LEGG MASON INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

66,200,845 shares of common stock and 2,072,451 exchangeable shares as of the close of business on November 6, 2003. The exchangeable shares, which were issued by Legg Mason Canada Holdings in connection with the acquisition of Perigee Inc., are exchangeable at any time into common stock on a one-for-one basis and entitle holders to dividend, voting and other rights equivalent to common stock.

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)


	Three months		Six months
	ended September 30,		ended September 30,
	2003	2002	2003	2002


Revenues
Investment advisory and related fees	$ 281,812	$ 203,133	$ 523,637	$ 425,481
Commissions	83,719	79,138	168,025	163,966
Principal transactions	41,407	41,188	84,353	77,423
Investment banking	39,220	28,075	70,687	59,610
Interest	20,027	29,708	41,861	58,587
Other	6,536	8,889	18,055	16,219

Total revenues	472,721	390,131	906,618	801,286
Interest expense	14,992	23,816	31,547	48,442

Net revenues	457,729	366,315	875,071	752,844


Non-Interest Expenses
Compensation and benefits	259,036	212,906	500,745	443,882
Communications and technology	21,923	22,418	44,567	44,765
Occupancy	16,402	16,502	32,490	31,835
Amortization of intangible assets	5,296	5,824	10,858	11,749
Litigation award charge	17,500	-	17,500	-
Other	40,938	35,573	76,953	67,047

Total non-interest expenses	361,095	293,223	683,113	599,278


Earnings from Continuing Operations
before Income Tax Provision	96,634	73,092	191,958	153,566
Income tax provision	37,260	27,246	74,108	58,724


Net Earnings from Continuing Operations	59,374	45,846	117,850	94,842
Discontinued operations, net of taxes	785	(475)	675	(453)
Gain on sale of discontinued operations, net of taxes	6,481	-	6,481	-

Net Earnings	$ 66,640	$ 45,371	$ 125,006	$ 94,389

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(continued)
(In thousands, except per share amounts)
(Unaudited)


	Three months		Six months
	ended September 30,		ended September 30,
	2003	2002	2003	2002


Earnings per Common Share
Basic:
Continuing operations	$ 0.89	$ 0.70	$ 1.77	$ 1.44
Discontinued operations	0.01	(0.01)	0.01	(0.01)
Gain on sale of discontinued operations	0.10	-	0.10	-

	$ 1.00	$ 0.69	$ 1.88	$ 1.43

Diluted:
Continuing operations	$ 0.83	$ 0.67	$ 1.66	$ 1.38
Discontinued operations	0.01	(0.01)	0.01	(0.01)
Gain on sale of discontinued operations	0.09	-	0.09	-

	$ 0.93	$ 0.66	$ 1.76	$ 1.37


Weighted Average Number of Common Shares
Outstanding
Basic	66,747	66,020	66,461	66,008
Diluted	71,584	68,446	70,914	68,785

Dividends Declared per Common Share	$ 0.15	$ 0.11	$ 0.26	$ 0.21

Book Value per Common Share, at end of period	$ 20.52	$ 17.40	$ 20.52	$ 17.40

See notes to consolidated financial statements.

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)


	September 30, 2003	March 31, 2003
	(Unaudited)

Assets
Cash and cash equivalents	$ 499,515	$ 690,752
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations	2,736,047	2,583,437
Securities purchased under agreements to resell	-	35,000
Receivables:
Customers	1,042,561	933,970
Investment advisory and related fees	156,227	121,209
Brokers and dealers	43,956	62,488
Others	54,311	36,854
Securities borrowed	388,836	255,230
Trading assets, at fair value	414,646	163,462
Investment securities, at fair value	36,379	42,519
Equipment and leasehold improvements, net	69,550	69,814
Intangible assets, net	453,589	470,408
Goodwill	459,273	454,512
Other	156,312	147,795

Total Assets	$ 6,511,202	$ 6,067,450

Liabilities and Stockholders' Equity
Liabilities
Payables:
Customers	$ 3,388,893	$ 3,246,285
Brokers and dealers	74,433	75,017
Securities loaned	279,206	219,954
Short-term borrowings	-	29,478
Trading liabilities, at fair value	130,247	59,583
Accrued compensation	219,998	235,971
Other	232,587	166,452
Long-term debt	790,471	786,753

Total Liabilities	5,115,835	4,819,493

Commitments and Contingencies (Note 6)
Stockholders' Equity
Common stock	6,588	6,483
Shares exchangeable into common stock	7,959	8,736
Additional paid-in capital	387,638	357,622
Deferred compensation and officer note receivable	(30,674)	(34,578)
Employee stock trust	(113,683)	(109,803)
Deferred compensation employee stock trust	113,683	109,803
Retained earnings	1,021,049	913,670
Accumulated other comprehensive income (loss), net	2,807	(3,976)

Total Stockholders' Equity	1,395,367	1,247,957

Total Liabilities and Stockholders' Equity	$ 6,511,202	$ 6,067,450

See notes to consolidated financial statements.

