primary class

l e g g m as o n va l u e t ru s t a n n ua l r e p o rt
march 31, 2002

20 Years of Value Creation

Twenty years ago, Legg Mason launched the Value Trust to embody our approach to managing money. We are value-oriented, long-term investors who believe that our strategy will benefit our clients, which is our only goal.

Raymond A. Mason
Chairman, President, and Chief Executive Officer of Legg Mason, Inc.

legg mason value trust annual report 2002

Growth of a $10,000 Investment in the Value Trust and the S & P 500 *
In Thousands $350 300

Value Trust
250 200

$262,340

S&P 500
150 100 50 0 4/82 3/84 3/86 3/88 3/90 3/92 3/94 3/96 3/98 3/00

$176,659

$10,000

3/02

to our shareholders
This is a special, expanded Annual Report, prepared in recognition of the Value Trusts 20th Anniversary. The following pages contain thoughts on the Value Trusts early years from Ernie Kiehne, who originally co-managed the funds investments with Bill Miller. Bill has written a retrospective of the 1990s and observations on the investment future. In addition, you will find a description of the Value Trusts investment process, which will help you better understand how Bill and his portfolio management team analyze companies and their securities. Also included is a commentary on corporate governance issues, a timely subject in light of recent business events. Finally, there is a tip of the cap to Legg Mason Wood Walkers Financial Advisors, who have been integral to the success of the Value Trust since it was launched on April 16, 1982. We thank you for your support and hope you will enjoy this report. In the years ahead, we will continue to do our very best to help you meet your longterm investment objectives.

Sincerely,

John F. Curley, Jr. Chairman of Legg Mason Value Trust

*This chart shows the growth of a $10,000 investment in the Value Trust and the S & P 500 on Value Trusts inception of 4/16/82, with dividends and capital gains reinvested. Past performance does not guarantee future results. Value Trusts 1-, 5-, and 10-year average annual total returns for the period ended 3/31/02 were 9.82%, 15.07%, and 17.69%, respectively. The investment return and principal value of the fund will fluctuate so that an investors shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. Please refer to the financial statements of this report beginning on page FS-1 for complete details. The S&P 500 is an unmanaged index of common stock prices that includes reinvestment of dividends and capital gain distributions and is generally considered representative of the U.S. stock market. Source: Lipper Inc. for Value Trust Primary Class. The S&P 500s 1-, 5-, and 10-year average annual total returns for the period ended 3/31/02 were 0.21%, 10.17%, and 13.25%, respectively.

A LOOK BACK AND A LOOK AHEAD

A recurring theme of the Value Trust since its earliest days has been optimism for the future.

legg mason value trust annual report 2002

Early Days of the Value Trust

The Legg Mason Value Trust saw the light of day on April 16, 1982. Chip Mason, Legg Masons Chairman, coined its classic name and also adroitly picked its kick-off date. The beginning net asset value was $10 per share, and Chip bought the first 100 shares.
The fund was committed to following the Value Approach to investing. This philosophy had been the cornerstone of Legg Mason advice to investors for many years. Kenneth Battye, a talented British-born Legg Mason officer and Financial Advisor, introduced value to the firm in the 1940s. Put simply, the rationale of the Value Approach was to buy stocks when they were undervalued and to sell them when they became fully priced or overvalued. Companies sought out should generally be selling at low comparative price-to-earnings ratios, offer good and growing dividends, and be priced favorably to book value. Early in 1982, Bill Miller and I were asked to co-manage the new fund. I was born in Baltimore on Mothers Day 1918, entered the Johns Hopkins University in 1936, and joined the Telephone Company after graduation in 1940. During World War II, from 1942 to 1946, I served in the Pacific on destroyers. At wars end I returned to the Telephone Company, and for the next 21 years enjoyed a wide variety of supervisory assignments at both the Maryland and national levels. Then, in an unusual switch, on April 3, 1967 I joined the then Legg & Co. as Director of Investment Research. Bill graduated from Washington and Lee University in 1973. After several years in military intelligence, he entered the graduate program in philosophy at the Johns Hopkins University. He joined the J.E. Baker Company in 1978, eventually becoming its Treasurer. I had planned to retire as Director of Research in 1983 at age 65 to become a Legg Mason stockbroker. We recruited Bill as my potential replacement and he joined the firm on November 2, 1981. I talked with the Chairman of the Johns Hopkins Philosophy Department about that time concerning Bill. I was told that he was a splendid student and the finest graduate student instructor the Chairman had known. Bill Miller and I had several things in common. We each attended Johns Hopkins, had two children, and enjoyed cats and dogs. We both liked stocks and actively invested in the market, and we both liked baseball and were right-handed pitchers in college. Therefore, it is not a coincidence that from its earliest days baseball touched the Value Trust. Baseball analogies and the similarities between successful baseball and investment strategies were frequently mentioned in our public presentations and investment writings. The great Baltimore Oriole manager Earl Weavers final season was 1982. His successful philosophy of winning through patience and the big hit carried over to our early and subsequent Value Trust efforts. It is also fitting that the start of Cal Ripkens remarkable streak of 2,632 consecutive games coincided with the birth of the fund. Ronald Reagan was President during the Value Trusts start-up year. It was a recessionary period with triple-A bonds averaging 14% and CPI inflation at 6%. In the spring gold was $321 an ounce and oil $34 a barrel. Of anecdotal interest, 1982 saw the break-up of AT&T, the first permanent artificial heart recipient, and the first quadruple summersault in the 123-year history of trapeze flying. In late April money began flowing to the Value Trust. By June 30 the fund had 331 shareholders, net assets of $1.1 million, and a net asset value of $10.25 per share. Initial stock purchases included the Ball Corporation, Continental Group, First Maryland Bancorp, PPG

Ernie Kiehne
Industries, SCM Corporation, and Westinghouse Electric. The 16 equities held on June 30 were selling on average at about four times estimated 1983 earnings, at two-thirds of book value and yielded 7.4%. We believed these initial holdings represented excellent values (and we were right!). As 1982 progressed, prospects for the economy brightened and the market rallied. By December 31, the net asset value per share was $13.94, after a dividend payment of $0.14 a share in October. The fund had net assets of $6.1 million and owned 61 different stocks. By year-end 1983, an original $10 Value Trust purchase was worth $20.11 and net assets were $48 million. We weathered a mild market setback in the first half of 1984 rather well, and by year-end 1985 the Value Trusts total investment return from inception was 199%. This record compared to a return of 115% for the S&P 500 over the same period and established the Value Trust as a top-performing, diversified mutual fund. Meanwhile, net assets had reached $420 million and the fund now held around 150 stocks. Names ranged from Amerada Hess to Zondervan and represented more than 30 industries.

4 5

Through these early, formative years we adhered generally to classic value stock selection measures depressed stock prices, low price-to-earnings ratios, discount to book value, and good and growing dividends. Over time we augmented these criteria with increased emphasis on sales growth, cash flow, quality of product, and competence of management. Two other methodologies we used successfully early on merit mention. In searching for winning stock ideas we regularly looked for otherwise healthy companies that had low, but improvable profit margins. If a company could improve its margins from a poor 1% to a mediocre 2% or 3%, earnings could double or triple. Add a modest growth in sales over this period and earnings could be further enhanced. We picked a number of nicely profitable stocks this way including SCM Corp., PPG Industries, Continental Group, Ball Corp., Allied Stores, and JWT Group. The other helpful strategy involved our continuing interest in bank stocks. We liked these stocks, not only because they usually looked cheap, but also because we viewed many as takeover candidates in an evolving U.S. banking industry consolidation. Of the many

banks owned by the Value Trust over the 19821985 period, over a dozen were eventually sold at a premium to acquirer institutions. We also stuck to several broader strategies. We were quite patient in our investing, and even in the early days our holding time probably averaged close to 36 months. Appropriate here perhaps is an old adage: You cant get rich taking just two points in a bull market. We did not try to time the market and normally were rather fully invested. To reduce risk, we were always well diversified. With 145 stocks in 1985, the Value Trust was probably overdiversified. However, there were an unusual number of good stock values at the time. Finally, much of the Value Trusts buying and selling was done on a scaling or incremental basis. Such a gradual or munching approach can moderate hasty or poor decisions and possibly improve a funds overall cost structure. I will close with several pleasant thoughts. For its entire 20-year life span, the atmosphere of the Value Trust operation has been harmonious and good-natured. For this we can thank many original and early Value Trust participants, including Bill, Chip Mason,

Jack Curley, the Trusts chairman, Marie Karpinski, the Trusts treasurer for many years, and Nancy Dennin, currently assistant manager of the Value Trust. Also important to the Trusts 20-year history are several long-time members of the team, including Mary Chris Gay, portfolio manager of our pooled products, Michael Ray, our head trader, Jennifer Murphy, our chief operating officer, Darlene Orange, our operations supervisor, and David Nelson, portfolio manager of the Legg Mason American Leading Companies Trust. Finally, a recurring theme of the Value Trust since its earliest days has been optimism for the future. Our Shareholder Letters of the 1980s predicted long-term world political gains, ample supplies of food and energy, improved government budgets, increased productivity, reduced inflation, moderate interest rates, good economic growth, and an excellent supply/demand equation for equities. The Value Trust today remains both harmonious and optimistic.
ERNIE KIEHNE Senior Vice President of Legg Mason Funds Management, Inc.

