Legg Mason Income Trust N-CSRS Certified semi-annual shareholder report (management investment company)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act file number: 811-5029

Name of Fund: Legg Mason Income Trust, Inc.
Address of Principal Executive Offices: 100 Light Street, Baltimore, MD 21202

Name and address of agent for service:
	Name and address of agent for service: Richard M. Wachterman, Esq. Legg Mason Wood Walker, Incorporated 100 Light Street Baltimore, MD 21202

Registrant’s telephone number, including area code: (410) 539-0000

Date of fiscal year end: December 31, 2004

Date of reporting period: June 30, 2004

Item 1 — Report to Shareholders

Semi-Annual Report to Shareholders

Legg Mason

Income Trust, Inc.

June 30, 2004

1

Semi-Annual Report to Shareholders

To Our Shareholders,

   We are pleased to provide you with Legg Mason Income Trust’s semi-annual report, combining reports for the Legg Mason Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, U.S. Government Intermediate-Term Portfolio and the U.S. Government Money Market Portfolio.

   The following table summarizes key statistics for the Primary Class of each portfolio, as of June 30, 2004:

					Net Asset Value
	SEC YieldA		Average Life		Per Share
Core Bond		2.66%		9.26 years	$	9.72
High Yield		6.65%		6.08 years	$	8.90
Investment Grade		4.55%		10.66 years	$	10.57
U.S. Government Intermediate		3.41%		4.55 years	$	10.31
U.S. Government Money MarketB		0.45%		66 days	$	1.00

   For the six months ended June 30, 2004, total returns for the Primary Class of shares of the High Yield, Investment Grade and Government Intermediate Portfolios were +0.83%, -0.44%, and -0.49%, respectively. Total returns for the Institutional Class of shares were +1.13%, -0.29%, and -0.34%, respectively. The Core Bond Fund, which commenced operations on February 27, 2004, had a total return of -2.10% for the period from its inception to June 30, 2004. (Total return measures investment performance in terms of appreciation or depreciation in a portfolio’s net asset value per share, plus dividends and any capital gain distributions.)

   For each of our Funds, historical performance is not indicative of future results, and the principal value of the Core Bond, High Yield, Investment Grade and Government Intermediate Portfolios will continue to fluctuate so that shares, when redeemed, may be worth more or less than their original cost. The U.S. Government Money Market Portfolio seeks to preserve the value of your investment at $1.00 per share; however, it is possible to lose money by investing in the Fund.

^A  SEC yields reported for the Core Bond, High Yield, Investment Grade and U.S. Government Intermediate Portfolios are for the 30 days ended June 30, 2004. For the U.S. Government Money Market Portfolio, the SEC yield is for the 7 days ended June 30, 2004.

^B  An investment in the U.S. Government Money Market Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

2

Semi-Annual Report to Shareholders

   Many of our shareholders regularly add to their Primary Class Fund holdings by authorizing automatic, monthly transfers from their bank checking or Legg Mason accounts. Your Legg Mason Financial Advisor will be happy to help you make these arrangements if you would like to purchase additional shares in this convenient way.

Sincerely,

John F. Curley, Jr. Chairman	Mark R. Fetting President

July 26, 2004

3

Semi-Annual Report to Shareholders

Performance Information

Core Bond Fund

   Total return measures investment performance in terms of appreciation or depreciation in a fund’s 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 annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results. No adjustment has been made for any income taxes payable by shareholders.

   Due to the limited operating history of the Core Bond Fund, performance graphs are not presented. The Fund, which began operations on February 27, 2004, had a total return of -2.10% for the period from its inception to June 30, 2004.

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s 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.

4

Semi-Annual Report to Shareholders

Portfolio Composition (as of June 30, 2004)

Debt Ratings^A (as a percentage of portfolio)

Maturity Schedule (as a percentage of portfolio)

^A Source: Standard & Poor’s

5

Semi-Annual Report to Shareholders

Portfolio of Investments

Core Bond Fund

June 30, 2004
(Amounts in Thousands) (Unaudited)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 97.6%
Corporate Bonds and Notes — 13.0%
Banking and Finance — 2.2%
	Ford Motor Credit Company		6.875%		2/1/06	$	240	$	252
	Ford Motor Credit Company		7.000%		10/1/13		150		151
	General Motors Acceptance Corporation		5.625%		5/15/09		210		210
	Household Finance Corporation		4.625%		1/15/08		180		183
	Wells Fargo & Company		3.500%		4/4/08		165		163
									959
Banks — 0.8%
	Bank of America Corporation		3.875%		1/15/08		160		160
	Bank One Corporation		6.500%		2/1/06		170		179
									339
Cable — 0.6%
	Comcast Corporation		6.500%		1/15/15		190		197
	Cox Communications, Inc.		3.875%		10/1/08		55		54
									251
Computer Services and Systems — 0.2%
	Electronic Data Systems Corporation		6.000%		8/1/13		100		95
Diversified Financial Services — 0.8%
	CIT Group Inc.		4.000%		5/8/08		5		5
	Citigroup Inc.		3.500%		2/1/08		185		183
	General Electric Capital Corporation		4.250%		1/15/08		175		177
									365
Electric — 0.9%
	Dominion Resources, Inc.		5.700%		9/17/12		90		91
	FirstEnergy Corp.		7.375%		11/15/31		235		245

6

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Electric — Continued
	Oncor Electric Delivery Company		6.375%		1/15/15	$	30	$	32
	The Cleveland Electric Illuminating Company		5.650%		12/15/13		20		19	A
									387
Energy — 0.3%
	Duke Energy Corporation		5.625%		11/30/12		105		105
	Pacific Gas and Electric Company		2.300%		4/3/06		20		20	B
	Pacific Gas and Electric Company		6.050%		3/1/34		30		28
									153
Environmental Services — 0.2%
	Waste Management, Inc.		6.375%		11/15/12		85		90
Food, Beverage and Tobacco — 1.1%
	Altria Group, Inc.		7.000%		11/4/13		185		188
	Anheuser-Busch Companies, Inc.		4.950%		1/15/14		125		123
	Kellogg Company		6.600%		4/1/11		80		88
	Kraft Foods Inc.		5.625%		11/1/11		105		107
									506
Investment Banking/ Brokerage — 1.5%
	Credit Suisse First Boston USA		4.625%		1/15/08		70		71
	J.P. Morgan Chase & Co.		3.625%		5/1/08		255		252
	Lehman Brothers Holdings Inc.		4.000%		1/22/08		90		90
	Morgan Stanley		3.625%		4/1/08		145		143
	The Goldman Sachs Group, Inc.		4.125%		1/15/08		125		125
									681
Media — 0.4%
	AOL Time Warner Inc.		6.875%		5/1/12		75		81
	AOL Time Warner Inc.		7.700%		5/1/32		75		82
									163

7

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Oil and Gas — 1.2%
	Amerada Hess Corporation		7.300%		8/15/31	$	100	$	101
	Apache Corporation		6.250%		4/15/12		75		82
	Conoco Inc.		6.950%		4/15/29		145		160
	ConocoPhillips		4.750%		10/15/12		40		39
	Devon Energy Corporation		7.950%		4/15/32		110		127
	XTO Energy, Inc.		7.500%		4/15/12		35		39
									548
Paper and Forest Products — 0.6%
	International Paper Company		5.500%		1/15/14		55		54
	MeadWestvaco Corporation		6.850%		4/1/12		30		32
	Weyerhaeuser Company		6.750%		3/15/12		150		162
									248
Retail — 0.6%
	Target Corporation		5.400%		10/1/08		120		126
	Wal-Mart Stores, Inc.		3.375%		10/1/08		150		146
									272
Special Purpose — 1.6%
	Anadarko Finance Company		6.750%		5/1/11		95		104
	ChevronTexaco Capital Company		3.500%		9/17/07		110		110
	DaimlerChrysler NA Holding Corporation		4.050%		6/4/08		110		108
	Sprint Capital Corporation		4.780%		8/17/06		15		15
	Sprint Capital Corporation		6.000%		1/15/07		220		231
	Verizon Global Funding Corp.		7.375%		9/1/12		130		146
									714
Total Corporate Bonds and Notes (Identified Cost — $5,957)									5,771
Asset-Backed Securities — 5.0%
Fixed Rate Securities — 3.3%
	Bank America Manufactured Housing Contract 1997-2		6.790%		12/10/22		194		199
	Bank One Issuance Trust 2003-C1		4.540%		9/15/10		200		202

8

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Asset-Backed Securities — Continued
Fixed Rate Securities — Continued
	Citibank Credit Card Issuance Trust 2000-B1		7.050%		9/17/07	$	200	$	210
	Citibank Credit Card Issuance Trust 2001-C3		6.650%		5/15/08		200		211
	Conseco Finance Home Equity Loan Trust 2001-A		7.440%		3/15/32		200		205
	Green Tree Home Improvement Loan Trust 1999-E		9.450%		10/15/24		200		208
	MMCA Auto Owner Trust 2002-2		3.670%		7/17/06		48		48
	MMCA Auto Owner Trust 2002-4		3.050%		11/16/09		200		200
									1,483
Indexed SecuritiesB — 1.7%
	Citibank Credit Card Issuance Trust 2000-C2		2.250%		10/15/07		200		201
	EQCC Trust 2002		1.600%		11/25/31		32		32
	Merrill Lynch Mortgage Investors, Inc. 2002-NC1		1.620%		5/25/33		39		39
	Residential Asset Mortgage Product, Inc. 2004-RP1A		1.600%		11/25/42		252		252
	Wachovia Asset Securitization, Inc. 2002-HE1		1.670%		9/27/32		226	227
									751
Total Asset-Backed Securities (Identified Cost — $2,231)									2,234

9

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — 2.0%
Fixed Rate Securities — 0.8%
	Asset Securitization Corporation 1996-D2		6.920%		2/14/29	$	68	$	71
	Washington Mutual Mortgage Securities Corporation 2004-RA1		7.000%		3/25/34		256		271
									342
Variable Rate SecuritiesC — 1.2%
	Bear Stearns Adjustable Rate Mortgage Trust 2004-4		3.517%		6/25/34		400		383
	Credit-Based Asset Servicing and Security 1999-3		6.324%		1/3/29		67		65	A
	Washington Mutual 2004-AR7		3.963%		7/25/34		100		96
									544
Total Mortgage-Backed Securities (Identified Cost — $884)									886
U.S. Government and Agency Obligations — 47.1%
Fixed Rate Securities — 37.5%
	Fannie Mae		1.650%		5/16/05		305		304
	Fannie Mae		3.000%		4/26/19		140		138	A
	United States Treasury Bonds		6.250%		8/15/23		150		166
	United States Treasury Bonds		5.250%		2/15/29		700		687
	United States Treasury Bonds		6.250%		5/15/30		360		403
	United States Treasury Bonds		5.375%		2/15/31		3,420		3,449
	United States Treasury Notes		1.500%		3/31/06		40		39
	United States Treasury Notes		2.750%		6/30/06		7,210		7,215
	United States Treasury Notes		3.125%		5/15/07		90		90
	United States Treasury Notes		3.000%		2/15/09		2,960		2,868
	United States Treasury Notes		4.000%		6/15/09		1,290		1,301
	United States Treasury Notes		4.250%		11/15/13		20		20
									16,680

10

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government and Agency Obligations — Continued
Indexed SecuritiesD — 9.6%
	United States Treasury Inflation-Protected Security		3.875%		1/15/09	$	493	$	550
	United States Treasury Inflation-Protected Security		2.000%		1/15/14		1,633		1,623
	United States Treasury Inflation-Protected Security		3.875%		4/15/29		1,635		2,085
									4,258
Stripped Securities — N.M.
	United States Treasury Bonds		0.000%		2/15/23		50		17	E2
Total U.S. Government and Agency Obligations (Identified Cost — $21,331)									20,955
U.S. Government Agency Mortgage-Backed Securities — 27.9%
Fixed Rate Securities — 27.9%
	Fannie Mae		6.000%	8/1/17 to 5/1/34			1,326		1,369
	Fannie Mae		5.500%	12/1/17 to 5/1/34			862		865
	Fannie Mae		5.500%		1/1/31		1,100		1,094	F
	Fannie Mae		6.000%		1/1/32		100		102	F
	Fannie Mae		5.500%		1/1/33		1,000		1,022	F
	Freddie Mac		5.500%	1/1/18 to 9/1/18			791		810
	Freddie Mac		4.500%		4/1/19		496		485
	Freddie Mac		5.000%		7/1/34		1,200		1,158	F
	Government National Mortgage Association		6.000%	11/15/28 to 12/15/33			1,717		1,763
	Government National Mortgage Association		6.500%		2/15/32		872		912
	Government National Mortgage Association		5.000%	8/15/33 to 5/15/34			1,274		1,239
	Government National Mortgage Association		5.500%	10/15/33 to 4/15/34			1,570		1,571
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $12,519)									12,390

11

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee BondsG — 2.6%
Foreign Governments — 1.2%
	Russian Federation		5.000%		3/31/30	$	210	$	192	A,H
	United Mexican States		7.500%		4/8/33		368		356
									548
Manufacturing (Diversified) — 0.6%
	Tyco International Group S.A.		6.375%		10/15/11		45		48
	Tyco International Group S.A.		6.875%		1/15/29		195		204
									252
Oil and Gas — 0.1%
	Apache Finance Canada Corp.		4.375%		5/15/15				28
Special Purpose — 0.5%
	Banagricola DPR Funding Ltd.		2.289%		3/15/10		192		191	A,B
	Deutsche Telekom International Finance BV		5.250%		7/22/13		40		39
									230
Telecommunications — 0.2%
	British Telecommunications plc		8.375%		12/15/10		75		87
	INTELSAT		6.500%		11/1/13		10		9
									96
Total Yankee Bonds (Identified Cost — $1,176)									1,154
Total Long-Term Securities (Identified Cost — $44,098)									43,390
Short-Term Securities — 6.6%
U.S. Government and Agency Obligations — 0.3%
	Fannie Mae		0.000%		9/8/04		121		121	I,J

12

Semi-Annual Report to Shareholders

		Par/
		Shares			Value
Options PurchasedK — N.M.
	Eurodollar Futures Call, October 2004, Strike Price $96.25		10	L	$	2
	Eurodollar Futures Call, October 2004, Strike Price $97.00		8	L		8
						10
Repurchase Agreements — 6.3%
Deutsche Bank AG
	1.40%, dated 6/30/04, to be repurchased at $1,500 on 7/1/04 (Collateral: $1,515 Federal Home Loan Bank bonds, 5.25%, due 6/18/14, value $1,539)		$1,500			1,500
Lehman Brothers, Inc.
	1.40%, dated 6/30/04, to be repurchased at $1,304 on 7/1/04 (Collateral: $1,360 Freddie Mac zero-coupon notes, due 5/31/05, value $1,330)		1,304			1,304
						2,804
Total Short-Term Securities (Identified Cost — $2,935)						2,935
Total Investments — 104.2% (Identified Cost — $47,033)						46,325
Other Assets Less Liabilities — (4.2)%						(1,897	)
Net Assets — 100.0%					$	44,428

13

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedK
	Eurodollar Futures	September 2004		8	$	—
	Eurodollar Futures	September 2004		40		1
	U.S. Treasury Note Futures	September 2004		51		52
	U.S. Treasury Note Futures	September 2004		26		9
					$	62
Futures Contracts WrittenK
	U.S. Treasury Bond Futures	September 2004		19	$	(18	)
Options WrittenK
	Eurodollar Futures Call, Strike Price $96.75	September 2004		4	$	2
	Eurodollar Futures Call, Strike Price $96.50	October 2004		1		—
	Eurodollar Futures Call, Strike Price $97.00	October 2004		3		1
	U.S. Treasury Note Futures Call, Strike Price $112.00	September 2004		16		5
	U.S. Treasury Note Futures Call, Strike Price $114.00	September 2004		6		6
	U.S. Treasury Note Futures Call, Strike Price $115.00	September 2004		3		3
	U.S. Treasury Note Futures Call, Strike Price $112.00	December 2004		15		1
	U.S. Treasury Note Futures Put, Strike Price $107.00	September 2004		3		1
	U.S. Treasury Bond Futures Call, Strike Price $104.00	September 2004		4		(1	)
	U.S. Treasury Bond Futures Call, Strike Price $107.00	September 2004		2		(1	)
	U.S. Treasury Bond Futures Call, Strike Price $112.00	September 2004		6		4
					$	21

14

Semi-Annual Report to Shareholders

^A Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 1.4% of net assets.

B	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (’LIBOR”). The coupon rates are the rates as of June 30, 2004.
C	The coupon rates shown on variable securities are the rates at June 30, 2004. These rates vary with the weighted average coupon of the underlying loans.
D	Inflation-Protected Securities — Security whose principal value is adjusted daily or monthly in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value.

