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.

100,765,945 shares of common stock and 2,856,801 exchangeable shares as of the close of business on October 28, 2004. The exchangeable shares, which were issued by Legg Mason Canada Holdings in connection with the acquisition of Legg Mason Canada 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,
	2004	2003	2004	2003


Revenues
Investment advisory and related fees	$ 393,900	$ 281,812	$ 762,696	$ 523,637
Commissions	82,549	83,719	168,834	168,025
Principal transactions	40,356	41,407	82,405	84,353
Investment banking	31,141	39,220	57,658	70,687
Interest	25,436	20,027	47,243	41,861
Other	12,134	6,536	21,607	18,055

Total revenues	585,516	472,721	1,140,443	906,618
Interest expense	17,551	14,992	33,541	31,547

Net revenues	567,965	457,729	1,106,902	875,071


Non-Interest Expenses
Compensation and benefits	313,474	259,036	613,684	500,745
Communications and technology	26,238	21,923	51,162	44,567
Occupancy	17,514	16,402	34,701	32,490
Distribution and service fees	18,182	10,307	34,216	18,042
Amortization of intangible assets	5,464	5,296	10,903	10,858
Litigation award charge	-	17,500	-	17,500
Other	38,413	30,631	74,855	58,911

Total non-interest expenses	419,285	361,095	819,521	683,113


Earnings from Continuing Operations
before Income Tax Provision	148,680	96,634	287,381	191,958
Income tax provision	57,018	37,260	109,305	74,108


Net Earnings from Continuing Operations	91,662	59,374	178,076	117,850
Discontinued operations, net of income taxes	-	785	-	675
Gain on sale of discontinued operations,
net of income taxes	-	6,481	-	6,481

Net Earnings	$ 91,662	$ 66,640	$ 178,076	$ 125,006

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,
	2004	2003	2004	2003


Earnings per Common Share
Basic:
Continuing operations	$ 0.90	$ 0.60	$ 1.75	$ 1.18
Discontinued operations	-	0.01	-	0.01
Gain on sale of discontinued operations	-	0.06	-	0.06

	$ 0.90	$ 0.67	$ 1.75	$ 1.25

Diluted:
Continuing operations	$ 0.81	$ 0.55	$ 1.57	$ 1.11
Discontinued operations	-	0.01	-	0.01
Gain on sale of discontinued operations	-	0.06	-	0.06

	$ 0.81	$ 0.62	$ 1.57	$ 1.18


Weighted Average Number of Common Shares
Outstanding:
Basic	101,932	100,121	101,754	99,692
Diluted	114,742	107,376	115,181	106,370

Dividends Declared per Common Share	$ 0.15	$ 0.10	$ 0.25	$ 0.17

Book Value per Common Share, at end of period			$ 16.69	$ 13.68

See notes to consolidated financial statements.

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


	September 30, 2004
	(Unaudited)	March 31, 2004

Assets
Cash and cash equivalents	$ 589,641	$ 868,060
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations	2,238,554	2,876,413
Receivables:
Customers	1,196,413	1,104,830
Investment advisory and related fees	224,860	202,845
Brokers and dealers	86,035	70,067
Others	72,028	79,941
Securities borrowed	476,024	568,399
Trading assets, at fair value	359,706	264,095
Investment securities, at fair value	66,575	38,275
Equipment and leasehold improvements, net	108,213	91,753
Intangible assets, net	433,391	444,434
Goodwill	969,650	466,207
Other	206,881	187,662

Total Assets	$ 7,027,971	$ 7,262,981

Liabilities and Stockholders' Equity
Liabilities
Payables:
Customers	$ 3,129,050	$ 3,576,059
Brokers and dealers	24,170	81,044
Securities loaned	362,143	487,717
Trading liabilities, at fair value	200,516	119,088
Accrued compensation	298,228	355,268
Accrued purchase consideration	100,000	-
Other	335,931	289,957
Long-term debt	849,611	794,238

Total Liabilities	5,299,649	5,703,371

Commitments and Contingencies (Note 7)
Stockholders' Equity
Common stock	10,067	6,655
Shares exchangeable into common stock	7,194	7,351
Additional paid-in capital	403,325	391,597
Deferred compensation and officer note receivable	(28,992)	(30,224)
Employee stock trust	(123,775)	(117,331)
Deferred compensation employee stock trust	123,775	117,331
Retained earnings	1,325,482	1,173,282
Accumulated other comprehensive income, net	11,246	10,949

