenses associated with any
Legg Mason fund, please consult a Legg Mason Financial Advisor for a prospectus.
Read it carefully before investing or sending money.
[LEGG MASON FUNDS LOGO]
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
Mark R. Fetting, President
Richard G. Gilmore
Arnold L. Lehman
Robin J.W. Masters
Dr. Jill E. McGovern
Arthur S. Mehlman
G. Peter O'Brien
S. Ford Rowan
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Braintree, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
This report is not to be distributed unless preceded or accompanied by a current
prospectus.
LEGG MASON WOOD WALKER, INCORPORATED
MEMBER NYSE, INC. - MEMBER SIPC
---------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 - 539 - 0000
8/03
Item 2 - Code of Ethics
Did the registrant adopt a code of ethics, as of the end of the period covered
by this report, which applies to the registrant's principal executive officer,
principal financial officer, principle accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party? If not, why not? Briefly
describe any amendments or waivers that occurred during the period. State if the
code of ethics, including amendments and waivers are on a website and provide
the website address. State if the registrant will send a copy of the code of
ethics to shareholders at no charge upon request.
(NOT REQUIRED UNTIL ANNUAL REPORT AFTER JULY 15, 2003)
Item 3 - Audit Committee Financial Expert
Did the registrant's board of directors determine that the registrant either:
(a) has at least one audit committee financial expert serving on its audit
committee; or (b) does not have an audit committee financial expert serving on
its audit committee? If yes,
disclose the name of the financial expert and whether he/she is "independent."
If no, explain why not.
(NOT REQUIRED UNTIL ANNUAL REPORT AFTER JULY 15, 2003)
Item 4 - Principal Accounting Fees and Services
(a) Audit Fees - Disclose the aggregate fees billed for each of the last two
fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements
or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal
years. N/A
(b) Audit-Related Fees - Disclose the aggregate fees billed in each of the
last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item. Describe the nature of the services
comprising the fees disclosed under this category. N/A
(c) Tax Fees - Disclose the aggregate fees billed in each of the last two
fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning. Describe
the nature of the services comprising the fees disclosed under this
category. N/A
(d) All Other Fees - Disclose the aggregate fees billed in each of the last
two fiscal years for products or services provided by the principal
accountant, other than the services reporting in paragraphs (a) through
(c) of this Item. Describe the nature of the services comprising the
fees disclosed under this category. N/A
(e) (1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A (2)
Disclose the percentage of services described in each of paragraphs (a)
through (d) of this Item that were approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. N/A
(f) If greater than 50%, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial
statements for the most recent fiscal year that were attributed to work
performed by persons other than the principal accountant's full-time,
permanent employees. N/A
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant. N/A
(h) Disclose whether the registrant's audit committee of the board of
directors has considered whether the provision of non-audit services
that were rendered to the registrant's investment adviser (not including
any sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant that were
not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
(NOT REQUIRED UNTIL ANNUAL REPORT AFTER DECEMBER 15, 2003)
Item 5 - Reserved
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures
For closed-end management investment companies, describe the policies and
procedures that it uses to determine how to vote proxies relating to portfolio
securities, including the procedures that the company uses when a vote presents
a conflict between the interests of its shareholders, and those of the company's
investment adviser; principal underwriter; or any affiliated person of the
company, its investment adviser, or its principal underwriter.
(NOT APPLICABLE)
Item 8 - Reserved
Item 9 - Controls and Procedures
(a) Disclose the conclusions of the registrant's principal executive officer
or officers and principal financial officer or officers, or persons
performing similar functions, regarding the effectiveness of the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Act (17 CFR 270.30a-3(c))) as of a date within 90
days of the filing date of the report that includes the disclosure
required by this paragraph, based on the evaluation of these controls
and procedures required by Rule 30a-3(b) under the Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Exchange Act
(17 CFR 240-13a-15(b) or 240.15d-15(b)).
WITHIN 90 DAYS OF THE FILING DATE OF THIS FORM N-CSR, THE REGISTRANT'S
PRESIDENT AND TREASURER REVIEWED THE REGISTRANT'S DISCLOSURE CONTROLS
AND PROCEDURES ("THE PROCEDURES") AND EVALUATED THEIR EFFECTIVENESS.
BASED ON THEIR REVIEW, SUCH OFFICERS DETERMINED THAT THE PROCEDURES
ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED BY THE REGISTRANT ON
FORM N-CSR IS RECORDED, PROCESSED, SUMMARIZED AND REPORTED WITHIN THE
TIME PERIODS REQUIRED BY THE SECURITIES AND EXCHANGE COMMISSION'S RULES
AND REGULATIONS.
(b) Disclose any change in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year
in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER
FINANCIAL REPORTING DURING THE REGISTRANT'S LAST HALF-YEAR THAT HAVE
MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, THE
INTERNAL CONTROL OVER FINANCIAL REPORTING.
Item 10 - Exhibits
(a) File the exhibits listed below as part of this Form.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of
the disclosure required by Item 2, to the extent that the
registrant intends to satisfy the Item requirements through
filing of an exhibit.
(NOT REQUIRED UNTIL ANNUAL REPORT AFTER JULY 15, 2003)
(a)(2) A separate certification for each principal execute officer and
principal financial officer of the registrant as required by
Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)), exactly as
set forth bolow:
(ATTACHED)
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange
Act, provide the certifications required by Rule 30a-2(b) under the
Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under
the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)), and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350) as an exhibit. A certification furnished pursuant to
this paragraph will not be deemed "filed" for the purposes of
Section 18 of the Exchange Act (15 U.S.C. 78r), or other wise
subject to the liability of that section. Such certification will
not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent
that the registrant specifically incorporates it by reference.
(ATTACHED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Legg Mason Income Trust, Inc.
By: /s/ Mark R. Fetting
-------------------
Mark R. Fetting
President, Legg Mason Income Trust, Inc.
Date: 8/25/03
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Mark R. Fetting
-------------------
Mark R. Fetting
President, Legg Mason Income Trust, Inc.
Date: 8/25/03
By: /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Treasurer, Legg Mason Income Trust, Inc.
Date: 8/25/03