E	Stripped security — Security with interest-only or principal-only payment streams, denoted by a 1 or 2 respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.
F	When-issued security — Security purchased on a delayed delivery basis. Final settlement amount and maturity have not yet been announced.

G	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.
H	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.

I	Zero coupon bond — A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.
J	Collateral to cover futures contracts.

K	Options and futures are described in more detail in the notes to financial statements.
L	Represents actual number of contracts.

N.M. — Not meaningful.

See notes to financial statements.

15

Semi-Annual Report to Shareholders

Statement of Assets and Liabilities

Core Bond Fund

June 30, 2004

(Amounts in Thousands) (Unaudited)

Assets:
	Investment securities at market value (cost — $44,098)			$	43,390
	Short-term securities at value (cost — $2,935)				2,935
			Total investments				$	46,325
	Cash							766
	Receivable for:
		Fund shares sold						476
		Interest						330
		Futures variation margin						52
								47,949
Liabilities:
	Options proceeds (cost — $52)							31
	Swap contracts							16
	Payable for:
		Fund shares repurchased						24
		Securities purchased						3,351
		Income distribution						53
	Accrued expenses							46
								3,521
Net Assets							$	44,428
Net assets consist of:
	Accumulated paid-in capital applicable to
			4,569 Primary Class shares outstanding	$	45,308
	Under/(over) distributed net investment income				(1	)
	Accumulated net realized gain/(loss) on investments, options, futures, and swaps				(230	)
	Unrealized appreciation/(depreciation) of investments, options, futures and swaps				(649	)
Net Assets							$	44,428
Net Asset Value Per Share:
	Primary Class							$9.72

See notes to financial statements.

16

Semi-Annual Report to Shareholders

Statement of Operations

Core Bond Fund

For the Period Ended June 30, 2004^A

(Amounts in Thousands) (Unaudited)

Investment Income:
	Interest					$	359
Expenses:
	Management fee			47
	Distribution and service fees			52
	Audit and legal fees			14
	Custodian fee			33
	Directors’ fees and expenses			7
	Registration fees			10
	Reports to shareholders			7
	Transfer agent and shareholder servicing expense			13
	Other expenses			11
				194
		Less fees waived		(90	)
			Total expenses, net of waivers				104
Net Investment Income							255
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments		(164	)
		Options		3
		Futures		(73	)
		Swaps		4
							(230	)
	Change in unrealized appreciation/(depreciation) of investments, options and futures						(649	)
Net Realized and Unrealized Gain/(Loss) on Investments							(879	)
Change in Net Assets Resulting From Operations						$	(624	)

^A For the period February 27, 2004 (commencement of operations) to June 30, 2004.

See notes to financial statements.

17

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

Core Bond Fund

(Amounts in Thousands)

		For the Period
		Ended
		6/30/04A
		(Unaudited)
Change in Net Assets:
Net investment income		$	255
Net realized gain/(loss) on investments, options, futures and swaps			(230	)
Change in unrealized appreciation/(depreciation) of investments, options, futures and swaps			(649	)
Change in net assets resulting from operations			(624	)
Distributions to shareholders from net investment income:
	Primary Class		(256	)
Change in net assets from Fund share transactions:
	Primary Class		45,308
Change in net assets			44,428
Net Assets:
Beginning of period			—
End of period		$	44,428
Under/(over) distributed net investment income		$	(1	)

^A For the period February 27, 2004 (commencement of operations) to June 30, 2004.

See notes to financial statements.

18

Semi-Annual Report to Shareholders

Financial Highlights

Core Bond Fund

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Period
		Ended
		June 30, 2004A
		(Unaudited)
Net asset value, beginning of period			$10.00
Investment operations:
	Net investment income		.07	B
	Net realized and unrealized gain/(loss) on investments		(.28	)
	Total from investment operations		(.21	)
Distributions:
	From net investment income		(.07	)
	Total distributions		(.07	)
Net asset value, end of period			$9.72
Ratios/supplemental data:
	Total return		(2.10	)%C
	Expenses to average net assets		1.00	%B,D
	Net investment income to average net assets		2.47	%B,D
	Portfolio turnover rate		126	%C
Net assets, end of period (in thousands)		$	44,428

^A For the period February 27, 2004 (commencement of operations) to June 30, 2004.

B	Net of fees waived by LMFA for expenses in excess of the voluntary expense limitation of 1.00% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to daily average net assets would have been 1.87%.
C	Not annualized.
D	Annualized.

See notes to financial statements.

19

Semi-Annual Report to Shareholders

Performance Information

High Yield Portfolio

   The following graphs compare the Fund’s total returns against that of a closely matched broad-based securities market index. The graphs illustrate the cumulative total return of an initial $10,000 investment in the Primary Class and an initial $1,000,000 investment in the Institutional Class of the Fund, 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 securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions.

   Total return measures investment performance in terms of appreciation or depreciation in a fund’s 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 annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results. No adjustment has been made for any income taxes payable by shareholders.

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s 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.

20

Semi-Annual Report to Shareholders

Performance Information — Continued

Growth of a $10,000 Investment — Primary Class

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+8.20%		+8.20%
Five Years		-1.76%		-0.35%
Ten Years		+64.19%		+5.08%

The graph and table do not reflect the deduction of taxes that a shareholder

would pay on Fund distributions or the redemption of Fund shares.

Past performance does not predict future performance.

^A A market value-weighted index that tracks the daily price-only, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission.

21

Semi-Annual Report to Shareholders

Growth of a $1,000,000 Investment — Institutional Class

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+8.80%		+8.80%
Five Years		+0.06%		+0.01%
Life of Class*		+1.14%		+0.18%
*Inception date: May 5, 1998

The graph and table do not reflect the deduction of taxes that a shareholder

would pay on Fund distributions or the redemption of Fund shares.

Past performance does not predict future performance.

^B Index returns are for periods beginning April 30, 1998.

22

Semi-Annual Report to Shareholders

Portfolio Composition (as of June 30, 2004)

Debt Ratings^C (as a percentage of portfolio)

Maturity Schedule (as a percentage of portfolio)

^C Source: Standard & Poor’s

23

Semi-Annual Report to Shareholders

Portfolio of Investments

High Yield Portfolio
June 30, 2004

(Amounts in Thousands) (Unaudited)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 98.3%
Corporate Bonds and Notes — 89.0%
Advertising — 0.6%
	Vertis Inc.		10.875%		6/15/09	$	1,205	$	1,295
Aerospace/ Defense — 1.8%
	Armor Holdings, Inc.		8.250%		8/15/13		1,050		1,123
	Esterline Technologies Corporation		7.750%		6/15/13		1,173		1,208
	Hexcel Corporation		9.875%		10/1/08		966		1,060
	Hexcel Corporation		9.750%		1/15/09		380		399
									3,790
Animal Hospitals — 0.5%
	Vicar Operating, Inc.		9.875%		12/1/09		915		1,007
Apparel — 1.6%
	Oxford Industries, Inc.		8.875%		6/1/11		1,181		1,246	A
	Russell Corporation		9.250%		5/1/10		998		1,060
	The William Carter Company		10.875%		8/15/11		887		1,005
									3,311
Auto and Automotive Parts — 1.9%
	Cummins Inc.		9.500%		12/1/10		992		1,123
	Keystone Automotive Operations Inc.		9.750%		11/1/13		1,100		1,177	A
	TRW Automotive		9.375%		2/15/13		839		946
	TRW Automotive		11.000%		2/15/13		588		694
									3,940
Automotive Retailer — 0.9%
	Asbury Automotive Group Inc.		9.000%		6/15/12		1,896		1,934
Building Materials — 3.3%
	Associated Materials Incorporated		0.000%		3/1/14		1,910		1,280	A,B
	Atrium Companies, Inc.		10.500%		5/1/09		1,970		2,063
	Interface, Inc.		7.300%		4/1/08		553		548
	Interface, Inc.		10.375%		2/1/10		913		1,018

24

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Building Materials — Continued
	Nortek Holdings, Inc.		0.000%		5/15/11	$	1,700	$	1,360	A,B
	Nortek Holdings, Inc.		9.875%		6/15/11		471		537
									6,806
Cable — 3.7%
	Charter Communications Holdings, LLC		9.625%		11/15/09		2,250		1,823
	Charter Communications Holdings, LLC		8.000%		4/30/12		1,440		1,393	A
	Charter Communications, Inc.		10.250%		9/15/10		1,575		1,587	A
	CSC Holdings Inc.		7.625%		4/1/11		700		702
	CSC Holdings Inc.		6.750%		4/15/12		170		163	A
	CSC Holdings Inc.		7.625%		7/15/18		946		882
	LodgeNet Entertainment Corporation		9.500%		6/15/13		1,152		1,259
									7,809
Casino Resorts — 4.4%
	Herbst Gaming, Inc.		8.125%		6/1/12		650		659	A
	Inn of the Mountain Gods		12.000%		11/15/10		1,580		1,754	A
	MGM MIRAGE		8.500%		9/15/10		1,192		1,288
	Mirage Resorts, Incorporated		7.250%		10/15/06		355		370
	Park Place Entertainment Corporation		7.875%		12/15/05		259		272
	Park Place Entertainment Corporation		8.875%		9/15/08		1,210		1,313
	Premier Entertainment Biloxi LLC		10.750%		2/1/12		747		784	A
	River Rock Entertainment		9.750%		11/1/11		990		1,079
	Station Casinos, Inc.		6.000%		4/1/12		560		542
	Station Casinos, Inc.		6.875%		3/1/16		470		452
	Wynn Las Vegas LLC		12.000%		11/1/10		541		648
									9,161
Chemicals — 5.5%
	Airgas, Inc.		6.250%		7/15/14		610		584	A
	Equistar Chemicals LP		10.125%		9/1/08		450		493
	Equistar Chemicals LP		10.625%		5/1/11		696		773
	FMC Corporation		10.250%		11/1/09		154		177
	Georgia Gulf Corporation		7.625%		11/15/05		6		6

25

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Chemicals — Continued
	Georgia Gulf Corporation		7.125%		12/15/13	$	490	$	496	A
	Hercules Incorporated		11.125%		11/15/07		300		351
	Huntsman International Holdings LLC		0.000%		12/31/09		1,086		532	C
	Huntsman International LLC		9.875%		3/1/09		302		326
	Huntsman International LLC		10.125%		7/1/09		967		986
	IMC Global Inc.		10.875%		6/1/08		576		670
	Lyondell Chemical Company		9.625%		5/1/07		1,037		1,084
	MacDermid, Incorporated		9.125%		7/15/11		822		916
	Millennium America Inc.		7.000%		11/15/06		526		540
	Millennium America Inc.		9.250%		6/15/08		782		841
	Nalco Company		7.750%		11/15/11		450		471	A
	Nalco Company		8.875%		11/15/13		640		671	A
	Westlake Chemical Corporation		8.750%		7/15/11		1,480		1,606
									11,523
Coal — 0.6%
	Alpha Natural Resources LLC		10.000%		6/1/12		1,280		1,338	A
Containers and Packaging — 1.0%
	Graphic Packaging International Corp.		9.500%		8/15/13		1,160		1,259
	Owens Brockway Glass Containers		8.750%		11/15/12		850		922
									2,181
Diversified Services — 0.4%
	SPX Corporation		7.500%		1/1/13		792		812
Electric — 3.6%
	FirstEnergy Corp.		5.500%		11/15/06		25		26
	FirstEnergy Corp.		6.450%		11/15/11		360		373
	Midwest Generation LLC		8.750%		5/1/34		1,000		1,010	A
	Nevada Power Company		6.500%		4/15/12		1,140		1,083	A
	Orion Power Holdings, Inc.		12.000%		5/1/10		1,703		2,077
	The AES Corporation		8.500%		11/1/07		718		736

26

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Electric — Continued
	The AES Corporation		9.500%		6/1/09	$	710	$	759
	The AES Corporation		9.000%		5/15/15		1,403		1,503	A
									7,567
Electronics — 1.7%
	Amkor Technology, Inc.		9.250%		2/15/08		900		941
	BRL Universal Equipment 2001 A., L.P.		8.875%		2/15/08		300		321
	Fairchild Semiconductor International, Inc.		10.500%		2/1/09		240		261
	Rayovac Corporation		8.500%		10/1/13		860		903
	Viasystems Inc.		10.500%		1/15/11		1,120		1,176	A
									3,602
Energy — 3.3%
	Calpine Corporation		7.625%		4/15/06		620		546
	Calpine Corporation		8.625%		8/15/10		777		505
	Calpine Corporation		8.500%		2/15/11		1,224		799
	Calpine Corporation		9.875%		12/1/11		600		510	A
	Calpine Corporation		8.750%		7/15/13		1,192		977	A
	Calpine Generating Co. LLC		11.500%		4/1/11		610		537	A
	NRG Energy, Inc.		8.000%		12/15/13		1,102		1,113	A
	Peabody Energy Corporation		5.875%		4/15/16		320		291
	PG&E Corporation		6.875%		7/15/08		690		721	A
	TECO Energy, Inc.		10.500%		12/1/07		830		925
									6,924
Environmental Services — 1.6%
	Allied Waste North America Incorporated		7.625%		1/1/06		69		72
	Allied Waste North America Incorporated		8.500%		12/1/08		979		1,071
	Allied Waste North America Incorporated		7.375%		4/15/14		980		953	A

27

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Environmental Services — Continued
	Capital Environment Resource, Inc.		9.500%		4/15/14	$	1,120	$	1,148	A
	Safety-Kleen Corp.		9.250%		5/15/09		3,894		195	D
									3,439
Food, Beverage and Tobacco — 1.4%
	Cott Beverages Incorporated		8.000%		12/15/11		950		1,010
	Domino’s, Inc.		8.250%		7/1/11		1,336		1,416
	Smithfield Foods, Inc.		8.000%		10/15/09		430		463
									2,889
Funeral Parlors and Cemetery — N.M
	Alderwoods Group, Inc.		12.250%		1/2/09		81		90
Gaming — 1.3%
	Argosy Gaming Company		9.000%		9/1/11		1,432		1,582
	Mohegan Tribal Gaming Authority		6.375%		7/15/09		1,110		1,113
									2,695
Gas and Pipeline Utilities — 4.6%
	ANR Pipeline, Inc.		8.875%		3/15/10		322		352
	ANR Pipeline, Inc.		9.625%		11/1/21		477		534
	Colorado Interstate Gas Company		10.000%		6/15/05		540		566
	Dynegy Holdings Inc.		10.125%		7/15/13		980		1,061	A
	Encore Acquisition Company		6.250%		4/15/14		310		291	A
	GulfTerra Energy Partners, L.P.		10.625%		12/1/12		466		554
	KCS Energy, Inc.		7.125%		4/1/12		930		925	A
	Northwest Pipelines Corporation		8.125%		3/1/10		254		274
	Sonat Inc.		6.875%		6/1/05		700		702
	Southern Natural Gas Company		8.875%		3/15/10		678		741
	The Williams Companies, Inc.		8.625%		6/1/10		472		519
	The Williams Companies, Inc.		8.125%		3/15/12		540		577
	The Williams Companies, Inc.		7.500%		1/15/31		334		302
	The Williams Companies, Inc.		8.750%		3/15/32		1,091		1,091

28

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Gas and Pipeline Utilities — Continued
	Transcontinental Gas Pipeline Corporation		7.000%		8/15/11	$	352	$	361
	Transcontinental Gas Pipeline Corporation		8.875%		7/15/12		729		824
									9,674
Health Care — 2.0%
	Ardent Health Services		10.000%		8/15/13		910		974
	Equinox Holdings Inc.		9.000%		12/15/09		940		935	A
	Tenet Healthcare Corporation		9.875%		7/1/14		2,147		2,185	A
									4,094
Homebuilding — 0.5%
	Schuler Homes, Inc.		9.375%		7/15/09		265		291
	Schuler Homes, Inc.		10.500%		7/15/11		640		730
									1,021
Lodging/ Hotels — 0.2%
	Hilton Hotels Corporation		7.950%		4/15/07		133		144
	La Quinta Inns, Inc.		8.875%		3/15/11		70		75
	Starwood Hotels & Resorts Worldwide, Inc.		7.875%		5/1/12		100		107
									326
Machinery — 3.8%
	Case New Holland Incorporated		9.250%		8/1/11		1,520		1,596	A
	Grant Prideco, Inc.		9.000%		12/15/09		877		954
	Hanover Compressor Company		8.625%		12/15/10		1,179		1,220
	Joy Global Inc.		8.750%		3/15/12		1,125		1,260
	NMHG Holdings Co.		10.000%		5/15/09		1,201		1,321
	Terex Corporation		10.375%		4/1/11		909		1,013
	Terex Corporation		9.250%		7/15/11		440		480
									7,844
Manufacturing (Diversified) — 2.8%
	Ames True Temper		10.000%		7/15/12		1,570		1,574	A
	California Steel Industries Inc.		6.125%		3/15/14		380		354