Holdings & Assets

This chart illustrates the relationship between Value Trusts number of portfolio holdings and its assets under management over the funds 20-year history.
Number of Portfolio Holdings

150

145

146

146
$13,570

$150

111 90 84 86 60 60 56 89
$8.094

$11,762

$11,751

120

$120

$90

$60 47 45 49 43 42 40
$1,387

49 48
$3,820

42 36 36 $30

30
$914 $645 $607 $678 $823 $636 $748 $842 $967 $48 $106 $420

$6

$2,041

$0 1998 2000 2001

1982

1984

1986

1988

1990

1992

1994

1996

Calendar Year End

Assets ($Billions)

legg mason value trust annual report 2002

Value Trust The 1990s

The 1990s were a great period for investors and for the Value Trust. It did not start out that way. I took over sole management of the fund in November 1990. The economy was in recession, stocks were down, banksour largest industry concentration were failing, Saddam Hussein occupied Kuwait, and oil had spiked to about $40.00 per barrel. It was clearly a terrific time to invest.
All of the great investing periods begin when things are terrible and end when they are wonderful. The best time to buy stocks in the 1930s was at the bottom of the Depression in July 1932; in the 1940s, at the outset of World War II. In the 1970s, you could not have done better than buy during late 1974, a time of rising rates and inflation, an oil embargo, recession, and a constitutional crisis with Watergate. The worst recession since the Depression hit in 1982. Rates were double digit, and inflation nearly so; Mexico defaulted on its debt, and a 17-year bull market was just beginning. In late 1990, we were about to embark on 11 straight years of outperforming the S&P 500, but you would have never suspected it by looking at our recent record. The Value Trust had underperformed the market in three of the previous four years, and badly trailed the index in 1990, falling 17.0% compared to the markets 3.1% decline. The approach that had been so successful for us from the bottom of the economic cycle in 1982 had serious shortcomings when the economy peaked and began to head down. The traditional value style, based on low price-toearnings (p/e), low price-to-book, or low price-to-sales, while delivering solid long-term results, was also subject to uncomfortably long droughts. I decided to see if the academic literature offered any insights into how we might improve our investment process. After reviewing the data, and looking at all the stocks we had owned in the

Bill Miller
fund and how they had done, it became clear that the conventional wisdom about value investing was wrong. The source of excess return had little to do with pure accounting factors such as low p/e or low price-to-cash flow; it had to do with changes in the return on capital. Low p/e stocks usually had low valuations because they had low returns on capital. If the return on capital didnt improve, neither did the valuation. That also explained why traditional value investing fared so well from the bottom of a recession to the peak of a cycle, while growth investing usually did better from the peak to the trough of the economy. Value stocks tended to be more cyclical than the classic growth stocks, which usually featured good returns on capital and unit growth. When the economy peaked and growth began to slow, the return on capital of cyclical stocks fell more rapidly than that of growth stocks such as the drugs or beverages. When the economy bottomed, the return on capital of the cyclicals expanded more rapidly than that of the growth names, which had contracted minimally, if at all, during the economys decline.

Value Trusts Oldest Holdings as of March 31, 2002

Of the stocks currently held in the fund, the five that have been held the longest are: Initial Purchase Date Fannie Mae Lloyds TSB MBNA Corp. Kroger Co. JP Morgan Chase & Co. 01/24/85 10/06/89 01/22/91 10/01/91 01/21/92 Initial Purchase Price $1.40 $1.54 $1.48 $4.50 $9.08 Price as of 03/31/02 $79.88 $10.27 $38.57 $22.16 $35.65

6 7

Did You Know

Value Trusts best day relative to the S&P 500 was October 19, 1987, when it outperformed by 7.94%. Value Trusts worst day relative to the S&P 500 was October 20, 1987, when it underperformed by 9.67%. Value Trusts best month relative to the S&P 500 was December 1998, when it outperformed by 7.28%. Value Trusts worst month relative to the S&P 500 was January 1987, when it underperformed by 5.31%. Value Trusts best quarter relative to the S&P 500 was calendar 4Q98, when it outperformed by 14.60%. Value Trusts worst quarter relative to the S&P 500 was calendar 2Q99, when it underperformed by 7.60%. Value Trusts best calendar year relative to the S&P 500 was 1983, when it outperformed by 20.20%. Value Trusts worst calendar year relative to the S&P 500 was 1990, when it underperformed by 13.85%.

Since its inception on April 16, 1982, Value Trust has outperformed the S&P 500: 52% of the days 54% of the months 55% of the quarters 80% of the calendar years

This suggested a way to deal with a perennial problem of value investing: buying too early and selling too soon. Combining statistical cheapness with an analytical view about when a companys return on capital would begin to improve would theoretically improve returns by improving the timing of purchases as well as eliminating companies that looked cheap but werent,

since they could not systematically improve their return on capital. As we later realized, if a company is earning above its cost of capital, its rate of change of sales growth is a proxy for the growth of intrinsic value. That meant a slowdown in sales meant a decline in the growth of intrinsic business value, assuming prices reflect the theoretical value implied by current fundamentals.

Stock prices change far more rapidly than does intrinsic business value. That is because prices reflect recent history, current fundamentals, and reasonably foreseeable prospects, those looking out say six to nine months, all filtered through the prism of psychology and emotion. A critical part of our process is normalization. When the economy is in recession, that is not a normal condition and it is reasonable to position portfolios for recovery when prices reflect recession, not recovery. When the economy is growing at unsustainable rates, as it was in late 1999, it makes sense to adjust valuations for more normal conditions, if the market has not done so. We did well in the early 1990s for the same reason we did well in the early 1980s: our traditional value names rebounded with the economy. It was in the late 1990s that we benefited from what we learned from our mistakes of the late 1980s. In early 1994 the Fed began to raise interest rates. By late 1995 fears began to increase that the economy had peaked and was headed toward an inevitable recession. As was widely remarked at the time, the Fed had never been able to engineer a soft landing. Jeff Vinik, then managing the worlds largest mutual fund, Fidelity Magellan, famously sold his technology stocks and moved 35% of the fund into bonds. Anticipating recession, the market marked tech stocks down viciously. We had minimal previous experience with tech; it always seemed too expensive. My value investing colleagues were buying paper stocks at the time, eschewing tech, as usual. Paper, steel, aluminum, chemicalsall the classic cyclicalswere poor businesses. Most were unable to earn their cost of capital through an economic cycle. They might be good trades but were bad investments. Technology was cyclical as well, but many tech companies were able to

legg mason value trust annual report 2002

maintain returns on capital above the cost of capital despite their cyclicality. We had learned something about analyzing these companies when we bought IBM in 1993 near the bottom. It was our first attempt to implement a strategy of buying businesses that were statistically cheap but whose business model would support high returns on assets or equity with significant free cash flow generation. Such companies could be held longer in the portfolio with better long-term returns for shareholders than if we tried to buy and sell stocks based on some sense of how they were likely to perform over the next year. That was the theory, anyway. The tech sell-off enabled us to buy a few great companies at wonderful prices. We should have bought a lot more. We bought Dell and Nokia and Sun, selling the latter far too soon. We bought AOL when people thought it was going bankrupt in late 1996. We looked at, liked, but skipped Cisco, a dreadful mistake in retrospect. From having minimal tech exposure in the early 1990s, we spent the latter part of the decade over-weight the sector. Having that exposure enabled us to avoid the difficulties that plagued many value investors during that time. We were fortunate that the 1990s were similar to the 1980s. Value investing beat growth in the early 1990s, as it did in the early 1980s. After the Fed began tightening in both decades, value investors who relied on accounting metrics alone, and failed to take into account the drivers to business value, languished. Our experience in the late 1980s and the changes we implemented in our process allowed us to sidestep that pothole in the late 1990s. In late 1999 GDP was growing at over 6%, inflation was negligible, S&P earnings were expanding at 20%, and stocks, mostly tech stocks, were soaring. It was clear to us that years of above average growth and rising valuations

made the market vulnerable to any change in the happy pattern that had prevailed. The Fed had begun to raise rates in response to high capacity utilization and tight labor markets, precursors to rising inflation if the economy did not revert to a more sustainable growth path of 3% to 4%. Euphoric tech investors ignored this, and pushed the stocks to even higher levels. We believed the Fed would raise rates to whatever level necessary to temper the growth of the economy. This meant that sales growth had to slow, which meant value creation would slow, which meant that valuations that depended on the continuation of the current environment were too high and had to come down. We had no idea whether the Fed would be able to gradually bring down growth, as it did in 1995, or whether the economy would eventually fall into recession, as happened. Whatever was the case, the probability that current valuations were sustainable was minimal and we began to aggressively sell our tech stocks. In the first quarter of 2000, as the tech bubble was peaking, we significantly underperformed the market as we were shifting our portfolio to the most undervalued parts of the market, chiefly financials, which had sold off due to the rising rate environment. As the year wore on, we gradually made up our lost ground. Our returns peaked in 1999. Any shareholder who sold the fund at the end of that year has missed two years of negative returns (well, unless he or she decided that was a good time to ride the soaring tech and telecom and Internet names). As I have elsewhere noted, back-to-back negative years are a relative rarity in the stock market. The last time it happened was a generation ago, 1973 and 1974. I believe the attacks on September 11 catalyzed a market bottom and that the

We are committed to producing returns that are competitive with the best in the business.

Top: Nancy Dennin and Bill Miller Bottom: (l to r) Albert Burr Burker, IV, Jay Leopold, Thomas Chip Coleman, Jr., Lisa Rapuano, and David Nelson

8 9

bear market ended on September 21, 2001. The path of least resistance for the market since then has been higher and I think it will continue that way. The future path of market returns, though, is unlikely to resemble that of the period that began shortly after we started the Value Trust 20 years ago.