Total Stockholders' Equity	1,728,322	1,559,610

Total Liabilities and Stockholders' Equity	$ 7,027,971	$ 7,262,981

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,
	2004	2003	2004	2003


Net Earnings	$ 91,662	$ 66,640	$ 178,076	$ 125,006
Other comprehensive income (loss):
Foreign currency translation adjustment	2,229	427	319	5,460

Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising during the period	41	(100)	(77)	(195)
Reclassification adjustment for (gains) losses included
in net income	(1)	(6)	20	(88)

Net unrealized gains (losses) on investment securities	40	(106)	(57)	(283)

Unrealized gains on cash flow hedges:
Unrealized holding gains arising during the period	-	743	-	743
Reclassification adjustment for losses realized
in net income	-	1,672	-	1,672

Net unrealized gains	-	2,415	-	2,415

Deferred income taxes	(12)	(877)	35	(809)

Total other comprehensive income	2,257	1,859	297	6,783


Comprehensive Income	$ 93,919	$ 68,499	$ 178,373	$ 131,789

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,
	2004	2003

Cash Flows from Operating Activities
Net earnings	$ 178,076	$ 125,006
Non-cash items included in earnings:
Depreciation and amortization	26,595	25,579
Accretion and amortization of securities discounts and premiums, net	4,076	3,743
Originated mortgage servicing rights	-	(919)
Deferred compensation	9,808	8,020
Unrealized gains on firm investments	(249)	(318)
Other	229	1,540
Deferred income taxes	24,173	(5,020)
Gain on sale of discontinued operations	-	(10,861)
Sales (purchases) of trading investments, net	(28,789)	5,212
Decrease (increase) in assets:
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations	637,859	(152,610)
Receivables from customers	(91,583)	(108,591)
Receivables for investment advisory and related fees	(21,861)	(34,485)
Receivables from brokers and dealers and other	(8,440)	(42,363)
Securities borrowed	92,375	(133,606)
Trading assets	(95,611)	(251,184)
Other	(7,749)	(2,937)
Increase (decrease) in liabilities:
Payables to customers	(447,009)	142,608
Payables to brokers and dealers	(56,874)	(584)
Securities loaned	(125,574)	59,252
Trading liabilities	81,428	70,350
Accrued compensation	(57,110)	(16,324)
Other	17,108	68,026

Cash Provided by (Used for) Operating Activities	130,878	(250,466)

Cash Flows from Investing Activities
Payments for:
Equipment and leasehold improvements	(32,294)	(13,787)
Contractual acquisition earnouts	(403,951)	(2,701)
Proceeds from sale of assets	-	63,530
Net decrease in securities purchased under agreements to resell	-	35,000
Purchases of investment securities	(4,985)	(9,332)
Proceeds from sales and maturities of investment securities	5,611	10,045

Cash Provided by (Used for) Investing Activities	(435,619)	82,755

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


	Six months ended
	September 30,
	2004	2003

Cash Flows from Financing Activities
Net decrease in short-term borrowings	-	(29,478)
Net proceeds from issuance of long-term debt	51,583	-
Repayment of principal on long-term debt	(28)	-
Issuance of common stock	31,808	41,117
Repurchase of common stock	(37,123)	(21,730)
Dividends paid	(20,615)	(14,797)

Cash Provided by (Used for) Financing Activities	25,625	(24,888)

Effect of Exchange Rate Changes on Cash	697	1,362
Net Decrease in Cash and Cash Equivalents	(278,419)	(191,237)
Cash and Cash Equivalents at Beginning of Period	868,060	690,752

Cash and Cash Equivalents at End of Period	$ 589,641	$ 499,515

SUPPLEMENTARY DISCLOSURE:

Non-cash activity:

During the quarter ended June 30, 2004, a contingent acquisition payment of $100,000 to the prior owners of Royce was accrued. At September 30, 2004, the $100,000 was recorded as additional goodwill and accrued purchase consideration. The $100,000 Royce payment was paid from available cash during October 2004.

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, 2004
(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 our 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 our 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 Legg Mason Canada 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.

Terms such as "we," "us," "our," and "company" refer to Legg Mason.

2. Significant Accounting Policies

Special Purpose Entities

In the normal course of our business activities, we are the general partner, and in some cases a limited partner, in investment partnerships and are the investment manager and/or managing member in limited liability companies and off-shore investment vehicles. These entities are primarily vehicles to facilitate investments by our customers in many types of investment strategies including real estate, equity and fixed income portfolios. Our exposure to risk in these entities is generally limited to any equity investment we have made and any earned but uncollected management fees. Uncollected fees from these entities were not material at September 30, 2004.