29

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Manufacturing (Diversified) — Continued
	Jacuzzi Brands Incorporated		9.625%		7/1/10	$	1,364	$	1,460
	Koppers Inc.		9.875%		10/15/13		920		1,007
	MMI Products, Inc.		11.250%		4/15/07		640		618
	Samsonite Corporation		8.875%		6/1/11		800		828	A
									5,841
Media — 2.5%
	EchoStar DBS Corporation		4.360%		10/1/08		1,240		1,291	E
	EchoStar DBS Corporation		9.125%		1/15/09		142		156
	Lamar Media Corporation		7.250%		1/1/13		620		631
	Paxson Communications Corporation		10.750%		7/15/08		645		654
	Paxson Communications Corporation		0.000%		1/15/09		25		22	B
	PRIMEDIA Inc.		6.615%		5/15/10		580		588	A,E
	Readers Digest Association, Inc.		6.500%		3/1/11		820		801
	Sinclair Broadcast Group, Inc.		8.750%		12/15/11		990		1,059
									5,202
Medical Care Facilities — 1.4%
	Extendicare Health Services, Inc.		9.500%		7/1/10		260		288
	Extendicare Health Services, Inc.		6.875%		5/1/14		720		677	A
	HCA Inc.		6.910%		6/15/05		49		51
	HCA Inc.		8.750%		9/1/10		136		155
	HCA Inc.		7.875%		2/1/11		510		559
	HCA Inc.		9.000%		12/15/14		970		1,128
									2,858
Medical Products — 0.4%
	Fresenius Medical Care Capital Trust II		7.875%		2/1/08		839		885	F
Medical Supplies and Services — 0.4%
	AmeriPath Inc.		10.500%		4/1/13		838		846

30

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Office Equipment and Supplies — 0.3%
	Xerox Corporation		7.625%		6/15/13	$	550	$	562
Oil and Gas — 5.8%
	Amerada Hess Corporation		7.875%		10/1/29		410		443
	Amerigas Partners LP		8.875%		5/20/11		806		858
	Chesapeake Energy Corporation		8.375%		11/1/08		140		151
	Chesapeake Energy Corporation		9.000%		8/15/12		1,083		1,218
	El Paso CGP Co.		7.750%		6/15/10		660		596
	El Paso Corporation		6.950%		12/15/07		698		675
	El Paso Corporation		7.800%		8/1/31		730		586
	El Paso Corporation		7.750%		1/15/32		670		538
	El Paso Energy Partners		8.500%		6/1/11		173		187
	Evergreen Resources, Inc.		5.875%		3/15/12		850		858	A
	Ferrellgas Partners LP		8.750%		6/15/12		150		160
	Ferrellgas Partners LP		6.750%		5/1/14		510		492	A
	Pacific Energy Partners		7.125%		6/15/14		530		538	A
	Parker Drilling Company		10.125%		11/15/09		290		306
	Plains Exploration & Production Company		7.125%		6/15/14		810		824	A
	Pride International, Inc.		7.375%		7/15/14		1,170		1,182	A
	Suburban Propane Partners LP		6.875%		12/15/13		810		788
	Vintage Petroleum, Inc.		7.875%		5/15/11		592		607
	Vintage Petroleum, Inc.		8.250%		5/1/12		250		265
	Westport Resources Corporation		8.250%		11/1/11		768		869
									12,141
Paper and Forest Products — 1.8%
	Georgia-Pacific Corp.		9.500%		12/1/11		932		1,095
	Georgia-Pacific Corp.		9.375%		2/1/13		947		1,084
	Georgia-Pacific Corp.		8.250%		3/1/23		201		207
	Georgia-Pacific Corp.		7.750%		11/15/29		6		6
	Georgia-Pacific Corp.		8.875%		5/15/31		1,290		1,377
									3,769

31

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Pharmaceuticals — 0.4%
	Leiner Health Products Inc.		11.000%		6/1/12	$	800	$	826	A
Publishing — 1.4%
	Dex Media East LLC		9.875%		11/15/09		19		22
	Dex Media East LLC		12.125%		11/15/12		986		1,151
	Hollinger International Publishing		9.000%		12/15/10		990		1,143
	Sun Media Corporation		7.625%		2/15/13		501		511
									2,827
Real Estate — 0.6%
	Forest City Enterprises, Inc.		7.625%		6/1/15		130		131
	Ventas Realty, Limited Partnership		8.750%		5/1/09		695		750
	Ventas Realty, Limited Partnership		9.000%		5/1/12		408		447
									1,328
Rental and Lease Services (Commercial) — 0.6%
	NationsRent, Inc.		9.500%		10/15/10		570		607	A
	United Rentals North America Inc.		7.000%		2/15/14		638		568
									1,175
Retail — 3.1%
	American Achievement Corp.		8.250%		4/1/12		780		792	A
	Cinemark, Inc.		0.000%		3/15/14		1,250		816	A,B
	Hollywood Entertainment Corporation		9.625%		3/15/11		411		473
	J.C. Penney Company, Inc.		8.000%		3/1/10		425		475
	J.C. Penney Company, Inc.		7.125%		11/15/23		540		553
	J.C. Penney Company, Inc.		7.400%		4/1/37		597		630
	Norcraft Companies		9.000%		11/1/11		1,490		1,572	A
	Stater Bros. Holdings Inc.		5.060%		6/15/10		640		650	A,E
	Toys “R” Us, Inc.		7.875%		4/15/13		550		552
									6,513
Special Purpose — 6.3%
	Alamosa Incorporated		11.000%		7/31/10		1,124		1,225
	Arch Western Finance LLC		6.750%		7/1/13		601		601	A

32

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
	H & E Equipment Services LLC		11.125%		6/15/12	$	1,314	$	1,330
	Huntsman Advanced Materials LLC		11.000%		7/15/10		370		417	A
	Midland Funding II		11.750%		7/23/05		687		711
	Milacron Escrow Corporation		11.500%		5/15/11		1,160		1,154	A
	Qwest Capital Funding, Inc.		7.000%		8/3/09		1,251		1,098
	Sensus Metering Systems Incorporated		8.625%		12/15/13		1,001		961	A
	The Williams Companies, Inc. Credit-Linked Certificates		6.750%		4/15/09		1,195		1,174	A
	Transdigm Funding Corp.		8.375%		7/15/11		1,167		1,185
	UCAR Finance Inc.		10.250%		2/15/12		1,315		1,463
	UGS Corporation		10.000%		6/1/12		900		959	A
	WII Components Inc.		10.000%		2/15/12		970		951	A
									13,229
Storage Facilities — 0.7%
	Mobile Mini, Inc.		9.500%		7/1/13		1,260		1,380
Telecommunications — 4.9%
	Cincinnati Bell Inc.		7.250%		7/15/13		144		135
	Cincinnati Bell Inc.		8.375%		1/15/14		1,060		943
	Crown Castle International Corp.		9.375%		8/1/11		810		891
	GTE Hawaiian Telephone Company, Inc.		7.000%		2/1/06		300		306
	GTE Hawaiian Telephone Company, Inc.		7.375%		9/1/06		230		236
	Insight Communications		10.500%		11/1/10		1,100		1,199	A
	MCI Inc.		5.908%		5/1/07		377		365
	MCI Inc.		6.688%		5/1/09		377		349
	MCI Inc.		7.735%		5/1/14		323		289
	PanAmSat Corporation		6.375%		1/15/08		651		657
	PanAmSat Corporation		8.500%		2/1/12		501		569
	Qwest Corporation		9.125%		3/15/12		1,420		1,534	A
	Qwest Services Corporation		13.500%		12/15/10		2,339		2,719	A
									10,192

33

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Telecommunications (Cellular/ Wireless) — 3.0%
	Centennial Communications Corporation		8.125%		2/1/14	$	1,290	$	1,196	A
	Nextel Communications, Inc.		5.250%		1/15/10		1,139		1,108	G
	Nextel Communications, Inc.		7.375%		8/1/15		1,055		1,065
	Rural Cellular Corporation		8.250%		3/15/12		780		798	A
	SBA Communications Corporation		0.000%		12/15/11		1,665		1,232
	US Unwired Inc.		10.000%		6/15/12		800		808	A
									6,207
Transportation — 1.7%
	Continental Airlines, Inc.		7.373%		12/15/15		1,042		833
	Horizon Lines, LLC		9.000%		11/1/12		800		800
	Kansas City Southern Railway		9.500%		10/1/08		1,834		1,992
									3,625
Water Utilities — 0.5%
	National Waterworks, Inc.		10.500%		12/1/12		957		1,062
Total Corporate Bonds and Notes (Identified Cost — $184,511)									185,540
Yankee BondsH — 8.3%
Building Materials — 0.4%
	North American Energy Partners		8.750%		12/1/11		940		930	A
Chemicals — 1.2%
	Rhodia SA		10.250%		6/1/10		980		990	A
	Rhodia SA		8.875%		6/1/11		1,750		1,479	A
									2,469
Foreign Governments — 0.6%
	Federative Republic of Brazil		14.500%		10/15/09		1,070		1,246
Manufacturing (Diversified) — 0.1%
	Tyco International Group S.A.		6.375%		10/15/11		193		205

34

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Media — 1.0%
	Kabel Deutschland GmbH		10.625%		7/1/14	$	920	$	945	A
	Vivendi Universal S.A.		9.250%		4/15/10		926		1,095
									2,040
Oil and Gas — 0.3%
	Western Oil Sands Inc.		8.375%		5/1/12		480		521	A
Paper and Forest Products — 0.4%
	Abitibi-Consolidated Inc.		8.550%		8/1/10		490		517
	Abitibi-Consolidated Inc.		5.020%		6/15/11		350		351	A,E
									868
Services — 0.5%
	Compagnie Generale de Geophysique S.A.		10.625%		11/15/07		958		1,020
Special Purpose — 2.2%
	Calpine Canada Energy Finance		8.500%		5/1/08		753		497
	Eircom Funding		8.250%		8/15/13		1,030		1,071
	Gemstone Investors Limited		7.710%		10/31/04		40		40	A
	Inmarsat Finance PLC		7.625%		6/30/12		1,000		968	A
	MDP Acquisitions PLC		9.625%		10/1/12		839		919
	Smurfit Capital Funding PLC		6.750%		11/20/05		410		420
	Yell Finance BV		10.750%		8/1/11		510		588
									4,503
Telecommunication — 0.2%
	Nortel Networks Ltd.		6.125%		2/15/06		520		522
Telecommunications (Cellular/ Wireless) — 0.7%
	OMI Corporation		7.625%		12/1/13		746		731
	Rogers Wireless Communications Inc.		9.625%		5/1/11		628		705
									1,436

35

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares			Value
Yankee Bonds — Continued
Transportation — 0.7%
	Teekay Shipping Corporation		8.875%		7/15/11	$	1,355		$	1,499
Total Yankee Bonds (Identified Cost — $17,158)										17,259
Common Stocks — 0.3%
Engineering and Construction — 0.1%
	Washington Group International, Inc.						8	shs		305	I
Food — N.M
	International Fast Food Corporation						40			0.01	I
Telecommunication — N.M.
	Cincinnati Bell Inc.						0.1			0.5
Telecommunications (Cellular/ Wireless) — 0.2%
	Rural Cellular Corporation						4			364	I
Total Common Stocks (Identified Cost — $3,245)										669
Preferred Stocks — 0.6%
	High Voltage Engineering Corporation		12.500%				0.5			5	J
	Paxson Communications Corporation		14.250%				0.1			1,290	J,K
Total Preferred Stocks (Identified Cost — $1,656)										1,295

36

Semi-Annual Report to Shareholders

		Par/
		Shares			Value
Warrants — 0.1%
	American Tower Corporation		1	wts	$	158	A,J
	Horizon PCS, Inc.		2			0.02	A,J
	Next Generation Network, Inc.		16			0.2	J
	Washington Group International, Series A		5			50	J
	Washington Group International, Series B		6			46	J
	Washington Group International, Series C		3			22	J
Total Warrants (Identified Cost — $310)						276
Total Long-Term Securities (Identified Cost — $206,880)						205,039
Short-Term Securities — 1.1%
Repurchase Agreements — 1.1%
Deutsche Bank AG
	1.40%, dated 6/30/04, to be repurchased at $1,000 on 7/1/04 (Collateral: $1,010 Federal Home Loan Bank bonds, 5.25%, dated 6/18/14, value $1,026)		$	1,000		1,000
Goldman, Sachs & Company
	1.40%, dated 6/30/04, to be repurchased at $1,173 on 7/1/04 (Collateral: $1,200 Freddie Mac zero-coupon notes, due 7/28/04, value $1,199)			1,173		1,173
Total Short-Term Securities (Identified Cost — $2,173)						2,173
Total Investments — 99.4% (Identified Cost — $209,053)						207,212
Other Assets Less Liabilities — 0.6%						1,208
Net Assets — 100.0%					$	208,420

37

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

^A Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 31.2% of net assets.

B	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.
C	Zero coupon bond — A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.
D	Bond is in default at June 30, 2004.

E	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of June 30, 2004.
F	Unit — A security which consists of a bond and warrants to purchase the common stock of the issuer.

G	Convertible security — Security may be converted into the issuer’s common stock.
H	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.

I	Non-income producing.
J	Pay-in-Kind (“PIK”) security — A security in which interest during the initial few years is paid in additional PIK securities rather than in cash.

^K Private placement.

N.M.  Not meaningful.

See notes to financial statements.

38

Semi-Annual Report to Shareholders

Statement of Assets and Liabilities

High Yield Portfolio

June 30, 2004

(Amounts in Thousands) (Unaudited)

Assets:
	Investment securities, at market value (cost — $206,880)			$	205,039
	Short-term securities, at value (cost — $2,173)				2,173
			Total investments				$	207,212
	Cash							1,199
	Receivable for:
		Fund shares sold						77
		Interest and dividends						3,889
	Other assets							162
								212,539
Liabilities:
	Payable for:
		Fund shares repurchased						317
		Securities purchased						3,479
	Due to manager and distributor							193
	Accrued expenses							130
								4,119
Net Assets							$	208,420
Net assets consist of:
	Accumulated paid-in capital applicable to:
			22,572 Primary Class shares outstanding	$	358,986
			851 Institutional Class shares outstanding		7,819
	Under/(over) distributed net investment income				639
	Accumulated net realized gain/(loss) on investments				(157,183	)
	Unrealized appreciation/(depreciation) of investments				(1,841	)
Net Assets							$	208,420
Net Asset Value Per Share:
	Primary Class							$8.90
	Institutional Class							$8.90

See notes to financial statements.

39

Semi-Annual Report to Shareholders

Statement of Operations

High Yield Portfolio

For the Six Months Ended June 30, 2004

(Amounts in Thousands) (Unaudited)

Investment Income:
	Dividends			$	113
	Interest				8,806
			Total income				$	8,919
Expenses:
	Management fee				718
	Distribution and service fees				534	A
	Audit and legal fees				30
	Custodian fee				78
	Directors’ fees and expenses				6
	Registration fees				11
	Reports to shareholders				19
	Transfer agent and shareholder servicing expense:
		Primary Class			100
		Institutional Class			1
	Other expenses				5
			Total expenses					1,502
Net Investment Income								7,417
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on investments				782
	Change in unrealized appreciation/(depreciation) of investments				(6,726	)
Net Realized and Unrealized Gain/(Loss) on Investments								(5,944	)
Change in Net Assets Resulting From Operations							$	1,473

^A See Note 1, Significant Accounting Policies, in the notes to financial statements.

See notes to financial statements.

40

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

High Yield Portfolio

(Amounts in Thousands)

		For the Six			For the
		Months Ended			Year Ended
		6/30/04			12/31/03
		(Unaudited)
Change in Net Assets:
Net investment income		$	7,417		$	15,039
Net realized gain/(loss) on investments			782			2,379
Change in unrealized appreciation/ (depreciation) of investments			(6,726	)		24,619
Change in net assets resulting from operations			1,473			42,037
Distributions to shareholders from net investment income:
	Primary Class		(6,452	)		(14,885	)
	Institutional Class		(238	)		(389	)
Change in net assets from Fund share transactions:
	Primary Class		(17,892	)		35,499
	Institutional Class		1,322			3,066
Change in net assets			(21,787	)		65,328
Net Assets:
Beginning of period			230,207			164,879
End of period		$	208,420		$	230,207
Under/(over) distributed net investment income		$	639		$	(88	)

See notes to financial statements.