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)


	Three months ended		Six months ended
	September 30,		September 30,
	2003	2002	2003	2002


Net Earnings	$ 66,640	$ 45,371	$ 125,006	$ 94,389
Other comprehensive income (loss):
Foreign currency translation adjustment	427	184	5,460	5,191

Unrealized gains (losses) on investment securities:
Unrealized holding losses arising during the period	(100)	(136)	(195)	(427)
Reclassification adjustment for (gains) losses
included in net income	(6)	90	(88)	90

Net unrealized losses on investment securities	(106)	(46)	(283)	(337)

Unrealized gains (losses) on cash flow hedges:
Unrealized holding gains (losses) arising during the period	743	686	743	(2,726)
Reclassification adjustments for losses realized
in net income	1,672	-	1,672	-

Net unrealized gain (losses)	2,415	686	2,415	(2,726)

Deferred income taxes	(877)	(275)	(809)	1,052

Total other comprehensive income	1,859	549	6,783	3,180


Comprehensive Income	$ 68,499	$ 45,920	$ 131,789	$ 97,569

See notes to consolidated financial statements.

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


	Six months ended
	September 30,
	2003	2002

Cash Flows from Operating Activities
Net earnings	$ 125,006	$ 94,389
Non-cash items included in earnings:
Depreciation and amortization	25,579	27,597
Accretion and amortization of securities discounts and premiums, net	3,743	3,828
Originated mortgage servicing rights	(919)	(758)
Deferred compensation	8,020	4,951
Unrealized (gains) losses on firm investments	(318)	2,482
Other	1,540	913
Deferred income taxes	(5,020)	7,402
Gain on sale of assets	-	(1,331)
Gain on sale of discontinued operations	(10,861)	-
Sales (purchases) of trading investments, net	5,212	(144)
Decrease (increase) in assets excluding acquisitions:
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations	(152,610)	(77,769)
Receivables from customers	(108,591)	56,000
Receivables for investment advisory and related fees	(34,485)	7,213
Receivables from brokers and dealers and other	(42,363)	38,998
Securities borrowed	(133,606)	85,418
Trading assets	(251,184)	(28,675)
Other	(2,937)	(5,819)
Increase (decrease) in liabilities excluding acquisitions:
Payable to customers	142,608	(15,101)
Payable to brokers and dealers	(584)	2,520
Securities loaned	59,252	(81,160)
Trading liabilities	70,350	(1,360)
Accrued compensation	(16,324)	(50,121)
Other	68,026	(6,534)

Cash Provided by (Used for) Operating Activities	(250,466)	62,939

Cash Flows from Investing Activities
Payments for:
Equipment and leasehold improvements	(13,787)	(16,011)
Acquisitions, net of cash acquired	(2,701)	(3,115)
Proceeds from sale of assets	63,530	1,451
Net decrease (increase) in securities purchased under agreements to resell	35,000	(63,000)
Purchases of investment securities	(9,332)	(8,165)
Proceeds from sales and maturities of investment securities	10,045	24,288

Cash Provided by (Used for) Investing Activities	82,755	(64,552)

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(Dollars in thousands)
(Unaudited)


	Six months ended
	September 30,
	2003	2002

Cash Flows from Financing Activities
Net increase (decrease) in short-term borrowings	(29,478)	114,987
Issuance of common stock	41,117	13,327
Repurchase of common stock	(21,730)	(22,291)
Dividends paid	(14,797)	(13,422)

Cash Provided by (Used for) Financing Activities	(24,888)	92,601

Effect of Exchange Rate Changes on Cash	1,362	524
Net Increase (Decrease) in Cash and Cash Equivalents	(191,237)	91,512
Cash and Cash Equivalents at Beginning of Period	690,752	468,377

Cash and Cash Equivalents at End of Period	$ 499,515	$ 559,889

SUPPLEMENTARY DISCLOSURE:

Noncash activity:

The value of common stock issued in connection with a business acquisition was $3,262 for the six months ended September 30, 2002. Of that amount, $1,783 was attributable to goodwill, $1,416 was attributable to intangible assets and $63 was attributable to tangible net assets. Additionally, in connection with the sale of the mortgage banking and servicing business of Legg Mason Real Estate Services, Legg Mason received a $6,900 non-interest bearing note due September 30, 2007, with a net present value of $5,100.