The following table is a recap of the Variable Interest Entities ("VIEs") in which we believe we have a variable interest but are not the primary beneficiary and therefore these VIEs are not subject to consolidation by us:


			Legg Mason's	Legg Mason's
	Number of		Equity Investment at	Remaining Capital
Entity Type	Entities	Total Assets*	September 30, 2004*	Commitments*

Trusts	41	$ 4,649	$ -	$ -
Collateralized Debt Obligations	7	4,044	-	-
Offshore Investment Vehicles⁽¹⁾	3	1,152	-	-
Limited Partnerships/REITS	10	597	20	10
Limited Liability Companies⁽²⁾	2	25	-	-

TOTAL	63	$ 10,467	$ 20	$ 10

*in millions

(1) Includes one money market fund with assets of $1.1 billion in which we believe we have less than a 1% variable interest.
(2) Excludes four limited liability companies in which one of our asset management subsidiaries has approximately $37 million invested by its long-term incentive plan. We do not have a direct variable interest since we do not earn any fees on these assets.

During the six months ended September 30, 2004, we provided a $1,200 subordinated loan to an unaffiliated entity, which became the sole equity investor in a VIE. The VIE simultaneously issued $31,583 of debt instruments to third-party investors. As a result of our loan to the sole equity investor in the VIE, we consider ourselves the primary beneficiary of the VIE. Accordingly, we are required to consolidate this entity as of, and for the six months ended, September 30, 2004. In October 2004, the subordinated loan was repaid and, as a result, we will no longer be required to consolidate this VIE.

Our Statement of Financial Condition at September 30, 2004 includes $47,258 of assets attributable to consolidated VIEs, of which $25,483 is in cash and cash equivalents, $10,362 is in equipment and leasehold improvements, $8,836 is in trading assets, and $47,258 of liabilities attributable to consolidated VIEs, of which $31,555 is in long-term debt, $9,180 is minority interest included in other liabilities, and $5,348 is in trading liabilities. Our assets, exclusive of the assets of consolidated VIEs, are not subject to the claims of the creditors of these consolidated VIEs and likewise the assets of the consolidated VIEs are not available to our creditors.

Stock Based Compensation

During fiscal 2004, we adopted the fair value method of accounting for stock-based compensation on a prospective basis 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 Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," compensation expense was recognized based on the fair value of stock options granted after April 1, 2003 over the applicable vesting period. No compensation expense was 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, 2004 is less than that which would have been included 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,
	2004	2003	2004	2003


Net earnings, as reported	$ 91,662	$ 66,640	$ 178,076	$ 125,006
Add: stock-based compensation included
in reported net earnings, net of taxes	1,861	2,146	2,800	2,422
Less: stock-based compensation determined
under fair value based method, net of taxes	(5,375)	(6,290)	(10,471)	(11,982)

Pro forma net earnings	$ 88,148	$ 62,496	$ 170,405	$ 115,446

Earnings per share:
As reported:
Basic	$ 0.90	$ 0.67	$ 1.75	$ 1.25
Diluted	0.81	0.62	1.57	1.18
Pro forma:
Basic	$ 0.86	$ 0.62	$ 1.67	$ 1.16
Diluted	0.78	0.58	1.50	1.09

The weighted average fair value of option grants of $22.55 and $19.79 per share for the six months ended September 30, 2004 and 2003, 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:


	Six months ended
		September 30,
	2004		2003

Expected dividend yield	0.79%		0.82%
Risk-free interest rate	4.04%		3.43%
Expected volatility	41.01%		41.40%
Expected lives (in years)	6.14		6.52

Restricted Cash

Included in cash and cash equivalents at September 30, 2004 is $40,452, which is restricted as to its use by Legg Mason. As discussed previously under Special Purpose Entities, we were required to consolidate a VIE, which had $19,931 of cash in escrow at September 30, 2004, to finance the construction of an office building. We also funded an escrow account in connection with our appeal of a

civil copyright lawsuit. At September 30, 2004, the balance of the escrow account was $20,521. These cash balances are considered restricted and are not available to Legg Mason for general corporate use.

Recent Accounting Developments

The Financial Accounting Standards Board ("FASB") has issued the following pronouncements since March 31, 2004.

The Emerging Issues Task Force ("EITF") affirmed its previous consensus regarding Issue 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share." The guidance in this Issue requires contingently convertible instruments to be included retroactively in diluted earnings per share computations (if dilutive) from the date of issuance of the instruments. The effective date of this EITF is expected to be for reporting periods ending after December 15, 2004. For both the quarter and six months ended September 30, 2003, the inclusion of these convertible senior notes in the diluted earnings per share computation would have resulted in a reduction in diluted earnings per share of $0.03 and $0.05 per share, respectively.