41

Semi-Annual Report to Shareholders

Financial Highlights

High Yield Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Six Months
		Ended			Years Ended December 31,
		June 30,
		2004			2003			2002			2001			2000			1999
		(Unaudited)
Net asset value, beginning of period			$9.10		$	7.96		$	9.22		$	10.18		$	14.97		$	14.72
Investment operations:
	Net investment income		.30			.63			.77			.94			1.32			1.01
	Net realized and unrealized gain/(loss) on investments		(.23	)		1.15			(1.26	)		(.94	)		(3.45	)		.29
	Total from investment operations		.07			1.78			(.49	)		—			(2.13	)		1.30
Distributions:
	From net investment income		(.27	)		(.64	)		(.77	)		(.96	)		(1.27	)		(1.05	)
	From net realized gain on investments		—			—			—			—			(1.39	)		—
	Total distributions		(.27	)		(.64	)		(.77	)		(.96	)		(2.66	)		(1.05	)
Net asset value, end of period			$8.90		$	9.10		$	7.96		$	9.22		$	10.18		$	14.97
Ratios/supplemental data:
	Total return		.83	%A		23.03	%		(5.28	)%		(.13	)%		(16.43	)%		8.82	%
	Expenses to average net assets		1.38	%B		1.41	%		1.36	%		1.51	%		1.51	%		1.31	%
	Net investment income to average net assets		6.68	%B		7.26	%		9.06	%		9.59	%		9.98	%		6.51	%
	Portfolio turnover rate		57	%A		122	%		97	%		130	%		45	%		83	%
Net assets, end of period (in thousands)		$	200,845		$	223,773		$	162,175		$	199,214		$	217,769		$	375,099

^A Not annualized.

^B Annualized.

See notes to financial statements.

42

Semi-Annual Report to Shareholders

Financial Highlights — Continued

Institutional Class:

		Six Months															Period From			Period
		Ended			Years Ended December 31,												March 8 to			Ended
		June 30,															December 31,			January 28,
		2004			2003			2002			2001			2000			1999			1999
		(Unaudited)
Net asset value, beginning of period			$9.11		$	7.96		$	9.20		$	10.18		$	14.97		$	15.98		$	14.67
Investment operations:
	Net investment income		.33			.66			.78			1.01			1.41			.89			.08
	Net realized and unrealized gain/(loss) on investments		(.24	)		1.15			(1.24	)		(1.00	)		(3.47	)		(.92	)		.72
	Total from investment operations		.09			1.81			(.46	)		.01			(2.06	)		(.03	)		.80
Distributions:
	From net investment income		(.30	)		(.66	)		(.78	)		(.99	)		(1.34	)		(.98	)		(.04	)
	From net realized gain on investments		—			—			—			—			(1.39	)		—			—
	Total distributions		(.30	)		(.66	)		(.78	)		(.99	)		(2.73	)		(.98	)		(.04	)
Net asset value, end of period			$8.90		$	9.11		$	7.96		$	9.20		$	10.18		$	14.97		$	15.43
Ratios/supplemental data:
	Total return		1.13	%A		23.54	%		(5.00	)%		(.06	)%		(15.99	)%		(.20	)%A		5.47	%A
	Expenses to average net assets		.81	%B		.85	%		.82	%		.97	%		1.03	%		.82	%B		.81	%B
	Net investment income to average net assets		7.29	%B		7.78	%		9.63	%		10.20	%		10.98	%		7.19	%B		7.17	%B
	Portfolio turnover rate		57	%A		122	%		97	%		130	%		45	%		78	%B		116	%B
Net assets, end of period (in thousands)			$7,575		$	6,434		$	2,704		$	1,331		$	673		$	673		$	—

See notes to financial statements.

43

Semi-Annual Report to Shareholders

Performance Information

Investment Grade Income Portfolio

   The following graphs compare the Fund’s total returns against those of a closely matched broad-based securities market index. The lines illustrate the cumulative total return of an initial $10,000 investment in Primary Class shares and an initial $1,000,000 investment in Institutional Class shares of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing each securities market index do not include any transaction costs associated with buying and selling securities in the index or other administrative expenses.

   Total return measures investment performance in terms of appreciation or depreciation in a fund’s 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 annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results. No adjustment has been made for any income taxes payable by shareholders.

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s 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.

44

Semi-Annual Report to Shareholders

Growth of a $10,000 Investment — Primary Class

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+0.40%		+0.40%
Five Years		+42.08%		+7.28%
Ten Years		+105.61%		+7.47%

The graph and table do not reflect the deduction of taxes that a shareholder

would pay on Fund distributions or the redemption of Fund shares.

Past performance does not predict future performance.

^A A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity.

^B This index includes all publicly issued, fixed rate, non-convertible, investment grade, domestic corporate debt. It also includes Yankee bonds, which are dollar-denominated, SEC-registered public, non-convertible debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies, and international agencies.

45

Semi-Annual Report to Shareholders

Growth of a $1,000,000 Investment — Institutional Class

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+0.80%		+0.80%
Five Years		+45.68%		+7.81%
Life of Class*		+80.12%		+7.10%
*Inception date: December 1, 1995

The graph and table do not reflect the deduction of taxes that a shareholder

would pay on Fund distributions or the redemption of Fund shares.

Past performance does not predict future performance.

^C Index returns are for periods beginning November 30, 1995.

46

Semi-Annual Report to Shareholders

Performance Information — Continued

Portfolio Composition (as of June 30, 2004)

Debt Ratings^D (as a percentage of portfolio)

Maturity Schedule (as a percentage of portfolio)

^D Source: Standard & Poor’s

47

Semi-Annual Report to Shareholders

Portfolio of Investments

Investment Grade Income Portfolio

June 30, 2004
(Amounts in Thousands) (Unaudited)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 98.0%
Corporate Bonds and Notes — 74.9%
Aerospace/ Defense — 1.3%
	General Dynamics Corporation		3.000%		5/15/08	$	525	$	507
	Lockheed Martin Corporation		8.500%		12/1/29		1,200		1,505
	Raytheon Company		6.150%		11/1/08		990		1,056
	Raytheon Company		5.375%		4/1/13		500		498
	Raytheon Company		6.400%		12/15/18		840		875
	United Technologies Corporation		7.500%		9/15/29		550		654
									5,095
Auto Parts and Equipment — 0.3%
	American Axle & Manufacturing Inc.		5.250%		2/11/14		800		768
	Lear Corporation		7.960%		5/15/05		231		241
									1,009
Automotive — 1.7%
	Ford Motor Company		7.450%		7/16/31		170		162
	Ford Motor Company		8.900%		1/15/32		370		403
	Ford Motor Company		7.700%		5/15/97		630		575
	General Motors Corporation		8.250%		7/15/23		650		681
	General Motors Corporation		8.375%		7/15/33		4,650		4,922
									6,743
Banking and Finance — 8.6%
	Boeing Capital Corporation		6.500%		2/15/12		1,000		1,078
	Capital One Bank		6.875%		2/1/06		150		158
	Caterpillar Financial Services Corporation		4.500%		6/15/09		1,040		1,044
	Countrywide Home Loans, Inc.		2.875%		2/15/07		1,320		1,294
	Countrywide Home Loans, Inc.		3.250%		5/21/08		1,200		1,155
	Ford Motor Credit Company		6.875%		2/1/06		250		262
	Ford Motor Credit Company		6.500%		1/25/07		6,950		7,303
	Ford Motor Credit Company		5.800%		1/12/09		2,500		2,523
	Ford Motor Credit Company		7.250%		10/25/11		1,600		1,671
	Ford Motor Credit Company		7.000%		10/1/13		2,730		2,756

48

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Banking and Finance — Continued
	General Motors Acceptance Corporation		2.135%		5/18/06	$	1,725	$	1,728	A
	General Motors Acceptance Corporation		6.125%		8/28/07		3,000		3,131
	General Motors Acceptance Corporation		6.875%		9/15/11		160		164
	General Motors Acceptance Corporation		0.000%		6/15/15		2,700		1,283	B
	John Deere Capital Corporation		4.500%		8/22/07		495		506
	MBNA America Bank		7.750%		9/15/05		1,200		1,264	C
	Mizuho Financial Group, Inc.		5.790%		4/15/14		2,595		2,551	C
	National Rural Utilities Cooperative Finance Corporation		7.250%		3/1/12		1,700		1,930
	SB Treasury Company LLC		10.925%		12/29/49		840		945	C
	Toyota Motor Credit Corporation		5.500%		12/15/08		1,000		1,051
									33,797
Banks — 4.5%
	Bank of America Corporation		3.375%		2/17/09		1,500		1,440
	Bank of America Corporation		7.400%		1/15/11		1,365		1,547
	Bank of America Corporation		6.250%		4/15/12		420		448
	Bank of America Corporation		4.750%		8/15/13		470		449
	Bank One Corporation		4.125%		9/1/07		730		739
	BankAmerica Capital		1.710%		1/15/27		585		564	A
	CBA Capital Trust I		5.805%		12/31/49		3,510		3,431	C
	Chase Capital II		1.679%		2/1/27		1,980		1,876	A
	FleetBoston Financial Corporation		7.250%		9/15/05		1,600		1,686
	UnionBanCal Corporation		5.250%		12/16/13		785		773
	Wachovia Bank NA		7.800%		8/18/10		580		670
	Wachovia Corporation		3.625%		2/17/09		2,400		2,328
	Washington Mutual, Inc.		5.625%		1/15/07		700		732
	Washington Mutual, Inc.		4.625%		4/1/14		1,000		912
									17,595

49

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Building Materials — N.M.
	American Standard, Inc.		8.250%		6/1/09	$	37	$	41
	American Standard, Inc.		7.625%		2/15/10		5		6
									47
Cable — 1.8%
	Comcast Cable Communications, Inc.		6.750%		1/30/11		160		173
	Comcast Corporation		5.850%		1/15/10		800		835
	Comcast Corporation		7.050%		3/15/33		1,800		1,864
	Cox Communications, Inc.		7.125%		10/1/12		2,255		2,471
	CSC Holdings Inc.		7.625%		7/15/18		1,500		1,399
	Tele-Communications, Inc.		7.125%		2/15/28		180		187
									6,929
Casino Resorts — 0.2%
	Harrah’s Operating Company, Inc.		7.875%		12/15/05		500		528
	Harrah’s Operating Company, Inc.		5.500%		7/1/10		410		412	C
									940
Chemicals — 0.7%
	E. I. du Pont de Nemours and Company		4.875%		4/30/14		1,100		1,073
	The Dow Chemical Company		6.000%		10/1/12		750		775
	The Dow Chemical Company		7.375%		11/1/29		800		870
									2,718
Computer Services and Systems — 1.4%
	Compaq Computer Corporation		7.650%		8/1/05		1,500		1,575
	Electronic Data Systems Corporation		7.125%		10/15/09		530		555	D
	Electronic Data Systems Corporation		6.000%		8/1/13		500		478
	Electronic Data Systems Corporation		7.450%		10/15/29		570		559
	Hewlett-Packard Company		6.500%		7/1/12		700		764
	International Business Machines Corporation		4.750%		11/29/12		1,750		1,712
									5,643

50

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Consumer Products — 0.3%
	The Procter & Gamble Company		4.300%		8/15/08	$	1,000	$	1,014
Diversified Financial Services — 7.3%
	Associates Corporation of North America		8.150%		8/1/09		775		896
	Boeing Capital Corporation		5.800%		1/15/13		1,500		1,545
	Capital One Financial Corporation		8.750%		2/1/07		400		443
	Capital One Financial Corporation		7.125%		8/1/08		340		366
	CIT Group Inc.		3.875%		11/3/08		2,350		2,296
	Citigroup Inc.		5.500%		8/9/06		1,000		1,044
	Citigroup Inc.		5.000%		3/6/07		4,800		4,979
	Citigroup Inc.		5.625%		8/27/12		1,600		1,645
	FDA Queens LP		6.990%		6/15/17		1,647		1,785
	General Electric Capital Corporation		6.800%		11/1/05		1,970		2,076
	General Electric Capital Corporation		4.250%		1/15/08		3,000		3,038
	General Electric Capital Corporation		3.500%		5/1/08		2,640		2,598
	General Electric Capital Corporation		5.450%		1/15/13		1,600		1,622
	General Electric Capital Corporation		6.750%		3/15/32		5		5
	IBJ Preferred Capital Corp. LLC		8.790%		12/29/49		1,520		1,664	C
	Wells Fargo & Company		5.125%		2/15/07		2,600		2,710
	Wells Fargo & Company		5.000%		11/15/14		90		87
									28,799
Drug and Grocery Store Chains — 0.8%
	Fred Meyer, Inc.		7.375%		3/1/05		1,000		1,032
	Kroger Company		8.000%		9/15/29		1,000		1,162
	Safeway Inc.		5.800%		8/15/12		750		756
									2,950
Electric — 4.4%
	AEP Texas Central Company		5.500%		2/15/13		1,060		1,061
	American Electric Power Company, Inc.		6.125%		5/15/06		965		1,013
	American Electric Power Company, Inc.		5.250%		6/1/15		350		336

51

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Electric — Continued
	Commonwealth Edison Company		6.150%		3/15/12	$	560	$	598
	Dominion Resources, Inc.		5.125%		12/15/09		490		496
	Dominion Resources, Inc.		5.700%		9/17/12		590		600
	FirstEnergy Corp.		5.500%		11/15/06		2,120		2,193
	FirstEnergy Corp.		6.450%		11/15/11		165		171
	FirstEnergy Corp.		7.375%		11/15/31		3,515		3,664
	Niagara Mohawk Power Corporation		7.750%		10/1/08		1,010		1,137
	Oncor Electric Delivery Company		7.000%		9/1/22		500		535
	Southern California Edison Company		8.000%		2/15/07		950		1,049
	System Energy Resources, Inc.		4.875%		10/1/07		1,020		1,033
	Tampa Electric Company		6.375%		8/15/12		380		393
	The Cleveland Electric Illuminating Company		5.650%		12/15/13		940		915	C
	The Cleveland Electric Illuminating Company		7.880%		11/1/17		850		981
	The Detroit Edison Company		5.200%		10/15/12		1,260		1,252
									17,427
Energy — 3.8%
	Alabama Power Company		3.125%		5/1/08		920		891
	Calpine Corporation		7.750%		4/15/09		49		31
	Calpine Corporation		8.500%		2/15/11		620		405
	DTE Energy Company		6.375%		4/15/33		350		328
	Duke Energy Corporation		1.824%		12/8/05		1,020		1,022	A
	Duke Energy Corporation		5.625%		11/30/12		270		269
	Exelon Corporation		6.750%		5/1/11		2,000		2,175
	MidAmerican Energy Holdings Company		5.875%		10/1/12		750		761
	Pacific Gas and Electric Company		1.810%		4/3/06		1,210		1,211	A
	Pacific Gas and Electric Company		6.050%		3/1/34		4,270		4,016
	Sempra Energy		1.740%		5/21/08		1,685		1,683	A
	TXU Corp.		6.375%		6/15/06		100		105

52

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Energy — Continued
	TXU Energy Co.		7.000%		3/15/13	$	930	$	1,013
	Xcel Energy, Inc.		7.000%		12/1/10		900		995
									14,905
Environmental Services — 0.9%
	Republic Services, Inc.		6.750%		8/15/11		2,340		2,560
	Safety-Kleen Corp.		9.250%		5/15/09		119		6	E
	Waste Management, Inc.		6.375%		11/15/12		310		328
	Waste Management, Inc.		7.375%		5/15/29		690		747
									3,641
Food, Beverage and Tobacco — 4.1%
	Altria Group, Inc.		6.375%		2/1/06		490		508
	Altria Group, Inc.		7.000%		11/4/13		2,450		2,495
	Altria Group, Inc.		7.750%		1/15/27		665		680
	Campbell Soup Company		6.750%		2/15/11		800		886
	Coca-Cola Enterprises Inc.		5.250%		5/15/07		980		1,027
	Kellogg Company		6.000%		4/1/06		1,000		1,049
	Kellogg Company		6.600%		4/1/11		300		329
	Kellogg Company		7.450%		4/1/31		650		750
	Kraft Foods Inc.		4.000%		10/1/08		3,750		3,695
	Kraft Foods Inc.		6.250%		6/1/12		210		221
	Kraft Foods Inc.		6.500%		11/1/31		1,050		1,061
	R.J. Reynolds Tobacco Holdings, Inc.		7.750%		5/15/06		1,280		1,331
	R.J. Reynolds Tobacco Holdings, Inc.		7.875%		5/15/09		860		869
	The Pepsi Bottling Group, Inc.		7.000%		3/1/29		340		379
	Tyson Foods, Inc.		7.000%		1/15/28		800		800
									16,080
Gaming — N.M.
	Horseshoe Gaming Holding Corp.		8.625%		5/15/09		69		72