See notes to consolidated financial statements.

LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
September 30, 2003
(Unaudited)

1. Interim Basis of Reporting

The accompanying unaudited interim consolidated financial statements of Legg Mason, Inc. and its subsidiaries (collectively "Legg Mason") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The interim consolidated financial statements have been prepared using the interim basis of reporting and, as such, reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. The nature of Legg Mason's business is such that the results of any interim period are not necessarily indicative of the results for a full year.

The information contained in the interim consolidated financial statements should be read in conjunction with Legg Mason's latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. Where appropriate, the prior year's financial statements have been reclassified to conform to the current year's presentation. Unless otherwise noted, all per share amounts include both common shares of Legg Mason and shares issued in connection with the acquisition of Perigee Inc., which are exchangeable into common shares of Legg Mason on a one-for-one basis at any time.

The preparation of interim consolidated financial statements requires management to make assumptions and estimates that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and the differences could have a material impact on the interim consolidated financial statements.

2. Significant Accounting Policies

Special Purpose Entities

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation Number ("FIN") 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51." FIN 46 requires that all special purpose entities be designated as either voting interest or variable interest entities ("VIE"), with VIEs subject to consolidation if the consolidating entity is deemed to be the primary beneficiary. The primary beneficiary is the entity that will absorb a majority of the VIE's expected losses, or if there is no such entity, the entity that will receive a majority of the VIE's expected residual returns. The implementation of FIN 46 was required for periods beginning after June 15, 2003; however, on October 9, 2003, the FASB deferred the effective date for interests in VIEs that were created before February 1, 2003 until the end of the first interim period ending after December 15, 2003.

Legg Mason, through one of its asset management subsidiaries, is the collateral manager of five Collateralized Debt Obligation entities ("CDOs"). CDOs are pooled investment vehicles in which equity and debt investors earn a return based on the performance of the underlying assets purchased with the invested capital. The debt is divided into different tranches or classes with varying credit ratings and coupon rates, which allows investors to gain exposure to a diversified pool of assets at their desired

risk/return levels. The cash flow generated from the pool of assets is used to pay administrative expenses and service the issued debt; any excess cash flow is paid to the equity holders.

Legg Mason had entered into a forward purchase contract as a cash flow hedge to purchase a $4,200 equity interest in one of the CDOs. During the quarter ended September 30, 2003, Legg Mason sold the forward purchase contract to a third party and recognized a pre-tax loss on the sale of $1,672 ($1,000 net of tax).

Legg Mason became involved with one of the CDOs in September 2003, to which the provisions of FIN 46 have been applied. This CDO acquired a $500,000 portfolio of investment grade asset-backed securities and issued approximately $480,000 of debt. Legg Mason does not have the right to use the assets of the CDO, and the liabilities of the CDO are without recourse to Legg Mason. For its services as collateral manager, Legg Mason is entitled to receive senior management fees, which are not material to Legg Mason' results of operations. Legg Mason may be removed as collateral manager under certain conditions. Legg Mason did not sell or transfer assets to the CDO and does not have an equity interest in the CDO.

Because Legg Mason does not have an equity interest in the CDO, it is not expected to have a significant amount of the expected losses of the entity. Legg Mason's maximum exposure to loss is the amount of earned but uncollected management fees, which are not material at September 30, 2003. Currently, Legg Mason does not believe that anyone will absorb a majority of expected losses. To calculate expected residual returns, Legg Mason used a discounted cash flow model, similar to that used by rating agencies, which incorporates a variety of assumptions regarding the underlying collateral of the portfolio. These assumptions reflect analysis of debt ratings and prices of the underlying collateral, probability of default, default timing and subsequent recovery, and an appropriate discount rate. Legg Mason is required to include the gross amount of the fees it earns for providing collateral management services, in addition to the variability of those fees, when calculating its portion of expected residual return (as compared to only the variability in expected returns for the investors). Based upon the modeling that was performed, Legg Mason has determined that it is not the primary beneficiary, and accordingly, did not consolidate this CDO.

Because the other four CDOs were created prior to February 1, 2003, Legg Mason has deferred the implementation of FIN 46 until December 31, 2003, as permitted by FASB Staff Position No. FIN 46-6. However, based upon the modeling that has been performed, Legg Mason has determined that it is not the primary beneficiary for any of the CDOs, and accordingly, does not expect to consolidate those entities at December 31, 2003.