THE FUTURE Rates of return on stocks are a function of three things: beginning dividend yields, growth of earnings, and changes in valuation. When the Value Trust started, the market had a dividend yield of 6.3% and traded at 7.4x earnings. Earnings grew from $12.64 in 1982 to $51.68 in 1999. Multiples rose to the current level of about 22x, as interest rates fell from 13.9% to 5.2% on the 10-year bond.* Today the beginning dividend yield is 1.4% and multiples are high by historic standards, although not out of line considering the present level of interest rates. The earnings growth rate of the market has generally tracked that of

nominal GDP, although it could be moderately higher over time as more of the S&P 500s earnings are sourced overseas. Nominal GDP is a function of growth of the labor force, growth of productivity, changes in hours worked, and inflation. The growth of the labor force is a bit less than 1% per year; productivity growth has averaged 2% long term but could trend as high as 3% with improvements due to technology. Hours worked are steady. The market-implied 10-year inflation rate is 2%. Putting this all together gives nominal growth of 5% to 6%, consistent with past trends. Adding in the current dividend yield results in an implied rate of return of about 6.5% to perhaps 8% for stocks. If valuations stay at todays levels, by no means a sure thing, then investors in stocks can expect total returns in the mid to high single digit range over the next 10 years. It is hard to see how returns could exceed that by much, although anything is possible in capital markets. It is easier to see how they could be lower, if inflation moves up a bit or if investors decide the risks in stocks warrant a lower multiple than the low 20s. In early 1997 I wrote shareholders that they should expect a return to normalcy in the market and that the very high rates of return earned on average since the summer of 1982 were not sustainable. That forecast looked wrong as stocks continued to soar in 1998 and 1999. Then came the losses of 2000 and 2001. As of this writing, the returns since that prediction have averaged 10.2%.** The

average annual rate of return on U.S. stocks over the past 101 years is 10.1%. A new study by Peter Bernstein and Robert Arnott examining the equity risk premium the amount by which stocks have outperformed bonds over market history calculates the long-term premium at 2.4%. That would place the implied rate of return on stocks at about 7.6%, consistent with the implied market rate determined above. However you look at it, you should expect stocks to return a lot less in the future than they did from 1982 through 1999. Over the life of the Value Trust, our premium over the S&P 500 has averaged 2.3%. During the decade of the 1990s it averaged 3.2%. Since I wrote about return to normalcy in early 1997, our average annual rate of return has been 14.9%, a premium of 4.7% per year.*** We cannot, of course, promise any premium or even that we will be able to match the market in the future. What we can promise is that we will manage your money with the same care and diligence we have brought to the process for 20 years, using the best analytical techniques and talent we can find. We are committed to producing returns that are competitive with the best in the business. No one will work harder for you and no one will care more about your money than the Value Trust team.
BILL MILLER Chief Executive Officer of Legg Mason Funds Management, Inc.

* April 30, 1982 to March 31, 2002 ** S&P 500 average annual return, including dividends, April 1, 1997 March 31, 2002 *** Period 4/1/97-3/31/02

Nancy Dennin, assistant portfolio manager of Value Trust

Our definition of value comes right out of the textbooks: a business is worth the present value of its future free cash flows.

OUR APPROACH

10 11

The Value Trust Investment Process

Our investment process is driven by valuation. We attempt to value just businesses, not stocks. We use a variety of qualitative and quantitative techniques that help us develop a high level of conviction about what a business is worth over the long term.
There are several advantages to focusing on business value rather than the near-term trend of stock prices. Business values normally change slowly, in contrast to stock prices, which fluctuate constantly and, sometimes, dramatically. Our objective is to find companies where stock prices are depressed because of negative news or events, but where the value of the business is significantly higher than the current stock price. It has been our experience that the market often overreacts to bad news, and that by looking out beyond the next 12 months, we can find stocks that are undervalued. In some cases, our efforts may involve assessing the probabilities that a turnaround will work and to what degree; in others, it may simply be looking past the current negative headlines to how the fundamentals are likely to develop beyond the next 12 months. It almost always involves looking at companies that are controversial and out of favor. When we have determined a company may be mispriced, we follow a rigorous process of qualitative and quantitative analysis to determine the potential value of the business. The qualitative side involves understanding the business itself, and some of the questions we try to answer are: What is the potential profitability of the business model? What is the size of the potential market? What are the competitive advantages and disadvantages of the company and its products? How well has management allocated capital in the past, and what are the capital needs of the business under various scenarios? Does the company demonstrate a commitment to shareholders or will future returns be diluted by such mechanisms as overly generous stock option plans?

Lisa Rapuano

What are the depth, quality, experience, and integrity of the management team? Understanding these characteristics of the business allows us to go into the quantitative side of the process, where we place a dollar value on the business. Our definition of value comes right out of the textbooks: a business is worth the present value of its future free cash flows. Applying that definition is difficult, however, since the future is uncertain, so we use a wide range of valuation techniques to triangulate what we believe the right value is. Among the quantitative measures we use are: Discounted Cash Flow (DCF) Price/Earnings (P/E) Ratios Price/Cash Flow Ratios Cross sectional, historical, and industry comparable analysis Enterprise Value/EBITDA Ratios Private Market Value Leveraged Buyout (LBO) Analysis Breakup Value Price/Book Ratios

Top Left: Head equity trader Michael Ray Top Right: (l to r) Portfolio managers Lisa Rapuano, Nancy Dennin, Kyle Legg, Bill Miller, Mary Chris Gay, David Nelson, and Jay Leopold

Price/Sales Ratios Return on Invested Capital (ROIC) Analysis

legg mason value trust annual report 2002

Not every technique is appropriate for every company. Companies without earnings obviously cannot be valued using P/Es. LBO analysis is not appropriate for companies that are in the investment phase of their development. Private Market Value can only be applied where there are private transactions to evaluate. Price/Book ratios have lost significance in many companies because of intangible assets and massive asset writedowns. However, we always use as many valuation tools as possible for each case. We believe that our hypothesis is most likely to be correct when we can support it from multiple angles. For example, if a company looks like it is worth around $50 per share using five different valuation methodologies, we have a much higher degree of conviction that $50 is the correct number than if one method says $50, one says $30, and one says $75. Discounted Cash Flow models are very valuable in understanding the potential long-term value of a business. It is one of the few tools that allows you to look beyond the next couple of years, and to explore the relationship between the growth of the business and its capital needs. Broadly speaking, a business growing 15% per year that consumes all of its retained earnings to achieve that growth is worth a great deal less than a business with the same growth rate that uses only one quarter of its capital and returns the excess to shareholders. The DCF framework allows you to build this relationship into any forecasts. However, DCFs are extremely sensitive to changes in inputs, and can often be made to come up with whatever answer you already have in mind. We use the DCF framework extensively, but never in isolation. If your DCF value tells you that a business should be worth something that works out to the highest multiples of earnings, cash flow or sales that one has seen in the market or industry, it is probably incorrect or, at best, overly optimistic. We look

for confirmation or negation of our DCF values from other techniques. We also use several discount rates and growth rates, coming up with a range of values rather than a single point estimate. Every company has slightly different economics: different growth rates, profit margins, cash flows, returns, and capital expenditures. We therefore spend most of our time trying to figure out what the right way to think about these different accounting or economic characteristics may be, and therefore what the right multiple for any of the characteristics is. Sometimes, for example in retail, one can look at the P/E multiples for a range of companies, and they vary from 5x to 65x. The question is why, and whether any of these may temporarily be higher or lower than the long-term economics of the business warrant. Other companies appear cheap all the time, when it is likely that the low valuations are correct because the businesses themselves have very low returns or are, in fact, consistently destroying value. Thus, we sometimes find that high p/e stocks are undervalued, while low p/e stocks are correctly priced or even overvalued. Since many valuation techniques involve the imperfect practice of forecasting, we also use scenario forecasting and probability analysis. For example, if a company is trying to turn itself around, we may have a scenario where the turnaround is successful, one where it takes longer than expected, one where the company is forced to explore other alternatives, and one where it is an outright failure. If we look at what the business would be worth under each of these outcomes, we have a much better idea of the risk to our investment, our potential upside, and our most likely, or probability-weighted, value. Once our analysis has explored all of these various valuation techniques, we arrive at what we call the central tendency of value. This is a range of dollar values that we believe is supported by as many valuation techniques as we

A Tool of the Trade

We use numerous tools to analyze businesses. Above is an example of one page of an extensive quantitative model we created while analyzing Eastman Kodak.

can apply. When we choose to invest, we select those companies that have the greatest potential returns and in which we have the highest degree of confidence. We do not contend that valuation is exact. However, we believe that by objectively applying multiple techniques, by looking out to the long-term potential of a company, by constantly evaluating and reevaluating our assumptions and forecasts, and by using a range of potential outcomes, we are able to determine a good estimate of a businesss value. When stock prices diverge dramatically from these values, we find the opportunity to earn excess returns.
L I S A R A P UA N O Senior Vice President/Director of Research of Legg Mason Funds Management, Inc.

12 13

Exploration vs. Exploitation

A study by scientists at the Santa Fe Institute on the food-gathering behavior of ant colonies found that ants have an uncanny ability to maximize the amount of calories workers collect every day through a process of balancing exploitation with exploration. They found that some ants in the colony focused on exploiting the small amounts of food that were reliably available at proven sites. But others in the colony traveled far afield, looking for food where none had been found before. While these explorer ants often failed to find anything, they occasionally hit the jackpot with a huge new food discovery. And the aggregate calories earned from exploration over time more than offset the total energy expended on it. In fact, scientists concluded that a threshold level of exploration was not only desirable but required to generate the necessary excess calories the colony needed to grow and expand. Our approach to market opportunities is similar. We do look for value in traditional places such as in companies that appear statistically cheap based on earnings ratios and other accounting factors. But we also regularly investigate potential new but unproven areas of value, such as technology, innovative media, telecommunications, and other areas. And like the ants, weve found exploration to be not only useful but essential in the quest for excess returns.