53

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Gas and Pipeline Utilities — 1.4%
	CenterPoint Energy Resources Corp.		7.875%		4/1/13	$	1,010	$	1,130
	Dynegy Holdings Inc.		8.750%		2/15/12		1,690		1,606
	Tennessee Gas Pipeline Company		8.375%		6/15/32		1,000		975
	The Williams Companies, Inc.		7.625%		7/15/19		2,000		1,925
									5,636
Health Care — 0.7%
	Tenet Healthcare Corporation		7.375%		2/1/13		2,310		2,090
	Tenet Healthcare Corporation		6.875%		11/15/31		750		589
									2,679
Homebuilding — 0.2%
	Centex Corporation		5.125%		10/1/13		420		397
	Pulte Homes, Inc.		6.250%		2/15/13		385		393
									790
Insurance — 0.6%
	Ace Capital Trust II		9.700%		4/1/30		50		65
	Loews Corporation		7.000%		10/15/23		1,000		992
	Oil Insurance Ltd		5.150%		8/15/33		585		586	C
	Provident Companies, Inc.		7.000%		7/15/18		590		562
									2,205
Investment Banking/ Brokerage — 5.6%
	Credit Suisse First Boston USA		3.875%		1/15/09		1,500		1,463
	J.P. Morgan Chase & Co.		5.350%		3/1/07		1,400		1,467
	J.P. Morgan Chase & Co.		5.750%		1/2/13		2,100		2,135
	Lehman Brothers Holdings Inc.		6.250%		5/15/06		2,000		2,110
	Lehman Brothers Holdings Inc.		4.800%		3/13/14		800		748
	Merrill Lynch & Co., Inc.		3.375%		9/14/07		1,345		1,332
	Merrill Lynch & Co., Inc.		6.000%		2/17/09		800		850
	Morgan Stanley		5.800%		4/1/07		2,600		2,749
	The Bear Stearns Companies Inc.		4.000%		1/31/08		1,600		1,595
	The Goldman Sachs Group, Inc.		4.750%		7/15/13		4,490		4,218

54

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Investment Banking/ Brokerage — Continued
	The Goldman Sachs Group, Inc.		6.125%		2/15/33	$	1,300	$	1,227
	The Goldman Sachs Group, Inc.		6.345%		2/15/34		2,025		1,901
									21,795
Manufacturing (Diversified) — 0.1%
	The Gillette Company		2.875%		3/15/08		410		399
Media — 3.4%
	AOL Time Warner Inc.		6.150%		5/1/07		1,600		1,694
	AOL Time Warner Inc.		6.875%		5/1/12		2,050		2,215
	AOL Time Warner Inc.		7.700%		5/1/32		2,020		2,207
	Clear Channel Communications, Inc.		4.400%		5/15/11		1,210		1,143
	EchoStar DBS Corporation		4.360%		10/1/08		500		521	A
	Liberty Media Corporation		3.020%		9/17/06		2,335		2,378	A
	Liberty Media Corporation		8.500%		7/15/29		840		973
	Liberty Media Corporation		8.250%		2/1/30		420		479
	News America Incorporated		6.550%		3/15/33		110		111
	Time Warner Entertainment Company, L.P.		8.375%		7/15/33		460		538
	Viacom Inc.		5.625%		8/15/12		1,250		1,276
									13,535
Media and Entertainment — 0.3%
	The Walt Disney Company		6.200%		6/20/14		1,280		1,341
Medical Care Facilities — 0.7%
	HCA Inc.		6.300%		10/1/12		1,790		1,791
	HCA Inc.		5.750%		3/15/14		1,000		951
									2,742
Metals and Mining — 0.5%
	Alcoa Inc.		5.375%		1/15/13		1,800		1,816

55

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Oil and Gas — 3.7%
	Amerada Hess Corporation		7.300%		8/15/31	$	1,990	$	2,020
	Apache Corporation		6.250%		4/15/12		1,150		1,251
	Conoco Inc.		6.950%		4/15/29		820		903
	ConocoPhillips		4.750%		10/15/12		2,170		2,120
	Devon Energy Corporation		7.950%		4/15/32		1,350		1,559
	El Paso Corporation		7.800%		8/1/31		1,660		1,332
	El Paso Corporation		7.750%		1/15/32		340		273
	Ocean Energy Inc.		4.375%		10/1/07		965		977
	Panhandle Eastern Pipe Line Company		4.800%		8/15/08		1,170		1,167
	Pemex Project Funding Master Trust		8.500%		2/15/08		100		110
	Valero Energy Corporation		6.875%		4/15/12		565		614
	XTO Energy, Inc.		7.500%		4/15/12		610		688
	XTO Energy, Inc.		6.250%		4/15/13		1,250		1,301
									14,315
Paper and Forest Products — 1.3%
	International Paper Company		5.500%		1/15/14		1,000		979
	MeadWestvaco Corporation		6.850%		4/1/12		1,130		1,212
	Weyerhaeuser Company		6.125%		3/15/07		750		792
	Weyerhaeuser Company		6.750%		3/15/12		1,070		1,159
	Weyerhaeuser Company		7.375%		3/15/32		720		783
									4,925
Pharmaceuticals — 0.4%
	Bristol-Myers Squibb Company		4.750%		10/1/06		300		309
	Bristol-Myers Squibb Company		5.750%		10/1/11		1,160		1,209
									1,518
Photo Equipment and Supplies — 0.4%
	Eastman Kodak Company		3.625%		5/15/08		975		922
	Eastman Kodak Company		7.250%		11/15/13		500		509
									1,431

56

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Real Estate — 0.4%
	EOP Operating Limited Partnership		6.750%		2/15/12	$	1,500	$	1,610
Retail — 0.5%
	Target Corporation		5.875%		3/1/12		1,240		1,311
	Wal-Mart Stores Inc.		6.875%		8/10/09		475		529
									1,840
Special Purpose — 7.1%
	Ahold Finance USA, Inc.		8.250%		7/15/10		960		1,013
	American Honda Finance Corporation		3.850%		11/6/08		960		943	C
	Anadarko Finance Company		6.750%		5/1/11		970		1,067
	BAE Systems Holdings Inc.		6.400%		12/15/11		1,250		1,331	C
	ChevronTexaco Capital Company		3.500%		9/17/07		1,000		999
	Conoco Funding Company		5.450%		10/15/06		1,250		1,309
	Conoco Funding Company		6.350%		10/15/11		640		696
	DaimlerChrysler NA Holding Corporation		6.400%		5/15/06		800		842
	DaimlerChrysler NA Holding Corporation		4.050%		6/4/08		730		716
	DaimlerChrysler NA Holding Corporation		7.300%		1/15/12		735		802
	DaimlerChrysler NA Holding Corporation		6.500%		11/15/13		290		297
	DaimlerChrysler NA Holding Corporation		8.500%		1/18/31		1,800		2,068
	Devon Financing Corporation ULC		6.875%		9/30/11		450		490
	Duke Capital Corporation		6.250%		2/15/13		340		345
	NiSource Finance Corp.		3.200%		11/1/06		985		974
	Sprint Capital Corporation		4.780%		8/17/06		1,055		1,075
	Sprint Capital Corporation		6.000%		1/15/07		700		733
	Sprint Capital Corporation		8.375%		3/15/12		2,750		3,161
	Sprint Capital Corporation		8.750%		3/15/32		810		944
	TCI Communications Financing III		9.650%		3/31/27		3,350		3,941

57

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
	Unilever Capital Corporation		7.125%		11/1/10	$	480	$	543
	Verizon Global Funding Corp.		6.125%		6/15/07		2,065		2,201
	Verizon Global Funding Corp.		7.750%		6/15/32		375		421
	Verizon Wireless Capital LLC		5.375%		12/15/06		800		834
									27,745
Telecommunications — 2.6%
	AT&T Corp.		8.050%		11/15/11		1,450		1,489
	Citizens Communications Company		8.500%		5/15/06		2,460		2,621
	GTE Hawaiian Telephone Company Incorporated		7.000%		2/1/06		750		766
	INTELSAT		6.500%		11/1/13		965		852
	Qwest Corporation		5.625%		11/15/08		550		538
	SBC Communications Inc.		5.875%		8/15/12		1,910		1,960
	Verizon New York Inc.		6.875%		4/1/12		1,820		1,951
									10,177
Telecommunications (Cellular/ Wireless) — 1.7%
	AT&T Wireless Services Inc.		7.500%		5/1/07		1,500		1,645
	AT&T Wireless Services Inc.		8.125%		5/1/12		515		595
	AT&T Wireless Services Inc.		8.750%		3/1/31		1,300		1,585
	Cingular Wireless LLC		5.625%		12/15/06		800		836
	Motorola, Inc.		7.625%		11/15/10		850		957
	Nextel Communications, Inc.		7.375%		8/1/15		1,040		1,051
									6,669
Transportation — 1.4%
	Burlington Northern Railroad Company		6.960%		3/22/09		253		269
	Burlington Northern Railroad Company		7.330%		6/23/10		184		184
	Consolidated Rail Corporation		7.875%		5/15/43		600		696
	Continental Airlines, Inc.		6.545%		2/2/19		169		158
	Continental Airlines, Inc.		7.256%		3/15/20		600		585
	Delta Air Lines, Inc.		7.570%		11/18/10		400		371

58

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Transportation — Continued
	Delta Air Lines, Inc.		6.718%		1/2/23	$	746	$	768
	Northwest Airlines Corporation		7.575%		9/1/20		199		196
	Union Pacific Corporation		6.500%		4/15/12		1,750		1,884
	United Airlines, Inc.		7.783%		1/1/14		245		202
									5,313
Total Corporate Bonds and Notes (Identified Cost — $292,338)									293,885
U.S. Government and Agency Obligations — 0.2%
Fixed Rate Securities — 0.2%
	Fannie Mae		2.375%		2/15/07		565		550
	Tennessee Valley Authority		5.375%		11/13/08		150		158
Total U.S. Government and Agency Obligations (Identified Cost — $705)									708
U.S. Government Agency Mortgage-Backed Securities — 0.1%
Fixed Rate Securities — N.M.
	Fannie Mae		8.000%		4/25/06		26		27
Indexed SecuritiesA — 0.1%
	Freddie Mac		3.309%		9/1/24		129		132
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $156)									159
Yankee BondsF — 22.8%
Banking and Finance — 0.9%
	Corporacion Andina de Fomento		1.520%		1/26/07		1,260		1,258	A
	HBOS Capital Funding LP		6.071%		6/30/49		1,490		1,496	C
	HBOS Treasury Services plc		3.750%		9/30/08		985		970	C
									3,724
Banks — 0.9%
	ABN Amro Bank NV		4.650%		6/4/18		1,530		1,361
	ING Bank N.V.		5.125%		5/1/15		500		481	C
	Royal Bank of Scotland Group plc		8.817%		3/31/49		1,500		1,567
									3,409

59

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Cable — 0.2%
	British Sky Broadcasting Group plc		6.875%		2/23/09	$	870	$	950
Electric — 1.0%
	Empresa Nacional de Electricidad S.A.		8.500%		4/1/09		1,805		1,972
	Hydro-Quebec		7.500%		4/1/16		1,625		1,929
									3,901
Foreign Governments — 7.9%
	Federative Republic of Brazil		2.125%		4/15/09		147		133	A
	Federative Republic of Brazil		14.500%		10/15/09		280		326
	Federative Republic of Brazil		12.000%		4/15/10		580		618
	Federative Republic of Brazil		2.125%		4/15/12		405		338	A
	Federative Republic of Brazil		2.125%		4/15/12		621		520	A
	Federative Republic of Brazil		8.000%		4/15/14		1,513		1,381
	Federative Republic of Brazil		11.000%		8/17/40		410		386
	Province of Nova Scotia		5.750%		2/27/12		1,500		1,577
	Province of Ontario		3.500%		9/17/07		1,000		995
	Province of Ontario		5.125%		7/17/12		900		917
	Quebec Province		7.500%		9/15/29		460		556
	Republic of Chile		1.570%		1/28/08		850		859	A
	Republic of Colombia		10.500%		7/9/10		360		385
	Republic of Colombia		11.750%		2/25/20		510		557
	Republic of Italy		3.750%		12/14/07		1,490		1,491
	Republic of Panama		9.625%		2/8/11		120		133
	Republic of Panama		9.375%		7/23/12		300		328
	Republic of Panama		2.000%		7/17/16		229		195
	Republic of Panama		10.750%		5/15/20		190		213
	Republic of Panama		9.375%		1/16/23		60		61
	Republic of Peru		9.125%		2/21/12		90		92
	Republic of Peru		8.375%		5/3/16		80		74
	Republic of Peru		5.000%		3/7/17		855		740	D
	Republic of Peru		5.000%		3/7/17		228		193	C,D
	Republic of Peru		8.750%		11/21/33		210		185

60

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Foreign Governments — Continued
	Republic of South Africa		7.375%		4/25/12	$	650	$	704
	Republic of South Africa		6.500%		6/2/14		700		707
	Republic of the Philippines		9.875%		1/15/19		310		308
	Russian Federation		8.250%		3/31/10		80		87
	Russian Federation		5.000%		3/31/30		3,820		3,488	D
	United Mexican States		8.375%		1/14/11		6,375		7,204
	United Mexican States		7.500%		4/8/33		5,454		5,279
									31,030
Insurance — 0.7%
	Axa		8.600%		12/15/30		1,630		1,996
	XL Capital plc		6.500%		1/15/12		700		749
									2,745
Manufacturing (Diversified) — 2.1%
	Tyco International Group S.A.		6.375%		2/15/06		1,900		1,995
	Tyco International Group S.A.		6.375%		10/15/11		250		266
	Tyco International Group S.A.		7.000%		6/15/28		554		588
	Tyco International Group S.A.		6.875%		1/15/29		5,321		5,570
									8,419
Oil and Gas — 1.4%
	Gaz Capital S.A.		8.625%		4/28/34		200		194	C
	Petrobras International Finance Company (PIFCO)		9.750%		7/6/11		905		982
	Petroliam Nasional Berhad		7.625%		10/15/26		610		650	C
	YPF Sociedad Anonima		10.000%		11/2/28		3,500		3,850
									5,676
Special Purpose — 3.8%
	Deutsche Telekom International Finance BV		8.750%		6/15/30		1,400		1,704
	Deutsche Telekom International Finance BV		9.250%		6/1/32		670		883
	Diageo Capital plc		3.500%		11/19/07		630		623
	Diageo Capital plc		3.375%		3/20/08		120		117

61

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Special Purpose — Continued
	Gemstone Investors Limited		7.710%		10/31/04	$	440	$	443	C
	General Motors Nova Scotia Finance Company		6.850%		10/15/08		1,160		1,216
	HSBC Capital Funding LP		4.610%		12/29/49		760		689	A,C
	HSBC Holdings plc		5.250%		12/12/12		4,400		4,371
	Petronas Capital Ltd.		7.875%		5/22/22		770		852	C
	Telefonica Europe BV		8.250%		9/15/30		800		973
	UFJ Finance Aruba AEC		6.750%		7/15/13		2,835		2,932
									14,803
Telecommunications — 2.9%
	British Telecommunications plc		8.375%		12/15/10		900		1,051
	British Telecommunications plc		8.875%		12/15/30		420		518
	France Telecom SA		8.750%		3/1/11		3,000		3,476
	France Telecom SA		9.500%		3/1/31		340		427
	Koninklijke KPN NV		8.000%		10/1/10		990		1,146
	Tele Norte Leste Participacoes S.A.		8.000%		12/18/13		1,080		967	C
	Telecom Italia S.p.A.		5.250%		11/15/13		2,025		1,960	C
	Telus Corporation		7.500%		6/1/07		700		763
	Vodafone Group PLC		7.625%		2/15/05		1,000		1,033
									11,341
Telecommunications (Cellular/ Wireless) — 0.2%
	Rogers Wireless Communications Inc.		6.375%		3/1/14		1,000		920	C
Transportation — 0.3%
	C P Railway Limited		7.125%		10/15/31		1,000		1,112

62

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Utilities — 0.4%
	United Utilities plc		5.375%		2/1/19	$	1,550	$	1,435
Total Yankee Bonds (Identified Cost — $88,146)									89,465
Total Long-Term Securities (Identified Cost — $381,343)									384,217
Short-Term Securities — N.M.
U.S. Government and Agency Obligations — N.M.
	Fannie Mae		0.000%		9/8/04		110		110	B,G
Total Short-Term Securities (Identified Cost — $110)									110
Total Investments — 98.0% (Identified Cost — $381,454)									384,327
Other Assets Less Liabilities — 2.0%									7,978
Net Assets — 100.0%								$	392,305

63

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedH
	Eurodollar Futures	March 2005		80	$	24
	U.S. Treasury Note Futures	September 2004		30		6
	U.S. Treasury Bond Futures	September 2004		2		48
					$	78

^A Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (’LIBOR”). The coupon rates are the rates as of June 30, 2004.