The EITF reached a consensus on Issue 04-10, "Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." This EITF requires individual operating segments that do not meet the quantitative thresholds set forth in SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, for separate reporting may be aggregated only if the segments meet certain requirements. These requirements are applicable for fiscal years ending after October 13, 2004. The adoption of EITF 04-10 will not impact Legg Mason's identified segments.

The EITF reached a consensus on Issue 02-14, "Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee but Exercises Significant Influence through Other Means." The consensus reached indicates that in situations where an investor has the ability to exercise significant influence over the investee, an investor should apply the equity method of accounting only when it has either common stock or "in-substance" common stock of a corporation. EITF 02-14 is effective for reporting periods beginning after September 15, 2004. The adoption of EITF 02-14 will not materially impact our Consolidated Financial Statements.

The EITF issued EITF 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128." EITF 03-6 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-6 is effective for fiscal periods beginning after March 31, 2004 and requires retroactive adjustment of prior period earnings per share to ensure comparability. The adoption of EITF 03-6 did not impact Legg Mason's basic or diluted earnings per share.

The EITF reached a consensus on Issue 03-16, "Accounting for Investments in Limited Liability Companies." This EITF requires that an investment in a Limited Liability Company ("LLC") that maintains a "specific ownership account" for each investor - similar to a partnership capital account structure - should be viewed as similar to an investment in a limited partnership for purposes of determining whether a non-controlling investment in an LLC should be accounted for using the cost method or the equity method. These requirements are applicable for reporting periods beginning after June 15, 2004. The adoption of EITF 03-16 did not materially impact Legg Mason's Consolidated Financial Statements.

3. Trading Assets, at Fair Value

At September 30, 2004, Legg Mason had pledged securities owned of $1,314 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, 2004	March 31, 2004

Amortizable Asset Management Contracts:
Cost	$ 352,095	$ 352,037
Accumulated Amortization	(78,554)	(67,537)

Net	$ 273,541	$ 284,500

Indefinite-Life Intangible Assets:
Fund management contracts	$ 105,150	$ 105,234
Trade name	54,700	54,700

Total	$ 159,850	$ 159,934

Total Intangible Assets, net	$ 433,391	$ 444,434

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


Fiscal year ended March 31:		Amount

Remaining 2005		10,902
2006		21,655
2007		21,311
2008		19,668
2009		19,155
2010		18,827

During the quarter ended June 30, 2004, we determined that, as a result of both Private Capital Management, L.P. ("PCM") and Royce & Associates, LLC ("Royce") meeting certain revenue levels as specified in the acquisition agreements, a contingent acquisition payment of $400,000 was due to the prior owners of PCM and a contingent acquisition payment of $100,000 was due to the prior owners of Royce. During the quarter ended September 30, 2004, payments totaling $400,000 were made from available cash to the prior owners of PCM. The $100,000 Royce payment, which at September 30, 2004 was recorded as accrued purchase consideration, was paid from available cash during October 2004.

The carrying value of goodwill of $969,650 at September 30, 2004 is primarily attributable to the Asset Management reporting segment. The increase in the carrying value of goodwill since March 31, 2004 primarily reflects $500,000 for additional purchase consideration described above, which is deductible for tax purposes, and $2,500 related to a contingent acquisition payment for the business of Rothschild Asset Management (Singapore) Limited.

5. Common Stock Split

On July 20, 2004 the Company declared a three-for-two stock split, paid as a dividend on September 24, 2004 to stockholders of record on September 8, 2004. Accordingly, all share and per share information has been retroactively restated to reflect the stock split, except for the number of shares presented in "Item 4, Submission of Matters to a Vote of Security Holders" and the common stock and additional paid-in capital presented in the Consolidated Statement of Financial Condition.

6. Long-Term Debt

In April 2004, a subsidiary of Legg Mason entered into a $20,000 term loan agreement with a commercial bank to finance tenant improvements on real property at the subsidiary's new headquarters. The loan bears interest at 4.19% and is collateralized by the property and equipment of the subsidiary, with a maturity date of October 2010. The subsidiary is required to maintain a compensating balance over the life of the loan beginning with $5,000 at the funding date and decreasing to zero at a predetermined rate. This compensating balance is not legally restricted; however, failure to maintain the appropriate balance will result in additional bank charges and possible acceleration of the maturity if such charges are not paid. The loan also provides for restrictive covenants at the subsidiary relating to the maintenance of specified financial performance ratios such as tangible net worth and debt service coverage. At September 30, 2004, we were in compliance with all covenants related to this and all faciliti es.

During the quarter ended June 30, 2004, we entered

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

MARYLAND	52-1200960

100 Light Street - Baltimore, MD	21202

(410) 539-0000