legg mason value trust annual report 2002

Corporate Governance
In our judgment, good corporate governance is primarily a question of management mindset. Boards of directors and management groups that think like owners most often govern well, and those that do not usually govern poorly.
Over the past 20 years, we have sought to align ourselves with managements and boards of directors who think like owners. Through experience, we have found that managements policies and actions in four areas have provided important indicators regarding their attitude toward corporate governance. These areas are: (1) management and employee stock ownership; (2) stock options; (3) shareholders rights; and (4) accounting and disclosure practices. MANAGEMENT STOCK OWNERSHIP Managements earn our trust by aligning their interests with ours as long-term shareholders. In our opinion, the best way to create this alignment is for all top managers to have the majority of their net worth invested in company stock. In our view, a sizeable percentage of these shares should be owned outright, rather than through options. In this way, we believe that managements come to better understand the risks, as well as the potential rewards, of stock ownership. One of our holdings, Citigroup, has adopted a practice that we hope will become more widespread. Citigroup requires more than 100 of its top managers to retain at least 75% of their stock, including that acquired through options, while they remain employees of the company. STOCK OPTIONS Our focus on how companies allocate capital, including the stock used for options, has been crucial to Value Trusts success. Many of our current holdings, such as MGIC Investment, Washington Mutual, AES, and Fannie Mae, have very small options programs. In contrast, the average company in the S&P 500 gives away options that will transfer almost 3% of the companys market value to employees each year. Since we expect the annual total return on stocks to be in the range of 5% to 8% over the next decade, 3% options dilution could cut investors collective returns in half. For shareholders to get their moneys worth from this proliferation of options, we believe a number of changes need to occur. As Federal Reserve Chairman Alan Greenspan has said, The failure to include the value of most stock-option grants as employee compensation and, hence, to subtract them from pretax profits has distorted earnings. Capital employed on the basis of misinformation is likely to be capital misused. By counting options as the expense they are, managements will be more mindful of their economic cost. We also encourage our holdings to treat options as either compensation or incentive. If options are compensation, cash compensation should be reduced. If options are incentives, they should payoff only if the company beats a benchmark, such as the return of the S&P 500 index. SHAREHOLDER RIGHTS Amazingly, shareholders of many companies regularly approve provisions that limit their own rights. We oppose those provisions that ostensibly protect shareholders but actually protect management, typically from losing their jobs due to a hostile takeover. For instance, many companies have adopted a staggered board, meaning that only a third of board members are elected by shareholders each year. In these companies, wresting control from entrenched management groups becomes much more difficult, and time-consuming. Not surprisingly, such limitations on shareholder rights have a significant effect on stock returns. A Harvard Business School study by Professor Paul Gompers and his colleagues found that the decile of companies with the best corporate governance policies outperformed the decile with the worst by an enormous 8.5% annually during the 1990s. ACCOUNTING AND DISCLOSURE PRACTICES Earnings can be as pliable as putty when a charlatan heads the company reporting them, according to Warren Buffett. Recently, all too many companies have manipulated accounting rules to maximize financial appearances at the expense of economic reality. One way managements can signal that their earnings reflect the underlying reality of their businesses is to pay reasonable and growing dividends. In our opinion, in a world of 5% to 8% annual stock returns, dividends will once again become an important source of investment return. Employee stock ownership, stock options, shareholder rights and accounting practices are the centerpiece of our efforts to improve corporate governance. We are taking an active interest in these matters because of their impact on the returns our shareholders will earn. We will continue to support only those governance practices that create long-term value.

We have just gone through one of the toughest markets in the last 30 years and it is often difficult to convince an existing client to hold on or a new one to invest. But experience tells us that good markets follow bad.

T H E A DV I S O R R E L AT I O N S H I P

legg mason value trust annual report 2002

The Value of a Financial Advisor

The launching of a new mutual fund is an exercise in hope. The sponsoring firm hopes enough investors will be interested in the management team and their philosophy. And, they hope the objective of the fund will meet the financial needs of a broad cross section of investors. Of course, the timing of a launch in terms of market conditions is also key.
Because our Financial Advisors had a close relationship with the managers and they knew the right thing to do in tough markets was not to liquidate, they held assets and positioned clients for ensuing market rebounds after difficult markets. One of the best values a Financial Advisor can provide is context and perspective. We have just gone through one of the toughest markets in the last 30 years and it is often difficult to convince an existing client to hold on or a new one to invest. But experience tells us that good markets follow bad. And, if the fund receives net inflows, the managers have cash flow to invest in depressed stocks to the future benefit of the client. The combination of a proven investment philosophy executed by an outstanding money manager with dedicated Financial Advisors is our strategic advantage. Over the past 20 years the Value Trust has proven to be one of the best funds available to investors. The Legg Mason Financial Advisor has had a prominent role in that success.

So in early 1982, when the Chairman of Legg Mason, Chip Mason, endeavored to launch the Value Trust, we as a firm were quite hopeful that it would be successful over the long term. But we knew we had strong headwinds. By mid-1982 the S&P 500 had returned a meager 5.82% annually since mid-1966. During that 16-year period we had stagflation, an unsuccessful war, significant political turmoil, three major bear markets, an energy crisis and two tough recessions. But we also knew we brought to our clients some real positives. First, the twin pillars of Americademocracy and capitalismwere blemished and tested but they were intact. Second, our philosophy of value investing seemed perfect for the time. An old adage in the investment business is That which is least popular is usually the best investment. Stocks, in early 1982, were hardly popular. But our value instincts recognized that American companies were on sale. Third, Chip Mason understood the synergy between the Financial Advisor and the fund management group and how important that synergy was to the client. The Legg Mason Wood Walker brokerage system had a contingent of top Financial Advisors that understood the contrarian notions of value investing. At a meeting on the Eastern Shore of Maryland, Chip Mason gave the details of the new fund and a new payout system to the Financial Advisors. He explained that it was ideal for IRAsa new concept in the early 1980s. And he explained the fund

would be managed by Ernie Kiehne (a respected value investor and Director of Research for Legg Mason) and his new partner, Bill Miller. The new payout system would be fee-based, not up-front commission as was the norm. Chip felt the fee system aligned client and advisor interests best. The fee system was not the typical instant gratification up-front load. The incentive was a quality long-term client relationship. Importantly, an advantage to our clients was that our Financial Advisors would have wide contact with the managers of the fund and, therefore, could give informed updates to investors.

Left to right: Mary Louise Neville, Marie Karpinski, Tal Daley, Richard Will, and Debbie Fox

16

In Appreciation of Their Support and Expertise

We would like to thank the following Legg Mason Financial Advisors for their support of the Value Trust over the years. Through their expert advice in both bull and bear markets, we believe they have served their clients our shareholders impeccably.
Alexandria, VA
Robert Benson Shawn McLaughlin

Carlisle, PA Charles McKain and David Metz Easton, MD Thomas E. Hill Frederick, MD Hunt Hendrickson and Matt McGreevy Gaithersburg, MD

Greenbelt, MD
Peter OMalley IV James Snyder

Baltimore, MD
H. Anderson deMuth Joseph Felser The Ford Group Gregory Hurlbrink

Lake Norman, NC
Keith Smithers

Lynchburg, VA
Andy Flowers III

Bryn Mawr, PA
Robert Eberly John Gallagher Andrew Nehrbas

Butler, PA
Daniel Crawford John Ivory and Jack Barkley

Paul H. Anderson, Jr. Thomas Boyle Ronald Fishbein Charles Graham Richard Vert Richard Will

Manassas, VA John Bouchard Morehead City, NC

Sandy Starling II

Newport News, VA Marc Cooper and Gary Bonnewell The Spencer Group Pikesville, MD
George Strum

Radford, VA
Abie Williams

Richmond, VA
Allan Strange

Towson, MD Gary Padussis Washington, DC Michael Freiman Robert Hugli Marvin McIntyre Westfield, NJ
Nick Baily Maggie and Jubb Corbet Otto and Ren Dierkes

Williamsburg, VA
Steve Griggs

To Our Shareholders,
The following table summarizes key statistics for the Primary Class of shares of the Legg Mason Value Trust, Inc., as of March 31, 2002:
Total ReturnsA 3 Months 12 Months

Value Trust Primary Class Lipper Large-Cap Core FundsB S&P 500 Stock Composite IndexC

3.66% 0.35% +0.23%

9.82% 1.87% +0.21%

As most shareholders know, the Value Trusts investment returns in most periods since its founding in 1982 have been excellent on both an absolute and relative basis. We are pleased that, over the full 20 years of the Funds existence, the Fund has earned an annual, compound return for shareholders of 17.78%. However, from time to time, the Fund has had periods of underperformance, and that has been true recently, as the above table indicates. In their letter beginning on page FS-2, Bill Miller and Nancy Dennin discuss the reasons for recent results and why they are optimistic that, on a long-term basis, the Fund will continue to produce attractive returns for shareholders. PricewaterhouseCoopers LLP, independent accountants for the Fund, has completed its annual examination, and audited nancial statements for the scal year ended March 31, 2002, are included in this report. Sincerely,

John F. Curley, Jr. Chairman

Mark R. Fetting President

April 30, 2002

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.

Average of the 874 funds comprising the Lipper universe of large-cap core funds, dened as funds that invest at least 75% of their equity assets in companies with market capitalizations greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap core funds have more latitude in the companies in which they invest. Large-cap core funds typically have a below average price-toearnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index. An unmanaged index of widely held common stocks, generally considered representative of the U.S. stock market.

FS-1

Portfolio Managers Comments

Legg Mason Value Trust, Inc. Review of Fiscal Year 2002 Market Conditions and Strategies Affecting Results
Since InceptionA Value Trust Primary Class S&P 500 Stock Composite Index Dow Jones Industrial AverageC NASDAQ CompositeD Lipper Large-Cap Growth FundsE Lipper Large-Cap Value FundsF Lipper Large-Cap Core FundsG Lipper Diversied Equity FundsH
B

Cumulative Total Returns, Periods Ending 3/31/02 15 Years 10 Years 5 Years 3 Years 1 Year +591.07% +469.70% +591.37% +329.10% +339.26% +395.76% +364.61% +373.11% +409.75% +247.15% +297.80% +205.64% +167.60% +218.52% +189.44% +205.77% +101.79% +62.30% +71.56% +51.05% +48.11% +54.29% +47.96% +61.31% -13.36% -7.43% +11.48% -25.03% -19.24% +8.31% -8.15% +13.12% -9.82% +0.21% +7.21% +0.28% -5.93% +1.39% -1.87% +2.65%

+2,520.83% +1,665.84% +2,177.47% +899.11% +1,052.64% +1,467.98% +1,175.40% +1,171.85%

Source: Lipper Inc. and Prudential Securities.