B	Zero coupon bond — A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.
C	Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 6.1% of net assets.
D	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.

E	Bond is in default at June 30, 2004.
F	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.

G	Collateral to cover futures contracts.
H	Futures are described in more detail in the notes to financial statements.

N.M. — Not meaningful.

See notes to financial statements.

64

Semi-Annual Report to Shareholders

Statement of Assets and Liabilities

Investment Grade Portfolio

June 30, 2004

(Amounts in Thousands) (Unaudited)

Assets:
	Investment securities at market value (cost — $381,344)			$	384,217
	Short-term securities at value (cost — $110)				110
			Total investments				$	384,327
	Cash							3,623
	Receivable for:
		Fund shares sold						719
		Securities sold						2,654
		Interest						6,253
	Futures variation margin							46
								397,622
Liabilities:
	Payable for:
		Fund shares repurchased						1,275
		Securities purchased						2,856
		Income distribution						786
	Due to manager and distributor							256
	Accrued expenses							144
								5,317
Net Assets							$	392,305
Net assets consist of:
	Accumulated paid-in capital applicable to:
			36,380 Primary Class shares outstanding	$	376,198
			750 Institutional Class shares outstanding		7,901
	Under/(over) distributed net investment income				(116	)
	Accumulated net realized gain/(loss) on investments, options and futures				5,371
	Unrealized appreciation/(depreciation) of investments, options and futures				2,951
Net Assets							$	392,305
Net Asset Value Per Share:
	Primary Class							$10.57
	Institutional Class							$10.57

See notes to financial statements.

65

Semi-Annual Report to Shareholders

Statement of Operations

Investment Grade Portfolio

For the Six Months Ended June 30, 2004

(Amounts in Thousands) (Unaudited)

Investment Income:
	Interest						$	11,396
Expenses:
	Management fee			$	1,234
	Distribution and service fees				1,011	A
	Audit and legal fees				29
	Custodian fee				102
	Directors’ fees and expenses				12
	Registration fees				15
	Reports to shareholders				21
	Transfer agent and shareholder servicing expense:
		Primary Class			174
		Institutional Class			2
	Other expenses				10
					2,610
		Less fees waived			(571	)
			Total expenses, net of waivers					2,039
Net Investment Income								9,357
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments			5,407
		Options			—
		Futures			91
	Change in unrealized appreciation/(depreciation) of investments, options and futures				(16,805	)
Net Realized and Unrealized Gain/(Loss) on Investments								(11,307	)
Change in Net Assets Resulting From Operations							$	(1,950	)

^A See Note 1, Significant Accountant Policies, in the notes to financial statements.

See notes to financial statements.

66

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

Investment Grade Portfolio

(Amounts in Thousands)

			For the Six			For the
			Months Ended			Year Ended
			6/30/04			12/31/03
			(Unaudited)
Change in Net Assets:
Net investment income			$	9,357		$	18,069
Net realized gain/(loss) on investments, options and futures				5,498			6,707
Change in unrealized appreciation/(depreciation) of investments, options, and futures				(16,805	)		11,745
Change in net assets resulting from operations				(1,950	)		36,521
Distributions to shareholders:
	From net investment income:
		Primary Class		(9,176	)		(18,075	)
		Institutional Class		(181	)		(209	)
	From net realized gain on investments:
		Primary Class		(690	)		(2,770	)
		Institutional Class		(14	)		(36	)
Change in net assets from Fund share transactions:
		Primary Class		(12,524	)		58,641
		Institutional Class		2,260			2,909
Change in net assets				(22,275	)		76,981
Net Assets:
Beginning of period				414,580			337,599
End of period			$	392,305		$	414,580
Under/(over) distributed net investment income			$	(116	)	$	(116	)

See notes to financial statements.

67

Semi-Annual Report to Shareholders

Financial Highlights

Investment Grade Income Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Six Months			Years Ended December 31,
		Ended
		June 30, 2004			2003			2002			2001			2000			1999
		(Unaudited)
Net asset value, beginning of period			$10.88		$	10.42		$	10.10		$	9.97		$	9.78		$	10.52
Investment operations:
	Net investment income		.24	A		.50	A		.54	A		.60	A		.67	A		.61	A
	Net realized and unrealized gain/(loss) on investments, options and futures		(.29	)		.53			.32			.14			.19			(.71	)
	Total from investment operations		(.05	)		1.03			.86			.74			.86			(.10	)
Distributions:
	From net investment income		(.24	)		(.50	)		(.54	)		(.61	)		(.67	)		(.61	)
	From net realized gain on investments		(.02	)		(.07	)		—			—			—			(.03	)
	Total distributions		(.26	)		(.57	)		(.54	)		(.61	)		(.67	)		(.64	)
Net asset value, end of period			$10.57		$	10.88		$	10.42		$	10.10		$	9.97		$	9.78
Ratios/supplemental data:
	Total return		(.44	)%B		10.16	%		8.82	%		7.52	%		9.16	%		(.91	)%
	Expenses to average net assets		1.00	%A,C		1.00	% A		1.00	% A		1.00	% A		1.00	% A		1.00	% A
	Net investment income to average net assets		4.54	%A,C		4.62	% A		5.32	% A		5.90	% A		6.82	% A		6.08	% A
	Portfolio turnover rate		42	%B		78	%		131	%		131	%		94	%		145	%
Net assets, end of period (in thousands)		$	384,380		$	408,685		$	334,763		$	255,298		$	194,987		$	183,615

^A Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the six months ended June 30, 2004, 1.28%; and for the years ended December 31, 2003, 1.28%; 2002, 1.30%; 2001, 1.27%; 2000, 1.31%; and 1999, 1.31%.

B	Not annualized.
C	Annualized.

See notes to financial statements.

68

Semi-Annual Report to Shareholders

Financial Highlights — Continued

Institutional Class:

		Six Months			Years Ended December 31,
		Ended
		June 30, 2004			2003			2002			2001			2000			1999
		(Unaudited)
Net asset value, beginning of period		$	10.89		$	10.43		$	10.11		$	9.97		$	9.79		$	10.52
Investment operations:
	Net investment income		.27	D		.55	D		.59	D		.66	D		.71	D		.66	D
	Net realized and unrealized gain/(loss) on investments, options and futures		(.30	)		.53			.31			.14			.19			(.70	)
	Total from investment operations		(.03	)		1.08			.90			.80			.90			(.04	)
Distributions:
	From net investment income		(.27	)		(.55	)		(.58	)		(.66	)		(.72	)		(.66	)
	From net realized gain on investments		(.02	)		(.07	)		—			—			—			(.03	)
	Total distributions		(.29	)		(.62	)		(.58	)		(.66	)		(.72	)		(.69	)
Net asset value, end of period		$	10.57		$	10.89		$	10.43		$	10.11		$	9.97		$	9.79
Ratios/supplemental data:
	Total return		(.29	)%B		10.71	%		9.38	%		8.16	%		9.63	%		(.33	)%
	Expenses to average net assets		.50	%C,D		.50	% D		.48	% D		.47	% D		.48	% D		.46	% D
	Net investment income to average net assets		5.08	%C,D		5.13	% D		5.85	% D		6.50	% D		7.32	% D		6.59	% D
	Portfolio turnover rate		42	%B		78	%		131	%		131	%		94	%		145	%
Net assets, end of period (in thousands)		$	7,925		$	5,895		$	2,836		$	1,424		$	839		$	238

^D Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the six months ended June 30, 2004, 0.77%; and for the years ended December 31, 2003, 0.78%; 2002, 0.78%; 2001, 0.74%; 2000, 0.79%; and 1999, 0.77%.

See notes to financial statements.

69

Semi-Annual Report to Shareholders

Performance Information

U.S. Government Intermediate-Term Portfolio

   The following graphs compare the Fund’s total returns against those of a closely matched broad-based securities market index. The lines illustrate the cumulative total return of an initial $10,000 investment in Primary Class shares and an initial $1,000,000 investment in Institutional Class shares of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing each securities market index do not include any transaction costs associated with buying and selling securities in the index or other administrative expenses.

   Total return measures investment performance in terms of appreciation or depreciation in a fund’s 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 annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results. No adjustment has been made for any income taxes payable by shareholders.

   Effective June 30, 2004, Government Intermediate changed its comparative index from the Lehman Intermediate Government Bond Index to the Merrill Lynch 1-3 Year Treasury Index, because the new index is more representative of the types of securities in which the Fund invests.

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s 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.

70

Semi-Annual Report to Shareholders

Performance Information — Continued

Growth of a $10,000 Investment — Primary Class

	Cumulative		Average Annual
	Total Return		Total Return
One Year		-1.52%		-1.52%
Five Years		+27.55%		+4.99%
Ten Years		+70.63%		+5.49%

The graph and table do not reflect the deduction of taxes that a shareholder

would pay on Fund distributions or the redemption of Fund shares.

Past performance does not predict future performance.

^A A total return index consisting of investment grade corporate debt issues as well as U.S. government securities. The debt issues all maintain maturities within a range of 1 to 10 years.

71

Semi-Annual Report to Shareholders

Growth of a $1,000,000 Investment — Institutional Class

	Cumulative		Average Annual
	Total Return		Total Return
One Year		-1.14%		-1.14%
Five Years		+30.90%		+5.53%
Life of Class*		+79.86%		+6.32%
*Inception date: December 1, 1994

The graph and table do not reflect the deduction of taxes that a shareholder

would pay on Fund distributions or the redemption of Fund shares.

Past performance does not predict future performance.

^B Index returns are for periods beginning November 30, 1994.

72

Semi-Annual Report to Shareholders

Portfolio Composition (as of June 30, 2004)

Debt Ratings^C (as a percentage of portfolio)

Maturity Schedule (as a percentage of portfolio)

^C Source: Standard & Poor’s

73

Semi-Annual Report to Shareholders

Portfolio of Investments

U.S. Government Intermediate

June 30, 2004

(Amounts in Thousands) (Unaudited)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 87.8%
U.S. Government and Agency Obligations — 37.0%
Fixed Rate Securities — 37.0%
	Fannie Mae		4.375%		7/17/13	$	7,000	$	6,554
	Freddie Mac		4.500%		1/15/13		33,000		31,783
	United States Treasury Bonds		8.000%		11/15/21		7,670		10,053
	United States Treasury Bonds		6.125%		11/15/27		20,370		22,322
	United States Treasury Bonds		5.375%		2/15/31		4		4
	United States Treasury Notes		2.250%		4/30/06		900		894
	United States Treasury Notes		4.250%		8/15/13		37,000		36,119
	United States Treasury Notes		4.750%		5/15/14		3,000		3,031
Total U.S. Government and Agency Obligations (Identified Cost — $115,024)									110,760
U.S. Government Agency Mortgage-Backed Securities — 32.9%
Fixed Rate Securities — 32.6%
	Fannie Mae		8.500%	6/1/10 to 8/1/11			115		117
	Fannie Mae		6.500%	11/1/10 to 10/1/32			9,982		10,433
	Fannie Mae		7.000%	1/1/13 to 1/1/33			10,523		11,131
	Fannie Mae		9.500%		7/1/14		131		145
	Fannie Mae		11.000%		12/1/15		104		114
	Fannie Mae		12.500%	1/1/18 to 4/1/18			111		128
	Fannie Mae		9.000%		11/1/21		253		282
	Fannie Mae		6.000%	11/1/27 to 9/1/32			1,656		1,694
	Fannie Mae		5.500%		1/1/32		4,000		4,090	A
	Fannie Mae		5.000%		1/1/33		33,500		33,531	A
	Freddie Mac		8.250%		2/1/08		35		35
	Freddie Mac		8.500%	12/1/08 to 6/1/21			180		191
	Freddie Mac		9.750%	11/1/09 to 11/1/14			61		66
	Freddie Mac		9.000%	1/1/17 to 1/1/21			322		352
	Freddie Mac		7.000%	1/25/21 to 4/1/32			5,066		5,356
	Freddie Mac		8.000%		2/1/31		755		819
	Freddie Mac		5.000%		8/1/33		22,661		21,944
	Freddie Mac		5.500%		7/1/34		4,000		4,086	A
	Government National Mortgage Association		9.000%	6/15/06 to 9/15/22			536		564

74

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
	Government National Mortgage Association		6.000%	5/15/14 to 11/15/32		$	1,657	$	1,707
	Government National Mortgage Association		6.500%	10/15/31 to 6/15/32			908		951
									97,736
Indexed SecuritiesB — 0.3%
	Government National Mortgage Association		7.250%		6/16/26		3,668		383	C1
	Government National Mortgage Association		7.300%		8/16/26		3,064		358	C1
									741
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $99,441)									98,477
Corporate Bonds and Notes — 0.3%
Banking and Finance — 0.2%
	Household Finance Corporation		8.000%		7/15/10		690		801
Telecommunications — 0.1%
	GTE Hawaiian Telephone Company, Inc.		7.000%		2/1/06		250		255
Total Corporate Bonds and Notes (Identified Cost — $983)									1,056

75

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

U.S. Government Intermediate — Continued

				Maturity		Par/
		Rate		Date		Shares			Value
Mortgage-Backed Securities — 17.3%
Fixed Rate Securities — 8.0%
	Blackrock Capital Finance L.P. 1997-R3		7.220%		11/25/28	$	733		$	750	D
	Residential Asset Securitization Trust 2003-A14		4.750%		2/25/19		14,526			14,065
	Washington Mutual Mortgage Securities Corporation 2004-RA		7.000%		3/25/34		8,548			9,030
										23,845
Indexed SecuritiesB — 9.3%
	GSR Mortgage Loan Trust 2004-5		3.685%		5/25/34		14,191			14,021
	Thornburg Mortgage Securities Trust 2004-1		2.657%		3/25/44		14,246			13,854
										27,875
Total Mortgage-Backed Securities (Identified Cost — $52,731)										51,720
Preferred Stocks — 0.3%
	Home Ownership Funding Corporation		13.331%				5	shs		217	D,E
	Home Ownership Funding Corporation II		13.338%				14			610	D,E
Total Preferred Stocks (Identified Cost — $1,537)										827
Total Long-Term Securities (Identified Cost — $269,716)										262,840

76

Semi-Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Short-Term Securities — 11.6%
U.S. Government and Agency Obligations — 0.3%
	Fannie Mae		0.00%		9/8/04	$	960	$	958	F,G
Repurchase Agreements — 11.3%
Goldman, Sachs & Company
	1.45%, dated 6/30/04, to be repurchased at $13,557 on 7/1/04 (Collateral: $14,095 Freddie Mac notes, 4.75%, due 10/11/12, value 13,978)						13,556		13,556
Merrill Lynch Government Securities, Inc.
	1.40%, dated 6/30/04, to be repurchased at $20,335 on 7/1/04 (Collateral: $19,620 Federal Home Loan Bank bonds, 3.10%, due 12/20/06, value $20,655)						20,334		20,334
									33,890
Total Short-Term Securities (Identified Cost — $34,848)									34,848
Total Investments — 99.4% (Identified Cost — $304,564)									297,688
Other Assets Less Liabilities — 0.6%									1,814
Net Assets — 100.0%								$	299,502

77

Semi-Annual Report to Shareholders

Portfolio of Investments — Continued

U.S. Government Intermediate — Continued

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedH
	Eurodollar Futures	September 2004		239	$	(206	)
	Eurodollar Futures	December 2004		100		52
	U.S. Treasury Note Futures	September 2004		392		412
					$	258
Futures Contracts WrittenH
	U.S. Treasury Note Futures	September 2004		557	$	(988	)
	U.S. Treasury Bond Futures	September 2004		282		(600	)
					$	(1,588	)

^A When-issued Securities — Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

B	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (’LIBOR”). The coupon rates are the rates as of June 30, 2004.
C	Stripped security — Security with interest-only or principal-only payment streams, denoted by a 1 or 2 respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.
D	Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 0.5% of net assets.

E	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.
F	Zero coupon bond — A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

G	Collateral to cover futures contracts.
H	Futures are described in more detail in the notes to financial statements.

See notes to financial statements.

