N-CSR 1 inctr063003ncsr01.txt LEGG MASON INCOME TRUST, INC. 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 U.S. GOVERNMENT MONEY MARKET SEMI-ANNUAL REPORT TO SHAREHOLDERS JUNE 30, 2003 PRIMARY CLASS ------------------------------------------------------ [LEGG MASON FUNDS LOGO] 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 Legg Mason U.S. Government Intermediate-Term Portfolio, Investment Grade Income Portfolio, High Yield Portfolio and the U.S. Government Money Market Portfolio. The following table summarizes key statistics for the Primary Class of each portfolio, as of June 30, 2003:
Net Asset Value SEC Yield(A) Average Life Per Share ------------ ------------ --------------- Government Intermediate 1.81% 4.48 years $10.79 Investment Grade 3.44% 10.69 years $11.12 High Yield 6.00% 6.24 years $ 8.81 Government Money Market(B) 0.49% 38 days $ 1.00
Total returns for the Primary Class of shares of the Government Intermediate, Investment Grade and High Yield Portfolios for the six-month period (not annualized) were +2.17%, +9.24%, and +14.66%, 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. The U.S. Government Money Market Portfolio seeks to preserve the value of your investment at $1.00 per share; however, it is possible to lose money by investing in the Fund. --------------- (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. For the U.S. Government Money Market Portfolio, the SEC yield is for the 7 days ended June 30, 2003. (B ) An investment in the U.S. Government Money Market Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Semi-Annual Report to Shareholders Many of our shareholders regularly add to their Fund holdings by authorizing automatic, monthly transfers from their bank checking or Legg Mason accounts. Your Legg Mason Financial Advisor will be happy to help you make these arrangements if you would like to purchase additional shares in this convenient way. Sincerely, /s/ JOHN F. CURLEY, JR. /S/ MARK R. FETTING John F. Curley, Jr. Mark R. Fetting Chairman President
July 24, 2003 2 Performance Information Legg Mason Income Trust, Inc. Total Returns for One, Five and Ten 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 Institutional Class is contained in a separate report to its shareholders. The U.S. Government Money Market Portfolio is excluded from this performance information because it does not have a variable share price. 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:
U.S. Government Investment Grade High Intermediate-Term Income Yield Portfolio Portfolio Portfolio ------------------------------------------------------------------------------------ Average Annual Total Return Primary Class: One Year +6.39% +17.42% +17.97% Five Years +5.67% +7.45% -2.27% Ten Years +5.64% +7.19% N/A Life of Class(A) +7.02% +8.27% +4.24% Cumulative Total Return Primary Class: One Year +6.39% +17.42% +17.97% Five Years +31.77% +43.22% -10.86% Ten Years +73.12% +100.26% N/A Life of Class(A) +194.13% +253.91% +47.80% ------------------------------------------------------------------------------------
--------------- (A) Primary Class inception dates are: U.S. Government Intermediate-Term Portfolio -- August 7, 1987 Investment Grade Income Portfolio -- August 7, 1987 High Yield Portfolio -- February 1, 1994 3 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
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
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Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ U.S. Government Agency Mortgage-Backed Securities -- Continued Fixed Rate Securities -- Continued 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 --------- 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 ------------------------------------------------------------------------------------------------
5 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued U.S. Government Intermediate-Term Portfolio -- Continued
Rate Maturity Date Shares/Par Value ------------------------------------------------------------------------------------------------ Preferred Stocks -- 0.3% Home Ownership Funding Corporation 13.331% 5 shs $ 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 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
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Par Value ------------------------------------------------------------------------------------------------ Repurchase Agreements -- Continued 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 =========
7 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued U.S. Government Intermediate-Term Portfolio -- Continued
Actual Appreciation/ Expiration 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 ----- -----------------------------------------------------------------------
(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. 8 Statement of Net Assets Legg Mason Income Trust, Inc. June 30, 2003 (Unaudited) (Amounts in Thousands) Investment Grade Income Portfolio
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
9 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued Banking and Finance -- Continued 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 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 --------
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Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued 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 -------- 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)