In the fourth calendar quarter of 2001, The National Bureau of Economic Research (NBER) declared the U.S. economy entered a recession in March 2001. By the time the ofcial declaration was made, the recession was over. Fourth quarter 2001 GDP was +1.7%; over the March to December time period, the economy actually grew at a 0.2% annual rate. That compares with an average 2.6% annual rate of decline in the rst ten months of the previous nine recessions and is the only time over this period that an increase has been reported. The market is a discounting mechanism. As it became evident the recession would not be prolonged, investors piled into stocks of companies whose results are perceived to be sensitive to the resumption of economic growth, such as paper, chemical, energy and mining stocks. The Value Trust has no exposure to these commodity cyclical stocks, which contributed to the Funds underperformance over the last twelve months. We observed similar patterns in the early 1990s, when investors hoped that cyclical and commodity-based companies were going to experience an extended period of prosperity. That resulted in short-term trading opportunities, but hopes of a more sustained improvement were not fullled. We believe this situation is similar today. From time to time these stocks are trades, as they just were, but are not, in our opinion, stocks to own for the long term, as most of them do not earn above their cost of capital over an economic cycle. The few that do consistently earn above their cost of capital, such as Exxon Mobil, very seldom trade at discounts to their intrinsic value.
A B C D

The Value Trust Primary Class inception date is April 16, 1982. Index returns are for periods beginning April 30, 1982. An unmanaged index of widely held common stocks, generally considered representative of the U.S. stock market. A total return price-weighted average based on the price movements of 30 blue chip stocks, computed by reinvesting quarterly dividends on a monthly basis. A market capitalization price-only index that tracks the performance of domestic common stocks traded on the regular NASDAQ market, as well as National Market System traded foreign common stocks and ADRs.

Average of the 851 funds comprising the Lipper universe of large-cap growth funds, dened as funds that invest at least 75% of their equity assets in companies with market capitalizations greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap growth funds typically have an above average price-to-earnings ratio, price-to-book ratio, and three-year sales-pershare growth value, compared to the S&P 500 Index.

Average of the 359 funds comprising the Lipper universe of large-cap value funds, dened as funds that invest at least 75% of their equity assets in companies with market capitalizations greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap value funds typically have a below average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index. Average of the 874 funds comprising the Lipper universe of large-cap core funds, dened as funds that invest at least 75% of their equity assets in companies with market capitalizations greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap core funds have more latitude in the companies in which they invest. Large-cap core funds typically have a below average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index. Average of all large-, multi-, mid-, and small-caps and the Specialty Equity Funds (S&P 500 Index, Equity Income, and Specialty Diversied Equity funds) as classied by Lipper.

FS-2

We try to buy companies whose shares trade at large discounts to our assessment of their economic value. Bargain prices do not occur when the consensus is cheery, the news is good, and investors are optimistic. Our research efforts are usually directed at precisely the area of the market that the news media tells you has the least promising outlook, and we are typically selling those stocks that you are reading have the greatest opportunity for near-term gain. This approach periodically results in variances with our benchmark, the S&P 500, as it just did. Of equal importance, performance numbers are very context-dependent. The fourth quarter 1998 and the rst quarter 1999 were the two best quarters in the Funds history. Over this six-month period, the Fund advanced 61.2%. On a relative basis, the Value Trust outperformed the S&P 500 by 34%. This was followed by the worst relative quarter in the Funds history, with the Fund down 0.6% compared to the S&P, which was up 7.1%. This second quarter of 1999 marked the beginning of the three-year period ended March 31, 2002. As you can see from the chart above, the Fund underperformed over this stretch, largely due to this three-month period. The composition of equity returns since 1985 has been heavily weighted to either the growth or value style of investing. From 1995 to 1999, the growth style dominated, while in 2000 and 2001 the traditional value style provided the outperformance. Today, there is no evidence of broad mispricing in traditional growth or value stocks. In our opinion, the opportunities to generate excess returns are currently in four distinct areas. The rst area of mispricing today is in cyclical companies where normalized earnings are much higher than investors currently believe. Examples of companies where we believe the market is not properly discounting their earnings potential include Nextel, Eastman Kodak, J.P. Morgan Chase, and many telecom equipment companies. The second category of mispricing is in companies that have dramatically sold off as the media has gone on a witch-hunt to try and uncover the next accounting-related scandal. Tyco International, a stock we recently began buying, has resorted to hosting weekly conference calls to assure investors about their accounting practices. The third area of mispricing is in out-of-favor industries. The utility industry currently falls into this category. AES, a stock we bought aggressively in the single digits, is down 82% over the last twelve months, as investors have unduly ed the utility industry after the Enron debacle. We believe the sell-off in the utility arena is very similar to the bank group sell-off in 1990 when a handful of banks failed. Investors who bought banks on the panicked selling were handsomely rewarded. The fourth area of mispricing is in under-recognized growth companies. These are generally large, wellknown companies with strong competitive positions and good returns on capital, but whose growth characteristics in terms of stability, duration, or magnitude are under-recognized. Examples of companies that we own which fall into this category are UnitedHealth Group and Waste Management. Our investment approach does not always link up well with results of the major indices over short-term periods, and we periodically diverge from them in direction and magnitude. Over the past eleven calendar years our results have consistently exceeded those of the S&P 500. There were periods in the past when we trailed that index, sometimes by a lot. Our portfolio does not look like the S&P 500, and thus should not act like the S&P 500. It should provide solid returns over the long term, which it has done and we are condent will continue to do. As always, we appreciate your support and welcome your comments. Bill Miller, CFA Nancy Dennin, CFA April 22, 2002 DJIA 10136.4

FS-3

Performance Information
Legg Mason Value Trust, Inc.

Total Returns for One, Five and Ten Years and Life of Class, as of March 31, 2002
The returns shown are based on historical results and are not intended to indicate future performance. The investment return and principal value of an investment in this Fund will uctuate so that an investors shares, when redeemed, may be worth more or less than their original cost. Average annual returns tend to smooth out variations in a funds return, so that they differ from actual year-to-year results. Total returns as of March 31, 2002, for the Value Line Geometric Average (Value Line) and S&P 500 Stock Composite indices are shown in the table below (additional Fund performance is shown with the graph). The Fund offers three classes of shares: Primary Class, Financial Intermediary Class, and Institutional Class. Information about the Financial Intermediary and Institutional Classes, offered only to certain institutional investors, is contained in a separate report to the shareholders of those classes. Total returns as of March 31, 2002, were as follows:
Value Trust Value Line Index S&P 500 Stock Composite Index

Average Annual Total Return Primary Class: One Year Five Years Ten Years Life of ClassA Cumulative Total Return Primary Class: One Year Five Years Ten Years Life of ClassA
A

9.82% +15.07% +17.69% +17.78%

+2.42% +0.40% +3.93% +5.49%

+0.21% +10.17% +13.25% +15.51%

9.82% +101.79% +409.75% +2,520.83%

+2.42% +2.00% +47.01% +189.94%

+0.21% +62.30% +247.15% +1,665.84%

The inception date of the Value Trust Primary Class is April 16, 1982. Index returns are for periods beginning April 30, 1982.

Performance Comparison of a $10,000 Investment as of March 31, 2002

The following graph compares the Funds total returns to the Value Line and S&P 500 Stock Composite indices. The graph illustrates the cumulative total return of an initial $10,000 investment for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling portfolio securities. The line representing each securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Funds results and the indices results assume reinvestment of all dividends and distributions.

FS-4

Value Trust Primary Class

Cumulative Total Return Average Annual Total Return

One Year Five Years Ten Years

9.82% +101.79% +409.75%

9.82% +15.07% +17.69%

$50,975

$34,715

$14,701

3 3/

3 3/

3 3/

0 /0 31 3/

31 3/

Selected Portfolio Performance C

Strong performers for the year ended March 31, 2002D 1. MGM Mirage Inc. +44.3% 2. McKesson HBOC, Inc. +40.9% 3. Amazon.com, Inc. +39.8% 4. The Bear Stearns Companies, Inc. +38.7% 5. Health Net Inc. +33.1% 6. UnitedHealth Group Incorporated +29.0% 7. General Motors Corporation +21.1% 8. Bank One Corporation +18.1% 9. MBNA Corporation +17.8% 10. Starwood Hotels & Resorts Worldwide, Inc. +13.0%
C D

Individual stock performance is measured by the change in the stocks price; dividends are assumed to be reinvested at the time they are paid. Securities held for the entire year.

Portfolio Changes
Securities added during the 1st quarter 2002 Tyco International Ltd. Securities sold during the 1st quarter 2002 Berkshire Hathaway Inc. Class A Dell Computer Corporation

3/
A B

31 /9 2

Composed of approximately 1,700 stocks, this index is a geometric average of the daily price percentage change in each stock, covering both large- and small-capitalization companies.

An unmanaged index of widely held common stocks, generally considered representative of the U.S. stock market.

The graph does not reect the deductions of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Past performance does not indicate future performance.

1/ 94

Value Trust

Value Line IndexA S&P 500 Stock Composite IndexB

1/ 96

Primary Class

Weak performers for the year ended March 31, 2002D 1. Nextel Communications, Inc. 62.6% 2. Gateway, Inc. 62.4% 3. AOL Time Warner Inc. 41.1% 4. Toys R Us, Inc. 28.4% 5. Eastman Kodak Company 19.1% 6. J.P. Morgan Chase & Co. 17.8% 7. The Kroger Co. 14.1% 8. Washington Mutual, Inc. 6.7% 9. FleetBoston Financial Corporation 3.8% 10. Metro-Goldwyn-Mayer, Inc. 3.0%

1/ 98

2 /0

FS-5

Statement of Net Assets

March 31, 2002 (Amounts in Thousands)

Legg Mason Value Trust, Inc.