78

Semi-Annual Report to Shareholders

Statement of Assets and Liabilities

U.S. Government Intermediate-Term Portfolio

June 30, 2004

(Amounts in Thousands) (Unaudited)

Assets:
	Investment securities at market value (cost — $269,716)			$	262,840
	Short-term securities at value (cost — $34,848)				34,848
			Total investments				$	297,688
	Receivable for:
		Fund shares sold						490
		Securities sold						42,757
		Interest and dividends						2,266
	Other assets							11
								343,212
Liabilities:
	Payable for:
		Fund shares repurchased						1,132
		Securities purchased						41,472
		Income distribution						437
		Payable for futures variation margin						389
	Due to manager and distributor							199
	Accrued expenses							81
								43,710
Net Assets							$	299,502
Net assets consist of:
	Accumulated paid-in capital applicable to:
			28,254 Primary Class shares outstanding	$	303,228
			803 Institutional Class shares outstanding		8,279
	Under/(over) distributed net investment income				1,395
	Accumulated net realized gain/(loss) on investments, options and futures				(5,194	)
	Unrealized appreciation/(depreciation) of investments, options and futures				(8,206	)
Net Assets							$	299,502
Net Asset Value Per Share:
	Primary Class						$	10.31
	Institutional Class						$	10.31

See notes to financial statements.

79

Semi-Annual Report to Shareholders

Statement of Operations

U.S. Government Intermediate Portfolio

For the Six Months Ended June 30, 2004

(Amounts in Thousands) (Unaudited)

Investment Income:
	Dividends			$	127
	Interest				7,051
			Total income				$	7,178
Expenses:
	Management fee				873
	Distribution and service fees				773	A
	Audit and legal fees				32
	Custodian fee				87
	Directors’ fees and expenses				11
	Registration fees				12
	Reports to shareholders				16
	Transfer agent and shareholder servicing expense:
		Primary Class			123
		Institutional Class			2
	Other expenses				3
					1,932
		Less fees waived			(365	)
		Total expenses, net of waivers						1,567
Net Investment Income								5,611
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments			(3,895	)
		Futures			1,978
	Change in unrealized appreciation/(depreciation) of investments, options and futures				(5,152	)
Net Realized and Unrealized Gain/(Loss) on Investments								(7,069	)
Change in Net Assets Resulting From Operations							$	(1,458	)

^A See Note 1, Significant Accounting Policies, in the notes to financial statements

See notes to financial statements.

80

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

U.S. Government Intermediate-Term Portfolio

(Amounts in Thousands)

		For the Six			For the
		Months Ended			Year Ended
		6/30/04			12/31/03
		(Unaudited)
Change in Net Assets:
Net investment income		$	5,611		$	9,203
Net realized gain/(loss) on investments, options and futures			(1,917	)		8,052
Change in unrealized appreciation/(depreciation) of investments, options and futures			(5,152	)		(13,276	)
Change in net assets resulting from operations			(1,458	)		3,979
Distributions to shareholders from net investment income:
	Primary Class		(5,327	)		(9,512	)
	Institutional Class		(158	)		(279	)
Change in net assets from Fund share transactions:
	Primary Class		(28,867	)		(47,284	)
	Institutional Class		728			(1,598	)
Change in net assets			(35,082	)		(54,694	)
Net Assets:
Beginning of period			334,584			389,278
End of period		$	299,502		$	334,584
Under/(over) distributed net investment income		$	1,395		$	1,269

See notes to financial statements.

81

Semi-Annual Report to Shareholders

Financial Highlights

U.S. Government Intermediate-Term Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Six Months
		Ended			Years Ended December 31,
		June 30,
		2004			2003			2002			2001			2000			1999
		(Unaudited)
Net asset value, beginning of period			$10.54		$	10.70		$	10.32		$	10.26		$	9.92		$	10.51
Investment operations:
	Net investment income		.19	A		.26	A		.41	A		.53	A		.62	A		.54	A
	Net realized and unrealized gain/(loss) on invest- ments, options and futures		(.24	)		(.14	)		.38			.06			.33			(.59	)
	Total from investment operations		(.05	)		.12			.79			.59			.95			(.05	)
Distributions:
	From net investment income		(.18	)		(.28	)		(.41	)		(.53	)		(.61	)		(.54	)
	Total distributions		(.18	)		(.28	)		(.41	)		(.53	)		(.61	)		(.54	)
Net asset value, end of period			$10.31		$	10.54		$	10.70		$	10.32		$	10.26		$	9.92
Ratios/supplemental data:
	Total return		(.49	)%B		1.11	%		7.79	%		5.83	%		9.95	%		(.48	)%
	Expenses to average net assets		1.00	%A,C		1.00	% A		1.00	% A		1.00	% A		1.00	% A		1.00	% A
	Net investment income to average net assets		3.52	%A,C		2.48	% A		3.85	% A		5.08	% A		6.14	% A		5.28	% A
	Portfolio turnover rate		73	%B		487	%		204	%		535	%		248	%		979	%
Net assets, end of period (in thousands)			$291,221		$	326,844		$	379,793		$	300,597		$	272,668		$	298,207

^A Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the six months ended June 30, 2004, 1.23%; and for the years ended December 31, 2003, 1.21%; 2002, 1.19%; 2001, 1.17%; 2000, 1.19%; and 1999, 1.19%.

B	Not annualized.
C	Annualized.

See notes to financial statements.

82

Semi-Annual Report to Shareholders

Financial Highlights — Continued

Institutional Class:

		Six Months
		Ended			Years Ended December 31,
		June 30,
		2004			2003			2002			2001			2000			1999
		(Unaudited)
Net asset value, beginning of period			$10.55		$	10.70		$	10.32		$	10.27		$	9.92		$	10.51
Investment operations:
	Net investment income		.21	D		.32	D		.46	D		.58	D		.67	D		.59	D
	Net realized and unrealized gain/(loss) on investments, options and futures		(.24	)		(.14	)		.38			.05			.35			(.59	)
	Total from investment operations		(.03	)		.18			.84			.63			1.02			—
Distributions:
	From net investment income		(.21	)		(.33	)		(.46	)		(.58	)		(.67	)		(.59	)
	Total distributions		(.21	)		(.33	)		(.46	)		(.58	)		(.67	)		(.59	)
Net asset value, end of period			$10.31		$	10.55		$	10.70		$	10.32		$	10.27		$	9.92
Ratios/supplemental data:
	Total return		(.34	)%B		1.71	%		8.35	%		6.30	%		10.64	%		.04	%
	Expenses to average net assets		.50	%C,D		.46	% D		.47	% D		.46	% D		.46	% D		.47	% D
	Net investment income to average net assets		4.04	%C,D		3.03	% D		4.38	% D		5.63	% D		6.66	% D		5.84	% D
	Portfolio turnover rate		73	%B		487	%		204	%		535	%		248	%		979	%
Net assets, end of period (in thousands)			$8,281		$	7,740		$	9,485		$	7,221		$	6,723		$	9,076

^D Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the six months ended June 30, 2004, 0.73%; and for the years ended December 31, 2003, 0.68%; 2002, 0.66%; 2001, 0.63%; 2000, 0.65%; and 1999, 0.66%.

See notes to financial statements.

83

Semi-Annual Report to Shareholders

Performance Information

U.S. Government Money Market Portfolio

Maturity Schedule (as a percentage of portfolio)

84

Semi-Annual Report to Shareholders

Statement of Net Assets

U.S. Government Money Market Portfolio

June 30, 2004

(Amounts in Thousands) (Unaudited)

			Maturity
		Rate	Date	Par		Value
U.S. Government and Agency Obligations — 99.4%
	Fannie Mae	0.92% to 1.8%	7/7/04 to 5/27/05	$	209,607	$	209,502
	Federal Home Loan Bank	0.9% to 1.3%	7/1/04 to 4/25/05		101,000		100,966
	Freddie Mac	0.935% to 1.43%	7/6/04 to 4/1/05		78,760		78,724
	The International Bank for Redevelopment and Development	1.068%	7/6/04		10,000		9,999
Total U.S. Government and Agency Obligations (Identified Cost — $399,191)							399,191
Total Investments, at Amortized Cost and Value — 99.4%							399,191	A
Other Assets Less Liabilities — 0.6%							2,426
Net Assets Applicable to 401,618 Shares						$	401,617
Net Asset Value Per Share						$	1.00

^A Also represents cost for income tax purposes.

See notes to financial statements.

85

Semi-Annual Report to Shareholders

Statement of Operations

U.S. Government Money Market Portfolio

For the Six Months Ended June 30, 2004

(Amounts in Thousands) (Unaudited)

Investment Income:
	Interest			$	2,542
Expenses:
	Management fee		1,162
	Distribution and service fees		232
	Audit and legal fees		20
	Custodian fee		71
	Directors’ fees and expenses		12
	Registration fees		24
	Reports to shareholders		14
	Transfer agent and shareholder servicing expense		129
	Other expenses		8
		Total expenses			1,672
Net Investment Income					870
Net Realized Gain/(Loss) on Investments:
	Realized gain/(loss) on investments and futures				(1	)
Change in Net Assets Resulting From Operations				$	869

See notes to financial statements.

86

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

U.S. Government Money Market Portfolio

(Amounts in Thousands)

	For the Six			For the
	Months Ended			Year Ended
	6/30/04			12/31/03
	(Unaudited)
Change in Net Assets:
Net investment income	$	870		$	2,477
Net realized gain/(loss) on investments		(1	)		—
Change in net assets resulting from operations		869			2,477
Distributions to shareholders from net investment income		(870	)		(2,633	)
Change in net assets from Fund share transactions		(42,263	)		(97,836	)
Change in net assets		(42,264	)		(97,992	)
Net Assets:
Beginning of period		443,881			541,873
End of period	$	401,617		$	443,881

See notes to financial statements.

87

Semi-Annual Report to Shareholders

Financial Highlights

U.S. Government Money Market Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

		Six Months
		Ended			Years Ended December 31,
		June 30,
		2004			2003			2002			2001			2000			1999
		(Unaudited)
Net asset value, beginning of period			$1.00		$	1.00		$	1.00		$	1.00		$	1.00		$	1.00
Investment operations:
	Net investment income		.0019			.0049			.01			.04			.06			.04
	Total from investment operations		.0019			.0049			.01			.04			.06			.04
Distributions:
	From net investment income		(.0019	)		(.0049	)		(.01	)		(.04	)		(.06	)		(.04	)
	Total distributions		(.0019	)		(.0049	)		(.01	)		(.04	)		(.06	)		(.04	)
Net asset value, end of period			$1.00		$	1.00		$	1.00		$	1.00		$	1.00		$	1.00
Ratios/supplemental data:
	Total return		.38	%A		.51	%		1.13	%		3.57	%		5.66	%		4.44	%
	Expenses to average net assets		.72	%A		.71	%		.72	%		.71	%		.73	%		.73	%
	Net investment income to average net assets		.37	%A		.49	%		1.11	%		3.46	%		5.53	%		4.34	%
Net assets, end of period (in thousands)			$401,617		$	443,881		$	541,873		$	501,070		$	426,988		$	379,994

^A Annualized.

See notes to financial statements.

88

Semi-Annual Report to Shareholders

Notes to Financial Statements

Legg Mason Income Trust, Inc.

(Amounts in Thousands) (Unaudited)

1. Significant Accounting Policies:

   The Legg Mason Income Trust, Inc. (“Corporation”), consisting of the Core Bond Fund (“Core Bond”), the High Yield Portfolio (“High Yield”), the Investment Grade Income Portfolio (“Investment Grade”), the U.S. Government Intermediate-Term Portfolio (“Government Intermediate”), and the U.S. Government Money Market Portfolio (“Government Money Market”) (each a “Fund”), is registered under the Investment Company Act of 1940 (“1940 Act”), as amended, as an open-end, diversified investment company.

   The High Yield, Investment Grade and Government Intermediate Portfolios consist of two classes of shares: Primary Class and Institutional Class. The income and expenses of each of these Funds are allocated proportionately to the two classes of shares based on daily net assets, except for Rule 12b-1 distribution fees, which are charged only on Primary Class shares, and transfer agent and shareholder servicing expenses, which are determined separately for each class.

   Preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements:

Security Valuation

   Securities owned by Core Bond, High Yield, Investment Grade and Government Intermediate for which market quotations are readily available are valued at current market value. Securities for which market quotations are not readily available are fair valued by the Board of Directors and management. In determining fair value, the Board of Directors and management consider all relevant qualitative and quantitative information available. These factors are subject to change over time and are reviewed periodically. The values assigned to fair value investments are based on available information and do not necessarily represent amounts that might ultimately be realized, since such amounts depend on future developments inherent in long-term investments. Further, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market of the investments existed, and the differences could be material.

89

Semi-Annual Report to Shareholders

   With respect to High Yield, where a security is traded on more than one market, which may include foreign markets, the securities are generally valued on the market considered by the Fund’s adviser to be the primary market. Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars using currency exchange rates determined prior to the close of trading on the Exchange, usually at 2:00 p.m. Eastern time. 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.

   In accordance with Rule 2a-7, the investments of Government Money Market are valued on the basis of amortized cost, so long as the Fund’s Board of Directors determines that this method constitutes fair value. Under this method, securities are valued at cost when purchased and, thereafter, a constant proportionate accretion or amortization of any discount or premium is recorded until maturity of the security.

Security Transactions

   Security transactions are recorded on the trade date. Realized gains and losses from security transactions are reported on an identified cost basis for both financial reporting and federal income tax purposes. At June 30, 2004, receivables for securities sold and payables for securities purchased for each Fund were:

	Receivable		Payable for
	for Securities		Securities
	Sold		Purchased
Core Bond	$	—	$	3,351
High Yield		—		3,479
Investment Grade		2,654		2,856
Government Intermediate		42,757		41,472

   For the six months ended June 30, 2004, investment transactions (excluding short-term investments) were as follows:

	Purchases				Proceeds From Sales
	U.S. Gov’t.				U.S. Gov’t.
	Securities		Other		Securities		Other
Core Bond	$	71,060	$	14,449	$	35,734	$	3,531
High Yield		—		123,171		—		128,546
Investment Grade		33,900		134,344		55,764		117,779
Government Intermediate		176,618		41,483		199,192		3,556

90

Semi-Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Repurchase Agreements

   The Funds may engage in repurchase agreement transactions. Under the terms of a typical repurchase agreement, a fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and a fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. This arrangement results in a fixed rate of return that is not subject to market fluctuations during the fund’s holding period. The value of the collateral is at all times at least equal to the total amount of the repurchase obligation, including interest. In the event of counterparty default, a fund has the right to use the collateral to satisfy the terms of the repurchase agreement. However, there could be potential loss to the fund in the event the fund is delayed or prevented from exercising its right to dispose of the collateral securities, including the risk of a possible decline in the value of the collateral securities during the period in which the fund seeks to assert its rights. The Funds’ investment adviser reviews the value of the collateral and the creditworthiness of those banks and dealers with which the Funds enter into repurchase agreements to evaluate potential risks.

Investment Income and Distributions to Shareholders

   Dividend income and distributions to shareholders are allocated at the class level and are recorded on the ex-dividend date. Dividends from net investment income are declared daily and paid monthly for each Fund except High Yield, which declares and pays dividends monthly. Net capital gain distributions, which are calculated at the fund level, are declared and paid after the end of the tax year in which the gain is realized. Distributions are determined in accordance with federal income tax regulations, which may differ from those determined in accordance with accounting principles generally accepted in the United States of America; accordingly, periodic reclassifications are made within the Funds’ capital accounts to reflect income and gains available for distribution under federal income tax regulations. At June 30, 2004, accrued dividends payable were as follows: Core Bond, $53; High Yield, $0; Investment Grade, $786; Government Intermediate, $437; and Government Money Market, $73. There were no capital gain distributions payable at June 30, 2004.

91

Semi-Annual Report to Shareholders

Other

   In the normal course of business, the Funds enter into contracts that provide general indemnifications. The Funds’ maximum exposure under these arrangements is dependent on claims that may be made against the Funds in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote.

2. Federal Income Taxes:

   No provision for federal income or excise taxes is required since each Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its taxable income and capital gain to its shareholders. Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gain distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements.

   The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. During the six months ended June 30, 2004, High Yield and Government Intermediate realized net gains/(losses) of $782 and $(1,917), respectively, which the Funds intend to offset against/(add to) available capital loss carryforwards for federal income tax purposes at the end of the fiscal year. At December 31, 2003, the Funds had capital loss carryforwards as follows:

				Government
Expiration Date	High Yield			Intermediate
2008	$	(38,887	)	$	(3,834	)
2009		(83,723	)		—
2010		(32,610	)		—
2011		(2,797	)		—

3. Financial Instruments:

Options and Futures

   As part of their investment programs, Core Bond, High Yield, Investment Grade and Government Intermediate may utilize options and futures. Options may be written (sold) or purchased by these Funds. When a Fund purchases a put or call option, the premium paid is recorded as an investment and its value is marked-to-market daily. When a Fund writes a put or call option, an amount equal to the premium received by the Fund is recorded as a liability and its value is marked-to-market daily.