11 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued Diversified Financial Services -- Continued 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 -------- 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
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Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued Electric -- Continued 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 --------
13 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
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 --------
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Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued 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 -------- 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
15 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued Media -- Continued 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) 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 --------
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Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued 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 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
17 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued Special Purpose -- Continued 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 -------- 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
18
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Corporate Bonds and Notes -- Continued Transportation -- Continued 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 ------------------------------------------------------------------------------------------------
19 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
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)
20
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Yankee Bonds -- Continued Foreign Governments -- Continued 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) 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
21 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ Yankee Bonds -- Continued Special Purpose -- Continued 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 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 --------
22
Par Value ------------------------------------------------------------------------------------------------ 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 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 -- 100.0% $418,436 ======== NET ASSET VALUE PER SHARE: PRIMARY CLASS $11.12 ======== INSTITUTIONAL CLASS $11.13 ========
23 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued Investment Grade Income Portfolio -- Continued
Actual Appreciation/ Expiration 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 --- -----------------------------------------------------------------------
(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. 24 Statement of Net Assets Legg Mason Income Trust, Inc. June 30, 2003 (Unaudited) (Amounts in Thousands) High Yield Portfolio
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
25 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued Building Materials -- Continued 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 --------- 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
26
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued Chemicals -- Continued 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) --------- 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)
27 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued Electric -- Continued 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) 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 ---------
28
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued 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 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
29 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued Gas and Pipeline Utilities -- Continued 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 Host Marriott Corporation 8.450% 12/1/08 120 124 Starwood Hotels & Resorts Worldwide, Inc. 7.375% 5/1/07 720 758 --------- 4,787 ---------
30
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued 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 ---------
31 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued 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 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
32
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued Oil and Gas -- Continued 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 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 ---------
33 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued 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) --------- 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
34
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued Special Purpose -- Continued 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) 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)
35 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------- Corporate Bonds and Notes -- Continued Telecommunications (Cellular/Wireless) -- Continued 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 ---------
36
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 ---------
37 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Rate Maturity Date Par/Shares Value ------------------------------------------------------------------------------------------------- Yankee Bonds -- Continued 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 --------- 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. 4 shs 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 ---------