Shares/Par Value

Common Stock and Equity Interests 99.7% Consumer Discretionary 22.5% Automobiles 1.9% General Motors Corporation
Hotels, Restaurants and Leisure 4.4% MGM Mirage Inc. Starwood Hotels & Resorts Worldwide, Inc. Internet and Catalog Retail 3.9% Amazon.com, Inc. Leisure Equipment and Products 3.7% Eastman Kodak Company Media 7.2% AOL Time Warner Inc. Metro-Goldwyn-Mayer, Inc. WPP Group plc Specialty Retail 1.4% Toys R Us, Inc. Consumer Staples 8.1% Food and Drug Retailing 8.1% Albertsons, Inc. The Kroger Co. Financials 32.0% Banks 14.3% Bank One Corporation FleetBoston Financial Corporation Lloyds TSB Group plc Washington Mutual, Inc. Diversied Financials 12.5% Citigroup Inc. Fannie Mae J.P. Morgan Chase & Co. MBNA Corporation The Bear Stearns Companies, Inc. Insurance 5.2% MGIC Investment Corporation Health Care 12.5% Health Care Providers and Services 12.5% Health Net Inc. McKesson HBOC, Inc. UnitedHealth Group Incorporated Industrials 9.6% Commercial Services and Supplies 5.9% Waste Management Inc. Industrial Conglomerates 3.7% Tyco International Ltd.

3,500 5,664 7,817

211,575 205,207A 293,997 499,204 443,614A,B 411,444 354,750A 58,792A 396,935 810,477 161,640A

31,022 13,200 15,000 3,537 34,756

9,000

17,000 16,000

563,380 354,560A 917,940 488,826 296,100 318,537 513,515 1,616,978 396,160 359,460 303,025 208,278 146,584 1,413,507 588,498B

11,700 8,460 31,025 15,500

8,000 4,500 8,500 5,400 2,336

8,600

9,300 10,000 10,202

255,192A,B 374,300 779,660 1,409,152 667,625 416,928

24,500 12,900

FS-6

Shares/Par

Value

Information Technology 7.2% Communications Equipment 3.3% Comverse Technology, Inc. Corning Incorporated Lucent Technologies Inc. Tellabs, Inc. Computers and Peripherals 3.9% Gateway, Inc. International Business Machines Corporation Telecommunication Services 4.1% Diversied Telecommunication Services 2.0% Qwest Communications International Inc. Wireless Telecommunication Services 2.1% Nextel Communications, Inc. Utilities 3.7% Electric Utilities 3.7% The AES Corporation Total Common Stock and Equity Interests (Identied Cost $9,832,727) Repurchase Agreements 0.1% J.P. Morgan Chase & Co. 1.88%, dated 3/28/02, to be repurchased at $7,438 on 4/1/02 (Collateral: $7,405 Federal Home Loan Bank notes, 6.75%, due 8/15/02, value $7,592) Morgan Stanley Dean Witter & Co., Inc. 1.88%, dated 3/28/02, to be repurchased at $7,438 on 4/1/02 (Collateral: $7,798 Fannie Mae mortgage-backed securities, 6%, due 12/1/16, value $7,586) Total Repurchase Agreements (Identied Cost $14,874) Total Investments 99.8% (Identied Cost $9,847,601) Other Assets Less Liabilities 0.2%
Net assets consist of:

8,000 9,009 17,000 12,000

101,360A 68,649 80,410A 125,640A 376,059 101,560A 332,800 434,360 221,940 242,100A,B

16,070 3,200

27,000 45,000

46,500

418,500A,B 11,261,541

7,437

7,437

7,437

7,437 14,874 11,276,415 22,053

Accumulated paid-in capital applicable to: 194,455 Primary Class shares outstanding 3,099 Financial Intermediary Class shares outstanding 34,471 Institutional Class shares outstanding Accumulated net investment income/(loss) Accumulated net realized gain/(loss) on investments and foreign currency transactions Unrealized appreciation/(depreciation) of investments and foreign currency translations
Net assets 100.0% Net asset value per share: Primary Class Financial Intermediary Class Institutional Class
A B

$8,231,073 194,531 2,011,899 (19) (567,887) 1,428,871

$ 11,298,468

$48.23 $50.97 $51.12

Non-income producing.

Affiliated Company As defined in the Investment Company Act of 1940, an Affiliated Company represents Fund ownership of at least 5% of the outstanding voting securities of an issuer. At March 31, 2002, the total market value of Affiliated Companies was $1,947,904 and the identified cost was $2,561,200.

See notes to nancial statements.

FS-7

Statement of Operations
For the Year Ended March 31, 2002 (Amounts in Thousands)

Legg Mason Value Trust, Inc.

Investment Income:
Dividends: Afliated companies Other securities Interest Total income
A

817 134,539 2,630 $ 137,986

Expenses:
Investment advisory fee Distribution and service fee Audit and legal fees Custodian fee Directors fees Registration fees Reports to shareholders Transfer agent and shareholder servicing expense Other expenses Less expenses reimbursed Total expenses, net of reimbursement Net Investment Income/(Loss) 79,322 96,146B 248 2,110 22 125 1,087 4,094B 377 183,531 (75) 183,456 (45,470)

Net Realized and Unrealized Gain/(Loss) on Investments:

Realized gain/(loss) on investments and foreign currency transactions Change in unrealized appreciation/(depreciation) of investments and foreign currency translations Net Realized and Unrealized Gain/(Loss) on Investments Change in Net Assets Resulting From Operations
A B

(336,670)C (863,146) (1,199,816) $(1,245,286)

Net of foreign taxes withheld of $2,058. Includes $(247,170) of net realized gain/(loss) on sale of shares of Afliated Companies.

See Note 1 to nancial statements.

See notes to nancial statements.

FS-8

Statement of Changes in Net Assets

(Amounts in Thousands)

Legg Mason Value Trust, Inc.

For the Years Ended March 31, 2002 2001

Change in Net Assets: Net investment income/(loss) Net realized gain/(loss) on investments and foreign currency transactions Change in unrealized appreciation/(depreciation) of investments and foreign currency translations
Change in net assets resulting from operations Distributions to shareholders: From net realized gain on investments: Primary Class Financial Intermediary Class Institutional Class Change in net assets from Fund share transactions: Primary Class Financial Intermediary Class Institutional Class Change in net assets from shares issued in connection with fund acquisition: Financial Intermediary Class Institutional Class Change in net assets Net Assets: Beginning of year End of year Accumulated net investment income/(loss)

(45,470) (336,670) (863,146) (1,245,286)

(44,242) 1,383,429 (2,635,039) (1,295,852)

(50,666) (825) (8,159) 157,935 6,206 290,207 (850,588) 12,149,056 $11,298,468 $ (19) $

(2,370,692) (251,757) 1,759,102 3,238 375,825 165,832 435,816 (1,178,488) 13,327,544 $12,149,056

Financial Highlights
Legg Mason Value 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 nancial statements.
Investment Operations Distributions Ratios/Supplemental Data Net Investment Expenses Income/(Loss) Portfolio Net Assets, to Average to Average Turnover End of Year Net Assets Net Assets Rate (in thousands) Net Asset Net Net Realized From Net Net Asset Value, Investment and Unrealized Total From From Net Realized Value, Beginning Income/ Gain/(Loss) on Investment Investment Gain on Total End of of Year (Loss) Investments Operations Income Investments Distributions Year

Total Return

Years Ended Mar. 31, 2002 2001 2000 1999 1998

A B

$53.73 75.25 73.09 50.10 34.11

$(.28) (.25) (.44) (.18) (.02)

$ (4.96) (6.80) 5.06 24.58 18.37

$ (5.24) (7.05) 4.62 24.40 18.35

$ (.04)

(.26) (14.47) (2.46) (1.41) (2.32)

$ (.26) $48.23 (14.47) 53.73 (2.46) 75.25 (1.41) 73.09 (2.36) 50.10

(9.82)% (9.99)% 6.74% 49.93% 55.34%

1.68% B 1.69% 1.68% 1.69% 1.73%

(.5)% (.5)% (.6)% (.4)% (.1)%

24.4% $ 9,378,228 27.0% 10,319,107 19.7% 12,116,912 19.3% 10,097,527 12.9% 4,810,409

Computed using average shares outstanding.

Interest expense incurred with respect to the borrowings described in Note 6 to the nancial statements did not affect the expense ratio, which, excluding interest expense, was 1.68% for the year ended March 31, 2002, and 1.69% for the year ended March 31, 2001.

See notes to nancial statements.

FS-9

Notes to Financial Statements

Legg Mason Value Trust, Inc. (Amounts in Thousands)

1. Organization and Signicant Accounting Policies: The Legg Mason Value Trust, Inc. (the Fund) is registered under the Investment Company Act of 1940, as amended, as an open-end, diversied investment company.
The Fund consists of three classes of shares: Primary Class, Financial Intermediary Class, and Institutional Class. Information about the Financial Intermediary and Institutional Classes is contained in a separate report to the shareholders of those classes. The income and expenses of the Fund are allocated proportionately to the three classes of shares based on daily net assets, except for Rule 12b-1 distribution fees, which are charged only on Primary and Financial Intermediary Class shares, and transfer agent and shareholder servicing expenses, which are determined separately for each class. For the year ended March 31, 2002, transfer agent and shareholder servicing expenses were allocated as follows: Primary Class, $3,929; Financial Intermediary Class, $112; and Institutional Class, $53. Rule 12b-1 distribution fees were allocated as follows: Primary Class, $95,716; and Financial Intermediary Class, $430. Preparation of the nancial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the nancial statements. Actual results could differ from those estimates. The following is a summary of signicant accounting policies followed by the Fund in the preparation of its nancial statements: Security Valuation Securities traded on national securities exchanges are valued at the last quoted sales price, or if no sales price is available, at the mean between the latest bid and asked prices. Over the counter securities are valued at the mean between the latest bid and asked prices as furnished by dealers who make markets in such securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value under procedures established by and under the general supervision of the Board of Directors. Fixed income securities with 60 days or less remaining to maturity are valued using the amortized cost method, which approximates current market value. Security Transactions Security transactions are recorded on the trade date. Realized gains and losses from security transactions are reported on an identied cost basis for both nancial reporting and federal income tax purposes. At March 31, 2002, receivables for securities sold and payables for securities purchased for the Fund were:
Receivable for Securities Sold Payable for Securities Purchased

$23,628
Purchases

$
Proceeds From Sales

For the year ended March 31, 2002, security transactions (excluding short-term investments) were: $3,335,592 $2,894,734

Foreign Currency Translation Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars at the closing daily rate of exchange. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are included with the net realized and unrealized gain or loss on investment securities. Repurchase Agreements The Fund 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 funds holding period. This arrangement results in a xed rate of return that is not subject to

FS-10

market uctuations during the funds 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 Fund enters into repurchase agreements to evaluate potential risks. Investment Income and Distributions to Shareholders Interest income and expenses are recorded on the accrual basis. Bond premiums and discounts are amortized for nancial reporting and federal income tax purposes. Dividend income is recorded on the exdividend date. Dividends from net investment income, if available, are determined at the class level and paid annually. 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 generally accepted accounting principles; accordingly, periodic reclassications are made within the Funds capital accounts to reect income and gains available for distribution under federal income tax regulations. As required, effective April 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies, which requires amortizing discount and premium on debt securities. Prior to April 1, 2001, the Fund did not amortize market discounts on debt securities. There was no impact on the Fund as a result of adopting this accounting principle.