In addition, in the normal course of Legg Mason's business activities, Legg Mason, through its subsidiaries, becomes the general partner, and in some cases, a limited partner, in investment partnerships and the investment manager and/or managing member in limited liability companies. Legg Mason is in the process of assessing the impact of FIN 46 on these entities.

Stock Based Compensation

Legg Mason's stock-based compensation plans include stock options, employee stock purchase plans, restricted stock awards and deferred compensation and retention bonuses payable in stock. Prior to April 1, 2003, Legg Mason accounted for stock-based employee compensation plans in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" as permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended. In accordance with APB No. 25,

compensation expense is not recognized for stock options that have no intrinsic value (the exercise price is not less than the market price) on the date of grant.

During the quarter ended September 30, 2003, Legg Mason adopted the fair value method of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," prospectively for all stock options granted and stock purchase plan transactions after April 1, 2003, using the Black-Scholes option pricing model. Under the prospective method allowed under SFAS No. 148, compensation expense is recognized based on the fair value of new stock options granted after April 1, 2003 over the applicable vesting period. No compensation expense is recognized for stock options granted prior to April 1, 2003. Therefore, the expense related to stock-based employee compensation included in the determination of net income for September 30, 2003 is less than that which would have been recognized if the fair value method had been applied to all awards.

The following table reflects pro forma results as if compensation expense associated with all option grants (regardless of grant date) and the stock purchase plan were recognized over the vesting period:


	Three months ended		Six months ended
	September 30,		September 30,

	2003	2002	2003	2002


Net Earnings, as reported	$ 66,640	$ 45,371	$ 125,006	$ 94,389
Add: stock-based compensation included
in reported net earnings, net of taxes	1,984	309	2,428	740
Less: stock-based compensation determined
under fair value based method, net of taxes	(6,121)	(6,506)	(11,479)	(11,908)

Pro forma net earnings	$ 62,503	$ 39,174	$ 115,955	$ 83,221

Earnings per share:
As reported:
Basic	$ 1.00	$ 0.69	$ 1.88	$ 1.43
Diluted	0.93	0.66	1.76	1.37
Pro forma:
Basic	$ 0.94	$ 0.59	$ 1.74	$ 1.26
Diluted	0.87	0.57	1.64	1.21

The fair value of each option grant of $29.69 and $15.84 per share for the six months ended September 30, 2003 and 2002, respectively, included in the pro forma net income shown above is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants for the six months ended September 30, 2003 and 2002:


	Six Months Ended,
		September 30,
	2003		2002

Expected dividend yield	0.82%		0.81%
Risk-free interest rate	3.43%		4.10%
Expected volatility	41.40%		34.30%
Expected lives (in years)	6.52		6.65

3. Trading Assets, at Fair Value

At September 30, 2003, Legg Mason had pledged securities owned of $764 as collateral to counterparties for securities loaned transactions, which can be sold or repledged by the counterparties.

4. Intangible Assets and Goodwill

The following table reflects the components of intangible assets as of:


	September 30, 2003	March 31, 2003

Amortized Intangible Assets, Cost
Asset management contracts	$ 350,394	$ 351,714
Mortgage servicing contracts	-	10,743

Total	$ 350,394	$ 362,457

Amortized Intangible Assets,
Accumulated Amortization
Asset management contracts	$ (56,216)	$ (46,900)
Mortgage servicing contracts	-	(4,317)

Total	$ (56,216)	$ (51,217)

Indefinite-Life Intangible Assets
Fund management contracts	$ 104,711	$ 104,468
Trade name	54,700	54,700

Total	$ 159,411	$ 159,168

Included in other expenses on the Consolidated Statements of Earnings are impairment charges of $188 and $687 for the six months ended September 30, 2003 and 2002, respectively, related to Legg Mason's Asset Management reporting segment. These charges represent the unamortized balance of acquired asset management contracts that were terminated.

Estimated amortization expense for each of the next five fiscal years is as follows:


Fiscal year ended March 31:		Amount

Remaining 2004		$ 10,815
2005		21,553
2006		21,396
2007		21,053
2008		19,466
2009		19,122

The carrying value of goodwill of $459,273 at September 30, 2003 is primarily attributable to Legg Mason's Asset Management reporting segment. The increase in the carrying value of goodwill since March 31, 2003 primarily reflects approximately $3,579 from the impact of changes in foreign currency exchange rates, approximately $1,914 related to the purchase of an increased ownership interest in Barrett Associates, Inc. and approximately $543 related to a contingent payment for a prior acquisition, partially offset by a decrease of approximately $1,275 related to the sale of the mortgage banking and servicing business of Legg Mason Real Estate Services, Inc. ("LMRES"). See Note 11 for information regarding the sale.