38
Rate Shares/Par Value -------------------------------------------------------------------------------------------- Preferred Stocks -- Continued Diversified Financial Services -- 0.4% Sinclair Capital Corporation 11.625% 9 shs $ 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) --------- Telecommunications -- N.M. Intermedia Communications, Inc. 13.500% 1 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 1 wts 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
39 Semi-Annual Report to Shareholders Statement of Net Assets -- Continued High Yield Portfolio -- Continued
Par Value -------------------------------------------------------------------------------------------- Repurchase Agreements -- Continued 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 =========
40
-------------------------------------------------------------------------------------------- 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 ========= --------------------------------------------------------------------------------------------
(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. 41 Semi-Annual Report to Shareholders Statement of Net Assets Legg Mason Income Trust, Inc. June 30, 2003 (Unaudited) (Amounts in Thousands) U.S. Government Money Market Portfolio
Rate Maturity Date Par Value ------------------------------------------------------------------------------------------------ U.S. Government and Agency Obligations -- 73.5% Fannie Mae 0.91%to 5.125% 7/2/03 to 2/13/04 $170,928 $171,268 Federal Home Loan Bank 1.00%to 4.5% 7/7/03 to 11/14/03 84,500 84,476 Freddie Mac 0.97%to 6.375% 7/1/03 to 1/15/04 83,200 83,384 Freddie Mac 0.00% 9/12/03 15,000 14,970(A) Sallie Mae 0.88% 9/18/03 5,000 5,000(B) Sallie Mae 0.88% 10/16/03 6,000 6,000(B) Sallie Mae 0.90% 11/20/03 5,000 5,000(B) -------- Total U.S. Government and Agency Obligations (Identified Cost -- $370,098) 370,098 ------------------------------------------------------------------------------------------------ Repurchase Agreements -- 27.0% Goldman, Sachs & Company 1.17%, dated 6/30/03, to be repurchased at $50,000 on 7/1/03 (Collateral: $51,265 Freddie Mac zero coupon notes, due 12/15/03, value $51,027) 50,000 50,000 Lehman Brothers, Inc. 1.15%, dated 6/30/03, to be repurchased at $77,160 on 7/1/03 (Collateral: $62,160 Freddie Mac notes, 5.625%, due 3/15/11, value $71,792; $10,000 Federal Home Loan Bank bonds, 5.625%, due 8/20/12, value $10,246; $5,000 Federal Farm Credit Bank bonds, 6.32%, due 12/15/15, value $6,003) 86,314 86,314 -------- Total Repurchase Agreements (Identified Cost -- $136,314) 136,314 ------------------------------------------------------------------------------------------------ Total Investments, at Amortized Cost and Value -- 100.5% 506,412(C) Other Assets Less Liabilities -- (0.5)% (2,720) -------- NET ASSETS APPLICABLE TO 503,561 SHARES OUTSTANDING -- 100.0% $503,692 ======== NET ASSET VALUE PER SHARE $1.00 ======== ------------------------------------------------------------------------------------------------
(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) Rates of interest earned on these securities are tied to the London Interbank Offered Rate ("LIBOR"), quarterly Treasury rate, or the Federal Funds rate. The coupon rates are the rates as of June 30, 2003. (C) Also represents cost for federal income tax purposes. See notes to financial statements. 42 Statements of Operations Legg Mason Income Trust, Inc. (Amounts in Thousands) (Unaudited)
Six Months Ended 6/30/03 --------------------------------------------------------------------- U.S. Government Investment Grade High U.S. Government Intermediate-Term Income Yield Money Market Portfolio Portfolio Portfolio Portfolio -------------------------------------------------------------------------------------------------------- Investment Income: Interest $ 7,070 $10,761 $ 8,659 $3,462 Dividends 120 -- 224 -- ------- ------- ------- ------ Total income 7,190 10,761 8,883 3,462 ------- ------- ------- ------ Expenses: Management fee 1,079 1,126 622 1,317 Distribution and service fees(A) 957 930 468 264 Audit and legal fees 34 37 35 19 Custodian fee 104 121 91 70 Directors' fees and expenses 11 19 6 17 Registration fees 16 22 15 36 Reports to shareholders 16 18 23 11 Transfer agent and shareholder servicing expense: Primary Class 113 150 86 135 Institutional Class 1 1 2 N/A Other expenses 7 7 6 7 ------- ------- ------- ------ 2,338 2,431 1,354 1,876 Less fees waived (402) (562) -- -- ------- ------- ------- ------ Total expenses, net of waivers 1,936 1,869 1,354 1,876 ------- ------- ------- ------ NET INVESTMENT INCOME 5,254 8,892 7,529 1,586 ------- ------- ------- ------ Net Realized and Unrealized Gain/(Loss) on Investments: Realized gain/(loss) on: Investments 11,735 2,188 (854) -- Options 149 -- -- N/A Futures (3,103) 924 -- N/A ------- ------- ------- ------ 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 $1,586 --------------------------------------------------------------------------------------------------------
(A) See Note 1 to the financial statements. N/A -- Not applicable. See notes to financial statements. 43 Semi-Annual Report to Shareholders Statements of Changes in Net Assets Legg Mason Income Trust, Inc. (Amounts in Thousands)