92

Semi-Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

   When options, whether written or purchased, expire, are exercised or are closed (by entering into a closing purchase or sale transaction), the Fund realizes a gain or loss as described in the chart below:

Purchased option:	Impact on the Fund:
The option expires	Realize a loss in the amount of the cost of the option.
The option is closed through a closing sale transaction	Realize a gain or loss depending on whether the proceeds from the closing sale transaction are greater or less than the cost of the option.
The Fund exercises a call option	The cost of the security purchased through the exercise of the option will be increased by the premium originally paid to purchase the option.
The Fund exercises a put option	Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be reduced by the premium originally paid to purchase the put option.

Written option:	Impact on the Fund:
The option expires	Realize a gain equal to the amount of the premium received.
The option is closed through a closing purchase transaction	Realize a gain or loss without regard to any unrealized gain or loss on the underlying security and eliminate the option liability. The Fund will realize a loss in this transaction if the cost of the closing purchase exceeds the premium received when the option was written.
A written call option is exercised by the option purchaser	Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be increased by the premium originally received when the option was written.
A written put option is exercised by the option purchaser	The amount of the premium originally received will reduce the cost of the security that the Fund purchased when the option was exercised.

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

93

Semi-Annual Report to Shareholders

   The risk associated with purchasing options is limited to the premium originally paid. Options written by a Fund involve, to varying degrees, risk of loss in excess of the option value reflected in the statement of net assets. The risk in writing a covered call option is that a Fund may forgo the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that a Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. In addition, there is the risk a Fund may not be able to enter into a closing transaction because of an illiquid secondary market or, for over-the-counter options, because of the counterparty’s inability to perform.

   Activity in written call and put options during the six months ended June 30, 2004, was as follows:

Core Bond:

	Calls						Puts
	Actual						Actual
	Contracts			Premiums			Contracts			Premiums
Options written		94		$	81			16		$	10
Options closed		(29	)		(27	)		(4	)		(4	)
Options expired		(5	)		(4	)		(9	)		(4	)
Options exercised		—			—			—			—
Options outstanding, June 30, 2004		60		$	50			3		$	2

   Upon entering into a futures contract, the Fund is required to deposit with the broker cash or cash equivalents in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin.” Subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses and the Fund recognizes a realized gain or loss when the contract is closed. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded.

   The Funds enter into futures contracts as a hedge against anticipated changes in interest rates. There are several risks in connection with the use of futures contracts as a hedging device. Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. The change in the value of futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with the change in the value of the hedged instruments. In addition, there is the risk that a Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

94

Semi-Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

   The open futures positions and related appreciation or depreciation at June 30, 2004, for Core Bond, Investment Grade, and Government Intermediate are listed at the end of each Fund’s portfolio of investments.

Forward Currency Exchange Contracts

   As part of its investment program, High Yield may utilize forward currency exchange contracts. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

   Forward foreign currency contracts are marked-to-market daily using forward foreign currency exchange rates supplied by an independent pricing service. The change in a contract’s market value is recorded by High Yield as an unrealized gain or loss. When the contract is closed or delivery is taken, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

   The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the Fund’s securities, but it does establish a rate of exchange that can be achieved in the future. These forward foreign currency contracts involve market risk in excess of amounts reflected in the financial statements. Although forward foreign currency contracts used for hedging purposes limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Fund’s adviser will enter into forward foreign currency contracts only with parties approved by the Board of Directors because there is a risk of loss to the Fund if the counterparties do not complete the transaction.

   At June 30, 2004, High Yield had no open forward currency exchange contracts.

Swap Agreements

   The use of swaps involves risks that are different from those associated with ordinary portfolio securities transactions. Swap agreements may be considered to be illiquid. Although a Fund will not enter into any swap agreement unless the adviser believes that the other party to the transaction is creditworthy, a Fund does bear the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of the agreement counterparty. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

95

Semi-Annual Report to Shareholders

   The Funds may invest in different types of swap agreements. Credit default swap contracts represent the exchange of commitments to provide a level of credit protection for a commitment to receive interest at a fixed rate based on the potential risk of default of the relevant underlying issuer (the relevant underlying issuer for credit default swap contracts is listed in a parenthetical reference following the agreement counterparty). Interest rate swap contracts involve the exchange of commitments to pay and receive interest based on a notional principal amount. Total return swap contracts involve the exchange of commitments to pay and receive interest based on the total return of an index over a specified period.

   The following is a summary of open swap contracts outstanding at June 30, 2004:

Core Bond:

					Contract		Unrealized
		The Fund		The Fund	Notional		Appreciation/
Agreement With:	Termination Date	Agrees to Pay		Will Receive	Amount		(Depreciation)
J.P. Morgan Chase & Co. (iBoxx IG Hi Vol 2)	September 20, 2009		1.15% Quarterly	Specified amount upon credit event noticeA	$	4,000	$	(16	)

4. Transactions With Affiliates:

   Each Fund has a management agreement with Legg Mason Fund Adviser, Inc. (“LMFA”). Pursuant to their respective agreements, LMFA provides the Funds with management and administrative services for which each Fund pays a fee, computed daily and payable monthly, at annual rates of each Fund’s average daily net assets. LMFA has voluntarily agreed to waive its fees to the extent each Fund’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates. These voluntary expense limitations for Core Bond, Investment Grade and Government Intermediate are due to expire on April 30, 2005. High Yield and Government Money Market have no expense limitations. The following chart shows annual rates of management fees, expense limits, management fees waived, and management fees payable for each Fund:

^A Fund will receive $1,000 upon bankruptcy or failure to make a scheduled interest payment.

96

Semi-Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

						Six Months
						Ended June 30,		At June 30,
						2004		2004
				Expense		Management		Management
Fund		Management Fee		Limitation		Fees Waived		Fees Payable
Core Bond			0.45%		1.00%	$	44	$	—
High Yield
	— Primary Class		0.65%		None		N/A		107
	— Institutional Class		0.65%		None		N/A		4
Investment Grade
	— Primary Class		0.60%		1.00%		561		96
	— Institutional Class		0.60%		0.50%		10		2
Government Intermediate
	— Primary Class		0.55%		1.00%		356		77
	— Institutional Class		0.55%		0.50%		9		2
Government Money Market		0.50% – 0.40% B			None		N/A		178

   Western Asset Management Company (“Adviser”) serves as investment adviser to the Funds. The Adviser is responsible for the actual investment activity of each Fund. LMFA pays the Adviser a fee, computed daily and payable monthly, at an annual rate of 0.40% of the management fee received by LMFA for Core Bond; 77% of the management fee received by LMFA for High Yield; 40% for Investment Grade; and 30% for Government Money Market. For Government Intermediate, LMFA pays the Adviser a fee, computed daily and payable monthly, of 0.20% of its average daily net assets, not to exceed the fee received by LMFA.

^B Government Money Market’s management fee varies with the level of the Fund’s average daily net assets. The management fee is calculated as follows:

Average Net Assets	Advisory Fee Rate
$0 – $500 million		0.50%
next $500 million		0.475%
next $500 million		0.45%
next $500 million		0.425%
thereafter		0.40%

97

Semi-Annual Report to Shareholders

   Legg Mason Wood Walker, Incorporated (“Legg Mason”), a member of the New York Stock Exchange, serves as distributor of the Funds. Legg Mason receives an annual distribution fee and an annual service fee based on each Fund’s Primary Class’s average daily net assets, computed daily and payable monthly as shown in the table below. For the period from its inception (February 27, 2004) to June 30, 2004, Legg Mason waived all $46 of Core Bond’s distribution and service fees.

					At June 30, 2004
	Distribution		Service		Distribution and Service
	Fee		Fee		Fees Payable
Core Bond		0.25%		0.25%	$	—
High Yield		0.25%		0.25%		82
Investment Grade		0.25%		0.25%		158
Government Intermediate		0.25%		0.25%		120
Government Money Market		N/A		0.10%		36

   LM Funds Services, Inc. (“LMFS”), a registered transfer agent, has an agreement with the Funds’ transfer agent to assist it with some of its duties. For this assistance, the transfer agent paid LMFS the following amounts for the period ended June 30, 2004: Core Bond, $0; High Yield, $30; Investment Grade, $41; Government Intermediate, $28; and Government Money Market, $46.

   LMFA, the Adviser, Legg Mason and LMFS are corporate affiliates and wholly owned subsidiaries of Legg Mason, Inc.

5. Line of Credit:

   The Funds, excluding Government Money Market, but including certain other Legg Mason Funds, participate in a $400 million line of credit (“Credit Agreement”) to be used for temporary or emergency purposes. Pursuant to the Credit Agreement, each participating Fund is liable only for principal and interest payments related to borrowings made by that Fund. Borrowings under the Credit Agreement bear interest at a rate equal to the federal funds rate plus the federal funds rate margin. For the six months ended June 30, 2004, the Funds had no borrowings under the Credit Agreement.

98

Semi-Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

6. Fund Share Transactions:

   At June 30, 2004, there were 1,750,000 shares authorized at $.001 par value for all classes of each portfolio of the Corporation. Share transactions were as follows:

		Core Bond
		Period
		Ended
		6/30/04C
Shares
	Sold		4,922
	Reinvested		20
	Repurchased		(373	)
	Net Change		4,569
Amount
	Sold	$	48,754
	Reinvested		189
	Repurchased		(3,635	)
	Net Change	$	45,308

		High Yield
		Primary Class						Institutional Class
		Six Months			Year			Six Months			Year
		Ended			Ended			Ended			Ended
		6/30/04			12/31/03			6/30/04			12/31/03
Shares
	Sold		2,804			11,415			359			978
	Reinvested		561			1,342			26			44
	Repurchased		(5,377	)		(8,542	)		(240	)		(656	)
	Net Change		(2,012	)		4,215			145			366
Amount
	Sold	$	25,462		$	97,837		$	3,256		$	8,358
	Reinvested		5,014			11,598			235			385
	Repurchased		(48,368	)		(73,936	)		(2,169	)		(5,677	)
	Net Change	$	(17,892	)	$	35,499		$	1,322		$	3,066

^C For the period February 27, 2004 (commencement of operations) to March 31, 2004.

99

Semi-Annual Report to Shareholders

		Investment Grade
		Primary Class						Institutional Class
		Six Months						Six Months			Year
		Ended			Year Ended			Ended			Ended
		6/30/04			12/31/03			6/30/04			12/31/03
Shares
	Sold		4,765			14,879			292			412
	Reinvested		745			1,713			17			23
	Repurchased		(6,701	)		(11,141	)		(101	)		(165	)
	Net Change		(1,191	)		5,451			208			270
Amount
	Sold	$	51,865		$	159,989		$	3,182		$	4,456
	Reinvested		8,019			18,456			178			244
	Repurchased		(72,408	)		(119,804	)		(1,100	)		(1,791	)
	Net Change	$	(12,524	)	$	58,641		$	2,260		$	2,909

		U.S. Government Intermediate
		Primary Class						Institutional Class
		Six Months						Six Months			Year
		Ended			Year Ended			Ended			Ended
		6/30/04			12/31/03			6/30/04			12/31/03
Shares
	Sold		2,593			10,382			210			417
	Reinvested		415			785			13			26
	Repurchased		(5,766	)		(15,656	)		(154	)		(595	)
	Net Change		(2,758	)		(4,489	)		69			(152	)
Amount
	Sold	$	27,266		$	110,857		$	2,212		$	4,469
	Reinvested		4,346			8,339			141			272
	Repurchased		(60,479	)		(166,480	)		(1,625	)		(6,339	)
	Net Change	$	(28,867	)	$	(47,284	)	$	728		$	(1,598	)

100

Semi-Annual Report to Shareholders

		U.S. Government Money
		Market
		Six Months			Year
		Ended			Ended
		6/30/04			12/31/03
Shares
	Sold		795,679			1,306,465
	Reinvested		842			2,476
	Repurchased		(838,784	)		(1,406,777	)
	Net Change		(42,263	)		(97,836	)
Amount
	Sold		795,679		$	1,306,465
	Reinvested		842			2,476
	Repurchased		(838,784	)		(1,406,777	)
	Net Change	$	(42,263	)	$	(97,836	)

Notes

Notes

Fund Information

Investment Manager

Legg Mason Fund Adviser, Inc.
Baltimore, MD

Investment Adviser

Western Asset Management Company
Pasadena, CA

Board of Directors

John F. Curley, Jr., Chairman
Mark R. Fetting, President
Arnold L. Lehman
Robin J.W. Masters
Dr. Jill E. McGovern
Arthur S. Mehlman
G. Peter O’Brien
S. Ford Rowan

Officers

Marie K. Karpinski, Vice President and Treasurer
Gregory T. Merz, Vice President, Secretary and Chief Legal Officer
Erin K. Morris, Assistant Treasurer
Richard M. Wachterman, Assistant Secretary

Transfer and Shareholder Servicing Agent

Boston Financial Data Services
Braintree, MA

Custodian

State Street Bank & Trust Company
Boston, MA

Counsel

Kirkpatrick & Lockhart LLP
Washington, DC

Independent Auditors

PricewaterhouseCoopers LLP
Baltimore, MD

About the Legg Mason Funds

Legg Mason, Inc., based in Baltimore, Maryland, has built its reputation, at least in part, on the success of the Legg Mason Funds, introduced in 1979. The primary purpose of our funds is to enable investors to diversify their portfolios across various asset classes and, consequently, enjoy the stability and growth prospects generally associated with diversification.

The success of our funds is contingent on the experience, discipline, and acumen of our fund managers. We believe the quality of our managers is crucial to investment success. Unlike many firms, which focus on a particular asset class or the fluctuations of the market, at Legg Mason we focus on providing a collection of top-notch managers in all the major asset classes.

For more information about the differences between the fund share classes included in this report, contact a Legg Mason Financial Advisor.

Information about the policies and procedures that the Funds use to determine how to vote proxies relating to each Fund’s portfolio securities is available in the Statement of Additional Information, available without charge upon request by calling 1-800-822-5544 or on the Securities and Exchange Commission website (http://www.sec.gov). Information regarding how the Funds voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is also available at the SEC’s website or without charge upon request through www.leggmasonfunds.com/about1mf.

This report is not to be distributed unless preceded or accompanied by a prospectus.

	Legg Mason Funds For Primary Class Shareholders 800-822-5544 www.leggmasonfunds.com	Legg Mason Institutional Funds For FI and I Class Shareholders 888-425-6432 www.lminstitutionalfunds.com
Legg Mason Wood Walker, Incorporated P.O. Box 1476, Baltimore, MD 21203-1476 410-539-0000

LMF-056

Item 2 — Code of Ethics

     Not applicable for semi-annual reports.

Item 3 — Audit Committee Financial Expert

     Not applicable for semi-annual reports.

Item 4 — Principal Accountant Fees and Services

     Not applicable for semi-annual reports.

Item 5 — Audit Committee of Listed Registrants

     Not applicable.

Item 6 — Schedule of Investments

The schedule of investments in securities of unaffiliated issuers is included in the semi-annual report.

Item 7 — Disclosure of Proxy Voting Policies and Procedures

     Not applicable.

Item 8 — Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers

     Not applicable.

Item 9 — Submission of Matters to a Vote of Security Holders

The Nominating Committee will accept recommendations for nominations from shareholders. Shareholders may forward recommendations to the Fund Secretary at 100 Light Street, 23rd Floor, Baltimore, Maryland 21202, Attn: Fund Secretary.

Item 10 — Controls and Procedures

(a)

The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the Registrant’s disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the Registrant’s disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the required time periods and that information required to be disclosed by the Registrant in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Registrant’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b)

There were no changes in the Registrant’s internal control over financial reporting during the Registrant’s last fiscal half-year that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

Item 11	— Exhibits
(a)	File the exhibits listed below as part of this Form.
(a)(1)	Not applicable for semi-annual reports.
(a)(2)	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3)	Not applicable.
(b)	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Legg Mason Income Trust, Inc.

By: /s/ Mark R. Fetting

Mark R. Fetting
President
Legg Mason Income Trust, Inc.

Date: 8/24/04

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By: /s/ Mark R. Fetting

Mark R. Fetting
President
Legg Mason Income Trust, Inc.

Date: 8/24/04

By: /s/ Marie K. Karpinski

Marie K. Karpinski
Vice President and Treasurer
Legg Mason Income Trust, Inc.
Date: 8/24/04