5. Short-Term Borrowings

During the six months ended September 30, 2003, Legg Mason renewed the committed, unsecured revolving credit facility of $100,000 for three years. In connection with the sale of the mortgage banking and servicing business of LMRES as discussed in Note 11, the committed, secured compensating balance line of credit and the secured warehouse line of credit utilized by LMRES were terminated.

6. Commitments and Contingencies

Legg Mason leases office facilities and equipment under non-cancelable operating leases and also has multi-year agreements for data processing and other services. These leases and service agreements expire on varying dates through 2018. Certain leases provide for renewal options and contain escalation clauses providing for increased rentals based upon maintenance, utility and tax increases.

As of September 30, 2003, the minimum annual aggregate rentals are as follows:



Remaining 2004		$ 33,824
2005		65,734
2006		54,394
2007		46,930
2008		42,428
Thereafter		113,314

Total		$ 356,624

Legg Mason has been the subject of customer complaints and has also been named as a defendant in various legal actions arising primarily from securities brokerage, asset management and investment banking activities, including certain class actions, which primarily allege violations of securities laws and seek unspecified damages, which could be substantial. Legg Mason has also been involved in governmental and self-regulatory agency inquiries, investigations and proceedings. In accordance with

SFAS No. 5, "Accounting for Contingencies," Legg Mason has established reserves for potential losses from pending complaints, legal actions, investigations and proceedings. While the ultimate resolution of these actions cannot be currently determined, in the opinion of management, after consultation with legal counsel, the actions are expected to be resolved with no material adverse effect on Legg Mason's financial condition. However, if during any period a potential adverse contingency should become probable or resolved, the results of operations in that period could be materially affected. On October 3, 2003, a federal district court jury rendered an approximately $20,000 verdict against Legg Mason in a civil copyright lawsuit. As a result of the verdict, Legg Mason recorded a $17,500 pre-tax charge in the quarter ended September 30, 2003. On October 21, 2003, Legg Mason filed a motion for New Trial and Judgment as a Matter of Law and is awaiting the trial judge's action on that motion.

In addition, the ultimate costs of litigation and regulatory matters can vary significantly from period to period, depending on factors such as market conditions, the size and volume of customer complaints and claims (including class action suits), the frequency and scope of regulatory investigations and proceedings and recoveries from indemnification, contribution or insurance reimbursement.

Like numerous other firms, starting in September 2003, Legg Mason received a subpoena from the New York Attorney General's office and inquiries from the Securities and Exchange Commission (the "SEC") relating to their investigations of possible late trading, market timing and selective disclosure of portfolio holdings in connection with mutual funds. Legg Mason has responded to the subpoena and the inquiries, is cooperating with an examination by the SEC, and has been conducting its own internal review. Based on the progress of the inquiries and examination to date, Legg Mason is not currently able to determine the eventual outcome of the regulatory inquiries and examination, or to predict what effect, if any, these matters will have on its business, results of operations or assets under management.

On November 4, 2003, Legg Mason Wood Walker, Incorporated ("LMWW") was informed by representatives of the enforcement divisions of the SEC and the National Association of Securities Dealers that they intend to seek authority to initiate disciplinary proceedings against LMWW for its failure to provide clients the benefit of breakpoint discounts in connection with client purchases of non-proprietary mutual fund Class A shares. The regulators have proposed a settlement consisting of a censure, cease and desist order and fine of approximately $2,300 and a requirement that LMWW: (a) conduct a comprehensive review of all purchases of non-proprietary mutual fund Class A shares since January 1, 2001 to determine whether clients were provided applicable breakpoint discounts and (b) reimburse any clients who did not receive applicable breakpoint discounts. Legg Mason is considering the proposed settlement, but does not expect that any reimbursements to clients will be material to Legg Mason's results of operations.

7. Earnings Per Share

Basic earnings per share ("EPS") is calculated by dividing net earnings by the weighted average number of common shares outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of potential common shares.

The following tables present the computations of basic and diluted EPS:


		Three months ended September 30,

(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

MARYLAND	No. 52-1200960

100 Light Street - Baltimore, MD	21202

(410) 539-0000