2. Federal Income Taxes: No provision for federal income or excise taxes is required since the Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its taxable income to its shareholders. Because federal income tax regulations differ from generally accepted accounting principles, income and capital gains distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for nancial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differs from those reected in the accompanying nancial statements.
Distributions during the years ended March 31, 2002 and 2001, were characterized as follows for tax purposes:
For the Years Ended March 31, 2002 2001

Long-term capital gains Total distributions

$59,650 $59,650

$2,622,449 $2,622,449

The tax basis components of net assets at March 31, 2002, were as follows: Unrealized appreciation Unrealized depreciation Net unrealized appreciation/(depreciation) Capital loss carryforwards Post-October and other losses Paid-in capital Net assets $ 3,671,989 (2,270,653) 1,401,336 (281,141) (259,230) 10,437,503 $11,298,468

FS-11

Notes to Financial Statements Continued

Pursuant to federal income tax regulations applicable to investment companies, the Fund has elected to treat net capital losses realized between November 1 and March 31 of each year (Post-October loss) as occurring on the rst day of the following tax year. For the year ended March 31, 2002, realized capital losses in the amount of $259,211 and foreign currency losses in the amount of $19 reected in the accompanying nancial statements will not be recognized for federal income tax purposes until 2003. The Fund intends to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. As of March 31, 2002, the Fund has capital loss carryforwards of $281,141 expiring in 2010. For nancial reporting purposes, capital accounts and distributions to shareholders are adjusted to reect the tax character of permanent book/tax differences. For the year ended March 31, 2002, the Fund recorded the following permanent reclassications, which relate primarily to the current net operating loss. Results of operations and net assets were not affected by these reclassications. Undistributed net investment income Accumulated net realized gain/(loss) Paid-in capital $ 45,451 855 (46,306)

At March 31, 2002, the cost of investments for federal income tax purposes was $9,875,137.

3. Transactions With Afliates: The Fund has an investment advisory and management agreement with Legg Mason Funds Management, Inc. (LMFM). Pursuant to the agreement, LMFM provides the Fund with investment advisory, management and administrative services for which the Fund pays a fee, computed daily and payable monthly, at annual rates of the Funds average daily net assets. Prior to August 1, 2000, Legg Mason Fund Adviser, Inc. (LMFA) served as investment adviser to the Fund, under compensation agreements substantially similar to those with the current adviser.
The Funds agreement with LMFM provides that expense reimbursements be made to the Fund for audit fees and compensation of the Funds independent directors. The following chart shows the annual rate of audit and directors expenses reimbursed and advisory fees payable for the Fund:
Year Ended March 31, 2002 Class Advisory Fee Asset Breakpoint Expenses Reimbursed At March 31, 2002 Advisory Fee Payable

Primary Class

Financial Intermediary Class Institutional Class

1.00% 0.75% 0.65% same as above same as above

$0 $100 million $100 million $1 billion in excess of $1 billion same as above same as above

$63

$5,238

1 11

87 993

LMFA serves as administrator to the Fund under an administrative services agreement with LMFM. For LMFAs services to the Fund, LMFM (not the Fund) pays LMFA a fee, calculated daily and payable monthly, of 0.05% of the average daily net assets of the Fund. For the year ended March 31, 2002, LMFA received $6,006. Legg Mason Wood Walker, Incorporated (Legg Mason), a member of the New York Stock Exchange, serves as distributor of the Fund. Legg Mason receives an annual distribution fee and an annual service fee,

FS-12

based on the Funds Primary and Financial Intermediary Classes average daily net assets, computed daily and payable monthly as follows:
At March 31, 2002 Distribution Fee Service Fee Distribution and Service Fees Payable

Primary Class Financial Intermediary Class

0.70% N/A

0.25% 0.25%

$7,546 33

The Fund paid $92 in brokerage commissions to Legg Mason for Fund security transactions during the year ended March 31, 2002. LM Fund Services, Inc., a registered transfer agent, has an agreement with the Funds transfer agent to assist it with some if its duties. For this assistance, the transfer agent paid LM Fund Services, Inc. $1,325 for the year ended March 31, 2002. LMFM, LMFA, Legg Mason, and LM Fund Services, Inc. are corporate afliates and wholly owned subsidiaries of Legg Mason, Inc.

4. Transactions With Afliated Companies: An afliated company is a company in which the Fund has ownership of at least 5% of the voting securities. Transactions during the year ended March 31, 2002, of companies which are or were afliated were as follows:
Afliate The AES Corporation Amazon.com, Inc. Gateway, Inc. Health Net Inc. MGIC Investment Corporation Nextel Communications, Inc. Starwood Hotels & Resorts Worldwide, Inc. Storage Technology Corporation Toys R Us, Inc. $ Value at 3/31/01 302,665 312,666 238,788 576,781 Purchased Cost $481,530 13,141 4,156 189 34,301 202,993 Shares 46,500 1,436 414 9 606 26,002 $ Cost (158,462) (62,323) (23,922) (128) Sold Shares (2,944) (2,295) (436) (2) Dividend Income $ 817 Value at 3/31/02 $ 418,500 443,614 255,192 588,498 242,100 Realized Gain/(Loss) $ (138,750)A (14,783) 5,432 (54)

322,551 57,450 383,528 $2,194,429

682 $736,992

23 74,990

(90,198) (112,040) (152,806) $(599,879)

(1,690) (5,275) (6,280) (18,922)

5,300 $6,117

$1,947,904

(42,019)B (41,906)C (15,090)D $(247,170)

A B

Due to the sale of shares, Gateway, Inc. is no longer an afliated company. As of March 31, 2002, the Fund held 4.96% of the total outstanding shares.

Due to the sale of shares, Starwood Hotels & Resorts Worldwide, Inc. is no longer an afliated company. As of March 31, 2002, the Fund held 3.95% of the total outstanding shares. Due to the sale of shares, Storage Technology Corporation is no longer an afliated company. As of March 31, 2002, the Fund did not hold any outstanding shares. Due to the sale of shares, Toys R Us, Inc. is no longer an afliated company. As of March 31, 2002, the Fund held 4.56% of the total outstanding shares.

FS-13

Notes to Financial Statements Continued

5. Acquisition of LM Value Institutional Portfolio: On March 28, 2001, the Fund acquired substantially all of the assets of the LM Value Institutional Portfolio, pursuant to the Agreement and Plan of Reorganization dated January 26, 2001, and approved by LM Value Institutional Portfolio shareholders on March 9, 2001. The acquisition was accomplished by a tax-free exchange of 7,835 Institutional Class shares, having a value of $435,816, and 2,982 Financial Intermediary Class shares, having a value of $165,832, for the 31,041 Institutional Class and 11,822 Financial Intermediary Class shares of the LM Value Institutional Portfolio outstanding at the merger date. The LM Value Institutional Portfolios net assets at that date, which included $105,843 of accumulated net realized loss and $30,783 of net unrealized gain, were combined with those of the Fund, resulting in aggregate net assets of $11,991,001. 6. Line of Credit: The Fund, along with certain other Legg Mason Funds, participates in a $300 million line of credit (Credit Agreement) to be utilized as an emergency source of cash in the event of unanticipated, large redemption requests by shareholders. Pursuant to the Credit Agreement, each participating Fund is liable only for principal and interest payments related to borrowings made by that Fund. Borrowings under the Credit Agreement bear interest at a rate equal to the prevailing federal funds rate plus the federal funds rate margin. During the year ended March 31, 2002, the Fund utilized $100 million during the month of September. The loan was outstanding for six days and had an average daily balance of $100,008. The weighted average rate of interest on the loan was 2.93%, resulting in interest expense of $65, which is included in Other Expenses on the Statement of Operations. 7. Fund Share Transactions: At March 31, 2002, there were 400,000 shares authorized at $.001 par value for the Primary Class of the Fund and 100,000 shares authorized at $.001 par value for each of the Financial Intermediary and Institutional Classes of the Fund. Share transactions were as follows:
Sold Shares Primary Class Year Ended March 31, 2002 Year Ended March 31, 2001 Financial Intermediary Class Year Ended March 31, 2002 Period Ended March 31, 2001A Institutional Class Year Ended March 31, 2002 Year Ended March 31, 2001 27,732 24,700 Amount $1,431,680 1,580,516 Reinvestment of Distributions Shares 848 38,296 14 127 3,820 Amount $ 48,143 2,247,708 $ 822 7,601 233,092 Repurchased Shares Amount Net Change Shares Amount $ 157,935 1,759,102 $ 6,206 169,070

(26,176) $(1,321,888) 2,404 (31,957) (2,069,122) 31,039 (1,294) $ (1) (69,466) (49) 58 3,041

1,338 $ 74,850 3,042B 169,119C 10,535 $ 577,393 34,055D 1,998,515E

(5,606) $ (294,787) 5,056 (24,078) (1,419,966) 13,797

$ 290,207 811,641

A B

For the period from March 23, 2001 (commencement of operations) to March 31, 2001. Includes $165,832 from fund acquisition (see Note 5). Includes 7,835 shares issued in connection with fund acquisition (see Note 5).