U.S. Government Investment Grade Intermediate-Term Income Portfolio Portfolio --------------------------------------------------------- Six Months Year Six Months Year Ended Ended Ended Ended 6/30/03 12/31/02 6/30/03 12/31/02 --------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Change in Net Assets: Net investment income $ 5,254 $ 13,614 $ 8,892 $ 15,507 Net realized gain/(loss) on investments, options and futures 8,781 4,950 3,112 4,513 Change in unrealized appreciation/ (depreciation) of investments, options and futures (5,364) 7,494 21,768 6,234 --------------------------------------------------------------------------------------------- Change in net assets resulting from operations 8,671 26,058 33,772 26,254 Distributions to shareholders: From net investment income: Primary Class (5,060) (13,280) (8,804) (15,366) Institutional Class (154) (374) (88) (142) Change in net assets from Fund share transactions: Primary Class 1,733 67,093 55,005 68,814 Institutional Class (361) 1,963 952 1,317 --------------------------------------------------------------------------------------------- Change in net assets 4,829 81,460 80,837 80,877 Net Assets: Beginning of period 389,278 307,818 337,599 256,722 --------------------------------------------------------------------------------------------- End of period $394,107 $389,278 $418,436 $337,599 --------------------------------------------------------------------------------------------- Undistributed net investment income $ 178 $ 6 $ 99 $ 99 ---------------------------------------------------------------------------------------------
N/A -- Not applicable. See notes to financial statements. 44
High U.S. Government Yield Money Market Portfolio Portfolio --------------------------------------------------------- Six Months Year Six Months Year Ended Ended Ended Ended 6/30/03 12/31/02 6/30/03 12/31/02 --------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Change in Net Assets: Net investment income $ 7,529 $ 16,637 $ 1,586 $ 5,624 Net realized gain/(loss) on investments, options and futures (854) (35,418) -- -- Change in unrealized appreciation/ (depreciation) of investments, options and futures 19,720 8,382 -- -- --------------------------------------------------------------------------------------------- Change in net assets resulting from operations 26,395 (10,399) 1,586 5,624 Distributions to shareholders: From net investment income: Primary Class (6,698) (16,509) (1,611) (5,624) Institutional Class (159) (204) N/A N/A Change in net assets from Fund share transactions: Primary Class 34,463 (10,226) (38,156) 40,803 Institutional Class 1,959 1,672 N/A N/A --------------------------------------------------------------------------------------------- Change in net assets 55,960 (35,666) (38,181) 40,803 Net Assets: Beginning of period 164,879 200,545 541,873 501,070 --------------------------------------------------------------------------------------------- End of period $220,839 $164,879 $503,692 $541,873 --------------------------------------------------------------------------------------------- Undistributed net investment income $ 807 $ 135 $ -- $ -- ---------------------------------------------------------------------------------------------
45 Semi-Annual Report to Shareholders Financial Highlights Legg Mason Income Trust, Inc. Contained below is per share operating performance data for a Primary 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.
Investment Operations ------------------------------------------------ Net Asset Net Realized and Value, Net Unrealized Gain/(Loss) Total From Beginning Investment on Investments, Investment of Period Income Options and Futures Operations ----------------------------------------------------------------------------------------- U.S. Government Intermediate-Term Portfolio Six Months Ended June 30, 2003(A) $10.70 $ .13(B) $ .09 $ .22 Years Ended Dec. 31, 2002 10.32 .41(B) .38 .79 2001 10.26 .53(B) .06 .59 2000 9.92 .62(B) .33 .95 1999 10.51 .54(B) (.59) (.05) 1998 10.40 .56(B) .11 .67 Investment Grade Income Portfolio Six Months Ended June 30, 2003(A) $10.42 $ .23(E) $ .70 $ .93 Years Ended Dec. 31, 2002 10.10 .54(E) .32 .86 2001 9.97 .60(E) .14 .74 2000 9.78 .67(E) .19 .86 1999 10.52 .61(E) (.71) (.10) 1998 10.59 .60(E) .12 .72 -----------------------------------------------------------------------------------------
(A) Unaudited. (B) Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% 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, 1.21%; for the years ended December 31, 2002, 1.19%; 2001, 1.17%; 2000, 1.19%; 1999, 1.19%; and 1998, 1.20%. (C) Not annualized. (D) Annualized. (E) Net of fees waived by LMFA for expenses in excess of voluntary expense limitations of 1.00% 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, 1.30%; for the years ended December 31, 2002, 1.30%; 2001, 1.27%; 2000, 1.31%; 1999, 1.31%; and 1998, 1.35%. See notes to financial statements. 46
Distributions ------------------------------------------------------ Tax From Net Net Asset From Net Return Realized Value, Investment of Gain on Total End of Income Capital Investments Distributions Period ------------------------------------------------------------------ $(.13) $ -- $ -- $(.13) $10.79 (.41) -- -- (.41) 10.70 (.53) -- -- (.53) 10.32 (.61) -- -- (.61) 10.26 (.54) -- -- (.54) 9.92 (.55) (.01) -- (.56) 10.51 $(.23) $ -- $ -- $(.23) $11.12 (.54) -- -- (.54) 10.42 (.61) -- -- (.61) 10.10 (.67) -- -- (.67) 9.97 (.61) -- (.03) (.64) 9.78 (.60) -- (.19) (.79) 10.52 ------------------------------------------------------------------ Ratios/Supplemental Data --- ------------------------------------------------------------------ Net Investment Expenses Income to Portfolio Net Assets, Total to Average Average Net Turnover End of Period Return Net Assets Assets Rate (in thousands) --- ------------------------------------------------------------------ 2.17%(C) 1.00%(B,D) 2.66%(B,D) 575%(D) $384,907 7.79% 1.00%(B) 3.85%(B) 204% 379,793 5.83% 1.00%(B) 5.08%(B) 535% 300,597 9.95% 1.00%(B) 6.14%(B) 248% 272,668 (.48)% 1.00%(B) 5.28%(B) 979% 298,207 6.56% 1.00%(B) 5.30%(B) 356% 352,729 9.24%(C) 1.00%(E,D) 4.73%(E,D) 93%(D) $414,430 8.82% 1.00%(E) 5.32%(E) 131% 334,763 7.52% 1.00%(E) 5.90%(E) 131% 255,298 9.16% 1.00%(E) 6.82%(E) 94% 194,987 (.91)% 1.00%(E) 6.08%(E) 145% 183,615 6.99% 1.00%(E) 5.68%(E) 279% 169,129 ---