Includes 2,982 shares issued in connection with fund acquisition (see Note 5).

D E

Includes $435,816 from fund acquisition (see Note 5).

FS-14

Report of Independent Accountants

To the Board of Directors and Primary Class Shareholders of Legg Mason Value Trust, Inc.:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the nancial highlights present fairly, in all material respects, the nancial position of Legg Mason Value Trust, Inc. (hereafter referred to as the Fund) at March 31, 2002, and the results of its operations, the changes in its net assets and the nancial highlights for each of the scal periods presented, in conformity with accounting principles generally accepted in the United States of America. These nancial statements and nancial highlights (hereafter referred to as nancial statements) are the responsibility of the Funds management; our responsibility is to express an opinion on these nancial statements based on our audits. We conducted our audits of these nancial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the nancial statements, assessing the accounting principles used and signicant estimates made by management, and evaluating the overall nancial statement presentation. We believe that our audits, which included conrmation of securities at March 31, 2002, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP Baltimore, Maryland April 26, 2002

Directors and Ofcers

The table below provides information about the Funds directors and ofcers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its afliates. The mailing address of each director and ofcer is 100 Light Street, Baltimore, Maryland 21202.
Term of Position(s) Ofce and Held With Length of Fund Time ServedA Number of Legg Mason Funds Overseen Other Directorships Held Principal Occupation(s) During the Past Five Years

Name and Age

Curley, John F., Jr. Age 62

Chairman Since 1982 Chairman and Director/ and Trustee of all Legg Director Mason funds (consisting of 23 portfolios).

None

Director and/or ofcer of various other Legg Mason afliates. Retired Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood Walker, Incorporated. Formerly: Director of Legg Mason Fund Adviser, Inc. and Western Asset Management Company (each a registered investment adviser). Executive Vice President of Legg Mason, Inc. Director and/or ofcer of various other Legg Mason afliates. Formerly: Division President and Senior Ofcer of Prudential Financial Group, Inc. and related companies, including fund boards and consulting services to subsidiary companies (1991-2000); Partner, Greenwich Associates; Vice President, T. Rowe Price Group, Inc.

Fetting, Mark R.B Age 47

President and Director

Since 2001 Director of Legg Mason Special Investment Trust, Inc., Legg Mason Investment Trust, Inc. and Legg Mason Charles Street Trust, Inc.; President of all Legg Mason funds (consisting of 23 portfolios).

Director of the Royce Family of Funds (consisting of 17 portfolios).

FS-15

Directors and Ofcers Continued

Term of Position(s) Ofce and Held With Length of Fund Time ServedA Number of Legg Mason Funds Overseen

Name and Age

Other Directorships Held

Principal Occupation(s) During the Past Five Years

Gilmore, Richard G. Age 74

Director

Since 1990 Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).

Director of CSS Industries, Inc. (diversied holding company that makes seasonal decorative products).

Trustee of Pacor Settlement Trust, Inc. Formerly: Senior Vice President, Chief Financial Ofcer and Director of PECO Energy Co., Inc. (now Exelon Corporation); Director of Finance for the City of Philadelphia; Executive Vice President and Treasurer, Girard Bank and Vice President of its parent holding company, the Girard Company. Director of The Brooklyn Museum of Art. Formerly: Director of The Baltimore Museum of Art. Chairman of the Board, President and Chief Executive Ofcer of Legg Mason, Inc. Chairman and Chief Executive Ofcer of Legg Mason Wood Walker, Incorporated. Chairman and/or Director of various other Legg Mason afliates. Trustee and Chairman-Elect of The Johns Hopkins University. Chief Executive Ofcer of The Marrow Foundation since 1993. Formerly: Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990). Trustee of Colgate University. President of Hill House, Inc. (residential home care). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999).

Lehman, Arnold L. Age 57 Mason, Raymond A. Age 65

Director

Since 1982 Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). Since 1982 Director of Legg Mason Special Investment Trust, Inc.

None

Director

None

McGovern, Jill E. Age 57

Director

Since 1989 Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).

None

OBrien, G. Peter Age 56

Director

Since 1999 Director/Trustee of all Legg Mason funds except Legg Mason Income Trust, Inc. and Legg Mason Tax Exempt Trust, Inc. (consisting of 18 portfolios).

Director of the Royce Family of Funds (consisting of 17 portfolios); Renaissance Capital Greenwich Funds; and Pinnacle Holdings, Inc. (wireless communications). None

Rodgers, T.A Age 67

Director

Since 1982 Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).

Principal, T.A. Rodgers & Associates (management consulting). Formerly: Director and Vice President of Corporate Development, Polk Audio, Inc. (manufacturer of audio components). Associate General Counsel of Legg Mason Wood Walker, Incorporated. Formerly: Senior Associate, Kirkpatrick & Lockhart LLP (1996-1999); Senior Counsel, Securities and Exchange Commission, Division of Investment Management (1989-1995). Vice President and Treasurer of Legg Mason Fund Adviser, Inc. and Western Asset Funds, Inc.; Treasurer of Pacic American Income Shares, Inc. and Western Asset Premier Bond Fund.

Duffy, Marc R.B Age 44

Vice Pres- Since 2000 Vice President and Secre- None ident and tary of all Legg Mason Secretary funds (consisting of 23 portfolios).

Karpinski, Marie K.B Age 53

Vice Pres- Since 1985 Vice President and Treaident and surer of all Legg Mason Treasurer funds (consisting of 23 portfolios).

None

Directors of the Fund serve a term of indenite length until their resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act. Ofcers of the Fund serve one-year terms, subject to annual reappointment by the Board of Directors. B Ofcers of the Fund are interested persons (as dened in the 1940 Act).

Mr. Curley, Mr. Fetting and Mr. Mason are considered to be interested persons (as dened in the 1940 Act) of the Fund on the basis of their employment with the Funds investment adviser or its afliated entities (including the Funds principal underwriter) and Legg Mason, Inc., the parent holding company. ADDITIONAL INFORMATION ABOUT THE FUNDS DIRECTORS AND OFFICERS IS CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION, AVAILABLE WITHOUT CHARGE UPON REQUEST BY CALLING 1-800-822-5544.

FS-16

Standing (l to r): Jennifer Murphy, Donald Li, Mark Niemann, Dale Wettlaufer, Michael Ray, Ernie Kiehne, Thomas Chip Coleman, Jr., Jay Leopold, Mary Chris Gay, Scot Labin, Mitchell Penn, and Anne Benson Hernandez. Seated (l to r): David Nelson, Kyle Legg, Bill Miller, Lisa Rapuano, Nancy Dennin, and Albert Burr Burker, IV (not shown: Robert Hagstrom and Randy Befumo) As we celebrate the 20th anniversary of the opening of the Value Trust, we want to take this opportunity to thank you, our shareholders, for the trust and confidence you have shown in us by choosing to place your assets in our care. From modest beginnings in April, 1982, Value Trusts shareholder ranks have grownsteadily at first and more rapidly in recent yearsto a total of 433,951 accounts as of March 31, 2002. Our records show that just over half of you live in Maryland (25.4%), Pennsylvania (11.3%), Virginia (11.3%) and New Jersey (6.0%). But the other half come from all the remaining 46 states, the District of Columbia, and four U.S. territories. Value Trusts global reach through its related investment products extends to every Canadian province and 80 other countries around the world. From the outset, we have sought to cultivate shareholders who understand that successful investing requires patience, a long-term perspective and the fortitude to ride out the inevitable ups and downs of the stock market. We believe weve achieved a fair measure of success in this endeavor, as our records show that our shareholders have owned Value Trust for an average of over 31/2 years, more than a third longer than the industry average. Evidence also suggests that Value Trust investors are less likely to redeem shares in difficult markets, and are, in fact, willing to make new commitments when prices are depressed. Value Trusts long-term record of superior performance has helped build investor confidence and loyalty. But despite the fact that Value Trust is well ahead of its benchmark since inception and has bettered the S&P 500 for 11 straight calendar years*, there have been plenty of rough patches along the way. We thank you for understanding that in order to beat the market, we have to be different than the market and sometimes those differences will produce poor results in the short-term. We applaud you for recognizing that disappointing short-term results are often the price paid for the opportunity to earn superior long-term returns. Thank you for your support and encouragement over the past 20 years we look forward to serving you in the years to come. Sincerely,

The Value Trust Team

*Past performance does not guarantee future results. Value Trusts 1-, 5-, and 10-year average annual total returns for the period ended 3/31/02 were 9.82%, 15.07%, and 17.69%, respectively. The investment return and principal value of the fund will fluctuate so that an investors shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. Please refer to the financial statements of this report beginning on page FS-1 for complete details. The S&P 500 is an unmanaged index of common stock prices that includes reinvestment of dividends and capital gain distributions and is generally considered representative of the U.S. stock market. Source: Lipper Inc. for Value Trust Primary Class. The S&P 500s 1-, 5-, and 10-year average annual total returns for the period ended 3/31/02 were 0.21%, 10.17%, and 13.25%, respectively.

LEGG MASON VALUE TRUST BOARD OF DIRECTORS

John F. Curley, Jr.,

C HAIRMAN

Mark R. Fetting,
P RESIDENT

Richard G. Gilmore Arnold L. Lehman Raymond A. Mason Dr. Jill E. McGovern G. Peter OBrien T.A. Rodgers

Legg Mason Wood Walker, Inc. Member NYSE, Inc. Member SIPC www.leggmasonfunds.com

LMF-002 (5/02)