47 Semi-Annual Report to Shareholders Financial Highlights -- Continued
Investment Operations ------------------------------------------------ Net Asset Net Realized and Value, Net Unrealized Gain/(Loss) Total From Beginning Investment on Investments, Investment of Period Income Options and Futures Operations ----------------------------------------------------------------------------------------- High Yield Portfolio Six Months Ended June 30, 2003(A) $ 7.96 $ .33 $ .82 $ 1.15 Years Ended Dec. 31, 2002 9.22 .77 (1.26) (.49) 2001 10.18 .94 (.94) -- 2000 14.97 1.32 (3.45) (2.13) 1999 14.72 1.01 .29 1.30 1998 16.29 1.32 (1.56) (.24) U.S. Government Money Market Portfolio Six Months Ended June 30, 2003(A) $ 1.00 $.003 Nil $ .003 Years Ended Dec. 31, 2002 1.00 .01 Nil .01 2001 1.00 .04 Nil .04 2000 1.00 .06 Nil .06 1999 1.00 .04 Nil .04 1998 1.00 .05 (Nil) .05 -----------------------------------------------------------------------------------------
(F) Legg Mason Fund Adviser, Inc. has determined that the prices for several bonds in the portfolio 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 total return as of December 31, 1998 would have been 0.54%. See notes to financial statements. 48
Distributions ------------------------------------------------------ Tax From Net Net Asset From Net Return Realized Value, Investment of Gain on Total End of Income Capital Investments Distributions Period ------------------------------------------------------------------ $ (.30) $ -- $ -- $ (.30) $ 8.81 (.77) -- -- (.77) 7.96 (.96) -- -- (.96) 9.22 (1.27) -- (1.39) (2.66) 10.18 (1.05) -- -- (1.05) 14.97 (1.32) -- (.01) (1.33) 14.72 $(.003) $ -- $ -- $(.003) $ 1.00 (.01) -- -- (.01) 1.00 (.04) -- -- (.04) 1.00 (.06) -- -- (.06) 1.00 (.04) -- -- (.04) 1.00 (.05) -- -- (.05) 1.00 ------------------------------------------------------------------ Ratios/Supplemental Data --- ------------------------------------------------------------------ Net Investment Expenses Income to Portfolio Net Assets, Total to Average Average Net Turnover End of Period Return Net Assets Assets Rate (in thousands) --- ------------------------------------------------------------------ 14.66%(C) 1.42%(D) 7.86%(D) 114%(D) $215,721 (5.28)% 1.36% 9.06% 97% 162,175 (.13)% 1.51% 9.59% 130% 199,214 (16.43)% 1.51% 9.98% 45% 217,769 8.82% 1.31% 6.51% 83% 375,099 (1.79)%(F) 1.30% 8.17% 107% 433,947 .60%(D) .71%(D) .60%(D) -- $503,692 1.13% .72% 1.11% -- 541,873 3.57% .71% 3.46% -- 501,070 5.66% .73% 5.53% -- 426,988 4.44% .73% 4.34% -- 379,994 4.83% .75% 4.73% -- 389,466 ---
49 Semi-Annual Report to Shareholders 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 Institutional 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. 50 -------------------------------------------------------------------------------- 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%. In accordance with Rule 2a-7, the investments of Government Money Market are valued on the basis of amortized cost, so long as the Fund's Board of Directors determines that this method constitutes fair value. Under this method, securities are valued at cost when purchased and, thereafter, a constant proportionate accretion or amortization of any discount or premium is recorded until maturity of the security. 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:
Receivable for Payable for Securities Sold Securities Purchased --------------------------------------------------------------- Government Intermediate $ -- $164,973 Investment Grade 2,116 2,658 High Yield 605 4,539 Government Money Market -- --
For the six months ended June 30, 2003, investment transactions (excluding short-term investments) were as follows:
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
51 Semi-Annual Report to Shareholders Notes to Financial Statements -- Continued -------------------------------------------------------------------------------- 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; High Yield, $0; and Government Money Market, $99. 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 52 -------------------------------------------------------------------------------- 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. The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. Government Money Market has no capital loss carryforwards. Unused capital loss carryforwards for federal income tax purposes for Government Intermediate, Investment Grade and High Yield at June 30, 2003, were:
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
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. 53 Semi-Annual Report to Shareholders Notes to Financial Statements -- Continued -------------------------------------------------------------------------------- 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:
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 Realize a gain or loss depending on whether the through a closing sale proceeds from the closing sale transaction are transaction greater or less than the cost of the option. --------------------------------------------------------------------------- The Fund exercises a The cost of the security purchased through the call option exercise of the option will be increased by the premium originally paid to purchase the option. --------------------------------------------------------------------------- The Fund exercises a put Realize a gain or loss from the sale of the option underlying security. The proceeds of that sale will be reduced by the premium originally paid to purchase the put option. --------------------------------------------------------------------------- WRITTEN OPTION: IMPACT ON THE FUND: The option expires Realize a gain equal to the amount of the premium received. --------------------------------------------------------------------------- The option is closed Realize a gain or loss without regard to any through a closing unrealized gain or loss on the underlying purchase transaction 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 Realize a gain or loss from the sale of the exercised by the option underlying security. The proceeds of that sale purchaser will be increased by the premium originally received when the option was written. --------------------------------------------------------------------------- A written put option is The amount of the premium originally received exercised by the option will reduce the cost of the security that the purchaser Fund purchased when the option was exercised. ---------------------------------------------------------------------------
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 54 -------------------------------------------------------------------------------- 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:
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 -- $ -- -- $ -- ===================================================================================
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 -- $ -- -- $ -- ===================================================================================
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. 55 Semi-Annual Report to Shareholders Notes to Financial Statements -- Continued -------------------------------------------------------------------------------- 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. 56 -------------------------------------------------------------------------------- 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 and Government Money Market have no expense limitations. The following chart shows annual rates of management fees, expense limits, management fees waived, and management fees payable for each Fund:
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 Government Money Market 0.50%-0.40%(A) None -- 203
Western Asset Management Company ("Adviser") serves as investment adviser to the Funds. The Adviser is responsible for the actual investment activity of each Fund. LMFA pays the Adviser a fee, computed daily and payable monthly, at an annual rate of: 40% of the management fee received by LMFA for Investment Grade; 77% for High Yield; and 30% for Government Money Market. For --------------- (A) The management fee on Government Money Market varies with the level of average daily net assets. The management fee is calculated as follows:
Average Net Assets Advisory Fee Rate -------------------------------------------- $0-$500 million 0.50% next $500 million 0.475% next $500 million 0.45% next $500 million 0.425% thereafter 0.40%
57 Semi-Annual Report to Shareholders Notes to Financial Statements -- Continued -------------------------------------------------------------------------------- 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:
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 Government Money Market -- 0.10% 40
Legg Mason has agreed that it will not request payment of more than 0.10% annually from Government Money Market indefinitely. If this voluntary limit is terminated, the Fund may pay Legg Mason a Rule 12b-1 service fee in an amount not to exceed an annual rate of 0.20% of its average daily net assets. 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; High Yield, $30; and Government Money Market, $52. 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. 58 -------------------------------------------------------------------------------- 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:
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 Government Money Market Six Months Ended June 30, 2003 656,507 $ 656,507 1,435 $ 1,435 Year Ended Dec. 31, 2002 1,465,517 1,465,517 5,423 5,423 -----------------------------------------------------------------------------
59 Semi-Annual Report to Shareholders Notes to Financial Statements -- Continued --------------------------------------------------------------------------------
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 Government Money Market Six Months Ended June 30, 2003 (696,098) $ (696,098) (38,156) $(38,156) Year Ended Dec. 31, 2002 (1,430,137) (1,430,137) 40,803 40,803 ---------------------------------------------------------------------------------
60 [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:
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
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
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
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 LMF-056 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